Reflexivity and Revolution, and why Soros isn't on the ball

NVDL: Ja, I'm going to make a bold statement. One of the wealthiest men in the world, and one of the savviest investors has got it wrong with his assessment of the oil bubble. He has also got a bit too close to the financial figures, and is himself a victim of wish fulfillment. Reality and what we want to happen (and hope) aren't the same thing. In fact we are about to pay a heavy price for our misplaced perception that oil - which underpins everything, and to a large extent our daily economic stasis, is now under threat. As such, it is almost impossible to place a dollar value on the stuff. Which means the price of oil is theoretically limitless once one begins to appreciate its real value. In short - Mr Soros, the oil price is not a bubble. It will not pop after $150, or $200 or $250.

A recession in US may allow for some sustained stability, but not for long. Oil will break our financial system, and it will break world civilisation as we know it. And we're right there, right now. Most people have not been willing to face this 'negative and pessimistic' news. Well, if you have cancer you can also choose not to face it. But the cancer still remains. And then we have to wonder how smart the psychology of ignorance in favor of positivity really is.

The example I often give is this. No one places any value on air or water. And when it's abundant it is vital, but worthless. But when it is no longer abundant, it's value increases rapidly. Since oil also underpins our ability to survive (to eat, to move, to warm our homes), it has inestimable value. Furthermore, our large scale addiction to the stuff as an integral part of daily activity means we now face fundamental and revolutionary change on a planet wide scale. Yes, now.

I found this quote: "The situations that men define as true, become true for them." Sociologist William Thomas, 1928 and a fascinating in-depth look at this topic here.

Soros: "So we can observe three very different conditions in history: the “normal,” in which the participants’ views and the actual state of affairs tend to converge; and two far-from- equilibrium conditions, one of apparent changelessness, in which thinking and reality are very far apart and show no tendency to converge, and one of revolutionary change in which the actual situation is so novel and unexpected and changing so rapidly that the participants’ views cannot keep up with it."

I can pontificate about my thoughts when I studied economics at university (that people's affinity and knowledge of brands and other associated information would also be an artificial impact on the prices of things beyond their real value.) Essentially I felt that the insider trading laws were absurd, because reflexivity [what I call trading on sentiment, perceptions of conventional financial wisdom] is happening in various shades of gray anyway. Seems like I was onto Soros thinking without knowing it. Difference is, he made money out of it, I didn't.
Nate Hagens:
In financial markets (which include oil futures), reflexivity occurs when prices themselves influence the fundamentals and that this newly-influenced set of fundamentals then changes expectations, thus influencing prices. This process then continues in a self-reinforcing pattern until it has overshot equilibrium. Because the pattern is self-perpetuating, markets tend towards disequilibrium- where every outcome is uniquely different from the past. (This of course flies in the face of most everything I was taught at the University of Chicago Business School)

People like James Kunstler have also spoken for years now about how delusional the markets are, expressed in the stock exchange index figures, where speculators have increasingly put themselves in a win/win situation. That's not how markets work. You can't profit realistically from a change in two opposing industries and still have the aggregate market increase. Not sure if that makes sense. I mean if oil prices go up, property markets ought to drop... stock markets ought to drop, because it makes it more difficult (costly) for markets to operate. But what happens is speculators buy oil and the whole market lifts, then when oil drops, they buy something else, perhaps financials, and the whole market lifts. It doesn't make sense. Oil up = market down, oil down = market up. That's a rational psychology, and it is not nearly reflected in the daily machinations of the market.

Here's an awesome analysis by Nate Hagens from Theoildrum.com:

Imagine that there were no Ken Deffeyes, Matt Simmons or Colin Campbell. Imagine that M. King Hubbert spent his retirement playing Parchesi with his wife and not modeling future oil depletion. Imagine that when the UK hit is second (and final) peak in 1999 that no one noticed, and that market participants didn't pay attention to the subsequent 12 fold increase in oil prices. Imagine we didn't know that the energy return on crude oil had declined from over 100:1, to 30:1 to around 10:1. Imagine that Nigerian rebels and Iraqi freedom fighters couldn't cause daily spikes in crude prices by their actions due to the fragility of supply and demand. Imagine that bandits weren't stealing scarce diesel fuel at night in California. And, imagine if places like theoildrum, or ASPO or energybulletin [or NVDL] didn't continually posit data and questions that pushed the envelope of conventional energy wisdom. Consider then only geology. That we use horizontal drilling and nitrogen and water injection, that we are drilling more and more wells all around the world using the latest seismic technology, etc. That the EIA continues to model supply forecasts with demand forecasts, because supply has never really been a constraint in the past....Would oil prices be approaching $130? Would T Boone Pickens be interviewed with a mixture of awe and fear on CNBC? Would there be major military presence in what was formerly the fertile crescent? Probably not. Yesterdays 'facts' are influencing today's perceptions which are influencing tomorrows realities.

$100+ oil DOES change consumption habits, but it also changes humans built in beliefs towards their futures, both individually and as nations. Earlier this week the CEO of TOTAL, one of the worlds largest oil companies, stated that new forms of energy would not be able to compensate for the coming oil and gas depletion. He also stated that new oil reserves cost $80 to procure so $80 would become the new price floor for oil going forward. We don't know that this is a fact - but is the opinion of an expert in a position to know more than the average participant. Monsieur de Margerie, via his perceived authority and public pronouncements is therby affecting the fundamentals of the oil industry. Each incremental admission, whether from the IEA, from TOTAL, or from theoildrum.com, shifts the mindsets of participants at the margin, which subsequently changes behaviours.

In 1999 with oil below $10 per barrel, the stock market at all time highs, and resource limit concerns restricted to a handful of cranky environmentalists and Hubbert acolytes, were we at 'equilibrium'? In 2001 with oil at $20? In 2005 with oil at $50? The point is that for a very long time we were not in equilibrium - the pendulum was pulled way to the left and finally let fly in 2000 - the question is, has it now past equilibrium in the other direction? Or have we moved into the third stage, where human collective awareness is accelerating knowledge about and action in the oil sector? More knowledge about finite flow limits changes professionals opinions about the future, which changes investment into refineries, changes long term contracts with exporting nations, changes military strategies, changes hoarding strategies, all of which are reflected in the price moonshot. Soros theory, which I happen to subscribe to, implies we will overshoot in both directions, because gravity and momementum will combine to send the pendulum backwards once market participants have not only caught up, but exceeded the reality of the situation. But Soros (to my knowledge) generally applied this principle to finance, and admitted to Congress he is not an expert in things energy. [Amen brother]. Reflexivity could of course have larger societal implications beyond investment booms and busts.

Nearly two years ago, in this post about the Amaranth blow up, I suggested that price floors and position limits would eventually become a reality because of the sheer size of dollars vs notional energy values. In A Closer Look at Futures, I commented:

I believe there are 3 different definitions of Peak Oil and they will come in succession.

1. The point when we have used half of the oil that will ever be extracted.
2. The point when we reach maximum sustained production (given that we use high technology like horizontal drilling and water and nitrogen injection, we are likely borrowing from the second half of what was normally a bell shaped curve so this point will come later).
3. The point when the meme of finite energy resources takes hold in society.

SOME PREDICTIONS

Here is my 'participant' part of the equation of Peak Oil. These are not facts, but my opinions:

1)There will be extreme volatility in next 5 years in oil and gas prices. Not only day to day, but year to year. Awareness of possible flow constraints is now upon us, rightly or wrongly. This combined with the tiny size of energy commodity markets compared to investable dollars will engender large position sizes that inevitably will fall victim to the fear/greed/leverage trifecta. Attention to the oil sector guarantees increased volatility. Accelerating oil depletion of older wells and skyrocketing reserve replacement costs guarantees higher highs and higher lows...

2)The Peak Oil community (e.g. those who generally understand that oil production is either peaking now or will peak soon) will begin to bifurcate into two relatively disparate camps - a)the supply-side camp that understands the urgency but will try and address energy and resource shortage via technology, more drilling and alternatives and b)the demand-side camp [That's NVDL] who will see that no matter what the energy source, a new paradigm of how we live our lives will be the only satisfactory answer to the twin problems of peak fossil fuels and a growing population. Conversations between these two camps will become increasingly disparate and tense. [Personally I believe we need to focus and emphasise the demand side, but obviously a fraction of attention needs to be applied to technologies that might alleviate our situation. Of course, currently, the focus is on supply side to an order of 90% if not more, with far too little focus on our rapacious and pernicious habits.]

3)There will be an eventual slowing and ultimately a cessation of speculation in energy markets by non-producers. This is tantamount to a change in capitalism so I don't say it lightly, but already only 6% of world oil reserves are owned by public companies - the amount of dollars NOW dwarfs the amount of notional physical resources - if printing presses are turned on while resources deplete this disparity will continue to grow. At some point people like you and I won't be allowed to buy oil futures, which is only a short step away from nationalization of the energy industry (which is the case in most countries already).

Conversations and thoughts like these are meant to raise the bar of discourse on energy topics so when real policy discussions take place, either locally or regionally, people will speak a common language. There is a fine line in peak oil outreach - more awareness is needed to accelerate renewable infrastructure and kick-start efficiency and conservation measures - yet too much awareness might cause supply disruptions (hoarding) and make it difficult for oil companies to extend the time horizon that we have access to a large baseline of production, etc.

As an editor on this site, I hope we are efforting positive change, but realize many of our readers are likely tuning in to know the latest details in order to improve their own situation, financial or otherwise. One of my concerns is when the pendulum swings back the other direction, and we head towards one of those 'higher lows', that the urgency of both supply and demand response will be lost. These are high stakes.

[I think the pendulum has a lot of sway left...beyond $200 right now may cause it to swing back to $150 or so. I believe oil prices are still cheap. They don't reflect our dependence.]

South Africa Faces Grim Epilogue

With the world in tow we now enter the decade starting with the soccer world cup on our knees

Let’s face it, for a while there South Africa had me fooled. I thought this damned country was going to make it happen. We seemed poised – with our mineral resources and growing economy, and certainly our coal energy supplies – to ride out this next wave of global malaise. While America sukkeld, we saw mineral prices shoot through the roof. But then we started sukkeling too: it turns out we will start what Kunstler calls The Long Emergency period in an even worse position than the war wearied USA.

The word ‘recession’ will soon be a cliché. The Long Emergency is essentially a period of worldwide contraction, where the limits to growth are realized, where food (for human beings), fuel (for transport to and from suburban sprawls) and energy supplies (electrification of that suburban sprawl) become concomitantly unaffordably expensive. In plain language, increasing numbers of people, including the conventional ‘Middle Class’ of Western society, will no longer be able to afford the costs of living. In even plainer language: there will not be enough to go around.

$90 oil is now a baseline average infecting the economic mechanism. Where house prices begin to lose value (as suburbia becomes less affordable), all bets are off in all dispensations that have invested so heavily in suburbia, in property. China, whose growth seems to many to be good, simply has reached adolescence too late. It will not find enough fuel to transition its populace into the lifestyle they are aiming for. They are struggling now to find the resources, scouring the world, especially Africa. When countries cannot themselves survive depletion, they will forget about trade, try to survive and either diminish, or strike out.

The world has experienced a supernatural period of growth lubricated, cushioned, unleashed by the potent energies we’ve harnessed from millennium’s worth of solar stores: fossil fuel oil. It has allowed our species to explode over this planet from around a billion a century ago, to close to 7 billion, a 7 fold increase. As excess demand for food, fuel and generic energy becomes the norm, so the number of economic losers will begin to climb.

We return from this background sketch, to our domestic scenario. How will South Africa fare in the Emergency scenario of a world facing the stranglehold of depletion? For a while we seemed to be poised very well. We are isolated from the larger military powers of the world. And until recently, seemed energy efficient at least in terms of keeping the lights on. We could possibly have bought our way out of trouble, selling coal to the Chinese, and enjoying their protection from other large military powers. Japan for example imports something like 90% of its energy; but Japan is also the world’s most energy efficient country, with advanced rail transit systems. As South Africa begins to develop one small urban rail project, the lights have begun to flicker. We are told they will continue to flicker for the next 7-8 years.
We now have to focus on finding ways to cope with a local emergency, we’re focusing already on survival, rather than having the luxury of brokering deals with nations that need our resources.
Unfortunately, this period coincides with the opening chapter of The Long Emergency. The introduction to this period has been the incredible peaks seen in affluence, peaks in stock exchanges. If it seemed like the world was awash in oil, if it seemed like we had never grown faster, or to such an extent, well this is exactly what Peak Oil presents. Our planet at Peak Capacity. Unfortunately, the curve takes us irrevocably down from there. Permanent Decline. The Infinite War. A war that will not end during our lifetimes. It is inevitable that we will see the lobbing of nuclear weapons, and all countries participating in global terrorism. Who will be the last man standing? Which country will emerge relatively unscathed? Not this one.

With a population already ravaged by rape, and murder, with a one party government more appalling and far more corrupt than the bullshitting Bush administration, we can expect the rule of law to diminish rapidly here, and for the demoralization and Africanisation of South Africa to go into high gear. Those who engineered the phrase ‘one settler, one bullet’ will return to centre stage. The number of jobless and poor South Africans will dwarf the ‘haves’. This trend will be paralleled worldwide, but South Africans will experience this in a chronic context. AIDS, poverty and crime will morph the majority of the populace into roving, rampaging, spectacularly self destructive mobs. Looting and burning will be common place. Our President will either endorse this ‘final overthrow’ with incidental ‘Machine Gun’ performances, or will attempt, unsuccessfully, to oppress and resist it. All Presidents in the era to come will be tragic figures: Brown, Obama, Zuma.

The solution to these dire circumstances will be (what may seem an ineffectual response) setting up organic, self sufficient systems: farms able to grow locally, households connected directly to local streams and crops. Secure, walkable communities. Given the state of flux, this will require massive resources and some time to procure and develop, and naturally, any and all surviving camps will be targeted by an overwhelming majority of economic losers. Also, most people – used to the ‘something for nothing’ mindset – will be more motivated to make war and take what they can from others, than to work on farms.

In this highly destructive, highly chaotic downward plunge, ordinary people without homes or jobs, will wonder how it all happened. The already stressed and disenfranchised human population will then have to deal with the inevitable bird flu pandemic, as attention is focused away from culling H5N1 infected chickens towards culling humans. During all this bloodletting, we will blame governments, we will blame our leaders, but more and more people will die unabated.

In the end, we became too many, and too many became too greedy. What happened to us is simply what happens to any species reaching overshoot: there is a crash. Ours will be spectacular. We will see a great culling not only in South Africa, but everywhere. Nuclear weapons will cut down the human race like wheat. Our number will plummet to below the billion number margin, to some hundred million, mostly in the Southern Hemisphere. Endless war will create massive pollution and radioactive contamination, and the climate of the world by then will have deteriorated obviously, becoming an interminable drain on what little motivations our species have to continue living.

For now it is appropriate in South Africa to remind ourselves how we engineered fate to be even less kind (to us) than the rest of the world. Don’t laugh: the dismantling of a world number one rugby team in favor of political chauvinism demonstrates a lack of will to succeed. A focus not on reality, but on personal politics at the expense of success is always risky. It’s also shooting yourself in the foot. This is symptomatic of a widespread delusion. It is this corrupt attitude of personal enrichment at the expense of the natural interest that causes the country to no longer be able to function: not having the capacity to keep the lights on is only one crisis South Africans currently endure. There are many others besides. We have lost the chance to come together as a unified community, we had a chance once upon a time, but I doubt whether there were enough of us whohad it in us to really accept and care about one another in this country.

Racism, religion, riches – will be used to target and terminate large groups of people. Blacks will prey on whites, in the US, the opposite, tribalism especially religious tribalism will be rife right around the world. There will be a ferocious baying for blood. It will be a terrible and systematic slaughter, probably taking place locally in schools and sports stadiums. The carnage in South Africa will reach epic proportions, but this will be echoed elsewhere as the bloodlust gathers momentum in other countries too.

David Bullard once said: “How can you NOT make a success of South Africa?” Indeed. But we have not, and now, cannot. Where to from here? I’m guessing an island state like the Seychelles, Mauritius, Reunion, New Zealand or Australia. But millions of others from here and abroad will make similar choices, and upon arrival we will fight each other over the scraps. The world was not enough. Or perhaps there was a hole in human beings we did not listen to, and have since spent lifetimes pouring our brokenness into the world. We now cover full circle, circumnavigating the great abyss created by our avarice, our vast ignorance. The circle opens like a dark volcano, and the dreamers fall into it, the nightmare and its engineers finally fulfilling its destiny. Let’s be clear that the austerity we face is one we have collectively authored, and as such, it will be an utterly bleak epilogue for our species on this planet.

Ps. I hope I'm wrong and that I won't be the one saying, 'Told you so.' If I am wrong it's good for everyone (including me). If I'm right, shit is on the cards. Unfortunately, I don't believe this to be a question of right or wrong, optimism or pessimism, negative or positive. I believe it to be a matter of logic.

Kunstler: Financial Climate Change

Behind all the blather and bullshit about the Federal Reserve's rescue gambits and the machinations of the ratings agencies, and the wiles of foreign sovereign wealth, and the incomprehensible mysteries of markets, and the various weather forecasts of a gathering "recession" is the simple fact that the USA is a way poorer nation than we imagined ourselves to be six months ago. The American economy has been running on the fumes of "creatively engineered" finance (i.e. new-and-improved swindling) for years, and now these swindles are unraveling. In their aftermath, they leave empty wallets, drained bank accounts, plundered retirements funds, boiled away capital reserves, worthless stocks, bankrupt companies, vandalized housing tracts, ruined families, and Wall Street executives who are still pulling down multimillion-dollar pay packages despite running their companies into the ground.

We're burning down the house and kidding ourselves that there is a remedy for it. All the rate cuts and loans to big banks and bank-like corporate organisms, and "monoline" bond insurers, and mortgage mills amount to little more than a final desperate shell game to conceal the radioactive pea of aggregate loss. The losses are everywhere, and when you add up seven billion here and eleven billion there they probably amount to something like a trillion dollars in sheer capital evaporation -- not counting the abstract "positions" that the capital was leveraged onto by the playerz and boyz who mistook algorithms for productive activity.

The shell game may run a few more weeks but personally I believe the timbers are burning. The losses are no longer "contained" or concealable. A consensus has now formed that we're in for a "recession." The idea is that, yes, this seems to be the low arc of the business cycle. Fewer Hamptons villas will be redecorated in the interim. We'll gird our loins and get through the bad weather and when the sun shines again, we'll be ready with new algorithms for new sport-with-capital.

Uh-uh. Think again. This is not so much financial bad weather as financial climate change. Something is happenin' Mr Jones, and you don't know what it is, do ya? There has been too much misbehavior and it can no longer be mitigated. We're not heading into a recession but a major depression, worse than the fabled trauma of the 1930s. That one occurred against the background of a society that had plenty of everything except money. Back then, we had plenty of mineral resources, lots of trained-and-regimented manpower, millions of productive family farms, factories that were practically new, and more than 90 percent left of the greatest petroleum reserve anywhere in the world. It took a world war to get all that stuff humming cooperatively again, and once it did, we devoted its productive capacity to building an empire of happy motoring leisure. (Tragic choice there.)

This new depression, which I call The Long Emergency, will play out against the background of a society that has pissed away its oil endowment, bulldozed its factories, arbitraged its productive labor, destroyed both family farms and the commercial infrastructure of main street, and trained its population to become overfed diabetic TV zombie "consumers" of other peoples' productivity, paid for by "money" they haven't earned.

There is a theory (see Nouriel Roubini's blog) that a reform process will now ensue in the financial realm, new regulation and oversight of the same old familiar activities. This too, I'm afraid, will prove to be wishful thinking. The financial system will not be reformed until it lies in smoking wreckage, and when that "re-form" happens the armature of the re-organizing society will barely resemble the one that the previous burnt-down-house was designed to dwell in. Among other things, it will not support capital enterprise at anything like the scale that we became accustomed to lately.

Globalism will be over.

The great nations of the world will be scrambling desperately for the world's remaining oil supplies. It will not be a friendly contest, and anyone who thinks that current trade relations and capital flows will continue despite that is liable to be disappointed. (Are you reading this Tom Friedman?)

Long before the mathematical projections of oil depletion play out, the oil markets themselves -- and all the complex operations that they comprise, such as drilling and exploration, and the movement of tankers around the planet -- will destabilize and seize up. We will no longer be any oil exporter's "favored customer." Many of the exporters will enjoy watching us suffer. Contrary to the political platitude-du-jour, the USA will never become "energy independent" in the way we currently imagine. Rather we'll become energy independent by being deprived of imported oil, and we'll be thrown back on our own dwindling supplies -- which means that we're not going to run our system of daily life the way it has been set up to run. When Americans can no longer run their cars on a whim, they will simply go apeshit and you can kiss normal politics goodbye.

The financial system that emerges from this cataclysm, and the economy it serves (which is supposed to be the master of its capital deployment "arm," not its servant) will likely be modest to a degree that will shock and embarrass everyone currently connected with what we have lately called finance. If it even trades in paper, that paper will have to stand for something based in reality, either a productive activity or a genuine asset. It may take decades for this society to even regain the confidence necessary to operate such an elementary system -- or it may not come back at all, at least as far as the horizon lies before us. That's how bad the mischief and the damage has been.

It's not hard to understand why the Bernankes, Paulsons, Lawrence Kudlows and other public representatives of capital keep pretending that everything is under control. On the other side of their pretenses lies disorder and hardship. One wonders, of course, what they really see in their private minds' eyes. Do they actually believe that the statistics issued by their serveling agencies amount to a plausible picture of reality? Are they so lost in their fantasies of "management" that they think they're controlling events?

My guess is that their credibility is spent. In the weeks ahead, nobody will know who or what to believe. We may even run out of questions to ask as we just all collectively stand there in a thrall of wonder and nausea, watching the nation's financial house burn down.

From www.kunstler.com

NVDL: For more wishful thinking, go here. We are seeing incredibly volatility now. Peak Oil also coincides with Peak Economics. This means we have breached maximum in almost every way. Thus, if it feels like we've never had more stuff, well that's spot on. This is why no one can believe we are about to have less stuff, and progressively less after that as we start sliding down the other side of Hobbert's Bell curve.

Does A $2,500 Tata Nano in India Mean Higher Gas Prices and More CO2 Everywhere Else? (WIRED)

As the hype surrounding the Tata Nano subsides, we're seeing a sharper picture of what a $2,500 car means for the environment and global energy demand. It doesn't look good.
The world's cheapest car is a marvel of engineering and ruthless cost-cutting sure to bring greater mobility to people throughout the developing world. And that is what makes it so troubling.

The Nano doesn't go on sale until fall, but already environmentalists say it will bring big increases in carbon dioxide emissions and pollution. "This car promises to be an environmental disaster of substantial proportions," Yale environmental law professor Daniel Esty told Newsweek. Some energy experts say all those new cars will increase demand for gasoline, with one telling CNN, "we'll get into a situation where we'll have to compete with them for gasoline, $4, $5 a gallon. Who knows how high we could go?"

It would be easy to denounce the naysayers as western do-gooders with no moral standing to criticize India. But the most vocal critics include Indians who say the Nano will deepen the country's critical pollution, infrastructure and traffic woes.
Could the Nano really be so bad?

NVDL: In a word: Duh! The problem is we are addicted to oil, we cannot live without it, and our consumption levels (demand levels) are so outrageously high... And everyone wants this lifestyle. You can't blame them, or stop them, but something has got to give.

By Chuck Squatriglia
For the rest of this excellent article, go here.

The Emergency Starts Here

South Africa presents an interesting example to other countries for what to expect. Britain is also experiencing intermittant gas supply interruptions (for heating and cooking) and has been for some time. This from Jim Kunstler's Grunt archive, penned by a South African woman:

SOUTH AFRICA IN THE PREMATURE LONG EMERGENCY
February 4, 2008 It began with a few potholes in the roads, the odd interruption to the water supply in the suburbs, a couple of days with strike action preventing the delivery of municipal services – no garbage collection, protest action disrupting the mining industry and picketing & toy toying at shopping malls…It continued over the next couple of years, largely with disregard for the disruptions, a little irritation to daily commercial and home life by the lack of service provision in food, gas, water and power.

In recent months, at the receivables end of the supply chain, there was a little aggravation at the delays, the lack of service, the shortage of a few consumer luxuries in the retail shops…, ‘but hey, what the hell, this is a great country, we cannot fault the lifestyle, the weather…’. For a couple of months, perhaps a year back or so, there seemed little or no reason to change our way of life, our lifestyles…a little further down the road and the disruptions become more frequent, we learn to cope, learn to accept the rising cost of living, gas supply shortages in the Winter of 2007, the intermittent water disruptions, the odd power outage and the potholes.

Potholes may well be the singular measure of the calamity we are in or about to face. We accept the transitions in South Africa, but it is all very well passing over these problems in the name of development, infrastructure development, greater housing plans and urbanization as a promised deliverable by the ANC government, together with the balancing of the wealth quotient. Access to finance and the shift of the material wealth are an indication of the success of the plans for economic growth in the New South Africa.

So, there have been interesting times, a few PDI’s (previously disadvantaged individuals), through black economic empowerment, becoming significantly enriched through commerce and business and, dare I say, politics. But the cracks that are now evident are tell tails signs, not only of the effectivity of the New South Africa and an explanation of the path traveled to this point in time, but more of what is promised for the future. And the future may be more a by product of global issues than issues unique and unfortunate to South Africa.

So what do we have at hand, what are the reactions and what are the consequences??? South Africa has been flung full tilt into a Premature Long Emergency. In the up market suburbs, not least to say generally all over the urban landscape, there is not a 1km (1/2 mile) strip of tarred road that is not full of potholes (hugh gapping holes, across which vehicles cannot drive), the roadside curbs are disintegrating, the road maintenance programmes over the last 10 years have failed to maintain the roads in a serviceable and passable state.

The nation is gripped in a crisis of rolling power outages caused by the incompetence of highly paid government ministers and their charges. The news of the weekend is that the nation is in dire straits with the supply of clean, drinkable water to households and business alike. We are faced with unusual weather patterns, floods at the moment, high rain fall for the Summer, the expectation of an early, long cold Winter.

THE POWER EMERGENCY

The rolling power outages are resulting in about a 25% national power outage per month. The ramifications of this can be related directly to an income loss of the same amount, retail supplies are being interrupted and from a security point of view it is dangerous to shop in malls. The Electricity Supply Commission – ESKOM are indicating a forced reduction on power usage by 10%, further, the mines have been told not to work on Fridays. There are revenue and cost implications here that extend beyond the obvious monthly figures. What of the power saving measures that may in turn lead to greater problems, the mines are unable to pump excess ground water from the shafts, the maintenance programmes are due to suffer. And what of the safety indications, miners are protesting the possibility of being caught under ground or in lift shafts as the random power cuts hit the service grids.

It is not only that ESKOM have not maintained or expanded their operations in the last 15 years, but the next big whammy is that there is no coal to keep the power stations running…at most times, there is a couple of months supply of coal onsite for electricity operations, today there is hardly a few days supply. Incidentally the reason given for this catastrophe is that the trucks delivering the coal have been unable to get to the power stations as the road infrastructure has deteriorated- potholes again. In the Afrikaans language: ‘slaggate’ – a direct translation to ‘slaughter holes’. As this is written, we wait for the next couple of days to see the effect of the ‘coal emergency’.

THE WATER EMERGENCY

At some point the effect of the power emergency on water and sanitation supply should be considered and this would be part of the roll out of unexpected events resultant of the collapse of the power supply, but the water board have usurped the power supply with homegrown problems of their own… So here we have it, 43% of the dams have safety problems and are in danger of collapsing. Further to this, the ground water in Gauteng, the province of Johannesburg, has radioactive contamination from mining operations. Now, as a matter of interest, Johannesburg is one of the few cities in the world that is built on a hill and water has to be pumped up into the city!!!

THE FROG IN THE POT

And what of the peoples reaction? Complacency does not even come close, the nation is either brain dead or ignorant, or just plain ‘frog in a pot’ of water with the temperature rising. The first reaction to the power emergency took the form of a rush for candles, refilling of gas bottles and the purchasing of generators (if you could get them). Then the complacency set it, business learnt to sit through power outages, retail shops were forced to close their doors for a few hours a day. There was and is a shortage of food supplies, food went bad in the fridges and had to been thrown away. It was kind of charming in a strange kind of way, to eat dinner by candle light and forgo the ‘soapies’ on TV. Traffic lights were out over a large number of suburbs and delays in getting to business meetings became the norm. The schools are unable to teach a full day’s lesson. The internet service providers and the mobile phone companies’ frequently have service delays or are just plain ‘off line’. The battery runs out on your laptop and that’s the days productive work is over until the power is back on…

Patients in ICU or undergoing operations, as the power grid went down, were at risk of and did, die.

As we head into February, it will be interesting to see the economic figures; theoretically the revenue generation for the period should be down by at least 25% or something similar to the power outage percentages. Notwithstanding that the stock market took a bend downwards and followed the USA crash and the antics of the Societé General rogue trader. (Well done on the foresight, James). The South African property market is following suit, as well. And just as we were wondering how the effect, implications and opinions of an emergency would pan out into daily life, what the tell tail signs would be… it happened, all of this is the short space of about 2-3 weeks, the realization dawns that it has begun, the country is experiencing and living through the beginning of the Long Emergency, rather unexpectedly and certainly too prematurely.

I proffer that the events in South Africa, tragic as they are, as they play themselves out, will give a good indication of the events that the USA and other countries will realize in the years to come as The Long Emergency’ comes to pass.[Ha! Just as I finish this, guess what… the power is out, the battery life in my laptop is about 5 mins, so at 11am, I cannot be productive for the rest of the day… the networks are down, so this cannot be mailed for the moment.]

Kunstler: Serial Bubbles?

Eric Janszen of iTuilip.com has made a splash in the mainstream media with his Harper's Magazine cover story on the "The Next Bubble." His thesis is that a new tidal wave of investment will shortly roll toward "infrastructure and alternative energy." By this Janszen means a revived nuclear power push, refurbishing highways, bridges, and tunnels, "high-speed rail," solar and wind power, and alternative liquid fuels. This coming boom, he says, would be driven by political fear about energy security.

On the face of it, Janszen's proposition seems more promising and intelligent than the previous engineered boom in suburban houses. But it raises a lot of questions and flags.

For one thing, the term "bubble" suggests suggests something more like a financial Chinese fire drill than actual productive activity. It would be an excellent thing if Americans invested in a restored passenger rail system. But if it were merely a scheme for big banks to issue innovative new securities for gigantic fees without actually getting any trains running -- well that would be in the nature of just another old-fashioned swindle, as the bundling of mortgages into securitized debt paper has proven to be.

In other words, does Janszen make a distinction between a boom and a "bubble?" He seems to understand that the previous two bubbles in dot-coms and houses were essentially frauds that generated imaginary wealth, which sooner or later evaporated off the balance sheets and out of the financial system.

A boom, it seems to me, is not the same as a "bubble." While perhaps wasteful and messy, booms at least produce something of value beyond the fees paid to bankers for arranging the deployment of capital. A boom that resulted in citizens being able to take a train from Boston to Albany would produce a substantial public good. The creation by Goldman Sachs of a company on paper that never accomplished anything would be something else. This, of course, leads to a deeper question as to whether the USA is actually a serious society or just a nation of hopeless, greedy clowns? Are we even capable anymore of distinguishing between purposeful activity and the art of the grift?

This leads to a further consideration of where the capital for "the next bubble" supposedly comes from. Janszen doesn't account for the essentially bankrupt condition of the USA. The capital that was deployed and squandered in the previous two bubbles is not there anymore to be washed, rinsed, and recycled. It's gone. It was winkled out of hundreds of pension funds, millions of individual investors, and, in terms of eventual obligations, the federal government. There is a black hole of unresolved debt where that "capital" used to be.

Janszen's idea seems to be that the new investment comes from simple credit reflation. I don't see how this is possible while the current bubble in housing remains only fractionally "worked out." It has a long way to unwind yet, and a lot of damage to do. It will bring down banks, insurance companies, hedge funds, municipal governments, and leave a lot of individuals impoverished, literally out in the cold. As long as trillions in losses remain concealed or unresolved, the basic system for deploying capital will remain paralyzed.

I wonder if fixing all the infrastructure for happy motoring is not an exercise in futility and another layer of tragic misinvestment. After all, it's based on the assumption that we will still be running huge numbers of cars and trucks decades ahead, and I'm not convinced that this will be possible under any circumstances. The psychology of previous investment will exert a powerful pull to throw money at our highways. It might be more realistic to think of this as a triage process -- to ask ourselves how much of this stuff do we just let go of and which parts do we actually keep. Thousands of miles of suburban commercial strip highway six-laners may not be needed at that "level of service." What becomes of them? Do we run trains down the interstates? Surely, we don't want our bridges to crumble.

By the same token, I wonder if our investments in alternative energy will prove to be chimerical -- things wished and hoped for but impossible to achieve. My own hunch is that our notions of scale are not consistent with what reality will permit in this field. I don't believe that we will build more than a few giant wind farm installations. Rather, I believe we'll discover that wind power is only really practical on the household or extremely local basis. Ditto solar. I also doubt that we will continue to get all the necessary exotic metals needed to fabricate the hardware for these things. Along similar lines, I believe our expectations for ethanol and bio-diesel fuel production will prove to be not only disappointing but destructive to the food production sector.

All of which is to say that an investment campaign aimed at sustaining the unsustainable by other means would end in tears. Personally, I don't think there will be a "next bubble." I think we're out of bubbles and that our current mode of life in this nation is running out of time. We're facing such an array of potential instabilities that even assuming we continue to live in an orderly society may be too much. Like every other activity in our lives, finance, too, may be in for an epochal downscaling.

NVDL: Personally I believe we're in for global carnage, massive war and spreading civil unrest as the whole global shabang collapses. Worryingly, a lot of ordinary people seem conscious - even if merely subliminally - to this trend. The messages - about the weather, markets, food and fossil energy - have been coming in for a long time. I think we know what we're in for. I think we behave collectively like a philandering half of a married couple. We know there's going to be divorce and tears, but we sort of want to come home and enjoy the last home comforts while we still can before we have to move out - finally - of house and home... losing if not everything, more than we are comfortable parting with. The point is the shift will be a forced shift.

If this seems an excessive prediction, here's a scenario a 5th grader can understand. First collapse the financial markets. We've had a few recent signals that this is imminent. When it happens, watch wealth evaporate and everything else collapse. Imagine you not having a job. Imagine the middle class people in your neighborhood waking up to find they have lost their money. Now imagine that on a massive scale. What do you think everyone is going to do with their free time and excess frustrations? Play computer games? Snooze in the park? Or vent...

Donkey Carts, Bicycles and Scooters

"The life you know, the stuff you take for granted, it's not going to last.”
- John Connor in Terminator 3.

Take a look around you. Wherever you here, look up from your computer, and just take in what’s around you. Just about everything in your environment comes to you courtesy of Cheap Oil. The plastic of your keyboard, the vinyl on your desk, the food in your refrigerator from your local Pick ‘n Pay – that food was trucked, shipped or airlifted to you. We’ve got televisions made in Korea, iPod’s made in China, and more than half of South Africa’s fleet of motor vehicles comes from doer anderkant. ¹ Many of your souvenirs, coasters, glasses, paintings, or porcelain you’ve purchased on an overseas trip. You probably flew on one the planet’s ultimate gas guzzlers, a Boeing 747. You flew cheaply.
You paid for your holiday by driving from your home to work and back, every day, and saving some of your paycheck each month. Did someone drive your kids to school? You didn’t really notice how much fuel you were consuming because it didn’t cost a lot. You’re starting to notice it now.

Everyone else who is stuck in traffic around you is living much the same way you are.
A theory put forward by Dr. M. King Hubbert predicted, with remarkable accuracy, the peak and decline of American fuel reserves in 1970². This theory forms the basis of Peak Oil Theory for the planet. This Theory is subscribed to by many experts who predict that the life we know is all going to change. Not a little but a lot, and not soon, it has already begun.

A Hungry and Thirsty Planet

"Our ignorance is not so vast as our failure to use what we know."
M. King Hubbert

If it seems unlikely to you that we’re about to run out of oil, you’re right. We’re nowhere near running out of oil. In fact, we’re currently producing the most we’ve ever produced in the history of oil production. We’re producing around 30 billion barrels annually, and the planet is gulping down over 80 million barrels a day. We’re trying to increase capacity, especially refining capacity as fast as we can. The problem isn’t just supply, you see, it’s demand. Demand continues to skyrocket, particularly from countries like China and India, with their billion plus populations. In China alone, the demand for motor vehicles means that 30 000 new cars are added to the roads of Beijing every month (1000 new cars a day).4 Imagine how that drives up the demand for oil. Not just to fill up those cars but bear in mind you need twenty seven barrels of oil for the construction of one car (in terms of energy). The worldwide fleet is now around 600 million, and 200 million are in the USA. The problem is that oil supply can no longer keep pace with demand.

Unfortunately, it doesn’t end there.
If our only problem was a demand side problem, we could take a deep breath, and try to be patient.
But the problem is not only on the demand side. It’s on the supply side too (see attached graphic), which makes this a global phenomenon that will be felt by all, in many ways that are the same, and in many that are not.

It’s a popular fact that none of the large oil companies (Shell, Exxon etc) have invested much in building new refineries simply because they know they won’t be able to provide extra refining capacity (they’ve explored everywhere and can’t find significant new sources of oil).

But haven’t we been here before? Yes, there was an oil crisis in the early 80’s (many news reports that make comparisons to today’s high prices refer to the records set in this particular period), and we survived it, didn’t we? How did we do it? With ingenuity. Oil exploration companies exploded over the planet, using new drilling methods in harsher environments, drilling the crust underwater or in subzero conditions (previously uncharted territory). These forays paid off. The North Sea finds yielded handsome new discoveries (for the UK and Norway), and so did Prudhoe Bay field in Alaska. That was it. That is basically what we found, and it’s lasted until now. Just over 20 years. We’ve found some scraps besides, but basically, we’re back in 1978-1980, this time with no North Sea fields beckoning, no Prudhoe Bay, and a very different planet. There are many more cars on the highways now, and millions more mouths to feed.

But surely we have the technology to save us, some have argued. Many intelligent people argue (even in newspapers like The New York Times) that we are smart enough to solve this problem too. We’ll just use technology. We’ll become even more fuel efficient. But technology is not energy. And without energy, technology becomes obsolete. Simple example: a car with no petrol doesn’t move, no matter how efficient it is. A computer with 200 Gigs of memory won’t operate if the electricity isn’t on.


Technology

We have turned to technology, in ways that have helped us, and in other ways (the Ghawar field as a prime example) that are questionable at best. The cars on the road today are twice as efficient as their forebears of a few years ago. And we’re getting better at sucking the oil out of the Earth too.
In Saudi Arabia for example, Ghawar is the largest single oil reservoir on the planet. It pumps out roughly 5 million plus barrels a day. But today, even Ghawar is hardly our panacea. For the oil barons there, it’s not coming out fast enough, so they have started pumping seawater into Ghawar, and voila, problem solved.

Over the short term, Ghawar’s capacity has increased slightly. But pumping in seawater into the world’s biggest oil well is an incredible gamble. What people are already seeing is 7 million barrels of seawater going into Ghawar (according to Matthew R. Simmons in Twilight in the Desert). Now we know only 5 million barrels a day is coming out. Meanwhile the sensitive geology of the well is being eroded and destroyed and a lot of this vital resource is being lost or ruined by this process.
If you’re interested in the topic, just google ‘Peak Oil’ or any of the terms used in this article (like ‘Ghawar’) and see what you come up with.

If you google ghawar seawater you’ll get this article6, fourth from the top:
Crude Awakening
The only hope for meeting growing world demand for oil is to tap Saudi Arabia's reserves. A Bush advisor on energy says those reserves don't exist.
By Kevin Drum

Simmons, an expert on energy investments, also says that the Saudi’s have consistently overstated their reserves. Recently we’ve seen Shell7 do the same on their balance sheets.
In fact, nobody knows how much oil is in the deep dark crevasses underground. But by using Hubbert’s physics and mathematical models, many authoritative people believe we are in the Peak Oil era right now. Some geologists have predicted Peak Oil by 2010. Other say we’re at the peak right now. Kunstler suggests we will see the Peak in November (Thanksgiving Day to be precise) 2005.

What Is Peak Oil?
"Carl Jung, one of the fathers of psychology, famously remarked that "people cannot stand too much reality..." James Howard Kunstler in The Long Emergency

Peak Oil is the top of a bell supply curve which represents that from now on, we will run out of oil faster and faster.
So if it seems like we are out our maximum capacity right now, and can’t pump out and more oil, any faster than we are, then we’re at the peak. It does seem like that if you follow the news. Despite these Hurricanes, despite the ongoing high prices, no country has been able to come up with spare capacity. Not a single one.
To complicate matters, the peak can only really be seen in ‘the rearview mirror’. Only once we’re in the crisis, in a worsening crisis, will we know we’ve reached, and passed the peak.

In plain language, once we have passed the peak, no matter how much we pump or refine, no matter what we do, we will get less oil out of the Earth. There won’t be enough for everyone and each day that passes there will be less and less. This means that prices will go through the roof no matter what we do (Simmons predicts $100 per barrel this winter, that’s December/January 2005/2006 and American gas prices around $10).

Effects

This effects you whether you live in New York or Orkney. The reality is this:
We are living on a planet that has enjoyed what Kunstler calls “the cheap oil fiesta”. Populations have expanded to bursting point, both in number and girth. Guess what made this possible? The Green Revolution, all the pesticides, fertilizers and equipment to harvest it all was powered by Cheap Oil. Peak Oil means that the supply lines begin to shut down, airlines especially, because oil is simply too scarce and too expensive for these supply runs to run profitably any more. Goodbye Wal-Mart, goodbye Pick‘n Pay. One of the first dilemmas people everywhere will face is food shortages.
We will see a drastic reduction in the human population of this planet as a result.8

What Can We Do In South Africa?

There are two answers:
1) Not a lot, since we’re addicted to oil in almost every aspect of our lives, and we’re already in the Peak Oil era. We must change how we move around, how and where we get our food, where we live etc. and some may find they can’t (or won’t).
2) Plenty. Time may not be on our side, but we can
- invest in renewables like solar (still expensive) and wind (cheaper but very underutilized)
- change the car you drive for a smaller, more up to date, and more fuel efficient model (better yet, buy a hybrid if you can afford one)
- find somewhere else to live, preferably closer to work (or change jobs)
- start using public transport, and share transport to common destinations
- think carefully about financial investments, especially purchases of property, and look to gold when oil prices begin to break loose (actual gold, not stocks)
- support local markets, like food stalletjies (not supermarkets, who get their products from very far away), from grocers to engine makers – soon we’ll have only them to rely on
- plant a vegetable garden in your back garden
- save energy and encourage those around you to do the same

But don’t take my word for it; there are plenty of experts who will tell you the same thing. Colin Cambell5 is one, Mathew Simmons (founder and Chairman of the world's largest energy investment banking company, Simmons & Co), Kenneth S. Deffeyes and numerous other writers. One of the most eloquent is an American writer, James Howard Kunstler, author of The Long Emergency: Surviving the Converging Catastrophes of the 21st Century. In this book he provides, in a succinct tone and somewhat euphemistically, an elaborate near future scenario. He also discusses the various alternatives, and explains why almost all can be dismissed as ‘too little, too late’.

Here’s a last word, from James Howard Kunstler:

Remember: These immensely hypertrophic organisms like Wal-Mart are products of the special economic growth of the late 20th century, namely an unusually long period of relative world peace and extraordinarily cheap energy. If you remove those two elements, all large-scale enterprises --corporate farming, big-box shopping, big government, professional sports -- are going to be in trouble. – James Howard Kunstler

Sources

Business Report: SA car prices compare favourably September 27, 2005By Justin Barnes, Raphael Kaplinsky and Mike Morris
http://www.busrep.co.za/index.php?fArticleId=2891837
"M. King Hubbert is best known in the greater earth-science community for having predicted oil shortage (in the USA) some twenty years before it actually occurred. He is well known in hydrogeology for his contributions to the hydrodynamics of groundwater and the application of hydrodynamics to the exploration for petroleum…His most famous predictive analysis was published in 1956. In it, he indicated that our (the USA’s) conventional crude-oil production would go over the top of a great curve in 1970 and start down..."
from: http://www.hubbertpeak.com/hubbert/
The World Is Flat: A Brief History of the Twenty-first Century Thomas L. Friedman, p.407Farrar, Straus & Giroux, Hardcover, 496 pages, April 2005
After being awarded a Ph.D at Oxford in 1957, Dr Campbell joined the oil industry as an exploration geologist. His career took him to Borneo, Trinidad, Colombia, Australia, Papua New Guinea, the USA, Ecuador, United Kingdom, Ireland, and Norway. He is now a Trustee of the Oil Depletion Analysis Centre ("ODAC"), a charitable organisation in London that is dedicated to researching the date and impact of the peak and decline of world oil production due to resource constraints, and raising awareness of the serious consequences. He has published extensively, and his recent articles have stimulated lively debate. His views are provocative yet carry the weight of a wide international experience. (Source: http://www.oilcrisis.com/campbell/)
http://www.washingtonmonthly.com/features/2005/0506.drum.html
http://www.foe.co.uk/resource/press_releases/shell_overstates_sakhalin_29112004.html
http://www.dieoff.org/, http://www.lifeaftertheoilcrash.net/, http://www.peakoil.org/,http:/www.hubbertpeak.com/, http://www.kunstler.com/
Further reading: The Long Emergency: Surviving the End of the Oil Age, Climate Change, and Other Converging Catastrophes of the Twenty-first Century (Hardcover) by James Howard Kunstler "Carl Jung, one of the fathers of psychology, famously remarked that "people cannot stand too much reality...", Hubbert's Peak: The Impending World Oil Shortage (Hardcover)by Kenneth S. Deffeyes "Global oil production will probably reach a peak sometime during this decade..." and Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy by Matthew R. Simmons
www.kunstler.com