Sunday, February 28, 2010

A New Plan

I have decided that it may be time for a change in strategy, a new plan. As part of the process I am going to review a lot of what I had previously assumed to be true, and decide if it is still true.

Usually, when developing a new plan, I divide my thoughts into three sections: why, what and how. So I will divide this post into three parts: Why Do I need a New Plan? What Will I Do? How Will I do It?

Why do I need a new plan?

Late in 2004 I wrote a series of scenarios, including what I considered to be my Worst Case. I now believe that my Worst Case was not the worst that can happen.

Allow me to summarize my Worst Case scenario and review where I went wrong. In summary, it looked like this:
• Sometime between 2007 and 2011 a financial/economic crisis will occur. This will undermine mitigation strategies that would have been undertaken to address the Peak Oil problem.
• Sometime between 2012 and 2025 Peak Oil will occur. Mitigation action will be completely inadequate. The impact of Peak Oil will reverse the nascent economic recovery, plunging the world into economic chaos once again. The world will be forced down pathways that will be CO2 intensive and destructive to the environment (Coal-To-Liquid, development of tar sands, etc). Mitigation of the Climate Change problem will be rendered almost impossible.
• Sometime between 2020 and 2040 Climate Change will start to impact. This will place more strain on already depleted resources and lead to compounded emergencies and ultimately trigger the outright collapse of entire nations.
• As a consequence we could experience an event comparable in severity to The Great Depression and the war that followed.
• On the positive side – Australia is self-sufficient in food and rich in resources. We import about half our oil, but given time we could adapt to using less oil. I have said many times that Australia is the place to be. (here, here, here, here. and here).

I still think Australia is a better place to be than almost anywhere else, but I'm not sure that my self-assured bug-in strategy is good enough to cope with a Worst Case. So where did I go wrong?

1. I assumed that the problems would occur one at a time, allowing us to at least partly respond to one problem before facing the next.
2. I assumed that we would definitely respond urgently to the problems when they occurred, attempting to address them in some kind of meaningful way.

So what has happened in the last 5-6 years and how have our leaders responded? Three trends stand out:

Trend 1. As we know, the financial crisis occurred. The exact causes will probably be discussed for some time, but certain things are safe to say:
• Instead of basing wealth on increases in production of real goods, wealth was “created” through speculation based on debt. (Some might suggest that a reduction in the availability of energy made an increase in production of real goods more difficult to achieve. A failure to achieve this increase would have triggered a decrease or flattening in GDP and thus a recession. Seeing the warning signs of a possible decline in GDP, the financial Powers That Be blew a series of bubbles by making debt-based liquidity easily available.)
• Debt was allowed to blow out at every level.
• Regulations controlling the irresponsible use of this liquidity were removed allowing this liquidity to be used to create completely illusory increases in wealth (and thus increases in GDP).
• This upside-down pyramid of debt eventually collapsed. Inflated valuations of illusory financial “products” such as CDOs and SIVs were eventually written down to their true worth – nothing.
• When they realized that there was no intrinsic worth inherent in the financial products that they owned and traded, the financial markets became paralyzed.

So what did our beloved leaders do in response to this debt-fueled crisis?
• They created “stimulus packages” to get money moving again. They funded these packages with ….errrr….. more debt.
• They created new committees and new official positions to establish new rules, structures and governance to steer us through this crisis. And they staffed these positions with …..errrr…. the same blood-gorged parasites who gamed the system to create the crisis in the first place.

You are probably thinking that a concussed work-experience student who has left his Ritalin at home could come up with policies that better address the underlying problem. So did I.

In defense of our leaders, I should point out that a drug-deprived, concussed work-experience student won’t be seeking re-election, so he has fewer limitations than our politicians. A politician has about as much chance of enacting fiscal policy purely because it is an important thing to do as the fan belt in my car has of driving the overhead cams purely because it is an important thing to do. They are both part of an overall machine. The machine decides what they do, and if they want to fit in, they do it.

Trend 2. Constraints in the supply of cheap, easily accessible oil started to bite.
Oil hit $147/barrel, then oscillated wildly. Starting in 2007, the IEA warned repeatedly of a supply crunch. These warnings were still being repeated in 2010

Between 2005 and 2010 numerous governments and NGOs created Peak Oil task forces of various types and these task forces delivered their warnings. The most recent such warning came from a group of UK Businessmen that included Richard Branson ( ). This group warned that Oil shortages, insecurity of supply and price volatility will destabilise economic and social activity potentially by 2015.

Here in Australia a number of task forces delivered similar reports, the most recent being Queensland Government’s Oil Vulnerability report.
So our leaders have been busy implementing all of the mitigation actions recommended in these reports right? Of course not! What on Earth was I thinking when I wrote those scenarios?

I assumed that when the crisis was so clearly upon us we would have a war-level response. Wrong. You only get a war-level response when the war has already started. Let us not forget that we were still shipping steel to Japan just prior to WWII, despite the clear warnings that the Japs would send it back to us as gift wrapping for high explosives.

In summary, the Australian Government response to Peak Oil has been essentially nothing.

Trend 3. Climate Change.
Drought and firestorms in Victoria. Melting in the arctic. The first commercial passage through the North West passage of the arctic. Acidification of the oceans. Do I need to continue?

So what did our leaders do about it? Well they rushed off to Copenhagen and held crisis meetings for a week and decided to do …. nothing.

Why I Need A New Plan – Summary.
If you had told me when I wrote my scenarios in 2004 that within 6 years entire nations would be technically bankrupt and defaulting, that oil would hit $147/barrel and that the arctic would be melting. Well, I would have laughed at such an improbably-compressed timeline.

If you then asserted that governments would respond to these events by doing nothing I would have dismissed such a notion as utterly implausible.

My Worst-Case Scenario assumed that these events would be spread over decades and that governments would respond. I speculated that despite the responses, the consequence could be an event of the same magnitude as The Great Depression and the war that followed.

However, in reality things are unfolding faster than I expected, and governments are doing less than nothing. The result will not be fun.

Benign scenarios are still possible, but for my Worst-Case Scenario I am now forced to ask: What is worse than The Great Depression and WWII?