Monday, April 4, 2011

I promised to enlarge on some of the scenarios. Here they are:-
Positive Scenario:
The Japanese economy never recovers from the consequences of the earthquake/tsunami/nuclear damage suffered in 2011. The cost of rebuilding is simply too much for an economy already heavily in debt. Japan's firesale of US treasuries in 2012 leads to a crisis in the US economy in 2013. With debt growing in both nations and without tangible goods or resources in proportion to these debts, they both experience a currency crisis.

Australia's economy survives because Australia is essentially "An island of coal and iron floating in a sea of natural gas". As the US and Japan decline, their resource usage drops in a quite pecipitous fashion and they start shipping bits of themselves overseas to pay the bills. Thus in Australia by 2016 we have plenty of low-cost oil and catabolised resources.

This scenario would involve a brief period of dislocation, followed by rich opportunities.

Negative Scenario:

Being a small resource-rich nation we effectively have a target painted on us. But could a full invasion be effectively mounted and the logistics maintained in a resource-constrained environment? I'm not convinced that a full conquest of Australia could be achieved by a resource-starved nation.

There are two invasion scenarios that I find plausible:
1. Partial invasion.
The invader puts troops on the ground to control some strategic resources (Coal mines, uranium, etc) and the ability to export them (road/train lines and a few ports). The rest of the country is not controlled, but kept destabilised. It is worth noting that China already owns many of our mines and quite a bit of our gas. If resource contention became an issue, China could consider itself quite justified in putting troops on the ground at these locations - purely to protect their interests. The US has invaded countries "in the national interest" with much weaker justification than this.

2. A de-facto invasion by refugees. (It is worth noting at this point that I financially support Amnesty International because I think that Australia's treatment of refugees is embarrassing. I am not anti-refugee, nor am I a xenophobe. I'm not claiming that refugees are in some way evil - because there, but for the grace of God, stand I. I'm looking at what real hurting people would do if faced with a plausible scenario.)

And I think that a refugee crisis is a highly plausible scenario.

As at 2011, the population of Indonesia is around 250 million. This exceeds their carrying capacity and consequently fishing grounds in Indonesia are in critical decline, as is the productivity of much of the land. A major event is going to happen there, it is only a question of when. Right after that there is going to be a refugee problem.

Here is a detailed scenario from the more extreme end of the "Plausible" scale:-
In 2012 Indonesia suffers from a particularly hot dry period and crops die in the field - local farms produce less than half the usual yield. Fishing grounds that were previously overfished are now drawn down further and they vanish entirely. At the same time the price of oil spikes. Energy and food costs cripple the average Indonenesian worker, who is already on a bare subsistence wage. Businesses fail. Poverty becomes widespread and protests sweep through Indonesia. Hunger spreads and 20% of the Indonesian population are at risk from starvation. Tens of millions of Indonesians are impacted and desperate people look at desperate options.

Fishing depleted grounds is less profitable than people-smuggling and many Indonesian fishing boats turn to this enterprise. Indonesian people-smugglers start shipping people to Australia in huge numbers.

Two thousand fishing boats represents a tiny percentage of the Indonesian fishing fleet - but it is enough to completely overwhelm Australia's border patrols. Each boat makes a trip every 2 weeks and each carries an average of 40 regugees. Some of these boats are turned back, but many make it through. Within 6 months the number of refugees hitting Australian shores has reached six hundred thousand. It becomes obvious that Northern Australia is the victim of a de-facto invasion. Lawlessness breaks out in parts of Western Australia and Queensland as the ability to supply this number of refugees with staples begins to fail.

High-profile targets are overrun by refugees in an effort by the refugees to secure attention and food. Civic centres are first, but the next highest profile target in Northern Australia is mines and resources. These are occupied by refugees and the resources are shut in. Every time the problem is resolved a new band of refugees repeats the tactic. Resource production is brought to a near halt.

China owns many of the mines and gas resources in the area. They send troops to defend their national interest. The troops drive the refugees out and occupy the facilities with armed guards who (unlike the Australian troops) are willing to shoot on sight. The situation worsens as refugees riot and loot entire towns. Australian troops respond, but the troops are massively outnumbered and unable to respond to every call for help. Refugees establish control of some areas and settle down to farming and local manufacturing. The previous incumbents are dead or displaced. As news reaches Indonesia that there is land going for free in Australia, more refugees set off for Australia. The Australian Navy simply cannot deal with this number without a change in the Rules Of Engagement and the political will to issue a "shoot to kill" change to the Rules Of Engagement is lacking. Even if such a change was made, there is some doubt that Australian Naval officers would be willing to fire on unarmed refugees. Within a year the number reaches 1.4 million.

Indonesian refugees declare their historic claim to Southern Irian Jaya (also known as the far north of Australia). They use asymetric warfare tactics to drive out the locals and control local resources. Australia's economy is crippled by a de-facto insurgency occurring in Northern Australia.

This scenario would involve a longer period of dislocation. Opportunities would still exist over the long term.

Saturday, April 2, 2011

Declining Resource Quality and the Consequences for Australia.

I’ve discussed the networked resource issue before, here:

and here:

But I want to return to it now and enlarge on how it will play out here in Australia.

I wrote this because I felt that there is a mathematical limit to declining resource quality - and every resource company is experiencing declining quality. There is an inflection point and asymptote that seems to be triggering some strange economic consequences. I wanted to express this in terms that anybody could understand, so I tried to write as accessibly as possible (no equations, only very simple graphs, and definitely no use of the word "asymptote"). This lead to me writing an initial article for “The Oil Drum”:

The problem is that the people in charge of resources are typically only in charge of one resource. While working for one of the “Big 4” consultancies I dealt with these people every day - I am convinced that there is no conspiracy of silence about resource problems. The people in charge are worried that their production is becoming increasingly uneconomic (even at higher selling prices), but from their perspective there is still plenty of their particular resource, it simply requires more money/inputs to extract the resource because the quality is far lower than it used to be.

Unfortunately, nobody is in charge of looking at the sum of the inputs and comparing it to the sum of outputs..... well actually there is an entity in charge, but the entity in charge is "The Market". In the discussion in the second link I discuss market signals and answer the question "How would the inflection point be signalled?"

The short answer is... look around you. Double dip recessions, widespread unemployment, spiralling resource costs, social unrest in multiple countries, non-resource producing countries struggling with decades-long economic contraction that no stimulus packages seem to help (i.e. the ongoing Japanese "lost decades" and the current US and European issues) and, of course, margins so thin that processes cannot cope with any form of major dislocation.

Our economic system was designed for a growth paradigm. If declining resource quality starts to constrain the net amount of free resources then growth cannot occur (yet we will have the illusion of growth because the gross amount of resource extraction continues to grow). When net growth stops, the market signals this event... but the signals are hard to read because gross growth is ongoing (at least for a while). Gross growth is continuing even though net growth is cannibalised to provide the resources for gross growth. The market responds with spiralling prices for inputs.

The market is telling us that this overshoot period will, unfortunately, end – in fact it is ending right now (at least for nations that don't produce resources at a net resource profit).

Despite the vilification that "Limits of Growth" received, the process is playing out before our eyes, right now. It just isn't manifesting in the way that was expected.

We live in a resource-producing nation, so this could represent a huge opportunity for us and our children - Australia could do well as it cannibalizes non-resource producers. But first we need to get through the resource contention and economic turmoil of the next 10-15 years.

The risk to us here in Oz is threefold:
1. Resource contention. A country with resources effectively has a target painted on it, if it exists in a world sufferring from resource issues. But how effectively can war be waged in a constrained resource environment? More on that later.
2. Economic turmoil. We are networked into the world economy. This is going to hurt. However we have survived a few dislocations already and come out in better shape than the rest of the world.
3. A refugee crisis. An influx of refugees that exceeds our ability to care for them is a very plausible scenario. More on this later.

And the upside? If we can avoid the pitfalls above, we could come out of this able to choose the people we want and cannibalize the resources we need. Not pretty, but somewhat brighter than some other nations.

So in this scenario (scenario, not prediction) we would face a tough decade or two (maybe very tough), then emerge into a period of catabolic rebuilding.