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.

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