Tag Archives: Paul Krugman

Crash in Oil Prices Should Bury Peak Oil Once and For All

by Arun Gupta Telesur January 29, 2015

In 1977 Isaac Asimov wrote of “The Nightmare Life Without Fuel.” Writing in the wake of the first Middle East oil shock, Asimov imagined cars and air conditioning becoming distant memories, cities mined for valuable minerals and hardware, and the last barrels of oil hoarded for agricultural and military purposes. A future of scarcity seemed in the cards after the 1979 revolution in Iran followed disrupted global supplies, reviving gas lines and rationing in the United States, and sending oil prices to a stratospheric $117 a barrel in today’s U.S. dollars.

The U.S. economy plunged into recession for the second time in a decade. Inflation, food prices and unemployment all shot up. Energy-importing Third World nations were devastated as expensive crude depleted their treasuries even as the U.S. Federal Reserve jacked interest rates, triggering the debt crises that remain unresolved to this day.

But high prices didn’t last long as Saudi Arabia opened its spigots to replace Iran as the West’s top oil supplier, oil exploration boomed in Texas, and vast new fields in the Gulf of MexicoNorth Sea and Alaska ramped up. By the mid-1980s two-hour lines at the filling station were a hazy childhood memory as I’d zip up to the pump and fill my gas-sipping Nissan Sentra for $5.

We are now replaying that era of energy shocks radiating from the Middle East, tight energy markets, expensive oil and an oversupply and bust. The cyclical nature of the fossil-fuel industry disapproves a concept that’s gained wide support, especially on the left, even though it’s flawed in every way: “peak oil.”

Asimov never used the term peak oil in his essay, but that was the underlying idea. Shell Oil geologist Marion King Hubbert developed peak oil theory in the 1950s, predicting domestic U.S. oil production would peak by 1970 and decline steadily thereafter. In exploiting an individual oil field, Hubbert contended, production ramps up quickly and hits a peak at about which time about half the recoverable oil has been extracted. As the oil becomes increasingly difficult and costly to pump out, the field goes into decline. Think of the production as a bell-shaped curve. The top point means half is gone and half is left. But because population and the economy continue to grow, so do energy needs. Hubbert held that his theory about an individual field was applicable to the continental U.S. oil production and even the entire world, which he predicted would peak around 2000.

After that, as one website describes, comes the nightmare future. “Worldwide demand for oil will outpace worldwide production of oil by a significant margin … the price will skyrocket, oil dependent economies are liable to crumble, and resource wars are liable to explode.”

Except panics over looming shortages are as old as the oil industry itself. One snake-oil salesman in 1855 implored buyers to purchase his petroleum-based cure-all “before this wonderful product is depleted from Nature’s laboratory.” The U.S. government warned numerous times in the 20th century that oil supplies would be depleted in a decade or two. The infamous 1972 Limits to Growth projected that by 2013 the world should have run out of “aluminum, copper, gold, lead, mercury, molybdenum, natural gas, oil, silver, tin, tungsten, and zinc.” Peak-oil theorists like Colin Campbell, Kenneth Deffeyes, Richard Heinberg and James Howard Kunstler have been declaring peak oil for more than twenty years but production keeps rising.

Despite this dismal track record many leftists embraced peak oil during the Bush era. It was a secular version of end times in the post-9/11 world. If movement building seems insurmountable, then it’s tempting to find solace in building post-carbon, do-it-yourself communities and wait for the wells to run dry at which point everything from the “war on terror” to climate change is resolved.

Fervent peak oilers are neo-Malthusians, believing the relentless growth of population and society on their own will outstrip natural resources. While Malthus’s ideas were discredited on scientific, historical, and economic grounds in the 19th century, they live on in peak oil, peak waterpeak mineralspeak soilpeak food and peak everything.

From a scientific perspective, peak oil posits geology as determining oil supplies. Of course oil is a finite and non-renewable resource, but the last decade of spiraling oil prices was caused by Middle East wars, Wall Street commodities speculation, and ecological disasters like Hurricane Katrina, not by natural limits. It’s the socio-economic system that determines how much oil, along with every other commodity, is produced, distributed, and consumed. Grasping why peak oil and its variants are flawed offers a deeper understanding of the global energy order, the politics of climate change, and capitalism itself.

Even the term peak oil is problematic, obscuring how the energy industry works. We may imagine oil as gushing out of a steel derrick in a barren desert, but energy companies are after hydrocarbons in any form. Cars on a highway could be powered by fuel derived from tar sands, natural-gas or its condensates, shale oil, biofuels, heavy oil, or coal-to-liquid. One scenario by the U.S. Energy Information Administration estimates such non-conventional sources could account for more than one-third of all oil produced by 2030.

Then there is the concept of a peak. Even though Hubbert was off by only one year—domestic production peaked in 1971—production looks nothing like his bell curve over time. It rose after each seventies shock, went into a twenty-year funk after the mid-eighties crash, and in the last five years it has soared to near its 1971 peak.

The inherent flaw of peak oil is that it naturalizes capitalism. Energy reserves are determined by price, investment and technology. The current oil boom, driven by innovations in fracking and drilling, tar-sands production, low-cost investment capital and persistently high oil prices, have smashed Hubbert’s theory to bits like brittle shale.

The inaccuracy of peak oil hasn’t stopped prominent figures like Paul Krugman and George Monbiot from flirting with the concept. Monbiot admitted his error in 2012, correctly noting the problem is not too little oil, but too much: “There is enough oil in the ground to deep-fry the lot of us, and no obvious means to prevail upon governments and industry to leave it in the ground.” On the left, Michael Klare has pushed versions of peak oil in books like Resource Wars and The Race for What’s Left. In 2005 Klare declared that “the world is headed for a severe and prolonged energy crunch in the not-too-distant future.” In 2008 Klare wrote that “the current energy crisis is almost certain to be long-lasting.” In 2012 he asserted that “oil prices are destined to remain high for a long time to come.”

Like the hardcore peak oilers, Klare confuses the energy economy with oil reserves rather than analyzing how economic, political, and technological forces turn tight markets into gluts, and booms into busts. While Klare tends not to endorse peak oil outright, he often quotes the ideas favorably. In recent years he has shifted to peak oil-lite, proclaiming the end of “cheap oil” or “easy oil.” Most any gas station these days refutes the “cheap oil” notion. The U.S. average is currently $2.03 for a gallon of gas, close to the inflation-adjusted average in the 1950s.

As for “easy oil,” that’s relative. In 1947 when the first commercial oil well was built out of the sight of land in the Gulf of Mexico it was an engineering marvel and in all of 18 feet of water. Today, Brazil has committed $82 billion to develop a “pre-salt basin” of oil under 6,900 feet of water and additional 17,000 feet of seabed. Japan is in uncharted waters with a pilot project to exploit methane hydrates, a form of frozen hydrocarbon on ocean floors that may be twenty-five times the size of all potential natural gas reserves. While there are uncertainties about these projects, especially methane hydrates, they show huge sums of investment are readily available to an energy industry that can rapidly innovate to develop profitable resources.

Klare, however, dismisses new hydrocarbon sources. He claims shale and tar sands oil is “tough oil” that “will have to overcome severe geological and environmental barriers.” The energy industry, however, doesn’t give a hoot about the environment. As Naomi Klein, author of This Changes Everything, puts it, “[Its] business model is fundamentally at war with life on earth.” And just as low gas prices refute the end of cheap oil, the output from Canada’s tar sands, more than 2.5 million barrels of synthetic crude a day, and U.S. shale formations, nearly 4 million barrels a day, proves tough oil is meaningless.

It’s the quest for hydrocarbons in general and geopolitical maneuvers that’s made the current oil crash rapid and steep. The last major crash was in the mid-eighties, and that taught Saudi Arabia to plan ahead. It’s amassed $750 billion in currency reserves and is pumping oil at full tilt rather than give up market share. The Saudis are willing to weather low prices to punish rivals like Iran and to force some unconventional black gold like shale and tar sands into the red. Conspiracy theorists see Washington’s hand because of the pain inflicted on Russia, Iran, and Venezuela, which all need high oil prices to meet their budgetary needs, but as the Socialist Worker points out, “Saudi Arabia’s decision not to prop up prices is the product of its rivalry with U.S. oil producers, not coordination with U.S. policymakers.” Daniel Yergin, author of The Prize, the Pulitzer Prize-winning history of the oil industry, contends we may be entering a new oil era where the United States supplants Saudi Arabia as the “swing producer” that can exert direct control over oil markets.

Critics contend that given ever-increasing thirst for hydrocarbons historically, any assumption about future usage based on current supply is dicey. That’s true, but “proven reserves” of oil and natural gas, which is the most conservative category, keep rising. One figure that has remained consistent over decades is the “reserve-to-production” ratio. In 1995 the world had an estimated 51 years of oil supply based on consumption that year. After burning through half-a-trillion barrels of oil since then, the global reserve-to-production ratio in 2013 was at 53.3 years.

While peak oilers snipe that Middle East producers overstate their supply, the opposite is the case. Officially, Saudi Arabia has 267 billion barrels of oil, but in twenty years, Saudi Aramco estimates it will have 630 billion barrels of recoverable reserves. That’s on top of current production rates of 4 billion barrels annually. The same is true for the United States, Canada, Venezuela, Iran, and Iraq. They can potentially produce far more oil than what’s listed in their reserves. One study of U.S. oil fields found the actual production was more than seven times the initial reserves reported. Conservative estimates of Brazil’s pre-salt oil fields put it at 14 billion barrels, which means they would eventually produce more than 100 billion barrels.

State companies like Saudi Aramco, known as “nationals,” often resist U.S. pressure to pump more oil because that could lead to a price crash. The nationals control 90 percent of global reserves, so many large fields remain untapped. The “majors”—corporations like ExxonMobil, Shell, BP, and Chevron—are left to grab what they can, such as shale oiltar sands, or search in extreme environments like the Arctic Ocean. This tendency only reflects the market imperative to maintain profitability, not a harbinger of the end of oil. But since Klare focuses mainly on the majors, his view is one in which oil is rapidly dwindling. In 2005 he wrote that “in the absence of major new discoveries, we face a gradual contraction in the global supply of petroleum” because “major private oil companies are failing to discover promising new sources of petroleum.” Yet since 2003 global proved reserves have increased by more than 350 billion barrels, and that is in addition to over 300 billion barrels consumed in the same period.

Shortfalls in supply often stem from U.S. policy to control the global spigot of oil. Obama told the U.N. General Assembly in 2013 that because “a severe disruption could destabilize the entire global economy,” he was prepared to use military force to “ensure the free flow of energy from the [Middle East] to the world.”

Since the 1990s, Washington has disrupted many major oil producers. This includes the invasion of Iraq, the overthrow of Muammar Gaddafi in Libya, sanctions on Iran, and dirty tricks against Venezuela. Ironically these actions tightened the oil market such that domestic fracking and tar sands became profitable. But the world is not about some free for all scramble for oil as in Klare’s “resource wars.” He contends that “unsettled resource deposits—contested oil and gas fields, shared water systems, embattled diamond mines—provides a guide to likely conflict zones in the twenty-first century.”

Other than those countries Washington designates as rogue states—like Iran, Iraq, and North Korea—every state accepts, even if grudgingly, the U.S.-managed global oil order. Even countries on the out are looking for an in. The drop in oil prices helped create the conditions for a rapprochement between Cuba and the United States, and it may be pushing Iran to reach a deal with the White House over its nuclear energy program.

A more accurate view of the global oil order is provided by physicist and geopolitical analyst Tom O’Donnell who terms it “one global barrel.” He argues that the pre-1973 oil system had no meaningful open market, making it a form of mercantilism. Back then the majors backed by Western states controlled the production of oil-rich countries. Supply disruptions to one company could affect an entire consuming country. The new system developed after Third World states nationalized oil companies. The global oil order now works through the market, mainly the London and New York commodities exchange, and is dominated by U.S.-protected Gulf States in OPEC and managed by international institutions such as the Organization for Economic Cooperation and Development and the International Energy Agency. Above it all is the U.S. government.

Klare implies national interests still reign supreme and nations are constantly on the brink of war over shrinking energy supplies. While China may chafe at U.S. control and Russia and the United States are at odds, the global oil order is marked by conflict, competition and cooperation at the same time and often in the same place. In Russia, Western oil companies continue to do business despite sanctions. In Iraq some opponents of the war crowed that Russian and Chinese oil companies that won concessions there marked the “declining influence of American capitalism.” But the scope of revamping Iraq’s oil infrastructure is so large that much of the lucrative drilling and exploration work is going to U.S. oil services firms. More important, Washington policymakers are generally indifferent to who is producing Iraq’s oil as long as it flows freely into the global market and U.S. influence holds over the Iraqi state.

If we could fast forward through time to find when oil production and consumption peaks, that would tell us nothing about the social impact. The 1980s crash was due to an increase in supply and drop in demand. Oil consumption may seem to march in lockstep with population and economic growth, but it is elastic. A barrel of oil today generates three times as much economic activity as it did in 1976. Unbelievably, U.S. oil consumption was lower in the first half of 2014 than the high point in 1989. Factors include lower car usage and increasing fuel efficiency that hit a record of 23.6 miles per gallon in 2012. Yet most European economies produce 50 to 60 percent more economic activity per unit of energy as does the United States. We could slash our oil consumption in half in a decade with a concerted effort. It could keep going down until oil is reserved for far more valuable uses such as road building, metal making and specialized lubricants, chemicals, plastics, and pharmaceuticals.

Oil consumption needs to drop dramatically because of the dangerous planetary effects. But that has nothing to do with peak oil. It’s a matter of how we reorganize our society and economy on the surface of the earth so we stop using the stuff that’s under it.


Filed under Climate Change, Corporations, Economy, Energy, Environment

The American Dream As We Know It Is Obsolete (Alternet)

Why progressives need to think beyond the mantra of creating a “middle class America.”

We’ve hit 14 occupations thus far. The latest ones being Charleston and Huntington, West Virginia, and Lexington, Kentucky. One common refrain is “the American Dream” is no longer possible, it’s dead or it’s a nightmare. The American Dream is shorthand for the middle class utopia. It’s the post-WWII ideal of well-paying working class jobs that can support a family, which have full benefits, and hope that the next generation will be better educated, have more opportunities and greater prosperity.

It’s a powerful mythology that ignores how socially deadening post-war society was. It was based on American Apartheid, virulent anti-Communism and suffocating notions of sexuality. Poverty was still widespread at home, Cold War militarism and the rise of advertising boosted the economy and plunder from the underdeveloped world allowed for increasing standards of living at home.

In the following article published before the occupy movement began I argue against the idea that “saving” the middle class should be the center of political or social struggles. Now, this is highly relevant to the Occupy movement because many people we have interviewed think we can just return to this post-war fantasy with a few policy tweaks and an election or two.

Just as the current crisis festered over many decades and is thus deeply rooted in our socio-economic system, creating a new world means radically restructuring our society and social relations, something that is not going to happen overnight or by electing some Democrats.

Leave a comment

Filed under Economy, Occupy Movement, Politics

Indebted to Lies (The Indypendent)

By Arun Gupta 

From the August 1, 2011 issue | Posted in National | Email this article

CREDIT: Marlena Buczek Smith
There is one simple truth about the discussion of the looming U.S. debt crisis: it is largely a compendium of half-truths, distortions, myths and outright lies.For example, is it true that the U.S. debt unsustainable, which is spurring the budget-cutting fever? Far from it. While U.S. debt is at one of its highest levels ever in terms of gross domestic product, the interest payments in 2011 on the $14.3 trillion public debt will be a mere $386 billion. This is barely more than the $364 billion paid way back in 1998. In real terms, the U.S. economy has grown nearly 30 percent since then. Rock-bottom interest rates on U.S. government debt account for the low payments today, but the practical effect is that servicing the debt as a percentage of GDP is the lowest it’s been in decades.

Or what about hysterical headlines like “U.S. Debt Default Looms” (courtesy of NPR) unless Democrats and Republicans agree to raise the debt ceiling? They are completely untrue. Richard Wolff, professor of economics emeritus at the University of Massachusetts, Amherst, says, if there is no agreement by Aug. 2 to allow the U.S. Treasury to borrow more funds, then “the government instead would choose among cutbacks on various expenditures such as state and local aid, medical aid, for war, for infrastructure. It would extraordinarily unusual for a government in such a situation to attack its creditors.”

If no deal on the debt ceiling is reached this sucks for the rest of us, such as the millions depending on their portion of the $23 billion in Social Security payments scheduled for Aug. 3. But the creditors will be kept happy and there will be no default because that is how government works in a capitalist economy. And even if the impasse dragged on, the feds could dip into $550 billion in reserves, including more than $400 billion in gold at current prices, to keep making debt payments.

One blatant lie is that Republicans and Democrats, the Congress and the White House are serious about reining in budget deficits to reduce the long-term debt. They are not. The Congressional Budget Office calculates that the deficit from 2011 to 2013 will be $3.5 trillion. Over the next decade it will be $8.5 trillion. Now, lots of numbers are being thrown about on spending cuts over a 10-year period, but they keep dropping — the Senate Democrats are currently proposing $2.2 trillion in cuts and costs savings while the House Republicans weigh in at $915 billion.

Cutting one or two hundred billion dollars a year is meaningless. Wolff says, “Even if you cut the debt $300 billion, you are left with an enormous annual deficit that adds hugely to the national debt they all claim to care so much about. It gives lie to the idea that the Republicans and Democrats are interested in trying to cut the national debt.”

Of course, the stand-off is based on another lie: that Congress and Obama administration can enforce cuts over a 10-year period. The budget process is an annual exercise. There is no provision whatsoever to make cuts permanent because they can always be undone by Congress, and taxes can always be lowered or costly new wars started, both of which always seem to happen, widening the deficit once more.

There is no end to the falsehoods and fantasies from the chattering classes. “We are in recovery.” So says Ben Bernanke — since 2009 no less. Obama has been saying the same since 2010, while hedging that it is “painfully slow.” Really? Tell that to the 25 million Americans who are unemployed, underemployed or have dropped out of the labor force. This amounts to an unemployment rate of 16.2 percent, but the real rate is probably closer to 20 percent after factoring in youth unable to enter the workforce or those who have taken early retirement. Try telling the 100 million Americans who are effectively caught in poverty (using far more realistic measures than the government does) or the 6.5 million households with mortgages that are delinquent or in foreclosure that we are in recovery.

The notion we are in recovery is based on believing the downturn was “the Great Recession,” a distortion the New York Times helped spread. Paul Krugman is one of the few mainstream commentators saying that not only is there no end in sight to the four-year-long slump, let’s give it a more accurate label such as, “the Lesser Depression.” Suppose the corporate media had been saying “Depression” for the last few years. It would have bolstered support for extraordinary measures to dig out of an extraordinary crisis, such as policies that did work during the last depression: jobs programs, infrastructure, social welfare, stronger labor rights and aid to local governments. But this would mean redistribution of wealth downwards instead of upwards. Therefore, saying recession makes it sound part of the normal boom-and-bust cycle, one we will overcome through the magic of the market as we have so many times before.

Recovery means we can move on to reducing the debt so as get our economic house in order, a big lie told by Serious People whether pundits, politicians or experts. We are being led to think the wisest course is repeating the major mistake of the Great Depression — enforcing austerity in a deep economic funk. It’s a position backed by the New York Times. Sure, the Times may sniffle that Obama’s stunning offer to hack $650 billion from Medicare, Medicaid and Social Security was “overly generous” to Republicans but that is just code for “we in the liberal penthouse support it with mild reservations.” On the other side of the media aisle, the Wall Street Journal endorsed the Republican sadism, saying that none of the critics on the right offer “anything nearly as fiscally or politically beneficial as Mr. Boehner’s plan.”

This is what passes for the range of opinion in the two-most esteemed newspapers in the country. That’s because we are still in thrall of the biggest lie of all — market fundamentalism. An eternity ago, in 2009, Newsweek declared, “We Are All Socialists Now.” They were right, but only in the way America has always been socialists: we socialize the rich when they lose money, and then we socialize their ability to profit.

Thus, the debate is about differing Democrats and Republicans visions on which parts of the welfare state should be packed off to the glue factory. “We all must sacrifice.” Never mind that the effect on the national debt will be laughably small, while the suffering will be enormous. Slashing $650 billion from entitlements — Obama’s burnt offering — will nick a miniscule 3 percent off the national debt by 2020. But we must do it to appease the markets.

Pleasing the markets means pleasing the credit rating agencies — Standard & Poor’s, Moody’s and Fitch — an example of cult-like devotion in which the elite command us to drink the Kool-Aid. Like a death watch, the media turn anxiously to the rating agencies to ask the condition of U.S. government debt. Are they going to downgrade it, which would mean higher interest rates and an even bigger debt problem? This is another lie as Japan’s huge debt — more than twice the size of U.S. debt as a percentage of GDP — was downgraded in January and “there was no negative impact at all,” according to one analyst.

Let’s review how the big three credit rating agencies inflated the mortgage bubble. The bubble was driven by the banking industry’s insatiable appetite for debt, the repackaging of dicey mortgages into profitable securities. The agencies, especially Moody’s and S&P, gave investment-grade ratings to almost any sack of residential mortgage backed securities (RMBS) and collateralized debt obligations (CDO) that landed on their desks. By law, banks, pension funds, insurance companies and other institutional investors need investment-grade ratings on these securities to hold them. Since the rating agencies were paid by the issuers, they were raking in cash by gold-plating shit. Moody’s revenue on these securities quadrupled from over $61 million in 2002 to over $260 million by 2006. For S&P, it went from $64 million to $265 million for CDOs in the same four years and from $184 million in 2002 to $561 million in 2007 for RMBSs.

Don’t think they didn’t know exactly what they were doing. At S&P, one manager emailed a co-worker in December 2006, “Let’s hope we are all retired and wealthy before this house of cards falters.” Then, according to a U.S. Senate report, the ratings firm triggered the financial collapse by downgrading huge amounts of these securities from AAA to junk. In one day, on Jan. 30, 2008, S&P downgraded an astonishing 6,300 ratings. In 18 months the two firms downgraded more securities than they had done in their entire 90-year histories. Once the securities turned to junk, the big players could no longer hold them, which burst the bubble as they were sold in a panic and losses began mounting on the bank’s balance sheets.

We know the rest of the story – the financial collapse, the trillions in bailouts and credit lines, the lack of punishment for executives at any of these firms, the return to obscene profits a year later, the de-fanging of any credible reform. But now, we are being told, the rating agencies word on debt is the word of God.

This time, S&P is not so much looking for a fast buck as nakedly pushing an agenda. On July 14, S&P issued a detailed statement, explaining that it was placing both long-term and short-term U.S. debt “on CreditWatch with negative implications.” It explained that “there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.”

S&P did offer a safe passage. If it determined that if “an agreement would be enacted and maintained throughout the decade” to realize “budget savings of $4 trillion,” then “other things unchanged” it could affirm the stellar ratings on both short- and long-term U.S. debt. But, it warned, any “credible” agreement “would require support from leaders of both political parties.”

S&P is telling Capitol Hill to drive a stake through the heart of the welfare state. To let the peasants know they must till the corporate fields until they die. Otherwise, the credit rating deities will rain downgrades upon our heads, blighting the land for future generations.

We must pay now and forever. This is the truth of the matter, a truth so crude it seems comical. Which is why we need so many lies.

Leave a comment

Filed under Economy