Tuesday, September 29, 2009

What is Cultural Economics?

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It Is ...


The study of how human culture interacts with economic events and conditions. Culture, in this sense, includes everything we are: our political systems, religious beliefs, ethnic character, mores, traditions, history, customs, arts, sciences, and education. These all play a role in how we chose to organize the production of goods and services, the values we place on labor and opportunity, how we make purchase and investment decisions, and how we utilize the resources of this earth. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. In the aggregate, these drive the data that is used to measure how our economy is behaving - markets, raw materials, production, finished goods, revenues, costs, profits, inventory, employment, housing, income, savings, stocks, bonds - and so on.

Why is Cultural Economics Important?

Cultural Economists must have a strong sense of the cultural matrix within which economic phenomena occur. However irrational they may appear, values and traditions are non-the-less relevant to economic analysis. Political and religious allegiance influence purchase decisions. Fear and greed are economic motivators. Attitudes about education, individual rights, the accumulation of wealth and the importance of private property drive the adoption of economic systems and political institutions. Collectivist, dictatorial and democratic solutions compete for political power that will determine how labor, capital and material resources are allocated and managed. Culture defines the collective manifestations of who and what we are, including our religious beliefs, political systems, customs, values, intellectual acumen and creative endeavors.

It should be obvious. If we want to make long range economic forecasts, we must understand how culture and cultural change will shape future economic choice.

What sets Cultural Economics apart from other methodologies of economic analysis?

Economic research frequently yields inadequate conclusions based on irrelevant or obsolete data that has been interpreted using algorithms of questionable relevance. In other words - we play with the numbers. It's a great academic exercise. Then we project our conclusions into the future on the basic assumption that future reality will be an extension of past reality.

Sometimes it actually works. We can usually make reasonable estimates of near term demand and consumption, Gross Domestic Product (GDP), inflation, employment and so on. We have a reasonable probability of success if we are making a specific forecast for event driven data that will occur within the next three to six months. It helps our accuracy if future events within the forecast period are well understood and relatively static. In other words – our economic environment will not be altered by any surprises such as weather disasters or unanticipated political events.

Unfortunately, the longer the forecast period, the higher the margin of error. Cultural change is a given. Our economic environment is always evolving in reaction to current events. If we only use historical data as the basis of our economic analysis, then forecasts that extend out beyond a year or two will be something of a crap shoot.

Why? Because the future is NEVER an exact duplicate of the past. The technology boom of the 1990s was a one time series of specific events that will never be repeated. It is therefore useless to extrapolate the economic data of that period in making forecasts of future events. When the boom went bust, all of our economic data got reshuffled. Sure. We will have other periods of boom - and bust - but they will be propelled by a different set of circumstances. Data from periods like the Great Depression and the 1990s can be used as a point of comparison, an illustration of what might happen, but not a blueprint of future events.

For example. Various economists have made estimates of how the price of oil impacts GDP, inflation and employment. These forecasts have usually been based on an analysis of historical data and events. They generally conclude that oil consumption only constitutes about four percent of domestic consumption and therefore even radical changes to the price of oil will only have a marginal impact on the economy. The numbers are correct.

But the forecast is not.

Why? Three reasons.

  1. Past oil demand occurred in a world where there was excess capacity. Although temporary supply restrictions drove up the price of oil in the early 1970s and 1980s, the supply of oil eventually recovered to a point where there was more than enough oil to satisfy consumer demand. The price of oil then declined. Our cumulative thirst for oil continued to increase. As we look ahead, however, the combined impact of cultural change and declining oil reserves will bring about a continuing decrease in available supply versus a continuing increase in demand. Islamic Jihad, for example, promises to have a negative impact on oil exploration, production and transportation. On the other hand, China and India are scrambling to secure as much oil as they can to satisfy the needs of their growing economies. Since actual consumption will be restricted by available supply, the economic disruption will far exceed a mere change in price. At first, supply disruptions will cause intense shifts in the world’s economy. Oil shortages will drive recession and inflation. Subsequent reductions in economic activity will reduce the demand for oil. When demand falls below available production, excess capacity becomes available and oil is no longer a barrier to economic growth. As economic activity recovers, the demand for oil will again increase until consumption equals production. The cycle will then be repeated. Good times beget bad times beget a resumption of good times. However, as described in “The Report on Oil Depletion”, the cumulative impact of declining reserves and escalating cultural conflict will push the world’s economy into a long term decline.
  2. Generally speaking, relatively short term oil shortages and price increases do not have much of an impact on long term consumer behavior. Despite what happened in the 1970s and 1980s, we Americans continue to favor energy intensive life styles and emerging industrialized powers such as China need a lot more oil in order to continue their economic growth. These life style and economic choices are structural in nature. That means they are embedded in the economic outlook of our respective cultures. The net result? Even though higher prices and widespread oil shortages will unquestionably force a transformation of national cultures, cultural change usually takes a long time to evolve. During the interim, oil depletion will have a long term inflationary impact on the price of oil and a recessionary impact on the world’s economy.
  3. The third reason has to do with the uneven impact of price on individual consumers. In 2002, the national average price per gallon for refined oil consumed was just over $1.50 per gallon. By 2008, it appears the average price for the refined oil we consume may exceed $3.00 per gallon. Since fuel shortages can be expected to increase the cost of transportation, warehousing and distribution, net discretionary income will decrease from 2002 to 2008. The greater percentage of this decrease will fall upon lower income groups. Given the patterns of oil product consumption by income group, and factoring in a three percent per annum increase in wages, if you made $25,000 in 2002, refined oil products absorbed over 8 percent of your income. By the end of 2008, refined oil products will cost you over 13 percent of your income. For someone making $100,000 a year, however, the direct and indirect cost of oil increases from a more affordable 2.35% of income in 2002 to 3.94% of annual income in 2008. There will be substantial shifts in the economy as consumers, particularly in lower income groups, scramble to reduce the cost of transportation. Consumers will demand vehicles that can deliver greater fuel efficiency, there will be political pressure to improve the public transportation infrastructure, and we will be forced to adopt less energy intensive life styles. Economic stress will drive a cultural transformation which – in turn – will drive additional economic change.

We must conclude that if we hope to forecast future reality with any accuracy, we must find a way to factor cultural change into our economic analysis. To meet the demands of this challenge, we need the disciplines of Cultural Economics.

What are the disciplines of Cultural Economics?

Cultural Economics is not some dreary cross between tedious accounting and data necrophilia. It is a science that quantifies the past, present and future of human behavior. If human existence is dynamic, then economics – as a field of study – must be able to characterize the interaction of culture and economics in contemporaneous terms.

  • We start with an understanding of human nature and its expression through the institutions and corporations that characterize our existence on this planet. Every organization has a unique personality. The contemporary economic environment influences organizational behavior. Political and social constraints impact business decisions. And finally, we need to understand research, development, production, marketing, distribution and finance as a series of interrelated business processes.
  • To this we add the sociology and psychology of consumer behavior and the projected evolution of established religious and political institutions. Both will respond to economic, demographic and social trends.
  • We then add information resources that quantify and describe our economic environment - population, employment, inflation, GDP, production, consumption, finance, commodities, trade, property, geography, and so on.

Research is a process of discovery. Raw information is accumulated and assembled into a series of related data structures that describe economic events, trends and environments. We are not looking for random pieces of information. Every piece of data that we chose to save must relate to the essential issues and questions of our inquiry. Research provides information.

Analysis is a process of creation. Starting with validated data structures, we assemble a hypothesis of future reality. Our hypothesis can then tested for logical consistency and intellectual credibility. Analysis yields understanding.

In order to make sense of our economic environment and to forecast future reality, we need to know how to focus our attention on a specific issue. For example, the key issue in our study of oil production and consumption was not - How much oil is left? Or when will we run out of oil? It soon became apparent that the real issue was - How much oil can we (humans) produce? That shifts the burden of research from geology to questions that describe how we find, produce, transport, refine and distribute the products derived from oil. Along the way we need to consider where the remaining oil is located. That leads to questions like: Who actually owns the oil that is left? Under what conditions will they be willing to let us find, extract and transport the remaining oil? Can we find oil elsewhere? What are the production constraints of alternative energy resources? And so on.

All of our questions should be relevant to the key issues we have identified. In doing the research for “The Report on Oil Depletion”, it was unnecessary (however interesting the topic) to become an expert on Islam. It was enough to establish if Islamic Jihad has the resources, intensity, and endurance to disrupt oil production. The next step was to establish a probable timetable and a realistic disruption scenario.

Our Cultural Economics Forecast starts with an examination of industry trends. We must understand existing and projected oil exploration and production by geographic region; the application of technology to enhance the discovery, extraction, refining and distribution of petroleum resources; competition and accommodation among the national governments that actually own most of the oil on this planet; how standards and bureaucratic duplicity impact the veracity of industry data; the role of cultural conflict as a barrier to exploration and production; and how political agendas, government regulation, and environmental challenges impact world oil supplies.

We then build a profile of current and projected consumer demand by examining petroleum market trends, consumer wants and needs, historical and projected demand data, consumer demographics, and purchase criteria. This profile of consumer demand is matched by a corresponding synopsis of suppliers that includes a chacterization of their exploration and production capability, market presence, financial strength, strategy, use of technology and business practices.

Assuming we have done a good job of identifying the key issues and developing a relevant set of questions, we can now plunge into a period of intensive primary and secondary research. We methodically collect the data and collateral information needed to answer our questions. Along the way, we will undoubtedly develop additional questions that scream for an answer because they are critical to our analysis and forecast.

After we collect, organize, calibrate, qualify, verify and synthesize a mountain of data that will (hopefully) permit us to accurately describe the contemporary economic environment and to lay down a credible forecast of future trends, we can proceed with our analysis and interpretation. Our oil production and consumption forecast, and the data upon which it is based, can then be substantiated by treating it as a hypothesis. In order for the hypothesis to be true, it must have intellectual consistency and the individual data elements should be verifiable through further research. If our hypothesis survives this rigorous examination, we have a credible forecast of future reality.

Our final step is to document our conclusions and forecasts in a comprehensive report that not only profiles the impact of resource depletion on oil production and consumption, it can also be used as a basis for projecting the effect of depletion on our economy.

So there you have it.

The market or industry research used in Cultural Economics is a process that involves a number of interrelated steps. Research reports are based on facts and opinions which have been compiled, organized, analyzed and interpreted by someone who understands the research process. Cultural Economics is not about static absolutes. It’s about people. Events. Products. Issues. Questions. Change. And their interrelationship.

Why is Economics called "The Dismal Science"?

Economics has been called "The Dismal Science". That phrase was coined in 1849 by Thomas Carlyle in an essay "An Occasional discourse on the Negro Question.". The essay attacked John Stuart Mill for supporting the emancipation of slaves. Mill, along with many other Economists of that era, assumed that people were basically all the same, and thus all entitled to liberty. The paragraph reads: " Truly, my philanthropic friends, Exeter Hall Philanthropy is wonderful; and the Social Science—not a "gay science," but a rueful—which finds the secret of this universe in "supply-and-demand," and reduces the duty of human governors to that of letting men alone, is also wonderful. Not a "gay science," I should say, like some we have heard of; no, a dreary, desolate, and indeed quite abject and distressing one; what we might call, by way of eminence, the dismal science." There are those who believe that Carlyle's label was also, in part, motivated by Mill's support of T. R. Malthus's gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship.

If my work had been confined to the mind numbing analysis of extinct events described by copious quantities of dubious numerical data; if economics were merely an exercise in abstract analysis based entirely on theory; then my interest would have withered long ago. But I quickly learned that neither number crunching nor theory can predict real world events with consistent accuracy. Because it is people – in their infinite diversity - who interact with economic events and conditions. That undeniable truth makes Cultural Economics a challenging, interesting, and provocative field of study.

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Friday, April 24, 2009

CULTURAL ECOSYSTEMS

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The following excerpts are from my book "Detensive Nation".

We are being challenged. We are challenged to change the way we think of energy. We will not be able to replace all of the oil and natural gas we use with alternative fuels. We will not have a "business as usual" future. We do have to change our economic system and social structure in order to deal with the realities of an energy constrained world. And we will transition to a more sustainable lifestyle.

One way or the other.


Definitions
For the purposes of this book, the term “Culture” includes everything we are: our political systems, religious beliefs, ethnic character, economic psychology, mores, traditions, history, customs, arts, sciences, and education. These all play a role in how we chose to organize the production of goods and services, the values we place on labor and opportunity, how we make purchase and investment decisions, and how we utilize the resources of this earth.

The term "Economics" refers to the extent and process of how we employ capital, labor and materials. In the aggregate, these drive the data that is used to measure how our economy is behaving - markets, raw materials, production, finished goods, revenues, costs, profits, inventory, employment, housing, income, savings, stocks, - and so on.

“Cultural Economics” is the study of how human culture interacts with economic events and conditions. A discussion of Cultural Economics can be found in the “References and Definitions” chapter.

“Cultural EcoSystem” defines the cultural, economic and physical environment within which individuals and social groups function, and includes our emotional and intellectual interaction with other people.


Change and Response
It is hard to imagine the hardship of a world struggling under the burden of chronic recession. Liberal socialism assumes it has all the answers. But it has neither the theology nor the money to achieve success. Conservative thinking tends to distance itself from the humdrum of reality. So. What to do? Start by determining our objective. What do we want to accomplish? What do we want government to do?

Bring us together. As a community.
Help us all to survive - and then - excel.

We humans typically function best in a social environment of responsible freedom. This is especially true within the evolved cultural structures of OECD nations where we expect to have freedom of speech, freedom of worship, the opportunity to achieve for personal comfort and gain, a chance to love and be loved, the fellowship of a comfortable and familiar social fabric, the emotional nourishment of family, and a mutually beneficial relationship with our community. Friendship, love and truth can only exist in an environment of social and economic stability.

Evolved cultures generally abhor feudal and despotic political structures. We are happier in a political and cultural environment that supports individual freedom. Hopefully, that means energy detensive societies will seek to avoid dictatorships and other nasty solutions to the challenges that lie ahead. Nations that have made a successful transition into the 21st century typically have a strong middle class. No matter where they are on this planet, these people tend to have similar beliefs about human existence:

* Prosperity is better than poverty.
* Freedom is better than limitation.
* Plenty is preferable to famine.
* Friendships are the sustenance of life.
* Fellowship is better than hostility.
* Life is enhanced if people are nice to each other.
* Love and caring are essential components of a happy and productive life.
* Sincerity is better than treachery.
* Tolerance is preferable to prejudice.
* Integrity, loyalty, honesty, charity and commitment are the hallmarks of a virtuous life.
* Hard work and clean living are usually rewarded with economic and social success.
* Religious hatred is an archaic expression of doctrinaire conviction.
* Differences in ideology can be resolved through understanding and communication.
* A stable and productive middle class is a desirable component of any national culture.
* Families and family life provide a framework for personal growth, a sense of belonging, and the essence of love we share when we care for others.
* Children are to be loved, nurtured and protected because they are an extension of our being and inspire the emotional experiences of living.
* Education is a personal right and an essential component of a productive life.
* Empires are an obsolete form of government.
* Human welfare is more important than national power.
* Despotic governments are to be avoided.
* Peace is better than war.
* The rule of law is preferable to anarchy.
* If disease can not be eradicated, then at least it must be controlled.
* We must conserve and care for our environment.
* The resources of this planet are finite. We must learn to live with the inevitable limitations.
* All members of a culture must benefit from their participation.
* Private life should be free from ideological pressure.

Cultural conflict is – unfortunately - inevitable. It can be mitigated by replacing discord with tolerance, understanding, education and communication. Although disparities of wealth are inevitable, there can not be a crushing difference between the economic circumstances of the rich versus the poor. Most people just want to be left alone so they can go about the activities of daily life without fear or interruption.

Human intellect and emotional health need the freedom to achieve and excel, the freedom to embrace perceived opportunity, the freedom to embrace personal beliefs, the freedom of reasonable self expression, the freedom of association, and the freedom to act in one's selfish best interest.

We humans, thank heavens, are usually sufficiently malleable and adaptable to adjust to changes in our environment. We can deal with physical change. We have a tougher time dealing with emotional and intellectual challenges because these require the adoption of new ideas. We like our habits. They fit us like a comfortable shoe. We do not have to deal with the unknown.

That reluctance, or intransigence, to deal with change presents a problem for our conversion to an energy detensive culture. For the last fifty (or more) years the individual has been increasingly isolated from normal human interaction by the oppressive demands of a screaming media, far too much information, and a frenetic existence.

In this new world we will have to act as community.
That means the emphasis on diversity
will have to give way to the adoption of integration.
We are, after all, in this together.

The neighborhood community only works if we love one another as equals, communicate as friends, and act as co-operating individuals. A requisite of relocalization is “coming together”. Class distinctions make no sense.


Institutions
An organization may be thought of as a group of people whose collective activities have an ordered existence that is intended to fulfill a common purpose. The group of people may have been brought together by a common cause, shared beliefs, or employment. The group's collective activities may be for a commercial, spiritual, or cultural purpose. Some form of order is imposed by selective members of the group on the activities of all group members. The rules, procedures, rituals and behavioral norms of individual participation may range from the assumption of laissez-faire attitudes to the imposition of strict responsibilities. The organization confers rights, obligations and liabilities on the individual participant. Participation will range from informal (casual) to formal (conferring implied or specific obligations).

Organizations become institutions when they take on an existence of perceived historical permanence that is separate and distinct from the lives of individual members. Institutions project a presence and authority that is larger than the influence of individual participants. There is a structure that confers power on selected members, demands obedience from all participants, and preserves the existence of the institution. For the purposes of this discussion, institutions may include churches and other religious organizations, charitable and fraternal associations, unions, political parties, government entities, corporations, hospitals, universities and so on. The Catholic Church, for example, is an institution that is separate and distinct from Catholics as a body of parishioners. The Republican Party is an institution that projects a presence that is more important than the existence of individual republicans. The Labor Department represents the activities of thousands of (largely) faceless government employees. General Electric and Harvard University are icons that have more charisma than any of the individuals that participate in their activities.

Organizations tend to be limited by the strengths and weaknesses of their management. Successful organizations - corporations, government agencies, universities, religious institutions, charities and so on - will normally have a strong and effective management team. The organization's leadership has a clear and informed vision of goals and objectives. It will usually be proactive, rather than reactive. These leaders, including individuals at all levels of the organization, are able to combine a comprehension of the organization's place in the real world with the capability to execute a detailed operating plan that permits the organization to succeed. Participants (employees or members) are focused on a strategy that will lead to accomplishing specific goals and objectives. There is a sense of mission, a sense of urgency and a sense of pride to be involved in the organization's mission. Most of the participants (employees or members) have a sense of belonging. The organization or institution provides a frame of reference for their daily activities. Tasks and work processes assume meaning because they are related to the success of the organization's mission. For each individual, success is measured in terms of results. Human energy is focused on the completion of assigned tasks. It is not wasted on debilitating internal political power struggles. Instead, the naturally competitive spirit of human endeavor is channeled into constructive activity that benefits the institution.

In this environment, the organization's leaders are not preoccupied with finding the most politically acceptable response to the inevitable challenges that occur in the course of an organization's activity. Instead, potential conflicts are resolved through pre-emptive personnel communication and proactive public relations.

Unfortunately organizations that have morphed into recognized institutions have a tendency to fossilize because bureaucratic rules, processes, privileges and restrictions suppress freedom of action. As this process permeates the institution, the organization invariably deteriorates, ceases to exist, or becomes irrelevant.

In general, institutions are opposed to change because change dislocates the participant's frame of reference and perception of personal status, disrupts the political structure of the organization, may force the reformation of the institution's culture, and impacts the rules, procedures, rituals and behavioral norms of individual participation. The larger the institution, the less flexible it becomes because increased size demands the incremental imposition of formal behavior. The older the institution, the greater the resistance to change because organizational aging breeds an increasingly rigid culture.

There is a fixation of beliefs. Symbolic exercises become pedantic routine. Traditional rituals are retained even though they no longer serve any useful purpose and may actually be antithetical to how the real world actually works. Truth is standardized and eventually fossilized. Artificial rituals and mindless rules crowd out innovation. The institution's embedded culture will tend to support the continuation of doctrinaire positions that create artificial social, intellectual, spiritual and emotional boundaries. There is a tendency to venerate the past while ignoring present needs and opportunities. Such traditionalism fosters false and exaggerated ideas of sacredness and fails to make contemporary interpretations of values and practices.

Zealots, in a display of very human behavior,
will defend the institution against change
because change is viewed as a heresy
against established beliefs.

Organizations are the invention of the human mind. They consequently display very human characteristics. Some participants will strive to accumulate power and authority. Others prefer to avoid personal responsibility or chose to maintain a low profile in order to keep from being blown out by internal political struggles. Competitive divisions and numerous cliques will inevitably develop. They encourage discrimination, elitism, and “chosen people” attitudes. These inner circles tend to believe that everyone else is an outsider who can not be trusted. Participation in the clique confers personal status and a sense of comfort because participants are dealing with familiar relationships. An “us” versus “them” psychology inevitably develops.

All institutions run the risk of evolving into politically active hell holes where everyone is backbiting everyone else. There is a nasty adversarial elitist struggle for personal position in the hierarchy. When institutions fall into this trap, they inevitably deteriorate because the accumulation and use of political power becomes more important than achieving the objectives or performing the duties of the institution. Rather than make rational decisions based on a careful evaluation of facts, decisions within this environment are made on the basis of political power. All too often, creative ideas are destroyed simply because one or more factions within the organization chose to oppose the idea merely to demonstrate their ability to dominate the decision making process.

Institutions are afraid to take risks. Risk requires the implementation of the unknown and the results can not be guaranteed. Failure is not politically acceptable. The retention of power is based on being right and consequently it is better to do nothing (frequently while appearing to do something), than to take an action which fails. If catering to the press is an important requisite of power retention, then it is inevitable that the selected course of action will conjure simplistic images rather than creative change. This is especially true when considering the decisions of government. Badgered by the press and mindless critics, there is no allowance for error. Creative experimentation is not allowed.

Institutions create bureaucracy. Rules, Procedures and Systems are necessary to maintain order. There is the impersonal application of general rules, both to outsiders and to internal staff. Applied rules are likely to be a repetition of what has worked in the past. They are made on a blanket basis, applying to everyone without regard for sanity or common sense. Rules are often part of an overall system, work process, or procedure. Since change can be disruptive, flexibility is to be avoided.

Bureaucratic procedures are usually proposed or written by people who do not have the capacity to understand their impact. They are made by an authorized person (autocratic) or by a committee (the pseudo democratic autocracy of the proletariat). Bureaucratic committees are usually populated by individuals who are ill equipped to make reasonable rules. Individual member motivation is likely to be political, rather than rational. The larger the committee, the more likely it is most of the members will not be able to make a contribution.

There is an inclination of leaders to become administrative bureaucrats or defenders of the institution rather than managers and communicators. Oppressive authority evolves. Rules and regulations replace creative leadership. Red tape and ingrained attitudes smother creative thinking. Traditionalized, dogmatized, and institutionalized organizations fail to hold the interest of adventurous people who could care less about their existence. As the institution is trivialized (becomes irrelevant), it becomes the target of scorn or is simply ignored. Although there is a retained façade of historical purpose, its actual activities invariably deviate from its original mission. What is the lesson? The creations of human invention inevitably deteriorate.

All institutions are destined to become obsolete.
It is a natural process.

Competitive and market driven institutions, such as corporations, can be revived by disruptive management because their continued existence depends on a positive transformation. Change is motivated by economic need. Although institutions that tend to be constrained by internal political squabbling, such as universities, are more difficult to change, they can also be revitalized. Their stature, economic success and relevance are at stake. But government institutions - legislatures, administrations, agencies - have the unfortunate ability to hide behind the protection of political dispensation and the police power of the state. Zealots will defend government institutions against change if change promises to alter perceived selfish-best-interest. Disruptive management, which could revitalize their purpose, is not allowed by the conceit of entrenched political power.

Even if they have become corrupt, irrelevant or
dominated by special interest agendas,
even if they are no longer needed
or have strayed from their original mission,
the institutions of government tend to survive.

Until there is a revolution.


Ideology
Ideology gets in the way of good government. Fascists, Communists, Socialists, Liberals, Conservatives, Anarchists and their ilk are idealists. With great fervor they insist on the adoption of management systems that will not work because they either ignore the reality of human nature or the structural needs of orderly management. They almost always either do not understand, or choose to ignore, the mechanisms of successful organizations. Worse, ideology is relentless progenitor of human division, dissent and disillusion.

But ideology will not go away. Ideology is the fertile dung heap for ceaseless, self-righteous intellectual masturbation. Millions of hours have been wasted on social theories that have little to do with cultural economic reality. We should learn from history. No specific ideological theory of government has always worked to the benefit of the governed. Installing a democracy does not equate to the achievement of independent democratic values. When voters installed Slobodan Milosevic in Yugoslavia, they empowered a government policy of ethnic cleansing. Adolph Hitler was elected to be Chancellor of Germany. Religious fundamentalist violence has accompanied democratic elections in Iraq, Indonesia, Nigeria, India, Iran and Pakistan. Communist and socialist theories have collided with economic reality and human nature in Russia, Great Britain, France and wherever else they have been tried. Dictatorships have failed to meet the cultural and economic needs of the governed in North Korea, Iraq, Germany, Italy and almost everywhere else they have been established.

Given a reasonable Cultural EcoSystem,
it is effective management - not ideology –
that makes government a functional success.

Independent democracy is the traditional form of self-rule found in countries like America, Australia, and Great Britain. Independent democracy combines the idea of individual rights with the concept of majority rule. Independence of thought and deed are exercised within the disciplines imposed by the responsibility of living in a democracy. Majority rule (popular sovereignty) enables a self-governing democracy. Independent Americans want a democracy that limits the role of government, guarantees the individual freedoms described by the Constitution, allows them to pursue their own interests and generally mirrors middle class moral values. Given the availability of suitable opportunity, the desire to be successful, and sufficient personal ability, it is believed that all individual Americans should have an equal chance to succeed in their endeavors. Independent Americans expect individuals to be treated equally before the law and to be responsible for their actions. In their view, people should be judged by their character and not by the characteristics of the group to which they belong. In an independent democracy, people form voluntary associations to achieve political and personal goals. Civic participation is therefore inclusive - open to everyone. Independent Americans believe that the private sector should be free from the interference of the State. Because we humans are not perfect, an independent democracy must have an internal structure of checks and balances in order to avoid corruption or the abuse of political power.

There would be little need for alternative ideologies,
if the ideologues could simply agree
on what they wanted for humanity.

Unfortunately, government institutions always attract those who seek to elevate their economic and collective power. The more bureaucratic the government, the greater the distortion of social and economic dispensation, as the participants - bureaucrats, politicians, voters and aliens - recognize that personal success depends more on political influence than on self reliance.

Democracy only works if it is based on the considered consensus of the majority of those being governed. A fundamental assumption of any working democracy is that the minority will agree to abide by the will of the majority. If the consent of the majority is defeated, whether by legislative process or by court ruling, and the police power of the State is used to enforce only a consideration of the minority, then democracy ceases to exist.


Why Governments Fail
One of the fantasies espoused with fervent ignorance is that the cold war ended when Communism failed. It had finally been proven, went the argument, that Communism is an inadequate form of government. Since Democracy provides a better means of managing the affairs of State, Democracy had won the contest.

When the communist government of the USSR collapsed, liberals and conservatives of every political affiliation struggled to find an explanation. Liberals in America, Canada and Western Europe had generally supported communism as a political theory, often comparing it as a preferred alternative to what they perceived as failed democratic institutions. For them, the demise of Russian communist rule was an embarrassment. By contrast, conservatives rejoiced at what they perceived as a victory for democracy. They believed that socialist political philosophy had been trampled by the reality of current events. The accepted explanation for people of both philosophies was that communism had lost the cold war. Democracy had won.

They were wrong.

Communism failed because Russia's leaders had lost the ability to govern. Russia's convoluted, corrupt and ossified bureaucratic institutions simply stopped working. The people did not make a conscious decision to overthrow Communism in favor of Democracy. They adopted a democratic form of government because it was perceived as being the only credible alternative to their failed institutions.

Democracy did not win. Communism did not lose. In reality, the Russian Government had simply stopped working. The Russian people were forced to adopt democratic capitalism because the credibility and the processes of bureaucratic centralized planning had evaporated. Ideology had little to do with the practical reality of finding a way to manage the affairs of government. If the Russian people choose democracy - even a pseudo democracy - it was because democracy appeared to be more acceptable than other alternative forms of self rule.

And that provokes an interesting question: Do Americans face the same uneasy dilemma that forced a change in Russia? Could it be argued that America's democratic institutions are suffering from the same cancerous problems that ended Communism?

Absolutely.

Governments fall from power because they either ossify or become too soft. In the former case the natural course of bureaucratic behavior creates an unworkable system of regulations backed by the stupid, overbearing and arrogant use of police power. The management functions of government become hopelessly entangled in politically motivated decisions that have nothing to do with present or future reality. In the latter case, government becomes so liberal that it can only act in a cowardly fashion. Pandering to the demands of the mob, justice and morality are continually degraded in a vain attempt to find the lowest common denominator. Groups gain special status through the granting of exclusive privilege. In either case, personal freedom is lost. Individuals can only survive by acting outside the system.

It is America's sad misfortune to suffer from both malady's at the same time.

All national governments are bureaucratic institutions. The underlying political philosophy may be totalitarian, authoritarian, democratic or laissez faire. It doesn't matter. The administrative success or failure of any government depends upon how well it manages the bureaucratic processes of governing. Successful governments will normally have a strong and effective leadership. There is a reasonably clear and informed vision of goals and objectives. It will usually be proactive, rather than reactive. Leaders at all levels of government are able to combine a comprehension of the country's place in the real world with the capability to execute the work processes of administrative management. Corrupt behavior, which plagues every nation, has been minimized either by the rule of law or outright oppression.

All national governments face the same political problem. The majority of the governed will continue to support their government if it appears to sustain the satisfaction of their selfish-best-interest. But governments fail for many reasons. Bad management, oppressive bureaucracy, a lack of natural resources, economic depression, social dislocation, religious civil war, cultural conflict, endemic corruption and human oppression can destroy the ability to govern. And as the Russian experience shows, the institutions of government will inevitably break down if they are allowed to strangle on the ravages of bureaucratic behavior. We must ask ourselves one simple question: Are democracies immune from the institutional problems that disrupted the rule of Russia's communist government?

No. Obstreperous bureaucratic behavior is an endemic problem for all governments.

It is remarkable how little collateral damage occurred when USSR shifted from communism to managed democracy. A similar transition in USA has the potential to be far more bloody because the liberal promotion of cultural diversity has created powerful opposition forces who will support their ideological solutions with fanatical zeal. If the American people are forced to restructure the institutions of government, what is their alternative? Will it be the class conscious, liberal, socialist, cultural democracy ideologues versus those who champion the integration of a homogeneous, moderate, egalitarian, entrepreneurial, independent democracy?

A worldwide depression will trigger cataclysmic change. Economic collapse always increases the appeal of an authoritarian political message. The electorate feels betrayed by events over which they are powerless. Democracy - indeed all forms of national government - must be able to match human anticipation with cultural economic reality, or the governed will look for an alternative form of rule. And in some cases, that means that governments must do what they absolutely fear the most - they must reduce the scope of the services that they can deliver to the governed. America, Canada, France, Germany, Great Britain and Australia are among the countries that will have to decrease the welfare, health care and retirement benefits of the electorate because they will be impoverished by current events and past mismanagement.

Americans are a generous and friendly people. That is their Christian heritage. But the frustration and poverty of a depression will make the country politically unstable. Cultural diversity will become the breeding ground for raw intolerance. And if a dictatorship ascends into power over the United States, then think revenge. Think hatred. Think of war as a cathartic release for pent up rage.

Too bizarre to happen you say? You forget your history. Go back and look at what happened in Germany from 1919 to 1945. Remember the Nazis? World War 2? Concentration camps? Millions dead from bombs, guns, disease and starvation? Who would have believed these god fearing, intelligent, culturally solid and industrious people would commit such atrocities?

But they did.

When the American stock market collapsed on Tuesday, October 29, 1929, a financial tsunami surged around the world. Germany, still struggling to recover from sanctions imposed after WW1, fell into disarray. Unemployment and inflation soared. Banks closed. Savings accounts vanished. Middle class Germans were ruined.

Adolf Hitler saw political opportunity.

The tiny, fanatical, highly disciplined Nazi party was able to capitalize on the disintegration of Germany’s democratic institutions. The Reichstag, torn by ceaseless bickering, had become an irrelevant institution. Hitler was able to enlist the support of several German industrialists and upper class socialites. A charismatic speaker with a good sense of what the German people wanted to hear, Hitler was able to rally support for his campaign. When Bruening asked Hindenburg to dissolve the Reichstag and call for new elections on September 14, 1930, the Nazi Party was ready to take power with a sense of mission and a positive message. The German people were ready for a new government.

Does any of this sound familiar? If it happened in Germany, it can happen in America. As I write this (2007), American public approval for this Administration is about 34 percent among likely voters. Not good. But public approval of the job Congress is doing is under 15 percent. Voters apparently believe Congress is an abysmal failure. One would think the Democrats would be pleased with a democratic Congress. But they do not appear to be very enthusiastic. Ten percent of very liberal people, 21 percent of liberals, and 19 percent of Democrats approve of the job Congress is doing. Other voters poll lower. Fourteen percent of very conservative and conservative people polled gave Congress good marks. That approval drops to 13 percent for Republicans and 8 percent of independents. Only 25 percent of all voters believe America is headed in the right direction. (Zogby International poll, July 2007)

Congress is torn by ceaseless bickering. Has it also become irrelevant? All we need is a catalyst to convert this disgust into aversion. Chronic recession, a depression, or terrorist activity could be the trigger.

If our Federal Government continues to drift away
from the traditional values of responsible democracy,
it will not endure.

Powerful political forces are attempting to reform the character of our institutions to suite their vision of a perfect autocratic society. Arbitrary law that panders to social caste, backed by the police power of the State, is used to gain support from blocks of voters. The sordid instincts of competitive animal behavior focus on the acquisition and preservation of political power. Voters become chattel. Ignorant ideology replaces economic justification, individual freedom and common sense as the basis for legislation. The institutions of government are rendered ineffective and excessively expensive by growing mismanagement. This form of government can last for as long as the governed will tolerate the inevitable detestation, corruption, incompetence and restrictions of an oppressive bureaucratic system.

American democracy was originally founded by a group of largely middle class colonists based on their cultural beliefs and their knowledge of the institutional failures that had besieged the nations of Europe. They wanted to avoid the obvious mistakes, form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty for themselves and their posterity. It was assumed that a nation of free men and women would share a belief in a supreme being. It was assumed that individual freedom incorporated the concept of individual responsibility.

A government which seeks to elevate the human condition takes its sense of mission from spiritual beliefs. Although Christianity has typically been used to provide this basis, any profound and moving relationship with a supreme being that encompasses the principals of friendship, love and truth will provide the necessary visualization. Within this context, terms such as industry, fidelity, caring, charity, honesty, and integrity are essential descriptors of personal behavior. America’s founding fathers firmly believed these characteristics must guide the legislative and administrative processes of government.

Founded as it is on the best impulses of human conduct, America can only decline if it abandons them in favor of elitist ideologies that promote the acquisition of political power over the individual.

Unfortunately for Americans, our Federal government has neither a strategic nor a tactical plan to manage the affairs of our nation. What happens next is a random walk. Our destiny will be determined by fate and the world’s ever-changing Cultural Ecosystem. There is no mechanism that compels either Congress or the Administration to address, and resolve, the constant stream of issues and questions that confront our highly complex culture. Worse, even when decisions are made, there is no universal commitment to success; i.e. a substantial percentage of the participants hope the initiative will fail in order to bolster their own selfish objectives.

Sabotage is a political weapon.

Why do we believe this management process will work? If we don’t know what we want to accomplish, how will we accomplish anything? Since we have no meaningful goals, we also have no timeline to accomplish them.

It will take forever to do nothing.

And yet, despite its highly probable failure, there are those who are dumb enough to believe the government should run everything.

Our existing economic crisis will encourage radical change. The looming fossil fuel energy crisis will absolutely force political change. When it hits. When the proletariat begins to suffer…..

The mob will ask two questions:
Why did you let this happen to us?
What are you going to do about it?
If the Federal Government does not have a good answer,
we the people are going to be looking for a new government.

One that actually works.

Is this America's future?


Western Government
Federal government malaise is not confined to America. OECD political institutions are consumed by an increasingly acerbic confrontation. Liberal versus conservative. Us versus them. We spend our time on old issues because we are unable to confront future reality.

The selfish accumulation of political power is more important than legislative wisdom. Government is supposed to be responsible for managing the future of humanity. Our Cultural EcoSystem. But that is not happening. Institutional obsolescence and imperious privilege have paralyzed the management process of contemporary political institutions. Belligerent behavior, uncompromising ideology and plain ignorance pass for legislative wisdom. Cynical commentary parades as moral righteousness. What ever happened to the accumulation of information based on objective research and the process of making decisions based on erudite analysis?

Have we forgotten how democracy is supposed to work?

If all governments operate on the principle that the preservation of political power is far more important than making rational decisions, if the satisfaction of selfish-best-interest always takes precedence over rational inquiry, and if ideology is always more important than truth, then it is guaranteed that increasingly dysfunctional national governments will be incapable of implementing the programs we so desperately need in order to survive the cultural and economic holocaust that lies ahead.

Our politicians have no intention of compromising their quarrelsome behavior. Worse, western political institutions are unable to deal constructively with Islamic terrorism because anything they attempt will be construed as politically incorrect. The idealists - liberal or conservative - insist on living in a world that does not exist. And until there is an overwhelming crisis, they can continue with their fantasy. Will obstinate self-righteousness make it impossible to mitigate the economic and cultural disaster of resource depletion?

Yes.

Will increasingly stressed, and heavily indebted, national governments will be able to deal with future economic and cultural challenges?

Probably not. Existing governments are in big trouble.


One
Peoples within nations that have not made a successful cultural transition into the 21st century will tend to loathe, ignore or disbelieve the characteristics of contemporary OECD national culture. They continue to be oppressed by their ancient beliefs and subsequent distrust of outsiders. Ignorance always emphasizes hatred as a release for self inflicted frustration. But for advanced civilizations, dictatorships are an obsolete form of government. Autocratic rule must be replaced if humanity is to achieve universal freedom. Those governments that fail to support individual civil rights and personal freedom face rebellion as national populations learn about these values.

Every civilized nation has gone through a transition from authoritarian rule to independent democracy. Tribal leaders came under the control of war lords, kings consolidated war lord territories into regional fiefdoms, emperors formed nations, the rise of the middle class encouraged the formation of autocratic or democratic nation states.

Democracy based on the concepts of individual civil rights and human freedom has become the foundation of enlightened 21st century governments. It took the nations of Western Europe almost 400 years to make this transition. It took 200 years for American and Canadian nationals to replace foreign colonial rule. The rise of a self-determining middle class composed of business and professional people enabled South Korea and Taiwan to convert from authoritarian rule to a managed democracy in less than 30 years. China is now struggling to make the same transition. The replacement of socialist, communist, and tyrannical dictatorships with more democratic institutions is the natural evolution of human political structures. But each nation will make the transition at its own pace and we must recognize - some nations will fail because they do not have the necessary cultural and economic means to succeed.

How can mankind encourage emerging nations to adopt 21st century democratic ideals? It is a two step process. First there must be a cultural change that educates the population to the benefits and responsibilities of democracy. Then a democratic political system can be installed. The transition can be implemented by means of a Managed Democracy. Managed democracy seeks to combine the benefits of limited democracy with the orderliness of centralized management. Authoritarian rule manages the bureaucratic functions of the State and enforces cultural discipline. The governed are encouraged to engage in limited democratic processes as they discover the benefits and responsibilities of independent democracy. They learn to embrace middle class values, including cultural tolerance, individual human rights, the rule of law and the protection of private property. They develop the ability to be self reliant entrepreneurs. Violent confrontation is gradually replaced by enlightened discussion and the will of the majority. Managed democracy is a particularly attractive option for nations that are transitioning from obsolete cultural norms to 21st century beliefs. Indeed when we talk about "nation building" in countries like Iraq and Afghanistan, one of the key objectives is to establish a vigorous middle class whose value systems will have a stabilizing influence on national cultural beliefs and behavior. In these efforts, the rulers who are enabling the transition must have a strong vision of their goals as well as the means to achieve them. Else they will fail.


Religion
Christianity is at a crossroads. Socialist cultural democracy clashes with ancient doctrine. We humans desperately need an enlightened vision of the spiritual universe.

The post WW2 baby boom produced a prolific growth in mainline church attendance during the 1950s. Americans scrambled for a conventional Sunday experience wrapped in an increasingly ecumenical, open-minded theology. By the 1970s, however, many Christians had turned to a more conservative theology, leading to the growth of evangelical and bible text centered faiths. Mainline church attendance began to decline. Thousands of churches closed. There was strong growth, however, within the Catholic Church (largely due to the migration of Mexican and South American Catholics into the United States), the Southern Baptist Convention, the Church of Jesus Christ of Latter Day Saints (Mormons), and Pentecostal churches. The Roman Catholic (69 million), Southern Baptist (16.3 million), and Methodist (8.1 million) churches remain the three largest denominations in the country. (NCC)

Overall Church attendance is declining (down 12% from 2000 – 2006). Declines have been particularly noticeable among mainline churches started before 1960. By contrast, nine out of ten new congregations have been started by evangelicals. More than 95 percent of America’s very large churches espouse an evangelical theology. (NCC)

Church membership growth is not keeping up with population growth, and on any given Sunday – less than 20% of Americans will walk through a Church door. If there is any growth in attendance, it is for the very large mega churches and within the thousands of very small congregations. (NCC)

There has been a significant fragmentation of theology within Christianity. Absent charismatic leadership, the Christian experience mostly centers around ancient tradition and doctrine.

Depression or chronic recession will drive a cataclysmic change to our Cultural EcoSystem. Confusion. Distrust. Fear. Hurt. Economic deprivation. Psychological trauma. Millions are going to need the comfort of a stable and re-assuring religious experience. We will seek solace.

Will our religious institutions be able to handle the challenge?

Absolutely – yes. But they will need time to get organized. Religious organizations are, after all, human institutions. There will be a temptation to rely on obsolete theology in a crumbling Cultural EcoSystem. But the old ways will not work. This is change on the gut level. Successful religious groups will evolve into inclusive community institutions. Mix the theology with compassion and forget the politics. Rely on the goodness of Christian middle class values.

Local religious groups can become a significant source of volunteer support for community activities. If local government is willing to identify these groups, and work with them, they can become a key component of organizing a response to the lifestyle challenges that lie ahead. These congregations provide a focus on human compassion, a psychological framework and reference for the bewildered, and a place to organize faith based volunteer support for the community.

Why am I concerned about the role of religion in the community?

Well. I am a Cultural Economist. And a positive, constructive religious experience will be a key component of successful communities. Inspirational worship and warm hospitality can do much to bring the community together.


Objectives
The future of mankind will be decided by the kind of government we the people demand in the 21st century. Cultural and economic chaos will force government to make a choice: fail or succeed. If our political institutions are unable to change, then failure is certain. If government wants to succeed, then we need to frame a new set of objectives based on the exercise of inclusive and compassionate leadership, accompanied by thoughtful innovation, a recognition of practical reality, and a sense of vision.

The ultimate objective is – of course – to ease the transition from our existing energy intensive lifestyle to the Cultural EcoSystem of an energy Detensive Nation.

Ron


Note: NCC : National Council of Churches
OECD : Organization for Economic Cooperation and Development
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Saturday, March 28, 2009

Zhou Xiaochuan: We Need An International Currency

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China wants to divorce the dollar. Good move. The dollar is on the brink of considerable depreciation. Premier Wen Jiabao is concerned looming inflationary pressures will sharply decrease the value of American debt held in Chinese banks. In order to encourage create greater monetary stability, Zhou Xiaochuan wants to create an international currency unit that can be used in trade as well as a standard against which other currencies can be pegged.

Zhou, an economist who is currently the Governor of the Peoples Bank of China, is absolutely right. We do have a global economy. To facilitate trade, we need an international currency. I mean, how can we have a global economy unless we also have a global currency? The dollar, which used to provide the functions of a reserve currency, has been decimated by Congressional ineptitude, administrative failure, and ideological egotism. Few believe it will recover any time soon.

So. The idea of an international currency is worth considering. Assuming the creators are able to make policy decisions based on constructive wisdom. If the dialogue degenerates into a political power play among participating nations, then nothing good can come from the effort.

By the way, we also need to create a way to regulate the international financial system, uniform international commercial law, and a uniform way to regulate international corporations. Current practice invites confusion, conflict and confrontation.

But for now, I’ll settle for a constructive dialogue on the subject of an international currency. Will the participants choose to peg the value to gold?


TCE
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Friday, September 05, 2008

Welcome to the Frozen Economy

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Shoshana Zuboff's July 14 column for BusinessWeek.com, marked a departure for the former Harvard Business School professor. She sat down with locals at Moody's Diner in Waldoboro, Maine, for an informal coffee klatch/focus group to find out if the economic slowdown was making Moody's diners even moodier—and how they were coping.

Not since the Depression

have financial difficulties so immobilized spending and credit.

Listen to the talk at a diner in Maine

The polar ice cap may be melting, but the U.S. economy is frozen, starting right here in my small town. Gradually rising levels of dismay at the gas pump and in the supermarket gave way to paralytic shock last week when "lock-in" notices from the local fuel company arrived. This year's advance price for home heating oil is nearly twice what people paid last year. A collective gasp of disbelief from my tough, resourceful Maine neighbors echoed across the meadows and up the rocky coast. Many claimed they would never sign the contract. "What's your alternative?" I asked a friend.

"I don't have one," he muttered.

In the days that followed, a new quality of dread settled over the place like soot, as people weighed their options. Heat or food? Gas or electricity? Medicine or mortgage payments? What to give up? What to cut back? The conversations were everywhere. In the supermarket, I heard one man tell another: "When I was a kid, you woke up, went into the bathroom, and broke up the ice in the toilet. Now my kids will have to do the same. America is moving backward."

My neighbors are like deer caught in the headlights: frozen in fear as something sinister, implacable, and wholly unanticipated lurches toward them. A reckoning has begun to unfurl like a dark flower, slowly at first, then gathering urgency and force. This is not a short detour after all, but an untraveled road to an unknown place from which there is no return, no escape…and we are not prepared.


Spending Paralysis

The economic crisis has been triggered by what economists call "structural shifts" in the global supply and demand for commodities, coupled with the meltdown in the mortgage markets and the ensuing credit squeeze. But this crisis is now moving into a whole new gear, creating a new set of economic conditions that have yet to be named. Call it "the frozen economy."

As pain reaches deep into the daily lives of ordinary Americans—irrespective of their creditworthiness—it will trigger unforeseen consequences for every corner of the marketplace. Nearly two-thirds of Americans already say they are cutting back on nonessentials, according to a new survey by Information Resources. But what's nonessential? Heat? Asthma medication? Shoes for your kids? A new yoga mat? At the same time, 57% of Americans interviewed last month by the Survey of Consumer Confidence reported that their financial situation had worsened—the poorest response since 1946, when the survey began. More than two-thirds of gross domestic product depends on consumer spending. But when the grass roots are frozen, nothing can grow.

The statistics tell a dramatic story, but people tell it better. So I went to Moody's Diner to listen.


Comfort Food

Moody's is our sanctuary of sameness, where regulars come for the $3.89 breakfast special—two pancakes, two eggs, two links—and tourists to satisfy a hunger for something that goes beyond food. Built in the 1920s on Maine's principal north-south route, it was a haven for loggers, truckers, and rusticators in an age before cholesterol. Now it's a fold in time. The yellowed linoleum counter, green vinyl swivel seats, scarred wooden booths, and worn tabletops have welcomed countless stacks of blueberry pancakes, thousands of fragrant chicken croquettes with gravy-covered mashed potatoes, a sea of shrimp stew, and enough chocolate cream pie to feed a small country.

Moody's welcomes us back to the world of childhood, of Grandma's kitchen, when all was innocence and order. This is no postmodern nostalgic wink, just the healing comfort of a nearly complete absence of change. Only the Support Our Troops in Iraq poster, with photos of local boys, suggests a new century.

At least, that's what I thought until the other day, when I sat down at the counter. Three working men in the booth behind me wondered about alternative energy. Wind? Solar? Pellets? The very notion was mysterious, and it wasn't clear how to figure it out. "We have to do something," they said. "But what?"

Next to me, Shirley and Irene recalled how their parents coped the last time no one could afford heat, during the Great Depression. Back then, three generations moved into Grandma's farmhouse for the winter. "It was the only way they could survive. Now it looks like we may have to do that again." Irene looked dazed. "I feel sick about it. We don't know what to do."

Seventy-three-year-old Arlie Fretner sat in his usual spot, the last seat at the counter, with his back to the wall. "I don't know what to do, or what to think, or what direction to go in. It looks like those folks in Washington don't know, either. The whole system has just seized right up. There's nothing I can compare this to, except how my people talked about the Depression."


Running Scared

"What about the next President?" I asked. "Will he be able to help?" They all looked at me with a mix of tenderness and pity, as if I had just spit up on my clean shirt. "The government should assist us," Arlie said, "but we've given up on that. They want to pacify us, not help us."

Robert had been listening quietly. For decades, he taught shop at the local high school and trained many of the skilled carpenters around town. Now he runs a small power-products business and helps out his son's logging operation. Few men are more respected in this community. "People are asking themselves, 'Will things go back to the way they were, or is this a fundamental change?'" he said. "Everything hit us at once. Now we are running scared for the winter. My business is off 75%. People want the products, but they're afraid to make a move, because they have to save everything to heat their homes. We have to choose between heat, gas, food, and medicine. Most of us have never lived through a time like this, where we can't afford the basics of a decent life. It's hard to believe that this is America."

Robert is living in the frozen economy, where paralysis reigns at every level. Psychologists have long observed a curvilinear relationship between anxiety and performance. Without anxiety, there is apathy. A good dose of anxiety motivates peak performance. But more anxiety and the whole thing morphs into paralysis. The way I see it, we've blown right past anxiety into brand-new territory, where people can't make choices because there aren't any good choices to make. They are paralyzed—frozen in place.


Credit Seizure

Our public and private institutions are facing their own version of this new Big Chill. Treasury Secretary Henry Paulson, speaking in London earlier this month, told his audience that the financial markets had not yet adapted to new circumstances. "Working through the turmoil will take additional time, as markets and financial institutions continue to reassess risk…." They, too, are uncertain where to turn, having seen the Dow's dismal June performance, when it lost the greatest percentage of its value since June 1930.

General Motors executives, having squandered these past decades on shamelessly obstructing the development of fuel-efficient engines, now see their share price at a 50-year low. Their solution? Lay off other employees…again. No peak performance there.

The G8 leaders appear powerless and irrelevant. At the U.S. Federal Reserve, the curtain has been ripped aside, and the once omniscient wizard looks startled and uncertain. Keep rates low to support growth? Raise rates and try to stem inflation? You know the banking sector has seized up when federal funds lend at 325 basis points less than a year ago, while 30-year mortgages are two full percentage points higher. Frozen.


Squeezing Budgets

Every aspect of the economy seems to be caught between fiercely opposing forces, leaving no good choices but plenty of ice. Prices are up: Dairy products and bread have jumped 15% over last year, eggs 26.7%, and poultry 73%, according to the Bureau of Labor Statistics. Gasoline is 36.7% more than a year ago, according to the Energy Information Administration. Health insurance premiums have increased 91% since 2000, according to the Commonwealth Fund. Meanwhile, real hourly earnings are falling—down 0.8% from a year ago, according to Bloomberg Economic Indicators.

There are more opposing forces: Consumer borrowing is up, while home values have fallen precipitously and mortgage delinquency rates are reaching record levels. The U.S. trade deficit continues to rise, while the cost of shipping a standard container from China has tripled since 2000, and many goods now cost more to transport and distribute than to produce. GDP is rising slightly, but the amount we can afford to buy with what we produce is growing at a pace that's even slower, by a full percentage point, than real GDP, according to the Dallas Fed. Home prices have fallen back, but the Conference Board indicates that the number of people intending to purchase a home in the next six months is at a 25-year low.

Americans are not alone in their shock and bewilderment. Demonstrations and riots over the rising cost of food and fuel are spreading from Asia and Africa across Europe.


Memories of Depression

Civilizations can prosper or decline. This is no coin flip but a consequence of how well societies perceive and adapt to economic, social, and environmental ruptures. In 1980, still in the grip of the last energy crisis, Americans signed on for "Morning in America." The promise of Ronald Reagan's candidacy, and of every President and Congress since, has been to humor our fears with a message of eternal sunshine—that everything is as it has always been. We've been lulled into escapism by opportunistic leaders. We chose to be pacified. Now decades have been lost while we've kept our heads in the sand. Most Americans alive today cannot recall the Depression—the last great shattering of our economic life—and what it felt like to be frozen. Will the economy mark the onset of our lingering decline, or will it finally rally us from denial?

As the economy ices over, the next President will confront a challenge that can be compared only to the one Franklin D. Roosevelt faced nearly 80 years ago. Discontinuous change will require a bold reexamination of our social contract and the rules of wealth creation in a global system. Thawing the frozen economy will entail reinvention of our public and private institutions, especially as they bear on health, education, finance, and energy. These are themes I plan to address in my next columns. In the meantime, here's my advice to the candidates: Start at Moody's Diner. Lose the cameras. Bring a notebook.

Shoshana Zuboff is the author of The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism. She was the Charles Edward Wilson Professor of Business Administration at Harvard Business School.

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Friday, June 20, 2008

Are We Ready For 1984?

Introduction

Most Americans are apprehensive and dissatisfied. Things are not going well. The economy is sick, prices are going up, retirement security is evaporating, and health care is in trouble. We worry about the price of food and fuel, a decreased standard of living, and the burden of debt payments. The future looks murky. For us and our kids.

Americans want change – a new direction - but there is no leadership in Congress or the Administration, and none of the candidates for President has a workable plan.

Change is coming to America. You can bet money on it. Energy, economic, cultural, and environmental challenges guarantee things are going to be different. And that begets a question. If democracy fails to deal with the challenges now unfolding in America, then what is the alternative?

Read on.


1984 Did Not Happen

George Orwell (the pen name of an Englishman named Eric Arthur Blair) conceptualized how a socialist - fascist Government could use technology to control a nation. First published in 1949, his book "Nineteen Eighty-Four", described an extremely oppressive bureaucratic system of social management. Fortunately for England, the brutally intrusive police state he depicted never happened.

There were three basic reasons:

1. We humans had not yet developed the necessary computer, software and communications technology. Though several dictatorships had extensive surveillance networks, they lacked the necessary technology to impose a truly effective system of social control.

2. Although several Western nations flirted with socialism, and liberals championed the brutal forms of communism found in China and Russia, the cultural trend from ~1950 through 2000 was toward the adoption of capitalistic democracy. Most western nations were able to overcome the economic, social and political strains of the Cold War without resorting to overly restrictive centralized planning. Communism collapsed because it is, in essence, a very inefficient management system, prone to institutionalized corruption, and ignorant of human nature.

3. There was no real danger to our EcoSystem. Our environmental challenges were perceived as relatively insignificant. We had ample supplies of cheap electricity, oil, natural gas and coal. Gasoline, diesel, propane, and heating oil fuels were readily available.


Fast Forward To The 21st Century.

Things have really changed. Technology now makes Orwell's "1984" description of socialist - fascist political control physically possible. We humans have the tools to create a brutal system of social management:

Computer Hardware

1984. Orwell's vision would have needed an almost unlimited amount of computer power. Although mainframes and minicomputers were readily available in 1984, they would have been too expensive and too slow to support the enormous computing demands of a nationwide information system. PCs were not pervasive. Data base server technology was just beginning to emerge as a systems architecture. Data storage peripherals were expensive and inadequate for the amount of information that would be required for an effective surveillance system.

Today. The hardware to build a distributed computer system with a massive database now exists. There is sufficient mainframe computer power. PCs are a ubiquitous tool for data entry and retrieval. Server technology is cheap and readily available. Millions of relatively inexpensive data storage peripherals have been delivered. The pervasive use of networked enterprise and personal computer technology is a reality.

Software

1984. Although many companies and government agencies had sophisticated software capability, the computer, network and database software that would have been required to support a massive system of social control was not available.

Today. As Oracle, SAP, Microsoft and other software companies have pointed out, we now have the systems architecture and software technology to track, monitor and record individual behavior on a massive scale. Indeed, several Internet Service companies and government agencies have already implemented user surveillance and tracking systems.

Communication Networks

1984. Although most corporations and government agencies had extensive networks by the 1980s, they lacked the pervasiveness and interconnection required to support a vast system of data acquisition and dissemination.

Today. We now have a pervasive network for connecting computers, servers, PCs, microelectronic devices, and network appliances to surveillance computer systems. It’s called the Internet.

Microelectronics

1984. The successful implementation of a socialist - fascist monitoring and behavior control system requires the widespread installation of millions of sensors and activity monitors. In 1984 sensors and monitors were relatively expensive and usually connected to a limited number of custom networks for specialized applications.

Today. Appliance and sensor technology is readily available and inexpensive (Credit and debit card readers, GPS appliances, radio frequency identity tags and sensors, micro TV cameras, etc.). The associated embedded systems software is well developed. These devices can be programmed to “talk” to each other and to a centralized data base. Computer ID chips, carried on the person or embedded in the skin, tell the system where you are whenever you pass a sensor. Location and identification technology is now in place.

To Summarize

Using available technology, it is entirely possible to create an effective surveillance system with a massive database to track the location, identity and activity of every registered person. We now have the means to create the socialist – fascist State envisioned by Orwell.


So Here We Are

The social pressures of an increasingly complex world invite top-down political solutions. We are aware of our environmental challenges. Energy is expensive. The availability of oil and natural gas are in doubt. There is a rising demand for change in the midst of social turmoil. Although we look for order and personal security, diversity continues to breed division. Governments can no longer control their borders or the growing population of self centered, self absorbed factions who owe no allegiance to anyone but themselves. Will Democracy provide an adequate response to the cultural, economic and environmental strains of the 21st century?

Maybe not:

Political Institutions

1984. No political ideology or established government had a realistic opportunity to impose a social control system on America or any of the other OECD nations in 1984.

Today. Our existing institutions are becoming increasingly irrelevant to the demands of 21st century governance. Good management is subordinated to political expediency. There is inadequate leadership in Washington. Not only is Congress unable to deal with complex issues, it does not even appear to understand its responsibility. Our State and Local institutions pursue an obsolete model of governance. If our existing political institutions fail, how difficult would it be for an autocratic political regime to implement a system for the control of social behavior?

Culture

1984. Although Western culture was in transition, traditional values were still important. We had a relatively strong confidence in our elected leaders and the institutions of democracy.

Today. Traditional values are under relentless attack. Self-righteous belief systems inevitably lead to distrust and the nourishment of social conflict. Liberal elitists reject democracy, disparage traditional values, routinely use the courts to make law, and deride idea of national sovereignty. Add a nagging fear of terrorism, growing economic apprehension, the dislocation caused by policies of social diversity, and the growth of political organizations with an anti-Christian agenda and we have a trend - a transition in progress - to a authoritarian culture.

Trigger Event

1984. Fortunately, no single event or combination of problems were catastrophic enough to encourage the creation of an authoritarian Government.

Today. Uneasy fears about our personal safety and economic security, incessant conflict between cultural groups, a pervasive shift from Christian democratic values to the autocratic theocracy of Liberalism, and a belief that the Federal Government has become hopelessly ineffective all contribute to a growing sense of frustration. We are not merely looking for new political leadership, we seek a fundamental change in the organization of our political institutions. A catastrophic act of terrorism, a disruption in the flow of oil, or a severe economic recession are among the events that could trigger a demand for a new system of government.


Conclusion

The political control of social behavior requires four elements: technology (we have the tools), the institutionalized monitoring of human behavior (broadly accepted under current law), motivated autocratic leadership (a firm belief in the perfect political solution), and a continuous flow of politically correct opinion management (think of it as mind control). All of these elements are in place. Our former beliefs in the freedom of personal responsibility are gradually being replaced by public behavior regulation – all backed by the police power of the State.

The American elections of 2008 are thus critical to the future of democracy. The winners will be challenged to find solutions for a wide range of domestic and international issues. If our leaders continue to make decisions based on political expediency, if they keep on stumbling from one crisis to another without any direction, if they fail to apply the principles of good management to the complex demands of governance, - then they will jeopardize their constitutional power. The penalty for failure could be politically catastrophic. At some point, there will be a backlash against existing democratic institutions for one really simple reason – they don’t work.

On the other hand, if American voters have the collective wisdom to elect the proactive, positive and constructive leadership described in a book like “Detensive Nation”, then it is possible our leaders will be able to redefine the role of government in a way that preserves the freedoms of democracy. In the final analysis, it is good management, not ideology, that enables successful political systems. We need intelligent, positive, and creative management skills at all levels of government – Federal, State and Local.


About Change

Our candidates for political office often use the word “change”. They assure us they can bring us together, enhance our security, and revitalize our economy. But change implies choice. Will we choose leaders who will bring about change by restoring traditional moral and democratic values? Or will we choose leaders whose actions invite an Orwellian conclusion?

Given the availability of enabling technology and existing cultural trends, this is by no means a trivial question. Perhaps we should be asking Barack Hussein Obama, Hillary Rodham Clinton and John Sidney McCain III if they understand the gravity of this choice.

Ronald R. Cooke
Author: Detensive Nation
From Regulation to Leadership, Redefining The Role Of Government


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Detensive Nation explores what is driving this transition, the challenges of lifestyle change, and the how government institutions can play a positive, constructive, and proactive role in redefining our Cultural EcoSystem. It describes the kind of government we will need, questions if existing institutions can survive, and then asks a key election year question:

who will lead us?

Detensive Nation thus describes the kind of government we will need if we expect to sustain our democratic institutions and personal freedoms.

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Tuesday, April 29, 2008

Cuba: Creating The opportunity For Personal Gain

An article by Michael Voss on BBC Internet News caught my eye this week (4/25/2008). Raul Castro has taken several small measures to give the Cuban people an opportunity to improve their circumstances. He has lifted the ban on owning cell phones, DVD players and PCs. Cubans can now stay at the same hotels as foreign visitors. Small family farms and private cooperatives - which currently produce more than half the country’s food on just a fifth of Cuba’s arable land – will be allowed to purchase or take over additional state owned acreage. There will be less red tape and bureaucratic control over what to plant, and there will be better (read: free market) access to farm supplies. The government has raised the price it will pay for some farm products. For the first time, it will be legal to hire farm workers. Enterprise workers will be able to earn bonuses based on productivity and maybe there will be no ceiling on what a worker can earn.

The Cuban people have already demonstrated their resiliency.

Cuba went through the chaos of an oil shortage in 1991. Local meat production and locally grown fruits and vegetables suddenly became very important. Local community neighborhoods learned greater self-sufficiency. People had to change their lifestyle in order to get by with less energy. And they were forced to make these changes in a hurry.

Fidel Castro called it Período especial en tiempo de paz - "A Special Period in a Time of Peace". It was a period of economic and cultural crisis. Cuba suddenly found that Russia was no longer able to supply it with the economic subsidies and oil products Cuba needed to survive. Oil imports dropped by approximately 53 percent, crippling Cuba's oil fired electric power system. Refrigeration and air conditioning failed. Chronic power shortages crippled transportation, agriculture, and industrial production. Estimated GDP declined by 33 percent, real wages fell, and unemployment soared. There were food shortages. It has been reported that Cuban adults lost an average of 20 pounds.

The Cuban people adapted to the crisis. From 1991 to 1995, they introduced locally grown sustainable agriculture, overhauled their economy, changed their diet, and adopted new lifestyles. Organic farms and urban gardens became socially acceptable. A home grown mass transportation system developed. Authorities enforced car-pooling. Locally grown fresh vegetable production increased 10 fold. Women had fewer babies. (Annual population growth declined from .8 to .4 percent !) The American dollar was used to provide a stable currency. Eventually, GDP growth resumed. The "Special Period" got Cuba through its initial cultural and economic crisis.

Although Castro ran a socialist dictatorship, he did not use coercion to meet the challenges of Cuba's "Peak Oil" crisis. Instead, he loosened the reins on private enterprise. He told his people that things would be very hard. The Cuban people were forced to find their own solutions. They quickly figured out how to get by with less energy.

Cuba’s experiment with personal initiative during its fuel crisis was not lost on Raul Castro. He apparently understands the entrepreneurial innovation it unleashed and is perhaps a more practical leader than Fidel. If he truly wants to improve the economic condition of the Cuban people, he will continue to loosen the tight grip of a cumbersome and ineffective central planning system.

What he will then discover is the stark difference between the limitations of centrally planned economic systems, and the far more robust growth of a market based economy. The reason for this difference is very simple. The quest for personal gain is human nature. Most of us are naturally competitive. The roots of these attributes are embedded in the basic survival instincts of our animal behavior. Food, water, shelter, security, and so on. The more we have, the more self-confident we feel. If we have the opportunity to increase our personal well-being, most of us will put in the time and effort to do so. It’s all very natural.

As a result, political systems which create the opportunity for personal gain are more likely to have the support of the population being governed. (There will always be dissidents).

Conversely, any political system that decreases or eliminates the opportunity for personal gain also decreases our interest in its success. In nations with this form of government, most people discover their quest for personal economic success is best found by working outside the “official” political structure. This was, and still is, a key characteristic of the Russian political system. It exists in Cuba. And as a matter of fact, multiple examples of underground economic activity can be found within any system of government - including democracy.

If we are not particularly interested in the survival of our current political system, then it – in turn – must use coercive measures to ensure our obedience. Hence the need for the apparatus of the police state to enforce uniform economic and ideological behavior. It is no accident that Communist and Socialist political systems are also oppressive forms of government. Restricting the fundamental desire for personal gain creates frustration and anger. Followed by cynicism, ridicule, and rebellion.

When a government restricts the opportunity for personal success, it guarantees two things: people working within the system will do as little as possible to achieve the ideological goals of the system; and most of the people who are able to work outside the system will be motivated to put in the time and effort to do so.

1. In the former case, people working within the system will espouse the quest for political power as a means of achieving personal gain. Politics becomes far more important than progress. The success of the political system becomes immaterial because they are really not motivated by a desire to find practical, common sense, solutions to current challenges. Hence, the effectiveness of the political system deteriorates.

2. In the latter case, the chance for economic gain becomes a primal motivator of clandestine private behavior. Monetary transactions are not reported. Goods are manufactured and transported by a network of “unknown” intermediaries. Services are rendered after personal negotiation.

Although government can not guarantee personal success, it can create the opportunity for personal gain. If Raul Castro understands this basic principal, he has the means to drive incredible economic growth by unleashing the creative energy of the Cuban people.

Ron

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Thursday, March 06, 2008

A Few Words On The Economy

In March of 2007, I predicted America would have a recession before the end of 2008. (see Warning: Recession Ahead at www.tce.name). At that point in time, my thoughts were greeted with a certain amount of – shall we say – skepticism. Well. Here we are one year later. It would appear the number of skeptics has decreased.

So. What is happening to our economy?

It has been my contention the Bureau Of Labor Statistics (BLS) understates inflation when it reports the Consumer Price Index (CPI), and the Bureau of Economic Analysis (BEA) overstates “real” economic growth when it reports Gross Domestic Product (GDP). In other words, our economy is in worse shape than the federal government is willing to admit.

The BLS continues to underweight the percentage of aggregate household budgets spent on food and fuel. That decreases the CPI estimates of inflation. Since the BEA deducts inflation from current dollar GDP (and makes some other adjustments) to calculate “Real” GDP, the result is an overstatement of Real GDP. We can summarize the equation as follows: Current dollar GDP - the rate of inflation = Real GDP. The effect of the BLS understatement shows up in the reported data for Q3 and Q4 of 2007.

  • The BLS reported a CPI –U increase of 2.36% for Q3 2007, and an increase of 3.97% for Q4 2007.

  • The BEA reported a current dollar GDP of 5.14% for Q4 2007. After deducting the effect of inflation, the BEA reported a very anemic Real GDP of .6%.

By my calculations (see CPI: Sophisticated Economic Theory, Terrible Ethics at www.tce.name ) the rate of inflation for Q3 2007 was closer to 4.02%. Although the BLS reported a significant increase in the rate of inflation for Q4, it is my belief consumer living costs actually went up by 5.18%. In my essay on GDP (see American GDP: Can We Trust The BEA Data? at www.tce.name ) I projected that Q4 2007 Net GDP would be neutral or negative. Although it would seem the BEA was “catching up” to my earlier estimate, Net GDP in Q4 – by my methodology – was closer to a negative .04% (5.14% - 5.18% = -.o4%). Furthermore, I believe Net GDP for all of 2007 versus all of 2006 was a very sluggish .61%.

OK. Now a question. Based on your own experiences and those of your friends and family, which set of numbers do you believe have a greater credibility?

So what can we look for in Q1 and Q2 of 2008? Do not be surprised if inflation exceeds 4%, and economic growth is negative. When the books are closed on 2008, I believe – if we are very lucky - they will record an annual rate of inflation of more than 4.5%, a GDP of less than “zero”, and an unemployment rate of over 5.5%. If America’s luck does not hold out, we could be in for a period of severe fixed asset deflation, a very high rate of soft goods (including food) inflation, and much higher unemployment by the end of the year. Pundits will be debating the terminology: is this a recession or a depression?

Now compare these numbers with what the United States Federal Reserve has forecasted for 2008: a GDP growth rate of 1.3 to 2 percent, an annual average unemployment rate of 5.2 to 5.3%, and an inflation rate of 2.1 to 2.4%. Does it appear the Fed is overly optimistic? Or am I being too pessimistic?

You decide. I could be wrong.


Ronald R. Cooke
Author: Detensive Nation
From Regulation To Leadership

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Wednesday, April 18, 2007

What Is The Real Cost Of Corn Ethanol?

Introduction

Corn is the most widely produced feed grain in the United States, accounting for more than 90 percent of total feed grain production. Around 80 million acres of land are planted to corn, with the majority of the crop grown in the Heartland region. Although most of the crop is used to feed livestock, corn is also processed into food and industrial products including starch, sweeteners, corn oil, beverage and industrial alcohol, and fuel ethanol. The United States is a major player in the world corn market. Approximately 20 percent of its corn crop is currently exported to other countries.

The United States Department of Agriculture (USDA) has announced American farmers are expected to get 55 percent more for a bushel of corn in the 2006/2007 growing season than they received in the 2005/2006 growing season. Average annual prices are expected to increase from $2.00 per bushel to about $3.10 per bushel.

Thanks to Federal mandates and subsidies, corn used for the production of corn ethanol is expected to increase from ~ 700 M Bushels in 2000/2001, to 3.2 B bushels in 2007/2008 – an increase of 357 percent. On December 11, 2006, the USDA estimated 2006-2007 U.S. ending stocks would be 935 million bushels, down from 1.97 billion bushels in 2005-2006. That decreases the ending stocks by more than 50 percent and puts the ending stocks to use ratio at 8%, - the lowest in 11 years. It should be obvious to all, we are going to need a lot more acreage and big yield improvements if corn production is going to keep up to demand. Prices could exceed $4.50 per Bu by the end of 2008. That’s a price increase of 125% over 2005/2006 season prices.

Score one for the agribusiness lobby.

Consumers Will Pay

Higher Food Prices

If corn prices increase by ~ 55 percent, year over year, then will the corn used for hog, cattle, chicken, turkey and fish feed go up 55 %? Doesn’t that increase the price of meat, poultry, fish, milk and eggs? If corn is used in corn meal, corn flakes, corn oil, and hundreds of other food items goes up 55%, doesn’t that increase the price of all these foods? Maybe. Since 2000, the price of beef is up 31%, eggs up 50%, corn sweeteners up 33%, wet corn milling up 39%, and corn flakes are up 10%. Chicken prices haven’t changed very much. Yet. Food producers are predicting higher prices.

The word on the street is that corn futures prices have risen because of the soaring demand for corn to produce corn ethanol. Iowa’s corn ethanol production is projected to exceed 3.6 billion gallons a year. At that rate, corn ethanol production would consume nearly 1.3 billion bushels of corn, or two thirds of the corn Iowa farmers harvested in 2006. Corn for July 2007 delivery, quoted on January 3, 2007, was $3.82 per bushel. That’s a ~ 60 percent increase over the average price for a bushel of corn from 1988 through 2006. But the net increase in the price of food is less than 60%. When processed into corn ethanol, a 56 pound bushel of corn can yield about 16 pounds of distillers grain, gluten meal, and corn oil, thus replacing some of the corn products lost to corn ethanol production. The inflationary impact of higher corn prices is also mitigated by the percentage of corn used in each item of food. The greater the percentage of corn used in the ingredients, the higher the final price paid by a consumer. Final consumer prices will also be driven by the impact of export demand, the efficiency of cultivation (including the use of fertilizers, herbicides, and insecticides), the increasing use of lower yield marginal land for corn production, corn belt weather, consumer demand, and the greed (or fear) of Futures Market speculators.

Corn prices don’t move in a vacuum. As the price of corn increases, there is a corresponding upward pressure on the price paid for other grains, such as rice and wheat. Poor growing conditions in Europe, the United States, the Ukraine, and Australia; along with low stocks of stored wheat; and an increase in production of biofuels; have combined to push international wheat prices up to levels not seen in 10 years. We can expect the price of bread, pasta, and cereals to increase in 2007.

If corn prices follow the upward trend in demand,
will the price of food double by the end of 2008?

Probably not. But food prices are headed UP. Families will be forced to spend a greater percentage of their budgets on groceries. Low income families face the specter of possible nutritional deficiency.

More For Fuel

Proponents argue we can “grow” our way out of our dependency on oil. E-85, a fuel blend containing 85% ethanol, along with blends of up to 10 % in other gasoline grades, and the manufacture of flex fuel vehicles that can burn any blend of ethanol with gasoline, promise to create a long term demand for fuel grade alcohol. It will be a profitable business.

At taxpayer expense.

Congress, anxious to do something – anything – about the price of gasoline, has given the agribusiness industry a mandate it can not refuse. Corn ethanol production must rise from 4.0 billion gallons in 2006 to 7.5 billion gallons by 2012. Anxious to make sure its corn ethanol mandate gets done, Congress has also decided to take our tax money and use it to subsidize the production of ethanol. The current ethanol subsidy is a flat 51 cents per gallon of ethanol paid to the agent (usually an oil company) that blends ethanol with gasoline. Some States add other incentives, all paid by the taxpayer.

But there is more. It costs money to store, transport and blend ethanol with gasoline. Since ethanol absorbs water, and water is corrosive to pipeline components, it must be transported by tanker to the distribution point where it is blended with gasoline for delivery to your gas station. That’s expensive transportation. It costs more to make a gasoline that can be blended with ethanol. Ethanol is lost through vaporization and contamination during this process. Gasoline/ethanol fuel blends that have been contaminated with water degrade the efficiency of combustion. E-85 ethanol is corrosive to the seals and fuel systems of most of our existing engines (including boats, generators, lawn mowers, hand power tools, etc.), and can not be dispensed through existing gas station pumps. And finally, ethanol has about 30 percent less energy per gallon than gasoline. That means the fuel economy of a vehicle running on E-85 will be about 25% less than a comparable vehicle running on gasoline.

So. How much does the consumer pay for a gallon of corn ethanol? Let’s sum it up.

Cost For A Gallon Of Corn Ethanol



Corn Ethanol Futures Market quote for January 2007 Delivery

$2.49

Add cost of transporting, storing and blending corn ethanol

$0.28

Added cost of making gasoline that can be blended with corn ethanol

$0.09

Add cost of subsidies paid to blender

$0.51

Total Direct Costs per Gallon

$3.37



Added cost from waste

$0.40

Added cost from damage to infrastructure and user's engine

$0.06

Total Indirect Costs per Gallon

$0.46



Added cost of lost energy

$1.27

Added cost of food (American family of four)

$1.79

Total Social Costs

$3.06



Total Cost of Corn Ethanol @ 85% Blend

$6.89

These numbers are estimates. We can speculate about the real cost of corn ethanol. It may cost more – or less – than $6.89 per gallon. But the real price we pay for corn ethanol is much higher than the one we see at the filling station. (Reference 1)

Energy Boondoggle

Under optimum conditions, using the latest technology, assuming “normal” corn yields, and also assuming energy credits are allocated to the co-products of corn ethanol production, the USDA estimated in 2002 that corn ethanol can provide us with an adjusted 19,287 Btu/gal. (Reference 2) Wait. Co products? Isn’t that the energy mostly derived from feeding corn products to animals? What do distiller’s dried grains with solubles from dry milling, and corn oil, corn gluten meal, and corn gluten feed from wet milling have to do with motor fuel?

Nothing. Nada. The 2002 study supports a net fuel energy gain of 8.2 percent. A later 2004 study concluded the net fuel energy gain was 5.9 percent. Critics of the USDA’s methodology point out that it does not include sufficient input energy for facilities, process equipment, and farm machinery. It fails to account for corn ethanol losses during blending, distribution, and consumption. We must also consider that corn crops are very dependent on the weather. In good years, prices will be “normal”. Bad weather, on the other hand, will not only increase the price we pay for corn ethanol and food, it may also lead to fuel shortages. (Reference 3)

Sorry. But we Americans have been used to deriving our energy from oil, where the historical return was more like 100:1, and where the return on land extraction still exceeds 10:1. In my opinion, if we wish to build our energy reserves, a viable liquid mobile fuel production process must yield at least twice the energy it consumes. By contrast, many believe corn ethanol consumes more energy than it yields. (Reference 4) And I agree. We could easily waste more than 8.2 percent of the corn ethanol we make in the distribution chain. That means the Congressional corn ethanol mandate is destructive, rather than constructive.

So. What did we accomplish with this rush to a politically expedient pop-culture solution?

The Benefits?

It can be done. We can ramp up corn ethanol production to 7.5 billion gallons per year by 2012. But if corn ethanol is not a cheap alternative to gasoline, and corn ethanol production increases the price of food, are there any offsetting benefits to make these higher costs worthwhile?

Cleaner Air

When most cars had a carburetor, adding corn ethanol to gasoline tricked the fuel system into delivering a leaner mixture to the engine. Since proponents tended to ignore the loss of fuel economy, it was assumed that all vehicles running on a 2 to 5 % mix would cause less air pollution. But that was 20 years ago. Today’s fuel injected engines self-adjust to the fuel mixture regardless of fuel composition. Sensors tell the fuel system computer if the mix needs to be rich (when the engine is warming up), or can be lean (for increased fuel efficiency and lower emissions). Corn ethanol does little, if anything, to reduce the tailpipe emissions of late model cars. (Reference 5)

The environmental benefits of E85 are both uncertain and confusing. Test results vary depending on water contamination, engine temperature, test vehicle fuel system design, ignition system performance, and the ideological convictions of the tester. It is likely E85, when compared with standard gasoline, will reduce tailpipe emissions from oxides of nitrogen, 1,3-butadiene, and benzene. Methane and total organic gas emissions are greater. Carbon monoxide ad CO2 results vary from reasonably good to really terrible. The real eye opener is a large increase in formaldehyde (isn’t that the stuff they use to embalm dead people?), and a huge increase in acetaldehyde emissions. A suspected neurotoxin, exposure to acetaldehyde vapor will irritate the victims eyes, skin and respiratory tract. The State of California has determined that acetaldehyde is a carcinogen.

And we should consider this concept. Do we release far more pollution into the environment during the production and processing of corn into corn ethanol than we save in act of consuming corn ethanol as a motor fuel? Probably. Corn is monoculture cultivation on a massive scale, requiring copious quantities of oil and natural gas for herbicides, pesticides, and fertilizers. These – along with tons of eroded soils – are deposited as a polluted waste in our rivers and oceans. If the agribusiness industry attempts to increase current levels of food production by deforestation and the use of marginal land, the net result is an acceleration of greenhouse gases and a decrease in biodiversity. Corn derived animal feeds are a potent source of methane, a greenhouse gas.

In my trusty Honda Accord, straight gasoline gave me roughly 31 MPG. When California added a low percentage of corn ethanol to the mix, my mileage dropped to 28 MPG. I had to use 9.7% more fuel to go the same distance. I just completed a like comparison in my Honda Pilot. My mileage dropped from an average of 22.5 MPG, to 20.4 MPG, a reduction of 9.3%. If the improvement in air quality is marginal (at best!), then doesn’t the energy loss of corn ethanol actually increase the release of CO2? Perhaps it is time to challenge our obsolete assumptions. This is 2007. Does corn ethanol in the mix continue to make any sense?

That, of course, is a rhetorical question. If we evaluate corn ethanol as a fuel system, we must add the hydrocarbon and poisons produced during planting, growing, harvesting, conversion, transportation, blending, distribution, and consumption to the additional hydrocarbons released by corn ethanol waste, and the hydrocarbon penalty from energy inefficiency.

More questions.

- Does our enthusiasm for corn ethanol actually increase global warming?

- Have we deceived ourselves with vaporous logic?

- Does corn ethanol reduce the production of green house gases, - or does it merely encourage the increased consumption of hydrocarbon fuels?

- Does the federal corn ethanol program encourage the perpetuation of our energy intensive lifestyle?

- Are we laboring under the self induced delusion we do not have to develop an energy detensive culture?

- If we burn a hydrocarbon fuel, what difference does it make when these hydrocarbon chains were created?

Green house gas is green house gas. Every puff adds to global warming. Our pop culture romance with corn ethanol – all carefully nurtured by agribusiness interests – obscures the realities of corn ethanol combustion. It does not force us to do the one thing we must do to protect our environment – increase the efficiency of fuel consumption.

Addressing Global Warming, Air Pollution Health Damage, and Long-Term Energy Needs Simultaneously, Mark Z. Jacobson, Dept. of Civil and Environmental Engineering, Stanford University, June 6, 2006. “Proponents of corn ethanol suggest that it is a clean and renewable fuel that will reduce air pollution and address climate change. Data, computer model results, and new emission information suggest that corn ethanol is neither clean nor has it been shown that it can slow global warming. To the contrary, its promotion will continue the public health crisis that has resulted in thousands of premature air-pollution-related deaths and millions of cases of asthma and respiratory disease each year in the U.S.” …..

So. Does adding corn ethanol to fuel mix do anything to help in our quest for cleaner air? The ecology of our planet? Global warming?

I could be wrong. You decide.

Makes Us Less dependent on Oil

A controversial conclusion. In the name of political expediency, Congress has failed to pursue a coherent energy policy. For example: Congress gives American auto manufacturers “excess mileage” credits for building E-85 flexible fuel vehicles, saving them $ millions in penalties they should have paid for not meeting this nation’s CAFÉ mileage standards. The result: the American auto industry builds lots of big cars, SUVs, and trucks. The net effect of Congressional policy is to increase tailpipe emissions and our nation’s dependency on foreign oil.

More controversy. Best case, it takes almost as much energy to make corn ethanol as we get from the resulting corn ethanol fuel. (Reference 6) Deduct waste and energy consumed in the supply chain, along with a sharp decrease in fuel efficiency, and what do you get? At best, if we reach the goals set by Congress, corn ethanol will make America less than 1 percent less dependent on oil as a fuel resource. (Reference 7)

I remain skeptical.

Unintended Consequences

I read somewhere that 80 million humans starved to death in the 20th century. That number seems low. Only 2 percent out of an average population of 4 billion humans.

Are body counts a State secret?

In any event, famines occurred throughout the 20th century: The Allied blockade of Germany from 1915 – 1918; Armenia 1915 – 1917; The Soviet Famine of 1932 – 1934; Poland 1940 – 1942; Leningrad 1941 to 1944; India 1943 – 1944; China 1928, 1942, 1958 - 1962; Biafra in the late 1960s; Cambodia in the 1970s; and more recently the famines in North Korea, Sub-Saharan Africa, South Asia and parts of Latin America. Pockets of starvation and malnutrition happened all over the globe. We can blame them on crop failure, drought, and pestilence. But most were either created or exacerbated by man. Hatred, war, genocide, lousy economic policy. Hunger has been politicized and globalized. Famine is invariably attended by disease, malnutrition, poverty, inflated food prices, declining education, disrupted medical systems, social disintegration, and – bloody senseless conflict. Most of the dead are little children and old people. More men than women. Millions suffer from severe malnutrition – the bride of crippling disease. And things are getting worse. We humans are destroying our arable land. The cost of the amendments and chemicals that spurred the green revolution are becoming prohibitively expensive. By the end of the 2oth century, the basic infrastructure of food production was breaking down in many parts of the world. In Brazil, for example, the replacement of small farms with vast seas of industrialized sugarcane monoculture has led to a decrease in biodiversity, the conversion of more forests to farmland, increased food prices, and rising social problems from vandalism, unemployment, political unrest and violence. Food production has declined at many subsistence farms in Africa, Asia, Mexico, and elsewhere. Although the demand for corn promises to increase the income of poor farmers in Mexico, they will have to chose between planting crops for food or crops for fuel.

Will the quest to “grow our way out of our dependency on oil” lead to greater hunger?

Is that the real cost of corn ethanol?

A study of third world cultural economics suggests millions of Third world farmers face increased deprivation. If impoverished farmers are forced to raise fuel crops because they increase the wealth of those in power, the farmers will starve because they did not grow enough food. Sadly. The prerequisite pattern of oppression has already been established in Third World countries. Inorganic fertilizers, herbicides and pesticides are already too expensive. So farmers plant the land without them until it is exhausted. Useless.

Current corn ethanol production plans will take most of America’s corn crop off the world market. Corn and grain crop prices paid by millions of people in multiple nations will go up. For some, there is not enough money to pay these inflated prices.

Do you care?

Images.

I have these images. They flash into my consciousness. Random thoughts as I write this essay:

- A little boy in Detroit easing the pangs of hunger by eating plaster.

- The CEO of an agribusiness corporation receiving a huge bonus because his company is so profitable.

- A mother in Germany who cries because she can no longer find enough money to feed her children.

- Congresswoman Nancy Pelosi exclaiming to a cheering crowd that the democrats have brought new wealth to the farmers of Iowa.

- A little girl dies of starvation in Africa.

- Truck load, after diesel truck load of corn headed for an ethanol plant.

- Hungry and impoverished, an elderly couple in Japan take the honorable way out.

- Senator Mich McConnell telling the people of Kentucky he is working to reduce the price of food.

- The children of a Mexican peasant are chronically hungry because he can’t afford the ever higher price of Tortilla flour. (Reference 8)

- Ignoring the price and availability of food, George Bush wants Americans to consume 35 billion gallons of alternative fuels every year by 2017. Archer-Daniels-Midland Co., US BioEnergy Corp., VeraSun Energy Corp. and other ethanol producers see this as a welcome profit opportunity.

- And finally, this haunting image. We climb a small hill overlooking several thousand acres of farmland. Row upon row of green as far as the eye can see. At the top of the hill stands a man. At first, we believe he is a farmer. But his demeanor tells us otherwise. Then I recognize him. Like us, he has come to view the wonderful bounty of nature. We have a few moments of conversation. Then I ask him the inevitable question. “Tell me”, I ask, “shall we feed the multitude or make motor fuel”? He looks at me. His eyes penetrate deep into my soul. He does not speak. Instead he merely shakes his head. Then he puts his hand on my shoulder. A tear makes its way down his dusty cheek.

I know His answer.

Are these images overstated? Too dramatic? Perhaps. But they force us to consider the morality of corn ethanol production.

Given the desperation of existing worldwide malnutrition and hunger, and knowing corn ethanol production will increase the price of almost everything we eat,

is it ethical to use arable land to produce ethanol?

You decide.

There Are Better Alternatives.

I will admit to angst. Frustration. Disgust. Many, many very bright people are working on the energy solutions. Wind, solar, biomass, coal, nuclear, oil, natural gas, currents – the list is very long. The Department of Energy has launched a number of constructive programs and projects. The work being done by the DOE’s Argonne National Laboratory, National Renewable Energy Laboratory, National Energy Technology Laboratory, Oak Ridge National Laboratory, and other organizations in basic science, fuel technology, fuel resources, and energy efficiency are highly commendable. But all to often the objectives are as much driven by political considerations as by practical program management. We can fault Congress for the misuse of wonderfully talented people. If we expect these programs to produce credible, viable results, they must be pursued without regard to pop culture or political influence. (Reference 9) A good energy program is a well managed product development program. Goals. Objectives. Time lines. Decisions based on real benefits.

- We would get a far better return on our investment if we took all the money Congress is spending on corn ethanol subsidies and spent it on automotive and industrial fuel efficiency. The benefits are immediate and quantifiable. Increased fuel efficiency reduces oil consumption, eases the problem of our dependence on foreign oil, and reduces the emission of green house gases.

- We could do a far better job of building our energy stocks and reducing global warming if we found a way to use dirty natural gas – the gas flared during the production and refining process - as a fuel. (Reference 10)

- Biodiesel and cellulosic Butanol appear promising. It would appear that the wide variety of feedstocks, the possible production of electricity from the combustion of lignin, and the higher net gain in energy all work to make cellulosic Butanol far more attractive as an energy solution than corn ethanol.

And on and on. There are multiple ways to reduce global warming. So. By comparison, what did this burst of enthusiasm for corn ethanol accomplish?

The Real Cost

Congress has decided to use our tax payer dollars to raise the price of food, increase the cost of motor fuels, and promote global warming. One could make the case Congressional action has also increased malnutrition, hunger, and disease. And why did Congress fund this immoral program? Because our politicians leaders are locked in a nasty battle for political power. It was a politically expedient decision. A pop-culture solution.

Is this what we want?

The marginal benefits of cleaner air will be offset by increased pollution in the corn ethanol supply chain. On a net energy basis, one can make the case corn ethanol increases America’s consumption of natural gas and oil. We have been warned by academics, staff at the United Nations, and many, many of others: The specter of famine promises to accelerate exponentially in the 21st century. Every acre converted to the production of fuel is an acre that will not be used for food. And finally, there are alternative energy solutions available to us that would be far more effective if we really want to do something constructive about global warming.

And despite all this – Congress wants to use crop land to grow fuel? Has motor fuel become more important than eating? Why has Congress chosen to ignore the impact their program will have on the price of food? And why corn ethanol? Is it because corn is a crop Iowa farmers know how to grow? Is campaign financing and the 2008 election cycle more important than constructive strategic planning? (Reference 11) Was corn ethanol an overly simplistic response to our looming energy shortages? Has most of the campaign for corn ethanol been financed by agribusiness interests? Do they have a financial interest in the outcome? Has the environmentalist community been hoodwinked? Was the claim that animal feed is energy deceptive?

You decide.

By all means, we should explore the development, production, and distribution of biomass fuels. Many are working diligently on the conversion of plant wastes and other organic materials into motor fuels. My son and I have talked frequently about alternative fuels. With great patience he has sketched out the chemical reactions needed to get from raw material to motor fuel. (Reference 12) Pieces of paper scattered about the kitchen table. Each promises a potential solution. All need work. He has his own ideas about the conversion of agricultural, commercial, industrial, and municipal wastes into useful fuels. We agree on the objective.

What ever we do, let’s base our alternative fuel decisions on good science, cultural economics, and a consideration for the use of these fuels within the context of our environmental goals. Pop culture solutions forced on us by the selfish-best-interest political power of the proponents is a trap we shall regret.

That’s the way I feel. How about you?

Ronald R. Cooke
The Cultural Economist

Additional information on oil depletion and my own recommendations to enable a “soft” landing may be found at www.oildepletion.blogspot.com.

References:

1. I encourage you to do your own homework. Analyze the best data you can find. Then plug your findings into the above Table. Just remember. Every box has a data point.

2. The Energy Balance of Corn ethanol: An Update. By Hosein Shapouri, James A. Duffield, and Michael Wang. U.S. Department of Agriculture, Office of the Chief Economist, Office of Energy Policy and New Uses. Agricultural Economic Report No. 814. July, 2002.

3. Apparently, when Brazil tried using agricultural crops other than sugar cane for ethanol, it achieved only a 1:1.20 energy conversion rate. It wasn’t worth the effort.

4. I encourage you to look up the evaluation done by David Pimentel (Cornell) and Tad Patzek (U. C. Berkeley). They believe it takes more energy to make ethanol than we get from ethanol.

5. The same technique can not be used to mix ethanol with diesel fuel.

6. If we are willing to ignore the environmental impacts, it would take ~ 6 units of energy to get ~ 1 unit of net new energy – best case – or a mere 60 gallons of net gain per acre of corn. If we think we can grow our way out of oil dependency, we had better plan on consuming corn at a rate of 77 acres per second!

7. Despite working toward energy independence since the 1970s, in 2000 Brazil found out that a bad crop year was as devastating as a reduction of imported oil. It was forced to import corn ethanol from the Archer Daniels Midland Co.

8. Yes. I know. Tortillas are made from white corn, not the yellow stuff used for ethanol. But every acre of land used for yellow corn is an acre that is not available for growing white corn. And our kids will still go hungry.

9. See “The Federal Energy Policy Act of 2005”

10. See “Dirty Natural Gas”

11. Iowa is a critical “must win” State for America’s politicians. Serious candidates do everything they can to please Iowa’s voters. Is the use of taxpayer money to subsidize corn and ethanol production a form of bribery? And now that California has changed its Primary date to February 2008, do Iowa farmers matter any more?

12. And with great patience, he has explained most of these alternative energy solutions were well known when he received his Masters Degree in Chemical Engineering at U. C. Davis – over 20 years ago.

Thursday, March 22, 2007

The Elasticity of Oil Production and Consumption

Elasticity

A quick lesson in economics. Elasticity. The production, or consumption, of a specific product is often referred to as being elastic – or – inelastic.

  • -If production is elastic, we assume that if the price of a product goes up, or if a shortage of the product develops, then competitors are able to add new capacity to increase the availability of that product. Higher prices and/or shortages encourage suppliers to invest in additional plant, equipment, materials, and labor in order to increase sales and profits. Economists generally believe that when this new capacity comes on-line, a surplus of product will eventually develop, and the resulting competition for business will force suppliers to reduce their prices in order to sell more products.
  • -If production is inelastic, then higher prices and/or shortages do NOT bring forth new capacity because suppliers are unwilling, or unable, to increase production.
  • -If demand is elastic, it simply means that consumers will buy more of a product when the price comes down. They will buy less when the price goes up. Yes. There are other reasons why consumers increase or decrease consumption, but price is a fundamental driver of demand.
  • -If demand is inelastic, changes in price initially do very little to change consumer buying habits. Lower prices do not encourage much more consumption. On the other hand, consumers are willing to pay higher prices (up to a point) to keep on buying what they need. As prices continue to increase, however, consumers will begin to purchase cheaper substitute products, and/or will seek to change their lifestyle, because they can no longer afford the product. Although low income consumers are usually the most vulnerable to these realities, middle income consumers are seldom far behind.

Classical economic theory contemplates that increased demand drives up the price. Higher prices attract new investment in the means of production (materials, labor, machinery and so on). Higher rates of production create a subsequent surplus of product, driving prices down as manufacturers compete for business. Unfortunately, classical economics does not understand how to deal with a depleting resource – such as oil or natural gas. Since both production and consumption are relatively inelastic (ignoring the impact of political, cultural and environmental disruption), changes in investment – even huge changes in investment- are unlikely to bring about a corresponding increase in supply.

The world oil market has become relatively inelastic in the sense that large increases in upstream investment no longer produce contemporaneous increases in supply. Even assuming there are no political obstacles, cultural disruptions, weather problems, or geographical challenges to delay exploration and production, it still typically takes many years to develop a new oil field. In addition, our ability to bring new production on-line is further limited by the political objectives and cultural challenges of the producer nation. Take a look at nations such as Iran, Iraq, Venezuela, or Nigeria. As described by cultural economics, any potential elasticity has been decreased by local restrictions.

Conclusion

As oil and natural gas deplete, suppliers will attempt to charge as much as the market will bear. That – in turn – will force demand destruction as higher prices and availability curb consumption. Unfortunately, since American oil demand per household has been relatively inelastic since 1982, demand destruction can only occur if the economy is forced into a recession, and/or Americans make substantial changes to their lifestyle.

Neither option will be pleasant.


TCE

Sunday, January 28, 2007

The Energy Detensive Economy

Challenges Ahead For Local Government

Introduction

Our local City Council recently held a public policy workshop on community development. After a brief introduction, attendees were divided into groups of 10 to 12 people and given the task of making a list of desirable land use priorities, community amenities, and development styles for our growing City. When we re-assembled, our lists were read to the audience. The results were remarkable. Along with the usual concerns about density, traffic and housing, there emerged a genuine apprehension about the consumption, cost and environmental impact of energy. Attendees believed community leaders are not giving sufficient consideration to energy in the local decision making process.

They are not alone. Energy has become a hot topic all over America. And it is becoming a strategic issue for local government. For example, the Portland, Oregon City Council has established a task force to assess the impact of energy resource depletion on 14 topics including Transportation, Land Use, Local Economy, Public Services, and Communication. Denver, Colorado, co-sponsored a Conference on Peak Oil, and has launched Greenprint Denver to promote the importance of sustainable development and ecologically-friendly practices throughout the community. Greenprint policy objectives include energy efficiency in the private sector, increased public transit access and use, transit-oriented development, bike and pedestrian enhancements, energy-efficient affordable housing, and the construction of solar and methane power plants.

Energy has become a key issue for environmentalists. Community leaders are being challenged.

Local government can no longer make policy decisions
based on the obsolete assumption
we will always have abundant quantities of affordable energy.


The Reality of Depletion

One vital reason can be summed in two words – oil depletion.

Much has been written about "Peak Oil". Many have tried to estimate the date when world oil production will peak and then begin to decline, causing chronic shortages and sharply higher prices. Most projections range from 2005 to 2025. Although the specific date may be speculative, the underlying facts are not. For more than 20 years, we have been using oil faster than we can find it. US oil production peaked over 35 years ago. The decline of production is irreversible in 33 of the largest 48 producer nations. New discoveries in 2004 and 2005 were woefully inadequate. Consumption now exceeds new discoveries by more than 2:1. In order to sustain the world economy, exploration and production companies must add at least 350 Bbl (Billion barrels) of oil to the world's reserves between 2005 and 2024. Despite sharp increases in exploration, and the utilization of the best available technology, few believe we can achieve this goal. At some point in the near term future, the demand for oil will exceed the supply of oil.

That's a fact.

Furthermore, we need to distinguish between conventional crude oil and non-conventional oil. Conventional crude oil, together with Natural Gas Liquids from the same geologic structures, is typically found under land or shallow water, and constitutes over 90 percent of the oil we have used in the past. Unfortunately, much of the oil we have been using has come from a relatively small number of aging "super" fields. Many are in decline. Going forward, we will have to place greater reliance on non-conventional oil – oil derived from deep sea resources, tar sands, polar wells, and so on – for an increasing percentage of the oil we use. It will be more expensive to find, produce, and transport this oil to the refinery. Much of it will be more costly to refine.

Political stability in the Middle East, Africa and South America is also a critical element of future oil production. Most of the world's known oil reserves lie within these geographic areas. Unfortunately, although Saudi Arabia has huge reserves of oil, its ability to provide a buffer for world oil stocks is almost gone. Iraq and Iran are embroiled in conflicts that may disrupt oil production, and sporadic conflict is not uncommon in Africa. Thus, even if depletion were not a factor in the oil market equation, the vulnerability and unpredictability of oil production will make it impossible to always balance supply with demand. Price volatility and sporadic shortages are inevitable.

Yes. There is more oil beneath the surface of our planet. But we are in a trap. We have used up most of the easy-to-get low cost oil. Resource nationalism exists. World oil has thus transitioned from a market driven by consumer demand to one limited by producer capacity. As a result, oil exporting countries are now able to control the price and the availability of an increasingly scarce commodity.

What happens when available oil production is no longer able to provide 40% of our total energy and 99% of our mobile fuels? The existing cost, mobility, and energy content of oil can not be duplicated by any known technology or natural resource. That means it is highly likely we will experience the economic and cultural impact of Peak Oil before we reach that magic date.

It's time to face reality.


California Is On A Collision Course

According to the Energy Information Administration (EIA), California is the second largest consumer of energy in the nation. It ranks 4th in both crude oil reserves and crude oil production. California is the largest consumer of gasoline, and 2nd in distillate and jet fuel consumption. California has the third largest refining capacity in the nation.

We have developed our economy, and our lifestyle,
on the basic assumption of unrestricted energy consumption.

Unfortunately for Californians, annual crude oil production peaked in 1985 at 394 million barrels. By 2005 in-State oil production had declined by 42 percent. To make up the difference, we Californians increased our oil imports from 50 million barrels in 1994 to more than 250 million barrels in 2005. We now depend on foreign suppliers for more than 42 percent of our oil, and that percentage is growing.

Rapidly.

So what does this all mean? Whether or not your gas station has enough gasoline or diesel fuel to sell depends on two factors:

  • the outcome of events now unfolding in Alaska, California, Saudi Arabia, Ecuador, Iraq, and Canada which supply California refineries with most of the oil we process, and

  • whether or not California can secure additional oil, gasoline, and diesel supplies from in-State, North American, or foreign resources.

Since there are severe limitations on the development of new in-State or North American oil resources, we Californians – like our counterparts in the other 49 States – will have to compete for declining oil resources in a world commodity market characterized by highly volatile prices and the constant threat of sporadic shortages.

So let us summarize where we are.

We Californians are planning to consume increasing quantities of a commodity
that may, or may not, be available,
at a price that many of us will not be able to afford.

Does this make any sense?

But wait. California's energy challenges go way beyond oil. Consider these excerpts from the California Energy Commission's 2005 Integrated Energy Policy Report:

  • "California is the sixth largest economy in the world. To meet the needs of its growing population, California’s economy depends upon affordable, reliable, and environmentally sound supplies of electricity, natural gas, and transportation fuels. The challenge for California’s policy makers is to manage an energy sector that is increasingly dependent on oil and natural gas and may face spiraling energy prices, potential supply shortages, and an inadequate and aging energy delivery infrastructure."

  • "Despite improvements in power plant licensing, enormously successful energy efficiency programs, and continued technological advances, development of new energy supplies is not keeping pace with the state’s increasing demand (for electricity)."

  • " In the transportation sector, California’s refineries cannot keep up with the mounting need for petroleum fuels and consequently depend upon increasing levels of imports to meet the state’s needs. California also imports 87 percent of its natural gas supplies, which are increasingly threatened by declining production in most U.S. supply basins and growing demand in neighboring states."

  • "As the state’s demand for electricity increases, California could face severe shortages in the next few years. ……."

The California Energy Commission's report contains some very chilling commentary. California is definitely on a collision course with an energy crisis. It's our inevitable destiny. We can no longer automatically assume we will have enough affordable energy to fuel our cars and trucks, heat and cool our homes, power our appliances and lights, or refrigerate and cook our food.

Welcome to the realities of the 21st Century. Thus far, we appear to be on a course not unlike the oil Production Crisis described in my book. Periods of surplus alternate with intervals of shortage. Although prices remain volatile, they inevitably increase over time. Shortages and higher prices are recessionary. Unemployment and inflation increase while GDP declines. The opposite trend occurs when there is a surplus of oil (assuming no other contravening problems) because the world economy is able to recover. On the other hand, a scenario similar to the book's Political Crisis is also entirely possible. The social chaos of a Political-Security crisis would be immediate and devastating. Fuel shortages and price shocks, added to existing vulnerabilities in our economy, could trigger a depression. Urban families, particularly those whose income depends on driving great distances each day, will be more affected than rural families. Government reaction will necessarily focus on welfare and social services.

But we need not be entirely pessimistic. We can avoid catastrophic change. Read the report by Robert L. Hirsch et al. for the Department of Energy (DOE). I present two key points from this excellent effort:

  • "Intervention by governments will be required, because the economic and social implications of oil peaking would otherwise be chaotic. The experiences of the 1970s and 1980s offer important guides as to government actions that are desirable and those that are undesirable, but the process will not be easy."

  • "Prudent risk management requires the planning and implementation of mitigation well before peaking. Early mitigation will almost certainly be less expensive than delayed mitigation."

Unfortunately, our civic institutions are ill-prepared to deal with the inevitable dislocation of declining energy resources. We continue to make planning decisions that encourage the intensive use of energy. Clogged freeway lanes, deficient public transportation, far distant suburbs, alienated shopping centers, and a frenetic lifestyle are the result. But it is time to face the inevitable. Community leaders and ordinary people must contemplate a basic question: Should we continue to assume a "business as usual energy intensive lifestyle for as long as possible (and thus risk a cataclysmic collapse), or should we take pre-emptive measures designed to ease the transition to an energy detensive society?

Our mechanized civilization has embraced the assumption we will always have unlimited quantities of affordable energy. But California can not drill its way out of the pending energy crisis, it can not isolate itself from world oil and natural gas markets, and it can not depend on technology to solve all of its problems. Yes. We all champion alternative energy solutions. And a few of them – like solar energy - hold great promise. But none of the proposed alternative energy solutions will provide sufficient energy to provide more than a fraction of the fuels and electricity we will need to sustain our current lifestyle.

That means our lifestyle has to change! Along with essential elements of our culture.

And that brings us to the real focus of this essay: what can local government do to help us through our pending energy crisis? What is the role and responsibility of municipal, county, and Regional political structures? Is local government obliged to develop a pro-active strategic community plan to manage the challenges that lie ahead?

Yes. And the sooner, the better.


The Role of Local Government

An energy crisis will create significant challenges for local government. As we switch from cheap oil and natural gas to alternative energy resources, people within the region will soon discover there is insufficient energy to sustain their current lifestyle. If natural gas and propane become sufficiently expensive - or unavailable - some will switch to wood and coal to heat their homes and cook their food. Increasing rates of inflation and unemployment will stress the welfare system. Constituents are not going to be happy about the loss of personal mobility, chronic shortages, insidious inflation, or declining employment opportunity. Expect a larger percentage of the population to fall below the poverty line. The declining availability of personal transportation, coupled with economic constraints, ensures that access to adequate health care will deteriorate. People will expect government to do more than it is logistically or financially capable of doing. Frustration will lead to a decreased commitment to diversity, social conflict on the streets and increased rates of crime.

So. What can local government do? We can moderate these risks. We can assume an energy detensive economy will drive social change, increasing the demand for social, medical, and community services. We must be willing to innovate a new model for the management and delivery of these services.

First. Community leaders and local government staff must become thoroughly familiar with the energy issues that confront us. No sugar coating. No promises we can not keep. In particular, we must be sure we understand the ramifications of oil depletion because they underlie the inevitable conflict over personal mobility, how we heat our homes, and pay our bills. Attend lectures, conduct discussion groups, read books and browse the Internet for information. Make sure everyone participates. Ignorance makes poor decisions.

Second. One of the most important jobs of local government will be communication. Lectures, conferences, books, visual media and printed materials must be available. The local library system must become a focal point of local communication. Again. Tell the truth. Many constituents will not understand the cause of their dislocation. Hence, one can expect opposition to government's response if it is not well explained.

Third. Evaluate local government's response. A Regional Comprehensive Plan, along with Local Government General Plans, can play an important role in initiating projects and programs, removing obstacles to energy conservation and efficiency initiatives, creating incentives for shared and public transportation, managing transportation pools, establishing self-sufficient neighborhoods, and fostering an environment of cooperation, experimentation, and urgency. Make sure both plans reflect the new energy reality. Every item must be examined. Does it assume unlimited quantities of cheap energy? If so, change it. Focus on the local economy. Make sure each planning decision will support the community in an energy detensive environment. Assume constituents will have to make lifestyle changes. Understand that Local and Regional government planning challenges and concerns will be substantially altered by trends in the availability and price of oil and natural gas. Issues of interest in 2006 will be supplanted by a wide range of new land use, service, and transportation demands by 2016. Re-evaluate land use policies. Key issues include: urban growth boundaries, integrated communities, residential density, localization of shopping, senior care and medical facilities, affordable housing, and personal versus public transportation options.

Fourth. Local community organizations will need to step up and assume responsibility for many social and logistical services. Our culture has made a huge mistake. We have replaced much of the work that used to be done by local charity organizations with officious government programs. We must reverse this process. Make sure civic groups, fraternal organizations, and religious institutions become part of the solution by tasking them to fund, staff and execute specific responsibilities. Encourage volunteer groups who agree to provide support to the infirm and elderly, educate and assist home owners with energy efficiency improvements, manage ride sharing and home delivery networks, develop community gardens, and so on. Don't get in the way. Avoid well-meaning regulations that discourage localization initiatives or the creation of neighborhood communities. Residents within the area can, and should, make a positive contribution to the needs of their own neighborhood community.

Fifth. Create a strategic plan to identify, develop, and initiate appropriate responses to the energy challenges that lie ahead. Organize the plan around specific desirable outcomes. Set five, ten and 15 year objectives. Assign responsibilities. Recognize government will not be able to do everything that needs to be done. Create a dialogue among neighbors for their mutual support. Neighborhood Communities must learn self sufficiency.

Sixth. Be sure there is a group within local government that has the authority, mission and responsibility to drive the implementation of the strategic plan you create.

Yes. We know the world is changing. We must change the way we see the world.


Actionable Response

Local Governments can prepare for the inevitable energy challenges that lie ahead. Here are three key concepts.

The Neighborhood Community

We have developed a culture around the assumption that large institutions operate as highly centralized organizations. Implicit in this concept is the use of vehicles to move people and things between a centralized core facility and a remote point of need. We must rethink our assumptions about community organization. We must replace the existing neighborhood model, which is often merely a collection of unrelated people who seldom talk with each other, with a cohesive community of neighbors who work together to create a better life for themselves. The Neighborhood Community must become the focal point for local government operations. Although most urban areas already have nascent Neighborhood Communities, suburban and rural parts of the region will need to develop these centers from scratch. Establish multiuse centers for every identified neighborhood. Here one can find a transportation center, local retail stores, personal and financial services, emergency and in-home medical facilities, child care for working moms, support programs for teens and seniors, library and communication services, and local government representation. People must be encouraged to take care of themselves within a group activity environment. Individuals become stakeholders with an interest in the outcome of daily operations. Encourage local groups to play a greater role in the provision of neighborhood services and support. For individual participants, the Neighborhood Community provides a frame of reference, serves as a surrogate extended family, reinforces peer group social values, and conveys a sense of emotional security.

Transportation

When I was a kid, I could walk or ride a bicycle to almost everything I needed – the market, clothing store, barber shop, movies, school, bus station, and so on. Relocalization into Neighborhood Communities will encourage walking and bicycling. Accelerating fuel prices, will encourage a shift from personal vehicles to carpooling and public transportation. This suggests Governments must refocus their transportation capital expenditures from personal vehicles to public transportation systems, and the support of multi-occupant carpooling programs. It's time to get serious about interconnected light rail, railroad, local shuttle, express and mini-bus services. Let local entrepreneurs experiment with ride sharing options to complement the fixed route public transportation system. Every Neighborhood Community must have its own public transportation center for transit stops and the coordination of local car pooling programs. Traffic congestion would sharply decrease. The downside has to do with lifestyle: greater use of public transportation and car pooling means we better plan to live closer to where we work.

Land Use, Zoning and Building Codes

Local governments must review their land use, zoning and building codes with one specific question in mind: does each code optimize the consumption of our energy resources? Energy intensive development must be replaced by energy detensive projects. It makes no sense to permit the development of any project that assumes the unrestricted use of affordable motor fuels. Zoning codes must focus on ending urban sprawl, the creation of Neighborhood Communities, encouraging mixed use projects, permitting home and community based businesses, altering road specifications to accommodate bicycles and pedestrians, and the generation of electricity from renewable resources. And we can no longer turn our noses up at the thought of converting sewage into fertilizer, re-using grey water for landscaping, or the creation of open spaces for community and private gardens. Property owners must be encouraged to participate in energy rating programs in order to reduce their consumption of electricity and fuels for heating and air conditioning. Remove the barriers to the use of new materials and construction techniques. Require all new construction to meet energy detensive guidelines.

For every planning decision, we must answer two simple questions. Where will we get the mobile, stationary, and heating fuels to sustain the proposed development? How do mass transit systems, electric power distribution, "green" building codes, and other energy considerations figure into the decision process? Our planning process, guidelines, and objectives must reflect the new reality of an energy detensive world.

There is much to be done.


Conclusion

We are a voracious consumer of energy. We have developed an energy intensive economy and lifestyle. Our culture assumes energy will always be inexpensive and readily available. Our values, laws, regulations, social customs, ambitions, and social progress have been inexorably linked the ever-increasing consumption of coal, oil and natural gas. Material abundance and population growth mirror energy consumption. The freedom of personal mobility is ingrained into our psyche. These things, we believe, are a natural right.

They are not.

We are being challenged. We are challenged to change the way we think of energy. We will not be able to replace all of the oil and natural gas we use with alternative fuels. We will not have a "business as usual" future. We do have to change our economic system and social structure in order to deal with the realities of an energy constrained world. And we will transition to a more sustainable lifestyle.

California is vulnerable to an energy shortage. A long term, forever, chronic, downtrend in energy consumption because it is no longer affordable or readily available is coming. We are going to learn to live in an energy detensive world. Our energy intensive lifestyle will give way to a daily routine that consumes less hydrocarbon energy.

Detensive. This word describes our energy future.

By the time you read this essay, the price of gasoline may be less than $2.50 a gallon, or it may be more than $4.00 a gallon. Short term fluctuations in price are to be expected. Although we can make the case that "Peak Oil" will not occur until after 2020, a dispassionate analysis of world events suggest it will happen much sooner. No matter what the timing, common sense dictates we must prepare for the inevitable. Local government can make a positive contribution to the successful creation of localized, self-sustaining, neighborhood communities; interconnected public transportation systems, and the development of an energy efficient infrastructure. Community leaders must be willing to challenge conventional wisdom with pro-active adaptation and practical flexibility. Existing assumptions, policies, codes and regulations may not be appropriate in an energy detensive world. We must be willing to review our infrastructure investment decisions within the context of an energy detensive environment and a genuine desire to work toward energy independence. Localization requires we pay attention to addressing a better balance between local jobs and housing. And finally - we must pro-actively include civic, fraternal, and religious organizations in our long term planning for community services.

The sooner we start the review process, the greater our potential success.


Ronald R. Cooke
The Cultural Economist

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  1. Portland's 93-page briefing book may be found at www.sustainableportland.org, or by doing an Internet search on "Peak Oil Task Force Briefing Book".
  2. Details on Denver's Greenprint agenda can be found at http://www.greenprintdenver.org.
  3. We have also been using natural gas faster than we can find it since 1991.
  4. The full text of the California Energy Commission' s 2005 Integrated Energy Policy Report is available on the Internet.
  5. If you want a better understanding of oil depletion and peak oil, most of the information you need can be found on the Internet. Start with my Blog at www.tce.name. Read my essays found in "Energy" and "Federal Energy Policy", browse through "The Report on Oil Depletion", and then cruise through the WEB sites listed in the "Links Worth Exploring" sidebar of the Energy Blog. It's all free and most of the people who sponsor these sites are honest, thoughtful, straight-up individuals who happen to have a genuine concern about the future of the human race.
  6. On July 19, 2006, Federal Reserve Chairman Ben Bernanke commented that economic moderation "seems underway". Although high oil prices were a concern, and despite the fact the core rate of inflation had risen at an annual rate of 3.6 percent over the prior 3 months, future increases should be moderated by declining economic activity. Real GDP was projected to grow at a rate of 3.25 to 3.5 percent for 2006. Unemployment would be in the range of 4.8 to 5 percent. The Federal Reserve's projections, of course, assume the oil market will not be disrupted by a production or political crisis. That assumption will be critically tested before the end of 2007.
  7. Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, published by the U.S. Department of Energy, National Energy Technology Laboratory, February 2005; Robert L. Hirsch, SAIC, Project Leader, Roger Bezdek, MISI, and Robert Wendling, MISI.

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Monday, January 01, 2007

Insidious Inflation

Although economic change can happen with dramatic ferocity – as it did in 1929 – it is far more likely to occur over a period of time. We can expect the inflationary impacts of higher natural gas prices, for example, to take several months to work their way through the chain of distribution from raw material to consumer product. At each step, business decisions are made about margins, material substitution, alternative resources, production volumes, and so on. And it's not unusual for a manufacturer to hedge forward commodity prices. Until these contracts expire, there is less pressure to increase end product prices.

But eventually, higher producer costs mean higher consumer prices. Increased oil and natural gas prices create a relentless upward pressure on inflation. And the forces of inflation are insidious – because they are often difficult to identify.

For example.

Chris Krug writes for the Oklahoman. In a recent article he shows how the farmers of Texas County, Oklahoma are being forced to dramatically reduce the size of their corn crops. Corn needs a lot of water. The water has to be pumped from the Ogallala aquifer from a depth of 300 to 350 feet and then pressurized for irrigation. The farmers use natural gas to power the pumps. Higher natural gas prices have almost tripled their pumping costs. So the farmers of Texas County are looking to plant other crops that need less water.

The price of natural gas has about doubled over the last two years. Higher natural gas prices force up the cost of irrigation. Planting corn becomes a higher risk business. That leads to less corn production. Less corn pushes up the price of corn. Higher corn prices push of the price of everything made from corn – including fuel amendments and cattle feed. Higher fuel amendment costs push up the price of gasoline. Higher cattle feed costs push up the price of that steak you plan to eat.

And the higher cost story doesn't end with pumping water. Higher oil and natural gas prices push up the cost of fertilizer, insecticides, and herbicides. It costs more to operate motorized farm machinery. It costs more to transport and process the crop. It costs more to convert corn, as a raw material, into consumer products. And it costs more to distribute these products through the chain of distribution.

It might take 2 or 3 years (or more) for these cost increases to work their way through the supply chain. But every link eventually gets more expensive.

Consumer prices go UP.

So the next time you hear someone say that increasing oil and natural gas prices have little impact on inflation, just remember the farmers of Texas County, and a supply chain that stretches all the way from a corn field in Oklahoma to your dinner table.

Wednesday, September 13, 2006

Oil Shortages?

It’s Happened Before. And It Will Happen Again.

Introduction

We love our cars, our pickup trucks, and our SUVs. They present us with the possible. Freedom of movement. Personal mobility. We are no longer confined by the boundaries of local geography. The open road calls. Owning a car has become a rite of passage to personal independence. We have arrived.

And we built our national culture around this concept of personal mobility. It sets the parameters of our space and time, enables the range of daily activity, and expands the universe of opportunity. Approximately 75 percent of America's 135 million workers commute to work. Alone. One person to a vehicle. Only 12 percent of us bother to car pool. Public transportation, once the primary means of personal mobility, now accounts for under 5 percent of commuter traffic – and this mostly in the highly populated North East corridor. Of the remaining commuters, 3 percent walked to work and just over one percent rode a bicycle or motor cycle or climbed into a cab. The rest of us don't commute at all. We work from home.

Our average travel time to work is 25 minutes. But that statistic doesn't mean much to the 10 million Americans whose daily commute to work takes an hour or more, or the millions of Americans who find themselves fighting frustrating freeway gridlock almost every day.

So here we are. The supreme irony.

We have become the captives of our freedom.

Every workday, over 117 million of us get into our vehicles to begin the commuting ritual all over again. Doomed conformists condemned to bear the stress and aggravation of congested freeways.

But wait. Aren't we overlooking something? See that river of vehicles? Millions of engines burning gasoline and diesel fuels. Clouds of hydrocarbon waste. We consumed - on average - over 555 million gallons each and every day in 2005. More than 4.8 billion barrels of motor fuel in a year.[i] Poof. Gone forever. Can we assume we will always have an unlimited supply of affordable fuels to sustain our existing means of personal mobility?

No. Of course not. Shortages are coming. I can not tell you when. There are far too many variables. But the ominous signs are everywhere. Fuel shortages. Higher prices.

Our future.


It's Happened in America.

Yes. Here in the United States. Three times in my lifetime. Ration books in 1942. Long lines at the gas station in 1973. Tension in 1979.


WW2

Although very young, I was acutely aware of WW2 gasoline shortages. I was in charge of the ration stamps. Precious little pieces of paper that bestow the freedom of personal transportation. I hid them in a special place. Counted each one with care. Each coupon was good for a little more of the precious fluid. Automobile owners counted the days until the next issue of stamps were scheduled to arrive. The distance of every trip was carefully calculated. They knew to the drop how much gasoline was left in the tank. And then a crucial decision. Is this trip really necessary?

I do not remember why we got gasoline ration stamps. We did not have a car. But it was fortunate for our family we did get them. They could be traded for ration coupons that allowed us to buy other goods we needed in a land of shortages: food, shoes, fuel oil, and so on. It was very sad. And frightening. More than once, someone would knock at our door, pleading for a few pieces of paper.

And of course with rationing came a sleazy black market in stolen and counterfite stamps, competition among people of influence for the special privilege of extra rations, and “back room” deals for allocations of gasoline. All very ugly.

GASOLINE - A, B and C coupons each are worth three gallons. T coupons are good for five gallons each. The A coupons numbered 5 must last through July 21, which is double the time of previous ration periods. B and C books bear own expiration dates. Information on price control may be obtained at the O. P. A. offices in the Empire State Building, Chickering 4-7300.

We were all very glad when WW2 ended.


1973 Oil Crisis

Egypt and Syria jointly attacked Israel on October 6, 1973, on Yom Kippur, the holiest day of the Jewish calendar. Other Arab states contributed troops and financial support. When America came to Israel’s rescue, Saudi Arabia then led the Arab world in an oil embargo imposed on the United States and other western nations.

Oil prices increased by 251 percent. The current rate of inflation soared to 6.2 percent in 1973, 10.97 percent in 1974, and 9.14 percent in 1975. Unemployment reached 8.5 percent in 1975. During this period, American oil consumption dropped by more than 4 percent, and oil consumption efficiency increased by over 20 percent.

Congress took desperate measures. It set a maximum highway speed limit of 55 mph, ordered all new cars to have fuel economy stickers, put daylight savings time into effect for the whole year, invoked a car fuel economy standard of 27.5 mpg, and gave tax credits for the development or use of alternative forms of energy. President Nixon ordered the Department of Defense to stockpile oil reserves, had rationing books printed (never used), called for voluntary carpooling, and formed the Department of Energy.

Many gas stations closed on Sundays, refused to sell to customers they did not know, and restricted fuel sales to 10 gallons per vehicle. They often had no gasoline. Motorists waited in long lines for a few gallons of the precious fluid. We turned down our thermostats, burned more wood and coal, purchased fuel efficient cars (mostly Japanese), and carpooled. The airline industry canceled flights and raised the ticket prices.

The oil embargo triggered a worldwide recession. OPEC was now in a position to manipulate world oil prices.


1978 Oil Crisis

President Jimmy Carter appeared on national television in 1977 to declare America’s dependency on foreign oil to be “the moral equivalent of war”. Few listened. Certainly not Congress.

That left America vulnerable – again – when the Shah of Iran was deposed in 1979. Iranian oil production came to a standstill. Oil production was further reduced when war erupted between Iraq and Iran. Shortages pushed oil prices up 162 percent by 1980, and the price of gasoline doubled by 1981. Inflation exceeded 10 percent per year for three years in a row. By 1983, unemployment had reached 9.6 percent.

Tens of thousands of Americans waited – sometimes vainly – in long lines at the filling station. There were shootings, riots and strikes. Congress reinstated controls on gasoline consumption. Some areas imposed an odd/even plan on gasoline purchases.

It took until 1983 to get inflation under control. Unemployment finally declined to 5.5 percent in 1988.


It Happened in Cuba and Venezuela.

Two nations, Cuba (1991), and Venezuela (2002) have gone through the chaos of oil shortages. In both cases, local meat production and locally grown fruits and vegetables suddenly became very important. Local community neighborhoods learned greater self-sufficiency. They had to change their lifestyle in order to get by with less energy. And they were forced to make these changes in a hurry.


Cuba 1991

Fidel Castro called it Período especial en tiempo de paz - "A Special Period in a Time of Peace". It began in 1991, after the collapse of the Soviet Union. It was a period of economic and cultural crisis. Cuba suddenly found that Russia was no longer able to supply it with the economic subsidies and oil products Cuba needed to survive. Oil imports dropped by approximately 53 percent, crippling Cuba's oil fired electric power system. Refrigeration and air conditioning failed. Chronic power shortages crippled transportation, agriculture, and industrial production. Estimated GDP declined by 33 percent, real wages fell, and unemployment soared. There were food shortages.[ii] It has been reported that Cuban adults lost an average of 20 pounds.

The Cuban people adapted to the crisis. From 1991 to 1995, they introduced locally grown sustainable agriculture, overhauled their economy, changed their diet, and adopted new lifestyles. They innovated new modes of mass transit. Authorities enforced car-pooling. Locally grown fresh vegetable production increased 10 fold. Annual population growth declined from .8 to .4 percent. Eventually, GDP growth resumed. Although the Cuban people still have severe economic problems, the "Special Period" got them through their initial crisis.[iii]

Although Castro runs Cuba like a socialist dictatorship, he did not use coercion to meet the challenges of Cuba's "Peak Oil" crisis. Instead, he loosened the reins on private enterprise. He told his people that things would be very hard. The Cuban people were forced to find their own solutions. They quickly figured out how to get by with less energy.

In some ways, Cuba serves as a model for an energy detensive economy. Cuba has ordered 8,000 high mileage buses from China as well as 12 locomotives to build a rail system. They are continuing the development of a surface mass transit system with trains to travel the length of the island, replacing energy intensive air travel. In January, 2006 Castro announced a plan to decentralize Cuba’s power system, gradually replacing five decrepit thermoelectric plants with smaller, regional plants supplemented by solar and wind power. He also said Cuba had ordered more than 4,000 diesel and oil generators, with more than 3,000 already delivered. Distributed local power systems are being implemented. Organic farms and urban gardens. A home grown mass transportation system. Decentralization and localization. That’s the plan. Conserve, cutback, curtail, innovate and change. Emphasis on cooperation rather than competition.[iv]


Venezuela 2002

In less than 12 months Venezuela went through a political crisis and a devastating economic crisis. The coup d’etat of April 11 was followed by an oil industry lockout and strike that lasted from December 2002 through February, 2003. At the time, Venezuela depended on oil for 80% of its export earnings, 50% of its government revenue, and 30% of its GNP. Unfortunately, events drove oil production down from approximately 3.2 million barrels per day in October, 2002 to a low of 25 thousand barrels per day in January of 2003. Production did not recover until May 2003.

Unemployment increased from 11 percent in 2001 to over 20 percent in March, 2003. Inflation rose from 12.5 percent in 2001 to 30 percent in 2002. The market for personal services was decimated. Customers had neither transportation nor cash. The banking system limited withdrawals. Small businesses were forced to close. Fuel deliveries had to be protected by the National Guard. Consumers waited for hours to fuel their cars and trucks. The availability of air travel evaporated. Caracas became a ghost town. Only a few abandoned cars could be found on previously busy 8 lane freeways. Price regulation was introduced to prevent profiteering. There was a shortage of food in urban areas. Thousands of farmers responded by bringing locally produced meat, fruit and vegetables into the City.

This – in a nation with plenty of oil.

The resumption of oil production brought about economic relief and life began to improve by the fall of 2003.


Conclusion

There are four concepts that thread their way through all five of these oil shortages.

1. There was plenty of oil in the ground. These oil shortages had nothing to do with world oil reserves or potential production. They happened anyway.[v]

2. All five oil shortages were related, or directly caused, by cultural conflict. A world war. Two regional wars. Cold war isolation. Internal political and labor strife. Above ground factors caused a decline in oil production.

3. All five oil shortages had a chaotic impact on the affected national economies. All had higher rates of inflation. With the exception of WW2, all produced higher rates of unemployment. Real GDP growth was erratic.

4. Government could not avert the economic or cultural impact of an oil shortage. People had to fend for themselves. Solve their own problems. Adjust their own lifestyles. We had to solve our personal transportation problems, find new jobs, scramble for food resources, learn to conserve fuels, improve energy efficiency, and so on. Government regulation and welfare could only provide a minimum of support.

On the other hand, we have to be impressed by the resiliency of the human spirit. In every case, we did adjust, we did innovate, we did take the initiative, and we did survive.

So. Here we are.

Every week, thousands of trucks ply our freeway system, delivering vital goods and services to our communities. They all run on fuels derived from oil. Every day, thousands upon thousands of containers move over our docks, millions of passengers land at our airports, and multiple thousands of rail freight cars move through our nation. All powered by oil. Every workday roads are paved, roofs are replaced, tires are changed, prescriptions are filled, lawns are fertilized, bugs are sprayed, and garments are purchased. All of these transactions depend on the unlimited availability of low cost oil.

We are a voracious consumer of energy. We have developed an energy intensive economy and lifestyle. Our culture assumes energy will always be inexpensive and readily available. Our values, laws, regulations, social customs, ambitions, and social progress have been inexorably linked the ever-increasing consumption of coal, oil and natural gas. Material abundance and population growth mirror energy consumption. The freedom of personal mobility is ingrained into our psyche. These things, we believe, are a natural right.

They are not.

America is vulnerable to an energy shortage. We almost had another one in 2005. And eventually a chronic downtrend in energy consumption will occur because it is no longer affordable or readily available. We are going to learn to live in an energy detensive world. Our energy intensive lifestyle will give way to a daily routine that consumes less energy.

Detensive. The word of our future.


Ronald R. Cooke
The Cultural Economist



[i] Source: U.S. Energy Information Administration

[ii] Portions of the information on Cuba courtesy of Megan Quinn, Outreach Director, for The Community Solution, a program of Community Service Inc., a nonprofit organization in Yellow Springs, Ohio. This article appeared in the special Peak Oil issue of Permaculture Activist, Spring 2006 http://www.permacultureactivist.net/.

[iii] For more information about the Cuban experience, do an Internet search on "Cuba GDP 1991 2000" or go to www.state.gov and search for "Cuba: Economic Summary".

[iv] In June 2005, President Fidel Castro spoke at the inaugural session of the First PetroCaribe Energy Summit of Caribbean Heads of State and Government. He said that an oil crisis is just around the corner, "it will take place during the current decade". Castro believes the human species faces possible extinction because it is running out of mineral resources. He also said that no Caribbean country will be able to afford to purchase oil if it exceeds $100 a barrel. The solution? Reduce oil consumption by two-thirds.

[v] Take that CERA. It’s time you guys got real.

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Thursday, July 06, 2006

Oil Depletion Economics 101

The following article looks at the basic economic considerations that must be resolved when we try to analyze oil production, consumption and pricing, or the impact these factors will have on the economy.

Consumption and GDP

When we buy goods and services, we are engaged in an act that will lead to their consumption. We may use (consume) them immediately (as with goods such as gasoline or services such as haircuts, etc.), sometime in the future (as we typically do with canned food, clothing, etc.), or over a long period of time (refrigerators, automobiles, etc.). We use Gross Domestic Product (GDP) as a way of measuring the dollar value of everything an individual nation, a geographic region, or the world is able to produce within a given time frame (a month, a quarter or a year).

As one may suspect, there is a relationship between consumption and GDP. As consumption rises, there is an attendant increase in the demand for goods and services that results in greater production (and hence GDP). Conversely, when consumption declines, so does GDP.

Historically, there has also been a relationship between oil consumption and GDP. In the past, the increase or decrease in GDP (which measures the production of goods and services), tended to drive the demand and consumption of oil. The more goods and services we produced, the more oil we needed in order to produce our goods and services. We used more gasoline to move things and people, we used more oil for the generation of electricity, and we used more oil as a feedstock for the production of goods (plastics, chemicals, cosmetics, drugs, and so on). If on the other hand, the consumption of goods and services declined, then GDP and oil consumption also declined.

In developing the economic impact analysis for the oil crisis scenarios described in my book, estimates of GDP are tied to estimated oil consumption and estimated oil pricing. In so doing, our formulae must account for the fact that the quantity of oil used per unit of GDP has been changing. While the mature economies of the world – like the United States - are becoming more efficient in their use of oil (using less per unit of GDP), emerging economies (such as China) have tended to use more oil per unit of GDP. We also need to include in our formulae the concept that sharp increases in the price of oil will force people to consume less oil (almost immediately because we cannot afford to pay a higher price) and sharp decreases in the price of oil will stimulate greater consumption (although this takes a longer time because lower consumption has usually been associated with recessive economic conditions that take time to improve).

There is another problem. In the past, GDP and oil consumption have tended to move in tandem (more or less - oil consumption tends to be more volatile than GDP). Changes in GDP drove changes in oil consumption. But as we move from a world economy that has enough oil to meet demand, to an economy that must deal with periodic oil shortages, then the reverse will be true.

Oil shortages (or availability), along with the price of oil,
will tend to drive the growth or decline of GDP.

In addition, the price of oil will rise until there is a balance between supply and demand. But this relationship will also be more complicated than it has been in the past. There is a high probability that future oil markets will be characterized by arbitrary oil prices. It will take longer for the supply versus demand mechanism to resolve any imbalances. In addition, oil consumption for transportation will evolve from an emphasis on individual vehicles (my car) to mass transportation (including ride sharing), moderating the normal impact that the supply versus demand mechanism would have on pricing.

In determining how changes in oil production (availability) will impact the price of oil, we must also consider whether or not changes in the price of oil are based on a willing buyer and a willing seller in a market that is free to move according to negotiated supply and demand pricing; we must factor in the impact of other inflationary forces; we must include the length of time that these changes take to occur; and we must determine the status of the economy at the time these price changes occur. And finally, the price of oil and GDP tend to have an inverse relationship.

Confused? Just remember.

We are moving from a world economy that enjoyed excess oil capacity
to a world economy dominated by
chronic, severe, and highly volatile shortages.

The GDP of all nations will have a volatile response to these shortages.

Rate of Inflation

It's safe to say that increased oil prices will drive up the Rate of Inflation. Although the price of oil tends to be more volatile than the Rate of Inflation, there is a correlation. Rates will be highly volatile as periods of oil shortage alternate with months of surplus. If the price of oil were the only driver of inflation, then inflation would skyrocket. But there are other factors that must enter into our calculation. The combination of higher prices and sporadic shortages will drive an increase in unemployment, restrict consumption and disrupt both the production and distribution of goods and services. Productivity will decrease. Lower interest rates will only marginally help the economy because oil shortages will disrupt the flow and use of money in the economy. These impacts are all deflationary. Thus in our formulae for calculating Inflation, we must offset the inflationary impact of higher oil prices with the recessive impact that oil prices and shortages will have on the economy.

We also have to include the deflationary impact of unemployment on regional demand and GDP. Over the last two decades, over 60 percent of displaced white collar workers found new jobs that paid less than they were making before becoming unemployed[1]. For white or blue collar workers living in the highly developed economies of the industrialized world, either the Political or the Production Crisis discussed in my book will exacerbate this problem. Lower pay means lower oil consumption and a declining GDP.

In the economic impact analysis used for the Best Case, Production and Political scenarios described in my book, the Rate of Inflation has been tied to the rate of change in the world price for oil as well as a calculation of unsatisfied oil demand. It works this way. The demand for a scarce commodity will drive up its price. As the price of oil goes up, changes in consumer spending choices gradually reduce real demand. This in turn reduces the upward price pressure on the commodity. As long as real demand (how much oil we would consume if it were readily available) exceeds actual consumption, the difference is called unsatisfied demand. All three scenarios reflect greater volatility in the Rate of Inflation because we are moving from a world economy that enjoyed excess oil capacity to a world economy dominated by chronic, severe, and highly volatile shortages. This volatility will drive corresponding changes in unsatisfied demand and inflation as consumers adjust to shortages by bidding up the price of oil based products.

Unemployment

Any oil crisis will drive up the rate of unemployment. Primary factors include: a decrease in consumption of goods and services, the horrific disruption of transportation and a fear driven decrease in capital spending. In the Best Case scenario described in my book, oil shortages create a mildly recessive condition in the economy. The Production Crisis drives us into a long period of chronic recession that alternates with intervals of mild economic recovery. The Political Crisis scenario describes an economy that plunges into a depression.

Future estimates of unemployment must include a consideration for persistent oil shortages and the resulting volatility of oil prices. The annual change in oil consumption is therefore a better guide to estimated unemployment than the price of oil. We can assume that in periods of restricted supply, nations will consume all the oil they can get up to the point where there is sufficient oil to sustain current economic activity. The level of economic activity will be directly proportional to available oil supplies. Oil consumption and unemployment have an inverse relationship. As oil consumption increases, unemployment will decrease - and vice versa.

For example, if a nation has sufficient free cash flow, consumer demand, and non-oil resources to increase its GDP by 1.3 percent for a given year, then its oil consumption also needs to increase by 1.3 percent (ignoring the impact of changes in energy efficiency). If there is a surplus of available oil, then a growth rate of 1.3 percent is achievable. However, if there isn't enough available oil to permit the potential increase in consumption, then economic activity must grow at a slower rate. If the shortage is severe enough, economic activity will be forced to decrease.

I relied on an inspection of how unemployment has acted in previous recessions (and the depression of 1929) in order to make an educated guess of the projected rate of unemployment that will occur in an oil crisis. Hopefully, there is a really good econometric model on a big computer somewhere that can be used by a really smart economist to improve on the results of my humble calculations.

Global Impact

Although this report only deals with the economic impact of an oil crisis on the United States, these calculations could be duplicated for every nation on this planet.

Any oil crisis will have a global reach,
sparing no nation from its pain and hardship.

The industrial nations of North America, Europe and the Pacific Rim
will be hit the hardest
because they have the most energy intensive economies.

In making assessments of global oil consumption, we have to factor in the rapid economic growth of nations such as China and India, increasing demand in third world countries, recognize the interaction of regional economies (consumption in America creates jobs in China, and so on), and make some assumptions about the development of alternative forms of energy that will eventually reduce the demand for oil. The oil crisis described in the Best Case and Production scenarios may also produce a panic in world financial markets. The Political Crisis will definitely cause these markets to collapse.

There is one other factor that we must consider when we make an estimate of how an oil crisis will impact global production and consumption.

People.

In making production assumptions, it can be assumed that as the price of oil increases, limited additional production will come on-line to satisfy demand. Thus, if Middle Eastern producers restrict production, the resulting shortages will drive up the price of oil and this in turn will stimulate additional production in the Pacific Rim, North America, EurAsia, Africa and South America. This has been the traditional economic response to shortages. But we must modify our production assumptions based on social responses as well as the limitations of elasticity discussed above. Environmental concerns will act as a drag on new production, exacerbating oil shortages and prolonging the recessive impact of an oil crisis. Islamist influence will have a negative impact on production and transportation in the Caspian, North African, West African, and Pacific Rim oil fields. The transition to alternative fuels is also both a technical and a cultural challenge. And of course, if our cultural problems can not be constrained, regional or world war is always a possibility.

1929

The last comparable economic shock to the world economy occurred in 1929. Severe deflation dropped the American Consumer Price Index (CPI) by over 23 percent to a low of 13 in 1933. The years 1934 through 1940 were characterized by modest changes to the CPI. Unemployment increased by 728 percent, from 1.55 million in 1929 to 12.83 million in 1933. America did not reach a full employment economy until 1942 - 13 years after the collapse of the economy in 1929. American Gross National Product (GNP) plummeted 9.4 percent in 1930, 8.5 percent in 1931, 13.4 percent in 1932, and 2.1 percent in 1933. It bounced back from 1934 through 1937, was negative again in 1938, and then increased through the years of WW2.

By 1932, industrial stocks had lost 80 percent of their value, 40 percent of the banks had failed, and international trade had fallen by more than 60 percent

.

If a Political Crisis occurs – like the one described in my book - the world will suffer the same kind of devastating economic volatility that it did in 1929. If oil production simply fails to meet consumer demand over a long period of time (there is no political crisis), then the Production scenario becomes more likely. In both cases, however, the economic trends will be irreversible unless we humans develop a suitable alternative energy system.

Interest Rates

In the above discussion, I stated that lower interest rates will only marginally help the economy because oil shortages will disrupt the flow and use of money in the economy. The reverse is also true. Although the American Federal Reserve (or its international counterparts) can try to contain inflation by raising interest rates, the availability and price of oil have a structural impact on the world economy. Higher prices will tend to exacerbate inflation, irrespective of the Federal interest rate policy. History shows that lower prices ease the upward pressure on inflation.

A gradual decline in the availability of oil will tend to be inflationary because consumers have time to adjust their spending habits as they encounter higher fuel and product prices. However, a sudden – and very large – decline in oil shipments could cause a short period of intense inflation (as consumers scramble to buy available oil based products), followed by a longer interval of deflation (as economic activity rapidly declines). It would appear that under depressive economic conditions, Federal interest rate policy will only have a modest impact on the outcome.

Conclusion

After weeks of trying to model world oil production and consumption, after spending hundreds of hours trying to develop and test formulae to predict American GDP, unemployment and inflation based on changes in world oil consumption and production, I concluded it is impossible to develop a conclusive business case from an analysis of available data.

Why? There are many reasons. Here are two of the most important.

  • Some of the essential data is unknown, or unknowable. For example, how much oil will Saudi Arabia produce over the next 20 years? What is the projection for Iraqi oil production? And so on.

  • It became very clear that past oil market behavior may not be a good predictor of future oil market performance. Historically, the interaction of production, consumption and pricing occurred in a market that had excess production capacity. That may, or may not, be true in the future.

We are forced, therefore, to use the scenario approach to our analysis of future oil market trends.

Scenarios are not predictions. Rather, they permit us to make, and then test, a hypothesis. We will then be able to challenge the assumptions, encourage debate about the model, and profile the probable result of our analysis. Scenarios are tools that give our evaluations focus, permit us to deal with the unexpected, and characterize the results of dynamic circumstances.

Based on its own alternative set of internally compatible assumptions, each scenario can be constructed with due attention to the associated economic and cultural constraints. These assumptions drive the values shown for each data series. We can then assign a probability value to each scenario we construct. High probability scenarios give us a clue to the future of the oil market.

After constructing several alternative scenarios, it became abundantly clear they all produced results that were strikingly similar. Every scenario produced higher rates of inflation and unemployment with declining GDP. The only real difference was in the timing and degree of severity.

TCE



[1] McKinsey Global Institute, reported in Business Week, December 8, 2003, pp. 71.

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