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Expect Next Phase Of Market Crash And A Large One For That Matter

"Expect Next Phase Of Market Crash And A Large One For That Matter…" - Interview With Nicole "Stoneleigh" Foss

By Alexander Ac    05 November, 2010   Energy Bulletin

Nicole Foss alias Stoneleigh - the co-editor-in-chief of the blog The Automatic Earth, together with Ilargi - is one of a few „big picture“ persons and it was a delightful experience to meet her at ASPO peak oil conference. For her, business-as-usual is not an option and current form of capitalism is a Ponzi scheme. She is clear about peak oil (it is here and renewables will not come to the rescue!), but she is even much more clear about financial markets – they will make everything worse. The next phase of debt-deflation and final bubble bursting will hinder future investments in energy sector. In the short term oil prices will go down, not up, as probably most of peak oil energy analysts expect. Unless we are in debt, nothing is solved, and she says that Paul Krugman is a monetarist whose recommendations will make nothing better (except maybe prolonging the life of banks – which is not good either). One planet for her would be not enough, but she hopes that that what she does justifies this. Decide for yourselves.

Alexander Ac: Here at ASPO-USA conference in Washington everybody seems to understand implications of energy scarcity. What would be your message to a lay person? What are the main implications of peak oil for the daily life?

Stoneleigh: We are going to have to get used to a much lower energy lifestyle. Energy has been cheap for a very long time, so we have developed a structural dependency on it. Energy is not going to be cheap for much longer though, and that means many of the things we take for granted will no longer be affordable. A much larger proportion of our income will have to go to energy costs, and that will leave very much less for everything else. Our material standard of living will fall, and we will have to go back to performing many functions with human energy rather than fossil fuel energy.

The wealthy may still have access to fossil fuels, but if most people do not, then they will not be able to live a modern life. A life fuelled by human energy alone is one where people have to spend an enormous amount of time performing everyday tasks, and will not have time to undertake much of a role in the wider economy. Some family members will have to stay at home and devote all their time to household tasks that will take far longer than we are used to.

AA: When did you first see the term “peak oil” and when did you realize it might be a problem?

Stoneleigh: I used to work at the Oxford Institute for Energy Studies, which is primarily an oil and gas institute, back in the 1990s. I worked on electricity, but most of my colleagues were involved in fossil fuels. There were many discussions about the upstream, meaning where oil is coming from, and that fact that it is finite. It was clear that supply would be a problem at some point, although when I was there, oil prices were very low ($10/barrel), so no one thought it would be an imminent problem. I began to look into energy returned on energy invested (net energy) and realized the problem would be much closer at hand in net energy terms, and that we would see major declines in my lifetime.

AA: Why is that most of the economists do not recognize the role of energy in economy?

Stoneleigh: Energy is invisible, and therefore taken for granted. Most economists do not recognize resource limits at all, partly because they do not understand the laws of thermodynamics. They live in a world of substitutions when something becomes scarce, and do not understand that energy is the master resource for which there are no substitutes.

Economists typically say that there are no limits, only price. If something is scarce, it will cost more, but we will never run out. I think this misses the tremendous impact on a society dependent not only on energy, but on cheap energy. All our modern infrastructure requires a steady supply of affordable energy to maintain it.

AA: Are “conservation” and “energy efficiency” solutions to peak oil? Is it enough?

Stoneleigh: Conservation and energy efficiency can help to extend the timeframe, but they cannot solve the problem. They could have done much more if we had made the necessary investments early, while we still had both cheap energy and enough money to make fundamental changes.

In wealthy countries, and even in moderately wealthy ones, we can greatly reduce the amount of energy we use because so much of what we use is wasted. Anything that has been far too cheap for a long time will be wasted. We do not need to use electricity to remove the lids for cans or to brush our teeth, for instance, and yet many of us do. Ceasing do do this would allow us to conserve some energy painlessly.

We also use many machines which have not been designed for energy efficiency at all. For instance a top-loading washing machine, like people typically use in North America, uses far more energy than a European front-loading one. If we were able to replace wasteful infrastructure with efficient infrastructure, we could probably save 30-40% of our energy consumption and hardly notice a difference in our standard of living. The difficulty is that in an era of financial crisis, we will not have the money to replace infrastructure. This will make it very hard to make efficiency improvements.

Rather than increase efficiency greatly, we will find ourselves forced to conserve energy in a low-energy and low-money future. We will have no choice but to do without, and it will not be painless once scarcity starts eating into our ability to perform essential functions rather than merely frivolous ones.

AA: What about alternatives or nuclear energy? People often say that if oil gets more expensive, alternatives are to be deployed. Is this flawed logic?

Stoneleigh: Alternatives to oil typically have a much lower energy returned on energy invested (EROEI), and are expensive, at a time when money will be very scarce. They also depend on the availability of cheap oil to produce them. These problems mean that it will be very difficult to provide anything like the energy we get from fossil fuels. Alternatives can help in small-scale niche applications, but they cannot solve the problem of running a society, especially an energy-intensive industrial society.

Alternatives generally do not scale up, for reasons of net energy, money and time. We do not even have the capacity to produce things like solar panels on a massive scale, and we have neither the time nor the money to build that capacity before our oil supplies decline, let alone build all the panels we would need as well. We have also allowed our grid infrastructure to age, to the point where much of it will need to be replaced.

As most alternatives produce electricity, we are very dependent on the grid. Unfortunately there is a large mismatch between renewable energy resource intensity, energy demand and grid capacity. That means far more grid investment would be required. We would also have t covert energy demand away from liquid fuels to electricity, and that will take a huge amount of time and money at a time when both will be in very short supply.

AA: Financial system seems to complicate the whole issue? In which way?

Stoneleigh: Financial crisis will make everything very much harder. We will have very little money in a deflationary world, and people will be highly risk averse. No one (individuals, companies and governments) will be wanting to spend at a time when future earnings are so uncertain, which will make it almost impossible to invest in the infrastructure changes we need to make in order to address energy crisis. With not enough to go around, people are unfortunately likely to waste efforts and resources fighting over what there is, rather than pooling scarce resources for the good of all. Financial crisis leads to social instability at a time when we most need to keep our heads and work together.

AA: Do you expect crash in stock markets? How serious it will be and what will be the main consequences?

Stoneleigh: Yes, I do expect a crash, and a very large one at that. I expect the larger trend to be down for several years. A lot of investments will fall a very long way in value, and where these investments have been used as collateral for borrowing, there will be knock-on consequences. We will see margin calls as values decline, and outstanding debt is now too high compared to the value of the asset, so that additional debt repayments have to be made. We are going to see a very large number of bankruptcies and many debt defaults. This will be a factor in crashing the money supply, leaving too little lubricant to run the engine of the economy.

AA: Debt seems to be large part of the problem. How large?

Stoneleigh: A massive debt bubble is the at the heart of the problem. It has been building for decades and is now far larger than any previous debt bubble in human history. Humanity periodically rediscovers leverage on a grand scale, after the lessons of the previous episode have mostly passed out of living memory. Expansions of credit and debt create the appearance of great wealth, but it is illusory (virtual). The obligations created are real though. People have expectations of being repaid, and they will not be, which will set up a grab for the underlying real wealth (collateral) which is nowhere near enough to go around. This is deflation, and its effects are very significant. Money will be scarce for a very long time.

AA: Still, some people say we should leave the solution of peak oil to the free market…?

Stoneleigh: The free market has a very short time horizon, while energy investments are long-term. In fact the time horizon of the free market is likely to shrink in the times of high risk that we are facing. No one will be making investments where there is no economic visibility, so returns are completely uncertain. Financing projects will be almost impossible. We are going to have to depend on public financing, but governments will have very little money and many more calls on their resources, so they will not be in a position to make many investments either.

AA: What does Paul Krugman (or others) get wrong? Should we listen to him (and spend more)?

Stoneleigh: No, we should not listen. Spending more will only dig us into an even deeper hole, and will not prevent the deflation that is coming. We need to become economically responsible and save. Of course this will accelerate the decline in economic activity, but this needs to happen. If we keep making the problem worse by spending, we will only have to face an even larger set of consequences later. It is better to let the house of cards fall and begin rebuilding once the toxic debt has been defaulted upon. The sooner that happens, the sooner we can begin to rebuild the trust and social cohesion that facilitate investments in the public good.

Mr Krugman is a monetarist, and does not understand the critical role of debt in setting up a deflationary collapse. Monetarists treat economies as machines governed by the laws of physics, rather than as formed of people. Machines can be controlled in order to produce predictable outcomes in ways that people cannot. Any human social construct will depend on the mechanisms of human social behaviour, and this is outside the monetarist model.

AA: We have created the most complex and interconnected civilization that ever existed on Earth. Does it make us more fragile or more vulnerable to resource exhaustion?

Stoneleigh: That makes us much more vulnerable, because we have so many more structural dependencies. The rate of change in both energy and finance is likely to be rapid enough that adaptation will be very difficult. We will not have time to adjust gradually, which means we face a significant dislocation.

Financial crisis is going to make resource depletion much harder to address, because we are not going to have the money to replace highly energy-dependent infrastructure. Doing so would be staggeringly expensive and would take a very long time even if we did have the money. As it is, we will be forced to conserve both money and resources by going without.

Socioeconomic complexity is very dependent on energy subsidy. With less energy, we will have to have a simpler society. Getting from here to there will be very painful though.

AA: Politics is another part of the problem. What should an honest politician do in an era of general decline? Should politicians acknowledge peak oil or try to “solve” it quietly.

Stoneleigh: That is a difficult question. Politicians never like to alarm people for fear of creating the very situations they are trying to avoid. Personally I think they should acknowledge the problem, as Jimmy Carter tried to do in the 1970s. That is a thankless task though. People do not like to see their politicians express challenging messages, especially messages with implications for their material standard of living. Hard times have very negative effects on the reputations of politicians, whatever they do or do not do, as people tend to blame their leaders for what happens to them, regardless of fault.

Ultimately, there can be no progress towards addressing the problem through the political process without public acceptance of the need to do so. However, events are going to overtake the political process anyway, and societies will be forced to change.

AA: How many politicians are ready to talk about peak oil?

Stoneleigh: I do not know of any who are prepared to talk about it. I do know quite a few are aware of it. Matt Simmons spent a lot of time explaining it to the previous administration in the US, who were oil men anyway.

The previous national liberal party leader in Canada, Stephane Dion, had read much of the literature on peak oil, but never addressed it during his tenure.

The military in several countries has been producing peak oil reports, and they would certainly have provided those to their political leadership before making them public. Still, politicians say nothing.

AA: Which countries in general are more adapted to post carbon future?

Stoneleigh: Countries with fewer structural dependencies on cheap energy should find adjustment much less painful. In other words, countries which have been poorer and less able to transition to what people typically consider a fully modern lifestyle over the last few decades may well find the future less difficult than wealthier countries. The more entrenched the dependencies, the more difficult the transition to a low-energy future will be.

Also, countries or regions with climates where there is less need for heating and cooling, and a longer growing season, should find a lower energy future easier to manage. An established tradition of family-scale farms should be a significant bonus, since the agri-business model is very vulnerable to both energy and financial shocks. Well developed renewable energy infrastructure should help, as should relatively localized economies which are less 'plugged-in' to globalization.

Ironically, the most economically efficient societies have the least ability to adapt, as buffers have often been trimmed to the bone already on cost grounds. That leaves them much less resilient than they would once have been. Jim Kunstler calls efficiency "the straightest path to the hell", and it is this brittleness that he is referring to.

AA: Do You think that the more complex view of the world one has, the more pessimistic outcome?

Stoneleigh: Yes, because it becomes obvious that simplistic one-dimensional solutions will not work. We need to understand the world in all its complexity in order to understand what we need to do and why, but in doing so we realize the extent of our predicament.

AA: What will be the key economic trends in (eastern) Europe in the coming months?

Stoneleigh: All of the European periphery is going to face very significant difficulties. There is far too much debt, both public and private, and the austerity measures that will have to be imposed at some point in order to stay in the eurozone could well be political suicide for any domestic politician. I think this could break up the eurozone and cause a great deal of anger.

I think the speculators will have a field day with sovereign debt default risk in Europe, and that will greatly increase the cost of borrowing for many European countries. I think the effects will be very uneven, which sadly will sharpen regional disparities and inflame regional tensions further.

I think European unity has been a noble goal and I do not like to see it under threat, but unfortunately I think that is a very real possibility.

AA: How does your optimism or pessimism scale to the rest of the peak oil and financial community?

Stoneleigh: I am more pessimistic than most, because I am addressing a broader scope of difficulties than most. Few commentators really cover even both energy and finance, and fewer still discuss geopolitics, collective human behaviour, ecological carrying capacity, population, climate change, pollution, resilience etc. Each field represents challenges for all the others.

AA: Are you more or less pessimistic about the future than 5 years ago?

Stoneleigh: My position has not changed significantly. I have been aware of where we are heading for many more than five years.

AA: If everybody on Earth had your lifestyle, would one planet be enough?

Stoneleigh: No. I live in a highly industrialized country (Canada). Any kind of life that would be considered remotely normal in such a place is not sustainable. Even a deliberate attempt to simplify as much as possible in one's personal life does not compensate for the over-consumption of the public and corporate spheres that are part of life here, whether one wants to be associated with them or not.

Also, I travel a great deal, and carry with me a number of electronic devices which allow me to function while on the road. This has a significant resource cost. I hope what I am doing justifies this.

AA: Are you preparing for post peak oil world? If yes, how?

Stoneleigh: We moved to Canada 10 years ago and bought a farm, which we could not have done in England where we lived before. We reduced our energy demand as much as possible and set ourselves up to use locally available energy sources (primarily wood and sun). We installed photovoltaics, a battery bank for energy storage, solar domestic hot water, an outdoor wood-burning furnace and a heated greenhouse for extending the growing season in our northern climate. We try to grow as many vegetables as we can, and also raise some of our own meat and eggs.

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