Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (36 page)

The U.S. military projection is actually five times more bleak than Brown's export extrapolations. World oil production stood at 86 million barrels per day at the time of the U.S. military's crisis alert, and they were forecasting production to fall by 10 million barrels a day by 2015, or an annual production decline of 2.5 percent, five times the 0.5 percent decline projected by Brown. If Brown's adjustments are overlaid on the U.S. military's more pessimistic forecast of falling oil production, the OECD economies would face a potentially catastrophic crisis from a collapse in energy inputs (and an accompanying spike in the price of those supplies that remain available).

But this raises the question of whether economies must decline when energy inputs fall. Unhappily, the answer seems to be yes.

As energy analyst Cameron Leckie points out, the International Energy Agency, the Paris-based intergovernmental energy group associated with the OECD, has conjured up a scenario under which a 6 million barrels per day decline in OECD oil demand will not result in a corresponding drop in OECD GDP. The IEA is simply projecting that “the oil intensity of the OECD economies will improve significantly over coming decades.”
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Oil intensity is a measure of total oil equivalent per thousand dollars of GDP at market exchange rates. The projection that the advanced economies will suddenly become much more efficient at employing energy to achieve economic growth begs a lot of questions. Yes, it is always possible to improve efficiency. But most of the easy and obvious steps in that direction were undertaken years ago in response to the first or second oil shocks. A close read of recent energy intensity measures shows that the advanced economies “have high energy consumption per capita, between 100 and 350 GJ, and high GDP per capita, between $10,000 and $43,000 (consisting of Western European countries and North American countries, Australia, and New Zealand).”
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A hint of the difficulty entailed in rapidly improving legacy inefficiencies in energy use comes from the countries of the former Soviet Union. Notwithstanding high oil prices that exceeded $146 a barrel in 2008, the former Soviet republics continued to have very high energy consumption per capita and very high energy consumption per GDP when compared with other Eurasian countries.
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They had significant incentives to improve efficiency, but it was just not that easy to accomplish.

The past record does not encourage optimism that any economy can readily prosper when oil intensity declines.

Declining oil intensity in the United States over the past four decades has coincided with the export of energy-intensive manufacturing jobs and the stagnation of real income for the middle class. The dot-com and housing bubbles reduced energy intensity in the United States, as did all forms of financialization that have increased the percentage of GDP pocketed by bankers whose activities are generally much less energy-intense than farming, construction, or manufacturing. By 2005, on the eve of the Great Correction, the finance industry accounted for one in every four dollars of profits earned by U.S. companies.

Even accounting for the higher percentage of the U.S. economy absorbed by the financial sector, the U.S. employs much more energy relative to GDP than Brazil. According to 2011 figures from the IMF, U.S. GDP was $48,187 per person while that in Brazil was only about $11,845, roughly one-quarter of the U.S. level. But energy consumption (in millions of barrels of oil equivalent) was 17,260 in the United States and only 1,750 in Brazil, a ratio of 9.86:1. Overall, the United States uses more than twice as much energy relative to per capita GDP than Brazil. While some improvements in energy efficiency are conceivable, they are not likely.

As Cameron Leckie puts it,

the difficulty of this challenge should not be underestimated particularly given current circumstances. Many OECD nations have aging populations, are heavily in debt, virtually all are dependent on oil imports with some notable exceptions (Norway and Mexico) and have in many instances outsourced much of their manufacturing industries to developing nations. Reducing the oil intensity of an economy will require significant capital investment, something that in the weakened economic state of many OECD nations is unlikely. . . . Reducing oil intensity is also subject to diminishing returns, each increment of improvement in oil intensity will become increasingly expensive and difficult to achieve. In this context, significantly reducing the oil intensity of the economy would be a monumental achievement.
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The challenge of reducing energy intensity without undermining the basis of prosperity is even more daunting than Leckie's lucid summary suggests. This is because the economy is a complex system with emergent properties. Economist James Rickards explains:

Complex systems design themselves through evolution or the interaction of myriad autonomous parts. The second principle is that complex systems have emergent properties, which is a technical way of saying the whole is greater than the sum of its parts—the entire system will behave in ways that cannot be inferred from looking at the pieces. The third principle is that complex systems run on exponentially greater amounts of energy. This energy can take many forms, but the point is that when you increase the system scale by a factor of ten, you increase the energy requirements by a factor of a thousand, and so on. The fourth principle is that complex systems are prone to catastrophic collapse. The third and fourth principles are related. When the system reaches a certain scale, the energy inputs dry up because the exponential relationship between scale and inputs exhausts the available resources. In a nutshell, complex systems arise spontaneously, behave unpredictably, exhaust resources and collapse catastrophically.
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Short of catastrophic collapse, you should be prepared for an increase in more familiar symptoms of economic distress. As we touched upon in the start to our peak oil discussion in Chapter 4, the United States has created a huge hostage to fortune by becoming the most deeply indebted nation in history. You cannot indenture yourself to others and expect your creditors to always act with your convenience in mind. With yours and my financial well-being closely tied to the prosperity of the United States, we may be prejudiced to suppose that what is good for the United States is good for the world economy.

With that in mind, it is perhaps too tempting to suppose that the Chinese would not be willing to foreclose on their wayward debtor, even at the risk of precipitating another down leg in the current depression. After all, U.S. consumers are China's best customers. Usually, you can count on trading partners not to bankrupt their customers.

But this is an argument reminiscent of claims before World War I that there could be no war because all the countries had a strong incentive to preserve the world's open trading system and the prosperity that went with it. Remember that China's leaders are Malthusian engineers. They are focused on long-term planning to secure access to the resources they need to grow their own economy. Their one child policy clearly shows they are inclined to take drastic action in an effort to minimize what they may see as the potentially destabilizing impact from population pressures on resources that cannot be expanded at the same geometric rate as unchecked population.

With peak oil a focus of growing concern, I suspect it is only a matter of time before the Chinese use their financial clout to take away some more of the roughly 18.8 million barrels per day of precious petroleum that the United States currently consumes. Contrary to the breezy assertions of alternative energy shills the energy density of oil is crucial to the economy of abundance, particularly when there are imbedded commitments to mobility. Without sufficient access to oil, economies like that of the United States would grind to a halt.

Depending upon how seriously China's ruling engineers view peak oil as a barrier to their internal growth and the degree of their concern about the threat to dynastic stability posed by rising food prices, they will move sooner rather than later to pull the plug on the U.S. economy. Deflating U.S. demand will reduce their sales, but also reduce their costs and enable them to reset oil and other commodity prices at lower levels.

Short of the rediscovery of Aladdin's lamp, it is highly unlikely that the OECD countries will be able to grow in an environment where their oil inputs seem destined to fall by 6 million barrels or more per day for a protracted period.

You need only recall Jeffrey Sachs's analysis mentioned at the start of this chapter from a little over a decade ago that correlated the underperformance of tropical economies with relatively smaller energy inputs. What was true in the nineteenth and twentieth centuries for tropical economies is likely to be no less true of the temperate economies in the twenty-first century era of peak oil. And how ironic, then, that Brazil, the world's largest tropical country, looms large as the new energy superpower of the twenty-first century.

Steeply higher energy prices will prove ruinous to the United States and other heavily indebted advanced economies. The Great Correction is only the brightest visible star in a constellation of economic crises associated with the repricing of hydrocarbon energy that implies the end of growth in the OECD countries.

Oil analyst and energy sector investor Gregor Macdonald (
http://gregor.us
) explains why higher oil prices hurt advanced economies, soon to be known as submerging economies, more than emerging ones:

High oil prices are more painful to the OECD/developed world user than the developing world user. In the developing world coal accounts for the largest chunk of BTU consumption, and the marginal utility to the new user of oil is high. In other words, the OECD user is embedded in a system where the historical consumption pattern has been to use much more oil per capita. But in the developing world, just a small amount of oil to the new user of oil is transformational. It will be the developing world therefore that will take oil to much, much higher prices in the next decade. They will use small amounts per capita, but the aggregate demand will be scary high. After all, the developing world's systems are not leveraged to oil. They are new users of oil—and unlike us aren't married to a system that breaks from high oil prices.
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The crucial passage here is “after all, the developing world's systems are not leveraged to oil. They are new users of oil—and unlike us, aren't married to a system that breaks from high oil prices.” Here “breaks” is used in the same sense as in “bankruptcy.” The word “bankruptcy” comes from the term
broken bench
or
banca rotta
, a use that originated in medieval Italy, where the practice of the day was to physically break the bench of an insolvent trader as a visible sign that he could no longer meet his obligations.

Think of California, a state designed around a highway system installed on the premise of $0.30 gasoline that prevailed in the 1950s. California's suburbs, like those in the rest of the United States, sprawl over the landscape, necessitating long, bumper-to-bumper commutes in every direction. Not incidentally, California consumes three times more energy than it produces. When the Chinese and Indians bid the price of oil into the stratosphere, they're bankrupting Los Angeles and San Diego, not Shanghai or Mumbai—where housing patterns do not incorporate the assumption of cheap gasoline. Much more could be said about the dependence of the United States on cheap oil. The horizontal rather than vertical development of U.S. metropolitan areas is only one dimension of the story. Another is the fact that the average American family has three automobiles, many of which are SUVs that guzzle fuel. China has now replaced the United States as the world's largest market for new cars. The cars the Chinese buy are tiny by U.S. standards. Much the same can be said for India's car market.

The adjustment to higher oil prices in China and India involves a choice of what to buy and how to build. The adjustment in the United States is destined to be much more wrenching. Scary-high oil prices imply the devaluation of the North American suburbs, a development that would obliterate much of what remains of the real estate equity of the suburban middle class, depreciating the largest investment of most Americans while simultaneously deepening insolvency of the banking system. The problem is not a cyclical decline in real estate values but a secular decline in earnings capacity of Americans, combined with peculiarly punishing consequences of skyrocketing oil prices on the infrastructure of middle-class America.

You are waiting in line to witness and participate in a stress-induced transition to the next stage of economic history. It could be a parallel to the initial stages of the Industrial Revolution, precipitated by peak wood, with the difference that it spells collapse for the complex systems of the advanced economies that are overextended on the basis of cheap oil.

Meanwhile, the venue for any deepening of prosperity is likely to be not the OECD countries, but emerging economies, such as China, India, and particularly the country of the future, Brazil.

Phase transitions to new energy sources have traditionally had far-reaching and disruptive consequences. The chill that settled in with the Maunder Minimum we explored in Chapter 4 was exactly that, although in some respects it later proved to be a blessing in disguise. If you remember, colder weather provided a stress-induced trigger to the greatest surge of prosperity in human history. It began with a doubling in the price of wood, from 6 grams of silver per million BTU to 12 grams of silver per BTU.
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Peak wood, precipitated by colder weather that reduced the growth of European forests, led to higher prices that, in turn, helped stimulate a switch to a higher-density energy source—coal. Richard Wilkinson pointed this out in his argument that the initial stages of the Industrial Revolution were stress-induced.
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