The Politico – Economicus of World Oil

Refer to The Best Kept Secret in Washington

Whatever the twists and turns in global politics, whatever the ebb of imperial power and the flow of national pride, one trend in the decades following World War II progressed in a straight and rapidly ascending line — the consumption of oil. If it can be said, in the abstract, that the sun energized the planet, it was oil that now powered its human population, both in its familiar forms as fuel and in the proliferation of new petrochemical products. Oil emerged triumphant, the undisputed King, a monarch garbed in a dazzling array of plastics. He was generous to his loyal subjects, sharing his wealth to, and even beyond, the point of waste. His reign was a time of confidence, of growth, of expansion, of astonishing economic performance. His largesse transformed his kingdom, ushering in a new drive-in civilization. It was the Age of Hydrocarbon Man.– Daniel Yergin, 1992.

The genius of our so-called democracy lies in its stability and predictability. James Madison (1751-1836) is known as “the father of the U.S. Constitution”. Madison’s primary political concern centered on the maintenance of social stability by the political and social control of competing factions; control by government itself was a secondary consideration. With those objectives in mind, the framers crafted an elaborate political system:

1. Where “first object of government” (highest priority) was “the faculties” of acquiring property.

2. Where the struggle of classes and passions (e.g., religious conflict) was replaced with the struggle of interests in the economic sphere.

3. Where the political system was extremely resistant to change.

4. Where political power was reserved for a white male minority while projecting the illusion of self-government to the majority. Madison scholar Richard K. Matthews explains:”By consciously denying virtually all but a handful of citizens any role in a governmental structure that, by design, was to be run by an elite of superior ability (who nonetheless would have to check and balance each other), Madison left [economic struggle] as the prime avenue for humanity to search for meaning.”

   Nowadays, the terms “democracy” and “market economy” are often used interchangeably. Political decisions in a market economy are stunningly simple: one dollar, one vote. In short, the market economy serves as a stealth political system to foster rational thought, universal values based on calculation, and world peace based on self-interest. The market economy succeeds because it satisfies our hunter/gatherer genetic drives for dominance, sex, food, and material possessions – survival of the fittest.

   One hundred years ago, fundamentally defective economic theories led to two world wars with millions killed. Today, the same defective economic theories are taught to students all over the world and are leading to a new generation of world wars with billions killed.

   America will soon lose the stability the framers worked so hard to create because it is becoming wholly dependent upon inherently unstable (authoritarian) oil-producing Muslim nations like Indonesia. It happened thirty-three years ago when OPEC quadrupled world oil prices and plunged America into “stagflation”. Fortunately, the non-OPEC producers still had a HUGE unexploited oil cushion to fall back on and simply pumped central bankers out of their economic crisis.

   But that was 1973 and this is 2007 — thirty-three years later the oil cushion is gone. Muslim nations will soon control virtually all of the world’s oil exports. Since neither capital nor labor can create energy, the next round of energy-shortage-induced stagflation will leave central bankers helpless and they will seek military solutions to their economic problems?

   It’s the best-kept secret in Washington, Whitehall, Brussels, and Jerusalem, but it’s just a matter of time until word hits the street…By definition, energy “sources” must produce more energy than they consume, otherwise they are called “sinks”.

   The market economy burns energy to make money — there is no substitute for energy. Although the economy treats energy just like any other resource, it’s not like any other resource. Available energy is the precondition for all resources — including energy resources.

   The key to understanding energy issues is to look at the “energy price” of energy. Energy “sources” that consume more energy than they produce are called “sinks” and are worthless as sources of energy. This thermodynamic law applies no matter how high the “money price” of energy goes.

   The market economy receives almost 80 percent of its energy subsidies from nonrenewable fossil sources: oil, gas, and coal

   In the 1950s, oil producers discovered about fifty barrels of oil for every barrel invested in drilling and pumping. Today, the figure is only about five for one. Sometime around 2005, that figure became one for one.

   The increasing energy cost of oil sets up a positive feedback loop: since oil is used directly or indirectly in everything, as the energy costs of oil increase, the energy costs of everything else increase too — including other forms of energy. For example, oil provides about 50% of the fuel used in coal extraction.

   Immutable energy laws tell us that a growing economy must eventually consume more energy than it can buy. When America spends more-than-one unit of energy to produce enough goods and services to buy one unit of energy, it will be physically impossible to cover the overhead (money is irrelevant). At that point, America’s economic machine is “out of gas”. Forever!

   EUR OILFor many years, geologists and petroleum engineers have published estimates of how much oil can be recovered from any given basin. This is known as “Estimated Ultimately Recoverable” (or EUR) oil. Remarkably, estimates of total worldwide EUR oil have varied little over the past half century!

   About fifty years ago, geologist M. King Hubbert developed a method for projecting future oil production and predicted that oil production in the lower 48 states would peak about 1970. This prediction has proved to be remarkably accurate. Both total and peak yields have risen slightly compared to Hubbert’s original estimate, but the timing of the peak and the general downward trend of production were correct. Hubbert showed that oil production begins to peak and starts to decline when approximately half of the EUR oil has been recovered.

   IHS Energy Group (formerly Petroconsultants) is the world’s leading provider of data and analysis for oil exploration and production. The company maintains its headquarters at a custom-built communications center in Geneva. It also has offices in London, Houston, Calgary, Sydney, Perth, Singapore and Hong Kong and a global information network. The backbone of the company is a staff of 300, embracing numerous nationalities, cultures and professions, specializing in petroleum geology, geophysics, petroleum engineering, economics, political science, petroleum legislation, cartography, computer science and information technology.

   In 1995, Petroconsultants published a report for oil industry insiders ($32,000 per copy) titled WORLD OIL SUPPLY 1930-2050 which concluded that world oil production could peak as soon as the year 2000 and decline to half that level by 2025. Large and permanent increases in oil prices are predicted after the year 2000.

   NO OIL? NO ECONOMY!

   If one considers the last one hundred years of the U.S. experience, fuel use and economic output are highly correlated… Energy quality is by far the dominant factor.– Cleveland, Costanza, Hall, and Kaufmann (Science 225: 890-897)

   One of the most important aspects of energy is its “quality”. Different kinds of fuel have different qualities. For example, coal contains more energy per pound than wood, which makes coal more efficient to store and transport than wood. Oil has a higher energy content per unit weight and burns at a higher temperature than coal; it is easier to transport, and can be used in internal combustion engines. A diesel locomotive uses only one-fifth the energy of a coal-powered steam engine to pull the same train.

   Oil is the highest quality energy we use, making up about 38 percent of the world energy supply. No other energy source equals oil’s intrinsic qualities of extractability, transportability, versatility and cost. The qualities that enabled oil to take over from coal as the front-line energy source in the industrialized world in the middle of this century are as relevant today as they were then. Oil’s many advantages provide 1.3 to 2.45 times more economic value per kilocalorie than coal.

   Studies show that nothing can replace oil: “A recent review of the future prospects of all alternatives has been published. The summary conclusion reached is that there is no known complete substitute for petroleum in its many and varied uses.” For example, when the oil’s gone, food production will drop to a fraction of today’s numbers: “If the fertilizers, partial irrigation [in part provided by oil energy], and pesticides were withdrawn, corn yields, for example, would drop from 130 bushels per acre to about 30 bushels.”

   THE LAWSThe human species may be seen as having evolved in the service of entropy, and it cannot be expected to outlast the dense accumulations of energy that have helped define its niche. Human beings like to believe they are in control of their destiny, but when the history of life on Earth is seen in perspective, the evolution of Homo sapiens is merely a transient episode that acts to redress the planet’s energy balance.– David Price. [i]

   Available energy is the prerequisite for any economic activity. For example, lifting 15 kg of rock 5 meters out of the ground requires 735 joules of energy just to overcome gravity — and the higher the lift, the greater the minimum energy requirements.[ii] The second law of thermodynamics places absolute limits the efficiency of the heat engines that power the global economy. [iii] A typical auto, bulldozer, truck, or power plant wastes more than 50 percent of the energy contained in its fuel!

   By a hundred years ago, physics had incorporated the laws of thermodynamics. Obviously, energy laws that govern the physical world also govern the economic world. Physical scientists attempted to point out this crucial fact to economists:”It is, in fact, the fate of all kinds of energy of position to be ultimately converted into energy of motion. The former may be compared to money in a bank, or capital, the latter to money which we are in the act of spending … If we pursue the analogy a step further, we shall see that the great capitalist is respected because he has the disposal of a great quantity of energy; and that whether he be nobleman or sovereign, or a general in command, he is powerful only from having something which enables him to make use of the services of others. When a man of wealth pays a labouring man to work for him, he is in truth converting so much of his energy of position into actual energy…The world of mechanism is not a manufactory, in which energy is created, but rather a mart, into which we may bring energy of one kind and change or barter it for an equivalent of another kind, that suits us better — but if we come with nothing in hand, with nothing we will most assuredly return.” [Balfour Stewart, 1883] [iv]

   But economists never understood the laws of thermodynamics because they evolved to worship the Market “god” instead.

   THE MARKET “GOD”

   No discipline [ except economics ] attempts to make the world act as it thinks the world should act. But of course what Homo sapiens does and what Homo economicus should do are often quite different. That, however, does not make the basic model wrong, as it would in every other discipline. It just means that actions must be taken to bend Homo sapiens into conformity with Homo economicus. So, instead of adjusting theory to reality, reality is adjusted to theory.– Lester Thurow. [v]

   The human mind evolved to believe in “god”s… Acceptance of the supernatural conveyed a great advantage throughout prehistory, when the brain was evolving. Thus it is in sharp contrast to [science] which was developed as a product of the modern age and is not underwritten by genetic algorithms.– E.O. Wilson. [vi]

   A zoologist from Outer Space would immediately classify us as just a third species of chimpanzee, along with pygmy chimp of Zaire and the common chimp of the rest of tropical Africa. Molecular genetic studies of the last half-dozen years have shown that we continue to share over 98 percent of our genetic program with the other two chimps.– Jared Diamond. [vii]

   By carefully observing people, we can deduce they were selected to believe in virtually anything:”Precisely what we believe is immaterial; what matters is the kind of behavior it generates. This is why humanity is characterized by such astonishing diversity in its belief systems. As far as our genes are concerned, we can believe that the universe is driven by an overweight fairy on a green cheese bicycle provided that such belief effectively coerces us into adopting genetically advantageous behavior in all matters of evolutionary consequence, such as feeding, mating, nurturing, bonding, and protecting family, tribe, and territory.” [viii]

   Even though scientists pointed out over a hundred years ago that energy — not money — was the source of the capitalists’ wealth, economists just didn’t have the genes to give up their beliefs and face the real world. In other words, two million years of evolution produced an animal that was ideally suited to worship the Market “god”. [ix]

   Adam Smith believed that “god”’s divine plan was revealed in a free market:”the divine being … contrived and conducted the immense machine of the universe, so as at all times to produce the greatest possible quantity of happiness.”

   Economic historian Deborah Redman explains:”Because the order of nature is providential, the free market that reflects natural order also reflects the workings of providence. In this way the spheres of morality, theology, jurisprudence, and economics become hostages to nature, so to speak.” [x]

   The first commandment of the Market “god” (as revealed by Adam Smith):

   “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interests in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.”

   The economists didn’t have the genes to understand the physics they were struggling to impersonate:”[ With the development of modern physics ] it became possible to see orthodox economic theory for what it really was: a bowdlerized imitation of nineteenth-century physics…It was not the methods of science that were appropriated by the early neoclassicals as it was the appearances of science, for the early neoclassicals possessed a singularly inept understanding of the physics they so admired… [ Neoclassical economists attempt ] to reduce all social institutions such as money, property rights, and the market itself to epiphenomena of individual constrained optimization calculation. All these attempts have failed, despite their supposed dependence upon mathematical rigor, because they always inadvertently assume what they aim to deduce… Conservation principles are the key to the understanding of a mathematical formulation of any phenomenon, and it has been there that the neoclassicals have been woefully negligent.” [xi]

   “Once one gets the scorecard straight, then it will become apparent that twentieth-century neoclassical theory resembles nothing so much as the child’s game of Mr. Potatohead — the fun comes in mixing and matching components with little or no concern for the coherence of the final profile.” [xii]Had economists evolved to understand the first and second laws of thermodynamics, they would have realized it was just a matter of time until global society entered a period of chronic energy shortage. Since neither capital nor labor can create energy, central bankers will soon have no way to manipulate the economy:”Increases or decreases in the level of money supply are thought to influence the level of production in the economy. However, this is true only if the ‘externals’ to the economy — i.e., sources of energy from outside of the money circle — are constant. When the availability of energy changes, the economy changes in ways not correctable by manipulations of the money supply.” [xiii]

   If central bankers try to stimulate the economy under conditions of chronic energy shortage, they will create “stagflation” instead:”High inflation rates can be explained by the linkages between fuel use and money supply. If the money supply is increased, stimulating demand beyond levels that can be satisfied by existing fuel supplies, then prices will rise. This implies that when the costs of obtaining fuel are high, fiscal and monetary policies may not be successful in stimulating economic growth.” [xiv]

   The next round of energy-shortage-induced stagflation will leave central bankers helpless and they will seek military solutions to their economic problems. This certainly isn’t the first time that faith in the Market “god” has led to military solutions.

   SAME BELIEF = SAME RESULT

   The true nature of the highly artificial economic organization on which peace rested becomes of utmost significance to the historian. — Karl Polanyi

   In late 1973 the first OPEC oil shock struck, as oil prices quadrupled and the general inflation indexes shot up to 11 percent. More important, gasoline lines appeared. Waiting in line to buy a basic commodity like gasoline is something that no American had ever experienced. Shock and irritation were high, but those lines were like the first small heart attack — an indication of mortality… What was worse, economists could pose no solution to the energy problem. Influential professionals, such as Milton Friedman, predicted that the oil cartel would quickly fall apart. It didn’t.– Lester Thurow. [xv]

   In the 19th century, economist Hermann Gossen proclaimed:”It would only frustrate totally or in part the purpose of the Creator were we to attempt to neutralize [the free market] in total or in part, as is the intention of some moral codes promulgated by men.”And he asks with moral indignation:”How can a creature be so arrogant as to frustrate totally or partly the purpose of his creator?” [xvi]

   The economists’ faith in the Market “god” led to two world wars and sent millions to their deaths.No other historian has explained the human suffering caused by failed economic theories as well as Karl Polanyi:”The origins of the cataclysm lay in the utopian endeavor of economic liberalism to set up a self-regulating market system.” [p. 29]”By the fourth quarter of the nineteenth century, world commodity prices were the central reality in the lives of millions of Continental peasants; the repercussions of the London money market were daily noted by businessmen all over the world; and governments discussed plans for the future in light of the situation on the world capital markets. Only a madman would have doubted that the international economic system was the axis of the material existence of the race. Because this system needed peace in order to function, the balance of power was made to serve it. Take this economic system away and the peace interest would disappear from politics.” [p. 18]

   “By the end of the seventies the free trade episode (1846-79) was at an end; the actual use of the gold standard by Germany marked the beginnings of an era of protectionism and colonial expansion… the symptoms of the dissolution of the existing forms of world economy — colonial rivalry and competition for exotic markets — became acute. The ability of haute finance to avert the spread of wars was diminishing rapidly. For another seven years peace dragged on but it was only a question of time before the dissolution of nineteenth century economic organization would bring the Hundred Years’ Peace to a close.” [p. 19]

   “The breakdown of the international gold standard was the invisible link between the disintegration of world economy since the turn of the century and the transformation of a whole civilization in the thirties. Unless the vital importance of this factor is realized, it is not possible to see rightly either the mechanism which railroaded Europe to its doom, or the circumstances which accounted for the astounding fact that the forms and contents of a civilization should rest on so precarious foundations.

   “The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system; the awful suddenness of the transformation thus took the world completely by surprise… To liberal economists the gold standard was purely an economic institution; they refused even to consider it as a part of a social mechanism. Thus it happened that the democratic countries were the last to realize the true nature of the catastrophe and the slowest to counter its effects. Not even when the cataclysm was already upon them did their leaders see that behind the collapse of the international system there stood a long development within the most advanced countries which made that system anachronistic; in other words, the failure of market economy itself still escaped them.” [p. 20]

   “The transformation came on even more abruptly than is usually realized. World War I and the postwar revolutions still formed part of the nineteenth century. The conflict of 1914-18 merely precipitated and immeasurably aggravated a crisis that it did not create. But the roots of the dilemma could not be discerned at the time…The dissolution of the system of world economy which had been in progress since 1900 was responsible for the political tension that exploded in 1914.” [p. 21] [xvii]

   Exactly like the economists of one hundred years ago, and despite millions killed in two world wars by their mistakes, economists still worship the Market “god”. Moreover, economists still haven’t changed their inherently defective methodology.

   Economists first abstract all commodities to money — which of course, obliterates all qualitative differences between the commodities themselves, and leaves economists uniquely unqualified to know anything about the commodities they purport to study.

   Although economists treat energy just like any other resource, it’s not like any other resource. Available energy is the precondition for all resources — including more available energy! Because of their total dependence on the measure of “money”, today’s most prominent economists are unable to know the difference between “libraries” and “oil”:

   “Should we be taking steps to limit the use of these most precious stocks of society’s capital so that they will still be available for our grandchildren? … Economists ask, Would future generations benefit more from larger stocks of natural capital such as oil, gas, and coal or from more produced capital such as additional scientists, better laboratories, and libraries linked together by information superhighways? … in the long run, oil and gas are not essential.” [Nobel Laureate Paul Samuelson and William Nordhaus] [xviii]

   Talk about an evolutionary cul-de-sac! The economists’ devotion to the Market “god” coupled with their innate inability to know the difference between libraries and oil will lead to a new generation of wars and send billions to their deaths.

   The next cycle of death will begin when the world experiences a severe oil crunch in less than ten years (probably less than five, perhaps much less). The crunch will be triggered by a political upheaval in one or more of the major oil-producing nations, a Muslim backlash against America’s friendship with Israel, OPEC reducing production to make more profit, or simply the natural — and inevitable — “peak” in global oil production.

   Once the crunch is here, it’s too late. The global economy will go to hell and rational planning will be replaced by crisis management. With the oil gone, there is nothing left to work with anyway.

   The coming oil crunch is the best-kept secret in Washington, Whitehall, Brussels, and Jerusalem, but it’s just a matter of time until word hits the street… Nigeria, Angola …Africa take note!

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