Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (14 page)

As higher-density energy came into use, economic growth accelerated. The Industrial Revolution raised living standards for average people as never before. peak coal at the eve of World War I precipitated a scramble for a still-higher-density energy source: oil. This broke the peace and shattered the nineteenth-century free trade system.

Now we face another crisis associated with an energy peak—peak oil. Unfortunately, there is no obvious, higher-density fuel in reserve to be exploited to forestall a collapse of complex societies already suffering from declining marginal returns in many areas. As Tainter concludes,

a new energy subsidy is necessary if a declining standard of living in a future global collapse are to be averted. A more abundant form of energy might not reverse the declining marginal return on investment in complexity, but it would make it more possible to finance that investment.
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Unfortunately, the result to be expected is the collapse of the advanced economies, the United States included.

Notwithstanding a drastic 469 percent increase in the real price of BTUs, since 1945 (calculated in terms of the annual average inflation-adjusted price of oil), so-called alternative energy continues to provide no more than a trivial contribution to meeting the world's need for power. For example, as of July 2011, solar power produced only 661,339 billion BTUs, or 0.002 percent of total world production of 267,757, 600 billion BTUs. Wind power produced 0.012 percent while geothermal accounted for just 0.0007 percent.

This implies that a Malthusian resource panic lies ahead as countries scramble to reserve as much precious hydrocarbon fuels, especially as much petroleum for themselves as they can secure. Therefore, a reasonable basis for forecasting the future prosperity of different economies is their relative capacity to sustain or even expand their current energy use. For reasons I spell out in greater detail in Chapter 10, Brazil has more capacity than most other economies to increase energy inputs per capita in a way that increases the return on energy invested.

Equally, the United States is ill-suited to effect a seamless transition to alternative sources of energy. For one thing, the United States lacks many of Brazil's natural advantages. For another, the spatial organization of the U.S. economy is dependent upon cheap oil. In addition to other risks, the United States faces strategic vulnerability as well as economic vulnerability. Among the many systems facing declining marginal returns for the United States is its military establishment, which costs as much as all the rest of the world's armies combined. It is not immaterial that the U.S. military alone consumes 300,000 barrels of oil daily—more oil on a daily basis than three-quarters of the world's countries.
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Brazil has one of the world's largest standing militaries, with 2.5 million men under arms. But annual security outlays at $28 billion in 2010 comprised only three percent of U.S. annual security spending of $929 billion.

I am persuaded that a not insignificant cause of the decline in the fortunes of the British economy after the advent of peak coal on the eve of World War I was the lack of access to higher energy-density oil in the United Kingdom. Similarly, as we look forward to growing global supply constriction associated with peak oil it is obvious that the U.S. economy will be especially challenged. Gail Tverberg, an editor of
The Oil Drum
, points out that slow growth or no growth in the availability of BTUs to the U.S. economy will be manifested as debt distress and recession. She writes,

Let me tell you what I think the symptoms of the arrival of peak oil are:

Furthermore, I expect that as the supply of oil declines over time, these symptoms will get worse and worse—even though people may call the cause of the decline in oil use “Peak Demand” rather than “Peak Supply.”
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Tverberg shrewdly points out that many aspects of dysfunction in the current economy are disguised symptoms of more expensive energy. She writes,

Cheap energy keeps our cars and factories running. It leaves homeowners with money to repay their mortgages, and permits the long-distance transfer of goods needed for globalization. . . . When economies of countries are able to grow rapidly, they can repay their debt with interest. But as growth wanes, it becomes much more difficult to repay debt, and many more defaults occur. Our debt-based financial system needs growth to continue. It is not a Ponzi scheme, but it has the same problem with not being sustainable without growth.
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Tverberg argues persuasively that the collapse in the U.S. housing bubble and the subsequent recession were disguised indicators of peak oil. Equally, you can expect this to be reflected in geopolitical terms in maneuvering between the world's two largest energy consumers, China and the United States.

I think it is entirely credible that the Chinese may choose, at some not-too-distant moment, to strategically deploy their financial clout to deflate the U.S. government debt bubble that Bernanke, Obama, and other U.S. authorities have labored so assiduously to inflate.

Quantitative easing or counterfeiting of trillions of dollars out of thin air is a recipe for forcing quantitative tightening in rapidly growing emerging economies like China's. You should not be surprised if it turns out that Bernanke and Obama have outsmarted themselves with monetary inflation. By lighting the fuse that set the world on fire, at a time when we had already traded far up the scale of vulnerability, they may have brought nearer the day when we will feel a blast of cold water in the face.

The United States has made itself hostage to fortune by becoming the most deeply indebted nation in history. You cannot indenture yourself to someone else and expect your creditor to always act with your convenience in mind. With your and my financial well-being closely tied to the prosperity of the United States, we probably are prejudiced to suppose “what is good for the United States is good for the world economy.”

As we went on our merry way using as much of the world's available cheap oil as we could borrow the money to buy, something else happened. Emerging economies like China, India, Brazil, Turkey, South Korea, and Mexico began to develop. People in those previously retarded economies started making money. As they did, they found something unsurprising. They preferred driving automobiles rather than riding bicycles and burros or just walking. Today, China has replaced the United States as the world's largest auto market. Brazil has replaced Germany as the world's fourth-largest auto market.

The growth of auto use in emerging economies implies skyrocketing oil use and skyrocketing prices. “From now to 2020, world oil consumption will rise by about 60 percent. Transportation will be the fastest growing oil-consuming sector. By 2025, the number of cars will increase to well over 1.25 billion from approximately 700 million today.”
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Not only does this imply a lot of traffic jams and time lost looking for a parking space, it also prefigures runaway oil prices and thus multiplying solvency stresses.

You're looking down the road toward gasoline prices of $8.00 to $10.00 per gallon. Global consumption of gasoline could double while yours may fall dramatically.

The two countries with the highest rate of growth in oil use are China and India, whose combined populations account for a third of humanity. In the next two decades, China's oil consumption is expected to grow at a rate of 7.5 percent per year and India's at 5.5 percent. (Compare to a 1 percent growth for the industrialized countries, or more probably, declining consumption.)

Dramatically augmented demand in developing economies against a backdrop of dwindling production from the world's heritage oil fields spells higher prices. As Hubbert explained half a century ago, the first oil that was found was the cheapest and easiest to produce. As of 2010 the annual depletion rate of those cheap oil fields was about 4 million barrels per day of production. That implies that by 2014, there would be 20 million fewer barrels of oil production per day to satisfy the surging world demand.

Many quibbles have been advanced to challenge the theory of peak oil. Mostly, these relate to the question of whether the world is truly running out of oil. Almost certainly those who argue that oil will not run out are correct. But this is a misleading truth.

What is happening is that the world is running out of the type of oil that fueled the prosperity of North America at a price that people could afford. Light sweet crude, by far the most desirable form of oil as it flows easily and can be readily refined into gasoline, appears to be rapidly depleting. The most famous varieties of light sweet crude including West Texas intermediate, Brent oil from the North Sea, and Saudi Light Crude are being used up.

According to OPEC figures, annual output of light sweet crude dropped by 2.6 million barrels per day from 2000 to 2004. While the OPEC figures are somewhat suspect because they don't completely integrate across the total production curve, it is incontrovertible that lighter, more desirable varieties of crude oil have been replaced with heavier, more sulfurous oil: hence, Saudi Arabia's persistent suggestion that the world's problem with oil was not a lack of oil per se, but a lack of refining capacity for heavy oil.

So at the very least we see the depletion of light sweet crude and its replacement with heavy sour crude or synthetic oil such as that from the Alberta tar sands, which is extremely expensive to produce.

The original Saudi Light oil discovered at Dhahran in 1938 was wildly profitable to pump, with oil at three dollars a barrel. The Saudi production cost was just $0.19 a barrel, plus $0.21 royalty, as late as 1947.
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When oil was discovered in Texas at Spindle Top, it sold for just three cents a barrel early in the past century. Today, the synthetic oil from tar sands costs $70 a barrel to produce. Perhaps more. At higher prices, it will be profitable to extract increasing volumes of synthetic oil from various tar sands and from deposits deep beneath the sea.

A hint of things to come was registered in 2005, when Saudi Arabia entered into three-year contracts with Rowan for five jack-up rigs for offshore wells, all of which were bid away from work in the Gulf of Mexico. Given that offshore drilling is both one of the most costly and slowest ways to develop oil, the fact that the Saudis were ready five years ago to pay premium prices to secure jack-up rigs strongly implies that they have run out of cheap sources of oil to drill out on land.

There are 300 billion barrels of difficult-to-extract oil in Athabasca tar sands in Alberta and untold more billions of barrels in shale deposits in the American West. There are many more billions of barrels under the ocean off the coast of Brazil.

It is true that there is oil in the world. The problem is that much of the oil that remains will be priced so high that you can't afford to use it.

When oil costs $200 a barrel, as it will soon, whether Saudi Arabia, Kuwait, and Venezuela follow Libya and Egypt into chaos, gasoline will cost at least $7.00 per gallon. How much driving will you be doing under those conditions? You may not choose to completely scrap your car at those prices, but others will. They will have no choice. The average American drives about 15,000 miles a year. You have to assume that this is not merely joyriding. When gasoline costs $7.00, much less $10.00 per gallon, the part-time jobs to which many Americans commute will no longer pay the tariff entailed in traveling to and fro. Whole suburbs and neighborhoods will go off-line.

When the oil from the Lucas Gusher in Texas sold at three cents a barrel, BTUs were priced at 193 million per dollar. True, the dollar was worth more then. But oil at $200 a barrel gets you only 29,000 BTU to the dollar. Nominally, that is a 665,000 percent increase in the price of a BTU. While this is exaggerated because not much oil changed hands at three cents a barrel, the direction of the change is not in doubt. The radical falloff in the energy density of BTUs per dollar implies a continuing and perhaps precipitous drop in American living standards.

Prosperity will fall away as the return on energy investment falls. This is a development pregnant with implications. I review some of them next, before introducing some topics for analysis in more detail in later chapters.

I would guess that American living standards are set for at least a 25 percent decline over the next couple of decades. As we regress to lower-density energy, you can expect to see a closure of the economy. Economic freedom will be curtailed. Globalization will be rolled back. The high price of bunker oil will effectively serve as a stiff tariff to refocus the production of heavy, relatively low-value products like steel domestically. Already, the
Wall Street Journal
has reported how the world's longest containership, the
Eugen Maersk
, has cut its cruising speed to 10 knots from its usual 26 knots. This cuts fuel consumption by 100 to 150 tons of fuel daily from 350 tons, saving up to $5,000 an hour.

I expect to see the reintroduction of sailing ships for long-haul transport. The web site
www.treehugger.com
has already begun to extol the promise of long-haul ocean freight under sail. If expensive oil requires container ships to poke along at 10 knots, they enjoy only an equivocal advantage over sail-powered freight.

International steel companies that do not serve large domestic markets will suffer. So will shipping companies. There will be fewer Chinese goods at Wal-Mart. Hence, Wal-Mart will lose some of its competitive advantage. We will move backwards toward a more local, closed economy.