2009, You Should Have Taken the Blue Pill

Year end is always a good time, I figure, to step back and look at the bigger picture and see how things are going. To begin with, I want to review something I've covered before, but is worth repeating at least once more: the exponential function. No don't skip ahead, this is not complicated, and it's important.

If something grows exponentially, all that really means is that the bigger it is, the faster it grows. You can understand how this is a process that could accelerate over time, and eventually get quite out of hand. Get bigger, grow faster, which makes you bigger, which makes you grow faster, which makes you bigger, and so on.

The thing about exponential growth patterns is that they can have a long period of what looks like stability, but that the growth cycle gets out of hand and there is a sudden unsustainable burst followed by, in most cases, a crash.

This initial long period of relative stability can create the illusion of sustainability. The example that made this clearest to me is the example of a water lily which doubles in size every day. Eventually, the lily will occupy the whole pond and smother it, killing all other life in the pond. But how much of the pond will the lily occupy just one day before the whole pond is covered? Only half. And the day before, only a quarter. The end will come suddenly, after a long period where it seemed everything would be all right.

Exponential growth can not be sustained and the only way out is to lower the rate of growth somehow.

Consider the following chart of global population over the last few hundred years.



Image from here

You can see the pattern of exponential growth, the line getting ever steeper and steeper as growth feeds size which feeds growth and so on. And keep in mind that on top of this growth in population, our economy is premised on exponential growth in wealth per person. So we have an exponential growth piled on top of an exponential growth.

Clearly, a continuation of this level of growth was not possible, and thankfully, reductions in global birth rates (especially in China) have ended this exponential growth pattern in enough of the world so that global population is levelling out and may even decline at some point in the next century.


However, global population has so far been able to rise to about 7 billion and counting, without being brought down by famine, pestilence or some other limiting factor. In order to understand if we can maintain this record, we need to understand what has allowed us to continue feeding (almost) everybody and advancing civilization, in the face of such huge numbers of people on a finite planet.

Some would say it is simply the expansion and application of human ingenuity, an infinite resource, and that we therefore have nothing to worry about, and could handle a global population of 20 billion or 50 billion or 100 billion.

Although I agree that human ingenuity is important, I offer two caveats (with a third implicit caveat being that there probably should be more caveats, I just haven't thought of them).

1) As much as ingenuity is important, if that ingenuity can’t come up with a replacement energy source for oil we have big problems. With enough energy you can solve almost any problem. Short on fresh water? Pipe it over mountain ranges, extract it from the oceans, build massive dams and reservoirs and irrigation systems. Short on food? Use natural gas to manufacture fertilizer, scour the earth for potash, irrigate the deserts. You get the picture. But without a big surplus of cheap energy, none of these methods for expanding nature's bounty are all that feasible.

Even all the efforts to reduce our dependence on oil (metal wind turbines shipped halfway around the world, massive concrete dams with 1000's of miles of transmission towers, etc.) depend on significant amount of cheap energy to build and maintain.

Will we inevitably find a better replacement for oil as supplies run low? Can we maintain a global population this large and the current Canadian lifestyle with dwindling supplies of easily accessed oil and gas? These are questions we don't have an answer for yet.

2) At a certain point, ingenuity is overwhelmed. Even the most optimistic cornucopian would admit that an earth which has one person per square foot of land wouldn't be a pleasant or sustainable place to live. The question is, is the current 8 billion and counting already past that point? Lately the global problems suggested we've overshot our carrying capacity seem to be piling up faster than we can solve them and few think that the world could sustain everybody living the way people in Canada currently do.

We’ve seen the problems from acid rain, we've had (and have ) the depletion of ozone in the atmosphere. The steady collapse of fisheries around the globe as we move further and further down the food chain. Dead zones in the sea due to agricultural runoff. Climate change(pdf) due to greenhouse gas emission. Deforestation. Loss of biodiversity. Acidification of the oceans. Etc.

Of course we will take action to try and mitigate these problems but each one will be a battle that will absorb resources, and many of them can only be partially mitigated, some hardly at all, and as long as we try to maintain global population and consumption at ever increasing levels, or even maintaining the current levels, these problems are just going to come harder and faster. At what point are we spending most of our resources just mitigating the negative effects of our existence, and few trying to improve it. At what point does even devoting all of our resources just trying to preserve the status quo prove inadequate? Are we past that point already? Again questions we don’t know the answer to.


So, 2009. The environmental problems will continue to harry us, but it’s still early days on that front (I hope!). After helping to blow up the global economy in 2008, oil prices and commodity prices are a big question mark for 2009. Absent some of that old human ingenuity, we currently seem stuck alternating between growth that drives up commodity prices because we don’t know how to get them cheaply any more or high commodity prices that kill growth because the inputs to everything get too expensive. I suspect that they will generally stay low for most of the year as the economic news gets grimmer and grimmer.

And on the financial front, while I predicted that financial problems would be the primary unpleasantness in 2008, even a pessimist like me underestimated just how bad things would be for the financial world last year. It will be more of the same in 2009, I suspect, namely trillions of dollars in government money given to banks to try and preserve the unpreservable status quo of a high leverage high debt economy.

There is no shortage of question marks surrounding the fate of the financial world in 2009, with seemingly plenty of smart people on both sides of every one. One of the questions I see asked most often is whether we will have deflation or inflation (likely deflation in 2009, followed by inflation at some point in the future). Another is will the U.S. dollar serve as a refuge as part of a flight to safety, or will people lose faith in the future value of U.S. dollars leading to a sudden, rapid plunge in the value of the U.S. dollar (beats me, either seems very possible - but sooner or later the bubble in U.S. debt will pop).

As for Canada, in 2008, the commodity boom that marked the end of the last debt fuelled boom, combined with the delayed collapse of our housing markets relative to the rest of the world helped cushion Canada from the economic troubles affecting the rest of the world. Now its 2009 and our housing market is falling and commodity prices are fallen and the last bits of Canadian smugness that suggest that, even if its not different this time, its different here will be wiped away by year's end.

Still in a world of 8 plus billion people, where resources of all kinds are likely to be in short supply, a place like Canada with a (relatively) sound financial system, a (relatively) stable political system, a placid population and a high ratio of useful stuff to people should be able to do better than most places over the medium haul. Sadly, doing better than most places in 2009 is likely to be a very low bar.

A friend who's been through a few recessions in his day suggested in a recent email that this might be a good time to 'keep your job, save some money for a pinch and ride out the impending hard times.'

Sounds like good advice to me.

The View From Here

I mean that title figuratively, but also literally, since the picture above is the view from my apartment. Which tells you a couple of things. One: I have a lousy view¹ and two: Gas prices are pretty high compared to the last few years.

Now, I know what you're thinking - 'sure they seem high, but aren't they pretty low once you adjust for inflation' - OK maybe you weren't thinking that, but some people were, I'm sure of it. Anyway, this chart shows the historical price of oil in inflation adjusted terms and you can see that, aside from the spike caused by an arbitrary decision by OPEC to reduce supply in the 70's, oil prices are looking pretty high, even after adjusting for inflation.

Mahigan over at True North has a post up which looks at 'peak oil' and some of it's potential consequences. The basic idea behind peak oil is that one of these years were going to hit an all-time peak in terms of oil production and after that oil production will begin to decline (because we've already extracted so much of the easy-to-get-to oil).

In fact, there's little dispute that this will occur sooner or later but where people differ (besides the sooner vs. later part) is on what the impact will be.

On one side we have the optimists. While they don’t deny that we are beginning the long process of running short on traditional fuel supplies (oil & gas), they believe that human ingenuity combined with pricing signals from the market will ensure an orderly transition. Count Alan Greenspan among this group. Optimists will point out that civilization has made it this far without hitting any resources constraints and that every previous time people have predicted some sort of resource crisis, they have turned out to be wrong. Basically they figure that if supplies of oil and gas get short the price will rise and people will figure out ways for our economy to keep on running with less oil and gas.

On the other side are pessimists such as James Howard Kunstler (quoted extensively in Mahigan’s post) who believe that the coming oil crunch will cause a drastic change in our lifestyles with car-dependent fully-detached suburban living no longer being viable for the middle class in a world of sky-high fuel prices. The geo-political pessimistic viewpoint sees the war in Iraq as just one example of what is likely to become an ever more desperate and high-stakes battle among the world’s most powerful economies to secure their share (and more) of what remains of the world’s oil supply.

Besides optimism/pessimism, another way to look at the situation is from a demand/supply perspective. As we can see here, worldwide oil consumption (demand) has been on a steady upward climb throughout recent history. The pessimistic view says that as huge, developing nations like China and India industrialize, we can only expect this consumption to keep climbing even if oil consumption in the developed world were to level off or decrease due to increased prices. The pessimistic view acknowledges that higher prices will lead to cutbacks in oil and gas use, but figures that prices will have to go high enough to cause crippling economic conditions before any significant changes will be made.

The optimistic view figures that human ingenuity and resourcefulness will find ways for us to easily lower our consumption if this proves necessary (true optimists don’t think it will be). Reasons for optimism on the consumption side would be technological advances which allow us to do the same things using less oil and gas (hybrid cars, led lights, efficient appliances, better insulation, etc. etc.), the colossal amounts of energy we currently waste at the consumer level (leaving room for relatively painless cutbacks), the fact that Europe manages a competitive quality of life using much less energy than North America, and the decreasing energy intensity of the economy (ratio of energy used to gdp) which show that energy use is making up a smaller % of our total economic activity over time.

More attention is generally shown to the production side. Generally, we get energy either from oil, gas, coal, hydro or nuclear (wind, while growing fairly rapidly, does not meet a significant % of our energy needs, and is unlikely to ever get beyond 5-10% of total energy supply). At best, oil and gas will require us to undertake ever more expensive efforts to ensure a steady supply. For example, building massive terminals to receive gas from overseas or drilling for oil in remote/environmentally sensitive areas or undertaking the huge costs of pulling oil out of the Alberta tar sands. At worst, even these efforts will be inadequate and prices will continue to rise faster than inflation.

There’s no shortage of coal in the ground, but if you’re worried about global warming, or if you live in Toronto and miss the sky during the summer, or if you happen to know one of the (estimated) thousands of people who have died prematurely do to air pollution caused by coal, you may not be too excited about the world making a big switch back to (or even continuing to use) coal as a primary fuel. The optimistic view is that innovation will find ways to burn coal without releasing carbon (or mercury or anything else nasty) into the environment, but while progress has been made (especially with regard to acid rain) there’s still a lot more work to be done and no guarantee that it will be successful (at a reasonable price). Also, if you consider the history of energy use from wood, to coal, to oil to gas the historical trend has been toward sources containing less carbon, not more.

Nuclear power represents another option. Here is a good example of the typical argument made in its defence. The trouble is that nuclear power needs uranium as an ingredient and world uranium supplies are hardly unlimited. Also, nobody needs a reminder of how dangerous nuclear power can be (20 years later, Chernobyl remains uninhabitable), and while the recent overall operating safety record of nuclear plants is pretty good, it wouldn’t take many accidents to change that in a hurry. And given that we look forward to a world likely to contain more and more terrorist actors possessed of ever more sophisticated weaponry, is it wise to have such potentially catastrophic targets scattered around the countryside – especially in the vicinity of large cities?

Disposal of the waste remains an unsolved problem as well. Do you really trust these people to run a nuclear program which will be safe for the next 10,000 years?

At its root, my worry about nuclear is that even if humans didn’t make it, the planet would probably survive serious global warming or most other environmental disasters with it’s ability to support life intact. Radiation however, is pretty much hostile to life in all forms – and for a very long time. If we are to use nuclear power its use should at least be based on a fair economic comparison with other power sources. That is, the costs of nuclear plants should include waste disposal costs (for perpetuity) and, most importantly, they should pay for their own insurance (right now, the government has assumed the liability from a nuclear accident in order to make nuclear power financially viable).

The last remaining major source of power for Canada is hydroelectric. Personally, I feel that the government should be working towards an expansion of our hydro capacity. I know, it's a provincial responsibility, but one way to help would be to divert infrastructure spending away from projects which promote energy consumption (such as twinning the trans-Canada highway through the less populated parts of the country) and towards projects which will produce energy – for example, helping to fund a high-voltage transmission line between Ontario and Manitoba to allow Manitoba to build more hydro capacity and sell it to Ontario.

True, there are some concerns with hydro, especially native land rights and salmon runs, but we need to avoid letting the perfect be the enemy of the good on this issue, because there are no perfect solutions - not even close. It seems clear to me that the environmental impacts of (carefully designed and implemented) hydro are less than that of the alternatives whether they be nuclear, coal, oil or gas (see here, for a good speech on the topic).

As an aside, I remember my dad telling me the story of one of the older dams in the northwestern U.S. where, after decades of operation, plans had been made to modify the hydro station. But there was opposition from local groups because the plans would upset the local ecosystem which people really liked – the same ecosystem artificially created by the dam’s construction many decades ago.

After hydro, there is wind which, while now cost competitive, is limited in its potential scope and is unreliable as a primary power supply (since wind doesn’t always blow). Furthermore, after you factor in all the effort and materials required to build a wind farm, it takes a number of years before the wind actually generates enough energy to cover all the fossil fuel energy which was used in its construction.

Finally, there is hopeful thinking, innovation and niche applications. Solar, geothermal, tidal, biomass, etc. power have all come a long way in recent years but remain limited to narrow applications (e.g. off-grid applications such as marine lighting for solar, location specific development such as Iceland for geo-thermal). Whether they will ever develop to the point where they can actually substitute for fossil fuels remains to be seen.

People talk about hydrogen in this context, but hydrogen isn’t really so much a source of energy as a means of storing it. That is because it takes energy to produce hydrogen. An adequately efficient process for generating, storing, transporting and using hydrogen is yet another unsolved problem in the world of energy.

The optimistic view is, ‘look at all these alternatives we’re bound to come up with a good, safe, cheap replacement for fossil fuels, it’s only a matter of time’. The pessimistic view notes that in the last 100 years the only really large scale energy source we’ve come up with is nuclear and that has a whole lot of problems of its own.


Looking at the overall picture, I am somewhat ambivalent about our energy future, with respect to having enough energy to maintain a lifestyle with a similar level of comfort to what we have now. On the one hand, the problem of finding a suitable replacement for fossil fuels seems like one of the toughest we've faced yet and sooner or later they will run out. This site does a great job going through the various alternatives and explaining just why they are not up to the job of getting us away from our dependence on oil and gas. On the other hand, I do believe that, in the face of steep and prolonged price increases, we have the ability to deeply cut back our fuel consumption without having a severe impact on our lives. Furthermore, we can build more hydro and wind energy plants as well as building more nuclear plants, burning more coal, or processing more tar-sands fuel if that is all that stands between us and the collapse of our economy.

The two things I worry most about are a) the geopolitical impacts of nations squabbling over what remains of the world’s cheap fossil fuel inheritance and b) the economic impacts of fossil fuel price increases. Even though we can live with using less energy or produce more from other sources, our economy could still be destabilized by price increases, much like it was in the 1970’s. Fuel price inflation could cause central banks to raise interest rates even in a period of sluggish economic growth thus putting the squeeze on heavily indebted consumers whose debt as a percentage of their income is already at all-time highs. We’re (somewhat) less dependent on energy than we were in the 1970’s but more dependent on low-interest rates so it’s hard to know how this would play out.

Another worry is that, much in the same way that AIDS is a particularly nasty disease because it targets the immune system, an energy crisis is particularly nasty economic disease because any solution to our energy problems would be reliant on large amounts of fossil fuels to provide the resources to fund/power the development of the solution. The last oil crisis was caused by an artificial constraint on supply which lessened over time. The next oil crisis won't give us that alternative.

At any rate, the government is facing an energy issue from two sides: climate change and the Kyoto Accord on one front and ‘peak oil’ and rising oil and gas prices on the other. Luckily, both of these problems have a similar solution. The price of oil and gas needs to fully reflect the costs of depleting the world’s resources, the damage done to the environment and the transition costs which will be required as easily accessed supplies dwindle and prices rise. So for starters, the government should stop subsidizing fossil fuel generation and increase fuel taxes (yes, I know, political suicide).

Beyond that, the government should adjust its taxes/incentives/legislation (that means you – nuclear) to bring the market prices of various energy sources into line with their true long-term prices (including all the externalities). Also, the government needs to get (further) ahead of the curve in funding energy research to make Canada (more of a) world leader in the energy industries of the future. Finally, the government needs to turn its infrastructure spending from energy consumption to energy production, with the expansion of hydro power - the only proven source with reliable supply, no input price fluctuations, no risk of radiation damage and no greenhouse gas emissions – being a logical target.



Update: April 17 - Looking for more information on 'peak oil' related stuff? Try here for a *lot* of links.


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¹ I showed the picture to my girlfriend and she figured the flowering branch probably made the view look nicer than it really is, but you get the point.