|
|
WinnersBeyond Peak Scenario Contest |
Peak Oil: a Perfect Storm
By Flavius Aetius
....what follows is the first installment of a fictional representation of how Peak Oil will effect America. Please note that this is only a conjecture, not a specific prediction.
Thanksgiving 2005
It was a bit of a struggle but the family had their traditional Thanksgiving dinner after all, he thought. The meal was costly, but he wanted to preserve the feeling that things will continue just as in the past. Thank God that a new interest-payment-only credit card had unexpectedly came though the mail; the grocery stores had long ago accepted plastic for payment. The next time we refinance the house, I just have to add it to the total. Again, he mused. Lately there's been more and more fiction between him and his wife about money, or more accurately, the lack of it. But they both didn't want their kids to know about it, but it was a problem that was getting harder to pretend didn't exist. Just this evening his daughter cautiously brought up the topic of her old car again, that the mechanic had warned her that her tires were bald and needed to be replaced. Great, he thought, there's an easy $400 gone, quickly followed by, Where's the money going to come from? Everything was going up in price, groceries, electric, you name it, except. of course, for his paycheck. He even had to adopt the Gas Company's monthly year round budget plan after getting that whopping $600 heating bill for last February.
Gasoline was now $3.25 a gallon. It had creeped up by a dime or so it seemed every week. He reflected how when he was his daughter's age, and got his first car, a beater really, gas was a whole fucking 35 cents a gallon. He and his buddies would scrounge the sofa in their college dump for loose change. It seemed that they were always broke but gas was so cheap that it never crossed their minds to question why. They were far more interested in who they were seeing at the time. Boy, he wished he still had that old '65 Chevy; he had gotten laid for the first time in its back seat. That seemed like only yesterday; and only a hundred years ago from his present reality. He was then rudely awakened from this most private and cherished of his memories. His wife, who coincidentally wasn't the babe in the Chevy, was bitching about the cost of food, especially vegetables and meat. She had just bought a whole roasting chicken, on sale for $15! Christ, he thought, are chickens becoming extinct or what?
Both he and his wife had good jobs, careers he corrected himself, and over the past decades they had made some good moves. With the birth of their first child, they bought their first house. His wife's parents helped out with the down payment, a fact which they never failed to mention in the years to come. Later his wife started to work and they could then afford some luxuries. Prices steadily climbed over the years, as more and more new subdivisions sprouted up from the farmland around the edges of the city. Cars made it possible to flee the conjestion and "undesirables" of the city. Farmers liked to joke that their last crop, houses, paid the best. They were playing a money game, of buying up from their previous house to something always bigger and bettor. They always stretched themselves financially when they made that next purchase and the gamble had paid off. He really couldn't take credit for making such great financial scores; the general economy over time had bailed them out. Their equity had grown, tax deferred, with each house purchase and resale. What's the point of scrimping and saving a few lousy bucks each paycheck when their house was steadily increasing in value big time every month? All they had to do was make the monthly mortgage payment, just one more bill along with the car payments and credit cards. The kids grew up in a good school district, and the truth was that they enjoyed a good suburban lifestyle. Their house was an ATM machine without limits.
His son had just graduated from college this June, and had a whopping $30,000 in student loans to prove it. Trouble was, there wasn't much of a job market for psych majors. The government kept annoucing that the unemployment rate was up slightly to "only 6.1%" but he doubted it. Worries about his own job were becoming harder and harder to push to the back of his mind. The sales department was perennially optimistic; privately the salesman always complained how lousy their sales and commissions were. When mega-corporations got into financial trouble, or just plain needed to boost profits to keep their stock prices up, they resorted to mass layoffs. No question about whether someone was a good worker or not, middle management needed personal to fill their body count quota. The economy was reeling from higher energy costs, something the government economists always dismissed in their monthly reports as being somehow separate from the "core rate", whatever the hell that was. Apparentally, they didn't need to eat or commute to work.
Some companies were effected to the extent that their higher utility bills impacted only part of their bottom lines. Others were not so fortunate. The colossal jump in natural gas prices forced the fertilizer industry to basically bail out of the US market. Hence forth, it was imported from overseas. The plastic industry was also hit hard. Car companies were having a terrible time maintaining their sales rate, even with zero percent financing or no payments for an incredible twelve months. They adopted a "throw shit on the wall and see if it sticks" approach to financing. Nearly anyone could be put behind the wheel of a new car; if they didn't make the payments the car could always be repro'ed. The important things was to keep the factories operating, otherwise the old grand scheme would be seen as the con game it had become. Pump prices had finally reached the point where a few new car buyers opted for smaller cars delivering better mpg. It was a source of contention between him and his wife what to do about her Ford Expedition: the gas costs were simply becoming too high to drive it, but they still owed big bucks on it. She wanted to keep it, since they couldn't sell it for what they still owed on it she argued, and besides, she felt "safe" in it. Toys are hard to give up, who wants drink beer again after sipping champagne? he thought.
What his family didn't know, nor cared about, was that during their Thanksgiving dinner, Peak Oil had occurred. Beginning with a chancy first drilling in Pennsylvania back in 1859, the oil era had completely transformed humanity. Now in 2005, worldwide production of that magical black elixir had peaked, and from that point forward would always be in decline.
Everyone's life was about to change.
Second Installment
"My Fellow Americans...
"My fellow Americans the recent events in the crude oil market and the continuing attack on the US dollar has caused an unacceptable rise in the price of gasoline. What is needed now is an immediate and practical response to this crisis. Accordingly, under the powers granted to the President by the Congress, I must now declare that a state of national emergency exists. Gasoline sales will now be rationed in order to help ensure that our limited fuel supplies will be used to revive our economy. The Office of Homeland Security will coordinate these effects with our Federal, State, and local agencies. Information on how these regulations will be implemented will be given to the press. Together, we can cope with this crisis and help restore our American way of life. God Bless America."
Well, something just had to be done he thought. Gasoline had soared from $3.50, just after Christmas, to a dizzying $9.00 a gallon in just three months. There were gas lines at every station. There was just no way to keep going; it was almost like working for the minimium wage after you subtracted the costs of commuting. And with his other monthly expenses soaring he knew that his family budget was being crushed. They were in big time money trouble. He didn't know what to do.
There were rumours that Muslim run gas stations in Kenosha, Wisconsin and Detroit were robbed and set on fire. While these attacks did indeed happen, the irony was that the counter help were Hindi, not Muslim. But the mood in the country was ugly, and besides geography was never really a strong point in the American public school system. The media went along with a request from Fed officials not to broadcast the tapes; it was feared that racial riots might break out.
With the advantage of hindsight (the trouble with that is you never get to use it when you need to, he grumbled) what led to this crisis was all too apparent now: the US dollar was being dumped. Some talk show guests claimed it really started in late 2005. No one wanted to be stuck with the "Old Maid" of world currency. The Treasury and Federal Reserve used every trick in their combined books to slow down the fall of the greenback. China, Japan, and Russia all issued very conciliatory statements urging global cooperation during this dollar crisis, and pledged their full support to the US in fighting the foreign exchange speculators. Meanwhile they pursued their desparate efforts to unload their huge US dollar reserves before they lost any more value. China with the biggest dollar amount quickly realized it couldn't simply sell their $515 billion worth of T-bonds on the open market. Sure they tried unloading a couple of billions in New York and Zurich, but the edgey markets couldn't absorb it all and the price plummeted. So China adopted the capitalistic strategy of spending away their vast holdings, and breaking free of the peg to the dollar. China had embarked on a spending spree that would have impressed the most determined "shop until you drop" American teenager. But instead of buying the latest electronic game toy, China was relentless in buying up natural resources, from chromium mines in Indonesia to a long term $200 billion deal with Iran for LNG and crude oil. Japan, and to a lessor extent India, were in the same predicament and ruthlessly competed world wide for each available company and concession.
Russia was quietly swapping dollars for Euros and signing profitable sales agreements for natural gas and crude oil with Europe. Russia clearly savored being in the position of dictating terms of the deal to the EU, and realizing a long held dream of assuring its national interests and importance in Europe. Russia would also supply crude to China, but only by rail car, not with the proposed pipeline direct to its mainland. Russia didn't want to be tried down to an exclusive buyer and there were geopolitical considerations as well. Besides, a pipeline of that length required a lot of crude just to fill it up before a single barrel could be pumped out at the destination terminal. If China wouldn't deal, Japan was eagerly clamoring for Russian oil and was prepared to pay any price. China balked but in the end accepted the deal. The needed the oil.
Crude oil exporting countries were in the mother of all seller's markets. At first Saudi Arabia tried to make up the shortfall, but the water cut at Ghawar was pushing 65%. They had to back off from trying to maximize production because they were bypassing too many oil pockets. It seems strange and all out of proportion that only few percent drop in world wide crude production could cause such violent price raises. But the old law of supply and demand stating that price is set at the margin hadn't been repealed yet. Trouble was the world was no longer willing to accept America's play money, compounding the problem for the US. Whatever the US couldn't afford to purchase, others would eagerly snap up.
Russia never formally joined OPEC but their interest was clearly served by higher prices. The old USSR was bankrupted by the Reagan administration, with its "I never saw a weapon system I didn't like" attitude. Payback was sweet indeed, and didn't require firing a shot. Russia eased up ever so slightly on production, siting drilling difficulties thereby giving it plausible denial. It netted even more revenue as a result and also kept the pressure on American imperial adventures in the Middle East. The cost of maintaining troops there was draining the US Treasury as well as keeping the body bags coming home.
Still, in spite of all the efforts by the Feds, the almighty US dollar crashed and burned, causing interest rates to soar. The prime rate was sitting at 12% and very few corporations qualified for that bargain rate. Their money, if they could get it at all, had several extra points tacked on to it. And consumers with their adjustable rate mortgages, well it wasn't pretty. The housing bubble was just some sticky gum on the soles of the American families now. Both personal bankruptcies and foreclosures jumped: after missing just two monthly payments the banks knew that their loan was in trouble and bounced. Trying to seize the assets were their only hope of realizing something. People resisted the these legal maneuvers as long as possible since the processing time required by the jammed legal machine represented free rent.
The jump in energy costs and higher interest rate costs were a double whammey on their pocketbooks. There was a run on cash advances from credit cards but with a few strokes of a keyboard Visa and MasterCard simply froze everyone's account. Surprisingly enough, considering that nobody else wanted them outside of the US, paper money was the only way to buy something now. Actual pieces of old fashioned money, cash, had some scarity value. Digital money like debit and credit cards were frozen stiff. The Fed quickly annouced a bank holiday, but only until matters could be straightened out. When that would be wasn't quite clear however. The Treasury was in desperate straits with the collapse of the dollar: it was effectively cut off from its daily fix of foreign funding. Raising taxes was both unpopular and impractical since national incomes were sinking. The only resort was to crank up the printing presses, even though every economist not quite completely brain dead from reading too much Keynes already knew what the inevitable result would be.
Third Installment
"We Got to Get Warm"
The summer of 2006 bought some relief to the suffering. At least, the furnace could be turned off now he thought. The quickness of the fall in the dollar's value, coming on top of already rising crude oil prices had taken America by total surprise. He was quietly proud how his family pulled together during the hard spots. To help lower their heating bill they turned down the thermostat to 50 degrees during the day and to 45 degrees at night. It was kind of comical seeing everyone bungled up with layers of sweaters and coats inside the house. They firgured out how to put barriers in the heating ducts so as to close up several rooms. The chief priority was to keep the kitchen, bath, and one bedroom warm.
At least we saved on electric for the refrigerator was his standing joke, a kind of gallows humor. Still, he was worried about how pale his daughter's face was becoming. A father must be able to protect and provide for his family; it was a primal male imperative awakening in him. Maybe the returning sunshine will help, he hoped.
The government was faced with a dilemma: how to ration the nation's natural gas supply. The Canadians had the gall to divert their natural gas supply to help keep their own homes warm; it was a loss of about 15% of what America needed. Domestic gas production was down about 7% from 2004. You just can't physically reduce the amount of gas going to a house or drop the line pressure. The decision was made to cap rates at $25 a million BTU's to discourage use. But by late spring the nation's storage reservoirs were dropping to critical levels; much lower and the pipeline pressure would drop below a minimum safety level. If natural gas ever mixed with air, a spark would turn a house into a crater. The end solution was to completely shut off natural gas region by region as they warmed up, starting from the Deep South. Such a enforced "sharing" didn't exactly endear the damm Yankees to the Southerners trying to figure out how to cook their breakfasts.
Enterprising "contractors", of dubious licensing, specialized in retrofitting houses with more insulation. There was a rash of house fires when suburbanites tried using their showcase fireplaces for the first time. What they didn't understand was that the expensive wood they bought from door to door hustlers was green and rapidly coated their chimneys with creosote.
Some areas of the country fared better then others, mostly as a result of geography and the fickleness of the winter storm tracks. The Northeast was hit hardest during the winter season because they were so dependent on heating oil.
Flu and colds were widespread due to the bitter cold; you could never really get warm. The elderly suffered the most; their bodies lacked the inner strength to endure the winter season. The government attributed their deaths to "natural causes" and not from lacking sufficent care. The South and Pacific Coast states were mostly spared by their milder climates. Their were rumors, angrily denied by offical media sources, of hundreds of deaths during one especially bad blizzard in February across the New England states. But people gave more credence to one hearing of a rumor then to the countless denials from the talking heads on TV.
Gasoline was rationed out on a per car basis; the minimum was 10 gallons per week. It was a kind of a crude approach at distribution, but it had at least the advantage of being able to be implemented quickly. A few sharp hustlers claimed additional ration booklets for a fleet of old junkers, and resold the gas on the black market. But this hoophole was closed when state computer data bases were traced. The local city hall handled "exemptions" on a case by case basis, and not surprisingly political pull made all the difference in scoring a few more gallons. Stealing gas was rampant and parking lots advertised having 24/7 security guards to assure safety. Bikes were used, and stolen, with increasing frequency. There was a run on locking gas caps, until thieves switched to using icepicks to drain gas from the tank. Carpooling was absolutely essential for commuting to work; no one single driver had enough gas to make it for the entire week. Nearly every McMansion had a SUV on the front yard for sale: but who did they think wanted to buy them? Most just ended up being repro'ed. Grocery stores countered the drop in sales by setting up phone banks to take orders over the telephone and on their websites. A delivery truck would then travel to the various intersections and people would get their order from the tailgate. Fresh fruit and vegetables were costly luxuries; most people had to settle for canned items. Meat was plentiful at first as the nation's farmers slaughtered their livestock. Malls were deserted, no matter how big the "Sales" were.
The trucking industry had a high priority since they were essential to keeping the economy moving. Railroads also were given a quota sufficent to keep them rolling; otherwise the nation's coal powered power plants would have run out of fuel. The utility workers, the classic blue collar workers, or what was left of them after decades of "downsizing jobs", were added to the roll of heros by the public.
Airplane use was strictly regulated by the government since there is no way to substitute for jet fuel. Most were bankrupt anyway,and management silently hoped they would be taken over by the Feds to assure some employment.
The power grid stood up, except for times in the New England states; clearly their dependence on heating oil was their weak point. Emission standards were "temporarily" suspended on the Midwest's coal powered power plants, as the country needed every kilowatt they could generate. Utilitles were given whatever they needed to keep going. Most people would have happily seen the North Slope of Alaska strip-mined if that meant they could be warm just one more time. Eating displaced caribou's would be seen as a bonus.
Fourth installment
"What Is Your Decision, Mr. President?"
By the fall of 2006, it was becoming all too apparent that "growth" was no longer possible. The new buzzword within the capital beltway was "stabilize". Keeping the economy from sinking any further was the sole focus now of the endless meetings of staffers and bureaucrats. Problem was that the nation's special interest groups, the real recipients of the government's largess, were engaged in savage infighting. Each was clamoring for a larger share of the Treasury's shrinking pie. Income tax collections were dropping rapidly, since most corporations were showing losses, and the middle class was reeling from unemployment.
The other problem was "unintended consequences" to their policy decisions. The Federal Register was recording hundreds of new agency directives, executive orders, and laws. Each was meant to fix some specific, immediate problem, but always seemed to adversely impact some other area of the economy. The economy, once it started to contract, was now a zero sum game: what one special interest was granted in relief, somebody else had to make up the loss. It was practially impossible to accurately forecast exactly what the ramifications of a new law or regulation would be. The politicians called it "financial collateral damage"; maintaining a steady flow of campaign donations was far more important.
The change in the nation's unemployment laws illustrated this problem. As the economy slid into recession, and unemployment soared, every state budget ran a deficit. The States at first turned to the Federal government for loans to finance this gap, as they had always done in the past. But the nation's Treasury was in deep crisis itself funding its own operations, and could not supply the necessary funds. The solution arrived at was a change in labor policy: shift the cost of unemployment benefits to businesses employing 25 or more employees. In effect, companies themselves now had to absorb all the costs of firing their excess employees, not the states. Some staffers argued that this would also discourage firms from laying off any more workers.
However, after heavy lobbying from business interests, it was agreed that a company's finanical liability was reduced to having to pay only at the minimum wage rate. Regardless of what they earned before, or their former job classification, each effected employee was paid at the same rate. And they were no longer entitled to any benefits: vacation, sick time, health insurance, etc. They were called "redundant employees" and the media hailed this as a true democracy by treating everyone equally. A former middle management type found himself doing the same "make work" for his remaining six months as the rest. Rather then resisting this new reg, corporations embraced it with a passion. They responded in several clever ways, totally taking the bureaucracts by surprise. Some corporations declared everyone (except top management) as redundant in order to lower their labor costs to the absolute minimum. After six months had past, they would rehire as few as they could and only as "temp workers" status in order to avoid overhead costs. As a result more people found themselves out of work, and now looking for jobs that paid only at the minimum wage rate. People would cynically say that the minimum wage was now the maximum rate. The official rate of unemployment was now 25.6%. Bankruptcy filings soared, the courts were jammed with cases, and a great many more people just stopped paying. Homelessness was becoming not just a TV show special; you hoped it would happen to somebody else, not to you.
The bank "holiday" which had earlier closed the nation's bank doors caused similar numerous unforeseen problems. With the collapse of the dollar's value, oversea owners of US accounts were rapidly wiring their funds out of the country. By the time Joe Six Pack recovered from his disbelief, shock, denial, and figured out he better get his ass down to his bank, it was too late. The Fed had no other choice, it seemed to them at the time, but to freeze all accounts. After two weeks of furious debate during closed-door meetings, the Fed's governors decided to reopen the banks, but to strictly limit cash withdrawals to $100 a week. No exceptions. All foreign owned accounts continued to be frozen however, since it was all too obvious that these funds would be completely withdrawn if they had a chance. This drain would have caused the nation's money supply to further shrink. But because nearly 60% of the nation's currency was already circulating overseas, it was possible for the Treasury to ramp up production of paper money without causing a burst of inflation, at least initially.
The worst consequence of these financial moves was to remore the last vestiges of international support for dollar denominated debt. Treasury bond sales had to be vastly curtailed, far below the amount needed to finance its maturing debt obligations and balloonuing budget defects. Treasury paper was now treated like it was from some third world country. If it traded at all, it was for pennies on the dollar. The US was trapped; it was forced into the humiliating position of having to ask for an IMF bridge loan to tide it over. They declined, citing "recent developments in the capital markets".
The President now faced his cabinet members at their daily crisis meeting and listened. Each gave their opinion on how to proceed, backed by reports written by their staffers. It was the emerging consensus that something drastic had to be done with the untold trillions of debt hanging over the US. The dollar crisis was greatly limiting the nation's ability to continue importing critical foreign-sourced supplies. Crude oil was the number one nightmare; the US was capable of only producing about 45% of its needs.
Is the glass half empty or half full? he thought to himself. The real point is that the US would never, ever again be able to refill that glass by itself. The US had long ago reached its production peak back in 1971. Damm if old Hubbert wasn't right, he said to himself, and damm us for wasting these past 35 years. If only we had taken this seriously, if only.....
A cabinet member who finally gathered enough courage to break the silence interrupted him.
What is your decision, Mr President?
