Financial markets

Buttonwood's notebook

Energy scarcity and growth

More on commodities and Malthus

Feb 11th 2011, 13:36 by Buttonwood

TWO more thoughts on the Barclays Capital report on Malthus. The first was brought to mind by a chapter in Alan Beattie's excellent book*, False Economy; that much agricultural trade involves the import and export of water. Rice producers are clearly exporting the liquid; Saudi Arabia is importing it in the form of food. Iceland is exporting water in the sense that it can use cheap hydroelectric power to produce aluminium. If food is embedded water, then a lot of manufactured goods are embedded energy, in the sense that it takes a lot of energy to produce them. This may seem less important in a service-dominated economy but the US has clearly built its economy around the cheap energy concept; air conditioning in the southern summer, heating in the northern winter, cheap gasoline to allow all those commuters to reach work from the suburbs. Very high energy prices represent a threat to that model.

The second thought was slightly rushed in yesterday's note. Clearly, there is not enough oil for China and India to reach US per capita levels, or even European levels. But how will the choking-off process occur? It could occur as high energy prices bankrupt debt-ridden developed economies, or because they choke off Chinese and Indian growth (some people think China has already overinvested, creating wasteful capacity). Even if the optimists are right, and new sources of energy are exploited, the process could be extremely disruptive. The big energy changes of the past (electrification, the motor car) took decades to phase in and were an addition to resources. They were not really replacing old technology, except candlemakers and horses, and the latter were in no position to complain. But any future shift will involve scrapping old capacity (petrol-driven cars, for example) and seems likely to be expensive.

* Full disclosure: Alan is a former colleague.

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bampbs wrote:
Feb 11th 2011 7:17 GMT

Cars can be converted to run on natural gas or alcohol and other biofuels. We don't have to throw them away. The same is true for any internal combustion engine.

jomiku wrote:
Feb 11th 2011 7:25 GMT

Let's take the Austrian idea of "malinvestment" and apply it for fun. The US now consumes a huge percentage. If prices go up, consumption goes down. One problem is that infrastructure is stick as heck; not very dense suburbs connected by vast road fabrics with minimal rail connections define the US. This suggests a long period of adjustment in which the relative living standard declines because - just like the Austrians say - we would have malinvested based on long term cheap energy (meaning cheap everything from food to A/C, etc.).

This ignores more acrimonious competition for resources.

Pacer wrote:
Feb 11th 2011 7:55 GMT

And if the shift cannot occur in time, then the machinery of cheap energy will be salvaged (cannibalized) to recreate the old lower-energy infrastructure. But of course, living standards, mobility, overall output and population sustainability will probably also regress somewhat in this alternate transition (which by the way is the one currently feasible with existing technology).

typingmonkey wrote:
Feb 11th 2011 8:03 GMT

Let's take a fresh hard look at one of America's newest, most forward-looking capitals of infrastructure investment, Phoenix Arizona. It is a city thrown up in the middle of a desert, with negligible local water and energy resources. It isn't even a city. It is a very large suburb with an airport and a basketball franchise. It has no real downtown, and even if you built one the heat would make walking a seasonal novelty at best. 24/7 air conditioning, sprawl and driving are built in.

In other words, it is a place where over 4 million Americans absolutely must consume enormous amounts of energy just to get through the day. Sadly, this also describes to one extent or another Houston, Los Angeles, Tampa, Atlanta, Denver, SLC, Las Vegas, and essentially every American city in existence.

Greens have always known this is environmentally unsustainable, but the time must come when "conservatives" recognize that it is economically and geopolitically unsustainable as well. The river of American dollars that now pours overseas everyday to feed our habit will only broaden and quicken when it must compete with Chinese and Indian rivers chasing a shrinking pool of petroleum. And tar sands are not your saviour. Global demand will raise the price on that too, and the money will still be leaving America.

So the Malthusian "adjustment" can not this time be easily sidestepped as with high-yield cereals. We do not plow under and replant suburbs every season. Housing is a 50 or 100 year crop, and replanting all our Phoenixes will be as painful and costly as recent experiences in Detroit and New Orleans. So if the adjustment cannot be avoided, it must be managed and mitigated. Denial and delay will only increase the shock.

So go ahead and keep denying global warming. But if you are a true conservative, a deficit hawk, a strong America patriot, get thee a carbon tax. This is where conservatives and liberals must eventually agree. It's a place called reality.

pheebel_wimpe wrote:
Feb 11th 2011 9:45 GMT

I think people shouldn't get too worked up thinking about the agricultural trade as importation or exportation of water. All water eventually flows back into the oceans. Since water has a fairly uniform density, it should flow from places where the density slightly higher than normal to places where the density is slightly lower than normal. The hydrologic cycle will keep evaporating it from the oceans, and raining it down in varying concentrations around the world.

Suppose I take a tonne of water out of a river in Canada, right before it flows into the ocean, and ship the water in food to Saudi Arabia. The fact that I have shipped the water there does not mean that I have reduced the amount that will rain down on Canada by a tonne. Only changes in weather patterns and climate can change how much rains back to Canada for use. All I have done is used a tonne of water that could have been used for another purpose, or flowed back into the ocean unused.

There are justifiable concerns about the use of local stocks and flows of fresh water. But unless agriculture is severely impacting them, we shouldn't be too concerned about the food trade moving water from places where it is in abundance to places where it in limited supply.

Doug Pascover wrote:
Feb 12th 2011 12:06 GMT

Time brings change and change brings occasional catastrophes, frequent improvements, funny anecdotes and badly-tempered codgers in their early 40s. I tend to think Malthus is right if food production can't keep up with population growth. In the event that richer people within a stable population want more meat and agriculture can't keep up with that, I would tend to say Malthus was wrong.

But I still hold up Doug's first law: Prophets of doom live forever in the beliefs of their followers.

mtangent wrote:
Feb 14th 2011 12:18 GMT

typingmokey:
The conservatives & liberals will never work it out,& don't need to.
If you are correct, the citizens will vote with their feet as the cost of living increases disproportionately in these strange cities.

Perhaps the first sign of an impending Malthusian event in first world countries will be unusual human migration e.g. phoenix halving in population.

Of course, in less wealthy, less civilised regions, such events may have been happening for decades. What the western media usually refers to as tribal/ethnic tensions, or genocides, could be described as wars over food & over-population. Think of Burundi 10 years ago, for example.

cgdoherty wrote:
Feb 14th 2011 7:54 GMT

As Eugene Ionesco said, "You can only predict things after they have happened.", but when I am challenged formidably by The Economist and find myself flummoxed, I figure this is the prophecy: http://www.youtube.com/watch?v=w8B2WuudHXs

On quite another editorial front, however, as a subscriber from the former, and culturally impoverished, colonies who often learns a new nook or cranny of the Queen's English or a clever phrasing from you all, I expect The Economist to be an exemplar of English language journalism, in all its media. So, please correct "..for China and india.." to "..for China and India.." Though I find it most vexing to see that the value of the most basic of editorial is lost on wire services such as AP and Reuters, where I find spelling, grammar and even cut/paste errors that render their missives unintelligible, at least I know I can direct my White-Out(tm) to the writers and editors at The Economist. I know they take due pride in their turn of phrase and lack of typographical errors, and well should for the price of our subscriptions. PS: If you are using a browser to post, Buttonwood, many are available with excellent automated spelling and grammar tools.

marijosius wrote:
Feb 14th 2011 11:17 GMT

It would be very interesting to hear Buttonwood's take on the comparison of the Deutche Bank asset allocation study (posted in the autumn) and Barclays Equity Gilt study. In DB study it seams that short term assets is still the best solution going forward, since rising yields and structural problems are not good news for both long bonds and stocks. Barclays seem to be more optimistic on stocks though (not so much for bonds).

Pacer wrote:
Feb 14th 2011 3:14 GMT

pheebel - Food trade not water trade?

I don't think the article's point was that shipping agricultural outputs is the same as moving water by tanker or pipeline. While it does happen (see American southwest, Chinese water diversion mega projects) it's seldom going to be the water that will be moved--too inefficient when you consider by weight the relative transport costs of terraforming desert into farmland versus shipping the finished crop from an already-wet place to the desert eaters.

What it means is that countries with the water to produce crops (and to varying extent it also takes water to produce energy, manufactured goods and various other inputs) will produce those things and export them to the countries who lack the water to produce those things in quantities sufficient for their needs.

I need not repeat the huge volume of studies and conclusions that are out there on this subject, but the preponderance of what I've read indicates that potable water is as strategic a resource as any and growing more so. If the global system for redistributing the secondary outputs of water breaks down, the chances for a Malthusian crisis in the importing regions is quite obvious.

Feb 16th 2011 7:32 GMT

Sir:

If the local cost of energy becomes high enough, humans will simply harvest energy from further afield such as the local solar flux outside the Earth's atmosphere.

Indeed, I have wondered why America, Europe, and Russia have squandered their space lead, instead giving up desirable high frontier near space "real estate", locations that will become valuable as local stored solar energy supplies (petroleum) are consumed.

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