Tuesday, March 29, 2011

Devastating Demand Destruction

While the assumption that supply and demand forces set market prices in the modern financial world is extremely flawed, it becomes a relevant consideration in a capitalist system with limited capacity for financial speculation. This is exactly the world we will be living in over the next ten years or so. Many so-called economists ignore the fundamental reality of limited resources (such as peak oil), and therefore overestimate the ability of producers to generate supply or find substitutes to these critical resources. Many peak oil theorists, on the other hand, believe that we will eventually be living in a supply-constrained world for energy, food and other material resources, and therefore many people will be priced out of the market for them.

They often cite official projections of increasing energy demand in "emerging markets" such as India or China as support, and there is no doubt that such has been the dominant trend in recent years. Even in the wake of the global financial crisis in 2007-08, many of these countries have continued to increase their levels of domestic energy consumption [1], as their industrial sectors have grown and governments around the world have backstopped financial markets. If there is one thing we should be very skeptical of in this discussion, however, it is official projections that extrapolate past trends into the future.

The past conditions that helped form those trends are never fixed, and the conditions generated by the trends will dynamically influence what happens next. Economic and financial realities determine social and political outcomes, and these outcomes coalesce to form a new reality of their own. As we are currently witnessing all across the Middle East, revolutions and military conflicts carry enormous consequences for human life. All wars, either directly or indirectly, are fought over resources (land, oil, minerals, water, etc.); religious and political ideologies are merely drugs ingested after the fact - an opium for the masses. Sometimes, we must entertain the most unpleasant thoughts, if for no other reason than their being realistic reflections of our potential future.

It stands to reason, then, that when resources become increasingly scarce due to ecosystem degradation, peak oil and climate change, violent conflict at the individual, community and nation-state level will become increasingly more likely to occur, which will also feed back into resource scarcity (i.e. oil supply disruptions in the Middle East). People will likely be exposed to this violence over the next few years, regardless of whether they live in Manhattan, London, Tehran, Beijing, Tokyo or many of the cities in between. In the frigid language of economics, systemic death (population collapse) is the ultimate form of demand destruction.

It is difficult, if not impossible, to predict whether a supply collapse will outrun demand destruction during this crucial time frame, or how the two will interact with each other. Another collapse in financial markets, by itself, is unlikely to overwhelm oil supply disruptions when peak oil awareness enters the mainstream dialogue, and it will most likely set up a sharper decline in supply than would have otherwise occurred. For that reason, there will certainly be at least a brief time period in which energy/food prices skyrocket, as well as the cost of finished goods, but it is not so certain how long that trend will last, and it could end much sooner than we would expect.

It is a distinct possibility that systemic demand destruction eventually wins out, especially in the age of nuclear, chemical and biological weapons of mass destruction. It is true that demand for energy and food becomes extremely inelastic to price changes at a certain threshold, but it is also true that central governments and markets simply do not care whether masses of people die from thirst, starvation or an inability to stay warm, and there is little they can do about it anyway. On top of that, we are already witnessing the devastating effects of climate change on human life, mostly in the form of floods and droughts, and billions more could die from accelerating atmospheric disturbance in the near future.

There is also the fact that our peaceful "solutions" to climate change and energy scarcity may be just as threatening to human life as the problem itself, as we are currently observing in Japan. Humans always tend to sacrifice long-term resilience for short-term profits, and our decisions in a complex society will always generate significant unintended consequences. India and China, the two most populous countries in the world, have vowed to continue their construction of nuclear power plants despite the ongoing disaster, albeit after they conduct a few "safety reviews". Eastern European countries, such as Russia, have decided to throw caution to the wind and will not delay their nuclear energy plans at all. [2].

Financially, these countries may find it nearly impossible to make good on these promises, since the up front and ongoing costs of construction and operation are staggering, especially when the cost of credit and oil is high (longer delays in construction mean more interest paid to bankers). Even if they do manage to build a few more plants in a hurry, however, any major flood, intentional sabotage and/or human errors (all likely events) could render them perpetual radioactive liabilities, rather than providers of cheap energy. A similar logic applies to the more forceful ways of securing energy, such as the "War on Terror", as they only create more incentives for dissident groups to formulate and launch large-scale attacks on the aggressor states.

Realistically, a range of predicaments from a lack of cheap oil, clean water, productive topsoil, stable weather patterns or critical bee populations (for pollination [3]) could absolutely decimate global food production in upcoming years. The scenario that would result from a combination of all of these things is nearly unimaginable, but, unfortunately, has a significant chance of occurring. Of course, what scares me the most are not the predicaments themselves, but the violent ways in which human populations, armed with advanced weaponry, will react to them. When push comes to shove, we are not a friendly species, and we will not voluntarily migrate to greener pastures like the lemmings do. In fact, we have nowhere left to migrate to.

Perhaps we will not suffer mass extinction at the mercy of a nuclear holocaust, but instead a worldwide pandemic. Humans tend to forget that they are not the only living species which adapts to and exploits the populations of other living beings. A virus, such as one of the influenza variety, would have a field day in our global, highly inter-connected society, especially in the midst of an economic depression (H1N1 killed 50 million people in the early 20th century [4], and new strains may currently be evolving in unpredictable ways). Lastly, NASA has recently confirmed that our solar system will directly align with the center of the Milky Way Galaxy in December of 2012, and a large energetic release will cause massive solar eruptions, which will in turn obliterate Earth's electromagnetic fields, along with every layer of its atmosphere.

Well, alright, that last one isn't so certain at this point, but, if it did happen, would you even be surprised?

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