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Charles Hugh Smith

Charles Hugh Smith

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global…

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Oil, Greece & China – On a Collision Course with Reality

Oil, Greece & China – On a Collision Course with Reality

A chart of exponential growth/depletion may be the "chart of the century."

The chart displays two lines: the blue line traces out exponential growth (for example, in demand for oil, deficit spending, etc.) while the lower lines traces out exponential depletion (for example, of oil reserves). The consequences of a "modest" 3% growth/depletion rate are striking and sobering.

The chart depicts 3-percent growth and depletion. It does not matter what is measured, whether it is energy, debt, land, or population, the effects are the same and they are important to understand.

Exponential Growth and Depletion

Time is not your friend and why the Red Queen’s Race cannot be won:

The arrows indicate how long it took to obtain an incremental level (100).

What does this mean? Considering debt growth, the current monetary system requires positive debt growth or the dreaded deflation will occur. As you can see to achieve the first increment of 100 took nearly 80 periods. The second period to achieve the next increment took about 11 periods and the third just over five.

The harsh reality demonstrated here is that it is not a matter of if the physical economy will be able to support such debt growth but only a matter of when it implodes. Remember, the inverse curve represents the necessary decline in savings or the ability to save. At the point that the government is giving away money, why should anyone work? Bailing out neither banks nor sovereign states can save the status quo.

This principle applies in terms of crude oil usage. It is most damaging to the arguments that we just need to find another giant field. It is also why Hubbert was absolutely correct in his assessment. The time to deplete an oil field the size of the one in Saudia Arabia decrements as seen here (if demand remained constant). With no new major finds and most fields mature or declining we are already too far behind the curve to prevent shortages.

I think (hope) with these examples you get the idea: We are on a collision course with reality.

The chart also applies to the current situation with Greece: Greece's physical economy cannot support its financial economy. This is the end game in the "debt as money-post industrial" economy for all OECD countries. California is another good example of the effects of compression. If we were to look at the growth rate (inflation) as necessary to maintain a constant standard then the problem for the physical economy is apparent. In reality it is not a "problem", it is an impossibility.

If we were to look at the first 80 periods as years then growth was considered strong and the reliance on inflation not really a concern. But then in order to maintain status quo the same amount of credit expansion had to be created in just about 11 years, then 5. Can products and services grow at this rate? Advances in technology, CDO/CDS have prolonged the endgame and made some people very wealthy but the leverage is way beyond what the physical economy can ever hope to service let alone repay.

I think the chart also emphasizes the problem with China. Unless something changes, this chart reveals that energy will be a huge obstacle to growth in China. What is thought of as the China Phenomenon will likely turn into the China Syndrome redux.

For arguments sake, if we were to say that there was one large oil field, it was used up in 80 years. Then we found another and with demand constant, even devoid of increases in technology, we used the second field (which was the same size as the first) in about 11 years. Then we got lucky and found another field of the same exact size as the rest but with demand growing at a constant 3 percent, we used it up in about 5 years. Regardless of how many energy deals China manages to finagle, the situation, short of a miracle, is hopeless.

And, as predicted in the exponential model instability is also occurring with greater frequency.

Finally, along the lines of Jevon's paradox, and, If you give a mouse a cookie... bringing jobs back to the US will not necessarily solve more comprehensive issues as the resource economy would not be able to support the physical economy.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.




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  • Anonymous on May 04 2010 said:
    There is one exponential growth curve you are forgetting: the exponential growth in technology...
  • Anonymous on May 04 2010 said:
    ...A century of low oil prices and previous lack of concern about global warming has provided very little incentive amongst the scientific community to address efficiency or find alternative energy sources; however, this is now the focal point of the scientific community. But we are only now about 5 years into putting up a real effort to solve our energy issues yet per capita oil demand has dropping steadily and this trend will grow exponentially as new technologies grow exponentially.
  • Anonymous on May 04 2010 said:
    There was a 50% increase in effiency of automobiles, but weight increases offset all but 15% of it. The chances of serious injury are half as likely in an Accord as a Fit and 1/3 in a Pilot. People have been choosing safety over money. Tech additions for safety have helped all type of vehicles, but weight is still the major factor in both safety and effiency. Do you want to use the law to mandate less safety? Is it that we are willing to kill for less oil use?

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