energy | Deirdre Kent

Economic reality strikes – growth is ending

Of late the Opposition has been pointing out that business confidence is declining. NZIER had released a survey saying business confidence is at a seven year low. The Government has been quick to dismiss it as a political bias by business – as something they always opine when a Labour Government comes in. And the Asian stockmarkets are currently looking wobbly. RNZ’s long term economic commentator Patrick O’Meara talked of softer demands, slower growth, lower investment intentions. He talked of the looming US-China trade war has attributed that to the fact that on Saturday Trump’s tariffs on Chinese goods begin. It may also affect markets in Europe, Canada and Mexico.

The trend started well before Trump appeared.
But because of declining net energy, worrying trends happened decades before Trump’s tariffs kicked in. Let me explain declining net energy. Whereas in the mid 20th century if you spent one unit of energy to extract oil, you would get 100 units of energy back, nowadays because it takes more energy to extract fossil fuels from deep sea wells and from fracking, the energy left for the economy is progressively declining. Since net energy available is closely correlated with economic growth we would expect economic growth to decline. Moreover productivity will decline. Productivity is an economic measure of output per unit of input and input includes energy.

Is it time for Nafeez Ahmed to be taken seriously?

British investigative journalist Nafeez Ahmed has written a great article explaining the gradual decline of both economic growth and productivity in the UK economy. He concludes, “In other words, trying to keep the growth machine growing when the machine itself is running out of steam is precisely the problem — the challenge is to move into a new economic model entirely.”

He quotes from a piece of research for the government by Professor Tim Jackson giving graphs of declining economic growth and productivity. Jackson says, “In 1996, the trend rate of growth in the global GDP was 5.5%. By 2016 it was little more than 2.5%”. From 1971-2016 productivity growth dropped from over 3% to just 1%. We must have similar graphs in New Zealand.

Economist Michael Reddell says on his website “Over the last five years there has been only about 1.5 per cent productivity growth in total.”

Ahmed himself is well ahead of others in the way he puts together and explains the connection between many serious global issues –fossil fuel depletion, climate change, finance, geopolitics, terrorism, food security, political instability.

Trump is just a symptom

Trump’ regime is picked to promote business as usual

Ahmed wrote on Inauguration Day 2017 that “Trump is not the problem. Trump is merely one symptom of a deeper systemic crisis. His emergence signals a fundamental and accelerating shift within a global geopolitical and domestic American political order which is breaking down.” He talked of the elephant in the room being the global net energy decline that drives all this.

Less than a month later he penned a chilling analysis of Trump’s regime. Half of them are now gone, having resigned or been fired by Trump. He grouped them under five headings – money monsters, fossil fuel freaks, black ops brigade, Ku Klux Klan and the guru gang – saying that was the perfect combination required to keep the old model working. Business as Usual must proceed. Drill baby drill. Increase funding for the military. If things look bad financially try riskier and riskier financial instruments.

Never before has there been such an environmental crisis where our emissions are making our habitat more and more inhospitable with floods, fires, droughts and the accompanying food insecurity. Never before have we seen governments like ours desperate to solve child poverty throwing money at them. We have even got a superannuitants winter energy payment. Yet homelessness and poverty continue.

The tragedy is that while the current government has its heart in the right place – to end poverty and preserve our environment – it is hamstrung. It is damned if it does and damned if it doesn’t. Political instability is becoming inevitable. Will New Zealanders after the hope of Jacinda Ardern be doomed to see in a Trump like government within five years? Nigel Farage is coming to our country soon. If we don’t find a new economic model that is not dependent on growth, we will come nowhere near a just, sustainable economy. That is the tragedy.

The price of petrol and climate action

Climate change groups were noticeably absent from the recent public discussion about the rising price of petrol. Nobody was saying publicly that if we are to turn emissions around, we have to make it more expensive to drive. Not the Greens, not Generation Zero or 350.0rg. Nobody. It had been a unanimous outcry of pain against high petrol prices. Why? Surely lower petrol prices would clog up our roads, get people off public transport and adversely impact our emissions?

Here was a discussion about how the margins had increased in Wellington and the South Island yet nobody had said we should drive less so use petrol and reduce our carbon footprint. Nobody came out with a comment that the oil companies have a growing debt burden because it is getting more and more uneconomic to get oil out of the ground, so it is not surprising. They have been binging on debt and are struggling to pay dividends and find new barrels. The big four doubled their net debt between 2014-2016.

The public debate was started by Judith Collins the Minister of Energy and Resources after a report came out, and Labour’s Stuart Nash praised her for ordering the report. Labour’s Stuart Nash praised her for ordering the report.

So how important is petrol to us? The average Kiwi family spends $42.30 a week on petrol – only $8 less than their average weekly spend on meat, fruit and veggies. That is mighty close. It won’t take much for petrol to be a bigger part of the budget than food. And to complicate it, when petrol costs rise food costs mostly get passed on to us.

But then I thought of the implications. The gross profit margin on fuel at the pump had doubled to about 30 cents a litre in Wellington and the South Island over the past four years and gone up by 5c a litre elsewhere. It has something to do with Gull only selling petrol north of Levin, but it is more than that.

The petrol retailers Z Energy, BP, Mobil, Caltex and Gull all defended their positions. Maybe the companies are suffering from their growing debt burden so increasing their margins are the only way to stay solvent.

Ten years ago when many environmentalists were involved with peak oil we would argue that the price of oil will one day be over $100 a barrel. It hasn’t turned out that way because we didn’t factor in debt or falling interest rates. As actuary Gail Tverberg says, the economy was far more complex than the original model assumes. “When interest rates fall, this tends to allow oil prices to rise, and thus allows increased production. This postpones the Peak Oil crisis, but makes the ultimate crisis worse.”

We all remember that the economy slowed right down when the price of oil spiked in 2008. That showed us how critical the price of oil is. High prices on energy products ripple through the economy is many different ways. Just thinking about the price of petrol gives a misleading impression. Tverberg says, “Because interest rates, debt, wages, and oil prices (and, in fact, commodity prices of all kinds) are linked, the system is much more complex than what most early modellers assumed was the case.”

Not all of us can get a handle on the huge complexity of it all and I am no exception. But I know Tverberg believes the price of oil will not rise beyond about $50 a barrel because consumers can’t afford it.

Environmental commentators are faced with several problems. First they are unlikely to have an understanding of the complexity of the peak oil problem and secondly because they know that saying petrol prices should rise (through increased taxes) will be unpopular. The petrol price components vary.

What should happen of course for climate change purposes is for the Government to increase taxes on petrol, diesel etc. The fact that the oil companies have been the villain has excused the government for inaction. Now we can cry together that the oil companies are a greedy, conniving cartel. I am not sure that does much to reverse climate change trends.

Back in 2015 the IMF issued a warning that permanently low fossil fuels are choking off investment in renewable sources of energy and hindering the fight against climate change. A year later after a big study, the World Bank chimed in.

Summary of The Big Shift: Rethinking Money, Tax, Welfare and Governance for the Next Economic System

The Big Shift: Rethinking Money, Tax, Welfare and Governance for the Next Economic System by Deirdre Kent

This important little book is a very dense read. The current growth-dependent economic system is not only broken must be completely replaced with a new paradigm.

This is now critical. Conventional oil peaked in 2005 and unconventional oil peaked in 2015. It takes energy to extract energy so the global net energy is inexorable decline. Therefore the economy can’t grow with less energy from fossil fuels to drive it. Therefore the economy can’t grow without more and more debt.

Based on the discussions of the New Economics Party of 2011-2015 to develop policy, the author argues that neither monetary reform nor tax reform are possible at central government level as the banks are too powerful these days. A change from an intrusive welfare system to a basic income should come from sharing the rents from land, natural resources and natural monopolies.

To design an economic system to serve the planet in a post fossil fuel age requires new thinking on money design, land tenure and governance. Examples from history are used as evidence of stable and prosperous societies using these principles.

This leads to the conclusion that very local government should assume powers of money creation, land purchase and rule-making about taxes for trades in that new currency.