Tuesday, October 21, 2014

Words of the month: bubble and loop

The oil bubble is deflating, but the response among economics, business and political leaders has been to get stuck in a logical loop.

The bubble blows

It seems that everyone needs to be reminded of the definition of bubble regularly, because they seem to deceive everyone, including educated and otherwise successful people and those who really ought to know better.

Here’s the definition according to Oxford: “a situation in which investments, sales, etc. increase rapidly and then collapse.”

How is it that the economic leaders of the world forget that definition, when it happens so often?

How did they forget the 2008 crisis, which followed banking deregulation, the bubble in housing prices and the valuation of asset-backed paper? That’s the nature of a financial bubble: people keep buying at ever higher prices because they assume the price increase will go on forever—or at least, until they can sell at a profit.

And when the bubble bursts, these people are caught, scrambling to sell at plummeting prices. They’re surprised every time. Unfortunately, it was mostly working-class and middle-class people who paid the price of the 2008 crisis. Governments bailed out international banks because they were “too big to fail,” resulting in the biggest transfer of public wealth to the upper classes in history.

Now, it’s happening again with oil. Oil prices have been increasing fairly steadily since 2001, when a barrel of crude was around US$25, to a high of $110 in April 2011. Despite short-term fluctuations that can seem dramatic, they’ve eased to the current level of around US$80. And the economists these days are predicting the price is going to keep falling.
Source: Macrotrends 
So, the bubble burst. Going from the charts, it seems to have burst back in 2011. Funny, though, because I remember paying less for a litre of gasoline then than I did last month. Although I am relieved to see the prices at the pumps falling.

Stuck in the loop

But this blog is about communications, not about economics. The communications lesson to take away here is: remember what bubble means the next time you are tempted to buy into something that’s growing fast.

The smart money people got caught again. Sure, there were economists who predicted falling oil prices a year ago or more. But the bursting of the bubble seems to have knocked their logic into a logical rut and they keep repeating the same logic:

  • High oil prices drove exploration and development of higher-cost sources like the tar sands in Canada and shale oil in the US. Now that these are producing, they’re increasing the world supply of oil. 
  • At the same time, more efficient consumption and the development of alternative sources of energy like solar and wind are reducing demand. As a result, prices are falling. 
  • Falling prices makes those new sources of oil—tar and shale—uneconomical. According to the sources I’ve read, at less than US$80 per barrel, fracking is too expensive to be worth it. Tar sands oil costs between US$50 to $90 per barrel, according to a report in the FinancialPost last year. 
  • With lower prices, companies will take fracking and tar sands production off line. Presumably, that will reduce supply and thus increase price. 
  • Falling prices for oil, like any commodity, are bad for the economy—the lower prices for oil on the world market have cause the stock markets to fall in the past month.
  • Falling prices for all fossil fuels makes alternative energy sources less attractive to energy consumers. We are about to enter a deflationary period with falling prices for all commodities, which is going to hurt the economy—in short, it’s going to be bad for the owners of oil and other companies. 
  • “The world economy depends on fossil fuel extraction and consumption,” goes the logic. With falling prices for fossil fuels comes a falling US dollar, stock markets and just about everything else.

If we try to build a new system without fossil fuels, we will be really starting over, because even today’s “renewables” are part of the fossil fuel system.3 We will have to go back to things that can be made directly from wood and other natural products without large amounts of heat, to have truly renewable resources. (Gail Tverberg, Our Finite World)

What these arguments miss, and the logical element that could knock them out of this repeating loop, is the environmental cost of oil versus other forms of power generation. The environmental and public health impacts of fracking and tar sands production have not yet been fully admitted by government nor industry, and I think even their staunchest opponents don’t know the full cost. 

Time to break out of the loop 

It seems the arguments just keep getting repeated: 

  • Fossil fuels are more efficient, more energy-dense, than wind or solar, which are unreliable.
  • Alternative energy sources would be as efficient if they got as serious development support as fossil fuels do.
    back to 
  • Supplying our energy needs from non-fossil sources would cost too much.
  • Fossil fuel costs are higher than the current price indicates. 

How about moving on by looking at all the facts. A year ago, the Economist magazine called oil "yesterday’s fuel.” 

No matter how you look at it, oil is a finite resource. And wouldn’t we all be healthier without fossil fuel exhaust in the air, water and soil? Wouldn’t we all be better off if we could talk calmly and openly about fossil fuel consumption’s contribution to climate change? 

I hate hearing the same old argument being repeated. It's like listening to your parents have the same fight again. How about this? How about we really consider an alternative to fossil fuels—something that's not poisonous, at least? And then use it as the basis for not only transportation, but our markets, like oil is now. And then move toward it steadily.

At least, talk about that instead of having the same useless argument again.

1 comment:

  1. This is a challenging and thought provoking post...thanks for sharing. Lots to ponder.