The purpose of this, my second (and much longer) piece on resource limitations, is to persuade investors with an interest in the long term to change their whole frame of reference: to recognize that we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common.
Jeremy Grantham is part of the monied elite, CIO of a $106 billion investment firm. And here he writes about a vast economic inflection point that we are currently experiencing. This reflects my own observations, and is perhaps the most important fact of modern life. The entire article is of value not only for building a compelling case for the reality of the inflection point, but for highlighting the reasons for it, the reasons why it is ignored, and the lessons we should be taking from it.
The key point is that we live in a time of unprecedented abundance. If we want to continue living in abundance and not experience a painful contraction, then we need to use this windfall wisely: to produce replacement energy sources which are sustainable.
To realize how threatening it would be to start to run out of cheap hydrocarbons before we have a renewable replacement technology, we have only to imagine a world without them. In 17th and 18th century Holland and Britain, there were small pockets of considerable wealth, commercial success, and technological progress. Western Europe was just beginning to build canals, a huge step forward in transportation productivity that would last 200 years and leave some canals that are still in use today. With Newton, Leibniz, and many others, science, by past standards, was leaping forward. Before the world came to owe much to hydrocarbons, Florence Nightingale – a great statistician, by the way – convinced the establishment that cleanliness would save lives. Clipper ships were soon models of presteam technology. A great power like Britain could muster the amazing resources to engage in multiple foreign wars around the globe (not quite winning all of them!), and all without hydrocarbons or even steam power. Population worldwide, though, was one-seventh of today’s population, and life expectancy was in the thirties.
But there was a near fatal flaw in that world: a looming lack of wood. It was necessary for producing the charcoal used in making steel, which in turn was critical to improving machinery – a key to progress. (It is now estimated that all of China’s wood production could not even produce 5% of its current steel output!) The wealth of Holland and Britain in particular depended on wooden sailing ships with tall, straight masts to the extent that access to suitable wood was a major item in foreign policy and foreign wars. Even more important, wood was also pretty much the sole producer of energy in Western Europe. Not surprisingly, a growing population and growing wealth put intolerable strains on the natural forests, which were quickly disappearing in Western Europe, especially in England, and had already been decimated in North Africa and the Near East. Wood availability was probably the most limiting factor on economic growth in the world and, in a hydrocarbonless world, the planet would have hurtled to a nearly treeless state. Science, which depended on the wealth and the surpluses that hydrocarbons permitted, would have proceeded at a much slower speed, perhaps as little as a third of its actual progress. Thus, from 1800 until today science might have advanced to only 1870 levels, and, even then, advances in medicine might have exceeded our ability to feed the growing population. And one thing is nearly certain: in such a world, we would either have developed the discipline to stay within our ability to grow and protect our tree supply, or we would eventually have pulled an Easter Island, cutting down the last trees and then watching, first, our quality of life decline and then, eventually, our population implode. Given our current inability to show discipline in the use of scarce resources, I would not have held my breath waiting for a good outcome in that alternative universe.
But in the real world, we do have hydrocarbons and other finite resources, and most of our current welfare, technology, and population size depends on that fact. Slowly running out of these resources will be painful enough. Running out abruptly and being ill-prepared would be disastrous.
If you want to read about the effects of a contraction, written in a realistic if chilling way, read The Windup Girl by Paolo Bacigalupi. That is not a world in which I personally would want to live.
Realistically, what can we do? First, lets stop burning incredible quantities of resources and lives in pointless wars. The fact is we are vulnerable to terrorism, it's time to just learn to live with it. Second, let's stop burning resources on mindless consumerism. We don't just burn resources like money, but the producers burn resources on engineering and marketing - people fritter away their days in cubicles making products that rational people wouldn't want. Alas, this is a cultural problem and so difficult to fix, but I personally have hope. Third, perhaps the single most important way to reduce demand for oil is to let people work from home. Indeed, we need to require that a larger fraction of the workforce work from home. (Critical to this is ubiquitous and cheap internet - which needs to be a public utility.) Last and not least, we need to stop getting distracted from the big problems by all the little problems. A good first cut at that problem would be to simplify everyone's lives with a flat tax, and a new law requiring that all legislation passed by congress be read aloud (and heard) by all members before being voted on - the idea being that short legislation is good legislation.