2 Dec 2010
Flashback to 2008: an interview with Dr. David Fleming
In June 2008, David Fleming was in Totnes to teach on the ‘Life After Oil’ course at Schumacher College, along with Richard Heinberg, myself and others. One afternoon, David and I slipped away so I could interview him for this website. In memory of his passing away this week, I am reprinting it here. We discussed peak oil and Tradable Energy Quotas, among other things. It was a joy.
How do you see the unfolding events of the past few weeks? (ie. the runaway price and it starting to make the price of petrol/diesel rise, with the impacts being felt acutely by those on lower incomes and in rural areas)?
Well, this is the beginning of the breakdown of the energy market. High prices are a sign that some people are having to forgo some or all of the oil which they would have expected to buy. In some cases, those purchases are absolutely essential to their livelihoods, and if they are priced out of the market in the oil auction, they will not be able to do really fundamental things like buying the kerosene they need to power their irrigation pumps. So far, most of those who have been affected to this extent are the poor – third world farmers, for instance. But it is coming our way.
The oil market is a complex system, and when complex systems break down they do so chaotically, so that it is impossible even in theory to say in any detail what will happen next. But the outcomes are certain. The energy famine, with oil in the lead, and the other fuels not far behind, is beginning, and, as the gap between supply and need widens, the market will begin to break down. Markets can only stand a certain amount of stress before behaving in peculiar ways. For the past century, the oil market has been a buyer’s market. There are many oil buyers (billions of us), as well as many sellers, and this has kept it stable. In contrast to this, a seller’s market, where a few sellers can determine the price by determining the supply, is unstable. If just one of the sellers stopped pumping oil, or drastically reduced the amount of oil being sold, some of the shipments on which we in the rich countries depend would simply stop.
So, why might one of the suppliers stop pumping? Well, there is a general answer to that: bankrolling unstable regimes causes trouble. But here are two more specific reasons. First, property rights: enormous profits can raise questions about security and orderly accountancy. Other people would like to get their hands on them. Patronage and security arrangements expand out of control, and every time you increase your security arrangements you add another level of insecurity, since you are recruiting more and more people you don’t know, and living at the centre of a storm of jealousy and politics. The prospect of something going wrong rises towards certainty. When that happens, production will be put on hold while local rivals attend to other matters.
Secondly, there is the problem of contango. As the upward trend in the price of oil continues, it becomes more likely that the price in the future will be higher than the price at present. And that means that the value of each barrel of oil you leave in the ground is higher than the value of the oil you produce. The longer you postpone producing it, the better the price you will get, so the rational thing to do (from the point of view of building capital and future income) is to reduce production, perhaps to supply just enough to meet domestic demand, plus a little bit left over to sell abroad. The rhetoric is simple: “We have to conserve our stocks”.
The difficulty is that any of these reasons could trigger a collapse in supply at any time. And that means we are no longer have the luxury of being able to discuss these things in terms of well-behaved changes in price. In a sense, high prices are a dose of sanity. There are many positive things that can happen in a world of very high transport costs. Local food production begins at last to enjoy a serious price advantage over food from the supermarkets. And the tables begin to turn in the whole of the delocalisation process which has been running amok for the last fifty years, as a good, real-world economic case begins to emerge for local shops, schools, market gardens abattoirs, workshops, pubs, arts, leisure, post-offices, self-government.
We will undoubtedly be seeing attempts to repair some of the damage that has been done to local economies, but, all too soon, the problem will move up a gear to the point where localities cannot get the fuel at any price. If the local food and community infrastructures had not been so relentlessly dismantled, we would have had a basis from which to build and respond to it. As it is, we are not starting with competent and confident local communities. We are starting from nowhere. And when the tension in the energy market breaks, the shock will be upon us in days.
What is the role of a rationing system such as TEQs?
When oil runs scarce, it will have to be rationed. If it is not rationed, then the available oil will simply be sold to the highest bidders, and crime will control the rest. What is likely to happen is that the government will be forced to go into the international oil market, where it will buy up an amount which is less, or much less, than the nation would normality use, and it will then put it into the domestic market. If this were done on the basis of price, then the government would simply distribute it for the highest prices it could get. There can of course be no question of this. Under these circumstances, rationing – aka entitlement – is essential. All that rhetoric about how “people don’t like rationing” will quickly be forgotten. People will grasp at rationing as the life-saving solution.
How would introducing TEQs tomorrow help Gordon Brown out of his current predicament, one he has chosen to deal with by talking about increased North Sea exploration and asking the King of Saudi to pump more oil?
He would find it very helpful for the following reasons:
1. If he is quick about it, there could just be a rationing system in place for use when the oil outages begin. We have no reliable estimates of how long TEQs system would take to install. It depends on the urgency: perhaps two years?
On the other hand, if he fails to get a TEQs system installed in time there would, of course, be the alternative of paper rations, and this should not be dismissed because, in the absence of an electronic system up and running, paper rations could seen as be the only available option. Fatally, they would have to be tradable, since energy needs are so unevenly distributed. So there is a parallel cash currency going around which people would store in their houses. This is not an entitlement system; it is a recipe for crime.
And don’t forget that, even if a paper rationing system were thought to be necessary in the absence of a TEQs system, it would still leave a gap of – how long? – three months? between the start of an oil outage and the start of the rationing. The whole of the task of identifying people who would qualify for the rations would have to be done for paper rations just as it would have to be done for TEQs. They would have to be securely distributed. The period without any rationing system at all would no doubt be filled by some government stratagem scrabbled together at the last minute: a limit of ten litres per car, perhaps – but what is to stop people simply driving on to the next petrol station? Number-plate monitoring? But how long would that take to set up? And how would it deal with the gas shortages which would quickly follow?
Life is too short to examine chaos. All we need to know is that an energy-dependent economy that is left without the energy it needs, and without a way of distributing even the insufficient supply of the energy it gets, is in trouble. If the outages are substantial, we are looking at some sort of premature endgame.
2. A TEQs system in place would mean that the response to oil outages would be integrated into a sensible energy policy.
We ought to be already working in a demand framework which guides us firmly and reliably down the energy descent with a rolling time-horizon of twenty years. If Gordon Brown did want to do something which could link his name with intelligent reality, he could, even at this late stage, introduce an economy-wide electronic energy entitlement scheme. He doesn’t even have to invent the concept: one exists – it is called TEQs.
What are the perils of leaving the introduction of TEQs for a significant period of time?
Well, I have partly answered that: the arrival of oil outages in a country whose government has failed to prepare a rationing system in advance would be a case of negligence, a breach of the contract between government and people. We would have nothing in place to guarantee access to energy. But our lives depend on that energy.
If TEQs were introduced tomorrow, how would it affect us and how would we observe those changes?
The most striking thing about TEQs – if it were done competently – is the extent to which it would be really a non-event. There is a lot of stuff written about how complicated it would be, and how confused people would be when handing their carbon cards over when they made purchases, but that is a simple a misunderstanding of the scheme. First, it would only apply to purchase of fuel and energy.
Secondly, practically all the transactions involving TEQs would take place hands-free – that is, by direct debit, or as automatic transfers based on the use of an ordinary credit card. People could have their carbon cards if they wanted them but there is no need for them. Automated debiting is perfectly capable of making the simple transfers of TEQs units that are needed. We could compare the introduction of TEQs with the great reform of the City of London in 1986 – Big Bang, except that in the case of TEQs, you would scarcely notice it.
In fact, there is no reason why the introduction of TEQs should immediately have any dramatic effect on households’ purchase of energy. If we were deep in an oil outage – yes, it would make a difference: it would guarantee that your right to buy fuel and energy would be the same as everybody else’s, and indeed that if you did not need to use your rations you could sell them on the market to be used by someone else who did.
But if we were not deep in an oil shock at the time, any reduction in the availability of TEQs units – and the energy which they entitled you to buy – would depend on the Carbon Budget. And the Carbon Budget could be quite gentle in the early years, allowing us citizens to get used to the idea that we need to work out ways of getting by with much less energy in the future. Alternatively, the Budget could be set to a steep energy descent, and that would be challenging for us all – but hang on: the whole purpose of the energy descent is to provide solutions to questions with lethal potential: to reduce our energy demand on a scale to match energy supply, and to reduce our carbon emission on a scale consistent with the survival of the planet. If you think those are tough and unacceptable things to do, try not doing them…
In short: don’t be spooked by terrors about the consequences of a TEQs scheme: evidence that the government was on the case at last would be a cause for celebration. And there is even better news: some serious progress down the energy descent would begin before the government had even done anything. As Terry Barker and others have suggested in their work on the Announcement Effect, just announcing that an effective scheme was to be introduced – that the nation was at last about to take steps down the energy descent – could be expected, on its own, to get results. The thing is, at present we are wandering in a fog of unreality: there is a sense that we shouldn’t really take climate change, peak oil, conservation, etc, too seriously: they are just tedious clichés of no interest to grown-ups who have real lives to live and real mortgages to repay. A robust systems-based system for guiding us down the energy descent would change our whole perception of what real means. It is not a prospect we should view with alarm.
Do you have a sense of there being a point beyond which we would have left it too late to introduce something like TEQs?
Your question brings to mind the famous phrase, “If you can keep your head when all about you are losing theirs, you clearly don’t know what is going on”. The problems of dependency on a once-off endowment of oil began to be understood in the 1950s. By the 1970s, they were widely recognised. By the 1990s, the oil peak was being modelled in detail. It was evident throughout that we would need to take action ahead of the peak, some fifty years ahead. This problem has not exactly come unannounced. It has been obvious that the essential thing is to avoid, at all costs, the mistake of waiting for the crisis to be upon us before starting to develop an effective response. But it is upon us, now, and we still have not started. The human race has been so entranced with admiration for its own intelligence that it has never worked out how to apply it.
I think it is best not to make forecasts, nor to have a sense of a crisis-point beyond which it is too late – and, instead, to concentrate on doing the right thing without any further delay. And, you know, you can be rewarded for doing the right thing, in unexpected ways. There could be some kind of temporary reprieve – I have no idea what it might be, but sometimes luck does come to those who work like hell to help themselves. Conversely, for those who don’t, it often happens that the reality is much much worse than anybody could have expected.