The Next Crisis: How business-as-usual will kill us all

As I argued in my previous essay, this convergence of energy, food and economic crises was no accident, but the inevitable outcome of a business-as-usual model of behaviour for a global political economic system that was now reaching its own internal limits, as well as breaching the limits of the natural environment.

Despite official assurances that the worst is over, that economies are now recovering and re-growing, current trends illustrate that the worst is yet to come - and that policymakers are clueless about the fundamental structural causes of crisis convergence.

The first fundamental problem is that orthodox neoliberal economists fail to understand the obvious reality of the embeddedness of the economy in the natural environment. For the economy to grow requires increasing inputs of energy, obtained from exploitation of natural resources - currently, for the most part, fossil fuels such as oil, gas and coal.

In theory, orthodox economists like to argue that capitalism can solve the energy-dependence problem by maximizing efficiency, so that the greater the economic growth, the more efficient the use of resources, and thus the less actual energy is required. This sort of argument underpins government support for the oxymoron of 'high growth, low carbon' societies.

As is common with neoliberal economic theory, the empirical data raises serious questions about this argument. As Tim Jackson shows unequivocally in his Prosperity Without Growth (pp. 74-6), global trends in fossil fuels and carbon emissions as well as extraction of metal ores and non-metallic minerals have escalated dramatically in the last two decades. In many cases, Jackson observes: "Global resource intensities (the ratios of resource use to GDP), far from declining, have been increasing significantly across a range of non-fuel minerals. Resource efficiency is going in the wrong direction." (p. 75)

Between 2005 and 2008, world conventional oil production has struggled along an undulating plateau that is unprecedented in the history of world oil production, and is unlikely to be able to rise significantly beyond 2008 levels. As noted by Dr. James Schlesinger - a former US Secretary of Energy (1977-79), Defense Secretary (1973-75) and CIA Director - "given projected decline curves running from 4 to 6 percent, and the projected increase in demand during the next quarter century, we shall require the new capacity equivalence of five Saudi Arabias." Whatever the uncertainties over deepwater and unconventional reserves and so on, he points out that "in general we must expect to get along without what has been our critical energy source in expanding the world's economy for more than half a century."

While supply levels appear to be wavering, a resurgence in demand due to a fragile economic recovery indicates the probability of another near-term oil price spike as rising demand hits relatively flat capacity limits. Much of the rising rampant demand for oil is not from the West, but from emerging industrial economies, such as China, and has already led financial institutions such as JP Morgan to predict an imminent rise in oil prices to $100 per barrel.

Simultaneously, with oil prices set to rise again, we are witnessing a return to spiralling prices for meat, sugar, rice, wheat and maize. As financial forecaster Addison Wiggin warned in a Forbes article at the end of October, "we could be just one supply shock away from a full-blown food crisis that would make the price spikes of 2008 look like a happy memory". He points out that the 2008 food crisis "never really went away", given that key farm commodities, although not as high as 2008 levels, are still higher than pre-2008 levels:

Corn: Up 63%
Wheat: Up 84%
Soybeans: Up 24%
Sugar: Up 55%

Meanwhile, the US Department of Agriculture has warned of falling wheat production next year, largely due to the impact of the Russian drought on agriculture, and highlighted a considerable drop in US corn production this year - apparently the biggest drop in harvest expectations "ever."

The link between current food supply shortfalls and climate change can no longer be ignored in the aftermath of the devastating impact of the Russian heat-wave and Pakistan floods on agriculture, fitting into the long-term predicted pattern of increased erratic weather and natural disasters due to global warming. The latest projections from the US National Center for Atmospheric Research (NCAR) based on a business-as-usual model suggest that within 30 years, the world could face an extreme permanent drought over parts of Asia, the US, southern Europe, as well as large areas of Africa, Latin America and the Middle East - with a devastating impact on agriculture and water resources.

The plateau in world oil production is not helping matters. Higher oil prices will generate an inflationary effect on the economy, exacerbating food price hikes. Further, because the industrial food system in its current form is so heavily dependent on fossil fuel inputs at multiple levels - onsite machinery; synthesis and production of fertilizers; processing, packaging, storage and transport of food - the energy supply plateau will enforce fundamental limits on world food production, worsening price hikes.

Unfortunately, the orthodox economic toolbox is likely to accelerate rather than ameliorate the convergence of these crises over the next few years. Currently, despite promising indicators of continuing GDP growth - taken by many as evidence of a continuing if fragile economic recovery - the underlying realities tell a very different story. Current total world derivatives trades remain at around the same levels as they were in late 2008 - about $1 quadrillion (thousand trillion) - which is a colossal 23 times world GDP. As noted by DK Matai, a leading global strategic risk analyst and government advisor on complex security threats, "The entire derivatives-based structured finance pyramid can keel over when the asset prices begin to decline and as a result, some of the counter-parties are unable to meet obligations", as happened in the lead-up to the 2008 crash.

The problem is that this danger has hardly been eliminated - but perhaps has even increased. Matai continues: "Even if 1% of the derivatives pyramid loses counterparties because they have become insolvent, that is more than 10 trillion dollars of a black hole. If that 1% becomes 5%, that is more than 50 trillion dollars, ie, more than the GDP of the entire world."

Currently, orthodox government economic strategy, based on neoliberal principles, has been focused on attempting to kick-start economic 'growth' through more asset-price inflation and derivatives trading - including on commodities like oil and food: that is, re-inflating the unsustainable debt-bubble that burst two years ago. The extensive bank bailouts - quantitative easing - served only to shore-up insolvent banks and financial institutions with tax-payers money.

This reduced the amount of money in circulation - contracting the real-world economy rooted in actual production, buying and selling - while permitting financiers to re-engage in their traditional activities. But both the US and UK authorities have acknowledged the probability of further quantitative easing purportedly to sustain continued economic recovery. Simultaneously, massive IMF-style austerity measures are set to constrain consumption and manufacturing, cut-down public services, while increasing unemployment.

The upward pressures in terms of price spikes for oil and food, both driven by fundamental production constraints impinging on supply in combination with regressive derivatives futures trading, will over the coming years generate an inflationary effect that will, as it did prior to 2008, impact on consumers massively. More quantitative easing, by taking taxpayers' money out of the real-world economy and plunging it into the virtual financial world, in effect amounts to re-inflating a fictional bubble of 'growth' while simultaneously reducing the size of the real-world box in which the bubble is supposed to grow.

Consumers and businesses will struggle to continue to repay debts, even as the debt-derivatives bubble becomes re-inflated in the context of more quantitative easing. Simultaneously, as debt-driven 'growth' continues to fuel a semblance of a seeming economic recovery, increasing economic activity will inevitably hit the limits of the world's plateauing and gradually declining hydrocarbon energy base.

Inevitably, the bubble will breach the limits of sustainability, both in terms of the capacity for debt-settlements as well as in terms of energy inputs from hydrocarbon resources. The result will be another crisis convergence, another comprehensive crash, encompassing the food, energy and economic sectors simultaneously with price hikes intensifying debt-defaults and thus deflating the derivatives bubble - all driven ultimately by a global political economy whose structural organization requires the physically impossible: infinite growth on a finite planet.

The next crisis, moreover, is hardly likely to be the last, as we continue to strain the earth's hydrocarbon resources while thereby increasingly devastating the planet's ecosystems and altering its climate. Rather it will be the second of several more rounds of crisis convergence, symptomatic of a protracted process of global system failure.

The question we all need to ask ourselves is, how much crisis can we take, before we wake up and realize that business-as-usual is killing us?