Q&A with Gregor Macdonald (Part 2 of 2)

2012-FEB-07

Click here to read Part 1 of GoldMoney's Q&A with Gregor Macdonald.

Why do you think so many people are reluctant to accept the concept of Peak Oil?

There are laymen who do not accept the concept, largely because of ignorance or because the complexity of a very large system requires some time and study to understand. But, there are also highly educated and experienced people who do not accept the concept either. In their case, a careful study of economic and resource history shows that humanity has been climbing the ladder of technological innovation and resource abundance for several hundred years. Their stance is as follows: why should that change? From a professional standpoint, if they are wrong about their stance from this point forward, they will not be blamed as such for any advice they've given because many will have also shared in their rationale. Predicting that a 200 year era of growth is about to end, therefore, has career risk. Interestingly, we know it is always the case that, historically, when an era comes to an end it is the group which understands the system best that is least prepared.

What do you say to those people who claim that Peak Oil isn’t a problem, because we’re finding huge volumes of oil under the ocean, in tar sands, etc, and that the combination of man’s ingenuity and the incentive of higher oil prices will lead to the development of economically viable ways of extracting these reserves?

In one sense, this is correct, because humans can adapt to radical changes and eventually tell themselves that everything is OK. We see this now: many US households are dropping ownership of their second car, and using bikes and public transport. People have time to read on the train, or perhaps there's a revelation that one car rather than two cars cuts the headache of car ownership down by half.

However, there is the problem of what is called the Built Environment. That is, the total inventory of society's infrastructure, much of which was built in the last 70 years and runs on oil. The highways, the bridges, the delivery systems, the suburbs. This represents an enormous and sunk investment that does not easily give itself over to being run on coal, or solar, or wind, or even natural gas. And so, the notion that Peak Oil is not a problem is, economically speaking, quite wrong. As I have said many times, do indeed bet on human innovation. But, you must also bet on a slower moving global economy. We ran at our highest levels on liquid fossil fuels. Running global systems on gaseous or solid fuels, or electricity, is inevitable but the transition will be rocky. And by the way, that rocky transition is what you see right now: disturbed economies, confused energy policies, and the escalating burden of trying to run the old system on a very high price of oil.

Other than crude oil, are there indications that man is starting to face supply constraints in other important commodities?

No question. I just put together a chart from the latest USGS data on global gold production and despite a 2-3 year uptick recently the last decade on the whole has seen a flattening of global gold production. This contrasts greatly with strong, previous growth especially in the 1980-2000 period.



And of course, it's not just gold. Ore grades of copper have been in steep decline for decades. Eastern US coal mines are old, and the global price of both thermal and metallurgical coal reflects the late phase in global coal production we've now achieved. But really, should any of this be a surprise? Coal production began over 225 years ago. What's critical that people understand now is that if the price of copper, oil, gold, or coal were to fall substantially, you would quickly and easily crash through the price floor needed to maintain the marginal supply that's come online in the past decade. These recent tranches of oil and other commodities are only made possible by price. It's really eye-opening to think what could happen to global copper supply at $2.00 a pound, oil supply at $60.00 a barrel, or gold supply at $1000 an ounce. You simply cannot create marginal supply at those prices.

Are we likely to see more “resource imperialism” in the future as a result of these difficulties, whereby countries attempt to corner supplies in strategically important commodities at the expense of other nations?

Yes. There will be both resource nationalism, in which countries figure out they've got to control more of domestic supply in a rising price environment, and, there will be resource conflicts, in which global players on the world stage seek to lock up distant supply. We have already seen this playing out in place like Brazil, which has decided as policy to bring on their new oil resources at a slower rate – thus keeping more for themselves. And, we have seen global players like China secure oil from Russia and also Africa.

But it's not just oil. It's everything from uranium, to copper, to arable land. Africa is seeing a wave of arable land leasing as players in the Middle East, countries like Saudi Arabia, outsource food production to serve their fast growing domestic populations. Essentially, this is an arbitrage in water. My fear, actually, has been that Africa could eventually see a series of conflicts as global super powers, which source some of their oil, copper, coal, and food there, bump up against each other on that troubled continent.

What kinds of things do people need to be considering in terms of their wealth and job security in the years to come?

If you are in the OECD, especially the United States, you will need to drop your identity as a consumer and transition back to being a producer. The US dollar is going to be sacrificed as the trend back to exports and manufacturing here gathers its pace. Meanwhile, the full global price of oil and food will be directly felt by Americans, as we increasingly have to bid for supply along with the rest of the world. The solution will be to produce things, make things. We could see the revival of locally made tools, crafts, foodstuffs, even clothes as Americans import less, export more, and make do. 'Use it up, wear it out, make do' is set to make a big comeback. As the price level rises and wages fail to keep up, we will recycle everything – especially building materials, old machinery, and anything that contains iron, copper, steel. As for work, an entrepreneur will need to think about ways to help Americans save on costs, and all workers will need to think more about selling their products – films, software, crafts, journalism, food products – to markets overseas.

Accordingly, I am constructive on certain regional economies, especially port regions on the coasts. It's going to be a very tumultuous time, as we transition many of our systems back to electrified and waterborne transport. But if you understand that North America is endowed with a rich array of natural resources and has the ability to use that to its advantage, you will understand better how to position both your capital and your career, and you will do well.

Gregor Macdonald blogs at gregor.us.