(Or: Why I am looking for a defensive Super Fund.)

 

Well the Peak Oil game is over. It is time for me to post something serious. So I am thinking about my Superannuation and how investments are likely to do in the economic conditions ahead....

 

I am on record (in an article in The Australian newspaper, about 18 months ago) as saying we can expect a boom, followed by a severe bust. The bust will be comparable with The Great Depression, or alternately, with Russia after the collapse of the Soviet Union. My estimate for the length of the boom was 10 years, but I have since revised that down a little. There are three causes for the downwards revision: Firstly resources are tighter than I thought (a lot of proven reserves have been revised downwards recently), secondly  "above ground" political factors are moving faster than I thought and finally, but most importantly, I failed to factor in the rather obvious fact that demand destruction occurs in non-exporting countries first (exporters service their own market first, then export the excess).... and the sources of the boom (China, India, to a lesser extent the US, etc) are net resource importers, not exporters, so they are likely to suffer from this effect (at least somewhat).

 

However, as a resource exporter I think Australia is well positioned to weather the bust. 

 

My supporting argument is based on this premise:-

Resources (led by oil and gas) are becoming expensive. While there is still a lot out there, the "low hanging fruit" is gone. As a result, we are seeing the demand curve diverge slightly from the supply curve and this is driving the increase in resource prices across the board.

 

The consequences are this:-

Countries with excess resources tend to consume their own resources and only export the excess. So when the demand curve diverges from the supply curve for a given resource the need of the exporting country is met first and the countries without the given resource tend to suffer disproportionately, as they only get the leftovers. Obviously, this is a simplification, the market does tend to balance things by escalating the price, but if the local market can pay (which they probably can, since they are getting a good price for their left-over resources) then the local market will be serviced first.

 

Oil production was steady last year (at around 84+ million barrels a day), but oil exports dropped by about 1% - despite record oil prices and thus a record incentive to export.  

 

Conclusion:-

I suggest that this drop in exports was caused by the fact that oil producing nations serviced their own market first and had no capacity to service the importing nations at the level demanded (hence the huge increase in oil prices as supply and demand diverged).

 

If there is a gap between the supply and demand curves, then the drop in exports that started in January 2006 is a symptom of this problem. The slope of this graph is tiny - there is slightly more than a 3% per year difference between the historic growth trend (upwards 2%) and the export trend in 2006/2007 (down 1%) , but the implication is profound. Instead of demand being met by increased exports,  substitution must occur to supply the demand increase, and a compounding 1% destruction in demand must be found each year to cover the decline in exports.

 

The pattern seems to be that substitution is covering the increase in demand by developed countries (using ethanol, LPG, etc), while the reduction in exports is being met by demand destruction in impoverished nations.

 

The trend could be simplified by assuming that the use of ethanol and LPG will increase by 2% each year in the years to come (this is perfectly in line with George W Bush's call for "20% ethanol by 2010") and another fragile nation implodes each year to cover the 1% decline in exports. A nice, neat solution. However this simplification is unlikely to be reflected in reality.   

 

This geographic demand destruction is a complication that I did not originally consider:- despite globalisation, the world can't be treated as one discrete market.

 

As an example:- As any economist can tell you, demand destruction occurs as prices rise. This demand destruction is happening already (at least for oil), but only in some geographic areas. If you live in Australia, you get a bit miffed at paying $1.30 per litre, but it has little impact on your habits. But if you live in a country that is already marginal (due to bad government or whatever) a tripling in the price of a barrel of oil leads to complete destruction of demand. People substitute or do without. This is currently occurring in several African nations (and to a lesser extent in parts of Asia and India).

 

People in Zimbabwe in particular have gone almost completely without oil for the last few months (the government there is particularly incompetent, making their economy very marginal). This complete demand destruction will probably lead to some African nations collapsing, as industry is unable to continue in these countries without oil, and without oil for transport food is simply not making it onto the shelves in the cities. We perceive the cause of this collapse as bad government (and it is), but it is worth noting that with the tripling of the cost of a barrel of oil, complete demand destruction is starting to occur in locations made fragile by local factors. 

 

Many other resources are showing similar rises in price, and substitution is occurring for many of them. However most non-energy resources (eg copper) are qualitatively different from oil. Resources  such as copper are not consumed when they are used. So, as copper (or any similar resource) goes up in price it becomes attractive to pull it out and re-use it more profitably somewhere else. This ability to re-use the resources elsewhere makes it possible to strip resources of this type from the infrastructure of an impoverished or failed nation and add them to the infrastructure of a wealthy nation.  Resources such as this are also obvious targets for theft - It is impossible to guard a thousand kilometres of copper power line. If the price of resources goes up far enough, infrastructure is likely to be threatened, particularly in less wealthy nations. The economic implications of constant infrastructure breakdown are obvious.

 

Even in wealthy nations, if the price of these resources keeps rising, our infrastructure is likely to be subject to disruption due to theft.

 

So demand destruction occurs in a geographically staggered sequence, with the most marginal areas suffering from demand destruction first. Where the country affected is already marginal, that country collapses.

 

Each year another 1% in demand destruction needs to occur. My prediction would be that this would lead to a series of rolling collapses of the world's more seriously "failed states". Where the nation is not marginal, substitution or "making-do" will lead to a depressed economy for a while, then ingenuity will (I presume) lead to a new, robust economy based on new techniques and technologies.

 

So my prediction would be that a truly global collapse of the economy will not occur (despite the Malthusian predictions to the contrary), but that a rolling series of problems could cause a sustained economic downturn. This will culminate when the economic drivers of the boom (China, India, etc), who are net resource importers, are constrained by resource unavailability. This constraint will be obvious to net exporters, thus mitigating somewhat against the constraint, as exporters will be motivated to find ways to export to the drivers of their economy. 

 

Eventually, new drivers will emerge. The new drivers will probably not be nations, the drivers will emerge from new energy technologies.

 

This emergence may be complicated by some problematic economic precursors: the asset bubble, the US deficit, the demise of the "petrodollar" leading to the demise of the $US as a unipolar fiat currency, while simultaneously we have the demise of the US as a unipolar world superpower (and the rise of China and resurrection of Russia),  etc. These factors are significant because they can cause some economic hiccups in the near term. These hiccups are problematic because while (as you say) substitution is a possible approach when resources are constrained, there is a problem - substitution frequently requires different (or extra) infrastructure. If the economy is suffering from a series of hiccups, then investment in infrastructure is difficult. This creates another constraint to growth further down the road (as infrastructure of this type often has a 5-10 year lead time).

 

These constraints can (and will) be overcome. But if these events occur, then we can expect a very rocky road for a number of years before the solutions arrive.

 

Hence, I want to be financially insulated against this possibility. There are three final obstacles to prediction:

1. Anybody who thinks they can predict outcomes ten years from now needs to increase the dosage of their medication.

2. Other people can predict too and this changes the outcome, frequently shortening timeframes (due to the "self-fulfilling prophecy" effect).

3. Specific political responses to resource constraints appear to be emerging. The US appears to have decided that controlling some Middle East oil is a good risk-management strategy - but this may have backfired, accelerating the problem rather than solving it. Meanwhile Russia is ramping up rhetoric. Associated with the hawkish rhetoric are some internal changes in Russia that look a lot like a move to extreme Nationalism, or even overt Fascism. Both China and Russia are modernising their armed forces and equipping them with technologies that may negate the US technological advantage. Both Russia and China are extending the borders of their claimed territory to include resource-rich areas. Other nations are disputing these claims. If this trend continues and deteriorates into localised belligerence or limited war (direct or by proxy), then it is really hard to guess where this will lead. In Australia, the effects may be limited. It might even be good for Australia.

 

So, to summarise the model:

 

1. We face resource constraints due to the emergence of developing markets combined with increased difficulty in extracting resources (most of the low hanging fruit has been harvested).  This has led to a slight divergence between supply and demand, which in turn has driven prices for resources up.

2. As this divergence of supply and demand proceeds, the resource constraints are likely to disproportionately affect net resource importers.

3. Sadly, the drivers of the current economic boom are net resource importers.

4. For this reason, resource constraints represent economic constraints as the resource constraint constrains the source of the economic boom.  (However, for reasons of pure self-interest, the exporters are likely to search for ways to support exports to the nations that are drivers of the economic boom, so this problem will be somewhat mitigated.)

5. These economic constraints do not effect everywhere equally. The first impacted areas will be the most marginal economies. The next affected areas will be the nations that are net importers that do not drive the economic boom (the non-boom nations get lower priority for imports).

6. Because geographic areas are impacted sequentially, a global breakdown won't occur (despite the doomsayer's predictions), but a sustained downturn is possible as a result of economies sequentially suffering from a downturn.

 

Oh.... and the final bit of the model:

7. If resource wars become widespread, all bets are off.

 

Is the model flawed? Yes. Because I have not talked about the people that need to die as part of “demand destruction”. And I am not going to. It depresses me.

 

  

I haven’t had time to do much outside of work, but as a result of spending way too much time at work I have a piece of news.

 

I guess it would not surprise you if I told you that we have some consultants in Saudi Arabia and Iraq? (Obviously, we have consultants everywhere.)

 

The teams from Saudi Arabia and Iraq got to talking while they were at a conference in Sydney. I won’t divulge everything that was said, but here is what is rumoured to have come out of that conversation:
- Iraq’s giant oilfield in Kirkuk was damaged during the Saddam Hussein era. Unsustainable practices were used to force high flow rates. As a result, the total amount of recoverable oil from the field has been cut by a factor of 2 – or possibly even 3. Shell technicians are studying the problem. Flow rates probably cannot be increased. We have been asked to examine the economic situation. Iraqi oil was meant to pay for Iraq’s reconstruction. But this is impossible - because the flow rates that were assumed before the invasion will never be achieved.
- At the same time all is not well in Saudi Arabia. Their biggest fields have been yielding oil at high flow rates for decades. High flow rates were maintained by using enhanced extraction techniques. Using these techniques it has been possible to suck 63%-72% of the oil out of these fields at ever-increasing flow rates. But now these fields are suffering from depletion, and the flow rates are dropping.

 

So flow rates from two big fields are dropping. What does this mean I hear you ask? Well flow rates are also dropping in virtually every other major field. Saudi Arabia was the area that was meant to make up the difference. Iraq was meant to help.

If the rumours are true, it is official - oil production has peaked and the decline is going to be faster than was expected, possibly as much as 5% per year.

 

Once the analysts got together and realised what this might mean, the word got around pretty quick. A lot of position papers and white papers are being written. Nobody seems to be certain what to do next, but.. .. is it significant that a lot of the guys doing analysis are going online to buy land and shotguns?

 

Latest Actions.

In my Blog entry on Security (http://aeldric.spaces.live.com/blog/cns!A859FF3D2F2384E4!118.entry ) I mentioned that I have ended another planning cycle, and I need to act.

That was all talk; action has been difficult, because I have to fit action in around work and work is pretty full-on at the moment. This is not a good sign – I work for one of the “Big 4” accountancy firms. When other companies get in trouble, they call us. A lot of companies are finding it hard to cope with a sudden doubling of fuel prices; it looks like some will go under. I don’t deal direct with these companies, but work tends to flow on.

Anyhow, work on my Peak Oil projects has been confined to a couple of lunchtime shopping expeditions and a little work in the garden on Saturdays.

Shopping for the Peak.

I mentioned in my post on being a member of a survivor community that I wanted to develop my ability to contribute to a trade-based economy (http://aeldric.spaces.live.com/blog/cns!A859FF3D2F2384E4!118.entry ). Getting that sorted out was the goal of my shopping trips last week.

First, I wanted to buy some jars for the jams I hope to make. But I don’t want to spend much money. I’ve got two dozen jars (for $44), and another two dozen big 1 litre resealable tins cheap – at $10 for the lot).

Next, I wanted to get bottles for home-brewed alcohol (again, made from the numerous fruit trees I’ve planted). I got two dozen screw-top wine bottles, and another five dozen cheap plastic bottles for home-brew cider. That cost me more than I wanted to spend, so I’ve told my friends to save their wine bottles for me. Some good news: I’ve got a friend who is giving me a couple of 300 litre fermentation vats free!

The last thing I was thinking of getting is some extra ammunition. But there I got stuck. In Australia guns and ammunition are hard to get, and expensive. I have the necessary licenses, so buying the ammo is not a problem, but I am not sure that I want to spend so much money. Sure, work pays me well, but each pay packet seems to vanish quickly - is more ammo the best use of my money? I am considering buying some reloading equipment, so that I can reuse brass cartridge cases, rather than just throwing them away. For the moment, I just don’t have time to deal with this.

Forming a Trading Community

I have been communicating with someone that I will call "G". It may be that if the worst happens, then we will be trading partners, we will see. We seem to have a lot of things to trade, and he seems to be trustworthy, and nearby.

Off to work. Need dollars to fund my post-peak preparations.

Peak Oil Gardening 1.

 

In future posts I will talk about some of the tips and tricks for gardening in your back yard, but in this post I want to talk about the most important step: Plan your garden for the future – have a “Post Peak” strategy.

 

I started my garden a year ago, and my plan was to have crops for personal consumption, and other crops for trading. I think that I will probably be able to sell any food crop post peak, but to really maximise value it would be good if my “trade crops” are different from everybody else’s. And even better if it was something that everybody wants.

 

My theory about Peak Oil is that once people realise that things aren’t going to get better, everybody will plant a vegetable garden. If I only plant peas and beans and tomatoes and carrots in my garden, then I have exactly the same stuff as everybody else.

I talk in my blog entry on “Being a Member of a Survivor Community” (http://aeldric.spaces.live.com/blog/cns!A859FF3D2F2384E4!118.entry ) about my plan to be a contributing member of a trading community. I only have my back yard to grow things in, so I need to maximise the value of my trade goods. I needed to figure out what I can offer that everybody wants and not enough people will grow.

 

The average vegetable patch has peas, tomatoes, beans, lettuce, etc. For non gardeners - these are known as “annual” crops. You plant them, water them and then harvest them a few months later. Then you have to plant again next year. This is great if you need a quick harvest, but since everybody concentrates on these quick-yielding crops, it means that everybody has similar stuff in their vegetable patches.

 

The perennial crops, on the other hand, are pretty rare in the suburbs. This is strange, as perennial crops need much less work than annuals, because you plant them and they yield a new crop every year.  Fruit trees are an example.

 

It takes 3-5 years to get fruit from a fruit tree and almost that long to get a yield from most other perennials. When things get critical, people aren’t going to plant crops that yield in 3-5 years, they are going to plant crops that give an immediate result. So I figured that perennials aren’t just less work, they will give me crops that are different from everybody else.

 

So I went down to the nursery a year ago and bought 25 fruit trees and vines. Even discounted to $1,000 because it was a bulk purchase, that purchase hurt – but not as much as the $4,000 that I spent on water the tanks and drip irrigation system that keeps them alive!

All of the fruit trees were at least 1 year old when I bought them – you can get them older, but you will pay more. Mine are two years old now and some of them are yielding tiny amounts of fruit already. Next year will be a little better, and three years from now, I should have fruit by the bushel.

 

In addition to fruit, people like herbs and spices. So I have mint, parsley, chilli bushes, curry plants, wild ginger, and a bay tree - none of these are annuals. I also have other perennials such as an almond, perennial runner beans, artichokes, asparagus and some bell peppers.

 

Sure, I have a permaculture garden with annuals (peas, beans etc), but that is for eating, not for trade.

 

Focussing on perennials rather than annuals is not the only thing I did to ensure maximum return when I traded the crop. History shows that prior to green houses and air-freighted foodstuffs, people were always interested in two types of food:
- Food in winter, particularly tasty and varied food
- Alcohol 

 

So my strategy is to do a little value-adding as well. I will:
- Ensure that some of my crop can be fermented. I am growing apples and pears (four trees - two trees of each)  for cider - and grapes (5 vines) for wine. I have fermentation vats, yeast and some sugar to give it a little extra alcoholic kick.
- Grow food that can be dried, or turned into jam for winter.  I have a hundred kilos of sugar and a couple of packets of pectin for jam, and I have a solar drier. Any excess fruit that doesn’t end up as alcohol will end up in jam, or as dried fruit strips.

 

As I have mentioned elsewhere, I also breed fish (the big, edible kind) in an aquaponics setup (aquaponics is a system that uses the fish wastes to feed the vegetables) and I’m hoping to breed Guinea Pigs. In my youth I was pretty good at smoking meat – I could definitely smoke Guinea Pigs to produce a very nice meat. I’m not sure that I would dare smoke fish (too easy to kill someone if I make a mistake), so I might sell live fish.

 

So there it is. I have about 300 square meters of back yard (large but not uncommonly so).

In it I have:
- A vegetable patch big enough to give us all the annual vegetables we need
- A vegetable patch for perennial vegetables, herbs and spices
- 25 fruits (trees and vines)
- A 3,000 litre fish tank
- A composter and worm farm

A

nd there is still room for a BBQ, an outdoor entertainment area, and a flower garden (granted, most of the flowers are edible).

 

Some lessons I have learned:

- Have a post-peak strategy. Will you try to be entirely self-sufficient, or will you use your garden for trade?
- You will need to find ways to pack a lot of diverse plants into the smallest possible area - research permaculture and bio-intensive gardening.
- If you want to be self sufficient, you will probably need to pack a lot of calories into a small area. Check out potatoes and sweet potatoes – as they are very good in terms of calories per square meter. Also check out PeakProphet on the subject of potatoes.
- It you are aiming to trade and you want to get some fruit trees in, you can cheat by buying mature trees from the nursery – you will get your first crop soon after you buy them.
- Buy compost, manure, organic pellets, blood and bone fertilizer, and anything else you can think of now. A bag of fertilizer now is a year of rich crops later.

 

I will enlarge on all of these thoughts later, but right now it is time to go to work.

 

 

Euroa is one of the big rural communities in my state.

Euroa ran out of water yesterday. Why? Because of high oil prices.

Australia has suffered climate-change drought for 5 years now. For months Euroa has depended on water trucked in from Seymour. When the price of oil went up, the trucking company discovered that they could not afford to honour their contract and so they asked to re-negotiate the contract to accommodate the higher price of oil. The Water Authority replied that their budget for this year did not allow them room for a re-negotiated contract.

So yesterday the people of Euroa woke up and turned on their taps to find that they had no water. The trucking company has declared that it is insolvent – unable to meet contracts at the current price of oil, and unable to re-negotiate - so it has gone out of business.

Today people in Euroa are talking about leaving the town. But Euroa supports all the surrounding farming communities. What will the farmers do? Who knows? After five years of climate-change drought, a lot of the farmers are ready to walk off the land. Maybe this will be the final straw and they will walk out.

Imagine a major rural town without a drop of water. That is Euroa.

The knock-on effects of higher oil prices are already being felt.

 

Previous posts have talked about the importance of being a member of a community, regardless of the scenario. The lone survivalist is a myth. It won’t work.

 

Why am I so sure that this is critically important?

 

Regardless of the scenario, the benefits that a community can offer me include:
- Extra security. Travelling in groups.
- A community to trade with. Got too many apples? Swap them for a pile of Joe’s chicken eggs.
- Health. Got a toothache? Give a couple of Joe’s eggs to the dentist and he will look after it.
- Companionship. Companionship not just for you but for the kids (if you have any).

 

However there are two scenarios to deal with (the "Mad Max" scenario and the simple "Decline" scenario - see my previous posts) and the communities that I need to form or join may vary between these two scenarios. I may, in fact, need to plan for membership in two different communities, one for each scenario.

 

In the "decline" (or "Business not quite As Usual") scenario, being part of a community is fairly easy. Make friends with the neighbours, and maintain friendships with school friends, friends from college, friends at work, and so on. Do it now. Once the network is there, I can find ways to arrange equitable relationships and trades if things decline.

 

I am lucky enough to have good neighbours, and a number of good friends, so this part is easy.

 

However, in event of a complete collapse it may be impossible to maintain these relationships. I may be forced to withdraw partially or completely. I may find myself holed up in my house most of the time, surviving on my stockpiled food and a little bit of fruit from the garden. When I emerge, my friends may be scattered, uncontactable, or worse. 

 

Forming (or joining) a new community will depend on my ability to provide the community with skills or resources of value.

 

Let us assume for now that if I have good skills or resources, then I can either find or form a community. But I must have good skills or resources…. What skills or resources are valued in both a decline and a post collapse scenario?

 

Here are a few thoughts. They apply to me, but might be easily adapted for most people:

 

In every model I looked at, a trade or “black market” economy emerged. Trade goods became valuable. An ability to contribute trade goods makes you a valuable part of a trading community.

 

Foods that store well enough to help people through winter are extremely valuable. I have numerous fruit trees planted. I have many kilograms of sugar stockpiled. So making jam is an obvious option. I also know how to dry fruit and I know how to smoke meat, so these are also possible trade goods.

 

Alcohol is another valued commodity. I am an experienced brewer and I have the necessary equipment. I have apples and pears planted, so I can make cider. I have several grape vines, so I might even consider making wine (I have never made it before, but I might try).

 

In addition to a trade or “black market” economy, security is a valued contribution to this type of community. Creating a marketplace and then providing security for that marketplace might be a good business opportunity.

I have:
- The ability to produce goods that would be valuable for trade.
- Some military training and the ability to teach others
- A few firearms.

On the face of it, I have the capacity to create and secure a trade area, thus providing people with a safe place to trade goods.

By using some or all of these skills, I believe it should be possible for me to either create or join a community.

 

To implement the last part of this plan I need to make sure that I can provide effective trade goods, and/or effective security. So I need to get:

- Jars for jam.

- Bottles for alcohol

- Maybe get a little extra ammunition?

 

I guess I am reaching the end of this planning cycle.... time for more action.

 

 

Before I deal with security, it might be time to summarise my thinking so far.

I believe that things will get worse before they get better. I need a strategy for dealing with a number of scenarios:
1. A gradual decline that eventually stabilizes and gets better.
2. A gradual decline that eventually surpasses people’s ability to cope, thus triggering a descent into a “Mad Max” world.
3. A sudden, severe event that surpasses people’s ability to adapt, triggering a descent into a “Mad Max” world.

 

The areas of concern that I identified initially were:
1. Food security
2. Water security
3. Ability to cook

 

Since then I have decided I also need to look at:
1. Transport
2. Some “luxuries” (like warm water)
3. Physical security for myself, my family and my property
4. Finding or creating a “Survivor Community”.

 

Water security will be achieved by water tanks, with water filters as a backup strategy, and water purification as a final back-up.

 

Food security is being achieved by a mixture of stockpiled food and garden produce. Back-up strategies and supplementation include breeding animals and fish, as well as basic hunting and fishing (I am lucky enough to be quite close to the edge of the city, and near the ocean).

 

Security
It is time to deal with the security issue.

 

Securing my property.
I never did get to buy the “lifeboat” farm that I always wanted to buy, which is good, because it means that I only have to secure a house and a few hundred square meters of back yard gardens.

 

This leads me to a tough problem. I have weapons, I’m a pretty good shot, and I even have a bit of military training. However I have never shot a living thing in my life (unless you count spear fishing), and I certainly can’t imagine shooting a person whose only crime is taking vegetables from my garden because they are hungry.

 

Sad, but there it is. My guns will not secure my property, because I simply can’t imagine using them against people who are not directly threatening me. Maybe I will feel different when I am hungry, but that is how I feel now, so I better plan a no-guns option.

 

So, instead I have high fences. Nobody can see the gardens in my back yard. “Security through obscurity” almost never works, but it is all I have.

 

Securing the inside of the house is different. If anybody breaks into my house, then they are a threat to my family. I think (I hope) that I would be willing to meet that threat with buckshot. Since most of the food is stockpiled in the house, I am willing to accept this compromise, as the majority of the calories are secured in the house. If we lose a few apples and carrots, I will live with it.

 

 

I have never carried a gun in civilian life. So what makes me think I might need to? I have been using the Argentinean Economic Collapse as one model for what a decline might look like. There is a discussion of that life here:

 

This article certainly seems to suggest that personal security is an issue, and a handgun might help.

Truer words have never been spoken. Any martial artist will tell you that the guy who attacks you on the street by coming at you with fists raised and a fixed look in his eye is not dangerous because you will have your guard up. But the guy who walks past you and throws a fist straight into your face while you are sitting in the train will get past your guard every time. A handgun is useless in many situations, because the bad guy will generally go out of his way to ensure that you don't see the threat coming.

 

My strategy may include firearms, but it also needs to include a strategy for not being in dangerous situations. One strategy is security in numbers (more on that below). For a few other tips, read the article.

 

It may be that the guy who wrote this article is being overly bleak (I hope so) but he makes a few good points. One is with regard to buying rifles for self-protection. An obvious point: You can’t carry a rifle to work. You will get talked about at the very least – and most likely arrested. Yet as things decline, security becomes an issue.  So perhaps carry a handgun. Sure they don’t have much range, but self-defence doesn’t usually require 200 meters of range.

 

A hand gun is a small part of the strategy (in Australia obtaining a handgun is extremely hard to do, and very expensive, but I have started the process). The major part of the strategy is staying out of dangerous situations. This is where I need to start talking about securing my family, because the rules that apply to me apply to them too.

 

Read the article. Rather than talk about strategy, I am going to quote directly from the article, then draw a few conclusions:

 

 

It is critical that being a contributing part of a community is part of my strategy. I have a few thoughts.

 

More on that later.

I promised to prepare a scenario that would lead to “Mad Max”.

 

Normally when I do analysis like this it runs for many pages (I have to justify the money that I get paid). It includes many branches, and provides citations and all sorts of other padding.

 

However, I am not doing this as a paid job; I am doing this for my own benefit, and for the benefit of any readers out there. I suspect you don’t have time to read a 20 page document, I know I don’t have time to write one. It took me a long time to research these thoughts, so what I am writing is just the distilled version. If you want references let me know and I will provide them.

 

Here is a Mad Max scenario in short form:

Step 1.
The US has been waiting patiently for Iran to spin up the last of their Uranium centrifuges. This allows them to destroy all of them at once. Iran completes work and spins them up. The US bombs Iran’s Uranium centrifuges. The amount of kinetic energy in these centrifuges is huge. They go off like small bombs, releasing Uranium Hexafluoride into Iran’s atmosphere.

 

In retaliation, Iran cuts off all oil supplies running through the Straits of Hormuz. As a result, world oil supplies are instantly cut by 40%.

Here in Australia we have our own oil wells, but this only supplies about 60-70% of our oil needs. The rest is imported. We do not import from the Middle East, so in theory we should not experience any major disruptions, but in practice there are three big problems:
1. Experience has shown that every time Middle Eastern oil is disrupted, our oil supply is cut off, as supplies that were intended for us get diverted to countries that are willing to pay for emergency supply contracts.
2. Our oil wells do not provide oil with the ideal “profile” for our needs (a “profile” is the balance of petrol, diesel, etc that the oil delivers). So the terrible truth is this: We do not use our own oil. We export most of it, and import oil that has the correct profile. When oil is cut off, our refineries are forced to use our oil instead of imported oil. But our refineries are not optimised for this. They need time to adapt, and the process is not efficient, even once it gets started. So although we have 70% of our energy needs in oil production, we probably could not refine 70% of our energy needs from our own oil!
3. We have no Strategic Reserve of oil. We only have 2 weeks of oil – mostly in petrol stations and refineries around Australia.

So here in Australia, if 40% of the world’s oil was cut off the crisis would hit almost immediately.

 

Transport would be immediately impacted. Food transport would obviously be given priority, and would thus be only partially impacted.

Within weeks Australian cities will start to run out of fuel. The government will implement their emergency plan for this situation, but it will not be enough to make up for the serious fuel shortfall. Within weeks businesses will be impacted, and within a few months the economy will be impacted.

 

However this, on its own, is not enough to cause a collapse.

 

Jarod Diamond observes in his book “Collapse” that a population collapse is frequently the result of multiple factors hitting at once.

Here in Australia, we have a water problem. We solve this problem by using energy to transport or desalinate our water. Almost every capital city is on the verge of a water crisis, so new projects in these areas are about to be undertaken. Without these projects, entire cities will be left without water. But these projects will require fuel to drive the numerous diesel engines required to build the infrastructure. If energy was in short supply we would be faced with some tough choices. Fuel for food? Or fuel for water? 

 

Most of our electricity comes from coal fired power stations. These power stations require diesel fuel to transport the massive quantities of coal required. They also require huge amounts of fresh water, which is used for cooling and other purposes inside the facilities. We could partially solve our water and fuel problems by turning off our power stations. But that is a decision for the future….

 

Step 2.
The US and allies (including Australia) cannot allow Iran to throttle traffic through the Straits of Hormuz any longer. After threats fail, a massive attack is launched. Iran, as a nation, is utterly expunged from the map in less than two weeks. But before they go under they manage to destroy every well in Iran. In addition:
- Iranian suicide bombers destroy multiple wells in US-controlled Iraq.
- Iran is afraid that an attack by the US might lead to domination of the Middle East by their rivals in Saudi Arabia, so missile and suicide bomb attacks are carried out on oil wells in Saudi Arabia.

 

About 30% of the World’s oil supply is taken off line. Restoration efforts fail to keep pace with ongoing sabotage.

 

Oil production is, by its nature, easy to disrupt and almost impossible to secure because it is so widely distributed. It is almost impossible to guard hundreds of well heads, thousands of kilometres of pipe, and acres of refineries. Suicide bombers from Iran and Iraq continue to destroy pipelines, refineries, oil wells and shipping facilities.

 

In early 2007 the Australian Prime Minister announced that if the water situation did not improve, then water would have to be cut off to our largest food producing areas. In mid 2007 this happens. Food production in Australia is drastically reduced. With fuel in short supply, our ability to import and distribute foreign-sourced food is limited. People start missing meals.

 

In early 2008 it becomes obvious that we simply do not have the fuel required to build water facilities. The government announces that power will be cut off for 4 hours in every 8, in order to conserve water and fuel. It also announces that people will be asked to voluntarily relocate out of the major cities, and into areas with more water. These areas immediately become ghettos of displaced and unemployed people. As food becomes scarcer, these areas become dangerous.

 

By late 2008 water in the cities is not only in short supply, it is unsafe to drink. The lack of power has undermined the water treatment, making the water unsafe without boiling. Without power, boiling water is difficult, and people are burning fences or anything else wood in an effort to make water safe. The cities become essentially unliveable, and people start heading out.  Clashes occur between new arrivals and people already living in ghettos, who will fight for what little they have. Food is not only scarce, distribution is almost impossible, as the people who worked for the trucking companies have been forced out of the city.

 

With power failing, water scarce, food scarce, and fuel in short supply, multiple things have gone wrong at once. Conditions are right for one of Jarod Diamond’s population collapses.

 

The fact that a lethal, human form of Bird Flu is starting to break out in the US does not really matter anymore, Australia is already heading into hell.

 

This is only a scenario. I don’t believe it is the most likely one. It is only used to demonstrate that even a developed nation like Australia could descend into collapse in as little as 18 months. An outbreak of disease would hasten the collapse, but is not actually necessary.

 

So I need to prepare for all possible scenarios.

In previous posts I have established that I must plan for 3 possible scenarios:
1. A gradual decline that eventually stabilises and gets better.
2. A gradual decline that eventually surpasses people’s ability to cope, thus triggering a descent into a “Mad Max” world.
3. A sudden, severe event that surpasses people’s ability to adapt, triggering a descent into a “Mad Max” world.

I regard scenario 1 as the most likely (here in Australia), but 2 and 3 could easily happen.

 

A threat scenario for 2 and 3 will be posted shortly. But first, you may be wondering why I think it will be enough to spend only a few hundred dollars on food, but thousands of dollars on equipment. Will a stockpile of around 300 kg of cheap calories be enough, even in the Mad Max scenario?

 

I am supplementing these calories with food from my garden, but here is what I am really counting on: population overshoot.

 

Population overshoot works in both directions. When times are good, populations breed until they exceed the capacity of their resources. It looks like we have done that. Then, when times are bad, populations collapse until local resources can more than support them.

 

In human populations, the collapse is caused by starvation, war and disease. If the collapse is severe, then there is no food and it is all over quickly. In that case 1 year of food is plenty. In a less severe collapse, there is some food, but not enough, and it is slower – possibly extending for a few years. In that case 1 year of food can turn “not enough” into enough to cover the few years in question.

 

After the collapse it is NOT all over. We have reached the point where there are enough resources for the population, but the surviving communities will be guarding those resources jealously. If you are not part of a community, then you need to form one (be able to deliver resources to people in return for skills or resources that they possess), or find a way to join one (accept resources from the community in return for resources or skills you possess). That period of time also needs to be planned for.

 

Membership in a viable community will be critical to surviving during the recovery period. Simple things like access to a trained dentist could be the difference between life and death for me or my children.

 

The lesson here:
It is not enough to be a lone survivor. You need to be part of a survivor community. The community must come out of the crisis with resources and a strategy for recovery. More on that later.

 

I’m starting to feel silly about panicking yesterday and buying all that stuff. There seems to be a constant line in front of most of the petrol stations, but grocery stores are mostly ticking over as usual. I could have spent more time planning, and made wiser purchases.

 

I need to plan my next steps carefully. I’ve burned a lot of money, and I won’t get more until payday. I need to figure out what the credible scenarios are, and from there figure out what I need to do. I guess the time has come to do a more detailed threat analysis, so here is a start:

 

The threats ahead exist in a continuum, ranging from doomsday scenarios that could lead to food scarcity and a general breakdown of society in less than a year, though to the more benign scenarios, with a gradual degradation of our way of life for 10-15 years. I guess you could call the doomsday scenarios “Mad Max”, while the slower declines are “Business not quite As Usual”.

 

The difference between “Mad Max” and “Business not quite As Usual” is the speed and/or degree of the crisis. If the crisis happens faster than people can adapt, or descends further than people can cope with, then there is a complete breakdown of law and order.

 

An example of “Business not quite As Usual” might be the recent Argentinean economic collapse. People went hungry and died, but society did not collapse. An example of a Mad Max scenario might be a situation such as that in Rwanda, where resource and food scarcity led to outright war and the complete collapse of society.

 

Rather than try to predict every possible scenario, I am just going to put together two scenarios, and make some predictions based on those scenarios. This post will deal with a Gradual Decline Scenario (Business not quite As Usual). My next post will deal with a Rapid Decline Scenario (Mad Max).

 

Scenario 1 (Gradual Decline).
Fact: The price of oil is going up progressively. There are no indications that this process can be reversed in the short term. The economy is inextricably linked to the price of energy, so the economy will decline as oil prices go up. We are currently heading for the Gradual Decline Scenario.

 

You may respond by saying “But oil is only one factor in the cost of energy - there is coal, solar, nuclear and a range of other power sources. So an increase in the price of oil may not have a critical impact on the economy.”

 

Sadly, it will have a critical impact. Unfortunately, oil is an absolutely necessary and irreplaceable resource in several areas of the economy. Firstly, oil is the principal input into transport and transport is critical to a working economy. Oil is also a necessary and almost irreplaceable input into numerous other critical areas of the economy (plastics, fertilizers, pesticides, etc, etc). There is no easy replacement in the short term. Replacing oil will require a significant financial investment and building the necessary infrastructure will take approximately two decades (Google the Hirsch Report to find out the details).

 

So if the price of oil goes up faster than the infrastructure can be built, the economy will be negatively impacted because we will lose the ability to economically create and transport goods. Since oil is a critical component and there is no replacement, this negative impact will be extremely profound.   

 

With this in mind, it is possible to predict the following things:

-  As the price of oil goes up, a series of economic thresholds get passed. The first of these thresholds has probably been reached. When these thresholds are passed the economy will enter a decline - passing in a series of steps from recession into depression. 
-  Depending on how deep and widespread the depression is demand destruction could reach 2-6 mbpd (Million Barrels of oil Per Day). This demand destruction will occur initially in Third World and less developed countries. It will be associated with some loss of governmental control, followed by famine and lawlessness, as economies that are dependent on oil learn to do without. If we wish to learn how to get by without oil, we should watch how these Third World and less developed countries cope with the problem, as they will be grappling with it first.
- The depression could last 2-10 years.
- We will exit the depression with little or no extra infrastructure, and little ability to build infrastructure (because of depleted energy and a devastated economy). This is unfortunate because extensive infrastructure will be needed if we are to deliver replacements for oil. The required infrastructure includes an increased number of power stations (providing electricity for plug in electrical vehicles), CTL (Coal-To-Liquid) plants, ethanol production facilities, etc. Unfortunately, the economic conditions will not support the production of this infrastructure on the scale required.
- We will exit the depression when demand destruction passes the oil depletion rate. However, with the ability to transport food and other resources now curtailed, food scarcity will become a reality even in developed countries. Areas of the world that have populations in excess of their carrying capacity will face a food scarcity crisis (carrying capacity is the ability of the local area to support the local population). These areas include entire countries. Any country that is a net food importer has probably exceeded the carrying capacity and is not a good place to be.

 

To get a feel for what this period of time will be like in the more developed countries, we can look at three periods in recent history and use them as possible “models” of the future. The 3 models I am using are the Russian Post-Soviet situation, the Cuban Post-Soviet situation, and the Argentinian economic collapse. In each of these models imports were drastically reduced, food production and distribution was impacted, and normal economic activities were dramatically changed in a relatively short timeframe. As a consequence, there was a significant problem with lawlessness because many people found themselves unemployed and hungry. These people were forced to search for food or money, obtaining it any way they could. Lawlessness impacted both urban and rural regions.

 

In Argentina a small percentage of the urban community went out into the rural environment. This small percentage caused harm out of all proportion to their numbers, creating a high degree of lawlessness.  In Cuba the situation was more controlled (it is a physically small country with strong police/military control), but a higher proportion of the urban population was forced into the rural regions (around 25-30%). Farms were converted from communes to privately run enterprises. This is not something we could do in Australia (the government does not own the farms, so they cannot give them away), so we are really looking at the Argentine model, not the Cuban one.  In Russia the situation was somewhere between the two. There was a degree of breakdown in the rule of law in both cities and rural areas, but in rural communities it was essentially lawless for some time. Communes became de-facto privately run, with citizens simply claiming areas, then fighting to keep them.

 

Starvation was not widespread, but not unheard of. Malnutrition was common, particularly among children. After a few years, things stabilised in each of these models. Society and the economy were drastically changed, with a new equilibrium reached that was somewhat below the previous level.

 

The key lessons to learn from these models are these:

1. Things changed. Those who refused to move with the times were left behind. Those who accepted that the past ways no longer applied, were able to position themselves well for the future. The people who did best were those who either adapted their business to the new conditions or created a new business to take advantage of changed conditions. Frequently the businesses were created in an atmosphere where old rules did not apply, and the process of creating the business depended on taking advantage of this lack of the old rules (or laws). For example the entrepreneur might simply walk into a factory that had ceased production, and re-task it to meet a new need that he had identified. The fact that he did not own the factory was a detail, to be sorted out later. Security was also an area with huge business potential. Many of the security firms that were formed operated without any legal basis, and were only slightly better than organised extortion rackets.

2. Food security was a problem. In Russia, the fact that most families had a vegetable garden is credited with saving Russians from mass starvation. In Australia, we do not have this advantage.

3. Personal security was impacted. In each of these models, although policing still occurred to some degree, higher levels of lawlessness were a problem. In each model, society continued to function to a greater or lesser degree. The Mad Max scenario of the lone Survivalist carrying his assault rifle through devastated, lawless streets simply did not occur. However developing a strategy for dealing with security at the personal, family and property level is required, as law enforcement agencies became unreliable in each of the three models above and hungry people were willing to do drastic things. An assault rifle is not something you can take to work, yet the trip to work can be somewhat more dangerous if law enforcement has partially broken down. A security plan needs to consider this. The Argentinean lessons suggest that old habits need to be changed. Always travel in groups. Children must be always supervised. If you must travel alone, a concealed handgun is not a ridiculous precaution – it might even be advisable.

 

And the final lesson is this: If the gradual decline goes past the point at which people can no longer cope, then society will break down -  and we enter the Mad Max scenario. This occurred in limited areas, and for short periods of time, in the 3 models that I have discussed. However there are numerous examples of Mad Max breakdowns in other areas, even in recent years. Essentially, in a Gradual Decline Scenario, we might simply reach a Business not quite As Usual equilibrium, or we might continue to descend.

 

ANY PLAN I MAKE MUST TAKE THIS INTO ACCOUNT. If we reach equilibrium and things pick up, then I might be left feeling foolish if I quit my job and buy shotguns and tinned food. My plan must cope with three possible scenarios:

1. Gradual decline then improvement.

2. Gradual decline descending into Mad Max because we pass people's ability to cope.

3. A severe dislocation thast exceeds the speed with which people can adapt and causes a very rapid descent into Mad Max.

 

I will write more on the Mad Max scenario in my next post.

 

Now I need to:

1. Develop a Threat Scenario for Mad Max

2. Develop a plan that can carry me through the Business not quite As Usual scenario and continue to work even if we descend as far as the Mad Max scenario.

OK, I’m back.

 

That was a very quick shopping expedition. Some people were buying petrol, but no panic-buying of food yet.

 

So what did I buy I hear you ask? How do you prepare for a possible apocalypse, when you don't know what kind of apocolypse it might be?

 

I mentioned that I want to secure food, water, and cooking. I did that, and thought of a few extras. Hereis what I have so far...

 

Here is the list, the cost and why:
- Sugar. 120 kg. $90. Does that sound crazy? Sugar travels 2,500 km to get to me, yet currently it only costs 75 cents per kilogram. Sugar is a preservative. I will use it to preserve the fruit that I grow so that it can feed me during winter. Preserved fruit is also likely to be a “Trade Good” - I can swap it for other items later. I am also a pretty good brewer. I can brew apple cider out of the apples from my apple tree. Sugar will go into that. Apple Cider might be another trade good.... or just a nice sip on a winter's night.

 

- White Rice. 90 kg. $85.  White rice stores for years (it has less nutrition, but the nutrients in brown rice cause it to go off). I can get vitamins and minerals from my garden, but I can’t get enough calories. I would need to grow wheat, corn, or something similar, and I just don’t have enough room. So I can use my garden to supply the vitamins, but I need to stockpile some easy, cheap calories.

 

- White Flour. 90 kg. $85. The same arguments apply here as with white rice.

 

The sugar, rice and flour will supply my entire family with all the missing calories they need for an entire year, for only $260! The vegetables and fruit in my garden will supply some calories as well as all the missing vitamins and minerals we need for 1 year.... or at least it will after I expand the garden. The fruit trees will not supply enough fruit this year, they are too young, so I need to get strawberries and watercress happening over the next few days and that will give me Vitamin C for the interim. I also need to plant.... well I will think about it later and I will turn it into a post. "What to plant".

 

So, I have calories, vitamins and minerals. what is missing? Protein. My aquaponics system can supply a few fish, but not enough. I can scale it up slowly, if I let the fish breed (instead of eating them), but for now I have no secure protein source. I'm not a vegetarian.  If you are squeamish, skip over the next paragraph.

 

I could buy 300 cans of tinned meat and tuna for $490 - but I’ve got other stuff I need to buy with that $490. So I am going to do two things: hunt meat and breed meat. Chickens would be ideal. I tried to buy some chickens, but I couldn’t find anywhere that would sell me a live chook. I guess there is not a big call for them here in the city. Then I passed a pet shop. Here’s the (gruesome) plan: Guinea pigs. They used to be bred for food. That’s right: I’m going to breed guinea pigs for food. I did warn you. It gets even more gruesome - I can hunt. I have never shot a living thing in my life, but I used to be pretty good at target shooting, and I still have a .22 rifle, a shotgun, and a .22 handgun (all licensed). So I bought ammo. The .22 ammo was cheap so I bought 800 rounds for $50. Shotgun ammo ammo was expensive – so I only got 200 rounds for $170.

 

Even if food gets completely cut off. that secures my family's food for 1 year. More likely it supplies us for many years, supplementing whatever is available.

 

Passing a sports shop, it suddenly dawned on me that I left something out of my mental list of things that I must secure: Transport.

I bought 3 bikes $1,400. Time to re-learn the art of bicycle riding.

 

I bought 3 of those cheap removalist trolleys that they sell in hardware stores – they will be good as trailers for the bikes.  $60.

 

I have rain tanks, but I want to make sure I have clean, safe water. So I bought some water filters and cartridges. $240.

 

I have bleach and water purification tablets, but don't really want to use them unless I have to. I would prefer to boil and filter.

 

 

For cooking I decided I wanted to keep things “normal” for as long as possible - I don’t want to be cooking on a fire made from my wooden furniture.

 

I have a gas stove top and my oven uses electricity. If one is cut off, I can use the other. If both are cut off, I have a BBQ that uses gas bottles. I bought another two large bottles. $180. This may be a silly expenditure – but I see it as a way of staying comfortable if gas and electricity are out for days or weeks at a time, but then run for days or weeks at a time – no need for huge life-changes, just use the BBQ.

 

I go camping, so I have a kerosene camp stove and 3 kersone lanterns. I bought 10 litres of kerosene for my camp stove and lanterns. $15 (the price of kerosene in the stores hasn’t caught up with the rise in oil prices yet).

 

I don’t have Solar Hot Water. I intended to get it, but I guess I’ve missed my chance. I bought a couple of Solar Camping Showers. $90.

I do a lot of chores at night. I like being able to see when I do those chores, so I bought an LED headlamp, 4 AA rechargeable batteries, and a solar-powered battery recharger. $95.

 

I’m out of money. Considering the fact that I have a 6-figure income, I don’t seem to have a lot of cash reserves. I have 3 credit cards. I keep them fully paid off, so I could go on a wild spending spree. But all the advice I’ve seen suggests that we are in for an economic meltdown, and I should try to stay debt free. Yet there are so many things I need to buy.

 

I will think about it. More soon.

 

 

This crisis will get worse before it gets better.

 

I am an analyst/consultant by training, so I am going to apply my training to the crisis, and decide what I need to do.

My analysis will be broken down into:

- The situation now.
- Future threat scenarios.
- My resources (I have already done a little preparing…. But not enough).
- Action plan.

 

Here are my high-level thoughts.... I will go into more detail in future posts.

 

The situation.

I am going to assume that anyone reading this blog knows what is happening. If you don’t, go to:

 http://www.worldwithoutoil.org/

 

In summary: Oil is expensive but available. This may not last for long.

 

More on the situation here in Australia in future posts.

 

 

Here in Australia, we are in big trouble. The bigger countries have enough leverage to ensure that they get what they need. Australia has always been second in line.  The US has months of oil in storage in their Strategic Reserve, but here in Australia we do not have a Strategic Reserve. 

 

So, people in the US, if you want to see 3 months into the future, just watch what is happening here in Australia.

 

If oil supplies get cut off, we have two weeks of oil stored in petrol stations and refineries, after that, we are out.

 

So what does that mean? Well, for a start: No oil = no food, no electricity, no water, no medicines.... you get the picture.

 

Being an analyst, I would say that threats range from losing a bit of weight but getting by, right through to “Mad Max”. Our world is about to change. I need to do an analysis of the threats, scenarios, and likely progression. But not now. I don't have time. Maybe only hours before people realize what this really means.  An analysis of impacts, scenarios and so on will be the subject of a future post.

 

For the moment I need to consider the immediate threats:
- Most of my food gets trucked hundreds or thousands of miles. That is likely to either stop, or get real expensive.
- Water is already tricky here in Australia (we are in the middle of a Climate Change induced drought) - so supplies may get uncertain.
- Shelter and warmth are not really problems here in Melbourne. It occasionally gets cold here, but as long as I have a house to live in, I won’t freeze.
- Cooking might get hard if gas or electricity get uncertain.

 

So my immediate requirements are:
- Secure food supply
- Secure water supply
- A method for cooking food.

 

I started preparing about a year ago, but it was a background task - I thought I had 5-10 years. I’m not ready.

 

It is like somebody sprang a pop quiz on me - but I can’t fail this quiz. If I fail, my family will go hungry.

 

This is what I have done in the last 12 months:
- Installed rain water tanks (Australia is dry).
- Planted fruit trees in the back yard.
- Set up a small Aquaponics system. It is not big enough to feed us and it is not self-sustaining.
- I planted a small vegetable garden.

 

My fruit trees are young, they won’t produce much fruit this year. The vegetable garden is much too small. My garden will provide an occasional side dish, but we can’t survive on that alone.

 

I can only hope that things deteriorate slowly, giving me more time. If things fall apart quickly, I’m in real trouble.
 
I intended to install a Solar Hot Water System and Solar Cells on the roof, but I guess it is too late now.

I intended to buy a small farm just outside the city…. Too late.

 

Things are still holding together. Mostly people seem irritated that they can’t afford to go for a weekend drive along the coast.

I have a little money, but not much.

With that money, I need to:
- Secure my food supply

- Secure my water supply

- Make sure that I can cook.

 

I have a plan. But I don't have time to tell you - I need to do it now. Then I will come back and post what I have done.

 

David C.