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.