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The world has learned the hard way that our political leaders lacked the judgement and resolve to identify and address the problems which led to the recession. Richard Douthwaite argues that a similarly flawed judgement is evident in the assumption that the economy will recover, and advises on how to prepare for a future of global economic contraction.
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The world has learned the hard way that our political leaders lacked the judgement and resolve to identify and address the problems which led to the recession. Richard Douthwaite argues that a similarly flawed judgement is evident in the assumption that the economy will recover, and advises on how to prepare for a future of global economic contraction.
In at least two speeches during the local and European election campaign, the Taoiseach, Brian Cowen, said that economic recovery was in sight and that Ireland was positioned to return to growth next year. The governor of the Central Bank, John Hurley, was more guarded when he spoke on RTE in early June. He warned that economic recovery would take time but he too expected it to start next year.
Both men were wrong. Very wrong. And the trouble with their optimism is that they misled the public and thus made it more difficult for people to make adequate plans for a future which will be very different from the one they have been conditioned throughout their lives to expect. If a recovery does begin it will be very short-lived, for reasons which I hope this article will make clear.
What Cowen and Hurley should have said is that the world in which long spells of rapid economic growth was possible has gone for ever. Instead, we are now in a world in which, apart from brief upturns, our incomes will decline every year. This changes everything. House prices will fall rather than rise. Debts will become unpayable and have to be written off. As a result, pension funds invested in property and bonds will disappear.
What brought the change about is that world oil production has peaked. As shown in illustration 1, it has already declined significantly from its maximum last year and, while it can retain its present level for a little while, some commentators expect output to begin to fall by around 3.4 per cent a year from the end of 2010. Even if they are wrong, it will never return to its 2008 level because, when oil prices dropped from their high of $147 a barrel last July to around a quarter of that level seven months later, oil and gas companies panicked and cut back spending on developing their fields.
CLICK IMAGE FOR LARGER VIEW: Illustration 1: World oil production peaked in July 2008 at 74.82 million barrels/day and now has fallen to about 71 mbd. It is expected that oil production will decline slowly until the end of next year as OPEC production increases while non-OPEC production declines. However, from the start of 2011, the decline rate could increase to 3.4% as OPEC production will probably be unable to offset the increasing pace of the non-OPEC production decline. The supply forecast in the International Energy Agency's World Energy Outlook 2008 is shown for comparison.
Source: http://www.theoildrum.com/files/ccst20090515.png
One result was that the number of rigs drilling for natural gas in the US was down to 685 this June compared with 1,600 last summer. Another was that in Russia, the world' s biggest gas producer is considering delaying investing to open its giant Bovanenkovo field for at least a year.
At the end of May, the International Energy Agency estimated that there had been a 21 per cent drop in oil and gas investment compared with the previous year. This means that the world has not fully replaced the oil and gas production capacity it has used up in the past twelve months. Future coal supplies will be lower too since that industry has also invested less.
Renewable energy projects have also been delayed by the downturn. In 2007, the waiting list for the delivery of a wind turbine was about three years. Things are quite different now and a few weeks ago, the biggest turbine manufacturer, Vestas, announced that it was closing a factory making the blades on the Isle of Wight. Similarly, the first of the two undersea electricity cables planned by Imera running from Ireland to Wales which was to have opened at the end of next year has been delayed by funding difficulties. This will slow the pace at which Irish windfarms can be developed.
If the “green shoots” of recovery that keep being mentioned actually do emerge and demand picks up appreciably, the delayed investments will mean that energy output will not be able to return to the level it reached last year and prices will soar. This will undermine the recovery in two ways. One is that it will take money out of consumers' pockets and send it off to the countries from which energy supplies come, thus curtailing domestic demand.
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