Archive for May 31st, 2009

Small Things

Sharon May 31st, 2009

A while back, Kiashu had a post, in which he debunked the commonly held perception (so commonly held that people are still repeating it – Toby Hemenway repeats this claim in his recent essay “Is Food the Last Thing To Worry About?” for example) that Cuba lost almost all or half of its oil imports after the collapse of the Soviet Union.  Kiashu establishes that actual oil consumption in Cuba dropped only by about 20%. 

 What is the case is that a 20% drop in oil imports caused massive disruptions in Cuban society – some of them undoubtedly because their government was full of idiots (since my government has no idiots in it, I know I’m safe from this particular problem ;-) ), but also because despite the fact that there remained plenty of oil for agriculture and basic needs, the loss of a compareatively small amount of oil meant a massive allocation problem.

In the United States, we can see how small losses also add up – for example, the 1970s oil crisis was precipitated by a 5% reduction in imports – that’s all.  Those who remember the gas lines and the economic dislocation may have assumed that something much more serious occurred – 5% is very little, after all, and even in the 1970s, we had plenty of room for belt tightening, as we found when we responded.  But the economic and structural implications of a small decline were much greater than most people might have predicted. 

There are plenty of other examples of small things becoming big things.  Looking at the current mortgage crisis, I’ve seen numbers that range between 6-9% of mortgages may have been “troubled” assets at the start of things (now many more mortgages are troubled, because of the crisis) – that is, it wasn’t the case that half of all those assets were bad – a small percentage was sufficient to bring down a good chunk of the global economy, simply because there was so little resilience in the system.

The food crisis was precipitated by a comparatively slight tightening of world grain supplies – overall, about 10% of the world’s grain harvest disappeared into fuel tanks, pushing almost a billion people back into poverty, and adding millions to the rolls of the starving. 

I’m hardly the first person to notice this, but it is important to note that complex systems tend to create situations where reverbations from small disruptions become extremely vast.  Which means that analyses of our absolute capacity, or waste in the system, don’t always help us.  That is, when people sit down and say “but the US produces X amount of oil each year and that’s sufficient for these four or five essential  projects” – that is indeed true.  It just isn’t all of the story. 

 Or when we observe that 25% of food or energy is completely wasted – that’s true, and much can be done to reduce waste.  But a waste free society has never been achieved, at least on this scale – that is, there will always be losses, there will always be failures and wastage – and when you get close to the systems’ limits in any respect, small losses can become large.  I think Gail the Actuary articulated this best when she said,

“I’ve discovered when you say, “There may not be medications”, I get a lot of arguments that this is the highest use, so of course we would have medications, even if we had nothing else. Also, if I say there may not be plastics, someone believes that since they take such a small share of the petroleum, surely they will be spared. And so on.”

The reality of our situation is that whatever balance we eventually strike in a world of shortfalls, we are likely to leave some needs – probably many needs – inadequately met.  There will always be competing priorities, many of them compelling, many of them compelling to those in power. 

All of which makes the IEA’s report on the decline of energy investment more disturbing – the IEA had already predicted substantial declines, with adequate investment – now we get confirmation of what many of us had already expected – that adequate investment is simply not occurring.   They also confirm that if the economy does recover, we are likely to see another high oil price spike – and probably another economic crisis, in response, if the work of James Hamilton and others are correct.  That is, it may no longer possible to grow in any meaningful sense.

Will this cause structural problems?  I don’t know the answer.  But I do think that the public discourse must include the recognition that it doesn’t require a large dislocation, a vast decline, in order to create a crisis.  Even small things matter.