Response to recession as the oil economy fades
Immediate responses

summary    details of fading hydrocarbons   price spikes   timeline   the immediate future
recession in USA    recession overview  
medium term reponse to recession 
recession to depression

"Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions were gradual and evolutionary. Oil peaking will be abrupt and revolutionary."
from Hirsch, Bezdek and Wendlings report 'The Peaking of World Oil production: Impacts, Mitigation, & Risk Management', in a March 2005 report to the US Department of Energy.

"Abrupt". "Revolutionary".

The first response of governments in industrialised oil economies is panic.

The second response is to 'do something'; firstly to make petrol affordable, and secondly to cut oil use.

Governments might pay corporate welfare to oil companies to keep the price to the consumer artificially low. There are no free lunches. The money has to come from somewhere. It must come from the taxes paid by ordinary citizens. Such a practise is unsustainable - it causes a ballooning deficit. Governments could instead simply print money to pay corporate welfare. But the result is spiralling inflation, high interest rates, credit defaults on citizens house loans, bank failures from failed loans and few buyers of defaulters property

If the advisors are capable of logical analysis, they realise that their options are constrained by reality. The possible responses are useful at the margin. But only at the margin. Many 'immediately doable' things can make a difference, but their added effect is trivial relative to the scale of the problem. There are no new sources of cheap and concentrated energy to match oil. That is the unhappy truth.

No 'techno-fixes'. No new inventions. No solutions. While all energy conserving actions are useful - and inevitable - in the short term they are far too little, and it is now far too late to make a useful difference. The time to implement the larger responses will take many years and vast capital.

In addition, the western economies will all want the same sort of infrastructure - new dams, new electric trolley buses, electric trains, small cars, coal liquifying plants, LPG terminals, many more LPG transport vessels and storage structures and so on. Obviously, even if you can pay for it, you may have to go on a waiting list that stretches for years. Such infrastructure doesn't appear overnight.

Quickly achievable but trivially important steps - Governance responsibilty
Legislate immediately to prevent overseas banks bankrupting locally registered branches; legislate for government to have power to protect citizen interests in a failed bank
Recession and inflation is inevitable. In the long term, perhaps there may be depression and deflation. Short term, jobs will disappear and people will find it hard to meet repayments on their mortgages and borrowing for consumption spending on new cars and overseas holidays. Prices will 'structurally inflate' to accomodate higher oil-input costs. Spending power will erode. This will  make it even harder to repay interst on domestic loans. Mortgages will be foreclosed. Houses will sell on a buyers market - but there will be few buyers. People will lose a large amount of equity in their houses - or even lose everything. Banks will have a greatly reduced profit. Thats the 'best case' scenario.

In the 'worst case' scenario, all the above will apply, but with a new twist. USA treasury has to print more junk bonds ('treasury bonds') to attract foreign capital, as it is in very deep debt. Other countries may do similar things, depending on the underlying rigor (non interference in market forces) of their monetary policy. To make an unattractive proposition attractive, it raises the promised interest on the bonds. The result is increased bank interest rates on their offers of loan money. The flow-on is a big hike in the interest rates on existing loans to small business and home owners. In a recession, many of these loans 'go bad'. Small business and domestic bankruptcies follow. The dollar falls rapidly. Panic ensues. People attempt to draw money from the bank. A 'run' on the banks ensues. As banks typically have less than 12% in 'real' money on hand at any given time (the rest is loaned out) banks can't immediately pay. Doors close.

In the shake-down, banks do two things - first, bankrupt branch offices in other countries by withdrawing all the funds in savings and investment accounts as return of capital on closure of the business. The bad debts - mostly to the offshore 'mother company' - remain. Bankruptcy is declared. Customers savings in those countries literally 'flit overseas' in a digital blink.

Second, banks ask for corporate welfare to reward them for all their bad decisions. This is by way of a government 'guarantee'. In reality, the government pays the banks bad loans for them. That is, the taxpayer - relatively poor citizens - are to pay their much needed money to the very rich. This may be seen as unfair.

Bottom line is, governments will need to act very early and very quickly - before there is even a sniff of a run on the banks - to prevent citizens saving in local branches from being sent abroad literally overnight. Once it has gone, it will be irretrievable.

In like manner, barring a national government-owned bank prudently run (not exposed to the US dollar, no dubious loans), any request for a 'bailout' by a bank defaulting on its obligation to pay its creditors (your savings) should be refused outright. The bank shouild be declared bankrupt, and the assets of the bank (including bad debts) should be taken by the government on behalf of the creditors; just as a bank takes the house of the citizen who defaults on the bank loan.

Don't  guarentee bank debt, but legislate to prevent savings accounts being used to pay bank debt and make savings account holders have first call on a banks assets
Typically, banks arrange to sell (either directly, or indirectly via complex 'swap' arrangements) interest paying bonds overseas which are 'self funding' - that is, the money paid for the bonds is on-lent on the domestic market for house loans, car loans, holidays, and consumption spending. The bank adds a profit margin to the interest charged to the domestic borrowers over what it has to pay the overseas bond holders. Clearly, as the banks have borrowed offshore, they must re-lend what they themselves have borrowed in order to get a profit margin on the debt they have taken on. If they can't, they make a loss.

The bonds run from 2 to perhaps 5 years or so, and then must be repaid. In a bubble of frenetic lending, the bond money is being sucked in the backdoor as fast as it is being re-lent out the front. This creates a 'wave' of bonds coming due for repayment all at once.

When the economy enters recession and the re-lending business for consumption business has evaporated, the banks are faced with overseas investors wanting their money in repeated 'bond maturity date' waves. If  a significant number of domestic mortgage loans and poorly secured business loans 'go bad', the banks cash-flow may not be enough to repay all bondholders as they come due. If allowed, they will presumably use customers savings to repay debt, even although this may not be enough to clear the debt due to low savings levels in many countries.

It is imperative to legislate very early to prevent any bank using the savings accounts of private citizens to repay debt. It is imperative to legislate very early to prevent any bank using any devise with similar effect.

The banks may attempt to turn their disasterous loan mangement into a bank profit. They may attempt to socialise their risks (debts) by appealing to the government to fund them 'to protect citizens savings'.

Any request for a 'bailout' by a bank defaulting on its obligation to pay its overseas creditors should be refused outright. The bank should be declared bankrupt, and the assets of the bank (including bad domestic home and business debts) should be allowed to be sold on behalf of the bond-holding creditors. There will likely be few takers in a recession. By legislating to prevent any but citizens owning domestic residences, any prospect of overseas speculators 'buying up' the citizens houses can be extinguished. The only possible buyer would then be the government. And it would then demand - and get - extremely favorably prices; cents in the dollar. The bond-holders may not get all their capital back. But that is always a commercial risk.

By making domestic savers the preferential creditors with first call on the banks assets, peoples savings are protected. As those employed continue to pay the receiver their (re-negotiated) mortgage, the repayments go to re-imbursing savers in full.

Regulate shipping industries and road transport so that cartels are broken

When oil is expensive, freighters are tempted to form cartels and 'price fix' their rates at a higher level than if they were subject to free-market competition. When spending power is down anyway, this anti-competitive behaviour adds unecessarily to domestic price inflation.

Stop all major highway projects
Luxury use of highways (holidays, visiting, and general 'tooling around') will fall away rapidly as the price of gas makes people think twice about driving. Save the money for public transport.

Remove all duties and taxes from all small engined vehicles, whether two, three, or four wheeled
The gas saved is unimportant - the rate of world consumption is so high that reducing automotive use won't make a meaningful difference. The importance of this measure is simply to make automotive travel as affordable aas possible for the ordinary working person. Smaller, lighter, vehicles use less gas, and therefore use up less of the average weekly paypacket.

Mandate safe and secure use of bicycles
Create and expand networks of car-excluded travel lanes for bicycle as marginal strips along roads, and as dedicated 'lanes' on footpaths. Change road rules to allow bicycles to make safe 'with traffic' turns at red lights.

Mandate that cities and towns provide widespread securable bicycle parking in the close proximity to offices and businesses.

Mandate that trains provide a combined bicycle with passenger carriage.

Remove all bureaucratic barriers to coastal and riverine shipping
Propelling heavy loads in barges and ships along canals and coastal waterways is a very fuel effective way of moving materials. The cost saving of using water transport helps to limit the structural inflation bedding into an economy based on expensive oil. In addition, an increase in coastal shipping and coastal docking facilities provides a source of jobs for members of the local community in a recessionary economy.

Break all cartels and monopoly ownership of scarce coastal docking
Docking will increasingly become a natural monopoly. While the numerically small 'greedies' in society would privatise any 'public good' for their personal further enrichment and make society pay as many of their private costs as they can, in a time of re-adjustment in society, the greatest public good comes if strategically important monopoly assets are taken back from private ownership.

Logs, for example, may be cheaper to transport in sea-borne rafts. But docking infrastructure is essential to allow yarding. Dockside rail tracking is essential to allow the logs to be carried internally. Public ownership of strategic docking and yarding space must be indisputable, non-negotiable.

Break all cartels and monopoly ownership of strategically important railway infrastructure
Rail transport will increasingly become a natural monopoly. Rail was made marginally economic by the advent of cheap oil. The situation has now changed. Permanently. Rail is around 5 to 10 times more energy efficient than road transport. Rail will be cheaper than road transport for many, if not most, items. It can also be a useful employer of labour, helping to keep men occupied in what could be a period of high unemployment.

Rail needs to be forcibly integrated with water-based transport. Dockside roads that once shared with rail have in many cases had the rails removed. They will now need to be put back, and take priority over automotive transport when using the shared road.

While the numerically small 'greedies' in society would privatise any 'public good' for their personal further enrichment and make society pay as many of their private costs as they can, in a time of re-adjustment in society, the greatest public good comes if strategically important monopoly assets, or the strategically important parts of a national rail network - at least - are taken back from private ownership.

Revise tax law to encourage a local sole trader economy
Small business, contrary to the perception of many - including so-called economic 'experts' - is the major employer of people in an economy and is fundementally much more important to the health and happiness of the majority of people than big business.

The price of fuel helps shape where people shop. When fuel prices are structurally high they will tend to shop closer to home. When large complexes with cheaper prices are physically distant, the possible saving available may be cancelled out by the cost of using more petrol to get there and return home than if shopping locally. Local markets may help keep local prices in check. For example, the profit centre of most supermarkets is fruit and vegetables, where profit margins may be around 20% (versus around 4% for most other goods in store), but local markets of seasonal fruit and vegetables may help keep prices in check. Where supermarkets are constrained to retain their existing pricing, local markets give an alternative source of lower cost fruit and vegetables.

Small time and first time entrepreneurs might be given help with the mechanics of running a business, and be forgiven taxes until they are worth taxing (if ever).

Shift public funds out of investments in recession-vunerable industries to infrastructure industries
Pension funds and some more prudent government treasuries have funds invested to provide for an aging populations health and welfare needs. Where these are independantly managed, they are likely to be very exposed to a severly weakened USA dollar and to fading consumption industries whose sun will rapidly set in a recession. Most private pension funds assets are 60% - 80% in stocks. Most private stock plans are predicated on unrealistic rates of return - 8% or 9% - continuing far into the future. This is utter fantasy. Even those invested in property trusts have a much lower income in a recession (around 2.5%).

Vast amounts of pension contributory and taxpayer funds may be at risk.

Funds could usefully be shifted to provide capital for the monopoly infrastructure needed to be 'least battered' in the coming crisis. Docks, strategic ships and barges, gas terminals, gasification plants, new hydro projects, repairing existing gas lines and rail lines, laying new gas lines and rail lines, repairing existing electricity line, building strategic new lines, building new rail stock, repairing rail stock, capitalising small business importing and modifying small engine cars to gas, laying new rail lines down quay-side streets, and so on.

The risk is that the long-term benefits of infrastructural chnage - measured not in profit but in lessened public distress - will be captured by rich individuals, in line with their socially contemptuous 'my-personal-enrichment-is-more-important-than-the-needs-of-the-entire-population-I-live-amongst' view that all public good 'should' be stripped from the vast majority of ordinary people and be directly or circuitously transferred to the already hugely overstuffed bank accounts of the tiny minority of society they represent.

And just this will happen if naiive public officials are gulled by the endless and highly polished false assertions of the 'economic advisors' employed by these closet monopolists. Stripped of the jargon, the false mantra is that only these few private individuals know anything about running efficient and uncorruptable enterprises. Among the countless rebuttals to this garbage propoganda, one stands out.


Countries with deficient Retirement, Medical, and Social Welfare Funds must cut Military and Medical spending to extremely low levels as soon as possible
Other countries (chief amongst these the USA - of the US$7.4 trillion Federal debt in 2004, US$3.1 was owed to government Trust Funds such as the Social Security Trust Fund, Federal Employee Retirement Fund, Federal Hospital Trust Fund, etc) have already taken most of the surplus saving in the Government Trust Funds in order to help fund deficit shortfalls. They have replaced actual money with treasury bonds of dubious worth. Nothing can now be done to restore the broken trust. The relatively small excess paid in from employee taxes over that required to pay retired persons pensions has not been accumulated for the future. They are essentially 'unfunded', and live off taxs paid from year to year. There is no provision for the bulge of 'baby boomers' reaching retirement age. There is no provision for a dramatic cut in payroll tax paid as the number in work drops dramatically. Truly massive cuts to the most expensive government services, and increased taxes for those working, are the only options available.

Ban ploughing
Ploughing requires a series of tractor cultivations of the same patch of dirt - one pass for ploughing, back over it again for rotary hoeing, back over it again for harrowing, and in some cases a further trip across the same dirt to roll the field. Using 'reduced tillage' and 'no tillage' techniques, the field can be sprayed with herbicide once, and then 'direct drilled' with seed in a second pass. This technique is used on 48 million hectares of cropping land of the West Eurasian Economic Union countries. It has resulted in an estimated saving of 6.4 million tonnes of oil a year - the equivalent of the entire annual oil use of a small country such as New Zealand.

Of course, if the arable industry already uses low tillage techniques, there is little room to move.

1. Hirsch, R.L., Bezdek, R.H, Wendling, R.M. 2005. Peaking of World Oil Production:  Impacts, Mitigation and Risk. Management.

© Copyright 2005 version 2
A Sustainable Living Organisation Publication