Paul Krugman, the Keynesian economist everyone loves to hate because he advocates giving away money nobody has dropped the ‘PO bomb and done so in the august pages of the New York Times’. You’re fired, Krugman:

In particular, today, as in 2007-2008, the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.

And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. True, alternative sources, like oil from Canada’s tar sands, have continued to grow. But these alternative sources come at relatively high cost, both monetary and environmental.

Also, over the past year, extreme weather — especially severe heat and drought in some important agricultural regions — played an important role in driving up food prices. And, yes, there’s every reason to believe that climate change is making such weather episodes more common.

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

More expensive resources means what, exactly? Resources that are expensive enough to keep them in the ground and out of the grasp of ‘industry’ means a Mad Max collapse. Expensive to the point of some trifling inconvenience to anyone other than economic ‘losers’ such as the Welfare Queenish unemployed is clearly not expensive enough. What is needed is the destruction of demand! Anything less is pointless, right Professor Krugman?

This is the dilemma that the establishment has created for itself by wasting its irreplaceable natural capital and calling the outcome ‘progress’. Our dilemma strands us. We require the comforting illusions that modernity provides of our ‘dominance’ of the natural world even as the exercise of that dominance undermines the modernity itself. The ‘change’ Krugman refers to is a parade of rear guard actions designed to keep catastrophe at bay.

High oil prices spill over into other goods and services that embed fuel or require it to get to a market of some kind. High prices reduce the supply of customers, which manifests as declines in the amount of business which in turn means less funds to service debts or keep governments solvent.

Grasping for the ‘more’ alternative is not confidence building. Also not confidence building is the Establishment denial of the Peak Oil subject. This suggests the Establishment is impotent or cowardly or both. Sez Rick Munroe @ The Energy Bulletin:

Liquid Fuel Emergency (LFE) planning is not a priority

As the Leotta team points out, “preparedness for oil/fuel disruptions isn’t one of those [most pressing] issues” for local and state government agencies. Furthermore, it’s not a priority at the federal level, either. Examination of the priority lists at Public Safety Canada and DHS give no indication of concern over future oil supply, nor of any attention to LFE planning. To their credit, both agencies have a clear focus on the protection of critical infrastructure, but there is no comparable concern over what’s inside the pipelines: the supply of oil and gas itself.

Another reason why LFE planning is not on the radar of emergency planners is the widespread unawareness of the evidence regarding oil supply. It is still rare to encounter an emergency planner (at any level) who is already familiar with the term, “peak oil” or the literature on oil supply security (eg. the Hirsch Report, warnings regarding export capacity and a near-term supply crunch, the Oil Shockwave exercise, military analyses of peak oil, recent statements from the International Energy Agency, etc.).

“All hands on deck”

Both Alan Smart in Australia and Kathy Leotta in her earlier study have stressed the importance of pre-planning for an LFE, as did the GAO in its analyses. The Leotta team is correct in stating, “It will be ‘all hands on deck’ when a crisis occurs or is imminent” and in warning that “some period of confusion and scrambling” appears likely. The supply of affordable fuel is so essential to our economy and our security that a major LFE could present emergency planners and civic leaders with a problem of unprecedented complexity, scale and risk to social order. The Oil Shockwave exercise (June, 2005) concluded that a 4% reduction in global oil supply could lead to a near-tripling of oil prices, and that effective government responses were very limited. Shockwave participant (and current Department of Defense chief) Robert Gates warned, “The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government.”

Half a decade later, Gates’ warning remains largely unobserved despite the mounting evidence of impending oil supply difficulties. Here in North America, we have instead sustained inattention at all levels of government, a situation which in turn is sustained by the unwillingness of mainstream media to examine the evidence and present it to citizens.

I’ll leave it up to the reader to come to his or her own conclusions about ‘Mad Max’. Real progress will only begin with embracing the concept of ‘Less’. What happens after supply disruptions begin escapes analysis. The supply- side obsession of American- style policy makers would suggest a no- holds- barred drilling regime with the vegetable garden @ the White House ripped out and replaced with an oil- drilling rig. Then what? More leaning on Canadians and military aggression around the world to feed the SUVs! This would have the White House drilling rig on one side and a missile aimed @ Caracas on the other.

Meanwhile there are a raft of 2011 prognoses @ Energy Bulletin of which this one by Ron Swenson from ASPO catches the eye:

Solar: Solar manufacturer shipments more than doubled from 2009 to 2010. I predict that world production of solar energy systems will double again this coming year. A quarter of the growth will come from PV (photovoltaics) and the balance of growth will come from large solar thermal electric projects being installed in the US southwest and other parts of the world. Oil: As a consequence of the drilling moratorium imposed by the Gulf of Mexico Deepwater Horizon disaster, the USA will experience oil shortages in 2011 or 2012. (A steady supply from the Gulf has been dependent on new wells filling in as production from older wells declines.) Thoughts of seeking satisfaction of market demand from sources more remote than the Gulf must take into account the longer trip time that would be required for oil tankers. Lacking excess capacity, the global tanker fleet is unlikely to be able to respond, even if other oil suppliers (Africa, Middle East) could be imagined to increase their production.

– Ron Swenson, ASPO-USA Board of Directors

It’s been a theme here @ Economic Undertow that shortages would be the consequence of unaffordable rather than unobtainable fuels. Our booming ‘poverty’ industry makes it likely that shortages that appear will be persistent. This creates the worst of all worlds as modernity- driven resource consumption continues unabated in the face of shortages while alternative approaches to employing workers and creating output is starved of capital. I don’t know right this minute how our fabulous so- called policy making apparatus is going to escape this particular trap- slash- vicious cycle.

As for 2011 predictions: the hardest thing is not so much making predictions but accurately noting what is taking place at the moment right under our feet. It is amazing how much is missed!

For instance, we are already in the post- peak world of less and less oil available AT AN AFFORDABLE PRICE. The price matters! Dollar- for- dollar, peak oil took place in 1998 when the yearly average barrel price was $14! We have been pricing our fuel waste ‘system’ into receivership for over ten years. No wonder our economies are having the bends!

Price a rationing tool which measures credit at the same time. @ + $90 the world has credit that it can free up so that fuel can be rationed to those who can borrow and bid.

The trend is shifting away from credit availability. The price that will matter is the ‘cash price’ not just of fuel but everything else. It is this ongoing destruction/repudiation of credit toward a preference for cash that is the large trend that carries from 2010 to 2011 and beyond.

This is what makes Swenson’s prediction/observation so troubling. When rationing by credit/price ends the rationing will be by physical availability. In given areas, there will be no fuel available regardless of price or how much money or credit customers have in their pockets.

You can have a thousand dollars in cash in your jeans but if there is no gas in the gas stations in your state you won’t go anywhere unless you walk. The next step may be no food in the supermarkets which is the troubling part, the part that Munroe tasks the establishment with ignoring.

Right now is the peak of ’emergency credit’: bailout funds from central banks, super- sovereigns, from foreign exchange and interest rate derivatives directed toward the lending/credit market that becomes more impaired by the minute. The Federal Reserve has according to some source or other been able to replace the credit evaporated in the shadow banking system since the failure of Lehman Brothers. What of it? What can the Fed do next? Can it create new customers who will take on new good loans? Can the Fed ‘print’ new products or good collateral to borrow against? What of the ‘assets’ that fall worthless tomorrow? The Fed has accepted a stupid and pointless task. More emergency credit solves nothing, the economic system built on endless waste of a finite good is now obviously insolvent. This insolvency will become more and more visible during the upcoming year.

Unaffordable fuel means all the depend on it is also unaffordable. This fact will be denied for as long as possible guaranteeing the insolvencies that emerge will be intractable, that final ruin will be total.

That ruin will be total, what a legacy we supposed wisest of apes leave to our children!