The Daily Reckoning December 11th

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The Internet Is a Dud

The world today looks almost identical to the world of the 1960s because there have been very few important innovations since then. But you will leap to reply — the internet! Alas, electronic technology does not seem to noticeably increase output of stuff. The Internet affects our quality of life in many ways, but not our standard of living.

The Internet was more or less fully built out in the US in the year 2000. All of a sudden, knowledge from all over the world…and from all of history…was available. Information could be accessed and questions could be answered at the speed of light. People could collaborate on a global scale, across borders and time zones, innovating, creating, critiquing, and elaborating new ideas of breathtaking scope.

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In the 1990s, many people believed that this electronic hyperactivity would eliminate the “speed limits” on growth. Analysts advised investors that they could pay almost an infinite price for start-up Internet companies. Growth would be fast. And it would not require capital inputs, they said.

And certainly, there are many Mercedes 500 automobiles on California highways that owe their existence to the Internet. Many entrepreneurs, software developers and “app” creators have gotten very rich. But based on growth rates, wages and household incomes, the Internet does not seem to have led to a general uptick in prosperity. Since 2000, household income in the US has actually fallen. So have wages. And stripping out government expenses and redistributed income shows negligible real growth in the private sector economy over that period. GDP minus government spending was $9.314 trillion in 2001 and only $9.721 trillion in 2010. At that rate, it would take 167 years for the GDP to double. By comparison, GDP doubled twice between 1929 and 1988.

Over the last 20 years, the top 10% of earners are the only ones to have added to their wealth. Everyone else is even…or worse. At the bottom, among the lowest quarter of the population, people are poorer now than they were 20 years ago.

What went wrong? Why didn’t the Internet make us richer?

According to The Financial Times the world spends 300 million minutes a day on a single computer game: Angry Birds. Millions more are spent looking at videos of puppies or kittens. People spend 700 billion minutes per month on Facebook. The typical user spends 15 hours and 33 minutes on the site each month. The YouTube viewer spends 2.9 billion hours per month on the site.

You get the idea. You don’t need the government to waste time; you can do it yourself!

Even when you’re not using the Internet to waste time, you’re rarely using it to add to GDP. Instead of going out to shop, you can shop on the worldwide web. You will find much greater selection at generally lower prices. You save the time and energy of going shopping at a mall. Likewise, entertainment is much easier and more convenient. Instead of going to a strip club, you can watch as much pornography as you want in the comfort of your own home.

In industry too, the Internet is primarily a cost-cutting, efficiency-enhancing technology. It permits better fleet management for trucking companies. It helps retailers avoid unnecessary inventories. It allows you to save time and energy in countless ways, such as checking in for flights on-line…reading widely without going to the library…sending massive files, graphics and reports with the press of a button. These things make life more fluid, and perhaps more easy and agreeable, but they do not add significantly to GDP.

The Internet cannot create GDP growth.

Growth is what you get when you use more energy, or use the energy you have better. Growth — more GDP…more jobs…more revenue…more people — is also what every government in the developed world desperately needs. Without it, their deficit spending (all are running in the red) leads to growing debt and eventual disaster.

Not only is the rate of growth in the developed world declining, so is the speed of recoveries. Here’s Harvard professor Clayton M. Christensen:

In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months, like clockwork — as if a spray of economic WD-40 had reset the balance on the three types of innovation, prompting a recovery.

In the last three recoveries, however, America’s economic engine has emitted sounds we’d never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels — and it’s not clear whether, when or how we’re going to get there. The economic machine is out of balance and losing its horsepower. But why?

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Why? The obvious reason: we’ve reached the point of diminishing returns on energy inputs. I use the word ‘energy’ in a broad sense — to include our intellectual energy, and our time and attention, as well the energy you get from fossil fuels. Returns on investment have gone down to marginal levels.

In 2012, the Congressional Budget Office helpfully looked ahead and saw an on-coming train. If federal spending remains on its present course, the US would add another $10 trillion in debt over the next 10 years. Congress, reacting to the emergency, passed a law which, if left unchanged, would reduce the additional debt to $8.7 trillion. The downside train kept coming.

But the train is far bigger and more powerful than the CBO thinks. The real federal deficit for 2012 is not $1.1 trillion as widely reported. Include unfunded Medicare and Social Security obligations and it is more than $7 trillion. GDP increased during the same period by about $320 billion. In other words, debt is going up 21 times faster than the economy that supports it. Already, if you reported the liabilities of the US government correctly, according to GAAP rules, such as every corporation is required to do, it would show a hole $86 trillion deep. And at the rate deficits accumulate, it will get twice as deep in the next ten years — to more than $150 trillion, or nearly 10 times the size of the economy.

Another way to look at this is to think again about how modern democracies finance themselves. Since the days of Bismarck, they take in money from citizens and pay much of it back, in the form of various social spending programs. The successful politician allows spending to outstrip revenues as much as possible, but not so much that he appears irresponsible. The more benefits he can plausibly promise to the voters, the more likely he is to gain power…and the more resources he can also shift to favored groups.

Growth over the last hundred years — in population, GDP, wages, prices — made it possible to expand government spending greatly, anticipating larger, richer generations that would support their smaller, poorer parents.

The mathematics of this system held up fairly well — until recently. Now, population growth rates are falling everywhere in the developed world — including the US, with a huge bulge of baby boomers preparing to retire and voting themselves the most lavish benefits in history. Without growth, this system of public financing is doomed to spectacular failure. More spending will not be better; it will be calamitous. The more dry debt tinder on the ground, the bigger the blaze.

Regards,

Bill Bonner
for The Daily Reckoning

The Internet Is a Dud appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

America’s Coolest Capitalist TV Shows

The cultural elite routinely disdain reality TV as voyeuristic garbage being churned out for the unwashed masses. But this unwashed woman is a fan of a new subgenre of the category that has become a sensation: reality capitalism. That’s not what the subgenre calls itself, of course, but that’s what it amounts to.

A flood of reality shows now demonstrate the daily operation of capitalism through humor, personal interaction, down-to-earth explanations, and likeable people. The shows are an antidote to crony, phony capitalism because they offer a window into how ordinary people deal in the free market, where there are no government privileges — only voluntary exchange.

An incomplete listing of reality capitalism:

Pawn Stars: The show follows daily life at the World Famous Gold & Silver Pawn Shop in Las Vegas, Nev., with a focus on transactions with customers.

The affable co-owner Rick carefully checks the authenticity of each item pawned because, as he repeats like a mantra, the pawn shop lives or dies on its reputation. He patiently explains the cost of doing business to customers who want retail value for items being pawned: Namely, he has overhead, items linger on shelves, and the market is down X% from two years ago. Then they negotiate. Each successful transaction ends with a handshake; unsuccessful ones end with Rick saying, “thank you for coming in.” Pawn Stars is the No. 2 reality show in America after Jersey Shore. Spinoffs include Cajun Pawn Stars, Hardcore Pawn and Pawn Queens.

American Pickers: Mike and Frank drive throughout the Midwest buying collectables from barns and garages to sell in their Iowa store. An easygoing nature is their main buying strength, but another is their honesty. They refuse to take advantage of someone who is ignorant of an antique’s value, often offering more than is asked. In a voice-over, one of them explains that this practice is good business because it establishes trust for the rest of the negotiations and ensures a warm welcome if they return for another ‘pick.’ Spinoffs include Canadian Pickers and Picker Sisters.

Storage Wars: Professional buyers and resellers in California aggressively compete in bidding for abandoned storage lockers that are being auctioned. The competitive tactics are entertaining, but the show’s key message is the incredible risk these entrepreneurs take in bidding on lockers based only on what they can see upfront and what they can deduce. For example, Bloomingdale’s bags and plastic-wrapped furniture bode well; cardboard boxes marked “Christmas”…not so much. The lockers won by each bidder during the show are financially estimated at the end, and an individual profit or loss is ascribed to each person. The premier of the second season drew 5.1 million viewers. Spin-offs include Storage Wars: Texas and the upcoming Storage Wars: New York.

These shows — and a multitude of similar others — vividly demonstrate how the free market functions in the lives of real people. The shows stand in marked contrast to what is often viewed as the quintessential capitalist show — The Apprentice, hosted by billionaire businessman Donald Trump, in which 16-18 young business people form two teams to compete in accomplishing largely unrealistic goals, and are then judged by a panel of experts presided over by Trump. The ‘worst’ individual competitor is voted out, and so the field narrows. The prize for the ultimate ‘survivor,’ is a $250,000, one-year contract to head a Trump company.

The Apprentice has little to do with capitalism. Success ultimately hinges on the judgment of a panel — the vote of elites — rather than on free market feedback. The tasks are usually artificial in their content and context. The reward of winning a $250,000 lottery is quixotic and belongs in the realm of game shows like Who Wants to Be a Millionaire? There is no recognition of the role played in capitalism by risk or reputation, overhead and years of specialized knowledge. Worst of all: The final adjudicator of success is one man, and that man is Donald Trump. The Apprentice resembles crony capitalism and politics far more than the free market.

By contrast, reality capitalism TV relies entirely upon feedback from the marketplace. Rick makes a deal for his pawn shop based solely on the worth of an item and the willingness of a customer to deal. The tasks assumed by Mike and Frank are practical, such as sharing pleasantries with a farmer to gain access to an outbuilding filled with old ‘stuff.’ The rewards are reasonable; the winner of a good storage locker can usually expect to double the value of his bid. Risk, reputation, character, overhead and knowledge are crucial to success.

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These so-called trash shows are capitalism at its best. It is the type of capitalism that ordinary people take home to pay their mortgages, a capitalism in which people shake each other’s hands at the end of a deal. It is not the bastardization of capitalism in which Donald Trump shouts, “You’re Fired!” at the end of every Apprentice show; the true spirit of exchange is expressed when Rick says, “Thank you for coming,” because he appreciates the business contact and hopes for future exchanges.

If you want to know where capitalism is flourishing, then look away from Wall Street, the White House, and the ivory tower. Capitalism has been thrown into the streets, unceremoniously but with applause. The streets are where capitalism belongs because that is where common people live and work. They are the last and best bastion of capitalism because they know that trading an honest dollar for honest work is what will feed their children.

Sincerely,
Wendy McElroy

Original article posted on Laissez-Faire Today

America’s Coolest Capitalist TV Shows appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Oil Production Plateau

I was at a talk recently where a well-known oil economist made an analogy.

He said that if you gathered up all the crude oil that people have ever pumped out of the ground since Col. Drake drilled his famous well in 1859, it would cover California to a depth of about 10 feet.

“Of course,” he said with a smile, “we don’t have to worry about California drowning under 10 feet of oil. Over the past 150 years, mankind has taken all that oil, burned it, harnessed the energy and put the combustion products into the atmosphere.”

Everyone in the room laughed… sort of. We got the thermodynamic point, which is that mankind uses a heck of a lot of oil, much of it via four-stroke engines and that well-known cycle: intake, compression, power and exhaust.

Why has mankind used so much oil? Because global population has risen for over a century, right along with oil use. “People are energy,” as Scott Tinker, the state geologist of Texas, says. And people like oil because it’s energy-dense. A little bit of oil goes a long way, if you use it right.

Of course, oil impacts the planet in many ways, good and not so good. Indeed, it’s fair to say that oil defines modernism, even modern civilization. Take away oil, and much else in our world goes away, starting with Big Government and its far-ranging military and police powers. Take away oil, and most of the world’s people go away, too, sooner or later.

Keep in mind that the world’s oil-dependent energy system has been a century and a half in the making. The world — as we know it — needs a constant oil fix, and that won’t change anytime soon. Not without a major dystopian catastrophe.

Flat Output

Enough introduction. Let’s look at some numbers. Every day, the world uses about 84 million barrels of crude oil. That oil, of course, comes out of the ground, from wells scattered pretty much everywhere.

Oil comes from the deserts of the Middle East, the frozen tundra of Russia and Alaska. Oil comes, in huge volumes, from platforms in the Gulf of Mexico and North Sea, and wells off Brazil and West Africa. And oil comes in dribs and drabs from stripper wells across the oil patches of America, Canada and many other locales. You get the idea.

These two graphs illustrate the sources and destinations of the world’s daily oil.

First, look at the production side graph. Note how overall global oil output has flattened out over the past five years or so. Is this the proverbial “Peak Oil” plateau, the maximum in global output that precedes a long-term decline?

Some people now hate hearing talk about Peak Oil. They won’t have a word of it. The so-called “fracking revolution” is supposed to solve our energy problems for a long time into the future. Between the Eagle Ford play, down in Texas, and the Bakken play, up in North Dakota, the U.S. is in tall cotton, energywise. Or so I’ve been told.

Indeed, lately, I’ve received snarky emails from some readers when I bring up Peak Oil. I’ve been accused of “living in 2005.” One reader asked if I knew that the U.S. “will surpass Saudi Arabia in oil output by 2020.” Well, yes. I received that memo. But there’s more to the story…

I’ve stated many times that the Peak Oil concept is a tool. It’s a lens through which one can observe the world of energy, both to figure out what’s happening now and to forecast possible future scenarios.

In simple terms we’re talking about natural depletion.  As we find more “fracking” oil and gas here in the U.S. many “conventional” forms of oil (domestically and globally) are naturally depleting – for example: Alaska’s North Slope, Mexico’s Cantarell field, and other, once-prolific production zone s like Siberia and Egypt.

Indeed, to say the current situation in Cairo has solely to do with natural oil depletion is NOT a far stretch of the imagination.

Going forward we’re going to need to produce a lot more oil to make up for this natural depletion. Here in the U.S. we’re actually seeing that happen — it’s that whole “drilling treadmill” idea that we covered last week.

Point is, as we find more domestic, unconventional energy we have to agree that the global oil production output — when accounting for natural depletion, — doesn’t jump off the charts.

Besides, when it comes to Peak Oil, time will tell. I started thinking about Peak Oil back in the 1970s when I met the geologist M. King Hubbert at Harvard. It’s only been 35 years. I can wait.

Can Consumption Exceed Production?

Let’s get back to those graphs. Look at the one for oil consumption. There’s no recent plateau there, right? Globally, oil demand has been steadily growing. It’s pretty clear that more and more oil is moving and burning across the world.

When you compare the two graphs, there appears to be higher oil “consumption” than there is “production.” How can that be? Can the world use more oil than it produces?

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The difference in production and consumption between the graphs is due to two main things. First is the growing supply of natural gas liquids (NGLs) — essentially “oil” from gas deposits, such as blowing down traditional gas caps, as well as the recent fracking revolution. Basically, the world supplements its crude supply with NGLs.

That NGL phenomenon will work until it stops working due to the dicey economics of what’s called “energy return on investment” (EROI). That is, at some point, eventually, somebody will figure out that they’re putting a barrel of oil in to get a barrel of oil out.

Whoops! Busted! At the end of the day, you can’t violate the second law of thermodynamics for long. Physics will prevail.

The second aspect of crude oil consumption exceeding production is a quirk of modern technology called “refinery gains.” In essence, down at the refinery, there are ways of transforming a barrel of crude into more than a barrel of refined product.

Here’s a graph that’s based on data from BP. The data show that crude oil production has hit a plateau in recent years at around 82-84 million barrels per day. Yet despite flat oil output, it’s apparent that refinery output has steadily increased. Why?

Refinery output has increased due to the proverbial “better living through chemistry.” That is, engineers continually figure out more ways to squeeze more barrels of refined product out of the same amount of raw material. More specifically, refiners take low-cost oil fractions — like distillates, which used to go to asphalt or bunker fuel — and upgrade them to higher-priced chemicals and fuels. More bang for the buck, more bucks for the barrel.

Who’s Burning Oil?

As the graphs up above indicate, oil consumption is growing fast in the Middle East. There, population has exploded in the wake of several decades’ worth of more babies and longer life spans. That, and there’s rapid, energy-intense industrialization all across the region. Plus, most Middle Eastern nations heavily subsidize energy use by the populace.

Of course, growing internal oil use across the Middle East leaves less oil available for export. Is that a problem? We’re about to find out. We’re exactly on the cusp of that thorny issue. Saudi Arabia’s so-called “spare capacity” is getting squeezed. It’s a problem, and it could transform into a really big problem in short order. Stand by.

The graph above also shows crude oil consumption growing strongly in Asia-Pacific, Africa and South/Central America. It’s the well-known story of how the developing world is… developing.

Billions of people are moving toward a higher standard of living. That requires oil.

That’s all for now. Tune in tomorrow for Part II of this discussion…

Byron W. King

Original article posted on Daily Resource Hunter 

The Oil Production Plateau appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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avatarThe Daily Reckoning - The Daily Reckoning posted Tuesday, December 11th, 2012.

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