Category Archives: Where

Oil Industry Investments Rapidly Becoming Uneconomic

My letter to The Southland Times published in today’s paper:


I heartily agree with Richard Soper [October 29] that Environment Southland is “not a green pressure group”.

Clearly that label cannot apply either to the Rockefeller Brothers Fund, the Norwegian Sovereign Wealth Fund, etc.

Oil is rapidly becoming an uneconomic option and divestment is actually the prudent economic decision.

Responsible institutional investors globally are weighing the evidence and making the choice on an economic and moral basis.

Right now, the oil industry is being driven to a crisis point by the combination of restricted cash flow due to depressed oil prices, and declining return on investment from (ever harder to access) new reserves.

Well before the current low prices prevailed, oil majors were issuing profit warnings, and performing desperate accounting manoeuvres such as share buy-backs to sustain their investor’s yields.

BP, Shell, ConocoPhillips, Saudi Arabia, are all in major trouble, with investors calling for capital restraint. Witness also the fracking ponzi schemes unravelling in the USA, where investors promised high returns have been continuously disappointed.

Additionally, the global economy appears to be sinking further into a deflationary spiral, which may well serve to depress oil prices further, worsening the crisis as noted recently by Goldman Sachs.

The coming oil supply crisis that this inevitably leads to is a major risk to our entire economy here in New Zealand. Investing in risk reduction in this context, preparing our community for an energy and capital constrained future, would be a far better use of our capital.

This would show they are taking the welfare of our children, and our children’s children seriously.

Nathan Surendran

Here’s the fully referenced version:

Here’s hoping Environment Southland and Venture Southland take note…

And here’s an image to accompany the letter which reinforces my case that any industry cannot do well with declining productivity of capital on the scale the oil industry is currently seeing, making it a BAD INVESTMENT…

oil - capex vs production

We desperately need to get serious as a community, nation and species, about the need to leave oil before it leaves us!


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Tony Seba’s ‘exponential increase’ in technology will save us – a rebuttal (of sorts)

World renown techno-utopian idealist, and singularitarian, Tony Seba was recently brought to Southland by Venture Southland and Callaghan Innovation to talk to business leaders about the current rate of change in technology and how this is a highly disruptive force to be reckoned with… I didn’t attend the rather expensive seminar, however I do keep coming across links to his talks, etc.

I’ve reviewed a couple of his talks, and I feel I need to put some stuff into writing:

Firstly, what I’m NOT saying:

  1. I’m not saying he’s wrong about the impressive pace of technological change ongoing (although I do think there must be diminishing returns to increases in technological complexity somewhere in there…)
  2. I’m not denying that the idea of being able to continue to do more, but with less, is attractive. It’s just plain and simple NOT POSSIBLE. The future we face from this point forward is doing LESS with LESS (although it can be more fulfilling and finally free up that social / leisure time that technology originally promised us) as I’ve written about here:
  3. Having said that, the type of disruption that Tony envisages, IF we can keep our techno-industrial civilisation going in the face of declining net energy available, and through the upcoming GFC MK2 (which again is partially attributable to declining energy profit as a root cause would certainly help with sustainability in any foreseeable future.

Secondly, the rebuttal, in the form of some thoughts and estimates on the potential for renewable electricity generation to replace liquid fossil hydrocarbons as a way to move us and our stuff around (based on what he presents here: and here: ):

Tony Seba’s thesis that solar’s costs are decreasing exponentially is unfortunate, as he misses (ignores) several key constraints on solar (taking NZ as an example):

1.) Liquid fuel for transport’s declining ROI is leading to a disastrous situation brewing in oil supply, something that has been known for a very long time, and which the current depressed price per barrel is bringing about that bit quicker:

2.) Solar and EV’s is not liquid fuel for transport, and there are no electric mine trucks, HGV’s, etc as the battery tech is not good enough. You could say well we can at least electrify personal transport, and you’d be right, but we can’t do this for heavy goods vehicles, which comprise 40%ish of NZ’s fuel consumption (See page 25:, and all of the inputs that industry across the globe relies on to produce all the tech that we use the electricity to power.

3.) I question given point 1, and its concomitant deleterious effects on the economy, whether we have sufficient potential profitability to be able to make a wholesale replacement of our vehicle fleet (even only 20% of it, if you subscribe to his arguments on reducing requirements for vehicles) going forwards, never mind the huge investment in infrastructure to power them. Solar requires a lot of material inputs and the input costs will expand rapidly as other limits affect overall industrial productivity and EROI of extraction activities. These blog posts from Gail Tverberg have lots of highly illuminating points in that direction:

4.) All hydro electricity generation in NZ is only 14.5 kWh/person/day (84.2 PJ/annum 2012 figures from IEA: Zealand&s=Balance) and in the same year our energy consumption for transport from fossil fuel was 32.6 kWh/person/day (189.6 PJ/annum), never mind that the hydro generation capacity is mostly spoken for for other uses.

5.) Can we make up the balance with solar? Our potential for solar energy generation (using the estimation methodology here: NZ population 2012 was 4.4M ( and 1 petajoule = 277,777,778 kilowatt hours so our fossil fuel liquids consumption was:
189.6 [PJ/annum] /365 = 0.5194520548 [PJ/day]
277777778 [kWh/PJ] => 144292237.558356 [kWh/day]
4433000 population => 32.55 [kWh/person/day] for Transport energy use.
We can get around 8-9 kWh/p/day PV generation based on this estimate for NZ: Add another 15% of the 84.2PJ of hydro if Tiwai Point shuts down, which equates (using the same calculation as above) to another 2.17 [kWh/person/day]
So the potential energy deficit to be met from another very low carbon emission source is around 32.55-11 which is approx 21.55 kWh/person/day… 

6.) At best solar is a fossil fuel extender, and it’s potential in terms of being a fossil fuel replacement is routinely and systemically overestimated, as most methodologies don’t account for the energy required to replace it at the end of its useful life:

Here’s some food for thought from a more believable source: Nate Hagens on Energy

Edit: This also from Nafeez Ahmed:

As oil prices have slumped over the last few years due to both the shale gas and Saudi oil gluts, the decline in profitability has forced oil majors to slash investments and shut down costly operations.

US industry experts now forecast that these events are setting the world up for an oil price spike, which could begin in the next six months to two years. There can be little doubt that the US government is aware of the industry’s fears.

Robert Hirsh, a former senior energy programme advisor for government contractor Science Applications International Corporation, wrote a major report on peak oil for the US Department of Energy in 2005.

He predicts a likely global oil shock by 2017, accompanied by a stock market crash, inflation, and unemployment.

He also points out that the Pentagon recognises the risk.

As oil production decreases due to the cost-cutting contraction of industry operations, along with declines from aging fields, the International Energy Agency predicts an increase in demand growth by the end of this year.

As demand rises, the question is how quickly existing oil and gas wells can increase global output in the face of this rapidly diminishing spare capacity.

The answer is not very. Over the next two years, around 200 major international oil and gas projects have been scheduled for final investment approvals. But due to the price collapse – and with it the collapse in profitability – the vast majority of them face postponement, or cancellation.

According to Tim Dodson, executive vice president for exploration at Statoil ASA, the industry is “struggling big-time to replace their oil resources and reserves”.

This is part of a wider pattern over the last decade. Oil majors like Royal Dutch Shell, British Petroleum, ConocoPhillips, ExxonMobil and Chevron have all seen their production fall year-over-year by 3.25 percent. Oil and gas extracted last year has not been replaced by new reserves.

The business model of the shale gas industry is so shaky, according to legendary US hedge-fund manager James Chanos, that when prices do rebound as demand growth hits the limits of declining supply, the oil majors will still be in trouble.

The end of oil, the next crash

With insufficient oil available amidst a price rebound, markets will be massively incentivised to flee expensive fossil fuels, empowering cheaper, alternative energy forms.

Oil majors, still facing high production costs and huge debt obligations, will have to grapple with further borrowing to kick-start costly investments in new production projects. But in the corresponding climate of a new economic recession triggered partly by oil price spikes, how likely is this?

Like Hirsh, Charles Maxwell, a senior energy analyst at Weeden & Co., forecasts a price spike in the next few years. “That’s going to bite us big time. 2019 is going to be hell.”

Five years ago, Maxwell told Forbes that “around 2015, we will hit a near-plateau of production around the world, and we will hold it for maybe four or five years. On the other side of that plateau, production will begin slowly moving down. By 2020, we should be headed in a downward direction for oil output in the world each year instead of an upward direction, as we are today”.

That prediction in 2010 appears to be transpiring today.

“And at around 2015, we will be unable to produce the incremental barrel in the global system. So a tightness of supply will begin to be felt,” Maxwell warned Forbes. “Let’s say in 2013, we may produce 1 percent more oil than we did the year before and then if we have a demand growth of 1¼ percent in 2013, we’ll be very slightly tightening the system. The difference between supply and demand is not going to be very much at first. It would not normally cause a big rise in price. On the other hand, in 2014, that tightness begins to grow and it is now a trend. By 2015 perhaps we’re only able to produce 0.50 percent more with about 1.25 percent higher demand, so that we’re 0.75 percent short.”

The next global recession, though, is likely to begin as oil prices bottom out further, potentially forcing many oil companies to virtually shut down production, facing the prospect of further write-downs and bankruptcies that could make the 2008 sub-prime mortgage crisis look a like a walk in the park.”

– See more at:

Further Reading:

  • “Peak oil turned out to be a more complex phenomenon than theorists originally anticipated. It has not been experienced as a precise ‘moment’ or ‘event’, but rather as a dynamic interplay between various forces that have provoked some adaptive adjustments (such as demand destruction or increased investments) in incremental and multidimensional ways. There may never be a ‘shock moment’ of peak oil’s arrival; instead, peak oil may continue to play out as a gradual, unplanned transition to a new set of energy and consumption patterns that are less oil dependent, giving rise to social, economic, and ecological impacts that no one can predict with any certainty. The evolving interrelationship of geological, geopolitical, economic, cultural, and technological variables has continued to surprise analysts – both the ‘cornucopians’, who claim there is nothing to worry about, and the ‘doomsayers’, who think collapse is imminent, as well as everyone in between. No doubt there will be more twists still to come in this energy tale.But what seems clear is that the consequences of peak oil are not going away. Whether the next twist arrives in the form of a new war or financial crisis, a new technology, a bursting shale bubble, or perhaps a radical cultural shift away from fossil fuels in response to climatic instability, intellectual integrity demands that analysts continue to revise viewpoints asfurther evidence continues to arrive. This issue is too important to be governed by ideology.”
    6 page academic paper on the economics of oil: The New Economics of Oil: Alexander, S. 2014 Melbourne Sustainability Issues paper No. 2, Melbourne Sustainable Society Institute
  • In a new book (March 2014), former oil geologist and government adviser on renewable energy, Dr. Jeremy Leggett, identifies five “global systemic risks directly connected to energy” which, he says, together “threaten capital markets and hence the global economy” in a way that could trigger a global crash sometime between 2015 and 2020.
  • The Energy Policy paper “Global oil risks in the early 21st century”, previously referenced in my submissions to Long Term Plans earlier in the year:
    The combination of increasingly difficult-to-extract conventional oil combined with depleting super-giant and giant oil fields, some of which have been producing for 7 decades, has led the International Energy Agency (IEA) to declare in late 2010 that the peak of conventional oil production occurred in 2006 (IEA, 2010). Conventional crude oil makes up the largest share of all liquids commonly counted as “oil” and refers to reservoirs that primarily allow oil to be recovered as a free-flowing dark to light-colored liquid (Speight, 2007). The peak of conventional oil production is an important turning point for the world energy system because many difficult questions remain unanswered. For instance: how long will conventional oil production stay on its current production plateau? Can unconventional oil production make up for the decline of conventional oil? What are the consequences to the world economy when overall oil production declines, as it eventually must? What are the steps businesses and governments can take now to prepare? In this paper we pay particular attention to oil for several reasons. First, most alternative energy sources are not replacements for oil. Many of these alternatives (wind, solar, geothermal, etc.) produce electricity— not liquid fuel. Consequently the world transportation fleet is at high risk of suffering from oil price shocks and oil shortages as conventional oil production declines. Though substitute liquid fuel production, like coal-to-liquids, will increase over the next two or three decades, it is not clear that it can completely make up for the decline of oil production. Second, oil contributes the largest share to the total primary energy supply, approximately 34%. Changes to its price and availability will have worldwide impact especially because alternative sources currently contribute so little to the world energy system (IEA, 2010).Oil is particularly important because of its unique role in the global energy system and the global economy. Oil supplies over 90% of the energy for world transportation (Sorrell et al., 2009). Its energy density and portability have allowed many other systems, from mineral extraction to deep-sea fishing (two sectors particularly dependent on diesel fuel but sectors by no means unique in their dependence on oil), to operate on a global scale. Oil is also the lynchpin of the remainder of the energy system. Without it, mining coal and uranium, drilling for natural gas and even manufacturing and distributing alternative energy systems like solar panels would be significantly more difficult and expensive. Thus, oil could be considered an “enabling” resource.

    Oil enables us to obtain all the other resources required to run our modern civilization.

    Peak oil is the result of a complex set of forces that includes geology, reservoir physics, economics, government policies and politics.”

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Submission to Venture Southland’s ‘Draft Business Plan’ 2015.

I made a submission again this year on the ‘big picture’ issues relating to the draft Venture Southland business plan. The full submission is available below, and under this para, my presentation to the committee which tries to summarise the main theme, which in itself can be summarised as follows: A probable future is one of much lower economic activity, particularly in export industries and tourism, and this will come about as a direct result of declining ‘net energy’ available to us as a result of global trends that have a root in bio-physical limits that we’re hitting.

The future we face is ‘not the future we ordered’…

Spoken Submission to VS Draft Business Plan 2015 consultation:

Nathan Surendran: 08/06/15

Submission to VS Draft Business Plan 2015 consultation:

Nathan Surendran: 22/05/15

I would like to speak to my submission.

I strongly support the CEO’s statement’s as follows:

International influences such as global oils prices, US dairy exports, international competition for our exports, international debt in Europe, and the growing economies in South East Asia will affect our economy. Continual awareness is critical to ensure that we capture all the opportunities, and proactively manage challenges, and any threats that are ahead of us.”

Our region, our resources and our environment offer the “X” factor many people are seeking domestically and internationally. This is our point of difference – this is our future – and together with our stakeholders, business, and the Southland people we aim to achieve and facilitate projects and initiatives that will enhance the prosperity and quality of life of Southland communities.”

Questions regarding these statements:

  1. What specific work is Venture undertaking to maintain ‘continual awareness’ (other than my submissions regarding limits), particularly of the threats to the growth agenda?
  2. In line with the ‘X factor’ of the region, what specific planning is being done to ensure that future migrants to the region have good quality, resource and energy efficient housing, resilient infrastructure, etc? As I stated at the time of its release, I believe that the thinking behind the “Southland Region Labour Market Assessment” is flawed, being modelled using assumptions regarding the future being a continuation of ‘business as usual’ that are not aligned with bio-physical reality. My full thoughts on this are appended as Appendix 1 and available online here:
  3. Did you receive the follow up to my oral presentation last year? I sent for circulation following comments made in the discussion following the presentation a blog post that I created outlining that the ‘Limits to Growth’ modelling I referenced in my submission which was challenged by Mayor Shadbolt is in fact not ‘disproved’. Specifically, the ‘world3’ model predicting overshoot and collapse is in fact correlating well with real world data accourding to updated research in recent years. The full post is available as Appendix 2 and is also online here: I never received any acknowledgement that this information had been circulated.

Suggested changes to the wording of the Priority Projects that VS must report upon, including reasoning for the changes suggested:

  • Increase in regional Gross Domestic Product. Remove this priority.I recently ‘discovered’ via the Southland Times, the ‘Regional Development Strategy’ workstream from the ‘Mayoral Forum’. In correspondance with the chairman Graham Cooney, the terms of reference for this particular strategy appear to be focused wholly towards maintaining ‘growth in GDP‘. I continue to disagree with this approach for the reasons I stated in this and my other recent submissions on an economic, energy and environmental basis. These physical constraints will ‘overrule’ your attempts to continue growth, and will untimately waste time and effort that would be far better directed towards adaption to, and mitigation of future challenges.

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Southern Energy and Resilience – Newspaper Edition

I’ve compiled many of my ‘go to’ news feeds into a helpful newspaper format (you can subscribe for daily emails) for those who are interested in reading around the issues I’m blogging about. You can access it via the link: Southern Energy and Resilience – News Feeds in paper format

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The religion of ‘economic growth’ – where is it leading us?

‘sustained economic recovery’? Not by any sane assessment. Printing money is illegal at home for good reason. The same ought to be true of QE, as it has a worse effect, even just considering its scale, but also as the ‘trickle down’ effect that the policy is predicated on (in theory, restarting banks lending to SME’s) is clearly not real (, and worsens inequality ( And never mind that we’re all indebted up to our eyeballs, and the SME’s and general public have no appetite for further indebtedness…

Public confidence is an illusion, as is control, and will evaporate sooner or later, as the ability to direct and manage the financial crisis with ‘more of the same’ thinking is shown to be unsustainable. “We cannot solve our problems with the same thinking we used when we created them.” – Albert Einstein

I wouldn’t wish the obvious challenges of the next term of government on my worst enemy. The sooner we accept growth is dead, and there is a fundamental shift under way, the better for everything and everyone. It’ll become obvious in the next few years to even the dullest of career politicians, lets just hope it galvanises them into asking the right fundamental questions. I feel these are:

Q1 – Why do we need growth? A: To service interest payments on money lent into existence as debt.

Q2 – Why is the economy moribund? A: Because we’ve hit diminishing returns on capital and energy in many spheres, as the expansion in economic activity and natural resource throughput of the last couple of centuries bumps up against planetary boundaries.

Q3 – What is a realistic view of the future? A: De-growth of economic activity, energy consumtion, natural resource exploitation rates, population, until we get back inside the sustainable capacity of the planet. and


It’s the basic maths of (exponential) growth, and people shouldn’t be allowed to govern nations until they’ve externalised this basic and fundamental concept: or review the talk given by Professor Albert Bartlett here:

Not convinced? Further resources worth a look:

  • Limits to Growth–At our doorstep, but not recognized: – I’d actually recommend all Gail Tverberg’s writing at her blog ‘Our Finite World’
  • The Next Global Meltdown Is Baked In: Connecting the Dots Between Oil, Debt, Interest Rates and Risk:



So what about positive alternatives, Nathan..?

The lower net energy future that we’re looking at makes certain activities more or less worthwhile, notwithstanding the probable disruption coming due to shortages in fundamental needs, primarily food ( and water (

Do I think all growth in economic output is bad? No. Southland as a region has to grow in some respects, as we will have to provide more for ourselves going forward, if we want to sustain a human presence in the province. This will be a result of ever more expensive transportation costs. In a practical sense, the seas will again expand (, but also the effort for the trip to Dunedin, or even Invercargill… As we look to a more local future, we’ll recognise more the inter-dependence with our closer neighbours, and we’ll have to reconfigure food and water supplies, finance, business, politics to suit this new reality. It’s why I’m interested in the Transition Towns movement:, and Transition Engineering: and why I support the Wise Response appeal:, submitted to parliament, which posits that:

A risk assessment is the first step in determining the nature, urgency and interrelationship between potential threats to New Zealand’s future economic social and environmental security. The World Economic Forum’s Global Risks 2014 report is an example of such an assessment. A report for New Zealand would provide a firm basis from which to engage the public and businesses in identifying practical ways to respond.

This petition therefore calls on Parliament as a whole to see funds allocated for an assessment of NZ’s critical risks in 5 key areas:
1. Economic / Financial Security: the risk of a sudden, deepening, or prolonged financial crisis.
2. Energy and Climate Security: the risk of continuing our heavy dependence on fossil fuels.
3. Business Continuity: the risk exposure of all New Zealand business, including farming, to a lower carbon economy.
4. Ecological / Environmental Security: the risks in failing to genuinely protect both land-based and marine ecosystems and their natural processes.
5. Genuine Well-Being: the risk of persisting with a subsidised, debt-based inequitable economy, preoccupied with maximising consumption and GDP.

I made a recent submission to the Venture Southland draft business plan 2014 (, outlining what I feel are some alternatives to the directions the region is currently looking:


Page 7
Relating to: statement that “significant growth opportunities” exist.
● Given: Vision and Mission Statement
● Given: increased environmental impacts from ‘growth’ at odds with the Vision and Mission statement
● Question: Does VS believe that ‘growth’ in the commonly accepted ‘GDP increase’ from increased levels of economic activity (which automatically creates increased throughput of natural capital and therefore increasing environmental impacts) is actually desirable?

Pages 16-20
Relating to: “Major Initiative: International Marketing Alliances”
● Missing category of potential migrants is people looking to relocate to an area with the following characteristics:
○ Non­nuclear (serious question marks exist over decommissioning of commercial nuclear power plants in a high price oil future ­ e.g. no long term waste storage facilities currently fully commissioned, anywhere in the world).
○ Low population density and high food production capacity.
○ Projected to be less affected (low lying coastal areas excluded) by global warming than most other parts of the world.
○ Abundant fresh water resources ­ huge catchment area above the plains, and natural storage in the lakes.
● Market to them on the basis of the above advantages. The people who are aware of these factors and have a desire to relocate are likely to be of a desirable demographic (affluent, educated, motivated to help with transition to a lower carbon, more strongly sustainable economy).
○ Idea: why not create a strategic plan for encouraging new sustainable communities with similar characteristics to

Pages 21­-23
Relating to: “Major Initiative: Rural Community Engagement”
● Community owned distributed power capacity ­ wood gasification, with short rotation coppice, biogas, etc. Leverage global open source initiatives such as ­ can be locally manufactured ­ job creation… Would also provide an alternative and probably cost effective alternative to the existing renewables proposals. There will be significant manufacturing capacity available when the smelter winds down.
● Further reading: ‘Power from the People’ -­ I have a copy for loan.
● Link this to the marketing to the demographic mentioned in my previous comment. Why can’t Southland Market itself of the basis of the highest number / density of off grid settlements in the world? It’d save on all the grid infrastructure maintenance that must be a significant proportion of the standing charges rural communities pay. Do the maths on whether this makes sense.

Pages 24-­26
Relating to: “Major Initiative: Events Promotion and Development”
● Given Southland’s geographic location and rising energy / transportation costs, this should be viewed from the perspective of community building around ‘worthwhile’ activities based on what will be affordable from an energy / travel perspective in the longer term ­ in this light, the ‘crank it up’ day is probably the most worthwhile event in Southland…

Pages 27-­29
Relating to: “Major Initiative: Land­use opportunities”
● I’m a founder of Love Local ­ a charitable trust, set up to provide locally sourced fruit and vegetables from the
○ Opportunity: create a food hub or hubs for Southland on a ‘not for profit’ (or ‘for benefit’ as it’s more appropriately termed) basis, to provide a direct grower to market pipeline that can bring small / medium size local producers into the market.
○ Opportunity: Use the blueprint designs from the likes of Open Source Ecology as the basis for a local manufacturing industry geared to supplying the needs of these small scale farmers. Many other tools for low carbon agriculture exist which could be locally fabricated. There will be significant manufacturing capacity available when the smelter winds down.
○ Further reading: the blog posts I’m writing on behalf of Love Local for the website. To date:,, with more in draft.
● Why not look into Bamboo and Hemp as well, both have huge potential for the local economy and a large, existing export market for products that local industries could adapt to service: sawmills for bamboo, bamboo and hemp as a biomass coppice source for biomass energy projects (higher biomass production per acre by far than forestry, and a lot faster to realise a return).

Sorry if these comments are a bit rushed / terse. I didn’t realise this was out for comment in time to put more effort into it. I hope the above is helpful!

Sincerely, Nathan

I’m speaking to my submission on the 14th. It’s a public meeting. Want to have some discussion on this..? Call me or come along: 03 221 7487 – the meeting is at the Venture Southland offices at 143 Spey Street in Invercargill, and submission hearings start from 1pm for an hour and a half.




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The China Clock Goes Tick Tock – repost from The Automatic Earth

Reliance on China for export a good idea. Probably not…

How do we know what’s really going on in China’s economy? Given that it’s – at least officially – under central control, that’s not easy. The Chinese leaders know their way around spin and propaganda; one might argue that their lives depend on it. Still, maybe following and connecting the dots as they appear in the news can be helpful. So I thought I’d squirrel together a few data and talking points from the past week, and see what comes out.

Of course the biggest news came 3 weeks ago, when the Custom Administration announced that Chinese exports in February dropped 18.1% from a year earlier. No matter what anybody may claim about Lunar New year, that’s a devastating number. It shows that China is simply losing its buyers. And for an economy that is singlemindedly focused on exports, that is earth shattering. But from inside the nation as well, there are increasing reports that things are not running smoothly.

The manufacturing index seems well embedded below the 50 break even point.

China Manufacturing Gauge Falls as Slowdown Deepens (Bloomberg)

China’s manufacturing industry weakened for a fifth straight month, according to a preliminary measure for March released today, deepening concern the nation will miss its 7.5% growth target this year. The Purchasing Managers’ Index from HSBC and Markit dropped to 48.1, compared with a 48.7 median estimate [..]

Real estate prices are starting to fall. Not everywhere, nor everywhere at the same pace, but for the many dozens of millions who’ve put their money in apartments, this is a grave worry.

Angry Chinese Homeowners Vent Frustrations After Price Cuts

Groups of angry homeowners put up banners and demanded their money back after Hong Kong-listed property developer Wharf Ltd. cut prices on new homes in an eastern Chinese city [..] They said they wanted their money back after prices at the project, called Phoenix Lake Garden, were cut by as much as 16% [..]

Debt levels among local governments are probably one of the murkiest issues in the country. It hardly matters at all what the state auditor says, because government-related debt is just the tip of the iceberg. In China, when you say local government, you say shadow banking. Local officials kept themselves sitting pretty through shadow borrowing. Where the money came from, how leveraged it is, who knows? WHat we do know for sure is that it’s much more expensive than ”official” loans.

China’s Local Government Debt Burden Varies Widely: Moody’s (CNBC)

China’s state auditor said in a report in December that local governments owe almost $3 trillion in outstanding debt as of the end of June last year, up 67% from the last audit in 2011. [..] Among the top 31 upper-tier local governments reporting government-related debt on their websites, indebtedness ranged from 69% to 156% of revenues, with the median at 108%, Moody’s said.

There are new forms of lending popping up, if only because the demand is so great due to debt needing to be rolled over and serviced, lest the scores of little emperors find themselves exposed.

China Banks Drained by Internet Funds Called Vampires (Bloomberg)

It has been labeled a “blood-sucking vampire” by a prominent commentator on state-run television. Executives at China’s largest banks have called for regulators to curb its rapid expansion. [..] The focus of this ire is Internet financing, specifically Yu’E Bao, the fund pioneered nine months ago by Alibaba Group Holding Ltd.’s online-payment affiliate Alipay. Its ease of use, involving a few taps on a smartphone, has drawn deposits from 81 million customers, more than the population of Germany, as they chase returns higher than China’s banks can offer. The total exceeded 500 billion yuan ($80 billion) as of Feb. 28 [..]

Despite surging pollution levels, China actively keeps drawing up plans to get more people into cities. It has understood that this is closely linked to growth numbers. We may find that short-sighted, and it is, but take a step back and imagine what US-style urban sprawl would look like on the scale of China.

China’s Urbanization Loses Momentum as Growth Slows (Bloomberg)

The pace of migration of rural Chinese to cities, a dynamic hailed by Premier Li Keqiang as key to the nation’s development, is set to slow by a third in coming years [..] Today’s report from the World Bank and the State Council’s Development Research Center, which helped inform the government’s plan, recommends changes including on land use to spur more-efficient and denser cities. That can save China $1.4 trillion from a projected $5.3 trillion in infrastructure spending over the next 15 years [..]


Bank runs look inevitable in China. At the first sign that Beijing loses only a little bit of control, people will demand cash to put into their mattresses. Cash that, just like in western nations, is of course not there if everyone wants it at the same time. The government’s biggest nightmare? There are many, but it might well be.

Hundreds Rush To Rural Chinese Banks After Solvency Rumours (Reuters)

Hundreds of people rushed on Tuesday to withdraw money from branches of two small Chinese banks after rumours spread about solvency at one of them, reflecting growing anxiety among investors as regulators signal greater tolerance for credit defaults. The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

Or could this be the biggest nightmare? China allegedly has 90,000 property developers in a system that even if it runs well only has space for maybe 30,000. How do you bring down numbers like that in an orderly fashion? I’m very glad that’s not my job. How many of those developers will go down with badly built properties, huge levels of bad debt and scores of very angry “investors”?

High Debt, Slow Sales Loom Over Chinese Property Firms (SCMP)

All eyes are now on a few Chinese real estate developers particularly vulnerable to slow sales and tight credit, as mainland China’s property market enters a new downturn. [..] At the end of June, Glorious Property (36%) and Hopson (42.8%) had the lowest ratio of cash versus short-term debt among all mainland Chinese developers rated by Moody’s.

China’s stimulus far outnumbers anything the US has done. And that’s when you get these insane debt levels. Which may be sort of bearable, temporarily, when exports keep growing at double digit rates. Not when they’re down 18%. Note also that China now needs $7-8 of new debt to generate $1 of economic growth, approaching levels that are set to doom western economies.

China Finds The Credit Habit Hard To Kick (Satyajit Das)

Chinese government debt, including local government debt, is about 55% of GDP –about $5 trillion (£3 trillion) – an increase of about 60% from 2010.

But the official Chinese government debt figure may not be complete, as it may exclude debts from local governments and central departments outside the finance ministry. If these items are included, China’s government debt including contingent liabilities would be higher, perhaps 90% of GDP. There has been a parallel increase in private sector debt. Corporate debt has increased sharply, approaching 150% of GDP. Traditionally considered compulsive savers, Chinese households have increased borrowing levels from about 20-30% to 40-50% of GDP. [..]

Another measure is the credit gap – the difference between increases in private sector credit growth and economic output. Research studies have found that 33 countries with credit gaps experienced a subsequent rapid slowdown in growth, typically by at least 50%. In China, the credit gap since 2008 is over 70% of GDP. Chinese credit intensity (the amount of debt needed to create additional economic activity) has increased. China now needs about $3-$5 to generate $1 of additional economic growth, although some economists put it even higher, at $6-$8. This is an increase from the $1-$2 needed for each dollar of growth 8 to 10 years ago.

I personally find this one especially worrisome, because it raises the question: where do Chinese industry and Chinese local government get their credit? And under what terms? As a local official, if you need those $7-8 of new debt to generate $1 of growth, you’re probably going to take it, as long as interest rates allow for it. But what are you getting your community into for the future?

Who are China’s lenders? How solid are they? How leveraged? What’s the level of bad loans they already have on their books? And who are the borrowers? Does either side do proper research on the other?

In the end, just about everything is state owned, all factories, enterprises etc. And as we know from history (Soviet Union), parties involved figure out very quickly that state enterprises don’t need to make a killing; the profit would only go to the state anyway. So buyers, suppliers, middle men and local officials start skimming off profits.

A company will buy an X amount of steel or copper with credit from lender Y. It will then turn to lender Z and use the steel as collateral to get credit for the purchase of an even larger amount of copper or steel. And down the line, who is worth what anymore? The individuals involved have all loaded up their pockets, preferably with dollars, but what’s going to happen to the company that’s left with all that steel? I would expect imports to start falling quite dramatically.

Hong Kong’s Soaring Bank Exposure to China Sparks Credit Concerns (Reuters)

In just a few years, Hong Kong banks have ramped up lending to China from near zero to $430 billion [..] Foreign bank claims on China hit $1 trillion last year, up from nearly zero 10 years ago, Bank of International Settlements data shows. The biggest portion of that is provided by Hong Kong, according to analyst estimates of the BIS data. The $430 billion in loans outstanding represents 165% of Hong Kong’s GDP [..] By the end of 2013, Hong Kong banks’ net claims on China as a percentage of their total loan book was nearing 40%, compared with zero in 2010.

If Beijing no longer offers implicit guarantees of loans state banks have put on their books, these banks are going to be a whole lot worse off than merely “spooked”. And the economy will become even more dependent on financing from the deep dark shadows. Beijing has put so much money into the economy that doubling up on that is hardly an option anymore. What seems left for Xi and Li now is to try and manage the path down. Whether that’s even an option is a great unknown and anyone’s guess.

Spooked By Defaults, China Banks Begin Retreat From Risk (Reuters)

Some of China’s struggling firms are finally getting the reception that regulators have been hoping for — a cold shoulder from banks in the form of smaller and costlier loans. [..]There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks. “Interest rates are going up 10% for the entire industry …” [..]

Some gauges of China’s corporate debt are already flashing red. Non-financial firms’ debt jumped to 134% of China’s GDP in 2012 from 103% in 2007, according to Standard & Poor’s. It predicted China’s corporate debt will reach “stratospheric levels” and become the world’s largest, overtaking the United States this year or next.

Don’t be surprised if heavy industry in China gets a series of very hard blows. The levels of leveraged finance will be crucial, and it’s not easy to be confident in that respect.

Default Risks Surge At China Steel Mills (FT)

Chinese steel mills were suffering a medley of woes in mid-March as sales slowed, production levels slumped and profits plunged, according to an investment bank survey published on Tuesday that foreshadows the rising risk of debt defaults in the world’s largest steel producer.

Macquarie Commodities Research, quoting a proprietary survey of Chinese steel mills and traders conducted in mid-March, found that large, medium and small steel mills were all enduring a contraction in orders compared to the same period in February, and profits had declined to historic lows. “Looking at profitability, it is clear why the smaller mills are making the largest cuts (in production) – for the first time in the history of the steel survey not one smaller mill reported that they are making money …

Oh yeah, why not give the developers, of which there are far too many to begin with, the option to sell mortgage-backed securities and things like that, offering people more great returns on their investments that way. Worked great in the US!

Chinese Developers Seek Alternative Financing As Investors Grow Wary (Reuters)

China’s property developers are turning to commercial mortgage-backed securities and looking at other alternative financing as creditors grow more discriminating in the face of rising concerns about the country’s real estate and debt markets. Bond buyers are shying away from second-tier developers because property sales have cooled as the economy slows. The expected bankruptcy of a local developer and the country’s first domestic bond default this month have heightened scrutiny of borrowers. [..]

Chinese regulators last week allowed developers Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. to offer a private placement of shares, opening up a fund raising avenue that had been closed for nearly four years. New rules were also unveiled last week allowing certain companies to issue preferred shares [..]

Big one. Importers backing out of deals. A system built on quicksand falls back to earth. They have to pay back the loans they bought the soy and rubber with, and are squeezed between those payments and less demand for their products. China’s like an oceanliner at full steam ahead that needs to step on the brakes. Too much inertia.

China Soybean, Rubber Importers Renege on Deals (WSJ)

Chinese importers of soybeans and rubber are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world’s second-biggest economy. Most purchases are private, with little data on the volumes affected, but traders at Asian trading firms say they are seeing a sharp rise in canceled contracts this year while other buyers are demanding heavy discounts. The U.S. Department of Agriculture confirmed that China has canceled orders for 517,000 metric tons of soybeans … [..]

The cancellations are a big worry for the commodity markets as exporters around the world had relied for years on China’s insatiable appetite for a wide range of raw ingredients. But now as jitters rise over the health of the economy, the fallout is rippling through into agricultural commodities, just weeks after the price of copper and iron ore tumbled on worries they had been used in risky Chinese financing deals. [..]

Rubber prices have dropped more than 20% since the beginning of the year, due to worries over China’s slowing economy and a global surplus of the commodity. Many sellers who bought at high prices are unwilling to sell at a loss, pushing up stocks at the port of Qingdao to near-record levels recently. Stockpiles in some other commodities like soybeans and iron ore are also high as buyers hang on.

More developers, more trouble. Pray tell, what’s the difference with the US, Ireland or Spain in 2006? Well, true, Chinese debt may well be even more leveraged.

China’s Developers Face Shakeout as Easy Money Ends (Bloomberg)

The collapse of a Chinese developer in a city south of Shanghai foreshadows a shakeout among the nation’s almost 90,000 real estate companies as the government reins in credit and the housing market slows. [..] Zhejiang Xingrun’s demise comes after a policy shift by Premier Li Keqiang to tighten credit. The effort to contain surging home prices comes after they climbed 60% since the government’s 4 trillion yuan of fiscal stimulus in 2008 to bolster the economy after the global financial crisis. Officials have stepped on the brakes even as economic growth was already estimated to grow 7.4% this year, the slowest pace since 1990 [..] China’s seven-day repurchase rate, which measures interbank funding availability, hit a record high of 10.8% on June 20

Bad banks are rarely a good idea. China is no exception. Wait till the state banks begin to wobble, that should be fun.

China’s Rapidly Expanding Black Box (WSJ)

China’s “bad bank” experiment is entering unchartered territory. China Cinda Asset Management, created as a bailout vehicle for China’s bad debts, is scooping up distressed loans at blistering pace. Assets rose by 51% last year to 384 billion yuan ($62 billion), much faster than earlier management guidance of 20% to 30% [..]

A loan bought for 30% to 40% of face value, as seems the company’s historical precedent, should provide enough cushion. But investors know little about the assets. Debt backed by a closed coal mine or property in a ghost city might be worth even less. Cinda, like much of China’s financial system, is still in many ways a black box. In the meantime, Cinda’s financial performance is weakening. Return on assets fell to 2.9% in 2013 from 3.4%, the third straight year of decline. And despite the rise in leverage, return on shareholder equity fell, to 13.8% from 15.8%.

So, anybody feel good about China after all that?

China. A behemoth government stimulus since 2008, a shadow banking system that has grown exponentially and is as opaque as can be, and a level of corruption most South American countries cannot touch. What’s not to like? And then it all comes back to earth. The transition from central control to free(r) market is never going to be easy, trying to juggle both at the same time is another thing still. And yes, China’s easily big enough to drag us all down with it.

I don’t know about you, but I don’t see this end well. The sunny side, though, is that we’ll need to start making a lot of our own stuff again. Sunny because, you know, we’ll create jobs. And can we please not do all the useless plastic trinkets, have a little more taste when we rebuild our manufacturing?


The China Clock Goes Tick Tock – The Automatic Earth.

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Global riot epidemic due to demise of cheap fossil fuels

 Venezuela protests February 2014 image via aandres/flickr. Creative Commons 2.0 license.

If anyone had hoped that the Arab Spring and Occupy protests a few years back were one-off episodes that would soon give way to more stability, they have another thing coming. The hope was that ongoing economic recovery would return to pre-crash levels of growth, alleviating the grievances fueling the fires of civil unrest, stoked by years of recession.

But this hasn’t happened. And it won’t.

Instead the post-2008 crash era, including 2013 and early 2014, has seen a persistence and proliferation of civil unrest on a scale that has never been seen before in human history. This month alone has seen riots kick-off in Venezuela, Bosnia, Ukraine, Iceland, and Thailand.

This is not a coincidence. The riots are of course rooted in common, regressive economic forces playing out across every continent of the planet – but those forces themselves are symptomatic of a deeper, protracted process of global system failure as we transition from the old industrial era of dirty fossil fuels, towards something else.

Even before the Arab Spring erupted in Tunisia in December 2010, analysts at the New England Complex Systems Institute warned of the danger of civil unrest due to escalating food prices. If the Food & Agricultural Organisation (FAO) food price index rises above 210, they warned, it could trigger riots across large areas of the world.

Hunger games

The pattern is clear. Food price spikes in 2008 coincided with the eruption of social unrest in Tunisia, Egypt, Yemen, Somalia, Cameroon, Mozambique, Sudan, Haiti, and India, among others.

In 2011, the price spikes preceded social unrest across the Middle East and North Africa – Egypt, Syria, Iraq, Oman, Saudi Arabia, Bahrain, Libya, Uganda, Mauritania, Algeria, and so on.

Last year saw food prices reach their third highest year on record, corresponding to the latest outbreaks of street violence and protests in Argentina, Brazil, Bangladesh, China, Kyrgyzstan, Turkey and elsewhere.

Since about a decade ago, the FAO food price index has more than doubled from 91.1 in 2000 to an average of 209.8 in 2013. As Prof Yaneer Bar-Yam, founding president of the Complex Systems Institute, told Vice magazine last week:

“Our analysis says that 210 on the FAO index is the boiling point and we have been hovering there for the past 18 months… In some of the cases the link is more explicit, in others, given that we are at the boiling point, anything will trigger unrest.”

But Bar-Yam’s analysis of the causes of the global food crisis don’t go deep enough – he focuses on the impact of farmland being used for biofuels, and excessive financial speculation on food commodities. But these factors barely scratch the surface.

It’s a gas

The recent cases illustrate not just an explicit link between civil unrest and an increasingly volatile global food system, but also the root of this problem in the increasing unsustainability of our chronic civilisational addiction to fossil fuels.

In Ukraine, previous food price shocks have impacted negatively on the country’s grain exports, contributing to intensifying urban poverty in particular. Accelerating levels of domestic inflation are underestimated in official statistics – Ukrainians spend on average as much as 75% on household bills, and more than half their incomes on necessities such as food and non-alcoholic drinks, and as75% on household bills. Similarly, for most of last year, Venezuela suffered from ongoing food shortages driven by policy mismanagement along with 17 year record-high inflation due mostly to rising food prices.

While dependence on increasingly expensive food imports plays a role here, at the heart of both countries is a deepening energy crisis. Ukraine is a net energy importer, having peaked in oil and gas production way back in 1976. Despite excitement about domestic shale potential, Ukraine’s oil production has declined by over 60% over the last twenty years driven by both geological challenges and dearth of investment.

Currently, about 80% of Ukraine’s oil, and 80% of its gas, is imported from Russia. But over half of Ukraine’s energy consumption is sustained by gas. Russian natural gas prices have nearly quadrupled since 2004. The rocketing energy prices underpin the inflation that is driving excruciating poverty rates for average Ukranians, exacerbating social, ethnic, political and class divisions.

The Ukrainian government’s recent decision to dramatically slash Russian gas imports will likely worsen this as alternative cheaper energy sources are in short supply. Hopes that domestic energy sources might save the day are slim – apart from the fact that shale cannot solve the prospect of expensive liquid fuels, nuclear will not help either. A leaked European Bank for Reconstruction and Development (EBRD) report reveals that proposals to loan 300 million Euros to renovate Ukraine’s ageing infrastructure of 15 state-owned nuclear reactors will gradually double already debilitating electricity prices by 2020.

“Socialism” or Soc-oil-ism?

In Venezuela, the story is familiar. Previously, the Oil and Gas Journal reported the country’s oil reserves were 99.4 billion barrels. As of 2011, this was revised upwards to a mammoth 211 billion barrels of proven oil reserves, and more recently by the US Geological Survey to a whopping 513 billion barrels. The massive boost came from the discovery of reserves of extra heavy oil in the Orinoco belt.

The huge associated costs of production and refining this heavy oil compared to cheaper conventional oil, however, mean the new finds have contributed little to Venezuela’s escalating energy and economic challenges. Venezuela’s oil production peaked around 1999, and has declined by a quarter since then. Its gas production peaked around 2001, and has declined by about a third.

Simultaneously, as domestic oil consumption has steadily increased – in fact almost doubling since 1990 – this has eaten further into declining production, resulting in net oil exports plummeting by nearly half since 1996. As oil represents 95% of export earnings and about half of budget revenues, this decline has massively reduced the scope to sustain government social programmes, including critical subsidies.

Looming pandemic?

These local conditions are being exacerbated by global structural realities. Record high global food prices impinge on these local conditions and push them over the edge. But the food price hikes, in turn, are symptomatic of a range of overlapping problems. Global agriculture‘s excessive dependence on fossil fuel inputs means food prices are invariably linked to oil price spikes. Naturally, biofuels and food commodity speculation pushes prices up even further – elite financiers alone benefit from this while working people from middle to lower classes bear the brunt.

Of course, the elephant in the room is climate change. According to Japanese media, a leaked draft of the UN Intergovernmental Panel on Climate Change‘s (IPCC) second major report warned that while demand for food will rise by 14%, global crop production will drop by 2% per decade due to current levels of global warming, and wreak $1.45 trillion of economic damage by the end of the century. The scenario is based on a projected rise of 2.5 degrees Celsius.

This is likely to be a very conservative estimate. Considering that the current trajectory of industrial agriculture is already seeing yield plateaus in major food basket regions, the interaction of environmental, energy, and economic crises suggests that business-as-usual won’t work.

The epidemic of global riots is symptomatic of global system failure – a civilisational form that has outlasted its usefulness. We need a new paradigm.

Unfortunately, simply taking to the streets isn’t the answer. What is needed is a meaningful vision for civilisational transition – backed up with people power and ethical consistence.

It’s time that governments, corporations and the public alike woke up to the fact that we are fast entering a new post-carbon era, and that the quicker we adapt to it, the far better our chances of successfully redefining a new form of civilisation – a new form of prosperity – that is capable of living in harmony with the Earth system.

But if we continue to make like ostriches, we’ll only have ourselves to blame when the epidemic becomes a pandemic at our doorsteps.

Re-blogged from: Global riot epidemic due to demise of cheap fossil fuels.

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