The Thermodynamic Economy and the Era of Peak Oil

Fiat Currency - Fiat money is money declared by a government to be legal tender. The term derives from the Latin fiat, meaning "let it be done". Fiat money achieves value because a government demands it in payment of taxes and says it should be used within the country as a tender (offering) to pay all debts. In effect, this validates it to be used to buy and sell goods and services and mandates it to pay tax. Where fiat money is used as currency, the term fiat currency is used. Today, most national currencies, including the major reserve currencies, i.e. US dollar, euro, and pound sterling, are fiat currencies.

Fractional Reserve Banking - Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. Fractional reserve banking necessarily occurs when banks lend out any fraction of the funds received from deposit accounts. This practice is universal in modern banking, as opposed to full-reserve banking.

By its nature, the practice of fractional reserve banking expands money supply (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by commercial decisions by bank on whether to lend out reserves (creating money) or not lend out the reserves (creating excess reserves).

Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial banking system, and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when a large number of depositors seek withdrawal of their deposits; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis. To mitigate these problems, central banks (or other government institutions) generally regulate and oversee commercial banks, act as lender of last resort to commercial banks, and also insure the deposits of the commercial banks' customers.

Compound Interest - Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding (i.e. the interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 initial principal and 1% interest per month would have a balance of $101 at the end of the first month, $102.01 at the end of the second month, and so on.

Pyramid Scheme - A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any product or service being delivered. Pyramid Schemes are based on an Infinite Growth paradigm, which is impossible to achieve. The Pyramid Scheme depends on a constant supply of investors on the back end to pay dividends to initial and subsequent investors. Once the investors on the back end dry up or initial investors begin taking out more capital than is being produced on the back end, by latter investors, then the pool of assets begins its rapid decline and collapse.

Infinite Growth Paradigm - Is a philosophy that growth of a commodity or tangible asset can continue forever at an constantly increasing rate.

Reserve Currency - A reserve currency (or anchor currency) is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc.

This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currency with each purchase and pay a transaction cost. (For major currencies, this transaction cost is negligible with respect to the price of the commodity.) It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.

The United States dollar is the most widely held reserve currency in the world today. Throughout the last decade, an average of two thirds of the total allocated foreign exchange reserves of countries have been in U.S. dollars. For this reason, the U.S. dollar is said to have "reserve-currency status," making it somewhat easier for the United States to run higher trade deficits with greatly postponed economic impact (see currency crisis). Central bank reserves held in dollar-denominated debt, however, are small compared to private holdings of such debt. In the event that non-United States holders of dollar-denominated assets decided to shift holdings to assets denominated in other currencies, there could be serious consequences for the U.S. economy. Changes of this kind are rare, and typically change takes place gradually over time; the markets involved adjust accordingly.

Petrodollar - A petrodollar is a United States dollar earned by a country through the sale of petroleum. The term was coined by Ibrahim Oweiss, a professor of economics at Georgetown University, in 1973. Oweiss felt there was a need for a word to describe the situation then occurring in oil producing, OPEC countries which were earning large amounts of money, in dollars, from oil production.

Thermodynamics - In physics, thermodynamics is the study of the conversion of energy into work and heat and its relation to macroscopic variables such as temperature, volume and pressure. Its progenitor, based on statistical predictions of the collective motion of particles from their microscopic behavior, is the field of statistical thermodynamics (or statistical mechanics), a branch of statistical physics. Historically, thermodynamics developed out of need to increase the efficiency of early steam engines.

* First law of thermodynamics, about the conservation of energy: The change in the internal energy of a closed thermodynamic system is equal to the sum of the amount of heat energy supplied to or removed from the system and the work done on or by the system or we can say " In an isolated system the heat is constant".

* Second law of thermodynamics, about entropy: The total entropy of any isolated thermodynamic system always increases over time, approaching a maximum value or we can say " in an isolated system, the entropy never decreases". Heat energy cannot be transferred from a material of lesser to a material of greater.

* Third law of thermodynamics, about the absolute zero of temperature: As a system asymptotically approaches absolute zero of temperature all processes virtually cease and the entropy of the system asymptotically approaches a minimum value; also stated as: "the entropy of all systems and of all states of a system is zero at absolute zero" or equivalently "it is impossible to reach the absolute zero of temperature by any finite number of processes."

Entropy - a function of thermodynamic variables, such as temperature, pressure, or composition, that is a measure of the energy that is not available for work during a thermodynamic process. *** What this is stating in layman's terms is that energy is not 100% efficient in it's process and as the process moves along the time variable more of the mass becomes inert until it produces no energy.

Peak Oil - Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. The concept is based on the observed production rates of individual oil wells, and the combined production rate of a field of related oil wells. The aggregate production rate from an oil field over time usually grows exponentially until the rate peaks and then declines—sometimes rapidly—until the field is depleted.

Finite Commodity Supply vs Infinite Growth Demands - No matter how anyone presents the facts, there are a finite amount of resources on this earth. When we figure out ways to use these resources, we create value and these resources become tangible assets (commodities).

Initially, when we develop these resources, it is easy to produce the commodity -- what many call low hanging fruit. But, with all finite resources as we begin utilizing the resources more and more to an exponential degree they become harder to find and it becomes a more costly process to develop these resources. Eventually the cost of exploration and development of these resources will be more costly than the value of the commodity itself.

The five phases of the Organizational Life Cycle are birth, growth, maturation, decline, and death. If you boil it all down, then you see that this is true of every entity on this earth. Nothing of this Earth lasts forever.

The Hound ties it together- We have already seen the dilemma of Peak Oil in the United States. It is cheaper to pay the Middle East for their oil (low hanging fruit), than it is to explore and develop our own resources. The Oil bought with these Petrodollars are what established the United States Dollar as the World's Reserve Currency and empowered autocratic authorities throughout the Middle East.

There in lies the dilemma of the low hanging fruit. At what cost to our society has this been done. How much hidden cost has been accumulated due to these wars we are waging half way around the world in the Middle East, because of our addiction to that oil? We all know if there was nothing but desert there, then we would not be there. The upfront cost seems to be a bargain to those who look at the simple equation of what is paid at the pump, but the ancillary hidden costs are never entered into the equation. Look at the dealings in the Middle East, look at the strategic race to lock up control of the reserves around the globe, look at the complex costs of exploration, and then get deep in your mind and think of the multitude of ancillary costs involved.

I don't want to hear the blame game, gotcha, or I told you so; because that pettiness isn't going to save us. I'm not saying Oil is bad. I don't think we can stop utilizing fossil fuels over night and trying to do so will mire us further into a deeper, prolonged economic contraction. This isn't some kind of Peter Pan dream. What I am trying to convey to you, is it is time to start the transition. It is time to start getting serious about this issue of building a bridge to the future and I am not talking about doing this through the usual methods of Authoritarian Hyperbole that has the dogs chasing their tails. What I am talking about is waking people up to reality.

We aren't going to run out of oil tomorrow, but with the growth of population on the planet and the demand for energy, in my opinion we are definitely at the top of the bell curve when it comes to the "Age of Oil." We are headed straight towards diminishing returns, which means that energy and everything that is a derivative of Oil will become more expensive. Easy Oil is what led to the population growth that we have seen over the last 100 years. Explosive growth has not taken place in the first world, because we have used resources to bring our society out of poverty and educate people and as a result lower the birthrate. The population explosion has continued in the third world where poverty and lack of education thrive.
Reference - Population Today - A publication of the Population Reference Bureau Volume 30, Number 8 November/December 2002 - page 7

Oil has been the cheapest, most plentiful, safest, and efficient Thermodynamic Energy resource in the history of humanity. There is corollary evidence that proves Oil as energy allowed the human race to grow at an exponential rate over the last 110 years. As of July 1, 2008 World population has grown to 6.7 Billion people, that is more than a 4-fold increase since 1900 and a 2 3/4-fold increase since 1950. It took 1,850 years (from 1 AD to 1850 AD) to increase the population 4-fold and only 160 years to increase the population 5 1/4 fold. This has all been done at a time when the worldwide birthrate has been cut in half.

What does this signify? That we are living in an era that should be treated seriously, but instead we are living in a societal era of moral and intellectual ambivalence at best and decay at worst. It seems that very few of us care, when we are living in a time of the most extraordinary growth in Human History. How many people today even realize how far we have come? This growth should not be taken for granted. It will not necessarily go on forever. It may even come to a standstill.

When I point to the negative consequences of today's economic numbers, I am treated like a pariah. I'm sorry that I can't live on ignorance and/or blind faith. If Oil producing nations decide to refuse our currency and it no longer garners reserve status, then we have to convert the currency into one that they will accept. There are fees that are attached to such conversions and thus oil is that much more expensive to purchase. If dollars come flowing back into the U.S., because foreign nations and people don't want them, then like having more stock shares available, supply and demand, the dollar will devalue further and thus oil will be even more expensive. Are you getting the point?

When it finally hits the fan, who will be panicking? I believe it will be the blissfully ignorant, those who refuse to prepare, and those who refuse to think.

I am not saying that you should not enjoy your life. You should, but life is about more than pleasure and instant gratification. We are morally obligated to leave this planet in better shape than it is left to us. We need balance and I am not talking about stifling growth until there is no growth. We need to be investing this country's assets towards building the infrastructure of the future. The fact that Oil will not last forever must be entered into the equation. We need to start utilizing our minds, our skills, our energy, and our collective soul to dig our way out of this hole we have created for ourselves. It is time.

We need to educate ourselves about the realities we face as a society. We really do need more people to spread the word about these challenges and we must restore accountability in the process. We need more problem solvers, instead of problem causers and we need to get away from silly political gamesmanship and self-aggrandizement.

What we are seeing today in our economy is the result of ignoring the signals. Our whole economy has been tied to Oil and the Oil Age is heading over the hill. There is an old saying, "Live by the sword and die by the sword." Oil is our sword. We conquered the World because of it and now we may lose our Empire if we don't adapt to the next energy source(s), whatever those may be, and a world with dwindling Oil supplies.

The signals have been there for quite some time and crazy amounts of resources, including but not limited to human capital, time, and money have been used to obfuscate the energy issue. Ignoring the signals is leading to a time of reckoning. Please join the cause and spread the word before its too late. History has proven that if Americans work together, they can do anything.