Monday, April 02, 2007

The ELP Plan: Economize; Localize & Produce

By: Jeffrey J. Brown

In this article I will further expound on my reasoning behind the ELP plan, otherwise known as “Cut thy spending and get thee to the non-discretionary side of the economy.”

I have been advising for anyone who would listen to voluntarily cut back on their consumption, based on the premise that we were probably headed, in a post-Peak Oil environment, for a prolonged period of deflation in the auto/housing/finance sectors and inflation in food and energy prices.

To put our current rate of worldwide crude oil consumption in perspective, during George W. Bush’s first term, the world used about 10% of all crude oil that has been consumed to date, and based on our mathematical models, the world will use about 10% of our remaining conventional crude oil reserves during George W. Bush’s second term.

First, a discussion of our current economy.

The Current Economy, “The Iron Triangle” & The Mortgage Meltdown

Author Thom Hartmann, in his book, “The Last Hours of Ancient Sunlight,” described a high tech company that he consulted for that went through several rounds of start up financing, and then collapsed, without ever delivering a real product. At the peak of their activity, that had several employees and lavish office space--until they ran out of capital. His point was that this company was analogous to a large portion of the US economy, which has the appearance of considerable activity and uses vast amounts of energy, but how much of this economic activity delivers essential goods and services?

I have read, and it seems reasonable, that the majority of Americans live off the discretionary income of other Americans. We are therefore facing a wrenching transformation of the US economy--from an economy focused on meeting “wants” to an economy focused on meeting needs--and the jobs of a vast number of Americans are thereby directly threatened in a post-Peak Oil environment.

I have described three segments of what I call the Iron Triangle: (1) The auto/housing/finance group (the “Debt” group); (2) The mainstream media group (the “MSM” group) and (3) Some major oil companies, some major oil exporters and some energy analysts (the “Energy” Group).

The Debt Group wants Americans to keep buying and financing large SUV’s and houses. The MSM Group wants to keep selling advertising to the Debt Group. The Energy Group provides the intellectual ammunition for the Debt Group and the MSM Group, i.e., we have trillions and trillions of barrels of remaining oil reserves, and Peak Oil is something that we don’t have to worry about for decades.

Unfortunately, the net effect of the efforts of the Iron Triangle is to encourage Americans to continue buying and financing large SUV’s and houses at great distances from their jobs, because higher oil production, and thus lower fuel prices, are right around the corner.

The US Mortgage Meltdown was inevitable, but in my opinion, the trigger for the meltdown was the increase in oil prices in the second quarter of 2005. The US Personal Saving Rate metric is not perfect, but it is a consistent measurement, and in recent years it was positive--until the second quarter of 2005. It has been negative ever since the second quarter (April, May, June) of 2005 .

The average monthly Brent spot crude oil price, in the 20 months prior to May, 2005 (the middle of the second quarter) was $38 per barrel. The average price after May, 2005 has been about $62, within a range of $54 to $74. I believe that this increase in energy prices was the final straw that pushed many US households into a negative saving rate, triggering the current wave upon wave of foreclosures.

Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA), in 2004 predicted that the long term oil price would be $38 per barrel, because rising crude oil production would force oil prices down in order to equalize supply and demand. In reality, flat to declining crude oil production since May, 2005 has forced prices up in order to equalize supply and demand.

Those who listened to the false promises of energy abundance made by CERA, et al, have had considerable reason to regret it.

What have I and others been advocating? Let’s start with Economize.

ELP: Economize

For some time, I have suggested a thought experiment. Assume that your income dropped by 50%. How would you change your lifestyle?

Many employees of Circuit City don’t have to imagine such a scenario. Many higher paid employees at Circuit City have been fired and then been told that they are welcome to apply for their old jobs, subject to about a 50% pay cut.

In my opinion, the unfortunate new reality is that we are going to see a growing labor surplus--against the backdrop of deflation in the auto/housing/finance sectors and inflation in food and energy prices. By reducing your expenses now, while you can do it voluntarily, you will at least be better prepared for whatever the future may bring.

A key way to Economize is to Localize.

ELP: Localize

I recommend that you try to reduce the distance between work and home to as close to zero as possible, and furthermore, that you live in smaller, much more energy efficient housing, preferably close to mass transit lines.

If you can walk or take mass transit to work, in many cases you can get by without a car, or least fewer cars--and save considerable amounts of money. Currently, it costs about $7,500 per year to drive the average late model US car about 15,000 miles per year. As gasoline prices increase, and as depreciation rates probably also increase, the cost per mile of driving cars will continue to increase.

I would further recommend that you integrate yourself into your local community. Get to know your neighbors. Become involved in local government, etc.

I would especially recommend support of local food producers, perhaps via Community Supported Agriculture, and support of local manufacturing and local businesses.

Finally, the Produce recommendation.

ELP: Produce

Jim Kunstler has suggested that we should not celebrate being largely a nation of consumers. I agree with Jim. We need to once again become a nation of producers. I recommend that you try to become, or work for, a provider of essential goods and services.

Key recommended sectors are obviously energy--conventional, non conventional and alternative energy production and energy conservation--as well as food production, especially local organic farming close to towns and cities.

Other sectors to consider are repair and maintenance, low cost energy efficient housing, low cost transportation, basic health care, etc.

The biggest risk to family finances is trying to maintain the SUV, suburban mortgage way of life in a period of contracting energy supplies. Beyond that, one of the next biggest risks in my opinion, is excessive and unwise spending--especially debt financed spending--on college education costs.

While we will desperately need engineers and many other technically qualified graduates, we are seeing wave upon wave of college graduates entering the work force with degrees that very poorly prepare them for work in a post-Peak Oil environment. We may ultimately see college graduates competing with illegal immigrants for agricultural jobs.

Perhaps the best education investment that many young people could make is a two year associate degree in some kind of repair/maintenance area, perhaps with summer jobs in the agricultural sector.

I would especially recommend that you consider buying, perhaps with a joint venture group, a small farm, either currently organic, or that can be converted to an organic farm. In the short term, if nothing else you could lease it out to an organic farmer. Longer term, you might consider building or moving a prefab, small energy efficient house to the farm. If nothing else, this plan may provide a place of work for your unemployed college graduate.

I think that “Tiny Houses” will become more popular, as larger homes are no longer viable. Where there are jobs nearby, many McMansions could be subdivided, but absent local job centers, I expect large swaths of American suburbia to be essentially abandoned. As Jim Kunstler warned, American suburbs represent the “Worst misallocation of capital in the history of the world.”

Very small (250 square feet or so), highly energy efficient, perhaps prefabricated housing makes a lot of sense, and this may become a growth sector.

I should confess that I in no way have a green thumb, but others certainly do, and there are some very encouraging case histories of Americans doing quite well with their own “Victory Gardens” so to speak, such as this case history: “Berkeley: Urban farmers produce nearly all their food with a sustainable garden in their backyard.”

How have people responded to these recommendations?

The Responses Thus Far

Two responses, from recent years, are illustrative.

First, the West Texan. After outlining my plan, a friend of mine from West Texas thought about it for a moment and then said, “But if we stop borrowing and spending, what will happen to the economy?”

Second, the Dallas socialite. Again after outlining my plan, this lady said, “You’re not from Dallas, are you?” I replied that I was not. To which she said, “No one raised in Dallas would ever talk about living below their means.”

So, living below one’s means, at least in years past, was somehow considered vaguely un-American and socially unacceptable.

However, recently people who have followed some version of the ELP plan, either because of my recommendations, or based on their own evaluation of the present environment, have had considerable reasons to be glad that they voluntarily downsized. So far, I have not heard any regrets from anyone who downsized.

Or, turn it around. Does anyone now wish that they had bought a large SUV and large suburban McMansion--all with 100% financing--on January 1, 2006?

Finally, if we are wrong about Peak Oil, and if you followed the ELP plan, you will have less--or no--debt, more money in the bank, and a lower stress way of life.

Please note that the next essay in this series probably won’t be posted until the week of April 16th. I will be doing ELP research, checking out post-Peak Oil locales.

Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. His e-mail address is westexas@aol.com.

39 comments:

  1. Thanks for some sound advice there. I'm amazed no-one's commented yet. But greets from Finland - we'll have an interesting future with our cold winters without cheap energy. Happily we as a nation have been somewhat ecological for decades already, but that means there's less Economization to be done. But there's always something you can improve on, I'm sure.

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  2. Anonymous11:54 PM

    I believe that po will occur in the next few years at latest or has already as some said 2005 was. I own 8 acres of land and have a big house that I would be willing to let sharecroppers stay in.

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  3. Anonymous10:53 PM

    In about 1-2 weeks we (I) will be facing the realities of less income. GM and UAW are about to announce an agreement that could dramatically alter the Auto workers pay and benefits. This will effect me (see delphi contract). I watch Full sized SUV's pass by me every day here in Texas. Many of my co-workers have & drive new auto's & suv's, drive several miles to work from new homes. They continue to purchase even after GM announced a cut in overtme and base production. The Hybred is going to keep this plant running and will be immune to closure. (so they think!) I have sold my house, moved within one mile from the plant, renting, paid all depts, and looking for land in Michigan. getting rid of all the dead weight(possessions,bills) is enough to consider "Westexas's ELP plan". The time to make changes is now. Get a plan "B" While people are still buying...

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    1. I was very encouraged to find this site. I wanted to thank you for this special read. I definitely savored every little bit of it and I have you bookmarked to check out new stuff you post.

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  4. Kathy McMahon1:32 AM

    Hi Jeffrey,

    Thanks for writing this useful post. I came across a term yesterday, "End of the Boom Psychology," and after looking it up, I think the writer made it up. He should have said "Depression-Era Mentality."

    I'm in the process of writing a post on the emotional changes we are likely to see as people come smack up against the contrast between the Media Group's message, their desire to "Party on, Dude!" and the shock of finding out that their house really didn't increase in value and no, they can't refinance to pay off the credit cards anymore.

    It's just more fun to shop at the mall than it is to spend your afternoons canning and weeding. But I'm afraid it will dawn on people a bit too slowly that these aren't "fun suggestions" and "quaint past times" to explore. When they wake up, I'm afraid it will be when they've maxed out their credit cards, the "tapeworm" of debt has raised their interest rates, the bank has turned them down for refinancing, and they can't afford bankruptcy.

    At this point, they will not be able to 'dig themselves deeper into debt' because someone took away the shovel. But they are still in a hole, and very very deep down.

    We can't use the 'Great Depression' as a good guide to how people will react, because there are too many differences. We have very few farmers, and many homesteading skills have been lost. Most of us, now, are city dwellers across the globe, and have become reliant on the culture for our most basic needs. We not only don't make anything anymore, few of us can do anything anymore that doesn't require fossil fuel, and most have very little interest in learning.

    I'm curious what your opinion is about what kinds of reactions we'll see when the 'Great Spending Contractions' happens for a large number of us. Poof! goes the take-home meals...Poof! goes the dry cleaning and gym memberships...Poof! goes the vacation plans and it gets more and more painful. No summer camp for the kids, no college for them either. No cell phone or cable bill. How long do we eat spaghetti?

    I think once the 'Great Spending Contractions' start, like labor, they'll just get closer together and more painful, without the baby after it's all over.

    The West Texan was right: When we stop partying and sober up, we'll all end up with a tremendous hang over. No spending means major contractions, job loss, more contractions. And the Socialite no doubt is familiar with the term "big hat, no cattle," to describe someone with the fluff but not the resources to back it up.

    Those of us with no hoofs, or ounces or acres or repair skills will end up being the 'big hat no cattle' of the future, even if we are 'oh so fashionable' now.

    Thanks for a great post.

    Kathy

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  5. What, no more engineers, scientists, policy makers, lawyers, accountants, professors, teachers, librarians? "Go to trade school and work on a farm" you say. Is that how someone such as yourself, who probably makes close to 7 figures, got to be where you are? Sure, going into debt for education at this historical juncture is not a good idea because of future uncertainty, and you're right to point that out. And decreasing class mobility is a b*tch. And maybe we will eventually have a total collapse kind of situation. But that in most probability (esp. outside of the US) will still be a while and meanwhile getting thee on the discretionary side of things still leaves a lot more room for choice than going to trade school and getting a farm job. If you have kids, what are they doing - training to be welders?

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  6. Oops, I meant non-discretionary (rather than "discretionary" as I said) in my above comment.

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  8. Anonymous1:14 PM

    Excellent post, Mr. Brown. As somebody who gave up Corporate America and started an organic farm, you've given me a great deal of food for thought here, no pun intended. I for one will take weeding and canning over shopping any day, and I believe that many who try it will feel the same way. With the current high interest in healthy local food, I'm hoping this will trigger increased interest.

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  9. I've always liked gardening and have kept a backyard garden for the last few years. In the summer, when it is producing, our grocery bills are noticeably lower. I'd encourage everyone to try to dabble in it, bit by bit (don't get too ambitious all at once). It's very satisfying to grow your own stuff, plus it tastes much better than the stuff you get at the supermarket. It gives you a bit of exercise and fresh air and relaxation as well. The main thing is to get your soil in good condition; I'd recommend getting a book or two on organic gardening, and again, starting small.

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