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Interview With Chris Martenson: "Prepare For peak Oil
While There Is Time"

By Alexander Ac

16 November, 2010

ASPO peak oil conference held in Washington was an unique opportunity to meet Dr. Chris Martenson. Chris is devoted to finances, economics, energy and environment and connects together these separate fields. He says that the next 20 years will be very different from the last 20 years. Peak oil “will change everything” and there is never too soon for preparations. The key is resilience, self-dependency and versatility. He is an optimist and believes that many people will survive peak oil happily – if they prepare themselves. As all people researching peak oil and its impacts, he advises people to get out of debt.

Alexander Ac: You have obtained your PhD in neurotoxicology. How have you come to such a different topic as peak oil? What is your motivation?

Chris Martenson: Technically my degree came from the pathology department at Duke, although my specialty was neurotoxicology. Pathology is all about risks. As a pathologist, somebody might say: “Hey, my uncle smokes 4 packs of cigarettes a day. Is he going to get cancer”? And the pathologist would then say: “Maybe," and talk about the probabilities involved. So I was trained… I grew up, thinking about risks. Everything is risks to me, not certainties. Well, once I started investigating how the economy was actually put together, once I learned how money is created- by the way that was something that I did not learn somehow, in my MBA program - I have never learned it anywhere in my traditional education… once I learned how money was made, I saw the risks in that. I soon came to realize that our money system has to grow in order to function well. And then I learned about peak oil. Classical economics tried to convince me that growth depended on such things as capital, production, labor...but never really accounted for resources. They just show up on time in the desired quantities. Actually, as a scientist I know that all growth and complexity depend on energy. So I started to look at the energy and when I discovered peak oil, I was like “Oh my god this changes everything”. And again, I take this entire story from the point of view of the risks involved. I have no idea how this is all going to turn out. But I see the risks to our economy and expected way of life as large, and they are growing.

AA: You said that the money needs to grow. But could it be otherwise or it has to be like this?

CM: Given our current money system, it has to grow. There are other systems that do not require growth and different money systems we could use. But not the one we are using, where one needs to loan money into existence. There are certain very theoretical constructs, where you could show that the system does not have to grow. But the very first time somebody takes out the loan for a nonproductive use, he starts the growth cycle. So think about all the ways we take out the loans for, essentially noneconomic reproductive uses, auto loans, mortgages… these are things where there really is no additional economic value. Once the house is built, it is built. And whether you and I trade it back and forth to each other taking out larger and larger mortgages, has no impact on the actual economy. Nothing is being produced in those subsequent transactions but higher levels of debt and money.

AA: It can’t go forever.

CM: Correct. For a while it can, that's for sure. But ultimately government borrowing in many cases is also very non-productive. To in the sense that US government borrows for military expenditures, builds a beautiful bomb, which creates a lot of economic activity, but then blows it up. So that there is no more economic activity associated with that bomb, right? Maybe there are even some destructive effects. But otherwise just the debt remains; nothing productive. Those are the sources of dynamics that creates a debt spiral, which is a compounding spiral and we see this perfectly in the data. I'm not here to say, whether this is good or bad. But understanding how and why this system grows, and has to grow, gives you really critical insights to the how the future is going to unfold.

AA: Are people willing to talk about the peak oil? What is their reaction? Is the openness to talk about energy decline part of the human nature?

CM: You know, everybody can understand peak oil, but very few people actually do. And it is not a question of intellectual inability. When I say that people can understand it, I mean that you can tell it to them…

AA: You do not have to be genius to understand…

CM: Exactly. It is very simple actually. Anybody, who ever… you know, had a drink with ice and put a straw, understands depletion. It always runs out, we understand that, right? But what happens is that people will hear it and then they will not go in. Because they have something blocking that information from going in, and that thing is almost always a belief of some sort. And what is usually at the core of people's difficulty in hearing about peak oil, the hardest belief, is faith in technology. And here is what a lot of people confuse, the technology with energy. And really, it is a bizarre thing. As a scientist I know the first law of thermodynamics. You can’t create energy and you can't destroy it. The second law states that every time you handle energy it gets smaller like a bar of soap; the more you handle it the smaller it gets. Some of it gets lost to the universe in the form of waste heat no matter how careful you are. It means we have been given one big block of energy and we are turning it into the waste heat. And that’s what economy is from an energy standpoint; a really amazing machine for turning high quality energy into waste heat. It is doing beautifully at that. But most people do not have that understanding, instead they see the next generation of iPhone come out and they think “wow…that's amazing”. And some people hold really crazy beliefs, like you can burn water in a car if you just fiddle with the carburetor. They do not understand that water is all the way down on the energy scale. You can’t burn water. I mean, oxygen is required to burn stuff, right? And water is H2O. So you have oxygen in it; it's already burnt. People do not fundamentally understand the science behind it. I think there is another blockage, why a lot of people do not want this fun, easy existence we live in, to end. They want to live comfortable life, which is perfectly understandable.

AA: And do you think that people understand the term diminishing return?

They certainly can, when I explain it. It is no problem for them to understand it intellectually.

CM:AA: And that there are implications of that, of course…

CM: Those are harder to grasp, even at this conference. I have seen a lot of people not quite getting what economically might happen. I have seen a lot of people assuming there is a kind of energy decline curve, so that economy might sort of to follow that. But we are entering this decline curve with the highest level of leverage, or debt, on record. We have been towering up huge amounts of debt that requires constant growth. So I see the possibility, again a risk, of a more disruptive future than perhaps others do.

AA: It won’t be a gradual decline, probably…

CM: No. Financial markets never works gradually. Like, one month Greece was fine and the next month it was bankrupt.

AA: Nobody would have predicted that, say half a year ago, or even sooner…

CM: No. Like in evolutionary biology, Stephen Jay Gould says that we go through punctuated equilibrium, right? Long periods of evolutionary stasis followed by incredible bursts of change. Financial markets are the same; they just sit for a while and then they suddenly change. That’s the thing some people don’t quite appreciate.

AA: Are people in the financial sector aware of peak oil? Can you guess any percentage?

CM: Awareness is growing. It is positive trend. You know, financial markets exhibit herding behavior, once the herd decides that peak oil is a real thing, I think we will see a very rapid shifts, in behaviors. So the reason I am worried is if we think of what is going to happen if even just a small percentage of all the money out there decides to chase after oil, you will see an incredible explosion. It will be very rapid, very sudden. You know 100 dollars per barrel or 200 or more, pick a number, it does not matter. And that is a very real possibility. More and more I am talking to financial firms which want to explore these issues. So they are getting it.

AA: What is the best evidence, that there is a causal relationship between global GDP and global oil use?

CM: Well, the correlations are very, very high. The question is, it is a causation, right? First of all, ; let's imagine that on the floor between us there is a giant pile of iron ore, really good stuff, like 10 % iron ore. But we have no energy. Now, quick, grow me an economy, turn this ore into steel, and then turn the steel into something you can sell…

AA: You can’t do anything without energy.

CM: No, you can’t. Even Julian Simon, who had the famous commodities bet with Paul Ehrlich once upon a time… he said: “Energy is the master resource”. That's absolutely right. This is why the United States has the Carter Doctrine, which is about how we are going to control, or make sure that oil flows from Middle East. We do not have any banana doctrines, you know, to ensure the bananas flow, or anything else that is completely replaceable. But energy is not replaceable. So just intuitively we can understand that the data shows good degrees of correlation…

AA: There is no reason to suggest that it is only correlation…

CM: Yes. There is causation. Let's be clear about this: Oil is just one form of energy. Actually, I think, the most important economic energy source is electricity. If you have to say quickly which one you could live without first, electricity or oil, the choice is clear. But oil is how we transport everything. And the risk that I see in this particular story is that we have built for ourselves a very big supply chain now. People talk about 1,800 mile salads, but they should really talk about 15,000 mile computers once all the component shipping is included… and in that chain be have done some very beautiful cost effective things meaning, we do not keep inventories anymore. We ship things just in time…

AA: The flow based economy…

CM: Yes. And it is beautifully efficient, but it's not robust. So cost efficiency comes with a trade-off. And we learned that in the case of Katrina which swept in, wrecked a city, which ran out of food almost instantly, because only a couple of days is normally kept on hand. So what I think we saw with respect to food supply in case of Katrina and New Orleans that is exactly the sort of storm I would predict would happen across global supply chains. Every single component has to be in that motherboard for the computer to be assembled. When you are missing even one chip, you can’t make it.

AA: So we can say that increasing complexity makes us, on one hand much more efficient, but at the same time it makes us much more prone to risks. It does not matter which part of the system breaks down, the whole system breaks down… the whole system can’t work anymore.

CM: Yes, exactly, cost efficiency comes at the expense of resilience. And if you want resilience, you can build inventories, but it is much less cost efficient, right? So that is the trade-off we always make and the globe, almost all of the OECD countries have tilted extremely far towards to the cost-efficient side of things. And this is what peak oil puts at risk, because we require to ship all these thing constantly in trucks, ships, planes, it is just constantly going all over the place.

AA: Do you think we can have electricity grid without oil, or is it interconnected?

CM: Yes, they are really interconnected at this point. I would really feel better if we had at least one complete supply chain where you could either assemble or reassemble through scavenging a complete new vehicle using only electricity in the entire process. We can get there, but we have yet. That is a crucial point.

AA: We should work on that…

CM: Yes, that would be great.

AA: If global oil consumption declines, let’s say 1 %, how much will or should the GDP decline? What are the scenarios and feedbacks?

CM: What are the numbers… every 1 % increase in GDP over the most recent two decades I believe was close to 0,25 % increase in oil consumption, that is about 4 to 1 sort of a relationship…

AA: But that is the increase.

CM: Yes. So on the downside… if we just went straight on a line and say increase equals decrease then we would say for every 1 % decline of oil we would see about a 4 % decline in GDP. I think that actually it would be more because of the levels of leverage and debt that exist…

AA: Maybe at the beginning it might be, but later on it might be more…

CM: Yes. There are going to be some non-linear relationships that are hard to predict. And there are feedback loops here, so if you go out and look at all the shale gas plays that are being drilled right now by small or independent companies, they have a lease, they get some capital, they start to drill a bunch of wells, and they sell them and keep moving. In this story if the capital markets seize up, the drilling stops, right? So we can imagine a scenario where as energy goes down it causes the debt markets to seize up, the debt markets cause the energy production system to seize up and because that is seized up, the markets can’t open again, and so on. It's a very big risk. So if you have this problem you could see how this negative feedback loop could develop. If we just leave it to markets, we could be in for a real disappointment. This is why many people say when we get to that point, energy development will have to be nationalized meaning that governments will have to step in and say "we do not care if this is not economic right now, here is your money, keep drilling, we need the energy more than we need to show an accounting profit."

AA: So we should not leave the solution of peak oil to free markets?

CM: I think the free markets are horribly positioned to address this matter. There are some times where free markets are great but other times they are absolute disaster… and I am going to be clear about this too. We do not actually have free markets. In the USA right now gasoline is about 2.50 per gallon. That’s leaving out of the price of that, all the externalities, all the environmental costs, and the military costs of making sure that oil comes out of the ground and makes it to market. The true price of gasoline is probably closer to 10 to 15 dollars per gallon. So we are getting the false information from the prices, which means it is not a true market. True free markets give you good solid price information and provide rapid feedback. But we do not have that. I mean 2.50 per gallon keeps people complacent, gulled into thinking that everything is OK for too long and then when the crisis hit they are unprepared because the free market failed to give good information via prices.

AA: There is a lot of talk about economic recovery. Do you think there is recovery and can we expect second economic downturn, or something like that?

CM: We have had a statistical recovery, at least with respect to the headline GDP number. That is not surprising; you know it is maybe up 1 % for the third quarter. What surprises me is that it is only up that much given that US government deficit spending is presently over 10 % GDP. So if you take out that deficit spending we actually had a minus 10 % quarter and I was expecting it to be stronger given that amount of stimulus. So that headline number we have to decompose into two parts. The actual rate of decline in the real economy plus the amount of support from government.

AA: So there was no real recovery…

CM: Not yet. We are not seeing base level demand increasing very much in any of the consumer data, so consumer debt is still going down, housing prices and activity is still way down, auto sales, retail sales.. there is also problem now that government numbers on retail housing are not lining up with what I consider to be better quality source of data, which is state sales tax data, that’s real, no statistical adjustments, no seasonal adjustments, no massaging. It is what it is. And what we see that they are consistently out of alignment with the GDP story. So there is a growing gap between what we are being told is the case and what people are experiencing is the case.

AA: People in energy sector in general they are expecting increasing oil price. Do you think the oil price will increase or decrease in the short term? There are people claiming that oil price should go down as a result of deflation…

CM: Yeah, I am really agnostic on it and here is why. You used an important word “should”. So I know what markets should be doing, but what they actually do is often a totally different thing. I am less certain as to whether we are going to see deflation or inflation. It is kind of between both at this point, there are deflationary aspects, while some things are absolutely inflationary. I can guarantee you that inflation is the preferred outcome from the policy standpoint, of all central banks. In the political spectrum there is a lot of interlocking players who share the hope, a desire to have inflation to happen. And let’s be clear about something. The FED and other central banks are not out of tricks yet. They can press a key, literally… and have money flow into every bank account if they choose to do that. So, in times past when we actually had gold or physical paper money, it was an entirely different set of challenges. When you have electronic money, it is completely different. They have not completely panicked yet. They are still trying the usual stuff, right? I am less convinced that deflation has to happen, just because that is what should happen. And I agree with what should be happening, but gosh, we have seen so many rules be tortured, robbed, changed… it is astonishing.

AA: Are you more optimistic about the future than 5 or 10 years ago, given the situation how it evolves now?

CM: Well, I am personally very optimistic because I have had a lot of progress in my community and getting my own life squared away and figuring out ways to be more resilient. Here is the most important thing; when people come first into this conversation they often do exactly do what I did which is they say “what do I need to get”. So they start thinking about the things they need, right? And that is fine, to get through the first wave. And then the second question is “what can I do without”? And in the process of paring down you can actually live on quite a bit less than you thought you needed. And so I am absolutely optimistic that my family is going to be happy and healthy through all this…

AA: And the general development, maybe your family, or some other families are fine, but the general trend…? Do you believe in high adaptability of people to sharp decline of energy availability, given the past experiences?

CM: There are two types of people out there, people who can adapt, who have open minds who can see these things coming in advance. And then people who have no idea what is happening, they have not paid attention; there is going to be a pain adjustment for these people. And the only thing I am concerned is how rapidly do we go from here to there. If it is very rapid, that is where you could see elements of social unrest, you could see anger…

AA: That is maybe starting to happen in Europe. Protests against austerity measures…

CM: Yes, absolutely. I mean it is usually never the absolute position you find yourselves in…

AA: Maybe, it is the difference between reality and expectations what matters most…

CM: Exactly. If you have enough time to get from here to there it could be a gentle process, but if it is abrupt… you know public sentiment could really spillover at that point, so… no question about it. You know, if I am right and peak oil has the impact I think it will have on the economy, we are going to see the unemployment rate double or triple of what we currently have. Simply because economies are complex systems, and all complex systems require energy in order to maintain their complexity and size. With less energy, we would predict that they would become simpler. Which means fewer services jobs for one thing. So if the only skill you have is regional media communications coordinator for the Midwest division of Boy Scouts… I mean you have some thoroughly specialized skill set, and if that is the only skill you have, it could be difficult. Again this is the same concept as with companies, they might be too efficient, exposed because they are not resilient, the same thing applies to people, and it applies at all levels. My advice to people is become resilient. Get additional skills, spread things around… it is time to control risks, right? Do this as much as possible…

AA: Do you prepare for peak oil and how?

CM: Very simply, I am absolutely that convinced that there is another energy crisis coming. No question about it. Is it 5 years, is it 3 years, is it 10 years,? I do not know. Is it tomorrow? I do not know. So what I am doing is making my house as energy resilient as possible, these are very personal examples, right? So I can now heat my house in four separate ways now – wood, restorable oil furnace… he have put in a whole lot of insulation, some nice windows, we have solar hot water on the roof now. And that solar hot water system can be entirely run off our solar photovoltaic array system if we want.

AA: So energy diversification is the key…

CM: Absolutely.

AA: For individuals and for countries probably…

CM: Absolutely. And people should be doing it now, while the time remains.

AA: Thank you very much, nice to talk to you.