Monday, January 07, 2013

What Is It With Bubbles?

There's something about bubbles we must find enormously comforting or somehow rewarding.   Look at the Americans.  They had the Savings & Loan fiasco.   Then it was Enron and a gaggle of similar cooked companies.   Who can forget the Dot.Com bubble where billions in notional wealth were conjured out of thin air to snare unwary pensioners.  And of course the housing/sub-prime mortgage bubble that rocked markets around the world.

Now, still very much reeling from the Great Recession of 2008, we're drifting about inside this fossil fuel bubble that, by some accounts, could be ready to burst any time.

This litany of bubbles proves, convincingly, that people and those who govern them are prepared to believe almost anything if it's what they want to hear.   If it sounds good enough, reason and caution can go straight out the window.   And experience shows once they're out the window you don't get them back either.  At that point, you're along for the ride.

What makes the current fossil fuel bubble particularly troublesome are its complexity and enormity.   Put most simply, fossil fuel resources are being carried on corporate books and being traded at prices wildly above their actual value.   They are today's sub-prime assets.

That point was made to the Governor of the Bank of England a year ago in an open letter from a blue ribbon panel of financiers, scientists and former politicians.

"These high-carbon assets pose significant strategic challenges for the future prosperity of Britain that just can't be ignored," said investment manager James Cameron, who is a member of the prime minister's business advisory group. "Investors continue to pour cash into unsustainable assets without understanding the risks associated with these investments, such as climate change,  local pollution, fossil fuel price volatility, political risk  and catastrophes such as Deepwater Horizon."

Many other voices since then have warned that, if we're to have any chance of limiting warming to 2C, 80% of known fossil fuel reserves will have to be left where they are, safely underground.  That would mean abandoning all of the higher-carbon fossil fuels including coal and bitumen.

In recent months the United States has been abuzz with with grand pronouncements of fossil fuel self-sufficiency due to the bounty of unimagineable amounts of shale oil and shale gas to be had by fracking.  It has been enough that it stampeded Harper and the Calgary Petroleum Club into a panic over where they were going to flog bitumen one Americans began unpacking their cornucopia of cheaper oil and gas.   All heads turned to the far west and China.

Now that the fracked fossil fuel markets may have been gamed by Wall Street much as they manipulated sub-prime mortgages just a few miserable years ago.   They've been bundling gas leases and transforming them into the same sorts of ersatz securities they contrived for sub-prime mortgages and buyers have been snapping them up.

Only now it's turning out that these securities, like those before them, may be dodgy.   Reserves, estimated to be good for thirty or forty years of production, may peter out in just seven or eight.  In other words they too are sub-prime assets wildly inflated above actual value.   Shit, oh dear.

If our biggest trading partner, the United States of America, to whose economy ours is lashed like a dinghy, is facing the convulsive recoil of yet another bubble why are we all ignoring it.   If fossil fuels generally have become sub-prime, why are we investing so heavily in expansion of the Tar Sands, carrying on the taxpayers' backs, all the deferred royalties and taxes, all the unfunded environmental calamity?   Worse yet, why are we doubling down on such a bad bet?

What is it with bubbles?

Update - for anyone interested in learning more of shale fracking in Canada, Andrew Nikiforuk has written extensively on the subject at The Tyee.

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