Tuesday, December 04, 2007

Chevron's CEO: The price of oil
Love it or hate it, argues David O'Reilly in an interview with Fortune's Geoff Colvin, the world is going to run on oil for several more decades.
By Geoff Colvin, Fortune senior editor-at-large

(Fortune Magazine) -- Oil companies are blamed (unjustly) for high gas prices, loathed for profiting from them, and criticized for their environmental record. So it's no wonder that most industry CEOs have made themselves scarce. Chevron's David O'Reilly is the exception. He regularly talks to reporters and appears on television to answer questions about Chevron and the industry.

O'Reilly, 60, joined Chevron 39 years ago after graduating from college in his native Dublin; he has been CEO for almost eight years, making him Big Oil's longest-serving chief. His record is strong. Chevron's market cap has increased by $100 billion on his watch, and its proven reserves have almost doubled.

O'Reilly sat down with Fortune's Geoff Colvin to talk about high oil prices, the future of alternative energy, the role of China and India, the presidential election, and much else. Here are edited excerpts.

Five years ago, oil was $25 a barrel. Recently it peaked at $96.70. What's the explanation?

Demand for oil has caught up with supply. It's very hard to justify any specific price, but we believe that prices will stay high because of growth in the developing world. In India you've seen almost 9% annual growth for five years. You've seen the impact of the population, the number of people who are driving cars, the amount of energy they're using to drive their industries, the improvement in quality of life. We're seeing that around the developing world, and that's what's driving oil prices.

Prices have been near record levels, yet Chevron just reported much lower quarterly profits - $3.7 billion compared with $5 billion last year. How can that be?

Let me do the math for a minute. At $90 a barrel, the cost of crude in a gallon of gasoline is about $2.25. In most states the federal and state taxes are 60 or 70 cents a gallon, so now you're up to at least $2.80 a gallon. Because the U.S. happened to be very well supplied with gasoline, that was the price it was selling for nationwide in most of the third quarter. Add the cost of transportation, refining, distributing, marketing - you're not going to make any money at that price. That's why our U.S. refining and marketing business did not make money in the last quarter.

With prices so high, buyers will find ways to use less oil, and governments will find new ways to reduce emissions related to global warming. Will oil become less important in the future?

The scale of the energy system is enormous. Forty thousand gallons of oil are consumed every second, and that represents only one-third of the total global energy system. To significantly change the energy mix is a big challenge, and I don't think it's likely to occur anytime soon. Very long term, a century out, maybe 50 years out, with new technology and changes in the capital structure - maybe some changes will occur. But in the next 25 years, it's unlikely there will be significant change.

The question, then, is how to reduce carbon emissions - a carbon tax, a cap-and-trade system, or something else?

Just to give you an example of how challenging this is, if you took every vehicle off the roads of the world today - all the trucks, all the cars, all the airplanes, all the trains - you would reduce carbon emissions by 14%.

If you took all the power generation off the face of the earth, all the commercial activity, all the residential heating and cooling off the face of the earth and went back to an agrarian society, you still wouldn't cut it by more than 60% or 70%.

We believe that the U.S. needs a carbon-management system. We're getting it by states today, and that's not very constructive. This is a nationwide and global problem, not a state problem.

As long as the rules are in place and predictable and understandable, we can compete. In a carbon-management environment, we believe people will focus on energy efficiency - the cheapest form of new energy we have. We're not doing enough to improve our energy efficiency in this country.

Any economist will tell you that the best way to get people to be more efficient is to raise the price.

The market is already telling us that we need to be more energy efficient. We're talking about $96 or $98 oil. What more incentive do we need?

But people seem to keep buying gasoline regardless of price.

I don't agree with that. We are seeing some evidence now of reduced demand as gasoline prices have risen. Gasoline is what gives us mobility, so people have to use it.

So are superhigh oil prices good or bad for Chevron?

I don't think they're particularly good for anybody, including Chevron, because it disrupts the economy. My great fear is that there could be an economic recession if the price gets too high too fast. I don't think that's healthy.

In a speech earlier this year you said, "Reduction of greenhouse-gas emissions must involve all the major emitting nations in the world." Well, China just became the No. 1 emitting nation. What if it refuses to cooperate?

I think it's in their interest to cooperate, because managing carbon emissions will drive efficient use of energy, and they're the second-largest energy importer after the U.S. China can reasonably argue, as can India and other developing countries, that they may not need to be as aggressive because they are further behind in development and because they have hundreds of millions of people trying to move up the socioeconomic ladder. But I do believe it's in the best interests of the major consuming countries to manage carbon and drive energy efficiency.

Chevron is investing in some alternative-energy projects - geothermal, biodiesel, hydrogen. Are you making money?

We make money in geothermal. We're the largest geothermal producer in the world. We're continuing to expand and invest in that business. That has now moved along the maturity curve to where it is a good moneymaking business.

In the other areas we're not making money. We're investing - particularly in "second generation" ethanol, which is ethanol from nonfood sources. There's a limit to how much corn-based ethanol this country can produce. We're already seeing stresses in the system - corn prices going up, land prices going up, food prices going up.

So can we find nonfood crops or waste that we can convert into ethanol and augment the fuel supply in a sensible way? It's proving difficult. It isn't commercial yet, but it's one area of focus.

As for hydrogen, we've demonstrated the efficiency of producing it at service stations. You take natural gas, convert it into hydrogen, and pump it into the car. The problem is that we're using natural gas, so you're back to hydrocarbons again, and that doesn't seem as good a long-term solution as, say, ethanol from nonfood crops.

These alternative-energy investments are not very large relative to the size of the company. A skeptic could say that they're really just good public relations expenditures. Is that wrong?

That's absolutely wrong. Over three years we've invested $2.5 billion. We're not going to spend $2.5 billion just to make people feel good. We're spending that money because we believe it's going to create shareholder value. But you're right - relative to the size of the rest of our system, it's still a modest investment. We're investing $20 billion a year in new energy supplies, and most of that energy is oil and gas.

China has been buying oil assets around the world, especially in Africa. Does that represent a danger for the world, and is it a competitive danger for Western oil companies?

The system is so big that I believe there's room for a lot of competition, and competition ought to be encouraged.

My concern is that policymakers in the U.S. seek to hogtie us. They are increasing taxes and limiting what we can do, when they ought to be encouraging us to invest. For example, 85% of our coastlines are off-limits to exploration. Britain allows exploration around its coast, Denmark allows coastal exploration, Norway, Australia - what's wrong with our country?

Why not open our coast up? It can be done in an environmentally sound way. The government puts it off-limits and at the same time calls for energy independence. What sense does that make?

Is energy independence possible for the U.S.?

Not in the foreseeable future - not for decades.

The presidential election is less than a year away. Based on energy policy, whom do you like?

None of them particularly. I don't think anyone has really got a plan, whether in the current administration, in the current Congress, or among the candidates. They're all taking a simple, relatively short-term view. You've got to take a view that you're going to look at this over 25 years or longer.

Tuesday, November 20, 2007

Do You Have Panglossian Disorder?
Wednesday, 14 November 2007
By Kathy McMahon, Psy.D.

Panglossian Disorder: “The neurotic tendency toward extreme optimism in the face of likely cultural and planetary collapse.”

I have spoken elsewhere about the label “Doomer,” and I’ve come to believe that this frame is outdated. Instead, I would like to suggest that we must stop asking ourselves, given the lateness of the hour, why there are those pessimistic about the future, and begin asking, instead, why there are those still blindly and enthusiastically optimistic about it.--KM


Panglossian Disorders and Their Subtypes

Panglossian Disorder: “The neurotic tendency toward extreme optimism in the face of likely cultural and planetary collapse.”

Temporal Subtypes:
Scarlet O’Hara-ism- “I’ll just have to think about that tomorrow.” A strategy of denial that allows the person to temporally compartmentalize the feared event(s).
Futurism: “Sure, that will happen, but it will occur after all of us are long dead.” A belief that something that might happen in the distant future is no concern in the present.
Y2K features : “They said everything would collapse with 2000, and it didn’t.” A belief that any prior concern about societal problems that didn’t occur demonstrates the impossibility of any others happening in the future.

Angry Subtypes:
Rhett-Butlerist Features - “Peak Oil? Planetary Collapse? Frankly, my dear, I don’t give a damn.” Aggressive denial of information not in keeping with one’s world view.
Kill the Messenger Redirection : “Why are you telling me this? What kind of sicko focuses on these kinds of facts? You need help!” The belief that those who bring bad news are doing it for malevolent reasons.

Narcissistic Subtypes:
Rigid Cheney-ism: “The American Way of Life is non-negotiable.” The belief that any undesirable change can be avoided by a sheer act of will.
Survivalistic features : “Hey, if the rest of the world is doomed, I don’t worry about it, because I’ve got mine.” A belief that personal preparation is adequate.

Religious Subtypes:
Religiousity : “God/The Planet/Mother Nature loves humans. He/She/It would never permit massive die-off.” Or “If that happens, I just put my faith in my Savior.”
Neoliberal Econo-manic Tendencies : “The market will sort it out.” A belief that market forces control all--- including geological realities.
Nascarian Features : “People love their automobiles. A solution will have to be found to keep us driving.”

Subtypes with Denial or Minimization as the Central Feature:
Pure Denial: “That can’t be right. It’s just impossible.”
Minimalization as a primary defense : “There may be some shortages, but I doubt it will be as bad as you say.”

Subtypes with Histrionic, Helplessness, Acquiescence or Submissive Features:
Submissive Features : You're probably right. [Shrug]" Too hard/scary to think about... A response that acknowledges the reality of the threat, but is emotionally frozen or unwilling to devote emotional time and energy to the matter.
Histrionic Features : “I just don’t know anything about that. Oh, Golly, I hope you’re wrong. That’s all I can say. Oh Golly, I just can’t think about it.”

Subtypes with Delusional or Magical Thinking:
Meglomatic Features :“This simply won’t happen to me.” A belief in one’s specialness, which will save them from the consequences affecting those around them.
Paternalistic Features : "The government/corporations will sort it out." A belief in the infallibility of organizational structures to resolve problems they aren’t willing to even acknowledge.
Doubting Thomas Features : “Peak Oil is a scam by the Oil Companies to raise prices!” Minimizing the possibility of the crisis by the belief that some one or some group has ultimate control over its happening.
Pure Cornucopian Features : “The more we need, the more they’ll be.” A belief that continued progress and provision of material items for mankind can be met by advances in technology.
The Flinestonian : “The stone-age didn’t end because they ran out of stones.” A belief that modern innovation is eternal.
Frank Zappa-ism : “As soon as things get really bad, they’ll come up with something.” A belief that necessity is the mother of invention.
Magical Thinking : “Don’t worry, we can build a car that can run on air!” Proposes solutions that are clearly outside the realm of physics.
McGiveristic Features - A belief that massive planetary problems can be solved with ordinary/common items found readily at hand. Eg.: “Pig dung will be the next fossil fuel.” Or “Coke Cans can be turned into solar panels.”


I have spoken elsewhere about the label “Doomer,” and I’ve come to believe that this frame is outdated. Instead, I would like to suggest that we must stop asking ourselves, given the lateness of the hour, why there are those pessimistic about the future, and begin asking, instead, why there are those still blindly and enthusiastically optimistic about it. We can easily see why those who might be gloomy about the future could feel hopeless and take the path of inactivity. On the other hand, this same fear of disaster can motivate constructive action in an attempt to mitigate the effects. Not so, however, for those who see no NEED to take action, because they live in the best of all possible worlds. Indeed, I might argue that it is the very blind hopefulness and inaction of the masses that leads many of my readers to assume a more hopeless posture toward world events.

Panglossian Disorder

Borrowing Voltaire’s character Pangloss in his novel Candide, we might speak of a Panglossian Disorder as the belief that “all is well and everything in the world is for the best.” In adopting a Panglossian philosophy, Candide accepts situations and tries not to change or overcome obstacles. Instead, he passively accepts whatever fate has in store, and shrugs off his personal responsibilities. The name Pangloss is actually a pun: pan = Greek for 'all', relating to the whole universe
(English); and 'gloss' (English) = both an explanation and an interpretation, which is deceptive in its external appearance. There is also a medical definition: Panglossia: abnormal or pathologic garrulousness, usually of a trivial nature.

While I was initially rather ‘tongue in cheek’ in proposing a new diagnostic category called “Panglossian Disorder” which I defined as “the neurotic tendency toward extreme optimism in the face of likely cultural and planetary collapse,” the more I thought about it, the more sober I became. A Panglossian perspective denies the need for constructive action, and leads to complacency and a worsening of our world’s woes. I’ve come to think about the Panglossian perspective as not optimism itself, but as a defense against pessimism. This defense takes many forms, which I’ll describe later, but first, I’d like to describe why so many of us NEED a defense against pessimism, and how, unfortunately, my profession of psychology has been so instrumental in fueling that defense.

Depression as Epidemic

Depression in the US has reached epidemic proportions. In contrast to a half-century ago, when it began well into adulthood, we now see depression in our children and adolescents. We can speak of clinical elements such as feelings of hopelessness and helplessness. Basically, depression is a disorder in which a person feels thwarted or is thwarted in pursuing her or his most important life goals. Unlike simple unhappiness, depression can be thought of as a sort of ‘burst balloon’, in which inflated desires are deflated fully and completely.

There are those who argue that this condition is caused by a radical imbalance between the “I” and “We” of our culture. As we’ve shifted away from a connection to our communities, our natural environment, and the responsibilities these entail, and focused increasingly on consumeristic and narcissistic pre-occupations, we’ve become cut off from a sense of meaning and richness. Paradoxically, we’ve also become more cut off from self-directed community aspirations that build virtues not found in modern psychological language---features such as “character” and “soul.”


Education, according to Herbert Spencer, “has for its object the formation of character” and yet today, our focus is not on building the character of our nation’s children, but settling instead for promoting their “self-esteem.” Whereas character is a complex of attributes that determines a persons moral and ethical actions and reactions, self-esteem is a feeling of pride in yourself and your inherent personal worth. While character is an active process of development, self-esteem is a passive satisfaction with what one has already achieved. Character is interactive with the world, while self-esteem is internal satisfaction with oneself.

The problem with this frame in our self-congratulatory back-slapping, is that while it promotes an “I’m Okay, You’re Okay” attitude,” it overlooks the question of whether collectively, WE’RE Okay, and if we aren’t, what is our social responsibility to change it.

In other words, the message “feel good about yourself” appears to be removed from why someone SHOULD feel good about themselves and the cultural imperative to do something to feel good ABOUT. This is a perversion from what true self-esteem is: a positive feeling in RESPONSE to effective action. What is being promoted is what Martin E.P. Seligman, Ph.D. calls “unwarranted self-esteem:…feeling good as opposed to doing well in the world.”

In the US, self-esteem is the primary outcomes assessed in youth development intervention evaluations today, and questions about self-esteem are the only positive (versus problematic) measures of mental health currently included in national surveys, according to Dr. Seligman. We want to know, essentially, “How do you feel about yourself?” rather than asking “How do you engage with the world around you?” We’ve come to believe that children who feel good about themselves will come to care about the people and planet around them. This has proven to be a faulty, incomplete analysis, but one that works well if our goal is to encourage consumers to buy products that make them feel better about themselves. Our schools tell our children how important it is that they feel good about themselves, and the television commercials they watch tell what to buy that will make them feel better and even more 'special.'

The Exalted “I” and the Problematic “We”

The imbalance between the “I” and the “We” has shifted so dramatically, in fact, that we blame our families and our developmental milieu for thwarting our “potential.” Pop psychology is filled with popular bestsellers that have told us for twenty years how to get the love we want, how to overcome toxic parents and how to triumph over the effects of our wounded past. This focus on the historical forces that have limited us, sends us the implicit message that the “We” in our world has constricted the unfolding that would have otherwise taken place, and is central in understanding our current troubles in life. Implicit in it, is an image of some idealized culture, family, planet that is loving, patient, reliable, safe and kind. It’s a world that loves us and all we are capable of, and we are mad or sad that we didn’t grow up in it.

Because of this ‘loss,’ we can't be all that (we imagine) we are capable of, because we’ve suffered damage as children. We know, from research, that the rate of things like suicide attempts, drug abuse, smoking, drinking, and being overweight are all elevated in those who have experienced abuse as children. Therefore, we make the leap that says that if we have been badly treated as children, and continue those self-destructive acts, we are not to blame. We are victims of circumstance. And if we turn inward, and away from the world in an attempt to recover from such a cruel series of events, who can blame us?

Psychological ‘Cure’

We've become a society of "discontents," looking for satisfaction. We turn both inward and gaze backward in our attempt to find a ‘cure.’ Our view is fixed, frozen, and reified. It is both suffocating and reassuring. We don’t seek to participate in the world, because the world is to blame as the source of our troubles. "Lifestyle" is what we start to search for, as a trade for being stuck with a "life." We cling to our professional identities because they provide us with a sense of self. We project a "professional image" because image becomes more important than who we actually are.

We read books to assure ourselves that “bad things happen to good people,” because these “bad things” appear somehow to be an undeserved punishment that someone else has inflicted on us, instead of just “what happens.” We attempt to distract ourselves from feeling anxiety and discomfort, with television, movies, music and internet. Cybersex and 'mind fucks' take the place of messy entanglements. We seek out those that will match us in our values, social class, religious beliefs, our fashion sense, our views, and we scorn those who fail to mirror us. We get married hoping to find someone who will "really know us," and we divorce when they actually start to, and have the nerve to tell us what they see. We look for a community to worship that is equally "fitting" of us and what we need and expect our spiritual leaders and our God to be sympathetic and undemanding. If not, we keep looking.

We are freed from the constrictions of being born in a particular place, during a particular time, in a particular climate, growing particular foodstuffs, surrounded by a set of particular people. We are free to be You and Me, and we get to mold it, as if we are the creative force itself. We no longer have to believe in a creator, because WE are IT.

The Anxious Creator

Yet, we are an anxious, restless creator, always trying to tweak our self-created images. When we imagine that there is such a thing as a Magic Muffin,’ and the world we currently live in, isn’t it, we happily join a “Second Life” that will show us pictures of rain forests so we can pretend we aren’t losing the real ones. We can construct our world of make-believe friends and make-believe communities, because the face-to-face kind are just too much trouble or require social skills we just don’t have. We can always click off or change our screen names or change our image if we run into make believe interpersonal difficulties. That’s harder to do in “real life.” And, as if to make it all more real, we have Second Life Shrinks we can visit to talk over our Second Life problems.

We reject the notion that we are "stuck" with a genetically impacted body type and we diet and exercise, or seek out plastic surgeons to shape our body to "look just right." We reject the aging process or the dying process itself, and instead choose the magic of the knife or the "fast freeze" to save our special selves until we can live forever. And always we are told that true contentment and satisfaction comes from this special candy bar, this marvelous diet, this fabulous lifestyle, this new therapeutic approach.

And yet, we still aren't told that if we do succeed in ‘healing our wounded Child,’ we still remain children--frightened, lonely, isolated, misunderstood. And so we keep looking for the right therapist and the right cure.

The Insanity of Being Our Own Creator

Therefore, if the real world collapses around us, it isn’t our fault and it isn’t our problem. We don’t ask if what we do and what we devote our lives to, is “sane,” and whether or not it ultimately benefits not only ourselves, but also our world. We only want reassurance that we aren’t “crazy.” Fitting in and not standing out is a hard enough job. So many of us have lost an internal compass that is grounded in an external reality, and have settled, instead, for trying to believe other people when they tell us over and over “You are really okay.” And, as long as we don’t look outside or don’t believe those who tell us that our world is dying, we just might believe it.

This stubborn self-focus and pathologizing people and actions become culturally endemic. We begin to see all acts of great charity as a “reaction” against a cruel parent or early poverty. Social activists are “angry people” with a “father complex” they try to resolve by trying to change the world. We diagnose Mother Teresa as having a “Savior Complex” or worse. No one works so hard to heal and repair the world, Tikkun Olam, unless they have some sort of psychological disorder. A notion of a common commitment to the civic good is a distant, quaint concept. We do so only if our “neurosis” drives us to it. And we've watched the show "Survivor," so we know that nice guys and gals finish last.

The Matrix Around Us

It is, therefore, while simmering in the pot of this cultural soup, that my readers write to me at

www.peakoilblues.com. They describe a sensation of having lived in a ‘Matrix,’ an illusionary world constructed in the movie by the same name, and have woken up to find themselves in a very different reality. Unlike those who continue to mourn the “paradise lost” of their pained childhoods, my contributors have woken up to confront real troubles in the world in real time. They have stopped looking into their past, and started to see a future that is both horrifying and compelling. Instead of seeing a “wounded child,” they see a wounded planet that they are killing.

In contrast to the Panglossians among them, who find such a view all too much to bear, they look directly into their futures and feel the despair. For indeed, when we absorb the full impact of our current world situation, and our place of having contributed to it, the sane response is, at least initially, despair. Doom, dreadful fate, or utter ruin, isn’t a view that they embrace joyfully, but one they are left with, when they recognize that the solutions are not individual, but collective ones. Here, we feel ill equipped, because collective solutions seem to fly in the very face of our “I” worldviews. Those “I” solutions, like changing a light bulb, appear inanely inadequate, and the more they are put forth as collective solutions, the gloomier my readers become. They recognize that we won’t “buy” our way out of this one.

It shakes them to their very core, as they realize that they ARE an element of their planet, and THEY are fully responsible for their futures, even more so then their past. They shake, they grieve, they feel the shock. Gradually, then, they wake up to realize that they are still standing on the same wounded planet. They begin to face and learn to manage the anxiety they feel. They start to grow themselves up. No, they soon won't be able to eat bananas on their cereals if they live up North. No, there is no single solution they can buy, to remove the Great Turning. They do not live in a Magic Muffin, but here on the Earth, in a particular place, in a particular time, and they are surrounded by a particular set of people. They have a body, a set of skills, a set of world views and no one will rescue them. They don't need to believe in a god, only that they aren't him/her/it. What a shock to realize that we are born in such a unique place and time, and that our wealth has left the rest of the planet barren, starving, and terribly polluted. We overlook the fact that it takes intense strength to feel so vulnerable, so blind, so frightened, so inept. And for many, they do look inward once again and they grieve hard, for months or sometimes years. But the grieving subsides and in its place remains the multiple decisions about how to act now, in the real world.

Most have attempted to enlist the cooperation of those around them in examining the extent of the problem, and pondering the solutions. Many have been met, instead, with a variety of Panglossian defenses. They see that for so many of their loved-ones, they cannot allow psychological room for the inevitable despair and pessimism, without feeling overwhelmed. These wounded souls, “at risk” for pathology, wounded as children by an unkind planet and careless parenting, cannot bear to view that which is outside themselves---TPTB, government, Big Daddy, the planet---as deeply flawed. And, if it is flawed so dramatically, it isn’t their fault, and it isn’t their problem. We are okay, and the world is okay. It has to be. We have enough to worry about, thank you very much. But what’s wrong with YOU?

And as our economy falters, oil supplies shrink, and the climate chaotically changes, our Panglossian world becomes even more steadfast in denying the change. Our job loss, political or banking scandals, mortgage defaults, are all “individual problems,” that have individual solutions. We want to discuss them in the privacy of our bedrooms or our therapists’ offices. But please, we beg our therapists, Don't wake us up. Don't tax us in confronting the real world around us. We are too overwrought to look outside ourselves. We are too worn out. And besides, none of what you say is on the television, so how can it be true? Help us, instead, to manage this anxiety we feel, that has no name. It floats all around us, depresses us, and depresses our children. We tell them that they are Okay, but still they feel pained, anxious, worried, upset. We need a cure, Doctor, a pill, a meditative chant, and we need it now!

As conditions worsen, fear or simply laziness may prevent us from examining whether in our individual case, the “personal is political,” and to reach out to those around us in both discussing our pain and brainstorming solutions that go beyond our individual problems.

Meglomanian Panglossia

Alternatively, we remain like the battered child, convinced that ultimately, WE have caused the abuse, and, as a result, WE have the power to stop it, if and when we feel strong enough or well enough to do so. If we get around to changing that light bulb, or buying that hybrid, the Tsunamis will stop. If we stagger our toilet flushes, the drought will stop. As soon as we find our next job, land that promotion, get back on our feet financially, the US dollar will recover and the depression will lift. If we encourage subsidies of ethanol, our addiction to oil will lessen. Getting back to “normal” is right around the corner. The Emperor has fine clothes, after all.

We do not, and cannot step back and connect the dots, because we might not like the picture that emerges.

Therefore, what I’m proposing is that unlike true optimism, a Panglossian perspective is a reaction to pessimism itself. While a true optimist can consider and plan for a negative outcome, a Panglossian perspective cannot. They aren’t wearing rose-colored glasses, but dark sunglasses that not only block out the harmful rays of the sun, but the sun itself. The view is rigid and unyielding. For some, the Panglossian view is an angry one, once more denied their ‘paradise lost.’ For others, the Panglossia takes the form of helplessness and vulnerability. Still others insist that they are ultimately in control of the entire planet, and what happens to it, is up to them.

Being Sane Is Not Enough

Now, for those of my readers who ask whether or not they are going crazy, as they see a gloomy future when those around them see “the best of all possible worlds,” I'd like to suggest that you are asking the wrong question. Being "sane" is not enough. Your actions are what matters now. Imagine yourself like Herr Shindler in Shindler's List, looking at your watch and saying "I could have sold this. I could have saved more." (Thank you, DRS, for that powerful metaphor.) You are living in an insane time, and you can't use the thinking of those around you to guide you in what to do. You have to start thinking and acting for yourself. You have to start looking around you for like-minded souls, and to be able to accurately identify those who are wrong-thinking, not to pathologize them, but to recognize them as living in a dream-world created for them by psychopathological corporate forces.

As you sit at your Thanksgiving table, open your ears and your hearts, as you listen to the Panglossians among you, and speak your simple truth, without attempting to alter this powerful delusion. It is not your job to fight this delusion. You cannot. But you can speak only for yourself and say what you see, and then listen. Maybe this year, maybe next, you may be thought of as the sane one after all, and they may come to you asking again for how you think, what you know, what you've done. But I wouldn't hold my breath.

Mental Illness and Sanity

Ultimately, it is important to look beyond whether someone is optimistic or pessimistic about the future, and ask, instead, whether this perspective leads an individual to self-directed action, and whether this action ultimately benefits the planet. It isn’t enough to live in a binary world of the “mentally ill” and those “not otherwise specified.” Looking squarely at personal or planetary problems requires more than people who aren’t crazy. A focus on mental illness will not bring us to a greater understanding of what is sane, even if it does provide mental health practitioners clients and grant monies. To define sanity, we need new and larger questions involving notions that go beyond profits and unlimited growth.

We need to be able to calm ourselves down and stand apart from our cultural norms. To be truly sane, we need the ability to grieve hard for the damage done all around us, to focus in on the Party Train as it speeds toward the abyss, and to work for collective change without any assurance that it will do a bit of good. We only adopt such a label when we develop that internal compass that directs us both inwardly and outwardly. It also, to quote airline advice, requires us to put on our own oxygen mask before convincing others to do so. Sanity, to paraphrase John Seed, is pulling our legs back away from the bus tires, and not calling it being “good to our legs.” It means shrinking our Global Footprint and not calling it being “good to the planet.” We ARE a part of the planet, even though the planet is not us. Learning to live as part of the global community sanely is no longer an option. To paraphrase Matt Savinar: if we don’t deal with our global reality, it will inevitably deal with us, whether in Panglossian delusion or not.

We, as therapists, do not need to be heavy-handed in our approach to our Panglossian clients, but neither must we remain silent about what we know and predict is coming. Here is where our therapeutic orientation and skills come in. Depending on their theoretical perspective, some of my Peak Oil savvy colleagues will approach these issues differently. Some, fearful of the impact on their clients (and themselves), will decide not to approach these issues at all. Should we speak up if a client tells us their plans to build a house on swampland, but don't know it? Will it destroy the therapeutic milieu to usher real life into our offices?

In psychoanalytic therapy, Panglossia may be regarded as an obstacle to progress that must eventually be confronted and interpreted at the right time. These therapists might want the client to appear emotionally ready or have some degree of insight into their problems before confronting them with TEOTWAWKI. In the humanistic and existential therapies, Panglossia might be seen as part of a cyclical pattern of life, death and rebirth, and clients may be helped to understand their place in this cycle, and their roles and responsibilities. In cognitive-behavioral therapies, Panglossia would be seen as another in a set of mal-adaptive behaviors used to cope with a stressful situation. Therapists would assist individuals in examining their current thoughts and behaviors and devising strategic ways to make changes. In all cases, the Peak Oil savvy therapist must be clear about the fact that Panglossia IS a defense, and to be firm that such denial IS acting against the best interests of their client.

Panglossia isn't limited to clients, however, and it effectively dulls therapeutic skill. Increasingly, those who are aware of the coming dangers report seeing therapists who are, themselves, suffering from the Panglossian condition, and ask me what they might do to help snap their therapists out of it. Friends, this isn't your job, any more than it is to educate your therapist about racism, sexism or homophobia. Therapists will begin to take these issues seriously when you begin to entrust your therapeutic dollars to those who do. Ask yourself how a Panglossian-diluted therapist can discourage you from some actions and encourage you in more useless pursuits.

Physicians and psychotherapists, Heal Thyself! Ask yourself whether your bright optimism is designed to help your clients or to help keep your own spirits up. Don't expect to be able to be effective in Peak Oil if you are in your own chaotic state after just finding out about it. Take some time to go through your own turmoil and grieving process, and develop your own internal compass about how to proceed.

Confronting major life changes such as Peak Oil, Climate Change, and Economic Collapse is, but a first step in helping the client assess their current life situation and design a new life plan. But as always, put on your own oxygen mask first, find your own sense of sanity and self-direction, before you begin to treat others. Model sanity.

~~~~~~~~~~~~~~~ Editorial Notes ~~~~~~~~~~~~~~~~~~~

Contributor Kathy McMahon writes:
Psychologists and other psychotherapists have been instrumental in teaching corporations how to promote mindless consumerism. We've promoted our own professional livelihoods in treating mental illness, while too many of us have remained silent about the cost of promoting the "I" culture while minimizing or ignoring the "We." Here, I argue for a need for change. We must re-examine our own concerns about "fitting in," and "being well thought of" and instead focus on being effective advocates not only of our clients, but also the planet we all inhabit. Our profession has done much to contribute to our malaise. It is now time we take the mandate to be 'greater change agents' seriously.

About the author:
Kathy McMahon, Psy.D. is an adjunct professor, a clinical psychologist, certified sex therapist, trainer, and a newbie chicken farmer in Massachusetts.

About Peak Oil Blues:
We assume Peak Oil is real. Our goal here is to talk about the emotional reactions to living in such a time of uncertainty.

Wednesday, October 31, 2007

The Catastrophist View
What would it take to send the U.S. economy—and New York’s—into free fall? A doomsday primer.
By Duff McDonald Published Oct 28, 2007

Peter Schiff is laughing at me. I’ve just asked him to entertain the following notion: that we dodged a bullet during August’s financial-market turmoil and, with the stock market bouncing right back from every dip, things might be okay. So why worry?

He stops laughing. “Why worry?” he asks. “Because we dodged a bullet but are about to step on a hand grenade.”

Sitting in a corner office of a nondescript building just off I-95 in Darien, Connecticut, Schiff, the president of brokerage Euro Pacific Capital, and author of Crash Proof: How to Profit From the Coming Economic Collapse, will spend the next hour spelling out a singularly pessimistic view of the American economy. And he will do so while exhibiting a curious juxtaposition unique to the bearish prognosticator: He speaks of disaster with a smile on his face. No, he’s not happy about our impending doom. But he is happy that people are finally taking him seriously.

Some people, anyway. The recessionary fears that were sparked by the global liquidity crisis in August have eased, largely because of a resilient stock market and a belief that the Federal Reserve’s interest-rate cut in September curtailed deeper losses. When Goldman Sachs invested in its own imploding Global Equity Opportunities hedge fund in August, calling it an “opportunity” and not a “rescue,” people laughed. Guess who laughed last? Goldman, which had reportedly enjoyed a $370 million gain on its $2 billion rescue by October. The optimists stay focused on stories like Steve Jobs’s next stroke of genius.

But Schiff, whom CNBC calls “Dr. Doom,” has not, as bears do when winter approaches, gone off to hide in a cave. Why not? Because every single one of the underlying economic factors that he has identified as cause for concern has worsened. And his is no longer a lone voice in the woods. If you don’t care to listen to a man nicknamed Dr. Doom, you can listen to people like former Federal Reserve chairman Alan Greenspan, esteemed bond-fund manager Bill Gross, or famed money manager Jeremy Grantham. They’re part of a growing chorus of voices that are saying many of the same things as Schiff.

Their bearish arguments come in many shapes and sizes, but here’s the basic one: The past five or six years have been deceptively fortunate ones for the U.S. economy. That’s because any troublesome developments—the surge in oil prices from $28 per barrel in 2003 to about $87 today, for example—have been papered over by rising home prices. Home equity has been used to buy flat-screen TVs, SUVs, and more homes. Wall Street bought up all this debt from lenders, thereby allowing them to lend more.

The softening of real-estate prices in most parts of the United States put a crimp in this system, but it hasn’t stopped it. The question is, what, if anything, will? What will bring on the apocalypse that Schiff and others believe is inevitable? They see it like this:

The Bottom Continues to Fall Out of the Housing Market
Manhattan’s gravity-defying real estate aside, it’s quite clear the nation is experiencing a genuine housing crisis. In August, pending home sales dropped 6.5 percent, and they currently sit at their lowest level since 2001. The National Association of Realtors conducted a recent survey that showed more than 10 percent of sales contracts fell through at the last moment in August, primarily owing to disappearing loan commitments from banks. The crisis will only deepen, when more borrowers see their adjustable-rate mortgages adjusted upward. There was a foreclosure filing for one of every 510 households in the country in August, the highest figure ever issued, and by one estimate, more than 1.7 million foreclosures will occur in the country by the end of 2008. That’s not just subprime borrowers: According to the Federal Housing Finance Board, while nearly 35 percent of conventional mortgages in 2004 used ARMs, some 70.7 percent of jumbo loans—those above $333,700 (the jumbo threshold in 2004; it’s now higher)—did too.

Historically, bond-market investors have been the boring counterparts to their equity-market brethren. But in his October Investment Outlook, famed bond investor Bill Gross was anything but. The managing director of money management firm pimco pointed out that the Federal Reserve is caught in a bind: It must continue to lower interest rates to ameliorate this burgeoning housing crisis, but in doing so, it “risks reigniting speculative equity market behavior, and … a run on the dollar.” (More on the dollar later.) Gross doesn’t have the answers but observes that the Fed is “in a pickle, and a sour one at that.” Worse yet, concerns that a rate cut might be inflationary actually caused bond yields to rise in the wake of the rate cut, something that doesn’t normally happen. The Fed’s influence, always overstated, might turn out to be nonexistent in a credit market that remains on edge.

Hedge-fund veteran Rick Bookstaber, the author of A Demon of Our Own Design, spells out a potentially disastrous scenario that could unfold regardless of what the Fed does: Continued foreclosures result in a further drop in housing prices, which results in further foreclosures, which result in a further drop in housing prices. Even for those of us not selling, reduced home values result in a reduced sense of security, which results in reduced consumption, which results in a slowing economy, which … you get the point.

The Derivatives-Related Meltdown, Part II
Anybody who glances occasionally at the financial pages these days knows that mortgages issued to home buyers are packaged together (in a process called securitization) into a collateralized-debt obligation, or CDO. That’s what’s known as a derivative, a security whose value depends on the value of other securities. The price of the CDO, you see, is “derived” from the prices of the underlying mortgages. (It works with credit cards, too, or bank loans—any kind of debt will do.)

In principle, the idea of a CDO makes perfect sense. In buying $5 million worth of a CDO, an investor has essentially lent money to an entire portfolio of homeowners, instead of placing all his eggs in one basket, say, by funding a single $5 million mortgage. In the real-estate-crazy environment of the past decade, the CDO market took off like a rocket. But the buyers of these derivatives made a critical error—they confused the spreading of risk with the elimination of risk. A booming economy made this confusion not just possible but irresistible. With relatively few defaults in the first half of the decade, investment firms, including many hedge funds, came to see CDO returns as a sure thing and loaded up on them, often borrowing money to do so, taking on debt to buy debt and thereby setting up a potentially deadly chain reaction. The readiness of the secondary market to buy all these mortgages encouraged the lenders to run wild and lend to anyone who walked through the door, leading—inevitably, in retrospect—to a decline in loan quality. Analyst Christopher Wood of Asia-Pacific investment house CLSA succinctly defines the problem in his highly readable newsletter Greed & Fear: “[Securitization] has one fatal flaw, which will ultimately prove to be its undoing … it removes the incentive of those making the loan to worry about whether the loan is a good credit.”

Still, it all held together until mortgage defaults began to cut into the yields of these CDOs and holders looked to sell them, only to realize their value had slipped. Forced liquidations as a result of that “price discovery” were a primary factor in Bear Stearns’ hedge-fund calamity in August. And it’s not over yet: The aftershocks of the mortgage meltdown are still being felt, as banks such as Citigroup and Deutsche Bank announce multibillion-dollar write-downs.

Each time one of these write-downs has been announced, the market has had a curiously positive response, taking the news as a sign that the worst was over and the banks were cleaning up their books. But because these derivatives are linked to other debt, there’s no reason to be certain that trouble won’t bleed into other markets. Among other things, the liquidity crisis froze the market in structured investment vehicles (SIVs), a nifty bit of financial engineering that banks use to profit from the spread between short-term debt and long-term debt. No one yet knows how nasty these losses could turn out to be because SIVs are stashed, Enron style, off the books.

Consumers Run Out of Steam (and Take the Economy Down With Them)
The U.S. economy, for all its worldly sophistication, is driven by mall shoppers and late-night Amazon addicts—70 percent of the gross domestic product is accounted for by consumer spending, which is buttressed by debt. According to the Federal Reserve, total U.S. household debt was, as of August, $2.5 trillion—a 24 percent increase in the past five years. Total credit-card debt, including gas cards and the like, was $915 billion.

The willingness of consumers to keep spending and piling on debt in the midst of a slowing real-estate market is hailed on Wall Street as an act of patriotism, which Schiff considers perverse. Imagine, he suggests, that you ran into a good friend and asked him how he was doing. His reply: “I took out a third mortgage, maxed out my credit cards, and emptied out my kids’ college savings account so I could buy a bigger TV and a new car, and we’re going to Greece on vacation over the holidays. Things are great!” Schiff lets the idea sink in and then finishes the thought: “And we’re celebrating the fact that we’re doing this as a nation?”

In a recent interview, John Santer, a district director of NeighborWorks America, a community-based nonprofit, pointed out that 43 percent of American households spend more than they earn each year, and fewer than six in ten have enough savings to last them three months if they were suddenly out of a job. So where’s the money coming from? From 1991 to 2005, Americans borrowed $530 billion against the value of their homes each year.

James Glassman, a senior economist at JPMorgan Chase, told a Tulsa, Oklahoma, luncheon crowd in early October that before 1985, consumer spending grew in line with income, but since that time, it’s grown half a percent faster on an annual basis. As a result, household savings, which once reached 10 percent of income, is now literally negative. “My guess is that in five years we’ll look back and realize … that the consumer we knew for twenty years is coming to an end,” he said.

Roger Ehrenberg, an ex–Wall Streeter and author of the financial blog Information Arbitrage, forecasts extreme financial pain. “You’ve got a weaker dollar, declining economic fundamentals, and a debt-strapped consumer—I’d call that a bad fact set,” he says. “Lay on top of that the mortgage problem and declining home values, and you can paint a pretty ugly picture.”

That the Rest of the World Decides They Don’t Need Us and the Dollar Tumbles Hard
The dollar is falling, possibly collapsing, depending on whom you talk to. The greenback has sunk close to its lowest point in the post-1973 floating-exchange-rate era, so low that it’s been overtaken by the Canadian dollar—affectionately known as the loonie—for the first time since 1976. How low will it go? When Alan Greenspan was asked by Lesley Stahl of 60 Minutes last month what currency he’d like to be paid in, his response was telling: “[The] key question … is, ‘In what currency do you wish to hold your assets?’ And what I’ve done is I diversify.” Translation: He isn’t betting on the dollar. And neither is the majority of Wall Street.

Here’s why catastrophists see that as a major problem: About 25 percent of our government debt is held by foreign governments, with the major holders being Japan ($610.9 billion), China ($407.8 billion), the U.K. ($210.1 billion), and our friends in the Middle East, the oil-exporting countries ($123.8 billion). When the current Fed chairman, Ben Bernanke, cuts rates to soften the housing blow for Americans, he also weakens the dollar by making dollar-based investments less attractive. And when the dollar weakens, so, too, does the value of these gigantic positions held by the foreign governments. At some point, they’re no longer going to tolerate the losses we inflict on them by lowering rates, and if that happens and they start dumping dollars, watch out for the peso.

The bulls will tell you that foreign governments understand the American economy is the key to global economic health, and that they’ll suck it up and take it when we devalue their debt. To which Schiff offers another analogy. Imagine if five people were washed up on a desert island: four Asians and an American. In splitting up their duties, one Asian says he’ll fish; another will hunt, another will look for firewood, and another will cook. The American assigns himself the job of eating.

“The modern economist looks at this situation and says the American is key to the whole thing,” says Schiff. “Because without him to eat, the four Asians would be unemployed.” The alternative: Without the American, the Asians might eat a little more themselves and even spend some time building a boat. This is happening as we speak: With the rise of the Chinese consumer class, the local citizenry is now spending, and the country is no longer totally dependent on exports. Which means they’re no longer totally dependent on us.

Readers of the financial press are surely familiar with the buzzword of the moment, decoupling. It’s used to describe how U.S.-Europe and U.S.-Asian trade relationships are becoming less dependent at the same time as European-Asian ties are growing. Most Asian nations, including China, are seeing more rapid growth in exports to Europe than to the U.S. And the U.S. now accounts for a declining share of European exports. The bearish interpretation: that the longtime global embrace of the dollar is loosening.

That We Don’t See It Happening Because It’s a Slow-Motion Train Wreck
Last but not least, we can circle back to the Dow Jones Industrial Average making new highs in October—14,087.55 on October 1—offering hope that our equity portfolios will carry us through to the other side of whatever it is we’re on the wrong side of. Before addressing the fact that the equity market might just be clueless, there’s one last dollar-related point to make. The true value of a stock portfolio isn’t really its quoted worth in dollars—it’s what you could buy with that portfolio if you were to sell it.

Given that we as Americans don’t manufacture that much anymore (we’re a service economy!), we are largely talking about foreign-made goods, such as flat-screens from Korea or cars from Germany. Over time, if the dollar continues to slump, foreign manufacturers will raise prices to compensate for what they’re losing in the exchange rate. In that light, a Dow at 14,000 with the euro at $1.42 is really no different from a Dow at 13,000 with the euro at $1.33. (One reason the price of oil has risen so high is that it is quoted in dollars, and the sellers thereof have had to continually jack up the per-barrel price to maintain their own purchasing power at home and elsewhere.)

Still, a rising Dow is better than a falling Dow, and the bulls are piling into every rally. Which still doesn’t impress Jeremy Grantham, chairman of Boston-based money manager GMO, in the least. “The equity market is always slow to pick up on someone else’s crisis,” he says, referring to the turmoil in both the housing and fixed-income markets. “And so you’ve got a slow-motion train wreck that has to work itself through the system.”

How will it work itself through? Grantham points to the recent strength in profit margins, fueled by—you guessed it!—our plummeting savings rate, and says there’s nowhere to go but down. “If you start with an overpriced market and bring profit margins down, that’s more than enough to bring stock prices down,” he says. “It is the most certain mean-reversion in all of finance.” Grantham calculates that the U.S. stock market will have to fall by a full third before it gets to its “fair value.” At which point we will likely be in full-blown recession. And when that happens, Schiff says, we will see a country in downsizing mode, “selling the consumer goods we’ve been buying back to the Chinese. It will be one big, giant repossession.”

So assuming all this is true, that Schiff and his fellow doomsayers are right about the rotten core of the U.S. economy, how will this affect New York City? We’ve grown accustomed to the idea of our local economy, particularly the real-estate market, being inherently stronger than the nation’s and possibly immune to whatever woes strike the rest of America. Wall Street, after all, makes money on downs as well as ups, and the stampede of foreigners and foreign cash could, if anything, be aided by the weak dollar.

Last week, though, the argument against New York invincibility was implicitly made when Merrill Lynch announced a larger-than-expected write-down of $7.9 billion dollars in its third quarter alone, primarily due to losses in the credit markets. Numbers as large as that can paradoxically seem trivial due to the abstract nature of accounting—a “write-down” involves no movement of real-life cash, just a readjustment of some theoretical values—but here’s something nontrivial to consider: Merrill Lynch is one of the largest employers in New York City. While so far only a few Merrill bigwigs have been shown the door, it’s almost certain that a chunk of the company’s rank and file will soon follow. All told, New York–based financial companies had already announced more than 42,000 layoffs as of October, according to one study, and the pace could pick up through the end of the year. That’s people who won’t be bidding up new apartments, who won’t be going out to dinner five times a week, who won’t be testing the outer limits of their credit cards at Barneys. The downstream effects of this could be even more severe, as every Wall Street job is estimated to account for another 1.3 to 2 jobs, meaning that additional job losses could push 100,000.

Meanwhile, the public sector is feeling it, too. A recent report by Nicole Gelinas, published by the Manhattan Institute, forecast a budget deficit for New York City next year and predicted that Mayor Bloomberg, who enjoyed a string of budget surpluses until this year, will likely be forced to leave his successor with a double whammy: a deficit and a projected 50 percent increase in outstanding debt. Of course, the catastrophists could be dead wrong, as they have been for going on a decade now—but to them, it sure smells like the seventies all over again.

Wednesday, October 03, 2007

The end of Las Vegas
Why alternative energy sources won't save us in the post-oil age


The room beamed with good intentions and positive thinking. So many ideas and innovations. You just had to believe.

On Aug. 27, inside the Dialogue Center at the Las Vegas Springs Preserve, the much-hyped $250 million beacon of alternative energy possibility, U.S. Sen. Harry Reid told the small group of concerned citizens and green business people in attendance that the time had come for Nevada to go renewable and lead the nation toward a clean energy future. Everybody agreed it was the right thing to do.

As Al Gore has said over and over, the planet is sick, and carbon dioxide emissions are to blame. Only hard-liners with a lefty bone to pick deny a big, fat storm's brewing. The rest of us, including the good-hearted folks at Reid's energy meeting, know global climate change is the real deal, and we'd better get to work and stop secreting massive amounts of black smoke into the fragile atmosphere. Yes, goes the mantra, it's time to go green, to substitute our use of fossil fuels for alternative energy supplies, and keep on keepin' on with business as usual. Simple as that.

"Global warming is here. Why? Because of fossil fuel," Reid told the audience. "So what we need to do is stop using fossil fuel." But, he added, "People need to be incentivized to do this."

To that end, and to his credit, Reid has been doing a lot more than doling out platitudes. In a torrent of press releases, he has announced his opposition to three proposed coal plants; hailed a decision by the Bureau of Land Management to lease 123,000 acres of Nevada land for geothermal exploration; sung the praises of a Senate energy bill that he says will ramp down our oil use and ramp up renewable use; and, most recently, highlighted a report that shows coal is an unpopular energy source as a means to push the Silver State into a leadership position on all things renewable. (His only flaws seem to be a decidedly non-green coddling of a politically supportive Nevada mining industry, and helping developer Harvey Whittemore build a giant suburb in the middle of nowhere.)

Yes, the man's got ideas.

So did the folks at the meeting. They talked about all the usual, obvious solutions. We should harness the power of the sun; use soybeans and fry grease to run the cars; create a hydrogen economy; and all the other stuff Americans have been hearing about of late to lower those nasty emissions destroying Mother Earth. Best part is: We'll get to continue living the same way -- tooling around in our cars, relaxing in our air-conditioned homes. Only now we'll finally be treating our old Momma with some respect while we do it.

Green smoke

Many energy experts say this a dangerous myth, one that will prevent us from adapting to a monumental change with no historical parallels. While it's surely imperative we clean up our act in the name of preserving our planet, a potentially even bigger issue than that of global climate change is staring us down: an oil shortage.

These critics say the American way of life as we know it is on the wane. They say our addiction to fossil fuels and all of the glorious achievements that accompanied our discovery of oil back in the mid-18th century have convinced us that the way we live is an inalienable right that will continue on into eternity. Because we have technology. Because we have ingenuity. Because we're Americans.

Fact is, none of that matters in the face of geology, experts say. Oil is a finite, fast-diminishing and, perhaps more importantly, unique resource that no amount of so-called alternatives can replace. Even if they could, we may already be too late to put together a plan.

"The renewables are not ready," says Jan Lundberg, an oil industry analyst. "They are not going to deliver energy the way cheap oil used to."

James Howard Kunstler, one of the most prominent speakers and prolific writers on the impending oil crisis, says of the push by Reid and other politicians to switch out energy sources: "What they are doing right now is blowing green smoke up the public's ass."

What's more, the issue isn't necessarily whether we run out of oil, but what happens when shortages throw the cost of energy into a schizophrenic tizzy of price spikes punctuated by brief, illusory drops, says Richard Heinberg, author of The Party's Over. Many credit him with being one of the first intellectuals to bring this issue to public light. "It's going to go up in a stair-step fashion, because oil usage is seasonal. March, April next year, we'll probably see softer prices. But softer in comparison to what? A few years ago, a soft price was $20."

Now oil hovers around $80 a barrel, a jump from around $60 earlier this year. "Reflect on what this is going to mean to the airlines and tourism in Las Vegas," says Kunstler. "You're going to be dealing with an increasingly tapped-out public. They're simply going to have a lot less money to toss into the casinos."

The endgame is even more frightening, surreal and just plain unimaginable. As oil peaks and prices soar, these experts say it will mean nothing less than the end of our air-conditioned, central-heated, car- and airplane-dependent neon metropolis, and it's coming soon, green revolution be damned.

A peak oil primer

"As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented." -- from "Peaking of World Oil Production: Impacts, Mitigation, & Risk Management," a report commissioned by the U.S. Department of Energy, published February 2005

Although it's written in the sterile language of bureaucrats, the Hirsch Report -- named for its lead author, veteran energy analyst Robert L. Hirsch -- nevertheless paints a dark portrait of a world in disarray, if we don't act soon enough to wean ourselves off oil. While the term may sound like the name of some exotic religion, peak oil is a fairly straightforward concept that belies its devastating consequences for industrialized nations, which depend on access to cheap oil for almost every aspect of daily life, from getting to work on time to locating the ingredients grandma needs to make her famous apple pie.

Consider: Nevada, with its relatively small population of 2.5 million people, consumed almost two million barrels of petroleum in 2004 for asphalt and road oil alone, according to the Energy Information Administration, the statistical arm of the Department of Energy. That's a fraction of the more than 48 million barrels we gobbled up that year for everything from jet fuel to gas for cars. With growth, our demand will only increase.

Because it means the point at which all of the world's reserves are depleted by half, global peak oil spells doom for meeting that demand by creating an unstoppable downward trend in the amount we can pump into our bigger-is-better economy. Compounding the problem is that, as we move farther down the slope, the more energy -- fueled by oil -- it takes to get less and less.

However, as the Hirsch Report notes, "It is important to recognize that oil production peaking is not 'running out.'" Indeed, even after peak, there will still be oil left. The problem isn't total depletion so much as it is the turbulent ride toward it.

Predicting when this will happen is tough going for myriad reasons. For example, no politician -- including President George W. Bush, who once employed energy-investment banker and peak oil expert Matthew Simmons as an advisor-- wants to tell his constituency that life as they know it is kaput. And no oil company exec wants to admit to shareholders they're invested in an industry in decline, especially as it earns record profits.

Despite such problems and others on the geopolitical stage (the Saudis, for example, closely guard their most sensitive state secret: how much oil they have left), experts have constructed a plausible window of time when peak might occur, which doesn't bode well for Vegas. According to the Hirsch Report, "Even the most optimistic forecasts suggest that world oil peaking will occur in less than 25 years." There are others who say it's already happened.

Peak oil commentator Heinberg points to the latest figures released by the International Energy Agency, which shows the global production of liquids dropped by 854,000 barrels per day from August 2006 to August 2007. In addition, we're pumping out 1.53 million barrels per day less than the all-time high of 86.13 million extracted in July 2006. Translation: The sun may have already set on our ability to meet world demand. (The latter number, according to a report released earlier this month by the Association for the Study of Peak Oil & Gas, stands at more than 20 million barrels per day for crude oil in the United States alone.)

This is not good.

Running that close to the bone means any systemic shock -- a hurricane that damages drilling platforms in the gulf, a terrorist attack on oil pipelines in Nigeria, an unexpected cold snap in the northeast -- could cause prices to skyrocket, impacting everything from costs at the pump to costs at the grocery store. What's worse, the less oil we have, the less it takes to zap the price upward.

It's an inevitable part of peaking, says Byron King, formerly a geologist with Gulf Oil, which was absorbed by Chevron, and now an energy and natural resources analyst with Agora Financial. "We've built an entire industrial civilization around [oil]," he says. "Now the question is: Can we transform it fast enough?"

The great green hope

"More electric energy, whether from renewables or coal, does not address the liquid fuels crisis posed by globally peaking crude oil. There is no green energy economy around the corner." -- Jan Lundberg

Harsh words, especially given our collective faith in so-called energy alternatives and the magic of the market. This doesn't, however, translate into zero options for electrical power, especially in Nevada, where an abundance of sources ripe for exploitation exist, many of which are on display at the Springs Preserve.

Cruising around its 180 acres of clean-burning infotainment, one gets bright-eyed with optimism about our ability to adjust in the face of an inexorable oil decline.

Above the parking lot sits an array of solar panels capturing energy all day long. Attached to the building are a total of eight "cooling towers" that essentially act as swamp coolers, sucking in hot air through a moist membrane and releasing it back out in cool blasts, even in summer.

Meanwhile, high windows shaded by awnings ensure "you're not getting the direct heat that comes along with the sun shining," says spokesman Jesse Davis. And this catalog of green goodies doesn't even include the insulation, which is composed of renewable materials that even sound eco-friendly, such as "straw bale" and "rammed earth."

While Davis says "we can't generate all of our power naturally," about 70 percent of it is generated on-site. He adds, "We live in one of the most hostile environments anywhere. And because of that, it requires more energy consumption. It's all about ensuring Las Vegas has a sustainable future."

Currently, Nevada's primary energy sources are anything but sustainable, since we rely largely on natural gas and coal to supply electricity, according to the Energy Information Administration. Same goes for Vegas. According to Nevada Power, 37 percent of its plants generate electricity via natural gas, and 63 percent use coal. The outlook is gloomy for both, but for different reasons.

Because coal is quickly becoming the bastard child of energy sources, with almost two dozen proposed coal projects getting axed since 2006, according to the Department of Energy, the future in our new, climate change-conscious world looks somewhat dim for the resource that launched the Industrial Revolution.

Not so with natural gas. Its future looks grim for the same reason oil's does -- supply scarcity. Recently, Southwest Gas Corporation delivered a report to the Nevada Public Utilities Commission warning of long-term supply problems in the face of a 4 percent increase in sales per year in Southern Nevada. The report also noted there was no conservation program on line to address it.

Heinberg says this isn't unique to Nevada -- it's a national catastrophe in the making. "We're facing a natural gas train wreck. We're basically drilling all the time, and we're getting less in return. That means you got to drill more and more wells. Yet the amount that's being produced is stagnant and really declining."

This is just one part of the fossil fuel saga, and one that should be remembered anytime someone mentions trading our use of conventional oil for natural gas. As the Hirsch Report flatly states: "Because of the time required to make major changes in the U.S. natural gas infrastructure and marketplace, forecasts of a decade of high prices and shortages are credible."

Thankfully, there are alternatives being developed. But, again, the question is: Will they be ready in time to head off peak oil, and, perhaps more importantly, will they provide the same level of energy? It depends on who you talk to, and what scenario is imagined as we push toward a re-shaping of our energy policies and infrastructure.

Robert Boehm, director of UNLV's Center for Energy Research, says we'll see a future powered by a variety of energy sources, as there is no one replacement for fossil fuels. He points to a massive solar project at Nellis Air Force Base anticipated to generate more than 25 percent of its power, as well as various projects he's involved in using solar energy.

Eventually, development of solar panel technology, especially storage, will allow us to run the Strip and beyond, he says. Plus, "after two or three years, you've usually paid off the energy that you've used to make it."

Still, the trouble is that solar is expensive compared to, say, coal, which makes many people shy away from investing in it -- at least until that magical market catches up to the times, and forces costs down. Boehm says technology needs to catch up, too. "The larger the system, the harder it is to store electricity. Your batteries have to get really large. And batteries are still problematic."

Heinberg adds that the photovoltaic panels used to harness the sun's energy are composed of rare elements such as gallium and indium "that are depleting pretty rapidly. There's just not that much in the earth's crust. If we're talking about replacing all the coal plants with photovoltaics, we find ourselves" coming up short.

Yet Reid publicly stated as recently as June: "If we were to develop the solar resources of just 90 square miles of Nevada, we could have the power requirements of the entire nation."

Lundberg says the assertion is "totally misleading, because loss over transmission lines is massive." Adding, "One thing to keep in mind is that a hell of a lot of petroleum energy goes into making solar and other energy alternatives." Meaning, if oil is scarce and thus more expensive, so is everything associated with it, including solar energy.

Another possibility is geothermal energy, especially in Nevada, which former oil geologist King labels "the Saudi Arabia of geothermal power." It's a commodity energy company Ormat specializes in.

Ormat's Public Policy Manager Paul Thomsen says geothermal is a win-win for everyone: It's clean, consistent and self-sustaining once it's found.

Here's how it works: You find a hot spring, geyser or some other similar source, drill a hole around 2,000 feet deep, bring up the hot water, install a heat exchanger (basically a tube and shell pipes close to each other), which then heats "working fluid" like an old radiator with a glass of water on top. This, in turn, expands when it's vaporized, generating pressure enough to turn a turbine. The energy is then captured and used again, says Thomsen.

The rub -- one of them, anyway -- is geothermal exploration is costly, because geologists must first search for a suitable source, then drill a "million dollar hole in the ground," says Thomsen. And guess what? Drilling requires petroleum.

But Thomsen says once the plant is running "it's entirely geothermal. We use the drill rig one time."

Nobody thinks in the post-cheap oil world we'll rely on one energy source the way we currently rely on fossil fuels, which provides more than 85 percent of everything we take as a "natural" part of life -- from electricity to transportation. Over the next 20 years, demand is expected to increase "even with aggressive development and deployment of renewable and nuclear technologies," according to the Department of Energy.

Says Thomsen, "Ormat's position is that [geothermal] should be part of a larger portfolio."

King likes Ormat, and he likes geothermal. But, again, the problem is one of timing. "On the backside of peak oil, your energy costs are going to be more expensive. Whether it's a geothermal well or an oil well or a gas well ... the cost of all your inputs are going up. It's going to be a lot harder because everything is going to be more expensive."

Not to mention the time associated with bringing a major project to fruition. "You don't do this stuff in two or three years. This is long term." Adding, "We need crash programs."

As for wind, many say it doesn't give much of a return on energy-invested, since storage when the fans aren't turning is still a problem -- not to mention that the turbines are composed largely of steel (read: coal) and carbon composites.

Bottom line, says Kunstler: "Without cheap air conditioning for virtually everybody, places like Las Vegas and Phoenix will not function." Adding "What we're really in the process of seeing is the beginning of a big campaign to sustain the unsustainable, and it will end in tears."

Car wrecks and plane crashes

"We've designed cities with sprawl in mind. Look at Phoenix, look at Las Vegas. We've built a country where everything is 45 minutes away from everything else." -- Byron King

Travel to Summerlin, and what do you see? Rows and rows of houses whose only real variation is size and the shade of beige. And there's another constant: They're inhabited by commuters, car owners who can't live without their vehicles. This is the legacy of suburban sprawl and the construction of the infrastructure -- highways, gas stations, repair shops -- that attends it.

All that driving leaves us here in our strip-malled, McHoused, multiple-laned valley car dependent to such an extreme as to make life near-impossible without them. Fretting about gasoline prices, not to mention the earth-killing fumes spewing out of the tailpipes, are the ancillary benefits to the way we've chosen to inhabit our desertscape. When peak oil hits, experts say car travel will be among the first things we reduce as our pockets tighten.

How will the California weekend warriors get here then?

Matthew Gregori has a partial solution: biodiesel. It's made from a variety of sources, from vegetable oil to soybeans to animal fats, not crude oil extracted from the earth and refined in plants. "We're not tied down to anything," he says of Biodiesel of Las Vegas, where he's vice president of development.

What's more, biodiesel is cheaper than standard diesel, burns cleaner and isn't subject to the kind of shocks the oil market regularly experiences. Still, he admits it's not a panacea: "It's going to be part of a larger scheme toward energy independence."

Perhaps the cleanest scheme to maintain our auto-centric lifestyles is hydrogen. (It's one that President Bush supports, having set aside $243 million for fuel cell research in 2006.) Boehm says that "while hydrogen is a very arguable topic," it's a plausible solution, since hydrogen atoms are abundant, as they're attached to many others, including those of fossil fuels. Good news is, it's also found with water -- you just have to separate the hydrogen atom.

"In a sense, it's like electricity -- electricity you have to make. You don't find it laying around," says Boehm. "You basically fill up one tank with water. You take it to the electrolyzer and it would make hydrogen out of it. You fill up another tank with your hydrogen. At least conceptually, you got a really renewable kind of source. Practically, there is some issue though."

One is that in a water-starved (or starving) desert city like ours setting up a battle between, say, whether you drink and whether we drive is "not a trivial concern," says Boehm. Plus, he continues, "You still got a lot of infrastructure to put in."

If we're staring at fast-diminishing oil reserves that are causing prices to skyrocket, let alone a major supply interruption that suddenly leaves us on or near empty, such a massive, long-term undertaking may not make it in time. Which means we'll have to find another way to get the groceries on the shelves and the kids to soccer practice.

That's, of course, the beauty of biodiesel, not to mention other "natural" sources we're hearing a lot about lately -- the existing infrastructure is basically there. Most wouldn't argue the benefits of recycling fry grease for use in transportation (although, as Heinberg notes, "There's only so many McDonald's restaurants"), but almost everyone agrees growing fuel is a disastrous "alternative." The reason? It sets up a basic competition between what we eat and what we burn in our tanks, which is why King calls it "deathanol."

All these pros and cons make it tough to figure which way to go. "Swapping out the motorized vehicle fleet is going to take 15 to 20 years at least," he continues. "If we knew what were going to swap it out into."

The plane truth

"We don't have planes that will run on anything but jet fuel." -- Richard Heinberg

Airplanes are another matter with even fewer options than cars in a peak oil world. Park on the north side of Sunset Road, just west of Eastern Avenue, and what do you see? Plane after plane landing and taking off from McCarran, often delivering that most precious of Vegas commodities -- tourists.

Currently, 25 percent of the airlines' operating costs is devoted to jet fuel, says industry analyst Ron Kuhlmann. And with the rise of fuel, of course, comes the rise of ticket prices, which could significantly cut down on those 38 million visitors we receive yearly.

Says King, "Las Vegas relies on the ability of people to get there cheaply and easily, which may not be the case in a world of expensive jet fuel."

So what about alternatives? None are currently in use. Billionaire Richard Branson, owner of Virgin Atlantic Airways, is attempting to develop airplanes that run on biomass -- that is, fuel made from organic material -- to help ease complaints about greenhouse gases, but, as Kuhlmann says, for that to happen, "We'd better get busy and build some more earth." In other words: Its limited supply will make it ridiculously expensive.

While electric cars are certainly possible as replacements to the combustion engine (though moving from lead-acid batteries that are prone to "crap out" needs development, says Boehm), the airline industry isn't there yet. "There are some people working on it," says Heinberg. "But they're talking about two-seaters, and that's still pretty much in the future."

Nevertheless, Kuhlmann remains optimistic about the prospects for the airline industry to adjust. He says when jets were first developed, they were terribly noisy, causing many people to complain, so the engineers came up with quieter engines. As such, the airlines' fuel woes will be subject to the same sort of creative force, he says. "If they show they need it, they will build it."

Kunstler says that's the most common misconception about how to pull ourselves out from the oil drain. "So many Americans, including people who ought to know better, have drunk this Kool-Aid telling them that technology will be used as a substitute for energy. That's going to be the cornerstone of the trouble."

This is the end

"Both Phoenix and Las Vegas were developed in places that have poor prospects for supporting large numbers of people, and it was enabled during a brief period of history solely by cheap energy. We are now leaving that era behind." -- James Howard Kunstler

It's anybody's guess how the slide down what King labels "the backside of peak oil" will go, but no one doubts the seriousness of the situation. "The Hirsch Report is all I need to let people know that you can't start reacting to peak oil once it hits. When they say severe economic hardship, that's bureaucratic language that they've had to tone down. They can't say the shit's gonna hit the fan," says oil industry analyst Lundberg.

When you consider how much we depend on oil not only in Vegas, but in the whole country, the prospect of a decline and all its attendant catastrophes becomes clear. From pesticides used in industrial agriculture, to plastic sandwich bags used in suburban homes, to the IV tubes used in hospitals, the fulcrum of the entire U.S. economy is petroleum, and lots of it.

Although we may not recognize it when peak oil finally dawns, the repercussions will be massive. Says King, "Certainly, within the next five years, we're going to feel something. Things are going to feel different. And a lot of it is going to depend on who gets the naming rights."

Will we blame it on Mexican oil reserve supplies suddenly slumping off? A continued housing crisis? A hurricane? "For as bad as Katrina was, there was still enough slack in the system," continues King. But now: "World demand is up, world supply is static. Another Hurricane Katrina ... would probably push things over the edge [so] that we would never get back to the way it was."

In Las Vegas, such a scenario would undoubtedly result in a population contraction, a mass exodus of necessity to other states not unlike that which occurred after Katrina. But, worries Heinberg, "How welcome they'll be I don't know."

Adds Kunstler, "Places like Phoenix and Tuscon and Las Vegas will be faced with problems beyond many of the problems faced by other cities." And the alternatives, even if they're developed in time, won't save us. "We are not going to run Wal-Mart, Walt Disney World, and the interstate highway system on any combination of alternative fuels. Instead, reality is going to compel us to make very different arrangements for the major activity of daily life."

Especially in the unstoppable city of Las Vegas.

Wednesday, August 15, 2007

The fight for the world's food
Population is growing. Supply is falling. Prices are rising. What will be the cost to the planet's poorest?
By Daniel Howden
Published: 23 June 2007
Most people in Britain won't have noticed. On the supermarket shelves the signs are still subtle. But the onset of a major change will be sitting in front of many people this morning in their breakfast bowl. The price of cereals in this country has jumped by 12 per cent in the past year. And the cost of milk on the global market has leapt by nearly 60 per cent. In short we may be reaching the end of cheap food.

For those of us who have grown up in post-war Britain food prices have gone only one way, and that is down. Sixty years ago an average British family spent more than one-third of its income on food. Today, that figure has dropped to one-tenth. But for the first time in generations agricultural commodity prices are surging with what analysts warn will be unpredictable consequences.

Like any other self-respecting trend this one now has its own name: agflation. Beneath this harmless-sounding piece of jargon - the conflation of agriculture and inflation - lie two main drivers that suggest that cheap food is about to become a thing of the past. Agflation, to those that believe that it is really happening, is an increase in the price of food that occurs as a result of increased demand from human consumption and the diversion of crops into usage as an alternative energy resource.

On the one hand the growing affluence of millions of people in China and India is creating a surge in demand for food - the rising populations are not content with their parents' diet and demand more meat. On the other, is the use of food crops as a source of energy in place of oil, the so-called bio-fuels boom.

As these two forces combine they are setting off warning bells around the world.

Rice prices are climbing worldwide. Butter prices in Europe have spiked by 40 per cent in the past year. Wheat futures are trading at their highest level for a decade. Global soybean prices have risen by a half. Pork prices in China are up 20 per cent on last year and the food price index in India was up by 11 per cent year on year. In Mexico there have been riots in response to a 60 per cent rise in the cost of tortillas.

It has even revived discussion of the work of the 18th-century British thinker Robert Malthus. He predicted that the growth of the world's population would outstrip its ability to produce food, leading to mass starvation.

So far in Britain we have been insulated from the early effects of these price rises by the competitive nature of our retail system. But the supermarkets cannot shield us for long. The European Commission no longer has reserves to help cushion its citizens. Its mountains of unsold butter and meat and its lake of powdered milk have disappeared after reforms to the Common Agricultural Policy.

Then there is corn. While relatively little corn is eaten directly it is of pivotal importance to the food economy as so much of it is consumed indirectly. The milk, eggs, cheese, butter, chicken, beef, ice cream and yoghurt in the average fridge is all produced using corn and the price of every one of these is influenced by the price of corn. In effect, our fridges are full of corn.

In the past 12 months the global corn price has doubled. The constant aim of agriculture is to produce enough food to carry us over to the next harvest. In six of the past seven years, we have used more grain worldwide than we have produced. As a result world grain reserves - or carryover stocks - have dwindled to 57 days. This is the lowest level of grain reserves in 34 years.

The reason for the price surge is the wholesale diversion of grain crops into the production of ethanol. Thirty per cent of next year's grain harvest in the US will go straight to an ethanol distillery. As the US supplies more than two-thirds of the world's grain imports this unprecedented move will affect food prices everywhere. In Europe farmers are switching en masse to fuel crops to meet the EU requirement that bio-fuels account for 20 per cent of the energy mix.

Ethanol is almost universally popular with politicians as it allows them to tell voters to keep on motoring, while bio-fuels will fix the problem of harmful greenhouse gas emissions. But bio-fuels are not a green panacea, as the influential economist Lester Brown from the Earth Policy Institute explained in a briefing to the US Senate last week. He said: "The stage is now set for direct competition for grain between the 800 million people who own automobiles, and the world's 2 billion poorest people."

Already there are signs that the food economy is merging with the fuel economy. The ethanol boom has seen sugar prices track oil prices and now the same is set to happen with grain, Mr Brown argues. "As the price of oil climbs so will the price of food," he says. "If oil jumps from $60 a barrel to $80, you can bet that your supermarket bills will also go up."

In the developed world this could mean a change of lifestyle. Elsewhere it could cost lives. Soaring food prices have already sparked riots in poor countries that depend on grain imports. More will follow. After decades of decline in the number of starving people worldwide the numbers are starting to rise. The UN lists 34 countries as needing food aid. Since feeding programmes tend to have fixed budgets, a doubling in the price of grain halves food aid.

Anger boiled over this week as Jean Ziegler, the UN special rapporteur on the right to food, accused the US and EU of "total hypocrisy" for promoting ethanol production in order to reduce their dependence on imported oil. He said producing ethanol instead of food would condemn hundreds of thousands of people to death from hunger.

Population and starvation

* Robert Thomas Malthus was a political economist who shot to prominence in late 18th century Britain. His Essay on the Principle of Population influenced generations of thinkers with its prediction that the world's population would outgrow its food supply, prompting starvation on an epic scale. "The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race," he wrote. "Gigantic inevitable famine stalks in the rear." But Malthus predicted disaster to strike in the mid-19th century.
Credit contagion
Is the worst over? Fortune's Peter Gumbel offers a 10-point guide to understanding two harrowing weeks - and what's likely to happen next.
By Peter Gumbel, Fortune
August 14 2007: 10:36 AM EDT

PARIS (Fortune) -- Relax! There's really no need to panic! That's the soothing message being put out this week by key players in financial markets after two harrowing weeks in which credit markets in Europe all but dried up, prompting massive injections of funds into the system by the European Central Bank, the U.S. Federal Reserve and the Bank of Japan.

Overnight borrowing rates have come back down after spiking wildly and stock and bond markets have been bouncing back around the world. The European Central Bank, which continued to inject funds into the market on Tuesday, albeit less than one-tenth the amount at the peak of the crisis last week, says that money-market conditions are "normalizing." And Tuen Draaisma, Morgan Stanley's chief European equity strategist, for one, recommended in a note to clients that they should go "overweight" in equities because "we may already be at the point of maximum bearishness and uncertainty, which by definition is the right moment to buy."

So is the worst over? Even the most die-hard optimists concede that it'll take a lot more than a few days of calm to restore confidence among financial institutions and retail investors. "The market is concerned pretty much across the board," says Gerry Rawcliffe, a managing director in the banking group at Fitch Ratings in London.

Here's a 10-point guide to what we know and don't know about the troubles, and what the repercussions are likely to be:

Why did America's subprime mortgage woes have such a big impact on world financial markets?

Because these mortgages were lumped together in packages and sold as asset-backed securities all over the world, particularly in Europe. Often the initial securities were themselves put into new packages, leveraged up and resold as so-called collateralized debt obligations (CDOs). They are a sort of derivative play on the underlying mortgages, just as futures and options are a play on stocks and commodities. Big banks have whole securitization departments who create these instruments. They do so to profit from the difference between the long-term returns these investment vehicles produce and their more plain vanilla short-term borrowing, and to earn fees.

Who bought them?

Everyone, and that's the problem. The CDO market has exploded in recent years: More than $100 billion worth of structured cash CDOs were issued in the fourth quarter of last year alone, according to CreditFlux Data+, a London firm that tracks them (and that doesn't include the even more arcane "synthetic" CDOs). Banks, institutional investors and hedge funds have been the main customers, but some retail investors have also bought into them through the asset-backed securities, or ABS, funds that some of the biggest European banks sell to the public. Everyone who bought these securities was given the same pitch, namely that they were a relatively safe bet, since much of the paper had AAA ratings, but offered higher returns than regular corporate bonds.

So what went wrong?

The number of delinquencies in the U.S. subprime mortgage market has been rising and is now substantially larger than anyone expected - about 14 percent of the total, up from about 10 percent in 2004 and 2005. That means there's a strong likelihood that some of the securities holders, especially those where the underlying mortgages were taken out in the past couple of years, are sitting on losses.

Those troubles have been massively compounded by the aggressive use of leverage in CDO packages. When U.S. blue chip financial players like Bear Stearns and then a variety of European banks began reporting problems, panic quickly gripped the markets. That turned into a vicious circle: These debt instruments have now become impossible to price because nobody wants to buy them any longer. And since they can't be priced, the size of the losses aren't clear, which in turn has given rise to more rumors about financial players in trouble. Banks in continental Europe especially simply stopped lending to one another, which is why the liquidity dried up in the credit markets as a whole and the European Central Bank had to jump in.

How big is the problem, really?

Nobody is quite sure. Patrick Artus, an economist at Natixis in Paris, reckons the total damage inflicted by subprime woes is a relatively manageable $45 billion, which is the difference between the expected rate of mortgage delinquencies and the current much higher rate. Another French bank that is an important player in the derivatives market, Sociéte Générale, reckons that even if things really turn sour, the worst will be losses of about $100 billion. That may sound like a lot, but it's the equivalent of about 1 percent of the total market capitalization of the S&P 500.

Such calculations highlight the real issue here, that the panic has been due more to a collapse of confidence than to any financial cataclysm. "We're still primarily looking at a liquidity crisis rather than a credit or a solvency crisis," says Fitch's Rawcliffe.

Is it really over?

No. The market "remains very, very fragile," says a top executive at one of the leading European banks. Some confidence has been restored into the international banking system and its overnight lending patterns by the big injections of central-bank funds, but nobody has yet dared to start buying that subprime paper in any sizeable quantities. And because there's so little transparency about who is sitting on what size losses, the rumors continue to swirl.

Nouriel Roubini, an economics professor at New York University's Stern School of Business, who has long warned about the risk of financial contagion, reckons some other parts of the U.S. housing market including home equity loans and second mortgages are starting to display what he calls the same "toxic characteristics" as the subprime sector. More optimistically, Neil McLeish, the chief European credit strategist at Morgan Stanley, says that, "we have passed the absolute peak of that anxiety and uncertainty." But even he believes that credit market conditions will be more difficult in the coming months and, "there is still some risk of additional volatility" at least for the next month or so.

Who are the biggest casualties?

Banks and financial market players across the world are starting to come clean about their exposure and losses, partly in order to help restore confidence in the market. The losses incurred by Wall Street titans Bear Stearns (Charts, Fortune 500) and Goldman Sachs (Charts, Fortune 500), which this week announced it is putting $2 billion into one of its hedge funds, have received the most publicity. Outside the United States, firms such as insurer AXA (Charts) and BNP Paribas in France have frozen or shut problem funds, while a range of banks including NIBC of the Netherlands and Commerzbank in Germany have detailed their exposure and expected losses.

The biggest international victim to date is a mid-sized German bank called IKB Deutsche Industriebank that its peers, including a government-owned bank, stepped in to rescue earlier this month, taking over $11 billion of credit lines and putting up a $4.7 billion funding package. IKB had been an aggressive player in the CDO market, through two off-balance sheet firms that it used to pump up its commission income and advisory fees. In the end, its exposure to dodgy securities through these two firms far exceeded the bank's liquidity and equity capital.

Is anyone safe?

Not completely, but barring some huge problem nobody yet knows about, major banks seem in the best position to weather this storm because they have the strongest balance sheets and are able to refinance their operations most easily thanks to the extra liquidity that central banks have put into the market in the past week. "Being a bank and having access to the central bank (credit) windows is key at the moment," says the top European banker.

Hedge funds are another story, as the Goldman Sachs-run one that was bailed out this week shows, although some of these funds foresaw the troubles and have been aggressively shorting the subprime sector and any securities relating to it.

Why didn't central banks cut interest rates in response?

Some critics of the European Central Bank, especially in France, are saying that its interest rate policy, which has consisted of regular rate hikes to counteract inflation, has partly fueled this crisis. "One can ask if the ECB isn't becoming a prisoner of its rate-increase strategy," Thierry Breton, the former French finance minister said this week. But bank economists are generally more supportive and say that the ECB acted smartly with its three consecutive days of huge money-market interventions - the biggest of which was a whopping $130 billion injection last Thursday. "It's a demonstration of the financial system operating as it should," said James Nixon, a London-based economist at France's Société Générale, who says that the troubles primarily affect the financial sector rather than the wider economy.

While the Fed did cut rates in 1998 during the last derivatives meltdown, involving Long Term Capital Management, central banks may not need to this time if markets continue to calm down. Indeed, the big question now is whether the ECB and the Bank of Japan will go ahead and raise rates in the next month, as they had signaled before the crisis. Roubini isn't sure, and thinks that the Fed may well move to reduce U.S. rates quite soon. "The likelihood of a cut in rates is now much higher," he says.

What does this mean for the world economy?

So far, not all that much - but keep your fingers crossed. Growth in Europe and Asia remains buoyant, even if the U.S. outlook is unclear. Some borrowing by companies and individuals is bound to get more expensive as markets adjust and restore a risk premium. But "it's not obvious that the repricing will lead to an economic slowdown," says Société Générale's Nixon, although there's a possibility that Britain's economy, which has thrived because of its heavy dependence on financial services, may be vulnerable. Roubini thinks the United States will bear the brunt of what he sees as an inevitable slowdown of consumer spending related to the housing woes, and reckons that this could ultimately spill over to the global economy if it's sufficiently severe. "The effect on the real economy in the rest of the world depends on whether there's a hard landing in the U.S." he says.

Will there be any regulatory fall out?

This is almost inevitable, especially in Europe where it's now clear that many of the purchasers of these securities didn't fully appreciate the risks they were taking. Look for the first moves to come in Germany, where bank bail-outs are exceedingly rare. The last time a bank got into serious trouble there was in 1974, when the Herstatt Bank collapsed after some disastrous forays into foreign-exchange trading that bear some similarity to IKB's woes. Regulators quickly followed up with an overhaul of the national banking system. It's not clear that IKB's rescue will have the same dramatic repercussions, but it's already prompting tough questions about how a mid-sized bank could end up with such an enormous exposure to risky assets via an off-balance-sheet firm.

"I suspect that at the end of this, regulators will ask themselves if this very rapid expansion (of transactions involving asset-backed securities) has been a good thing for banks, or if the risk comes back to haunt you," says Fitch's Rawcliffe. Watch also for credit agencies to come under pressure to do a better job at assessing the market risk of exotic financial instruments.