Yesterday I was reading
chapter 4 of the book "Limits to Growth:
A 30-Year Update," (http://www.amazon.com/Limits-Growth-Donella-H-Meadows/dp/193149858X)
and came across this description (pages 170-171) of their Scenario 1 (or
baseline) model run:

As
non-renewable resources become harder to obtain in Scenario 1, capital is
diverted to producing more of them. That
leaves less industrial output to invest in sustaining the high agricultural
output and further industrial growth.
And finally, around 2020, investment in industrial capital no longer
keeps up with depreciation. (This is physical
investment and depreciation; in other words, wear and tear and
obsolescence, not monetary depreciation in accounting books.) The result is
industrial decline, which is hard to avoid in this situation, since the economy
cannot stop putting capital into the resource sector. If it did, the scarcity of materials and
fuels would restrict industrial production even more quickly.

The book and models
describe various ways in which the human economy can encounter limits, and
Scenario 1 demonstrates the impacts of resource constraints. Another way to express what the authors are
saying is that as more work is needed over time just to obtain the raw material
resources needed for economic production, cost inflation eventually leads to
industrial decline, followed by a shortfalls in food, medicine, and other basic
services like delivering water supplies.

Now for anyone who
follows the news in the sectors of construction, energy, or agriculture might
get chills reading that paragraph. Take
for example this item coming out of the central valley of California, one of the most important
agricultural regions in the world:

http://www.centralvalleybusinesstimes.com/stories/001/?ID=7175

 

Diesel
prices pick farmers' wallets

Fresno, Dec. 5, 2007

 

California farmers who are considering changing their
cropping patterns due to the state's water shortage are now looking at growing
crops that may also help them cushion the impact of the latest fuel crunch.

With diesel
prices at record highs, California
farmers and ranchers are trying to find ways to minimize fuel usage on the farm
without compromising production.

One way is to
farm crops that require less equipment usage, says Dan Errotabere, a Fresno County
diversified farmer who grows almonds, pistachios, processing tomatoes, cotton,
alfalfa, wheat and other crops.

....

Many farmers say
they have continually changed how they operate their farms to try to conserve
energy, and what they could do they've already done. What's left now is they
must absorb the higher costs of doing business, says Fresno County
farmer Russel Efird.

"I think
most of agriculture has already pared down all the fat," says Mr. Efird,
who grows grapes, nuts and tree fruit and has a commercial harvesting
operation. "My concern with this pinch right now is there's not any more
places to trim."

"Once
you've done all that, you've already cut down on your trips through the fields,
so now you're down to only the necessary trips," says Mr. Efird, president
of Fresno County Farm Bureau.

Having already
maximized his efficiencies, he says if he tries to cut back further, his crops
will suffer and that will cost him more money down the road.

....

While some
farmers have been able to adjust their practices on the farm to use less fuel, Sonoma County
dairyman Domenic Carinalli says there hasn't been much he can do in his
operation to curb his usage. Most everything on his dairy runs on diesel,
including tractors that clean the barn and trucks that haul feed in and haul
milk out.

 

So why are fuel prices so
high? Here's what some people in the
energy industry saying:

http://www.rigzone.com/news/article.asp?a_id=53040

 

Oil
Officials See Limit Looming on Production

Nov.
19, 2007

 

A growing number of oil-industry chieftains are
endorsing an idea long deemed fringe: The world is approaching a practical
limit to the number of barrels of crude oil that can be pumped every day.

 

....

 

Sadad Ibrahim Al Husseini, a former head of
exploration and production at Saudi
Arabia's national oil company, has also gone
public with doubts. He said in London last month that he didn't believe there were
enough engineers or equipment to ramp up production fast enough to keep up with
the thirsty global economy. What's more, he said, new discoveries are tending
to be smaller and more complex to develop.

 

....

 

Oil companies have seen several years of bull-market prices, and thus of
trying to produce more. This has given their executives a better sense of what
is and isn't possible.

One limit: Many people think most of the world's giant fields already
have been discovered. By 1970, oil-industry explorers had discovered 10 giants
that could each produce more than 600,000 barrels a day, according to Matt
Simmons, chairman of energy investment banking firm Simmons & Co.
International. Exploration in the next 20 years, to 1990, yielded only two.
Since 1990, despite billions in new spending, the industry has found only one
field with the potential to top 500,000 barrels a day, Kazakhstan's Kashagan field in the Caspian Sea. And Mr. Simmons notes it is proving
expensive and difficult to extract.

....

Labor and construction bottlenecks also are making it difficult to
develop proven fields. One of the largest obstacles is the booming commodity
markets themselves: The prices of raw materials used in oil-field platforms and
equipment has escalated. And during the years of low or moderate oil prices in
the 1980s and 1990s, companies didn't develop enough geologists and other
skilled workers to supply today's needs. "Years of underinvestment in new
talent have led to a limited and aging pool of skilled workers," noted
Andrew Gould, the CEO of oil-service giant Schlumberger Ltd., last month.

High oil prices have also led to steep cost inflation for drilling rigs
and other equipment. Costs have soared so much that the industry is falling
behind in the investment needed to sate expected future demand. To meet demand
forecasts of 90 million barrels of oil a day in 2010, the industry needed to
have spent $350 billion on drilling and producing in 2005, argues Larry G.
Chorn, chief economist of Platts, the energy and commodities-information
division of McGraw-Hill Cos. But the International Energy Agency estimates that
spending on oil-field production in 2005 came to only about $225 billion, he
says.

A failure to spend enough in the past few years "may have already
put the industry behind the spending curve," Mr. Chorn says. As a result,
he predicts "temporary shortages over several years, causing debilitating
price spikes."

Compounding the problem: Most of the world's biggest fields are aging,
and production at them is declining rapidly. So, just to keep global production
at current levels, the industry needs to add new production of at least four
million daily barrels, every year. That need is roughly five times the daily
production of Alaska, with its big Prudhoe Bay field -- and it doesn't assume any demand
growth at all.

Mr. Simmons scoffs at estimates that production from proven fields will
decline only 4.5% a year. He thinks a more realistic rate of decline is 8% to
10% a year, especially because modern technology actually succeeds in depleting
fields faster.

If he's right, the industry needs to add new daily production of at
least eight million barrels -- 10 times current Alaskan production -- just to
stay even.

Notice
the references to shortages of the necessary equipment needed to coordinate an
expansion of drilling activity. If more
oil rigs, well pipes, pumps, etc. are needed, industrial capacity may have to
be expanded, which relies on the construction sector. And yet, the construction sector is having
their own set of problems related to rising costs, which makes it difficult to
maintain and expand infrastructure:

http://www.agc.org/galleries/economics/CIA08.pdf

 

AGC's
Construction Inflation Alert:
Construction Costs: End of the Calm is Coming Soon

Oct.,
2007

 

After years of minimal cost increases, prices of many construction
materials skyrocketed from 2004 to mid-2006. Since mid-2006, some input prices
have moderated, while others have fallen. But the cumulative increase in the
producer price index (PPI) for construction inputs since December 2003 (28
percent through August 2007) remains more than double the 13 percent increase
in the most common measure of overall inflation, the consumer price index (CPI)
for all urban consumers. Labor costs, in contrast, have risen at similar rates
for construction and for the private sector as a whole.

 

The cumulative difference matters because the estimates for many
projects now being bid, especially public facilities, were prepared in
2003-2005 under the assumption that construction costs would escalate at the
same rate as the CPI. That divergence explains why some projects are being
canceled, delayed or redesigned.

 

In the next several months, the PPI for construction inputs, which
covers items used up in construction such as diesel fuel as well as materials
that go into a project, is expected to accelerate to a 3-5 percent annual rate
of increase from the recent 1.5-3 percent range. By the end of 2008, and
indefinitely thereafter, construction input costs are likely to be rising at
6-8 percent. Labor cost increases could top 5 percent by the end of 2007 and
5-6 percent in subsequent years.

As
the previous articles make clear, it takes energy to find and develop energy
supplies. It takes energy to build the
tools and run the machinery that develop energy supples. And it takes energy to house, transport and
feed the workers that develop energy supplies.

Our
current living arrangement appears to be entering a stage of rapidly diminishing
returns, and there is much wringing of hands over it by people who don't
understand why it is so, or that it is an inevitable consequence of a growth
phase reaching its limits. I recommend
reading the work of the authors who saw this happening long ago, because the
worst thing we can do is keep behaving as we always have and expect things to
get better. Change will be forced upon
us, but if we get ahead of the curve we have a better chance at a decent
outcome.