Book review: Game Over
Game Over: How You Can Prosper in a Shattered Economy by Stephen Leeb.
Game Over makes that case that we're running into resource limits on every front--energy, metals, water--and that this problem is going to affect everything we do. Then, it looks at what can we do about it, as individuals and as a society.
The book breaks down into four sections.
The first lays out the case that we're running into resource limits on every front. The second suggests that we, as a society, may well be able to do something about this--but only if we're clever and foresightful. The third looks at some issues related to the way we've been running the economy for the past few years. The fourth suggests a bunch of things individuals might do, to position themselves so that their finances don't get too beaten up by the problems.
Peak oil (and peak lots of other stuff)
Part one begins with peak oil, but then expands on that issue by pointing out that we're hitting limits with many other resources as well--metals, water, etc.
It's no surprise that we're hitting so many limits at once. For almost any resource there are partial substitutes. The end result of going down that path, though, is that the substitutes get used wherever they're adequate--meaning that eventually they'll hit a limit as well. If you aggressively substitute the cheapest alternative in every case--which is exactly what happens in a free market--pretty soon all your resources will be pushing up against their own limit.
Leeb lays out the case for peak oil pretty well. At some point--roughly at the point when half the oil has been produced from a field--that field hits a peak: it produces more oil than it has ever produced before or will ever produce again. This is clearly true of individual fields--we've seen it over and over again, all over the word. It is also clearly true of countries. The United States hit its peak in 1970. Since then, even with the addition of oil from Alaska, we've never produced as much oil again. It is true of the world as a whole as well--add up all the production from all the fields, each one eventually hitting its own peak, and at some point the planet hits a peak. Every year after that, the world will produce a bit less oil than the year before.
Besides laying out the case for peak oil, Leeb introduces another concept that he calls "absolute peak oil," by which he means that point at which it takes more energy to produce a barrel of oil than you'll get by burning the oil. It's an important concept, although I don't think Leeb develops it very well.
The concept he's referring to is the "energy return on energy invested," usually abbreviated EROEI. When your EROEI is less than one--when the energy produced is less than the energy it took to produce it--whatever you're doing is no longer an energy source. Of course, that doesn't make it worthless. Batteries, for example, have an EROEI of less than one--it takes a lot more energy to construct a battery and deliver it to you than your battery-powered device will ever get out of it. But that's okay. Batteries are an energy delivery mechanism, not an energy production mechanism. As long as people will pay more for a battery than it costs to make it, people will keep making batteries.
Peak oil will start to bite long before we hit that point. Once we hit the peak, the world as a whole will have to burn a bit less oil each year than the year before. The consequences for how people live will be enormous.
Part two talks about the development of alternative sources of energy, and the key message is that many alternatives that look possible simply don't scale, because of limits in other resources.
Wind, for example, could replace most of the energy that we get from oil. The EROEI for a wind turbine is pretty good. But there's a huge capital investment--you need to build towers, turbines, and generators. You can build hundreds of wind turbines no problem, but if you tried to build enough wind turbines to replace the energy we get from fossil fuels, you start running out of things like steel to build them out of.
All the alternatives have similar issues. Try to replace oil with ethanol and you start running out of land and water (and, in the shorter term, food). Try to replace oil with tar sands, and you run out of natural gas and water.
The key take-away from part two of Leeb's book is that there are many possibilities for alternative energy production, and that many of them will work to some extent, but that we need to look very seriously at which ones can be scaled up to produce enough energy to make a difference without hitting other resource limits.
I should add that this part of the book has Leeb's worst misstep. He talks about conservation as part of the basket of choices to get us through the rough patch where resource limits really start to bite--and then thoughtlessly dismisses the notion on the grounds that our conservation probably just makes the energy cheaper, so other people will use it up all the faster.
The point he misses (and he's certainly not the only person to make this mistake) is that the goal of conservation is not to "stretch out" the depleting supply for a while longer. The point is to find a balance between the production of energy and the use of energy.
It's sad that he couldn't take this step, as it follows rather directly from his previous point--that if we try to build enough windmills to replace the energy we get from oil, we run out of steel. Suppose, though, we could build some windmills--enough to replace a fraction of the energy we get from oil. Suppose we could also get modest-but-significant amounts of energy from other renewable sources (photovoltaics, biofuels, geothermal). The point of conservation is to find a way to live comfortably using only that much energy. Duh!
The third section talks about the economy, making the case that inflation will be the big economic problem over the next few years, and that it won't be easy to deal with.
The central banks have made the determination of late that inflation is the safer risk. We know how to end inflation, so it's safe to risk a little inflation in an effort to avoid a depression. Leeb says that this isn't going to work. Yes, we know how to stop inflation--but only by causing a recession. If the economy is already in a recession, the central banks will never make that worse just to end inflation.
There is, of course, the key counter-example of the policies of the Federal Reserve under Paul Volker in the late 1970s and early 1980s. Leeb's analysis, though, is that we were in better shape then to tolerate the disinflation, but that we're not now.
Personally, I hope he's wrong--and I think there's a good chance he is. In a recession, the pain hits some much worse than others--business owners suffer, workers who lose their jobs suffer. In an inflation, the pain hits everybody, but it especially hits people with money. To the extent that "people with money" have power within society, I think eventually the pain of a bad inflation will push policy maker's to grind the inflation out of the system, even at the cost of a recession.
The last section of the book is on investments. It's informed by his thinking on inflation, so one key suggestion is gold. He suggests a variety of companies that should make money as we try to build out alternative energy production facilities, and he suggests some companies that will thrive as developing countries (where they use less energy than the rich countries do) continue to grow.
On balance it's a good book. Certainly it's right about the problem. It also has a thoughtful (if limited) look at the range of possible solutions. His economic analysis is different from mine, which leads to different investment suggestions than I would make, but that's really the least important part of the book (and time may yet prove that he's hit closer to the mark than I).
If you're interested in learning more about how limits in energy and other resources are going to affect us, and how we might address those problems both as individuals and as a society, Game Over is a good place to start.
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