The mystery of Lusi

The struggle to discover the cause of the eruption of a mud volcano has vital importance for the loc

Volcanoes are usually stately and sometimes violent. Great mountains with smooth slopes and circular calderas, they lie dormant for centuries, or give off occasional wisps of steam and, more rarely, surges of lava and clouds of ash. And every now and then, one of them explodes spectacularly.

But the volcano that erupted at 5am on 29 May 2006 in Porong, Indonesia, was different; no mountain, just a spreading lake of simmering mud and a 30m plume of sulphurous steam. Up to 50,000 people lost their homes, more than a dozen villages were submerged and two dozen factories abandoned. Rice paddies and shrimp ponds were inundated, roads and railways diverted. The death toll so far is 13, killed when a gas pipeline ruptured.

At its peak, the mud volcano, called Lusi, pumps out 150,000 cubic metres a day, enough to fill Wembley Stadium in about three weeks. And it’s been gushing for nearly two and a half years, with no end in sight.

One recent study by a Durham University-led team considered what Lusi would be like if it keeps erupting for another decade. Attempts to cork the volcano by dropping thousands of concrete balls linked by chains into the vent failed completely. Environmentalists fear that diversion of the mudflow into the Porong river will destroy the local fisheries. Meanwhile the levees keep rising.

Mud volcanoes are not well understood, partly because they usually occur on the seabed. What is clear is that a hot, high pressure reservoir of liquid, in this case mostly water, broke through a rocky cap and began percolating through a layer of clay, turning it into mud and carrying it up to geyser forth at the surface.

The cause of this disaster has generated scientific, legal and political debates as heated as the 60C eruption. Two hypotheses are in play, one is that the magnitude 6.3 Yogyakarta earthquake, which killed 6,000 people two days earlier and 260km away, triggered Lusi. The other is that the Banjar Panji-1 drilling rig operated by PT Lapindo Brantas, which was exploring for natural gas just 150 metres from Lusi’s main vent, set it off.

The legal and political arguments swirl around this central scientific issue. Legally the question is who should pay for dealing with the disaster and compensating the victims. If the drilling was at fault, the companies involved should cough up. If it was a consequence of the earthquake, the government is responsible. The stakes are high; the IMF estimates the cost of Lusi at some £2bn.

And that’s where the politics comes in. Lapindo is 50 per cent owned by Energi Mega Persada, part of the business conglomerate controlled by the family of Aburizal Bakrie, Indonesia’s Co-ordinating Minister for the People’s Welfare. Mr Bakrie has been criticised for distancing himself from the disaster, both as a businessman and as a minister. His refusal to visit Lusi prompted angry activists to spray 700kg of mud on his ministry’s gates in Jakarta. Although his family’s company provides food and other aid to the refugees, and has agreed to pay them £240m in compensation, they denounce it at every turn.

The scientific question came to the fore again at the Geological Society of London on 22 October. Proponents of the earthquake hypothesis, employed by the oil companies, claimed that evidence from their well proved its innocence.

Bambang Istadi, a geologist and exploration manager at Energi Mega Persada, argued that if the 2,800m borehole was guilty, a powerful pressure spike, called a kick, would have been observed. Although there was a spike, he said the roughnecks brought it under control in less than an hour, before it could damage the rock formation. Pressure tests since then have shown that the well is intact; with no leaks in or out. Nor is there any evidence of an underground blowout in the formation surrounding the well; if there had been, the borehole’s temperature would have risen to match the volcano’s and the remaining piece of the drill left in the hole would have slipped down into an opening abyss. So if it wasn’t the well, it must have been the earthquake.

Professor Richard Davies of Durham University’s Centre for Research into Earth Energy Systems, who also made a presentation to the Geological Society, remained unconvinced. The kick was powerful enough to damage the rock formation, he argued, and the lower portion of the well had not been sheathed to prevent such problems. The evidence cited by Mr Istadi can be explained if the massive upheaval when the volcano was triggered resulted in the well becoming pressure sealed from what was going on around it. And crucially, the earthquake was too far away and too weak to have caused the mud volcano. So if it wasn’t the earthquake, it must have been the drilling.

The scientific question, then, is far from settled. But progress is being made. So confident are they of their data, that Mr Istadi and the companies have agreed to share it with Professor Davies. If one side or the other can carry the scientific argument, the legal and political issues will be clarified too. For the people whose homes have been swallowed by Lusi, that can only be good.

Paul Rodgers is a freelance science, medicine and technology journalist. He was born in Derby, the son of a science teacher, and emigrated with his family to the Canadian prairies when he was nine. He began writing for a student newspaper in Winnipeg in 1982 and had staff positions on several Canadian dailies. Despite his return to these shores 15 years ago, he still talks with a funny accent.
Getty
Show Hide image

We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?