Figure 1. World population from US Census Bureau, overlaid with fossil fuel use (red) by Vaclav Smil from Energy Transitions: History, Requirements, Prospects.

While the addition of fossil fuels is part of the story, after reading Craig Dilworth’s Too Smart for Our Own Good: The Ecological Predicament of Mankind, I realized that there might be another contributing factor. Animals of all types (presumably including humans) have instincts and learned behaviors that prevent population from rising without limit.

Dilworth talks about an experiment in which a few Norway rats were put into a cage of 1,000 square meters and provided plenty of food and water for 28 months. If they had produced as many offspring as theoretically possible, there would have been 50,000 of them at the end of experiment. If they had maxed out at the 0.2 m² allowed for caged rates in laboratories, there would have been 5,000 of them. What actually happened is that the population stabilized at less than 200.

As I read about the mechanisms for keeping the population of most animals down, it struck me that there seem to be parallels in humans. Dilworth talks about many species being “territorial,” and how aggression among groups is one of the first approaches to keeping population down. When that fails (as with humans’ globalization), social power structures and hierarchies become more important. This seems to happen with humans also:

Paul Buchheit, from DePaul University, revealed, “From 1980 to 2006 the richest 1% of America tripled their after-tax percentage of our nation’s total income, while the bottom 90% have seen their share drop over 20%.” Robert Freeman added, “Between 2002 and 2006, it was even worse: an astounding three-quarters of all the economy’s growth was captured by the top 1%.”

This sounds exactly like the kind of hierarchical behavior observed in the animal kingdom when social species get stressed. If there is not enough to go around, resources that are available are concentrated in the hands of those at the top of the pyramid, marginalizing those at the bottom of the pyramid. If total resources are inadequate,  population at the bottom of the pyramid is reduced, leaving those at the top untouched.

In this post, I discuss some of the issues raised by Dilworth  and the parallels I see with humans. I also add a perspective of hope.

Craig Dilworth’s Theory: Too Smart for our Own Good

I won’t be able to do justice to all of the ideas in this fairly academic 500 page book, but let me try to explain some of Dilworth’s ideas.

Types of Species

Dilworth distinguishes between two types of species:

K-selected species: Species selected for Krowding tolerance. Their members are characterized by large size, slow growth and reproduction, few offspring with low mortality, parental care, relatively constant population size, and existence which is easily jeopardized by a new predation threat. Most mammals are K-selected, as are trees.

r-selected species: Characterized by small size, rapid growth and reproduction, short lives (less than 1 year), numerous offspring with high mortality, little or no parental care, and lack of territoriality, and populations characterized by exponential growth followed by crashes. Insects and annual plants are typical r-selected species.

With these definitions, humans are K-selected. Because humans are K-selected, they theoretically should have a stable population size.

Territoriality and other Mechanisms for Holding Population Down

In K-selected species, territoriality tends to hold down population size by restraining the number of breeding pairs. The territories chosen by instinct are large enough to ensure that populations do not grow to such a size that they undermine their own resource base. Thus, if territoriality is working properly, there is no problem with tragedy of the commons (excessive use of shared resources), because the territory selected by the male for his family group is large enough to feed the family, with much available food left over.

There are really two mechanisms at work in K-selected species: food availability and adequate territory. It really is Liebig’s Law of the Minimum that leads to adequate territory usually being the limiting factor for K-selected species. Liebig observed that if a crop needs several types of inputs (such as nitrogen fertilizer, phosphorus fertilizer, and potassium fertilizer), the crop yield would be determined by the scarcest resource, not by the total amount of resources. Thus, additional nitrogen fertilizer cannot substitute for some other type of fertilizer. In the case of K-selected species, such as primates, there are both food and territory requirements, but the limit on territory is usually reached first.

There are a number of  mechanisms for keeping K-selected populations in balance with the rest of the ecological system. For example,

• Too high population tends to cause stress and leads to violence against neighboring groups. The winner gets more territory; the losers typically are killed.
• Infants may be killed, to keep the population in line with resources.
• Learned behaviors or instincts may limit when mating takes place.
• High population will tend to attract predators (germs, in the case of humans)
• If population is too high, hierarchical behavior may appear or increase. Because individuals who do not need resources get a disproportionate share of the total, there is less for those at the bottom of the hierarchy, helping to reduce population size more quickly than if resources are shared equally. Those at the top are spared.

With social animals, altruism becomes important, because the instinctual drives that keep the population in check must not be allowed to operate at too high a level within the family group. Therefore, within the home territory, social instincts tend to over-ride more basic sexual or survival instincts. Groups of the same species often share resources, look after young, and protect injured individuals.

In  most instances, populations with these (and other) checks and balances will tend to remain in “dynamic equilibrium” with the rest of the ecosystem. One exception to this rule is  in “pioneering” situations, when both food and territory increase, or when predators are removed. Human’s use of stored energy (both wood and fossil fuels) is in a way a type of pioneering behavior, because it allowed us to expand our food supply and eliminate predators.

Figure 2. World per capita energy consumption is now at an all-time high, thanks to the increasing use of coal. (Based on energy data from Vaclav Smil's, "Energy Transitions" and BP Statistical Data; population from Angus Maddison)

Humans are also different from other species in that our intelligence has allowed us to substitute learning for at least part of instinctual behavior. This substitution of learning for instinct, together with the use of external energy, seems to have led to over-population.

There are currently 7 billion humans on earth; Colin McEvedy and Richard Jones in Atlas of World Population History estimate that human population would be expected to be in the 70,000 – 1,000,000 range, based on a comparison with gorilla and chimpanzee populations. Clearly human population now far exceeds its expected share of the ecological system, as one among many animal species.

My interpretation of Dilworth’s theory applied to humans

Primitive Societies. Dilworth indicates that internal population checks (including abortion, infanticide, and prolonged abstention from intercourse) were almost universal in primitive societies. If twins were born, often one was put to death. If a second child was born before a mother was able to take care of it, it would be put to death. These population checks were helpful, but did not keep the population level. At least part of the problem was that new territory and food sources kept being added, because of humans’ inventiveness. Humans began using fire about 125,000 years ago, and emigrated out of Africa and settled new lands about 90,000 years ago.

Religions. Religions have played a major role in encouraging altruism within their own groups, with teachings such as “Do unto others as you would have them do unto you,” and “Love your neighbor as yourself.” Religions  are also are a way of passing on traditions and building connectedness among members.

Modern religions have not done as well with population control, however. The command, “Be fruitful and multiply” is at counter-purposes with population control. When missionaries are sent to primitive groups who still practice infanticide, this has the effect of raising population. The practice of improving health care without providing free contraceptives and teaching about birth control also tends to raise population.

The “instinct” to fight those of other religions is helpful from a population control point of view, but most readers of this article wouldn’t find it an acceptable way to solve population problems. Unfortunately, if we were to try to parallel population control methods of animal species, death through wars with neighboring countries would need to become acceptable.

Hierarchical behavior. I mentioned that if population control doesn’t come by other means, hierarchical behavior may take over, to solve the problem. Hierarchical behavior was not known among hunter-gatherers, but once humans settled down and started accumulating property for agriculture, hierarchical behavior became more the norm.

Hierarchical behavior has increased recently. Immediate causes of the shift would include such causes as:

• Greater specialization as processes become more complex. Jobs that are at the top of the hierarchy pay very well.
• Globalization. Jobs at the bottom of the hierarchy may compete with foreign labor or workers in countries where wages are low.
• More debt. Debt tends to transfer interest-related payments from those at the bottom of the hierarchy to individuals at the top of the hierarchy.
• Tax schemes. Modern schemes favor the wealthy and corporations.

Charles Murray recently wrote the book Coming Apart: The State of White America, 1960-2010. Murray explores the formation of classes that are different from those American has known in the past. The lower classes are losing many of the stabilizing influences they have had in the past–marriage; opportunity to attend schools with people of all classes; joining religious groups.

I might also note that economics, and the belief in economic growth as a savior for all, has become almost a new religion. If this “religion” is followed, there is little need for other belief systems. Economic influences are not new, however. Trade was started very early, even before the days of Abraham and Isaac in the Old Testament. This tended to break down barriers among groups, reducing the effect of territoriality.

Another source of belief systems is television shows. These seem to portray how family life operates and explain what is truly important (more stuff!).

All of these new influences conflict with our instinctual behaviors to stay with our family groups, and not live lives that deviate too far from what we have known in the past.

Hope for the Future

Dilworth doesn’t see much hope for getting out of our of current predicament well. He talks about the vicious circle principle. A particular lifestyle at some point ceases to provide enough food for a growing population, so we develop a new approach that is not really better–for example, farming instead of hunter-gathering, or applying chemicals for fertilizer instead of waiting for natural cycles to take their course. We end up with more people, but those people are not really better off, and we find ourselves further into overshoot.

I can think of a couple of possible mitigations for our apparently bleak future, or at least our response to it.

1. Higher Power Intervention.

If a person looks at how ecological systems work together, one cannot help but be impressed by how the whole system (except possibly for humans, which are out of synch) works together. Perhaps there is a Higher Power behind all of the religions of the world, who has devised the plan as a whole, and who has a continuing plan for humans. We cannot know this with certainty, but the hope can be helpful for some individuals.

2. Greater Flexibility and Focus on the Present.

I think of a letter I received from “Derek” who has spent considerable time in Kenya.   I put up a letter from him on The Oil Drum in April 2009. He talks about a very different life there.

What I experience there [in Kenya] is a society that does pretty well with VERY little energy, all things considering. This wouldn’t be ‘pretty well’ by any standard of the Western world, though. But survival – and happiness! – are pretty much possible. Oddly, a first-time visitor would think the Masai live quite horribly, but they are very happy people and wouldn’t want to change a thing.

It’s the mindset that makes most Kenyans experience a happiness most Westerners would not consider possible given the realities, as they see and experience them.

In Kenya, we do use electricity (hydro / diesel), if we can. We have constant power cuts. But that’s not the only limit. In fact, the vast majority of us, even the so-called middle-class, build our lives around limits. Limits are the basis for every decision we make, business or otherwise. It is, you could say, a way of life that is happy when it is not done in, and not unhappy if things go wrong.

People there – including myself – would celebrate every day that was a good day. And a good day is one where we got by. I would say, for 95% of Kenyans, life there is very much focused on the hour, and hardly ever on the future.

One secret Derek points out is how this works out, when there is a great mishap, like a child dying.

. . . I have also been witness to a great many situations where people lost their children, cried for a week, and moved on, had new babies, weren’t depressed – nor impressed. This is strange to me too, but that is the way it is. People in Kenya have a different view of things.

We have been led to believe that we can control our futures by going to the “right” colleges and getting the “right” degrees and investing in the “right” investments. It looks like these approaches are not going to work any more. Perhaps we need to have the flexibility to try new (to us) more traditional approaches. Along with this, we need the ability to move on, when things aren’t working. If a child or spouse dies, we will somehow need to move on quickly.

Another piece of what needs to happen is that we need to find a way to get more connectedness and altruism back into society.  This is part of what makes life in Kenya as positive an experience as Derek reports that it is. Religion has played a role in this in the past. It seems to be especially the marginalized groups of society that are losing this connectedness.

1. In Science, Technology is Turning U. S. Oil Around But Not the World’s, by Richard A. Kerr;
2. In Nature, Climate Policy: Oil’s Tipping Point has Passed, by James Murray and David King; and
3. In Energy, Oil Supply Limits and the Continuing Financial Crisis, by Gail Tverberg.

The fact that these articles have been published is significant, because articles in the  mainstream press, such as Bloomberg’s recent article, Peak Oil Scare Fades as Shale Deepwater Wells Gush Crude, seem to suggest that our oil problems are past. While the US oil supply situation may be a little better, the world supply situation is still very bad, and oil prices are still very high around the world.

Furthermore, high oil prices tend to have a recessionary effect, and can lead to debt defaults. These issues are described in both the second and third articles above. Thus, there is a substantial chance that high oil prices are contributing to the debt default problem in Europe, and to forecast low world economic growth.

In this post, I briefly describe these articles.

In Science, Technology is Turning U. S. Oil Around But Not the World’s, by Richard A. Kerr

This article points out that even the optimistic estimates, such as BP’s recent Energy Outlook to 2030, see little growth in non-OPEC conventional oil production between now and 2030 (Figure 1).

Figure 1. BP oil forecast to 2030, from BP Energy Outlook to 2030

We are thus dependent on growth in OPEC crude oil and in OPEC natural gas liquids, neither of which is assured, given political uncertainties in the Middle East. While technology advances are making possible some new US oil production, this growth is needed to offset declines in existing fields around the world. There is a great temptation by those using new technology to make forecasts using an “overabundance of optimism.” History shows that US oil production has mostly fallen since 1970 (Figure 2).

Figure 2. History of US production of crude oil, in figure created by EIA (similar to, but not the same as, figure shown Science article).

In Nature, Climate Policy: Oil’s Tipping Point has Passed, by James Murray and David King

According to the authors:

There is less fossil-fuel production available to us than many people believe. From 2005 onwards, conventional crude-oil production has not risen to match increasing demand. We argue that the oil market has tipped into a new state, similar to a phase transition in physics: production is now ‘inelastic’, unable to respond to rising demand, and this is leading to wild price swings. Other fossil-fuel resources don’t seem capable of making up the difference.

Such major spikes in fuel price can cause economic crises, and contributed to the one the world is recovering from now. The future economy is unlikely to be able to bear what oil prices have in store. Only by moving away from fossil fuels can we both ensure a more robust economic outlook and address the challenges of climate change. This will be a decades-long transformation that needs to start immediately.

The article talks about how high oil prices erode family budgets, and points out that it seems likely that it wasn’t just the ‘credit crunch’ that triggered the 2008 recession. The oil price crunch was also involved.

A call-out from the article summarizes a current problem:

The price of oil is likely to have been a contributor to the euro crisis in southern Europe.

In Energy, Oil Supply Limits and the Continuing Financial Crisis, by Gail Tverberg

This is an article I wrote in early 2011, that wasn’t officially published until January 2012. The article can temporarily be downloaded free, as the fifth item down on this list of articles from the January issue.

In this article, I explain why one would expect high oil prices to cause economic disruptions of many types. If consumers are spending more on high-priced oil (and high-priced food, because both costs tend to rise together), they will cut back on discretionary  expenditures, such as going out to restaurants and taking vacations and buying new cars. Workers in affected industries will be laid off.

There will also be indirect impacts. People who have been laid off from work will tend to default on their loans, as will people who are living paycheck to paycheck and find that the cost of commuting has rising, and the cost of food has also risen. Holders of sub-prime mortgages will be disproportionately represented in the group of those with defaults, since they were among the least qualified loan applicants.

High oil prices can also be expect to affect housing prices. In part, this occurs because people who spend more on necessities (commuting and food) are less likely to want to buy a move-up home. As a result, there will be a cut-back in demand for homes, and thus in resale prices. Also, at the time that oil prices rose in the 2004-2006 period, the Federal Reserve raised interest rates in an attempt to try to bring oil prices back down. These higher interest rates also tended to reduce demand for move-up homes. I also show that the timing in the drop in US home values matches with what a person would expect, if it were high oil prices, and actions taken by the Federal Reserve in response to high oil prices, that were really behind the drop in home prices.

According to Kenny:

Titled Limits to Growth, their report suggested the world was heading toward economic collapse as it exhausted the natural resources, such as oil and copper, required for economic production. The report forecast that the world would run out of new gold in 2001 and petroleum by 2022, at the latest.

Limits to Growth gives a table that might be interpreted to show that oil and gold new extraction will be exhausted by the dates indicated. The book is careful to explain that the situation is more complicated, though. The way the book summarizes the issue is as a price problem:

Given present resource consumption rates and the projected increase in these rates, the great majority of non-renewable resources will be extremely costly 100 years from now.

In fact, high cost is precisely the issue with oil right now, and we are still ten years away from 2022. A graph of recent crude oil production is shown below. The amount of production has not been able to rise above about 75 million barrels a day (MBD) since 2005. At the same time, price is very high.

Figure 1. World crude oil production has been bumping up against a limit of about 75 million barrels a day (MBD) since 2005, as oil prices have gyrated wildly. (EIA data)

If we look at gold production and prices, it shows pretty much the same story: stalled out production and very high prices.

Figure 2. Gold production has been flat to slightly declining as gold prices soared. Gold production from USGS; Gold Price is from World Bank Commodity Markets Pink Sheet.

The problem is a two-fold problem: it is a price problem, and a problem of not being to increase extraction as much as one would like. The issue is one of declining quality of resources, as lower grade ores are found, and more difficult to extract oil is found. There are plenty of resources available; the issue is that we cannot afford the high cost of extracting them.

Kenny says, “Far from being depleted, worldwide reserves of minerals continue to climb.” He then goes on to list a whole host of resources: natural gas liquids of 1.2 trillion barrels, shale oil of 4.8 trillion barrels, and tar sands of 6 trillion barrels.

These are lower and lower quality resources. In order to make sense for these resources to be extracted, it is important that the cost of extraction not be too high. Many of the large oil importing nations went into recession in 2008-2009 when oil prices climbed to $147 barrel, and quite a few economies are struggling now, with prices in the $100 to $110 barrel range. Unless we can get the oil out at a reasonable price, there is no point in even counting them in the base.

There is also an issue of how quickly resources can be extracted. Canada has been attempting to develop the oil sands since 1967, but even after more than 40 years of attempted development, only 2% of the world’s oil supply is from this source.

Kenny also doesn’t seem to understand that Daniel Yergin is far from an unbiased observer. He says,

And yet according to renowned oil analyst Daniel Yergen [sic], technology advances and new discoveries have allowed oil reserves worldwide to keep growing.

Daniel Yergin is chairman of IHS Cambridge Energy Research Associates and Executive Vice President of IHS. The companies he works for do consulting work for oil companies. These oil companies would like you to think that their prospects for the future are as good as possible. In many ways, Daniel Yergin’s role is not too different from that of Jack Gerard, CEO of the American Petroleum Institute. If a person checks back, one finds that many of Yergin’s rosy predictions have proven false.

Kenny has another overstatement:

New technologies suggest the dawn of U.S. energy independence.

This is flowery language, but doesn’t represent the real situation. A big part of the reason our imports are down in recent years is because US oil consumption is down. People who are laid off from work drive less, and with high oil prices, fewer people take driving vacations or go by airplane. The EIA shows this graph of net imports.

Figure 3. Net imports as percentage of petroleum products supplied--Graph created by EIA. http://www.eia.gov/totalenergy/data/monthly/pdf/sec3_6.pdf

We are still importing 45.2% of “products supplied”. This comparison is on a volume basis, not on an energy basis. If the comparison were on an energy basis, we would be importing over 50% of petroleum products. Biofuels and natural gas liquids, which are lower energy than oil, are treated if they were substituting for oil on a barrel for barrel basis, but they really are not.

We hear a lot about having very low natural gas prices right now, because of higher production of natural gas combined with a warm winter. Unfortunately, having more natural gas doesn’t fix our oil problem. Our oil problem is the fact that price is too high because of inadequate world supply and also because much of the cheap-to-extract oil is already gone. We have had to move on to more expensive-to-extract oil supplies.

Over time, natural gas may make a small dent in our oil problem, if a few vehicles can be converted to natural gas. But the large size of natural gas tanks and lack of refueling stations make them unsuitable for many uses. The amount of natural gas available for substitution also isn’t all that high, relative to the world oil deficit.

Kenny also said:

Limits to Growth suggested the world would be on the verge of complete economic collapse around about now, with industrial output falling to its level of 1900 by the end of this century, as resources vital to sustaining a modern economy dried up. However dire today’s global financial crisis, we are nowhere near such a doomsday scenario.

I would disagree with Kenny on this. He doesn’t seem to see the close connection between high oil prices and the economic problems we are seeing today. With high oil prices, people cut back on discretionary goods, resulting in layoffs among people who work in those industries. For example, fewer people have jobs in vacation industries (for example, in Greece and Spain) if oil prices are high. This leads to recession and debt defaults. If one country defaults, ripple effects can spread to banks around the world.

Our economy has a high level of debt. We need economic growth in order to repay that debt with interest. If oil supply remains flat, or worse yet, falls, it will be difficult to produce the level of economic growth needed to prevent debt defaults.

Hopefully, Kenny will be right about the issue of economic collapse, but it seems to me that the possibility should be a serious concern. Peak oil and the related issue of Limits to Growth are real issues, even if Charles Kenny doesn’t understand them.

This post was written for ASPO-USA’s February 6, 2012, Peak Oil Review. 

Since 2005, world crude oil supply has bumped up against what seems to be a limit of 75 million barrels of oil a day. No matter how hard companies try to extract more crude oil, and no matter how high world oil prices rise, they seem unable to extract more than 75 million barrels a day (MBD).

Figure 1. World crude oil production has been bumping up against a limit of about 75 million barrels a day (MBD) since 2005, as oil prices have gyrated wildly. (EIA data)

The US Government is aware of this issue, and now issues data for Total Oil Supply. Total oil supply includes various other liquids that are somewhat like crude oil, including biofuels, natural gas liquids, and “refinery gain”. But even including the additional categories, growth in supply has been anemic. Oil prices started rising as early as 2004 because supply (whether defined as crude oil or more broadly) was not rising fast enough to meet increased demand around the world.

With world oil supply virtually flat, countries have had to share what oil is available. Since 1985, there has been a big shift in which countries are the “winners” in the way the world’s limited oil supply is divided (Figure 2).

Figure 2. Growth in oil consumption has varied greatly in recent years. The Former Soviet Union’s oil use dropped off after its break up in 1991. Europe, US, Japan, and Australia showed modest growth until 2005, followed by a drop off. Consumption of countries in “Remainder” (which includes China, India, and oil exporting countries) has risen rapidly since 1985. (Based on EIA data)

Clearly the “winners” in the contest for who is able to buy the oil are the “Remainder” countries—countries like China and India and Korea, and the oil exporting nations.

Over the period 1985 – 2010, the grouping “Europe, US, Japan, Australia” experienced an average real GDP growth rate of 2.4%; the Remainder group experienced an average growth rate of 4.7%. The Former Soviet Union experienced a peak to trough drop in real GDP of 41% after its breakup in 1991. The grouping Europe, US, Japan, and Australia experienced a major dip in oil consumption and a serious recession in 2008-2009, while the Remainder countries continued to grow.

High oil prices are clearly a problem for oil importing countries, because funds that would have been used for discretionary spending suddenly need to be used for necessities—food that is grown and transported using oil, and gasoline used for commuting to work. It is precisely the big oil importing countries that have tended to have a problem with reduced economic growth when oil prices are high.

In my view, what the world needs now is inexpensive oil, and lots of it. What we need is enough inexpensive oil to bring oil prices back down to $20 to $30 dollars a barrel, like it was in the 2001 to 2003 period. If we had inexpensive oil in this large quantity, there would be plenty of oil to go around. It wouldn’t be only the oil exporters and the countries with large coal-based manufacturing industries that would be able to consume as much oil as they need for economic growth. Countries like Greece and Spain, which need low oil prices to stoke world tourism, would be able to consume their share of the oil as well.

One issue is of concern is the connection between economic growth and debt.

Figure 2. Two views of future economic growth

If an economy is growing, as in Scenario 1, it makes financial sense to borrow money, even if it is necessary to pay it back with interest. Borrowing makes it possible to “pre-spend” a little of the economic growth that will be available in the future. This relationship is especially important for governmental borrowing, but it also plays a role for private borrowing.

If an economy is shrinking, it is hard to make a case for borrowing. In such a case, the future is likely to have less to offer than what we have today. This might happen if there is not enough oil to go around, and oil prices are very high (at least until recession hits).

A great deal has been said about decoupling economic growth from natural resource use. It is not clear to what extent this really is possible. We can move manufacturing to the Far East, and pretend that the resource use isn’t ours, but on a world basis, during the past decade, energy use has been rising as fast as world real GDP. This has happened largely because Asian growth in energy use has offset savings elsewhere.

Theoretically, if world oil supply is inadequate, we should be able to make substitutions that would work—either find a different liquid fuel to substitute for oil, or create new vehicles or machines that use a different source of energy than petroleum products. The problem is that making these substitutions is a slow, expensive process.

We are currently using millions of cars, trucks, trains, airplanes, boats, and machines that require petroleum products to operate. Most of them are nowhere near the ends of their normal lives, so replacing them would be expensive.

Liquid biofuels we have developed are expensive. To solve our problem, they really need to cost $20 or $30 dollars a barrel to make.

What the world really needs now is a huge supply of inexpensive oil. It is not clear where we will find it, however.

(Note: This post was written in response to a request by Business Insider that I write a short editorial in response to the question, “What is the most important resource for our future?” It covers some of the main points in my new academic article in the journal Energy, “Oil Supply Limits and the Continuing Financial Crisis.” That article is temporarily available free at this link, or this one.)

My article abstract is as follows:

Since 2005, (1) world oil supply has not increased, and (2) the world has undergone its most severe economic crisis since the Depression. In this paper, logical arguments and direct evidence are presented suggesting that a reduction in oil supply can be expected to reduce the ability of economies to use debt for leverage. The expected impact of reduced oil supply combined with this reduced leverage is similar to the actual impact of the 2008–2009 recession in OECD countries. If world oil supply should continue to remain generally flat, there appears to be a significant possibility that oil consumption in OECD countries will continue to decline, as emerging markets consume a greater share of the total oil that is available. If this should happen, based on these findings we can expect a continuing financial crisis similar to the 2008–2009 recession including significant debt defaults. The financial crisis may eventually worsen, to resemble a collapse situation as described by Joseph Tainter in The Collapse of Complex Societies (1990) or an adverse decline situation similar to adverse scenarios foreseen by Donella Meadows in Limits to Growth (1972).

Dinner with a group of attendees and speakers at the Barcelona conference. I am wearing the red jacket.

I was in Barcelona for an entire week, for the conference and for a related meeting with high school students. The meeting with high school students was in a large auditorium. Students were asked to submit questions in advance relating to oil limits and possible ways to deal with them. There was also time for some impromptu questions.

Gail Tverberg, Charles Hall, Mario Giampietro, and Joseph Tainter in auditorium in Barcelona, Spain. They would later answer questions from students from 11 high schools in the area. Translation from Catalan to English was provided by headphone.

Figure 1. Base scenario from 1972 Limits to Growth, printed using today's graphics by Charles Hall and John Day in "Revisiting Limits to Growth After Peak Oil" http://www.esf.edu/efb/hall/2009-05Hall0327.pdf

In my earlier post, I talked about how rising oil prices are associated with rising food prices, and how these high prices can make it harder for borrowers to repay their loans, as is now happening in Europe. These same problems can lead to a contraction of credit availability. A contraction in credit availability can be doubly problematic: it can lead to a cutback in demand because buyers cannot afford goods using oil, such as new cars, and it can lead to a drop in financing for industrial uses, including expanded oil drilling. All of these issues may lead to contraction of the type expected in Limits to Growth. US governmental debt limit problems and European debt defaults are also outcomes of the type expected with rising oil prices.

In this post, I would like to discuss some other basic issues that seem to be associated with Limits to Growth, and that may eventually lead to an abrupt downturn or collapse.

Limits to Growth: More Basic Issues

1. The over-use of resources by humans seems to be of very-long standing origin, dating to the time-period 100,000 BC when there were fewer than 100,000 people on earth. Capitalism today is an extension of this long-term pattern.

2. World systems often seem to work as a gradual build-up of forces followed by a cataclysmic release. Examples include earthquakes and hurricanes. Even getting hungry, and then eating, follows this pattern. A similar pattern may happen with the Limits to Growth that we seem to be reaching.

3. The extent to which humans can gather resources for their own use depends on their geographical reach. As hunter-gatherers, our reach was quite limited. This reach has gradually grown through inventions such as ships, through the settling of new lands and colonialism, and most recently through international globalization. Globalization is necessarily the end of this growth.

4. Globalization sows the seeds of its own demise because factory workers are effectively forced to compete for wages with workers from around the world. Workers in the Global South can get along with lower wages for a number of reasons, including the fact that they tend to live in warmer areas, so do not need to build as sturdy homes and have less need to heat them. With fewer jobs and less investment in the Global North, demand falls and debt defaults become more of a problem.

5. In the normal scheme of things, world systems would rest and regroup once resources reach some sort of crisis point, defined by Liebig’s Law of the Minimum. Soils would build up again; aquifers would refresh; climate would reach a new equilibrium; and a different group of plants and animals would become dominant. Oil and gas supplies might even be rebuilt, over millions of years. It is not clear that humans will be part of the new world order, however.

Long-Term Overuse of Resources

Over the past 100,000 years, man’s record of sustainably using natural resources has been poor. Humans differ from other primates because of their relatively larger brain size, but humans have not used this intelligence to preserve the environment. Colin McEvedy and Richard Jones in Atlas of World Population History report that the final increase in Homo sapiens’ brain size to the current average of 1450 cc took  place about 100,000 years ago.

There have been five periods in the history of the world in which large numbers of species have died off. These are sometimes called “mass extinctions“. (See my post European Debt Crisis and Sustainability.) According to Niles Eldridge, the Sixth Extinction is occurring now:

• Phase One began when the first modern humans began to disperse to different parts of the world about 100,000 years ago.
• Phase Two began about 10,000 years ago when humans turned to agriculture.

According to Eldridge, humans have been like bulls in a China shop. They disrupted ecosystems by overhunting game species and perhaps also by spreading disease organisms. Regarding the development of agriculture, he says:

Homo sapiens became the first species to stop living inside local ecosystems. . . . Indeed, to develop agriculture is essentially to declare war on ecosystems – converting land to produce one or two food crops, with all other native plant species all now classified as unwanted “weeds” — and all but a few domesticated species of animals now considered as pests.

The development of fossil fuels ramped up the attack on natural systems further. Fossil fuel could be used for irrigation, and to produce herbicides, pesticides, and fertilizer, allowing farmers to choose the crops they preferred to grow. Fossil fuels also enabled large fishing boats to deplete the oceans of large fish.

Capitalism furthered this attack on the natural order by giving those who extracted resources from the earth profits based on this extraction. While governments may have taxed these profits, these taxes, too, were used for developing infrastructure so that man could continue his attack on the natural order, and this extraction of resources would become more efficient.

The final tool man found in his attach on natural ecosystems was debt based financing. While debt had been used for many years, it took on a new role when economists started realizing that greater debt could be used to increase demand for goods. This happens because debt financing gives people money to spend in advance of when it is earned (for example, a car loan allows a person to buy a car that he could not otherwise afford).

Because debt allows people to buy thing that they would not otherwise be able to afford, it has a tendency to raise commodity prices. These higher commodity prices make it economic to extract more marginal resources, such as oil in difficult locations.

Natural systems often operate through a build up of forces, followed by a cataclysmic release

There are no doubt some natural forces operate at a pretty steady level indefinitely–gravity, for example. But many of the processes we experience are “batch processes”. We remain awake during the day; by evening we become tired, and fall asleep until the next morning. We eat, digest the food, and become hungry again. Movement of earth’s plates gradually builds up forces which are released by an earthquake. When force is released, the change can be quick and dramatic.

Right now, one stress is that of  limited oil supply. This is leading to rising oil prices and stress on economies of oil importing countries.

Figure 2. Two views of future growth

The problem is that when limited oil supply is rationed by high oil prices, economic growth slows down, and eventually decreases (Figure 2). When this happens, it becomes much less advantageous to borrow from the future, because the future is no longer better than today. If an economic contraction occurs for very long, the whole debt system can be expected to undergo a major “unwind”.

Logic says the result would be fairly cataclysmic. We recently started seeing the beginning of this unwind with the financial crisis of 2008-2009. We are seeing more of the potential unwind with the problems in Greece and the rest of Europe, and with the US government reaching limits on borrowed debt. Exactly how this will play out is uncertain, but debt defaults in Europe could spread to banks worldwide, in one scenario.

With much less credit available, demand for extracted energy products would fall, because with less debt, people can afford to purchase fewer products that use energy, such as new cars. Prices of oil and oil substitutes will fall, making oil extraction unprofitable in locations where extraction costs are high. The result is not likely to be a slow decline, of the type attributed to M. King Hubbert. Instead, a much more precipitous decline can be expected (Figure 3).

Figure 3. Historical crude, condensate, and NGL production based on BP and EIA data, plus a Guesstimate of Future Oil Supply.

Human Geographical Reach

The amount of food and other goods we have access to and the steadiness of supply depend very much on our geographical reach. In the earliest days, humans were nomadic, so that they could gather food from a wide area. It was not until about 10,000 years ago that humans began to settle down with agricultural existence. When a change to local agriculture took place,  this change led to shorter stature and earlier deaths. Part of this was due to poorer nutrition from a less varied diet; part of this was due to an increase in the incidence of infectious diseases, because of closer proximity to other humans and domesticated animals.

Now, with globalization, we have reached the logical maximum in our geographical reach. Those who are rich enough can buy foods from around the world. We also have access to computers and other high-tech devices that can only be made with inputs from around the world. Most people’s expectation is that somehow we will keep up this wide reach, even if our world financial system fails due to debt defaults, but we have no guarantee that this really will be possible.

If we start re-localizing, we will likely run into problems that people have had since the dawn of agriculture. It is hard to grow a wide range of crops in one area. Weather conditions are often bad in one year, necessitating either multiple-year storage of crops, or trade with other areas. If we cannot maintain our use of antibiotics and of water and sewer treatment, deaths from infections may soar.

Globalization Sows the Seeds of Its Own Demise

From the point of view of profit-making businesses, globalization is wonderful. Workers can be found in “less developed” areas of the world who will work for lower wages. As a result, wages of workers in the Global North are put in direct competition with wages for workers in the Global South. Wages in the Global South can be lower for several reasons:

• Workers may expect to work more hours per week to earn the funds needed to support themselves and their families.
• Payments to workers do not need to include as much for healthcare benefits, or as much for retirement payments to the elderly, because of the younger workforce, and differences in the healthcare systems.
• Energy costs of workers are likely to be lower because of greater use of coal, smaller homes, less needed for heating in warm climates, and use of bicycles instead of cars.

But there are adverse effects of sending manufacturing oversees:

• The unemployed need to be taken care of by government programs, even if they don’t have jobs.
• Demand for goods produced may fall. Neither the low-wage workers producing the goods in the Global South nor the workers without jobs in the Global North are likely to be able to afford the products that are being produced.
• Economic growth is likely to decline in countries of the Global North that outsource manufacturing and other processes.
• Debt is likely to become more of a problem in countries of the Global North, because of low economic growth or actual contraction. Laid-off workers are likely to find themselves less able to repay their loans. Governments are likely to find themselves in difficulty because of low tax revenues, high benefits to laid-off workers, and high debt levels.

Thus, globalization sows the seed of its own demise.

Regrouping is Likely to be Needed

At some point, the system can be expected to fail, and regrouping will be needed. The path to failure seems to be through debt defaults, leading to falling demand for the products that capitalism provides.

Once this decline starts, it is hard to see a natural “stopping point” for the decline. On the “way up,” businesses, governments, traditions, and even religious beliefs are built that reinforce the processes that are in place. For example, if a certain amount of oil, gas, and coal is being extracted from the ground, businesses will be formed that use these fossil fuels, and traditions will be started (for example, expensive healthcare for many, and college education for most) that will use these fossil fuels. Economics becomes the new religion, touting the benefits of more consumption.

If the decline is to stop, we need a whole different set of businesses and traditions to support a much lower level consumption of fossil fuels and other inputs. It is not at all clear that we can adapt quickly enough for a change of this type.

When we look back a few thousand years, societies had a surprisingly rich tapestry of businesses and traditions to support them. For example, David Graber, in Debt: The First 5,000 Years talks about the ancient (2700 BC) Mesopotamian city-states being dominated by vast temples where trading was done. It wasn’t until about a century later that Abraham left “Ur of the Chaldeans” (Genesis 11:31), a major port at that time.

Part of our problem in going back is that we can’t even imagine what web of businesses and traditions would be needed to support a lower fuel use than we have now.  We can build a garden in our backyard, and we can print some “local currency” for local citizens to trade, but these types of activities do not really fill the major void that would be left if our current approach to civilization fails.

Sustainability: What Would Work

If we think about it, it is pretty obvious how humans could fit into the natural world better. We could behave like other animals. We could stop wearing clothes. We could stop living in houses. We could eat food in its raw form. This food would be only that which we can pick or catch with our bare hands. We could co-evolve with our fellow creatures. If a virus or bacteria comes along and kills off a significant share of mankind, or if a woman dies in child-birth, we could simply accept that as the natural order of things.

I don’t think any of us would accept such a solution, though. It is just too harsh an outcome. Such a solution would not work except in very warm climates, and even there, we would need fire to cook meals and tools for killing animals. Under one theory, cooking of food is necessary for our current level of intelligence, so we could not give that up.

We can’t know how our current predicament will turn out. Logic says that the natural system needs to rest and regroup after Limits to Growth are reached, in one way or another. Perhaps there is a “happily ever after” solution that will include a large number of humans. Unfortunately, it is hard to see what that solution might be.

Figure 1. Structure built with blocks. (Barkless tree blocks from www.childmode.com) Our economy is also built piece by piece, based on the rules and prices that are in effect when individual decisions are made.

Clearly there are many possible ways forward. Using Figure 1 as an analogy, there is the theoretical possibility of continuing to build our economy to ever-higher heights, as we are told by economists and politicians, despite the obstacle of high oil prices. There is the possibility of taking down parts of the economy, and rebuilding in a more fuel-efficient manner. There is also the theoretical possibility of eliminating unneeded parts of the economic structure we have built to date, so that the structure is more compact. And, unfortunately, there is also the possibility that a major portion of what we have built to date will inadvertently be knocked down, as constricted oil supply makes its effects known.

Before discussing what paths may lie ahead, I would like to talk about how contraction of an economy differs from continued expansion.

Economic Expansion vs. Economic Contraction

It is easy to assume that economic contraction is similar to economic expansion, just with the sign reversed, but anyone who has lived through the last few years knows that this is not the case.

For example, on the way up, it appears that the size of the current economic system easily “scales” upward, as the economy grows. The number of available workers gradually rises, as does the number of job openings, and the amount of goods and services produced. Everything rises together, and the system “works”.

On the way down, there is a good deal more “stickiness” to the system. There are now seven billion people on the planet, and they all would like to eat on a regular basis. There are perhaps two-thirds as many potential workers, and most of them would like to have jobs, even if the economy is contracting, and their particular job is disappearing.

Another issue is that we have built millions of miles of electrical transmission, oil and gas pipelines, water and sewer pipelines, and roads. It becomes difficult to abandon parts of these systems, even if total resources for maintaining the system are constricted. If we think of the situation in terms of tax dollars (or charges by utility companies), it becomes increasingly difficult to collect enough tax dollars (or utility charges) to pay for the inflated cost of replacing worn out roads, pipelines, and electrical transmission, as the rising price of oil makes these costs rise much more rapidly than salaries.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Another issue is debt repayment (Figure 2). We are used to an ever-expanding economy, where future goods and services produced will always be greater than those produced this year. As long as this growth pattern persists, our system of long-term financing of major expenditures, even if the expenditures are not really income producing, can continue. For example, we are able to buy homes with 20 or 30 year loans, and governments are able to continue borrowing, claiming that they will have more funds to repay loans (with interest) in the future. Once the situation changes to a shrinking economy, it becomes much more difficult to repay loans, and the financial system quickly reaches the risk of collapsing, due to multiple debt defaults.

A related issue is that of financing a new or expanding company. If the economy continues to grow, investment in a new company is likely to make sense because the value of the company can be expected to grow as the demand for products of the type it sells continues to grow. But if it becomes clear that the economy is on a path of long-term contraction, the possibility of failure within a few years rises, so new investment makes much less sense.

Where may continued high oil prices lead?

1. Widespread loan defaults, leading to far less international trade and the manufacture of fewer high-tech goods.

This is my personal view as to a likely outcome of continued high oil prices, unless some approach is developed that will somehow allow economic growth to continue, despite limited oil supply and high oil prices. Renewables at this point are higher priced, and not helpful in this regard.

In this situation, widespread loan defaults would lead to impaired credit availability and difficulty in arranging international trade. Individual countries would presumably continue to issue their own currency, so local trade would continue. In the new environment, countries with debt default problems, such as Greece, would likely have difficulty buying oil (and other scarce goods) without something (besides Drachma) to trade in return.

With limited international trade, there would likely be disruptions to oil and gas extraction, since workers and equipment are traded internationally today. At some point, it may be difficult to make high-tech goods like computers, because of the difficulty in assembling the many inputs from sources around the world.

Political disruptions would seem to be likely as well. Some countries may even see civil war. Some countries may even break into smaller units, similar to the way the Soviet Union did in 1991.

The timing is not clear, but disruption could come as soon as the next few months. The current problems with debt defaults in Europe would seem to have the possibility of spreading to banks and other financial institutions around the world.

We don’t know how much of the system such a contraction would pull down. It seems to me that in the analogy of Figure 1, some vulnerable sections (like Greece) could be pulled down first, with others falling later. Bailouts may help temporarily, but at some point, the bailouts are likely to fail as well, because the underlying problem of restricted oil supply has not been fixed.

2. Planned contraction, with certain parts of the economy left behind.

In this approach, particular unneeded segments of the economy would be discarded. For example, President Obama is planning military cuts. President Obama is also talking about merging agencies and eliminating the Commerce Department.

In a shrinking economy, changes of these types are certainly needed. The problem is that the amount of shrinkage that is being proposed is far too small to have much impact.

Another type of contraction that has been suggested relates to expenditures which seem unnecessary. For example, the US medical care system could be scaled back, because healthcare expenditures in the US accounted for 17.6% of GDP in 2009, far more than for other developed nations. Another area which might be scaled back is animal production on industrialized farms, since corn-fed animals are not good for health, and since the huge amount of meat we eat contributes to global warming. These are just two examples; each of us could name favorite boondoggles to eliminate.

The problem is trying to get agreement on any kind of contraction, such as these. Our current system is the only one most of us have ever known. Most people are not aware of our need for change, and would resist changing what appears to be working at least somewhat well. Employees in the current systems would certainly be unhappy, because they would stand a chance of losing their jobs.

If changes such as these could be made, it would be one way of contracting the current system, hopefully without crashing it.

3. Contraction away from the poles and other areas with bad climactic conditions.

This appears to be a natural approach to contraction.

It takes more fuel to heat homes near the poles. Homes also have to be built more substantially. If we look back at the historical record, populations have tended to be highest in warm climates–India, fairly warm areas in China, and the Middle East. According to scholar Angus Maddison, about 75% of the world’s population lived in these areas in the year 0 AD, and even in 2008, 68% of the world’s population lived in Asia. Northern countries of Europe and America have tended to have lower populations, but higher average real GDP (fueled by fossil fuels).

This past week, newspapers discussed Nome, Alaska’s fuel shortage. They reported that a Russian fuel tanker was being used to deliver additional oil. If oil prices stay high, we will have an increasingly difficult time supporting populations that disproportionately need oil, such as those in very cold areas.

High oil prices may also limit the amount of infrastructure repairs that can be done. If this happens, decisions will need to be made regarding which roads not to repave and which electric transmission lines not to maintain. I would expect that infrastructure that serves the fewest people would be most likely to be subject to cutbacks.  These areas are likely to be in areas that are unattractive for settlement because they are very cold or very dry.

4. A transition back to “old” renewables

In my view, there are two kinds of renewables:

(1) Old renewables, like wood, and small wind and water power that can be replenished with local materials. This category would probably also include draft animals. It would also include solar thermal water heaters, similar to hot water bottles that can be left out in the sun to heat water, since they can be made simply with recycled materials.

(2) New renewables, like electricity from large industrially produced wind turbines, solar electric, and large hydro-electric dams, that require modern technology for building and repairs. Electric cars might also be in this category.

In this section, I am discussing the first of these categories, Old Renewables. One concern is that at some point, perhaps many years from now, today’s whole economic structure will collapse (Figure 1). How this would play out is unknown. Perhaps we could continue to reuse parts of our current system. If not (for example, if difficulties with international trade greatly reduce access to fossil fuels), we may be faced with creating a new economy, based primarily on “old renewables”.

The problem with this outcome is that old renewables are quite limited in their quantity. The world could not possibly support seven billion people. McEvedy and Jones, in Atlas of World Population History, estimate that if human population followed the population patterns of similar animals (gorillas and chimpanzees), world human population would be somewhere in the range of 70,000 and 1,000,000. This was the approximate probable initial human population, about 200,000 years ago.

Human population gradually grew, reflecting mankind’s ability to appropriate resources for its use beyond what its normal role in the ecosystem would allow.  McEvedy and Jones estimate that human populations grew to 1.7 million by 100,000 BC and to 4.0 million by 10,000 BC. Over time, humans gradually increased their ability to operate outside ecosystem boundaries, killing off other species, domesticating animals, and using resources such as water power, wind power, and burning wood and peat. Total world population grew as follows, according to Angus Maddison:

1 AD – 225,820,000

1000 AD – 267,000,000

1500 AD – 438,428,000

1820 AD – 1,041,708,000

How far back population would fall in the case of collapse is not at all certain. As long as humans keep their ability to appropriate resources that might theoretically be shared by other species, their numbers will remain high. This propensity, however, is what leads to the tendency toward renewed growth, and new pressure on resource availability.

5. A transition to “new” renewables

Some people are hoping for a transition to new renewables–”unbuilding” the fossil fuel structure that we have, and trying to build a new one based on renewables instead. This approach may be appropriate for some wealthy individuals, but it is not clear that it has significant feasibility for society as a whole, because the cost of most new renewables is higher than that of the fuels they replace, making the high oil price problem worse, not better. If new renewables drop in price, this situation may change.

The extent of today’s new renewables is less than many people understand. In the United States, renewable energy (including hydroelectric, biofuels, wood burned as fuel, geothermal, wind, and solar) amounted to 5.4% of total energy consumed in 2010, according to BP energy statistics. If we lived on today’s renewables alone, our per capita energy consumption would be roughly equivalent to that of India. India generally does not need fuel for heating, while we in the United States do. Taking into account the differing fuel needs, the average US citizen living on renewables alone would be somewhat worse off than today’s citizen of India.

The other issue that people tend not to be aware of is that new renewables, as they are built and used today, are very much part of the fossil fuel system. They are built using fossil fuels, and they are maintained using fossil fuels. Except for biofuels, they depend on electric transmission lines, and these need to maintained with fossil fuels as well. Furthermore, if we are to maintain electric transmission lines, we need oil to maintain the roads that lead to the lines.

We probably also need international trade to maintain new renewables, because replacement parts use minerals from many parts of the world, and depend on the availability of computerized systems to support production. If financial problems disrupt international trade, we may find that our “renewable” systems degrade quite quickly, because we are not able to maintain them properly.

Nevertheless, there is a possibility that new renewables will soften the economic fall for those who have access to them, especially if issues of repairs can be kept at a minimum. Because of this, new renewables such as solar PV remain a popular choice among people who are concerned about continued economic contraction.

6. The “Just Use Less” approach

If oil prices remain high, this view suggests that finding ways to use less should be our primary response oil limits. For example, responses might include planting gardens near home, getting people to change their light bulbs for more energy-efficient models, and building more fuel-efficient cars.

While this approach has merit, it is not clear that this approach, in and of itself, is more than a small part of the solution, because of the bigger picture issues that are causing major strains on the system. Saving fuel in one place puts financial strains on other parts of the system. For example, a utility that fails because of bankruptcy could reduce electricity availability. What appear to be frivolous uses of our current systems (for example, game playing and downloading movies over the Internet), help to keep costs down for more serious users. Because of the complexity of our current system, savings in one area could cause problems in another section of our economic structure.

Thus, this approach would shrink some parts of Figure 1. While this may somewhat work, there is also the possibility that this shrinkage will by itself cause strains or actual breaks in other parts of the economic system.

—–

All in all, we do not have firm answers. Instead, we have a number of views of how the downturn due to high oil prices may proceed, and appropriate responses to it.

Historically people have shifted their belief systems in various ways. The Greeks and Romans believed in numerous gods and goddesses and attributed all kinds of powers to them. Then the great monotheistic religions came along and people began to believe in just one god, though they honored him under different names.

Recently, beliefs have shifted again, with people worshipping just one part of a god, the invisible hand. Thanks to Adam Smith and those who followed him, especially the current neoclassical economic theologians, we have seen such an increase in the world’s wealth and sheer numbers that it is hard to imagine life before the industrial revolution, with its shift from mostly human and animal muscle power to the energy dense fossil fuels—coal, oil, and natural gas. It is also hard to imagine that humanity could someday slide back into another age of scarcer and more expensive energy, but that is a possibility that cannot be excluded from our thinking.

The Faustian Bargain

What about the Faustian bargain? It remains deeply hidden from view because its exposure by the high priests of modern economics would force us to rethink how we live and why we live this way, as well as what we’re planning to leave for future generations. The Faustian bargain goes something like this: Thanks to the discovery and exploitation of fossil fuels, humans (really just a small minority of them) are able to live richer lives today than even the queens and kings of yore could have dreamed of.

Furthermore, we’ve used some of those finite resources to increase food supplies and to expand the human population, which provides the economic system with both more workers and more consumers, a necessity to keep the economy growing under our current economic model. The world’s population increased from 1.6 billion in 1900 to 7 billion today, and we add about 80 million more each year. Humans have quickly become the most numerous megafauna on the planet.

The other side of the bargain, the side hidden from view and never mentioned in economics texts is this: At some undetermined time in the future, one that creeps ever closer, this economic system, fed by energy and other resources at ever increasing rates at one end and spewing out waste products at rates that cannot be absorbed by Earth’s ecosystems at the other, is unsustainable. What that means is simple enough: Industrial society as we know it cannot go on as it has forever—not even close.

Our economic system must exist within Earth’s finite limits, so recent and current generations have sold their soul to the devil for temporary riches, leaving the Devil to collect his due when the system falls apart under its own weight and the four horsemen of the apocalypse ride again across the world’s landscapes. None of this will happen tomorrow or this week or this year, but our economic system is faltering at both ends.

For many, if not most, of the world’s population life may become more difficult, incomes lower, and uncertainty greater. It does not mean the end of the world, as some predict for 2012, but it will mean that future generations probably will not live like current ones. Rather than admit that the current system cannot be sustained, the affluent and powerful will do everything possible to maintain the status quo.

The Fallacy of Long-Term Economic Growth

Economic growth remains a mantra for politicians and corporate leaders, including the banksters who brought us the Great Recession. Even President Obama, like presidents before him, speaks regularly about “growing the economy.” But nothing in the real world suggests that economic growth can continue forever. Nor does much evidence support the notion that economic growth has been a good thing for either the planet or billions of its human residents. It looks more like a colossal Ponzi scheme.

One of the most optimistic supporters of modern economics and its marvels is Tim Harford, who wrote, in his book The Logic of Life, “The more of us there are in the world, living our logical lives, the better our chances of seeing out the next million years.” This may be the dumbest thing an economist has ever written and he shows not even the slightest understanding of the planet on which we live. Homo sapiens has only been around for about 200,000 years, so another 800,000 years at the rate we’re going seems absurd. If our population were to continue to grow at an annual rate of only 1.0 percent, slightly less than our current growth rate, then our numbers would increase to over 115 trillion in just the next thousand years. You can play with the growth rate if you wish, but you cannot escape the cold hard fact that human population growth must stop. Only economists seem to miss the fact that economic growth must stop.

Among the high priests of modern economic theology, Paul Krugman came closer than anyone to admitting that growth could not go on forever on our planet. In an Op-Ed piece in the New York Times (12-26-10) he wrote, “What the commodity markets are telling us is that we’re living in a finite world [my italics] ….” He went on to mention the possibility of peak oil production and even climate change, both of which threaten the modern economic system, but then, returning to the faithful fold, he wrote, “This won’t bring an end to economic growth….” He admitted that our lifestyles might have to change but gave no clue about where and how that might come about or where it might lead.

Economic reality and economic theology don’t fit together very well. In 1988 Edward Abbey wrote, in his book One Life at a Time, Please:

It should be clear to everyone by now that crude numerical growth does not solve our problems of unemployment, welfare, crime, traffic, filth, noise, squalor, the pollution of air, the corruption of our politics, the debasement of the school system (hardly worthy of the name ‘education’), and the general loss of popular control over the political process—where money, not people, is now the determining factor.

Today, 24 years later, virtually every word of Abbey’s statement is truer than ever, yet politicians and economic theologians continue to preach that if we can just grow the economy (local, state, national, and world) then all will be well again. You need not look far or deeply to see how wrong they are and what price we’ll pay when the Devil comes looking for our collective souls.

Among economists, Herman Daly is one of the few who has tried to reveal the Faustian bargain for what it really is, as is apparent in this statement from a Dec. 26 article, Rio+20 Needs to Address the Downsides of Growth:

Even though economies are still growing, and still put growth in first place, it is no longer economic growth, at least in wealthy countries, but has become uneconomic growth. In other words, the environmental and social costs of increased production are growing faster than the benefits, increasing “illth” faster than wealth, thereby making us poorer, not richer. We hide the uneconomic nature of growth from ourselves by faulty national accounting because growth is our panacea, indeed our idol, and we are very afraid of the idea of a steady-state economy. The increasing illth is evident in exploding financial debt, in biodiversity loss, and in destruction of natural services, most notably climate regulation.

As a geographer, I look for signs in my local cultural landscape that look ominous, from potholes in streets to for sale and/or for lease signs strewn around our city like leaves after a storm. Ours is a small city, with about 30,000 residents, yet our city manager, in an end-of-the-year report, pointed out that we would need some $80,000,000 to repair our current infrastructure, a figure out of all proportion to our physical and residential size. That amounts to nearly $2,700 for each man, woman, and child. He also pointed out that our city is operating with below necessary numbers of police, fire, and emergency responders. The potholes will get larger in 2012 and beyond.

Though these and other problems are widely distributed across the nation, I think the infrastructure issue alone is symbolic. The U.S. is becoming a “pothole culture,” one in which the pothole is a symbol of our inability to accomplish all kinds of things any more. (See recent New York Times article.) Other nations are on their way as well.

Despite the continued whirring of the world economy, most people here and elsewhere are not getting anywhere and are feeling jilted by the system they’ve depended on for decades because they thought it could be sustained forever. It cannot, but that doesn’t mean life cannot go on, it means, instead, that we need to move in new directions, but we won’t do that until we understand what is making so many people so unhappy. We need to realize that instead of believing bigger is better we need to decide to favor better over bigger, quality over quantity, less over more.

Two examples illustrate the point that the world economy has exceeded both Earth’s ability to provide ever more inputs and its ability to absorb and purify excessive wastes. Crude oil is a good example of the first; carbon emissions and global warming good examples of the second. Both were mentioned by Krugman, but he provided no details about how we might deal with either issue, nor did he say how economic growth would continue without confronting these and numerous other raw material and waste issues.

First Example of Limits to Economic Growth: Crude Oil

Given that most Americans have a knowledge of history that doesn’t go back much over a month or two, it is no surprise that they cannot conceive of a time without cars, gasoline (preferably cheap), and a pattern of settlement that requires the use of both—our modern suburban landscape. For many years the U.S. was the world’s largest producer of crude oil and the largest exporter of it as well. In 1970, however, our oil extraction reached a peak and then started down hill. We became an importer of oil and today import more oil than any other nation, even though we still produce lots of oil and our extraction has been increasing in recent years.

Since about 2005 the world’s extraction of crude oil has been almost flat, despite prices that rose at one point to around $147 per barrel. Though we may not know for a while whether the world has reached its peak oil production or not, we do know that it will. In the meantime we know that traditional oil fields are getting more and more difficult to find, are harder to get to, and will be more expensive to develop. Alternative sources of oil, such as the Athabascan tar sands, are abundant but also expensive to develop and environmentally undesirable. Substitutes for gasoline, such as corn ethanol, are not only nonsensical from either an environmental or an economic viewpoint, they are also diverting food from humans (mostly via animals) to SUVs, driving food prices upward.

Figure 1 below, by mathematician Tom Murphy on his Do the Math blog, in  post called, The Future Needs and Attitude Adjustment, provides a deeper historical perspective on oil production and industrial societies.

Figure 1: Image by Tom Murphy. Original caption: "On the long view, the fossil fuel age is a blip, with a down side mirroring the (more fun) up side."

You don’t need any knowledge of either deep history or the unpredictable future to get the point of this graph (unless, of course, you are an economist). Like Earth itself, the supply of crude oil is finite, even if we don’t know exactly how much is there, where it all is, or how much of it we can ultimately recover. Though we can tweak this curve, argue about its shape, and nibble along its edges, the basic fact remains: World oil extraction will reach a peak, probably sooner rather than later. After that, extraction will decline, though along what kind of curve we don’t know for sure. Just as the Stone Age did not end because of a lack of stones, the oil age will not end because of a lack of oil. Rather, it will end because what is left of the oil supply will at some point cost far more than it is worth; it will take more energy to extract it than we would get from it.

Knowing this, the prudent course would be to wean ourselves from this energy source as soon as possible, in order to treat our addiction before it is too late. However, we live in one of the most competitive periods in world history. Not only do Americans not want to be parted from their cars but millions of Chinese, Indians, and others are lining up to get their first taste of “the freedom of the road.” That is one of the reasons why, despite a sagging world economy and lower crude oil consumption in the U.S. in recent years, the price of crude oil has hovered around $100 per barrel through most of 2011 ($98.83 on Dec. 31).

Second Example of Limits to Economic Growth: Carbon Emissions and Global Warming

Burning fossil fuels to provide energy at the input end of our economic system results in a combination of outputs or waste products that cannot be removed or neutralized quickly enough by our ocean and atmosphere. That leads to an increasing amount of gases and particulates gathering in both, changing the chemistry of both the ocean and our atmosphere. Among the gases is carbon dioxide, a greenhouse gas that we know plays a role in how Earth’s atmosphere is warmed. Adding more carbon dioxide to our atmosphere is analogous to turning our heater up a little—we get more heat.

We know that the carbon dioxide content of the atmosphere has gone from about 280 parts per million around 1850 to 390 parts per million in 2011, an increase of just over 39 percent. Though we did not discover how to measure the atmospheric content of carbon dioxide directly before the mid-1950s, we do have a careful record of what it has been doing since then, as shown in Figure 2 below (from Wikipedia):

Figure 2. The Keeling Curve of atmospheric CO2 concentrations measured at the Mauna Loa Observatory. (From Wikipedia)

It is hard to miss the upward trend in the carbon dioxide content of the atmosphere since 1958. Few scientists would identify a source for this trend outside of humans and our burning of fossil fuels. Figure 3 below  shows how much more carbon dioxide humans are adding each year through the burning of fossil fuels, setting a new record for emissions in 2010 (source):

Figure 3. Greenhouse Gas image from Yahoo News

It also shows the major contributors, China and the U.S. The failure of the U.S. to lead the world toward an economic system less dependent on fossil fuels is monumental. Modeling shows that rising carbon dioxide emissions can be expected to lead to global warming.

Conclusions

Though causes and effects may be difficult to connect, the outbreak of protests around the world in 2011 doesn’t seem coincidental. From the Arab Spring, to Greece and other European countries, to the Occupy Wall Street movement in the U.S., and even to demonstrations in Russia, people have taken to the streets to protest governments, corporations, and policies that are affecting their lives in negative ways. TIME magazine in 2011 chose “The Protestor” as its person of the year.

The are several reasons for people to be angry and upset. High oil prices and more extreme weather conditions have been driving food prices upward and high gas prices act as a tax on consumers, slowing modern economies. In addition, in the U.S. awareness has grown that most of the gains of economic growth are going to the top one percent (or less) of the population. Figure 4 below from Mother Jones (“It’s the Inequality, Stupid,” by Dave Gilson and Carolyn Perot, March/April 2011) says all one needs to know about inequality in the U.S. today.

Figure 4. Average Income Per Family Distributed by Income Group. (From Mother Jones)

Figure 5 below from the Congressional Budget Office shows how things have changed for different income groups in recent decades in the U.S. Citizens who are not in the top 1% are coming out very much worse than those at the top, whether they realize it or not.

Figure 5.

Even as nations continue to prop up banks and the Fed plays games with trillions of dollars, the general feeling seems to be that the “pothole culture” or its equivalent is spreading, that the benefits of what economic growth there is are not being shared equitably, and that many places cannot even maintain what they have in terms of infrastructure. Frustration is widespread, and much of it seems connected to what may be first signs that our modern industrial economy is breaking down. An analogy might be those first tiny pools of oil that you start to see under your car, warning you softly that things may be going wrong.

Unless humanity recognizes the bargain we’ve made with the Devil, and soon, we’ll saddle ourselves or posterity with paying the Devil his due. We cannot treat our current addiction to fossil fuels and economic growth until we admit we have them. Perhaps the best advice I’ve seen lately came from John Greer, who wrote:

Right now, as the limits to growth tighten around us like a noose and an economy geared to perpetual expansion shudders and cracks in the throes of decline, one of the things that’s needed most is the willingness, in a time of gathering darkness, to locate what lamps can still be found, and light them.

Is anyone out there listening? You can bet the Devil is!

Figure 1. Wind energy (dark green) is barely visible in a graph of US energy consumption by source. Based on EIA data.

Such slow progress seems strange for a product that seems to have such great promise. It can reduce CO2 emissions. It doesn’t require fuel. It is at least partly US made. It seems to have promise for protecting against rising fossil fuel prices.

In this post, I discuss a few of the obstacles facing wind energy in the United States and their implications for the expansion of wind energy. 

Obstacle 1: Wind energy is dependent on large subsidies.

According to the EIA’s report, Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010, wind energy received subsidies of $4.986 billion from the federal government for Fiscal Year 2010. This amount is equal to approximately half the cost of new wind power installed during that period. State and local subsidies would be in addition. (The US Wind Energy Association shows that 6034 megawatts of new capacity was installed between October 1, 2009 and September 30, 2010, so the subsidy per megawatt was $826,318. This compares to an average cost per megawatt of about $1.4 million, excluding construction and connection costs.)

Wind energy’s largest subsidy, the Production Tax Credit, is set to expire on December 31, 2012, unless Congress acts to extend it, so there is now a big rush to get orders filled before that date. A study by Navigant Consulting forecasts a large drop in wind investment, if the Production Tax Credit is not extended (Figure 2).

Figure 2. Annual Investment in Wind Energy in $ Billion, according to Navigant Consulting.

Needless to say, the US Federal Government is not flush with money for subsidies, so there is the possibility that subsidies will not be renewed or will be cut back.

Obstacle 2: Wind energy is more variable than electricity produced by fossil fuels and by nuclear energy.

Wind blows when it chooses, which is often not when it is needed most. In theory, this problem could be resolved with robust long-distance transmission of electricity and with adequate electrical storage, but in the US, these are not available. Bill Richardson, energy secretary under Bill Clinton has said, “We’re a superpower with a Third World grid.”  This means that even in locations where wind energy makes up a relatively large share of the fuel mix, other types of generations must be available to supply almost the full level of demand, if the wind is not blowing.

As a result, the role of wind energy is fairly limited.  What wind energy does is permit electricity generating plants, particularly those fueled by natural gas, to use less fuel. Consequently, the price of wind energy tends to compete with the price of fuel, rather than with the wholesale price of electricity.

Chis Namoviz, who is in charge of renewable energy forecasting at the EIA, explained this to me in an e-mail in 2009:

Because of its relatively low “capacity value” (a result of usually not blowing very regularly during peak load hours), wind largely competes as a “fuel saver” resource, and can generally be compared against the fuel cost of what ever mix of fuel it is displacing (whether from existing capacity or from alternative investments in future capacity). In the U.S., this is typically some mix of relatively inexpensive coal and somewhat expensive natural gas, depending on the location of the wind plant, and the resulting seasonal/daily wind and load profiles . . .[Note from Gail: Natural gas is now cheaper than when this statement was made.]

We can see the result of this situation in Figure 3, from Annual Report on U. S. Wind Power Installation, Cost, and Performance Trends: 2007. The price of wind generation tends to trade a below the wholesale band for other types of wind generation, more at the price of the fuel that is saved (frequently natural gas) than at the usual wholesale price.

Figure 3. Comparison of prices of wind generated electricity with electricity generated by other means, from US Department of Energy report, "Annual Report on U. S. Wind Power Installation, Cost, and Performance Trends: 2007."

This lower price for wind-generated electricity helps explain some of the need for subsidies.

A related issue is the confusion caused by a comparison of the “levelized cost of wind” with the levelized cost of other types of generation, such as is shown in Figure 4 by the US Energy Information Administration.

Figure 4. EIA's exhibit showing Estimated Levelized Cost of New Electricity Generation Resources, from Annual Energy Outlook 2011.

Because wind acts as a fuel-saver, Figure 4 represents an “apples to oranges” comparison, if one makes the standard comparison of amounts in the last column. Instead, since wind energy only replaces fuel, what needs to be compared is

• “Total System Levelized Cost” for wind relative to
• “Variable O&M (including fuel)” for other sources of production

In Figure 4,  the Total System Levelized Cost of Wind is 97.0, and of Wind-Offshore is 243.2. These might be compared with the Variable O&M (including fuel) of coal (Advanced coal is 25.7) or of natural gas (Conventional Combined Cycle is 45.6), for example. On this basis, wind energy comes out badly, and is one reason it requires such high subsides.

Another related issue is that a person would normally want to substitute a less-scarce fuel for a more scarce fuel, but to some extent this works in reverse for wind power. At least some petroleum is used in manufacturing, transporting, installing, and maintaining wind turbines, but the energy that is provided as an output is mostly replacing natural gas, and perhaps some coal. Coal and natural gas are much cheaper (and more abundant) than oil, so even a small input/output substitution in this direction can quickly hurt the economics of the process.

While one intent of wind energy was to protect against rising fossil fuel prices, in the US  those prices are not rising evenly. Oil is particularly high priced, but it is not oil that is being saved, it is other fuels.

Obstacle 3: Natural gas is now very cheap in the US, and there is a huge amount of natural gas generating capacity already built.

Since wind energy tends to compete with the cost of fossil fuels used to produce electricity (mostly natural gas and coal in the US), a low price for natural gas is a problem because even greater subsidies will be required for wind energy to be competitive.

Furthermore, natural gas generating capacity is no issue, because a great deal of natural gas generating capacity has been added in recent years.

Figure 5: US Generation Capacity by Year and Source, based on EIA Data. (The amount of electricity generated is not proportional to capacity, however. Nuclear is used at over 90% of capacity, coal a little below 70%, and wind at a little under 30% of capacity.)

Obstacle 4: In the US, we do not have an electrical grid that can provide very much long distance transport of electricity, and there are several reasons why changing this situation is very difficult.

Growth in wind energy requires very good long distance transmission capability, partly because wind resources are often located a long way from prospective users, and partly because the variable nature of wind can be “evened out” if wind energy is shared over a large area. Unfortunately, the US electrical system has grown up under a system where each locality has been expected to generate its own electricity. Under such a system, electrical transmission from city to city was originally designed to handle only occasional emergencies, and thus is very limited. I have written more about US electrical grid issues in The US Electrical Grid: Will it Be Our Undoing? and Upgrading the Grid – Many Pluses but Some Minuses Too.

The way the US electric transmission system was set up produces many anomalies. Electrical rates vary greatly from state to state. We needlessly burn large amounts of oil transporting coal to where it will be burned for electricity, rather than burning it near where the coal is mined, and then transporting the electric power over transmission lines.  Nuclear-fueled power plants are sometimes located near large cities.

The problem is very difficult to fix for many reasons. Any improvement in electric transmission would tend to even out electricity rates, but this would be to the detriment of customers who currently have low electric rates. To the extent that new transmission costs more, and these higher costs are charged back in electric rates, such a change could result in higher electricity costs for more than half of the population–something most politicians would find unacceptable.

If better transmission were readily available and free, no one would want to build a power plant in their back yard, making it even harder to site new power plants than it is now.

Another issue is that a good mechanism for paying for the installation and maintenance of new long distance transmission lines has not been established. Under current procedures, a determination must be made as to which electric generating companies will benefit from new transmission lines, and the costs allocated among the beneficiaries. The government in the past has not funded long distance electrical transmission. No one really “owns” the long distance lines.

The only partial fix I can see would be to create a separate organization to build and maintain a few new long-distance transmission lines. Wind energy and other users seeking to use these lines would be charged for the use of these lines, similar to a toll road. It might be possible that more coal fired-power plants would be built near these lines, because wind usage by itself could not support these lines. Even this arrangement would likely require a change to current laws. The net effect might be more CO2, rather than less.

The cost of long distance electric transmission is likely to be fairly high–at least several cents per kWh, for wind energy transported over long distances. Over time, the price can be expected to rise as the price of oil rises. Some maintenance may become very difficult, such as that currently done by helicopters in remote locations.

Obstacle 5: A high proportion of funding for wind energy is up front.

Oil, coal, and gas all started out as fairly high EROEI investments, and much of the investment took place as the fuel was extracted. In such a situation, the investments threw off a high level of profit which could be used to fund further investment.

Fossil fuels are gradually shifting away from this model, with higher up front investment, and lower profit available to fund further investment. Wind turbines represent the extreme end of this continuum with most of the investment up front, and the return trailing many years behind.

As a result of this shift in timing, it is becoming more difficult to fund projects with huge up-front investment. In the “good old days,” we had the low price of fossil fuels which made other investments easier to afford. We also could count on a being always able to add more debt, but we are reaching limits on sustainable debt. I wrote two posts on The Link Between Peak Oil and Peak Debt (Part 1 and Part 2). More recently, I talked about how Net Savings is dropping dramatically in the US, so that non-debt sources of funding are also disappearing.

Figure 6. US Savings and Investment Ratios, based on US Bureau of Economic Analysis Data.

The net of all of this is that if we are reaching limits with respect to finite resources, it is going to be increasingly difficult to fund projects that require large up-front investment and provide a return later. We will likely have to give up some investments we really need (such as replacing worn out roads, pipelines, and school buildings) in order to ramp up investments in projects that require large front-end funding, like wind turbines.

Obstacle 6: Adding wind energy to the electric grid adds complexity which may be difficult to manage with declining resources.

The job of balancing supply with electrical demand and keeping all sources of electricity “in synch” becomes more difficult, as more variable sources of supply come on line. While it is theoretically possible to find technical solutions to these issues, it is not clear that we will in practice.

Furthermore, one approach that is being tried in order to avoid the cost of adding new electricity generating capacity and new electric transmission is to use the Smart Grid to help limit demand when at times when demand would normally be high, such as when temperatures are high or low.  In the words of Smart Grid R & D: 2010-2014 Draft 2, “Smart grid can improve asset utilization and thereby avoid the need for new capacity.“

The expected effect of avoiding new capacity is that components are operated at closer to maximum capacity. Since adding new capacity is avoided, assets will over time tend to be older as well.  While theoretically everything should go well, operating older units at closer to their theoretical capacity adds stresses to the system. Because of these factors, Smart Grid enhancements add efficiency to the system, but may reduce resilience.

According to the same report, the Smart Grid is being built as it is being planned. The amount of funding is not clear; costs must be recovered from customers based on cost recovery laws which vary by state. There are a huge number of details that need to worked out, such as necessary cyber security measures. It would be easier to rest easy if the Smart Grid had all been planned out in advance, tested on a small scale and pre-funded.

The grid with the new enhancements will work until at some point it doesn’t work–for example, an unplanned event causes a major failure within the system, or a needed system upgrade is too expensive to afford, or a replacement part from overseas is unavailable. Hopefully, failures of this type will be temporary and local, but if resources are limited, the time may come when the high cost of maintaining the system becomes unsustainable.

Further Thoughts about Wind Energy

I have not been able to touch on more than a few issues in this post.

One of the big issues with wind is that hopes have been raised for its widespread use, without really working through feasibility issues. If we are already having trouble with the electrical grid not being able to accept more wind energy in popular wind-generating areas when wind energy constitutes only 2.3% of total electricity supply, then wind energy is going to be difficult to scale up quickly. The issues I point out in this article suggest that the cost problem is still large, and the fixes needed to add long-distance transmission are likely to make the cost problem even worse.

The government needs to be able to show it is “doing something” about our energy problem, so it makes statements such as “Wind generation added 30% of all US generating capacity in 2007.” (See Figure 5 above.) Few people are energy literate enough to realize that even this progress is very slow, because relatively little new capacity is added in a year, and because wind, with its low-capacity factor, requires a disproportionate share of total new generation capacity, to make much progress. If wind turbines have an average life of 20-30 years, and other types of generation last for 40+ years, this will also affect the amount of new generation needed for wind, compared to other units.

It is easy for readers to become confused, when confronted with the many technology possibilities available, when they don’t understand the time, cost, and scale involved. Dr. Robert Hirsch, in the January 9, 2012, issue of the ASPO-USA Peak Oil Review writes:

The foregoing are realities that many people fail to understand, which means that they can be trapped into advocating energy changes that are not practical in the short term. Examples of some of the current common traps: 1) Assuming that wind and solar systems – electricity producers – can be a near-term solution to high gasoline prices; 2) Assuming that natural gas from shale is a near-term solution to our dependence on foreign oil; 3) Assuming that wind and solar can be a near-term means to lower the emissions from vehicles now powered by oil products; etc.

If transitions to new energy sources and new technologies could be made cheaply and quickly, then many options that appear to be feasible in fact would have a reasonable chance of working out. But there is another issue as well. Based on technology today, we need fossil fuels to make wind energy, and we need fossil fuels to transport wind turbines to the locations where they are to be installed. We also need fossil fuels to repair wind turbines and to maintain transmission lines. So wind energy and other proposed replacements for fossil fuels are deeply imbedded in the fossil fuel system, and dependent on it.

I expect that at some point grid problems will become overwhelming, so at least the long-distance portion of the grid will be lost. It is possible that adding more wind energy to the grid will make that date come sooner, rather than later, because of the complexity issues I mentioned. Unless the limiting factor on the life of the electric grid is the amount of coal and natural gas available, and wind energy somehow delays running out of these, I have a hard time seeing how wind energy will make the electric grid last longer.

There are so many obstacles for wind to overcome in the US that I am not sure that we should even try to push for higher wind penetration levels. The only exception might be in areas where wind energy is cheap to produce and the grid can readily accept the electricity.

Since the world is finite, there is a good chance that at some point we are going to have to get along with less electricity as well as less oil. Instead of focusing on delaying the inevitable, perhaps we should start thinking about preparing people for simpler lives that use less energy of all types. Such an approach might solve multiple problems at once–too much CO2, too little oil, and too little capital to tackle all the problems that need to be tackled at once.

• Drill for more oil and gas;
• Develop alternative energy sources;
• Build more efficient gas-powered cars or electric cars;
• Fix homes and offices so they are more energy efficient.

I thought I would check through government data to see if we really have a chance of being able to invest enough money to solve our problems.

What I found was more than a little disturbing. United States’ “Net Savings,” as a percentage of Gross National Income has dropped greatly and is now below zero. This is a situation one website described as implying an “unsustainable path”.

Figure 1. US Net Savings as a Percentage of Gross National Income, based on Bureau of Economic Analysis Data (Table 5.1)

Back in the 1950s and 1960s, when the Interstate Expressway System was built and the electric grid that we are still using today was built, Net Savings averaged close to 10% of Gross National Income. It has dropped since then, and is now negative.

Let me explain “Net Savings” by showing a second graph.

Figure 2. US Savings and Investment Ratios, based on US Bureau of Economic Analysis Data.

In the United States, investment is made in many kinds of long-lasting goods, including everything from buildings, to roads, to oil and gas drilling, to pipelines, to wind turbines, to equipment for factories. Gross Domestic Investment (blue) is the total of such investment made in a given year, shown as a percentage of Gross National Income.

Some of this Gross Domestic Investment comes from an increase in debt; some of it comes from savings. Gross Savings (red) is the portion that comes from savings (foregone consumption), rather than an increase in debt.

Each year, some long-term assets wear out or are destroyed. Net Savings (green) is what is left, after subtracting the portion that relates to these assets which are lost (“Consumption of Fixed Assets”). So basically Net Savings is the amount of investment during a given year in long-lasting goods that was not financed by an increase in debt, and is not simply a replacement for something that has worn out. If Net Savings is negative (as it is today), we are not even replacing things that wear out, except through the use of more borrowed money.

Quarterly data shows that Net Savings is still negative in 2011.

Figure 3. US Net Savings as a Percentage of Gross National Income on a Quarterly Basis, based on BEA Data.

When Does High Net Savings Occur?

High Net Savings occurs when companies in general are quite profitable–in other words, when invested capital can be expected to yield a high rate of return. In such an environment, most companies will be earning enough profit that they can invest in additional plant and equipment, if desired. In such an environment, real wages are likely to rise. Governments will have little difficulty obtaining enough taxes for schools and roads, and other governmental investment.

The term “bankable project” is sometimes used to describe a project with an expected high rate of return, since this is something that a bank might be willing to lend money on, if  asked. An economy with high Net Savings will have many bankable projects.

Why would Net Savings Decline?

I can think of four reasons for the decline:

1. Declining EROI. Much of the infrastructure of the United States was built in the day when oil was cheap because the Energy Return on Energy Invested (EROI) was very high. Over time, EROI has dropped, and as a result, the price of oil has risen. When the price of oil was inexpensive, new infrastructure could be added cheaply. Oil and gas companies made good returns, even with low oil prices. Now oil costs have risen but wages have not risen correspondingly, creating a mis-match. With the relatively lower wages now, it is harder for workers to afford oil-based products and goods manufacturers make.

2. Human Labor Has Been Mostly Replaced. At one point, it was possible to create substantial efficiency gains simply by replacing human labor by fossil fuel labor. For example, a ditch digger could be replaced by a machine that dug ditches, and the cost of digging ditches would go down quickly, creating a profit for the entrepreneur buying the machines and the company making the ditch digging machines. The biggest opportunities for efficiency gains have already been taken.

3. Decline in Protectionism / Rise of World Market. In the early days, domestic industries were protected with tariffs. As tariffs were lifted and world trade increased, there was increased competition from areas with lower wages.  Capital was attracted to parts of the world where returns on capital appeared to be better, leading to a loss of investment in the US.

4. Limits to Growth. As we reach Limits to Growth (of the type described in the 1972 book by that name), completing claims for limited resources can be expected to raise costs for basic materials relative to wages. As a result, bankable investment projects can be expected to become less numerous. Herman Daly talks about a lack of bankable projects, not only in the US, but around the world,  in this recent post. In his view, the low returns on projects today may be related to ecological limits to growth.

Will There be Enough Funds for the Investments that will be Required to Solve our Energy Shortfall?

It is difficult to see that there will be enough funds available for such investment.

At this point, we need increasing debt just to stay even in terms of replacing infrastructure. We cannot expect ever rising debt to continue, however.  Instead, we should expect reduced debt, as I described in my post The Link Between Peak Oil and Peak Debt – Part 1. Private debt is already declining and is under further pressure, because of  European banking problems and Basel III rules reducing the amounts European banks are able to lend. The US Government keeps increasing its debt level, but this continued growth in debt is unsustainable, and is the reason behind threatened governmental shut-downs.

With reduced debt levels in the future, Gross Domestic Investment will drop below Gross Savings in Figure 2, above, leaving even a smaller amount of funds available for investment than we have today. We may very well, in the aggregate, reach the point where we are not able to maintain current infrastructure with the funds that are available for investment. This means that will need to make choices on which things we maintain–schools or roads or oil distribution pipelines or electric grid or our housing stock. If we suddenly want to spend a lot more on new oil and gas drilling, or on an upgraded electrical grid and more wind turbines, this would seem to reduce funds available for investment in other things, which are also quite necessary.

If we think of investment as requiring the use of resources such as oil, steel,  copper, and fresh water, it would stand to reason that there is an upper limit on how much we can invest each year. If we are in fact reaching “Limits to Growth,” or even “Peak Oil,” the total amount of these resources available in world markets will be declining. Even if the amount of resources extracted each year does not decline, but stays close to flat, the share of these resources that the US is able to obtain and use for infrastructure building is likely to decline, because of more-rapid growth of emerging market nations.

The Way Forward

The only way around this difficulty that I can see is adding high EROI, quick payback, energy projects such as oil wells from the 1930s. Unfortunately, there aren’t any of these left (and of course, they have environmental issues as well).

We have deluded ourselves into thinking that projects that require government subsidies and that theoretically will produce an adequate return over a long period (20 to 60 years) are an acceptable way of replacing high EROI, fast payback projects. This might be true, if we still lived in a world in which fossil fuels would provide enough of a  subsidy to the system that we could live without favorable cash flow returns from other investments.

The problem is that now, even fossil fuel investments require a lot of up front funding (think oil sands extraction in Canada, and fracking of oil and gas wells in the US), and don’t necessarily have all that good a long-term return, regardless. This is especially the case if the government needs to take an increasingly large share of this return, in order to fund its infrastructure requirements.

And increased debt is less and less of a solution.

Somehow, we need to be looking at the overall picture. How can we get enough profitable cash flow to get the cash we need to buy the resources needed to maintain essential parts of infrastructure? If we are looking at energy-related investments, what do they really provide in terms of cash flow? They may supposedly have a high EROI, if viewed over a long enough period, but this in itself is not all that helpful, if cash flow is not positive in a fairly short time-period–probably seven years or less.

My expectation is that the majority of energy investments will be terrible in terms of cash flow, and thus make our “Net Savings” (and Gross Domestic Investment) even lower over time. Installation of wind turbines and solar panels is likely to fail in terms of providing quick cash returns.

In fact, anything that requires a subsidy is likely to have serious cash flow issues. But even new nuclear power plants and new coal-fired power plants will have such issues. Adding scrubbers to coal-fired power plants without them is a great idea from an environmental point of view, but further adds to the need for additional infrastructure investment, without ever generating additional cash.

Perhaps we need to be figuring out which infrastructure investments we can eliminate, that won’t bring down the whole system. Which roads do we turn from asphalt to gravel? Can we eliminate purchase of military jets? Do we stop building and upgrading schools and universities? Do we stop building new homes and office parks?

I will admit I do not fully understand this whole issue. If we could suddenly convince the world that US has more opportunities for profitable investments than anywhere else in the world, theoretically our problem could be solved. But I don’t see this happening. Some have claimed that the recent improvements in oil and gas drilling make the US a more attractive place for investment, but I am doubtful that this is a true solution. Many of the assessments seem to be based on very optimistic estimates of future oil and gas production from “fracked” wells. And the amount of the effect is likely small.

I am afraid that the lack of cash flow funding for investment in infrastructure is what will eventually bring the system down. This is not an issue that researchers have looked at much, to my knowledge. This connection has the potential to pull the whole system down quite quickly–I would guess in 20 years or less.

Perhaps we need to be thinking more about what infrastructure investments can truly last beyond the system itself. The names “Renewables” were given to our current high-tech wind turbines and solar PV to give us the impression that they can last beyond the system themselves, but I  am doubtful that this is really the case, since they depend on the availability of the electric grid and other support systems. Perhaps we need to be focusing more on lower tech applications that can be repaired with local materials and will truly provide lasting benefit.