Figure 1. One view of future energy consumption for the world as a whole. History is based on BP’s 2012 Statistical Review of World Energy.

I explained in that post that oil limits are different from what most people expect. Oil limits are price limits. Indirectly because of these price limits, fuel consumption of all sorts (not just oil) will decline in the near future. The problem will be greater job loss and an inability to afford products of many kinds, including those made with fossil fuels. Financial collapse, particularly of governments, and a long-term decline in population are also part of this scenario.

My estimate of CO2 generation by fossil fuels in the 21st century is only about one-quarter of the amount (range midpoint) assumed in the 2007 Intergovernmental Panel on Climate Change (IPCC) Report. When differences in estimates of an important variable are this far apart, one starts reaching the “Garbage in, garbage out” problem. This is a persistent problem for all modelers. Even if the climate model is perfect apart from its estimate of future CO2 fossil fuel use, and even if anthropogenic issues are implicated as a cause of recent climate changes, the model with its incorrect estimate of future fossil fuel energy consumption can still be unhelpful for determining needed future actions.

A comparison of energy consumption estimates is shown in Figure 2. My estimate of energy consumption (similar to that in Figure 1) is shown as the Collapse scenario.

Figure 2. Comparison of Energy Consumption Estimates. Climate high and Climate low are based on Figure 1 of this Oil Drum post by DeSousa and Mearns. “Peak oil” is based on a 2013 estimate by Energy Watch Group. Collapse is my estimate, associated with Figure 1 of this post. In all of the estimates, there is an implicit assumption that the fuel mix stays relatively constant.

Figure 2 Explanation

The Collapse Scenario in Figure 2 is my estimate of future energy consumption, using amounts similar to Figure 1 of this post. It is based on the assumption that financial limits are what brings down the system. As the system is brought down, our capability to provide many basic services, such as our ability to maintain roads and electric transmission lines, disappears. Thus, we become unable to maintain the complex systems needed to extract oil and gas and coal, and because of this, are unable to maintain current energy supplies. Even renewables will become a problem, because we need fossil fuels to create new renewable energy generation. We also need fossil fuels to maintain the lines used to transmit the electricity, and to provide back-up generation.

If the problem we are facing is financial collapse, biomass can be expected to behave differently than other renewable energy resources. If people are poorer, there will be great demand for wood for heating, and perhaps for creating metals and glass. In fact, there is evidence that Greece is turning to wood burning already. (Greece is an early example of a country approaching the financial problems we expect world wide.) Thus, under the Collapse Scenario, a likely problem is deforestation.

The Peak Oil Scenario shown in Figure 2 is based on a 2013 estimate by the Energy Watch Group. The assumption in estimates using “Peak Oil” ways of evaluating supplies is that geological constraints determine supply. The question of price doesn’t come into the analysis; instead curve fitting techniques are used. If oil supplies decline, the assumption is made that natural gas and coal extraction will to some extent rise to offset the oil decline.

Many who support the peak oil method of calculating expected availability of future fuel supplies are advocates of a ramp-up of wind and solar PV. One reason use of these resources is supported is because fossil fuels are seen to be limited, and renewables might act as “fossil fuel extenders”. I personally am concerned about adding intermittent renewables to the grid in large quantities. Doing so is likely to shorten the lifespan of the grid, if the intermittent renewables introduce greater cost and complexity.

I believe that peak oil estimates are overstated because they do not consider the economics of depleting fossil fuel supplies. Oil consumption by importers starts to decline if price is high–something that happens long before world oil supply actually starts to decline. James Hamilton has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes. (Recession tends to lead to less consumption of many products, including oil.) At the same time, oil exporters need high prices, and have financial problems if price or production declines too much. If exporters do not get enough revenue from oil exports, some of them collapse. See my post How Oil Exporters Reach Financial Collapse.

The Climate High and Climate Low estimates are based on carbon amounts shown in Figure 1 of this 2008 Oil Drum post by De Sousa and Mearns. In converting these carbon estimates to energy consumption estimates, I implicitly assumed that the carbon intensity of energy use would remain unchanged–that is, improvements resulting from  more use of natural gas and renewables use would be offset by increases in coal consumption. This assumption is probably not what the IPCC would make. Their “Low Estimate” would probably assume greater use of renewables and natural gas than their High Estimate, so that the actual energy available in their Low Estimate would be closer to the energy available in their High Estimate than what my graph would suggest. The  2007 IPCC report does not give much detail, except to generally discuss their reasoning.

The IPCC’s basic assumptions seem to be:

1. Demand is the basic determiner of supply. In the view of the IPCC, there is lots of oil, gas, and coal in the ground (see Figure 4.2 of Working Group III Report). It is assumed that we can get these fuels out, essentially as fast as we want. No consideration is given of diminishing returns, and the resulting likely run-up in both needed investment funds and  price to the user. (See Our Investment Sinkhole Problem.)

2. Because the IPCC report misses the issue of diminishing returns and resulting higher price, it assumes that demand can keep on ramping up pretty much indefinitely. In the real word, demand is what customers can afford to buy. This is already declining for the US, Europe and Japan, with the high oil prices experienced in recent years.

Figure 3. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

Overview of IPCC 2007 Report

As I see it, there are three important aspects  of the 2007 IPCC analysis:

1. The Climate Model. This is the part of the report that says, if CO2 is such and such, and other forcings are so much, the effect on the climate is this amount. I personally do not have expertise to evaluate this part of the report. I note, however, that at least some climate scientists seem to be back-pedalling on how much impact is expected from a given amount of carbon. A letter published in Nature Geoscience on May 19, 2013, titled Energy Budget Constraints on Climate Response indicates that the climate effects of a given set of forcings seems to be lower than the 2007 IPCC report suggested. This letter, together with explanatory information is available free for download, with registration.

2. The Estimates of Fossil Fuels going into the Model. It is this part of the model that seems to be seriously in error. The carbon added during the 21st century in the Collapse Scenario is only about 25% of what the IPCC estimates use (averaging the high and low) . De Sousa and Mearns calculate that their Peak Oil estimates would keep CO2 emissions below 450 parts per million. My Collapse Scenario estimates are considerably below De Sousa and Mearn’s Peak Oil estimates, so would in theory produce lower yet CO2 impacts.

3. What to Do About the Problem. I think this part of IPCC report has a serious problem as well. The report, as it is published, is not about How to Reduce CO2 Emissions. If this had been the goal, the report would likely have talked about reducing population, eating less meat, making manufactured goods that last longer, and standardizing goods, so that it is not necessary to buy new goods, just replacement parts. Instead, the IPCC 2007 report provides a wish list of ways we might keep Business as Usual (BAU) going, using techniques that might reduce fossil fuel use with little pain to the business community and consumers.

A big part of the problem with the analysis of what to do about the problem is that the researchers putting together the analysis do not understand the way the current system works. According to Newton’s Third Law of Motion, “For every action, there is an equal and opposite reaction.” Unfortunately, there is something very similar when one tries to make energy substitutions. A researcher might assume that substitution of higher-priced renewable energy for lower-priced fossil fuel energy would reduce world carbon emissions, but this is true only if second and third order effects don’t undo the supposed benefit. Higher-priced fuels make a country less competitive in the world marketplace, and give an advantage to countries using coal for their generation. Adding a carbon tax has similar unplanned effects.

Figure 4. Actual world carbon dioxide emissions from fossil fuels, as shown in BP’s 2012 Statistical Review of World Energy. Fitted line is expected trend in emissions, based on actual trend in emissions from 1987-1997, equal to about 1.0% per year.

When we look at actual CO2 emissions, we find that they have risen remarkably since the Kyoto Protocol was ratified in 1997 (Figure 3, above). (See my posts, Twelve Reasons Why Globalization is a Huge Problem and Climate Change: The Standard Fixes Don’t Work.)

One of the implicit assumptions in the IPCC report is that continued growth in a finite world makes sense, and can be expected to continue until 2100. In fact, we are reaching limits of many kinds.

Figure 5. Various types of limits we are now reaching

In fact, modelers should be considering all of the limits simultaneously. Modeling any one limit on Figure 5 by itself will produce results that will suggest that that limit is a huge problem, that perhaps can be fixed. To a significant extent, there are workarounds for many of these problems, including more research on antibiotics, desalination of water, and intermittent renewables to substitute for some fossil fuels. The problem with each of these workarounds is that they all involve higher cost, and thus tend to create financial problems, especially for governments that try to fix the problems. Thus, the real issue is a likely near-term financial problem. This financial problem can be expected to lead to economic shrinkage which will by itself help mitigate several of the problems, including climate change.

Given the multiple limits we are reaching, I think we need to step back. Energy is truly needed to create products and services of all kinds. The IPCC is claiming that with a few tweaks, economic growth of the type we have grown to expect can continue until the year 2100.  This assertion is clearly false, with or without the tweaks they are advocating.

We need to be figuring out how to live with a world that is rapidly changing for the worse, in terms of energy availability. I am not sure climate change should be our Number 1 concern, because the CO2 part of the problem is likely to mostly take care of itself. Instead, we need to be looking at how we can make the best use possible of energy sources we have. We also need to be cutting back on the real source of demand–population growth.

Perhaps we need to be thinking about different options than we have been thinking about to date–for example, making supply chains shorter and bringing production closer to the end-user. We might want to make such a change in an attempt to sustain production for longer, whether or not this has an adverse CO2 effect, viewed from today’s peculiar perspective: Only manufacturing which results in local CO2 production seems to be viewed as “bad;” exporting coal to China, or importing goods manufactured using coal from China/ India is not viewed as a problem.  Having economists with a mindset of BAU forever and helping businesses get ahead, doesn’t necessarily produce the best results from the point of view of taking care of the existing population. Perhaps we should be looking at our current problems from a broader perspective than the IPCC report suggests.

When the populations of various species are graphed, they rise and fall.  We usually think of a close match, such as depicted in this graph:

Figure 1. Volterra_Lotka equations used to illustrate situation where population of predators and prey do not vary over too wide a range.Source: Wikipedia.

In fact, the variability of the many species over time tends to be greater than this, as illustrated by the following model that started with 80 baboons and 40 cheetahs:

Figure 2. Lotka-Volterra equations used to illustrate situation that begins with 80 baboons and 40 cheetahs. Source: Wikipedia

If species evolve together, a natural balance tends to remain in place. If a species suddenly finds a new, better source of nourishment (really, energy supply, since food supplies energy), its population may increase greatly. For example, yeast may metabolize the sugar in grape juice, converting it to alcohol. The yeast population temporarily rises and then declines, as the food source disappears and alcohol pollution poisons the yeast. Or bacteria may multiply rapidly inside the human body under certain circumstances (including  adequate nutrients and a compromised immune system).

An example is sometimes given of reindeer introduced to St. Matthews Island near Alaska, where there was considerable lichen on the rock. The reindeer ate the lichen at a speed faster than the lichen could reproduce. Soon the lichen was gone, and the reindeer population crashed.

Figure 3. Assumed population of St. Matthew Reindeer herd, with actual counts given. Based on research of David R. Klein of University of Alaska.

The reindeer example is similar to a very severe predator-prey curve. The reindeer ate a renewable resource faster than it could reproduce. There were a few other food sources a reindeer could eat, so a few reindeer remained, but there was a very sharp drop in the number of reindeer.

The population of humans has ramped up greatly in recent times:

Figure 4. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

The most recent growth coincides with the addition of fossil fuels to the energy supplies used by humans, starting about 1800. If we look back, we see though that human population has been ramping up for a very long period. Humans discovered how to control fire over 1,000,000 years ago. Since 75,000 BCE, there has been fairly consistent population growth, if we look at the data on a log/log graph.

Figure 5. Log/log graph of human population growth, with energy sources giving rise to this growth.

The initial growth of human population occurred with the discovery of how to burn biomass, and how to use it for such purposes as cooking, keeping warm, honing stone tools to a sharper edge, and scaring predator animals away. All of these uses allowed ancestors of modern man to spread over a wider area of the globe, while at the same time wiping out many species of animals, as humans spread to new areas. Biologist and paleontologist Niles Eldridge says that Phase One of the Sixth Mass Extinction 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. Even at these early stages, energy use by humans allowed human population to grow at the expense of the population of predator species.

There was a lull in human world population growth between 1 CE and 800 CE (Figure 5). In this period, there were many local collapses, so growth in one area tended to offset collapse in another area. When these collapses happened, they generally looked financial in nature, according to the research of Peter Turchin and Surgey Nefedov in Secular Cycles. Populations had found a new resource that allowed them to have more food supply–for example, they cleared land of trees so that it could be farmed or learned to use irrigation.

But over time, population grew and caught up with available resources. At the same time, the resources started degrading. The soil started eroding, or became less fertile, and or salt built up from irrigation. Wages of the common worker dropped, and it was hard for them to get adequate nourishment. Epidemics became common. The general shape of these collapses was approximately as follows:

Figure 6. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov.

So even in the Year 1 CE to Year 800 CE period, there was not a Steady State. Instead, there was a combination of overshoot and collapse type waves of the types seen with other species in different parts of the globe, which together averaged out to relatively flat world population growth.

Angus Maddison analyzed GDP growth in the 1 CE to 1000CE period. He concluded that the per capita GDP was slightly lower at the end of the period (453) than at the beginning of the period (476). He doesn’t give amounts at the Year 800. But assuming that the change was fairly representative, the period 1CE to 800CE or 1 CE to 1000CE was close to a Steady State economy (with lots of collapses), considering the lack of both population growth and GDP growth per capita.

In more recent times, humans were able to add more energy sources (including peat moss, windmills, and water mills). They also developed better ocean-going ships that allowed them to make colonies, and spread agriculture further, and demand that these colonies extract resources to support the home country. Also, with a more globalized world, agriculture could be improved through a wider choice of domesticated plants and animals, by introducing species from other parts of the world.

Since 1800, the growth in fossil fuels has helped ramp up both population and standards of living.

Figure 7. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.

What Are Humans’ Options for Living in a Steady State Economy?

I am not sure there are many good choices:

1. If we went back to the period before the ancestors of humans discovered fire, about 100,000 to 200,000 of us could live in the warm areas of the world, eating raw food, and living much as chimpanzees and baboons do today, based on populations of those primates today. The population of humans under such a scenario would fluctuate upward and downward, perhaps as in Figure 1.

Because of the availability of cooked foods for many years, the bodies of humans have adapted to the improvement in diet. It is not clear that our teeth and internal organs could handle a purely raw-food diet, unless we happened to live in a part of the world where a soft diet (berries, fish and worms) was available. The areas where humans could live would also need to be warm, so our lack of fur would not be a problem. To meet these criteria, the population might need to be even lower than 100,000 to 200,000.

2. Having no humans at all is by definition a Steady State. I am doubtful that most people would consider this an acceptable Steady State, however.

3. If we did not have globalization and stopped adding energy supplies, we might continue to have local collapses, as in the 1CE to 800CE or 1000CE period. In this way, we could approximate a Steady State. Of course, now with globalization, a problem in one part of the world quickly spreads to other parts of the world.

4. If we want 7 billion people to be able to continue to live, we will need some basic level of energy supplies for these 7 billion people. If we assume that as a minimum, people today will need at least the 1820 level of energy consumption (based on Figure 7), we will need total energy consumption of at least 22 gigajoules per capita. This would amount to about 7% of the current energy consumption of the United States. It would not be enough to perform what we now consider basic functions such as maintaining roads, electrical systems, water systems, and sewer systems, so would be a major step down for US residents.

At the 1820 level of energy consumption, we would still need to continue a portion of fossil fuel consumption, since there are now so many of us that biofuels would no longer suffice (Figure 7–read across at 1820 level). Also, renewables, including today’s modern hydroelectric and solar panels are made and transported with fossil fuels, so in order to have what we now consider renewables, we would need to continue to have some fossil fuel use. Also, electricity from wind and solar PV needs to be backed up with natural gas electricity generation.

In addition to needing energy to maintain a population of 7 billion people, we would also need a way to

(a) keep population down, and

(b) keep people from using available energy supplies (beyond the 22 gigajoules per capita allotted), to improve their lifestyles.

The way we often hear proposed for keeping population down is more education of women together with availability of birth control measures. Unfortunately, this approach is energy dependent. Unless considerable external energy is available, women will have to work in the fields to produce food.  This will give them little time for education or the jobs that education would provide.

There are some cultures that have been able to keep population down by less energy-dependent means. For example, China uses strict governmental controls. Cultural and religious practices may also be used, such as delayed marriage and long breastfeeding. In some cases, abortion or infanticide may be used.

Keeping people from using available energy supplies to improve their lifestyles is even trickier. Some central authority can dictate that the US will use only 7% of the energy the population used in the past, meaning that everyone has to give up nearly everything. But enforcing this will be a real trick, unless energy supplies really are constrained.

There seems to be a common belief that cutting down on personal transportation fuel would have a big impact on total energy consumption. In the US, gasoline amounts to about 44% of US oil consumption. If we eliminated all gasoline consumption (even that by police, ambulances, and sales people), it would only reduce US energy consumption  (all types, not just oil) by 16%. On a worldwide basis, much less oil is used for personal transportation, so eliminating all oil for personal transportation would likely reduce world energy consumption by something like 10% to 12%.

Is There a Reason for Aiming for a Steady State Economy? 

At this point, we seem to be headed for collapse, because the number of humans is so far out of line with the population of other species. There are many other limits we are reaching as well, including the cost of oil extraction, the availability of fresh water, and the amount of pollution (including CO2 pollution). Also, governments are in increasingly poor financial condition, because when there are not enough resources to go around, governments tend to “come up short”. They can’t collect enough taxes relative to the benefits they pay out and all of the government programs they administer.

The only way a Steady State would make sense would be if there were some level of Steady State that humans could fall back to, instead of collapse. Unfortunately, it is hard to see a good place to fall back to. The only period during which human population was relatively constant was the period 1 CE to 800 CE, when frequent collapses kept population down. It is difficult to see any point at which humans have not increased population, or increased resource use, if resources were available, except when frequent civilization collapses overwhelmed the system.

If our civilization does collapse to a lower level, but not all the way back to zero, it seems likely that humans will again repeat the pattern they have experienced, over and over. They will again increase population and resource use, if resources are available. This pattern seems to be an instinct for all species, which is why it is virtually impossible to eliminate. Humans will then again collapse back to a more sustainable level.

At some point, in a finite world, we start reaching limits. There are now about seven billion people in the world. We could probably add some more, but how many? What is it that limits our ability to add more people to the world we live in today?

Too Much Population “Morphs” to an Energy and Financial Limit

One obvious guess as to what might limit world population is the amount of fresh water that is available. If we don’t have enough fresh water available, we can’t continue to expand population.

The amount of fresh water that is available can be changed, though, by adding desalination plants. There are many other ways of getting fresh water. To give an extreme example, the amount of fresh water available could be increased by melting ice in Antarctica and importing it by ship. Either of these solutions would require energy in an appropriate form—either to run the desalination plant, or to melt the ice and transport it by ship. Thus the fresh water shortage, at least for the foreseeable future, can be worked around if there is sufficient energy available of the right type.

The other not-so-minor detail is that the cost of desalination or of importing melted ice from Antarctica needs to be inexpensive enough that users of fresh water can afford it. In order for this to be the case, the cost of the appropriate type of energy must be extremely inexpensive.

We can think of other kinds of limits to population growth as well. For example, carbon dioxide limits. In theory, there are ways around carbon dioxide limits. For example, assuming current research projects are successful, we can build carbon capture and storage facilities and change our electricity generating plants so that the carbon dioxide that is emitted can be captured and stored underground.

Here, too, there are energy limits and cost limits. Carbon has a molecular weight of 12, while carbon dioxide has a molecular weight of 44. Because of this, if we create carbon dioxide from coal, the carbon dioxide we produce is much heavier and bulkier than the coal that we burned to make the electricity. It will take a lot of energy to store this gas underground in a suitable place. Thus, we have another problem that can be handled, if there is enough cheap energy of the right type available.

Almost any kind of obstacle to increased human population that we can think of has an energy-based work-around. Will people be so crowded that disease transmission will be a problem?  There are workarounds: better water treatment plants and sewer treatment plants, especially in the poorer parts of the world; more immunizations; more and better hospitals; antibiotics for all those who need them. These solutions also require energy, as well as other inputs (which indirectly require energy as well). The difficulty is making them affordable for the people who need them.

If the problem is not enough food, perhaps because of degraded soil, there are energy-based workarounds as well. Food can be imported from a distance. More fertilizers and soil amendments (either made using fossil fuels, or transported using fossil fuels) may be used. Irrigation, which uses either diesel fuel or electricity to pump water may be used to pump water to too dry areas, to increase food production per acre. In some cases, artificial soil can be created, and plants grown in a green house—again requiring much energy.  The issue again gets to be whether consumers can afford the food produced using this more energy-intensive procedure.

The Problem With Degraded Resource Supplies

Degraded resource supplies occasionally run out—for example, an aquifer may run dry. A more common situation, though, is that resources become progressively more expensive to extract as we approach limits. We tend to extract the easiest to extract (and thus cheapest-to extract) resources first. These resources are the highest quality ones, in the easiest to access locations. We then move on to more expensive to extract resources. A similar pattern applies to many types of resources, including ore used in making metals, oil, gas, coal, and uranium.

When we analyze resources of a given type, say uranium, we find that there are always more resources available. The problem is that they are increasingly expensive to extract because the ore is of lower concentration, or is located in a harder to reach area, or there is some other problem involved.

We have illustrated this situation in Figure 1, as a triangle with a dotted line at the bottom, because of the uncertain cut-off regarding how much is available. The cut-off is really a price cut-off. At some point, the resource becomes too expensive for customers to afford products made with it.

FIGURE 1 – Triangle of Available Resources

Figure 1. Triangle of available resources, with dotted line indicating uncertain financial cut-off.

A company starts from the top of this triangle, extracting whatever resource is involved. A company can “see” a little way ahead, as it looks down toward the bottom of the triangle. The company will report reserves which are continually increasing because the width of the triangle keeps getting wider, even though these reserves are of lower quality and can only be extracted in a more energy-intensive way. The question then becomes whether customers can really afford products made with these expensive-to-extract resources.

The Broader Energy Picture

Energy is pretty amazing. Energy is what allows work of any kind to be done, from making a clay pot by hand, to baking a cake, to creating a carbon capture and storage facility. Humans by themselves are able to produce some energy, because of the food we eat. But we are also able to leverage the energy that our own bodies produce with energy from other sources, such as from burning biomass. We learned to burn biomass a very long time ago, over 1,000,000 year ago.

If humans were like other large primates, there would be only 100,000 or 200,000 of us, rather than 7 billion of us. We would live in an area to which we are biologically adapted, most likely a very warm part of Africa. Humans’ population is much higher, because once we learned to control fire, we were able to settle areas of the world that would otherwise be too cold or dry to live in, and we were able to increase population densities through energy-related techniques we developed.

One thing we learned to do was cook part of our food supply. This had many advantages. Unlike apes, we no longer needed to spend literally half of our day chewing. This freed up time for other activities, like tool-making, hunting, and clothing making. It also allowed the human body to evolve in a way that allowed a bigger brain and smaller digestive organs. Gradually we used our improved brain to develop other techniques such as making heat-tempered stone tools, which were sharper than other stone tools, and teaching dogs to help us with hunting for food. All of these approaches to using external energy allowed humans to leverage our own puny energy supply from food with energy supply from other sources and gain an advantage over other animals.

Human prosperity was able to increase and population was able to grow as we learned to use increasing amounts of energy from outside sources. Energy sources we gained control over included domesticated plants and animals, facilitating agriculture. World population by the year 1 C. E. reached 200 million, or over 1,000 times the population level before the leveraging impact of external energy supplies began enabling greater human world population.

Fossil fuel (coal, oil and natural gas) use became common after about 1800 C. E., and population grew very quickly. In fact, when population is graphed, it looks like it went straight up starting when fossil fuels were added.

FIGURE 2 – World Population

Figure 2. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.

Use of fossil fuels did not grow by themselves. Their use was facilitated by the development of improved technology, which provided the vehicle for their use. Increased debt also facilitated fossil fuel use, because it allowed potential buyers to afford the new products being developed, and provided companies doing energy extraction funds for their work.

Our ability to do physical work using human labor is quite limited. For example, if we want to dig a well for water, the depth that humans can dig without the assistance of a machine intended for this purpose is only about 20 feet. With mechanical drilling equipment, typically powered by oil, we can quickly and cheaply dig a well many hundreds of feet deep.

As another example, if we want to transport goods a long distance without external energy,  we can only push a cart at the speed at which we can walk. Oil or another other modern fuel allows inexpensive long-distance transport of goods.

Adding energy use changes costs. There is a two-way tug on costs:

1. Costs are typically reduced when fossil fuel energy or electricity from any source can be substituted for human energy. This allows greater leverage of the energy of the remaining humans doing the “work”.

2. Costs tend to increase, as the cost of the energy source in (1) increases. Such an increase in costs occurs as we approach limits of a finite world, partly because extraction is from more depleted resources (farther down in the resource triangle shown in Figure 1), and partly because we reach increased problems with pollution, such as the BP Deepwater Horizon well blowout in 2010. The cost of mitigating pollution problems also adds to energy costs.

Up until about the year 2000, this tug of war had a favorable outcome. An increased amount of fossil fuel energy was substituted for human energy, leading to lower costs. As mentioned previously, improved technology and additional debt enabling this substitution played a role as well.

In recent years, the tug of war has started to go the other direction. The cost, particularly for oil energy, has tended to rise far more rapidly than costs in general (Figure 3). This has produced many dislocations within the economy, making countries that use a lot of oil less competitive in the world marketplace and reducing economic growth rates, especially among  countries no longer able to complete. The higher cost of oil products reduces disposable income of citizen, leading to recession and to deficit spending by governments.

FIGURE 3 – World Oil Price in Current $

Figure 3. Brent-equivalent oil price in current $, based on data from BP 2012 Statistical Review of World Energy.

In future years, we can expect that two way tug on costs will increasingly be lead to higher costs, because of greater impact of limits of a finite world. This will tend to send economies increasingly into recession.

Our financial system has been built assuming that economic growth will continue indefinitely. There is significant risk that the recessionary influences of high oil costs will bring down the current economy. We know from a recent analysis by Peter Turchin and Sergey Nefedov (Secular Cycles, Princeton University Press, 2009) that historically, when civilizations collapsed, they did so for financial reasons, as the cost of government became too great for citizens to fund with tax revenue. There would seem to be a significant risk that today’s economy will reach the same end.

Why didn’t others recognize this issue?

Reaching limits of a finite world is a subject that does not easily fit into any one subject area, so the subject tends to be missed by researchers concentrating on one field of study.

The closest fit came in the analysis The Limits to Growth (Donella Meadows et al, Universe books, 1972).  This analysis came very close, but did not quite hit the nail on the head because it missed the connection of debt to limits to growth. (The model was of course not expected to be complete.) More recent analyses along this line to miss the debt connection as well, pushing the likely date of collapse forward.

There is much confusion about the question of what limits, such as oil limits, mean. Many people believe that rising oil reserves (which are a given when the problem is ever-more expensive to extract oil, as illustrated in Figure 1) mean that our oil problems are solved. Our problem is not a lack of oil reserves; our problem is that the selling price needs to keep rising, to cover the rising costs of extraction and to cover government dependence on tax revenues. This increase in selling price makes oil ever less affordable, which is our real problem.

Even when oil price drops, this is not necessarily a good sign. It may mean that some oil extraction companies will no longer be able to afford to add new wells, because production will not be sufficiently profitable at the new lower price. It may also mean that some oil exporting nations will

not be able to get enough tax revenue from oil operations to fund programs (food subsidies, for example) that prevent revolt.

Reaching limits in a finite world is a scary issue. The book Limits to Growth was not well received when it was published. Governments have tried their best to avoid the issue. No president or prime minister wants to announce, “We have a problem that we have no way to solve.”

Why might I be able to shed light on the real impact of finite world limits?

My background is as a casualty actuary, doing financial forecasting for insurance companies. Thus, I started with somewhat of a financial background, but did not have the usual “brainwashing” that comes when a person has studied the economy from the perspective of today’s economists. My background gave me a great deal of experience hunting for  publicly available databases, making graphs, doing analyses, and explaining the results to lay audience.

I got interested in the issue of oil limits and what impact they might have when read the book, The Empty Tank: Oil, Gas, Hot Air, and the Coming Global Financial Catastrophe (Jeremy Leggett,  Random House, 2005). His view comes from the “peak oil” view, which is close to my view, but not quite the same.

When I read Leggett’s book, it hit a responsive chord because I had had first hand experience with the impact that high oil prices had on insurance companies in the 1973-1974 period. In 1973, I was the actuary for a small insurance company that ultimately went bankrupt, at least partly because of the indirect impact of higher oil prices. Reporting to the president of the company, I got to see up close what kind of havoc high oil prices could cause in the financial world.

After I read Leggett’s book, I started researching the issue on my own. I wrote an article for insurance executives in early 2006 and an article for actuaries in early 2007. In March 2007, I decided to take early retirement, and work on the issue full time.

I set up my blog site, OurFiniteWorld.com in March 2007. I soon was asked to help with the website TheOilDrum.com, where I wrote under the name, “Gail the Actuary,” and made many contacts with others interested in the issue of limited oil supply.

To make a long story short, over the past several years, I have made many contacts with researchers who have discovered at least part of the story of oil limits and energy limits. Through my blog posts, I also received much valuable input, including suggestions from readers regarding academic books that might be helpful.

My work is now being published in the academic world as well. I wrote a paper, “Oil Supply Limits and the Continuing Financial Crisis,” published in the journal Energy in January 2012. It has so far been cited by 10. I was also a co-author of “An analysis of China’s coal supply and its impact on China’s future economic growth” (Energy Policy, June 2013). My most recent publication is an article called, “Financial Issues Affecting Energy Security” in the soon-to-be published book, Energy Security and Development–The Changing Global Context, (B. S. Reddy and S. Ulgiati Eds., Cambridge Scholars Publishing, 2013).

Debt limits are also closely tied to oil supply limits. It is actually debt limits, such as those we seem to be reaching right now, that may bring the whole system to a screeching stop. (See my posts How Resource Limits Lead to Financial Collapse, How Oil Exporters Reach Financial Collapse, Peak Oil Demand is Already a Huge Problem, and Low Oil Prices Lead to Economic Peak Oil.)

We have many Main Street Media (MSM) paradigms that mischaracterize our current predicament. But we also have what I would call Green paradigms, that aren’t really right either, because they don’t recognize the true state of our predicament. What we need now is new set of paradigms. Let’s look at a few common beliefs.

Inadequate Oil Supply Paradigm

As I stated above, indications that oil supply is a problem are confusing. MSM seems to believe, “If the US can be oil independent, our oil supply problems are solved.” If a person believes the goofy models our economists have put together, this is perhaps true, but this is not true in the real world.

Without a huge, huge increase in US oil production (far more than is being proposed), being “oil independent” simply means that we are unable to compete in the world market for buying oil exports. US oil consumption ends up dropping, and we end up on the edge of recession, or actually in recession. Oil exports instead go to the countries that have lower manufacturing costs (that is, use oil more sparingly).  See Figure 1 below. In fact, even some of the oil products that are created by US refineries end up going to users in other countries, because it is businesses in other countries that are making many of today’s goods, and it is these businesses and the workers they hire who can  afford to buy products like gasoline for their cars or diesel for their irrigation pumps.

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

The Green version of this paradigm seems to be, “If world oil supply is rising, everything is fine.” This is related to the idea that our problem is “peak oil” production caused by geological depletion, and if we haven’t hit peak oil production, everything is more or less OK. In fact, the limit we are reaching is an economic limit, that comes far before world oil supply begins to decline for geological reasons. See my post, Low Oil Prices Lead to Economic Peak Oil.

The real paradigm is, “Limited oil supply leads to financial collapse.” This is true for both oil exporters and for oil importer. For oil importers, the problem occurs because they cannot import enough oil, and oil is needed for critical parts of the economy. The belief by economists that substitution will take place is not happening in the quantity and at the price level (very low) that it needs to happen at, to keep the economy expanding as it has in the past.

Limited oil supply first leads to high oil prices, as it did in the 2004 to 2008 period; then it leads to government financial distress, as governments try to deal with less employment and lower tax revenue. By the time oil prices start falling because of the poor condition of oil importers, we are well on our way down the slippery slope to financial collapse.

Growth Paradigm

The MSM version of this paradigm is, “Growth can be expected to continue forever.” A corollary to this is, “The economy can be expected to return to robust growth, soon.”

In a finite world, this paradigm is obviously untrue.  At some point, we start reaching limits of various kinds, such as fresh water limits and the inability to extract an adequate supply of oil cheaply.

Economists base their models on the assumption that the economy only needs labor and capital; it doesn’t need specific resources such as fresh water and energy of the proper type. Unfortunately, substitutability among resources is not very good, and price is all-important. In the real world, growth slows as resources become more expensive to extract.

The Green version of the growth paradigm seems to be, “We can have a steady state economy forever.” Unfortunately, this is just as untrue as the “Growth can be expected to continue to forever.” Even to maintain a steady state economy requires far more cheap-to-extract oil resources than the earth really has. (US shale oil resources, which are the new hope for oil growth, can only grow if oil prices are sufficiently high.)

We are very dependent on fossil fuels for making our food supply possible and for our ability to make metals in reasonable quantity. Fossil fuels are also necessary for making concrete and glass in reasonable quantities, and for making modern renewable energy, such as hydroelectric dams, wind turbines, and PV panels. We cannot keep 7 billion people alive without fossil fuels. Perhaps the quantity of fossil fuels consumed can be temporarily reduced from current levels, but with continued population growth, any savings will be quickly offset by additional mouths to feed and by the desire of the poorest segment of the population to have the living standards of the richest.

Unfortunately, the correct version of the paradigm seems to be, “Overshoot and collapse is to be expected.” This is what happens in nature, whenever any species discovers a way to way to increase its energy (food) supply. Yeast, when added to grape juice will multiply, until the yeast have consumed the available sugars and turned them to alcohol. They then die.

The same pattern has happened over and over with historical civilizations. They learned to use a new approach that allowed them to increase food supply (such as clearing land of trees and farming the land, or adding irrigation to an area), but eventually population caught up. Research shows that before collapse, they reached financial limits much as we are reaching now. The symptoms, both then and now, were increasingly great wage disparity between the rich and the working class, and governments that needed ever-higher taxes to fund their operations.

Eventually a Crisis period hit these historical civilizations, typically lasting 20 to 50 years. Workers rebelled against the higher taxes, and more government changes took place. Governments fought wars to get more resources, with many killed in battle. Epidemics became more of a problem, because of the weakened condition of workers who could no longer afford an adequate diet. Eventually the population was greatly reduced, sometimes to zero. A new civilization did not rise again for many years.

Figure 2. One possible future path of future real (that is, inflation-adjusted) GDP, under an overshoot and collapse scenario.

It seems to me that unfortunately overshoot and collapse is the model to expect. It is not a model anyone would like to have happen, so there is great opposition when the idea is suggested. Overshoot and collapse is very similar to the model described in the 1972 book Limits to Growth by Donella Meadows and others.

Role of Economics, Science, and Technology Paradigm

The MSM paradigm seems to be, “Economics and the businesses that make up the economy can solve all problems.” Growth will continue. New technology will solve all problems. We don’t need religion any more, because we now understand what makes people happy: More stuff! As long as the economy can give people more stuff, people will be satisfied and happy. Economics even can allow us to find “green” solutions that will solve environmental problems with win-win solutions (assuming you believe MSM).

The Green version of the paradigm seems to be, “Science and technology can solve all problems, and can properly alert us to future problems.” Again, we don’t need religion, because here we can put our faith in science to solve all of our problems.

I am not sure the Green version of the paradigm is any more accurate than the MSM media version. Science is not good at figuring out turning points. It is very easy to miss interactions that are outside the realm of science, and more in the realm of economics–for example, the fact high-priced oil is not an adequate substitute for cheap-to-extract oil, and it is the lack of cheap oil that is causing a major portion of today’s problem.

It is also very easy to put together climate change models that are based on far too high assumptions of the amount of fossil fuels that will be burned in the future, because economic interactions are missed. If debt collapse brings down the economy, it will bring down all fossil fuels at once, meaning that the vast majority of what we think of as reserves today will stay in the ground forever. A debt collapse will also affect renewables, by cutting off production of new renewables, and by making maintenance of existing systems more difficult.

The real paradigm should be, “Neither science and technology, nor economics can solve the problems of humans. We have instincts similar to those of other species to reproduce in far greater numbers than needed for survival, and to utilize all resources available to us. This leads us toward overshoot and collapse scenarios, even though we have great knowledge.“

Because of our propensity toward overshoot and collapse scenarios, humans have a real need for a “moral compass” to tell us what is right and wrong. If there is no longer enough food to go around, how do we decide which family members should get it? Is it OK to start a civil war, if there are not enough resources to go around? There is also a need to deal with our many personal disappointments, such as finding that the advanced degrees we worked so hard on will have little use in the future, and that life expectancies are much lower. Perhaps there is still a need for religion, even though many have abandoned the idea. The “story line” of religions may not sound exactly reasonable, but if a particular religion can provide reasonable guidance on how to handle today’s problems, it may still be helpful.

Climate Change Paradigm

The MSM view of climate change seems to vary with the country. In the US, the view seems to be that it is not too important, and that it can be adapted to. Perhaps the models are not right. In Europe, there is more belief that the models are right, and that local cutbacks in fossil fuel consumption will reduce world CO2 production.

The Green view of climate change seems to be, “Of course climate change models are 100% right. We should rationally be able to solve the problem.” There is only the minor detail that humans (like other species) have a basic instinct to use energy resources at their disposal to allow more of their offspring to live and to allow themselves personally to live longer.

Unfortunately, a more realistic view is that climate change may indeed be happening, and may indeed by caused by human actions, but (1) we are already on the edge of collapse. Moving collapse ahead by a few months will not solve the climate change problem, and (2) collapse itself is an even worse problem than climate change to deal with.  By the time rising ocean levels become a problem, population is likely to be low enough that the remaining population can move to higher ground, and agriculture can move to where the climate is more hospitable.

Climate change may indeed cause population to drop even more than it would if our only problem were overshoot and collapse. But because the cause is related to human instincts (having more offspring than needed to replace oneself and the drive to use energy supplies that are available), changing the underlying behavior is extremely difficult.

Over the eons, the earth has been cycling from one climate state to another, with one species after another being the dominant species. Perhaps natural balances are such that the time has now come that humans’ turn as the dominant species is over. The earth is now ready to cycle to a state where some other species is dominant, perhaps a type of plant that can use high carbon dioxide levels. If this is the case, this is another disappointment that we  will need to deal with.

Nature of  Our Problem Paradigm

The MSM’s paradigm seems to be, “Our problem is getting the economy back to growth.” Or, perhaps, “Our problem is preventing climate change.“

In a way, the MSM paradigm of “Our problem is getting the economy back to growth,” has some truth to it. We are slipping into financial collapse, and in a sense, getting the economy back to growth would be a solution to the problem.

The underlying problem, however, is that oil supply is getting more and more expensive to extract. This means that an increasing share of resources must be devoted to oil extraction, and to other necessary activities (such as desalinating water because we are reaching fresh water limits as well). As a result, the rest of the world’s economy is getting squeezed back. See my post Our Investment Sinkhole Problem. Squeezing the world’s economy creates great problems for all of the debt outstanding. The likely outcome is widespread debt defaults, and collapse of the world economy as we know it.

The Green paradigm seems to be, “We have a liquid fuel supply problem.“  If we can solve this with other liquid fuels, or with electricity, we will be fine. Many Greens also emphasize the climate change problem, so their big issue is finding electric solutions for the liquid fuel supply problems. There is also an emphasis on local food production, especially with respect to perishable foods.

Unfortunately, the real problem seems to be, “We are facing a financial collapse scenario that is likely to wreak havoc on all energy sources at once.” Using less oil products may be helpful for a while, but in the long term, we are dealing with an issue of major system collapses. Using less of a particular product “works” as long as the supply chain for that product is still intact, including the existence of all of the factories needed to make the product, and the existence of trained workers to operate the factories. Banks also need to remain open. World trade needs to continue as well, if we are to keep our supply chains operating. The real danger is that supply chains for many essential services, including fresh water, sewage disposal, medicines, grain production, road repair, and electricity transmission repair will be interrupted. As a result, we will need to find local solutions for all of them.

The situation we are facing is not at all good. While we can do a little, it will be very challenging to build a new system that does not use fossil fuels. In the past, when the world did not use fossil fuels, the population was much lower than today–one billion or less.

Also, in the past, we started simple, and gradually added complexity to solve the problems that arose. This time around, we need to do the reverse. We already have very complex systems, that are too difficult to maintain for the long term. What we need instead is simpler systems that can be maintained with local materials. This is not a direction in which science and technology is used to working.

Creating new systems that require only local resources (and a few other resources, if transport can be arranged) will be a real challenge. Areas of the world that have never adopted modern technology would seem  to have the bast chance of making such a change.

Importance of Tomorrow Paradigm

MSM seems to assume that we can save and plan for tomorrow. Greens have a similar view.

Perhaps, given the changes that are happening, we need to change our focus more toward to day, and less toward tomorrow. How can we make today the best day possible? What are the good things we can appreciate about today? Are there simple things we can enjoy today, like sunshine, and fresh air, and our children?

We have come to believe that we can and will fix all of the problems of tomorrow. Perhaps we can; but perhaps we cannot. Maybe we need to simply take each day as it comes, and solve that day’s problems as best as we can. That may be all we can reasonably accomplish.

This is an unusual conference–most of the talks are in a large tent. Some of the discussions are in a pavilion that is covered but open to the outdoors. Dress is very casual. Many attendees bring tents and camp on site. There are also hotels not too far away where one can stay. Registration fees are very reasonable. An old-fashioned barn dance is planned one evening. Registration is available at this link.

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

The speakers this year, besides myself, are John Michael Greer, Dmitry Orlov,  Carolyn Baker, Albert Bates, Guy McPherson, and the organizer, Orren Whiddon.  This is a link to a draft schedule. The topics of my talks are “Collapse 101″ and “Energy, Debt, and Financial Collapse.”Other talks will be on a variety of subjects, many more related to mitigation and dealing with emotions than numbers-type subjects. For example, one of Dmitry Orlov’s talks is called “Fostering Multigenerational Community.” One evening session is called, “Speaking the Words, Confronting Collapse, a discussion in the Round.”

Preceding the Age of Limits Conference, on May 17-May 22, there will be a Sustainable Life Skills Permaculture session taught by Patricia Allison at the same location. A person can register for both sessions, if desired.

The reason I am somewhat knowledgeable about the Age of Limits conference is that I spoke at a smaller version of the conference last year. The speakers last year included several of the same ones speaking this time–John Michael Greer, Dmitry Orlov, Carolyn Baker and myself. About 185 attended last year. I understand the setup has been changed to permit more to attend this year.

The group sponsoring this conference is the Four Quarters InterFaith Sanctuary. Church members provide a lot of volunteer labor, helping to keep costs down.

As long as the price of oil keeps rising, there is at least some chance the amount of oil extracted each year will keep rising, because more oil resources will become economic to extract. The real problem arises when oil price falls back from a price level it has held, as it has done recently, and as it did back in July 2008. Then there is a real chance that investment will become non-economic, and because of this, oil production will fall.

Figure 1. World crude oil price and production, based on monthly EIA data.The corresponding price in late April is approximately $100 barrel, so is even lower yet.

Oil prices play multiple roles:

1. High oil prices encourage extraction from more difficult locations, because the higher cost covers the additional extraction costs.
2. High oil prices allow exporters to have adequate money to pacify their populations, even if their oil exports have been declining, as they have been for many exporters.
3. High oil prices allow funds for investment in new oil fields, as old ones deplete.
4. High oil prices tend to put oil importing countries into recession, because it raises the costs of goods and services produced, without raising the salaries of the workers. In fact, there is evidence that high oil prices lower wages (both directly and through lower workforce participation).
5. High oil prices make countries that use large amounts of oil less competitive with countries that use less fuel in general, and less oil in particular.

When oil prices decline, it is evidence that Items 4 and 5 above are outweighing Items 1, 2, and 3.  This tips the scale in the direction of a fall in oil production.

Debt also affects oil prices. As long as investors have faith that businesses can make money, despite high oil prices, they will continue to borrow to expand their businesses. This additional debt helps drive up demand for goods and services of all kinds, including oil, so oil prices rise. Also, if consumers are able to borrow increasing amounts of money, this also drives up demand for goods that use oil, such as cars. But once the debt bubble bursts, it is easy for oil prices fall very far, very fast, as they did in 2008.

If we look at the 2008 situation, oil limits were very much behind the overall problem, even though most people do not recognize this connection. It was the fact that oil limits eventually led to credit limits that caused the system (including oil prices) to crash as it did. High oil prices led to debt defaults and bank write offs, and eventually led to a huge credit contraction in economies of the developed world. This credit contraction affected not just oil demand, but demand for other energy products as well.

The problems of the 2008 period were never really solved: the lack of growth in world oil supply remains, and this lack of growth in world oil supply continues to hold back world economic growth, particularly in developed countries. We recently have not been feeling the effects as much, because with deficit spending, the problems have largely moved from the private sector to the government sector.

The situation remains a tinderbox, however. The financial situation is propped up by ultra-low interest rates, continued government deficit spending, and Quantitative Easing. In a finite world, debt growth cannot continue indefinitely. But if debt growth permanently stops, and switches to contraction, we would end up in an even worse financial mess than in 2008. In fact, such a change would very likely to would lead to a contraction of “Limits to Growth” proportions.

In this post, I will explain some of these issues further.

The Rise and Fall of Oil Prices in 2008

Figure 2. World crude oil production and Brent oil prices, based on monthly EIA data, with different scale for oil production.

If we look at world oil production and price between January 1998 and July 2008 on an X-Y graph, we see that as long as oil demand stayed below 71 million barrels a day, oil price stayed low (Figure 3, below). But once demand started to push above that level, oil price started to rise rapidly, with little increase in production. It was as if a brick wall on oil supply had been hit. No matter how much the oil price rose, virtually no more production was available.

Figure 3. X-Y graph of world of monthly world oil production and price data, based on the EIA data shown in Figures 1 and 2.

If we look at an X-Y graph of the non-OPEC portion of oil supply, we see that the situation was even worse for the non-OPEC portion (Figure 4, below). The amount of oil that could be produced at a given price had actually begun to fall back. While in 2003 and 2004, non-OPEC had been able to produce 42 million barrels a day for only $30 barrel, by 2008, non-OPEC could not reach 42 million barrels a day, no matter how high the price. It looked as though non-OPEC had hit “peak oil” production. Geological limits appeared to have the upper hand.

Figure 4. X-Y graph of world of non-OPEC world oil production and price data, based on EIA data.

Fortunately, during this period OPEC was able to raise its production somewhat, in response to higher prices, as illustrated in Figure 5, below. Between July 2007 and July 2008, it was able to raise oil production by 2.1 million barrels a day, in response to a $56 dollar a barrel increase in price in a one-year time-period. (The small increase in response to a huge price rise suggests that OPEC’s spare capacity was not nearly as great as claimed, however.)

Figure 5. X-Y Graph of OPEC oil production and price, based on EIA data.

What brought about the collapse in oil prices in July 2008? I believe it was ultimately a financial limit that was reached that eventually worked its way to the credit markets. Once the credit markets were affected, individuals and businesses were not able to borrow as much, and it was this lack of credit that cut back demand for many types of products, including oil.

The way this cutback in credit came about was as follows: Oil prices had been rising for a very long time–since about 2003, affecting the inflation rate in food and fuel prices. The Federal Reserve Open Market Committee tried (unsuccessfully) to get oil prices down by raising target interest rates. I describe this in an article published in the journal Energy called, “Oil Supply Limits and the Continuing Financial Crisis,” available here or here.  The combination of high oil prices and higher interest rates led to falling housing prices starting in 2006 (big oops for the Federal Reserve), and debt defaults, particularly among the most vulnerable (those with sub-price mortgages). As early as 2007, large banks had large debt write-offs, lowering their appetite for more debt of questionable quality. Total US household mortgage debt reached its maximum point on June 30, 2008, and began to fall the following quarter.

Figure 6. US Mortgage Debt Outstanding, based on Federal Reserve Z1 Report.

By July 2008, the financial problems of consumers in response to high oil prices and falling housing prices had transferred to other credit markets as well. Revolving credit outstanding (mostly credit card debt), hit a maximum in July 2008, and has not recovered (Figure 7 below). (July 2008 is exactly the same month as oil prices began to fall!) Non-revolving credit, such as auto loans, hit a maximum in the same month.

Figure 7. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data of the Federal Reserve.

Credit issues kept getting worse. The Federal takeover of Fannie Mae and Freddie Mac took place in September 2008, as did the bankruptcy of Lehman Brothers. By late 2008, cutbacks in credit had spread to businesses including all sectors of the energy industry. I wrote an article on December 1, 2008, documenting that credit issues led to lower prices not only for oil, but for coal, natural gas, nuclear, and renewables as well.

The reason why a cutback in credit availability is a problem is because it is very difficult to buy a new car or home, or to finance a new business operation, if credit isn’t available. In fact, the amount a business or family can spend depends on the sum of their income during a period, plus the amount of additional debt they take on during that period. If the amount of debt outstanding is going down, then, for example, old credit card debt is being paid down faster than new credit card is being added, and the amount currently spent is lower.

The Federal Government tried to fix the situation by running larger deficits  (Figure 8), starting the very next quarter after oil prices hit a peak and started declining.

Figure 8. US Federal Debt, from Federal Reserve Z-1 Report. (Excludes debt owed to Social Security and other Federal programs.)

Oil prices rose again starting in 2009 as demand outside the US, Europe, and Japan continued to grow. By 2011, high oil prices were back. The economies of US, Europe and Japan did not bounce back to the kind of economic growth most expected, because at high oil prices, their products were not competitive in a world marketplace that relied on an energy mix that was slanted more toward coal (which is cheaper), and also offered lower wages.

In 2013, world oil supply is still constrained.

It is easy to get the idea from news reports that everything is rosy, but the story presented to us is painted to look much better than it really is. Production from existing sites is constantly depleting. In order to replace declining production, huge investment must be made in new productive capacity. It is as if oil producers must keep running, just to stay in place.

Part of the problem is that the cost of new capacity keeps escalating. I have called this the Investment Sinkhole Problem. The Financial Times describes the problem as Energy: More Buck, Less Bang.

Cash flow has historically financed much investment. Now we read, Energy Industry Struggling to Generate Free Cash Flow.

Many naive people believe Saudi Arabia’s stories about their “productive capacity” of 12.5 million barrels a day, but their maximum crude and condensate production in recent years has been only been 10,040,000, according to the EIA. Their recent production has been only a little over 9 million barrels a day in recent months, according to OPEC Monthly Oil Market Report.

Iraq is supposed to be the great hope for future oil production, yet it increasingly seems to be stumbling toward civil war.

Russia is now the largest oil producer in the world, with a little over 10.0 million barrels a day of crude and condensate production.   According to a Russian analyst,”Gas condensate production is the real driver behind the [recent] growth. Crude oil output is falling and organic growth currently is impossible.”

Figure 9. US crude oil production, based on EIA data. 2012 data estimated based on partial year data. Tight oil split is author’s estimate based on state distribution of oil supply increases.

Admittedly, tight oil production has ramped up quickly. But it is an expensive technology, that requires a high oil price, and lots upfront investment. There is evidence that such oil is concentrated in “sweet spots” and these get tapped out quickly. In North Dakota, the earliest area for US tight oil extraction, rig count is down from 203 at the beginning of June, 2012, to 176 at April 19, 2013, according to Baker Hughes. Lynn Helms, Director of the North Dakota Department of Mineral Services gave this explanation, “Rapidly escalating costs have consumed capital spending budgets faster than many companies anticipated and uncertainty surrounding future federal policies on hydraulic fracturing is impacting capital investment decisions.” Meanwhile, North Dakota oil production has recently been flat–perhaps because of weather; perhaps because of other issues as well.

The ramp-up in US crude oil production amounted to 812,000 barrels a day in 2012–very small in comparison to world crude oil needs. World oil production, shown in Figures 1 and 2, is barely affected. In a world with 7 billion people, most of whom would like vehicles, the amount of oil supply being added is tiny.

In 2013, the financial problems of the United States, the Euro-zone, and Japan haven’t gone away.

Current high oil prices make the big oil-importing countries less competitive. It is hard to compete with countries with lower average fuel costs, thanks a mix that it much heavier on coal, and lighter on oil.  A graph of oil consumption shows that oil is increasingly going to the Rest of the World, rather than the US, EU, and Japan (Figure 10).

Figure 10. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

The countries that see little growth in oil consumption are the same ones struggling with low economic growth. Low economic growth makes debt very difficult to repay. Governments are tempted to add more debt, to try to fix their problems.

Tackling government debt problems in 2013 tends to bring recession back.

The big problem when oil prices rise is that workers’ discretionary income is squeezed, because their wages don’t rise at the same time. This problem can somewhat be offset by deficit spending of governments for programs to help the unemployed, and for stimulus.

Once taxes are raised, or benefits are cut, the old problem of lower discretionary income for workers reappears. Thus, the recession that governments so cleverly found a way around previously, re-emerges.

In 2005, there was a very sharp impact to oil prices when high oil prices indirectly affected the credit system.  This time, a big issue is rising government taxes and lower benefits. These are staggered in their implementation, so the effect feeds in more slowly.  Greece and Spain started their cut-backs early. The US raised Social Security taxes by 2% of wages, as of January 1, 2013. Later it added sequester cuts. All of these effects feed in slowly, and add up.

With respect to debt, in 2013  we are rapidly approaching the time when this time truly is different.

There has been a great deal in the press about a mistake Rienhart and Rogoff recently made in their book, This Time Is Different. I think Rienhart and Rogoff, as well as economists in general, have missed an issue that is much more basic: In a finite world, debt, like anything else, cannot keep growing. The economy (whether economists realize it or not) depends on physical resources, and these are in limited supply. One piece of evidence with respect to the limited supply of oil is the fact that the cost of its extraction keeps rising. This means that fewer resources are available to be used for making other goods and services.

I show in my paper, Oil Supply Limits and the Continuing Financial Crisis, that lower economic growth rates make debt harder to repay. Reinhart and Rogoff seem to confirm this relationship works in practice. In their NBER paper, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” they make the observation, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”(They did not seem to understand why, though!)

The 2007-2009 recession partially brought the level of debt down, outside the government sector. Government debt has been ramping up rapidly because tax revenues are down and benefits are up (Figure 8).

Figure 11. US Debt by Sector, based on Federal Reserve Z.1 data. (Amounts shown exclude government debt that is not publicly held.)

Government debt helps take the place of “missing” debt from other sectors (at least in theory). Now government debt is above acceptable levels. US debt is around 100% of GDP, and growing each quarter.

Without rapid economic growth, only a small portion of the debt that remains can be repaid. If increases in taxes/cutback in benefits leave more without work,  a new round of debt defaults can be expected. Student loans are particularly at risk. Business loans maybe a problem as well, especially in discretionary industries. Government debt is likely to be a problem, especially for states and municipalities. Banks may again have financial problems, especially if they have exposure to debt from other countries, or student loans.

I am not certain what will happen to the huge amount of US government debt, if Quantitative Easing ever stops. The same might be said of the debt of all of the other countries doing quantitative easing. Who will buy the debt? And at what interest rate? If the interest rate rises, there will be a huge problem, because suddenly loans of all types will have higher interest rates. Governments will need higher taxes yet, to pay their debts. It will be hard to sell cars with higher interest rates on debt. Home prices will likely drop, because fewer people can afford to buy homes with higher interest rates.

I showed in Reaching Debt Limits what a big difference increases in household debt can make to per capita income (Figure 12).

Figure 12. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report.

If debt starts long-term contraction, we will truly have a mess on our hands. Businesses will have a hard time investing. Individuals will have a hard time buying big-ticket items, like cars, furniture, and houses. Demand for all types of goods and services will fall. I showed in my post Why Malthus Got His Forecast Wrong that increasing debt was what allowed rapid growth in fossil fuel use. If debt stops growing and starts shrinking, we will get to see the reverse of this phenomenon.

What is Ahead?

Lower oil prices indicate that demand is declining. (The cost of extraction is not lower!) Lower oil demand seems to be related to poorer earnings reports for the first quarter of 2013, which in turn is at least partly related to the increase in US Social Security taxes withheld, starting January 1, 2013.  Nothing will necessarily happen quickly, but by next quarter’s earnings reports, some of the “sequester” cuts will be added to the cuts. Businesses with poor earnings are likely to lay off workers, and those workers will file for unemployment benefits. Gradually, we will see increasing evidence of recession.

It is not clear that this time will necessarily lead to the “all time” switch to long-term debt contraction, but it will bring us one step closer, at least in US, and probably in Europe and Japan as well. Oil supply may not drop very much, very quickly. If we are lucky, demand will bounce back and bring prices back up, as in 2009-2010. But with all of the debt problems around the world, it is possible that a contagion will begin, and defaults in one country will spread to other countries. This is what is truly frightening.

Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

We can see an even more pronounced version of this pattern if we look at the oil consumption of the five countries known as the PIIGS in Europe: Portugal, Italy, Ireland, Greece, and Spain. All of these countries have had serious declines in oil consumption in recent years, as high oil prices have impeded their economies.

Figure 2. Oil consumption for Portugal, Italy, Ireland, Greece, and Spain, based on EIA data.

Oil consumption for the PIIGS in total hit its highest level in 2004, before the decline began. Peak oil consumption by country varied a bit: Portugal, 2002; Italy, declining since 1995; Ireland, peak in 2007; Spain, peak in 2007; Greece, peak in 2006.

Peak demand is very much related to jobs. Peak oil demand occurs when a country is not competitive in the world market-place, and because of this, loses industry and jobs. One reason this happens is because the country’s energy cost structure is not competitive in the world market-place. With the run-up in oil prices starting about 2003, oil is by far the most expensive of the traditional energy sources we have available today. Countries that use a large percentage of oil in their energy mix can be expected to have a hard time competing, because of oil’s higher cost.

Figure 3. Oil consumption as percentage of energy consumption for selected countries, based on BP’s 2012 Statistical Review of World Energy.

Anything else that is done which raises costs for businesses will also have an impact. This would include “carbon taxes,” if competitors do not have them, and if there is no tariff on imported goods to reflect carbon inputs.

High-cost renewables can also have an adverse impact, regardless of whether the cost is borne by businesses, consumers or the government.

• If the cost is borne by businesses, those businesses must raise their prices to keep the same profit margins, and because of this become less competitive.
• If the cost is borne by consumers, those consumers will cut back on discretionary expenditures, in order to balance their budgets. This is likely to mean  a cutback in demand for discretionary goods by local consumers.
• If the government bears the cost, it still must pass the cost back to businesses or consumers, and thus reduce competitiveness because of higher tax costs.

This importance of competitiveness holds, no matter how worthy a given approach is. If costs were “externalized” before, and are now borne by the local system, it makes the local system less competitive. For example, putting in proper pollution controls will make local industry less competitive, if the competition is Chinese industry, acting without such  controls.

One issue in competitiveness is wage levels. Wages in turn are related to standards of living. In a global economy, countries with higher wage levels for workers, and higher benefit levels for workers (such as health insurance and pensions) will be at a competitive disadvantage. Countries that use coal as their prime source of energy will be at an advantage, because workers’ wages will tend to “go farther” in heating their homes and buying electricity.

Countries that are warm in the winter will be at a competitive advantage, because homes don’t have to be built as sturdily, and don’t have to be heated in winter. Workers can commute by bicycle even in the coldest weather.

Energy usage (all types combined, not just oil) is far higher in cold countries than it is in warm wet countries. Countries that extract oil also tend to be high users of energy.

Figure 4. Per capita energy consumption for selected countries for the year 2010, based on EIA data.

The difference in per capita energy usage among the various countries is truly astounding. For example, Bangladesh’s per capita energy consumption is slightly less than 2% of US energy consumption. This difference in energy consumption means that salaries can be much lower, and thus products made in Bangladesh can be much cheaper, than those made in the United States. This is part of our competitiveness problem, even apart from the energy mix problem mentioned earlier.

In my view, globalization brought on many of our current problems. Perhaps globalization could not be avoided, but we should have foreseen the problems. We could have put tariffs in place to make a more level playing field.  See my post, Twelve Reasons Why Globalization is a Huge Problem.

Inadequate world oil supply isn’t exactly the problem. The issue is far more that the price of oil extraction is rising.  The price of oil extraction is rising for a variety of reasons, an important one being that we extracted the easy to extract oil first, and what is left is more expensive to extract. Another issue is that oil exporters now have large populations that need to be kept fed and clothed, so they don’t revolt. This is a separate issue, that raises costs, even above the direct cost of extraction. There is no reason to believe that these costs will level off or fall, no matter how much oil the US produces using high-priced methods, such as fracking.

When oil prices rise, wages don’t rise at the same time. In fact, in the US there is evidence  that wages stagnate when oil prices are high, partly because fewer are employed, and partly because the wages of those employed flatten.

Figure 5. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.

The countries that are most affected by rising oil prices are the countries that use oil to the greatest extent in their mix of energy products. In Figure 3, that would be the PIIGS. The rest of the US, EU-27, and Japan would be next in line.

When oil prices rise, consumers need to balance their budgets. The price of oil products and food rises, so they cut back on discretionary items.  Their smaller purchases of discretionary goods and services means that workers in discretionary sectors get laid off.

Businesses find that the price of oil used in manufacturing and shipping their products has risen. If they raise the sales price of the goods to reflect their higher costs, it means that fewer people can afford their products. This too, leads to cutbacks in sales, and layoffs of workers. Sometimes businesses decide to outsource production to a cheaper country, or use more automation, as a way of mitigating the cost increases that higher oil prices add, but automation or outsourcing also tends to reduce US wages.

The net effect of all of these changes is that there are fewer workers with jobs in the countries with high oil usage. This reduces the demand for oil in the high oil usage countries, both from business owners making goods and from the consumers who might use gasoline to drive their cars. This price mechanism is part of what leads to the oil consumption shift we see in Figure 1.

We are dealing with is close to a zero-sum game, when it comes to oil supply. The amount of oil that is extracted from the ground is almost constant (very slightly increasing for the world in total). If prices stayed at the low level they were in the past (say $20 barrel), there would not be enough to go around. Instead, higher prices redistribute oil to countries that can use it manufacture goods at low overall cost. Workers in factories making these goods are then able to afford to buy goods that use oil, such as a motor scooter.

Citigroup recently released a report titled, “Global Oil Demand Growth, – the End is Nigh.” Its subtitle says,

The substitution of natural gas for oil combined with increasing fuel economy means oil demand is approaching a tipping point.

This is out-and-out baloney, for a number of reasons:

1. There are way too many of “them” compared to the number of “us,” for energy efficiency to make even a dent in our problem.

2. When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.

3. Substituting natural gas for oil still leaves cost levels for the US, Europe, and Japan very high, compared to those for the rest of the world, where little energy is used.

4. There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers until they reach a different limit of some sort.

Let’s look at these issues separately.

There are way too many of “them” relative to us, for energy efficiency to even make a dent in our problem.

If we look at world population, this is what we see:

Figure 6. World population split between US, EU-27, and Japan, and the Rest of the World.

Using a ruler, we could probably make fairly reasonable projections of future population for each of these groups.

If we look at per capita oil consumption for the two groups separately, there is a huge disparity:

Figure 7. Per capita oil consumption separately for the group US, EU-27, plus Japan, and for the rest of the world, based on BP’s 2102 Statistical Review of World Energy, and population statistics from EIA (since 1980) and Angus Maddison data. (earlier dates).

Per capita oil consumption for the EU, US, and Japan group peaked in 1973–a very long time ago. In recent years, it has been drifting down fairly rapidly, just to keep up with a slight per capita rise in oil consumption of the Rest of the World. Even with recent changes, per capita oil consumption of the EU, US and Japan group is more than 4.5 times that of the rest of the world.

If cars were made more efficient, more people could afford them. The market for cars is unbelievably huge, compared to today’s market, if costs could be brought down. Furthermore, gasoline accounts for less than half of US oil consumption. Even if efficiency were improved to allow cars to use half as much fuel, it would save a little less than one-fourth of current oil consumption. How far would this oil go in satisfying the needs of 6 billion other people–and growing every year?

When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.

If we look at per capita oil consumption in the US, split between gasoline and other oil products, we see that the big drop in oil consumption came from the drop in other oil products–that is the commercial and industrial part of US oil consumption.

Figure 8. US per capita consumption of oil products, split between gasoline and other. Total consumption from BP’s 2012 Statistical Review of World Energy. Gasoline consumption from EIA. (Amounts include biofuels.) Difference by subtraction.

The amount of fuel used for gasoline has stayed in the 10 to 12 barrels a year per capita band, since 1970, in spite of huge improvements in vehicle efficiency.

I recently wrote a post called Why is US Oil Consumption Lower? Better Gasoline Mileage? In it, I looked at the decrease in US oil consumption between 2005 and 2012. I concluded that the majority of the decrease in consumption was due to a drop in commercial use. Only 7% was due to an improvement in miles per gallon for gasoline powered vehicles.

Substituting natural gas for oil still leaves the US (as well as Europe and Japan) very high priced, compared to the rest of the world, that doesn’t use much energy.

Living in the US, Europe or Japan, it is  hard to get an idea of the cost structure of the rest of the world. We are so far above the cost structure of the rest of the world that substituting natural gas for oil would do little to fix the situation.

Figure 9. Photo of an auto-rickshaw I took while visiting India in October 2012. A total of 10 of us (including driver) traveled for several miles in a three-seated version of one of these. Those of us on the edges held on tightly to the frame, because there was not room for all of us.

We can also debate how much substitution of natural gas will actually do, and in what timeframe. In the US, natural gas is temporarily very cheap. But it costs more to extract shale gas than the market currently pays, in many areas. Also, a recently University of Texas study showed that Barnett Shale was past peak production, if prices do not rise.

There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers, until they reach a different limit of some sort.

When a country is not competitive, it is not just oil consumption that drops, but consumption of other energy products as well.  If we look at the per capita energy consumption of the US, EU-27, and Japan combined, we see that non-oil energy consumption per capita reached its peak in 2004, and is now declining (Figure 10, below).  If consumers are too poor to buy oil products, they are also too poor to buy products made with other types of energy.

Figure 10. Per capita consumption for the sum of the EU-27, US, and Japan, based on BP’s 2012 Statistical Review of World Energy.

The Rest of the World followed a very different pattern of energy consumption. Non-oil consumption soared, on a per capita basis. Oil consumption also increased on a per capita basis.

Figure 11. Per capita energy consumption for the Rest of the World, based on BP’s 2012 Statistical Review of World Energy.

More detailed data shows that the big increase in non-oil consumption was a huge rise in coal consumption, after China was admitted to the World Trade Organization in December 2001.

How does peak oil demand work out in the end?

I would argue that lack of competitiveness in world markets is a limit that the US, EU-27 and Japan are hitting right now, but at slightly different rates. EU-27 now seems to be ahead in the race to the bottom, partly because its combined currency. I wrote a post in March 2012 called Why High Oil Prices Are Now Affecting Europe More Than the US, explaining the situation.

It seems to me, though, that a big piece of the problem with lack of competitiveness gets transferred to the governments of the affected countries. This happens because collection of tax revenue lags, because not enough people are working, and those who are working are earning lower wages. At the same time increased payouts are needed to stimulate the economy, and to provide benefits to the many without jobs.

Governments increase their debt to meet the revenue shortfall. They reduce interest rates to record-low levels, to stimulate the economy.  They also use Quantitative Easing, or “printing money” to try to lower long-term interest rates, and to try to make their exports more competitive. Unfortunately, these actions do not solve the basic structural problem of high and rising world oil prices, and the fact that these rising prices make their economies increasingly less competitive in the world marketplace.

One possible way I see of the current situation working out is that the total energy consumption (including all types of energy products, not just oil) of the EU, US and Japan will continue to fall, as high-priced oil continues to erode our competitive position in the world marketplace.

Figure 12. One view of future energy consumption for the EU-27, US, and Japan. Historical is based on BP’s 2012 Statistical Review of World Energy.

The slope of the decline is based on the type of decline experienced by the Former Soviet Union, in the years immediately following its collapse. This pattern might reflect a combination of different patterns for different countries. Greece and Spain, for example might continue to fall quite quickly. The US might lag the EU in the speed at which problems take place. The likely path seems downward, because any action taken to fix the government gap between income and expense can be expected to have a recessionary impact, and thus have an adverse impact on energy consumption.

The Rest of the World is now growing rapidly, but at some point they will start reaching limits. One of these limits will be lack of an export market. Another will be lack of spare parts, because businesses in the US, Europe and Japan are failing for financial reasons. Some of these limits will relate to pollution and lack of fresh water. The effect of these limits will also be to raise costs. For example, a shortage of water can be worked around through desalination, but this raises costs. Lack of spare parts can be worked around by building a new plant to make the spare part. Pollution problems can be mitigated by pollution controls, but these add costs. These higher costs, when passed on to consumers will also lead to a cutback in demand for discretionary goods, and the same kinds of problems experienced in oil exporting nations. Thus, these countries will also have “Peak Demand” problems, because of rising prices, related to limits they are reaching.

I don’t know exactly how soon the Rest of the World will hit limits, but given the interconnectedness of the world system, it would seem to be within the next few years. Figure 13 shows one estimate of how this may occur.

Figure 13. One view of energy consumption for the Rest of the World. Historical data are based on BP’s 2012 Statistical Review of World Energy.

Here again, individual countries may do better than others. Countries with little connectedness to the world system (for example, countries in central Africa) may have fewer problems than others. Of course, their energy consumption (of the type measured by the EIA or BP) is very low now. They may use cow dung and fallen branches for fuel, but these are not counted in international data.

Figure 14, below, shows the sum of the amounts from Figures 12 and 13. Thus, it gives one estimate of  future world energy consumption based on Peak Demand considerations.

Figure 14. One view of future energy consumption for the world as a whole. History is based on BP’s 2012 Statistical Review of World Energy.

If there is a silver lining to all of this, it is that world CO2 emissions are likely to start falling quite rapidly, because of Peak Oil Demand. World CO2 emissions could quite possibly drop below 20% of current levels before 2050. In the scenario I show, energy consumption drops faster than forecasts such as those put out by the Energy Watch Group. Such forecasts do not take into account financial considerations, so are likely overstated.

The downside of Peak Oil Demand is that the world we live in will be very much changed. Population levels will likely drop, indirectly because of serious recession, job loss, and cutbacks in government benefits. The financial system will need to be completely revised, because debt financing will make sense much less often than today. In fact, in a shrinking world economy, money can no longer act as a store of value. There no doubt will be some people who survive and prosper, but their lives will likely be very different from what they are today.

Unfortunately, we have many examples of countries that were oil exporters, but are dealing with collapse situations. Egypt, Syria, and Yemen all have had political disruptions since 2011. These may not be called financial collapse, but they all took place as the country’s oil exports decreased and as the price of imported food rose. Another example is the Former Soviet Union (FSU). It collapsed in 1991, after a period of low oil prices, in what looks very much like a financial collapse.

There are several dynamics at work in the financial collapse of oil exporters:

1. Oil exporters are often dependent on oil export revenue to fund government programs.
2. The need for government programs grows as population grows and as the price of food  rises.
3. The amount of oil that can be extracted in a given year often declines over time, as initial stores are depleted.
4. Exports often decline even more rapidly than oil supply, because of rising oil consumption as population grows.

In general, high oil prices are good for oil exporters (except the effect on food prices). At the same time, oil importers strongly prefer low oil prices.  As a result, we end up with a price tug of war between oil importers and oil exporters.

One additional issue is declining Energy Return on Energy Invested. Countries often have the option of reducing their rate of decline by adding production in areas which are more expensive to drill (say deeper, smaller locations offshore Norway) or by using enhanced oil recovery methods. Such approaches add costs (and energy use), and further add to the price that oil exporters need for their product.

Egypt, Syria, and Yemen

Egypt, Syria, and Yemen are three countries that the press would say are suffering from the continuing impact of the Arab Spring revolutions, which began in 2011, or of civil war. The similarity of the oil production and consumption charts for the three countries (shown below) suggests that declining oil exports likely played a major role as well. 

In all three countries, oil production rose and then began to fall (Figures 1, 2, and 3). At the same time, oil consumption rose. The two lines–production and consumption–come very close to meeting in 2011, indicating that oil exports are at that point dropping to 0.

Figure 1. Oil production and consumption for Syria, based on EIA data. (Both are on an “all liquids” basis.)

FIgure 2. Oil production and consumption for Egypt, based on BP’s 2012 Statistical Review of World Energy.

Figure 3. Oil production and consumption for Yemen, based on EIA data. (Both are on an “all liquids” basis.)

To make matters worse, the three countries are in an arid part of the world, where a large share of food must be imported. Oil prices and food prices tend to rise at the same time (Figure 4, below). By 2011, both food and oil prices were high. In fact, both prices have tended to stay high. Now, these countries find themselves with the unpleasant problem of paying for the higher cost of imported food (grown and transported with oil), so indirectly they are becoming an oil importer instead of an oil exporter.

Figure 4. Food and oil prices tend to rise at the same time. Based on data of the FAO and the EIA.

Faced with less revenue from oil exports, and higher prices of food imports, these countries find themselves with a permanent mismatch between revenue and expenses. Part of the revenue mismatch relates to subsidies offered to poor residents. With higher food and oil prices, the funding needed for subsidies rises rapidly, even as oil exports drop to close to zero.

One issue that makes the situation worse is the huge rise in  population that came with increased prosperity. Population has nearly doubled since 1980 in Egypt, and has more than doubled in both Syria and Yemen (Figure 5, below).

Figure 5. Ratio of population in later years to population in 1980, based on EIA data.

All in all, the situation is very bad. These countries admittedly do have other resources, such as grazing land for animals, food crop production, and in some cases natural gas exports, but the loss of oil exports puts a hole in their budgets. If oil production continues to drop in the future, both jobs and local oil consumption are likely to be affected as well. (This is a link to a post I wrote about the Egyptian situation two years ago.)

I tried to put together an index of the relative dependence of various countries on oil exports, by comparing the value of oil exports to Gross National Income.  Based on exports before the recent drop-off, Yemen’s index is around 30%; Syria and Egypt are a little under 10%. The index no doubt understates the role of oil, because it does not include the oil the country uses itself, or the impact of any natural gas industry. It also excludes indirect jobs, like that of grocery store owner or taxi driver.

If Egypt and Syria are indeed collapsing with what seems like low dependence on oil exports, it makes one wonder about the impact if Saudi Arabia’s (index over 70%) or Libya’s (index about 60%) oil extraction would drop.

The Collapse of the Former Soviet Union

The Soviet Union was an oil exporter and a major world power, prior to its collapse in 1991. While there are many views as to what led to this collapse, one issue  seems to be a drop in oil price in the early 1980s.

Figure 6. Former Soviet Union oil production and price in 2011$, based on data from BP’s 2012 Statistical Review of World Energy.

The drop in oil prices did not lead to an immediate decline in oil production (Figure 6), most likely because the cost of maintaining production on a field that has recently developed,  is low for a few years. What is expensive is the up-front cost of bringing new fields on line. These were not added, causing a decline in production, after a few years.

Russia’s energy data shows the marks of the financial collapse building, prior to 1991. Revenue from oil exports dropped in the mid 1980s, because of the lower oil price. Oil production started declining in 1987, four years before the collapse. Other types of energy production started declining as well, as if a recession were underway, pulling the economy down in all areas.

Figure 7. Former Soviet Union Energy production by type (hydroelectric omitted), based on BP’s 2012 Statistical Review of World Energy.

Every type of energy production (except hydropower, not shown) dropped back during this period, even coal and nuclear, with decreases beginning prior to 1991. Population growth started slowing prior to 1991 as well. Eventually, the government collapsed, after continuing recession.

Figure 8. Former Soviet Union energy production and consumption, based on BP’s 2012 Statistical Review of World Energy.

The FSU never regained its former stature as a manufacturing country, even when oil production rose, after oil prices rebounded. With little manufacturing, energy consumption has remained far below its pre-1991 levels (Figure 8).

I visited Russia in 2012, and saw for myself a little of the current situation. One problem is that its cost structure (based primarily on oil and gas which is now high-priced, and workers who need wages to pay for these fuels) is not competitive with the low-cost structure of the Chinese and Indians. Another issue is the poor condition of Russia’s infrastructure (roads, bridges, water pipelines, etc.) due to neglect during the time of its collapse. With the high cost of oil, it is expensive to make repairs and add new infrastructure.

In terms of my index, Russia’s oil exports now amount to a little less than 20% of Gross National Income.

Collapse in Countries with Declining Exports

Egypt, Syria, and Yemen are examples of countries whose exports have pretty much disappeared, causing great crisis. But how about countries with earlier declines in production? To some extent, there were not many problems in the 2003 to 2008 period, because declines in oil exports could often be offset by increases in oil prices.

One country that stands out, though, is Argentina, with problems both before and after the 2003-2008 period.

Figure 9. Oil and Gas Production of Argentina, based on EIA data (total liquids).

Argentina’s oil production hit a peak in 1998, and began dropping in 1999. Oil prices were  at an unusually low level in the 1998 to 2002 period. This timing coincided precisely with it first economic crisis, which came in 1999 to 2002. Oil prices rose in the 2003 to 2008 period, and Argentina’s problems seemed to disappear.

Now Argentina’s oil exports are very low, and in 2012 and 2013, the country is again having financial problems. Argentina’s economy is well diversified, so a person wouldn’t think that oil would play a big role. (My index of the role of oil exports was only about 2%, as of 2008.) But oil problems overlay any other problems a country may have. If a country has a tendency to overspend its income, or over-promise subsidies, any reduction in oil income will tend to magnify this effect. When making plans, it is easy to overlook the fact that the benefit from oil income is temporary.

Target Break-Even Brent Oil Prices

Many large oil exporters include revenue from oil exports in a country’s annual budget. This is quite different from the cost of pulling the oil out of the ground. It is the money governments collect, as taxes or revenue sharing agreements or leases,  to support their programs.  With rising population, and often with declining exports, oil exporters find that they need higher prices each year, just to make their budgets balance.

Figure 10 provides some Deutche Bank estimates of budget break-even oil prices.

FIgure 10. Budget breakeven oil prices, based on a Deutche Bank analysis provided in a presentation by Mark Lewis.

Note that the indicated break-even prices for Nigeria and Russia are above current Brent price levels.  (The current Brent Crude oil price is $106.) An estimate from Energy Policy Information Center (EPIC) shows Venezuela’s break-even price to be a little higher than Russia’s, and Iran’s between that of Nigeria and Russia. According to EPIC, Iraq’s break-even is in the $80 to $100 barrel range. The Saudi Arabian oil minister was quoted on January 16, 2013 as saying that the country needs oil prices averaging $100 barrel.

One concern is that these break-even prices will keep rising. Another concern is that countries “at the margin” will find it difficult to reach their price targets.

One country of concern is Venezuela. It has a very high break-even price, and recently underwent a leadership change. It also has a tendency to spend oil revenue, even before the oil is pulled from the ground, through loan programs from the Chinese.

Figure 11. Oil production and consumption of Venezuela, based on data of the EIA.

Venezuela’s exports are lower than in some previous years (Figure 11, above), but with the rise in the price per barrel, the dollar value has perhaps risen–this really depends on the price negotiated by China. With funds spent before the oil is produced, Venezuela can easily get itself into a trap, if “regular” oil production drops, or if it is difficult to ramp up new planned production.

Venezuela’s oil export index is about 20%, which is similar to Russia’s and Norway’s.

In general, oil exporters with declining oil production face worrisome situations. Reduced oil exports present a drag on the economy unless oil prices are rising rapidly. If oil prices do not keep rising rapidly, oil exporters will need to cut back on social programs–something that will not be well-accepted by citizens. Furthermore, adding new industries to take the place of missing oil supply may be difficult. There may even be a reduction in oil supply available to world market, if civil disorder causes a loss of production which would otherwise reach the export market.

Many analysts discussing resource limits are talking about a very different concern than I am talking about. Many from the “peak oil” community say that what we should worry about is a decline in world oil supply. In my view, the danger is quite different: The real danger is financial collapse, coming much earlier than a decline in oil supply. This collapse is related to high oil price, and also to higher costs for other resources as we approach limits (for example, desalination of water where water supply is a problem, and higher natural gas prices in much of the world).

The financial collapse is related to Energy Return on Energy Invested (EROEI) that is already too low. I don’t see any particular EROEI target as being a threshold–the calculations for individual energy sources are not on a system-wide basis, so are not always helpful. The issue is not precisely low EROEI. Instead, the issue is the loss of  cheap fossil fuel energy to subsidize the rest of society.

If an energy source, such as oil back when the cost was $20 or $30 barrel, can produce a large amount of energy in the form it is needed with low inputs, it is likely to be a very profitable endeavor. Governments can tax it heavily (with severance taxes, royalties, rental for drilling rights, and other fees that are not necessarily called taxes). In many oil exporting countries, these oil-based revenues provide a large share of government revenues. The availability of cheap energy also allows inexpensive roads, bridges, pipelines, and schools to be built.

As we move to energy that requires more expensive inputs for extraction (such as the current $90+ barrel oil), these benefits are lost. The cost of roads, bridges, and pipelines escalates. It is this loss of a subsidy from cheap fossil fuels that is significant part of what moves us toward financial collapse.

Renewable energy generally does not solve this problem. In fact, it can exacerbate the problem, because the cost of its inputs tend to be high and very “front-ended,” leading to a need for subsidies. What is really needed is a way to replace lost tax revenue, and a way to bring down the high cost of new bridges and roads–that is a way to get back to the cost structure we had when oil (and other fossil fuels) could be extracted cheaply.

The Way Resource Extraction Reaches Financial Limits

Figure 1. Illustration of why resource limits are very hard to see

When a company decides to extract a resource such as oil, gold, or fresh water, it looks for the least expensive source available. After many years of extraction, the least expensive sources become depleted, and the company must move on to more expensive resources. It always looks like there are plenty of resources left; they are just increasingly expensive to extract. Eventually an extraction limit is reached; this limit is a price limit.

As easy to extract resources become more depleted, it becomes necessary to invest more resources of every type in extraction (for example, manpower, oil, natural gas, fresh water), in order to extract a similar amount of the resource. I have called this the Investment Sinkhole problem.

The need to use greater resources in the process of resource extraction leaves fewer resources available for other purposes. Prices adjust to reflect this out of balance. If there is no substitute available for the resource that is reaching limits, the economy adjusts by contracting to match the amount of resource that is available at an affordable price. Some economists might call the situation “reduced demand at high price”. What the situation looks like, in terms most of us are used to using, is recession or depression.

Part of the confusion is that many people completely miss the fact that there is a close connection between cheap energy supply of the exact type needed (for example, gasoline for cars, diesel for trucks, electricity for many factory applications) and the ability of the world economy to make goods and services.

If the price of energy of the type a particular manufacturer or service provider uses increases (say gasoline or diesel or natural gas or electricity), that manufacturer or service provider in the short term has no choice but to pay the increased price, because there is no substitute for energy of the right type. If the manufacturer or service provider tries to pass these higher costs on to its customers, there is likely to be a cutback in demand, leading to a need for layoffs. Alternatively, with longer lead time,  the company may be able to find a way around the problem of increased costs, by using more  automation, or by outsourcing production to a country where costs are cheaper. Any of these responses leads to reduced US employment and recessionary impacts.

What History Says about Prior Collapses

Until fossil fuels came into widespread use, civilizations regularly grew until they reached limits of some sort, and then collapsed. There are many books looking at this issue. David Montgomery, in Dirt: The Erosion of Civilizations talks about the role soil erosion and soil degradation play in bringing civilizations down. Sing Chew, in The Recurring Dark Ages, talks about how ecological stress, deforestation, and climate change have led to long periods of collapse and low economic activity. Joseph Tainter, in The Collapse of Complex Societies, talks about how increasingly complex solutions to the problems of the day lead to ever-higher administrative costs that eventually become too expensive to afford.

Peter Turchin and Surgey Nefedov in the book Secular Cycles take more of an analytical approach. They look at how cycles actually played out, based on financial and other detailed records of the day. Their analysis considered eight economies, the earliest of which began in 350 B. C. E.. The pattern they found looks disturbingly like the pattern that the world has been going through since the widespread use of fossil fuels began about 1800: A civilization starts its existence when a new resource becomes available, for example by deforesting land to be used for agriculture (or in our case, finding ways fossil  fuels could be used). A civilization experiences Growth for 100+ years as the population is able to grow with the new resource available to it.

Eventually the civilization reaches a Stagflation period. This happens when the civilization starts reaching limits. Population is much higher, the size of the governing class is much larger, and feedbacks like erosion and soil depletion start to play a role. In my view, Stagflation period began for the United States around 1970, when US oil production began to fall.

Turchin and Nefedov found that during the Stagflation period, population growth slows and wages stop rising. Wage disparity increases, and debt grows. The cost of food and other resources becomes more variable, and begins to spike. The level of required taxes grows, as the number of government administrators grows and as armies increase in size. (Joseph Tainter refers to this growth in government services as a product of increased complexity.)

Eventually, after 50 or 60 years, a Crisis Phase begins, when it is no longer possible to raise taxes enough to cover all of the governmental costs. In this period, wages of commoners drop to such a low level that nutrition declines, leading to epidemics and a higher death rate. Commoners often revolt, leading to government collapses. Wars for resources are sometimes fought. The Crisis Phase lasts a variable length of time, typically 20 to 50 years, with the length of time seeming to be shorter in the more recent cycles analyzed. There is considerable die-off from illness and warfare in the Crisis Phase.

It seems to me that the United States, most of Europe, and Japan are now very close to the point where they will enter the Crisis Phase of a similar cycle.

The Nature of the Financial Predicament We Are Reaching

At the beginning of this post, I mentioned that rising investment costs lead to what I call an investment sinkhole problem, as we extract fuels and ores that require increasingly expensive inputs near the bottom of Figure 1. An examples might be tight oil, that is extracted using “fracking”. While we hear much about the hoped-for higher supply, we don’t hear that the newer types of oil are available only because oil prices are high. They can’t be expected to bring oil prices down. An investment sinkhole means that our dollar of investment doesn’t go as far; it is precisely the opposite of increased productivity.

When we were still far from reaching resource limits, efficiency improvements could more than make up for the loss of efficiency that comes from the Investment Sinkhole effect. But as we get closer to limits, the situation is reversed. Efficiency improvements are outweighed by the ratcheting up of extraction costs, because of the Investment Sinkhole effect. This means that instead of increased wealth being added to the system by efficiency improvements over time, we find the Sinkhole effect predominates. The common worker needs to spend an increasing proportion of his paycheck on necessities, leaving less for discretionary items. The result is recession, or very slow economic growth.

When the Investment Sinkhole problem starts to predominate, financial models suddenly don’t work very. Central banks react by cutting interest rates, in an attempt to stimulate economic growth. They also try to stimulate the economy by Quantitative Easing. This adds more money to the economy, and attempts to reduce longer-term interest rates. Of course, if the problem is really structural, there is no bounce-back to economic growth. The temporary fix becomes a bridge to nowhere.

A Long-Term View of our Financial Problems

In the previous section, we talked about our immediate problems. But what about our longer-term problems?

Figure 2. Author’s view of how various limits might work together to produce different symptoms, of the type seen by Turchin and Nefedov.

Today’s financial system is based on the assumption that individuals and businesses can make and keep financial promises. This system worked well, when resource prices were flat or declining, as was the case prior to 2000. It was possible for businesses and governments to take out loans under the expectation of continued prosperity, and for individuals to buy houses and cars under the expectation that they would continue to have jobs, so that they could continue to make auto loan or mortgage payments.

The situation changes dramatically, if the long-term expectation is for oil prices and other commodity prices to keep ratcheting upward. We don’t really have substitutes for oil and other commodities, so if we want to keep obtaining them, we need to pay the ever-higher cost. Even devices such as more efficient cars are affected by higher prices, because they too, use fossil fuels in their construction, and depend on ever more expensive technology.

In a period when commodity prices are ratcheting upward, businesses find it increasingly difficult to forecast whether new facilities will continue to be economic 10, 20 or 40 years. Businesses find that customers gradually have less discretionary income, instead of more, so it becomes increasingly difficult for these customers to afford the products which are being sold. This makes business planning much more difficult.

If a bank makes a long-term loan, it needs to include a much larger provision for the expected cost of loan write-offs. These higher loan write-off provisions causes interest rates to rise, making long-term loans unaffordable for many (or most) people and businesses. Governments are hugely affected as well.

Without access to cheap loans, and with resource prices (especially oil, but sometimes desalinated water instead of well water, and natural gas) ratcheting upward, business failures rise. This leads to more layoffs, and more defaults on mortgages and auto loans.  Interest rates on these can be expected to rise as well.

All of these effects mean that debt-financing becomes much less attractive. Debt defaults, such we have just seen in Cyprus and Greece, become more common. This is not a temporary passing phase; it is a permanent long-term situation, caused by the ratcheting up of oil and other commodity prices, as resource extraction becomes more expensive.

In such an environment, the amount of goods and services available tends to decline over time. Continued economic growth changes to continued economic contraction. If governments issue fiat money, it declines in value over time as well. (Money is sometimes defined as a “store of value,” but this becomes less possible.) One way this decline could occur is if those holding money have an expectation for continued inflation. Alternatively, money can be subject to an automatic downward adjustment that reduces its value on a monthly or annual basis.

With such a system, individuals discover that if they have money, the best strategy is to spend it immediately, rather than to try to save for retirement or some distant goal. Investments in stock markets, or in stocks of new companies, are likely to decline.

Without the availability of debt at a reasonable cost, businesses find it much more difficult to expand or to begin from scratch. New businesses tend to be small ones, that can finance their own operations by bootstrapping–that is, self-financing by using the profits on early sales to pay for materials needed for later sales, and hopefully for a little expansion as well.

All of these issues mean that if there is a financial collapse, picking ourselves up afterward will be quite difficult. Our current financial system would need substantial modification to work in such a system. The size of the current financial sector would likely shrink dramatically.

If the various countries of the world set up different financial systems to deal with the new realities, connecting them into a world system is likely to be difficult. Political stability is likely to be lower in a system such as this. How does one arrange long-term contracts, when there is a very real possibility that the government of the country that is party to an agreement may have collapsed, prior to the end of the contract?

What Brings the Whole System Down?

It is easy to think of a long list of things that might bring the system down. In fact, there are so many contenders that if any one of them starts the collapse, it seems likely others will push it on its way.

Clearly one of the issues is the wide gap between US Federal Government revenue and government expenditures.

Figure 3. US Federal Government Receipts and Expenditures (including Social Security, etc.) based on Table 3.2 of the US Bureau of Economic Analysis.

If the US government (or the government of any of the many countries who are having difficulty balancing their budgets) tries to raise taxes or cut benefits, to get revenue and expense back in line, the outcome is likely to be more recession and more layoffs. Debt defaults are likely to rise, putting banks into financial difficulty. There will then be a need for more bank bailouts, and a rerun of the problems we saw in 2008, but with governments in poorer financial condition to solve these problems.

Another possible way the system could be brought down is by rising interest rates for governments, perhaps because of all of the failures elsewhere around the globe. Rising interest rates will mean that a government’s budget is even more unbalanced than it was before, because the higher interest rates translate to higher government expenses.

These higher government interest rates would quickly be reflected in other interest rates, such as mortgage interest rates and interest on corporate loans. Sale of homes would drop dramatically, as interest rates rise. Prices of homes would likely drop as well. Business investment would drop dramatically. Much of the “stimulus” that the government has put in place would disappear. We likely would be headed back into major recession.

A third possibility relates to the Quantitative Easing that has been done recently, and the artificially low interest rates that have resulted, even for longer-term loans. Investors who have to contend with these low interest rates will try to find ways around them, and in the process, create bubbles in asset prices. These bubbles invariably burst, with bad outcomes. For example, the WSJ recently published an article titled, “Investors pile into housing, this time as landlords.” Of course, when something goes wrong (like mis-estimating returns, or oil prices rising higher, leading to more pressure on renters’ ability to pay), the same investors are likely to pile right back out, puncturing the new bubble. Commercial investors rushing out will pull down property values, leading to yet more mortgage defaults as homeowners again find their loans “underwater”.

A fourth possibility is that oil prices will ratchet upward again. Alternatively, natural gas may rise from its current artificially low price level in the US, to more like European or Japanese levels. Either of these would lead to more financial pressures on citizens, and more debt defaults. Banks would likely again be in difficulty, needing bail outs.

A fifth possibility is that the Euro ceases to be a currency. Alternatively, some of the debtor nations could drop out of the Euro, allowing the Euro to rise for remaining nations, thus putting the remaining nations in a worse position for selling their exports. In either of these scenarios, the European crisis could be exported to the US, partly as reduced demand for our goods, and partly through exposure of banks to European defaults.

A sixth possibility is the effects of ObamaCare will destabilize an already weak economy, as businesses attempt to circumvent its effects by substituting more part-time workers for full-time workers.

A seventh possibility is that pensions start running into real financial difficulty, because of artificially low interest rates. The US government may be called in to bail out pension funds, or the Pension Benefit Guaranty Corporation, at high cost.

An eighth possibility is that states start leaving the United States, because they feel that they would be better off on their own, as taxes and mandatory programs (such as ObamaCare) become increasingly difficult to deal with.

What does the shape of the decline look like?

Many people who base their views on geological depletion of oil expect that the decline will be somewhat slow, matching geological decline. I don’t think geological decline rates will have much to do with the shape of the decline, except for perhaps setting an upper bound as to how well things might, in theory, work out.

The big question in my mind is how well the international financial system will hold together. There is a close corollary question: How successful will be at replacing it on a timely basis if it does fall apart? My concern is that if banks are suddenly closed, businesses of all types will fail. This could include companies extracting oil as well as companies selling electric power and companies providing fresh water.

If there are long-term problems with the financial system, international trade is likely to be greatly reduced. Businesses making trades are likely to want greater assurances that they will actually be paid than is the case today. This could take the form of bilateral trade with trusted partners, or “I’ll ship you Product A if you will ship me Product B,” as a form of barter.

A slowdown in world trade could have dramatic repercussions quickly with respect to our ability to keep basic services in good repair, because we are now  dependent on international trade for replacement parts of products we use every day (such as cars and trucks). Nearly everything that is manufactured today incorporates raw materials from around the world, and uses machines that depend on parts from around the world.

Another question is whether there will be huge political disruptions. If banks are closed, someone usually is blamed. We have seen many ways these political disruptions can take place. Some examples might include Syria, Egypt, the Former Soviet Union, and Greece.

One scenario I can imagine is that some parts of a country are subject to more disruption than others. In one part of the country, banks may be closed, while in another part, states may be able to reopen closed banks. Or electricity outages may occur following a storm, and never be repaired, while other locations nearby are doing fairly well. There may be political riots, but these are often located in areas where politicians are located, not in other areas.

Perhaps it is just as well that we don’t know exactly what the decline will look like. Not knowing gives us some chance for optimism.

Figure 1. World fuel consumption based on BP’s 2012 Statistical Review of World Energy data.

1. Renewables that we have today won’t replace the quantity of  today’s fossil fuels, in any reasonable timeframe.

Figure 1, above shows the distribution of fuels used since 1965. 

Other renewables, which includes wind, solar, geothermal and other categories of new renewables, in total amounts to 1.6% of world energy supply in 2011, according to BP. The light blue line is not very visible on Figure 1. (The blue line that is visible at the top is “Nuclear.”)

Biofuels, which would include ethanol and other types of biofuels, such as palm oil, amounts to 0.5% of world energy supply. Its orange line is not very visible on the chart either.

Hydroelectric, shown in purple, has been around a long time–since 1880 in the United States. It amounts to 6.4% of world energy supply. Its quantity is not growing very much, because most of the good locations have already been dammed.

In total, the three categories amount to 8.5% of world energy supply. If growth continues at today’s rate, it will be a very long time before renewable energy supply can be expected to amount to more than 10% or 15% of world energy supply. We very clearly cannot operate all the equipment we have today on this quantity of energy. In fact, it is doubtful that we can even cover the basics (food, water, and heat to keep from freezing) for 7 billion people, with this quantity of energy.

2. If there is a huge collapse scenario, there is a possibility that those who are in possession of renewable energy technologies will be able to  use these technologies to their own benefit, when others do not have such options. 

There are many ways that today’s technologies may benefit a few hundred thousand or a few million people who happen to have use of them, for perhaps a few decades. A person who has a solar panel and backup battery may be able to operate an electric light, when no one else has one. A person living near a large hydroelectric plant may expect to have electricity, when other parts of the country do not. A person with a solar thermal hot water heater may be able to have hot water, when others do not. 

There are of course limits to this. If the solar panel depends on battery backup, the battery may wear out pretty quickly. We know from the Second Law of Thermodynamics that everything degrades over time. This includes solar panels, hydroelectric plants, transmission wires, and even the solar thermal hot water heater. So at most, the benefit of today’s technology is only likely to last for a few generations, unless we are able to repeat making new units.

There is considerable misunderstanding regarding the availability of electricity from solar PV panels on roofs of houses. Usually, these are operated with an inverter (to produce alternating current) and connected to the electric grid. These units cannot be used if there is an electrical outage in the area. With some rewiring, the panels might be used on a stand-alone basis. On such a basis, their use would be much more limited. They could only be used for devices taking direct current, and only when the sun is shining (unless backup batteries are available).

3. Renewables can’t be expected to operate on a “stand-alone” basis, in any reasonable timeframe.  

Each energy  source is quite specialized. In the past, human and animal labor played an important role in growing crops. Charcoal made from wood was used in making a very limited amount of metals and glass. It was possible to use traditional sources of “renewable energy” to power society, in large part because only a small amount of  non-human and non-animal energy was used in total. World population was 1 billion or less, not 7 billion. The standard of living was quite low.

In India today, the crops are grown primarily with human and animal labor, two sources which could be considered “renewable”.

Figure 2. Workers harvesting rice in India. Photo taken by author while visiting India in October 2012.

Even with this low standard of living, there is a substantial fossil fuel contribution that would be difficult to eliminate. The hand tools that workers use are sickles, which are made using coal.  India uses nitrogen fertilizer made using fossil fuel (natural gas or coal) as well as  irrigation pumps (manufactured using fossil fuel, and fueled by diesel or electricity). Only the electricity component would be fairly easy to eliminate with today’s renewable energy (if scaled up sufficiently).

Some seem to believe that renewables can power the world on a stand-alone basis. The tiny quantity of renewable energy currently available is, in and of itself, a huge limitation in making this happen. Furthermore, today’s solar PV panels and wind turbines are made and transported using fossil fuels, and most of our transportation industry uses petroleum. In theory, we could develop new devices that use only electricity, or create enough biofuels to make a complete closed loop (devices made and transported only with renewables). In practice, we have trillions of dollars of cars, trucks, airplanes, and construction machinery built to use oil. Because of this, a complete changeover to renewables is at best decades away.

At this point, renewables are only “fossil fuel extenders.” They operate within our current fossil fuel system. They cannot be expected to reproduce themselves without the benefit of fossil fuels.

4. Some renewables are economic in today’s world, while others require subsidies.

There are clearly many types of renewable energy that are economic in today’s world. Geothermal is economic in some locations, because there is underground heat that can be used to boil water to create electricity, or to heat homes directly. Solar PV panels, together with back-up batteries, are often the lowest-cost electricity source in remote locations (Figure 3, below). This is why energy companies use them to provide power in remote locations. Solar thermal energy is inexpensive for heating swimming pools and for heating hot water in warmer climates.

Figure 3. Natural gas wells with solar panels for electricity for monitoring devices at BP tight gas installation in Wamsutter, WY. (2008 photo by author.)

Other renewables require subsidies. We usually think of intermittent renewables, such as wind and solar PV panels, as requiring subsidies. In fact, it is often difficult to tell how much subsidy is truly required. Part of the subsidy comes in the need for upgraded grid transmission; part of the subsidy comes from the need to run fossil fuel back-up stations fewer hours and ramp them up and down more often, making them wear out more quickly; part of the subsidy comes in the form of increased complexity, that makes it more difficult to maintain electricity supply for the long run. There is no obvious reason to believe that intermittent electricity will make the electric grid last longer–if we are increasing the complexity of grid regulation at the same time we are reaching limits of many types, adding more intermittent renewables would seem to increase the likelihood of early failure.

As long as there are renewable energy mandates for renewables, and costs divided among many different payers (most of whom are not reimbursed for their payments), it is hard to tell how much today’s subsidy actually is. Energy return on energy invested (EROEI) calculations of intermittent renewables do not look at the whole system cost, including impacts on other players, so overstate economic benefits and understate energy costs. In the end, we do not have a good measure of how much mandated renewable energy supplies cost us. Also, as we add more intermittent renewables to the electric grid, the cost to other players can be expected to escalate, making the understatement of costs (and overstatement of EROEI) greater over time.

5. High-priced renewables help some of our problems, but make others worse.

Inexpensive renewables–ones that require no subsidy or mandate–are not a problem from a financial point of view. Many of these can help the environment without providing economic challenges.

The ones that tend to be problematic are ones that require subsidies, especially when we have no idea how much the subsidy really is. Figure 4, below, gives my view of how some of the various limits we are reaching act together.

Figure 4. Author’s view of how various limits might work together to produce different symptoms.

In my view, the limits we hit first are the limits on the outside of the chart on Figure 4: financial issues and political issues. (I introduce this chart in my post Our Energy Predicament in Charts.) Disease susceptibility enters in, as there are more unemployed and as the government finds it necessary to cut back in financial programs for the poor and unemployed.

If the price of renewable energy is high, it tends to exacerbate the problems on the outside of this chart, even as it reduces CO₂ contributions within the country, and reduces local pollution as electricity is made. There may still be pollution issues associated with making the rare earth metals that go into the wind turbines or the solar panels, but these are conveniently in China or another remote location. Making devices themselves also requires fossil fuels–usually coal if the devices are imported from China.

The way our current financial woes work out can be represented by Figure 5, below:

Figure 5. Author’s representation of how government financially caught in the middle. Photo credits: Texaspolicy.com, Thetaxhaven.com.au, Usahitman.com, politic365.com, autoevolution.com.

High priced renewables tend to exacerbate the poor financial situation of governments represented in Figure 5 in several ways:

• Wage earners are even more penniless, thanks to the higher cost of these renewables,
• Companies tend to move their manufacturing to cheaper locations (often using coal). This both reduces (a) taxes paid by the company to the US government, and (b) wages paid to US workers,
• The government pays out more benefits to the unemployed workers, and
• The government pays out more in funds for subsidies.

In the end, when we look at world CO₂ emissions, we discover that they have in fact risen relative what would have been expected prior to the Kyoto protocol (signed in 1997), rather than fallen, as the emphasis on renewables grew (Figure 6).

Figure 6. Actual world carbon dioxide emissions from fossil fuels, as shown in BP’s 2012 Statistical Review of World Energy. Fitted line is expected trend in emissions, based on actual trend in emissions from 1987-1997, equal to about 1.0% per year.

A major reason for emissions growth shown in Figure 6 seems to be globalization. I wonder, though, if  globalization was pushed forward by the practice of looking at emissions within a country’s own boundaries, while excluding emissions associated with imported manufactured goods. The pushed developed countries toward renewables, at the same time Asia increased market share greatly through its use of coal.

Germany is now the leader in the use of renewable energy. Recent reports say that there are 800,000 German households that cannot pay their electricity bills, because of the high cost renewables add. There are also reports that German natural gas producers want to close back-up plants for wind/solar, unless they too receive subsidies.

6. Even if renewables look to be cheap and non-intermittent, there still can be problems with their use.

Unfortunately, nature doesn’t really provide us with a free lunch. If we use growing plants–such as trees, corn, palm oil trees, or other biomass, we start reaching limits as well. It is very easy to cut down trees more quickly than they regrow. We know from research by Sing Chew that deforestation was already a problem 6,000 years ago, when there were only 20 million humans on earth. Deforestation also leads to soil loss and erosion, which is also a huge problem. Plowing of fields for crops of any kind in fact tends to lead to soil loss.

Hydroelectric, as good an energy source as it is, has its downsides as well. In the early years after its construction, it tends to increase CO2 production in the flooded areas. It tends to interfere with fish migration, and with the normal balance of species. Building large hydroelectric plants can take huge amounts of arable land out of cultivation and displace large populations. It can lead to earthquakes and landslides. One country can sometimes “steal” the water of another, by building a hydroelectric facility.

Our whole ecological system, including animals and our climate system, requires a balance among the various species. We are being warned by scientist today that humans cannot simply commandeer all of the natural resources for our own use. Renewables often use natural resources that other species also have a need for-especially biofuels, wood and biomass. Biologists tell us we are in danger of reaching a tipping point due to overly high use of “net primary productivity” (Barnosky and Haberi).

Conclusion

It truly would be convenient if nature had provided us with a free lunch, in the form of renewables. At best, we were given something that if we use wisely, can add a little to what we have today. Renewables may, in fact, “save” some remnant of humanity, if limits truly become a problem in the near future.

If renewables are truly to provide widespread benefit for the world population as a whole (going beyond the measly 2% for non-hydroelectric renewables), we need to develop renewable energy supplies which are much lower in resource use than the renewables we have today.¹ Such lower resource use would have several benefits:

1. It would reduce the pollution impacts of making the renewable generating devices.
2. It would reduce the cost of making alternative energy.
3. It would improve the scalability of such renewables.
4. It would improve the EROEI of such renewables.

There seems to be widespread belief that an EROEI of 3 or 4 or 5 is “good enough” for renewables. The economy is showing signs that our current cost of fuels is already way too high. What we really need to do is bring our energy cost level down. Thus, what we really need is renewable energy sources that will reduce our average energy cost and raise our average EROEI of fuels.

Note:
[1] The name renewable unfortunately doesn’t equate to low resource use. In some cases, such as solar and wind, it means “front-ended fossil fuel resource” use. In other cases, such as biofuels, it means “using soil, fresh water, and fossil fuels to provide an oil substitute.”