2022: Energy limits are likely to push the world economy into recession

In my view, there are three ways a growing economy can be sustained:

  1. With a growing supply of cheap-to-produce energy products, matched to the economy’s energy needs.
  2. With growing debt and other indirect promises of future goods and services, such as rising asset prices.
  3. With growing complexity, such as greater mechanization of processes and supply lines that extend around the world.

All three of these approaches are reaching limits. The empty shelves some of us have been seeing recently are testimony to the fact that complexity is reaching a limit. And the growth in debt looks increasingly like a bubble that can easily be popped, perhaps by rising interest rates.

In my view, the first item listed is critical at this time: Is the supply of cheap-to-produce energy products growing fast enough to keep the world economy operating and the debt bubble inflated? My analysis suggests that it is not. There are two parts to this problem:

[a] The cost of producing fossil fuels and delivering them to where they are needed is rising rapidly because of the effects of depletion. This higher cost cannot be passed on to customers, without causing recession. Politicians will act to keep prices low for the benefit of consumers. Ultimately, these low prices will lead to falling production because of inadequate reinvestment to offset depletion.

[b] Non-fossil fuel energy products are not living up to the expectations of their developers. They are not available when they are needed, where they are needed, at a low enough cost for customers. Electricity prices don’t rise high enough to cover their true cost of production. Subsidies for wind and solar tend to drive nuclear electricity out of business, leaving an electricity situation that is worse, rather than better. Rolling blackouts can be expected to become an increasing problem.

In this post, I will explore the energy-related issues that are contributing to the recessionary trends that the world economy is facing, starting later in 2022.

[1] World oil supplies are unlikely to rise very rapidly in 2022 because of depletion and inadequate reinvestment. Even if oil prices rise higher in the first part of 2022, this action cannot offset years of underinvestment.

Figure 1. Crude oil and liquids production quantities through 2020 based on EIA data. “IEA Estimate” adds IEA indicated increases in 2021 and 2022 to historical EIA liquids estimates. Tverberg Estimate relate to crude oil production.

The IEA, in its Oil Market Report, December 2021, forecasts a 6.4-million-barrel increase in world oil production in 2022 over 2021. Indications through September of 2021 strongly suggest that there was only a small rebound (about 1 million bpd) in the world’s oil production in 2021 compared to 2020. In my view, IEA’s view that liquids production will increase by a huge 6.4 million barrels a day between 2021 and 2022 defies common sense.

The basic reason why oil production is low is because oil prices have been too low for producers since about 2012. Companies have had to cut back on developing new fields in higher cost areas because oil prices have not been high enough to justify such investments. For example, producers from shale formations could add new wells outside the rapidly depleting “core” regions if the oil price were much higher, perhaps $120 to $150 per barrel. But US WTI oil prices averaged only $57 per barrel in 2019, $39 per barrel in 2020, and $68 per barrel in 2021, so this new investment has not been started.

Recently, oil prices have been over $80 per barrel, but even this is considered too high by politicians. For example, countries are releasing oil from their strategic oil reserves to try to force oil prices down. The reason why politicians are interested in low oil prices is because if the price of oil rises, both the price of food and the cost of commuting are likely to rise, since oil is used in farming and in commuting. Inflation is likely to become a problem, making citizens unhappy. Wages will go less far, and politicians who allow high oil prices will be voted out of office.

[2] Natural gas production can be expected to rise by 1.6% in 2022, but this small increase will not be enough to meet the needs of the world economy.

Figure 2. Natural gas production though 2020 based on data from BP’s 2021 Statistical Review of World Energy. For 2020 and 2021, Tverberg estimates reflect increases similar to IEA indications, so only one indication is shown.

With natural gas production growing at a little less than 2% per year, a major issue is that there is not enough natural gas to “go around.” Natural gas is the smallest of the fossil fuels in quantity. We are depending on its growth to solve many problems, simultaneously:

  • To increase natural gas imports for countries whose own production is declining
  • To provide quick relief from inadequate production by wind turbines and solar panels, whenever such relief is needed
  • To offset declining coal consumption related to a combination of issues (depletion, high pollution, climate change concerns)
  • To help increase world electricity supply, as transportation and other processes are gradually electrified

Furthermore, the rate at which natural gas supply increases cannot easily be speeded up because (a) the development of new fields, (b) the development of transportation structures (pipeline or Liquefied Natural Gas (LNG) ships), and (c) the development of storage facilities all require major upfront expenditures. All of these must be planned years in advance. They require huge amounts of resources of many kinds. The selling price of natural gas must be high enough to cover all of the resource and labor costs. For those familiar with the concept of Energy Returned on Energy Invested (EROEI), the basic problem is that the delivered EROEI falls too low when all of the many parts of the system are considered.

Storage is extremely important for natural gas because fluctuations tend to occur in the quantity of natural gas the overall system requires. For example, if stored natural gas is available, it can be used when wind turbines are not producing enough electricity. Also, a huge amount of energy is needed in winter to keep homes warm and to keep the lights on. If sufficient natural gas can be stored for months at a time, it can help provide this additional energy.

As a gas, natural gas is difficult to store. In practice, underground caverns are used for storage, assuming caverns of the right type are available. Trying to build storage, if such caverns are not available, is almost certainly an expensive undertaking. In theory, importing natural gas by pipeline or LNG can transfer the storage problem to LNG producers. This is not a satisfactory solution, however. Without adequate storage available to sellers, this means that natural gas can be extracted for only part of the year and LNG ships can only be used for part of the year. As a result, return on investment is likely to be poor.

Now, in 2022, we are hitting the issue of very slowly rising natural gas production head-on in many parts of the world. Countries that import natural gas without long-term contracts are facing spiking prices. Countries in Europe and Asia are especially affected. The United States has mostly been isolated from the spiking prices thanks to producing its own natural gas. Also, only a small portion of the natural gas produced by the US is exported (9% in 2020).

The reason for the small export percentage is because shipping natural gas as LNG tends to be very expensive. Long-distance LNG shipping only makes economic sense if there is a several dollar (or more) price differential between the buyer’s price and the seller’s costs that can be used to cover the high transport costs.

We now seem to be reaching a period of spiking natural gas prices, especially for counties importing natural gas without long-term contracts. If natural gas prices rise, this will tend to make electricity prices rise because natural gas is often burned to produce electricity. Products made with high-priced electricity will be less competitive in a world market. Individual citizens will become unhappy with their high cost of heat and light.

High natural gas prices can have very adverse consequences. In areas with high prices, products made using natural gas as a raw material will tend to be squeezed out. One such product is urea, used as a nitrogen fertilizer. With less nitrogen fertilizer available, food production is likely to fall. If food prices rise in response to short supply, consumers will tend to reduce discretionary spending to ensure that there are sufficient funds for food. A reduction in discretionary spending is one way recession starts.

Inadequate growth in world natural gas production can be expected to hit poor countries especially hard. For example, a recent article mentions LNG suppliers backing out of planned deliveries of LNG to Pakistan, given the high prices available elsewhere. Another article indicates that Kosovo, a poor country in Europe, is experiencing rolling blackouts. Eventually, if natural gas available for export remains limited in supply, electricity blackouts can be expected to spread more widely, to less poor parts of Europe and around the world.

[3] World coal production can be expected to decline, further pushing the world economy toward recession.

Figure 3 shows my estimate for world coal production, next to a recent IEA forecast.

Figure 3. Coal production through 2020 based on data from BP’s 2021 Statistical Review of World Energy. “IEA Estimate” adds IEA indicated increases to historical BP coal quantities. Tverberg Estimate provides lower estimates for 2021 and 2022, considering depletion issues.

Figure 3 shows that world coal consumption has not been rising for about a decade.

Coal seems to be having the same problem with rising costs as oil. The cost of producing the coal is rising because of depletion, but citizens cannot afford to pay more for end products made with coal, such as electricity, steel and solar panels. Coal producers need higher prices to cover their higher costs, but it becomes increasingly difficult to pass these higher costs on to consumers. This is because politicians want to keep electricity prices low to keep their citizens and businesses happy.

If the cost of electricity rises, the cost of goods made with high-priced electricity will tend to rise. Businesses will find their sales falling in response to higher prices. In turn, they will tend to lay off workers. This is a recipe for recession, but a slightly different one than the ones mentioned earlier. It also is a good way for politicians not to get re-elected. As a result, politicians will try to hide rising coal costs from customers. For example, laws may be enacted capping electricity prices that can be charged to customers. Because of this, some electricity companies may be forced out of business.

The decrease in coal production I am showing for 2022 is only 1%, but when this small reduction is combined with the growth problems shown for coal and oil and the rising world population, it means that world coal supplies will be stretched.

China is the world’s largest coal producer and consumer. A major concern is that the country has serious coal depletion problems. It has experienced rolling blackouts since the fall of 2020. It has tried to encourage its own production by limiting coal imports, thus keeping wholesale coal prices high for local producers. It also limits the extent to which high coal costs can be passed on to electricity customers. As a result, the 2021 profits of electricity companies are expected to be reduced.

[4] The US may have some untapped coal resources that could be tapped, if there is a plan to ship more natural gas to Europe and other areas in need of the fuel.

The possibility of additional US coal production occurs because coal production in the US seems to have occurred because of competition from incredibly inexpensive natural gas (Figure 4). To some extent, this low natural gas price results from laws prohibiting oil and gas companies from “flaring” (burning off) natural gas that is too expensive to produce relative to the price it can be sold for. Prohibitions against flaring are a type of mandated subsidy of natural gas production by the oil-producing portion of “Oil & Gas” companies. This required subsidy leads to part of the need for high oil prices, especially for companies drilling in shale formations.

Figure 4. US coal production amounts through 2020 are from BP’s 2021 Statistical Review of World Energy. Amounts for 2021 and 2022 are estimated based on forecasts from EIA’s Short Term Energy Outlook. Natural gas prices are average annual Henry Hub spot prices per million Btus, based on EIA data.

A major reason why US coal extraction started to decline about 2009 is because a very large amount of shale gas production started becoming available then as a byproduct of oil production from shale. Oil producers were primarily interested in extracting oil because it (hopefully) sold for a high price. Natural gas was a byproduct whose collection was barely economic, given its low selling price. Also, the economy didn’t have uses, such as trucks powered by natural gas, for all of this extra natural gas production. Figure 4 suggests that wholesale natural gas prices dropped by close to half, in response to this extra supply.

With these low natural gas prices, as well as coal pollution concerns, a significant amount of US electricity production was switched from coal to natural gas. It is my view that this change left coal in the ground, potentially for later use. Thus, if natural gas prices rise again, US coal production could perhaps rise again. The catch, of course, is that many coal-fired electricity-generating plants in the US have been taken out of service. In addition, coal mines have been closed. Any increase in future coal production would likely take place very slowly because of the need for many simultaneous changes.

[5] On a combined basis, using Tverberg Estimates for 2021 and 2022, fossil fuel production in total takes a step down in 2020 and doesn’t rise much in 2021 and 2022.

Figure 5. Sum of Tverberg Estimates related to oil, coal, and natural gas. Oil includes natural gas liquids but not biofuels. Historical amounts are from BP’s 2021 Statistical Review of World Energy.

Figure 5 shows that on a combined basis, the overall energy being provided by fossil fuels is likely to remain lower in 2021 and 2022 than it was in 2018 and 2019. This is concerning, because the economy cannot go back to its 2019 level of “openness” and optional travel for sightseers, without a big step up in energy supply, especially for oil.

This same figure shows that the production of the three fossil fuels is somewhat similar in quantity: Oil is the highest, coal is second, and natural gas comes in third. However, oil shows a step down in 2020’s production from which it has not recovered. Coal shows a smoother pattern of rise and eventual fall. So far, natural gas has mostly been rising, but not very steeply in recent years.

[6] Alternatives to fossil fuels are not living up to early expectations. Electricity from wind turbines and solar panels is not available when it is needed, requiring a great deal of back-up electricity generated by fossil fuels or nuclear. The total quantity of non-fossil fuel electricity is far too low. A transition now will simply lead to electricity blackouts and recession.

Figure 6 shows a summary of non-fossil fuel energy production for the years 2000 through 2020, without a projection to 2022. For clarification, wind and solar are part of the electrical renewables category.

Figure 6. World energy production for various categories, based on data from BP’s 2021 Statistical Review of World Energy.

Figure 6 shows that nuclear electricity production has been declining at the same time that the production of electrical renewables has been increasing. In fact, a significant decrease in nuclear electricity is planned in Europe in 2022. This reduction in nuclear electricity is part of what is causing the concern about electricity supply for Europe for 2022.

The addition of wind and solar to an electrical grid seems to encourage the closure of nuclear electricity plants, even if they have many years of safe production still ahead of them. This happens because wind and solar are given the subsidy of “going first,” if they happen to have electricity available. Wind and solar may also be subsidized in other ways.

The net result of this arrangement is that wholesale electricity prices set through competitive markets quite frequently fall too low for other electricity producers (apart from wind and solar). For example, wind and solar electricity that is produced during weekends may be unneeded because many businesses are closed. Electricity produced by wind and solar in the spring and fall may be unneeded because heating and cooling needs tend to be low at these times of the year. Wind and solar electricity providers are not asked to cut back supply because their production is unneeded; instead, low (or negative) prices encourage other electricity producers to cut back supply.

Nuclear electricity producers are particularly adversely affected by this pricing arrangement because they cannot save money by cutting back their output when wind and solar are over-producing electricity, relative to demand. This strange pricing arrangement leads to unacceptably low profits for many nuclear electricity providers. They may voluntarily choose to be closed. Local governments find that if they want to keep their nuclear electricity producers, they need to subsidize them.

Wind and solar, with their subsidies, tend to look more profitable to investors, even though they cannot support the economy without a substantial amount of supplementary electricity production from other electricity providers, which, perversely, they are driving out of business through their subsidized pricing structure.

The fact that wind and solar cannot be depended upon has become increasingly obvious in recent months, as coal, natural gas and electricity prices have spiked in Europe because of low wind production. In theory, coal and natural gas imports should make up the shortfall, at a reasonable price. But total volumes available for import have not been increasing in the quantities that consumers need them to increase. And, as mentioned above, nuclear electricity production is increasingly unavailable as well.

[7] The total quantity of non-fossil fuel energy supplies is not very large, relative to the quantity of fossil fuel energy. Even if these non-fossil fuel energy supplies increase at a trend rate similar to that in the recent past, they do not make up for the projected fossil fuel production deficit.

Figure 7. Total energy production, based on the fossil fuel estimates in Figure 5 together with non-fossil fuels in Figure 6.

With respect to anticipated future non-fossil fuel electricity generation, one issue is how much nuclear is being shut off. I would imagine these current closure schedules could change, if countries become aware that they may be facing rolling blackouts without nuclear.

A second issue is the growing awareness that renewables don’t really work as intended. Why add more if they don’t really work?

A third issue is new studies suggesting that prices being paid for locally generated electricity may be too generous. Based on such an analysis, California is proposing a major reduction to its payments for renewable-generated electricity, starting July 1, 2022. This type of change could reduce new installations of solar panels on homes in California. Other locations may decide to make similar changes.

I have shown two estimates of future non-fossil fuel energy supply in Figure 7. The high estimate reflects a 4.5% annual increase in the total supply, in line with recent past increases for the group in total. The lower one assumes that 2021 production is similar to that in 2020 (because of more nuclear being closed, for example). Production for 2022 represents a 5% decrease from 2021’s production.

Regardless of which assumption is made, growth in non-fossil fuel electricity supply is not very important in the overall total. The world economy is still mostly powered by fossil fuels. The share of non-fossil fuels relative to total energy ranges from 16% to 18% in 2020, based on my low and high estimates.

[8] The energy narrative we are being told is mostly the narrative that politicians would like us to believe, rather than the narrative that historians and physicists would develop.

Politicians would like us to believe that we live in a world of everlasting economic growth and that the only thing we should fear is climate change. They base their analyses on models by economists who seem to think that an “invisible hand” will fix all problems. The economy can always grow; enough fossil fuels and other resources will always be available. Governments seem to be able to print money; somehow, this money will be transformed into physical goods and services. With these assumptions, the only problems are distant ones that central banks and carbon taxes can handle.

The realists are historians and physicists. They tell us that a huge number of past economies have collapsed when their populations attempted to grow at the same time that their resource bases were depleting. These realists tell us that there is a high probability that our current economy will eventually collapse, as well.

Figure 8. The Seneca Cliff by Ugo Bardi

The general shape that economic growth is likely to take is that of a “Seneca Curve” or “Seneca Cliff.” In the words of Lucius Annaeus Seneca in the first century CE, “Increases are of sluggish growth, but the way to ruin is rapid.” If we think of the amount graphed as the total quantity of goods and services received by citizens, the amount tends to rise slowly, gradually plateaus and then falls.

We now seem to be encountering lower energy supply while population continues to rise. It takes energy for any activity that we think of as contributing to GDP to occur. We should not be surprised if we are at the edge of a recession. If we cannot get our energy problems solved, the downturn could be very long-lasting.

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Merry Christmas to All

I plan to write a new post in a few days. For now, I will just leave an open thread.

I hope everyone has happy holidays of whatever type you celebrate. This is a good time to be with family and friends.

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Is it possible that the world is approaching end times?

I frequently write that the world economy is, in physics terms, a dissipative structure that is powered by energy. It can grow for a time, but eventually it reaches limits of many kinds. Ultimately, it can be expected to stop growing and collapse.

It seems to me that the world economy is showing signs that it has reached a turning point. Economic growth stopped in 2020 and is having trouble restarting in 2021. Fossil fuel energy of all types (oil, coal and natural gas) is in short supply, relative to the world’s huge population. Ultimately, this inadequate energy supply can be expected to pull the world economy toward collapse.

The world economy doesn’t behave the way most people would expect. Standard modeling approaches miss the point that economies require adequate supplies of energy products of the right kinds, provided at the right times of day and year, if they are to keep from collapsing. Shortages are not necessarily marked by high prices; prices that are too low for producers will bring down the energy supply quickly. A collapse may occur due to inadequate demand; in fact, such a scenario is described in Revelation 18.

As strange as it may seem, we may be approaching what some of us would think of as end times, if our economy collapses for lack of cheap-to-produce energy supplies. In this post, I will try to explain what is happening.


[1] In some ways, the self-organizing economy is like a child’s building toy that, with the use of human energy, can be built up to higher and higher levels.

Figure 1. Thought map by Gail Tverberg.

The economy is gradually built up by the addition of new customers, new businesses and new products. Governments play a role as well, adding new infrastructure, laws and taxes. Adequate wages for employees are important because, to a significant extent, employees are also consumers of goods and services made by the economy.

Adequate energy supplies of the right types are terribly important because every process used by the economy requires energy, even if the only energy used is electricity to light a light bulb or operate a computer. Heating and cooling require energy, as does transportation.

Human energy is an important part of the economy, as well. Humans eat food to provide them with energy. An individual human’s own energy output is relatively tiny; it is about equal to the output of a 100-watt light bulb. With the use of supplemental energy of various kinds, humans can do many tasks that would not be possible otherwise, such as cooking food, creating metals from ores, heating homes, and building cars and trucks.

The economy cannot “go backwards” because, if a product is no longer needed, it will no longer be produced. The economy represented by Figure 1 is in some sense hollow inside. For example, once people started using automobiles, buggy whips were no longer made. If cities went back to using horses as their main means of transport, we would need manure removal services. These, too, would be missing.

[2] Another way of thinking about the world economy is that it is somewhat like a rocket that needs fuel. It also has waste outputs. Both of these limit the growth of the world economy.

Figure 2. Chart by Gail Tverberg.

The economy uses a wide array of inputs. At the same time, it produces a whole host of undesirable outputs. Inputs need to be inexpensive to produce, or citizens will not be able to afford the goods and services made by the system. The waste outputs cannot become too significant, or they can lead the economy to fail. In fact, with the world’s growing population, we seem to be reaching many limits with respect to both inputs and undesirable outputs, simultaneously.

[3] Strangely enough, the major energy limit that the world economy is hitting seems to be “energy prices that do not rise high enough for producers.”

This energy limit is exactly the opposite of what most people are looking for. They assume that “demand” will always rise. In fact, the cost of production of energy products keeps rising because the easy to produce energy products are produced first. It is the market prices that energy products can be sold for that do not rise adequately.

When we trace the problem back, we discover that the problem with prices arises from the equivalence between producers of goods and services and consumers of goods and services indicated on Figure 1. In order to have enough “demand” to keep energy prices high enough for providers, it turns out that even the very low wage people in the world economy need to be able to afford necessities such as food, water, clothing, basic housing and transportation. In fact, if the cost of extracting fossil fuels rises too quickly because of depletion, or if the cost of getting renewable electricity into a form in which it is useful for society rises too much, there may be a situation when even a price based on full demand from all consumers is too low for energy producers.

Let’s define “return on human labor” as what a person without advanced training can earn by selling his physical labor as unskilled labor. Rather than dollar or euro terms, wages need to be thought of in terms of the physical goods and services that these wages can purchase. If supplemental energy per capita is rising rapidly, the return on human labor tends to rise. This happens because with higher energy consumption, humans can have more tools and technology requiring energy at their command. For example, the period between 1950 and 1970 was a time when energy consumption was rising rapidly. It was also a time of rising standards of living, even for workers without advanced training.

Figure 3. World per capita energy consumption, with the 1950-1980 period of rapid growth highlighted. World Energy Consumption by Source, based on Vaclav Smil’s estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent years, divided by population estimates by Angus Maddison.

The world economy can be expected to run into a major problem once supplemental energy consumption per capita starts falling because then human labor is necessarily less leveraged by fewer machines, such as trucks and airplanes. In total, fewer goods and services can be produced.

If energy supply is inadequate, businesses often find it advantageous to substitute computers or other machines for some work previously done by low paid workers. While these machines use a little energy in their operation, they do not need food, housing or transportation the way human workers do. With fewer actual workers, demand for finished goods and services tends to fall, pushing commodity prices, including those for fossil fuels, down. This further adds to the low-price problem.

It is the lack of jobs that pay well that tends to hold down commodity prices below the prices producers require. Ultimately, it is the lack of sufficient jobs that pay well that tends to bring the whole economy down. Most researchers have missed this important point.

[4] In the period leading up to collapse, wages fail to rise with the cost of required services. This leads to increasingly unhappy workers. Healthcare costs and college costs are especially problematic, because their costs have been rising faster than costs in general.

Figure 4. Illustrates the issue that seems to be occurring:

Figure 4. Chart from Washington Post based on a Cost-of-Thriving analysis by Oren Cass.

When energy consumption per capita is growing rapidly, the economy adds items that were not previously considered necessary. Instead of a basic education for all being sufficient, advanced education (often paid for by the student) becomes necessary for many jobs. Healthcare costs keep rising rapidly, making it more difficult to make wages cover all necessary expenses (Figure 4).

We can see additional evidence that workers have been tending to get poorer in recent years by looking at the trend in the number of light vehicles purchased. With rising population, a person would expect the number of automobiles sold to increase, year after year, if citizens found their incomes as adequate as in the past. Instead, we see a pattern of falling automobile sales, practically everywhere, starting well before 2020. For example, peak light vehicle sales in China occurred in 2017.

Figure 5. Auto sales by country based on data of VDA.de.

[5] An increase in debt can temporarily be used to hide both inadequate inexpensive-to-produce energy supply and inadequate wages of workers, but we seem to be reaching limits using this approach to hide energy problems.

The last time the world had relatively stable low oil prices was in the years prior to 1973. As noted previously, low energy prices tend to make finished goods, such as homes and cars, inexpensive to buy and operate. Thus, they tend to be affordable.

Figure 6. Inflation-adjusted oil prices based on data of BP’s 2021 Statistical Review of World Energy.

The big issue if oil and other prices rise very high is that the selling prices of goods and services tend to rise too high to be affordable to consumers. The workaround that was developed to fix this unaffordability problem was to change the economy to use more debt. To be affordable, interest rates had to fall lower and lower. Peak interest rates occurred in 1981; they have been trending downward since then.

Figure 7. 10-Year US Treasury and 3-Month Treasury yields, through November 2021. Chart by St. Louis Federal Reserve (FRED).

If debt at ever-lower interest rates is available, assets such as homes, farmland, factories and shares of stock become more affordable, allowing prices of these assets to rise. Owners of these assets feel wealthier. In fact, they may borrow more money against the inflated price of these assets and use this money to buy more goods and services made with commodities, thus helping to raise commodity prices. The lower interest rates make the purchase of automobiles more affordable as well, helping to raise the price of commodities used to make and operate automobiles.

There is a limit on how low these interest rates can go, however, especially if inflation is a problem. Current interest rates seem to be down near where they were during the Great Depression of the 1930s. This suggests that the economy is truly doing very poorly.

Today, Brent oil prices are about $69 per barrel. This price is not high enough for producers to want to prepare more fields for drilling. As far as I can see, the price needs to be up in the range of $120 per barrel, and stay there for many years, for oil producers to consider putting major effort into developing more fields. Natural gas and coal have similar low-price problems.

While governments cannot seem to be able to fix the low-price problem for fossil fuels, they can find ways to pay their citizens money for doing nothing, or next to nothing. These payments will add to a government’s debt, but they don’t really produce more goods and services. What these payments tend to produce is inflation in the prices of goods and services that are available.

Over time, we can expect the lack of growth in energy supply to lead to an increasing number of broken supply lines. Without long-term high-price guarantees, producers will not be willing to increase production. Without adequate fuel supply, an increasing number of products will disappear from the shelves of stores. A smaller number of people will have jobs, especially jobs that pay well. The economy can be expected to head in the direction of collapse.

We can think of debt as a promise of future goods and services, made with future energy production. If energy supplies are rising rapidly and can be expected to continue to rise rapidly in the future, this promise can be expected to hold. Of course, if energy supplies start falling, all bets are off. Supply lines are likely to break. We consider money and other securities issued by governments to be a “store of value,” but, if there is little to buy (for example, all international flights are cancelled and automobiles of the desired type are permanently out of stock), its ability to act as a store of value will start to disappear. If the economy collapses completely, neither stocks nor bonds will have value.

[6] Nothing happens for a single reason in a self-organizing economy. Lack of energy affects every part of the economy, from jobs to finished output, almost simultaneously.

In a self-organizing economy, everything is interconnected. Inadequate energy per capita leads to low selling prices for commodities of all kinds. Inadequate energy per capita also leads to low wages for workers, low benefits provided by governments, and uprisings to protest these low wages and benefits. These uprisings began in 2019 or even earlier.

The unhappiness of workers leads to the election of increasingly radical politicians, in the hope that something can be done to fix the problems. There are basically not enough goods and services to go around, but no one wants to admit that this could be a problem.

[7] Citizens cannot imagine a declining and eventually collapsing economy. Businesses, governments and individual citizens all demand “happily ever after futures.”

Figure 8. Chart by Gail Tverberg. Amounts through 2020 based on an analysis of historical energy consumption using the same sources as those used in Figure 3.

If there is a history of growth, nearly everyone is happier if forecasts pretend that economic growth can continue forever. Newspapers want such stories, because this is what their advertisers, such as automakers, want. Automobiles need to be usable for a long period in the future. Universities want favorable forecasts because they want their students to believe that their degrees will have great future value. Politicians want a story of growth forever, because this is what voters want and expect. They have come to believe that governments can save them from all problems; there is no longer any need for religion.

As energy supplies get scarce, the rich tend to become richer and the poor tend to become poorer. François Roddier explains that this is because of the physics of the situation. Wealthy individuals and corporations discover that they have a rapidly growing ability to influence the narrative provided by Mainstream Media. If influential citizens and groups want citizens to hear a “happily ever after ending” to our current problems, they can make certain that this is the predominant narrative of Mainstream Media. It is only people who are willing to hear sources outside of the mainstream who can learn what is really happening.

The fact that the world economy would run into energy limits about now has been known for a very long time. For example, US Navy Rear Admiral Hyman Rickover talks about the close connection between energy and the economy in this 1957 speech. He points out that the world is likely to run short of fossil fuel by 2050. Later modeling documented in the 1972 book The Limits to Growth indicated that the world economy was likely to collapse in a similar timeframe. The modeling done in that analysis considered rising population relative to total resources, without looking at energy resources separately.

[8] It is easy to create models that predict growth will continue forever, even if the physics of the situation says this is not possible.

Economists provide their work to politicians. They certainly cannot provide forecasts of a coming calamity such as economic collapse. They also are unaware of the physics of the situation, even though many researchers have been writing about the issue from a physics point of view since at least the mid-1980s.

Economists have chosen instead to make models that assume no limits are ahead. They seem to assume that all problems will be fixed by innovation, substitution and the pricing mechanism. They produce forecasts suggesting that the economy can grow endlessly in the future. Based on these forecasts, they provide input to models that reach the conclusion that amazingly large amounts of fossil fuels will be extracted in the future. Based on these nonsensical models, our problem is not the near-term limits that we are reaching; instead, our chief problem is climate change. Its impacts occur mostly in the future.

A corollary to this belief system is that it is we humans who are in charge and not the laws of physics. We can expect governments to protect us. We don’t need any outside help from a literal Higher Power who created the laws of physics. We need to listen to what the authorities on earth tell us. In fact, in troubled times, governments need more authority over their citizens. The many concerns regarding COVID-19 make it easy for governments to increase their control over citizens. We are told that it is only by following the mandates of governments that we will get through this strange time.

With nearly everyone on board with the idea that somehow the story of near-term collapse must be avoided at all costs, every part of the economy bases its actions on the narrative that the world economy is voluntarily moving away from fossil fuels. In this narrative, renewables will save us; electric vehicles are the way of the future; the world economy can continue to grow, but in a new way.

In fact, we are colliding with resource limits, right now. This seems to be what produced the bizarre situation experienced in 2020.

[9] As 2020 began, many sectors of the world economy were squeezed simultaneously. With limited energy resources, large parts of the economy needed to be cut back. The self-organizing economy acted in a very strange way. Shutdowns supposedly aimed at stopping COVID-19 from spreading acted very much like energy rationing, without mentioning the world’s energy problem.

Figure 9. World per capita energy supply by type of fuel, based on BP 2021 Statistical Review of World Energy data.

Several years before 2020, it should have been clear that the world economy was doing very poorly based on the continued need for very low interest rates (Figure 7) and Quantitative Easing. China, in particular, was doing poorly, as indicated by its low sales of automobiles (Figure 5). Of course, China doesn’t broadcast its problems to the rest of the world, so few people were aware of this issue.

China had been able to boost the world’s per capita supply of inexpensive-to-produce energy by ramping up its coal production after it joined the World Trade Organization in 2001. (Note the world ramp-up in coal, starting after 2001, on Figure 9.) Unfortunately, because of depletion, China’s coal production since 2013 has been close to flat. Furthermore, China had had a big recycling business, but discontinued it effective January 1, 2018. Discontinuation of this program was necessary because oil prices had fallen in 2014 and had never recovered to their former level. With low oil prices, most recycling in China made no sense economically. The loss of jobs from recycling and cutbacks in coal operations no doubt contributed to the declining sale of vehicles in China.

In the years before 2020, another big issue was that the wages of many workers were not keeping up with the rising cost of living. Figure 4 illustrates this issue for the US. The problem was especially acute for lower wage workers. During this period, the prices of many commodities were too low for producers. This led to layoffs and low wages for workers.

In early 2020, the world became aware of a new coronavirus that had been identified in China. The response to this new illness was very strange, compared to how previous pandemics had been handled. The response looked a great deal like intentionally scaring people (especially older people) into staying at home. If this were done, much less oil could be used. Natural gas and coal consumption could be reduced, as well.

This story is perhaps not so strange if we look at it in context. On January 8, 2020, I wrote that we should be expecting recession and low oil prices in 2020. I included this oil price chart.

Figure 10. Inflation adjusted weekly average Brent oil price, based on EIA oil spot prices and US CPI-urban inflation.

On January 29, I wrote, It is easy to overreact to a coronavirus. In this article, I pointed out that the economy already seemed to be headed in the direction of recession. Shutdowns would only make the problem worse.

Politicians choosing to shut down their economies in early 2020 were likely not aware that the real underlying problem within their economy was inadequate availability of inexpensive-to-produce energy. They were aware that China had decided to shut down part of its economy, so perhaps there might be some usefulness to such an action. Local leaders outside of China knew that their own factories were underutilized. If their own factories could be shut down temporarily, perhaps they could operate at closer to capacity, once they reopened.

Furthermore, a shutdown would give an excuse to keep workers protesting low wages inside. After the shutdown, there would be an excuse to raise the debt level, perhaps keeping the financial part of the economy going for a while longer. So, a shutdown would have many benefits, apart from any potential benefit from (sort of) containing the virus.

It became apparent as time went on that the vaccine story for COVID-19 was playing multiple roles, as well. The healthcare industry was becoming very large in the US. In fact, the size of the healthcare industry was beginning to interfere with the economy as a whole (Figure 4). Furthermore, manufacturers of medicines and vaccines were having problems with diminishing returns because the big, important drug finds had been discovered years ago. It was becoming difficult to profitably fund all of the research needed for new drugs.

Behind the scenes, the vaccine industry had been working for years on creating new viruses and preparing vaccines for these same viruses. The theory was that the same approaches that delivered vaccines might be helpful in treating diseases of various kinds. Vaccines might also be helpful in responding to bioweapon attacks. If drug manufacturers could market a blockbuster vaccine, the manufacturers, as well as the individuals holding the vaccine patents, could become rich.

The US was not alone in the research with respect to viruses and vaccines for these viruses. Many major countries, including Canada, France, Italy, Australia and China had funded this research, partly through their budgets for health research and partly through military budgets. There was virtually no chance that anyone would figure out the source of any problematic virus because so many major countries had had a part in funding this research. If citizens could be convinced that the virus was extremely dangerous and mandate the use of vaccines, the vaccine industry could greatly profit from vaccine sales. The vaccine could be created and marketed quickly because all of the research (but not enough testing) had been performed earlier.

A great deal of planning had been done before the pandemic appeared, based to a significant extent upon what outcome vaccine makers would prefer. Johns Hopkins University completed a SPARS Pandemic Scenario in October 2017, rehearsing responses to a pandemic. A training exercise called Event 201 was held on October 18, 2019, for the purpose of training high level government officials and news writers what their responses should be.

The sponsors of Event 201 were “The Johns Hopkins Center for Health Security in partnership with the World Economic Forum and the Bill and Melinda Gates Foundation.” The latter two organizations are representatives of the very wealthy individuals and very large corporations. The primary interest of these organizations is enriching those who are already wealthy. The World Economic Forum is known for proclaiming, “You’ll own nothing and you’ll be happy.”

As time went on, it became very clear that the true nature of the COVID-19 epidemic was being hidden from citizens. It was, and is, not a terribly dangerous illness if it is treated properly with any number of inexpensive medications including aspirin, ivermectin, antihistamine and steroids. In fact, the severity of the disease could also be lessened by taking vitamin D in advance. There really was not a great deal of point to the vaccines, except to enrich the vaccine manufacturers and those who would benefit from the sale of the vaccines, including Anthony Fauci and the Bill and Melinda Gates Foundation.

It also became clear that the vaccines don’t really do what a person might expect a vaccine to do. They do tend to stop severe illness, but taking vitamin D in advance would provide pretty much the same benefit. They don’t stop COVID-19 from circulating because vaccinated people can still catch COVID-19. The vaccines seem to have any number of side effects, including raising the risk of heart attacks.

The historical period most similar to the current period, in terms of shortage of energy supply, is that between World War I and World War II. At that time, the Jews were persecuted. Now, there is an attempt to divide the world into Vaccinated and Unvaccinated, with the Unvaccinated persecuted. When the economy cannot produce enough goods and services for all members of the economy, the economy seems to divide into almost warring parts.

We are basically trying to deal with an energy scenario that looks a lot like Figure 8, and the self-organizing economy comes up with very strange solutions. If people can convince themselves that it is OK to ostracize the unvaccinated, then maybe the move down the collapse will go more smoothly. For example, the military can be cut back in size by dismissing the unvaccinated, without admitting that with current resources, there is a need to reduce the size of the military.

Europe is the part of the world where the push for vaccinations is now highest. It is also in terrible shape with respect to energy supply. By ostracizing the unvaccinated, European countries can attempt to cut back their economies to the size that their energy supply will support, without admitting the real problem.

[10] The world economy is increasingly acting like economies that have collapsed in the past. In fact, there seems to be a connection with some of the strange statements from the book of Revelation.

We are living in a world now in which even if there are temporary price spikes, there is little chance that fossil fuel providers will ramp up their production. In order to ramp up supplies, they would need to start several years in advance, preparing new fields. Oil, coal and gas prices have stayed so low, for so long, that there is no belief that prices can rise to a high enough level and stay there, as the fuels are extracted. Thus, the fossil fuel will stay in the ground.

At the same time, it is becoming increasingly clear that renewables cannot be depended upon. In fact, low generation of electricity by wind turbines is part of the reason Europe is having to import the large quantity of natural gas and coal supplies it now requires. There is concern that rolling blackouts may be necessary during the winter in Europe, if not this year, sometime in the next few years.

It is becoming increasingly clear that the future energy scenario will look something like Figure 8, causing world population to fall dramatically within the next thirty years. This is the kind of situation most of us would associate with collapse. I think of it as being equivalent to end times, since our modern civilization will be disappearing. It is possible that there will be a remnant of people left, but they will be living a much simpler life, without fossil fuels or modern renewables.

There are several parts to what is happening that remind me of Old Testament writings in general, and of the book of Revelation (from the New Testament), in particular.

First, the willingness of the ultra-rich to look out for themselves and keep what look like perfectly good, cheap cures for COVID-19 from the world population seems to be precisely the kind of despicable behavior that Old Testament prophets despised. For example, in Amos 5:21-24, Amos tells the Jews that God despises their prior behavior. In verse 24 (NIV), he says, “But let justice roll on like a river, righteousness like a never-failing stream!”

As I noted in the introduction, Revelation 18 talks about lack of demand being an issue in the collapse of Babylon, and presumably in any future collapse that occurs. Revelation 18:11-13 reads:

11 The merchants of the earth will weep and mourn over her because no one buys their cargoes anymore— 12 cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble;13 cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and human beings sold as slaves.

The need for vaccine passports in some countries reminds a person of Revelation 13:17, “they could not buy or sell unless they had the mark, which is the name of the beast or the number of its name.” In fact, people in Sweden are getting microchip implants after its latest COVID passport mandate.

Some people believe that Revelation 12 describes the Antichrist; that is, the polar opposite of Christ. Before the world comes to an end, Revelation 12 seems to predict a great fight against this Antichrist, which Christ wins. I could imagine Anthony Fauci being the Antichrist.

We are not used to living in a world where very little that is published by the Mainstream Media makes sense. But when we live in a time where no one wants to hear what is true, the system changes in a bizarre way, so that a great deal that is published is false.

It is disturbing to think that we may be living near the end of the world economy, but there is an upside to this situation. We have had the opportunity to live at a time with more conveniences than any other civilization. We can appreciate the many conveniences we have.

We also have the opportunity to decide how we want to live the rest of our lives. We have been led for many years down the path of believing that economic growth will last forever; all we need to do is have faith in the government and our educational institutions. If we figure out that this really isn’t the path to follow, we can change course now. If we want to choose a more spiritual approach, this is a choice we can still make.

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Our fossil fuel energy predicament, including why the correct story is rarely told

There is more to the fossil fuel energy predicament than we usually hear about.

Strangely enough, a big part of the confusion regarding the nature of our energy problem comes from the fact that virtually everyone wants to hear good news, even when the news isn’t very good. We end up seeing information in the Mainstream Media mostly from the perspective of what people want to hear, rather than from the perspective of what the story really is. In this post, I explain why this situation tends to occur. I also explain why our current energy situation is starting to look more and more like an energy shortage situation that could lead to economic collapse.

This post is a write-up of a presentation I gave recently. A PDF of my talk can be found at this link. An mp4 video of my talk can be found at this link: Gail Tverberg’s Nov. 9 presentation–Our Fossil Fuel Energy Predicament.

Slide 1
Slide 2

Most people attending my talk reported that they had mostly heard about the issue on the right end of Slide 2: the problem of using too much fossil fuel and related climate change.

I think the real issue is the one shown on the left side of Slide 2. This is a physics issue. Without fossil fuels, we would find it necessary to go back to using older renewables, such as oxen or horses for plowing, burned wood and other biomass for heat, and wind-powered sail boats for international transport.

Needless to say, these older renewables are only available in tiny quantities today, if they are available at all. They wouldn’t provide many jobs other than those depending on manual labor, such as subsistence agriculture. Nuclear and modern renewables would not be available because they depend on fossil fuels for their production, maintenance and long distance transmission lines.

Slide 3
Slide 4

On Slide 4, note that M. King Hubbert was a physicist. This seems to be the academic specialty that finds holes in other people’s wishful thinking.

Another thing to note is Hubbert’s willingness to speculate about the future of nuclear energy. He seemed to believe that nuclear energy could take over, when other energy fails. Needless to say, this hasn’t happened. Today, nuclear energy comprises only 4% of the world’s total energy supply.

Slide 5

The transcript of the entire talk by Rear Admiral Hyman Rickover is worth reading. I have excerpted a few sentences from his talk. His talk took place only a year after Hubbert published his research.

Rickover clearly understood the important role that fossil fuels played in the economy. At that early date, it looked as if fossil fuels would become too expensive to extract between 2000 and 2050. A doubling of unit costs for energy may not sound like much, but it is, if a person thinks about how much poor people in poor countries spend on food and other energy products. If the price of these goods rises from 25% of their income to 50% of their income, there is not enough left over for other goods and services.

Slide 6

Regarding Slide 6, the book The Limits to Growth by Donella Meadows and others provided early computer modeling of how population growth and extraction of resources might play out. The base model seemed to indicate that economic decline would start about now. Various other scenarios were considered, including a doubling of the resources. Without very unrealistic assumptions, the economy always headed downward before 2100.

Slide 7

Another way of approaching the problem is to analyze historical civilizations that have collapsed. Peter Turchin and Sergey Nefedov analyzed eight economies that collapsed in their book Secular Cycles. There have been many examples of economies encountering a new source of energy (conquering a new land, or developing a new way of producing more energy), growing for a time, reaching a time where growth is more limited, and finally discovering that the economy that had been built up could no longer be supported by the resources available. Both population and production of goods and services tended to crash.

We can think of the current economy, based on the use of fossil fuels, as likely following a similar path. Coal began to be used in quantity about 200 years ago, in 1820. The economy grew, as oil and natural gas production was added. We seem to have hit a period of “Stagflation,” about 1970, which is 50 years ago. The timing might be right to enter the “Crisis” period, about now.

We don’t know how long such a Crisis Period might last this time. Early economies were very different from today’s economy. They didn’t depend on electricity, international trade or international finance in the same way that today’s world economy does. It is possible (in fact, fairly likely) that the downslope might occur more rapidly this time.

Past Crisis Periods seem to feature a high level of conflict because rising population leads to a situation where there are no longer enough goods and services to go around. According to Turchin and Nefedov, some features of the Crisis Periods included increased wage disparity, collapsing or overturned governments, debt defaults, inadequate tax revenue and epidemics. Economists tell us that there is a physics reason for the rich to get richer and the poor to get poorer during Crisis Periods; in some sense, the poor get “frozen out” and the wealth rises to the top, like steam.

Slide 8
Slide 9

Slide 9 is a chart I prepared several years ago, showing the growth in the world production of fuels of various types. What little wind and solar was available at that time was included in the biofuels section at the bottom. Early biofuels consisted largely of wood and charcoal used for heat.

Slide 10

Slide 10 shows average annual increases for 10-year periods corresponding to the periods shown on Slide 9. This chart goes to 2020, so it covers a full 200-year period. Note that the increases in energy consumption shown are especially high in the 1951-1960 and 1961-1970 periods. These periods occurred after World War II when the economy was growing especially rapidly.

Slide 11

Slide 11 is similar to Slide 10, except I divide the bars into two pieces. The bottom, blue part corresponds to the amount that population grew, on average, during this ten-year period. Whatever is left over I have referred to as the amount available to increase the standard of living, shown in red. A person can see that when the overall growth in energy consumption is high, population tends to rise rapidly. With more energy, it is possible to feed and clothe larger families.

Slide 12

Slide 12 is like Slide 11, except that it is an area chart. I have also added some notes regarding what went wrong when energy consumption growth was low or negative. An early dip occurred at the time of the US Civil War. There was a very long, low period later that corresponded to the period of World War I, World War II and the Depression. The collapse of the central government of the Soviet Union occurred in 1991, so it is part of the 10-year period ended 2000. Most recently, we have encountered COVID shutdowns.

The peaks, on the other hand, tended to be good times. The period leading up to 1910 corresponded to the time of early electrification. The period after World War II was a period of growth and rebuilding. Most recently, China and its large coal resources helped pull the world economy forward. China’s coal supply stopped growing about 2013. I have written that we can no longer depend on China’s economy to pull the world economy forward. With recent rolling blackouts in China (mentioned in the next section), this is becoming more evident.

Without enough energy, the current period is beginning to look more and more like the period that included World War I and II and the Great Depression. Strange outcomes can occur when there basically are not enough resources to go around.

Slide 13
Slide 14

Slide 14 shows recent energy production. A person can see from this slide that wind and solar aren’t really ramping up very much. A major problem is caused by the fact that wind and solar are given the subsidy of “going first” and prices paid to other electricity producers are adjusted downward, to reflect the fact that their electricity is no longer needed by the grid. This approach tends to drive nuclear out of business because wholesale electricity rates tend to fall to very low levels, or become negative, when unneeded wind and solar are added. Nuclear power plants cannot easily shut down. Instead, the low prices tend to drive the nuclear power plants out of business. This is sad, because electricity from nuclear is far more stable, and thus more helpful to the grid, than electricity from wind or solar.

Slide 15

Fossil fuel producers need quite high energy prices for a variety of reasons. One of these reasons is simply because the easiest-to-extract resources were removed first. In recent years, producers have needed to move on to resources with a higher cost of extraction, thus raising their required selling prices. Wages of ordinary citizens haven’t kept up, making it hard for selling prices to rise sufficiently to cover the new higher costs.

Another issue is that fossil fuel energy prices need to cover far more than the cost of drilling the current well. Producers need to start to develop new areas to drill, years in advance of actually getting production from those sites. They need extra funds to work on these new sites.

Also, oil companies, especially, have historically paid high taxes. Besides regular income taxes, oil companies pay state taxes and royalty taxes. These taxes are a way of passing the “surplus energy” that is produced back to the rest of the economy, in the form of taxes. This is exactly the opposite of wind and solar that need subsidies of many kinds, especially the subsidy of “going first,” that drives other electricity providers out of business.

Prices for oil, coal and natural gas have been far lower than producers need, for a long time. The COVID shutdowns in 2020 made the problem worse. Now, with producers quitting at the same time the economy is trying to reopen, it is not surprising that some prices are spiking.

Slide 16

Most local US papers don’t tell much about world energy prices, but these are increasingly becoming a big problem. Natural gas is expensive to ship and store, so prices vary greatly around the world. US natural gas prices have roughly doubled from a year ago, but this is a far lower increase than many other parts of the world are experiencing. In fact, the bills that most US natural gas residential customers will receive will increase by far less than 100% because at the historic low price, over half of the price for residential service is distribution expenses, and such expenses don’t change very much.

Slide 17

Slide 17 shows another way of looking at data that is similar to that in Slide 14. This slide shows amounts on a per capita basis, with groupings I have chosen. I think of coal and oil as being pretty much the only energy resources that can “stand on their own.” The recent peak year for combined coal and oil, on a per capita basis, was 2008.

Natural gas, nuclear, and hydroelectric were the first add-ons. If a person looks closely, it can be seen that the growth rate of this group has slowed, at least in part because of the pricing problems caused by wind and solar.

The “green” sources at the bottom are growing, but from a very low base. The main reason for their growth is the subsidies they receive. If fossil fuels falter in any major way, it will adversely affect the growth of wind and solar. Already, there are articles about supply chain problems for the big wind turbines. Any cutback in subsidies is also harmful to their production.

Slide 18

US papers don’t tell us much about these problems, but they are getting to be very serious problems in other parts of the world. The countries with the biggest problems are the ones trying to import natural gas or coal. If an exporting country finds its own production falling short, it is likely to make certain that its own citizens are adequately supplied first, before providing exports to others. Thus, importing countries may find very high prices, or supplies simply not available.

Slide 19
Slide 20

This slide got a lot of laughs. The university does have some sort of agricultural plot, but teaching subsistence farming is not its goal.

Slide 21
Slide 22
Slide 23
Slide 24

My point about “scientists who are not pressured by the need for research grants or acceptance of written papers are the ones trying to tell the whole truth” got quite a few laughs. As a practical matter, this means that retired scientists tend to be disproportionately involved in trying to discern the truth.

With the military understanding the need to work around energy limits, one change has been to move away from preparation for “hot wars” to more interest in biological weapons, such as viruses. Thus, governments of many countries, including the United States, Canada, France, Italy, Australia and China, have funded research on making viruses more virulent. The vaccine-making industry also supported this effort because it might enhance the industry’s ability to make and sell more vaccines. It was believed that there might even be new techniques that would develop from this new technology that would increase the overall revenue generated by the healthcare industry.

Questions came up, both during the talk and later, about what other changes have taken place because of the need for much of the audience to hear a story with a happily ever after ending, and because of the known likely decline of the economy for physics reasons. Clearly one thing that happens is successful entrepreneurs, such as Elon Musk, aim their production in areas where subsidies will be available. With fossil fuel production not making money, fossil fuel producers are even willing to undertake renewable projects if subsidies seem to be high enough. The issue isn’t really, “What is sustainable?” It is much more, “Where will the profits be, given where subsidies will be, and what people are being taught about how to perceive today’s problems?”

Slide 25
Slide 26
Slide 27
Slide 28

In fact, what has been happening in recent years is that a great deal of debt has been added to the world economy. Mostly, this added debt seems to be creating added inflation. It definitely is not leading to the rapid extraction of a great deal more fossil fuels, which is what really would allow the production of more goods and services. If inflation leads to higher interest rates, this, by itself, could destabilize the financial system.

Slide 29

I tried to explain, as I have in the past, how a self-organizing economy works. New citizens are born, and old ones pass away. New businesses are formed, and they add new products, keeping in mind what products citizens want and can afford. Governments add laws and taxes, as situations change. Energy is needed at every step in production, so availability of inexpensive energy is important in the operation of the economy, as well. There are equivalences, such as employees tend also to be customers. If the wages of employees are high, they can afford to buy many goods and services; if wages are low, employees will be very restricted in what they can afford.

In some sense, the economy is hollow inside, because the economy will stop manufacturing unneeded products. If an economy starts making cars, for example, it will phase out products associated with transportation using horse and buggy.

Slide 30

A self-organizing economy clearly does not operate in the simple way economists seem to model the economy. Low prices can be just as big a problem as high prices, for example.

Another issue is that the energy needs of an economy seem to depend on its population and how far it has already been built up. For example, roads, bridges, water distribution pipelines and electricity transmission infrastructure must all be maintained, even if the population falls. We know humans need something like 2000 calories a day of food. Economies seem to have a similar constant need for energy, based on both the number of people in the economy and the amount of infrastructure that has been built up. There is no way to cut back very much, without the economy collapsing.

Slide 31

I am not exactly certain when the first discussion of the economy as a dissipative structure (self-organizing system powered by energy) started. When I prepared this slide, I was thinking that perhaps it was in 1996, when Yoshinori Shizoawa wrote a paper called Economy as a Dissipative Structure. However, when I did a search today, I encountered an earlier paper by Robert Ayres, written in 1988, also discussing the economy as a dissipative structure. So, the idea has been around for a very long time. But getting ideas from one part of academia to other parts of academia seems to be a very slow process.

Debt cannot grow indefinitely, either, because there needs to be a way for it to be paid back in a way that produces real goods and services. Without adequate energy supplies, it becomes impossible to produce the goods and services that consumers need.

Slide 32

Attendees asked about earlier posts that might be helpful in understanding our current predicament. This is the list I provided:

Humans Left Sustainability Behind as Hunter Gatherers  – Dec. 2, 2020
How the World’s Energy Problem Has Been Hidden – June 21, 2021
Energy Is the Economy; Shrinkage in Energy Supply Leads to Conflict – Nov. 9, 2020
Why a Great Reset Based on Green Energy Isn’t Possible – July 17, 2020
The “Wind and Solar Will Save Us” Delusion – Jan. 30, 2017

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Spike in energy prices suggests that sharp changes are ahead

An analysis of what is going terribly wrong in the world economy

The world economy requires stability. People living in the world economy need stability, as well. They need food every day and a place to live. Children need a home situation that they can count on.

Back in the 1950 to 1979 era, when energy supplies of many kinds were growing rapidly, it was possible to build stability into the economic system: Jobs with a company were often long-time careers; pensions after retirement were offered; electricity was sold through regulated “utilities” that charged prices that wrapped in long-term maintenance of the electric grid and the cost of fuel, among other things.

But as high energy prices hit in the 1970s, the system became more and more strained. The mood changed. Margaret Thatcher became the Prime Minister of the UK in 1979, and Ronald Reagan became President of the United States in 1981. Under their leadership, debt was increasingly used to cover longer-term costs, and competition was encouraged. A person might say that a move toward greater complexity, but less stability, of the economic system had begun.

Now, through several iterations, the economy has become increasingly complex, with less and less redundancy to provide stability. The energy price spike that is being experienced today is a warning that something is very, very wrong. As I see the situation, the trend toward complexity has gone too far; the economic system is starting to break down. Sharp changes appear to be ahead. The world economy is shifting into contraction mode, with more and more parts of the system failing.

In this post, I will discuss some of the issues involved. It turns out that energy modelers haven’t understood how detrimental intermittency really is. They modeled intermittent electricity from renewables (wind, water and solar) as far more helpful than it really is. This has been confusing to everyone. The sharp changes that the title of this post refers to represent an early stage of economic collapse.

[1] If energy supplies are inexpensive and widely available, it is easy to build an economy.

I have written in the past about the need for energy supplies to keep the economy functioning properly being analogous to the need for food, to keep humans functioning properly.

The economy doesn’t operate on a single type of energy, any more than a human lives on a single type of food. The economy uses a portfolio of energy types. These include human labor, energy directly from sunlight, and energy from burning various types of fuels, including biomass and fossil fuels.

As long as energy sources are inexpensive and readily available, an economy can grow and provide goods and services for an increasing number of citizens. We can think of this as being analogous to, “As long as buying and preparing food takes little of our wages (or time, if we are growing it ourselves), then there are plenty of wages (or time) left over for other activities.”

But once energy prices start spiking, it looks like there is not enough to go around. In the absence of ways to hide the problem, citizens need to cut back on non-essentials, pushing the economy into recession. Or businesses stop making essential products that require natural gas or coal, such as fertilizer or fuel additives to hold emissions down. The lack of such products can, by itself, be very disruptive to an economy.

[2] Once energy supplies become constrained, energy prices tend to spike. In the early stages of these price spikes, adding complexity allows the economy to better tolerate higher energy costs.

There are many ways to work around the problem of rising energy prices, at least temporarily. For example:

  • Build vehicles, such as cars, that are smaller and more fuel efficient.
  • Extend fossil fuel supplies by building nuclear power plants, hydroelectric generating plants, wind turbines, solar panels, and geothermal electricity generation.
  • Make factories more efficient.
  • Add insulation to buildings; eliminate any cracks that might allow outside air into buildings.
  • Instead of pre-funding capital costs, use debt to transfer these costs to later purchasers of energy products.
  • Encourage competition in providing different parts of electricity production and distribution.
  • Develop time-of-day pricing for electricity, so as to keep prices down to the marginal cost of production, even though this does not, in total, repay all costs of production and distribution.
  • Cut back on routine maintenance of electricity transmission systems.
  • Purchase coal and natural gas imports using spot pricing, rather than long term contracts, as long as these seem to be lower-priced than long-term commitments.
  • Throughout the economy, take advantage of economies of scale and mechanization. Build huge companies. Replace human labor wherever possible.
  • Stimulate the economy by increasing debt availability and lowering interest rates. This is helpful because a more rapidly growing economy can withstand higher energy prices.
  • Use global supply chains to source as large a share of manufacturing inputs as possible from countries with low wages and low energy costs.
  • Build very “lean” just-in-time supply chains.
  • Create complex financial systems, with debt resold and repackaged in different ways, futures contracts, and exchange traded funds.

Together, these approaches comprise “complexity.” They tend to make the economic system less resilient. At least temporarily, they pass fewer of the higher costs of energy products through to current citizens. As a result, the economy can temporarily withstand a higher price of energy. But the system tends to become brittle and prone to failure.

[3] There are limits to added complexity. In fact, complexity limits are what are likely to make the economic system fail.

Joseph Tainter, in The Collapse of Complex Societies, makes the point that there are diminishing returns to added complexity. For example, the changes that result in the biggest gains in fuel savings for vehicles are the ones added first.

Another drawback of added complexity is the extreme wage disparity that tends to result. Instead of everyone earning close to the same amount, those at the top of the hierarchy get a disproportionate share of the wages. This is what leads to many of the problems we are seeing today. Would-be workers don’t want to apply for jobs, even when they seem to be available. Citizens become unhappy and rebellious. Lower-paid workers may not eat well, so that pandemics spread more easily.

The underlying problem is that population tends to rise, but it becomes harder and harder to produce food and other necessities with the arable land and energy resources available. Ugo Bardi uses Figure 1 to show the shape of the expected decline in goods and services produced in such a situation:

Figure 1. Seneca Cliff by Ugo Bardi.

According to Bardi, Seneca in the title refers to a statement written by Lucius Annaeus Seneca in 91 CE, “It would be of some consolation for the feebleness of ourselves and our works if all things should perish as slowly as they come into being. As it is, increases are of sluggish growth, but the way to ruin is rapid.” In fact, this shape seems to approximate the type of cycle Turchin and Nefedov observed when analyzing several agricultural civilizations that collapsed in their book Secular Cycles.

[4] An increasing amount of complexity has been added since 1981 to help compensate for rising oil and other energy prices.

The prices of commodities, including oil, tend to be extremely variable because storage is very limited, relative to the large quantities used every day. There needs to be a very close match between supply and demand, or prices will rise very high or fall very low.

Oil is exceptionally important because it is the single largest source of energy for the world economy. It is heavily used in food production and in the extraction of minerals of all types. If the price of oil increases, the price of food tends to rise, as does the price of metals of many types. Oil is also important as a transportation fuel.

In the early days, before depletion led to higher extraction costs, oil prices remained stable and low (Figure 2), as a result of utility-type pricing by the Texas Railroad Commission. Oil prices started to spike, once depletion became more of a problem.

Figure 2. Brent-equivalent oil prices in 2020 US$. Based on data from BP’s 2021 Statistical Review of World Energy.

Economists tell us that oil and other commodity prices depend on “supply and demand.” When we look at turning points for oil prices, it becomes clear that financial manipulations play a significant role in determining oil demand. Such manipulations lead to prices that have practically nothing to do with the underlying cost of producing commodities. The huge changes in prices seem to reflect actions by central bankers to encourage or discourage lending (QE on Figure 3).

Figure 3. Monthly Brent oil prices with dates of US beginning and ending Quantitative Easing. Later Quantitative Easing did not bring oil prices back up to their prior level.

Quantitative easing (QE) makes it cheaper to borrow money. Adding QE tends to raise oil prices; deleting QE seems to reduce oil prices. These prices have little direct connection with the cost of extracting oil from the ground. Instead, prices are closely related to the amount of complexity being added to the system and whether it is having its intended impact on energy prices.

At the time of the 1973-1974 oil crisis, many people thought that the world was truly running out of oil. The petroleum industry did, indeed, succeed in extracting more. The 2005 to 2008 period was another period of concern that the world might be running out of oil. Then, in 2014, when oil prices suddenly fell, the dominant story suddenly became, “There is plenty of oil. The world’s biggest problem is climate change.”

In fact, there was no real reason to believe that the shortage situation had changed. US oil from shale had a brief run-up in production in the 2007 to 2019 period, but this production was unprofitable for producers, especially after oil prices dropped in 2014 (Figures 2 and 3). Producers of oil from shale are no longer investing very much in new production. With the sweet spots of fields depleted and this low level of investment, it will not be surprising if oil production from shale continues to fall.

Figure 4. US crude and condensate oil production for the 48 states, Alaska, and for shale basins, based on data of the US Energy Information Administration.

The real story is that the supply of oil, coal and natural gas is limited by the extent to which additional complexity can be added to the economy, to keep selling prices so that they are both:

  • High enough for producers of these products, so that they can both pay adequate taxes and make adequate reinvestment.
  • Low enough for consumers, especially for the many consumers around the world with very low wages.

Many people have missed the point that, at least since 2014, financial manipulations have not kept prices for fossil fuels high enough for producers. Low prices are driving them out of business. This is the case for oil, coal and natural gas. In fact, low prices caused by giving wind and solar priority on the electric grid are driving producers of nuclear electricity out of business, as well.

Oil producers require a price of $120 a barrel or more to cover all of their costs. Without a much higher price than available today (even with oil prices over $80 per barrel), shale oil production can be expected to fall. In fact, OPEC and its affiliates won’t ramp up production by very large amounts either because they, too, need much higher prices to cover all their costs.

[5] Economists and analysts of many types put together models that give misleading results because they missed several important points.

After oil prices fell in late 2014, it became fashionable to believe that vast amounts of fossil fuels are available for extraction, and that our biggest problem in the future would be climate change. Besides low prices, one reason for this concern was the high level of fossil fuel proven reserves reported by many countries around the world.

Figure 5. Ratio of reported proven reserves at December 31, 2020, to reported production in 2020 based on data from BP’s 2021 Statistical Review of World Energy.

Even fossil fuel companies started to invest in renewables because of the poor returns experienced from fossil fuel investments. It looked to them as if investment in renewables would be more profitable than continued investment in fossil fuel production. Of course, the profits of renewables were largely the result of government subsidies, particularly the subsidy of “going first.” Giving wind and solar first access when they happen to be available tends to lead to very low, and even negative, wholesale prices for other electricity producers. This drives these other producers of electricity out of business, even though they are really needed to correct for the intermittency of renewables.

There were many things that hardly anyone understood:

  • Energy prices in today’s financially manipulated economy bear little relationship to the true cost of production.
  • Fossil fuel producers need to be guaranteed long-term high prices, if there is to be any chance of ramping up production.
  • Intermittent renewables (including wind, solar, and hydroelectric) have little value in a modern economy unless they are backed up with a great deal of fossil fuels and nuclear electricity.
  • Our real problem with fossil fuels is a shortage problem. Price signals are very misleading.
  • The models of economists are mostly wrong. The use of carbon pricing and intermittent renewables will simply disadvantage the countries adopting them.

The reason why geologists and fossil fuel producers give misleading information about the amount of oil, coal and natural gas available to be extracted is because it is not something they can be expected to know. In a sense, the question is, “How much complexity can the economy withstand before it becomes too brittle to handle a temporary shock, such as a pandemic shutdown?” It isn’t the amount of fossil fuels in the ground that matters; it is the follow-on effects of the high level of complexity on the rest of the economy that matters.

[6] At this point, ramping up fossil fuel production would be very difficult because of the long-term low prices for fossil fuels. Unfortunately, the economy cannot get along with only today’s small quantity of renewables.

Figure 6. World energy supply by type, based on data from BP’s 2021 Statistical Review of World Energy.

Most people don’t realize just how slowly renewables have been ramping up as a share of world energy supplies. For 2020, wind and solar together amounted to only 5% of world energy supplies and hydroelectric amounted to 7% of world energy supplies. The world economy cannot function on 12% (or perhaps 20%, if more items are included) of its current energy supply any more than a person’s body can function on 12% or 20% of its current calorie intake.

Also, the world’s reaction to the pandemic acted, in many ways, like oil rationing. Figure 6 shows that consumption was reduced for oil, coal and natural gas. An even bigger impact was on the prices of these fuels. Prices fell, even though the cost of production was not falling. (See, for example, Figure 2 for the fall in oil prices.)

These lower prices left fossil fuel providers even worse off financially than they were previously. Some providers went out of business. They certainly do not have reserve funds set aside to develop the new fields that they would need to develop, if they were to ramp up production for oil, coal and natural gas now. Because of this, it is virtually impossible to ramp up fossil fuel production now. A lead time of at least several years is needed, besides a clear way of funding the higher production.

[7] Every plant and animal and, in fact, every growing thing, needs to win the battle against intermittency.

As mentioned in the introduction, humans need to eat on a regular basis. Hunter-gatherers solved the problem of intermittency of harvests by moving from area to area, so that their own location would match the location of food availability. Early agriculture and cities became possible when the growing of grain was perfected. Grain was both storable and portable, so it could be used year around. It could also be brought to cities, allowing people to live in a different location from where the crops were stored.

We can think of any number of adaptations in the plant and animal kingdom to intermittency. Some birds migrate. Bears hibernate. Deciduous trees lose their leaves each fall and grow them back again each spring.

Our supply of any of our energy products is in some sense intermittent. Oil wells deplete, so new ones need to be drilled. Biomass burned for fuel grows for a while, before it is cut down (or falls down) and is burned for fuel. Solar energy is available only until a cloud comes in front of the sun. In winter, solar energy is mostly absent.

[8] Any modeling of the cost of energy needs to take into account the full system needed to “bridge the intermittency gap.”

As far as I can see, the only pricing system that generates enough funds is one that takes into account the full system needs, including the need to overcome intermittency and the need for transportation of the energy to the user. In fact, I would argue that even more than this needs to be included. Good roads are generally required if the system is to be kept in good repair. Good schools are needed for would-be workers in the energy system. Any costs associated with pollution should be wrapped into the required price. Thus, the true cost of energy generation really should include a fairly substantial load for taxes for all of the governmental services that the system requires. And, of course, all parts of the system should pay their workers a living wage.

This high level of pricing can only be provided by utility type pricing of fossil fuels and electricity. The use of long-term contracts to purchase fossil fuels, uranium or electricity can also build in most of these costs. The alternative approach, buying fuels using spot contracts or pricing based on time of day electricity supply, looks appealing when costs are low. But such systems don’t build in sufficient funding for replacement of depleted fields or the full cost of a 24/7/365 electrical system.

Modelers didn’t understand that the “low prices now, higher prices later” approaches that were being advocated don’t really work for the long term. As limits are approached, prices tend to spike badly. Modelers had assumed that the economic system could handle such spikes in prices, and that the spikes in prices would quickly lead to new supply or adaptation. In fact, huge spikes in prices are very disruptive to the system. New supply is what is really needed, but providers tend to be too damaged by previous long periods of artificially low prices to provide this supply. The approach looks great in academic papers, but it leads to rolling blackouts and unfilled natural gas reservoirs for winter.

[9] Major changes for the worse seem to be ahead for the world economy.

At this point, it seems as if complexity has gone too far. The pandemic moved the world economy in the direction of contraction but prices of fossil fuels tend to spike as the economy opens up.

Figure 7. Chart by BBC/Bloomberg. Source: BBC

The recent spikes in prices are highly unlikely to produce the natural gas, coal and oil that is required. They are more likely to cause recession. Fossil fuel suppliers need high prices guaranteed for the long term. Even if such guarantees could be provided, it would still take several years to ramp up production to the level needed.

The general trend of the economy is likely to be in the direction of the Seneca Cliff (Figure 1). Everything won’t collapse all at once, but big “chunks” may start breaking away.

The debt system is a very vulnerable part. Debt is, in effect, a promise of goods or services made with energy in the future. If the energy isn’t there, the promised goods and services won’t be available. Governments may try to hide this problem with new debt, but governments can’t solve the underlying problem of missing goods and services.

Pension systems of all kinds are also vulnerable. If fewer goods and services are being made in total, they will need to be divided up differently. Pensioners are likely to get a reduced share, or nothing at all.

Importers of fossil fuels seem likely to be especially affected by price spikes because exporters have the ability to cut back in the quantity available for export, if total supply is inadequate. Europe is one part of the world that is especially dependent on oil, natural gas and coal imports.

Figure 8. Total energy production and consumption of Europe, based on data of BP’s 2021 Statistical Review of World Energy. The gap between consumption and production is filled by imports of oil, coal, natural gas and biofuels. Within Europe, countries also import electricity from each other.
Figure 9. Europe energy production by fuel based on data from BP’s 2021 Statistical Review of World Energy.

The combined production of hydroelectric, wind and solar and biofuels (in Figure 9) amounts to only 19% of Europe’s total energy consumption (shown in Figure 8). There is no possible way that Europe can get along only with renewable energy, at any foreseeable time in the future.

European economists should have told European citizens, “There is no way you can get along using renewables alone for many, many years. Treat the countries that are exporting fossil fuels to you very well. Sign long term contracts with them. If they want to use a new pipeline, raise no objection. Your bargaining power is very low.” Instead, European economists talked about saving the planet from carbon dioxide. It is an interesting idea, but the sad truth is that if Europe takes itself out of the contest for energy imports, it mostly leaves more fossil fuels for exporters to sell to others.

China stands out as well, as the world’s largest consumer of energy, and as the world’s largest importer of oil, coal and natural gas. It is already encountering electricity shortages that are leading to rolling blackouts. In fact, rolling blackouts in China started almost a year ago in late 2020. China is, of course, a major exporter of goods to the rest of the world. If China has major energy problems, the rest of the world will no longer be able to count on China’s exports. Lack of China’s exports, by itself, could be a huge problem for the rest of the world.

I could continue speculating on the changes ahead. The basic problem, as I see it, is that we have reached limits on oil, coal and natural gas extraction, pretty much simultaneously. The limits are really complexity limits. The renewables that we have today aren’t able to save us, regardless of what the models of Mark Jacobson and others might say.

In the next few years, I am afraid that we will find out how collapse actually proceeds in a very interconnected world economy.

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