Today’s Energy Crisis Is Very Different from the Energy Crisis of 2005

Back in 2005, the world economy was “humming along.” World growth in energy consumption per capita was rising at 2.3% per year in the 2001 to 2005 period. China had been added to the World Trade Organization in December 2001, ramping up its demand for all kinds of fossil fuels. There was also a bubble in the US housing market, brought on by low interest rates and loose underwriting standards.

Figure 1. World primary energy consumption per capita based on BP’s 2022 Statistical Review of World Energy.

The problem in 2005, as now, was inflation in energy costs that was feeding through to inflation in general. Inflation in food prices was especially a problem. The Federal Reserve chose to fix the problem by raising the Federal Funds interest rate from 1.00% to 5.25% between June 30, 2004 and June 30, 2006.

Now, the world is facing a very different problem. High energy prices are again feeding over to food prices and to inflation in general. But the underlying trend in energy consumption is very different. The growth rate in world energy consumption per capita was 2.3% per year in the 2001 to 2005 period, but energy consumption per capita for the period 2017 to 2021 seems to be slightly shrinking at minus 0.4% per year. The world seems to already be on the edge of recession.

The Federal Reserve seems to be using a similar interest rate approach now, in very different circumstances. In this post, I will try to explain why I don’t think that this approach will produce the desired outcome.

[1] The 2004 to 2006 interest rate hikes didn’t lead to lower oil prices until after July 2008.

It is easiest to see the impact (or lack thereof) of rising interest rates by looking at average monthly world oil prices.

Figure 2. Average monthly Brent spot oil prices based on data of the US Energy Information Administration. Latest month shown is July 2022.

The US Federal Reserve began raising target interest rates in June 2004 when the average Brent oil price was only $38.22 per barrel. These interest rates stopped rising at the end of June 2006, when oil prices averaged $68.56 per barrel. Oil prices on this basis eventually reached $132.72 per barrel in July 2008. (All of these amounts are in dollars of the day, rather than being adjusted for inflation.) Thus, the highest price was over three times the price in June 2004, when the US Federal Reserve made the decision to start raising target interest rates.

Based on Figure 2 (including my notes regarding the timing of the interest rate rise), I would conclude that raising interest rates didn’t work very well at bringing down the price of oil when it was tried in the 2004 to 2006 period. Of course, the economy was growing rapidly, then. The rapid growth of the economy likely led to the very high oil price shown in mid-2008.

I expect that the result of the US Federal Reserve raising interest rates now, in a low-growth world economy, might be quite different. The world’s debt bubble might pop, leading to a worse situation than the financial crisis of 2008. Indirectly, both asset prices and commodity prices, including oil prices, would tend to fall very low.

Analysts looking at the situation from strictly an energy perspective tend to miss the interconnected nature of the economy. Factors which energy analysts overlook (particularly debt becoming impossible to repay, as interest rates rise) may lead to an outcome that is pretty much the opposite result of the standard belief. The typical belief of energy analysts is that low oil supply will lead to very high prices and more oil production. In the current situation, I expect that the result might be closer to the opposite: Oil prices will fall because of financial problems brought on by the higher interest rates, and these lower oil prices will lead to even lower oil production.

[2] The purpose of the US Federal reserve raising target interest rates was to flatten the growth rate of the world economy. Looking back at Figure 1, the growth in energy consumption per capita was much lower after the Great Recession. I doubt that now in 2022, we want even lower growth (really, more shrinkage) in energy consumption per capita for future years.*

Looking at Figure 1, growth in energy consumption per capita has been very slow since the Great Recession. A person wonders: What is the point of governments and their central banks pushing the world economy down, now in 2022, when the world economy is already barely able to maintain international supply lines and provide enough diesel for all of the world’s trucks and agricultural equipment?

If the world economy is pushed downward now, what would the result be? Would some countries find themselves unable to afford fossil fuel energy products in the future? This might lead to problems both in growing and transporting food, at least for these countries. Would the whole world suffer a major crisis of some sort, such as a financial crisis? The world economy is a self-organizing system. It is difficult to forecast precisely how the situation would work out.

[3] While the growth rate in energy consumption per capita was much lower after 2008, the price of crude oil quickly bounced back to over $120 per barrel in inflation-adjusted prices in the 2011-2013 time frame.

Figure 3 shows that oil prices immediately bounced back up after the Great Recession of 2008-2009. Quantitative Easing (QE), which the US Federal Reserve began in late 2008, helped energy prices to shoot back up again. QE helped keep the cost of borrowing by governments low, allowing governments to run larger deficits than might otherwise have been possible without interest rates rising. These higher deficits added to the demand for commodities of all types, including oil, thus raising prices.

Figure 3. Average annual oil prices inflation-adjusted oil prices based on data from BP’s 2022 Statistical Review of World Energy. Amounts shown are Brent equivalent spot prices.

The chart above shows average annual Brent oil prices through 2021. The above chart does not show 2022 prices. The current Brent oil price is about $91 per barrel. So, oil prices today are a little higher than they have been recently, but they are nowhere nearly as high as they were in the 2011 to 2013 period or in the late 1970s. The extreme reaction we are seeing is very strange. The problem seems to be much more than oil prices, by themselves.

[4] High prices in the 2006 to 2013 period allowed the rise of unconventional oil production. These high oil prices also helped keep conventional oil production from falling after 2005.

It is difficult to find detail on the precise amount of unconventional oil, but some countries are known for their unconventional oil production. For example, the US has become a leader in the extraction of tight oil from shale formations. Canada also produces a little tight oil, but it also produces quite a bit of very heavy oil from the oil sands. Venezuela produces a different type of very heavy oil. Brazil produces crude oil from under the salt layer of the ocean, sometimes called pre-salt crude oil. These unconventional types of extraction tend to be expensive.

Figure 4 shows world oil production for various combinations of countries. The top line is total world crude oil production. The bottom gray line approximates world total conventional oil production. Unconventional oil production has been rising since, say, 2010, so this approximation is better for years 2010 and subsequent years on the chart, than it is for earlier years.

Figure 4. Crude and condensate oil production based on international data of the US Energy Information Administration. The lower lines subtract the full amount of crude and condensate production for the countries listed. These countries have substantial amounts of unconventional oil production, but they may also have some conventional production.

From this chart, it appears that world conventional oil production leveled off after 2005. Some people (often referred to as “Peak Oilers”) were concerned that conventional oil production would reach a peak and begin to decline, starting shortly after 2005.

The thing that seems to have kept production from falling after 2005 is the steep rise in oil prices in the 2004 to 2008 period. Figure 3 shows that oil prices were quite low between 1986 and 2003. Once oil prices began to rise in 2004 and 2005, oil companies found that they had enough revenue that they could start adopting more intensive (and expensive) extraction techniques. This allowed more oil to be extracted from existing conventional oil fields. Of course, diminishing returns still set in, even with these more intensive techniques.

These diminishing returns are probably a major reason that conventional oil production started to fall in 2019. Indirectly, diminishing returns likely contributed to the decline in 2020, and the failure of the oil supply to bounce back up to its 2018 (or 2019) level in 2021.

[5] A better way of looking at world crude oil production is on a per capita basis because the world’s crude oil needs depend on world population.

Everyone in the world needs the benefit of crude oil, since it is used both in farming and in transporting goods of all kinds. Thus, the need for crude oil rises with population growth. I prefer analyzing crude oil production on a per capita basis.

Figure 5. Per capita crude oil production based on international data by country from the US Energy Information Administration.

Figure 5 shows that on a per capita basis, conventional crude oil production (gray bottom line) started declining after 2005. It was only with the addition of unconventional oil that crude oil production per capita could remain fairly level between 2005 and 2018 or 2019.

[6] Unconventional oil, if analyzed by itself, seems to be quite price sensitive. If politicians everywhere want to hold oil prices down, the world cannot count on extracting very much of the huge amount of unconventional oil resources that seem to be available.

Figure 6. Crude oil production based on international data for the US Energy Information Administration for each of the countries shown.

On Figure 6, crude oil production dips in 2016 – 2017 and also in 2020 – 2021. Both the 2016 and the 2020 dips are related to low prices. The continued low prices in 2017 and 2021 may reflect start-up problems after a low price, or they may reflect skepticism that prices can stay high enough to make continued extraction profitable. Canada seems to show similar dips in its oil production.

Venezuela shows a fairly different pattern. Information from the US Energy Information Administration mentions that the country started having major problems once the world oil price started falling in 2014. I am aware that the US has had sanctions against Venezuela in recent years, but it seems to me that these sanctions are closely related to Venezuela’s oil price problems. If Venezuela’s very heavy oil could really be extracted profitably, and the producers of this oil could be taxed to provide services for the people of Venezuela, the country would not have the many problems that it has today. The country likely needs a price between $200 and $300 per barrel to allow for sufficient funds for extraction plus adequate tax revenue.

Brazil’s oil production seems to be relatively more stable, but its growth has been slow. It has taken many years to get its production up to 2.9 million barrels per day. There is also some pre-salt oil production just now getting started in Angola and other countries of West Africa. This type of oil requires a high level of technical expertise and imported resources from around the world. If world trade falters, this type of oil production is likely to falter, as well.

A large share of the world’s oil reserves are unconventional oil reserves, of one type or another. The fact that rising oil prices are a real problem for citizens means that these unconventional reserves are unlikely to be tapped. Instead, we may be dealing with seriously short supplies of products we need for operating our economies, including diesel oil and jet fuel.

[7] Figure 1 at the beginning of this post indicated falling energy consumption per capita. This problem extends to more than oil. On a per capita basis, both coal and nuclear energy consumption are falling.

Practically no one pays any attention to coal consumption, but this is the fuel that allowed the Industrial Revolution to start. It is reasonable to expect that since the world economy started using coal first, it might be the first to deplete. Figure 7 shows that world coal consumption per capita hit a peak in 2011 and has declined since then.

Figure 7. World coal consumption per capita, based on data from BP’s 2022 Statistical Review of World Energy.

Many of us have heard about Aesop’s Fable, The Fox and the Grapes. According to Wikipedia, “The story concerns a fox that tries to eat grapes from a vine but cannot reach them. Rather than admit defeat, he states they are undesirable. The expression ‘sour grapes’ originated from this fable.”

In the case of coal, we are told that coal is undesirable because it is very polluting and raises CO2 levels. While these things are true, coal has historically been very inexpensive, and this is important for people buying coal. Coal is also easy to transport. It could be used for fuel instead of cutting down trees, thus helping local ecosystems. The negative things that we are being told about coal are true, but it is hard to find an adequate inexpensive substitute.

Figure 8 shows that world nuclear energy per capita is also falling. To some extent, its fall has stabilized since 2012 because China and a few other “developing nations” have been adding nuclear capacity, while developed nations in Europe have tended to remove their existing nuclear power plants.

Figure 8. World nuclear electricity consumption per capita, based on data from BP’s 2022 Statistical Review of World Energy. Amounts are based on the amount of fossil fuels that this electricity would theoretically replace.

Nuclear energy is confusing because experts seem to disagree on how dangerous nuclear power plants are, over the long term. One concern relates to proper disposal of spent fuel after its use.

[8] The world seems to be at a difficult time now because we don’t have any good options for fixing our falling energy consumption per capita problem, without greatly reducing world population. The two choices that seem to be available both seem to be far higher-priced than is feasible.

There are two choices that seem to be available:

[A] Encourage large amounts of fossil fuel production by encouraging very high fossil fuel prices. With such high prices, say $300 per barrel for oil, unconventional crude oil in many parts of the world would be available. Unconventional coal, such as that under the North Sea, would also be available. With sufficiently high prices, natural gas production could be raised. This natural gas could be shipped as liquefied natural gas (LNG) around the world at great cost. Additionally, many processing plants could be built, both for supercooling the natural gas to allow it to be shipped around the world and for re-gasification, when it arrives at its destination.

With this approach, food costs would be very high. Much of the world’s population would need to work in the food industry and in fossil fuel production and shipping. With these priorities, citizens would not have time or money for most things we buy today. They likely could not afford a vehicle or a nice home. Governments would need to shrivel in size, with the usual outcome being government by a local dictator. Governments wouldn’t have sufficient funds for roads or schools. CO2 emissions would be very high, but this likely would not be our most serious problem.

[B] Try to electrify everything, including agriculture. Greatly ramp up wind and solar. Wind and solar are very intermittent, and their intermittency does not match up well with human needs. In particular, one of the world’s primary needs is for heat in winter, but solar energy comes in summer. It cannot be saved until winter with today’s technology. Spend enormous amounts and resources on electricity transmission lines and batteries to try to somewhat work around these problems. Try to find substitutes for the many things that fossil fuels provide today, including paved roads and chemicals used in agriculture and in medicine.

Hydroelectricity is also a renewable form of electricity generation. It cannot be expected to ramp up much because it has mostly been built out already.

Figure 9. World consumption of hydroelectricity per capita, based on data from BP’s 2022 Statistical Review of World Energy.

Even if greatly ramped up, wind and solar electricity production would likely be grossly inadequate by themselves to try to operate any kind of economy. In addition, at a minimum, natural gas, shipped at very high cost as LNG around the world, would likely be needed. Also, huge quantity of batteries would be needed, leading to a short supply of materials. Huge quantities of steel would be needed to make new electrical machines to try to replace current oil-power machines. A minimum 50-year transition would likely be needed.

I am doubtful that this second approach would be feasible in any reasonable timeframe.

[9] Conclusion. Figure 1 seems to imply that the world economy is headed for troubled times ahead.

The world economy is a self-organizing system, so we cannot know precisely what form changes in the next few years will take. The economy can be expected to shrink back in an uneven pattern, with some parts of the world and some classes of citizens, such as workers versus the elderly, doing better than others.

Leaders will never tell us that the world has an energy shortage. Instead, leaders will tell us how awful fossil fuels are, so that we will be happy that the economy is losing their usage. They will never tell us how worthless intermittent wind and solar are for solving today’s energy problems. Instead, they will lead us to believe that a transition to vehicles powered by electricity and batteries is just around the corner. They will tell us that the world’s worst problem is climate change, and that by working together, we can move away from fossil fuels.

Again, the whole situation reminds me of Aesop’s Fables. The system puts a “good spin” on whatever frightening changes are happening. This way, leaders can convince their citizens that everything is fine when, in fact, it is not.

NOTE

*If the US Federal Reserve raises its target interest rate, central banks of other countries around the world are forced to take a similar action if they do not want their currencies to fall relative to the US dollar. Countries that do not raise their target interest rates tend to be penalized by the market: With a falling currency, the local prices of oil and other commodities tend to rise because commodities are priced in US dollars. As a result, citizens of these countries tend to face a worse inflation problem than they would otherwise face.

The country with the greatest increase in its target interest rate can, in theory, win, in what is more or less a competition to move inflation elsewhere. This competition cannot go on indefinitely, however, because every country depends, to some extent, on imports from other countries. If countries with weaker economies (i. e. those that cannot afford to raise interest rates) stop producing essential goods for world trade, it will tend to bring the world economy down.

Raising interest rates also raises the likelihood of debt defaults, and these debt defaults can be a huge problem, especially for banks and other financial institutions. With higher interest rates, pension funding becomes less adequate. Businesses of all kinds find new investment more expensive. Many businesses are likely to shrink or fail completely. These indirect impacts are yet another way for the world economy to fail.

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Why financial approaches won’t fix the world’s economic problems this time

Time and time again, financial approaches have worked to fix economic problems. Raising interest rates has acted to slow the economy and lowering them has acted to speed up the economy. Governments overspending their incomes also acts to push the economy ahead; doing the reverse seems to slow economies down.

What could possibly go wrong? The issue is a physics problem. The economy doesn’t run simply on money and debt. It operates on resources of many kinds, including energy-related resources. As the population grows, the need for energy-related resources grows. The bottleneck that occurs is something that is hard to see in advance; it is an affordability bottleneck.

For a very long time, financial manipulations have been able to adjust affordability in a way that is optimal for most players. At some point, resources, especially energy resources, get stretched too thin, relative to the rising population and all the commitments that have been made, such as pension commitments. As a result, there is no way for the quantity of goods and services produced to grow sufficiently to match the promises that the financial system has made. This is the real bottleneck that the world economy reaches.

I believe that we are closely approaching this bottleneck today. I recently gave a talk to a group of European officials at the 2nd Luxembourg Strategy Conference, discussing the issue from the European point of view. Europeans seem to be especially vulnerable because Europe, with its early entry into the Industrial Revolution, substantially depleted its fossil fuel resources many years ago. The topic I was asked to discuss was, “Energy: The interconnection of energy limits and the economy and what this means for the future.”

In this post, I write about this presentation.

Slide 3

The major issue is that money, by itself, cannot operate the economy, because we cannot eat money. Any model of the economy must include energy and other resources. In a finite world, these resources tend to deplete. Also, human population tends to grow. At some point, not enough goods and services are produced for the growing population.

I believe that the major reason we have not been told about how the economy really works is because it would simply be too disturbing to understand the real situation. If today’s economy is dependent on finite fossil fuel supplies, it becomes clear that, at some point, these will run short. Then the world economy is likely to face a very difficult time.

A secondary reason for the confusion about how the economy operates is too much specialization by researchers studying the issue. Physicists (who are concerned about energy) don’t study economics; politicians and economists don’t study physics. As a result, neither group has a very broad understanding of the situation.

I am an actuary. I come from a different perspective: Will physical resources be adequate to meet financial promises being made? I have had the privilege of learning a little from both economic and physics sides of the discussion. I have also learned about the issue from a historical perspective.

Slide 4
Slide 5

World energy consumption has been growing very rapidly at the same time that the world economy has been growing. This makes it hard to tell whether the growing energy supply enabled the economic growth, or whether the higher demand created by the growing economy encouraged the world economy to use more resources, including energy resources.

Physics says that it is energy resources that enable economic growth.

Slide 6

The R-squared of GDP as a function of energy is .98, relative to the equation shown.

Slide 7

Physicists talk about the “dissipation” of energy. In this process, the ability of an energy product to do “useful work” is depleted. For example, food is an energy product. When food is digested, its ability to do useful work (provide energy for our body) is used up. Cooking food, whether using a campfire or electricity or by burning natural gas, is another way of dissipating energy.

Humans are clearly part of the economy. Every type of work that is done depends upon energy dissipation. If energy supplies deplete, the form of the economy must change to match.

Slide 8

There are a huge number of systems that seem to grow by themselves using a process called self-organization. I have listed a few of these on Slide 8. Some of these things are alive; most are not. They are all called “dissipative structures.”

The key input that allows these systems to stay in a “non-dead” state is dissipation of energy of the appropriate type. For example, we know that humans need about 2,000 calories a day to continue to function properly. The mix of food must be approximately correct, too. Humans probably could not live on a diet of lettuce alone, for example.

Economies have their own need for energy supplies of the proper kind, or they don’t function properly. For example, today’s agricultural equipment, as well as today’s long-distance trucks, operate on diesel fuel. Without enough diesel fuel, it becomes impossible to plant and harvest crops and bring them to market. A transition to an all-electric system would take many, many years, if it could be done at all.

Slide 9

I think of an economy as being like a child’s building toy. Gradually, new participants are added, both in the form of new citizens and new businesses. Businesses are formed in response to expected changes in the markets. Governments gradually add new laws and new taxes. Supply and demand seem to set market prices. When the system seems to be operating poorly, regulators step in, typically adjusting interest rates and the availability of debt.

One key to keeping the economy working well is the fact that those who are “consumers” closely overlap those who are “employees.” The consumers (= employees) need to be paid well enough, or they cannot purchase the goods and services made by the economy.

A less obvious key to keeping the economy working well is that the whole system needs to be growing. This is necessary so that there are enough goods and services available for the growing population. A growing economy is also needed so that debt can be repaid with interest, and so that pension obligations can be paid as promised.

Slide 10

World population has been growing year after year, but arable land stays close to constant. To provide enough food for this rising population, more intensive agriculture is required, often including irrigation, fertilizers, herbicides and pesticides.

Furthermore, an increasing amount of fresh water is needed, leading to a need for deeper wells and, in some places, desalination to supplement other water sources. All these additional efforts add energy usage, as well as costs.

In addition, mineral ores and energy supplies of all kinds tend to become depleted because the best resources are accessed first. This leaves the more expensive-to-extract resources for later.

Slide 11

The issues in Slide 11 are a continuation of the issues described on Slide 10. The result is that the cost of energy production eventually rises so much that its higher costs spill over into the cost of all other goods and services. Workers find that their paychecks are not high enough to cover the items they usually purchased in the past. Some poor people cannot even afford food and fresh water.

Slide 12
Slide 13

Increasing debt is helpful as an economy grows. A farmer can borrow money for seed to grow a crop, and he can repay the debt, once the crop has grown. Or an entrepreneur can finance a factory using debt.

On the consumer side, debt at a sufficiently low interest rate can be used to make the purchase of a home or vehicle affordable.

Central banks and others involved in the financial world figured out many years ago that if they manipulate interest rates and the availability of credit, they are generally able to get the economy to grow as fast as they would like.

Slide 14

It is hard for most people to imagine how much interest rates have varied over the last century. Back during the Great Depression of the 1930s and the early 1940s, interest rates were very close to zero. As large amounts of inexpensive energy were added to the economy in the post-World War II period, the world economy raced ahead. It was possible to hold back growth by raising interest rates.

Oil supply was constrained in the 1970s, but demand and prices kept rising. US Federal Reserve Chairman Paul Volker is known for raising interest rates to unheard of heights (over 15%) with a peak in 1981 to end inflation brought on by high oil prices. This high inflation rate brought on a huge recession from which the economy eventually recovered, as the higher prices brought more oil supply online (Alaska, North Sea, and Mexico), and as substitution was made for some oil use. For example, home heating was moved away from burning oil; electricity-production was mostly moved from oil to nuclear, coal and natural gas.

Another thing that has helped the economy since 1981 has been the ability to stimulate demand by lowering interest rates, making monthly payments more affordable. In 2008, the US added Quantitative Easing as a way of further holding interest rates down. A huge debt bubble has thus been built up since 1981, as the world economy has increasingly been operated with an increasing amount of debt at ever-lower interest rates. (See 3-month and 10 year interest rates shown on Slide 14.) This cheap debt has allowed rapidly rising asset prices.

Slide 15

The world economy starts hitting major obstacles when energy supply stops growing faster than population because the supply of finished goods and services (such as new automobile, new homes, paved roads, and airplane trips for passengers) produced stops growing as rapidly as population. These obstacles take the form of affordability obstacles. The physics of the situation somehow causes the wages and wealth to be increasingly concentrated among the top 10% or 1%. Lower-paid individuals are increasingly left out. While goods are still produced, ever-fewer workers can afford more than basic necessities. Such a situation makes for unhappy workers.

World energy consumption per capita hit a peak in 2018 and began to slide in 2019, with an even bigger drop in 2020. With less energy consumption, world automobile sales began to slide in 2019 and fell even lower in 2020. Protests, often indirectly related to inadequate wages or benefits, became an increasing problem in 2019. The year 2020 is known for Covid-19 related shutdowns and flight cancellations, but the indirect effect was to reduce energy consumption by less travel and by broken supply lines leading to unavailable goods. Prices of fossil fuels dropped far too low for producers.

Governments tried to get their own economies growing by various techniques, including spending more than the tax revenue they took in, leading to a need for more government debt, and by Quantitative Easing, acting to hold down interest rates. The result was a big increase in the money supply in many countries. This increased money supply was often distributed to individual citizens as subsidies of various kinds.

The higher demand caused by this additional money tended to cause inflation. It tended to raise fossil fuel prices because the inexpensive-to-extract fuels have mostly been extracted. In the days of Paul Volker, more energy supply at a little higher price was available within a few years. This seems extremely unlikely today because of diminishing returns. The problem is that there is little new oil supply available unless prices can stay above at least $120 per barrel on a consistent basis, and prices this high, or higher, do not seem to be available.

Oil prices are not rising this high, even with all of the stimulus funds because of the physics-based wage disparity problem mentioned previously. Also, those with political power try to keep fuel prices down so that the standards of living of citizens will not fall. Because of these low oil prices, OPEC+ continues to make cuts in production. The existence of chronically low prices for fossil fuels is likely the reason why Russia behaves in as belligerent a manner as it does today.

Today, with rising interest rates and Quantitative Tightening instead of Quantitative Easing, a major concern is that the debt bubble that has grown since in 1981 will start to collapse. With falling debt levels, prices of assets, such as homes, farms, and shares of stock, can be expected to fall. Many borrowers will be unable to repay their loans.

If this combination of events occurs, deflation is a likely outcome because banks and pension funds are likely to fail. If, somehow, local governments are able to bail out banks and pension funds, then there is a substantial likelihood of local hyperinflation. In such a case, people will have huge quantities of money, but practically nothing available to buy. In either case, the world economy will shrink because of inadequate energy supply.

Slide 16
Slide 17

Most people have a “normalcy bias.” They assume that if economic growth has continued for a long time in the past, it necessarily will occur in the future. Yet, we all know that all dissipative structures somehow come to an end. Humans can come to an end in many ways: They can get hit by a car; they can catch an illness and succumb to it; they can die of old age; they can starve to death.

History tells us that economies nearly always collapse, usually over a period of years. Sometimes, population rises so high that the food production margin becomes tight; it becomes difficult to set aside enough food if the cycle of weather should turn for the worse. Thus, population drops when crops fail.

In the years leading up to collapse, it is common that the wages of ordinary citizens fall too low for them to be able to afford an adequate diet. In such a situation, epidemics can spread easily and kill many citizens. With so much poverty, it becomes impossible for governments to collect enough taxes to maintain services they have promised. Sometimes, nations lose at war because they cannot afford a suitable army. Very often, governmental debt becomes non-repayable.

The world economy today seems to be approaching some of the same bottlenecks that more local economies hit in the past.

Slide 18

The basic problem is that with inadequate energy supplies, the total quantity of goods and services provided by the economy must shrink. Thus, on average, people must become poorer. Most individual citizens, as well as most governments, will not be happy about this situation.

The situation becomes very much like the game of musical chairs. In this game, one chair at a time is removed. The players walk around the chairs while music plays. When the music stops, all participants grab for a chair. Someone gets left out. In the case of energy supplies, the stronger countries will try to push aside the weaker competitors.

Slide 19

Countries that understand the importance of adequate energy supplies recognize that Europe is relatively weak because of its dependence on imported fuel. However, Europe seems to be oblivious to its poor position, attempting to dictate to others how important it is to prevent climate change by eliminating fossil fuels. With this view, it can easily keep its high opinion of itself.

If we think about the musical chairs’ situation and not enough energy supplies to go around, everyone in the world (except Europe) would be better off if Europe were to be forced out of its high imports of fossil fuels. Russia could perhaps obtain higher energy export prices in Asia and the Far East. The whole situation becomes very strange. Europe tells itself it is cutting off imports to punish Russia. But, if Europe’s imports can remain very low, everyone else, from the US, to Russia, to China, to Japan would benefit.

Slide 20

The benefits of wind and solar energy are glorified in Europe, with people being led to believe that it would be easy to transition from fossil fuels, and perhaps leave nuclear, as well. The problem is that wind, solar, and even hydroelectric energy supply are very undependable. They cannot ever be ramped up to provide year-round heat. They are poorly adapted for agricultural use (except for sunshine helping crops grow).

Few people realize that the benefits that wind and solar provide are tiny. They cannot be depended on, so companies providing electricity need to maintain duplicate generating capacity. Wind and solar require far more transmission than fossil-fuel-generated electricity because the best sources are often far from population centers. When all costs are included (without subsidy), wind and solar electricity tend to be more expensive than fossil-fuel generated electricity. They are especially difficult to rely on in winter. Therefore, many people in Europe are concerned about possibly “freezing in the dark,” as soon as this winter.

There is no possibility of ever transitioning to a system that operates only on intermittent electricity with the population that Europe has today, or that the world has today. Wind turbines and solar panels are built and maintained using fossil fuel energy. Transmission lines cannot be maintained using intermittent electricity alone.

Slide 21
Slide 22

Basically, Europe must use very much less fossil fuel energy, for the long term. Citizens cannot assume that the war with Ukraine will soon be over, and everything will be back to the way it was several years ago. It is much more likely that the freeze-in-the-dark problem will be present every winter, from now on. In fact, European citizens might actually be happier if the climate would warm up a bit.

With this as background, there is a need to figure out how to use less energy without hurting lifestyles too badly. To some extent, changes from the Covid-19 shutdowns can be used, since these indirectly were ways of saving energy. Furthermore, if families can move in together, fewer buildings in total will need to be heated. Cooking can perhaps be done for larger groups at a time, saving on fuel.

If families can home-school their children, this saves both the energy for transportation to school and the energy for heating the school. If families can keep younger children at home, instead of sending them to daycare, this saves energy, as well.

A major issue that I do not point out directly in this presentation is the high energy cost of supporting the elderly in the lifestyles to which they have become accustomed. One issue is the huge amount and cost of healthcare. Another is the cost of separate residences. These costs can be reduced if the elderly can be persuaded to move in with family members, as was done in the past. Pension programs worldwide are running into financial difficulty now, with interest rates rising. Countries with large elderly populations are likely to be especially affected.

Slide 23

Besides conserving energy, the other thing people in Europe can do is attempt to understand the dynamics of our current situation. We are in a different world now, with not enough energy of the right kinds to go around.

The dynamics in a world of energy shortages are like those of the musical chairs’ game. We can expect more fighting. We cannot expect that countries that have been on our side in the past will necessarily be on our side in the future. It is more like being in an undeclared war with many participants.

Under ideal circumstances, Europe would be on good terms with energy exporters, even Russia. I suppose at this late date, nothing can be done.

A major issue is that if Europe attempts to hold down fossil fuel prices, the indirect result will be to reduce supply. Oil, natural gas and coal producers will all reduce supply before they will accept a price that they consider too low. Given the dependence of the world economy on energy supplies, especially fossil fuel energy supplies, this will make the situation worse, rather than better.

Wind and solar are not replacements for fossil fuels. They are made with fossil fuels. We don’t have the ability to store up solar energy from summer to winter. Wind is also too undependable, and battery capacity too low, to compensate for need for storage from season to season. Thus, without a growing supply of fossil fuels, it is impossible for today’s economy to continue in its current form.

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Ramping Up Renewables Can’t Provide Enough Heat Energy in Winter

We usually don’t think about the wonderful service fossil fuels provide in terms of being a store of heat energy for winter, the time when there is a greater need for heat energy. Figure 1 shows dramatically how, in the US, the residential usage of heating fuels spikes during the winter months.

Figure 1. US residential use of energy, based on EIA data. The category “Natural Gas, etc.” includes all fuels bought directly by households and burned. This is primarily natural gas, but also includes small amounts of propane and diesel burned as heating oil. Wood chips or other commercial wood purchased to be burned is also in this category.

Solar energy is most abundantly available in the May-June-July period, making it a poor candidate for fixing the problem of the need for winter heat.

Figure 2. California solar electricity production by month through June 30, 2022, based on EIA data. Amounts are for utility scale and small scale solar combined.

In some ways, the lack of availability of fuels for winter is a canary in the coal mine regarding future energy shortages. People have been concerned about oil shortages, but winter fuel shortages are, in many ways, just as bad. They can result in people “freezing in the dark.”

In this post, I will look at some of the issues involved.

[1] Batteries are suitable for fine-tuning the precise time during a 24-hour period solar electricity is used. They cannot be scaled up to store solar energy from summer to winter.

In today’s world, batteries can be used to delay the use of solar electricity for at most a few hours. In exceptional situations, perhaps the holding period can be increased to a few days.

California is known both for its high level of battery storage and its high level of renewables. These renewables include both solar and wind energy, plus smaller amounts of electricity generated in geothermal plants and electricity generated by burning biomass. The problem encountered is that the electricity generated by solar panels tends to start and end too early in the day, relative to when citizens want to use this electricity. After citizens return home after work, they would like to cook their dinners and use their air conditioning, leading to considerable demand after the sun sets.

Figure 3. Illustration by Inside Climate News showing the combination of resources utilized during July 9, 2022, which was a day of peak electricity consumption. Imports refer to electricity purchased from outside the State of California.

Figure 3 illustrates how batteries in combination with hydroelectric generation (hydro) are used to save electricity generation from early in the day for use in the evening hours. While battery use is suitable for fine tuning exactly when, during a 24-hour period, solar energy will be used, the quantity of batteries cannot be ramped up sufficiently to save electricity from summer to winter. The world would run out of battery-making materials, if nothing else.

[2] Ramping up hydro is not a solution to our problem of inadequate energy for heat in winter.

One problem is that, in long-industrialized economies, hydro capabilities were built out years ago.

Figure 4. Annual hydro generation based on data of BP’s 2022 Statistical Review of World Energy.

It is difficult to believe that much more buildout is available in these countries.

Another issue is that hydro tends to be quite variable from year to year, even over an area as large as the United States, as shown in Figure 4 above. When the variability is viewed over a smaller area, the year-to-year variability is even higher, as illustrated in Figure 5 below.

Figure 5. Monthly California hydroelectric generation through June 30, 2022, based on EIA data.

The pattern shown reflects peak generation in the spring, when the ice pack is melting. Low generation generally occurs during the winter, when the ice pack is frozen. Thus, hydro tends not be helpful for raising winter energy supplies. A similar pattern tends to happen in other temperate areas.

A third issue is that variability in hydro supply is already causing problems. Norway has recently reported that it may need to limit hydro exports in coming months because water reservoirs are low. Norway’s exports of electricity are used to help balance Europe’s wind and solar electricity. Thus, this issue may lead to yet another energy problem for Europe.

As another example, China reports a severe power crunch in its Sichuan Province, related to low rainfall and high temperatures. Fossil fuel generation is not available to fill the gap.

[3] Wind energy is not a greatly better than hydro and solar, in terms of variability and poor timing of supply.

For example, Europe experienced a power crunch in the third quarter of 2021 related to weak winds. Europe’s largest wind producers (Britain, Germany and France) produced only 14% of their rated capacity during this period, compared with an average of 20% to 26% in previous years. No one had planned for this kind of three-month shortfall.

In 2021, China experienced dry, windless weather, resulting in both its generation from wind and hydro being low. The country found it needed to use rolling blackouts to deal with the situation. This led to traffic lights failing and many families needing to eat candle-lit dinners.

Even viewed on a nationwide basis, US wind generation varies considerably from month to month.

Figure 6. Total US wind electricity generation through June 20, 2022, based on EIA data.

US total wind electricity generation tends to be highest in April or May. This can cause oversupply issues because hydro generation tends to be high about the same time. The demand for electricity tends to be low because of generally mild weather. The result is that even at today’s renewable levels, a wet, windy spring can lead to a situation in which the combination of hydro and wind electricity supply exceeds total local demand for electricity.

[4] As more wind and solar are added to the grid, the challenges and costs become increasingly great.

There are a huge number of technical problems associated with trying to add a large amount of wind and solar energy to the grid. Some of them are outlined in Figure 7.

Figure 7. Introductory slide from a presentation by power engineers shown in this YouTube Video.

One of the issues is torque distortion, especially related to wind energy.

Figure 8. Slide describing torque distortion issues from the same presentation to power engineers as Figure 7. YouTube Video.

There are also many other issues, including some outlined on this Drax website. Wind and solar provide no “inertia” to the system. This makes me wonder whether the grid could even function without a substantial amount of fossil fuel or nuclear generation providing sufficient inertia.

Furthermore, wind and solar tend to make voltage fluctuate, necessitating systems to absorb and discharge something called “reactive power.”

[5] The word “sustainable” has created unrealistic expectations with respect to intermittent wind and solar electricity.

A person in the wind turbine repair industry once told me, “Wind turbines run on a steady supply of replacement parts.” Individual parts may be made to last 20-years, or even longer, but there are so many parts that some are likely to need replacement long before that time. An article in Windpower Engineering says, “Turbine gearboxes are typically given a design life of 20 years, but few make it past the 10-year mark.”

There is also the problem of wind damage, especially in the case of a severe storm.

Figure 9. Hurricane-damaged solar panels in Puerto Rico. Source.

Furthermore, the operational lives for fossil fuel and nuclear generating plants are typically much longer than those for wind and solar. In the US, some nuclear plants have licenses to operate for 60 years. Efforts are underway to extend some licenses to 80 years.

With the short life spans for wind and solar, constant rebuilding of wind turbines and solar generation is necessary, using fossil fuels. Between the rebuilding issue and the need for fossil fuels to maintain the electric grid, the output of wind turbines and solar panels cannot be expected to last any longer than fossil fuel supply.

[6] Energy modeling has led to unrealistic expectations for wind and solar.

Energy models don’t take into account all of the many adjustments to the transmission system that are needed to support wind and solar, and the resulting added costs. Besides the direct cost of the extra transmission required, there is an ongoing need to inspect parts for signs of wear. Brush around the transmission lines also needs to be cut back. If adequate maintenance is not performed, transmission lines can cause fires. Burying transmission lines is sometimes an option, but doing so is expensive, both in energy use and cost.

Energy models also don’t take into account the way wind turbines and solar panels perform in “real life.” In particular, most researchers miss the point that electricity from solar panels cannot be expected to be very helpful for meeting our need for heat energy in winter. If we want to add more summer air conditioning, solar panels can “sort of” support this effort, especially if batteries are also added to help fine tune when, during the 24-hour day, the solar electricity will be utilized. Unfortunately, we don’t have any realistic way of saving the output of solar panels from summer to winter.

It seems to me that supporting air conditioning is a rather frivolous use for what seems to be a dwindling quantity of available energy supply. In my opinion, our first two priorities should be adequate food supply and preventing freezing in the dark in winter. Solar, especially, does nothing for these issues. Wind can be used to pump water for crops and animals. In fact, an ordinary windmill, built 100 years ago, can also be used to provide this type of service.

Because of the intermittency issue, especially the “summer to winter” intermittency issue, wind and solar are not truly replacements for electricity produced by fossil fuels or nuclear. The problem is that most of the current system needs to remain in place, in addition to the renewable energy system. When researchers make cost comparisons, they should be comparing the cost of the intermittent energy, including necessary batteries and grid enhancements with the cost of the fuel saved by operating these devices.

[7] Competitive pricing plans that enable the growth of wind and solar electricity are part of what is pushing a number of areas in the world toward a “freezing-in-the-dark” problem.

In the early days of electricity production, “utility pricing” was generally used. With this approach, vertical integration of electricity supply was encouraged. A utility would make long term contracts with a number of providers and would set prices for customers based on the expected long-term cost of electricity production and distribution. The utility would make certain that transmission lines were properly repaired and would add new generation as needed.

Energy prices of all kinds spiked in the late 1970s. Not long afterward, in an attempt to prevent high electricity prices from causing inflation, a shift in pricing arrangements started taking place. More competition was encouraged, with the new approach called competitive pricing. Vertically integrated groups were broken up. Wholesale electricity prices started varying by time of day, based on which providers were willing to sell their production at the lowest price, for that particular time period. This approach encouraged providers to neglect maintaining their power lines and stop adding more storage capacity. Any kind of overhead expense was discouraged.

In fact, under this arrangement, wind and solar were also given the privilege of “going first.” If too much energy in total was produced, negative rates could result for other providers. This approach was especially harmful for nuclear energy. Nuclear power plants found that their overall price structure was too low. They sometimes closed because of inadequate profitability. New investments in nuclear energy were discouraged, as was proper maintenance. This effect has been especially noticeable in Europe.

Figure 10. Nuclear, wind and solar electricity generated in Europe, based on data of BP’s 2022 Statistical Review of World Energy.

The result is that about a third of the gain from wind and solar energy has been offset by the decline in nuclear electricity generation. Of course, nuclear is another low-carbon form of electricity. It is a great deal more reliable than wind or solar. It can even help prevent freezing in the dark because it is likely to be available in winter, when more electricity for heating is likely to be needed.

Another issue is that competitive pricing discouraged the building of adequate storage facilities for natural gas. Also, it tended to discourage purchasing natural gas under long term contracts. The thinking went, “Rather than building storage, why not wait until the natural gas is needed, and then purchase it at the market rate?”

Unfortunately, producing natural gas requires long-term investments. Companies producing natural gas operate wells that produce approximately equal amounts year-round. The same pattern of high winter-consumption of natural gas tends to occur almost simultaneously in many Northern Hemisphere areas with cold winters. If the system is going to work, customers need to be purchasing natural gas, year-round, and stowing it away for winter.

Natural gas production has been falling in Europe, as has coal production (not shown), necessitating more imports of replacement fuel, often natural gas.

Figure 11. Natural gas production in Europe, based on data of BP’s 2022 Statistical Review of World Energy.

With competitive rating and LNG ships seeming to sell natural gas on an “as needed” basis, there has been a tendency in Europe to overlook the need for long term contracts and additional storage to go with rising natural gas imports. Now, Europe is starting to discover the folly of this approach. Solar is close to worthless for providing electricity in winter; wind cannot be relied upon. It doesn’t ramp up nearly quickly enough, in any reasonable timeframe. The danger is that countries will risk having their citizens freeze in the dark because of inadequate natural gas import availability.

[8] The world is a very long way from producing enough wind and solar to solve its energy problems, especially its need for heat in winter.

The energy supply that the world uses includes much more than electricity. It contains oil and fuels burned directly, such as natural gas. The percentage share of this total energy supply that wind and solar output provides depends on how it is counted. The International Energy Agency treats wind and solar as if they only replace fuel, rather than replacing dispatchable electricity.

Figure 12 Wind and solar generation for a category called “Wind, Solar, etc.” by the IEA. Amounts are for 2020 for Germany, the UK, Australia, Norway, the United States, and Japan. For other groups shown in this chart, the amounts are calculated using 2019 data.

On this basis, the share of total energy provided by the Wind and Solar category is very low, only 2.2% for the world as a whole. Germany comes out highest of the groups analyzed, but even it is replacing only 6.0% of its total energy consumed. It is difficult to imagine how the land and water around Germany could tolerate wind turbines and solar panels being ramped up sufficiently to cover such a shortfall. Other parts of the world are even farther from replacing current energy supplies with wind and solar.

Clearly, we cannot expect wind and solar to ever be ramped up to meet our energy needs, even in combination with hydro.

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Why No Politician Is Willing to Tell Us the Real Energy Story

No politician wants to tell us the real story of fossil fuel depletion. The real story is that we are already running short of oil, coal and natural gas because the direct and indirect costs of extraction are reaching a point where the selling price of food and other basic necessities needs to be unacceptably high to make the overall economic system work. At the same time, wind and solar and other “clean energy” sources are nowhere nearly able to substitute for the quantity of fossil fuels being lost.

This unfortunate energy story is essentially a physics problem. Energy per capita and, in fact, resources per capita, must stay high enough for an economy’s growing population. When this does not happen, history shows that civilizations tend to collapse.

Figure 1. World fossil fuel energy consumption per capita, based on data of BP’s 2022 Statistical Review of World Energy.

Politicians cannot possibly admit that today’s world economy is headed for collapse, in a way similar to that of prior civilizations. Instead, they need to provide the illusion that they are in charge. The self-organizing system somehow leads politicians to put forward reasons why the changes ahead might be desirable (to avert climate change), or at least temporary (because of sanctions against Russia).

In this post, I will try to try to explain at least a few of the issues involved.

[1] Citizens around the world can sense that something is very wrong. It looks like the economy may be headed for a serious recession in the near term.

Figure 2. Index of consumer sentiment and news heard of company changes as reported by the University of Michigan Survey of Consumers, based on preliminary indications for August 2022.

Consumer sentiment is at an extraordinarily low level, worse than during the 2008-2009 great recession according to a chart (Figure 2) shown on the University of Michigan Survey of Consumers website. According to the same website, nearly 48% of consumers blame inflation for eroding their standard of living. Food prices have risen significantly. Over the past year, the cost of car ownership has escalated, as has the cost of buying or renting a home.

The situation in Europe is at least as bad, or worse. Citizens are worried about possibly “freezing in the dark” this winter if electricity generation cannot be maintained at an adequate level. Natural gas supplies, mostly purchased from Russia by pipeline, are less available and high-priced. Coal is also high-priced. Because of the fall of the Euro relative to the US dollar, the price of oil in euros is as high as it was in 2008 and 2012.

Figure 3. Inflation-adjusted Brent crude oil price in US dollars and euros, in chart by the US Energy Information Administration, as published in EIA’s August 2022 Short Term Energy Outlook.

Many other countries, besides those in the Eurozone, are experiencing low currencies relative to the dollar. Some examples include Argentina, India, Pakistan, Nigeria, Turkey, Japan, and South Korea.

China has problems with developers of condominium homes for its citizen. Many of these homes cannot be delivered to purchasers as promised. As a protest, buyers are withholding payments on their unfinished homes. To make matters worse, the prices of condominium homes have started to fall, leading to a loss of value of these would-be investments. All of this could lead to serious problems for the Chinese banking industry.

Even with these major problems, central banks in the US, the UK and the Eurozone are raising target interest rates. The US is also implementing Quantitative Tightening, which also tends to raise interest rates. Thus, central banks are intentionally raising the cost of borrowing. It doesn’t take much insight to see that the combination of price inflation and higher borrowing costs is likely to force consumers to cut back on spending, leading to recession.

[2] Politicians will avoid talking about possible future economic problems related to inadequate energy supply.

Politicians want to get re-elected. They want citizens to think that everything is OK. If there are energy supply problems, they need to be framed as being temporary, perhaps related to the war in Ukraine. Alternatively, any issue that arises will be discussed as if it can easily be fixed with new legislation and perhaps a little more debt.

Businesses also want to minimize problems. They want citizens to place orders for their goods and services, without the fear of being laid off. They would like the news media to publish stories saying that any economic dip is likely to be very mild and temporary.

Universities don’t mind problems, but they want the problems to be framed as solvable ones that will offer their students opportunities for jobs that will pay well. A near-term, unsolvable predicament is not helpful at all.

[3] What is wrong is a physics problem. The operation of our economy requires energy of the correct type and the right quantity.

The economy is something that grows through the “dissipation” of energy. Examples of dissipation of energy include the digestion of food to give energy to humans, the burning of fossil fuels, and the use of electricity to power a light bulb. A rise in world energy consumption is highly correlated with growth in the world economy. Falling energy consumption is associated with economic contraction.

Figure 4. Correlation between world GDP measured in “Purchasing Power Parity” (PPP) 2017 International $ and world energy consumption, including both fossil fuels and renewables. GDP is as reported by the World Bank for 1990 through 2021 as of July 26, 2022; total energy consumption is as reported by BP in its 2022 Statistical Review of World Energy.

In physics terms, the world economy is a dissipative structure, just as all plants, animals and ecosystems are. All dissipative structures have finite lifespans, including the world economy.

This finding is not well known because academic researchers seem to operate in ivory towers. Researchers in economic departments aren’t expected to understand physics and how it applies to the economy. In fairness to academia, the discovery that the economy is a dissipative structure did not occur until 1996. It takes a long time for findings to filter through from one department to another. Even now, I am one of a very small number of people in the world writing about this issue.

Also, economic researchers are not expected to study the history of the many smaller, more-localized civilizations that have collapsed in the past. Typically, the population of these smaller civilizations increased at the same time as the resources used by the population started to degrade. The use of technology, such as dams to redirect water flows, may have helped for a while, but eventually this was not enough. The combination of declining availability of high quality resources and increasing population tended to leave these civilizations with little margin for dealing with the bad times that can be expected to occur by chance. In many cases, such civilizations collapsed after disease epidemics, a military invasion, or a climate fluctuation that led to a series of crop failures.

[4] Many people have been confused by common misunderstandings regarding how an economy really works.

[a] Standard economics models foster the belief that the economy can continue to grow without a corresponding increase in energy supply.

When economic models are designed with labor and capital being the important inputs, energy supply doesn’t seem to be needed, at all.

[b] People seem to understand that legislation capping apartment rents will stop the building of new apartments, but they do not make the same connection with steps taken to hold down fossil fuel prices.

If efforts are made to bring down the prices of fossil fuels (such as raising interest rates and adding oil from the US petroleum reserves to increase total oil supply), we need to expect that extraction will be adversely affected. One article reports that Saudi Arabia does not seem to be using recent record profits to quickly raise reinvestment to the level that seemed to be required a few years ago. This suggests that Saudi Arabia needs prices that are quite a bit higher than $100 per barrel in order to take significant steps toward extracting the country’s remaining resources. This would seem to contradict published reserves that, in theory, take current prices into consideration.

Reuters reports that Venezuela has reneged on its promise to send more oil to Europe, under an oil for debt deal. It wants oil product swaps instead, since it is lacking in its ability to make finished products from its oil itself. It would take a long run of prices much higher than today’s level for Venezuela to be able to sufficiently invest in infrastructure to do such refining. Venezuela reports the highest oil reserves in the world (303.8 thousand million barrels), even higher than Saudi Arabia’s reported 297.5 thousand million barrels, but neither country can be counted on to take major steps to raise supply.

Similarly, there have been reports that US shale drillers are not investing to keep production growing, despite what seem to be sufficiently high prices. There are simply too many issues. The cost of new investment is very high, outside of the already drilled sweet spots. Also, there is no guarantee the price will stay high. There are also supply line issues, such as whether appropriate steel drilling pipes and fracking sand will be available, when needed.

[c] Published information suggests that there is a huge amount of fossil fuels remaining to be extracted, given today’s level of technology. If we assume that technology will get better and better, it is easy to believe that any fossil fuel limit is hundreds of years in the future.

The way the economy works, the extraction limit is really an affordability issue. If the cost of extraction rises too high, relative to what people around the world have for spendable income, production will stop because demand (in terms of what people can afford) will drop too low. People will tend to cut back on discretionary spending, such as vacation travel and meals in restaurants, cutting back on demand for fossil fuels.

[d] How “demand” works is poorly understood. Very often, researchers and the general public assume that demand for energy products will automatically remain high.

A surprisingly large share of demand is tied to the need for food, water, and basic services such as schools, roads, and bus service. Poor people require these basics just as much as rich people do. There are literally billions of poor people in the world. If the wages of poor people fall too low relative to the wages of rich people, the system cannot work. Poor people find that they must spend nearly all their income on food, water and housing. As a result, they have little left to pay taxes to support basic governmental services. Without adequate demand from poor people, the prices of commodities tend to fall too low to encourage reinvestment.

The majority of fossil fuel use is by commercial and industrial users. For example, natural gas is often used in making nitrogen fertilizer. If the price of natural gas is high, the price of fertilizer will rise higher than farmers are willing to pay for the fertilizer. Farmers will cut back on fertilizer use, reducing yields for their crops. The farmers’ own costs will be lower, but there will be less of the desired crops grown, perhaps indirectly raising overall food prices. This is not a connection that economic modelers build into their models.

The lockdowns of 2020 show that governments can indeed ramp up demand (and thus prices) for energy products by sending out checks to citizens. We are now seeing that the approach seems to produce inflation rather than more energy production. Also, countries without energy resources of their own may see their currencies fall with respect to the US dollar.

[e] It is not true that energy types can easily be substituted for one another.

In energy modeling, such as in calculating “Energy Return on Energy Invested,” a popular assumption is that all energy is substitutable for other energy. This isn’t true, unless a person accounts for all of the details of the transition, and the energy needed to make such a transition possible.

For example, intermittent electricity, such as that generated by wind turbines or solar panels, is not substitutable for load-following electricity. Such intermittent electricity is not always available when people need it. Some of this intermittency is very long-term. For example, wind-generated electricity may be low for more than a month at a time. In the case of solar energy, the problem tends to be storing up enough electricity during summer months for use in winter. A naive person might assume that adding a few hours of battery backup would fix intermittency problems, but such a fix turns out to be very inadequate.

If people are not to freeze in the dark in winter, longer-term solutions are needed. One standard approach is to use a fossil fuel system to fill in the gaps when wind and solar are not available. The catch, then, is that the fossil fuel system really needs to be a year-around system, with trained staffing, pipelines and adequate fuel storage. A modeler needs to consider the need to build a whole double system instead of a single system.

Because of intermittency issues, electricity from wind and solar only substitute for fuels (coal, natural gas, uranium) that operate our current system. Publications often talk about the cost of intermittent electricity being at “grid parity” when its temporary cost seems to match the cost of grid electricity, but this is matching “apples and oranges.” The cost comparison needs to be in comparison to the average cost of fuel for plants producing electricity, rather than to electricity prices.

Another popular assumption is that electricity can be substituted for liquid fuels. For example, in theory, every piece of farm equipment could be redesigned and rebuilt to be based on electricity, rather than diesel, which is typically used today. The catch is that there would need to be an enormous number of batteries built and eventually disposed of for this transition to work. There would need also need to be factories to build all this new equipment. We would need an international trade system operating extraordinarily well, to find all the raw materials. Likely, there would still not be enough raw materials to make the system work.

[f] There is a great deal of confusion about expected oil and other energy prices, as an economy reaches energy limits.

This issue is closely related to [4][d], with respect to the confusion about how energy demand works. A common assumption among analysts is that “of course” oil prices will rise, as limits are approached. This assumption is based on the standard supply and demand curve used by economists.

Figure 5. Standard economic supply and demand curve from Wikipedia. Description of how this curve works: The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

The issue is that the availability of inexpensive energy products very much affects demand as well as supply. Jobs that pay well are only available if inexpensive energy products can leverage human labor. For example, surgeons today perform robotic surgery, requiring, at a minimum, a stable source of electricity for each operation. Furthermore, the equipment used in the surgery is created using fossil fuels. Surgeons also use anesthetic products that require fossil fuels. Without today’s fancy equipment, surgeons would not be able to charge nearly as much they do for their services.

Thus, it is not immediately obvious whether demand or supply would tend to fall faster, if energy supply should hit limits. We know that Revelation 18:11-13 in the Bible provides a list of a number of commodities, including humans sold as slaves, for which prices dropped very low at the time of the collapse of ancient Babylon. This suggests that at least sometimes during prior collapses, the problem was too low demand (and too low prices), rather than too low supply of energy products.

[5] The International Energy Agency and politicians around the world have recommended a transition to the use of wind and solar to try to prevent climate change for quite a few years. This approach seemed to have the approval of both those concerned about too much burning of fossil fuels causing climate change and those concerned about too little fossil fuel energy causing economic collapse.

A rough estimate of what the decline in energy supply might look like under the rapid shift to renewables proposed by politicians is shown in Figure 6.

Figure 6. Estimate by Gail Tverberg of World Energy Consumption from 1820 to 2050. Amounts for earliest years based on estimates in Vaclav Smil’s book Energy Transitions: History, Requirements and Prospectsand BP’s 2020 Statistical Review of World Energy for the years 1965 to 2019. Energy consumption for 2020 is estimated to be 5% below that for 2019. Energy for years after 2020 is assumed to fall by 6.6% per year, so that the amount reaches a level similar to renewables only by 2050. Amounts shown include more use of local energy products (wood and animal dung) than BP includes.

If a person understands the connection between energy consumption and the economy, such a rapid drop in energy supply looks like something that would likely be associated with economic collapse. The goal of politicians seems to be to keep citizens from understanding how awful the situation really is by reframing the story of the decline in energy supply as something politicians and economists have chosen to do, to try to prevent climate change for the sake of future generations.

The rich and powerful can see this change as a good thing if they themselves can profit from it. When there is not enough energy, the physics of the situation tends to lead to increasing wage and wealth disparities. Wealthy individuals see this outcome as a good thing: They can perhaps personally profit. For example, Bill Gates has amassed about 270,000 acres of farmland in the United States, including newly purchased farmland in North Dakota.

Furthermore, politicians see that they can have more control over populations if they can direct citizens in a way that will use less energy. For example, bank accounts can be linked to some type of social credit score. Politicians will explain that this is for people’s own good–to prevent the spread of disease or to prevent undesirables from using too much of the available resources.

One way of dramatically reducing energy consumption is by mandating shutdowns in an area, purportedly to prevent the spread of Covid-19, as China has been doing recently. Such shutdowns can be explained as being needed to stop the spread of disease. These shutdowns can also help hide other problems, such as not having enough fuels to prevent rolling blackouts of electricity.

[6] We are living in a truly unusual time, with a major energy problem being hidden from view.

Politicians cannot tell the world how bad the energy situation really is. The problem with near-term energy limits has been known since at least 1956 (M. King Hubbert) and 1957 (Hyman Rickover). The problem was confirmed in the modeling performed for the 1972 book, The Limits to Growth by Donella Meadows and others.

Most high-level politicians are aware of the energy supply issue, but they cannot possibly talk about it. Instead, they choose to talk about what would happen if the economy were allowed to speed ahead without limits, and how bad the consequences of that might be.

Militaries around the world are no doubt well aware of the fact that there will not be enough energy supplies to go around. This means that the world will be in a contest for who gets how much. In a war-like setting, we should not be surprised if communications are carefully controlled. The views we can expect to hear loudly and repeatedly are the ones governments and influential individuals want ordinary citizens to hear.

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The world’s self-organizing economy can be expected to act strangely, as energy supplies deplete

It is my view that when energy supply falls, it falls not because reserves “run out.” It falls because economies around the world cannot afford to purchase goods and services made with energy products and using energy products in their operation. It is really a price problem. Prices cannot be simultaneously high enough for oil producers (such as Russia and Saudi Arabia) to ramp up production and remain low enough for consumers around the world to buy the goods and services that they are accustomed to buying.

Figure 1. Chart showing average annual Brent-equivalent oil prices in 2021$ based on data from BP’s 2022 Statistical Review of World Energy, together with bars showing periods when prices seemed to be favorable to producers.

We are now in a period of price conflict. Oil and other energy prices have remained too low for producers since at least mid-2014. At the same time, depletion of fossil fuels has led to higher costs of extraction. Often, the tax needs of governments of oil exporting countries are higher as well, leading to even higher required prices for producers if they are to continue to produce oil and raise their production. Thus, producers truly require higher prices.

Governments of countries affected by this inflation in price are quite disturbed: Higher prices for energy products mean higher prices for all goods and services. This makes citizens very unhappy because wages do not rise to compensate for this inflation. Prices today are high enough to cause significant inflation (about $107 per barrel for Brent oil (Europe) and $97 for WTI (US)), but still not high enough to satisfy the high-price needs of energy producers.

It is my expectation that these and other issues will lead to a very strangely behaving world economy in the months and years ahead. The world economy we know today is, in fact, a self-organizing system operating under the laws of physics. With less energy, it will start “coming apart.” World trade will increasingly falter. Fossil fuel prices will be volatile, but not necessarily very high. In this post, I will try to explain some of the issues I see.

[1] The issue causing the price conflict can be described as reduced productivity of the economy. The ultimate outcome of reduced productivity of the economy is fewer total goods and services produced by the economy.

Figure 2 shows that, historically, there is an extremely high correlation between world energy consumption and the total quantity of goods and services produced by the world economy. In my analysis, I use Purchasing Power Parity (PPP) GDP because it is not distorted by the rise and fall of the US dollar relative to other currencies.

Figure 2. Correlation between world GDP measured in “Purchasing Power Parity” (PPP) 2017 International $ and world energy consumption, including both fossil fuels and renewables. GDP is as reported by the World Bank for 1990 through 2021 as of July 26, 2022; total energy consumption is as reported by BP in its 2022 Statistical Review of World Energy.

The reason such a high correlation exists is because it takes energy to perform each activity that contributes to GDP, such as lighting a room or transporting goods. Energy consumption which is cheap to produce and growing rapidly in quantity is ideal for increasing energy productivity, since it allows factories to be built cheaply and raw materials and finished goods to be transported at low cost.

Humans are part of the economy. Food is the energy product that humans require. Reducing food supply by 20% or 40% or 50% cannot be expected to work well. The economy suffers the same difficulty.

In recent years, depletion has been making the extraction of fossil fuel resources increasingly expensive. One issue is that the resources that were easiest to extract and closest to where they were needed were extracted first, leaving the highest cost resources for extraction later. Another issue is that with a growing population, the governments of oil exporting countries require higher tax revenue to support the overall needs of their countries.

Intermittent wind and solar are not substitutes for fossil fuels because they are not available when they are needed. If several months’ worth of storage could be added, the total cost would be so high that these energy sources would have no chance of being competitive. I recently wrote about some of the issues with renewables in Limits to Green Energy Are Becoming Much Clearer.

Rising population is a second problem leading to falling efficiency. In order to feed, clothe and house a rising population, a growing quantity of food must be produced from essentially the same amount of arable land. More water for the rising population is required for the rising population, often obtained by deeper wells or desalination. Clearly, the need to use increased materials and labor to work around problems caused by rising world population adds another layer of inefficiency.

If we also add the cost of attempting to work around pollution issues, this further adds another layer of inefficiency in the use of energy supplies.

More technology is not a solution, either, because adding any type of complexity requires energy to implement. For example, adding machines to replace current workers requires the use of energy products to make and operate the machines. Moving production to cheaper locations overseas (another form of complexity) requires energy for the transport of goods from where they are transported to where they are used.

Figure 2 shows that the world economy still requires more energy to produce increasing GDP, even with the gains achieved in technology and efficiency.

Because of energy limits, the world economy is trying to change from a “growth mode” to a “shrinkage mode.” This is something very much like the collapse of many ancient civilizations, including the fall of Rome in 165 to 197 CE. Historically, such collapses have unfolded over a period of years or decades.

[2] In the past, the growth rate of GDP has exceeded that of energy consumption. As the economy changes from growth to shrinkage, we should expect this situation to reverse: The rate of shrinkage of GDP will be greater than the rate of shrinkage of energy consumption.

Figure 3 shows that, historically, world economic growth has been slightly higher than the growth in energy consumption. This growth in energy consumption is based on total consumption of fossil fuels and renewables, as calculated by BP.

Figure 3. Annual growth in world PPP GDP compared to annual growth in consumption of energy supplies. World PPP GDP is data provided by the World Bank; world energy consumption is based on data of BP’s 2022 Statistical Review of World Energy.

In fact, based on the discussion in Section [1], this is precisely the situation we should expect: GDP growth should exceed energy consumption growth when the economy is growing. Unfortunately, Section [1] also suggests that we can expect this favorable relationship to disappear as energy supply begins to shrink because of growing inefficiencies in the system. In such a case, GDP is likely to shrink even more quickly than energy supply shrinks. One reason this happens is because complexity of many types cannot be maintained as energy supply shrinks. For example, international supply lines are likely to break if energy supplies fall too low.

[3] Interest rates play an important role in encouraging the development of energy resources. Generally falling interest rates are very beneficial; rising interest rates are quite detrimental. As the economy shifts toward shrinkage, the pattern we can expect is higher interest rates, rather than lower. As the limits of energy extraction are hit, these higher rates will tend to make the economy shrink even faster than it would otherwise shrink.

Part of what has allowed growing energy consumption in the period shown in Figures 2 and 3 is rising debt levels at generally lower interest rates. Falling interest rates together with debt availability make investment in factories and mines more affordable. They also help citizens seeking to buy a new car or home because the lower monthly payments make these items more affordable. Demand for energy products tends to rise, allowing the prices of commodities to rise higher than they would otherwise rise, thus making their production more profitable. This encourages more fossil fuel extraction and more development of renewables.

Once the economy starts to shrink, debt levels seem likely to shrink because of defaults and because of reluctance of lenders to lend, for fear of defaults. Interest rates will tend to rise, partly because of the higher inflation rates and partly because of the higher level of expected defaults. This debt pattern in turn will reinforce the tendency toward lower GDP growth compared to energy consumption growth. This is a major reason that raising interest rates now is likely to push the economy downward.

[4] With fewer goods and services produced by the economy, the world economy must eventually shrink. We should not be surprised if this shrinkage in some ways echoes the shrinkage that took place in the 2008-2009 recession and the 2020 shutdowns.

The GDP of the world economy is the goods and services produced by the world economy. If the economy starts to shrink, total world GDP will necessarily fall.

What happens in the future may echo what has happened in the past.

Figure 4. World energy consumption per capita, based on information published in BP’s 2022 Statistical Review of World Energy.

Central bank officials felt it was important to stop inflation in oil prices (and indirectly in food prices) back in the 2004 to 2006 period. This indirectly led to the 2008-2009 recession as parts of the world debt bubble started to collapse and many jobs were lost. We should not be surprised if a much worse version of this happens in the future.

The 2020 shutdowns were characterized in most news media as a response to Covid-19. Viewed on an overall system basis, however, they really were a response to many simultaneous problems:

  • Covid-19
  • A hidden shortage of fossil fuels that was not reflected as high enough prices for producers to ramp up production
  • Hidden financial problems that threatened a new version of the 2008 financial collapse
  • Factories in many parts of the world that were operating at far less than capacity
  • Workers demonstrating in the streets with respect to low wages and low pensions
  • Airlines with financial problems
  • Citizens frustrated by long commutes
  • Very many old, sick people in care homes of various types, passing around illnesses
  • An outsized medical system that still desired to increase profits
  • Politicians who wanted a way to better control their populations–perhaps rationing of output would work around an inadequate total supply of goods and services

Shutting down non-essential activities for a while would temporarily reduce demand for oil and other energy products, making it easier for the rest of the system to appear profitable. It would give an excuse to increase borrowing (and money printing) to hide the financial problems for a while longer. It would keep people at home, reducing the need for oil and other energy products, hiding the fossil fuel shortage for a while longer. It would force the medical system to reorganize, offering more telephone visits and laying off non-essential workers. Many individual citizens could reduce time lost to commuting, thanks to new work-from-home rules and internet connections. The homebuilding and home remodeling industries were stimulated, offering work to those who had been laid off.

The impacts of the shutdowns were greatest on poor people in poor countries, such as those in Central and South America. For example, many people in the vacation and travel industries were laid off in poor countries. People making fancy clothing for people going to conferences and weddings were laid off, as were people raising flowers for fancy events. These people had trouble finding new employment. They are at increased risk of dying, either from Covid-19 or inadequate nutrition, making them susceptible to other illnesses.

We should not be surprised if some near-term problems echo what has happened in the past. Debt defaults and falling home prices are very real possibilities, for example. Also, making a new crisis a huge focal point and scaring the population into staying at home has proven to be a huge success in temporarily reducing energy consumption without actual rationing. Some people believe that monkeypox or a climate change crisis will be the next area of focus in an attempt to reduce energy consumption, and thus lower oil prices.

[5] There is likely to be more conflict in a world with not enough goods and services to go around.

With a shrinking amount of finished goods and services, we should not be surprised if we see more conflict in the world. Many wars are resource wars. The conflict between Russia and Ukraine, with other countries indirectly involved, certainly could be considered a resource war. Russia wants higher prices for its exports of many kinds, including energy exports. I wrote about the conflict issue in a post I wrote in April 2022: The world has a major crude oil problem; expect conflict ahead.

World War I and World War II were almost certainly about energy resources. Peak coal in the UK seems to be closely related to World War I. Inadequate coal in Germany and lack of oil in Japan (and elsewhere) seem to be related to World War II.

[6] We seem to be facing a new set of problems in addition to the problems that gave rise to the Covid-19 shutdowns. These are likely to shape how any new crisis plays out.

Some recently added problems include the following:

  • Debt has risen to a high level, relative to 2008. This debt will be harder to repay with higher interest rates.
  • The US dollar is very high relative to other currencies. The high level of the US dollar causes problems for borrowers from outside the US in repaying their loans. It also makes energy prices very high outside the US.
  • Oil, coal and natural gas are all in short supply world-wide, leading to falling productivity of the overall system Item 1. If extraction is to continue, prices need to be much higher.
  • Difficulties with broken supply lines make it hard to ramp up production of manufactured goods of many kinds.
  • Inadequate labor supply is an increasing problem. Baby boomers are now retiring; not enough young people are available to take their place. Increased illness, associated with Covid-19 and its vaccines, is also an issue.

These issues point to a situation where rising interest rates seem likely to send the world economy downward because of debt defaults and failing businesses of many kinds.

The high dollar relative to other currencies leads to the potential for the system to break apart under stress. Alternatively, the US dollar may play a smaller role in international trade than in the past.

[7] Many parts of the economy are likely to find that the promised payments to be made to them cannot really take place.

We have been taught that money is a store of value. We have also been taught that government promises, such as pensions, unemployment insurance and health insurance can be counted on. If there are fewer goods and services available in total, the whole system must change to reflect the fact that there are no longer enough goods and services to go around. There may not even be enough food to go around.

As the world economy hits limits, we cannot assume that the money we have in the bank will really be able to purchase the goods we want in the future. The goods may not be available to purchase, or the government may put a restriction (such as $200 per week) on how much we can withdraw from our account each week, or inflation may make goods we currently buy unaffordable.

If we think about the situation, the world will be producing fewer goods and services each year, regardless of what promises that have been made in the past might say. For example, the number of bushels of wheat available worldwide will start falling, as will the number of new cars and the number of computers. Somehow, the goods and services people expected to be available will start disappearing. If the problem is inflation, the affordable quantity will start to fall.

We don’t know precisely what will happen, but these are some ideas, especially as higher interest rates become a problem:

  • Many businesses will fail. They will default on their debt; the value of their stock will go to zero. They will lay off their employees.
  • Employees and governments will also default on debts. Banks will have difficulty remaining solvent.
  • Pension plans will have nowhere nearly enough money to pay promised pensions. Either they will default or prices will rise so high that the pensions do not really purchase the goods that recipients hoped for.
  • The international system of trade is likely to start withering away. Eventually, most goods will be locally produced with whatever resources are available.
  • Many government agencies will become inadequately funded and fail. Intergovernmental agencies, such as the European Union and the United Nations, are especially vulnerable.
  • Governments are likely to reduce services provided because tax revenues are too low. Even if more money is printed, it cannot buy goods that are not there.
  • Citizens may become so unhappy with their governments that they overthrow them. Simpler, cheaper governmental systems, offering fewer services, may follow.

[8] It is likely that, in inflation-adjusted dollars, energy prices will not rise very high, for very long.

We are likely dealing with an economy that is basically falling apart. Factories will produce less because they cannot obtain financing. Purchasers of finished goods and services will have difficulty finding jobs that pay well and loans based on this employment. These effects will tend to keep commodity prices too low for producers. While there may be temporary spurts of higher prices, finished goods made with high-cost energy products will be too expensive for most citizens to afford. This will tend to push prices back down again.

[9] Conclusion.

We are dealing with a situation that economists, politicians and central banks are ill-equipped to handle. Raising interest rates may squeeze out a huge share of the economy. The economy was already “at the edge.” We can’t know for certain.

Virtually no one looks at the economy from a physics point of view. For one thing, the result is too distressing to explain to citizens. For another, it is fashionable for scientists of all types to produce papers and have them peer reviewed by others within their own ivory towers. Economists, politicians and central bankers don’t care about the physics of the situation. Even those basing their analysis on Energy Return on Energy Invested (EROEI) tend to focus on only a narrow portion of what I explained in Section [1]. Once researchers have invested a huge amount of time and effort in one direction, they cannot consider the possibility that their approach may be seriously incomplete.

Unfortunately, the physics-based approach I am using indicates that the world’s economy is likely to change dramatically for the worse in the months and years ahead. Economies, in general, cannot last forever. Populations outgrow their resource bases; resources become too depleted. In physics terms, economies are dissipative structures, not unlike ecosystems, plants and animals. They can only exist for a limited time before they die or end their operation. They tend to be replaced by new, similar dissipative structures.

While the current world economy cannot last indefinitely, humans have continued to exist through many bottlenecks in the past, including ice ages. It is likely that some humans, perhaps in mutated form, will make it through the current bottleneck. These humans will likely create a new economy that is better adapted to the Earth as it changes.

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