A Few Insights Based on CDC Data Regarding COVID and its Vaccines

My background is as a casualty actuary. I am used to looking at data from standard sources and trying to make some sense of it. I am hesitant to take someone else’s word for what the data show because I know that it is easy for mistakes to creep in. In this post, I will provide observations based on data from the databases of the US Centers for Disease Control and Prevention (CDC) and the Johns Hopkins University. Hopefully, some of these observations will prove insightful.

I am aware that the proper reference for COVID is “COVID-19.” In this post, I have elected to use the shorter reference, except when shown in an exhibit prepared using software developed by someone else (Figure 3).

[1] Recent data show that COVID vaccines don’t really prevent a person from catching and passing along the virus that causes COVID. The CDC has recently changed its guidance to reflect the fact that the vaccines mostly reduce the chance of severe illness. Vaccines are still recommended by the CDC, not because they reduce transmission, but because they may reduce COVID-related healthcare costs.

Figure 1. Number of US vaccine doses provided to various age groups, based on data from a CDC database.

It is clear from Figure 1 that the big initial push for vaccine delivery peaked around April 2021. The rollout was substantially accomplished by July 2021. Then there was a second, lower peak, related primarily to boosters in the November 2021 to January 2022 period.

Figure 2 shows the pattern of newly reported COVID cases, relative to the first round of COVID vaccinations, based on data reported to the Johns Hopkins University database.

Figure 2.US reported COVID cases by month based on data from the Johns Hopkins University database.

Clearly, the first round of vaccinations did not put an end to new COVID cases. In fact, the CDC started becoming concerned about transmission among the vaccinated as early as July 2021. At that time, it started recommending that everyone wear a mask in conditions that represented high transmission. It also began using the term breakthrough infection to describe the (hopefully uncommon) condition of coming down with COVID after being vaccinated.

In fact, back when the Delta wave hit in the fall of 2021, it was possible to blame at least part of the problem on the lesser-vaccinated Southern part of the US. The well-vaccinated Northeast seemed to fare relatively much better (Figure 3).

Figure 3. US reported COVID cases (moving 7-day average, relative to population) by part of the US based on data from the Johns Hopkins University database. Visualization is available at this web address.

Figure 3 indicates that a quite different situation occurred when the Omicron variant hit close to the beginning of 2022. The heavily vaccinated Northeast clearly led the way, both in timing and in the number of COVID cases relative to population. The relatively less vaccinated South was much lower, close to the Midwest in its number of cases, relative to population.

The Omicron variant is very different from the original Wuhan version of the virus. This difference between virus variants is at least part reason that current mRNA vaccines fail to block transmission of the Omicron virus. Instead, current vaccines mostly reduce severe symptoms. This is very similar to the explanation we have heard when getting influenza vaccines each year. Researchers make a guess with respect to which particular strains will be circulating the following year. The level of protection will vary, depending upon whether the researchers’ guesses prove to be accurate the following year.

There are also indications from patterns elsewhere (and from theory) that it is not good practice to vaccinate at the time a virus is already starting to circulate widely. The booster vaccinations that took place in November and December 2021 (Figure 1) may have inadvertently raised, rather than lowered, their recipients’ chances of catching COVID. But, of course, the illness would be (on average) relatively mild. This lower severity of outcome is to be expected, partly because the mutated virus seems to be less virulent than the Wuhan COVID virus, and partly because the vaccines tend to reduce the severity of the disease.

The CDC started moving in the direction of treating vaccinated and unvaccinated people alike back in July 2021. Now, with the evidence from the Omicron wave coming in, it has had no choice but to move even further in the direction of treating everyone alike. For example, for domestic travel, the CDC recommends tests for both vaccinated and unvaccinated travelers if there is a concern about COVID. Recent CDC recommendations with respect to the wearing of masks do not depend upon vaccine status, either.

The idea of requiring everyone to be vaccinated likely originated from the cost-savings and profits that were expected to occur if people could be vaccinated and kept out of hospitals. Employers were very much in favor of such cost-savings because their workers likely would be able to stay on the job more of the time. Insurance companies were in favor of such an approach as well, because it would lower health care claim costs. Hospitals and physicians were in favor of the recommended COVID vaccines because physicians could perform more elective surgery (and thus make more money) if the hospitals were not full of COVID patients. Of course, the drug companies selling vaccines were in favor of selling more vaccines, too.

Furthermore, we know from prior experience with viruses that the ability to stop transmission with a vaccine varies greatly from virus to virus. Forecasting that any proposed vaccine will prevent transmission is a very “iffy” proposition. The viruses that cause the common cold, HIV and SARS are related (in some way) to the virus that causes COVID. Despite decades of research, none of these viruses has a successful vaccine. This suggests that COVID cannot be stopped by a vaccine, either. We also know, in general, that if a virus jumps from an animal to human hosts, transmission can only be stopped if all of the animal hosts are successfully vaccinated, as well.

[2] COVID vaccines used in the US do not seem to have done much to reduce total COVID deaths.

Figure 4. Number of US COVID deaths by month on two slightly different reporting bases. CDC data are based on death certificate data, reported up to several months after the date of the death, but backdated to the date of actual death. Thus, its indications will tend to be low for recent months. The Johns Hopkins University database contains reports sent in by providers. It should be more complete for recent dates.

Vaccinations started in December of 2020, but there were about 20% more COVID deaths in 2021 than in 2020. Part of the problem is that after the Delta peak in deaths in September, deaths never retreated to zero, or close to zero. COVID deaths immediately began increasing with the Omicron peak. While there was a lull during March 2022 in reported cases (Figures 2 and 3), data for April and May seem to indicate that reported cases are again on an upward path.

If today’s vaccines really worked as people initially hoped, I would expect to see a lot more progress in reducing new cases than shown to date.

[3] Data from OurWorldInData.org provides excess mortality indications for five age groupings. This data indicates that Ages 15-64 were particularly hard hit by the last two waves of COVID (Delta and Omicron). Ages 85+ were hit very lightly.

Figure 5. Chart prepared by OurWorldInData.org showing excess mortality.

Since these charts are for all causes of death combined, they will reflect deaths that might have occurred due to other problems of the 2020 to 2022 period, in addition to COVID deaths. For example, increased suicides and homicides would be included, as would a rise in drug overdoses and motor vehicle accidents. If there are deaths stemming from the use of vaccines, these deaths would be included in the total deaths from all causes, as well.

The rise in deaths in the Ages 15-64 grouping is particularly striking. This group is known for being more likely to be depressed by the events of the day. The base number of expected deaths is relatively lower than for the older ages. This allows the deaths from newly increased causes to magnify the total death rate of the period by a greater factor. Life insurance companies have been complaining about the high numbers of deaths experienced on their policies, predominantly for this age group.

The strikingly low deaths in the Ages 85+ group in 2021 may reflect the working of the vaccine. There might be other causes as well. Some of the weaker members of this group likely died in 2020, leaving fewer to die in 2021. This lower death rate may also reflect the impact of antibodies gained from catching COVID in 2020. People included in Ages 85+, more frequently than younger age groups, lived in care homes of various kinds during 2020. In this setting, they were more exposed to the early rounds of COVID than those living in home settings. Thus, they had more of a chance to develop antibodies from catching the illness.

[4] If we prepare charts showing provisional mortality data for 2021, together with similar indications for prior years, we can see how US mortality rates have been changing for different age groups. We can also see the relative role of COVID cases in these changes.

Figure 6. Death rates for four youngest age groupings, based on CDC Provisional Mortality Data for various years.

The CDC data show mortality rates based on deaths from all causes. For the years 2020 and 2021, it gives a separate indication of mortality associated with COVID. The orange line represents what the mortality would be if all COVID deaths (using a broad definition of COVID death, based on COVID appearing as “any cause” on the death certificate) were removed.

COVID vaccines were not available until mid-December 2020, and then for only a very small group, so the difference in the orange and blue lines at the 2020 point represents the number of COVID deaths for the age group, before the vaccines became available. The 2021 difference between the two lines represents the number of deaths from COVID taking into account whatever vaccines were used for this age group. We might expect the gap between the blue and orange lines to become smaller in 2021 than in 2020 if the vaccines given to the particular age group (or the prior antibodies from catching the illness) were making a significant change in reducing COVID cases in 2021.

Looking at Figure 6, COVID has essentially no impact on babies under Age 1. The total number of deaths seemed to drop more than usual in 2020, perhaps partly because mothers were at home more. For Ages 1-4, death rates are up in 2021, but not because of COVID. COVID seems to play practically no role in the mortality of Ages 5-14 and at most a very minor role for Ages 15-24. For the latter group, mortality is significantly up in both 2020 and 2021, perhaps because of more suicides and risky behavior resulting in death (such as car accidents and drug overdoses).

Figure 7. Death rates per 100,000 for four groupings between ages 25 and 64, based on CDC Provisional Mortality Data for various years.

We can see similar patterns to what we saw for Ages 15-24 in the chart above, but with progressively more COVID in the mix of causes leading to the uptick in the overall death rates. The share of COVID cases in the mix rises in 2021 relative to 2020 for all of these age groupings, despite the vaccines and prior immunity which should start building up (if immunity is truly “durable,” something that is not always the case).

Figure 8. Death rates for three groups from age 65 and up, based on CDC Provisional Mortality Data for various years.

It is only when we get to these oldest ages that death rates stop increasing in 2021. In fact, when the impact of COVID deaths is removed, the death rates seem to be improving. These age groups tended to get the vaccine early. They also lost quite a few sickly members in 2020, when the first round of COVID hit. The remaining group may be in somewhat better health than the original mix. Also, as mentioned in Section [3], they may also have more antibodies from actually catching COVID during 202o, while living in a care home.

[5] We can perhaps get an inkling of what is going wrong with death rates by comparing deaths by cause for January 2020, January 2021, and January 2022, based on monthly provisional death data.

A sample of one month is not very much, but January tends to be bad for mortality because the cold weather encourages dry indoor conditions, especially in the colder parts of the country. People tend to stay inside more because of cold weather. Vitamin D levels tend to be low because of lower sunlight exposure. Communicable disease deaths, including those of COVID, tend to be high at this time of year.

Figure 9. Chart prepared by Gail Tverberg using CDC data for Select Natural Causes. Amounts for January 2022 are likely somewhat incomplete because of the lag in death certificate preparation.

Looking at Figure 9, the first thing we notice is that total January 2022 deaths from natural causes are still outrageously high compared with January 2020 deaths. These deaths exclude deaths from suicides, drug overdoses, car accidents and many other unnatural causes that we know are trending up substantially, so the overall situation is probably even worse than natural death indications would suggest.

One thing we notice is that heart disease deaths seem to be trending higher. This could be a fluke, or it might be caused by COVID or the vaccines (or both). Investigation might be useful.

Cancer deaths, at least based on this tiny sample, seem to be flat. This suggests that fears of a rapid rise in cancer deaths because of vaccine-related issues may be unwarranted.

COVID deaths in January 2022 are down from their very elevated level in January 2021.

Cerebrovascular diseases, diabetes and kidney disease deaths all are higher, in this very small sample. These diseases would all seem to possibly be influenced by a greater number of COVID cases or perhaps by side effects associated with vaccines or with treatments. Researchers interested in these topics should be aware that data are being collected that might give insight into changes in the number of deaths associated with these causes.

One thing that alarmed me when I looked at the CDC’s list of “selected” natural causes is that the list of diseases for which data is given is not very complete. One grouping that clearly has been omitted is diseases of the liver. I would strongly suspect that deaths from diseases of the liver are rising, if people have been staying at home and drinking more alcoholic beverages.

[6] Conclusions and ideas for further examination.

Clearly, the CDC has a huge quantity of data that can be examined if anyone wants to put the time and energy into looking at it. Too often researchers coming from the biological sciences do not stop and think about using whatever data is available to support or refute their ideas, at least based on the evidence to date.

The significant increases in mortality for the many age groups between 15 and 64 would seem to suggest that something is going badly wrong. Someone should be examining these changes. If part of the problem is that vaccines are having serious side effects, this can perhaps be seen by analyzing deaths by cause for these age groups.

The lack of COVID cases in the youngest age groupings (babies and Ages 1-4) would suggest that vaccines are not really needed for these age groupings. Babies don’t excessively fill hospitals with COVID cases. Training their immune systems to look for a long-extinct version of the virus cannot be very helpful in the long run.

If the underlying purpose of vaccines is to help the profitability of big companies, hospitals, doctors and vaccine-makers, this makes a big difference in our understanding of what we are being told. Clearly, the government is also a big employer; its ability to stay within its budget is enhanced by holding down the hospital and other medical costs of its employees. For example, if the government wants the hospitalization costs and work lost by those in the US Army and US Navy to be as low as possible, it will mandate vaccines for these employees. The CDC, being a government agency, cannot help but be at least somewhat influenced by what government leaders are demanding when interpreting scientific evidence.

The government cannot explain that the reason it wants everyone to be vaccinated has essentially nothing to do with disease transmission, without upsetting many people, so it publicizes its change in stance with respect to vaccines as little as possible. Businesses do not want it known that their reason for demanding vaccines is to hold down their own COVID healthcare costs, so they are not anxious to publicize the underlying reason, either. Thus, the vast majority of citizens are not aware of the fact that even with boosters, their chance of catching COVID and passing it along to others is still very high. Studies seem to indicate that boosters may provide an individual person with a short window (6 weeks, or so) of lower likelihood of catching COVID, but the overall effect is not enough to reduce the overall pattern of disease transmission.

If a vaccine against Omicron is developed, we need to be aware that there is a high probability that by the time the vaccine is widely distributed, the virus will have mutated sufficiently that its only benefit will be to somewhat reduce the severity of whatever version of COVID is prevalent at the time the next wave of cases appears. Thus, we cannot hope that with a better-directed vaccine, it will make any substantial difference in disease transmission. Thus, we should expect that the major benefit will always be “reduced healthcare costs with respect to COVID.”

There are quite a few people who have discovered from reading on-line articles that there are ways of potentially reducing the severity of COVID besides receiving the vaccine. These include raising vitamin D levels in advance of contracting COVID and taking any number of common, inexpensive drugs (including aspirin) if the disease does hit. They also recognize that the long-term effects of the vaccines are unknown. For example, if repeated too many times, the vaccines may damage the immune system, according to some analyses. The views of these vaccine-refusers need to be respected. The vaccine-refusers can easily be turned into scapegoats.

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Is the debt bubble supporting the world economy in danger of collapsing?

The years between 1981 and 2020 were very special years for the world economy because interest rates were generally falling:

Figure 1. Yields on 10-year and 3-month US Treasuries, in a chart made by the Federal Reserve of St. Louis, as of May 10, 2022.

In some sense, falling interest rates meant that debt was becoming increasingly affordable. The monthly out-of-pocket expense for a new $500,000 mortgage was falling lower and lower. Automobile payments for a new $30,000 vehicle could more easily be accommodated into a person’s budget. A business would find it more affordable to add $5,000,000 in new debt to open at an additional location. With these beneficial effects, it would be no surprise if a debt bubble were to form.

With an ever-lower cost of debt, the economy has had a hidden tailwind pushing it long between 1981 to 2020. Now that interest rates are again rising, the danger is that a substantial portion of this debt bubble may collapse. My concern is that the economy may be heading for an incredibly hard landing because of the inter-relationship between interest rates and energy prices (Figure 2), and the important role energy plays in powering the economy.

Figure 2. Chart showing the important role Quantitative Easing (QE) to lower interest rates plays in adjusting the level of “demand” (and thus the selling price) for oil. Lower interest rates make goods and services created with higher-priced oil more affordable. In addition to the items noted on the chart, US QE3 was discontinued in 2014, about the time of the 2014 oil price crash. Also, the debt bubble crash of 2008 seems to be the indirect result of the US raising short term interest rates (Figure 1) in the 2004 to 2007 period.

In this post, I will try to explain my concerns.

[1] Ever since civilization began, a combination of (a) energy consumption and (b) debt has been required to power the economy.

Under the laws of physics, energy is required to power the economy. This happens because it takes the “dissipation” of energy to perform any activity that contributes to GDP. The energy dissipated can be the food energy that a person eats, or it can be wood or coal or another material burned to provide energy. Sometimes the energy dissipated is in the form of electricity. Looking back, we can see the close relationship between total energy consumption and world total GDP.

Figure 3. World energy consumption for the period 1990 to 2020, based on energy data from BP’s 2021 Statistical Review of World Energy and world Purchasing Power Parity GDP in 2017 International Dollars, as published by the World Bank.

The need for debt or some other approach that acts as a funding mechanism for capital expenditures (sale of shares of stock, for example), comes from the fact that humans make investments that will not produce a return for many years. For example, ever since civilization began, people have been planting crops. In some cases, there is a delay of a few months before a crop is produced; in other cases, such as with fruit or nut trees, there can be a delay of years before the investment pays back. Even the purchase by an individual of a home or a vehicle is, in a sense, an investment that will offer a return over a period of years.

With all parts of the economy benefiting from the lower interest rates (except, perhaps, banks and others lending the funds, who are making less profit from the lower interest rates), it is easy to see why lower interest rates would tend to stimulate new investment and drive up demand for commodities.

Commodities are used in great quantity, but the supply available at any one time is tiny by comparison. A sudden increase in demand will tend to send the commodity price higher because the quantity of the commodity available will need to be rationed among more would-be purchasers. A sudden decrease in the demand for a commodity (for example, crude oil, or wheat) will tend to send prices lower. Therefore, we see the strange sharp corners in Figure 2 that seem to be related to changing debt levels and higher or lower interest rates.

[2] The current plan of central banks is to raise interest rates aggressively. My concern is that this approach will leave commodity prices too low for producers. They will be tempted to decrease or stop production.

Politicians are concerned about the price of food and fuel being too high for consumers. Lenders are concerned about interest rates being too low to properly compensate for the loss of value of their investments due to inflation. The plan, which is already being implemented in the United States, is to raise interest rates and to significantly reverse Quantitative Easing (QE). Some people call the latter Quantitative Tightening (QT).

The concern that I have is that aggressively raising interest rates and reversing QE will lead to commodity prices that are too low for producers. There are likely to be many other impacts as well, such as the following:

  • Lower energy supply, due to cutbacks in production and lack of new investment
  • Lower food supply, due to inadequate fertilizer and broken supply lines
  • Much defaulting of debt
  • Pension plans that reduce or stop payments because of debt-related problems
  • Falling prices of stock
  • Defaults on derivatives

[3] My analysis shows how important increased energy consumption has been to economic growth over the last 200 years. Energy consumption per capita has been growing during this entire period, except during times of serious economic distress.

Figure 4. World energy consumption from 1820-2010, based on data from Appendix A of Vaclav Smil’s Energy Transitions: History, Requirements and Prospects and BP Statistical Review of World Energy for 1965 and subsequent. Wind and solar energy are included in “Biofuels.”

Figure 4 shows the amazing growth in world energy consumption between 1820 and 2010. In the early part of the period, the energy used was mostly wood burned as fuel. In some parts of the world, animal dung was also used as fuel. Gradually, other fuels were added to the mix.

Figure 5. Estimated average annual increase in world energy consumption over 10-year periods using the data underlying Figure 4, plus similar additional data through 2020.

Figure 5 takes the same information shown in Figure 4 and calculates the average approximate annual increase in world energy consumption over 10-year periods. A person can see from this chart that the periods from 1951-1960 and from 1961-1970 were outliers on the high side. This was the time of rebuilding after World War II. Many families were able to own a car for the first time. The US highway interstate system was begun. Many pipelines and electricity transmission lines were built. This building continued into the 1971-1980 period.

Figure 6. Same chart as Figure 5, except that the portion of economic growth that was devoted to population growth is shown in blue at the bottom of each 10-year period. The amount of growth in energy consumption “left over” for improvement in the standard of living is shown in red.

Figure 6 displays the same information as Figure 5, except that each column is divided into two pieces. The lower (blue) portion represents the average annual growth in population during each period. The part left over at the top (in red) represents the growth in energy consumption that was available for increases in standard of living.

Figure 7. The same information displayed in Figure 6, displayed as an area chart. Blue areas represent average annual population growth percentages during these 10-year periods. The red area is determined by subtraction. It represents the amount of energy consumption growth that is “left over” for growth in the standard of living. Captions show distressing events during periods of low increases in the portion available to raise standards of living.

Figure 7 shows the same information as Figure 6, displayed as an area chart. I have also shown some of the distressing events that happened when growth in population was, in effect, taking up essentially all of energy consumption growth. The world economy could not grow normally. There was a tendency toward conflict. Unusual events would happen during these periods, including the collapse of the central government of the Soviet Union and the restrictions associated with the COVID pandemic.

The economy is a self-organizing system that behaves strangely when there is not enough inexpensive energy of the right types available to the system. Wars tend to start. Layers of government may disappear. Strange lockdowns may occur, such as the current restrictions in China.

[4] The energy situation at the time of rising interest rates in the 1960 to 1980 period was very different from today.

If we define years with high inflation rates as those with inflation rates of 5% or higher, Figure 8 shows that the period with high US inflation rates included nearly all the years from 1969 through 1982. Using a 5% inflation cutoff, the year 2021 would not qualify as a high inflation rate year.

Figure 8. US inflation rates, based on Table 1.1.4 Price Index for Gross Domestic Product, published by the US Bureau of Economic Analysis.

It is only when we look at annualized quarterly data that inflation rates start spiking to high levels. Inflation rates have been above 5% in each of the four quarters ended 2022-Q1. Trade problems related to the Ukraine Conflict have tended to add to price pressures recently.

Figure 9. US inflation rates, based on Table 1.1.4 Price Index for Gross Domestic Product, published by the US Bureau of Economic Analysis.

Underlying these price spikes are increases in the prices of many commodities. Some of this represents a bounce back from artificially low prices that began in late 2014, probably related to the discontinuation of US QE3 (See Figure 2). These prices were far too low for producers. Coal and natural gas prices have also needed to rise, as a result of depletion and prior low prices. Food prices are also rising rapidly, since food is grown and transported using considerable quantities of fossil fuels.

The main differences between that period leading up to 1980 and now are the following:

[a] The big problem in the 1970s was spiking crude oil prices. Now, our problems seem to be spiking crude oil, natural gas and coal prices. In fact, nuclear power may also be a problem because a significant portion of uranium processing is performed in Russia. Thus, we now seem to be verging on losing nearly all our energy supplies to conflict or high prices!

[b] In the 1970s, there were many solutions to the crude oil problem, which were easily implemented. Electricity production could be switched from crude oil to coal or nuclear, with little problem, apart from building the new infrastructure. US cars were very large and fuel inefficient in the early 1970s. These could be replaced with smaller, more fuel-efficient vehicles that were already being manufactured in Europe and Japan. Home heating could be transferred to natural gas or propane, to save crude oil for places where energy density was really needed.

Today, we are told that a transition to green energy is a solution. Unfortunately, this is mostly wishful thinking. At best, a transition to green energy will need a huge investment of fossil fuels (which are increasingly unavailable) over a period of at least 30 to 50 years if it is to be successful. See my article, Limits to Green Energy Are Becoming Much Clearer. Vaclav Smil, in his book Energy Transitions: History, Requirements and Prospects, discusses the need for very long transitions because energy supply needs to match the devices using it. Furthermore, new energy types are generally only add-ons to other supply, not replacements for those supplies.

[c] The types of economic growth in (a) the 1960 to 1980 period and (b) the period since 2008 are very different. In the earlier of these periods (especially prior to 1973), it was easy to extract oil, coal and natural gas inexpensively. Inflation-adjusted oil prices of less than $20 per barrel were typical. An ever-increasing supply of this oil seemed to be available. New machines (created with fossil fuels) made workers increasingly efficient. The economy tended to “overheat” if interest rates were not repeatedly raised (Figure 1). While higher interest rates could be expected to slow the economy, this was of little concern because rapid growth seemed to be inevitable. The supply of finished goods and services made by the economy was growing rapidly, even with headwinds from the higher interest rates.

On the other hand, in the 2008 to 2020 period, economic growth is largely the result of financial manipulation. The system has been flooded with increasing amounts of debt at ever lower interest rates. By the time of the lockdowns of 2020, would-be workers were being paid for doing nothing. World production of finished goods and services declined in 2020, and it has had difficulty rising since. In the first quarter of 2022, the US economy contracted by -1.4%. If headwinds from higher interest rates and QT are added, the economic system is likely to encounter substantial debt defaults and increasing breakdowns of supply lines.

[5] Today’s spiking energy prices appear to be much more closely related to the problems of the 1913 to 1945 era than they are to the problems of the late 1970s.

Looking back at Figure 7, our current period is more like the period between the two world wars than the period in the 1970s that we often associate with high inflation. In both periods, the “red” portion of the chart (the portion I identify with rising standard of living), has pretty much disappeared. In both the 1913 to 1945 period and today, it is nearly all the energy supplies other than biofuels that are disappearing.

In the 1913 to 1945 period, the problem was coal. Mines were becoming increasingly depleted, but raising coal prices to pay for the higher cost of extracting coal from depleted mines tended to make the coal prohibitively expensive. Mine operators tried to reduce wages, but this was not a solution either. Fighting broke out among countries, almost certainly related to inadequate coal supplies. Countries wanted coal to supply to their citizens so that industry could continue, and so that citizens could continue heating their homes.

Figure 10. Slide prepared by Gail Tverberg showing peak coal estimates for the UK and for Germany.

As stated at the beginning of this section, today’s problem is that nearly all our energy supplies are becoming unaffordable. In some sense, wind and solar may look better, but this is because of mandates and subsidies. They are not suitable for operating the world economy within any reasonable time frame.

There are other parallels to the 1913 to 1945 period. One of the big problems of the 1930s was prices that would not rise high enough for farmers to make a profit. Oil prices in the United States were extraordinarily low then. BP 2021 Statistical Review of World Energy reports that the average oil price in 1931, in 2020 US$, was $11.08. This is the lowest inflation-adjusted price of any year back to 1865. Such a price was almost certainly too low for producers to make a profit. Low prices, relative to rising costs, have recently been problems for both farmers and oil producers.

Another major problem of the 1930s was huge income disparity. Wide income disparity is again an issue today, thanks to increased specialization. Competition with unskilled workers in low wage countries is also an issue.

It is important to note that the big problem of the 1930s was deflation rather than inflation, as the debt bubble started popping in 1929.

[6] If a person looks only at the outcome of raising interest rates in the 1960s to 1980 timeframe, it is easy to get a misleading idea of the impact of increased interest rates now.

If people look only at what happened in the 1980s, the longer-term impact of the spike in interest rates doesn’t seem too severe. The world economy was growing well before the interest rates were raised. After the peak in interest rates, the world economy generally continued to grow. As a result of the high oil prices and the spiking interest rates, the world hastened its transition to using a bit less crude oil per person.

Figure 11. Per capita crude oil production from 1973 through 2021. Crude oil amounts are from international statistics of the US Energy Information Administration. Population estimates are from UN 2019 population estimates. The low population growth projection from the UN data is used for 2021.

At the same time, the world economy was able to expand the use of other energy products, at least through 2018.

Figure 12. World per capita total energy supply based on data from BP’s 2021 Statistical Review of World Energy. World per capita crude oil is based on international data of the EIA, together with UN 2019 population estimates. Note that crude oil data is through 2021, but total energy amounts are only through 2020.

Since 2019, our problem has been that the total energy supply has not been keeping up with the rising population. The cost of extraction of all kinds of oil, coal and natural gas keeps rising due to depletion, but the ability of customers to afford the higher prices of finished goods and services made with those energy products does not rise to match these higher costs. Energy prices probably would have spiked in 2020 if it were not for COVID-related restrictions. Production of oil, coal and natural gas has not been able to rise sufficiently after the lockdowns for economies to fully re-open. This is the primary reason for the recent spiking of energy prices.

Turning to inflation rates, the relationship between higher interest rates (Figure 1) and annual inflation rates (Figure 8) is surprisingly not very close. Inflation rates rose during the 1960 to 1973 period despite rising interest rates, mostly likely because of the rapid growth of the economy from an increased per-capita supply of inexpensive energy.

Figure 8 shows that inflation rates did not come down immediately after interest rates were raised to a high level in 1980, either. There was a decline in the inflation rate to 4% in 1983, but it was not until the collapse of the central government of the Soviet Union in 1991 that inflation rates have tended to stay close to 2% per year.

[7] A more relevant recent example with respect to the expected impact of rising interest rates is the impact of the increase in US short-term interest rates in the 2004 to 2007 period. This led to the subprime debt collapse in the US, associated with the Great Recession of 2008-2009.

Looking back at Figure 1, one can see the effect of raising short-term interest rates in the 2004 to 2007 era. This eventually led to the Great Recession of 2008-2009. I wrote about this in my academic paper, Oil Supply Limits and the Continuing Financial Crisis, published in the journal Energy in 2010.

The situation we are facing today is much more severe than in 2008. The debt bubble is much larger. The shortage of energy products has spread beyond oil to coal and natural gas, as well. The idea of raising interest rates today is very much like going into the Great Depression and deciding to raise interest rates because bankers don’t feel like they are getting an adequate share of the goods and services produced by the economy. If there really aren’t enough goods and services for everyone, giving lenders a larger share of the total supply cannot work out well.

[8] The problems we are encountering have been hidden for many years by an outdated understanding of how the economy operates.

Because of the physics of the economy, it behaves very differently than most people assume. People almost invariably assume that all aspects of the economy can “stay together” regardless of whether there are shortages of energy or of other products. People also assume that shortages will be immediately become obvious through high prices, without realizing the huge role interest rates and debt levels play. People further assume that these spiking prices will somehow bring about greater supply, and the whole system will go on as before. Furthermore, they expect that whatever resources are in the ground, which we have the technical capability to extract, can be extracted.

It is important to note that prices are not necessarily a good indicator of shortages. Just as a fever can have many causes, high prices can have many causes.

The economy can only continue as long as all of its important parts continue. We cannot assume that reported reserves of anything can really be extracted, even if the reserves have been audited by a reliable auditor. What actually can be extracted depends on prices staying high enough to generate funds for additional investment as required. The amount that can be extracted also depends on the continuation of international supply lines providing goods such as steel pipe. The continued existence of governments that can keep order in the areas where extraction is to take place is important, as well.

What we should be most concerned about is a very rapidly shrinking economic system that cannot accommodate very many people. It seems that such a situation might occur if the debt bubble is popped and too many supply lines are broken. There may be a time lag between when interest rates are raised and when the adverse impacts on the economy are seen. This is a reason why central bankers should be very cautious about the increases in interest rates they make as well as QT. The situation may turn out much worse than planned!

Posted in Energy policy, Financial Implications | Tagged , , | 4,216 Comments

The world has a major crude oil problem; expect conflict ahead

Media outlets tend to make it sound as if all our economic problems are temporary problems, related to Russia’s invasion of Ukraine. In fact, world crude oil production has been falling behind needed levels since 2019. This problem, by itself, encourages the world economy to contract in unexpected ways, including in the form of economic lockdowns and aggression between countries. This crude oil shortfall seems likely to become greater in the years ahead, pushing the world economy toward conflict and the elimination of inefficient players.

To me, crude oil production is of particular importance because this form of oil is especially useful. With refining, it can operate tractors used to cultivate crops, and it can operate trucks to bring food to stores to sell. With refining, it can be used to make jet fuel. It can also be refined to make fuel for earth moving equipment used in road building. In recent years, it has become common to publish “all liquids” amounts, which include liquid fuels such as ethanol and natural gas liquids. These fuels have uses when energy density is not important, but they do not operate the heavy machinery needed to maintain today’s economy.

In this post, I provide an overview of the crude oil situation as I see it. In my analysis, I utilize crude oil production data by the US Energy Information Agency (EIA) that has only recently become available for the full year of 2021. In some exhibits, I also make estimates for the first quarter of 2022 based on preliminary information for this period.

[1] World crude oil production grew marginally in 2021.

Figure 1. World crude oil production based on EIA international data through December 31, 2021.

Crude oil production for the year 2021 was a disappointment for those hoping that production would rapidly bounce back to at least the 2019 level. World crude oil production increased by 1.4% in 2021, to 77.0 million barrels per day, after a decrease of -7.5% in 2020. If we look back, we can see that the highest year of crude oil production was in 2018, not 2019. Oil production in 2021 was still 5.9 million barrels per day below the 2018 level.

With respect to the overall increase in crude oil production of 1.4% in 2021, OPEC helped bring this average up with an increase of 3.0% in 2021. Russia also helped, with an increase of 2.5%. The United States helped pull the world crude increase down, with a decrease in production of -1.1% in 2021. In Section [5], more information will be provided with respect to crude production for these groupings.

[2] The growth in world crude oil production shows an amazingly steady relationship to the growth in world population since 1991. The major exception is the decrease in consumption that took place in 2020, with the lockdowns that changed consumption patterns.

Figure 2. World per capita crude oil production based on EIA international data through December 31, 2021, together with UN 2019 population estimates. The UN’s estimated historical amounts were used through 2020; the “low growth” estimate was used for 2021.

Figure 2 indicates that, up through 2018, each person in the world consumed an average of around 4.0 barrels of crude oil. This equates to 168 US gallons or 636 liters of crude per year. Much of this crude is used by businesses and governments to produce the basic goods we expect from our economy, including food and roads.

A big downshift occurred in 2020 with the COVID lockdowns. Many people began working from home; international travel was scaled back. The reduction of these uses of oil helped bring down total world usage. Changes such as these explain the big dip in crude oil production (and consumption) in 2020, which continued into 2021.

Even in 2019, the world economy was starting to scale back. Beginning in early 2018, China banned the importation of many types of materials for recycling, and other countries soon followed suit. As a result, less oil was used for transporting materials across the ocean for recycling. (Subsidies for recycling were helping to pay for this oil.) Loss of recycling and other cutbacks (especially in China and India) led to fewer people in these countries being able to afford automobiles and smartphones. Lower production of these devices contributed to the lower use of crude oil.

On Figure 2, there is a slight year-to-year variation in crude oil per capita. The single highest year over the time period shown is 2005, with 2004 not far behind. This was about the time many people think that conventional oil production “peaked,” reducing the availability of inexpensive-to-produce oil.

[3] Crude oil prices dropped dramatically when economies were shut in, beginning in March 2020. Prices began spiking the summer and fall of 2021, as the world economy attempted to open up. This pattern suggests that the real problem is tight crude oil supply when the economy is not artificially constrained by COVID restrictions.

Figure 3. Average weekly Brent oil price in chart prepared by EIA, through April 8, 2022. Amounts are not adjusted for inflation.

An analysis of price trends suggests that most of the recent spike in crude prices is due to the tightness of the crude oil supply, rather than the Ukraine conflict. The Brent oil price dropped to an average of $14.24 in the week ending April 24, 2020, not long after COVID restrictions were enacted. When the economy started to reopen, in the week ending July 2, 2021, the average price rose to $76.26. By the week ending January 28, 2022, the average price had risen to $90.22.

Russia invaded Ukraine on February 24, 2022. The Brent spot price on February 23, 2022, was $99.29. Brent prices briefly spiked higher, with weekly average prices rising as high as $123.60, for the week ending March 25, 2022. The current Brent oil price is about $107. If we compare the current price to the price the day before the invasion began, the price is only $8 higher. Even compared to the January 28 weekly average of $90.22, the current price is $17 higher.

Saying that the Ukraine invasion is causing the current high price is mostly a convenient excuse, suggesting that the high prices will suddenly disappear if this conflict disappears. The sad truth is that depletion is causing the cost of extraction to rise. Governments of oil exporting countries also need high prices to enable high taxes on exported oil. We are increasingly experiencing a conflict between the prices that the customers can afford and the prices that those doing the extraction require. In my view, most oil exporting countries need a price in excess of $120 per barrel to meet all of their needs, including reinvestment and taxes. Consumers would prefer oil prices under $50 per barrel to keep the price of food and transportation low.

[4] Food prices tend to rise when oil prices are high because products made from crude oil are used in the production and transport of food.

History shows that bad things tend to happen when food prices are very high, including riots by unhappy citizens. This is a major reason that high oil prices tend to lead to conflict.

Figure 4. FAO inflation-adjusted monthly food price index. Source.

[5] Quarterly crude oil data suggests that few opportunities exist to raise crude oil production to the level needed for the world economy to operate at the level it operated at in 2018 or 2019.

Figure 5 shows quarterly world crude oil production broken down into four groupings: OPEC, US, Russia, and “All Other.”

Figure 5. Quarterly crude oil production through first quarter of 2022. Amounts through December 2021 are EIA international estimates. Increase in OPEC first quarter of 2022 production is estimated based on OPEC Monthly Oil Market Report, April 2022. US crude oil production for first quarter of 2022 estimated based on preliminary EIA indications. Russia and All Other production for first quarter of 2022 are estimated based on recent trends.

Figure 5 shows four very different patterns of past growth in crude oil supply. The All Other grouping is generally trending a bit downward in terms of quantity supplied. If world per capita crude oil production is to stay at least level, the total production of the other three groupings (OPEC, US, and Russia) needs to be rising to offset this decline. In fact, it needs to rise enough that overall crude production growth keeps up with population growth.

Russian Crude Oil Production

The data underlying Figure 5 shows that up until the COVID restrictions, Russia’s crude oil production was increasing by 1.4% per year between early 2005 and early 2020. During the same period, world population was increasing by about 1.2%. Thus, Russia’s oil production has been part of what has helped keep world crude production about level, on a per capita basis. Also, Russia seems to have made up most of its temporary decrease in production related to COVID restrictions by the first quarter of 2022.

US Crude Oil Production

Growth in US crude oil production has been more of a “feast or famine” situation. This can be seen both in Figure 5 above and in Figure 6 below.

Figure 6. US crude oil production based on EIA data. First quarter of 2022 amount is estimated based on EIA weekly and monthly indications.

US crude oil production spurted up rapidly in the 2011 to 2014 period, when oil prices were high (Figure 3). When oil prices fell in late 2014, US crude production fell for about two years. US oil production began to rise again in late 2016, as oil prices rose again. By early 2019 (when oil prices were again lower), US crude oil growth began to slow down.

In early 2020, COVID lockdowns brought a 15% drop in crude oil production (considering quarterly production), most of which has not been made up. In fact, growth after the lockdowns has been slow, similar to the level of growth during the “growth slowdown” circled in Figure 6. We hear reports that the sweet spots in shale formations have largely been drilled. This leaves mostly high-cost areas left to drill. Also, investors would like better financial discipline. Ramping up greatly, and then cutting back, is no way to operate a successful company.

Thus, while growth in US crude oil production greatly supported world growth in crude oil production in the 2009 to 2018 period, it is impossible to see this pattern continuing. Getting crude oil production back up to the level of 12 million barrels a day where it was before the COVID restrictions would be extremely difficult. Further production growth, to support the growing needs of an expanding world population, is likely impossible.

OPEC Crude Oil Production

Figure 7 shows EIA crude oil production estimates for the total group of countries that are now members of OPEC. It also shows crude oil production excluding the two countries which have recently been subject to sanctions: Iran and Venezuela.

Figure 7. OPEC crude oil production to December 31, 2021, based on EIA data. Estimates for first quarter of 2022 based on indications from OPEC Monthly Oil Market Report, April 2022.

If Iran and Venezuela are removed, OPEC’s long-term production is surprisingly “flat.” The “peak” period of production is the fourth quarter of 2018. The fourth quarter of 2018 was the time when the OPEC countries were producing as much oil as they could, to get their production quotas as high as possible after the planned cutbacks that took effect at the beginning of 2019.

Strangely, EIA data indicates that production didn’t fall very much for this group of countries (OPEC excluding Iran and Venezuela), starting in early 2019. The 2019 cutback seems mostly to have affected the production of Iran and Venezuela. It was only later, in the first three quarters of 2020, when COVID restrictions were affecting worldwide production, that crude oil production for OPEC excluding Iran and Venezuela fell by 4 million barrels per day. Production for this group then began to rise, leaving a shortfall of about 900,000 barrels a day, relative to where it had been before the 2020 lockdowns.

It seems to me that, at most, production for the group of OPEC countries excluding Iran and Venezuela can be ramped up by 900,000 barrels a day, and even this is “iffy.” Iraq is reported to be having difficulty with its production; it needs more investment, or its production will fall. Nigeria is past peak, and it is also having difficulty with its production. The high reported crude oil reserves are meaningless; the question is, “How much can these countries produce when it is required?” It doesn’t look like production can be ramped up very much. Furthermore, we cannot count on continued long-term growth in production from these countries, such as would be needed to keep pace with rising world population.

Figure 8. Crude oil production indications for Iran and Venezuela, based on EIA data through December 31, 2021. Change in oil production for first quarter of 2021 is estimated based on OPEC Monthly Oil Market Report, April 2022.

Figure 8 suggests that, indeed, Iran might be able to raise its production by perhaps 1.0 million barrels a day when sanctions are lifted.

Venezuela looks like a country whose crude oil production was already declining before sanctions were imposed. The cost of production there was likely far higher than the world oil price. Also, Venezuela has oil debts to China that it needs to repay. At most, we might expect that Venezuela’s production could be raised by 300,000 barrels per day in the absence of sanctions.

Putting the three estimates of amounts that crude oil production can perhaps be raised together, we have:

  • OPEC ex Iran and Venezuela: 900,000 bpd
  • Iran: 1,000,000 bpd
  • Venezuela: 300,000 bpd
  • Total: 2.2 million bpd

The shortfall of crude oil production in 2021, relative to 2018 production, was 5.9 million bpd, as mentioned in Section [1]. The 2.2 million barrels per day possibly available from this analysis gets us nowhere near the 2018 level. Furthermore, we have nowhere to go to obtain the rising crude oil production required to support the rising population with enough crude oil to supply food and industrial goods at today’s consumption level.

[6] Eliminating, or even reducing, Russia’s crude oil production is certain to have an adverse impact on the world economy.

Figure 9 shows the step-down in crude oil production that occurred in early 2020 and indicates that the world’s oil supply is having difficulty getting back up to pre-COVID levels. If Russia’s crude oil production were to be eliminated, it would make for another step-down of comparable magnitude. Major segments of the economy would likely need to be eliminated.

Figure 9. Quarterly crude oil production through first quarter of 2022 divided by world population estimates based on 2019 UN population estimates. Crude oil amounts through December 2021 are EIA estimates. Crude oil production estimates for first quarter 2022 are as described in the caption to Figure 5.

[7] When there isn’t enough crude oil to go around, the naive belief is that oil prices will rise and either more oil will be found, or substitutes will take its place. In fact, the result may be conflict and elimination of segments of the economy.

Our self-organizing economy will tend to adapt in its own way to inadequate crude oil supplies. Eventually, the economy may collapse completely, but before that happens, changes are likely to happen to try to preserve the “better functioning” parts of the economy. In this way, perhaps parts of the world economy can continue to function for a while longer while getting rid of less productive parts of the economy.

The following is a partial list of ways the economy might adapt:

  • Fighting may take place over the remaining crude oil supplies. This may be the underlying reason for the conflict between NATO and Russia, with respect to Ukraine.
  • COVID lockdowns indirectly reduce demand for crude oil. A person might wonder whether the current COVID lockdowns in China are partly aimed at preventing oil and other commodity prices from rising to absurd levels.
  • Some organizations may disappear from the world economy because of inadequate funding or lack of profitability.
  • Additional supply lines are likely to break, allowing fewer types of goods and services to be made.
  • The world economy may subdivide into multiple pieces, with each piece able to make a much more limited array of goods and services than is provided today. A shift toward the use of other currencies instead of the US dollar may be part of this shift.
  • World population may shrink for multiple reasons, including poor nutrition and epidemics.
  • The poor, the elderly and the disabled may be increasingly cut off from government programs, as total goods and services (including total food supplies) fall too low.
  • Europe could be cut off from Russian fossil fuel exports, leaving relatively more for the rest of the world.

[8] Countries that are major importers of crude oil and crude oil products would seem to be at significant risk of reduced supply if there is not enough crude oil to go around.

Figure 10 shows a rough estimate of the ratio of crude oil produced to crude oil products consumed in 2019, the last full year before the pandemic. On an “All Liquids” basis, the US ratio of crude oil production to consumption would appear higher than shown on Figure 10 because of its unusually high share of natural gas liquids, ethanol, and “refinery gain” in its liquids production. If these types of production are omitted, the US still seems to have a deficit in producing the crude oil it consumes.

Figure 10. Rough estimate of ratio of crude oil produce to the quantity of crude oil products consumed, based on “Crude oil production” and “Oil: Regional consumption – by product group” in BP’s 2021 Statistical Review of World Energy. Russia+ includes Russia plus the other countries in the Commonwealth of Independent States.

Perhaps all that is needed is the general idea. If inadequate crude oil is available, all of the countries at the left of Figure 10 are quite vulnerable because they are very dependent on imports. Russia and the Middle East are prime targets for countries that are desperate for crude oil.

[9] Conclusion: We are likely entering a period of conflict and confusion because of the way the world’s self-organizing economy behaves when there is an inadequate supply of crude oil.

The issue of how important crude oil is to the world economy has been left out of most textbooks for years. Instead, we were taught creative myths covering several topics:

  • Huge amounts of fossil fuels will be available in the future
  • Climate change is our worst problem
  • Wind and solar will save us
  • A fast transition to an all-electric economy is possible
  • Electric cars are the future
  • The economy will grow forever

Now we are running into a serious shortfall of crude oil. We can expect a new set of problems, including far more conflict. Wars are likely. Debt defaults are likely. Political parties will take increasingly divergent positions on how to work around current problems. News media will increasingly tell the narrative that their owners and advertisers want told, with little regard for the real situation.

About all we can do is enjoy each day we have and try not to be disturbed by the increasing conflict around us. It becomes clear that many of us will not live as long or well as we previously expected, regardless of savings or supposed government programs. There is no real way to fix this issue, except perhaps to make religion and the possibility of life after death more of a focus.

Posted in Financial Implications, oil shortages | Tagged , , , | 4,255 Comments

No one will win in the Russia-Ukraine conflict

Most people have a preconceived notion that there will be a clear winner and loser from any war. In their view, the world economy will go on, much as before, after the war is “won” by one side or the other. In my view, we are basically dealing with a no-win situation. No matter what the outcome, the world economy will be worse off after the fighting stops.

The problem the world economy is up against is the depletion of many kinds of resources simultaneously. This depletion is made worse by rising population, meaning that the resources available need to provide an adequate living for an increasing number of world inhabitants. Because of depletion, the world economy is reaching a point where it can no longer grow in the way it has in the past. Inflation, food shortages and rolling blackouts are likely to become increasing problems in many parts of the world. Eventually, the population is likely to fall.

We are living in a world that is beginning to behave like the players scrambling for seats in a game of musical chairs. In each round of a musical chairs game, one chair is removed from the circle. The players in the game must walk around the outside of the circle. When the music stops, all the players scramble for the remaining chairs. Someone gets left out.

Figure 1. Circle of chairs arranged for a game of musical chairs. Source

In this post, I will try to explain some of the issues.

[1] In a world with inadequate resources relative to population, conflicts are likely to become increasingly common.

The Russia-Ukraine conflict is one example of a resource-associated conflict. The allies underlying the NATO organization have chosen to escalate the Russia-Ukraine conflict, in part, because the existence of the conflict helps to hide resource shortages and accompanying high prices that are already taking place. No matter how the war is stopped, the underlying resource shortage issue will continue to exist. Therefore, the conflict cannot end well.

If sanctions lead to less trade with Russia (or even worse, less trade with Russia and China), the world economy will have an even greater problem with inadequate resources after the war is over. In fact, many parts of the current economic system are in danger of failing, primarily because depletion is leading to too little energy and other resources per capita. For example, the US dollar may lose its reserve currency status, the world debt bubble may pop, and globalization may take a major step backward.

[2] There is a huge resource depletion issue that authorities in many countries have known about for a very long time. The issue is so frightening that authorities have chosen not to explain it to the general population.

Mainstream media (MSM) practically never mentions that there is a major issue with resource depletion. Instead, MSM tells a narrative about “transitioning to a lower carbon economy,” without mentioning that this transition is out of necessity: The world is up against extraction limits for many kinds of resources. Besides oil, coal and natural gas, resources with limits include many other minerals, such as copper, lithium, and nickel. Other resources, including fresh water and minerals used for fertilizer are also only available in limited supply. MSM fails to tell us that there is no evidence that a transition to a low carbon economy can actually be made.

[3] The big depletion issue is affordability of end products made with high priced resources. The cost of extraction rises, but the ability of the world’s citizens to pay for end products made using these high-cost resources doesn’t rise. Commodity prices do not rise enough to cover the rising cost of extraction. When this affordability limit is hit, it is the resource extracting countries, such as Russia, that find themselves in a terrible situation with respect to the financial well-being of their populations.

The big issue that hits because of depletion is a price conflict. Businesses extracting resources need high prices so that they can reinvest in new mines, in ever more costly locations, but consumers cannot afford these high prices.

In a sense, the higher cost is because of “inefficiency.” As a result of depletion, it takes more hours of labor, more machine time, and a greater use of energy products to extract the same quantity of a given resource that was previously extracted elsewhere. Growing efficiency tends to help wages, but growing inefficiency tends to work the opposite way: Wages don’t rise, certainly not as rapidly as prices of end products.

As a result, commodity exporters, such as Russia, are caught in a bind: They cannot raise prices enough to make new investments profitable. The problem is that the world’s consumers cannot afford the resulting high prices of essentials such as food, electricity and transportation. Russia reports very high reserve amounts, especially for natural gas and coal. It is doubtful, however, that these reserves can actually be extracted. Over the long term, selling prices cannot be maintained at a sufficiently high level to cover the huge cost of extracting, transporting and refining these resources.

The success of a country’s economy can, in some sense, be measured by the country’s per capita GDP. Russia’s GDP per capita has tended to lag far behind that of the US (Figure 2).

Figure 2. Inflation-adjusted per capita GDP of the United States, Russia and Ukraine. Amounts are as provided by the World Bank, using Purchasing Power Parity GDP in 2017 International Dollars.

Russia’s inflation-adjusted GDP per capita fell after the collapse of the central government of the Soviet Union in 1991. It was able to grow again, once oil prices began to rise in the early 2000s. Since 2013, Russia’s GDP per capita growth has again fallen behind that of the US, as increases in oil and other commodity prices again lagged the rising cost of production. Given these difficulties with depletion, Russia is becoming increasingly unwilling to ignore poor treatment it receives from Ukraine.

There may be another factor, as well, leading especially to the escalation of the conflict. The US seems to covet Russia’s resources. Some powers behind the throne seem to believe that Western forces supporting Ukraine can quickly win in this conflict. If such an early win occurs, the aim is for Western forces to step in and inexpensively ramp up Russian resource extraction, allowing the world a new source of cheap-to-produce fossil fuels and other minerals.

In this context, Russia launched an attack on Ukraine on February 24, 2022. Ukraine has presented Russia with problems for many years. One issue has been transit fees for natural gas passing through the country; is Ukraine taking too much gas out? Another problem area has been the rise of the far-right Azov regiment. Russia has also expressed concern that NATO has been training soldiers within Ukraine, even though Ukraine is not a member of NATO. Russia doesn’t want military, trained by NATO, at its doorstep.

[4] World economic growth very much depends on growing energy consumption.

There are two ways of measuring world GDP. The standard one is with the production of each country measured in inflation-adjusted US$, with the changing relative value to the US$ considered. The other approach uses “Purchasing Power Parity” GDP. The latter is supposedly not affected by the changing level of the dollar, relative to other currencies. Inflation-Adjusted Purchasing Power Parity GDP is only available for 1990 and subsequent years. Figure 3 shows the high correlation between energy consumption and PPP GDP during the period from 1990 through 2020.

Figure 3. X,Y graph of world energy consumption for the period 1990 to 2020, based on energy data from BP’s 2021 Statistical Review of World Energy and world Purchasing Power Parity GDP in 2017 International Dollars, as published by the World Bank.

The reason for a strong association between GDP growth with energy consumption growth is a physics-based reason. Producing goods and providing services requires the “dissipation” of energy products because the laws of physics tell us that energy is required to move any object from one place to another, or to heat any object. In the latter case, it is the individual molecules within a substance that move faster and faster as they get hotter. The economy is a “dissipative structure” in physics terms because of the need for energy dissipation to provide the work needed to make the system operate.

Human beings are also dissipative structures. The energy that humans get comes from the dissipation of the energy found in foods of every kind. Food energy is commonly measured in Calories (technically, kilocalories).

[5] World economic growth also seems to depend on factors besides energy consumption.

The fitted equation on Figure 3 (the equation beginning with “y”) implies that GDP is rising much more rapidly than energy consumption, almost twice as rapidly. Over the entire 30-year period, the actual growth rate in energy consumption averages about 1.8% a year. If energy consumption growth had really been 1.8% per year, the fitted equation implies that growth in GDP would have greatly sped up over the period. (In fact, the growth rate in energy consumption was falling over the 30-year period, but GDP grew at closer to a constant rate. In terms of the fitted equation, these two conditions are equivalent.)

Figure 4. Calculated expected GDP growth rate if energy consumption grows at a constant 1.8% per year, based on the fitted equation shown in Figure 3.

How can GDP rise so much more rapidly than energy dissipation? There seem to be several ways such a higher rate of increase can occur, on a temporary basis:

[a] A worldwide trend toward an economy using more services. The production of services tends to require less energy consumption than the production of essential goods, such as food, water, housing and local transportation. As the world economy gets wealthier, it can afford to add more services, such as education, healthcare, and childcare.

[b] A worldwide trend toward more wage and wealth disparity. Such a trend tends to happen with more specialization and more globalization. Strangely enough, a trend to more wage disparity allows the world economy to continue to grow without adding a proportionately greater amount of energy consumption use because of the different spending patterns between low-paid workers and high-paid workers.

Analyzing the situation, the world is filled mostly with low-paid workers. To the extent that the pay of these low-paid workers can be squeezed down, it can prevent these workers from buying goods that tend to use relatively high amounts of energy products, such as automobiles, motorcycles and modern homes. At the same time, growing wage disparity allows the higher-paid workers to be paid more. These higher-paid workers tend to spend a disproportionate share of their income on services, such as education and healthcare, which tend to consume less energy.

Thus, greater wage disparity tends to shift spending away from goods and toward services. The main beneficiaries are the top 1% of workers (who buy mostly services, requiring little energy consumption), rather than the remaining 99% (who would really like goods such as a car and their own home, which require much more energy consumption).

[c] Improvements in technology. Improvements in technology are helpful in raising GDP because technological improvements tend to make finished goods and services more affordable. With greater affordability, more people can afford goods and services. This effect is favorable for allowing the economy, as measured by GDP, to grow more quickly than energy consumption.

There is a catch associated with using improved technology to make goods and services more affordable. Improved technology tends to increase wage disparity because it nearly always leads to owners and a few highly educated workers being paid more, while workers doing the more routine parts of processes are paid less. Thus, it tends to lead to the problem discussed above: [b] A trend toward wage and wealth disparity.

Also, with improved technology, available resources tend to be depleted more quickly than without improved technology. This happens because finished goods are less expensive, so more people can afford them. Once resources start getting exhausted, improved technology can’t fix the situation because resource extraction costs are likely to rise more rapidly than can be offset with the impact of new technology.

[d] A worldwide trend toward more debt at ever-lower interest rates.

We all know that the monthly payment required to purchase a car or home is lower if the interest rate on the debt used to finance the purchase is lower. Thus, falling interest rates can make paychecks go further. Both businesses and citizens can afford to purchase more goods and services using credit, so the overall level of debt tends to rise with falling interest rates.

If we are only considering the period from 1990 to the present, the trend is clearly toward lower interest rates. These lower interest rates are part of what is making the GDP growth higher than what would be expected if interest rates and debt levels remained constant.

Figure 5. 3-month and 10-year US Treasury interest rates through February 28, 2022. Chart by FRED of the St. Louis Federal Reserve.

[6] The world economy now seems to be reaching limits with respect to many of the variables allowing world economic growth to continue as it has in the past, as discussed in Sections [4] and [5], above.

Figure 6. World per capita GDP based on Purchasing Power Parity GDP in 2017 International Dollars calculated using World Bank data.

Figure 6 shows that there have been two major step-downs in world inflation-adjusted per capita PPP GDP. The first one occurred in the 2008-2009 period; the second one occurred in 2020. Figure 7 shows the sharp dips in energy consumption occurring in the same time periods.

Figure 7. World per capita energy based on data of BP’s 2021 Statistical Review of World Energy.

In 2021, energy prices started to rise rapidly when the world economy tried to reopen. This rapid rise in prices strongly suggests that energy extraction limits are being reached.

Another clue that energy production limits are being reached comes from the fact that the group of oil exporters, OPEC+, found that they couldn’t actually ramp up their oil production as quickly as they promised. Once oil production is cut back because of inadequate prices, it is hard to get production to rise again, even if prices temporarily rise because the many pieces of the chain supporting this extraction are broken. For example, trained workers leave and find jobs elsewhere, and contractors go out of business because of inadequate profits.

If we think about it, Items [5a], [5b], [5c] and [5d] are all reaching limits as well. Item [5d] is probably clearest: Interest rates can no longer be lowered. In fact, nearly everyone says that interest rates should now be raised because of the high inflation rates. If interest rates are raised, commodity prices, including prices for fossil fuels, will fall.

With lower fossil fuel prices, there will be pressure for oil, gas and coal producers to reduce their production, even from today’s lower levels. Because of the tight connection between energy and GDP, lower energy production will tend to push economies further toward contraction. Of course, this will make resource exporters, such as Russia, worse off.

As the world economy enters recession, we can expect that Item [5a], the shift from goods toward services, to turn around. People with barely enough money for necessities will reduce their use of services such as haircuts and music lessons. Item [5b], globalization and related wage disparity, is already under pressure. Countries are finding that with broken supply chains, more local production is needed. In the US, recent wage gains have tended to go to the lowest-paid workers. Item [5c], technology growth, cannot ramp up as resources needed from around the world are increasingly unavailable, due to broken supply chains and depletion.

[7] We are likely facing a collapsing world economy because of the limits being reached. Adding sanctions against Russia will further push the world economy in the direction of collapse.

Many sources report that Russian exports of wheat, aluminum, nickel, and fertilizers will be “temporarily” disrupted. A few sources note that Russia plays an important role in the processing of uranium fuel used in nuclear power plants. According to the Conversation:

Most of the 32 countries that use nuclear power rely on Russia for some part of their nuclear fuel supply chain.

We have become used to efficient air travel, but sanctions against Russia make this less possible, especially for flights to Southeast Asia. A Bloomberg article called Siberian Detour Requires Airlines to Retrace Cold War Era Routes gives the example of direct flights from Finland to Southeast Asia being canceled because they have become too expensive and are too time-consuming with the required detours. It becomes necessary to fly indirect connecting routes if a person wants to travel. Many other routes have similar problems.

Figure 8. Source: Bloomberg, “Siberian detour requires airlines to retrace cold war era routes.”

US President Joseph Biden is warning that food shortages are likely in many parts of the world as a result of the sanctions placed against Russia.

According to a video shown on Zerohedge,

“It’s going to be real. The price of the sanctions is not just imposed upon Russia. It’s imposed upon an awful lot of countries as well, including European countries and our country as well.”

If the world economy were doing well, and if Russia were a tiny part of the world economy, perhaps the sanctions could be tolerated by the world economy. As it is, the Russia-Ukraine conflict acts to hide the underlying resource shortage problem. This is possible because, with the conflict, the resource shortages can be described as “temporary” and “necessary” in the context of the terrible things the Russians are doing. The way the West frames the problem provides a scapegoat to deflect anger toward, but it doesn’t fix the problem.

Russia started out being very disadvantaged because commodity prices, in recent years, have not been rising high enough to ensure an adequate living for Russian citizens and high enough tax revenue for the Russian government. Adding sanctions against Russia will simply make Russia’s problems worse.

[8] There is little reason to believe that Russia will “give up” in response to sanctions imposed by the United States and other countries.

The attacks by Russia of Ukrainian sites seems to be occurring for many related reasons. Russia can no longer tolerate being inadequately compensated for the resources it is extracting and selling to Ukraine and the rest of the world. It is tired of being “pushed around” by the rich economies, especially the United States, as NATO adds more countries. It is also tired of NATO training Ukrainian soldiers. Russia seems to have no plan to gain the entire territory of Ukraine; it is more of a temporary police action.

Russia’s underlying problem is that it can no longer produce commodities that the world wants as inexpensively as the world demands. Building all the infrastructure needed to extract and ship more fossil fuel resources would take more capital spending than Russia can afford. The selling price will never rise high enough to justify these investments, including the cost of the Nord Stream 2 pipeline. Russia has nothing to lose at this point. The current situation is not working; going back to it is no incentive for stopping the current conflict.

Russia is in some ways like a heavily armed, suicidal old man, who can no longer earn an adequate living. The economic system of Russia is no longer working as it should. Russia is incredibly well-armed. The situation reminds a person of the story of Samson, in his old age, taking down the temple of the Philistines and losing his own life at the same time. Russia has no reason to back down in response to sanctions.

Figure 9. Figure showing that Russia has a higher inventory nuclear warheads than the US. Figure by the Federation of American Scientists. Source

[9] Leaders of the world, including Joe Biden, appear to be oblivious to the situation we are facing.

Leaders of the world have created ridiculous narratives that overlook the critical role commodities play. They seem to believe that it is possible to cut off purchases from Russia with, at most, temporary harm to the rest of the world economy.

The history of the world shows that the populations of many civilizations have outgrown their resource bases and have collapsed. Physics points out that this outcome is almost inevitable because of the way the Universe is constructed. Everything is constantly evolving, even economies. The climate is constantly evolving, as are the species inhabiting the Earth.

Elected leaders need a story of everlasting growth that they can tell their citizens. They cannot even consider the physics-based way the world economy operates, and the resulting expected pattern of overshoot and collapse. Modelers of what are intended to be long-lasting structures cannot accept this outcome either.

Limits which are defined based on affordability of end products are incredibly difficult to model, so creative narratives have been developed suggesting that humans can move away from fossil fuels if they so desire. No one stops to think that economies cannot continue to exist using a much lower quantity of energy, any more than an adult human can get along on 500 calories a day. Both are dissipative structures; the ongoing energy requirement is built in. Factories close when electricity, diesel and other energy products are cut off.

[10] The sanctions and the Russia-Ukraine conflict cannot end well.

The world economy is already on the edge of collapse because of the resource limits it is hitting. Intentionally stopping Russia’s output of resources like fertilizer and processed uranium is certain to make the situation worse, not better. Once Russia’s output is stopped, it is likely to be impossible to restart Russia’s production at the same level. Trained workers who lose their jobs will likely find jobs elsewhere, for one thing. The shortfall in output will affect countries around the world.

The United States dollar is now the world’s reserve currency. The sanctions being applied indirectly encourage countries to use other currencies to work around the sanctions. There seems to be a substantial chance that the US economy will lose its role as the center of international trade. If such a change takes place, the US will no longer be able to import far more than it exports, year after year.

A major issue is the huge amount of debt most countries of the world have. With a rapidly slowing world economy, repaying debt with interest will become impossible. Debt defaults will further wreak havoc with the world economic system.

We don’t know the exact timing of how this will play out, but the situation does not look good.

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Russia’s attack on Ukraine represents a demand for a new world order

Russia’s attack on Ukraine represents a demand for a new world order that, over the long term, will support higher prices for fossil fuels, especially oil. Such an economy would probably be centered on Russia and China. The rest of the world economy, to the extent that it continues to exist, will largely have to get along without fossil fuels, other than the fossil fuels that countries continue to produce for themselves. Population and living standards will fall in most of the world.

If a Russia-and-China-centric economy can be developed, the US dollar will no longer be the world’s reserve currency. Trade will be in the currency of the new Russia-China block. Outside of this block, local currencies will play a dominant role. Most of today’s debt will ultimately be defaulted upon; to the extent that this debt is replaced, it will be replaced with debt in local currencies.

As I see the situation, the underlying problem is the fact that, on a world basis, energy consumption per capita is shrinking. Energy consumption is essential for creating goods and services.

Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.

The shrinking amount of energy per person means that, on average, fewer and fewer finished goods and services can be produced for each person. Some countries do better than average; others do worse. With low fossil fuel prices, Russia has been faring worse than average; it wants to remedy the situation with long-term higher energy prices. If Russia can start transferring its energy exports to China, perhaps the new Russia-China economy, with limited support from the rest of the world, can afford to pay Russia the high prices for fossil fuels that Russia requires to maintain its economy.

In this post, I will try to explain what I see is happening.

[1] It appears that Russia now fears that it is near collapse, not too different from the collapse of the central government of the Soviet Union in 1991. Such a collapse would lead to a huge drop in Russia’s living standards, even from today’s relatively low level.

If we look back at the Soviet Union’s energy consumption, we see a strange pattern. The Soviet Union’s energy consumption rose rapidly in the period after World War II. It became a military rival of the US, as its energy consumption grew in the 1965 to 1985 period. Its energy consumption leveled off before the central government collapsed in 1991. In fact, energy consumption has never gotten back to its level in the late 1980s.

Figure 2. Former Soviet Union (FSU) energy consumption by fuel, based on data of BP’s Statistical Review of World Energy 2018.

[2] The thing that seems to have been behind the 1991 collapse is the same thing that seems to be behind Russia’s current fear of collapse: continued low oil prices.

When we look back at inflation-adjusted oil prices, we see that a long period of low prices preceded this collapse. These low prices were harmful in many ways. They reduced funds for reinvestment, which led to the collapse in oil supply. They reduced the funds available to pay wages. They also reduced the tax revenue that the Soviet Union could collect.

Figure 3. Oil production and price of the former Soviet Union (FSU), based on BP’s Statistical Review of World Energy 2015.

I believe that these chronically low oil prices ultimately brought down the top layer of the government of the Soviet Union. This is because of the physics of the situation. It takes energy to provide the services of the top level of the government. As the total energy that could be purchased by the system fell because of low prices received for exports, it became impossible to support this top level of governmental services. This top layer was less essential than the lower levels of government, so it fell away.

In recent times, there has also been a long period of low prices, since about 2013:

Figure 4. Inflation adjusted Brent Oil prices in 2020$, based on data of the US Energy Information Administration.

Unless this pattern of low prices can be reversed quickly, Russia as a political entity could collapse. Exports of all of the goods it now produces would likely fall.

[3] While oil prices depend on “supply and demand,” as a practical matter, demand is very dependent on interest rates and debt levels. The higher the debt level and the lower the interest rate, the higher the price of oil can rise.

If we look back at Figure 4, we can see that before the US subprime housing bubble popped in 2008, inflation-adjusted oil prices were able to rise to $157 per barrel, adjusted to the 2020 price level. Once the debt bubble popped, inflation-adjusted oil prices fell to $49 per barrel. It was at this low point (and correspondingly low prices for many other commodities) that the US started its program of Quantitative Easing (QE) to lower interest rates.

After two years of QE, oil prices were back above $140 per barrel, in inflation-adjusted prices, but these soon started sliding down. By the time oil prices dropped to $120 per barrel, oil companies started to complain that prices were falling too low to meet all of their needs, including the need to drill in ever less productive areas. Now we are at a point where interest rates are about as low as they can go. Short-term interest rates are near zero, which is where they were in the late 1930s.

Figure 5. 3-month and 10-year US Treasury interest rates, through February 28, 2022. Chart by FRED of the St. Louis Federal Reserve.

The quantity of funds in people’s checking and savings accounts is at an extraordinarily high level, as well. This is partly because of the availability of debt at these low interest rates.

Figure 6. M2 Real (Inflation-Adjusted) Money Stock in chart by FRED of the St. Louis Federal Reserve.

Thus, even before the Ukrainian invasion, oil prices were raised about as high as they could go, through low interest rates and generous debt availability. With all this stimulus, Brent Spot Oil prices averaged $86.51 in January 2022. Even now, with all the disruption of the attack by Russia against Ukraine, oil prices are below the $120 threshold that producers seem to need. This price issue, plus the corresponding low-price issues for natural gas and coal, is the problem that Russia is concerned about.

Prices for imported coal and natural gas have bounced very high in the last few months, but no one expects these high prices to last. For one thing, they are too high for the European manufacturers that use imported coal or natural gas to stay in business. For example, producers that create urea fertilizer using natural gas find that the price of fertilizer produced in this way is way too high for farmers to afford. For another, the electricity produced by burning the high-priced natural gas or coal tends to be too expensive for European households to afford.

[4] The fundamental problem behind recent low oil prices is the fact that the current mix of consumers cannot afford goods and services produced using the high oil prices that producers, such as Russia, need to operate, pay high enough wages, and do adequate reinvestment.

When the price of oil was very low, back before 1970 (see Figure 3), it was relatively easy for consumers to afford goods and services made with oil. This was the period when the world economy was growing rapidly, and many people could afford to purchase automobiles and buy the oil products needed to operate them.

Once the cost of oil extraction started rising because of depletion, it became more and more difficult to keep prices both:

  1. High enough for oil producers, such as Russia, and
  2. Low enough to make affordable goods for consumers, as was possible prior to 1970

To try to hide the increasingly difficult problem of keeping prices both high enough for producers and low enough for consumers, central banks have lowered interest rates and encouraged the use of more debt. The idea is that if a person can buy a fuel-efficient car at a low enough interest rate and over a long enough term, perhaps this will make the vehicle more affordable. Similarly, interest rates on home mortgages have fallen to very low levels. All of this, plus the fact that debt is used to finance new factories and mines, leads to the relationship we saw in Figure 4 between oil prices and debt availability, related to interest rates.

[5] No one knows precisely how much oil, coal and natural gas can be extracted because the quantity that can be extracted depends on the extent of the price rise that can be tolerated without plunging the economy into recession.

If prices of these fossil fuels can rise very high (say, $300 per barrel for oil, and correspondingly high prices for other fossil fuels), a huge amount of fossil fuel can be extracted. Conversely, if energy prices cannot stay above the equivalent of $80 per barrel oil for very long without a serious recession, then we may already be very close to the end of available fossil fuel extraction. Both oil and gas producers and coal producers can be expected to go out of business because prices do not leave a sufficient margin for the required investment in new fields to offset the depletion of existing fields. Renewables will falter, as well, because both building and maintaining renewables requires fossil fuels.

The amount of resources of any kind (fossil fuels and minerals such as lithium, uranium, copper and zinc) that can be extracted depends upon the extent of depletion that the economy can tolerate. Depletion of any kind of resource means that a bigger effort (more workers, more machinery, more energy products) is required to extract a given quantity of each resource. It is clear that the entire economy cannot be transferred to the extraction of fossil fuels and mineral resources. For example, some workers and resources are needed for growing and transporting food. This puts a limit on how much depletion can be tolerated.

What Russia (as well as every other oil producer) would like is a way to get the tolerable oil price up significantly higher, for example, to $150 per barrel, so that more oil can be extracted. The hope is that a Russia-and-China-centric economy might be able to do this. Ideally, the tolerable maximum price for coal and natural gas would rise, as well.

[6] Europe, in particular, cannot afford high oil prices. If interest rates are increased soon, this will make the problem even worse. China seems to have definite advantages as an economic partner.

Europe is already having difficulty tolerating very high prices of imported natural gas and coal. Rising oil prices will add even more stress. Central banks are planning to raise interest rates. These higher interest rates will make loan payments more expensive. These higher interest rates will tend to push Europe’s economy further toward recession.

Given the problems with Europe as an energy importer, China would seem to have the possibility of being a better customer that can perhaps tolerate higher prices. For one thing, China is more efficient in its use of energy products than Europe. For example, many homes in the southern half of China are not heated in winter. People instead dress warmly inside their homes in winter. Also, homes and businesses in northern China are sometimes heated with waste heat from nearby coal-fired electricity plants. This is a very efficient approach to heating.

China also uses more coal in its energy mix than Europe. Historically, coal has been much less expensive than oil. What is needed is a low average price of energy. A small amount of high-priced oil can be tolerated in an economy that uses mostly coal in its energy mix. When all costs are counted, wind and solar are very high-priced energy sources, which contributes to Europe’s problems.

In recent years, China’s consumption of energy products has been growing very rapidly. Perhaps, in the view of Russia, China can use high-priced fossil fuel better than other parts of the world.

Figure 7. Energy consumption per capita for the world, the Asia-Pacific Region, and China based on data from BP’s 2021 Statistical Review of World Energy.

[7] Russia realized that the rest of the world is utterly dependent upon its fossil fuel exports. Because of this dependency, as well as the physics-based connection between the burning of fossil fuels and the making of finished goods and services, Russia holds huge power over the world economy.

The world economy should have known about the importance of fossil fuels and the likelihood that the world economy would face depletion issues in the first half of the 21st century, ever since a speech by Rear Admiral Hyman Rickover in 1957. In this speech, Rickover said,

We live in what historians may someday call the Fossil Fuel Age. . .With high energy consumption goes a high standard of living. . . A reduction of per capita energy consumption has always in the past led to a decline in civilization and a reversion to a more primitive way of life. 

Current estimates of fossil fuel reserves vary to an astonishing degree. In part this is because the results differ greatly if cost of extraction is disregarded or if in calculating how long reserves will last, population growth is not taken into consideration; or, equally important, not enough weight is given to increased fuel consumption required to process inferior or substitute metals. We are rapidly approaching the time when exhaustion of better grade metals will force us to turn to poorer grades requiring in most cases greater expenditure of energy per unit of metal.

. . . it is an unpleasant fact that according to our best estimates, total fossil fuel reserves recoverable at not over twice today’s unit cost are likely to run out at sometime between the years 2000 and 2050, if present standards of living and population growth rates are taken into account.

I suggest that this is a good time to think soberly about our responsibilities to our descendants – those who will ring out the Fossil Fuel Age. Our greatest responsibility, as parents and as citizens, is to give America’s youngsters the best possible education [including the energy problem of a world with finite resources].

Many people today would conclude that world leaders have done their best to ignore this advice. The likely problem with fossil fuels has been hidden behind an imaginative, but false, narrative that our biggest problem is climate change caused primarily by fossil fuel extraction that can be expected to extend until at least 2100, unless positive steps are made to hold back this extraction.

In this false narrative, all the world needs to do is to move to wind and solar for its energy needs. As I discussed in my most recent post, titled Limits to Green Energy Are Becoming Much Clearer, this narrative of success is completely false. Instead, we seem to be hitting energy limits in the near term because of chronically low prices. Wind and solar are doing very little to help because they cannot be depended upon when needed. Furthermore, the quantity of wind and solar available is far too low to replace fossil fuels.

Few people in America and Europe realize that the world economy is entirely dependent upon Russia’s exports of oil, coal and natural gas. This dependency can be seen in many ways. For example, in 2020, 41% of world natural gas exports came from Russia. Natural gas is especially important for balancing electricity from wind and solar.

North America has historically played only a very small role in natural gas exports; it is questionable whether North America can ramp up its total natural gas production in the future, given the depletion problems being experienced with respect to the extraction of oil and the associated natural gas from shale formations. Continuously high oil prices are necessary to justify ramping up production outside of sweet spots. If drillers consider long-term prospects for oil prices to be too low, the associated natural gas will not be collected.

Figure 8. Natural gas exports by part of the world, considering only exports outside of a given region. Based on data of BP’s 2021 Statistical Review of World Energy.

Europe is especially dependent upon natural gas imports (Figure 9). Its imports of natural gas exceed the exports of Russia and its affiliated countries in the Commonwealth of Independent States, referred to as Russia+ in Figures 8 and 9.

Figure 9. Natural gas imports by part of the world, considering only exports outside of a given region. Based on data of BP’s 2021 Statistical Review of World Energy.

Without the natural gas exports of Russia and its close affiliates, there is no possibility of supplying adequate natural gas exports to the rest of the world.

Diesel fuel, created by refining oil, is another energy product that is in critically short supply, especially in Europe. Diesel fuel is used to power trucks and farm tractors, as well as many European automobiles. An Argus Media report indicates that Russian supplies account for 50% to 60% of Europe’s seaborne imports of diesel and other gasoil, amounting to 4 to 6 million tons of fuel per month. It likely would be impossible to replace these imports, using supplies from elsewhere, without bidding the price of these imported fuels up to a much higher price level than today. Even then, countries outside Europe would be left with inadequate diesel supplies.

[8] Russia’s attack on Ukraine seems to have been made for many reasons.

Russia was clearly frustrated with the current situation, with NATO becoming increasingly assertive within Ukraine itself, even though Ukraine is not itself a NATO member. Russia is also aware that in some sense, it has far more power over the world economy than most people realize because the world economy is utterly dependent on Russia’s fossil fuel exports (Section 7). Sanctions against Russia will likely hurt the countries making the sanctions as much or more than they hurt Russia.

There were also several concerns that were specifically Ukrainian giving rise to the attack on Ukraine. There had been long standing conflicts about natural gas pipelines. Was Ukraine taking too much natural gas out as a transit fee? Was it paying the correct fee for the natural gas it used? Ukraine also seems to have mistreated quite a few Russian-speaking Ukrainians over the years.

Russia has become increasingly frustrated with the small share of the world’s output of goods and services that it receives. The way the economic system works today, those who provide “services” seem to receive a disproportionate share of the world’s output of goods and services. Russia, with its extraction of minerals of many kinds, including fossil fuels, has not been well compensated for the great wealth that it brings to the world as a whole.

Over the years, Russia’s great strength has been its military. Perhaps Ukraine would not be too large a country to do battle over. Russia might be able to eliminate some of its irritations with Ukraine. At the same time, it might be able to make changes that would help to raise what have become chronically low fossil fuel prices. The sanctions that other countries would make would tend to push the required changes along more quickly.

If the sanctions really did push Russia down, the result would tend to push the whole world economy toward collapse, because the rest of the world is extremely dependent upon Russia’s fossil fuel exports. In Figure 1, the laws of physics say that there is a proportional response to the quantity of energy “dissipated”; if a greater output of goods and services is desired, more energy input is required. Efficiency changes can somewhat help, but efficiency savings tend to be offset by the higher energetic needs of the more complex system required to achieve these savings.

If energy prices do not rise high enough, we will somehow need to get along with very little or no fossil fuels. It is doubtful that renewables will last very long either because they depend upon fossil fuels for their maintenance and repair.

[9] If higher energy prices cannot be achieved, there is a significant chance that the change in the world order will be in the direction of pushing the world economy toward collapse.

We are living in a world today with shrinking energy resources per capita. We should be aware that we are reaching the limits of fossil fuels and other minerals that we can extract, unless we can somehow figure out a way to get the economy to tolerate higher prices.

The danger that we are approaching is that the top levels of governments, everywhere in the world, will either collapse or be overthrown by their unhappy citizens. The reduced amounts of energy available will push governments in this way. At the same time, programs such as government-funded pension plans and unemployment plans will disappear. Electricity is likely to become intermittent and then fail completely. International trade will shrink back; economies will become much more local.

We were warned that we would be reaching a time period with serious energy problems about now. The first time came in the 1957 Rickover speech discussed in Section 7. The second warning came from the 1972 book, The Limits to Growth by Donella Meadows and others, which documented a computer modeling approach to the problem of limits of a finite world. The Ukraine invasion may be a push in the direction of more serious energy problems, emerging primarily from the fact that other countries will want to punish Russia. Few people will realize that punishing Russia is a dangerous path; a serious concern is that today’s economy cannot continue in its current form without Russia’s fossil fuel exports.

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