Introduction to the “World’s Fragile Economic Condition”

I will be giving a presentation to a group of casualty actuaries on September 17 called “The World’s Fragile Economic Condition.” I plan to write up the presentation in two posts, one covering the first three of the six sections of the presentation, and the second one covering the second three sections, so that it is easier to read online.

I am putting up a link now to the presentation, to allow those who want to look at the presentation now, a chance to do so.

The World’s Fragile Economic Condition

This presentation pulls together quite a few things I have been talking about. It also adds a new model of how our self-organizing economy works.

This is the outline of what I discuss in the presentation:

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How energy shortages really affect the economy

Many people expect energy shortages to lead to high prices. This is based on their view of what “running out” of oil might do to the economy.

In this post, I look at historical data surrounding inadequate energy supply. I also consider some of the physics associated with the situation. I see a strange coincidence between when coal production peaked (hit its maximum production before declining) in the United Kingdom and when World War I broke out. There was an equally strange coincidence between when the highest quality coal peaked in Germany and when World War II broke out. A good case can be made that inadequate energy supply is associated with conflict and fighting because leaders recognize how important an adequate energy supply is.

Some of my previous analysis has shown that if we view energy in terms of average energy supply per person, the world as a whole may be again entering into a period of inadequate energy supply. If my view is correct that inadequate energy supply leads to increased conflict, the recent discord that we have been seeing among world leaders may be related to today’s low supply of energy. (My energy analysis considers the combined energy supply available per person from fossil fuels, nuclear, and renewables. It is not simply an oil-based analysis.)

The physics of the low energy situation may be trying to “freeze out” the less efficient portions of the economy. If successful, the outcome might be analogous to the collapse of the central government of the Soviet Union in 1991, after oil prices had been low for several years. Total energy consumption of countries involved in the collapse dropped by close to 40%, on average. The rest of the world benefitted from lower oil prices (resulting from lower total demand). It also benefitted from the oil that remained in the ground and consequently was available for extraction in recent years, when we really needed it.

The idea that oil prices can rise very high seems to be based on the oil price increases of the 1970s and of the early 2000s. While oil prices can temporarily rise very high, it is hard to make a case that they can remain high for an extended period. For one thing, high oil prices tend to cause recessions and lower employment. In such an environment, affordability of energy products is lower, and oil prices tend to fall. For another, it is easy for the Federal Reserve to get oil prices back down by raising interest rates. In fact, the Federal Reserve is raising interest rates right now.

In my opinion, we should be more concerned about low oil prices than high because we live in a world economy with huge debt bubbles. Debt bubbles are part of what enable today’s high employment. Debt bubbles support employers that are close to the edge financially; they also support buyers who would not be able afford automobiles or college educations, if loans were to become more expensive because of higher interest rates. Employment in the affected industries would be cut back, leading to recession.

Because of these issues, pricking the debt bubble is likely to lead to a major recession and, indirectly, lower energy prices, as in late 2008 (Figure 12). These lower prices are not good news because energy providers of all kinds need fairly high energy prices to survive–probably equivalent to oil at $80 per barrel or higher. If energy prices stay persistently low, the world is likely to see much lower oil supply, in part because oil exporters need the tax revenue that they obtain from high-priced oil to fund their programs.  Continue reading

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Supplemental energy puts humans in charge

Energy is a subject that is greatly misunderstood. Its role in our lives is truly amazing. We humans are able to live and move because of the energy that we get from food. We count this energy in calories.

Green plants are also energy dependent. In photosynthesis, plants use energy from the sun to convert carbon dioxide and water into the glucose that they need to grow.

Ecosystems are energy dependent as well. The ecologist Howard T. Odum in Environment, Power, and Society explains that ecosystems self-organize in a way that maximizes the useful energy obtained by the group of plants and animals.

Economies created by humans are in some respects very similar to ecosystems. They, too, self-organize and seem to be energy dependent. The big difference is that over one million years ago, pre-humans learned to control fire. As a result, they were able to burn biomass and indirectly add the energy this provided to the food energy that they otherwise had available. The energy from burning biomass was an early form of supplemental energy. How important was this change?

How Humans Gained Dominion Over Other Animals

James C. Scott, in Against the Grain, explains that being able to burn biomass was sufficient to turn around who was in charge: pre-humans or large animals. In one cave in South Africa, he indicates that a lower layer of remains found in the cave did not show any carbon deposits, and hence were created before pre-humans occupying the cave gained control of fire. In this layer, skeletons of big cats were found, along with scattered gnawed bones of pre-humans.

In a higher layer, carbon deposits were found. In this layer, pre-humans were clearly in charge. Their skeletons were much more intact, and the bones of big cats were scattered about and showed signs of gnawing. Who was in charge had changed.

There is other evidence of human domination becoming possible with the controlled use of fire. Studies show a dramatic drop in numbers of large mammals not long after settlement by humans in several areas outside Africa. (Jeremy Lent, The Patterning Instinct, based on P. S. Martin’s “Prehistoric overkill: A global model” in Quaternary Extinctions: A Prehistoric Revolution.) Continue reading

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The world’s weird self-organizing economy

Why is it so difficult to make accurate long-term economic forecasts for the world economy? There are many separate countries involved, each with a self-organizing economy made up of businesses, consumers, governments, and laws. These individual economies together create a single world economy, which again is self-organizing.

Self-organizing economies don’t work in a convenient linear pattern–in other words, in a way that makes it possible to make valid straight line predictions from the past. Instead, they work in ways that don’t match up well with standard projection techniques.

How do we forecast what lies ahead? Today, some economists believe that the economy of the United States is in danger of overheating. Others believe that Italy and the United Kingdom are facing dire problems, and that these problems could adversely affect the world economy. The world economy should be our highest concern because each country is dependent on a combination of imported and exported goods. The forecasting question becomes, “How will divergent economic results affect the world’s economy?”

I am not an economist; I am a retired actuary. I have spent years making forecasts within the insurance industry. These forecasts were financial in nature, so I have had hands-on experience with how various parts of the financial system work. I was one of the people who correctly forecast the Great Recession. I also wrote the frequently cited academic article, Oil Supply Limits and the Continuing Financial Crisis, which points out the connection between the Great Recession and oil limits.

Today’s indications seem to suggest that an even more major recession than the Great Recession may strike in the not too distant future. Why should this be the case? Am I imagining problems where none exist?

The next ten sections provide an introduction to how the world’s self-organizing economy seems to operate.

[1] The economy is one of many self-organized systems that grow. All are governed by the laws of physics. All use energy in their operation.

Continue reading

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Eight insights based on December 2017 energy data

BP recently published energy data through December 31, 2017, in its Statistical Review of World Energy 2018. The following are a few points we observe, looking at the data:

[1] The world is making limited progress toward moving away from fossil fuels.

The two bands that top fossil fuels that are relatively easy to see are nuclear electric power and hydroelectricity. Solar, wind, and “geothermal, biomass, and other” are small quantities at the top that are hard to distinguish.

Figure 1. World energy consumption divided between fossil fuels and non-fossil fuel energy sources, based on data from BP 2018 Statistical Review of World Energy 2018.

Wind provided 1.9% of total energy supplies in 2017; solar provided 0.7% of total energy supplies. Fossil fuels provided 85% of energy supplies in 2017. We are moving away from fossil fuels, but not quickly.

Of the 252 million tons of oil equivalent (MTOE) energy consumption added in 2017, wind added 37 MTOE and solar added 26 MTOE. Thus, wind and solar amounted to about 25% of total energy consumption added in 2017. Fossil fuels added 67% of total energy consumption added in 2017, and other categories added the remaining 8%.

[2] World per capita energy consumption is still on a plateau.

Continue reading

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