A New Explanation for Tariffs and Bombings

Posted on March 2, 2026 by Gail Tverberg

The underlying problems are energy-related

A few years ago, I analyzed the growth of world energy consumption, breaking it down into (a) the growth in energy consumption needed to support the growth in world population, and (b) the growth in energy consumption available to support higher standards of living. This analysis covered the period 1820 to 2020. I found that periods of low growth tended to coincide with wars, depressions, and collapses. This is not surprising in a world economy governed by the laws of physics. Every part of the economy requires adequate energy of appropriate kinds.

Line graph depicting world energy consumption growth, population growth, and standard of living increase from 1830 to 2020. The x-axis represents decades, while the y-axis shows average annual percentage. The red line indicates the standard of living, and the blue line represents population growth, with notable events marked along the timeline.
Figure 1. Chart from 2021, showing average annual growth in world energy consumption for 10-year periods. These increases were divided into the portion needed to cover the population increase, and the remaining amount available to support an increase in living standards.

In this post, I analyze data for 5-year periods, ending in 2024, to obtain an updated view of recent energy consumption and population trends. My conclusion is that total energy consumption growth in recent years has not been sufficient to forestall major problems. A more detailed analysis reveals that growth in certain vital resources (the diesel+jet fuel part of oil supply, and critical minerals related to electricity production and usage) is particularly problematic.

These findings indicate that the economy is already beginning to hit energy limits. Because of energy-related shortages that are already being encountered, national economies are beginning to act like the players in a game of musical chairs, with one too few chairs. Leaders have taken to building up armies, cutting off exports of critical minerals, imposing tariffs, and bombing other countries, even though these actions might not make sense to peace-loving citizens.

[1] Figure 2 is a stacked bar chart showing similar indications to Figure 1.

Bar graph comparing world energy consumption growth (red) and population growth (blue) from 1830 to 2020, showing average annual increase over each decade.
Figure 2. Average worldwide growth in energy consumption, divided into two segments: (a) the portion needed to provide for existing population at the current standard of living, and (2) the portion available to support growth in worldwide living standards. This chart displays the same data as Figure 1, differently.

The total of the red and blue segments is the average annual increase in world energy consumption over a particular 10-year period. The blue amounts (usually at the bottom) are those necessary to provide services at the same level as in the past, given the population increase. The red amounts (usually at the top) are determined by subtraction. Large red caps are good, while red caps below the zero line are very bad. They indicate that the per-capita energy supply is declining.

[2] The largest increases in Figure 2 correspond to favorable economic times.

The vertical text in Figure 1 provides examples of how low points in energy consumption have proven to be very bad. In this section, I show that the opposite is also true: High points tend to correspond to very good times economically.

One peak in Figures 1 and 2 coincides with the 1901 to 1910 period. This period corresponds to early electrification and advances in the mechanization of agriculture. It was before 1913 when the United Kingdom hit peak coal, limiting the amount of coal that could be profitably extracted. Germany hit peak hard coal shortly before World War II. After peak coal was reached, less coal was available per capita. Leaders felt the pressure of “not enough coal to go around” and opted for war.

In Figures 1 and 2, rapid energy growth occurred after World War II, during the 1950s, 1960s and 1970s. The lower peak in the 2001-2010 period coincided with much greater use of coal after China was added to the World Trade Organization (WTO) in late 2001. High-wage countries started transferring their industry to China because costs would be lower in two ways: Wage costs were lower, and coal was an inexpensive fuel, reducing energy costs. Furthermore, by transferring industry, including manufacturing and mining, to China, high-wage countries could also lower their own CO2 emissions, as required by the 1997 Kyoto Protocol.

We would expect the patterns we are seeing in Figures 1 and 2 if the world economy is governed by the laws of physics. The availability of plenty of inexpensive energy, of kinds that match built infrastructure, is what is needed to allow the world economy to grow.

[3] Figure 3 shows more recent world energy data organized by 5-year periods. It shows how small the “red caps” of the types leading to favorable economic outcomes have been in the last decade.

Bar graph showing 5-year average growth in total energy from 1974 to 2024, with blue bars representing population growth and orange bars indicating per capita energy growth. The Y-axis ranges from -2% to 5%, highlighting fluctuations in energy growth over the decades.
Figure 3. Chart showing similar information to that in Figure 2, calculated for 5-year periods, instead of 10-year periods. Underlying data is from the 2025 Statistical Review of World Energy, published by the Energy Institute.

The latest two 5-year periods comprise the years 2015 to 2024. The short red caps on these two 5-year periods mean that the economy is already being squeezed in the direction of not-enough-to go-around.

[4] Viewed on this same basis, diesel and jet fuel supplies are being squeezed even more than the overall supply of energy products.

Diesel and jet fuel are somewhat similar in composition. They are grouped together in some energy reports as “middle distillates.” They are relatively heavy oil products that come out of oil refineries. If there is a shortage of one, there likely is a shortage of the other as well.

Bar graph showing 5-year average growth in diesel and jet fuel from 1974 to 2024, comparing population growth and per capita growth.
Figure 4. Chart showing similar information to Figures 2 and 3, calculated for 5-year periods, with respect to “middle distillates,” a category that includes diesel and jet fuel. The underlying data is from the 2025 Statistical Review of World Energy, published by the Energy Institute.

Diesel and jet fuel are of concern because, since 2015, there has been an actual shrinkage in the amount of these fuels available relative to population. In fact, every five-year period since the 2000 to 2004 period has shown less growth in diesel and jet fuel than in the overall world energy supply. (Compare Figures 3 and 4.)

The low growth of diesel+jet fuel is particularly concerning because these fuels are essential for international transportation. With too little of these oil types, trade across the Atlantic and Pacific needs to shrink back. The physics of the situation makes tariffs look like an attractive solution for reducing trade.

World map highlighting the regions affected by low diesel and jet fuel supply, emphasizing the Atlantic and Pacific trading routes.
Figure 5. Chart made by the author, pointing out the need for shorter trade routes.

Another concern is that diesel is essential for food production and transportation. Even if some other types of energy are available in plentiful supply, we cannot get along without food. While wind and solar are popular energy types today, they are not very useful for either international transport or for operating modern agricultural equipment.

[5] The underlying problem is that populations tend to outgrow their resource bases, including energy supplies.

The issue of the world not being able to support endlessly rising human population is an issue that no politician, auto maker, or economist wants to mention. The standard work-around is to show energy supplies without using an adjustment to a per-capita basis. This tends to make the energy situation look much better than it really is. Figure 6 is an example of such a chart.

Line graph comparing world energy sources from 1965 to 2022, showing fossil fuels alongside biofuels, nuclear, hydroelectric, and renewable energy (wind and solar).
Figure 6. World energy divided between fossil fuels and other types, based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute.

Figure 6 emphasizes how modest the recent add-ons to the fossil fuel supply really are. These add-ons are made possible by fossil fuels; they would tend to disappear if fossil fuels were to disappear. Nuclear, which is the largest of the add-ons, requires both uranium and fossil fuels. The category “Wind+Solar” is the tiny green stripe at the top of Figure 6. In 2024, Wind+Solar amounted to 2.8% of world energy supply.

[6] It is easy to make electricity look like a growth area that can continue its pattern forever.

Figure 7 is a world electricity chart that, like Figure 6, is not on a per-capita basis.

A chart illustrating the world electricity supply by fuel type from 1985 to projected values in 2024, showing trends in fossil fuels, nuclear, hydroelectric, other renewables, and wind plus solar energy, measured in petawatt hours.
Figure 7. World electricity divided between fossil fuels and other types, based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute.

There are a few details that are easy to miss:

(a) Current electricity production is quite small compared to the total energy supply. As counted by the Energy Institute, electricity amounts to only about 20% of total energy, varying by year and by part of the world. It is already incorporated in Figure 6.

(b) Almost all the non-fossil fuel part of the energy supply (“Add-Ons”) is electricity. In Figure 6, the only type of non-fossil energy shown that is not electricity is biofuels. These are mostly ethanol and biodiesel.

(c) Another detail that is easy to miss is the fact that the growth in the world’s electricity supply, as shown in Figure 7, has been almost exclusively outside the Advanced Economies–that is, members of the Organization for Economic Co-operation and Development (OECD). The Advanced Economies group includes the US, most of Europe, Japan, Australia, and several other countries.

Line graph comparing electricity generation in Advanced Economies versus Other Economies from 1985 to 2024, showing trends in petawatt hours, with annotations noting key events.
Figure 8. Electricity generation divided between Advanced Economies and Other Economies, based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute. The amounts are not per capita.

Figure 8 shows the growth in electricity generation separately for the Advanced Economies and the Other Economies. The chart shows that generation of electricity by the Advanced Economies grew until 2007 but flattened after that date. Electricity generation by the Other Economies has grown the entire time since 1985. The rate of electricity production growth of Other Economies became noticeably more rapid after China joined the WTO in 2001.

Also, population growth since 1985 has disproportionately taken place in Other Economies, as contrasted with Advanced Economies.

A bar graph showing the world population growth from 1985 to 2024, with two segments: 'Advanced Economies' in dark blue and 'Other Economies' in orange, indicating a significant increase in populations, particularly in 'Other Economies'.
Figure 9. Population of Advanced and Other Economies, based on the population assumptions underlying the per capita calculations shown in the 2025 Statistical Review of World Energy, published by the Energy Institute.

[7] In the Advanced Economies, electricity production has recently been falling on a per capita basis, making a shift to greater electrification seem difficult.

A major issue is that the Advanced Economies are already seeing their electricity supplies per capita declining as shown on Figure 10 below. This is true for all five of the selected economies. Some of the lower consumption is due to efficiency improvements, but some is the result of the offshoring of jobs and industries to low-wage countries.

Line graph depicting electricity production per capita in selected advanced economies from 1985 to 2024, showing trends for the US, Australia, Japan, EU, and UK, measured in kWh per person per 1000.
Figure 10. Per capita electricity production in five selected Advanced Economies, based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute.

In comparison, electricity production per capita of other economies, with typically lower wages than Advanced Economies and often accompanied by more rapid population growth, has tended to rise, as shown on Figure 11.

Line graph showing electricity production per capita (kWh per person/1000) from 1985 to 2024 for Saudi Arabia, Russia, China, and India.
Figure 11. Per capita electricity production in four selected economies, not included in Advanced Economies, based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute.

The four “Other Economies” are less similar to each other than the five Advanced Economies. But what is striking is that they all have shown growth in per-capita electricity production since 1999. In 2024, Saudi Arabia’s electricity production had risen to about the per-capita level of the US’s electricity production. By 2024, China’s per-capita electricity production had surpassed that of both the EU and the UK. Russia was part of the Soviet Union before the latter collapsed in 1991. Once Russia’s economy had started recovering from the collapse, about 1999, its per-capita electricity production also began to rise.

[8] Other issues are also making a continued shift to electrification appear difficult, particularly for the Advanced Economies.

Trying to work around using fossil fuels leads to the need for more specialized minerals to produce high tech electrical goods and electricity transmission. The problem faced by Advanced Economies is that they produce practically none of these minerals; they must import them. The US has a long list of minerals it considers critical.

2025 USGS list of critical minerals featuring 60 minerals including 10 new critical minerals and 15 rare earth elements.
Figure 12. Chart of 60 Critical Minerals. Source: https://www.usgs.gov/programs/mineral-resources-program/science/about-2025-list-critical-minerals

Some of these minerals aren’t rare in the earth’s crust. Part of the problem is the lack of industrial capacity in Advanced Economies today, as industry has been moved overseas to reduce costs and local CO2 emissions. For example, the US used to be a major producer of aluminum, but this production has dwindled; other countries, including China, can produce aluminum at lower cost.

Another issue is that China produces the majority of quite a few of these minerals. The US, and probably the other Advanced Economies, had planned to buy what they needed on the world market. Now, production is not keeping up with the amount the world could easily use. In 2025, China announced export restrictions on some minerals, including gallium, germanium and antimony. It has become clear that if Advanced Economies want to have adequate supplies of high-demand minerals (including silver, copper, platinum, rare earth minerals, and uranium, among others), they need to start producing them themselves.

Diesel is used in extracting many of these minerals. If diesel is in short supply, that adds another layer of problems. All these issues may lie behind President Trump’s interest in Greenland.

[9] We don’t hear about these issues partly because academic researchers live in ivory towers, and partly because politicians don’t dare explain the issues to voters.

Part of the problem is that economists don’t understand how tightly the various parts of the world economy are interconnected through the laws of physics. Economists tend to believe that if there is a shortage, prices will rise, and these higher prices will solve nearly all problems. This is not necessarily the case. Buyers cannot purchase more than they can afford. Prices may spike temporarily and then fall back. Production of fossil fuels or minerals may end because prices do not rise high enough, for long enough, for producers to depend upon the higher prices for the long term.

In the case of a shortage, most people assume that the only change the economy will make is in prices. However, the economy is tightly interconnected. It can move production to a different part of the world, where wages and energy costs are lower. An indirect result, in the country losing jobs, may be more wage and wealth disparity. The US seems to be experiencing this issue now, with fewer young people being able to find a job that pays well.

Needless to say, politicians aren’t willing to admit, “We have difficulties for which we can see no solution.” Even leaders of universities are reluctant to suggest that there might be major problems ahead. They don’t want to frighten students or their parents. University officials want all problems to be ones their students can work on, with the hope of solving them in the next few years.

[10] What is happening now is similar to the outcome of a game of musical chairs, when there is one fewer chair than the number of players.

A circular arrangement of seven red wooden chairs with shadows cast on the ground.
Figure 13. Chairs arranged for Musical Chairs Source: Fund Raising Auctioneer

In the game of musical chairs, players walk around a group of chairs until the music stops. At the end of each round, one chair is removed, leaving one fewer chair than the number of players. In the next round, the remaining players all scramble for the chairs available, which often leads to small fights over who gets a chair. This not-enough-to-go-around problem explains the poor relations we see today among countries and political parties. It is also the underlying reason for the interest in imposing tariffs and in bombing other countries.

Financial markets tend to perform well during periods of economic growth. However, if certain kinds of essential resources are in short supply, this will tend to hold back growth. Debt defaults and falling stock markets could result. For these reasons, problems in financial markets may be ahead.

Major governmental changes may be ahead. Representative governments require more energy than simpler types of organizations, such as dictatorships. Furthermore, citizens do not like disorder; they may want to overthrow leaders who seem to allow too much disorder. They may vote them out of office or even try to assassinate them. The problem of resource inadequacy is structural, however. Getting rid of a particular leader doesn’t necessarily help the situation.

Everywhere in the world, at least part of today’s problem is that there are not enough jobs available that pay well. Economists have told us to expect high prices if there are shortages. In a way, not having enough jobs that pay well is the opposite problem. But from a physics standpoint, the result is the same. Only a few people can afford many of the goods that are available. The economists’ misinterpretation of what is going wrong further confuses people’s understanding of our current situation.

Mainstream media needs to cater to advertisers. Because of this issue, we cannot expect them to tell us what is happening. That task seems to fall to bloggers, like me. I try to write an article approximately every month. I hope that the graphs and other figures I have presented in this article will help readers understand why we are currently seeing more types of disruptions, such as tariffs and bombings.

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Understanding Deglobalization: The Role of Diesel and Jet Fuel

Posted on February 2, 2026 by Gail Tverberg

We are starting to see the beginnings of deglobalization: Countries are increasingly at odds with each other. There is wider disparity among political parties. Trump is making what look to many people like unreasonable demands, both within the US and around the world.

I believe that there is an underlying problem that most people are missing. A worldwide shortage of diesel and jet fuel is forcing international trade to begin moving into a new downward phase, relative to the recent share of GDP shown on Figure 1.

Line graph showing trade as a share of GDP from 1960 to 2024 for the world, India, China, and the United States, expressed as a percentage.
Figure 1. Trade as a share of GDP, 1960 to 2024, in a chart prepared by OurWorldinData.org.

While international trade grew as a percentage of GDP between the 1960s and 2008, it has been basically flat since then. Now the shortages of diesel and jet fuel are forcing the international trade percentage to start falling to a lower level.

In this post, I will try to explain the situation further. One conclusion: Conflict results from the need to reorganize the world economy in a way that uses less long-distance international trade.

[1] Background: The world economy is a dissipative structure, operating under the laws of physics.

The economy behaves differently than most researchers assume because economies are dissipative structures, operating under the laws of physics. Most researchers model tiny parts of economies, and because their views are so narrow, they reach misleading or wrong conclusions.

Most structures that we see, such as books or houses, are, in a sense, dead. Dissipative structures, however, are different in that they can temporarily grow. In order to stay away from being in a dead state, they need to “dissipate” energy of the proper kinds, in adequate amounts. Examples of dissipative structures include plants and animals of all kinds, ecosystems, and hurricanes.

The human body is a dissipative structure that requires food to stay away from a dead state. Hurricanes are dissipative structures that dissipate the heat of a warm body of water.

If an ecosystem doesn’t get enough energy of the right kinds, it will adapt to accommodate the actual mix of fuels and other resources available. If an ecosystem doesn’t get enough sunlight, or enough warm temperatures, or enough water, it will gradually shift toward a different mix of plants and animals that can operate within the mix of resources available. This is similar to what happens within the human body. If a human doesn’t get enough food, their body will shrink or become thinner.

I believe that without adequate diesel and jet fuel, our economy will make a transition analogous to a human going on a diet, or analogous to an ecosystem changing when a different mix of resources is available.

Academic researchers around the world have misunderstood how the process works because they tend to work in ivory towers. They create models based on the narrow view of the economy that their academic area considers appropriate. Once they have developed a narrow model, they cling to it, even though recent insights from physics suggest that a very different model is more appropriate.

[2] Researchers in academic settings make many unwarranted simplifications in their models.

Researchers like to assume that all energy is alike. Substitution is assumed to be relatively easy and quick. Models tend to indicate that if the supply of energy is inadequate, prices will rise. With these higher prices, the economic system will keep problems away practically indefinitely.

The real world doesn’t work this way. When we eat food, we cannot simply substitute kale for all our other food consumption and expect to thrive, even though models would seem to suggest that kale is good for us. Within ecosystems, it is the mix of resources and predators that matters. If the top-level predator is killed off, the system will change. The world economy will face similar changes if today’s international transport system runs into difficulties.

[3] The fuels especially used for international transport today are diesel and jet fuel.

To be useful in international transport, fuels need to

  • Be energy dense
  • Be easy to store
  • Match current infrastructure, unless change is many years away, and system is rebuilt
  • Be inexpensive; not require a lot of capital investment in infrastructure to support

Diesel and jet fuel have long been the prime fuels used for international travel and transport. “Bunker fuel,” which tends to be heavier and more polluting, has also been used. Its use is strongly discouraged today because of pollution issues.

[4] An issue we have today is that diesel is also essential for many other uses.

Diesel is an essential fuel today for food production and local transport. Most of the agricultural equipment now in use operates using diesel fuel. Diesel-powered machines can easily navigate muddy fields. In addition, diesel also powers most of the heavy semi-trucks around the world. These trucks deliver goods of all kinds, locally, including food.

Another essential use for diesel is building and maintaining infrastructure. This would include:

  • Roads
  • Bridges
  • Pipelines
  • Commercial buildings
  • Factories
  • Electricity transmission lines
  • Building and maintaining structures used to produce electricity, such as nuclear power plants and hydroelectric plants

The importance of diesel to the economy is difficult for most people to see because these are behind-the-scenes types of activities.

[5] It is very difficult to get the price of diesel to rise for any extended period.

If the price of diesel rises, the price of food tends to rise. This happens because diesel is heavily used in food production and transport. Needless to say, high food prices tend to be unpopular with voters. For this reason, even if the diesel supply is low, the price of the fuel doesn’t necessarily rise. If this happened, voters would be very unhappy. They would elect new politicians.

What, in fact, tends to happen is that oil prices (not just diesel and jet fuel prices) tend to bounce up and down. Figure 2 shows a chart of average annual oil prices.

Line graph depicting the average annual inflation-adjusted Brent oil price from 1948 to 2024, highlighting low prices before 1970.
Figure 2. Average annual Brent equivalent oil prices, in 2024 US$. Data for 1948 through 2024 from the 2025 Statistical Review of World Energy, published by the Energy Institute. Data for 2024 estimated based on EIA estimates of spot Brent prices for 2025, adjusted for inflation.

Figure 2 smooths out some of the price irregularities. For example, there was a very high peak in July 2008, but the price fell to a low level by December of the same year. The peak doesn’t appear very high on this chart, but it greatly affected financial markets. See my article, Oil Supply Limits and the Continuing Financial Crisis.

[6] Diesel and jet fuel disproportionately come from oil that is quite “heavy.” Oil refineries tend to offer lower prices for heavy oil, making it unattractive to extract.

There is a price compression problem with heavy oil:

  • Heavy oil tends to be difficult to ship because it doesn’t flow through pipelines well. It often needs to be heated, or diluted with a very light oil, to make transportation possible.
  • To make matters worse, heavy oil quite often contains sulfur and other impurities that need to be removed, adding refining costs.
  • The problem is that these higher costs cannot easily be passed on to the ultimate consumers of diesel and jet fuel. For example, food production and transport depend significantly on diesel, and sometimes even on jet fuel. Consumers of food do not like high food costs.

Because of these issues, the prices refineries are willing to pay for heavy oil tend to be lower than the prices they offer for “light, sweet” oil. For example, the current oil prices shown on OilPrice.com are $70.51 for Brent Crude (a light, sweet European crude), $65.13 for West Texas Intermediate (a sweet US crude) and $50.86 for Western Canadian Select, from Canada’s Oil Sands. Russia also has moderately heavy oil; Russia’s Urals blend is diluted to make it flow adequately. Its price is listed at $54.48.

These pricing issues make the extraction of heavy oil, especially very heavy oil, unattractive to oil companies. Basically, oil prices do not rise high enough, for long enough, to make extraction profitable. People who look at the Energy Return on Energy Invested (EROEI) of resource extraction would say that the EROEI is very low. In other words, a huge amount of energy needs to be invested to make heavy oil extraction possible. This tends to make the cost of oil extraction expensive.

Because of this price compression, and thus the low prices paid to oil producers, it is not very profitable for oil companies to extract heavy oil. This means that governments cannot charge these companies very high taxes, or they will stop producing oil completely. In addition, tax revenue collected from oil producers tends to fall too low to provide adequate government services., and it also becomes difficult to pay workers adequate wages. These issues lead to unrest in countries with heavy oil reserves, but not much other industry, such as Venezuela.

[7] A naive look at the oil data received from the various agencies does not disclose the nature of the world’s oil problem.

A chart summarizing the consumption of different types of oil, based on data from the 2025 Statistical Review of World Energy, is as shown in Figure 3. Note that the Diesel+Jet Fuel layer is the product grouping with the largest consumption. In the US, we hear a lot about Gasoline, but Diesel+Jet Fuel is the layer with the greatest fuel consumption. Diesel+Jet Fuel provides a huge quantity of services, but its usage is mostly hidden from sight.

A line graph illustrating world oil consumption by type from 1980 to 2024, showing different categories including Heavy Group, Diesel and Jet Fuel, Gasoline, and Light Group, measured in million barrels per day.
Figure 3. Figure prepared using data from the “Oil-Regional Consumption” tab of the 2025 Statistical Review of World Energy, published by the Energy Institute. The Light Group is the combination of naphtha, ethane, and liquid petroleum gas (LPG). These are close to gases. The other categories have longer molecules, and thus higher boiling points. The Heavy Group includes waxes, lubricants, asphalt, as well as a fairly unrefined oil, used as a cheap but polluting fuel, shown as “Fuel Oil” on the same tab.

Most published data show only the sum of the four layers in Figure 3. It seems to be rising. This amount represents a combination of quite a few types of oil. When this increasing production is considered along with the reported high oil reserves (particularly heavy oil in Canada and Venezuela), and the belief that prices will always rise if there is a shortage, most researchers cannot imagine that a problem might be occurring.

Researchers often overlook how crucial oil is to the economy. People all over the world need food, roads, and many other things that depend on oil. The number of people who can make an adequate living seems to depend upon the oil supply. It makes sense to look at oil supply per capita. The chart below uses the same amounts, divided by world population. On this basis, world oil consumption is flatter. In fact, per capita oil supply has been somewhat declining recently.

Line graph showing per capita world oil consumption by type from 1980 to 2024, with areas representing gasoline, diesel and jet fuel, and heavy oil usage.
Figure 4. Amounts shown in Figure 3, divided by world population used by the Energy Institute in its 2025 Statistical Review of World Energy. Different colors are used in this chart compared to Figure 3.

The other thing that becomes apparent from this chart is that the overall mix of products coming out of current processes (extracting and refining oil) has been getting lighter over time. This should not be surprising because the most rapidly growing oil supply since 2008 has been tight oil, extracted from shale in the United States. This tight oil tends to be quite light, adding output to the Light Group and to Gasoline, far more than to Diesel+Jet Fuel or the Heavy Group.

[8] The pattern of diesel supply growth provides insight into what is going wrong with world trade.

Line graph showing global per capita diesel supply as a percentage of the 1980 level from 1980 to 2024, indicating a decline since 2008.
Figure 5. World per capita diesel supply based on data of the 2025 Statistical Review of World Energy, published by the Energy Institute.

Diesel is about 78% of the combined grouping Diesel+Jet Fuel. The two are similar enough that refineries can slightly change the output mix between the two.

The World Trade Organization began operation in 1995. Its purpose was to encourage more world trade. The Kyoto Protocol of 1997 encouraged countries to cut their own CO2 emissions. The easiest way to do this was by sending manufacturing, mining, and other industries to other countries around the world. Thus, indirectly, the Kyoto Protocol also encouraged world trade. Figure 5 shows that between 1995 and 2008, per-capita world diesel consumption was increasing. The restriction in supply that began around 2008 corresponds with the flattening of world international trade shown in Figure 1.

[9] Several issues contributed to the drop in per-capita diesel supply starting about 2008.

(a) In the period before 2008, there was relatively more oil in the Heavy Group that could be refined into Diesel + Jet Fuel (Figure 4). Notice how the Heavy Group layer gets narrower, especially between 1980 and 2008. The Heavy Group includes end uses such as lubricants, waxes, and asphalt. It also includes some heavy oil consumed in close to an unrefined state, such as bunker fuel for ships. Burning such oil is very polluting, so laws have been changed to discourage its use. Simple refining could transform oil such as bunker oil into diesel and jet fuel.

(b) A technique called hydrocracking can be used to transform long hydrocarbon molecules, such as the ones that make up asphalt, into shorter ones. The EIA in 2013 reported, Hydrocracking is an important source of diesel and jet fuel. This technique is expensive, however. It needs a high selling price of crude oil for the economics to work. If the price of oil is high enough, it makes sense to make less asphalt, and more diesel oil and jet fuel.

(c) Price differentials tend to discourage the development of heavy oil fields. As documented in Section [6], the price refineries are willing to pay for heavy oil tends to be quite a bit lower than the price of lighter oil. In the early days of extraction, medium grades of oil tended to give a range of products, from light to heavy. But peak conventional oil took place about 2005, forcing oil companies to extract both very light grades and very heavy grades, with the hope of combining the two types of output to meet the needs of society. Since 2008, the growth in light oil extraction has been spectacular, particularly in the US, with its tight oil from shale. But growth in the heavy oil supply has tended to lag.

(d) Depletion is an issue for oil supplies. As with many other resources, the oil taken first is the oil that is easiest to extract and the closest to where the end product is to be used. The oil that is left for later tends to be higher cost to extract and transport. High-cost oil is likely to produce high-cost food. High-cost food tends to upset family budgets, making voters unhappy.

(e) Political issues play a role as well. A major issue is the low profitability of heavy oil extraction because of its low sales price to refineries. With low profitability, tax revenue based on oil royalties tends to be low. Without adequate tax revenue, leaders of countries producing heavy oil for export tend to become belligerent. Examples include Venezuela, Russia, and Canada. Within the US, California produces heavy oil.

[10] The world order seems to on the verge of radical change.

We are now facing a situation in which the world economic order seems to be breaking apart, in order to form a new order that “works” better with the changing quantity of Diesel+Jet Fuel available.

We are dealing with a situation that has much in common with a game of musical chairs.

A circle of red wooden chairs arranged in a circular pattern on a white background, casting shadows.
Figure 6. Chairs arranged for Musical Chairs Source: Fund Raising Auctioneer

The game of musical chairs is played in rounds. At the beginning, there are as many players as chairs. In each round, one of the chairs is removed. The players walk around the circle of chairs until the music stops. When the music stops, all the players try to grab a chair to sit on. There can be small fights over who gets a chair. The person who does not get a chair is eliminated from the game.

When an economy is faced with an inadequate supply of Diesel+Jet Fuel, it needs to regroup in a different way. To do this, some existing businesses and governments must fail, so that others can take their place. In addition, supply lines need to be rearranged to use the resources that are actually available. Customs and beliefs may need to change, as well.

The way nations interact can change as well. In the years of growing international trade, (1970s to 2008), co-operation seemed to be important. Working together was relatively easy. During the tearing down stage, which seems to be starting now, the situation can be expected to be very different. We can expect assertive leaders, and lots of conflict. We are facing this strained situation today.

[11] What lies ahead?

I don’t think that any of us know for certain what will happen in the future. Nevertheless, the self-organizing world economy seems to be organizing for itself what is ahead. Or perhaps, the hand of a Higher Power is organizing what is happening.

I have only discussed the problem of inadequate Diesel+Jet Fuel, and its impact on international trade and some other parts of the economy. There are other shortages that the world economy needs to work around, that I have not touched on:

In many parts of the world, one shortage is of fresh water. This is often connected with depleted aquifers and today’s high human population.

Another shortage relates to the critical minerals required for a high-tech society. Billionaire Robert Friedland describes the issue in this video. We have plunged headlong into high tech goods of all kinds, including wind turbines, solar panels, electric vehicles, batteries, computers, and electrification of many kinds of things without realizing that we would soon reach limits in the supply of many minerals used in making these high-tech devices.

For many of these minerals, China controls the vast majority of these critical minerals. Countries must try to start producing their own critical minerals, or remain on good enough terms with China to purchase some of the limited supplies available.

A third shortage relates to nuclear, and our plans to ramp up nuclear energy. As far as I can see, uranium extraction is currently constrained. In theory, it can be ramped up, but it takes a long chain of events to do so.

With these shortages, AI seems to be constrained in how quickly its use can be expanded. It needs to become far more energy efficient to be truly useful.

With all of these issues, it seems impossible to keep forging ahead as we have done in the recent past. We are being forced to source more of our manufactured output locally. We need to greatly reduce the transportation of goods across the Atlantic and Pacific. Using tariffs seems to be a way of trying to accomplish this change.

Strange as it may seem, some of Trump’s policies make a certain amount of sense, when viewed in the light of the issues the world is facing. I expect that a replacement leader would be just as abrasive. The new leader would likely have different strange policies, but the underlying problems are structural. The new leader would likely also face difficulties in trying to fix today’s problems.

I am afraid we will have to wait for the self-organizing economic system to find a solution for us. Perhaps innovations can bring us new ways of doing things that will eventually work around these difficulties. But, for the near term, higher levels of conflict because of resource shortages seem likely.

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2026: Expect a very uneven world economic downturn

Posted on December 31, 2025 by Gail Tverberg

Recently, many people have begun talking about the US having a k-shaped economy. In it, a handful of wealthy people are doing very well financially, while many others are falling further and further behind. I expect that the low wages of the majority of workers will soon lead to adverse impacts on businesses, governments, and international organizations. This phenomenon is likely to lead to a very uneven world economic downturn in 2026.

The world economy is subject to the laws of physics. The world economy seems to be reaching growth limits because there are too few easily extractable energy resources (as well as other resources, such as fresh water), relative to the world’s population. The Maximum Power Principle strongly suggests that even as limits are hit, the world economy cannot be expected to collapse all at once. Instead, the most efficient producers of goods and services will be able to succeed as long as resources are available, while less efficient producers will tend to fall by the wayside. Thus, the Maximum Power Principle somewhat limits the speed of the world’s economic downturn.

In this post, I will try to explain the challenges the world economy is now facing. I will also provide some thoughts on how 2026 will turn out.

[1] The k-shaped economy that the US and many other countries are experiencing is an indication that resources are, in some way, “running short.”

Humans all have similar basic needs. They need food to eat, and they need to cook at least some of this food before they eat it. They tend to need transportation services, both for themselves (to get to work) and for goods, such as the food they eat. They also need governments to keep order and to provide basic services, such as roads and schools. All these goods and services require energy of a suitable kind, such as human labor, burned biomass, or fossil fuel energy. They also require arable land, fresh water, and minerals of many kinds.

If there are not enough resources to go around, the easiest way to accomplish this is by creating a k-shaped economy. One example is with farmland. In many traditions, when a farmer dies, his oldest son inherits the farm. Younger children are then forced to find other kinds of employment, such as being a craftsman, farmer’s helper, or priest in a church. Wages for these younger children can easily fall lower than the income of their land-holding older brothers, especially if large families become common. Creating jobs that pay well for all the younger children becomes a problem.

A similar phenomenon has been happening in many Advanced Economies (US, UK, and other countries included in the OECD) in recent years. Parents are doing quite well financially, but their children often have difficulty finding jobs that pay well, even after advanced schooling. Some adult children are also left with educational debt to repay. This is a new type of k-shaped economy.

[2] The world’s current problem is an ever-rising population paired with resources that are becoming ever-more “expensive” to extract.

World population has exploded since fossil fuel consumption became abundant. This has allowed more food to be grown, inexpensive transportation of goods and people, and the development of antibiotics and other drugs.

Graph illustrating the rapid increase of world population from 1800 to present, showing a rise from 1 billion to 8 billion after the introduction of fossil fuels.
Figure 1. Chart made by Gail Tverberg based on several population sources.

At the same time, the most accessible resources were extracted first. For example, fresh water initially came from streams, lakes, and shallow aquifers. As the population grew and industrial needs became increased, wells had to be dug deeper and aquifers began to be drained. In some places, desalination now needs to be used. Each of these advances in producing fresh water became more resource-intensive. It became increasingly difficult to gather enough fresh water using human labor alone. Instead, increasing quantities of physical materials, energy supplies, and debt were needed to make the new systems work.

The reason debt was needed to purchase capital goods, such as those required to obtain high-cost water, was because the devices purchased were expected to provide the desired output (water, in this case) for a long time in the future. Securing this future benefit required advance funding, using an approach such as debt. The sale of shares of stock, which are expected to appreciate over time and pay dividends, provides a similar benefit to debt.

A similar issue arises with the increasing extraction of minerals of many kinds, such as copper, tin, uranium, lithium, coal, and oil. Early on, extraction using manual labor and simple tools was sufficient. However, once the easiest to extract resources were removed, capital goods became necessary to make extraction efficient.

Capital goods, such as coal fired power plants, wind turbines, solar panels, and hydroelectric power plants also allowed electricity to be produced, extending the benefits of fossil fuels. Producing these capital devices requires physical materials and energy supplies, as well as debt or the sale of shares of stock for financing.

[3] A major limit on the system seems to be debt and the interest required on the debt.

In an economy, the growth of inexpensive energy supply acts very much like leavening works in making bread; it greatly helps economic growth. With the increasing use of inexpensive energy supply, vehicles can be made ever-less expensively, compared to using much hand labor for manufacturing (literally, making goods by hand). With this growing efficiency, wages rise faster than inflation. In the 1950s and 1960s, young people found that they could marry and live in nicer homes than their parents. Now, the reverse seems to be happening: many adult children are finding it difficult to keep up with the lifestyles of their parents.

Once the inexpensive-to-extract energy supply is depleted, economies tend to add an increasing amount of debt, in an attempt to pull the economy forward. It seems to me that a major limit on the system comes when an economy slows down so much that it can no longer repay its debt with interest.

Illustration of a bicycle with labeled components representing economic concepts, such as 'Human rider' as the primary energy provider, 'Steering system' as profitability and laws, 'Braking system' as interest rates, and 'Front wheel' as the debt system.
Figure 2. The author’s view of the analogy of a speeding upright bicycle and a speeding economy. “Debt with its time-shifting ability helps pull the economy forward, but it only works if the economy is moving fast enough.”

Political leaders like to believe that growing debt, by itself, will pull the economy forward. In fact, this does work, for a time, as long as interest rates are falling. But falling interest rates stopped happening in 2022.

A line graph depicting the market yield on U.S. Treasury securities compared to the 3-month Treasury Bill secondary market rate from 1940 to 2022, highlighting fluctuations and trends over time.
Figure 3. Interest rates on 10-year Treasuries (red) and on 3-month Treasuries (blue), based on data of the Federal Reserve of St. Louis.

Of course, all the added debt contributes to the k-shaped economy. The already wealthy disproportionately benefit from debt payments. They also tend to benefit from dividends on shares of stock and from share price appreciation. The poorer people find that an increasing share of their wages goes to paying interest on debt, especially as interest rates rise.

As debt levels grow, governments eventually have a problem with repayment of debt with interest. They need to raise taxes simply to cover their rising interest payments. This is the reason why Donald Trump wants to get interest rates down. Interest payments are rising rapidly, with near-zero interest rates in the rear-view mirror (Figure 3).

[4] Added technology and economies of scale have been adding to the k-shaped economy.

Technology requires specialization. People with more training and higher skill levels tend to earn more than others. Economies of scale encourage the growth of ever-larger businesses. The people at the top of huge organizations tend to earn more than those at the bottom. Also, as international trade is added, low-wage people in the hierarchy increasingly compete for wages with workers from countries with much lower wage scales. Thus, the wages of less-skilled individuals are increasingly squeezed down.

Furthermore, both added technology and economies of scale require added debt. Again, the interest on this debt (and dividends on stock) disproportionately benefits those who are already wealthy.

[5] In a sense, artificial intelligence (AI) is simply an extension of added technology, with a huge need for electricity, water, and debt.

The hope for AI is that it will make our already k-shaped economy, a great deal more k-shaped. The hope is that AI can eliminate a significant share of jobs, with such high profits that the owners of this technology can become very rich. If it works, the wealth will be even more concentrated at the top than today.

I see the need for electricity, water, and debt as stumbling blocks for AI. I expect that, starting in 2026, the AI rapid growth spurt will seize up because it is already using more resources than are available in some areas. I expect that a significant downshift in AI will adversely affect the US stock market and the rate of growth of the US economy. My hope is that the loss of growth in the AI sphere will not, by itself, bring down the US economy–just nudge it toward recession.

[6] In 2026, with an increasingly k-shaped economy, I expect that world oil prices will drift lower than today.

“Demand” for oil really means “the quantity of oil that people, businesses, and governments around the world can afford to purchase.” As the economy becomes more k-shaped, fewer people can afford to buy vehicles of any kind. Poor people, in the lower part of the k, are hardest hit. They will tend to increasingly rely on low energy approaches, such as ride-sharing, walking, or using a bicycle. They will tend to buy fewer goods that are transported internationally. Governments, as they begin collecting less in tax revenue from the many poorer people, will be inclined to cut back their spending on new buildings and road improvements. These changes work in the direction of reducing oil demand, and thus oil prices.

It is this increasingly k-shaped economy that has been holding world oil prices down in 2025. I expect that prices will drift even lower in 2026 because of the increasingly k-shaped world economy. There aren’t enough very rich people to hold up oil and other resource demand by themselves.

Oil production will not immediately drop in response to these low prices, although it may start drifting lower in 2027. The US Energy Information Administration is forecasting that world oil production will rise by 1.1 million barrels per day in 2025 and by 1.2 million barrels per day in 2026. These amounts do not seem unreasonable based on new developments that have already started producing higher amounts of crude oil.

[7] The heavier types of oil, from which diesel and jet fuel are disproportionately made, are in short supply now. They are likely to continue to be in short supply in 2026.

World oil production has risen in recent months. When I investigated, I found that the vast majority of the recent growth seems to be in light oil. Thus, the shortfall in diesel and other heavy fuels is likely to continue as in the recent past.

Line graph showing world per capita diesel supply from 1980 to 2024, indicating fluctuations and challenges in maintaining high levels since 2008.
Figure 4. Chart showing the level of per-capita diesel consumption, relative to the per-capita consumption in 1980. Amounts are based on Diesel/Gasoil amounts shown in the “Oil-Regional Consumption” tab of the 2025 Statistical Review of World Energy, published by the Energy Institute.

This shortage of the heavy types of oil has several impacts:

a. With a shortage of heavy oil, a fairly strong country, such as the US, is tempted to attack Venezuela, which has the world’s largest reserves of heavy oil.

b. Island nations without their own fossil fuel supplies tend to use a disproportionately large share of diesel and jet fuel, for several reasons: (1) Such islands often burn diesel fuel for electricity. This is an expensive way to make electricity; goods produced with this electricity become too expensive to export. (2) Imports and exports need to be shipped in by boat or by air, again using limited types of fuel supply. Physics tends to push these economies down by making their products expensive to sell elsewhere. Examples of islands with these problems include Cuba, Puerto Rico, Madagascar, and Sri Lanka. Such places tend to be adversely affected by shortages of heavy oil sooner than other locations.

c. Without enough jet fuel, long distance tourism is likely to be reduced in 2026. One issue is the lack of jet fuel for flying planes. Another issue is that an increasing share of the population will not be able to afford long-distance tourism because of the k-shaped economy.

d. Tariffs are a way of discouraging the shipping of goods long distance, to indirectly save on heavy oil. We should not be surprised by their increasing usage.

[8] In my view, deflation is a greater risk than inflation in 2026.

With a k-shaped economy, demand for apartments (especially smaller ones) tends to stay low. As an economy becomes increasingly k-shaped, low-paid workers tend to share an apartment with one or more friends or move in with family members to save money. In a December 23 report, Apartment Advisor writes that the US average asking rent for studio apartments fell by 2.81% in 2025 compared to 2024. The similar comparison for one-bedroom apartments showed a price drop of 1.72% in 2025. In an increasingly k-shaped economy, I would expect this trend toward lower rental prices of smaller apartments to continue and perhaps become more pronounced.

Real estate selling prices may also be an area for downward price pressure. Young people who have not built up equity through prior home ownership tend to find themselves shut out from buying homes. Also, commercial real estate of many kinds seems to be grossly oversupplied in many areas. Given this situation, downward price adjustments seem likely.

Underlying this downward pressure on prices may be some actual cuts in wages. One law firm reports that cuts in wages are becoming increasingly common, especially for employees of smaller companies.

There are precedents for deflation becoming a problem. The US had problems with deflation at the time of the Great Depression. Japan had problems with deflation after its crash in real estate prices in the 1990s, and China (with its real estate price crash) has recently been having problems with deflation.

[9] “Bread and circuses” become more important as the economy becomes more k-shaped.

Many readers have heard about bread and circuses. Before the Roman Empire collapsed, it used bread and circuses to keep its citizens from rioting from a lack of food. The way to prevent food riots is by making sure everyone has enough to eat through food distribution programs, described as “bread.” Providing circuses offers a distraction from the fact that there are not enough well-paying jobs to go around.

Today, with our increasingly k-shaped economies, leaders have figured out that meeting citizens’ basic needs is essential if unrest is to be avoided. Political leaders somehow need to provide food and healthcare to their poorer citizens. They also need to keep people distracted with entertainment. For many years, governments of Advanced Economies have been trying to provide the equivalent of bread and circuses. In the US, legislation providing Social Security for the elderly was enacted in 1935, during the Great Depression. Many other financial support programs have been added over the years. Today’s circuses today are provided through televised entertainment and video games.

A major problem is that the costs of these programs have become more expensive than tax revenue can support. This is especially true of the cost of “bread,” if its cost is defined as including healthcare and pensions for the elderly, in addition to food. Ultimately, these high-cost programs can bring an economy down. The high cost of bread and circuses is thus a second limiting factor, besides excessive interest payments on government debt, (discussed in Section [3]).

[10] Leaders of many countries are already making plans that can be used to deal with shrinking resources per capita.

If there aren’t enough resources to go around, what can governments do to prevent riots? Two obvious choices come to mind:

(a) Tighten controls on citizens to prevent riots. China has been a leader in this area, and the UK and US seem to be trending in a similar direction. In a sense, the Covid requirements of 2020 were practice with respect to restrictions on movement.

(b) Develop a rationing system that can be used, in case of a shortfall of essential goods. Many countries are looking at central bank digital currencies (CBDCs). These are a digital form of central bank money that is widely available to the public. In the US, I expect CBDCs will be rolled out initially as a way for those who are entitled to food stamps to easily access their benefits. If these digital currencies work, CBDCs can easily be expanded into a widespread rationing system. Government leaders will then be able to decide who can afford to buy what, rather than depending on the way the k-shaped economy currently allocates buying-power.

[11] What lies ahead in 2026?

I don’t think any of us know for certain. The general direction of the world economy seems to be toward contraction, but some parts of the world economy will fare better than others.

Europe looks increasingly like it is an “also-ran” behind the US and China in the world economy. I expect its resource use will continue to shrink back in 2026, indirectly benefiting the United States and the rest of the world. I am hoping that with cutbacks in oil usage by island nations and Europe, and the resulting lower world oil prices, the United States will be able to avoid the worst of the recessionary tendencies looming in 2026.

There are some reports that AI, as it is being applied in China, is providing major success in reducing the cost of coal mining in China. If this is true, it may allow China’s economy to grow in 2026, despite downturns in many other countries.

I am fairly certain that AI, as it is being developed in the US and Europe, cannot continue its recent exponential growth trajectory, and I expect this to become obvious in the next few months. This shift seems likely to pull down US stock market indices. Here again, I am hoping that despite this issue, the US will be able to avoid the worst of the world’s recessionary tendencies.

I don’t expect a world war in 2026. For one thing, no country has adequate ammunition capability. I think civil wars and wars against nearby countries are more likely.

It is possible that the EU will collapse in 2026, leaving the individual countries on their own.

At some point in the future, I expect that the central government of the US will also collapse, in the manner of the Soviet Union in 1991. States will likely regroup and issue new local currencies; the new combined governments will likely provide much more limited benefits than the US government provides today.

Many people think that different leadership will change the current trajectory, but I am doubtful about this. Most of the world’s problems are “baked into the cake” by resource shortages and by too high a population relative to resources. Keeping immigration down is one way of trying to keep resources and population in closer balance.

All in all, I expect a very uneven world economic downturn in 2026. Economies will continue to become more k-shaped. Governments will do their best to hide problems from the public. Stock markets will likely not do well in 2026, if they can no longer count on AI for an uplift.

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Too many promises; too few future physical goods

Posted on December 4, 2025 by Gail Tverberg

Summary:

  • Today’s financial system allows many promises of future goods and services. These include debts, pensions, and even prices of shares of stock.
  • However, the quantity of actual physical goods and services that can be produced appears likely to be shrinking in future years because of resource depletion.
  • This mismatch means that many/most of these promises likely cannot be paid as promised. The economy will somehow change to match what is actually available. We should not be surprised if, one way or another, we receive much less than has supposedly been promised. Even if a high currency amount is provided, it likely will not buy very much. Or a new government may be in power, with virtually no promises of benefits.
  • Today’s economic system requires both increasing energy supplies and increasing debt to function properly. We are now encountering limits with respect to both world energy supplies and US government debt. The parts of the world economy that are most affected by limits will likely begin to contract soon.
  • We don’t know precisely how this contraction will take place, but we can examine a list of countries whose GDP has already been contracting to see how they are faring.
  • Perhaps we need to be relying more on our families and/or on “villages” made up of extended relatives or friends for our long-term support, rather than on government programs.

Introduction

The world is filled with financial promises, including loans, pensions, and even the market value of stocks. So far, the system seems to be working, but in a finite world, it is hard to believe that the system will work indefinitely. Governments can create money simply by adding more promises, but they cannot create goods and services in a similar fashion.

We know that actual physical materials are needed to make the goods and services that people depend upon. Energy supplies are particularly important in making goods and services because, according to the laws of physics, energy is required to produce physical goods and services. Forecasts that support current financial promises ignore the fact that we live in a finite world. Eventually, we will run short of easy-to-extract essential materials, including fossil fuels, uranium, lithium, and copper. Economic growth will need to be replaced by economic contraction.

In this post, I will try to explain the situation in more detail, together with some charts showing what is going wrong now, such as Figure 1. In some ways, we already seem to be reaching limits to growth.

Graph showing world growth in energy consumption per capita from 1968 to 2024, illustrating fluctuating trends with a downward trend line indicating potential scarcity.
Figure 1. Per capita energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute, with trend line and note.

[1] At first, added debt is helpful to an economy.

In some sense, added debt pulls an economy forward.

Illustration of a bicycle with labeled parts representing economic systems: human rider symbolizes primary energy provider, steering system represents profitability and laws, braking system denotes interest rates, front wheel signifies the debt system, gearing system indicates energy efficiency, and rear wheel shows where energy operates.
Figure 2. The author’s view of the analogy of a speeding upright bicycle and a speeding economy.

As long as there are plenty of inexpensively available resources and not too much interest to pay, added debt seems to make sense. It pulls the economy forward, in the direction that those resources are to be used. It “feels good” to the recipients of the goods and services made possible by the debt. People like the homes and cars that added debt makes possible.

Ordinary citizens have clear limits on their credit card debt. The limits on government promises seem to be hidden until they are actually reached.

As long as an economy is growing, that growth seems to hide many problems. Carmen Reinhart and Kenneth Rogoff are two well-known US economists. In a 2008 working paper (p.15) examining 800 years of government debt defaults, they remarked, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.” Without “hugely successful economic growth,” it is impossible to keep adding debt and repaying it with interest. The growth allows debt to be paid back with interest. It allows the fiction that an economy will continue to grow, and this growth will provide the margin needed to repay the debt with interest.

While the world economy has been an amazingly successful growth story since the industrial revolution, we now seem to be running short of the inexpensively available fossil fuels that have made economic growth so far possible. With this change, the economy is likely to start a major shift from economic growth to economic contraction.

We don’t know exactly how this shift from economic growth to economic contraction will take place, but we can hypothesize that the economies that have recently been growing fastest might be farthest from contraction, and the economies that are already struggling with low growth might be the ones most likely to slip into contraction. The countries slipping into contraction can be expected to have special difficulty repaying debt with interest and meeting other financial promises. Some governments may even collapse, perhaps in the way the government of the Soviet Union collapsed in 1991.

[2] Not too surprisingly, given the physics connection stated in the introduction, total world GDP and world energy consumption are highly correlated.

A scatter plot showing the relationship between world energy consumption (measured in Exajoules) and global GDP (in trillions of 2015 US dollars), with a trend line indicating a strong correlation (R² = 0.9757).
Figure 3. Energy based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP in constant 2015 US$ is as published by the World Bank.

In fact, the growth rate of energy consumption and the growth rate of GDP are also correlated, as can be seen from the similar patterns on Figure 4.

A line graph showing the correlation between world growth in energy consumption and growth in inflation-adjusted GDP from 1968 to 2024, with energy consumption represented in blue and GDP growth in orange.
Figure 4. Three-year average growth rates are used for stability. Energy growth rates are based on energy data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP growth rates are based on GDP in constant 2015 US$ as published by the World Bank.

A scatter diagram of the X-Y data used in Figure 4 gives the result shown in Figure 5:

Scatter plot illustrating the relationship between world energy growth and GDP growth, showing a positive correlation with data points scattered around a trendline.

Figure 5. Three-year average growth rates are used for stability. Energy growth rates are based on energy data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP growth rates are based on GDP in constant 2015 US$ as published by the World Bank.

[3] A major issue is the fact that the growth rate of world energy consumption is trending downward.

Line graph showing world growth in energy consumption over the years, with a trend line indicating a general decline in growth rates.
Figure 6. Energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute.

Figure 6 shows a big upward bump starting not long after the year 2000, driven by the addition of China’s inexpensive coal resources to the global energy supply. The low-cost portion of China’s coal resources is now mostly depleted. In addition, we don’t seem to have any other energy sources that will be available in large quantity in the near future. We have been adding wind and solar, but their impact has been small. Their impact is reflected in the total energy increases shown in Figure 6, and in the other charts above.

[4] Even worse, the rate of growth of world energy consumption per capita is trending downward. In fact, if the trend line were extended to 2025, it would seem to indicate contraction in per capita energy supplies.

Line graph depicting world growth in energy consumption per capita from 1968 to 2024, showing fluctuations in growth rates with a downward trend line indicating a predicted shortage of energy.
Figure 7. Per capita energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute with trend line and note by Gail Tverberg. (Same as Figure 1.)

We know that it takes energy to make physical goods. Even services require some level of physical goods and energy, such as a building to perform these services, electricity to operate tools, and the materials needed to make any tools, such as computers or scissors.

On Figure 7, note that the trend line is dropping below 0% in 2024, and even farther below 0% in 2025. This means that a smaller energy supply is available, relative to the population. If less energy supply is available, fewer physical goods relative to the population are likely to be available, as well. No one announces this, but we see the impact in many ways. For example, we discover that our daily newspaper is no longer being delivered. Or we discover that the products we see in stores are becoming increasingly flimsy. Meanwhile, young people are becoming less able to afford cars, homes, and almost everything else.

Furthermore, with limited total energy supply, international fighting about physical goods becomes more of a problem. The place we see this first is with respect to minerals. With limited energy supply and ores that are increasingly less concentrated, it is becoming difficult to extract enough materials such as uranium, rare earths, and platinum to meet the needs of all countries. Prices may temporarily spike, but they do not rise high enough, for long enough, to allow production to rise to the overall needed level.

[5] Falling interest rates push the economy along; rising interest rates act like putting brakes on the economy.

Graph showing the 3-Month Treasury Bill Secondary Market Rate and Market Yield on U.S. Treasury Securities over time, with historical peaks and recessions indicated.
Figure 8. Interest rates on 10-year Treasuries (red) and on 3-month Treasuries (blue), based on data of the Federal Reserve of St. Louis.

Interest rates play a far greater role in the economy, and in economic growth, than many people would expect. Falling interest rates between 1981 and 2022 greatly supported the economy (Figure 8). Since 2022, higher interest rates have acted like a headwind to the economy. This is a concern when it comes to the possibility that the economy is heading into economic contraction because of an inadequate supply of low-cost energy.

Another piece of the picture is the effect of the “yen carry trade.” It allows international investors to borrow money at low rates in Japan, and invest this money in the United States and other countries at higher rates. The yen carry trade has been supporting international borrowing, but it now seems to be at the edge of unwinding because Japanese interest rates are now higher. With this change, it is more difficult to borrow yen at a low rate and invest the proceeds elsewhere at a higher rate. The unwinding of the yen carry trade could push US interest rates up, regardless of what the Federal Reserve tries to do.

[6] Interest payments on US government debt are already getting to be a problem.

US government debt is now close to $38 trillion, and total interest payments have recently risen because interest rates are no longer near zero. Total payments now exceed $1 trillion per year.

Line graph showing federal government current expenditures on interest payments in billions of dollars from 1950 to 2025, illustrating a significant increase since 2020.
Figure 9. US federal government interest payments through June 30, 2025.

The US Congressional Budget Office (CBO) is now concerned about the high level of interest payments. When interest rates were very low in the 2008 to 2020 period (Figure 8), it was possible to add debt without substantially raising the amount of interest to be paid. But now, with higher interest rates and the debt balance increasing, interest payments have become very high, to the point where they even exceed defense spending. It becomes difficult to raise taxes enough to cover both interest outlays and other funding shortfalls.

Graph illustrating the total deficit, net interest outlays, and primary deficit in the US from 1975 to projected values in 2035, showing the percentage of GDP.
Figure 10. Chart by CBO showing annual deficit in two pieces–(a) the amount simply from spending more than available income, and (b) interest on outstanding debt. Source.

I talk more about some of these issues in post called “Energy limits are forcing the economy to contract.” Clearly, if the US economy is being forced to contract, it is very difficult for it to be a hugely successful growth story.

[7] Which countries of the world seem likely to be most resilient against energy limits?

If we believe Reinhart and Rogoff, the countries that would be most resistant to collapse would be the countries that have been growing most rapidly, in recent years. Figure 11 shows a listing of the most rapidly growing countries during the 2019 – 2024 period, based on World Bank GDP data.

Table listing the fastest growing countries in the world from 2019 to 2024, categorized by region.
Figure 11. Listing based on World Bank GDP data (in 2015 US$) for the years 2019 to 2024. The average growth rate of these countries was 4.9% per year or higher.

The only country on Figure 11 that is an “Advanced Economy” (member of the OECD) is Ireland. Ireland is known for its pharmaceutical exports and for its unusually low taxes on corporations. Many companies choose to domicile in Ireland to take advantage of the country’s low tax rates.

All the other countries are, in some sense, “less advanced economies.” Wages are likely lower, giving them an edge in extracting resources and in manufacturing, and then selling the goods to more advanced countries. Some of these countries may have been given loans by the IMF or China to help them develop their resources.

China and India are both known for their coal use; historically, coal has been an inexpensive energy product, allowing countries to make goods inexpensively, for export. The only country listed whose growing GDP is based on oil extraction seems to be Guyana in South America. Its oil extraction started very recently.

Table displaying the slowest growing countries in the world from 2019 to 2024, categorized into shrinking economies and slowly growing economies.
Figure 12. Listing based on World Bank GDP data (in 2015 US$) for the years 2019 to 2024. Average growth rates were strictly less than 0% for shrinking economies, and between 0% and 0.5% (inclusive) for slowly growing economies.

On Figure 12, the list of shrinking economies reads like a list of sad situations that we have read about in the news, way too many times. Many of the countries have recently been in wars or similar situations. None of the countries are Advanced Economies. A few of the countries (Iraq, Libya, Trinidad and Tobago, South Sudan, Venezuela) are oil producing countries.

With respect to the list of slowly growing countries, shown on the right side of Figure 12:

  • Austria, Czechia, Estonia, Finland, Germany, and Japan are all Advanced Economies with inadequate energy supplies of their own.
  • Puerto Rico is an island territory that has recently had debt problems.
  • Thailand is, in some sense, a dropout from the rapidly growing nations of Southeast Asia. My impression when I visited Thailand earlier this year was that a great deal of overbuilding had taken place. Excuses for more debt had mostly stopped.
  • Argentina is an oil-producing country with difficulties.
  • China tightened its grip on Hong Kong in 2019, leading to much slower economic growth. Presumably, there were underlying issues that caused this tightened grip.
  • South Africa has both coal supply problems and inadequate water supplies.

[8] What lies ahead?

I think that we are already in a world of “not enough to go around,” because resource limits are leading to an inadequate supply of finished goods and services for the world economy as a whole. Some countries are already being squeezed out, particularly the countries listed as having “shrinking GDP” in Figure 12. I expect that, over time, an increasing number of countries will be added to the shrinking GDP list. The outcomes may be as bad as seem to be happening to the economies that are shrinking today.

History shows that governments of shrinking countries tend to be overturned by their citizens, or they may collapse on their own. If collapse happens in either of these ways, governmental promises of pensions, and of guarantees on bank accounts, are likely to disappear. Even if the current governments can be maintained, countries will be forced to cut back greatly on the programs they are providing. Pensions may be cut, or they may be inflated away by hyperinflation.

Some governments today talk about possibly introducing Central Bank Digital Currencies (CBDCs). If these currencies are implemented, I would expect that they will be used to ration the increasingly limited supplies of goods and services that are available among their populations.

I do not expect that there will be a formal World War III. Instead, I think the United States is already in a cold war against practically every other country because there cannot be enough goods and services to go around. The US can’t go into a formal war against China because it provides parts of the supply chains for many essential goods the US uses today. Even Europe is a competitor for essential goods. For example, the less oil Europe uses, the more oil will be available for other countries.

While new technologies such as artificial intelligence and energy recovery may eventually alleviate our energy problems, it is unlikely that such approaches will solve our problem in the near term. As a result, governments are likely to be less able to keep their promises. Historically, families or “villages” of extended kin have provided safety nets, rather than government programs. Perhaps now is a good time to be thinking about how we can move in this direction, as well.

Posted in Financial Implications, Planning for the Future | Tagged , , , | 1,375 Comments

A lack of very cheap oil is leading to debt problems

Posted on October 31, 2025 by Gail Tverberg

Economists, actuaries, and others tend to make forecasts as if whatever current situation exists will continue indefinitely or will perhaps improve a bit. No one wants to consider the possibility that things will somehow change for the worse. Politicians want to get re-elected. University presidents want their students to believe that their degrees will be truly useful in the future. Absolutely no one wants to hear unfavorable predictions.

The issue I see is that many promises were made during the period between the end of World War II and 1973, when oil prices were very low, and most people assumed that oil supply could grow endlessly. No one stopped to think that this was a temporary situation that likely could not be repeated. If things didn’t work out as planned, debt bubbles could bring down the economy. This was a heading I used in my talk at the recent Minnesota Degrowth Summit:

Text slide discussing economic assumptions about oil supply and debt impact, featuring a blue background with white and light blue text.
Figure 1. Text: Our economy has been built as if a growing supply of $20 oil (EROI of 50 – 100) would continue! Simply add more debt if this isn’t true.

In this post, I will provide a few highlights from my recent talk. I also provide a link to a PDF of my Degrowth Summit talk and a link to a Vimeo recording of the summit, which includes a transcript. To access the transcript and an outline of the timings of the various talks, scroll down on the front page of the recording. Joseph Tainter spoke first; there was a recorded section showing clips by other speakers that only online viewers saw, and I spoke last (starting at about 1:55 on the video).

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Between 1920 and 1970, US oil supply grew rapidly. The early oil was easy to extract and close to customers wanting to purchase it. There had been warnings from physicists (including, most notably, M. King Hubbert) that this could not go on indefinitely, but most people assumed that any obstacles were far in the future.

Graph showing U.S. field production of crude oil from 1920 to 2020, highlighting the peak in 1970; a visual representation of changes in oil extraction complexities over time.
Figure 2

Of course, there were other countries producing oil besides the US at that time, so it was possible to purchase imported oil. The US still had some oil it could produce, but it tended to require more complex operations. For example, some of the oil was in Alaska. Bringing this oil to market required working in a cold climate, laying a long pipeline, and using ships to transport the oil to locations with refineries.

Low oil prices were very beneficial to the economy, for as long as they lasted.

Line graph showing the average annual inflation-adjusted oil price from 1948 to 2025, highlighting low oil prices pre-1970, where the price was around $20 per barrel.
Figure 3

We don’t appreciate how important low-cost food is to our personal finances. If food purchases amounts to, say, 50% of available income, necessities such as clothing and housing would take nearly all our income. There would be little left over for optional items. On the other hand, if purchases of food require only 5% to 10% of available pay, there would much more likely be money left over for discretionary purchases, such as buying a vehicle or paying for school tuition for a child.

Oil and other energy products are like food for the economy. During the period when oil prices were very low, there was sufficient margin for purchasing all kinds of “extras,” such as the items listed in Figure 4 below.

A list of historical developments in the United States from 1948 to 1973, highlighting social and economic advancements made possible by low oil prices.
Figure 4

In the low-priced oil era, small businesses were sufficient for many types of operations. There was little need for a deep organizational hierarchy, or for advanced energy-saving versions of manufactured devices. Most goods used in the US were made in the US.

Slide from a presentation discussing the low-priced oil era, highlighting key points about the US economy, including low wage disparity, healthcare costs, affordability of homes, and the economic impact of low-cost oil.
Figure 5

Once the economy started to need more complexity, things began to change.

Slide displaying key points about government spending needs, wage disparity, social changes, healthcare costs, and aging population.
Figure 6

The economy needs a strong middle class to maintain the buying power needed to purchase goods such as vehicles, motorcycles, and new homes, to keep the price of oil up. If the middle class starts to disappear, or if young people start earning less than their parents did at the same age (adjusted for inflation), then it becomes difficult to keep the prices of oil and other energy products up. Prices must be both high enough for producers and low enough for consumers.

Graph displaying average annual inflation-adjusted Brent oil prices from 1948 to 2025, highlighting low prices before 1970 and the impact of wage disparity on affordability.
Figure 7

Recessions took place when oil prices rose. Governments found that they needed to bail out their economies with more debt when oil prices rose. Since 2008, the ratio of US debt to GDP has skyrocketed. Quite a bit of the added debt has been to pay for programs for poor people and the elderly.

Line graph showing the ratio of US federal debt to GDP from 1970 to 2020, indicating significant increase after 1980 and especially after 2008.
Figure 8. Chart by the Federal Reserve Bank of St. Louis, showing the ratio of US public debt to GDP. The ratios would have been even higher if internal debt, such as debt owed to pay for Social Security benefits, were included.

The current level of debt of the US government is widely viewed as being too high. One analysis suggests that if the ratio of government debt to GDP exceeds 90%, economic growth is inhibited. The US debt to GDP ratio is now 120% on the basis shown, which is well above the 90% threshold. One concern is that interest payments on debt already exceed the amount the US spends on defense each year. Taxes need to rise, simply to pay the interest on the debt.

Growing debt, particularly during the Stagflation Stage, is one of the issues mentioned by researchers into so-called secular cycles, which are long-term cycles that take centuries to complete. In the book Secular Cycles by Peter Turchin and Sergey Nefedov, a group of people somehow obtain possession of an area of land (often by cutting down trees or winning a war) that allows the population of the group to temporarily surge. When the population reaches the carrying capacity of the area, population growth greatly slows in a period referred to as Stagflation. Wage and wealth disparity become more of a problem, as does debt.

Eventually, according to Turchin and Nefedof’s study examining eight societies, populations tended to collapse over long periods, ranging from 20 to 50 years. Such cycles are closely related to the periods of growth and collapse analyzed in Prof. Joseph Tainter’s book, “The Collapse of Complex Societies.”

Graph illustrating economic cycles, specifically the Secular Cycle, showing population growth, stagnation, crisis, and intercyclic phases over time.
Figure 9. This chart is my chart, using information from the book Secular Cycles. The extent of the decline of the in population during the Crisis Period is quite variable.

The time ahead looks worrying, if my analysis is correct.

A presentation slide discussing the Secular Cycles Diagram and its implications for today's economy, highlighting the expected duration of Stagflation and potential upcoming Crisis Years.
Figure 10
Slide displaying conclusions regarding economic predictions and concerns, with bullet points about potential parallels to the Great Depression, job market issues, commodity pricing, debt bubbles, and rising conflict levels.
Figure 11
Slide displaying the conclusion of a presentation, summarizing economic cycles, and emphasizing investment in health, tools, skills, and relationships.
Figure 12

A few comments for my regular readers:

  1. My presentation included 51 slides. Look at the PDF to see the full presentation.
  2. Even though I didn’t mention it, having a rapidly growing energy supply at a very high EROI would not be sufficient to forestall collapse indefinitely. Other issues would emerge. Population would rise higher, and pollution would be more of a problem. Eventually, the system would still reach a limit and tend to collapse.
  3. I only included EROI because I thought a few people would already be aware of the concept. I didn’t define it or talk about it.
  4. My analysis seems to suggest that extenders of fossil fuels, such as wind, solar, and nuclear, need to have very high EROIs. But even with high EROIs, they are unlikely to be helpful for very long because the system would still tend to reach its limits.
Posted in Financial Implications, Introductory Post, PDFs Available | Tagged , , , , | 1,521 Comments