Energy Leveraging: An Explanation for China’s Success and the World’s Unemployment

If an employer wants to maximize profits, it will want to leverage its use of high-priced energy sources.  From an employer’s point of view, there are basically three kinds of energy, from most to least expensive:

  1. Human energy
  2. Petroleum energy
  3. Everything else

If an employer wants to keep its costs low, it needs to minimize its use of expensive energy sources. The primary way it does this is by leveraging expensive energy sources with cheaper energy sources that help keep overall energy costs in line with what competitors (including overseas competitors) are paying. Thus, employers will want to use as little human and petroleum energy as possible, instead using cheap energy to substitute.

Human Energy

Human energy is the most expensive form of energy. It is very expensive because an employer needs to pay the employee enough to live on. This amount includes the cost of energy to fulfill the human’s needs, plus enough extra to cover taxes to cover the cost of energy for those who for some reason cannot work, plus taxes for maintenance of public infrastructure. An employer can keep his cost of human energy low by

  1. Substituting mechanical or electrical energy, which is usually cheaper.
  2. Hiring humans whose wage costs are low. Usually this means is humans who use little energy in their personal lives, and what energy is used, is cheap energy.
  3. Hiring in areas where taxes are low, usually reflecting a lack of benefits to employees.

Petroleum Energy

Petroleum is a second form of energy. It is the second most expensive form of energy, after human energy. Its supply on a world basis is constrained (Figure 1, below). Crude oil supply is only growing at a rate of about 0.3% per year on a worldwide basis.  While the growth in extraction in the US temporarily higher than the world average, it is not of sufficient in quantity to offset big declines elsewhere, such as in Europe.

Figure 1. World Crude and Condensate production since 1994, with fitted trend lines, based on US Energy Information Administration data.

Figure 1. World Crude and Condensate production since 1994, with fitted trend lines, based on US Energy Information Administration data.

America’s recent oil-drilling success relates primarily to shale oil (sometimes called tight oil). There is no guarantee that America’s success with shale oil will continue. The Bakken is today’s biggest source of shale oil, with some claims that Bakken will be able to provide over 1 million barrels a day of oil for many years. It seems strange then that recently ONEOK Partners was not able to find subscribers for a 200,000 barrel a day crude pipeline for Bakken oil. The number of drilling rigs active in North Dakota is now down about 13% from its high in June, according to Baker Hughes–something else a person wouldn’t expect in an area where future production is expect to grow rapidly.

Because world oil supply is growing less rapidly than either population or GDP, businesses and consumers find that they need to use less of it, each year. In addition, the rising cost of oil is a problem. This occurs because we extracted the cheapest to extract oil first, and now the “easy to extract” oil is gone. We see many news items supporting the need for higher oil prices. For example, Brazil’s offshore oil is supposed to be one of the sources of rising future oil production, but reports now say:

The company [Petrobas] hopes to sell $14.8 billion of assets this year as soaring costs, falling production and rising fuel imports have crimped Petrobras’s ability to pay for a $237 billion five-year expansion plan, the world’s largest corporate investment program, Reuters reported.

As another example, Credit Suisse estimates that BP needs a Brent price of $121 barrel in 2013 in order to have sufficient cash flow to cover both investment expenses and dividends.

Oil has many very specific uses, and when used in these ways, substitution is very difficult. Oil is used to power the vast majority of automobiles, trucks, and ships in operation today, and all of the world’s airplanes. It is used for pumping water and generating electricity in areas where electricity is unavailable, either temporarily or long-term. It is used as the feedstock for pharmaceuticals, herbicides, and pesticides. It is used for lubricating machinery of all types.

There are literally trillions of dollars of built infrastructure that depend on oil, supporting all of the above uses, plus others. We don’t have a non-oil replacement for most of our oil-dependent infrastructure. Even if we did, we couldn’t afford a full replacement until current infrastructure wears out. Because of the cost issue, a transition away from oil will likely require very long time, up to 50 years.

Other Kinds of Energy, Besides Human and Petroleum

There are many kinds of energy besides human and petroleum. Biomass has been a source of energy  for over 1 million years. Animal energy, such as dogs for hunting or animals for riding or plowing is another source of energy. Other types of energy include  coal, natural gas, nuclear, wind power, water power, heat from the sun, solar PV, geothermal, peat moss, and man-made substitutes such as ethanol.

From the point of view of a business wanting to produce some type of goods or service,  the most important characteristic of the energy product used is cheap relative to the services performed, assuming the business wants to be competitive with other businesses.  At this point, coal seems to be the winner in the “cheap” category, especially if a country has local supply and is willing to overlook the need for good scrubbers.

In the US recently, natural gas has been selling very cheaply as well. The low price of natural gas seems to be a temporary, local situation, however, because very little of the natural gas can actually be produced for the price it is currently being sold for. Many shale gas companies have had to write off reserves. Either the sales price of natural gas will need to increase significantly from the current U. S. level, or many players will have to drop out. If the price rises by several dollars per Mcf, we can expect considerable electrical-generation switching from natural gas back to coal.

Some companies may prefer higher-priced fuels for environmental reasons, but unless there is a tax on imports of goods and services produced with coal, goods produced with higher priced fuels are at a competitive disadvantage. The competitive disadvantage runs to labor costs as well, since using cheap coal (especially without proper environmental protection), helps keep the cost of living down through cheap prices on home heating and local transport.

Looking at Energy Services from a Citizen’s Point of View

The naive view would be that humans don’t need external energy. In order for this belief to be true, we would need to live like other animals.  Humans could live without external energy if we could live without clothing or shelter, and if we could eat all of our food raw, without chewing for literally half the day.

Humans discovered how to control fire over 1 million years ago. We have now adapted to the availability of external energy sources in many ways. As we learned to cook part of our food, the size of our teeth, jaws, and digestive system shrank, leaving more energy for  brain development. With better brains and clothing (made using embedded energy) we were able to move to less hospitable areas of the world, increasing our total numbers.

The amount of external energy each person needs today varies. In particularly hospitable areas, a few people can live as hunter gatherers, burning twigs or dung for fuel. But in general, the vast majority of people will need some additional external energy. They will also need some means of either buying food (which is a form of energy) or growing it on a plot of land that has been provided. They will also need other essentials, including clean water and protection from the elements. If humans do not have a job in today’s economy, they will need financial support to purchase the goods and services they require to live.

The more cheaply the necessary services can be provided to citizens (generally meaning the lower the energy costs), the lower the salary employees need to earn to provide a comfortable way of life. An employee who lives in a tropical area where he can walk to work will probably not need a very high salary to be comfortable; an employee in a very cold area may need heat for a home, besides needing clothing and a warm vehicle. If the employee uses expensive oil products for his vehicle, he will require a higher salary than if similar services are provided with, say, an electric bicycle, or walking.

How China Beats the United States at Energy Leveraging

If we look at China’s energy leveraging, we see that it uses very little oil and much coal. China joined the World Trade Organization in December 2001, and ramped up its coal usage shortly thereafter.

Figure 5. China's energy consumption by source, based on BP's Statistical Review of World Energy data.

Figure 2. China’s energy consumption by source, based on BP’s Statistical Review of World Energy data.

The percentage of people in the US with jobs started decreasing at about the same time that China ramped up its coal usage.

Figure 11. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census.  2012 is partial year estimate.

Figure 3. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate.

While we can’t prove there is a connection, we know that several other Asian countries, including India and Bangladesh, also ramped up international trade about the same time. The combination of lower salaries in Asian countries and low energy costs made Chinese costs of production much cheaper than that of developed countries. The cost of services, such as computer technical support in India, also became very inexpensive, and with greater trade, more available to companies seeking to reduce coasts.

Toward the beginning of the period shown on Figure 3 (above), there were more US farmers, and more women staying at home with children (on the farm and otherwise) than there are today As the birthrate in the US dropped in the 1960s and 1970s, more women joined the work force. Many households were able to add a second wage-earner. So prior to 2000, there was a long-term rise in the percentage of the US population with jobs–a trend then many economists seem to have overlooked in analyzing long-term economic growth. Now the trend has reversed, during a time when the US is having increased financial problems.

Higher oil prices are also tied to the reduction in the proportion of US citizens with jobs, because high oil prices tend to cause a reduction in discretionary expenditures, and a loss of jobs in discretionary sectors. The combination leads to government financial problems, as I explained in my recent post about the Fiscal Cliff. Countries like China and India which leverage their oil use to a greater extent with more coal use are less affected by a rise in oil prices. This is another reason why jobs are moving to China and India, and away from the US.

In China, demographics seem to be keeping the cost of maintaining a household low. At this point, Chinese households have relatively few children and elderly to take care of. In some instances, multiple generations live in one household, further lowering required per-person income needed to maintain a household.

Lack of pension programs in China can also be a boon for Chinese businesses because without such a program, there is likely to be increased private savings and thus more funds for investment. This is especially the case with one-child families, because citizens realize that with small families, they cannot depend on offspring for support, leading to a greater need to save for retirement.

The Path Ahead  – Fewer and Fewer Fossil Fuel Supported Jobs

What is concerning is where the current path leads us. With the miracles of computers and mechanization in general, fewer and fewer employes are needed to produce goods and services. The employees that companies choose to hire often live in parts of the world where labor is cheap because the standard of living is low. With expensive petroleum expected to stretch farther and farther, more potential users (who might start a new company or sell a new service) are priced out of the market.

In a competitive world economy, there is little role for people who need high wages because they live petroleum dependent lifestyles. The major exceptions are (a) a few management employees and (b) employees in sheltered areas of the economy, such as health care and higher education. It is not clear that these sheltered areas can continue very long because it is increasingly difficult for other workers to afford their high cost.

It is possible to leverage human labor using non-fossil fuel energy, but generally the leveraging isn’t very good. For example, a person can raise a horse, if he or she has an extra ten acres to graze the horse on, and reasonable rainfall. The horse can then be used for transportation and perhaps pulling a plow. A windmill made from local materials can perhaps be used to pump water for the horse, and a water wheel can be used to grind grain.

In 1800, with little fossil fuel use, the world supported about 1 billion people. It is not clear how many people the world could support now if fossil fuel use were discontinued. Fossil fuels are needed to make concrete and to make metals in the quantity used today. Because of this, without fossil fuels we would likely lose our ability to make new “renewable” energy products, such as hydroelectric dams and wind turbines, as well as supporting products such as new electrical transmission line.

Should There Be More Taxes on Businesses?

There are a couple of kinds of taxes that are needed in our current situation. One type of tax is to pay for transfer payments to all of the unemployed individuals, as our current system requires fewer workers. These taxes are now being paid mostly by employees, either through federal taxes or through local taxes. If the cause of this unemployment is actions by employers, perhaps these taxes should be paid by employers. The ones particularly at fault are those who choose to hire workers from lower wage areas and those who subcontract with companies from low-wage areas.

Another kind of tax that is needed is a tax to support the increasingly high cost of maintaining infrastructure, because upkeep of infrastructure is usually oil-dependent. (I suppose this could be called an “entropy tax.”) Even if individuals are priced out of having their own vehicles, businesses are still likely to expect to use roads for shipment. These roads need to be maintained, because freezing and thawing will cause the roads to deteriorate, even if few use them. Similarly, hurricanes and windstorms will bring down power lines, regardless of how little electricity is used. We will also need to maintain oil and natural gas pipelines and water and sewer pipelines, if we expect to use these services at all.

At the present time, the cost of maintaining this infrastructure is either paid by the companies selling the product or by taxes on  individual citizens. As fewer people are employed, it will be difficult for US utilities to continue to collect as much revenue from individual subscribers. If businesses want to continue to receive these services, perhaps a change in funding is needed, with businesses bearing a disproportionate share of these costs. Of course, this will further increase costs in countries with lots of built-infrastructure, compared with low-income countries, adding to the competitive disadvantage of developed countries.

Does it really make sense to continue on the path to increasing globalization? We will need to quit a some point, either because of a choice to move away from fossil fuels, or because oil supply becomes even more constrained, and the ensuing financial problems cause us to cut back.

Policymakers and economists assume that the only path forward is increased globalization, and have not really examined any other path. In a world with limited resources, the path away from globalization is more sustainable one. The big concern is  how much population it can support.

A Note on The Role of Biofuels

Biofuels can act as a partial substitute for oil, in some cases, and thus extend supply. If their cost is no higher than that of oil, they can make it possible to produce more goods and services, especially if the use of biofuels leads to more petroleum availability in the industrial/commercial sector.

Adding biofuels to the personal sector is of questionable benefit. Increasing biofuel production leads to burning coal and gas more quickly, since it adds to oil supply, rather than substituting for it.  Increasing personal biofuel use tends to keep citizens’ use of oil products higher than they otherwise would be, leading to a need for higher wages, and thus a less competitive position in the world economy.

Postscript

I think anyone who reads this far will feel like screaming, “This is not a system that works!” It isn’t, and it is frustrating. But it is hard to see a way to change the system in a way that makes the system work better for all 7 billion humans alive today. Perhaps the best we can do is work toward a less globalized system, even if not everyone can be helped by it.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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116 Responses to Energy Leveraging: An Explanation for China’s Success and the World’s Unemployment

  1. PeteTheBee says:

    Gail loves to hate on the Bakken. I wonder whether she will make a prediction re: it’s production? She did so here http://www.theoildrum.com/node/3868 and missed it, by a lot.

    ” it seems unlikely that total Bakken production will exceed 2x to 3x current rate of 75,000 BOPD.”

    Here you have ND producing 662,428 BOPD, or around triple Gail’s ceiling. 75K per day was not even a speed bump.

    https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf

    As to the pipeline that wasn’t built… there is a well known glut of oil in Cushing, the destination of the pipeline. The railroad’s can give better prices by delivering to locations that aren’t already over-supplied. The KXL pipeline will also pass close enough to allow for a Bakken spur.

    I wouldn’t read too much into one pipeline. But if you want to predict a Bakken production ceiling, let’s hear it.

    • The post you linked to was a guest post. I didn’t write it. Not everyone gets their forecasts right.

      The pipeline situation is changing rapidly. There is a rush to build pipelines now to the Gulf Coast (reverse Seaway pipeline, at 150,000 bpd on May 17, 2012; 400,000 per day by early 2013; 850,000 barrels per day mid 2014. Also southern leg of Keystone pipeline by by . By the new Bakken pipeline would be built.) So the glut issue because of pipeline capacity to the Gulf would not be much of a problem, by the time the pipeline gets built.

      Of course, the refineries at the coast are pretty close to full-up right now, and Bakken oil doesn’t really need the expensive cracking capability Gulf coast refineries. I think the real issue is that with the higher price available for Brent crude on the East Coast, producers would really prefer using East Coast refineries, as long as the WTI/ Brent differential holds up. Of course if these refineries go broke (because they cannot get a high enough crack spread on high priced Brent oil) or if the differential goes away, then Bakken producers will be looking for a different place to refine their oil.

      I think the real issue in the Bakken is how long the companies operating in the Bakken can continue to get enough financing to keep increasing their operations. The drop in number of drilling rigs suggests they have already started leveling off or cutting back. I am not one who follows individual stocks, but I understand that a number of Bakken oil companies are not doing very well in the stock market (including Northern Oil & Gas, Continental Resources, Newfield Exploration Company). The game becomes one of trying to sell out to some new company, perhaps with deeper pockets, who can finance more drilling and fracking.

      • PeteTheBee says:

        Right, I guess you’re too careful not to make a prediction.

        Predictions are often wrong, but the peak oil people have been spectacularly wrong about the Bakken.

        In a couple years, the Eagle Ford will over take the Bakken, then we’ll hear horrendous predictions about that play.

        • donsailorman says:

          With all due respect, you are 100% all wet. The depletion rate of the Bakken is extremely high, and the decline rate will also be extraordinarily high. For more information, study theoildrum.com, and especially the comments of their petroleum engineers and petroleum geologists re the Bakken.

          • PeteTheBee says:

            right the oildrum… did you see the oil drum link above, where they predicted the Bakken should have peaked at half it’s current production?

            the peak oil people don’t understand the economics or the mechanics of shale energy, they are “fightting the last war”. The US has an almost endless supply of oil at $80 bl, and similarly gas at $5 mmbtu. Those thresholds are moving down, not up, as the technology improves. Eagle Ford has a lot of oil that’s profitable at $40 bl.

            If theoildrum was correct, the US would not be producing fossil fuel energy at an all time higher.

            • donsailorman says:

              You are still 100% all wet concerning the Bakken. Have you noticed the declining number of oil rigs there? The Bakken is a Red Queen’s Race, and within a year or two production will almost certainly be declining.

              Major commentators on theoildrum.com such as westexas and Darwinian are quite right, and their numbers are right.

              Once again, with all due respect, may I inquire as to your credentials in petroleum geology or petroleum engineering?

            • The Oil Drum is not always correct. High prices do stimulate more production, I will agree. We will have to see how this plays out.

              I could see a pretty steep drop in oil prices, if we go into recession with higher taxes / lower benefits after the first of the year. Our huge deficit spending and artificially low interest rates are hiding a multitude of problems. $80 oil prices may disappear into the rear-view window, and substantially slow Bakken development.

  2. One could think about Americans slowly getting more energy efficient in structural ways:
    – online secondary education: no buses, abandoning buildings that used energy, “dense packing” teachers (they have cubicles in what look like call centers). Huge growth in PA, zero growth in Virginia, we’ll have some compare and contrasts fairly soon.
    – local food: forget the plane rides for lobsters, and refrigerated cars for oranges, i eat the seasons and region, i don’t expect 12 different kinds of lettuces in January in the Northeast
    – online post-secondary education: already happening in various geographical and vertical niches, similar to secondary but also includes removing dorm rooms
    – abandoning roads: solid to gravel, doesn’t get plowed after 6pm, etc… if your in Detroit, it is completely gone, you have grass
    – work to rule on food imports: chinese food imports (and many others) are a disaster if tested against USDA and FDA regs, but they simply aren’t tested. I’ll bet we could remove 90% of those imports forcing national and local solutions.
    – abandonment of remote suburbs: already happening in some geographies, gas costs too much to commute

    Many of these things aren’t even policy decisions, they come from loss of income which we have been enjoying for many years. Rolling back to the 60s won’t kill us, especially if we retain the socio progress of Woman’s rights, Minority rights etc.

    • Interesting points. I know my husband is now teaching a university course where the students only get to view the lectures (which he gives to a different group of students) on line. It would seem like the students would get a price break for this arrangement, but I understand that they are paying the full price. In some cases, there even seems to be a surcharge for online courses.

      Some of the energy cutbacks can have some negative consequences. The use of Charter Schools for elementary and secondary education in Georgia allows schools to operate without bus systems and (I believe) hot lunch programs. This means that the schools only appeal to higher income parents, who don’t require these services. The better students are siphoned off from the public school system, at lower energy cost to the tax payers. The state pays the lower cost for the Charter Schools, so saves money. I doubt that there is lower energy cost overall, though. The high-income parents drive their children to school, and cook their children’s lunches. (Fewer cooks commute to school, though.) The buses to public schools still run their full route, and the poorer students get pushed together to a greater extent than before.

      • David F Collins says:

        What you say of Georgia (primary & secondary education) applies to Chicago. Here, though, there are special public schools, not just charter and private (including sectarian) schools for the children of people who deserve a good education for their children. But one benefit is that this means increasing numbers of people who are still wannabe 1%ers live in the city.

        Also, the underfunding of the prestigious flagship universities of the Midwest helps assure a better future for the children of people who deserve a good future for their children.

        It is right and proper that the Eloi should be kept apart from the Morlocks. (In periods of being occupationally challenged, I have worked as a substitute teacher in schools for Morlocks. I would not want my grandchildren in them!)

    • GermanStacker says:

      structural efficiency “going local” = economic contraction = debt collapse = big depression.
      Example: I stop taking tennis lessons on the way home to my 25 mile away suburb (because working home office now), tennis teachers loose their job, the big sports center goes bankrupt, etc.

    • GermanStacker says:

      It’s just not our model. Not how we (i.e. 90% of society) define ourself. Won’t be. Look at emerging markets, everyone hoping for the western growth model. The system favours complexity. Big social rewards in all cultures: going for the action, have that house, kids, 2 cars, maybe a boat, holiday cottage, going to places, travel… Nobody wants to be that first generation to give up the old progress dream. It’s about your parents, your friends, your children judging you, you want to present the success story they expect from you. Needs a big crash to stop it.

      • yt75 says:

        Not really, all of the above always bored me, although I have all the degrees to get them:)

        • This is a huge part of our problem, any discussion that outlines what will affect the collective ‘we’ is invariably countered with an argument from someone unable to see beyond the singular ‘I’
          we have all ridden on the progressive rollercoaster, no matter how much boredom we affect to show about it

          • yt75 says:

            There are also different traditions, critics of technological progess or the will to maintain the difference between science and technoscience (or technology) is very strong in French litterature for instance, or in German one with Nietzsche and others.
            What problem are you refering to exactly ? I sometime feel than British people are totally (or more than others) unable to reason besides “problems” and “solutions” with this kind of mandatory “positive thinking and need for usefulness” or switching back to total moodiness.
            If there is a “solution” it is primarily in taxing fuels or raw materials in general much more than work for instance, overall there is no problem and no solution.

        • Arthur Robey says:

          I hope you are using your degrees to get us out of this gravity well. It sucks down here. And this is as good as it gets.
          Many factors make me an Uberdoomer. I wont bore you with the details. But our survival depends on us getting out of the gravity well. (By “our” I mean Gaia’s survival)
          There is a lot of space in the 3rd dimension. And we are trapped in two and running out of the 4th.
          There are hints on how to survive in Colossal Carbon Nanotubes, artificial intelligence, Quantum computing, Genetic engineering, Lattice Assisted Nuclear Reactions, Gerard K O’Neill’s space habitats.
          Dive right in. Don’t just stand there.
          I have made up one scenario in my science fiction novelette, The Breeding. (Lots of Sex, you will like it.)
          http://coldfusionnow.org/gallery/arthur-robey/the-breeding/

  3. Don Stewart says:

    Gail
    I gather from the tone of this post that you didn’t hear anything positive about the prospects for oil in Austin?
    thanks…Don Stewart

    • Actually, ASPO-USA does have some speakers come and give their view of why oil and gas production could increase, but you are right, they are outnumbered by the “decrease” speakers.

      Steve Kopits gave a very good talk about why demand from Asia may continue to grow very rapidly, so regardless of oil growth, it would be hard to keep up with demand. He also calculated the oil price at which demand starts falling in various parts of the world, and made a graph of how this has changed over time. I got permission from him to write up his talk up as a post, but there is likely to be a time lag. It would be helpful to have the video and slides available, but neither is available yet.

      There were a number of other interesting points made at the conference. Mark Lewis of Deutche Banke put up a slide in which he said that the Brent oil price Russia needs for budget purposes is $115.9/barrel.

      Jason Schenker of Prestige Economics debated Charlie Hall. One point that Schenker made is that how high the dollar is floating relative to other currencies is very important in the price we pay for oil, and the price Europe pays. There is significant upside risk in the US price of oil, if the value of the dollar should suddenly drop. This could happen very quickly. He did not see any other currencies that could easily step in to fill the gap, if the dollar should suddenly lose its current role.

      With respect the needed price for US natural gas to ramp up, the consensus of several speakers was between $7 and $8 per Mcf. At that price, the US price would high enough that there would no longer be the needed price gap to support exporting natural gas to Europe. Bill Powers expects a natural gas crisis in the 2013 to 2015 time period, with prices rising to $12.50 to $15.00 Mcf range. The issue I see though is energy switching back to coal above say $4 Mcf. I am not sure that the natural gas price can rise very much without falling US demand, especially for electricity.

      Kjell Aleklett observed that the best shale gas resources in Europe are under Paris. He doesn’t ever expect to see drilling there.

      Tad Patzek of the University of Texas in Austin will be the new ASPO-USA President. He will succeed Jim Baldauf, who has been president for several years. Tad Patzek is the fellow on the left in the photo below. The fellow on the right is Kjell Aleklett, the researcher from Upsalla University in Sweden and ASPO International (which I think of as European) president. The graphic is one that Kjell brought.

      Tad Patzek and Kjell Aleklett

      Charlie Hall received an award for Excellence in Education. He will be retiring from teaching at SUNY-ESF in Syracuse, NY at the end of the school year. This is a picture of Jan Mueller (ASPO-USA Executive Director = paid staff person) reading the award to Charlie Hall. After Jan read the award, Jan said whoops, Tad was supposed to make this presentation, and the rest of the ceremony went on with Tad. But I didn’t get the later picture. This is the one with Jan and Charlie.

      Jan Mueller reading award to Charles Hall

      • donsailorman says:

        I think a sudden and drastic drop in the value of the dollar is highly unlikely. To the best of my recollection, there are only three times that the dollar has quickly lost its value: the Revolutionary War, the War of 1812, and the Civil War.

        Prior to 1913, inflations were followed by deflations, and the dollar returned to its original value as defined in terms of silver, which (if memory serves) was before the Revolutionary War. What I think is most likely to happen is a gradual ratcheting up of inflation as happened during the great stagflation of the 1970s and early 1980s. Unless the unemployment rate rises above 25% I do not think the Fed will permit a rate of inflation of more than 10%. Note that inflation eases the burden of debt greatly while it steals the wealth of creditors. A 10% rate of inflation will cut the value of the dollar in half over a period of 7.2 years. A 7% rate of inflation will cut the value of the dollar in half in roughly ten years.

  4. Ikonoclast says:

    There is a bit of a seeming paradox here. Energy is a crucial input to all human and economic processes (and all biological processes). It is the KEY resource. Energy is the one resource that is needed to exploit all other resources. Water comes a close second. Water is needed, in one way or another for most processes which obtain or use other resources. Indeed water (as well as input energy) is needed to obtain more energy; pumping water in to pressurise old oils and using it in fracking for example.

    The seeming paradox is this. Energy is essential but it is not always ostensibly the most expensive input in economic terms. However, that last sentence might need to be qualfied depending on how we do the energy accounting. One argument would have it that human input to work is not all raw or basic energy but that there are also qualititative aspects like knowledge, skill, coordination and intelligent direction of effort. Then there is machinery, technology, invention, innovation, discovery and so on. Another argument would hold, even here, that (biochemical) energy is always involved, even in thinking. Thus the issues of knowledge, skill, coordination, intelligent direction, invention and innovation actually involve investments of energy too. It’s just that this type of energy input when done well has a multiplier effect on output. That is to say;

    Output is proportional to Raw Energy Input times Process Efficiency.

    Thus energy investment in improving process efficiency could, in some cases, have a multiplier effect on output. For example, a further 10% investment of energy in developing processing efficiency (over and above the raw energy used in the processes) could result in a doubling of output.

    Thus energy is not to be equivalently costed or valued economically speaking. Raw energy from a barrel of oil or a hundred weight of coal or the human bicep has one value range. The energy for intelligent direction (for want of a better term) has a different and much higher price range. Thus the actuary who works all day in the acturial office and (let us assume) burns off serious calories as a hard recreational exerciser might well use the same calories (food energy) as an unskilled labourer. Yet the energy of the actuary input into work needs to be costed much higher if (and its a big if) we want to consider an energy theory of value.

    This is only one aspect of what I am arguing about. In the the costs of any project, the ostensible energy costs might be only say 20%. Another 40% might be human physical and intellectual labour costs and the final 40% might be materials costs.

    The question and conundrum is this. Do rising energy prices affect only the energy input costs? The answer would seem to be no. However, whereas rising energy costs affect energy input costs in a 1 to 1 relationship, they do not affect material or intellectual inputs in the same ratio. The price of a material will reflect many input components but one of these components is clearly not “energy” or an energy component no matter how far we examine the matter in recursion. One of these components is an “ownership premium” at least under the capitalist mixed economy system of both public and private ownership spheres.

    It might be that the sovereign state as owner of all minerals of the nation extracts royalty payments which the miner must pay for the mineral rights or right to extract minerals. It might be that a private owner of mineral rights is extracting a premium. The Beverley Hills High School (admittedly a public school) receives or should have received royalties and maybe compensation (or the equivalent US terms) for oil extracted on its campus. Strange but true! You can check it out in Wikpedia.

    http://en.wikipedia.org/wiki/Beverly_Hills_High_School#Oil_wells

    However, back to the argument. This premium alone indicates that energy is not the only economic input cost to materials, even oil as a recovered material before it is burnt or put to other uses like lubrication or chemical feedstock. With intellectual inputs, an actuary or an architect could face rising food (energy input) costs and not take account of this at all for a very long time. Food would be a relatively low living cost compared to all other living costs. Thus food energy costs could rise and that component of the intellectual worker’s energy costs would not rise at all although accounting for other energy cost rises might well occur as in commuting and office energy costs.

    Thus energy costs and by implication energy leverging are important but not all-important in the economic cost and competition equation. This is true even though energy is a necessity for every process. Thus there is a kind of partial disconnect between productivity outputs and energy inputs. But I am not arguing in any way that this disconnect is total. It is proportional and it can improve, flatten out or even decline depending on a host of other factors.

    • I think that the part that is missing in your story in the issue of embedded energy, and also the time lag involved for embedded energy.

      Quite a bit of energy goes into embedded energy. A spear is an early example of embedded energy. Roads and pipelines are other examples. These are constantly degrading, and we need to keep using additional energy to upgrade them again.

      Another way embedded energy is used is in educating highly educated people. A society has to have a high amount of energy in it, in order that not everyone is involved in basic necessities like food production and gathering water. If there is enough energy, some people can set aside enough time from basic energy gathering tasks to write books and to become teachers. If a society is truly rich in energy, it can spare significant numbers of people from the workforce for long periods, to study in higher education and to work as teachers.

      The “emergy” branch of energy researchers (following H T Odum) have looked at this issue, and put numbers together of embedded energy for education. Hopefully this link works.

      Emergy of Education

      The embedded energy of education lasts for a while, but not forever. The knowledge could be come obsolete, if we need to go back to old ways, and the recent learning can no longer be applied. Obviously, individual people who have had the benefit of education will die as well. And there is a forgetting process, if we can’t keep adding to what we know with current information, as from the Internet.

      I tried to touch on a bit of this issue back in this post, but obviously need to do more.

      • Ikonoclast says:

        I have included the issue of embedded energy by implication.

        I wrote; “The price of a material will reflect many input components but one of these components is clearly not “energy” or an energy component no matter how far we examine the matter in recursion.”

        The statement “no matter how far we examine the matter in recursion” contains the implied recognition that embedded energy exists. Discovery of the full quantity of “embedded energy” is a recursive process. One must iteratively go back (recursion) calculating the energy embedded at each manufacture or process step. One must also account for the embedded energy in each human and piece of equipment uses in a manufacture process.

        Embedded energy is implicitly recognised in my analysis.

        • strav7 says:

          I don’t think anyone would disagree. I don’t know how many times I have wished that manufacturers would have to account for embedded energy in their products. It won’t happen during this rise and fall, though.

          • Ed Dolan says:

            Here is a question about imbedded energy: If all energy was priced at its full cost (including production costs plus all externalities, climate change, pollution ,etc.), would it not then be true that the prices of all products would correctly reflect the value of “embedded energy,” just as they now reflect “embedded labor” through both direct labor costs and labor cost components of inputs, capital, etc.? In other words, if we priced energy correctly, why would we need to keep track of embedded energy through some separate physical accounting method?

            • donsailorman says:

              Ed,
              You are entirely correct. For more than half a century mainstream economic literature has grappled with the problem in internalizing externalities through a system of taxes and subsidies. The theoretical and many of the practical issues in how high to tax or how much to subsidize have largely become solved problems. However, the huge stumbling block is politics.

              Democratic governments fail in at least three fatal ways:
              1. The rational ignorance effect, because why should a voter bother to inform herself when one vote is unlikely to decide a major election.
              2. The special-interest effect, whereby special-interest groups (especially vested interest groups) contribute to the election campaigns of politicians. We used to call this graft. Now it is standard operating procedure.
              3. The shortsightedness effect, which refers to the powerful force that acts on politicians to ignore consequences that will not happen until after the next election.

              Aristotle identified a fourth fatal flaw of pure democracy: The large majority of people are relatively poor, but by responding to demagogues who promise to tax the rich and to increase welfare benefits democracy inevitably becomes perverted into mob rule. From mob rule you typically find a transformation to a single tyrant or an oligarchy such as the infamous thirty tyrants of ancient Athens.

              Aristotle emphasized that all pure forms of government tend to self destruct. Hence he advocated a mixed kind of government which he called “polity.”

            • Ed Dolan says:

              Amen. Not much left to say after that.

            • It is possible that we are passing, or have passed, “peak democracy”. Even where democracy is in place, special interests seem to have increasing influence.

  5. davekimble2 says:

    If anyone has any doubt about how low wages can be driven by merciless capitalists, they only have to look to Asia, Africa and S. America. The gains won for the workers by trade unions in Europe and N. America are constantly being eroded by the capitalists, and globalisation, with the off-shoring of jobs, is their way of driving wages down to the lowest common denominator.

    Being rich, they are also politically powerful, and have bought the democratic system that we are all taught to have faith in. TweedleDum and TweedleDee parties vie for their turn at being in charge, but the outcome is always the same – the rich get richer and poor get poorer. Freedom is the freedom of the rich to do as they like, while the prisons fill up with the rest of us.

    If you express the opinion that Capitalism, Freedom and Democracy is a failure, you are branded an extremist and subjected to government spying, leading to worse. The only hope is that The Collapse comes soon and is total, taking us back to pre-Industrial Revolution days, which were tough but not as bad as living like the average Indian today.

    • Wealth is true freedom and the surfs get to go to their jobs early in the morning in a “right to work state”. Amen Bajesus.

    • I am not sure I would put it quite that way, but having visited India recently, I would agree that there is no way that the average American could live the way the average Indian does. The Indian government goes out of its way to create jobs for people, but they are $1 a day (or perhaps $2 day) jobs. I saw barefoot women sweeping the pavement with homemade brooms, as their job. (Certainly low external energy input!) This is a photo I took of workers harvesting rice with sickles. (There is embedded energy in the metal sickles–not much else.)

      Workers harvesting rice in India with sickles

    • with an average life expectancy of around 40?
      I can’t wait

  6. donsailorman says:

    Gail,
    As usual, I agree with you 100%. Let me recommend my favorite book on energy, as usual, available cheap on amazon.com MAN, ENERGY, SOCIETY by Earl Cook, 1976. The books published during the seventies on energy and the environment I find, by and large, to be better written and more compelling than books written during the twenty-first century. Another book I strongly recommend is by Barkley and Secker, ECONOMIC GROWTH: The Solution Becomes the problem. I used to use that book as one of my texts in my Environmental Economics class. The two other texts were one by Herman Dayly and also the most excellent book on the population problem ever written (IMO) : EXPLORING NEW ETHICS FOR SURVIVAL: The Voyage of the Spaceship Beagle by Garrett Hardin.

  7. Jeff Berner says:

    Hi Gail
    Much of your posting reminds of what Dana Meadows wrote in the update to “Limits to Growth”. Specifically, she mentioned that critics of the work failed to understand a key point that it was an incorrect price signal which was the cause of overshoot.

    So with the price signal indicating that wealth is to be made in ever scarcer fossil fuels, we are over-investing in massive deep water drilling rigs or tight gas and oil plays. And conversely under investing in efficiency, alternatives and rail/mass transit

    I have a different perspective on the issues of pensions and social security. In my view, pension systems are solely a means of allocating society’s physical wealth, i.e. food, housing, etc. In the absence of a robust pension system, a functional society as a whole will still find a means to ensure that the elderly are fed and housed.

    • Hi Jeff,
      I have a different prespective too. As an Insurance agent for the last 20 years and maybe over 5000 clients. What I have learned is a very large percent of adults out there can’t plan or take care of themselfs. If the system didn’t take a little bit of their income and put it away in a pension plan or social security. A lot of adults today would piss that savings away and we would have today a much higher level of poverty than we do.
      Employers, capitalist, managers, Republicans, businessperson, owners, the rich or whatever you want to call this group would love to stop paying their half into that Social Security system for their needed labor. It’s why they do every thing in their political power to destroy that safety net. What’s sad is that alot of younger adults don’t even realize their need for the system that keeps them out of poverty. Defined benefit plans for labor will rest with the dinosaurs before we run out of oil.

  8. Humans are capital not energy in the economic world. Like a computer that uses electricity and can do many difficult jobs or tasks. Humans need energy to function but are not used as energy. Human capital can be expense and employers like to replace humans with lower cost machines(or chinese slave labor). The only time I can think of humans used as energy is in the movie Soylent Green a science fiction film in 1973. Now I’m starting to understand why you don’t agree with economist on the economic future.

    • donsailorman says:

      Humans are still used as energy in both the few remaining hunting and gathering societies and also in horticultural societies. In the early eighteen hundreds in the U.S. wives were used as draft animals, pulling the plow, while the man worked behind the plow. There was a great scarcity of draft animals in the U.S. up to roughly 1840 when mules, oxen, and plow horses became widely available.

      Up until recently, a lot of human energy went into activities such as milking cows.

      Over the next one hundred years I think we will depend more and more on human energy. I also expect the return of slavery or serfdom and very likely plantation economies.

      • “Humans are capital not energy in the economic world”

        I will stand by my statement. Your car is capital. It gets you from here to there, but you don’t view your car as energy. Yes you could burn the seats to keep yourself warm for a few minutes. There is some stored energy in the battery and fuel tank. There is also heat energy in the vehicle. But the fossil fuel is the energy used in the car that gets you from here to there.

        So the next time you want to use your wife as a draft animal to plow your back yard. Just remember if you don’t feed her. She will run out of fuel and stop working because economily she is not energy, she is your capital equipment.

        • Economists have a lot of trouble understanding our current economy, because they do not take seriously the role of energy. The fact that they choose to call something “Capital” doesn’t mean that its function can’t be viewed in a quite different light.

          Economists keep talking about improvement of “labor productivity”. A large share of this is just better leveraging of human labor with machines operated using either electricity or oil. Instead of paying a human wages, business owners are able to feed the machines oil or electricity. The cost of the oil or electricity is much lower than the salaries of humans. If humans were slaves (and perhaps they are), then the parallel would be clearer.

      • I think all of us use human energy in some way in a job, if only to type on a keyboard. Our thinking capability counts for something too.

        A person working at MacDonaald’s provides physical labor. They are taking orders, making fries etc, assembling orders, handing orders to the client, taking money, and making change. If MacDoanald’s could figure out a way to do all these things with robots or computers, I expect they would.

        I wouldn’t be surprised if you are right about slavery or serfdom. Given a choice between starving, and a job working as a slave or serf, a lot of people would choose the slave/serf job.

  9. Gail gives us all a cheery thought for Christmas.
    looks like Santa has given up on us
    Still, an insightful piece that needed saying, it’s unfortunate that it doesn’t have a wider audience.
    When we called our website ‘Medieval Future’ 3 years ago, it sounded ridiculous…now it doesn’t

    • robert wilson says:

      Headwinds – is economic growth over?

      http://www.cepr.org/pubs/PolicyInsights/PolicyInsight63.pdf

      • really useful reference stuff there–thanks Robert

      • Bicycle Dave says:

        Hi Robert,

        Thanks for the link. I read the entire paper and found much of it very interesting. However, IMO, the author omits some very significant “Headwinds”

        – Although he mentions the problem of climate change when discussing energy, he doesn’t deal with depleting supplies of FF.
        – He seems to ignore the issue of 7B -> 10B human global population and instead seems to suggest more immigration would be a good idea.
        – Although he talks about the economic effects of globalization, he never mentions how our political global standing could be significantly degraded and the impacts that would have on our ability to get the resources to keep our military machine in its dominant global role.
        – He doesn’t seem to consider that the US could easily suffer political and social instability if our ability to sustain our technological lifestyle is compromised by shortages.

        But, still a good paper – every kid in high school should have to do a book report on this paper …. uhm, do kids still do book reports?

      • Interesting reference!

  10. Schalk says:

    As I see it the globalization movement is simply the global economy striving for equilibrium. Chinese wages are rocketing upwards at 13% pa while US wages are already back to levels last seen in the early nineties. The result is simply that China is rapidly increasing its consumption rate of expensive human energy (discretionary consumption) and pertroleum energy (autos).

    The day will come when expensive energy use in the US and China become sufficiently similar and outsourcing no longer makes economic sense. Question is just whether this rebalancing will be mostly due to increasing energy usage in China or decreasing energy usage in the US. When considering fixed planetary resource boundaries, it will probably be the latter…

    It will be very interesting to see how this plays out in the future though. As international trade diminishes, countries will no longer be able to tap into each others’ energy resources so lavishly. This could put densely populated countries like China and India at a great disadvantag and again start to build up global imbalances in per capita energy use.

    We certainly live in interesting times…

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