Our Investment Sinkhole Problem

We are used to expecting that more investment will yield more output, but in the real world, things don’t always work out that way.

Figure 1. Comparison of 2005 to 2011 percent change in real GDP vs percent change in oil consumption, both on a per capita basis. (GDP per capita on a PPP basis from World bank, oil consumption from BP's 2012 Statistical Review of World Energy.

Figure 1. Comparison of 2005 to 2011 percent change in real GDP vs percent change in oil consumption, both on a per capita basis. (GDP per capita on a PPP basis from World Bank, oil consumption from BP’s 2012 Statistical Review of World Energy.)

In Figure 1, we see that for several groupings, the increase (or decrease) in oil consumption tends to correlate with the increase (or decrease) in GDP. The usual pattern is that GDP growth is a little greater than oil consumption growth. This happens because of changes of various sorts: (a) Increasing substitution of other energy sources for oil, (b) Increased efficiency in using oil, and (c) A changing GDP mix away from producing goods, and toward producing services, leading to a proportionately lower need for oil and other energy products.

The situation is strikingly different for Saudi Arabia, however. A huge increase in oil consumption (Figure 1), and in fact in total energy consumption (Figure 2, below), does not seem to result in a corresponding rise in GDP.

Figure 2. Total primary energy consumed per capita, based on BP's 2012 Statistical Review of World Energy data and population data from EIA.

Figure 2. Total primary energy consumed per capita, based on BP’s 2012 Statistical Review of World Energy data and population data from EIA.

At least part of problem is that Saudi Arabia is reaching limits of various types. One of them is inadequate water for a rising population. Adding desalination plants adds huge costs and huge energy usage, but does not increase the standards of living of citizens. Instead, adding desalination plants simply allows the country to pump less water from its depleting aquifers.

To some extent, the same situation occurs in oil and gas fields. Expensive investment is required, but it is doubtful that there is an increase in capacity that is proportional to its cost. To a significant extent, new investment simply offsets a decline in production elsewhere, so maintains the status quo. It is expensive, but adds little to what gets measured as GDP.

The world outside of Saudi Arabia is now running into an investment sinkhole issue as well. This takes several forms: water limits that require deeper wells or desalination plants; oil and gas limits that require more expensive forms of extraction; and pollution limits requiring expensive adjustments to automobiles or to power plants.

These higher investment costs lead to higher end product costs of goods using these resources. These higher costs eventually transfer to other products that most of us consider essential: food because it uses much oil in growing and transport; electricity because it is associated with pollution controls; and metals for basic manufacturing, because they also use oil in extraction and transport.

Ultimately, these investment sinkholes seem likely to cause huge problems. In some sense, they mean the economy is becoming less efficient, rather than more efficient. From an investment point of view, they can expect to crowd out other types of investment. From a consumer’s point of view, they lead to a rising cost of essential products that can be expected to squeeze out other purchases.  

Why Investment Sinkholes Go Unrecognized

From the point of view of an individual investor, all that matters is whether he will get an adequate return on the investment he makes. If a city government decides to install a desalination plant, the investor’s primary concern is that someone (the government or those buying water) will pay enough money that he can make an adequate return on his investment over time. Citizens clearly need water. The only question is whether citizens can afford the desalinated water from their discretionary income. Obviously, if citizens spend more on desalinated water, the amount of discretionary income available for other goods will be reduced.

The same issue arises with pollution control equipment installed by a utility, or by an auto maker.  The need for pollution control equipment arises because of limits we are reaching–too many people in too small a space, and too many waste products for the environment to handle. The utility or auto makers adds what is mandated, since clearly, buyers of electricity or of an automobile will recognize the need for clean air, and will be willing to use some of their discretionary income for pollution control equipment. Mandated renewable energy requirements are another way that governments attempt to compensate for limits we are reaching. These, too, tend to impose higher costs, and indirectly reduce consumers’ discretionary income.

All types of mineral extraction, but particularly oil, eventually reach the situation where it takes an increasing amount of investment (money, energy products, and often water) to extract a given amount of resource. This situation arises because companies extract the cheapest to extract resources first, and move on to the more expensive to extract resources later. As consumers, we recognize the situation through rising commodity prices. There is generally a real issue behind the rising prices–not enough resource available in readily accessible locations, so we need to dig deeper, or apply more “high tech” solutions. These high tech solutions indirectly require more investment and more energy, as well.

While we don’t stop to think about what is happening, the reality is that increasingly less oil (or other product such as natural gas, coal, gold, or copper) is being produced, for the same investment dollar. As long as the price of the product keeps rising sufficiently to cover the higher cost of extraction, the investor is happy, even if the cost of the resource is becoming unbearably high for consumers.

The catch with energy products is that consumers really need the products extracted–the oil to grow the food they eat and for commuting, for example. We also know that in general, energy of some sort is required to manufacture every kind of product that is made, and is needed to enable nearly every kind of service. Oil is the most portable of the world’s energy sources, and because of this, is used in powering most types of vehicles and much portable equipment. It is also used as a raw material in many products. As a result, limits on oil supply are likely to have an adverse impact on the economy as a whole, and on economic growth.

The Oil and Gas Part of the Problem

A major issue today is that oil supply is already constrained–it is not rising very quickly on a world basis, no matter how much investment is made (Figure 3).

Figure 3. World oil supply with exponential trend lines fitted by author. Oil consumption data from BP 2012 Statistical Review of World Energy.

Figure 3. World oil supply with exponential trend lines fitted by author. Oil consumption data from BP 2012 Statistical Review of World Energy.

As noted above, the easy-to-extract oil and gas was extracted first. New development is increasingly occurring in expensive-to-extract locations, such as deep water, Canadian oil sands, arctic oil, and “tight oil” that requires fracking to extract. This oil requires more energy to produce, and more inputs of other sorts, such as water for fracking. Because of rising costs, the price of oil has tripled in the last 10 years.

Investment costs also continue to soar because of rising costs associated with exploration and production. Worldwide, oil and gas exploration and production spending increased by 19% in 2011 and 11% in 2012, according to Barclays Capital. Such spending produced only a modest increase in output–about 0.1% increase in crude oil production in 2011, and 2.2% increase in the first 10 months of 2012, based on EIA data. Natural gas production increased by 3.1% in 2011, according to BP. Estimates for 2012 are not yet available.

If we want to “grow” oil and gas production at all, businesses will need to keep investing increasing amounts of money (and energy) into oil and gas extraction. For this to happen, prices paid by consumers for oil and gas will need to continue to rise. In the US, there is a particular problem, because the selling price of natural gas is now far below what it costs shale gas producers to produce it–a price estimated to be $8 by Steve Kopits of Douglas Westwood. The Henry Hub spot natural gas price is now only $3.38.

The question now is whether oil and gas investment will keep rising fast enough to keep production rising. Barclays is forecasting only a 7% increase in worldwide oil and gas investment in 2013. According to the forecast, virtually none of the investment growth will come from North America, apparently because oil and gas prices are not currently high enough to justify the high-priced projects needed. The flat investment forecast by Barclays suggests a major disconnect between what the IEA is saying–that North America is on its way to becoming an energy exporter–and the actual actions of oil and gas companies based on current price levels. Of course, if oil and gas prices would go higher, more investment might be made–a point I made when writing about the IEA analysis.

What will the ultimate impact be on the economy?

I would argue that for most of the developed (OECD) countries, the ultimate impact will be  a long-term contraction of the economy, similar to that illustrated in Scenario 2 of Figure 4.

What happens if economy stops growing

Figure 4. Two views of future economic growth.

What happens is that as we increasingly reach limits, more and more investment capital (and physical use of oil) is allocated toward the investment sinkholes. This has a double  effect:

(1) The prices paid for resources that are subject in investment sinkholes need to continue to rise, in order to continue to attract enough investment capital. This is true both for goods that directly come from investment sinkholes (oil, gas and water) and from products that have a less direct connection, but depend on rising-cost inputs (such as food and electricity).

(2) Products outside of essential goods and services will increasingly be starved of investment capital and physical resources. This happens partly because of the greater investment needs in the sinkhole areas. Also, as consumers pay increasing amounts for essential goods and service because of (1), they cut back on the purchase of discretionary items, reducing demand for non-essentials.

In some real sense, because of the sinkhole investment phenomenon, we are getting less and less back for every dollar invested (and every barrel of oil invested). This phenomenon as applied to energy resources is sometimes referred to as declining Energy Return on Energy Invested.

As discussed above, world oil supply in recent years is quite close to flat (Figure 3). The flat supply of oil is further reduced by the additional oil investment required by sinkhole projects, such as the ones Saudi Arabia is undertaking. Also, there is a tendency for the developing world to attract a disproportionate share of the oil supply that is available, because they can leverage its use to a greater extent. Both of these phenomena lead to a shrinking oil supply for OECD countries.

The combination of shrinking OECD oil supply, together with the need for oil for many functions necessary for economic growth, leads to a tendency for the economies of OECD nations to shrink.  It is hard to see an end to this shrinkage, because there really is no end to the limits we are reaching. No one has invented a substitute for water, or for unpolluted air.  People talk about inventing a substitute for oil, but biofuels and intermittent electricity are very poor substitutes. Often substitutes have even higher costs, adding to the investment sinkhole problem, rather than solving it.

Where we are now

When resource prices rise, the impact is felt almost immediately. Salaries don’t rise at the same time oil prices rise, so consumers have to cut back on some purchases of discretionary goods and services. The initial impact is layoffs in discretionary sectors of the economy. Within a few years, however, the layoff problems are transformed into central government debt problems. This happens because governments need to pay benefits to laid-off workers at the same time they are collecting less in taxes.

The most recent time we experienced the full impact of rising commodity prices was in 2008-2009, but we are not yet over these problems. The US government now has a severe debt problem. As the government attempts to extricate itself from the high level of debt it has gotten itself into, citizens are again likely to see their budgets squeezed because of  higher taxes, lay-offs of government workers, and reduced government benefits. As a result, consumers will have less to spend on discretionary goods and service. Layoffs will occur in discretionary sectors of the economy, eventually leading to more recession.

Over time, we can expect the investment sinkhole problem to get worse. In time, the impact is likely to look like long-term contraction, as illustrated in Scenario 2 of Figure 4.

Is there an End to the Contraction?

It is hard to see a favorable outcome to the continued contraction. Our current financial system depends on long-term growth. The impact on it is likely to be huge stress on the financial system and a large number of debt defaults. It is even possible we will see a collapse of the financial system, or of some governments.

In a way, what we are talking about is the Limits to Growth problem modeled in the 1972 book by that name. It is the fact that we are reaching limits in many ways simultaneously that is causing our problem. There are theoretical ways around individual limits, but putting them together makes the cost impossibly high for the consumer, and places huge financial stress on governments.

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 financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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67 Responses to Our Investment Sinkhole Problem

  1. Christopher Johnson says:

    Pace Malthus. One in one hundred allowed to reproduce? Thanks. And who decides? Shall the Pentagon start printing lottery tickets? The economics of declining generations might be as decisive as the uproar of the religious is noisy.

  2. Tom Reis says:

    http://www.boerse-express.com/mobile#/mobile/belogs/get_belog/683419 blogged @ Austrian Financial Blog as a answer to Mainstream Interview with OMV CEO Roiss

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  16. Bill Simpson says:

    Your readers might want to visit the Zero Hedge website and search for Kyle Bass. If you type his name into the Zero Hedge search box, a bunch of his CNBC TV interview videos will come up in articles on Zero Hedge. He made a huge fortune betting against the subprime debt, as shown in the ‘CNBC Originals’ documentary, ‘House of Cards’ available on hulu. Anyway, he is now predicting the collapse of the Japanese debt bubble within the next couple of years. With a 240% debt to GNP ratio, and rapid additional debt creation being planned, they soon won’t be able to pay the interest on their debt without creating more and more money. That will raise interest rates even more, creating a vicious circle. Japan will be unable to pay its’ debt with paper money with real value. That will happen in the world’s third largest economy. I don’t think it will happen in the next couple of years, but it will happen, especially since the Japanese are shutting down their nuclear power plants forcing them to import expensive natural gas. Gas isn’t cheap over there in Asia, like it is here.
    So Japan may be the first developed country to undergo the collapse you have predicted. And if billionaire Kyle Bass is correct, it won’t be gradual, like in your Figure 4. The question is, since we can’t stop it, how do we make money on it? Any ideas, Gail?

    • SlowRider says:

      Other investment experts assume that Japan will be forced to go back to nuclear, in fact that we will be seeing a global renaissance of nuclear. Uranium is rather cheap right now, because Germany and Japan said they will stop using it. But Russian export of cheap demilitarized uranium is declining. It might be possible to make money buying uranium assets now.

    • I am not good on the “making money” angle. Shortly after the Fukushima Earthquake, I heard a talk by James Howard Kunstler in which he predicted that Japan would be the first first-world country to collapse. I may be making more out of it than I should be–when I talked to him later, it seems like he had toned down his forecast.

      I think we have a contest among a number of countries on timing–Japan (for all of its debt); the Eurozone falling apart, taking many countries down at the same time; the United States and its funding problems; and Britain with its big financial industry, which could implode pretty easily.

      • SlowRider says:

        Thanks for your reply. I wasn’t really making the point specifically for the money angle, but rather to continue on the previous comment. Also, following the money can often give many good indications – not so much about the fundamentals, but about near term developments and decisions by the powerful.
        Europe “falling apart” is a very U.S. centric perspective, it won’t happen soon. Even if Greek, Portugal and Spain leave the currency, that would make the Euro stronger, and not damage the world economy much. France and Italy will stay in for many years. After the German elections this fall, Germany will slowly step away from it’s hawkish position, especially if the left wins. The Euro has never been weak for money printing like the Dollar or Yen, but for (so far irrational) fear of disruption. The ECB hasn’t even started to print big time, they have lots of room for that. And they get all the swaps from the Fed they ask for. It’s all about bailing out insolvent European banks. In the few cases that came up, they immediately stepped in, and will continue to do so.

        • We seem to have different views of the European situation. For example, I think that Germany would be in very bad shape without Greek, Portugal, and Spain, because the Euro would float higher. Its a co-dependency problem.

          • SlowRider says:

            German exports are at record highs, but at the same time they are just slightly higher than German imports! (I don’t have the exact numbers ready)
            Wouldn’t you agree that a strong currency is positive to buy energy and resources for a resource-poor country?

            Germany has been export champion already in the good old times of the (very strong) D-Mark. Germans workers could afford cheap holiday destinations – like Spain and Italy! That was European harmony by accepting the natural differences, now we have crisis by denying them.

            The Suiss central bank just went into the same thinking model – cheapen your currency to help export companies. But the Suiss people liked very much the purchasing power their strong Frank enjoyed in Italy or France.

            As Jim Rickards said it so well – nobody can win in a currency war.

            • I will have to admit Germany has always been hard working and resourceful. A strong currency would help keep import cost down. Maybe they can succeed in a competitive world market place.

  17. Don Stewart says:

    Dear Gail
    Very good post.

    As an example of something that might become (or maybe already is) a sinkhole, consider Agriculture. The USDA has just issued a very detailed report on climate change and agriculture. There are several lead authors and over 150 contributing scientists.


    Let me note that plants flourished during the age of dinosaurs, when CO2 levels were higher than they are now and when our fossil fuels were mostly laid down. Plants live on CO2. Nevertheless, there are challenges and the report tries to enumerate them.

    I was in a meeting with one of the lead authors on Friday, Laura Lengnick. She said that, in her opinion, what we really need is ‘to design a self-organizing ecosystem capable of sustained food and fiber production using renewable resources in a variable climate’. I can’t argue with that…it sounds like Permaculture or Food Forests or similar endeavors. But if you look into the details of what is published, you will find many, many studies which change one variable only, while assuming essentially unlimited availability of other variables. For example, a study may quantify the amount of the increase in a particular crop’s yield with an increase in CO2, while assuming that the availability of oil, phosphate rock fertilizers, and irrigation water are unlimited. But suppose we are faced with the situation where CO2 increases and all those other factors are quite limited.

    I understand why scientific studies tend to control everything except one variable. But the net result, I think, is that we really have little idea what will happen to yields under the most likely scenario.

    Toward the end of the report, the authors lament that humans, including farmers, don’t make entirely rational decisions and thus the actions which they believe must be taken to mitigate climate change impacts on agriculture may not, in fact, be executed.

    Here is where I see the potential for an Investment Sinkhole. Large investments which assume that ‘everything else will be equal’ are likely to be a waste of money. I think that investments in very robust things like forming the earth to slow down and hold water are likely to pay off–while building more big dams to store water probably won’t. Investments in retaining nutrients such as phosphates are likely to pay off, while investments made assuming that the supply of phosphate rock is unlimited probably won’t.

    I am sympathetic to the authors in terms of the problems such an analysis would have raised, but I think that Laura Lengnick’s one sentence description of what we need to do is on the money.

    I think that there are probably similar potential sinkholes everywhere in our economy. Thus, the current Keynesian thinking of just spending money to try to get everything started again is desperately wrong.

    Don Stewart

    • You raise very good points.

      I think nature has provided a perfect adaptation for changing climate. Every plant gives off seeds that differ a bit from the parent. The seeds that are best adapted to the changing climate survive. Also, seeds blow in from neighboring areas. If they are better adapted, they survive.

      Of course, we have very fixed ideas about what needs to grow where. Certain areas have land that is better adapted for farming. We would like those areas to produce the crops we are accustomed to, in part because they have very high yields per acre, when adequate fertilizer and water are used, and when steps are taken to prevent “weeds” and crop loss to pests, both large (deer, squirrels) and tiny. For most of humans history, we were hunter-gathers and we could easily adapt to changing climate.

      Any change from our current agricultural system has big costs involved, I expect, so is in a way, an “investment sinkhole”. Even over the long run, we may not be able to grow as much per acre, and harvesting will likely require a good deal more hand labor.

      • Don Stewart says:

        Since you are a skilled actuary….which is the best choice for the American citizen
        1. Have a Congress which denies climate change and cope as best you can
        2. Have a Congress which concludes that climate change is real and that they have a duty (opportunity?) to do something about mitigating the harm?

        I sort of lean toward coping. I figure the second alternative is just a wonderful opportunity for them to give trillions to those who funded them.

        Don Stewart

        • I am afraid I am not at all convinced that there really is a good way of mitigating climate change, other than reducing population significantly. Carey King reminded me recently of a quote from Joe Tainter and Tad Patzek’s book. “Drilling Down: The Gulf Oil Debacle and Our Energy Dilemma.” The quote is, “… contrary to what is often suggested in debates about energy, climate, and our future, it is usually not possible for a society to reduce its consumption of resources voluntarily over the long term.”

          I personally think that the money spent on carbon capture and storage research so far is just plain silly. The scheme has little chance of working, and burns up our coal supply more quickly. I think I agree with you–the government would simply spend more money on CC&S and other equally ridiculous schemes.

  18. Jonathan Madden says:

    A comment in a previous article is very pertinent: that the cost of effecting infrastructure repairs today is rising, and is in excess or considerably in excess of the original construction cost due to rising oil and other commodity prices.
    One tends to look upon crumbling roads and the like and wonder why the civic authority seemingly cannot get its act together and keep its estate in good repair. Just standing still is becoming a demanding sinkhole.

    • I agree. Exactly. We can’t afford to maintain the roads, waterways, water and sewer systems, and electricity transmission lines we have built. Building electric cars doesn’t fix the problem, especially if they are even higher-cost than other cars.

  19. davefairtex says:

    I couldn’t resist doing the math on TCMDO over that same period (2005=39,456, 2012Q3=55,309) which yields a total increase in money & credit of 40%. So if we look at nominal GDP growth through the lens of the increase in money & credit, things look even worse.

  20. davefairtex says:

    Gail is correct about the GDP calculation. Here is how to verify. A chart of nominal GDP divided by US Population (Fred: GDP/POP) shows per cap nominal GDP of 41,863 in 2005 and 50,280 in 2013. Doing the math (50,280/41,863) shows a 20% change in per cap GDP over that period. A chart of all items CPI (Fred: USACPIALLMINMEI) shows a value 97.65 in 2005 and 118.49 in 2013. Doing the math (118.49/97.65) math shows CPI grew 21% over that period.

    I was surprised by this result as well.

    • Huh. Well I’ll be!

      On a per capita basis, my intuition/recollection of the numbers was not right at all. This is an interesting result that is worth pondering as it explains much…

      Just for fun, without the per capita adjustment, nominal GDP was $12.9 T in Q4 2005 and $15.8 T in Q4 which yields an annualized growth rate of 2.9%.

      Using the CPI numbers provided, I derive an annualized CPI rate of 2.8%. Subtracting the two gives us the marginally positive number for real GDP growth as reported (more or less, the deflator varies slightly from CPI).

      What this tells us is that *cough*highoilprices*cough*toomuchdebt*cough*cough the economy has been mired since 2005. With the Fed attempting to “fix” this situation by cramming more money and debt into the system we can all wonder as to the risks being undertaken in our collective names by this experiment.

  21. we ‘invest’ to get a return on ‘product’
    this is the fundamental law under which we have elected to live, and this law applies to all species.
    Whoever made the first metal spear or arrowhead ‘invested’ an enormous amount of effort to do it. When perfected, It gave the group he belonged to an equally large advantage in energy return, because metal spears, or arrowheads produced more meat-energy. That produced a better survival chance for the group and (more importantly) its offspring. Until of course, too many spears were manufactured which depleted the meat-energy sources and forced the group to die back.
    Now fast forward to the invention of the oil or electrically driven pump.
    the first desert dweller to get hold of one immediately had an advantage in being able to source more water and thus grow more food (energy) for his tribe.
    But then millions of desert dwellers got hold of pumps
    The link between the two eras is blindingly obvious, but most reject the connection, and expect to go on pumping more and more water irrespective of logic or common sense. (the same applies to the American midwest)
    This is where Saudi Arabia is right now, The bounty of oil boosted their population 30 fold in a century, with the blind expectation that ‘investment’ will continue to pay ‘dividends’ for no better reason than it always has, forgetting that ‘always’ in this context has been a hundred years. Oil provided food and water, the essential factors for population explosion.
    If you want to scare yourself even more, consider the ultimate insanity, that Saudi expects to become an oil importer by 2030! by then Saudi will have an even bigger population of unemployable young men, faced with a non existent future in a country that will be unable to supply even their most basic needs. One sees the towers of the Gulf States and is forcefully reminded of Ozymandias: “look on my works ye mighty, and despair” when thinking of the water investment necessary to keep them viable

    • Thanks! I am afraid you are right.

      One thing I hadn’t realized until recently is that allowing wealthy men to have multiple wives allows population to increase more quickly than otherwise. This is an observation made in Secular Cycles by Peter Turchin and Surgey Nevedof. They say that while the full collapse cycle takes 300 years in countries that allow only one wife, it takes “on the order of one century” when multiple wives are allowed for the elite. I think Saudi Arabia and several other Middle Eastern countries may be proving that true.

      • pretty much every society has allowed wealthy men to have multiple wives. They just called them concubines, mistresses–whatever. (which is why you see a bimbo on the arm of a billionaire) The effect was the same, lots of offspring to carry the rich man’s genes. Muslims just formalised it to four. When the muslims spread their empire across Africa and into Spain, many were killed, so that left ‘spare’ females who needed looking after in what could be a dangerous environment . I believe the muslim faith only allows 4 wives if they can be afforded. The ‘century’ of multiple wives fits but only when linked to the ‘oil century’, without oil, muslim countries bumbled along OK for 1500 years, with population controlled by a harsh environment.
        Due to oil, Saudi has the wackiest situation of all, where 30000 men can claim relation to the royal family, and thus get paid “royalties’ ( that word takes on an interesting context there) from oil revenues, for doing nothing at all. ..they are offspring of the royal family and thus ‘princes’ .
        post oil they will just go back to camel trading and goat herding, but the transition will be traumatic.
        But overall having multi-offspring works as long as society is expanding in resources and geography. In a dangerous world too, females can feel safer under the protection of a wealthy man, even if it does mean sharing his favours. It’s a balance. As a king’s mistress you might get a large mansion for providing a refuge from a nagging queen !!
        In the 1600s when the USA was ’empty’, we in Europe packed our excess offspring, rich and poor alike, off there to fill it up. There’s wonderful historical accounts of idle rich young men arriving in the early colonies with the rude shock of being told that if they didn’t work they didn’t eat.
        Every society adjusts itself to current needs, oil just skewed everything. ,

  22. Mark Miller says:

    Well done and, as usual, another interesting angle. I especially appreciated Figure 1, which says so much about how various countries are able to leverage oil. [Note: I think there’s a small typo “desalination plan” should be “desalination plant”(?)]

  23. What should be obvious is the whole meme is wrong to begin with.

    Equating “Consumption” with “Growth” of anything is simply wrong. Its not GROSS that is important, but NET GDP. Fact is the NET of Industrial living is NEGATIVE, By consuming energy faster than it gets replenished,eventually you burn up the capital.

    Steve on EU covers this ofen enough, so I really do wonder why taking gross GDP figures as important is done at all? The NET is what is important, not the GROSS.


    • Good point! And even within gross GDP, we don’t make an offset for additional debt incurred to obtain this increase in output.

      The people who are convinced “renewables” will save us are not aware that they are drawing down resources as well, although arguably not as fast. They use fossil fuels in their construction and transport.

      • It would be interesting to try to figure out NDP (Net GDP is poor phrasing, fixing it here). How Negative are we REALLY, if you take into account all the liabilities incurred? This would better measure how fast we are going down the sinkhole. You would have to factor in energy depletion rates, ecological damage and cleanup costs, Nuke Plant decommissioning costs, etc. IOW, all the stuff modern economistas ignore.

        A job for a CPA or maybe an Actuary. 😉


        • We already know the results would be depressing. Economists must be amazingly creative to come up with their view of reality.

          Just backing out the impact of more debt, by itself, would make the results look much worse.

        • Bicycle Dave says:

          Hi RE:

          What should be obvious is the whole meme is wrong to begin with.

          A meme (pron.: meem) is “an idea, behavior or style that spreads from person to person within a culture.”

          So, I assume that you are saying that Western culture generally holds to the idea (and behaves accordingly) that consumption of natural resources is intrinsically “good” and you feel this is a “bad” idea. Also, because you used the word “meme”, this implies that this “consumption is good” idea is baked into Western culture and, by definition, can only be changed in an evolutionary fashion – not quickly by force of reason or law. Of course, die-offs or extinction can have a very quick impact on evolutionary processes.

          So, your reasoning regarding negative NDP implies a very deep conflict with the general belief that humans are entitled to have an ever increasing positive NDP. And, given the evolutionary underpinnings involved, it is highly doubtful that a cultural shift to an acceptance of less resource consumption can occur without something akin to a “cultural mutation”. Mutations occur all the time, the trick is for a mutation to provide an advantage for survival and replication.

          From my POV, first I doubt that our existing culture can survive and I suspect its demise will be very traumatic. But, more importantly, what mutations will help our species to survive for thousands of more years assuming we don’t simply go extinct? Gail and some other here argue that religion as a meme will prove most beneficial. It seems to me that a meme founded on myths about a supernatural realm being part of our existence will not serve us well. Survival of our species might depend upon memes that value reason and evidence based belief systems. If the latter is the case, then it should be pretty obvious what future generations might value.

          • Yes I agree here. I think its a general problem that the more you believe in this “supernatural realm” the less responsible you might feel for the real physical one we are all part of. I often feel that the more radical a religion is, the less it is likely to care much for the planet and the problems we are facing here, and often don’t care much for life either due to the “better life in the afterlife” kind of thinking. You cant generalise this ofc, and there are religious communities that does more for conservation than the ones who believe in the dollar.

            The cultural shift that is needed is for people to stop believing in otherworldly deities and learn that we are very physical and fragile organic lifeforms in all sorts of shapes living in some sort of symbiosis on this planet which took billions of years to form (a long timeframe of our history might give a person more respect than the whim of a god with a magical stick conjuring humanity). It is clearly in our power to wreck havoc to all life seriously if we continue the path we are currently on. No doubt the earth will survive and most likely many species as well (but very few mammals). But less belief that “god” will show up magically and conjure up a solution would be beneficial. Likewise less belief in that “god” will punish us for doing bad things to the planet is also advised as it shifts our responsibility from the predicament at hand to one of resignation and “ragnarok” kind of prophetizing. Like any psychologist will tell you, that the only way to deal with a problem is to act and deal with it, take responsibility and use your time wisely.

          • I suspect that the only real approach that will allow humans to survive is a voluntary major reduction in population. I don’t mean one child per family–maybe one child per 100 families. We will still have the huge problem of those children tending to reproduce in greater numbers than 2 per parent, or alternatively, allowing children/adults to die through natural selection. We are, literally, Too Smart for our Own Good.

            Religion doesn’t have anything to do with this.

          • Bicycle Dave says:

            Hi Gail & John,

            I totally agree with you regarding the 1 child per 100 families – I believe I did a back-of-napkin calculation a while back and posted a comment here to that effect. I recall the goal was to get to 4B by 2100. I also recall, it was a sliding scale where the 100 number decreased over time if we stayed on track.

            I totally disagree with you that “Religion doesn’t have anything to do with this” as nothing could be more tightly coupled to human reproduction than religion. To date, I’ve not noticed any major religions that are promoting the birth rate plan we both think is needed and is easily within the technical capability of humans to enact. But, we’ve been down this path before….

            BTW, I think John Christian’s insight is valuable and should be a part of this discussion. The fact this type of discussion is so taboo for most people demonstrates one of the main problems of faith based belief systems. Until the main tenets of the major religions can be openly analyzed and discussed I doubt there is much hope for the type of global cooperation we need to avoid a collapse. Also, as John implied with his comment about “ones who believe in the dollar”, there are equally powerful memes regarding economics and politics. For example, why many people adhere to ideologies espousing free markets vs socialism or conservative vs liberal is another set of syndromes that need to be part of the fabric of any serious discussion as these belief systems often follow the same type of blind faith.

    • GermanStacker says:

      Chinese industrial wastelands, or the Alberta tar sands are very good examples how we get some more “GDP”, externalizing many costs. German high-tech companies, on the other hand, are making a lot of money dealing with these costs for customers willing to pay for things like a nice environment and good health. But as you say, this is not adding to quality of life, just maintaining it. In some Chinese cities, rich people have their children driven to school in special cars with air cleaning systems, so that they don’t have to breathe the smog. That’s also creating “GDP”. I’m wondering how long the model is going to work.

  24. PeteTheBee says:

    The “current contraction” only exists if you massage the data beyond all recognition.

    The global per capita GDP measured in inflation-adjusted dollars hit an all time high in 2011. That is hardly a contraction.

    • World is different from individual countries, isn’t it?

      • Lurker says:

        You are right, China and India alone have over 30% of the world population. The increase in their GDP, especially China, helps to distort the statistics in the way PeteTheBee sees them.

      • PeteTheBee says:

        ok, so you can cherry pick some countries to pretend that TEOTWAWKI is occurring.

        But it isn’t. The global economy is growing. I’m sure if the global economy was declining while the European economy was booming you would almost the exact same article. That’s called propaganda – same message, no matter what the facts are.

  25. Jeff Hains says:

    Re-blogged at http://six-labs.tumblr.com/

    Thank you for the years of work, Gail. You’re that brave voice; signal light before the storm.

  26. wotfigo says:

    In Figure 1 the Red GDP Bar for the USA does not show on my computer. It is possibly Zero % & maybe hidden on the base line but I can’t see it.
    In any case Gail, Great article as always. Basically an EROEI problem which is multisystemic now as the planet surpasses the resource limits to sustaining the massive global population. There is less & less “product” available per unit of energy invested.
    We need a new measurement PPOEI Product Produced On Energy Invested. This applies to food, water, minerals, (many not all) consumer items, & even money itself. Money is a de facto representation of energy anyhow. And more & more money is needed in the form of debt (future energy) just to try & maintain the wealthy life style we once had when we were energy & resource rich. And we are not even able to do that despite massive government debt in every nation. Quality of life for many people all around the world continues its inexorable decline.all due to this same problem.
    Basically, the pie keeps on getting smaller while the number of humans wanting a piece of it keeps on increasing. There is only one way to go with this trend.
    Thank you.

    • Thank you for your comment.

      Regarding the missing bar, it is slightly below zero, but less than 0.1%, so doesn’t show up. Sorry about that!

      I agree that we need some sort of “product” available per dollar of energy invested, for quite a lot of things. As I was writing the article, I was thinking about other things that we are getting less “product” back, as well. If the product of healthcare is good health, I would argue that we have been getting very little return over the years, certainly a lot less than other countries have been getting. We have been instead getting a lot of fancy machines and specialists, when more emphasis on food quality and lifestyle would have likely yielded much better results.

      Another product with very poor investment returns over the years is education. With increasingly high tuition, room and board for colleges and universities, students now live in apartments instead of sharing a single room. Universities are bloated with administrators. Professors are required to spend a significant portion of their time on research. The catch is, that the research rarely provides much new insight, because it must be churned out at a rapid rate, and pass peer review, so tends not to fall far from the status quo. This is a problem when the base thinking is wrong, as in economics. Also, schools can now support high paid football coaches, and football stadiums, to enhance their prestige.

      Cul de sac streets are another product with a real loss of practical utility. Simple grids would save a huge amount of energy.

      When I went to college, four years of private college tuition, room and board was about equivalent to my starting salary out of college (actually graduate school, but males were making the same amount with a BA). My first car was equivalent in cost to about three month’s pay. These relationships don’t hold any more.

      • Gail,
        Again a very nice article!

        I don’t have the data in front of me, but it’s not likely to be the case that the US has either a nominal or real GDP ‘growth’ of -0.1% between 2005 and 2011.

        The most recent quarter, Q4-12, was -0.1% but (going from memory here) in 2005 US GDP was in the vicinity of $12 T and hit $15 T in 2011. That would give us growth in the range of 15% to 20% depending on what the actual numbers are?

        • I am wondering if you missed the “per capita” part of the caption. All of my calculations are on a per capita basis, to facilitate comparison among countries. I had more charts, but as you know, quite a few end up on the cutting room floor.

          The numbers I was using were from the World Bank data set. They are on a PPP basis in 2005$, so are a bit different from what I am used to working with (but I thought that they were more “official”, since that is what the IMF uses in its forecasts.) According to that data, the US per capita GDP was $42,516.39 in 2005 and $42,485.98 in 2011.

          Since you raised the question, I also calculated the numbers using real GDP in $2005, not on a PPP basis. With that approach, I am getting $42,681 in 2005, and $42,422 in 2011. Different population numbers might change those amounts a tiny bit.

          Make sure what you are looking at is “per capita.” In my comparison, both oil use and GDP are per capita, so it is an “apples to apples” comparison.

          • Even with the Per Capita adjustment, something doesn’t make sense here. Population in the US is growing at ~1% and real GDP at closer to ~3% over the time frame you are using. There ‘should’ be a positive difference there even on a per capita basis.

            I suppose once a “PPP” adjustment is thrown in then a different result can be found, but I am unsure what sorts of statistical juju is involved there…I am only familiar with the already too-messy and massaged GDP numbers and have not delved into the procedures necessary to compute the parity numbers.

            Without really diving in to figure it all out, I’m just saying there’s something in the -0.1% result that does not square up with the reported numbers as I am familiar with them, and perhaps others may have the same quizzical reaction. I think the explanation lies in the fact that all of the reported GDP numbers are in current dollars and the various PPP and per captia series are in chained dollars….those two series give very, very different views of GDP growth over time with current dollars being a bit more than 2x larger than chained dollars over the past ten years.

            • I think you may be thinking about GDP numbers as originally set forth. The BEA has revised those downward. This is one news release they put out. As I recall, they initially underestimated the inflation rate, and then adjusted several years’ real GDP downward at the same time.

              What I am doing in Figure 1 is comparing US real GDP in 2011 to the real GDP in 2005, (adjusted to per capita basis, of course). This is equivalent to the geometric average of the GDP increases from 2006 through 2011. If I look at Bureau of Economic Analysis Table 1.1.1, what is recorded as the real GDP for those years is as follows:

              2006 2.7%
              2007 1.9%
              2008 -0.3%
              2009 -3.1%
              2010 2.4%
              2011 1.8%

              In that six year period, not a single year exceed 3.0%, so your recollection of a 3.0% average increase in real GDP for that period is not in agreement with what the BEA is now saying about those years. (The year 2012 is shown at 2.2%, so it does not exceed 3.0% either.) The arithmetic average of the numbers provided is 0.9%. If population is growing at “about 1%”, the first pass estimate is that a contraction of about 0.1% per year has taken place during this period on a per capita basis, which is very close to what I am showing.

              If we look at the calculation instead more the way I did it (but using official US numbers, not PPP numbers), real GDP for 2011 is 13.299 trillion. Real GDP for 2005 is 12.623 trillion. The 6 year percentage change is 5.4%. On average, GDP would have to increase by 0.9% per year to reach this amount in six years (based on 1.05356 ^ (1/6)). Backing out the 1% per year population growth gives exactly the same numbers as computed all of the other ways–contraction of 0.1% per year.

              I think part of the problem with real GDP numbers is that the inflation number is not tied to the CPI-Urban, or to any other recognized inflation number. There is a great temptation to make reported real GDP look better than it really is, by underestimating the inflation rate. Once in a while reality catches up, and BEA is forced to go back and restate several years GDP at the same time. I am fairly certain that this is what happened in the numbers you are recalling, so they aren’t now being reported the way you recall them.

              This is a link to an article by Dave Cohen about the general issue. I was trying to find an article about the big restatement, but didn’t notice one. I don’t recall the press making a big deal about it.

          • Joe Clarkson says:


            I believe Chris is right. My reading of the World Bank per capita real GDP data shows the US gaining 13.2% between 2005-2011. PPP does not normally apply to the US, but rather to the purchasing power of “international dollars” as compared with a dollar spent in the US.

      • Toozy Psiatin says:

        Gail just some additional comments :

        US health care system is highly commercialized and geared towards options with higher returns. Drug research, expensive equipment etc are potentially highly profitable areas.
        More emphasis on preventive medicine, lifestyle modifications won’t yield the same ROI.

        Most of today’s health related issues are related to increased many fold level of stress in society as a whole (the thing which is undeniable but hard to quantify). Rise in obesity rates, diabetes, suicides, alcoholism, epidemic of mental deceases etc are consequence of financial insecurity. It is hard to retain composure checking email when you expect a huge credit card bill or foreclosure notice. Mortality & morbidity rates for preventable deceases is and will remain the best indicator of the state of society.

        Income redistribution between countries is a reality and the Western World has nobody to blame for this but itself. It traded profit for jobs and it got none of the both at the end. In 1990 doctor’s salary in Russia was about $20/month whereas welfare assistance in Canada was $1350/months. Back then most people in Russia couldn’t even dream of having VCR ($200), let alone a car. There was a huge incentive for people to emigrate and millions did so. Now nurse’s salary in Russia starts from $500 in province and $1000 in Moscow. Real value of dollar plunged at least 30 fold for the last 20 years. The same apartment which was worth $3K in 1992 has sold last year for about $80K.
        People in developing countries are acutely aware of situation in western word and reluctant to emigrate. There is a huge influx uneducated immigrants from Mexico though but their value as an asset for the modern economy is questionable. Western world finds it harder to attract human material of high value.

      • wotfigo says:

        “The Relationships Don’t Hold Up Anymore”. Absolutely correct & this is the problem of diminishing returns right here.
        My example; In 1970 I was earning just under $80 pw pre tax, take home pay $62. I lived quite well. Shared rent with my girlfriend for a water front apartment was $20, food for the week $20 (each) And to fill up my V8 car was around $2. So for 1/40th of my salary I could fill up a big car. Today that big car (70 litre fuel tank) costs just under $100 to fill. I live in Australia where we are paying $!.50 per litre.
        So I need to be earning 40 times my fuel costs to match my 1970 expenses. That would be a salary of $4,000 a week or over $200,000 per year. Yeah right. The current average Australian wage is $55,000.
        Don’t even think of extrapolating this horror trend another 40 years into the future. If there are still privately owned petrol driven cars on the road then (there won’t be) then the only owners will be Larry Page, Richard Branson, Bill Gates & assorted Middle Eastern Sheiks.
        The relationships do not hold any more – so right This is exactly the diminishing returns from increasing energy expended on nearly ALL products that we are witnessing as the cheap easy to get stuff disappears.
        I hope you do a post on this one day.
        BTW John Michael Greer has just written on the decline in American Education in his latest post on The Archdruid Report if you haven’t seen it.

    • strav7 says:

      Money is a de facto representation of
      1. Energy
      2. Other natural resources (iron, steel, phosphorous, whatever)
      3. National and international political trust (I don’t know if trust is the right word.. Has to do with perceived risk).
      Energy does seem to be the limiting factor, in our worldly example.
      Still monetary value is an aggregate of ALL of a nation’s resources. But I agree with you in principle.

  27. bob legg says:

    Barclay’s correctly spelt first time, two more Barklay’s not correct.

    Well argued article, thanks.

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