Why a Finite World is a Problem

Why is a finite world a problem? I can think of many answers:

1. A finite world is a problem because we and all of the other creatures living in this world share the same piece of “real estate.” If humans use increasingly more resources, other species necessarily use less. Even “renewable” resources are shared with other species. If humans use more, other species must use less. Solar panels covering the desert floor interfere with normal wildlife; the use of plants for biofuels means less area is available for planting food and for vegetation preferred by desirable insects, such as bees.

2. A finite world is governed by cycles. We like to project in straight lines or as constant percentage increases, but the real world doesn’t follow such patterns. Each day has 24 hours. Water moves in waves. Humans are born, mature, and die. A resource is extracted from an area, and the area suddenly becomes much poorer once the income from those exports is removed. Once a country becomes poorer, fighting is likely to break out. A recent example of this is Egypt’s loss of oil exports, about the time of the Arab Spring uprisings in 2011 (Figure 1). The fighting has not yet stopped. 

Figure 1. Egypt's oil production and consumption, based on BP's 2013 Statistical Review of World Energy data.

Figure 1. Egypt’s oil production and consumption, based on BP’s 2013 Statistical Review of World Energy data.

The interconnectedness of resources with the way economies work, and the problems that occur when those resources are not present, make the future much less predictable than most models would suggest.

3.  A finite world means that we eventually run short of easy-to-extract resources of many types, including fossil fuels, uranium, and metals.  This doesn’t mean that we will “run out” of these resources. Instead, it means that the extraction process will become more expensive for these fuels and metals, unless technology somehow acts to hold costs down. If extraction costs rise, anything made using these fuels and metals becomes more expensive, assuming businesses selling these products are able to recover their costs. (If they don’t, they go out of business, quickly!) Figure 2 shows that a recent turning point toward higher costs came in 2002, for both energy products and base metals.

Figure 2. World Bank Energy (oil, natural gas, and coal) and Base Metals price indices, using 2005 US dollars, indexed to 2010 = 100.  Data source: World Bank.

Figure 2. World Bank Energy (oil, natural gas, and coal) and Base Metals price indices, using 2005 US dollars, indexed to 2010 = 100. Base metals exclude iron. Data source: World Bank.

4. A finite world means that globalization will prove to be a major problem, because it added proportionately far more humans to world demand than it added undeveloped resources to world supply. China was added to the World Trade Organization in December 2001. Its use of fuels of all types skyrocketed quickly soon afterward (Figure 3, below). As noted in Item 3 above, the turning point for prices of fuels and metals was in 2002. In my view, this was not a coincidence–it was connected with rising demand from China, as well as the fact that we had extracted a considerable share of the cheap to extract fuels earlier.

Figure 3. Energy consumption by source for China based on BP 2013 Statistical Review of World Energy.

Figure 3. Energy consumption by source for China based on BP 2013 Statistical Review of World Energy.

5. In a finite world, wages don’t rise as much as fuel and metal extraction costs rise, because the extra extraction costs add no real benefit to society–they simply remove resources that could have been put to work elsewhere in the economy. We are, in effect, becoming less and less efficient at producing energy products and metals. This happens because we are producing fuels that are located in harder to reach places and that have more pollutants mixed in. Metal ores have similar problems–they are deeper and of lower concentration. All of the extra human effort and extra resource expenditure does not produce more end product. Instead, we are left with less human effort and less resources to invest in the rest of the economy. As a result, total production of goods and services for the economy tends to stagnate.

In such an economy, workers find that their inflation-adjusted wages tend to lag. (This happens because the total economy produces less, so each worker’s share of what is produced is less.) Companies producing energy and metal products are also likely to find it harder to make a profit, because with lagging wages, consumers cannot afford to buy very much product at the higher prices. In fact, there is likely to be the danger of an abrupt drop in production, because prices remain too low to justify the high cost of additional investment.

6. When workers can afford less and less (see Item 5 above), we end up with multiple problems:

a. If workers can afford less, they cut back in discretionary spending. This tends to slow or eventually stop economic growth. Lack of economic growth eventually affects stock market prices, since stock prices assume that sale of their products will continue to grow indefinitely.

b. If workers can afford less, one item that is increasingly out of reach is a more expensive home. As result, housing prices tend to stagnate or fall with stagnating wages and rising fuel and metals prices. The government can somewhat fix the problem through low interest rates and more commercial sales–that is why the problem is mostly gone now.

c. If workers find their wages lagging, and some are laid off, they increasingly fall back on government services. This leaves governments with a need to pay out more in benefits, without being able to collect sufficient taxes. Thus, governments ultimately end up with financial problems, if extraction costs for fuels and metals rise faster than can be offset by innovation, as they have been since 2002.

7. A finite world means that the need for debt keeps increasing, at the same time the ability to repay debt starts to fall. Workers find that goods, such as cars, are increasingly out of their ability to pay for them, because car prices are affected by the rising cost of metals and fuels. As a result, debt levels need to rise to buy these cars. Governments find that they need more debt to pay for all of the services promised to increasingly impoverished workers. Even energy companies find a need for more debt. For example, according to today’s Wall Street Journal,

Last year, 80 big energy companies in North America spent a combined $50.6 billion more than they brought in from their operations, according to data from S&P Capital IQ. That deficit was twice as high as in 2011, and four times as high as in 2010.

At the same time that the need for debt is increasing, the ability to pay it back is falling. Discretionary income of workers is lagging, because of today’s high prices of fuels and metals. Governments find it difficult to raise taxes. Fuel and metal companies find it hard to raise prices enough to  finance operations out of cash flow. Ultimately, (which may not be too in the future) this situation has to come to an unhappy end.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Governments can cover up this problem for a while, with super low interest rates. But if interest rates ever rise again, the increase in interest rates is likely to lead to huge debt defaults, and major financial failures internationally. This happens because higher interest rates lead to a need for higher taxes, and because higher interest rates mean purchases such as  homes, cars, and new factories become less affordable. Rising interest rates also mean that the selling price of existing bonds falls, potentially creating financial problems for banks and insurance companies.

8. The fact that the world is finite means that economic growth will need to slow and eventually stop. We are already seeing slower economic growth in the parts of the world  that have seen a drop in oil consumption (European Union, the United States, and Japan), even as the rest of the world has seen rising oil consumption.

Figure 5. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 5. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

Countries that have had particularly steep drops in oil consumption, such as Greece (Figure 6 below), have had particularly steep drops in their economic growth, while countries with rapid increases in oil and other energy consumption, such as China shown in Figure 2 above, have shown rapid economic growth.

Figure 6. Oil consumption of Greece, Based on EIA data.

Figure 6. Oil consumption of Greece, Based on EIA data.

The reason why we are already reaching difficulties with oil consumption is because for oil, we are reaching limits of a finite world. We have already pulled out most of the easy to extract oil, and what is left is more expensive and slow to extract. World oil production is not rising very fast in total, and the price needs to be high to cover the high cost of extraction.  Someone has to be left out. The countries that use a large proportion of oil in their energy mix (like Greece, with its tourist trade) find that the products they produce are too expensive in a world marketplace. Countries that use mostly coal (which is cheaper), such as China, have a huge cost advantage in a cost-competitive world.

9. The fact that the world is finite has been omitted from virtually every model predicting the future. This means that economic models are virtually all wrong. The models generally predict that economic growth will continue indefinitely, but this is not really possible in a finite world. The models don’t even consider the fact that economic growth will scale back in mature economies.

Even climate change models include far too much future fossil fuel use, in both their standard runs and in their “peak oil” scenarios. This is convenient for regulators. Oil limits are scary because they indicate a possible near-term problem. If a climate change model indicates a need to cut back on future fossil fuel use, these models give the regulator a more distant problem to talk about instead.

10. Even the most basic economic relationships tend to be mis-estimated in a finite world. It is common for economists to look at relationships that worked in the past,  and assume that similar relationships will work now. For example, researchers like to look at how much debt an economy can afford relative to GDP, or how much debt a business can afford. The problem is that the amount of debt an economy or a business can afford shrinks dramatically, as the economic growth rates shrinks, unless the interest rate is extremely low.

As another example, economists believe that higher prices will lead to substitutes or a reduction in demand. Unfortunately, they have never stopped to consider that the reduction in demand for an energy product might have a serious adverse impact on the economy–for example, it could mean many fewer jobs are available. Fewer jobs mean less demand (or affordability), but is that what is really desired?

Economists also seem to believe that prices for oil products will keep rising, until they eventually reach the price level of substitutes. If people are poorer, this is not necessarily the case, as discussed above.

11. Besides energy products and metals, there are many other limits that are a problem in a finite world. There is already an inadequate supply of fresh water in many parts of the world. This problem can be solved with desalination, but doing so is expensive and takes resources away from other uses.

Arable land in a finite world is subject to limits. Soil is subject to erosion and degrades in quality if it is mistreated. Food is dependent on oil, water, arable land, and soil quality, so it quickly reaches limits if any of these inputs are disturbed. Pollinating insects, such as bees, are also important.

Probably the biggest problem in a finite world is the problem of too high population. Before fossil fuel use was added, the world could feed only 1 billion people. It is not clear that even that many could be fed today, without fossil fuels. The world’s population now exceeds 7 billion.

Where We Are Now in a Finite World

At this point, the problem of hitting limits in a finite world has morphed into primarily a financial problem. Governments are particularly affected. They find that they need to borrow increasing amounts of money to provide promised services to their citizens. Debt is a huge problem, both for governments and for individual citizens. Interest rates need to stay very low, in order for the current system to “stick together.”

Governments are either unaware of the true nature of their problems, or are doing everything they can to hide the true situation from their constituents. Governments rely on economists for advice on what to do next. Economists’ models do a very poor job of representing today’s world, so they provide little useful guidance.

The primary way of dealing with limits seems to be “solutions” dictated by concern over climate change. These solutions are of questionable benefit when it comes to the real limits of a finite world, but they do make it look like politicians are doing something useful. They also provide a continuing revenue stream to academic institutions and “green” businesses.

The public has been placated by all kinds of misleading stories about how oil from shale will be the solution. Quantitative Easing (used by governments to lower interest rates) has temporarily allowed stock markets to soar, and allowed interest rates to stay quite low. So superficially, everything looks great. The question is how long all of this will last. Will interest rates rise, and undo the happy situation? Or will a different financial problem (for example, a debt problem in Europe or Japan) bring the house of cards down? Or will the ultimate problem be a decline in oil supply, perhaps caused by oil and gas companies reaching debt limits?

2014 will be an interesting year. Let’s all keep our fingers crossed as to how things will work out. It is surreal how close we can be to limits, without major media catching on to what the problem really is.

This entry was posted in Financial Implications and tagged , , , , by Gail Tverberg. Bookmark the permalink.

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.

437 thoughts on “Why a Finite World is a Problem

    • Interesting! What the article is talking primarily about is the fact that US spending is out of control, relative to receipts. They are taking the view that the spending must be reigned in–a typical Republican position. A person can quite easily get to this position, looking at the numbers. I am not sure that the author has thought through the ramifications for the economy, though. Of course, one can also look at all of the people depending on the programs, and come to the opposite conclusion.

      • Of course this position seems not to get the consequencies for the economy as a whole, and seems not to care about programs. In case such a proposal goes on and seems to reach constitutional force, I wonder what a government which believes QE is completely necessary would do to maintain it, specially given the new proposal does not have a positive program. But , is QE really essential to US economy going on?

  1. Bicycles; local parts and repair; its all about being a quasi prepper and simpler trying to be prepared for worst case scenarios. A fifty pound bag of rice stored in the garage. Lots of material could be done on preparation for worst case scenarios.

    • RUNNING OUT OF A STABLE INCOME will be what collapse looks like for most of us. The economy will still be there to buy things for a while, the problem will be not enough money. If you have a job, you can drive a small old car or a scooter without a problem. If you have no job, where do you go with your electric bicicle?

      So, my prepping list would rather include
      Being useful to my customers and my company
      Downsizing my live (house, car, vacations, food…)
      Saving currency, buy some gold
      Not going into consumer debt, morgage loans etc.

      • I think it is as slowrider says. If you have a job and/or own income producing property (stock, apartment, farm, …) things are working for you and your concern is keeping the system going. You do not want it to break due to excessive borrowing.

        If you do not have a job and do not have income producing property you need government welfare to avoid starvation, freezing to death in the winter cold, etc.. You want the government to shell out even if that involves borrowing that may crash the whole system. A risk of future disaster is better than starving or freezing today.

        Both parties are rational economic consumer. No one is misinformed, no one is miscalculating. People just have different goals.

      • It does not matter what you have…..if the crash is as big as we are talking about here…it will be taken from you.

      • If the Titanic is sinking it won’t matter how much money you have…you will still drown eventually….you might just live a little longer…..or maybe not….

  2. Dear Gail and Others
    Sorry, but another little editorial about complexity and Nature. George Mobus has written about complexity and collapse and our human bandwidth to deal with information:
    http://questioneverything.typepad.com/question_everything/2014/01/peak-complexity.html

    I want to weave together a few strands in addition to Mobus. First, a TED talk about why diets don’t work:

    Then an observation from Jonathan Bailor’s book, The Calorie Myth:
    ‘There is no pill, product, or service that comes close to providing the health and physique benefits you will get from eating so many non-starchy vegetables, nutrient-dense protein, and whole-food fats that you are too full for starches and sweets.’

    He then adds: ‘ Why do I say this? At least 95 percent of people avoided obesity and over 99 percent avoided diabetes for all human history before (insert name of new pill, product, or service) existed.’

    Third, a recent TED talk by the commander of the nuclear submarine which went from ‘worst in the Navy’ to ‘best in the Navy’ over a two year period. The Captain delivers the talk, and says that the secret was forgetting about the Navy’s manual which describes 400 commands that only the Captain is allowed to deliver, and instead counting on people to do their jobs proficiently. He says that the only commands he reserved to himself was the firing of deadly weapons. (I can’t locate the talk, trust me.)

    Fourth, the ongoing debacle of Obamacare.

    Fifth, the previous video I recommended featuring Will Harris III of White Oak Pastures.

    What these have in common, I think, is the exhibition of the limits of bandwidth in human intelligence, which is explained in detail in the book Scarcity, which I have recommended on several occasions. That is, humans get overloaded and don’t function well. Scarcity and Mobus describe the phenomenon a little differently, but it comes out to the same place.

    So, relative to dieting, let’s ask the simple question ‘Why would Nature leave something as important as weight to human thinking? (as in calorie counting)’ Nature doesn’t leave other essential functions to the Slow Thinking that Daniel Kahneman has described. And we get the answer from Jonathan Bailor: eat the stuff that Nature designed you to eat and forget about calories. (There are also some complexities having to do with resetting hormones if you have already gotten overweight…we humans do make complexity for ourselves). So, essentially, Bailor is saying ‘live the way Nature designed you to live and you don’t have to spend precious cognitive resources on calories and weight and nutrition’.

    Will Harris doesn’t have any illusions about issuing 400 command decisions at White Oak Pastures. He knows that the microbes are going to do their thing if he just treats them decently. He doesn’t know exactly what they are going to do, couldn’t issue orders which would be effective, and doesn’t try to. He sits in his pastures and drinks some wine and has fun watching the show. The commander of the Navy submarine does roughly the same thing and tremenedously improves the performance of the Sub.

    Will Harris knows that the microbes built a tremendously productive ecosystem long before humans appeared on the scene, and that he can pretty much trust them to do what they need to do. The Navy Commander knows that humans want to do a good job, and that if he has given them the right tools, they will strive to do a good job. Neither man has to consult the Navy Manual and issue 400 commands.

    What went wrong with Obamacare? The Senators were told that the fundamental problem with American health was pretty much as Bailor describes it…eating the wrong stuff. Of course, they ignored that message. Instead, they let lobbyists write thousands of pages of micro-management legislation which is totally disconnected from any real, resource constrained, world. Is anyone surprised by the debacle?

    The Industrial System depends on a human issuing commands for the tiniest operations. A machine can be exploded into a drawing of thousands of individual parts. If you are going to manufacture that machine, you better have each and every part. I think that some of the strains we are currently experiencing are due to the fact that our reliance on this ‘command and control’ method has reached its limits, is paying reduced marginal returns, and is subject to horrendous failure in the face of resource shortages.

    Therefore, what makes sense is to rediscover the biological solutions to our problems and to stop poisoning the ecosphere so that the biological solutions can operate effectively.

    Does my recommendation just make things more complicated? I don’t think so. It is more like a religious conversion…just let go and let (Jesus, Allah, the gods on Olympus) take charge. Try biology!

    Don Stewart

    • If the federal government can force the purchase of health insurance maybe it should force the purchase of healthy food and gym memberships.

    • Don

      There are two Imperial options for dealing with tribal societies if you wish to modify their politics:

      1/ Negotiate, bribe, use existing structures to promote your aims, not impose.

      2/ Spend a fortune in lives and equipment in an invasion designed to dominate – and get beaten in the end.

      With Nature, we have tried the invade and dominate option, and as in Iraq, Afghanistan, the result is chaos, death and sterility.

  3. Can someone explain city farming to me. New York City is about 20 miles by 20 miles. The sunlight can fall either on farm plants or on providing day lighting to houses, apartments, businesses, streets, parks. If we use half the sunlight for the non-farm uses that leaves 10 by 20 square miles of sunlight. The rest of New York state is about 300 miles by 150 miles roughly. That is 225 times more sunlight area. What fraction of NYC food supply can be provided by 200 square miles of sunlight.

    • Dear Ed

      I don’t claim to be an expert, but perhaps I can shed a little light on the ‘urban farmer’ question.

      First, anyplace there is soil and available sunlight and water, food can be grown. It doesn’t have to look like a Kansas wheat field. It can be a beautiful, multi-purpose garden. ‘SPIN farmers’ (Small Plot Intensive) farmers are young people who grow food intensively in other peoples urban or suburban yards. Of course, the homeowner could garden the plot themselves, and we might call the gardener an ‘urban farmer’ if we wished. Here is a video of a beautiful suburban yard:
      http://www.geofflawton.com/fe/33812-urban-permaculture

      Second, a neighborhood may be designed to grow food which is largely available to the public. Here is a beautiful example of a neighborhood in Davis, CA, which is now about 30 years old.
      http://www.geofflawton.com/fe/60356-food-forest-suburb

      Third, food can be grown in very dense urban areas such as Brooklyn. Here is Geoff’s video of one of these farms:
      http://www.geofflawton.com/fe/60918-rooftop-farm

      Fourth, it is important to distinguish between calories and health supportive micronutrients. For example, see:
      http://www.whfoods.com/genpage.php?tname=foodspice&dbid=9

      Read the first few bulleted points, and then scroll down the page and pay particular attention to the cancer section. In a word, broccoli (and other brassica) are an essential ingredient in any realistic cancer prevention program. But any green plant begins to die when it is harvested. It will steadily lose its powerful properties as it sits in storage or in transit. The most powerful cancer protection you can get is to go out in the back yard and harvest some broccoli and bring it inside and eat it. Eating a wheat berry is quite a different kettle of fish. Wheat is a high calorie but low micronutrient density food which is easily dried and shipped great distances at slow speeds.

      So when we are thinking about urban gardening or farming, we must, I think, distinguish between foods which have a high water content with low calories, which makes them quite perishable, many of which perform very valuable health functions for us, and foods which basically provide us calories and can be dried and shipped easily. An urban garden should focus on the first group and the vast wheatfields on the second group.

      Consequently, looking simply at calories isn’t very informative. If you want the people in New York City to be healthy, then they have to have a steady supply of fresh brassica. Most of the brassica in New York City are currently shipped in from California. So the current strategy is to harvest the brassica in California, ship it by land to New York City, distribute it to grocery stores, have people eat it, the people defecate and urinate and the waste is taken to a sewage plant, and the sewage is dumped somewhere.

      You can work out the vulnerabilities in each of those steps for yourself. For example, your neighbor the Omega Institute tackled the last step in the cycle with their biological sewage treatment system which produces drinking quality water and fertilizer.

      In the Geoff Lawton video of the Brooklyn rooftop, he observes that there is abundant waste in New York City. That waste can be used to grow food, and you see a neat composting operation. One of the principles of Permaculture is to look for energy gradients and to harvest the energy. Food trimmings and human manure and urine are essential ingredients in a composting system which produces a lot of heat. Thus, they are part of an energy gradient. The Brooklyn farm is harvesting, rather than dumping, the ingredients of that energy gradient. (Not making any accusations about humanure in Brooklyn. A really good system would use something like the Omega system.)

      Cornell recently did a study to determine if New York State’s cities could feed themselves. I didn’t read the study, but what I did read said that NYC cannot supply itself with enough calories, but all the other cities can be largely self-sufficient if they work at it. Could NYC be self-sufficient in brassica, thereby stopping cancer? People seldom ask that question.

      Don Stewart

    • Anyone concerned with the science and common sense of sustainability should read Prof David Mackay’s book, Sustainable energy, without the hot air’ Its available free to download http://www.withouthotair.com/
      it details every aspect of where energy comes from and where/how it’s used, how much is available per sq metre on the planet
      Also I strongly recommend watching his lecture

  4. Dear Gail and All Interested

    For an example of biological complexity which has been newly discovered, see:
    http://www.zerohedge.com/news/2014-01-11/best-scientific-images-2013

    Scroll down to the pictures of networks with and without parasites. You will see that, in the presence of parasites, Nature builds more complex networks. Do humans understand the networks? Not at all. Are humans smart to pour on the poisons to kill the parasites? Well….

    Don Stewart

  5. Unfortunately roads will be the last thing to go….ever here of shovel ready projects? No matter how broke this country is it will always throw money at the roads…whether it makes sense or not. Every politician will get behind building new roads. Danny

    • Unfortunately the people who ramble on about ‘shovel ready’ jobs, really mean ‘excavator ready’.
      Stop and take a look at any major building project, it’s mostly men driving machinery of one sort or another. You cannot build interstate highways or anything else with sufficient strength to withstand modern usage, using picks shovels and human muscle.
      That means putting fuel into the excavators.
      When fuel gets too expensive, road building/maintenance on the scale we have known it will cease.
      To an certain extent we see this happening already, roads don’t get fixed because the money/energy supply chain is failing. That supply of money/energy comes from the taxes of joe public, his money in turn is derived for the raw energy that powers the systems of our civilised infrastructure. So ultimately everything depends on that infinite supply of cheap energy.
      But we’ve burned it all. Still, it was good while it lasted

      • End

        I agree: I have been very struck by the very rapid disintegration of the main road to my village and the cycle path to town caused by winter frosts, etc.

        Just a few years unrepaired would make both unusable for cyclists, and probably for many ordinary vehicles.

        Still, a community effort to patch it up could probably keep the path to a fair standard, if not the road.

        Maybe I’ll be village road-mender?

        • xabier
          good idea!
          Every town used to have a roadmender/s which generally consisted of a horse and cart and a load of stones.
          After the Romans left that was about it for about 1700 years, hence the Roman roads fell apart because no incentive was there to fix them. (as opposed to the central initiative of the Roman army).
          This is always my point about our wheeled society, it takes a lot more to keep it rolling that inflated tyres

            • Dear Xabier and More
              You may remember that Thoreau observed that maintenance of ‘roads and all cross-lots paths’ paid very poorly in Concord. He never got his statements ‘audited, much less approved and paid’.

              Don Stewart

  6. Thank you to Gail and all who post here. It is a pleasure to have a discussion on the internet where people are informed, thoughtful and polite.

  7. Don

    Hence the once well-known Victorian painting: ‘Death of the Road Mender’ (of hunger, slumped by the roadside!).

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