What Greece, Cyprus, and Puerto Rico Have in Common

We all know one thing that Greece, Cyprus, and Puerto Rico have in common–severe financial problems. There is something else that they have in common–a high proportion of their energy use is from oil. Figure 1 shows the ratio of oil use to energy use for selected European countries in 2006.

Figure 1. Oil as a percentage of total energy consumption in 2006, based on June 2015 Energy Information data. (Inverted order from chart originally shown.)

Figure 1. Oil as a percentage of total energy consumption in 2006, based on June 2015 Energy Information data. (Inverted order from chart originally shown.)

Greece and Cyprus are at the top of this chart. The other “PIIGS” countries (Ireland, Spain, Italy, and Portugal) are immediately below Greece. Puerto Rico is not European so is not on Figure 1, but it if were shown on this chart, it would appear between Cyprus and Greece–its oil as a percentage of its energy consumption was 98.4% in 2006. The year 2006 was chosen because it was before the big crash of 2008. The percentages are bit lower now, but the relationship is very similar now.

Why would high oil consumption as a percentage of total energy be a problem for countries? The issue, as I see it, is competitiveness (or lack thereof) in the world marketplace. Years ago, say back in the early 1900s, when countries built up their infrastructure, oil price was much lower than today–less than $20 a barrel (even in inflation-adjusted dollars). Between 1985 and 2000 there was another period when prices were below $40 barrel. Back then, the price of oil was not too different from the price of other types of energy, so an energy mix slanted toward oil was not a problem.

Figure 2. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Figure 2. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Oil prices are now in the $60 barrel range. This is still high by historical standards. Furthermore, much of the financial difficulty countries have gotten into has occurred in the recent past, when oil prices were in the $100 per barrel range.

While countries with a large share of oil in their energy mix tend to fare poorly, at least some countries with a preponderance of cheap energy fuels in their energy mix have tended to do very well. For example, China’s economy has grown rapidly in recent years. In 2006, its share of oil in its energy mix was only 23.0%, putting it below Norway but above Poland, if it were included in Figure 1.

Let’s look a little at what it takes for an economy to produce economic growth, and what goes wrong in countries with high energy costs. I should mention that high energy costs can occur for any number of reasons, not just because a country’s energy mix includes a large proportion of oil. Other causes might include a high percentage of high-priced renewables or high-priced liquefied natural gas (LNG) in a country’s energy mix. The reason doesn’t really matter–high price is a problem, whatever its cause.

What Is Needed for an Economy to Grow

The following reflects my view regarding what is needed for an economy to grow:

1. A growing supply of energy products, either internally produced or purchased on the world market, is needed for an economy to grow.

The reason why a growing supply of these energy products is needed is because it takes energy (human energy plus supplemental energy) to make goods and services.

The availability of today’s jobs is also tied to the use of supplemental energy. High-paying jobs such as operating a bull-dozer, producing large quantities of food on a farm using modern equipment, or operating a computer, require supplemental energy in addition to human energy.  While jobs can be created that use little supplemental energy to leverage human energy (for example, manual accounting without electricity or computers, growing food without modern equipment, or digging ditches with shovels), these jobs tend to pay very poorly because output per hour worked tends to be low.

To obtain growth in the number of jobs available to workers, a growing supply of energy products to leverage human energy is needed. Looking at the world economy, we can see that historically, growth in energy consumption is highly correlated with economic growth.

Figure 3. World GDP in 2010$ compared (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014).

Figure 3. World GDP in 2010$ compared (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014).

In fact, we tend to need an increasing percentage growth in energy supply to produce a given percentage growth of GDP because the y intercept of the fitted line is -17.394, rather than 0.000. Back in 1969, 1.0% growth in the consumption of energy products produced 2.2% GDP growth. The fitted line implies that recently, the amount of GDP growth associated with one percentage growth in energy consumption is only 1.2% of GDP. This poor result is taking place, despite all of our efforts toward increased efficiency. Thus, as time goes on, we need more and more energy growth to produce the same level of GDP growth. This is a rather unfortunate situation that world leaders don’t mention. They tend to focus instead on the fact that the growth in GDP tends to be at least a little higher than the growth in energy use.

2.  This growing energy supply must be inexpensive, in order to be able to create goods that are competitive in the world market. 

Human energy is by its nature expensive energy. Humans require food, water, clothing, and housing to support their biological needs–we are not adapted to eating entirely uncooked food, or to living in climates that get very cold in winter, unless we have protection from the elements. Thus, wages must be high enough to cover these costs.

Cheap supplemental energy provides a great deal more leveraging power than expensive supplemental energy. If we can leverage human energy with cheap energy such as wood or fossil fuels, it is easy to bring down the average cost of energy. (This calculation is made on a Calorie or Btu basis, for the sum of the energy provided by human labor plus that provided by supplemental energy.) If we are dealing with supplemental energy that is by itself high-cost, it is very difficult to bring down this weighted average cost. This is why high-cost oil, or for that matter high-cost supplemental energy of any kind, is a problem.

If human energy can be leveraged with increasing amounts of cheap energy, it can produce an increasing amount of goods and services, ever more cheaply. In fact, this seems to be where economic growth comes from. These goods and services can be shared with many parts of the economy, including government funding, wages for elite workers, wages for non-elite workers, payback of loans with interest, and dividends to stockholders. If there are enough goods and services produced thanks to this increased leverage, all of the various parts of the economy can get a reasonable share, and all can adequately prosper.

If there is not enough to go around, then there are likely be shortfalls in many parts of the economy at once. It is likely to be hard to find good paying jobs, for ordinary “non-elite” workers. Governments are likely to find it difficult to collect enough taxes. Governments may lower interest rates, or may take other steps to make it easier for businesses to continue their operations. Even with lower interest rates, debt defaults may become a problem. See my post, Why We Have an Oversupply of Almost Everything. The entire economy tends to do poorly.

Ayres and Warr provide an illustration of how an increasingly inexpensive supply of energy can lead to greater consumption of that energy–in this case electricity–in their paper Accounting for Growth: The Role of Physical Role of Physical Work.

Figure 4. Ayres and Warr Electricity Prices and Electricity Demand, from

Figure 4. Ayres and Warr Electricity Prices and Electricity Demand, from “Accounting for growth: the role of physical work.”

There is a logical reason why falling energy prices would lead to rising use of an energy product. If a person can afford to buy, say, $100 worth of energy and the cost is $1 per unit, the person can afford to buy 100 units. If the cost is $5 per unit, the person can afford to buy 20 units of energy. If it is the energy itself that aids growth in economic output (by moving a truck farther, or operating a machine longer), then lower energy prices lead to more energy consumed. This higher amount of energy consumed in turn leads to more economic output. This greater economic output is frequently shared with workers in the form of higher wages because of the workers’ “higher productivity” (thanks to the leveraging of cheap supplemental energy).

When it comes to the cost of energy production, there are “tugs” in two different directions. In one direction, there is the savings in costs that technology can provide. In the other, there is the trend toward higher extraction costs because companies tend to extract the cheapest resource of a given type first. As the inexpensive-to-extract resources are exhausted, the cost of resource extraction tends to rise. We can see from Figure 2 that oil prices first began to spike in the 1970s. After some temporary “fixes” (shifting much electrical production away from oil to cheaper fuels, shifting home heating from oil to other fuels, and starting new extraction in Alaska, Mexico, and the North Sea), the problem was more or less solved for a while. The problem came back in the early 2000s, and hasn’t really been solved. Thus, most of the tug now is in the direction of higher costs of production.1

Once oil prices rose, Greece and other countries that continued to use a high percentage of oil in their energy mix were handicapped because their products tended to become too high-priced for customers. Wages of customers did not rise correspondingly. Potential tourists could not afford the high cost of airline tickets and cruise ship tickets, because these prices depended on the price of oil. Even when oil prices dropped recently, airline companies have not reduced airline ticket prices to reflect their savings.

Because of the high-cost energy structure, manufacturing costs have tended to be high as well. With fewer tourism jobs and few possibilities for making goods for exports, the number of good-paying jobs has tended to shrink. Without enough good-paying jobs, Greek demand for fuel products of all kinds dropped rapidly. (Demand reflects the amount of goods a person wants and can afford. Young people without jobs live with their parents, and thus do not buy new homes or cars, lowering consumption.)

Figure 5. Greece's energy consumption by fuel, based on BP Statistical Review of World Energy, 2015 data.

Figure 5. Greece’s energy consumption by fuel, based on BP Statistical Review of World Energy, 2015 data.

Other countries that were positioned to add huge amounts of inexpensive energy were able to continue to grow. The country that did this best was China. It was able to cheaply and rapidly ramp up its coal supply, once it entered the World Trade Organization in 2001. If Greece now adds production of goods, it needs to be able to compete in price with China and other goods-producers.

Figure 6. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 6. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

3. If the energy supply that a country plans to use is cheap, it doesn’t matter whether the energy supply is locally produced or not.

If the energy supply that a country is locked into using is expensive, then using locally produced high-priced energy is “less bad” than using imported energy, but there is still a problem.

If a growing supply of cheap energy is available, this can be used to leverage local human labor to produce inexpensive goods. This works well, regardless of whether the fuel is imported or not. Because imported energy “works” in such a situation, many island nations (including Cyprus and Puerto Rico) were able to develop their economies using oil as the energy base. These island nations typically did not have natural gas available, unless they imported expensive LNG. Coal and nuclear were also difficult to use, because power plants of these types are built on too a large scale to be suitable for on an island. But oil generally worked well, even if imported.

Greece includes 227 inhabited islands, and thus is faced with many of the problems of an island nation. Back when oil was cheap, oil was an easy solution. It could be used for electricity and for many processes that require heat, such as baking bread, dying cloth, making bricks, and recycling metals.

If a county is using imported oil, once oil becomes high-priced, there is essentially nothing that can be done to fix the problem. Devaluing the currency doesn’t work, because then oil becomes higher-priced in the new devalued currency. As a result, it still is prohibitively expensive to make goods, even after the devaluation. In fact, devaluing the currency also tends to make other imported energy products, such as LNG and solar PV panels, more expensive as well.

With respect to previously purchased renewables, the ongoing cost is typically the debt payments for the devices used to generate this energy. How devaluation will affect these payments depend on the currency the debt is in. If these debt payments are in the country’s own currency, then devaluing the currency will not affect the payments (so devaluation won’t help reduce costs). If debt payments for renewables are in another currency (such as the dollar or Euros), then devaluing the currency will increase the cost, making the loans more difficult to repay.

Even for an oil exporter like Saudi Arabia, high-priced oil is a problem, for a number of reasons:

  1. If the oil exporter uses some of its oil itself, the revenue that would have been gained by selling this oil abroad is lost. The government may be able to purchase the oil for essentially the cost of extraction, but it loses the extra revenue that it would gain by selling the oil abroad. This revenue could be used to fund government programs and new oil investment.
  2. The countries that import this high-priced oil tend to find their economies depressed, leading to less use of the oil. Thus, oil exports tend to become depressed.
  3. The price of oil may fall (and in fact has fallen, and may fall more), because of low demand. With low prices, it becomes difficult for exporters to collect enough revenue for government projects and investment in new supply.

The reason why locally produced high-priced oil is “less bad” than imported oil is because jobs related to producing the oil tend to stay in the country. This is a plus, in itself. If there is a currency devaluation, wage costs and other local costs will be lower, making the energy product less expensive to produce. Unfortunately, production costs (including taxes needed to support government services) may still be above the market price, because of depressed demand.

4. Debt helps increase demand for goods. But to make the debt repayable, these goods need to be made with low-priced energy products. 

Ramping up debt for a country helps, but only if, with this debt, the country is able to profitably sell more goods and services in the world marketplace. Greece seems to have added debt, but wasn’t able to use this debt to create goods and services that could be sold cheaply enough that their prices would be competitive in the world market.

China clearly has been willing to add huge amounts of debt to support all of its new industry and new homes it has built with the coal it has been extracting. There is no doubt that the growth in China’s debt has played a major role in extracting growing quantities of coal. Now China’s coal consumption is slowing for a number of reasons including overbuilding of factories, too much pollution, and higher cost of coal production. China’s slowdown in energy consumption is leading to a slow-down in economic growth, and may even lead to a hard crash.

Greece has added a lot of debt in recent years, but it has not been used for ramping up the use of a new cheap supply of energy. Instead, much of Greece’s debt seems to be for purposes such as bailing out banks. This doesn’t really tell us what is/was wrong with the economy to begin with. I would argue that high-priced fuel tends to make it difficult to make any kind of goods or services inexpensively enough to compete in the world market, and this is at least part of the problem. The result of this is that companies, no matter what they invest debt in, have a difficult time being profitable.

The Greek government tries to cover up the country’s problems with programs that are funded by debt. Hidden subsidies may be occurring in several government-owned energy-related firms: Public Power Corporation of Greece (Greece’s largest electric utility), Hellenic Petroleum, DEPA Natural Gas, and ADMIE Grid Operating Company. There have been proposals to privatize these companies because they are poorly run. Whether or not they are poorly run, I expect that it will be very difficult to run them profitably, simply because of the inherent high-cost nature of the products they produce and workers’ lack of disposable income. This problem reflects the high cost of the underlying products they are producing.

There have been some proposals to try to get energy costs down, including a proposal to install a new lignite coal-fired electric power plant. There is also a plan to connect four of the islands to the electric grid, so that the islands won’t have to depend on oil-fired electricity. Even if these changes are made, it is not clear that Greece’s energy costs will be low enough to produce goods that are competitive in the world market. For one thing, airplanes and cruise ships operate using oil, not electricity produced by lignite, so will not be affected by additional inexpensive lignite electricity production.

From everything I can see, Greece’s debt needs to be written off. There is no way that the country can change its system to repay it. Greece can perhaps repay a little new debt, if it is channeled to support low-cost energy production to substitute for current high-cost energy.

Conclusion

Most people don’t understand that our world economy runs on cheap energy. High-priced energy is not an adequate substitute, even if the high-priced energy is “low carbon” or claims to have a reasonably high EROEI (Energy Return on Energy Invested) ratio. Our world economy is sensitive to prices and costs, even if the current “politically correct” discussion ignores these matters.

Economies that are part of our current system can’t get along without energy supplies, either. Humans have used supplemental energy since our hunter-gatherer days, when we learned to control fire. In fact, the use of large amounts of supplemental energy seems to be the way we are now able to support a world population of 7+ billion people.

Given that the world economy runs on “cheap” energy, adding expensive energy production, no matter how “green” it may appear to be, does not solve a country’s financial problems. In fact, it likely tends to make its financial problems worse. There is no way that high-priced energy will produce goods and services that are competitive in the world market. In fact, it is doubtful that high-priced energy will return a high enough “profit” to pay its own way, in terms of having the ability to pay suitable taxes to support required government services, such as schools and roads. High-priced energy is instead likely to need government subsidies, both for initially building the devices and for helping citizens pay the ongoing cost of electricity.

Greece clearly has a lot of problems besides its high-energy cost, including excessive pensions and inefficiently operated state-owned companies. To some extent, I expect that these other problems reflect the difficulty of creating goods that can compete profitably in the world economy. If there is no way businesses can successfully compete in the world economy, I can see why leaders would do whatever they could to keep the system operating. This might mean adding more debt, keeping staffing at government-operated companies at higher levels than needed, and providing overly generous pension programs.

The thing that Greece has going for it is a relatively warm climate and a history of doing well with relatively little supplemental energy. Ancient Greece was known for its philosophy, literature and theatre, music and dance, science and technology, and art and architecture. Northern Europe, because of its cold climate, was not able to do very much until it added peat moss and coal as supplemental energy. Once these cheap supplemental energies were added, Northern Europe was able to industrialize, while Southern Europe lagged behind. If we are running into obstacles now with respect to fossil fuels, perhaps the advantage will again go back to people who live in warm enough climates that they can mostly live without supplemental energy.

Note:

[1] While cost of oil production is rising, oil prices are not necessarily rising to match the cost of production, and in fact, have fallen below the cost of production. This occurs because costs are now too high relative to wages, so oil isn’t affordable. This is an important story in its own right, and is likely to eventually bring down the whole system. See for example my post, Ten Reasons Why a Severe Drop in Oil Prices is a Problem.

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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1,257 Responses to What Greece, Cyprus, and Puerto Rico Have in Common

  1. Fast Eddy (pause) The Warlord says:

    China has Destroyed Confidence in its Markets:

    China’s leaders have gone to extreme lengths to tame the nation’s $7.2 trillion equity market. Officials allowed more than 1,400 companies to halt trading, banned major shareholders from selling stakes, suspended initial public offerings and gave a government agency access to more than $480 billion of borrowed funds to help finance equity purchases.

    “Most foreign investors are scared and stunned,” said Warut Siwasariyanon, the head of research at Asia Wealth Securities Co. in Bangkok. “It’s unlikely that there will be another major rally.”

    http://www.bloomberg.com/news/articles/2015-07-22/china-s-stock-index-futures-fall-after-shanghai-s-four-day-rally

    • Stilgar Wilcox says:

      Who the heck knows what Chinese officials were thinking when they dipped their hands into trying to control something that really only works as a ‘Free’ market, as in people can buy and sell when they want to. The trouble with what they did is when people need to panic sell the worst thing you can do to them is make them wait. That’s like having a heart attack in slow motion. Nobody wants to play the casino of a stock market if they think someone’s going to threaten years in jail for selling. They’ve taken it from ‘Free’ to ‘Controlled’ and that doesn’t work. No, you have to let people walk into the casino, throw their money around for better or worse and freely walk out. Otherwise they lose interest like the article notes.

      • Fast Eddy (pause) The Warlord says:

        Desperate times call for desperate measures….

        I would assume what they were thinking is they had no other choice…

        I think this is an indication of how close to the edge we are — as well as how far we are going to fall when we tip over.

        The PTB will pull out all stops to delay the imminent collapse.

        China is pretty much a dead man walking after this.

        • Michael Jones says:

          We can always start a major world war to keep the ball rolling
          The Great Debate
          The weapons the U.S. needs for a war it doesn’t want
          By P.W. Singer and August Cole July 20, 2015
          Tags: CHINA | DEFENSE DEPARTMENT | F-35 JOINT STRIKE FIGHTER | F-4 PHANTOM | KC-46 AERIAL REFUELING TANKER | PENTAGON | RUSSIA
          Fourth F-35 Lightning II arrives at Nellis Air Force Base
          The fourth Air Force F-35A Lightning II aircraft arrives at the 422nd Test and Evaluation Squadron at Nellis Air Force Base, Nevada, April 24, 2013, REUTERS/U.S. Air Force/Daniel Hughes/Handout

          Terrorism and Middle East insurgencies are not going away. Yet in the 21st century, the United States must understand it faces a return of a serious national-security concern that shaped the last century: the risk of great-power conflict.

          The Defense Department’s new military strategy acknowledges this by noting the implications of the renewed rivalry with China and Russia. The possibility of a major war with great powers, like World Wars One and Two, is “growing,” according to the U.S. National Military Strategy released this month.
          http://blogs.reuters.com/great-debate/2015/07/19/the-weapons-we-need-for-a-war-we-dont-want/
          Pentagon must continue to push the development of potentially game-changing weapons. The naval electromagnetic railgun, able to fire a conventional projectile 100 miles, is one good example. As are new laser systems that are capable of offensive and defensive fire. Long-range air-to-air missiles and strike systems will be crucial against an adversary like China, which is likely to match U.S. forces in quality as well as quantity sooner than many anticipate.

          As the United States pushes forward, Washington has to recognize that a new race is afoot. China is now testing not just three different long-range drone-strike programs but a massive new drone, the Soar Eagle, potentially able to ferret out stealthy aircraft that the Pentagon is investing in.

          The issue, though, is not just one of pursuing new innovations in weaponry. Expecting modern warfare to play out the way the Pentagon plans is a risk that has to be addressed head-on. The Pentagon must plan for the worst day of war, not the best.

          And you thought you had worries?

        • I read it similarly, to halt trading in such fashion at the “crucial time” when they are promoting BRICS/AIIB deals around the world is very strange. It’s either because of immature decision making as it relates to new equity markets or total desperate measure, with the propensity of the evidence on the latter because they must now about the recent retail stampede on margin into their stock market and thus higher volatility risks. Also take into account they don’t want rehash of another 1998 asian market collapse followed by panic rush into u$d, so they should be pretty desperate to gorilla tape their system from all sides. Plus as reported and confirmed by ZH/banksters today they are probably increasing the offloading of US paper.

          However, even the mother of all global crashes could be papered over by TPTB via SDR and or some other scheme of “world leaders to the rescue” to kick the can on slightly different playground much to their own liking..

          • Fast Eddy says:

            I think it is a mistake to think that the central banks are not thinking through these decisions and actions….

            The PBOC obviously knows that the market is a bubble — their entire economy is false and would have blown to pieces long ago without global QE and ZIRP — the sell-off was lighting a fire under that heap of dry straw — and they had to put that out by whatever means possible…

            Because if that pile were allowed to catch fire the inferno would roar across the world lighting other pyres and we’d soon have the

  2. kesar0 says:

    Big Oil is loosing ground, look at the “annual production chart”.
    WSJ: After Settlement, BP Faces Rocky Landscape
    https://www.google.pl/search?q=After+Settlement,+BP+Faces+Rocky+Landscape&ie=utf-8&oe=utf-8&gws_rd=cr&ei=zi6vVZHSGIKcygOxrLbIBw

  3. Pingback: News update | Peak Oil India | Exploring the coming energy crisis and the way forward

  4. Stefeun says:

    “China’s Record Dumping Of US Treasuries Leaves Goldman Speechless”

    “… the chart above and the magnitude of the Chinese capital outflow is certainly the biggest story surrounding the world’s most populous nation: what is happening in its stock market is just a diversion.”
    http://www.zerohedge.com/news/2015-07-21/chinas-record-dumping-us-treasuries-leaves-goldman-speechless

    Very difficult to figure out what’s really going on, to guess if someone is in control, and to evaluate the risk.

    • Thanks! I will have to admit that this is not a topic I have been following. There seem to be a lot of unanswered questions: Is China really experiencing a very large outflow of funds? Is this because foreign investors are leaving? Or because people have figured out that buying condos and stocks in the Chinese stock market are not good investments, and somehow have figured a way around capital controls?

      When so many people are trying to manipulate so many different variables, it stands to reason that something will go wrong.

  5. Don Stewart says:

    Jan Steinman and Others Who Are Interested

    You bring up the subject of the relative merits of Donella Meadows’ book Thinking in Systems and Capra and Luisi’s book The Systems View of Life. I would like to add a few more books and concepts to the list:
    Mobus and Kalton’s Principles of Systems Science
    Adrian Bejan’s Design in Nature
    Permaculture
    James Howard Kunstler’s interview with Catherine Ingram
    http://kunstler.com/podcast/kunstlercast-268-catherine-ingram-of-the-dharma-dialogues/
    BW Hill’s concept that energy production tends to cannibalize itself and result in a Seneca Cliff
    The work of the MacArthur Foundation as they try to design some solutions

    The overarching goal that I think any systemic solution must address is captured by this quote, which I have already called to your attention:

    ‘Conversations with Fritjof Capra helped me clarify this division between the natural and social sciences. According to Capra, “this division will no longer be possible, because the key challenge of this new century – for social scientists, natural scientists, and everyone else – will be to build ecologically sustainable communities, designed in such a way that their technologies and social institutions – their material and social structures – do not interfere with nature’s inherent ability to sustain life.’

    Now I want to delve into a few factoids which may indicate some of the issues:
    *Bejan observes that a system optimizes flow through evolution, given freedom. One example he uses is the human respiratory system. Our respiratory system optimizes the flow of oxygen in, the oxygenation of the blood, and the flow of carbon dioxide out. When we look at the materials used and the design and the pulsing rate and the size and just about any characteristic we want to look at, they all make sense in terms of facilitating the flows.
    *However, a respiratory system does not make a human body. For that, we need Captra and Luisi’s notion of a network of components, which are balanced in a Cognitive system.
    *Bejan attacks the notion of ‘mechanistic causation’. Genes don’t cause behavior and messing around with algebra to generate fractals on a screen doesn’t cause structure. ‘Mechanism is not law.’ Therefore, we have to look for ‘what is flowing?’

    And ‘Complexity is a result, not an objective; not an artist’s wish; and, contrary to current dogma based in fractal geometry, it is certainly not ‘maximized’.
    *In James Kunstler’s interview, Catharine Ingram observes that our society rewards most liberally those who distract us. Is distraction what flows in early 21st century society? Will it evolve to flow ever more easily?
    *Back to Bejan’s conception of the constructal law and Ingram’s observation. Bejan:
    ‘Everything that moves, whether animate or inanimate, is a flow system. All flow systems generate shape and structure in time in order to facilitate this movement across a landscape filled with resistance (for example, friction). The designs we see in nature are not the result of chance. They arise naturally, spontaneously, because they enhance access to flow in time.’

    In other words, if we want distraction, it will appear as if by magic. Miley Cyrus and Kim Kardashian and the rise of spectator sports are not accidents.
    *Bejan looks at some deep thinking from a variety of people:
    Faulkner: ‘Living is motion, and motion is change and alteration and therefore the alternative to motion is un-motion, stasis, death.’
    Thoreau: ‘Dwell as near as possible to the channel in which your life flows.’
    Henry George: The fundamental principle of human action is that men seek to gratify their desires with the least exertion.
    Heron of Alexander: Light bouncing off a mirror follows the shortest path between two points.
    Pierre Fermat: The broken ray of light from a stick in the water follows the minimum travel time to the eye.

    Is it true that our culture is trying to maximize distraction?
    *BW Hill points out that it is taking more energy to produce a barrel of oil, reducing the amount of work that we can derive from each barrel. The effect is non-linear and results in a Seneca Cliff. I have given an explanation for how an economic system which resists change to a lower level of work can run into severe stresses as a result. Which brings us to one of Bejan’s caveats: ‘Given Freedom’. A constrained system cannot adapt, and will probably just break. At the present time, three huge barriers to change are governments, debt, and advertising and the constant barrage of distraction.
    *Permaculture teaches us that each element must serve multiple functions. Therefore, unlike the respiratory system which can be neatly categorized as an oxygen and carbon dioxide management system, a human gets a lot more complicated. For example, there are a huge number of bicycles parked at my food co-op on Sunday mornings. What functions are the bicycles fulfilling? They are an extremely efficient way to move a human body from Point A to Point B, they give wonderful exercise which is essential to human health, they are relatively inexpensive, the speed generates exhilaration, groups of bikers stimulates the hormones of attachment to others, and so forth and so on. So the design that humans are called on to do is very much more of a balancing act than most of the examples in Bejan’s book. The design of the chain and pedals is more like Bejan, but the overall ecosystem which includes bicycles is very much more complicated, balancing conflicting objectives and is more like Capra and Luisi.
    *Capra and Luisi emphasize the elements and the network. Therefore, in order to understand a human designed system, we will have to answer a few questions. The first one is ‘What exercises overall control over the components?’ At the present time, the neoliberal answer which is dominant everywhere is ‘Nothing’. Corporations are the components and they should be free to do what they do, which is maximize profit. The counter culture tries to design elements which can both be efficient in their mission (moving something) and also lead to a healthy human and larger ecosystem. For example, a Permaculture design will involve food, water, shelter, place for family, and pleasure and a sense of purpose.

    If we accept that the global system is going to be forced toward a lower work capability, then it is urgent that we answer some more questions:
    *Is the corporation the best vehicle to find efficient flow structures in the new environment?
    *Is neo-liberalism the best vehicle to achieve balance between the components?
    *What barriers prevent corporations and neo-liberal political structures from adjusting to lower cork capability.
    *If corporations and neo-liberalism are not the right structures to achieve the goals set out by Capra in the early paragraph, can a counter-culture develop and survive?
    #As a continuation of relatively high tech society, as in the MacArthur Foundation scenarios?
    #As a low-tech society as in Holmgren/s Lifeboats?

    I don’t think there is any single source which pulls all this together.

    Don Stewart

    • urbangdl says:

      In my opinion a corporation is supposed to satisfy a need becoming better by reinvesting the income it gets selling the service or product taking an upward spiral. In the process it makes profit for the owners or the investors.
      There is nothing wrong about corporations in my opinion (open to feedback) only when they deviate from the next aspects:
      1. purpose of the product: is it worthy to spend resources and energy to make it.
      2. Limits and use to the profit
      3.Feasible and neccesary size of the corporation. which in my opinon the bigger the corporation the less we have of freedom, equity, diversity and others.

      • Artleads says:

        “There is nothing wrong about corporations in my opinion (open to feedback) only when they deviate from the next aspects:
        1. purpose of the product: is it worthy to spend resources and energy to make it.”

        This brings to mind a video Don posted yesterday, where the speaker made the distinction between doing it right, and doing the right thing.

        Doing it right could be self-driving cars. But I very much doubt that this is the right thing to do. Whither bound are those self-driving cars? And why are they going there? And how are they maintained in a world without resources? Bicycles make more sense, but I’m not sure they are the right thing either. There seem to be far more attention to doing it right than doing the right thing. IMO, the right thing is doing only what is needed to survive relative to the surrounding “environment,” and doing very little else.

    • Jan Steinman says:

      In other words, if we want distraction, it will appear as if by magic.

      It appears in my inbox every few minutes, in the form of new postings to this list!:-)

      Gotta get recycling ready and deliver milk orders.

      Hey everyone: step away from the keyboard and do something real today!

  6. Fast Eddy (pause) The Warlord says:

    A good mate was bemoaning the deflationary bust up that is ruining his stock portfolio — he’s a former banking analyst who currently runs other businesses but still is heavily involved in the markets…

    He is a very bright guy but refuses to accept that the problem is related to the cost of production of energy — I know quite a few people who are ‘analysts’ and they also refuse to accept that this is the problem.

    They also did not heed my warnings that shale was a fraud … they piled into the ‘next big thing’

    Which leads me to wonder — do these high powered finance MBA’s really give you the powers of true analysis? Or do they simply train you to work within the system which is basically smoke and mirrors… without understanding that it is smoke and mirrors?

    Kinda like another Koombaya — you have to convince yourself that the world is real (all that hard work in MBA school and the highly paid jobs help with that… and the serious people on CNBs 24/7 … and the board room meetings with more very serious people….) — and you end up analyzing what is effectively a false world … built on false premises … a world that is infinite…

    Anyway…. my mate is bewildered by all that is happening….

    I left him to ponder this:

    “There is something fundamentally wrong with the system… and we are loading nuclear bombs into the centre in an effort to stop it from blowing up”

  7. Fast Eddy (pause) The Warlord says:

    We are approaching a point where the oil that is in the ground will remain in the ground … forevever… because the price that the market can pay is so far below the cost to extract…

    http://www.zerohedge.com/news/2015-07-22/far-worse-1986-oil-downturn-has-no-parallel-recorded-history-morgan-stanley-says

    • Peak oil folks haven’t stopped to figure out that the problem could be low prices, rather than high. So most of them seem to be waiting for the big price turn around.

      • Jan Steinman says:

        So most of them seem to be waiting for the big price turn around.

        I could still see that happening.

        I’ve long envisioned a whip-saw, volatile decline. If it is possible that current low prices can inspire a recovery of sorts, of course prices will go up until they hit the “glass ceiling” of supply constraints, at which point, they will crash again.

        Witness 2008, when oil went from an all-time high of $147 to $33 or so, but then climbed back to ~$120, before crashing to ~$40.

        If one were certain that such a scenario is to occur, one could make a lot of money. But I prefer to get off the economy to the greatest extent possible.

        • Stilgar Wilcox says:

          “Witness 2008, when oil went from an all-time high of $147 to $33 or so, but then climbed back to ~$120, before crashing to ~$40.”

          When I was on The Oil Drum in 08 after it hit it’s low and then started to slowly climb back up, I put forth the idea that 147 to the high side and 33 to the low side would never be breached again, i.e. until collapse. To my thinking the economy would never muster the get up and go to surpass 147 again, but would not slide lower than 33, with the price probably just bobbing up and down in between. Since then it’s done just that.

          We are now witnessing the pressures of worldwide consumer affordability pushing down oil price with all the major producers battling it out for market share, until supply is short once again, then a max. price will be tested again. Due to diminishing returns, consumer affordability should continue to decline while costs of new production keeps going up.

          The result of that dynamic should be a drop from peak sometime, who knows when, but some think it will occur soon. I just note changes as they occur and wait for the next one.

          “If one were certain that such a scenario is to occur, one could make a lot of money. But I prefer to get off the economy to the greatest extent possible.”

          Smart thinking, Jan. Getting in a quad mini-split hvac system on the 29th that should reduce energy output. Going from 5 seer to 20-30 seer energy efficiency. People off grid use the mini-split hvac systems so hope it will get our bill out of the 4th tier. Replaced all the bulbs with LED. Looking at Solar. Got so much to do before getting anywhere near off most of this economy – oh my! I don’t want this economy going south just yet.

          • And yet, bafflingly, rig count is up:
            http://www.zerohedge.com/news/2015-07-24/crude-slips-after-oil-rig-count-surges-my-most-15-months

            It seems so incredible to me, that when oil rose to $60, people rushed out and planned more drilling. They must need to sell oil, even at a net loss, to service their existing debts.

            • A couple of things I have heard:
              1. There are two kinds of reserves–those that are under development, and those that are not. When it comes to loans, they can get a lot more credit for those under development compared to those that are not. So they may drill, to get land under development. There may also be loan covenants requiring such development.

              2. There are rigs that drill vertical wells and rigs that drill horizontal wells. Vertical well are much cheaper to drill, but don’t extract much oil. If they have to “hold” land by drilling, companies may be ordering cheap rigs to drill vertical wells. I haven’t looked at the vertical-horizontal split of drilling rigs recently. If the growth in drilling rigs represent a switch to more vertical drilling, it could be cheaper, regardless.

          • Jan Steinman says:

            I put forth the idea that 147 to the high side and 33 to the low side would never be breached again… with the price probably just bobbing up and down in between. Since then it’s done just that.

            Sounds very reasonable.

            This pattern is called “damped+oscillation” or “ringing” in physics. It results from a one-time pulse of energy into a resonant system, which may be what we have here.

            I’m always fascinated when the macro behaves like the micro. It implies some overriding principle or pattern is at work. Which implies that if you can identify the pattern, you can make reasonable predictions.

  8. Fast Eddy (pause) The Warlord says:

    Look. See.

    Forget Recession: According To Caterpillar There Is A Full-Blown Global Depression

    There has now been an unprecedented 31 consecutive months of CAT retail sales declines.

    This compares to “only” 19 during the near systemic collapse in 2008. In other words, if global demand for heavy industrial machinery, as opposed to unemployed millennials’ demands for $0.99 Apple apps, is any indication of the true underlying economy, forget recession: the world is now in a second great depression which is getting worse by the month.

    . but the company’s publicly disclosed monthly retail sales have just one message for anyone who follows them: forget recession, there is a global depression going on.

    And it is not just in China as many would like to scapegoat: in June, in addition to a -19% drop in Asia Pacific (following a 30% Y/Y plunge a year ago, which in turn followed a 21% drop in 2013), US retail sales posted their first Y/Y decline since February, dropping by 5%.

    But the real depression is in Latin America, where CAT retail sales plummeted by a whopping 50%: the most in reported history, and follow an 18% drop from a year earlier.

    More http://www.zerohedge.com/news/2015-07-22/forget-recession-according-caterpillar-there-full-blown-global-depression

    Now for those who don’t think collapse can be rapid, deflationary and Holocaustalistic in nature…. look no further than CAT — a bell-weather stock for the global economy

    There is a relentless drop in sales — closing in on 3 years where every single month is worse than the last….

    This is in spite of ZIRP – in spite of trillions of dollars blown on needless infrastructure and construction projects around the world…

    Nothing the PTB can do is halting the slide….

    So the slide will continue….

    But the stock price is strong! Because of buy backs using QE…

    But eventually surely CAT will hit a certain point where even if the stock price is high it just implodes …. that will be well before its sales taper down to nil….

    At some point the company will unload large numbers of workers in a desperate attempt to scale down and try to survive.

    Now keep in mind CAT is not the only company in this position — most companies are facing similar problems — shrinking markets….

    This is how you get your deflationary crack up… it will be like a snowball being pushed off the side of Mount Everest…..

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