A Video Game Analogy to Our Energy Predicament

The way the world economy is manipulated by world leaders is a little like a giant video game. The object of the game is to keep the world economy growing, without too many adverse consequences to particular members of the world economy. We represent this need for growth of the world economy as being similar to making a jet airplane fly at ever-higher altitudes.

Figure 1. Author’s view of the situation we are facing. World leaders look at their video screens and adjust their controllers to try to make the world economy fly at ever-higher levels.

World leaders look at their video game screens for indications regarding where the world economy is now. They also want to see whether there are specific parts of the economy that are doing badly.

The game controllers that the world leaders have are somewhat limited in the functions they can perform. Typical adjustments they can make include the following:

  • Add or remove government programs aimed at providing jobs for would-be workers
  • Add or remove government sponsored pension plans and payments to those without jobs
  • Add or remove laws regulating efficiencies of new vehicles
  • Change who or what is taxed, and the overall level of taxation
  • Through the above mechanisms, change government debt levels
  • Change interest rates

There are numerous problems with this approach. For one thing, the video game screen doesn’t give a very complete picture of what is happening. For another, the aspects of the economy that can be controlled are rather limited. Furthermore, the situation is very complex–there seem to be several “sides” of the economy that need to “win” at the same time, for the economy to continue to grow: (a) oil importers and oil exporters, (b) businesses and their would-be customers, (c) governments and their would-be taxpayers, and (d) asset holders and the would-be buyers of these assets, such as families needing new homes.

An even bigger problem is a physics problem that is hidden from the view of those operating the control mechanism. Jet airplanes in the real world cannot rise beyond a certain altitude (varying depending upon the plane), because the atmosphere becomes “too thin.” There is a parallel problem in the economic world. The atmosphere that allows an economy to grow is provided by a combination of (a) an increasing supply of cheap-to-produce energy, and (b) increased technology to put this growing energy supply to use. This atmosphere can become too thin for several reasons, including the higher cost of energy production, rising population, and growing wage disparity.

We know that in the real world, a jet airplane cannot rise ever-higher. Instead, at some point, the airplane hits what has been called its “coffin corner.”

Figure 2. Diagram of Coffin Corner by Aleks Udris of Boldmethod. On the chart, Vs is the velocity; MMO is the Maximum Mach Number.

According to Aleks Udris, “The region is deadly. Get too slow, and you’ll stall the jet at high altitude.¬†Get too fast, and you’ll exceed your critical mach number. The air over your wings will go supersonic, you’ll pitch down, the aircraft will accelerate, and your wings will fall off. Also bad.”

What Happens As Coffin Corner Limits Are Reached in the Economic World?

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Will China Bring an Energy-Debt Crisis?

It is easy for those of us in the West to overlook how important China has become to the world economy, and also the limits it is reaching. The two big areas in which China seems to be reaching limits are energy production and debt. Reaching either of these limits could eventually cause a collapse.

China is reaching energy production limits in a way few would have imagined. As long as coal and oil prices were rising, it made sense to keep drilling. Once fuel prices started dropping in 2014, it made sense to close unprofitable coal mines and oil wells. The thing that is striking is that the drop in prices corresponds to a slowdown in the wage growth of Chinese urban workers. Perhaps rapidly rising Chinese wages have been playing a significant role in maintaining high world “demand” (and thus prices) for energy products. Low Chinese wage growth thus seems to depress energy prices.

(Shown as Figure 5, below). China’s percentage growth in average urban wages. Values for 1999 based on China Statistical Yearbook data regarding the number of urban workers and their total wages. The percentage increase for 2016 was based on a Bloomberg Survey.

The debt situation has arisen because feedback loops in China are quite different from in the US. The economic system is set up in a way that tends to push the economy toward ever more growth in apartment buildings, energy installations, and factories. Feedbacks do indeed come from the centrally planned government, but they are not as immediate as feedbacks in the Western economic system. Thus, there is a tendency for a bubble of over-investment to grow. This bubble could collapse if interest rates rise, or if China reins in growing debt.

China’s Oversized Influence in the World Continue reading