How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

Why have long-term interest rates generally fallen since 1981? Why have asset prices risen? Can these trends be expected to continue? The standard evaluation approach by actuaries and economists seems to be to look at past patterns and assume that they will be repeated.

The catch is that energy consumption growth plays a hugely important role in GDP growth. It also plays an important role in interest rates that businesses and governments can afford to pay. Energy consumption growth has been slowing; it is hard to see how growth in energy consumption can ramp back up materially in the future.

Slowing growth in energy consumption puts the world on track for a future like the 1930s, or even worse. It is hard to see how GDP growth, interest rates, and inflation rates can ramp up in the future. More likely, asset price bubbles will pop, leading to significant financial distress. Derivatives may be affected by rapid changes in prices and currency relativities, as asset bubbles pop.

The article that follows is a partial write-up of a long talk I gave to a group of life and annuity actuaries. (I am a casualty actuary myself, which is a slightly different specialty.) A PDF of my presentation can be found at this link: Reaching Limits of a Finite World

 

Slide 1

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Slide 4

After the audience had a chance to answer this question (mostly with yes), I gave my answer: “Yes, indeed, it is possible to build a model that gives misleading results, and not understand the situation.” For example, a flat map works as a perfectly adequate model in some situations. But when longer distances are involved, a globe is needed. A two-dimensional model works for some purposes, but not for others.

Slide 5

The model in Slide 5 is the familiar Supply and Demand model used by economists. According to the model, if Demand increases from D1 to D2, then price will increase from P1 to P2. The rising price, in turn, will allow the quantity produced to rise from Q1 to Q2, based on the upward sloping supply curve S. This model is true in some cases, but it is not always true.

Supply and Demand Are Both Affected by Reaching Limits

As the economy approaches energy limits, lack of sufficient growth in energy consumption affects both Supply and Demand. Diminishing returns leads to high costs on the Supply side. Because of this, the cost of producing oil and other energy products tends to rise.

At the same time, businesses find that they cannot pass on these higher costs to their consumers because the wages of consumers don’t rise with rising energy costs. Diminishing returns acts like growing inefficiency; it takes more materials, more labor, more tax dollars, and more debt to produce the world’s overall mix of energy products, leaving a smaller amount of resources for producing end products (such as homes, cars, and bicycles) that consumers really want.

Persistent high energy costs lead businesses to try to find workarounds to reduce total costs. A major target for cost reduction is labor costs. If some labor costs can be replaced by lower-paid labor from overseas, or by robots, the company can perhaps make a reasonable profit, even with higher prices for oil and other energy products. The catch is new lower-cost labor force does not create as much Demand for goods and services as was available before jobs were replaced by robots or sent overseas. Workers in China and India will buy some goods and services, but the quantity will likely be lower than if the jobs remained in the US, Europe, and Japan.

We end up with a tug-of-war between the high prices that the producers of energy products need and the low prices that the many low-wage workers around the world can afford. Energy products are used in making pretty much everything, including food, homes, cars, and computers. As young people need to live with their parents longer, and as demand moves to lower-waged countries overseas, the lack of buying power tends to pull energy prices down below the cost of production. Energy prices below the cost of production are just as much a product of reaching energy limits as high energy prices!

Peak Oil is Another Two-Dimensional Model

Before we go on, I should probably offer some more explanation. Some of you may have thought that I would be talking about the Peak Oil story today. I consider the Peak Oil story to be another two-dimensional model. It gives some insights, but it really does not give a good explanation of what can be expected as we go ahead. Its emphases on oil and on high prices are both wrong, in my opinion.

Geologists coming up with the Peak Oil model relied on the incorrect Supply and Demand model of economists. They did not understand that both Demand and Supply are affected, as energy limits approach. They also never considered what the energy needs of the economy really are–total energy consumption needs to grow, if enough goods and services are to be produced for the growing world population. Rising energy consumption is also needed to keep commodity prices high enough to keep production from collapsing from low prices, due to inadequate Demand.

The Role of Added Energy

Many of you have heard the saying, “As you sow [seeds], so shall you reap.” In other words, the effort you put in can be expected to correspond to the end product that is produced. This saying is somewhat true if an economy uses only human labor to produce goods and services. For example, if a person digs a ditch for five hours, the result will correspond to effort put in. Increasing the hours of digging to six can perhaps add 20% to the length of ditch that can be dug. (There is the detail that it even takes energy products to make a shovel. Perhaps the example should be digging a ditch with a stick, and thus using only human labor!)

If a person really wants to dig a ditch quickly, he needs ditch-digging equipment and diesel fuel to operate the equipment. The ditch-digging equipment is made with energy products; it also uses energy products while it is operated. If energy consumption per capita is rising, then businesses, on average, can use increasing amounts of energy to increasingly leverage the labor of the workers they hire. This seems to be what leads to productivity growth.

This is why I talk so much about energy consumption per capita, and the importance of falling prices of energy services (including efficiency gains) to encourage the growth in energy consumption. One example of energy services (whose costs need to fall) would be the cost of heating a 1,000 square meter home (including efficiency gains in furnaces and insulation). Another example would be the cost of transporting 100 kilograms of grain 100 kilometers.

Slide 6

In fact, over time, the cost of energy services has been falling. The fall in costs more than offset the growing quantity of energy consumed. Thus, the cost of energy services is becoming a smaller and smaller share of world GDP. This falling share of energy products as a percentage of the world GDP seems to be necessary, if the remainder of the world economy is to grow. If the cost of energy products starts to rise, it will tend to crowd out some of the discretionary goods and services that the world economy has been able to add, as the world economy has grown.

Higher Energy Prices Are Damaging to the Economy; Lower Energy Prices Encourage GDP Growth

Energy needs to be consumed by the system, whether workers dig ditches with shovels or with ditch-digging equipment. If energy is very expensive, it is likely that all that employers can afford is the equivalent of shovels for workers to work with. If energy becomes less expensive to use (including efficiency gains), then it becomes possible to scale up the use of tools using energy, and the economy can expand. As a result, workers can become more efficient, businesses can make more profits, and the government can collect more taxes. The falling price of energy services seem to be the major force underlying GDP growth.

Conversely, if oil consumption growth is constricted by a spike in oil prices, we know (based on the work of Economist James Hamilton) that the US economy tends to go into recession. Higher prices make it difficult for both businesses and consumers to buy energy products. Falling energy consumption is damaging to the economy, because the creation of goods and services depends on the use of energy products.

High Correlation Between World GDP and Energy Consumption

Slide 7

Energy consumption is not mentioned at all on the economists’ supply and demand model (Slide 5), but it is clear that energy consumption is highly correlated with economic growth. There is a reason for this: it takes energy products to make both goods and services. It even takes energy to heat and light an office for workers, and to make and power computers.

Economists tend to miss the connection between energy and the economy because they tend to perform their analyses on an individual country basis. The connection between GDP growth and energy growth is less clear on a country-by-country basis because individual countries can reduce their energy consumption by shifting some of their manufacturing to less developed countries, confusing the analysis. The International Energy Agency has concluded that higher oil prices can be expected to have an adverse impact on the world economy as a whole.

The Economy Is a Self-Organized System Operated by Energy

Slide 8

The reason for the strange behavior of energy prices near limits is because the system is very interconnected. It is a self-organized system that gradually changes over time. New customers are added over time. These customers are often also wage-earners. They decide what to buy based on their own wages, and based on other considerations, such as the prices of competing products and whether inexpensive financing is available.

Businesses make decisions based on what they think customers might want. They also consider products offered by competitors. Governments play a role as well, both in regulation and taxation.

Physics indirectly helps determine prices, wages, and profits, because the economy uses energy to make goods and services. If a rapidly growing amount of cheap energy is available, it becomes easy for businesses to make a profit and raise wages. As businesses grow, economies of scale tend to increase profits. Higher energy prices tend to reverse these beneficial effects.

Oil Prices Are Now Too Low for Many Oil Producers

Slide 9

If you are not familiar with energy price trends, it probably would be worthwhile to take a minute to look at the strange price pattern shown on Slide 9. If you are coming from a financial background, you will probably be familiar with the financial disruptions of 2008, but not the high oil (and other energy) prices of the same period. The steep drop in prices corresponds to the time of major financial distress.

Most United States infrastructure, such as interstate highways, pipelines, and electricity transmission systems, were built in the pre-1970 period, when the inflation-adjusted price of oil was generally less than $20 per barrel. Thus, in a sense, most of the oil prices we are seeing in recent years on Slide 9 are high, relative to historical costs. The question becomes, “How high a price can the economy withstand?” It becomes very expensive to replace a worn-out pipeline built with $20 per barrel oil using $120 per barrel oil.

On Slide 9, prices required by oil exporting countries (such as Saudi Arabia, Venezuela, and Norway) seem to be well over $100 per barrel. Such a high price is needed if these countries are to be able to collect enough tax revenue and also have funds for investment in new fields to replace depleting fields.

On the other hand, the economies of the United States, Europe, and Japan do very much better if oil prices are low. They would prefer prices under $50 per barrel. This is the price mismatch mentioned on Slide 9.

Extended periods of low prices can be expected to lead to two adverse impacts over a period of several years:

  1. Falling growth in energy production. Investment in new fields to offset declining production from existing fields is likely to fall. The big drop in oil prices occurred in 2014, and it is now four years later. Many analysts expect growth in oil production to slow in the next few years, because of inadequate investment. Coal, natural gas, and uranium have somewhat similar problems, with falling prices discouraging reinvestment.
  2. Collapsing governments of oil exporting nations. Governments of countries that export oil are often very dependent on the high price of oil to collect adequate tax revenue. The central government of the Soviet Union collapsed in 1991, after several years of low oil prices. Lack of adequate tax revenue could cause a similar problem today. Venezuela is particularly at risk, but Saudi Arabia and many other countries could follow.

It is ironic that Venezuela reports the highest oil reserves in the world. These reserves can only be extracted if energy prices are much higher than today. This would seem to require higher wages of non-elite workers around the world. If wages were much higher in countries such as India and Nigeria, they could afford goods such as motorcycles and air conditioning, helping push up world demand for energy products.

Slide 10

It is clear that the growth rate of energy consumption simultaneously affects Supply and Demand.

An important point on Slide 10 is the fact that growing debt acts as a helper for energy consumption. It allows consumers to afford goods and services with their monthly wages, and it allows businesses to pay for new tools for workers over the lifetime of those tools. In a sense, debt is the promise of future goods and services made with energy products.

Money is a type of debt. We can print money, but we can’t print cheap-to-produce energy products. Thus, at some point, there can be a mismatch between promises of future goods and services and the quantity of affordable energy products available to create those goods and services. This is part of what is likely to cause debt defaults.

Slide 11

Slide 11 lists some of the things that seem likely as we reach the limits of cheap-to-produce energy supply. I will describe these issues more, later in this talk.

Slide 12

Slide 12 is an outline of the rest of the talk. This post primarily covers Points 1 and 2. Thus, this article relates primarily to GDP growth, interest rates, and asset prices. Slides are shown for Points 3 and 4 as well.

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In recent years, it has become increasingly apparent that the ability of humans (and pre-humans) to cook part of our food supply has had a major impact on our ability to be different from other animals. We could eat a wider variety of foods, and we could get more energy value from those foods. Our bodies could evolve in a very different way. Our brains could become bigger, and our jaws and gut could be smaller.

Slide 15

Even back in hunter-gatherer days, humans were using more energy than similar animals. Now, in the industrial period, we are using 80 times as much energy (=8000/100) as a human-like animal would use, considering the various types of supplemental energy available to us. Some people have described the situation as having 80 energy-slaves for each person. This makes it possible to do tasks, such as farming and digging ditches, in a more efficient way than using sticks as tools.

Slide 16

Besides the usual tools, we have many related ways of using energy, with the goal of eventually providing more goods and services. Energy can be used to organize data on computers. Energy can be used to provide advanced education on topics helpful to growing the economy. If individuals or businesses are paid wages or interest payments, they can use those proceeds to buy energy products, such as a new car, or an overseas vacation. Thus, energy consumption growth affects every part of the economy.

Slide 17

Growing debt is extremely important in growing the world economy. I describe the situation more fully in this article: What has gone wrong with oil prices, debt, and GDP growth?

Technology is what most people focus on, as being the way to move the world economy forward. However, it takes energy products to make the new machines made possible by technology. Without a steady supply of energy products, we cannot maintain existing roads, or the electric grid, or the internet.

Slide 18

Anyone who has purchased a home knows that interest rates are very important in determining what price of home a particular buyer can afford. Here I show a range of monthly payments, for a 30-year, $300,000 mortgage at various interest rates. It is clear that a person can afford to buy a great deal more house at a low interest rate than a high interest rate. If interest only loans are available, costs are lower still.

Slide 19

Everyone who works with interest rates is aware of this pattern in 10-year US Treasury interest rates. The peak in interest rates was in 1981, and there has been a downward trend most of the time since that date.

Slide 20

The interest rates that regulators can easily adjust are short-term interest rates. When these interest rates are increased, they tend to induce recession. There may be a lag in timing. The increase in short-term interest rates in the 2004 to 2006 period seems to have been instrumental in popping the subprime debt bubble and bringing on the Great Recession of 2007-2009. This is my article relating to this issue: Oil Supply Limits and the Continuing Financial Crisis

Slide 21

When energy consumption is growing rapidly, and there are productive projects that can be added (interstate highway system, long distance electric grid, interstate pipelines, first-time telephone service for many people, growing number of trucks and airplanes), then it is possible for the economy to grow rapidly.

In this rapidly growing economy, the economy could easily ramp up long term interest rates without damaging the economy because the underlying growth rate was so high. In a sense, the higher interest rates were analogous to inflation affecting food and energy prices. There was so much growth in demand for goods and services that the economy could afford to pay rising interest rates during the period between World War II and 1981.

Slide 22

The period since 1981 is a period when investments have become much less productive, from a point of view of allowing more goods and services to be produced. Instead, growth is coming from selling more services to each other, and sending more manufacturing to lower-cost parts of the world.

Since 1981, we find ourselves with an increasing amount of old infrastructure that needs to be maintained. Fixing this infrastructure doesn’t really improve productivity. New investments simply keep productivity from falling.

One recent innovation has been the internet. It gives us more information, and it relieves us from the burden of having to use the phone book or go to the library. Thus, it makes us more productive. But in many ways, it is not as important as many earlier inventions, such as the internal combustion engine, the light bulb, and the telephone. There is a temptation to computerize all kinds of data and to expect data mining to solve all our problems. A person wonders what the true cost/benefit is.

Innovations in medicine now allow more 85-year-olds to live to be 86-year-olds and allow more cases of cancer to be cured. But the big changes, brought about by antibiotics and better sanitation, occurred before 1981.

Another growth area has been higher education. The payback is often wages that are barely high enough to live on. How are college graduates who cannot find high-paying jobs going to be able to repay their loans and still get married and have a family?

Admittedly, some investments have been productive. This is especially true when new factories, roads, and ports have been installed in emerging markets. But a large share of recent investments have been aimed at making vehicles more fuel efficient. Or trying to reduce CO2 emissions. These do not really have a payback in lower-cost goods and services.

Interest on debt can only be paid if the economy is truly growing, and thus has a sufficient margin to pay interest with. This seems to be less and less possible outside of emerging markets. I would expect that this is why long-term interest rates are persistently low.

Slide 23

The decline in the ten-year interest rates should make homes more affordable. The long-term decline in shorter-interest rates should make vehicles more affordable. In spite of this boost to the economy, US GDP growth rates have persistently fallen. World GDP growth rates have fallen as well.

Slide 24

There is relatively little storage available for commodities of most types, including oil. As a result, even a small change in demand can lead to a major price shift.

I show in Oil Supply Limits and the Continuing Financial Crisis that the peak in oil prices corresponded to the peak in US debt in several categories, including credit cards and home mortgages. Once US debt stopped rising, the demand for oil fell, and prices dropped precipitously.

Quantitative Easing (QE) by the US Federal Reserve began near the end of 2008. It acted to lower interest rates, especially long-term interest rates. These lower interest rates helped get oil prices back up closer to the level required by producers. But once QE stopped in 2014, prices slid back down. As noted earlier, recent oil prices are far too low for most producers. But they do help stimulate the economies of oil importing countries.

Slide 25

If a business adds debt to expand a factory, this may lead to more wages. The chart indicates that growing non-financial debt does not always lead to higher wages. Sometimes it leads to asset bubbles.

Slide 26

Disposable personal income (DPI) is income that individuals receive, including payments such as Social Security and Unemployment Insurance. This amount is netted out for taxes paid. If we divide DPI by population, we get per capita DPI. This amount is not inflation adjusted; it gives us an estimate of how much incomes have been rising, including payments made to compensate for inflation.

Clearly, there have been huge changes in the growth of per capita DPI over time. Prior to 1981, per capita DPI was rising rapidly, as more women joined the workforce, and as companies gave cost of living raises, in an attempt to keep their employees. In several years, per capita DPI was rising at over 10%.

Families with rapidly rising incomes were looking for ways to spend their new-found wealth. This seems to be at least part of the reason for the high inflation rates of this period. Without this rapid run up in DPI, it is hard to see how the oil prices spikes of the 1970s could have occurred.

Now, the economy has slowed greatly. DPI per capita is sputtering along at less than 4% per year. With this low rate of increase in funds available for spending, it seems like the current economy will not be able to support a big spike in oil prices.

Slide 27

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Slide 28

If the economy is not really growing, it is very difficult to pay interest. This is why a person would expect interest rates to roughly follow GDP growth. Back before 1981, GDP growth was significantly greater than 10-year Treasury yields. Since then, 10-year Treasuries have tended to yield a little more than GDP growth (including inflation). Very recently, the pattern seems to have returned to the pre-1981 pattern.

Slide 29

If interest rates are lower, more people can afford to buy a given house, or a piece of land, or shares of stock. The additional demand tends to bid up asset prices.

Slide 30

This should be clear from Slide 29.

Slide 31

Interest rate assumptions often were originally made when interest rates were higher.

Slide 32

Payments to individuals in a particular year act as a way of dividing up goods and services available in that year. If the share of goods and services going to those who are paid interest rises, it will mean fewer goods and services are available for others. History says that it is the non-elite workers that are most likely to be “shorted,” if there are not enough goods and services to go around.

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Even a decline in coal consumption is a problem, if it causes total energy consumption per capita to fall! Wind and solar cannot possibly make up the shortfall. Also, their installed cost is high, if the cost of intermittency workarounds is included.

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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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1,217 Responses to How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

  1. Harry Gibbs says:

    “Emerging-market governments have borrowed steadily over the past decade amid rock-bottom interest rates. Companies have also binged: U.S. dollar credit to non-bank borrowers in developing countries reached $3.7 trillion at the end of last year, up from $1.5 trillion a decade earlier, according to the Bank for International Settlements.”

    https://www.financialexpress.com/economy/another-2008-like-crash-no-it-could-be-worse-heres-what-emerging-markets-numbers-show/1171235/

    • Harry Gibbs says:

      “[The South Korean] Government needs to take pre-emptive measures.

      “The current economic situation could be far more serious than policymakers think.

      “There have long been economic warning signs. The jobs report is moving beyond the shocking stage to a crisis level… Even manufacturing job growth turned downward in April for the first time in nearly a year, adding to employment gloom… Nor are external conditions favorable to Korea… Goldman Sachs… predicted Korea would be hit hardest among emerging economies if the U.S. Fed continues to raise interest rates.”

      https://www.koreatimes.co.kr/www/opinion/2018/05/202_249153.html

  2. Harry Gibbs says:

    “The populist parties that are on the brink of forming a new government in Italy discussed demanding a debt write-off of €250 billion (£220 billion), all but guaranteeing a showdown with Brussels.The shock revelation came as the leader of one of the parties, The League, said Italians no longer wanted to be “slaves” to the EU and financial markets.”

    https://www.telegraph.co.uk/politics/2018/05/16/brussels-calls-italy-stay-committed-european-path/

  3. Grant says:

    What are the signs of an impending implosion of a social structure and its economy?

    For example, I read that the latest giant cruise ship had a budget of $1Billion or more. Apparently there are another 30 or so similar vessels in build or being planned for the next few years. The expected working life of each will be about 30 years.

    Will there be 30 years worth of people wealthy enough to fill them?

    If so, why? What is the point and how does the building if a huge ship, great for numbers on the GDP stats of the country building it, translate into really productive use of that capital?

    Do groups of relatively wealthy people floating around on the oceans of the world return something positive and productive from the investment? Or is it just a rather expensive way of undertaking wealth redistribution whilst using finite resources and spreading some forms of what we call “pollution”?

    At a more day to day level the motor car, as it developed for practical and productive use by those who were less than rich, mass produced vehicles like the model T Ford and quickly offered considerable social mobility over a generation or so.

    At the consumer level the engineering was simple, practical, affordable and serviceable. Anyone with a few tools and a little knowledge could ensure that the utility a vehicle offered could be available at reasonable cost most of the time.

    Somewhere in the 1970s things started to get more complicated, initially based on a perceived need to improve safety and subsequently because of “pollution” concerns and latterly the supposed “demand” for sophisticated electronic devices to keep the iPad generations happy.

    So engineering has developed relatively light and efficient cars back 30 to 40 years ago, improved materials technology so they withstand the elements better and rust more slowly and enhanced mechanical aspect to make the components (and therefore the entire vehicle) longer lived overall with better efficiency and less maintenance requirement.

    Having achieved that objective (in the main) at some point in the late 1980s we have somehow moved on to a level of performance that is generally unnecessary and unusable from even average cars and trucks. For top end models the outputs are absurd for real world use – but they still sell and premium markups so the manufacturers will create them. For the extra cash they offer no useful utility above their lesser siblings in the range.

    Along the way has come ever changing regulation and so ever changing component design – especially in terms of electronics, system controls and the software that runs everything.

    With constant changes you lose the economies of scale. Not so much manufacturing where volumes of metal components can be consistent enough in most ranges to support the value of long term spares stock, but in the electronic components – the very components that are likely to fail early.They can usually be replaced quite easily – if you can find one and if it is not seriously over priced thus making the fix “uneconomic”.

    So now we build vehicles that, even in relatively harsh conditions – think Europe rather than California – can easily expect to last for 20 years before succumbing to rust rather than the 5 years of 40 years ago. Engines are engineered with cleaner outputs to last hundreds of thousands of miles rather than tens of thousands 40 years ago.

    The effort and energy required to deliver these advances has mostly been wasted during the past decade as vehicles have become so complex and regulation often so ill thought through, that the cost of service, especially certain service parts, makes them uneconomic to repair when much less than 10 years old.

    The social investment, driven by the apparent desire for ever greater complexity despite (or perhaps due to) the ever worsening travel conditions due to lack of sensible investment in the road infrastructure that would facilitate people’s journeys, whether productive or purely for what we think of as leisure, is largely wasted due to early removal, compare to designed whole life expectations, from the social asset pool.

    To me this does not seem to make economic sense in a world awash with debt that is using resources ever more rapidly only to see slower “progress” to a good return on the cash and effort expended.

    I think it is fair comment to say that the same pattern applies throughout the consumption arena.

    20 years ago you might buy an ordinary vacuum cleaner and expect it to last 20 or 30 years with minimum maintenance. Now you are doing well to get past the first year out of warranty and the more expensive and “sophisticated” devices seem to fail just as swiftly as the cheap throwaways.

    Heating boilers/furnaces, mobile phones, TVs, white goods for laundry – all seem to have the same in built planned obsolescence. Is there anything that doesn’t? Kids toys for example – Toys r Us surely did not fail due to toy durability and lack of demand!

    Even the infrastructure – roads, electricity grids, water supplies and sewage pipes – seems subject to under-investment and poor results from new techniques for both build and maintenance.

    It would be interesting to know if the Romans had similar situations reflected in the technology of their times that left them prone to the destruction of their Empire by simpler and less technically skillful competitors.

    I wonder what the Romans had as the equivalent of 21st century Cruise Ships?

    • I know that my repairmen seem to lament at how poorly the new “more efficient” clothes washers hold up. If there are more parts that can be easily damaged, that becomes a problem.

      • Grant says:

        I have a trivially small but annoying fault with an otherwise excellent though relatively expensive German dishwasher. It’s based on a few cents worth of plastic that seems to be affected by a moisture and chemical mix. The plastic crumbles. The other half of the plastic panel is fine but contains all of the electronics. Cost of part and engineer to fit it all, self fit not being an option due to setting up the electronics, would be almost the same cost as a new unit with 7 year guarantee.

        It was 8 years old. Eventually I bought some plastic making repair chemicals and bodged a fix. Lasted 2 years. Good considering what I had to work with.

        Now the manufacturer will, under some terms of service, offer a 20 year guarantee on this unit. I think it would last that long, but for the problem plastic.

        Discussing options with someone in the industry he pointed out that even the better names from Germany now have 2 distinct classes of white goods. The lower priced end, not made in Germany and the higher priced end which are made in Germany.

        If you are planning to need the unit for long, by at the lower end. It’s pretty much the same for all goods.

        The problem comes when a particular good succumbs to a single source of supply no matter what the retail price.

        • Davidin100millionbilliontrillionzillionyears says:

          this fits quite well with declining surplus energy…

          it seems that companies can’t afford to make a product as good as 10 years ago…

          labor, materials, quality… costs must be reduced everywhere…

          if a $500 product built 10 years ago lasted for 10 years, and now the “same” $500 product lasts for 5 years:

          what’s the rate of inflation?

      • Mark says:

        I have a light bulb from circa 1945. It was used on a (rattling) pull chain, and was used every day for 60+ years when I took it out. It still works fine.

    • yup—-all with a full complement of galley slaves.–EROEI direct you might call that.

      i saw it in Ben Hur.

    • Duncan Idaho says:

      Excellent analysis—-
      Where is this going?

    • Mark says:

      Agree with Norman. The ships use flags of convenience for their (relatively mild) slavery. It’s a narrow part of the population that takes cruises, but growing in Asia.

    • Slow Paul says:

      Excellent analysis. The problem is basically profit versus “sustainability”, or rather the maximum power principle. Most men strive to affirm their existence and making money and not caring for the long term longevity of mankind seems to be the way to go.

      • Fast Eddy says:

        Choose 100 men.

        Ask them:

        If you could make a billion dollars off a scheme that would guarantee the extinction of man within 2 generations — would you go ahead?

        I bet most would say yes

        • Jason says:

          I’ll take that bet

        • Davidin100millionbilliontrillionzillionyears says:

          to appear decent and honorable, most would say “no”, only because they would know that the question was unrealistic…

          but in their thoughts, many would want to be able to make the billion…

    • Baby Doomer says:

      Don’t worry they have a plan for this…

      • Jonzo says:

        A declining human population would be the best news out there. It’s the ONLY good news actually. Increasing population makes EVERYTHING else irrelevant. Too bad the media and Govt’s can’t see that. Complete female empowerment resulting in a gradual population decline is the ONLY answer.

        • MG says:

          Female empowerment in the times of energy decline? Well, the only powerfull women will be women who have some physical power, i.e. I mean real muscles, not fitness dolls…

          • theblondbeast says:

            Exactly! The birth rate will not go down. The death rate will rise, just like always.

            • Jonzo says:

              Then, so be it. The human “Cancer” needs to be addressed one way or another.

            • MG says:

              Raising children is more and more costly matter, so the birthrate will go down.

            • Or the would be parents have more school related-debt, so they cannot afford a home big enough for a child or children.

            • theblondbeast says:

              @MG – perhaps I should say the global birth rate will not voluntarily go negative. In other words not a solution. It is a fact that the crude birth rate has been decreasing since the 1950’s. https://en.wikipedia.org/wiki/Birth_rate

              Population reduction will not be voluntary, since it is even more sensitive than population increase. I could see someone trying it, ending in revolution, which splinters and ends BAU. But it won’t be obvious to the masses population is the problem. It will look like economic political issues are the problem. BAU will end and most people won’t know why – kind of like the endless theories of the fall of the roman empire.

          • MG – I agree. The rise in the power of women came because we have had energy slaves to help with tasks that require muscle power. They also help with household chores and food production. But without energy, the role of women will likely change.

            • MG says:

              This is interesting:

              “Every second euro of the healthcare insurance in Slovakia is spent on the healthcare services of the pensioners.” (“Na Slovensku každé druhé euro vydané na zdravotné poistenie ide na úhradu zdravotníckych služieb dôchodcom.”)

              The article is not very much complete, but this sentence tells very much about how ageing of the populations impacts the systems:

              https://www.postoj.sk/33239/k-pricinam-nizkej-porodnosti

        • SomeoneInAsia says:

          A decline in birth rates and therefore in population can be a good thing for an overpopulated world, if not for one problem: that more and more of those alive are greying

          It can’t be good if the ratio of retirees to able-bodied, working members of a population keeps climbing…

          • MG says:

            And surviving more disabled children that require care is also a big problem. The states can not or do not want to give them more, which makes birthrate even lower, as in case your child is born with some serious defects and there is very limited abortion (like in Poland):

            http://www.dw.com/en/parents-of-disabled-children-occupy-polands-parliament/a-43555600

            “Although parents occupying the Sejm receive visits from politicians, none offer solutions to their problems. When President Andrzej Duda came to encourage parents to keep up the fight he was shown videos of his own election campaign. At the time, he loudly proclaimed that he would fight for the rights of the disabled but he has done nothing to help them or their families since then.

            Prime Minister Mateusz Morawiecki promised protesters a “road map” but cautioned that federal coffers were empty. Nevertheless, the parents have no intention of giving up. More protests are planned. “

            • xabier says:

              In Spain this was usually handled by monks and nuns, the peasants were grateful to get the children off their hands, and it was quite inexpensive.

              During the Civil War, the kind and noble Anarchists and Communists massacred the monks and left the children defenceless.

        • Fast Eddy says:

          I agree – it is great news if you think humans are a cancer on the earth and should be wiped out…

          Because reducing the population would definitely give you that result

          Three cheers for the deflationary death spiral!!! That would end BAU and trigger the spent fuel ponds.

          Hip hip hurrah – hip hip hurrah — hip hip hurrah!!!

  4. Baby Doomer says:

    Nasa reveals dozens of areas in danger of running out of water

    New satellite data on freshwater reserves from Nasa have revealed that dozens of regions across the globe are in danger of becoming the next Cape Town.

    The South African city was in danger this year of becoming the first big city to run out of water and had to impose severe water-saving measures to avert “day zero”.

    Research from scientists at Nasa and the Jet Propulsion Laboratory shows that worldwide fresh water reserves have changed drastically since 2002. The decline in water availability in regions such as northern India, north-east China, the Caspian Sea and across the Middle East has been blamed mainly on irrigation and groundwater pumping.

    “Any of these spots on the map are potential ‘Cape Towns’ in future,” says Jay Famiglietti, one of the authors of the study, referring to the 34 areas that showed the greatest changes. “Fresh water availability is changing and water insecurity is much closer than we think.”

    The paper, to be published in Nature, is the first to use gravitational satellite data to map global trends in fresh water availability across a 14-year period, drawing on data from Nasa’s Grace satellites.

    The research identifies areas where water resources rose or fell significantly during the period, and identifies 14 regions where changes were primarily due to human activity, compared with eight regions where the changes were mainly caused by climate.

    “The human impact has been far, far greater than we ever anticipated,” said Mr Famiglietti. “The human fingerprint is all over that fresh water availability map and we need to deal with it.”

    Irrigation for farmland was the biggest single user of fresh water, and the study showed stark declines in highly irrigated areas such as northern India.

    The changing water patterns are creating great disparities in water availability, Mr Famiglietti points out, with dramatical declines in some areas and unusual increases in others, which could make them vulnerable to flooding.

    Regions such as western Brazil, the Okavango Delta in Botswana, and the northern plains in the US and Canada all saw significant increases in fresh water storage during the period. Prolonged droughts in California, eastern Brazil and the Middle East led to depleted groundwater reserves.

    The study uses gravitational satellites to solve a problem that has long perplexed hydrologists: how to measure accurately the water that is hidden underground, particularly across a large area such as a continent.

    Gravitational satellites do not take images. Instead they measure differences in the gravitational pull of the earth, which can be affected by the presence of water.

    “The largest changes we see anywhere are the ice sheet and glacier losses, those are the fastest rates of change. But that is not typically water you would use for drinking or agriculture,” says Matthew Rodell, the lead author on the report and a hydrologist at Nasa.

    Melting ice caused big drops in fresh water storage in Antarctica, Greenland, Alaska and Patagonia, mainly due to climate change.

    Mr Rodell declined to identify any single region most likely to encounter a “Day Zero” shortage like Cape Town’s, but said that careful water management was crucial to combating shortages.

    “Almost any region can be affected by a drought, but the ones that are more vulnerable are ones where people don’t have access to multiple different sources of water.”

    https://www.ft.com/content/c2f6ab6a-5915-11e8-b8b2-d6ceb45fa9d0?utm_campaign=Echobox&utm_medium=Social&utm_source=Twitter#link_time=1526508951

  5. Third World person says:

    Mysterious rise in banned ozone-destroying chemical shocks scientists

    CFCs have been outlawed for years but researchers have detected new production somewhere in east Asia
    A sharp and mysterious rise in emissions of a key ozone-destroying chemical has been detected by scientists, despite its production being banned around the world.

    Unless the culprit is found and stopped, the recovery of the ozone layer, which protects life on Earth from damaging UV radiation, could be delayed by a decade. The source of the new emissions has been tracked to east Asia, but finding a more precise location requires further investigation.

    CFC chemicals were used in making foams for furniture and buildings, in aerosols and as refrigerants. But they were banned under the global Montreal protocol after the discovery of the ozone hole over Antarctica in the 1980s. Since 2007, there has been essentially zero reported production of CFC-11, the second most damaging of all CFCs.

    The rise in CFC-11 was revealed by Stephen Montzka, at the US National Oceanic and Atmospheric Administration (NOAA) in Colorado, and colleagues who monitor chemicals in the atmosphere. “I have been doing this for 27 years and this is the most surprising thing I’ve ever seen,” he said. “I was just shocked by it.”

    “We are acting as detectives of the atmosphere, trying to understand what is happening and why,” Montzka said. “When things go awry, we raise a flag.”

    Erik Solheim, head of UN Environment, said: “If these emissions continue unabated, they have the potential to slow down the recovery of the ozone layer. It’s therefore critical that we identify the precise causes of these emissions and take the necessary action.”

    CFCs used in buildings and appliances before the ban came into force still leak into the air today. The rate of leakage was declining steadily until 2013, when an abrupt slowing of the decline was detected at research stations from Greenland to the South Pole.

    Scientists then embarked on an investigation, published in the journal Nature, to find out the cause. The detective work began by assessing whether there had been changes in how the atmosphere distributes and destroys CFC-11 that could explain the changed measurements. But this factor was mostly ruled out and in the most recent data – 2017 – it appears to have played no role at all.
    https://www.theguardian.com/environment/2018/may/16/mysterious-rise-in-banned-ozone-destroying-chemical-shocks-scientists

    anybody remember when people where saying that ozone layer is getting fixed
    well folks they will tell fake news

  6. Baby Doomer says:

    #BREAKING Total CEO says oil price could hit $100 ‘in coming months’

    • Davidin100millionbilliontrillionzillionyears says:

      such bold predictions…

      Brent is almost $80…

      that’s about $30 higher than a year ago…

      it seems some CEOs can do basic math…

    • Fast Eddy says:

      This is how you get more punters to fuel the shale revolution ….

    • Baby Doomer says:

      Oil Is Above $70, but Frackers Still Struggle to Make Money

      Most of top 20 shale-oil producers spent more than they made in first quarter

      American shale drillers are still spending more money than they are making, even as oil prices rise.

      Of the top 20 U.S. oil companies that focus mostly on fracking, only five managed to generate more cash than they spent in the first quarter, according to a Wall Street Journal analysis of FactSet data.

      Shale companies have helped propel U.S. oil output to all-time highs, surpassing 10 million barrels a day and rivaling Russia and Saudi Arabia. But the top 20 companies by market capitalization collectively spent almost $2 billion more in the quarter than they took in from operations, largely due to bad bets hedging crude prices, as well as transportation bottlenecks, labor and material shortages that raised costs.

      Many of the producers did better to start this year than at any point since 2014, when oil prices began a crash that the industry is fully recovering from only now. Still, the companies spent about $1.13 for every $1 they took in. Oasis Petroleum Inc. OAS +3.62% spent $3.27 for every $1 it made in cash, while Parsley Energy Inc . spent almost $2 for every $1 it made in cash, according to FactSet.

      While many shale operators have positive net income this year, many shareholders have begun paying closer attention to how much the companies are spending, as they seek to compel them to live within their means and begin to produce stronger returns.

      Hedging played a big role in companies’ underwhelming cash generation. Seeking stability after years of wild fluctuations in crude prices, many operators entered into derivatives contracts in late 2017 that effectively ensured they could sell some of their 2018 output for $50 to $55 a barrel. Now that prices have risen to more than $70 a barrel, many are failing to capture the value of the rally. WPX Energy Inc. reported an adjusted net loss of $30 million last quarter, which it said was driven by $69 million in losses on its hedges due to higher oil prices.

      Some companies are already adjusting their strategies because of higher oil prices. Parsley Energy, which is focused on the Permian Basin, the oil field in Texas and New Mexico that is currently the center of U.S. shale-drilling activity, hedged most of its 2018 production. It plans to change that going forward, and expects to generate more cash relative to spending in coming quarters.

      “Early signs of labor tightness motivated Parsley Energy to increase drilling and completion activity significantly last year when rigs and crews were easier to come by,” said Parsley Chief Executive Bryan Sheffield. “[N]ow that we are operating at a steady development pace, we should continue to generate increasing cash flow.”

      Continental Resources Inc., which is primarily active in shale formations in North Dakota and Oklahoma, didn’t hedge its oil production for 2018. It raked in almost $258 million in cash after expenses in the first quarter, best among its peers.

      If U.S. crude prices stay at about $70 a barrel for the rest of 2018, energy consultant Wood Mackenzie estimates that hedging strategies would reduce annual revenue by an average of 7% for six companies focused on the Permian basin.

      Investors remain broadly hopeful that shale companies’ performance will improve in 2018 due to rising oil prices and global demand. But concerns about the companies’ ability to manage expenses linger.

      “These companies have done well this year and they are saying the right things,” said Tyler Rosenlicht, a senior vice president at Cohen & Steers, which manages about $60 billion in assets. “But a lot of investors were so burned down in the past that there will be a longer pause before they feel fully comfortable again.”

      EOG Resources Inc., the biggest U.S. shale producer, reported first-quarter profit of $638 million, a more than twentyfold increase over the prior year. But its cash surplus compared with spending was $110 million for the period. Its stock has risen about 9% this year, while U.S. crude prices are up 17% in that time.

      Shale producers failed to generate cash even as one of their primary obstacles to profitability in past years, oil-field-services costs, rose only modestly.

      While trucking and labor shortages in the Permian are already vexing many companies, some costs related to drilling contractors have increased by 15% or less because rates were locked in last year when oil prices were low. But those costs could climb further later this year, analysts say.

      Shale companies’ profitability may also be threatened by rising costs for the immense amounts of sand and water needed for fracking. Modern fracking jobs now require 500 tons of steel pipe, enough water to fill 35 Olympic swimming pools and enough railcars filled with sand to stretch for 14 football fields, according to Rice University’s Center for Energy Studies.

      Many companies may be forced to choose between hitting production targets, and promises to investors to keep spending in check, said James West, an analyst at Evercore ISI.

      “Service pricing is going to hit them like a brick wall,” he said. “I’m personally not convinced [they will] stick to capital discipline. In their heart of hearts, they just want to grow.”

      https://www.wsj.com/articles/oils-at-70-but-frackers-still-struggling-to-make-money-1526549401

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