The World’s Fragile Economic Condition – Part 1

Where is the world economy heading? In my opinion, a large portion of the story that we usually hear about how the world economy operates and the role energy plays is not really correct. In this post (to be continued in Part 2 in the near future), I explain how some of the major elements of the world economy seem to function. I also point out some relationships that tend to make the world’s economic condition more fragile.

Trying to explain the situation a bit further, the economy is a networked system. It doesn’t behave the way nearly everyone expects it to behave. Many people believe that any energy problem will be signaled by high prices. A look at history shows that this is not really the case: fighting and conflict are also likely outcomes. In fact, rising tariffs are a sign of energy problems.

The underlying energy problem represents a conflict between supply and demand, but not in the way most people expect. The world needs rising demand to support the rising cost of energy products, but this rising demand is, in fact, very difficult to produce. The way that this rising demand is normally produced is by adding increasing amounts of debt, at ever-lower interest rates. At some point, the debt bubble created to provide the necessary demand becomes overstretched. Now, we seem to be reaching a situation where the debt bubble may pop, at least in some parts of the world. This is a very concerning situation.

Context. The presentation discussed in this post was given to the Casualty Actuaries of the Southeast. (I am a casualty actuary myself, living in the Southeast.) The attendees tended to be quite young, and they tended not to be very aware of energy issues. I was trying to “bring them up to speed.” This is a link to the presentation: The World’s Fragile Economic Condition.

Slide 1

Slide 2

This post covers only Items 1, 2, and 3 from the Outline in Slide 2. I will save Items 3 through 6 for a post called “The World’s Fragile Economic Condition-Part 2.”

Slide 3

Slide 4

The audience was able to guess that the situation for humans and the economy are parallel. Energy in some sense powers the economy, in a way similar to how food powers humans.

Slide 5

On Slide 5, I am pointing out that changes in the red line, denoting energy consumption growth, tend to come before the corresponding changes in the blue line. This is one way of confirming that energy consumption causes GDP growth, rather than vice versa.

In recent years, countries have found ways of creating GDP growth, without adding true value. This may explain why GDP growth is higher than Energy growth since 2013 on Slide 5. As an example of GDP growth with overstated value, a large share of young people are now being encouraged to purchase advanced education, at considerable cost. This would make sense, if there were suitable high-paying jobs for all of those graduating. It is questionable whether this is the case.

Slide 6

Of course, the issue is not only energy consumption, just as our health is influenced by more than simply what food we eat.

Slide 7

At one time, the emphasis in physics was on systems that are “closed” from an energy point of view. Such systems never grow; they simply decline toward “heat death.”

The real world is made up of many structures that grow and change over time. This growth and ability to change is possible because the energy system we live in is thermodynamically “open,” thanks to flows of energy from the sun, and thanks to fossil fuel energy, which represents stored solar energy from long ago.

Slide 8

The answers to the questions on Slide 8 are easy to guess.

Slide 9

The economy adds new businesses, as citizens see new needs and set up companies to meet those needs. Customers make choices regarding which goods and services to buy, based on their income (primarily wages) and the prices of available goods and services. Governments gradually add new laws, including changes to the way taxes are assessed. The system gradually grows and changes, as the population grows, and as the quantity of goods and services created to meet the needs of that population increases.

One thing to note is that the goods and services produced by the system will eventually be divided among the various players in the system. If one group gets more (say, those receiving interest income), then other groups will necessarily receive less.

Another important point to note is that as new products are added, old ones disappear. For example, once cars came into use, we lost the ability to go back to horses and buggies. There are no longer enough horses; there are no longer facilities to “park” the horses in downtown areas, while at work or shopping; and there are no longer services to clean up after the mess that the horses make.

Without being able to go backward, the system is quite brittle. It would appear that under sufficiently adverse conditions, the entire system could collapse. In fact, we know that many ancient civilizations did collapse, when conditions weren’t right.

Slide 10

The strange interconnections of a networked system make the world economy behave in a different way than we might initially expect. Later in this presentation (in Part 2 of the write-up), I will show some examples of inadequate energy supplies leading to very different results than high prices.

Slide 11

The model of The Limits to Growth looked at how long resources might last, before the growth of the world economy came to a halt from a variety of problems, including a lack of easy-to-extract resources. In some ways, the model was quite simple. For example, the model did not include a financial system or debt. In the single most likely scenario, the base run, the world economy hit limits about now, in the 2015 to 2025 time period. The authors have said that, once limits are hit, the forecast on the right-hand side of the chart cannot be relied upon; the model is too simple to forecast how the down slope might actually occur.

Slide 12

Slide 13

The pattern of world energy consumption seems to be one of rapid growth, especially in the period since World War II.

Slide 14

Energy consumption growth is particularly high in the period covered by the red box. In other words, energy consumption growth is particularly high from the 1940s through the 1970s. If the economy relies on energy, we would expect this to be a particularly booming period for the economy.

Slide 15

We can break energy consumption growth down into two components: (1) the portion to cover higher population, and (2) the portion to cover improved standards of living. Looking at this chart, it is clear that “higher population” takes the majority of the increase, except when increases are very large.

Slide 16

I have labelled the three big bumps with my view of what seems to have led to them. The first is early electrification, when street cars were added and when the early mechanization of farming was implemented. The second is the postwar boom and the third is the recent period of globalization, led by China’s major ramp up in coal production.

Slide 17

China’s energy consumption grew rapidly after it joined the World Trade Organization in 2001. The thing that most people don’t realize is that China is reaching limits on its coal extraction. Its coal production seems to have peaked about 2013. Its comparatively tiny amount of wind and solar (shown in orange on the chart) is not making up the shortfall. Instead, China is being forced to rely more on imported energy. Imported energy tends to be higher in cost, and may be limited in supply. For all these reasons, we cannot rely on China to continue to power future world economic growth.

Slide 18

It is not just China that gets only a small share of its energy production from wind and solar. This is also true of the world as a whole.

Slide 19

Slide 20

Boxes 1 through 4 show a different model of how the world economy works than that shown earlier (in Slide 9). In Slide 20, the Economy (in Box 3) acts like a giant factory. It uses Resources of various kinds (a few of which are listed in Box 2) to make Goods and Services (a few of which are listed in Box 4). If the Economy is getting to be more and more efficient, Box 4 will expand much more rapidly than Box 2, producing a great abundance of goods and services. If this happens, all of the Resource Providers in Box 1 (plus some I have failed to list) can be rewarded more than adequately for their services, with Goods and Services produced by the economy. The transfer of these Goods and Services occurs through the use of money.

Slide 21

Everyone can get rich at once!

Slide 22

The top line is GDP growth including inflation; the bottom line is GDP growth excluding inflation. Before the dotted line, both GDP growth rates and inflation rates are high; after the dotted line (when energy growth was lower), they tend to be lower.

Slide 23

Interest rates were raised to try to damp down oil and other energy prices. We will see in a later section that reducing interest rates helped hide the fact that energy growth was slower after 1980.

Slide 24

The wages shown on Slide 24 have already been inflation adjusted. Thus, in the period before 1968, wages for both the lower 90% of workers and for the top 10% of workers were rising rapidly, even considering the impact of inflation. Many families were able to afford a car for the first time. After 1980, the wages of the top 10% rose much more quickly than the wages of the bottom 90%.

Slide 25

In 1930, wage disparity seems to have been at about today’s level. Early mechanization had replaced many jobs, both on the farm and elsewhere. Farmers who could not afford the new technology found that they could not produce food cheaply enough to compete with the low prices made possible by the new technology. The growing wage disparity meant that a large share of the population could not afford more than the basic necessities of life. The many people with low wages kept demand for most goods and services low. Oil prices were low, and there was a glut of oil, not unlike what recent markets have experienced. New tariffs were added, and immigration was restricted.

Slide 26

The period before the mid-1970s is when a great deal of the United States’ infrastructure was built. The Eisenhower Interstate Highway System dates from this time period. Many of the oil and gas pipelines and electricity transmission systems in use today were also built in this period.

Once the price of oil and other energy products started rising, it became much more expensive to add or replace this type of infrastructure. Once oil prices rose, more debt at lower interest rates seemed to be needed to keep the economy growing, as I will explain in Part 2 of this write-up.

Slide 27

The least expensive to extract oil supply–US oil supply in the contiguous 48 states that could be extracted by conventional means–was developed first. Alaska production was added when it was clear that the early supply was starting to deplete. It was more expensive, as was North Sea oil, which was also added after early US oil began to deplete.

Once oil prices rose in the 2005-2008 period, companies became interested in developing oil from shale formations (sometimes called tight oil). This oil seems to be much more expensive. It is doubtful that this oil is profitable at today’s prices.

Slide 28

Many people believe that oil prices will rise, indefinitely, with the cost of production. The thing that they don’t realize is that high oil prices tend to lead to recession. When this happens, employment drops, and the average buying power of the population no longer rises–it tends to remain flat or falls. As a result, high oil prices do not “stick.”

Slide 29

We are today in a situation where oil prices have been too low for years. For a while, this situation can be hidden, but eventually low investment can be expected to lead to lower production of energy products. It is even possible that some governments of oil exporters may collapse from lack of adequate tax revenue. Governments of oil exporters often obtain over half of their total tax revenue from taxes on oil production. Adequate tax revenue for these governments requires a high selling price for oil.

The situation with food prices tends to parallel oil prices. This occurs partly because oil is used in growing and transporting food, and partly because of substitution issues. For example, corn can be used to make either ethanol for vehicles or food for people.

Slide 30

M. King Hubbert was one of the early scientists who talked about what appeared to be a problem of running out of oil and other fossil fuels. While I call him a geologist, he really was a geophysicist. The catch was that the physics thinking of the day was mostly about “thermodynamically closed systems.” If closed systems were the problem, then running out of fossil fuels that could be extracted using current techniques was the major issue.

Hubbert and others did not realize that energy supply is part of a larger economic system, which also functions under the laws of physics. The economic system is part of a thermodynamically open system, not a closed system. It gets energy both directly from the sun and from fossil fuels, which provide solar energy stored as fossil fuels.

The issue is how this larger economic system behaves: does it allow the oil prices to rise to a high enough level to extract all of the oil and other fossil fuels that seem to be available? I don’t think it does. But under the “right” conditions (lots of debt growth), the economic system does allow energy prices to rise somewhat. This is what we have seen since the 1970s.

It is extremely difficult to figure out what true costs and true benefits are in a networked system. The standard approach for evaluating the benefit of wind and solar considers only a small part of the system. If the proposed devices do not directly burn fossil fuels and if not too much fossil fuel is used in their production, the usual practice is to assume that the devices must be helpful to the overall system, because they seem to be “low carbon.” This approach leaves out many important costs.

The problem is that wind and solar are not now, and never can be, standalone devices. When all costs are considered, they are simply very inefficient add-ons to the fossil fuel system. These costs include buffering services (using batteries or other storage), the cost of capital, the cost of leases, and wages and taxes. A very high-cost electricity generating system is not likely to be helpful to the economy because such a system is very inefficient. It can be expected to affect the economy as adversely as high-priced oil does.

Slide 31

An economy operates best when energy costs are very low because goods and services made with this low-cost energy tend to be low-cost as well. Oil is used in producing and transporting food. Thus, low-cost oil tends to produce inexpensive food.

If energy costs begin to rise in a country, it tends to make that country less competitive in the world marketplace. It also tends to push the country toward recession, because the higher costs are difficult to recover from customers whose wages don’t rise to cover the higher costs.

Slide 32

Many people believe that the amount of fossil fuel that will ultimately be extracted depends on a combination of (a) the amount of resources in the ground, and (b) the technology developed for extraction. While these are indeed eventual limits, I think that a maximum affordable price limit comes much sooner. This depends on how high a debt bubble the economy can sustain. The role of debt will be discussed in Part 2.

Slide 33

One thing that is confusing is the familiar supply and demand curve for energy. Many people believe that “of course” prices must rise if energy is scarce. The catch is that energy consumption affects all parts of the economy. It takes energy to create jobs, just as it takes energy to produce goods and services. Because both supply and demand are affected by a shortage of energy, our intuition regarding how prices should move can be totally wrong.

The word “Demand” is confusing, also, because most energy use is difficult to see. Most energy use is not found in the gasoline we buy at the pump or the electricity we purchase. Instead, energy is used in creating the streets that we drive on, and in building the schools that our children attend. Building new homes and manufacturing cars also takes huge amounts of energy. If energy costs rise very much, the problem is that many people can no longer afford homes or cars. Instead, young people live in their parents’ basements indefinitely. Governments may decide to stop paving some roads, because repaving is too expensive to afford. Reduced demand for oil might be better described as reduced purchases of goods and services of all kinds, because certain groups of would-be buyers find prices too high to afford.

[To be continued in “The World’s Fragile Economic Condition – Part 2”]

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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1,500 Responses to The World’s Fragile Economic Condition – Part 1

  1. Fast Eddy says:

    Facts? Well these are the facts:

    The kkkkkkkkklimate change debate went nuclear Sunday over a whistleblower’s explosive allegation that the National Oceanic and Atmospheric Association manipulated data to advance a political agenda by hiding the g lob al wa rm ing “pause.”

    In an article on the C limate Etc. blog, John Bates, who retired last year as principal scientist of the National Climatic Data Center, accused the lead author of the 2015 NOAA “pausebuster” report of trying to “discredit” the hiatus through “flagrant manipulation of scientific integrity guidelines and scientific publication standards.”


    How anyone can possible believe in this bull shi t after reading this … is beyond me

    The stoooopidity is just… epic

    • JesseJames says:

      Snow is hitting the northern agricultural areas of the US and Canada early this year, destroying agricultural crops and preventing harvest. This is what we expect with a Little Ice Age weather that reduces the growing season significantly. Expect higher food prices.

      • Perhaps food prices that are still too low for farmers whose crops have been destroyed, however.

        Food is a another type of energy where there is no price that works. A price that is high enough for producers becomes too high for consumers.

      • The issue is that there is essentially nothing, from a fuel point of view, that we can do about climate change.

        There is little true evidence that wind and solar are at all beneficial in the whole scheme of things, because EROEI calculations are misleading.

        Efficiency changes don’t really help. Making air conditioners more efficient, for example, will make it possible for more people to afford air conditioners and worsen the problem (unless doing so drives up the cost so much that it makes air conditioners less affordable). The IEA has been forecasting huge demand growth from air conditioners in India and Africa.

        Using more biological renewables, such as burning plant remains after harvest for fuel for homes and businesses are basically ridiculous. They would damage agricultural lands, because the plant remains would not get back to the soil. We are already overusing our forests, so using more of them is not a solution either.

        Things that theoretically might be done that would help the problem:

        1. Move up the date of collapse.
        2. Reduce population growth in Africa, the Middle East, and other areas with growing population. Somehow, women need to derive their value from something other than having lots of children. Without fossil fuels, the tendency is for more of this belief, rather than less.
        3. Change eating patterns to a more vegetable and whole grain basis, with much less meat and dairy. Food should be locally grown as well.
        4. Use some engineering approach to reduce energy gain from the sun, such as painting large areas white (or something else–but there is a major chance that this will add to the problem in unforeseen ways.

        • Duncan Idaho says:

          “All christianity was written from the perspective of small, bronze age tribes, all economics has been written from the perspective of a civilization with an ever growing supply of cheap and benign energy.”

          • Third World person says:

            duncan i hope fast eddy

            does not thinking that international space station
            is also fake

          • We live in a world with self-organizing systems. Religions are indeed self-organizing system, powered by energy, just as all other systems are.

            Our problem now is that we have “thrown the baby out with the bathwater.” One thing that religions gave us was a sense of awe–a sense that we are ultimately not in charge; something else outside us is in charge. This literal Higher Power has somehow created a system that could go on for billions of years.

            Another thing that religions gave us was a way of passing down wisdom on how to work together in the context of the current (energy) situation. If each of us were only individuals, with enough energy available to act on our own, we could completely disregard everyone else. In fact, today’s society comes pretty close to this. This is a major reason why religion has in recent years mostly been disregarded. Each person can afford his/her own apartment, and walk around with his or her phone, playing endless games to amuse himself.

            If each of us is dependent on the group for survival, then religions give us some understanding of how to get along within that group. Some form of sharing is optimal. So is some form of looking out for the needs of other. “Sin” has to do with looking out only for our own needs, when the survival of our group depends on some level of cooperation. “Thy kingdom come on earth as it is in heaven” is a request for harmony on earth, as it is in heaven. It says nothing about what happens after death.

            Now, we are faced with having to go back from endless energy for ourselves (making us fat besides video-game obsessed), to a situation where there is clearly not enough to go around. We should at least understand the nature of the predicament we are in. We have convinced ourselves that we humans can solve all of our problems, when this is almost certainly not the case.

            • Sven Røgeberg says:

              Hard to get this point across in a society which is worshipping science…

            • Duncan Idaho says:

              Religion is poison
              (He occasionally got things right- that is why we are dealing with China presently )

        • Sven Røgeberg says:

          «Global energy demand from air conditioners is expected to triple by 2050, requiring new electricity capacity the equivalent to the combined electricity capacity of the United States, the EU and Japan today.
          Global energy demand from air conditioners is expected to triple by 2050, requiring new electricity capacity the equivalent to the combined electricity capacity of the United States, the EU and Japan today.»

    • lracine says:

      Your link is dead… maybe because it is well over a year old… Bates’ accusation is a bit more nuanced than you portray… here is a direct quote in his own words

      “The issue here is not an issue of tampering with data, but rather really of timing of a release of a paper that had not properly disclosed everything it was,” he said.

      With regards to your last sentence perhaps you should take a good hard look in the mirror….. just saying

      • Fast Eddy says:

        Nothing wrong with the link … to prevent it from not being posted I cut it in half….

        Now since you are operating off of an IQ lower than the temperature here in Queenstown today… I will … help you

        1. Copy the url into your browser
        2. Put your cursor after the letter c and delete the space
        3. Click enter
        4. Ask your mother to read the article to you and explain it … as one would to a 3 year old… ask her to talk in baby talk.

  2. soft targets says:

    Given all the Intersectionalist racism hysteria in the U.S….here is a real case of racism and it is against the most vulnerable minority and least visible minority in America.

    It makes since that bona fide white supremacists would go for a soft target, a group of people literally walled off from the rest of American society and do not have lobbyists in Washington D.C. fighting for “representation” because they are somewhat seperatists.

    • Dan says:

      I know for a fact Native America tribes have lobbyists. If you are going to spew bs and lies please find a more suitable site.

  3. soft targets says:

    America’s Original Sin

    I wonder why there hasn’t been a social justice movement two send all non-Native Americans back to “Where they came from” since Progressive women and POC knowingly continue to occupy territory that used to belong to Native Americans?

    • Dan says:

      Check yourself – On the contrary I say americans showed alot of constraint and excercised alot of compassion to a conquered people. Yes we conquered them.
      Go ask the Alaska natives who were more benvolent americans or russians. Go ask the amazon tribes how the portugese and now brazilians honor their claims. Ask the now mexico and central america natives how their experience with the spanish fared.
      Peddle your guilt tirades elsewhere or learn your fning history first before you do.

      • aaaa says:

        Whatever concept of conquerer’s mercy that USA has over anybody else is only because America came about after the inquisition went out of fashion. Isn’t it convenient how all the urbanized, sand-based religions basically deemed everybody else to be inhuman, subhuman, evil worshipers of false idols and Satan?

    • doomphd says:

      “America’s Original Sin”

      Is this trotted out every Columbus Day these days? Name any benighn colonialists. It’ll be a short list.

      • Fast Eddy says:

        If anyone is uncomfortable with benefitting from the plundering of aboriginal peoples in their backyards… they are most welcome to donate half their income to the various agencies that provide assistance to said peoples.

        Did I mention a friend of mine back in Canada has his native status card — he was forever accepting grants from one of these associations for free school + room and board … not attending school … and dropping out when the money ran out … then rinsing and repeating…

        Did I mention my brother who is an architect and has worked for First Nations on various projects — he regales me with stories of massive corruption….

        In celebration of Genocide Day — let’s all give generously!

    • Third World person says:

      well usa modern sin

      is that they can not accept that they have lost war against bunch of goat farmers
      for 18 years

  4. Duncan Idaho says:

    “All ch-ti-an-i was written from the perspective of small, bronze age tribes, all economics has been written from the perspective of a civilization with an ever growing supply of cheap and benign energy.”

  5. Fast Eddy says:

    To all the du mb f789s in the world….

    Who travel in and out of FW….

    I dedicate this post….

    To all the du mb f789s in the world

    KKKlimate scientists versus KKKKlimate data

    by John Bates

    In the following sections, I provide the details of how Mr. Karl failed to disclose critical information to NO..AA, Science Magazine, and Chairman Smith regarding the datasets used in K15. I have extensive documentation that provides independent verification of the story below. I also provide my suggestions for how we might keep such a flagrant manipulation of scientific integrity guidelines and scientific publication standards from happening in the future. Finally, I provide some links to examples of what well documented CDRs look like that readers might contrast and compare with what Mr. Karl has provided. limate-scientists-versus-c limate-data/

    • Fast Eddy says:

      I read with great irony recently that scientists are “frantically copying U.S. kklimate data, fearing it might vanish under Trump” (e.g., Washington Post 13 December 2016). As a kklimate scientist formerly responsible for NOAA’s kklimate archive, the most critical issue in archival of kklimate data is actually scientists who are unwilling to formally archive and document their data. I spent the last decade cajoling kklimate scientists to archive their data and fully document the datasets. I established a kklimate data records program that was awarded a U.S. Department of Commerce Gold Medal in 2014 for visionary work in the acquisition, production, and preservation of kklimate data records (CDRs), which accurately describe the Earth’s changing environment.

      The most serious example of a kklimate scientist not archiving or documenting a critical kklimate dataset was the study of Tom Karl et al. 2015 (hereafter referred to as the Karl study or K15), purporting to show no ‘hiatus’ in g lobal w arming in the 2000s (Federal scientists say there never was any g lobal w arming “pause”).

      The study drew criticism from other kkklimate scientists, who disagreed with K15’s conclusion about the ‘hiatus.’ (Making sense of the early-2000s w arming slowdown). The paper also drew the attention of the Chairman of the House Science Committee, Representative Lamar Smith, who questioned the timing of the report, which was issued just prior to the Obama Administration’s Clean Power Plan submission to the Paris kkklimate Conference in 2015.

  6. Fast Eddy says:

    Look at how easy that was… I did a google search … and I found the original article….

    And then I copy and pasted parts of it onto FW….

    If I can do this …. why can’t the MSM?

    Why can’t the Green Groopie R e tard sites do what I have done?

    They could – they could!!!!

    But they won’t – they won’t

    Because most people with some level intelligence would read that entire article… and they’d realize they’d been played…. that man-caused G W …. is a LIE… a ho ax… a pile of steaming do sh it…

    The MSM does not want this to happen…. because the hopium narrative is right up there with the jesus, holy spirit, god narrative…. solar energy EVs and G W….. you need all 3 to create a whole… to create hopium….

    Don Draper is a clever man

    As I have said before – if Al Gore came out and admitted this is a huge ho ax…. and that he volunteered to be the front man…. you clowns would call him a villain and accuse him of being paid by the coal companies…

    That is …. the definition of … profound stu pidity

  7. Ed says:

    How long will we have to wait until affordable energy is in clear decline? Will the general mob ever see over shoot as a harm to their own well being?

  8. Artleads says:

    Either this was going to take a very long time to open, or my computer couldn’t process it. I don’t know if it would show various energy mining sites (rather than only houses). It could help with safety planning if it did.

  9. Fast Eddy says:

    Raw vs Cooked

    It seems that some foods are better taken raw….

    Just thinking… what the harnessing of fire – and cooking did… was release vast amounts of calories into the human population …

    For instance… without cooking wild grains and many vegetables were useless… try chewing a mouthful of raw wheat for instance… or gnaw on a raw turnip, potato, cassava or beetroot….

  10. Artleads says:

    There seem to be some issues of how drilling is done, and that could affect public support for it.

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