Why stimulus can’t fix our energy problems

Economists tell us that within the economy there is a lot of substitutability, and they are correct. However, there are a couple of not-so-minor details that they overlook:

  • There is no substitute for energy. It is possible to harness energy from another source, or to make a particular object run more efficiently, but the laws of physics prevent us from substituting something else for energy. Energy is required whenever physical changes are made, such as when an object is moved, or a material is heated, or electricity is produced.
  • Supplemental energy leverages human energy. The reason why the human population is as high as it is today is because pre-humans long ago started learning how to leverage their human energy (available from digesting food) with energy from other sources. Energy from burning biomass was first used over one million years ago. Other types of energy, such as harnessing the energy of animals and capturing wind energy with sails of boats, began to be used later. If we cut back on our total energy consumption in any material way, humans will lose their advantage over other species. Population will likely plummet because of epidemics and fighting over scarce resources.

Many people appear to believe that stimulus programs by governments and central banks can substitute for growth in energy consumption. Others are convinced that efficiency gains can substitute for growing energy consumption. My analysis indicates that workarounds, in the aggregate, don’t keep energy prices high enough for energy producers. Oil prices are at risk, but so are coal and natural gas prices. We end up with a different energy problem than most have expected: energy prices that remain too low for producers. Such a problem can have severe consequences.

Let’s look at a few of the issues involved:

[1] Despite all of the progress being made in reducing birth rates around the globe, the world’s population continues to grow, year after year.

Figure 1. 2019 World Population Estimates of the United Nations. Source: https://population.un.org/wpp/Download/Standard/Population/

Advanced economies in particular have been reducing birth rates for many years. But despite these lower birth rates, world population continues to rise because of the offsetting impact of increasing life expectancy. The UN estimates that in 2018, world population grew by 1.1%.

[2] This growing world population leads to a growing use of natural resources of every kind.

There are three reasons we might expect growing use of material resources:

(a) The growing world population in Figure 1 needs food, clothing, homes, schools, roads and other goods and services. All of these needs lead to the use of more resources of many different types.

(b) The world economy needs to work around the problems of an increasingly resource-constrained world. Deeper wells and more desalination are required to handle the water needs of a rising population. More intensive agriculture (with more irrigation, fertilization, and pest control) is needed to harvest more food from essentially the same number of arable acres. Metal ores are increasingly depleted, requiring more soil to be moved to extract the ore needed to maintain the use of metals and other minerals. All of these workarounds to accommodate a higher population relative to base resources are likely to add to the economy’s material resource requirements.

(c) Energy products themselves are also subject to limits. Greater energy use is required to extract, process, and transport energy products, leading to higher costs and lower net available quantities.

Somewhat offsetting these rising resource requirements is the inventiveness of humans and the resulting gradual improvements in technology over time.

What does actual resource use look like? UN data summarized by MaterialFlows.net shows that extraction of world material resources does indeed increase most years.

Figure 2. World total extraction of physical materials used by the world economy, calculated using weight in metric tons. Chart is by MaterialFlows.net. Amounts shown are based on the Global Material Flows Database of the UN International Resource Panel. Non-metallic minerals include many types of materials including sand, gravel and stone, as well as minerals such as salt, gypsum and lithium.

[3] The years during which the quantities of material resources cease to grow correspond almost precisely to recessionary years.

If we examine Figure 2, we see flat periods or periods of actual decline at the following points: 1974-75, 1980-1982, 1991, and 2008-2009. These points match up almost exactly with US recessionary periods since 1970:

Figure 3. Dates of US recessions since 1970, as graphed by the Federal Reserve of St. Louis.

The one recessionary period that is missed by the Figure 2 flat periods is the brief recession that occurred about 2001.

[4] World energy consumption (Figure 4) follows a very similar pattern to world resource extraction (Figure 2).

Figure 4. World Energy Consumption by fuel through 2018, based on 2019 BP Statistical Review of World Energy. Quantities are measured in energy equivalence. “Other Renew” includes a number of kinds of renewables, including wind, solar, geothermal, and sawdust burned to provide electricity. Biofuels such as ethanol are included in “Oil.”

Note that the flat periods are almost identical to the flat periods in the extraction of material resources in Figure 2. This is what we would expect, if it takes material resources to make goods and services, and the laws of physics require that energy consumption be used to enable the physical transformations required for these goods and services.

[5] The world economy seems to need an annual growth in world energy consumption of at least 2% per year, to stay away from recession.

There are really two parts to projecting how much energy consumption is needed:

  1. How much growth in energy consumption is required to keep up with growing population?
  2. How much growth in energy consumption is required to keep up with the other needs of a growing economy?

Regarding the first item, if the population growth rate continues at a rate similar to the recent past (or slightly lower), about 1% growth in energy consumption is needed to match population growth.

To estimate how much growth in energy supply is needed to keep up with the other needs of a growing economy, we can look at per capita historical relationships:

Figure 5. Three-year average growth rates of energy consumption and GDP. Energy consumption growth per capita uses amounts provided in BP 2019 Statistical Review of World Energy. World per capita GDP amounts are from the World Bank, using GDP on a 2010 US$ basis.

The average world per capita energy consumption growth rate in non-recessionary periods varies as follows:

  • All years: 1.5% per year
  • 1970 to present: 1.3% per year
  • 1983 to present: 1.0% per year

Let’s take 1.0% per year as the minimum growth in energy consumption per capita required to keep the economy functioning normally.

If we add this 1% to the 1% per year expected to support continued population growth, the total growth in energy consumption required to keep the economy growing normally is about 2% per year.

Actual reported GDP growth would be expected to be higher than 2%. This occurs because the red line (GDP) is higher than the blue line (energy consumption) on Figure 5. We might estimate the difference to be about 1%. Adding this 1% to the 2% above, total reported world GDP would be expected to be about 3% in a non-recessionary environment.

There are several reasons why reported GDP might be higher than energy consumption growth in Figure 5:

  • A shift to more of a service economy, using less energy in proportion to GDP growth
  • Efficiency gains, based on technological changes
  • Possible intentional overstatement of reported GDP amounts by some countries to help their countries qualify for loans or to otherwise enhance their status
  • Intentional or unintentional understatement of inflation rates by reporting countries

[6] In the years subsequent to 2011, growth in world energy consumption has fallen behind the 2% per year growth rate required to avoid recession.

Figure 7 shows the extent to which energy consumption growth has fallen behind a target growth rate of 2% since 2011.

Figure 6. Indicated amounts to provide 2% annual growth in energy consumption, as well as actual increases in world energy consumption since 2011. Deficit is calculated as Actual minus Required at 2%. Historical amounts from BP 2019 Statistical Review of World Energy.

[7] The growth rates of oil, coal and nuclear have all slowed to below 2% per year since 2011. While the consumption of natural gas, hydroelectric and other renewables is still growing faster than 2% per year, their surplus growth is less than the deficit of oil, coal and nuclear.

Oil, coal, and nuclear are the types of energy whose growth has lagged below 2% since 2011.

Figure 7. Oil, coal, and nuclear growth rates have lagged behind the target 2% growth rate. Amounts based on data from BP’s 2019 Statistical Review of World Energy.

The situations behind these lagging growth rates vary:

  • Oil. The slowdown in world oil consumption began in 2005, when the price of oil spiked to the equivalent of $70 per barrel (in 2018$). The relatively higher cost of oil compared with other fuels since 2005 has encouraged conservation and the switching to other fuels.
  • Coal. China, especially, has experienced lagging coal production since 2012. Production costs have risen because of depleted mines and more distant sources, but coal prices have not risen to match these higher costs. Worldwide, coal has pollution issues, encouraging a switch to other fuels.
  • Nuclear. Growth has been low or negative since the Fukushima accident in 2011.

Figure 8 shows the types of world energy consumption that have been growing more rapidly than 2% per year since 2011.

Figure 8. Natural gas, hydroelectric, and other renewables (including wind and solar) have been growing more rapidly than 2% since 2011. Amounts based on data from BP’s 2019 Statistical Review of World Energy.

While these types of energy produce some surplus relative to an overall 2% growth rate, their total quantity is not high enough to offset the significant deficit generated by oil, coal, and nuclear.

Also, it is not certain how long the high growth rates for natural gas, hydroelectric, and other renewables can persist. The growth in natural gas may slow because transport costs are high, and consumers are not willing/able to pay for the high delivered cost of natural gas, when distant sources are used. Hydroelectric encounters limits because most of the good sites for dams are already taken. Other renewables also encounter limits, partly because many of the best sites are already taken, and partly because batteries are needed for wind and solar, and there is a limit to how fast battery makers can expand production.

Putting the two groupings together, we obtain the same deficit found in Figure 6.

Figure 9. Comparison of extra energy over targeted 2% growth from natural gas, hydroelectric and other renewables with energy growth deficit from oil, coal and nuclear combined. Amounts based on data from BP’s 2019 Statistical Review of World Energy.

Based on the above discussion, it seems likely that energy consumption growth will tend to lag behind 2% per year for the foreseeable future.

[8] The economy needs to produce its own “demand” for energy products, in order to keep prices high enough for producers. When energy consumption growth is below 2% per year, the danger is that energy prices will fall below the level needed by energy producers.

Workers play a double role in the economy:

  • They earn wages, based on their jobs, and
  • They are the purchasers of goods and services.

In fact, low-wage workers (the workers that I sometimes call “non-elite workers”) are especially important, because of their large numbers and their role in buying many items that use significant amounts of energy. If these workers aren’t earning enough, they tend to cut back on their discretionary buying of homes, cars, air conditioners, and even meat. All of these require considerable energy in their production and in their use.

High-wage workers tend to spend their money differently. Most of them have already purchased as many homes and vehicles as they can use. They tend to spend their extra money differently–on services such as private education for their children, or on investments such as shares of stock.

An economy can be configured with “increased complexity” in order to save energy consumption and costs. Such increased complexity can be expected to include larger companies, more specialization and more globalization. Such increased complexity is especially likely if energy prices rise, increasing the benefit of substitution away from the energy products. Increased complexity is also likely if stimulus programs provide inexpensive funds that can be used to buy out other firms and for the purchase of new equipment to replace workers.

The catch is that increased complexity tends to reduce demand for energy products because the new way the economy is configured tends to increase wage disparity. An increasing share of workers are replaced by machines or find themselves needing to compete with workers in low-wage countries, lowering their wages. These lower wages tend to lower the demand of non-elite workers.

If there is no increase in complexity, then the wages of non-elite workers can stay high. The use of growing energy supplies can lead to the use of more and better machines to help non-elite workers, and the benefit of those machines can flow back to non-elite workers in the form of higher wages, reflecting “higher worker productivity.” With the benefit of higher wages, non-elite workers can buy the energy-consuming items that they prefer. Demand stays high for finished goods and services. Indirectly, it also stays high for commodities used in the process of making these finished goods and services. Thus, prices of energy products can be as high as needed, so as to encourage production.

In fact, if we look at average annual inflation-adjusted oil prices, we find that 2011 (the base year in Sections [6] and [7]) had the single highest average price for oil.1 This is what we would expect, if energy consumption growth had been adequate immediately preceding 2011.

Figure 10. Historical inflation-adjusted Brent-equivalent oil prices based on data from 2019 BP Statistical Review of World Energy.

If we think about the situation, it is not surprising that the peak in average annual oil prices took place in 2011, and the decline in oil prices has coincided with the growing net deficit shown in Figures 6 and 9. There was really a double loss of demand, as growth in energy use slowed (reducing direct demand for energy products) and as complexity increased (shifting more of the demand to high-wage earners and away from the non-elite workers).

What is even more surprising is the fact that the prices of fuels in general tend to follow a similar pattern (Figure 11). This strongly suggests that demand is an important part of price setting for energy products of all kinds. People cannot buy more goods and services (made and transported with energy products) than they can afford over the long term.

Figure 11. Comparison of changes in oil prices with changes in other energy prices, based on time series of historical energy prices shown in BP’s 2019 Statistical Review of World Energy. The prices in this chart are not inflation-adjusted.

If a person looks at all of these charts (deficits in Figures 6 and 9 and oil and energy prices in general from Figures 10 and 11) for the period 2011 onward, there is a very distinct pattern. There is at first a slow slide down, then a fast slide down, followed (at the end) by an uptick. This is what we should expect, if low energy growth is leading to low prices for energy products in general.

[9] There are two different ways that oil and other energy prices can damage the economy: (a) by rising too high for consumers or (b) by falling too low for producers to have funds for reinvestment, taxes and other needs. The danger at this point is from (b), energy prices falling too low for producers.

Many people believe that the only energy problem that an economy can have is prices that are too high for consumers. In fact, energy prices seemed to be very high in the lead-ups to the 1974-1975 recession, the 1980-1982 recession, and the 2008-2009 recession. Figure 5 shows that the worldwide growth in energy consumption was very high in the lead-up to all three of these recessions. In the two earlier time periods, the US, Europe, and the Soviet Union were all growing their economies, leading to high demand. Preceding the 2008-2009 Great Recession, China was growing its economy very rapidly at the same time the US was providing low interest rates for home purchases, some of them to subprime borrowers. Thus, demand was very high at that time.

The 1974-75 recession and the 1980-1982 recession were fixed by raising interest rates. The world economy was overheating with all of the increased leveraging of human energy with energy products. Higher short-term interest rates helped bring growth in energy prices (as well as food prices, which are very dependent on energy consumption) down to a more manageable level.

Figure 12. Three-month and ten-year interest rates through May 2019, in chart by Federal Reserve of St. Louis.

There was really a two-way interest rate fix related to the Great Recession of 2008-2009. First, when oil and other energy prices started to spike, the US Federal Reserve raised short term interest rates in the mid 2000s. This, by itself, was almost enough to cause recession. When recession started to set in, short-term interest rates were brought back down. Also, in late 2008, when oil prices were very low, the US began using Quantitative Easing to bring longer-term interest rates down, and the price of oil back up.

Figure 13. Monthly Brent oil prices with dates of US beginning and ending Quantitative Easing.

There is one recession that seems to have been the result of low oil prices, perhaps combined with other factors. That is the recession that was associated with the collapse of the central government of the Soviet Union in 1991.

[10] The recession that comes closest to the situation we seem to be heading into is the one that affected the world economy in 1991 and shortly thereafter.

If we look at Figures 2 and 5, we can see that the recession that occurred in 1991 had a moderately severe effect on the world economy. Looking back at what happened, this situation occurred when the central government of the Soviet Union collapsed after 10 years of low oil prices (1982-1991). With these low prices, the Soviet Union had not been earning enough to reinvest in new oil fields. Also, communism had proven to be a fairly inefficient method of operating the economy. The world’s self-organizing economy produced a situation in which the central government of the Soviet Union collapsed. The effect on resource consumption was very severe for the countries most involved with this collapse.

Figure 14. Total extraction of physical materials Eastern Europe, Caucasus and Central Asia, in chart by MaterialFlows.net. Amounts shown are based on the Global Material Flows Database of the UN International Resource Panel.

World oil prices have been falling too low, at least since 2012. The biggest decreases in prices have come since 2014. With energy prices already very low compared to what producers need, there is a need right now for some type of stimulus. With interest rates as low as they are today, it will be very difficult to lower interest rates much further.

Also, as we have seen, debt-related stimulus is not very effective at raising energy prices unless it actually raises energy consumption. What works much better is energy supply that is cheap and abundant enough that supply can be ramped up at a rate well in excess of 2% per year, to help support the growth of the economy. Suitable energy supply should be inexpensive enough to produce that it can be taxed heavily, in order to help support the rest of the economy.

Unfortunately, we cannot just walk away from economic growth because we have an economy that needs to continue to expand. One part of this need is related to the world’s population, which continues to grow. Another part of this need relates to the large amount of debt that needs to be repaid with interest. We know from recent history (as well as common sense) that when economic growth slows too much, repayment of debt with interest becomes a problem, especially for the most vulnerable borrowers. Economic growth is also needed if businesses are to receive the benefit of economies of scale. Ultimately, an expanding economy can be expected to benefit the price of a company’s stock.

Observations and Conclusions

Perhaps the best way of summing up how my model of the world economy differs from other ones is to compare it to other popular models.

The Peak Oil model says that our energy problem will be an oil supply problem. Some people believe that oil demand will rise endlessly, allowing prices to rise in a pattern following the ever-rising cost of extraction. In the view of Peak Oilers, a particular point of interest is the date when the supply of oil “peaks” and starts to decline. In the view of many, the price of oil will start to skyrocket at that point because of inadequate supply.

To their credit, Peak Oilers did understand that there was an energy bottleneck ahead, but they didn’t understand how it would work. While oil supply is an important issue, and in fact, the first issue that starts affecting the economy, total energy supply is an even more important issue. The turning point that is important is when energy consumption stops growing rapidly enough–that is, greater than the 2% per year needed to support adequate economic growth.

The growth in oil consumption first fell below the 2% level in 2005, which is the year that some observers have claimed that “conventional” (that is, free flowing, low-cost) oil production peaked. If we look at all types of energy consumption combined, growth fell below the critical 2% level in 2012. Both of these issues have made the world economy more vulnerable to recession. We experienced a recession based on prices that were too high for consumers in 2008-2009. It appears that the next bottleneck may be caused by energy prices that are too low for producers.

Recessions that are based on prices that are too low for the producer are the more severe type. For one thing, such recessions cannot be fixed by a simple interest rate fix. For another, the timing is unpredictable because a problem with low prices for the producer can linger for quite a few years before it actually leads to a major collapse. In fact, individual countries affected by low energy prices, such as Venezuela, can collapse before the overall system collapses.

While the Peak Oil model got some things right and some things wrong, the models used by most conventional economists, including those included in the various IPCC reports, are far more deficient. They assume that energy resources that seem to be in the ground can actually be extracted. They see no limitations caused by prices that are too high for consumers or too low for producers. They do not realize that affordable energy prices can actually fall over time, as the economy weakens.

Conventional economists assume that it is possible for politicians to direct the economy along lines that they prefer, even if doing so contradicts the laws of physics. In particular, they assume that the economy can be made to operate with much less energy consumption than is used today. They assume that we collectively can decide to move away from coal consumption, without having another fuel available that can adequately replace coal in quantity and uses.

History shows that the collapse of economies is very common. Collectively, we have closed our eyes to this possibility ever happening to the world economy in the modern era. If the issue with collapsing demand causing ever-lower energy prices is as severe as my analysis indicates, perhaps we should be examining this scenario more closely.

Note:

[1] There was a higher spike in oil prices in 2008, but averaged over the whole year, the 2008 price was lower than the continued high prices of 2011.

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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880 Responses to Why stimulus can’t fix our energy problems

  1. Harry McGibbs says:

    “Bank of England research shows that the share of corporate debt owed by highly leveraged companies across major advanced economies is now similar to, or higher than, levels in 2007. The reason that this should worry us is that “cross-country data shows that growth in the corporate debt to GDP ratio is associated with deeper recessions…

    “It is now companies which are very indebted, in notional numbers and as a percent equivalent of GDP. Many of these are zombie companies that have been borrowing to pay existing debt, pay dividends, engage in share buy backs, and/or to pay executives bigger bonuses. As we get into an economic downturn, there is a high risk that leveraged companies will default on their obligations and fire employees in an attempt to stay afloat.

    “Presently, 80-85% of leveraged loans have lite or no covenants. When companies default, lenders will have very little in protection.”

    https://www.forbes.com/sites/mayrarodriguezvalladares/2019/07/21/banks-are-the-largest-holders-worldwide-of-leveraged-loans-and-collateralized-loan-obligations/#6d2fe3903079

    • Harry McGibbs says:

      “Citi strategists pointed out the earnings recession is likely to continue into 2020. I’ll just note that the stock market behaved the same way in the run-up to the dot-com crash, rising quarter after quarter as earnings fell quarter after quarter. Of course, it will be different this time because today’s people are never as stupid as yesterday’s people!”

      https://seekingalpha.com/article/4276256-drip-drip-drip-recession

      • This article presents a nice summary of the worrisome “fundamentals” that would seem to lead to falling stock prices.

        I agree, but there is also the question of how much money is “out there” to be invested, and how high the perceived returns are on the alternative investments to stocks, particularly bonds. If money available for investment dries up, prices could indeed fall quickly.

    • Furthermore, Basel III rules seem not to fix the situation, in the case of defaults. Instead, they seem to encourage actions that would make it worse. According to the article:

      Since the 2008 financial crisis, Basel III credit and market risk rules have become stricter. Now, banks would have to increase capital allocations to their banking and trading books in the event that these products’ credit quality migrated downward and when they become even less liquid in trading portfolios than they are now. As banks have to increase capital in an economic downturn, not only will they want to sell leveraged loans CLOs, they might also have to sell other assets in order to meet capital regulatory buffers.

      I am not sure what regulators were thinking of!

      • Back then it was simply placating common sense and responsibility for the moment (PR stunt), so as to balance out the global QE wave gusher which was in the pipeline etc.. Nowadays, it would not be taken seriously during GFCvXY, they will gobble together another action rescue plan for the day, rinse and repeat..

        People seems to like this system enough that it will be resurrected from the dark coma again, again and yet again..

  2. Harry McGibbs says:

    “Central banks world-wide are poised to unleash some of the most aggressive monetary stimulus since the financial crisis a decade ago. But the circumstances are different now, with policies aimed more at breathing life into decade-old expansions rather than at averting an economic collapse.

    “…it is unclear whether the central bankers’ depleted tools will be adequate.”

    https://www.wsj.com/articles/central-banks-are-in-sync-on-need-for-fresh-stimulus-11563714002

    • Harry McGibbs says:

      “New Zealanders could be in line for a cash payout, alongside temporary tax cuts if the economy crashes, according to advice from Treasury…

      “It says the “best case” stimulus would focus on tax cuts and stimulus, alongside spending money on building infrastructure, which would also boost the economy. It recommends giving money to households, particularly those in need, saying that tax changes or cash transfers (meaning a payment of some kind, possibly a benefit) meet its policy objectives of boosting the economy, but in a way that achieves equity.”

      https://www.stuff.co.nz/national/politics/114413517/give-kiwis-helicopter-money-cash-payouts-if-economy-crashes–treasury

      • Xabier says:

        Ah yes, pouring more concrete, the sophisticated response of a complex economy – as everywhere…..

      • New Zealand seems to be in the position of many other countries: interest rates that are too low to cut very much further. So it looks about, trying to find something that would work to bail out the economy.

      • Chrome Mags says:

        “It recommends giving money to households…”

        This is going to be a very slippery slope if New Zealand takes a lead off position for the developed world pack, initiating helicopter cash for strapped people caught in the grips of a world with thinning surplus energy.

        I’ve actually been waiting for this to happen somewhere, sometime, but not sure when. Why? Because when interest rates have been so low for so long and no longer generating what is needed regarding growth, and the QE button has been pushed as far as it should be, then that only leaves cash for strapped regular people. The danger of that is inflation on steroids, a precursor for hyper-inflation.

        It’s not difficult to see with the trend of how things have been going that all roads eventually lead to debasing currencies. Then maybe out of absolute pure desperation a unified world currency is created, but who could afford it if it requires precious metals to get some of it? Precious metals prices would skyrocket and people would have pawn all their stuff just to get some metals to convert to new currency to buy some food. “Yes, sell the 3rd car too at a massive discount, so we can get that tiny bar of silver, so we can get $5, so we can get a gallon of milk!”

    • Xabier says:

      Let’s re-phrase that as ‘breathing life into a decade-old mega-debt bubble’ just to see how intelligent it really is.
      And it is certainly an attempt to stave off collapse.

      One of the principal problems with economics now is not just the flawed theories, the corporate capture of governments, etc, but the degenerated language used to obscure rather than elucidate.

      • Tim Groves says:

        The degenerated language is used to make things sound complicated and to impress the punters, but most of the time the basic game plan is that the owners, shareholders, syndics, executives and the other insiders just want to make as much profit as they can for themselves, by whatever means they can get away with.

        • Harry McGibbs says:

          Amen to that. Makes me think of that splendid George Bernard Shaw quote, to which there is certainly some truth:

          “All professions are conspiracies against the laity.”

    • Fixing a world economy that is essentially growing to slowly to keep energy prices up is very difficult, when interest rates are already close to zero. It certainly is uncertain whether their tools will be adequate.

  3. Harry McGibbs says:

    “Credit rating agencies for years assigned high ratings to India’s Infrastructure Leasing & Financial Services (IL&FS) and its group companies despite its deteriorating finances…

    ““Various strategies deployed by the then key officials of IL&FS group and certain favours/gifts provided to rating agency officials suggest the possible reasons for consistent good ratings provided to IL&FS group,” said Grant Thornton in its report that detailed gifts or favours such as smartwatches and tickets to overseas sporting events.”

    https://uk.reuters.com/article/uk-india-il-fs-ratings/rating-agencies-knew-of-stress-at-indias-ilfs-but-gave-good-ratings-audit-idUKKCN1UF0IS

    • Harry McGibbs says:

      “India is attempting to prevent any repeat of last year’s shadow banking crisis after detecting “signs of fragility” in some of the 50 housing finance and other non-bank lenders it is monitoring, according to central bank Governor Shaktikanta Das.

      “The Reserve Bank of India is working closely with the country’s lenders to prevent the collapse of another large systemically important non-bank finance company…”

      https://www.aljazeera.com/ajimpact/india-monitoring-shadow-banks-signs-weakness-190722062854878.html

    • IL&FS is the abbreviation for “Infrastructure Leasing and Financial Services.” As I see it, IL&FS is an organization that deals with spun-off government responsibilities in many areas (including energy, roads, water and wastewater). Unfortunately, it cannot really generate an adequate profit on the financial income it can generate from selling its services. Even if it could, the cash flow isn’t working out.

  4. Harry McGibbs says:

    “Britain’s currency sank to a two-year low last week, dipping below $1.24 as fears of a no-deal Brexit grew.”

    • Harry McGibbs says:

      “Confrontation with the EU over Brexit means that Britain has no alternative but to ally itself ever more closely to the US.”

      https://www.independent.co.uk/news/world/middle-east/iran-tanker-crisis-brexit-uk-trump-nuclear-deal-us-a9014561.html

      • Harry McGibbs says:

        “….the US military has announced its intention to create and lead an anti-Iranian naval coalition in the Persian Gulf…

        “Iran and its powerful allies have also developed formidable asymmetrical capabilities across the region. It has both the will and means to decisively engage with a belligerent power…

        “Millions of people would stream towards Europe [in the event of war], even as the EU and the rest of the world would be facing an economic catastrophe.”

        https://news.sky.com/story/global-economic-catastrophe-likely-if-us-attacks-iran-11766319

        • Chrome Mags says:

          I hope people realize the only reason things are headed towards war with Iran is because one of two political party’s decided they didn’t want the other party to continue to get credit for a deal that provided for inspections to confirm uranium was not being enriched in Iran. They needed to run down the other party so they nixed a perfectly good deal. Now we’re headed for war?! That’s the most politically desperate, spiteful and absurd thing I’ve ever heard (and I’ve seen and heard some doozies).

          • Tim Groves says:

            We’ve always been at war with Eurasia, or was it Eastasia?

            As an explanation for the current US strategy toward Iran, your theory has much to commend it, but I suspect your conclusion is erroneous. There is probably more than one reason why things are going the way they are going now.

            Also, the neocon faction and their predecessors have been pushing for war with Iran for the past forty years, regardless of which political party happened to be in power. They have not been doing this merely to run down the Democrats.

            Prior to the 2016 US Presidential election, both the Democrats and the Republicans displayed a hostile attitude toward Iran. For example:

            Unlike the Republicans, the Democratic platform does endorse the nuclear deal. However, it declares that a Democratic president “will not hesitate to take military action” if Iran violates the agreement.

            The promise to “not hesitate” to launch what would inevitably be a major war with disastrous consequences is disturbing on a number of levels. Among these is the fact that in the unlikely event Iran decided to violate the agreement, it would take Iranians at least a few years to rebuild their nuclear program to the point where they could develop even a single nuclear weapon, thereby allowing plenty of time for the international community to apply nonmilitary pressures to force the regime to resume its compliance.

            U.N. Security Council Resolution 2231, which codifies the agreement, was adopted under Article 41 of the U.N. Charter, which empowers the Security Council to “decide what measures not involving the use of armed force are to be employed to give effect to its decisions.” This is distinct from Article 42, which allows for military force only if nonmilitary means “have proved to be inadequate” and only if the Security Council specifically authorized it.

            Therefore, the Democrats’ insistence that the United States should “not hesitate to take military action if Iran violates the agreement,” like the Republicans’ promise to “retain all options” regarding Iran, is nothing short of rejection of U.S. obligations under the United Nations Charter.

            So there!

            And moreover, the Butcher of Libya—the Democratic candidate for President in 2016—was characteristically bellicose on Iran:

            Hillary Clinton’s insistence that the 2016 Democratic Party platform include the threat to unilaterally resort to military action against Iran in response to potential violations of limits on its nuclear program bears disturbing parallels to her insistence that the United States had the right to unilaterally resort to military action against Iraq due to its alleged violations of limits on its nuclear program.

            Indeed, during the 2008 presidential campaign, she accused Barack Obama of being “naive” and “irresponsible” for wanting to engage with Iran diplomatically. According to a story in Time magazine on her tenure as secretary of state, Obama administration officials noted how she was “skeptical of diplomacy with Iran, and firmly opposed to talk of a ‘containment’ policy that would be an alternative to military action should negotiations with Tehran fail.”

            https://www.ncronline.org/blogs/ncr-today/republicans-democrats-alike-still-level-threats-iran

      • Conflict everywhere!

  5. It's different this time around....NO says:

    Oh Boy, seems we are in deep poopoo now…
    Oil Giant Saudi Arabia Is Set to Start First Wind-Power Plant
    Anthony DiPaola
    BloombergJuly 22, 2019, 8:21 AM EDT
    (Bloomberg) — Saudi Arabia, the world’s biggest oil exporter, is poised to start generating wind power within three years as part of an effort to harness renewable energy to cut local demand for fossil fuels.
    The renewable energy units of Electricite de France SA and Abu Dhabi’s Mubadala Investment Co. completed arrangements with Saudi and international banks to finance the project, according to a statement from Masdar, as the Abu Dhabi business is known. Masdar didn’t identify the lenders.
    EdF Renewables and Masdar won a contract in January to build the 400-megawatt Dumat Al Jandal facility, which is to begin producing electricity in the first quarter of 2022. The project will be the biggest wind-power plant in the Middle East when it begins producing, Masdar said

    Cut local demand……sure it will with a growing population that embraces BAU🤣
    Seems Gail wasn’t listen to in the Middle East recently.
    Oh well, let them pretend to fix it with a tweak here and there. It at least makes good press and keeps the Green brigade happy and at Bay.
    We know better here at OFW, thanks again Gail for all your insights!

    • Saudi Arabia makes at least some of its electricity by burning oil. (Some comes from burning gas.) Getting electricity from oil is a horribly expensive way to make electricity, especially if the oil could otherwise be sold elsewhere at a reasonable price. To the extent that the energy from wind can be used to reduce its fuel use, it actually might make sense for Saudi Arabia to use wind. In some ways, Saudi Arabia is like an island out in the middle of the ocean, with a horribly expensive fuel source for its electricity. Offsetting part of its use with wind might actually make sense.

      • It's different this time around....NO says:

        Yes, especially when they have Air Conditioning and make ice
        70% of Saudi Arabia’s electricity is used for air conditioning
        In Saudi Arabia, the weather is always warm. That means the air conditioner is always on.

        Saudi Arabia uses more than 70% of its electricity on air conditioning and cooling, according to a paper (paywall) published in 2017 by researchers at King Abdulaziz University in the city of Jeddah. And in the summer months, when temperatures regularly exceed 100°F (38°C), electricity use for air conditioning roughly doubles compared to winter use.
        https://qz.com/1284239/70-of-saudi-arabias-electricity-is-used-for-air-conditioning/
        It is what it is

        • When the International Energy Agency writes about the future, it seems to assume that it is reasonable to think that in the future India and Africa will be able to have widespread use of air conditioning as well.

    • richard b says:

      Can someone help me out here. The world is awash in ballooning debt.

      The question is, who is advancing all of this debt? If it’s largely government paper, who are the investors with piles of cash rushing to buy zero or very low yield paper? Do pension funds really have this kind of money – after all, they can’t just buy debt, they must also buy shares and property?

      So that leaves the central banks as the buyers and that means they owe a lot of the debt to themselves. This is the same as money printing because there’s no day of reckoning here.

      Japan seems to be in this position where its debt mountain seems to be doing it little damage and keeps on growing with no sign of collapse.

      And proof that economies are shrinking and not growing comes from the fact that no inflation is coming out of this process. Or maybe there is inflation because instead of deflation we are getting low inflation? Or we are getting inflation but the official figures are a bust.

      Of course the final question is: what will bring all of this to an end? Hyperinflation for sure, but we are hundreds of miles away from that at the moment.

      • Yes, as you alluded there are many components to it.
        For one part, there is significant inflation, e.g. pro athletes/entertainers earning $1M per day of work, econobox cars no longer starting at 7-9k, house/land prices elevated etc..

        Since the last GFC we know it got serious since they all massively printed in sync.
        I guess there will be several intermediate steps before full abandonment of the legacy system, I’d expect at some point they will try phase in some energy related barter-credits to keep the global trade arteries open, how this will translate locally don’t know likely not pretty etc.

      • Regarding where all of the debt goes, I expect that quite a bit of it goes to pension plans and insurance companies. They end up holding a lot of other people’s money, and need to put it someplace. Other financial institutions may hold some of the debt as well. As a practical matter, there is a whole lot more debt in the world than there are shares of stock. Lack of other reasonable places to put money may influence decisions as well.

    • Tim Groves says:

      It’s interesting the Saudis are going for wind when they are blessed with so much sunshine. Arabia is one place where solar energy is plentiful year round and in tandem with a couple of nuclear plants for base load would provide them with all the juice they need.

      • I expect that Saudi Arabia is pretty windy as well. The wind blows at different times than the sun shines, so there is a point in diversification. The sun tends to very quickly “max out” before it needs batteries to make use of the overage when the sun shines. Wind maxes out too, but it can be added independently of solar.

        • Niko B says:

          attach solar to ice making factory. Or store solar as a frozen energy differential throughout the country. Air conditioners that freeze water in cryo balls and then pass air over them later at night to get the heat out of the air. That would be more efficient.

          • Xabier says:

            Better still, construct buildings so they don’t need powered air conditioning – numerous examples were developed historically.

            And not being so childish and soft as to require perfect comfort all the time: it’s good to be made uncomfortable, reminding one of reality and that life is not a playground.

  6. It's different this time around....NO says:

    Wait till BAU ExPLODES…head for the Hills…
    https://finance.yahoo.com/news/philadelphia-energy-files-chapter-11-042356872.html
    Philadelphia Energy Files for Chapter 11 Bankruptcy After June Explosion
    (Bloomberg) — Philadelphia Energy Solutions filed for bankruptcy protection and reached a financing agreement with debt holders as the fuel-making company grapples with the aftermath of a June explosion and fire at its oil refinery that forced it to shut operations.
    The company submitted Chapter 11 petitions at the U.S. Bankruptcy Court for the District of Delaware on Sunday. It also entered into a proposed debtor-in-possession financing agreement with holders of its outstanding term loan debt for up to $100 million, the company said in a statement.
    The moves provide the company “with the additional financing and liquidity necessary to ensure we can safely wind down our refining operations,” Chief Executive Officer Mark Smith said in the statement.
    It will be the company’s second trip to bankruptcy court in less than two years, after emerging from Chapter 11 in August 2018. Estimated liabilities for this round are as high as $10 billion, according to the recent filings. The East Coast’s largest oil refiner said in June that it was dismissing more than 1,000 workers and shutting its plant, which could process 335,000 barrels of crude oil a day
    There will be many bankruptcies ahead…since the Economy is essentially BANKRUPT and pretending we still are solvent

  7. It's different this time around....NO says:

    Yo…Comment 501…
    Junk-Bond Fund Draws $622 Million as Negative Yields Go Global
    Enthusiasm for speculative-grade credit has become a global phenomenon as yields compress amid dovish language from central banks around the world. With markets near certain that the Fed will lower interest rates later this month, the debate is now over the size of the cut and its impact. About $13 trillion of global debt already carries negative yields, pushing investors to take more risk to generate greater returns.
    “In a world where you have very low yields on risk-free assets, people are looking for yield in other places,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute. “If you’re an investor who has a required rate of return of 5%-plus, your options are fairly limited.
    https://finance.yahoo.com/news/junk-bond-fund-draws-622-153343212.html

    Yes Sir, A man gots to know his limitations!

    Yes Sir, coming to an investment fund you own!

    • Maybe shale drillers won’t have as difficult deal getting additional financing as we thought, if consumers are jumping into speculative grade credit.

    • Wind and solar are not stand alone sources of energy. Calculating EROEIs at the device level, using a model of electricity they might provide in the future, is to me a very flawed metric. Meta analyses simply aggregate a flawed metric. Unless these devices can pay their full way (including paying backup providers for their services), plus pay high taxes like other energy providers, they are not really contributing net energy to the economy, the way I see it.

      A while back, I tried to explain in a post what is wrong. Look toward the end of this article.

      https://ourfiniteworld.com/2019/01/30/how-the-peak-oil-story-could-be-close-but-not-quite-right/

      Also, see sections 11 and 12 of this article. https://ourfiniteworld.com/2018/04/04/why-the-standard-model-of-future-energy-supply-doesnt-work/

      Charlie Hall responds in this post. https://ourfiniteworld.com/2018/04/12/energy-return-on-energy-invested-prof-charles-halls-comments/

      If an economy is trying to produce electricity using oil, wind can be helpful for reducing the quantity of oil needed to run the generators. Other places, their use needs to be very closely evaluated. Will the goofy pricing that results simply lead to financial problems for electricity backup providers? If so, adding wind may simply make the electric supply as a whole last less long.

      • Sven Røgeberg says:

        Thanks!
        I have an article out in the main norwegian newspaper, which criticizes Jørgen Randers view that it`s easy to fix the climate. This article is based on your way of seeing the larger picture concerning RE, and the newspaper has asked them to send over references. Let us hope the readers get a chance to read your articles.
        https://www.aftenposten.no/meninger/debatt/i/0nbLjg/Professoral-onsketenking-om-fornybar-energi–Sven-Rogeberg

        • One thing I should also point out is that even if EROI is calculated 100% correctly, having a high EROI is a necessary, but not a sufficient condition for a fuel to useful.

          –A proposed fuel should be sufficiently scalable, if there is any intent to mandate its use. What is truly important is total quantity of all energy production, because the economy depends on a growing supply of inexpensive-to-produce energy products. Substituting a tiny supply of one type of energy for a large supply of another will not work.
          –Regardless of what EROI calculation seems to show, actual real world production (with all of the direct and indirect costs included, including batteries and extra transmission lines) should be inexpensive.
          –The new fuel should not damage the production of electricity from other fuels because of how it is priced.
          –The new fuel should not discourage needed investment in other types of electricity production.
          –The new fuel should not damage electricity transmission systems of the country it is in, or of neighboring countries.

          This list is probably not exhaustive.

        • When I first responded, I hadn’t read your comment very closely, or looked at your article. You wrote a very fine article for the Aftenposten. It makes many of the points I was trying to make in the comment I just made.

          If it helps, I have also written articles criticizing Randers and his work and offering an alternative way to look at the situation.
          https://ourfiniteworld.com/2013/09/25/why-i-dont-believe-randers-limits-to-growth-forecast-to-2052/
          https://ourfiniteworld.com/2014/01/13/why-eia-iea-and-randers-2052-energy-forecasts-are-wrong/
          https://ourfiniteworld.com/2016/02/08/the-physics-of-energy-and-the-economy/

          • Sven Røgeberg says:

            Thanks, Gail! BTW do you have a link to a study how the subsidizing of RE drives other providers out of buisness and thus reduce the total amount of energy from the system?

            • I am afraid that I don’t really have a study on how the subsidizing of RE drives other providers out of business and thus reduces the total energy of the system. In some sense, it is obvious that wind and solar need some sort of balancing (batteries or backup by other providers), and that they should be required to pay for its costs, otherwise these costs will come back to the rest of the system. The electricity providers with the most fixed costs (often nuclear) will be penalized most. Capacity market payments are sometimes used to help compensate other providers for the backup services they are providing. This is only sometimes done, and the payments likely aren’t adequate.

              The closest thing I might have to what you are looking for might be the Department of Energy “Staff Report to the Secretary on Electricity Markets and Reliability,” put together because of concerns regarding what wind and solar might do to harm the US electric grid, shortly after Trump was elected.

              https://www.energy.gov/staff-report-secretary-electricity-markets-and-reliability

              Somewhat related:

              https://www.sciencedaily.com/releases/2017/01/170125120742.htm

              100% renewable energy sources require overcapacity
              To switch electricity supply from nuclear to wind and solar power is not so simple
              Date: January 25, 2017
              Source: Springer
              Summary:
              Germany decided to go nuclear-free by 2022. A CO2-emission-free electricity supply system based on intermittent sources, such as wind and solar — or photovoltaic (PV) — power could replace nuclear power. However, these sources depend on the weather conditions. Scientists have now analysed weather conditions using 2010, 2012, 2013 and 2015 data derived from the electricity supply system itself, instead of relying on meteorological data. By scaling existing data up to a 100% supply from intermittent renewable energy sources, the author demonstrates that an average 325 GW wind and PV power are required to meet the 100% renewable energy target. This study shows the complexity of replacing the present primary energy supply with electricity from intermittent renewable sources, which would inevitably need to be supplemented by other forms of CO2-free energy production.

              This is a 2013 study on the cost of operating reserves. https://www.nrel.gov/docs/fy13osti/58491.pdf

              This is an article about legislation recently passed in Ohio, to prevent wind energy from driving its nuclear power plants out of business.
              https://www.greentechmedia.com/articles/read/ohio-passes-bill-to-bail-out-nuclear-and-coal-plants#gs.rmih7j

              This article relates to testimony before a house committee on the distorting impacts of subsidies
              https://www.mercatus.org/publication/subsidies-are-problem-not-solution-innovation-energy

              https://www.wsj.com/articles/utilities-speed-up-closure-of-coal-fired-power-plants-11547035201

              Just last summer, Northern Indiana Public Service Co. NI +0.41% planned to retire two of its five remaining coal-fired power plants by 2023. Now, it plans to do away with all of them over the next decade, and buy more solar and wind power instead.

              The Midwestern company’s decision is part of a shift among some American utilities toward less costly energy sources. The companies are accelerating the closure of coal plants, as wind and solar power become more economical alternatives, aided by federal subsidies, and natural gas continues to be a cheap fuel for electricity in the U.S., thanks to the shale-drilling boom.

  8. It's different this time around.... NOW says:

    As always, FAST EDDIE was RIGHT!!!
    CARACAS, Venezuela (AP) — The lights went out across much of Venezuela Monday, reviving fears of the blackouts that plunged the country into chaos a few months ago as the government once again accused opponents of sabotaging the nation’s hydroelectric power system.
    The power in the capital went out after 4 p.m. (2000 GMT) and immediately backed up traffic as stop lights and the subway stopped working during rush hour.
    “This is horrible, a disaster,” Reni Blanco, a 48-year-old teacher, said as she joined a crush of people who flooded into the streets of the capital trying to make it home before nightfall.
    Almost three hours into the blackout authorities broke their silence and blamed an “electromagnetic attack” on a series of dams located in southern Venezuela — the same culprit it attributed an almost week-long outage in March that left millions of Venezuelans without water or the ability to communicate with loved ones.

    https://news.yahoo.com/venezuela-capital-dark-again-massive-221725607.html
    Yes, Fast Eddie claimed hydroelectric was not a cure all for Preppers Doomers…and this disruption proves Dams will be Damned!
    Thanks FE for ALL your WISDOM

    • jupiviv says:

      Are you the real Fast Eddy or just roleplaying as him? Honest answer please.

      • I can tell by IP addresses that “It’s different this time around…NOW” isn’t Fast Eddy. He started commenting in August 2018, under other names before adopting his current name. Fast Eddy left in November 2018.

        It’s different this time around…NOW does things differently. Not as “over the top,” for example. Not as many . . .s.

        • Forever Young says:

          Nice you keeping tabs on me, Gail…under constant moderation…I’m a bad boy.😂🤩😜

          Showing my age here, aren’t I?
          Funniest picture is them meeting the Wolfman, Frankenstein and Dracula

          Actually, my parents turned me on to them

          Back when BAU was going into it’s own…and the future looked unlimited.

          FE may be gone….but he’s forever lives here on this blog…

          • Actually, I have been doing moderation to a significant extent by IP addresses. So names may change, but if the IP address does not, the account stays under moderation. Perhaps moderation should have been removed ages ago, but I never thought about it. So some moderation may be excessive.

            I have noticed that I am getting an awfully lot of comments to moderate now, even though there is nothing wrong with them.

          • Actually, I think part of your problem is that at least some of the time you are using different IP addresses. Every new IP address has to have its first post approved by me.

            • Living the Good Life! says:

              I got no problem Gail! Please, I am honored by the moderation! Do what you feel best.
              After all, it is your blog site and aI am amazed of the time and effort you devote to it.
              Really, my heartfelt thanks for putting up with us all, good and bad.
              Can’t imagine all the hours put into it.🙄
              Glad it’s still going strong even without you know who🤔

    • DJ says:

      In other news venezulans buy lots of bitcoins.. hmm…

  9. DB says:

    This is a long article about the difficulties of keeping hydroelectric power reasonably priced in the US Pacific Northwest:
    https://www.seattletimes.com/seattle-news/bonneville-power-the-northwests-biggest-clean-energy-supplier-strains-to-keep-up-its-aging-hydro-system-and-restore-salmon/

    The dams built several decades ago have expensive maintenance and repairs to be done. Environmental rules regarding salmon protection make it more difficult to operate efficiently. (I know a fisheries biologist who studied salmon for decades and whose work showed that the declining fish runs were almost entirely due to catches in the ocean, often by non-US fishing fleets. These politically incorrect results have been consistently ignored for decades.)

    The public utilities (both local and federal) had the security of very long-term power contracts. But if those customers don’t return when the contracts expire, what would they do? They can’t just shut down operations. Breaching is very expensive and permanent, and would cripple other parts of the economy (irrigation and shipping for agriculture, recreation [a key element in the rural areas], and the jobs and revenue the utilities themselves provide to these communities).

    It seems to reinforce what Gail says about modern forms of “renewable” energy generation — that they aren’t really renewable in the long-term. Think of the enormous subsidies and energy that went into the dams’ construction. And witness in the article the astounding complexity of the components involved with hydropower.

    • Interesting story. Thanks for pointing it out. Renewable is only for a while, and then a stored up deficit in spending energy to maintain the system starts hitting you. Buyers cannot really afford the higher energy costs and go out of business.

      We also have another version of “hydroelectric won’t save us” appearing in the news, from Venezuela. Most of Venezuela’s electricity supply is hydroelectric, but yesterday, it experienced a new widespread blackout. The real cause seems to be to deferred maintenance on the electrical system over a long period. https://www.argusmedia.com/en/news/1944527-venezuela-restoring-power-after-blackout-minister

      • Harry McGibbs says:

        “Zimbabwe’s economy could grind to a halt if power outages gripping the nation persist as production plunges, exports decline, companies lay off staff and disposable incomes shrink, after it emerged that manufacturing companies are going for up to 18 hours without electricity…

        “Foreign currency shortages, recurrent breakdown of aged equipment, debt and severe reduction of water levels at Kariba [hydro] Power Station have contributed to the energy crisis in the past couple of months.”

        https://www.theindependent.co.zw/2019/07/19/power-blackouts-force-zim-firms-to-shut-down/

        • I see “severe reduction of water levels at Kariba [hydro] Power Station have contributed to the energy crisis in the past couple of months.”

          People don’t understand that hydroelectric in countries with wet seasons and dry seasons is not necessarily dependable year around.

          • Yes, the problem with hydro (of any scale) even within recently considered mild-moderate climate zones are increasing swings-spikes in ‘extreme’ weather patterns, so both in sync more frequent floods as well as drought conditions could wipe you out financially. Lets imagine nowadays you get: 3x seasons of floods and 2x seasons of droughts per decade.. => lots of repairs and unrealized income hence it’s better to go nuclear in big macro scale or PV+batt for mid-smaller scale, eventually animal power in tiny scale..

            • We have had way too much faith in models that claimed that the climate would stay constant. If we had looked at past history more closely, we would have figured out that there is a huge amount of variability in climate. We know, for example, that the level of the Sea of Galilee has risen and fallen quite a bit over the years. My niece has been working on an archaeological dig in Israel and that has been an issue in what they are finding. Some past villages are under water.

    • Xabier says:

      Taking a segment of the industrial economy and labelling it ‘renewable’ changes nothing.

Comments are closed.