Our Energy and Debt Predicament in 2019

Many people are concerned that we have an oil problem. Or they are concerned about recession and the need to lower interest rates.

As I see the situation, we have a problem of a networked economy that is not functioning well. A big part of this problem is energy-related. Strange as it may seem, energy prices (including oil prices) are too low for producers. If debt levels were growing more rapidly, this low-price problem would go away.

The “standard way” of encouraging more debt-based purchases is by lowering interest rates. But we are running out of room to do this now. We also seem to be running out of economic investments to make with debt. If expected returns on investment were greater, interest rates would be higher.

Without economic investments, demand for commodities of all kinds, including energy products, tends to stay too low. This is the problem we have today. Our debt problem and our energy problem are really different aspects of a networked economy that is no longer generating enough total return. History suggests that these periods tend to end badly.

In the following sections, I will explain some of the issues involved.

[1] Our problem is not just that oil prices are too low. Prices are too low for practically every type of energy producer, and in many parts of the globe.

Oil: OPEC oil producers have cut back production because they view oil prices as too low. OPEC reports a cutback in production of 2.7 million barrels per day between November 2018 and July 2019 (from 32.3 million bpd to 29.6 million bpd).

In the US, there has been an increase in bankruptcies of oil producers during 2019, relative to 2018. There has also been a reduction in the number of oil drilling rigs of 17% since the week of November 16, 2018, according to reports by Baker Hughes. These are signs of producer distress.

Natural gas: While recent US natural gas prices have bounced up off their recent lows, as recently as August 8, 2019, we were reading:

U.S. gas futures this week collapsed to a three-year low, while spot prices were on track to post their weakest summer in over 20 years. In other markets, such lackluster pricing would cause investment to retrench and supply to contract.

But gas production is at a record high and expected to keep growing. Demand is rising as power generators shut coal plants and burn more gas for electricity, and as rapidly expanding liquefied natural gas (LNG) terminals turn more of the fuel into super-cooled liquid for export.

Analysts believe the natural gas market is not trading on demand fundamentals because supply growth continues to far outpace rising consumption. Energy firms are pulling record amounts of oil from shale formations and with that oil comes associated gas that needs either to be shipped or burned off.

When we look worldwide, we see that the Wall Street Journal is reporting, “U.S. Glut in Natural Gas Supplies Goes Global.” A chart from that article shows falling natural gas prices in Europe and Asia, almost to the level of US natural gas prices.

Coal: The US Energy Information Administration writes, “More than half of US coal mines operating in 2008 have since closed.” USA Today writes, “Is President Trump losing his fight to save coal? Third major company since May files for bankruptcy.”

China has also been closing coal mines in response to low prices. Its coal production ramped up quickly after it joined the World Trade Organization in 2001, but since the 2012 to 2013 period, production has been close to level. An academic paper talks about a “de-capacity program” undertaken in China in 2016 in response to plunging coal prices and overall financial loss of coal enterprises.

Figure 1. China energy production by fuel, based on 2019 BP Statistical Review of World Energy data. “Other Ren” stands for “Renewables other than hydroelectric.” This category includes wind, solar, and other miscellaneous types, such as sawdust burned for electricity.

Uranium: A recent article says, “Plummeting global uranium prices hit Namibia hard.” Another article talks about the huge amount of capacity that has been taken off-line because of continued low uranium prices. The article estimates that 25% to 35% of global uranium production had already been taken off-line by the time the article was published (May 20, 2019).

Ethanol: According to the Wall Street Journal, the ethanol industry has been losing money since at least 2015, and is now closing ethanol plants in three states. The trade war has exacerbated its problems, but clearly its problems began before the trade war.

[2] The general trend in oil prices has been down since 2008. In fact, a similar trend applies for many other fuels.

Figure 2 shows that oil prices since 2008 have been trending downward.

Figure 2. Inflation adjusted weekly average Brent Oil price, based on EIA oil spot prices and US CPI-urban inflation.

Figure 3 shows that other energy prices have been following a similar price trend to that of oil. This situation happens because energy products are primarily used in finished goods and services of many kinds, such as cars, homes, vacation travel, and air conditioning. If demand for finished goods and services is high, prices for all commodities can be expected to be high; if demand for finished goods and services is low, prices for all commodities can be expected to be low. Thus, it shouldn’t be too shocking that the problem of prices that are too low for energy producers is very widespread.

Figure 3. 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. They are annual averages, so smooth out quite a few smaller bumps.

[3] The situation of prices being too low for many types of energy producers simultaneously is precisely the problem I found back in December 2008 when I wrote the article Impact of the Credit Crisis on the Energy Industry – Where Are We Now? 

The article mentioned was written in December 2008. If we look back at Figure 2, this was a time when oil prices were very low. I had first noticed a cutback in credit of various kinds (including credit card debt and mortgage debt) in the middle of 2008, about the time oil prices crashed. Later in the year, additional financial problems emerged, including the collapse of Lehman Brothers. Banks became less willing to offer credit to buyers who were deemed insufficiently creditworthy.

In my December 2008 article, I wrote about suppliers in various supply chains not being able to get credit. Without credit, supply chains could not operate. Businesses depending on supply chains were forced to cut back on their purchases. In fact, some suppliers went bankrupt. Workers were laid off in this process; these layoffs added to the lack of buyers for finished goods and services. Energy prices of many types crashed simultaneously because of the lack of demand for commodities used to make finished products of many kinds.

The fix for the problem back in late 2008 was for the US to begin Quantitative Easing. Quantitative Easing lowered longer-term interest rates and allowed more credit to get back to supply chains. By 2011, oil prices had risen to a level that was more tolerable for producers. These higher prices slowly slipped away, especially disappearing when the US discontinued its Quantitative Easing program in 2014.

If a person looks at the late 2008 situation, it is clear that a lack of debt availability indirectly led to low commodity prices. Prices dropped almost vertically when the debt bubble popped. This time, the situation is a little different. We arrived at low prices through the long diagonal black dotted line on Figure 2; this time other factors besides an obvious lack of debt have been involved.

One issue that seems to be involved this time is a shift in relativities between the dollar and other currencies, making energy products more expensive for those outside the US.

A second contributing issue this time is growing wage disparities, as goods are increasingly manufactured in low-wage countries. Low-wage workers (both in developing countries and in advanced economies trying to compete with developing countries) are less able to buy finished goods and services. This contributes to the lack of demand for finished goods and services using commodities of all kinds, including energy products.

[4] In the right circumstances, a rapidly growing supply of cheap energy products can help the world economy grow.

If we look back, there was a period of rapid growth in the world’s energy consumption between World War II and 1980. This was a period of rapid growth in the world economy.

Figure 4. Average growth in energy consumption for 10 year periods, based Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent.

In fact, both population and energy consumption per capita were growing. This growing energy consumption per capita allowed living standards to grow as well (Figure 5).

Figure 5. Energy growth amounts shown in Figure 4, divided between amount that supported population growth (based on 2019 world population estimates and earlier estimates by Angus Maddison) and all other, which I have called “living standards.”

Most people would agree that a major increase in living standards took place between World War II and 1980. New buildings were constructed to replace those destroyed or damaged during World War II. Many people were able to buy cars for the first time. Interstate highway systems were built. Electric transmission lines were built, and oil and gas pipelines were laid. In rural areas, homes were often electrified for the first time. With the aid of energy saving appliances and birth control pills, many women joined the workforce. The US, Europe, Japan, and the Soviet Union all saw their economies grow.

[5] It is striking that the period of rapid energy consumption growth between World War II and 1980 corresponds closely to the long-term rise in US interest rates between the 1940s and 1980 (Figure 6).

Figure 6. Three-month and ten-year interest rates through July 2019, in chart by Federal Reserve of St. Louis.

If interest rates rise, it becomes more expensive to borrow money. Monthly payments for homes, cars, and new factories all rise. Evidently, the US economy was growing robustly enough in the 1940 to 1980 timeframe that US short term interest rates could be raised without much economic harm. The big concern seemed to be an overheating economy as a result of too rapid growth.

The huge increase in interest rates in 1980-1981 put an end to any concern about an overheating economy (compare Figures 6 and 7). Oil prices came back down once the world economy was in recession from these high interest rates.

Figure 7. Historical inflation-adjusted Brent-equivalent oil prices based on data from 2019 BP Statistical Review of World Energy.

[6] Starting about 1980, the US economy began substituting rapidly growing debt for rapidly growing energy supplies. For a while, this substitution seemed to pull the economy forward. Now growth in debt is failing as well.

Figure 8 shows how the ratio of total US debt (including governmental, household, business and financial) has changed since 1946. It becomes clear that once the big “push” that the economy received from rising consumption of energy products began to fail about 1980, the US moved to the addition of debt as a substitute.

Figure 8. Ten-year average increase in US debt relative to GDP. Debt is “All Sectors, Liability Level” from FRED; GDP is in dollars of the day.

I think of debt as being one of many kinds of promises. Figure 9 illustrates that while the total amount of goods and services has been growing, debt levels and other kinds of promises have been growing even more rapidly.

Figure 9. Promises of future goods and services tend to rise much more rapidly than actual goods and services. Chart by Gail Tverberg.

Many things can go wrong with this system. If the growth in added debt slows too much, we can expect to start seeing financial problems similar to those we saw in 2008. Also, if the level of debt (such as student debt) gets too high, its payback interferes with the purchase of other needed goods, such as a home. If energy providers decide prices are too low and stop producing, then promised Future Goods and Services can’t really appear. Huge defaults on promises of all kinds can be expected. This happens because the laws of physics require the dissipation of energy for physical processes underlying GDP growth.

[7] Since 2001, world economic growth has been pulled forward by China with its growing coal supply and its growing debt. In the future, this stimulus seems likely to disappear. 

Figure 10. Figure similar to Figure 5, with bump that is primarily the result of China’s accelerated growth circled.

China has been financing its rapid economic growth since 2001 with growing debt.

Figure 11. China Debt to GDP Ratio, in figure by the IIF.

We know that low prices for coal have led to flattening production since the 2012 – 2013 period (Figure 1). In fact, part of the reason for the flattening of non-financial corporate debt in recent years in Figure 11 may reflect swaps of uncollectible coal mine debt for equity, removing part of coal mine debt from the chart.

The failure of coal production to grow rapidly puts China at an economic disadvantage because coal is a very low-cost energy source. Any substitution, even imported coal, is likely to raise its cost of making goods and services. This makes competition in a world economy more difficult. And China’s debt level is already very high, putting it at risk of the problems discussed in Section [6].

[8] The world economy needs much more rapidly growing debt if energy prices are to rise to a level that is acceptable to energy producers. 

Debt acts like a promise of future goods and services. Growing debt, plus increases in other types of promises of future goods and services, helps to keep energy prices high enough for energy producers. There are at least three reasons that growing debt helps an economy:

First, increasing debt can be used to build factories, and these factories hire large numbers of people. The factories utilize various raw materials and energy products themselves, raising demand for goods and services. Furthermore, the workers hired by the factories, with their incomes from their jobs, also raise the demand for goods and services. These goods and services are made with commodities. Growing debt thus raises demand for commodities, and thus their prices.

Second, increasing debt levels by governments are often used to hire workers or to raise benefits for the unemployed or the elderly. This has a very similar effect to building new factories. These workers and these beneficiaries can afford more goods and services, and these goods and services are made using commodities. Governments also use some of their funds to build schools, pave roads and operate police cars. All of these things require energy consumption.

Third, consumers can afford to buy more of the output of the economy, if their debt levels are increased. If debt can be structured so that anyone who walks into a car dealership can afford a new car (such as longer durations, lower interest rates, and no down payment), this added debt allows increasing demand for new cars. It also allows increasing demand for the energy products used to make and operate these new vehicles. Furthermore, if new homes can be made more affordable for young people, this works in the direction of adding more mortgage debt.

The Institute of International Finance (IIF) reports that the ratio of world debt to GDP (red line on Figure 12) has been falling since 2016. This falling ratio of debt to GDP no doubt contributes to the low-priced energy problem with which energy producers are now struggling.

Figure 12. IIF figure showing total world debt and the ratio of total world debt to GDP.

Non-debt promises of many types can also have an impact on energy prices, but it is beyond the scope of this article to discuss their impact. Some examples of non-debt promises are shown on Figure 9.

[9] The world economy seems to be running out of truly productive uses for debt. There are investments available, but the rate of return is very low. The lack of investments with adequate return is a significant part of what is preventing the economy from being able to support higher interest rates.

In a self-organizing networked economy, market interest rates (especially long-term interest rates) are determined by the laws of physics. Regulators do have some margin for action, however. They can raise or lower certain short-term interest rates. They can also use their central banks to purchase existing securities, thereby influencing both short- and long-term interest rates. In addition, they can indirectly affect the system by raising and lowering tax rates and by adopting stimulus programs.

Market interest rates, in some sense, tell us how productive investments truly are at a point in time. Years ago, investments that the economy was able to make were far more productive than the investments we are making today. For example, the first paved road in an area had a huge beneficial effect. New roads were able to open whole areas up to commerce. Once an area had been developed, later investments were much less beneficial. Fixing up a road that has many holes in it takes energy and materials of many types, but it doesn’t really add productivity to the system. It just keeps productivity from falling.

After a point, adding new roads or other infrastructure doesn’t add much of anything. This is especially the case if population is level or falling. If population is falling, it would likely make sense to reduce the number of roads, but this is difficult to do, once there are a few occupied homes along a road.

As another example, a car that gets a person from home to work is a great addition if the vehicle allows the person to take a job that he could not otherwise take. But added “bells and whistles” on cars, such as air conditioning, a musical system, sturdier bumpers, and devices to reduce emissions, are of more questionable value, viewed from the point of view of allowing the economy to function cheaply and efficiently.

Another type of investment is education. At one point, a high school education was sufficient for the vast majority of the population. Now additional years of schooling, paid for by the student himself, are increasingly expected. An investment in higher education can be “productive,” in the sense of helping to differentiate himself/herself from those with no post-secondary education. But the overall level of wages has not been rising enough to compensate for all of the extra education. It is the growing complexity of the system that is forcing the need for extra education upon us. In a sense, the extra education is a tax we are required to pay for having a more complex system.

The need for pollution control might be considered another kind of tax on the system.

Our hugely expensive health care system is another tax on the system. After paying the cost of health care, workers have less funding available for buying or renting a home, raising a family, food and transportation.

[10] Since 1981, regulators have been able to prop up the economy by reducing interest rates whenever economic growth was faltering. Now we have pretty much run out of this built-in source stimulus.

Many observers have noted that central bankers are running out of tools to fix our economic problems. The lack of room to take down interest rates can be seen in Figure 6.

Figure 13 shows that long-term patterns of reductions in interest rates (darker bands) have happened previously. These reductions in interest rates came to an end because they couldn’t go any lower, given inflation expectations and likely levels of defaults. We seem to be facing a similar situation today.

Figure 13. Chart from the Financial Times showing historic interest rates and periods during which interest rates fell.

According to Figure 13, there have been three periods of falling interest rates in the last 200 years:

  • 1817-1854
  • 1873-1909
  • 1985-2019

In the gap between the first two periods of falling interest rates (1854 to 1873), the US Civil War took place. This was a period of very poor return on investments. Somehow it ended in war.

Immediately after the second two periods of falling interest rates (after 1909), the world entered a very unstable period. First there was World War I, then the Great Depression, followed by World War II.

Now we are facing the possibility of yet another end-point for the take-down in interest rates.

[11] The total return of the economy seems to be too low now. This seems to be why we have problems of many types, ranging from (a) low interest rates to (b) low profitability for energy producers to (c) too much wage disparity. 

All of the problems listed above are manifestations of an economy that is not producing sufficient total return. The laws of physics distribute the problem to many areas of the economy, simultaneously.

A person wonders what could be ahead. We seem to be reaching the end of the line regarding the takedown of interest rates, as shown in Figure 13. If a takedown in interest rates is possible, it acts as a relief valve for some of the other problems the economy is facing, including too much wage disparity and energy prices that are too low for producers.

In Section [10], we saw that when the relief valve of lower interest rates had disappeared, wars and depressions have taken place. We can’t know the precise outcome this time, but our current situation doesn’t look good. Will we encounter wars, or a serious depression, or financial problems worse than 2008? We can’t know for certain. Or will we somehow find a way around serious problems?

 

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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1,324 Responses to Our Energy and Debt Predicament in 2019

  1. Harry McGibbs says:

    Great stuff as ever, Gail. I found someone as bearish on oil prices as you:

    “…forget about contraction, there is a recession which is coming and one should fasten the seatbelts because turbulent times are coming and the fall could be bigger than what we have seen even in 2008…

    “Capital expenditure is falling globally. The global PMI is below 50, which would suggest that the world is headed towards recession. We are seeing the US ISM fall below 50, which increases the probability of recession significantly. We are also seeing Germany, China essentially in recession. We are seeing manufacturing, global trade contract everywhere. All major countries are seeing global exports decreasing. We are seeing big ticket items decreasing as well. This is a lot of leading indicators that suggest there is trouble ahead…

    “I think oil could go to $30 or if not $20 a barrel which I do not think people are prepared for.”

    https://economictimes.indiatimes.com/markets/expert-view/i-am-expecting-a-global-recession-oil-could-go-to-30-if-not-20-a-barrel-raoul-pal-real-vision/articleshow/71078971.cms

    • Harry McGibbs says:

      “Global oil demand continues to see downgrades from major energy forecasters, with several downward revisions in just the past week…

      “The U.S. EIA said in its Short-Term Energy Outlook that it expects oil demand to grow by only 0.9 million barrels per day (mb/d) this year, the latest in a series of downgrades from the agency. In July, it said 2019 demand would grow by 1.1 mb/d and in June it said 1.2 mb/d. The EIA started off the year expecting demand to grow by 1.5 mb/d this year.

      “The point is not to pick on the EIA – just about every major forecaster has been forced to dramatically slash their numbers – but rather the global economy has slowed down by much more than expected. If the roughly 890,000-bpd demand growth figure comes to pass as the EIA now predicts, it would be the first time since 2011 that oil demand grew by less than 1 mb/d.”

      https://oilprice.com/Energy/Energy-General/Oil-Demand-Growth-Weakest-In-Nearly-A-Decade.html

    • The fellow in India has some different insights than I do, but they all come together in the same way. He is particularly concerned about the lack of money supply. I see money as a form of government debt, which I have not focused on separately. Recent Quantitative Tightening has raised the relativity of the US dollar to other currencies, including the Indian rupee. This is a big part of the problem.

  2. Pingback: Our Energy and Debt Predicament in 2019 – Enjeux énergies et environnement

  3. Doug W. says:

    No mention of negative interest rates. As I kept reading I thought you might discuss negative interest rates in the next paragraph. So where do they fit in? They are being tried in other parts of the world, and the popular press seems to indicate they will be coming to the US soon enough. So how do negative interest rates fit into your analysis? Will you be addressing them in future posts?

    • Negative interest rates in some (many) parts of the world are simply a sign that rates of return on investment are too low. The world economy is not producing enough output for all parts of the system. Some parts of the system have to get “shorted.” Investors demanding return on bonds are some who get shorted.

      I didn’t mention negative interest rates because I already had an awfully lot of topics in this post. It was getting too long. Also, since I am in the United States, negative interest rates are at least not quite as much of a perceived problem as in Europe and Japan.

      • richard b says:

        Gail, you say that negative interest rates are a feature of there being insufficient return on capital for new investments.  And in a contracting economy with falling house prices, falling commodity prices and the like, this seems logical.

        But what’s not logical is why anyone would lend out their hard earned cash for a negative return.  So wouldn’t negative rates just lead to a contraction in credit extension? Or even an end of credit extension?

        And so negative rates must be accompanied with QE to keep credit extension going. And this must keep on going forever to monetize the debt in the system until there is a total collapse of the currency.

        I think this is the road we are firmly on at the moment.

        • My understanding of the negative interest rates debt:

          1. A lot of it is hidden inside of perfectly ordinary looking investment vehicles.

          2. Those who are package up these negative interest rate loans are working on the principle that as interest rates become more negative, the carrying value of the loan raise.

          This procedure clearly only works as long as interest rates are becoming more and more negative. If interest rates start rising again, then the “book value” of these bonds suddenly drops.

          One article we saw a while back summarized the issue as, “Negative interest rate bonds are for trading, not for holding.” This is a link: https://www.forbes.com/sites/vineerbhansali/2019/06/17/trading-sardines-the-case-of-currency-hedged-negative-yielding-bonds/#719d6e535f70

          Another issue is that most money that is invested in not invested by ordinary citizens. It is invested by institutions that have huge quantities of funds to invest. These would include insurance companies, pension plans, banks, hedge funds, and those operating money market funds and the like. A private individual can put dollar bills under the mattress, or buy a little gold. But these options don’t really work for institutional investors. They need to work with stocks, bonds, derivatives, and other things that are readily for sale.

  4. Ivan Lukic says:

    I think that one factor often neglected is the price of food as indicator. You see, one can reduce spending on everything, except food. You can live without plasma TV or expensive stereo amp, but you can’t live without food. At certain moment low energy prices will impact food prices. At that moment one who has both energy source and arable land (like US or Russia) will achieve some kind of world food monopoly. There will be many mouths to feed but not enough food, at least until population reduction solves the problem by itself. For instance, I would suggest to a country like Russia to reduce oil exports as much as possible and wait for the moment when it can sell energy product embedded in food product. At that moment you can charge any price for energy product. At that moment food supplier is the master and everybody else is the servant. No need to say that it would be difficult to take food from Russia because they have powerful nuclear weapons to protect their food product.

    I am keen observer in many things, but since I am not an economist, I can only observe shop prices as indicator. I think that country like Serbia is indicative because it’s some kind of world economy median and I observe slow but steady food prices rise in spite of the fact that Serbia even in the worst of years usually has food surplus for export.

  5. Pat Thomas says:

    Gail, thanks another great article. You might consider writing an article detailing the ramifications of the New Green Deal…. eliminating fossil fuels, etc. There is a lot for you to work with on that subject.

  6. https://www.bloomberg.com/news/articles/2019-09-11/chinese-electric-car-sales-drop-for-second-straight-month

    Chinese Electric Car Sales Drop for Second Straight Month

    Chinese electric-car sales fell for a second straight month after the government scaled back subsidies, the latest sign that one of the final pillars of strength in the world’s largest automobile market is crumbling.

    Sales of new energy vehicles — all-electric, fuel-celled autos and plugin hybrids — declined 16% from a year earlier to 85,000 units in August, the China Association of Automobile Manufacturers said Wednesday. That followed a 4.7% drop in July.

    • Harry McGibbs says:

      “…27 years of following the auto industry have taught me one thing:  when consumers stop buying cars they stop buying all models, regardless of propulsion system.”

      https://www.forbes.com/sites/jimcollins/2019/09/11/chinas-car-market-is-heading-from-recession-to-depression/#3d8705fa6b55

      • Changes in emission rules seem to be part of the problem. Reuters reports, Behind the plunge in China auto sales: chaotic implementation of new emission rules.

        The crux of the problem: a June 30 deadline for cars built to so-called China-5 emissions standards to be sold. After that only vehicles meeting new standards could be put up for sale.

        People were still coming in but weren’t buying the stage-5 cars, Li said.

        “Customers didn’t know how long they could drive China-5 cars or whether they would be able to resell them in the future. And to be honest, we didn’t know either.”

        While a slowing economy and the trade war with the United States were initially held responsible for slides in sales since April, most of the blame is now being laid on the poorly managed fast-tracking of new rules by the 15 cities and provinces, which account for more than 60% of sales in the world’s largest auto market.

        Dealers are being left with a lot of vehicles that don’t meet the new emission standards. It is not clear to me what cars meet the new rules. This is a paper on the new standards. https://www.technology.matthey.com/article/61/4/269-278/

        • Robert Firth says:

          I thing emission standards are becoming a big problem, because they are the wrong solution. One way out is simply to cheat, as German car makers did. Another way is to avoid buying new cars, as the Chinese seem to be doing.

          Electric cars we can forget about: they simply move the emissions from the tailpipe of the car to the smokestack of the power station. There is only one effective solution to auto emissions: get rid of the autos. Move to a system where 90% of journeys are by public transport, and an electric scooter or little runabput covers the last mile.

          Not easy is a country devoted to “suburban sprawl”, but the land under those houses would be far more productive converted back to sustainable agriculture.

          • DJ says:

            “last mile” how about walking? Like we always done.

            • Robert Firth says:

              Thank you, DJ; that’s what I have always done. Except at my last job the last mile was the only mile: I walked to and from work. And today I walk to the bus stop, walk around the “big city” doing my shopping, and walk back home from the bus stop.

              But that is rather unusual for someone who is 74. Many older people cannot walk very well, and certainly not with a load of shopping. To them, mobility is an important part of their lifestyle.

          • Kowalainen says:

            Bicycles is the transportation of the past and the future.

            THE RULES:
            We are the Keepers of the Cog. In so being, we also maintain the sacred text wherein lie the simple truths of cycling etiquette known as The Rules.

            //1. Obey The Rules.
            //2. Lead by example.
            It is forbidden for someone familiar with The Rules to knowingly assist another person to breach them.
            //3. Guide the uninitiated.
            No matter how good you think your reason is to knowingly breach The Rules, it is never good enough.
            //4. It’s all about the bike.
            It is, absolutely, without question, unequivocally, about the bike. Anyone who says otherwise is obviously a twatwaffle.
            //5. Harden The Fuck Up.

            https://www.velominati.com/

            • Also, figure out how to maintain roads. These are horribly difficult to maintain without fossil fuels. This is a point that people often miss. Without paved roads, we need different forms of transportation.

          • The issue is as much roads as it is vehicles. Maintaining roads requires a lot of fossil fuels. People become excessively focused on the vehicle part of the problem. If we have vehicles, they need to be vehicles that are adapted to dealing with unpaved roads–vehicles set high off the ground, for example. Also, we won’t need to go to current jobs, so going to the same central areas we do now will not be helpful. Governments are likely to be weaker. They will not be able to subsidize public transport the way it is subsidized now, I expect.

            Also, “using less” is not really a solution. We need to keep demand up, or the whole system tends to fall apart.

            • Robert Firth says:

              Gail, the Romans maintained excellent roads using no fossil fuel. The solution is simple: instead of building roads to take the weight of heavy vehicles, make the vehicles light enough not to damage the roads. Maybe not roman legions and oxcarts, but pedestrians, bicycles, and light runabouts for people with limited mobility. And maybe trams, but not at grade level.

              What about heavy loads? Oceans, rivers, canals and railways between densely populated areas; for the outback, the cargo airship would be a sustainable and very cheap solution, not least because it requires almost no infrastructure on the ground.

              As always, the only way to cope with a declining supply of energy is to reduce our need for energy, by as much as possible.

            • My understanding is that the way the Roman roads were maintained was by importing a constant supply of slave labor. The work was so demanding that ordinary citizens were unwilling to do it. Life expectancy of workers was short. This is a big reason why once Rome fell, these roads could not be maintained.

              Yes, having light weight vehicles does help these roads last. But this is precisely the opposite of public transportation and trucks pulling double trailers.

              Human or animal pulled boats, operating in canals or flat rivers, has been a historical solution for moving heavy goods like coal. Aside from water transport, transportation has been extraordinarily difficult, because we never have had the slave labor to keep up the huge amount of roads that would be needed.

              Using less fossil fuels is not really an answer, because we cannot keep the prices up high enough.

              We need a system in which the “return on human labor” is sufficiently high. At this point, for quite a bit of the world’s population, this return is too low. Our level of complexity requires advanced education, expensive healthcare, and taxes to pay for the many elderly who have been promised retirement and healthcare benefits. By the time all of the these have been paid for, young people don’t have funds left to start families of their own. They continue to live in their parents’ basements forever.

          • The alternative to urban sprawl is high density with apartment towers. Sydney’s monopoly game around new and planned metro stations is a good example

            Sydney’s Immigration Metros
            http://crudeoilpeak.info/sydneys-immigration-metros-part-1

            • Artleads says:

              I hope Gail will weigh in here. I suspect that the hidden costs of apartment towers would lead to ginormous problems. But as to high (or high-ish) density in urban places, depending on the type of shelter devised, that would seem better all around than sprawl.

            • The existence of large numbers of people living in close proximity is possible only because of high energy consumption. The high energy consumption allows materials to constantly be brought to the core of the city, and waste products to be removed from the city.

              It seems like it was Jared Diamond who wrote about how difficult it was keeping the population of cities up, before modern times. Communicable diseases were a huge problem. Cities had to keep importing population from surrounding rural areas to keep population from falling.

              With less energy consumption, we will have a great deal less need for cities. There won’t be the jobs in cities to support much population. So, in a way, the discussion doesn’t make much sense. If a city has 24/7/365 electricity to run elevators, and a large share of GDP to spend on trying to outwit germs, then elevator building make sense.

              Otherwise, most of our wealth will come from what we can grow. A much smaller number of people will need to be widely dispersed. Or perhaps they can live in small villages, with their fields around them. But today’s homes aren’t built in this configuration. New homes, if they are built at all, will be much simpler, I would expect. They will be constructed with local materials, without electricity or indoor plumbing, I would expect.

            • Artleads says:

              Thanks, Gail! I never put all this together, and we’ve tended to go from one extreme scenario to the other. But you are talking about what looks like a middle ground, where there might be some, much reduced and localized, industrial production. Someone mentioned solar heating on the roof, which would be beyond the means of individuals, but perhaps not a local government. I’m seeing those overhead buckets that you tip over for showering. Basic compost toilets are a possibility if there can be a local education and support program around them. Happy days!

            • Artleads says:

              Also, I’ve been around “urban agriculture” (or horticulture) communities for a very long time, and have done enough and seen enough to be sure more food can be grown on the ground in cities than now…by an order of magnitude. Learning and programing to do that could be one of several things to reduce sprawl. And where you already have the makings of of a village, there could be the nudge to create more villages, which also would be a sprawl prevention strategy.

            • Gail is absolutely right that these dense cities need 24/7 power supply. But that will not be the case in future. I attended 2 Greater Sydney Commission panel meetings and advised them that by approving one residential and office tower after the other they overbook Sydney’s power supply.
              That will become apparent in the next hot summer when global warming will make it more and more likely that we’ll have simultaneous heatwaves in 3 East Coast states all hanging on the same grid and depending on power imports from each other.
              In 2017 we already had load shedding. Instead of turning off the lights and aircons in those government departments which are responsible for the planning mess, they had to turn off pot lines in an alumina smelter, one-by-one for 1 hr. This is actually a No-No.

              14 Feb 2017
              NSW’s privatized giveaway coal plant causes load shedding in extreme weather
              http://crudeoilpeak.info/nsws-privatized-giveaway-coal-plant-causes-load-shedding-in-extreme-weather

              For those who read my immigration metro article it should be clear that I am against this type of development. In the summer 2018/19 we just made it. I have now gone also into the details of power supplies because the public thinks we are going to have a smooth transition to electric cars.They would move the problem from oil back to coal. First priority would be to replace existing (and aging!) coal plants by renewables plus pumped hydro storage which are massive projects and would also depend on rainfall (once dams are filled evaporation and other losses would need to be constantly replenished)

              Dam levels for hydro power are here, for the 2017/18 season (no hurry to update for 2018/19)
              https://www.snowyhydro.com.au/our-energy/water/storages/

              Talking of water, Sydney’s dam levels are now at 49%
              https://www.waternsw.com.au/supply/Greater-Sydney/greater-sydneys-dam-levels

              Gail’s website title “our finite world” is the appropriate heading for all these problems.

              Here is Sydney’s power supply situation as of January/February 2019, the hottest months

              5/2/2019
              NSW coal fired power plants generation in late January 2019
              http://crudeoilpeak.info/nsw-coal-fired-power-plants-generation-in-late-january-2019

            • A couple of points:

              1. Right now we are, admittedly, talking about relatively limited power outages. Figuring a way to work around them is not too difficult. But we cannot count on this going forward. The outages may represent rolling blackouts, on a regular basis, or they may reflect damage that hasn’t been repaired after storms. They may represent mishaps that we have not encountered before. In such a case, it becomes difficult, because elevators don’t work in high rise buildings and traffic lights don’t work. Air conditioning systems in buildings with windows that don’t open don’t work. Workers cannot get work done, without electricity.

              2. Looking at the Australia electricity situation from a distance, I see this pattern of energy production.

              *Renewables include wind and solar. They also include something called “other” by BP, which seems to be used primarily in the oldest years. It may be oil-related. There are two things of note about hydroelectric:

              a) It is basically not growing. It can be used less and less (proportionately) for balancing wind and solar. The amount of hydroelectric reached a peak in 2011, at 19.6 terawatt hours. In 2017, it was down to 13.5 terawatt hours, then back up to 17.3 terawatt hours in 2018.

              b) Hydroelectric is extremely variable from year to year, and I am certain from month to month. This is another reason that it cannot be counted on a whole lot for balancing.

              This leaves natural gas as the primary balancing fuel. You know much better than I do its distribution around Australia. In total, natural gas used for electricity has been about flat since 2013. Somehow, it must be pressed into use to a rapidly growing extent, if wind and solar are to be balanced. I expect that batteries and simply cutting off unneeded production will likely be required as well. With less hydro for balancing, the situation because more difficult to keep in balance.

            • Artleads says:

              Hi Gail,

              I shared your writing on Facebook, and got this response from a man who thinks he’s very smart. I think his view of the world is that energy can just be summoned up at will if we but have the proper attitude. You must certainly have seen this kind of reasoning before and figured out to stop it in its tracks? Please help!!!!!

              “I’m unable to decipher whether the author is for or against city dwelling other than this statement; With less energy consumption, we will have a great deal less need for cities. There won’t be the jobs in cities to support much population. So, in a way, the discussion doesn’t make much sense. If a city has 24/7/365 electricity to run elevators, and a large share of GDP to spend on trying to outwit germs, then elevator building make sense.” They (homes I imagine) will be constructed with local materials, without electricity or indoor plumbing, I would expect.” This statement need elaboration. Young folks born in the 90s and beyond (for the most part) see farming as labor intensive, back breaking work and see Agriculture as an industry requiring modern technology providing the food we need. If the author is advocating relocating folks from the cities, other than producing food what would their source of income be? Sprawl is an unavoidable reality in the culture of developed Countries as the populations of progressive Cities become an attractive place to raise the modern family. I can attest to that from the vantage point of living in Atlanta. A 3 bedrm dwelling in 1980; avg 1500 sq ft, sold for $40,000 today that home in an average neighborhood sells for $250,000. When minimum wages go up so does every thing else. A never ending spiral that millennials accept as normal.”

            • Robert Firth says:

              London solved this problem four hundred years ago, with the Georgian square, an eminently liveable high density concept. Of course, we had inherited from the Romans a strict prohibition of buildings taller than six storeys, a wise decision that was abandoned only after 1945, when “modern” architecture took over, and began building for awards rather than humans.

            • Artleads says:

              Thanks, Robert Firth! This is so well stated! I’d like to share it elsewhere, especially if I can find a visual to go with it.

            • Kowalainen says:

              Mm, yeah, more centralization inevitably creates single points of failure. Let’s say for example drone striking a few of the major transformer stations (up to 1 year delivery time of a new transformer) or transmission lines towards these centralized behemoths which only goal is to produce humanoid worker drones – slaves to the system.

              The “upside” to large cities is that the plebs can be controlled much more easily through bread and circuses, guaranteeing the vote, instead of what nature can offer in terms of resilience, agriculture, fishing, hunting, connectedness and solitude.

          • Kowalainen says:

            Electrification of autos isn’t about the environment. It’s about saving oil and natgas for the commercial transport uses.

            The electrification is however cleverly marketed. It is the same with the meat industry. What you are unaware of – you can not suffer from.

            • I thought electrification of autos was primarily to give a new industry to China, and to help it better use its coal resources instead of imported oil. Also, electric autos would allow coal burned at a distance to power autos, helping keep the air in the heavily populated cities free from particulate matter.

              Also, the peak oilers spread the word that we were “running out of oil.” Electrification of autos was about avoiding this problem.

            • Kowalainen says:

              Lessening the extractive and processing pressures which is a burden for the oil industry will be to the benefit of economic growth.

              Burning low grade fossil fuels for powering autos and other electrified infrastructure makes sense. However, not for the environment.

  7. Shawn says:

    Brilliant post, thank you.

    Conjecture: central banks set short term interest rates, influence, but do not control, longer term interest rates. Longer term rates are set by inflation/growth expectations. As cheap oil depletes, global growth diminishes down to zero, interest rates globally move to zero (on average) until the system freezes and eventually breaks through political currency crisis, political dis-union, wars. There are maybe 3-5 years more to go on the current global growth rate trend-line downward to zero.

    Why the market does not “see” the risk here and add a substantial default risk premium to bonds etc. is hard to understand. But historically bond prices did impending defaults and wars, until very last. I guess we are just willingly blind to the future.

    • Shawn says:

      Correction to my comment. Sorry. “But historically bond prices did not warn of impending defaults and wars, until very last.”

      • Robert Firth says:

        Bond prices indeed did not warn of impending wars, because the experts and intelligentsia believed war to be impossible. This was set out in detail in a book called “The Great Illusion”, written by one Norman Angell. The reason: countries’ economies had become so intertwined, so dependent on transnational supply chains, that war between industrial countries was futile and unproductive, so would not happen.

        A much admired best seller when published, in 1909.

        By another irony of history, one year earlier the Liberal government of H H Asquith had come to power, and introduced policies that near enough made the Great War inevitable.

  8. Romain Dubuis says:

    Thanks Gail for that new post!

    I’ve been also thinking about the fact a first built road has much more effect than maintaining it. We can also add the fact that once people buy a new product, it creates some growth. But once the market is full, for example with cars or phones in developed country, the market stagnate. The people will not have many cars at the same time usually.

    Other subject, I’ve been attending to a conference in the last 2 days with European actors on hydropower. It was very interesting, especially to discuss the role hydropower has to play to bring flexibility and storage for the future renewable mix we want to have. At least, people working in hydro industry are aware we can’t only rely on intermittent electricity production and battery. The fact that pump storage is much cheaper than battery was also underlined. Now we have to let the rest of the actor aware of those issues.

    • Yes, once a market gets full of cars (or practically anything else), it is hard to add more than the amount needed for those that wear out, plus those needed for new entrants into the economy. If there is no net gain, it is hard to build economies of scale.

      Regarding hydroelectric backup, the question isn’t whether the approach is cheaper than other methods; it is whether it raises total wholesale costs too much relative to what the market is willing to pay. There is an in-and-out loss on storage, for one thing. It seems like the only way companies can tell if something will work is to try it. Here in the US, there has been a bad problem with intermittent electricity driving down the wholesale price of electricity.

      Regulators are at their wits end, trying to figure out what to do. When wind and solar get subsidies (even the subsidy of going first), everything else needs subsidies. Now nuclear needs subsidies. This is a link to the article this is from. https://www.bloomberg.com/news/articles/2019-07-25/biggest-u-s-power-grid-ordered-to-halt-2019-capacity-auction

  9. Jim W. says:

    Hi Gail,

    Thanks for today’s post. Tucked away at the close of one paragraph you state “Huge defaults on promises of all kinds can be expected.” This matches a sort of nightmare vision I keep having for the coming decade. Will the 2020s be the Decade of Defaults? That’s how it’s looking to me, metastasizing into an excruciating hot mess! I think we’re almost certain to encounter most of the horribly difficult predicaments you mention in closing. Most efforts to ‘find a way around serious problems’ only amount to kicking the can down the proverbial road. Bracing for hard times ahead seems prudent, to say the least. I greatly appreciate your hardnosed realism and respect for the laws of physics!

    Jim

    • With everything (more or less) going wrong at once, it is hard to know how “huge defaults on promises of all sorts” will work out. It could indeed to lead to a lot of financial problems, everywhere. It could lead to the Federal Government trying to push Social Security over to the states to handle (if they can).

      But we really don’t know how this all will work out, with so many things happening at once. It is possible that there will be some kind of war, with many people dying in the war. Or there could be an epidemic that wipes out billions of people. Or there could be some kind of religious ending to our predicament that we don’t understand. There could be governmental collapses of various types.

      The best advice I can give you is to enjoy every day you have now. Diversify your investments, so if one goes first, you aren’t left with nothing. Try to maintain good relationships with family members, such as adult children or siblings. If things are not going well, perhaps you can team up with others.

      I am not sure that trying to grow your own food is a good plan. It is too difficult for most of us. Grains in particular are difficult. If things change, homesteading may be hard to keep up.

    • Robert Firth says:

      Jim, I agree with your vision, but not with the nightmare. I see the coming defaults as the systematic replacement of false values by true values. “For he is like a refiner’s fire”, as the Good Book has it.

      And I remember well the words of my first and best financial advisor: “Pay cash, or go without”. Thank you, grandmother.

  10. Janet Greenhalgh says:

    It seems to me resource depletion and debt are only the two of the biggest factors leading to one or many big disruptive events that will bring life as we knew it to a close. Seen in the timescale of human history, it’s just a blip. I predict those left standing will regroup in a more local and much less energy-intensive way. Having said this, the evolutionary march towards the singularity is unstoppable in the long run. If our descendants in three or four generations are recognizable to their ancestors, I would be very surprised.

    • Humans and pre-humans made it through ice ages. Some humans can probably make it through almost anything else that comes along. You are right about regrouping. Trying to make it on ones own would be very difficult.

    • DJ says:

      “If our descendants in three or four generations are recognizable to their ancestors, I would be very surprised.”

      🙂

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