Recession Ahead: An Overview of Our Predicament

Many people have the impression that recessions come from financial missteps, such as the US subprime loan fiasco. If energy is involved at all, the problem comes from high oil prices as supply becomes inadequate to meet demand.

The real situation is different. We already seem to be on the road toward a new crisis; this crisis is likely to be much worse than the Great Recession of 2008-2009. This time, a major problem is likely to be energy prices that are too low for producers. Last time, a major problem was oil prices that were too high for consumers. The problem is different, but it is in some ways symmetric.

Last time, the United States seemed to be the epicenter; this time, my analysis indicates China is likely to be the epicenter. Last time, the world economy was coming off a high growth period; this time, the world economy is already somewhat depressed, even before hitting headwinds. These differences, plus the strange physics-based way that the world economy is organized, explain why the outcome seems likely to be worse this time than in 2008-2009.

I recently explained what I see as happening in a presentation for actuaries: Recession Likely: Expect a Bend in Trend Lines. This post is based on this presentation, omitting the strictly insurance-related portions.

The big thing that the vast majority of people do not understand is how important energy is to the economy. Because of this issue, I started my presentation with this slide:

Slide 3

After an opportunity for discussion, I offered the explanation that the role of food for humans is very much parallel to the need for energy of various types for the world economy. Food provides people with the energy required if they are to have the ability to think, move and speak. Energy products of many kinds enable the activities that we associate with GDP. For example, energy consumption enables machinery to operate and goods to be transported.

Slide 4 – Larger image at this link.

Using data from Smil, as well as more recent BP data, we can estimate how fast energy consumption has been growing over a very long period–nearly 200 years. We can see that the highest energy consumption growth occurred in the 1961 to 1970 period; the second highest growth occurred in the 1951 to 1960 period. These are periods we associate with rapid GDP growth and prosperity.

On the next slide, I show the same data displayed in a different way.

Slide 5 – Larger image at this link.

On this slide, I make two changes in the way the data are displayed:

  1. The increases in energy consumption are split into two components: (a) energy used to support population growth and (b) all other, which I describe as energy used to support improvement in “living standards.”
  2. A different graphing approach is used.

Note that when population growth corresponds to the full amount of energy consumption growth (in other words, at times when there is no red area above the blue area), energy consumption per capita is flat. High growth in energy consumption per capita seems to correspond to rising living standards, as occurred in the 1950s and 1960s.

While I label the “all other” category as if it is simply changes in living standards, there are other components, as well. One breakdown might be the following:

  1. True improvement in living standards.
  2. Additional energy investments required to offset diminishing returns.
  3. Increasing use of energy for overhead items that don’t get back to individuals, such as energy used to fight pollution or to allow globalization.
  4. Efficiency improvements allowing available energy to be more productive.

Efficiency improvements (Item 4) will allow more energy to be available for improvement in living standards, while Items 2 and 3 in the above list act in the opposite direction. We do not know to what extent these items really offset each other. Thus, “All other” = “Improvement in Living Standards” is only a rough approximation.

Slide 6 – Larger image at this link.

We can see from Slide 6 that whenever there is no red area above the blue area (flat living standards or flat energy per capita), adverse events seem to happen.

For example, the US Civil War (1861-1865) came at a time of low energy consumption growth. The Great Depression of the 1930s came during another period of low energy consumption per capita growth. World War I came at the beginning of this period, and World War II came at the end. The collapse of the central government of the Soviet Union in 1991 ushered in a decade of low world energy consumption growth, in part because of the loss of the central currency of the Soviet Union.

The “China Coal” note at the end pertains to the way that China and its coal supply has helped pull the world economy forward since 2001. This benefit seems to be already declining.

Slide 7 – Larger image at this link.

Slide 7 shows China’s energy production by fuel. Coal production (in red) soared after China was added to the World Trade Organization in December 2001. Beginning about 2012, China’s coal production began to plateau. Depleting mines and low prices for coal have kept production flat. Imports can be used as substitutes, to some extent, but it is difficult to keep costs low enough and provide adequate total supply.

With the loss of growth in China’s coal production, its economy has had to cut back. Each year, we read about coal mine closures and miners needing to find new jobs. We know that China discontinued its paper and plastic recycling business as of January 1, 2018. China has also been cutting back on solar subsidies, leading to fewer jobs installing solar panels. All of these types of changes reduce the number of people who can afford to buy high-priced goods, such as new homes, vehicles and smart phones.

Slide 8 – Larger image at this link.

It is becoming increasingly clear that China is being forced to cut back on heavy industrialization because of its coal difficulties. Slide 8 shows automobile purchases for six large economies. China is by far the largest of these economies in terms of auto sales. China’s auto sales began to slide in 2018 and are sliding further in 2019 (about -11%).

If we look back at the time of the 2008-2009 recession, we see that auto sales of the US dropped precipitously. The United States was the country that led the world into recession. The inability of US citizens to buy cars was a sign that something was seriously wrong. Now we are seeing a similar pattern in China.

China has reported that its GDP growth rate has been slightly lower during 2019, but we really don’t know how much lower. The amounts it publishes are too “smooth” to be believed. The actual GDP growth rate is believed to be lower than the recently reported 6.0%, but no one knows by precisely how much.

Figure 8b – CNBC Chart of changes in auto sales by country, based on data through October 2019. (Not part of original presentation.) Source

Figure 8b gives a little more information about recent car sales by country. We can see from this chart that based on data through October 2019, world automobile sales are expected to fall by about the same percentage (3%) in 2019 as during the recession year of 2008. I find this disturbing.

We can also see the huge impact that China has had on keeping world private passenger auto sales rising. The world economy looked like it was headed into recession in January, 2016, when world oil prices were very low, but a spike in China’s automobile sales at that time helped keep total world automobile sales rising and allowed world oil prices to rise from their low point.

In the next sections, I provide some background regarding this story.

Slide 9

Slide 10 – Larger image at this link.

Slide 10 shows the way that I visualize the world economy self-organizing and growing. The economy grows by adding new “layers” of businesses, products, consumers and laws. Unneeded products, such as buggy whips, are dropped from the bottom. Unprofitable businesses close. In some sense, the economy is hollow because of these deletions. It cannot easily go backward because, for example, the support services for widespread use of transport using horses are lacking.

Energy is used to operate all aspects of the system. One part of the system is a self-organizing financial system that helps decide, through wage levels, who gets the benefit of the goods and services that are made. This financial system includes self-organizing interest rates and self-organizing commodity prices.

The most important connection within the economy is the one I show at the center as “Consumers = Employees.” Consumers are very dependent on their wages as employees. If the economy is to continue to operate, workers must receive high enough wages to purchase the goods and services the economy produces. Even the lower-paid workers need to be able to afford food, housing and transportation, or the economy will tend to collapse.

Slide 11

When we look back through the history on Slides 4, 5 and 6, we see that the growth of energy consumption is very important in how economies operate. The theories of Ilya Prigogine explain why this is the case; when adequate flows of energy are available, self-organizing systems are able to grow.

Few economists today include energy consumption in their models, however. Economic theory has grown over time in its own “ivory tower.” Like other academic subjects, it depends on early theories and the process of peer review. The views expressed must also be pleasing to those in power, who would like everyone to believe that politicians, rather than the laws of physics, are in charge.

Slide 12

There are many types of self-organizing systems that grow. They all, directly or indirectly, require energy. Plants and animals of all types are self-organizing systems that grow. Hurricanes grow using the energy that they get from warm water.

Governments grow from the tax revenue that they are able to collect; they use the revenue to buy energy products such as electricity to operate governmental offices, oil to build roads and operate police cars, and natural gas to heat buildings.

The Internet grows through the revenue collected to provide its services. The Internet uses revenue to buy computers (made with energy products) and electricity to operate those computers.

Slice 13

Nearly all 0f the energy we use is hidden. For example, modern food production is very much dependent on energy consumption. Agricultural machines are made using energy products. Soil amendments, including organic soil amendments, are transported using fossil fuel energy. Refrigeration is possible through the use of energy. Hybrid seeds are only possible through energy consumption. Planting seeds by digging with a stick would only use human energy, but such a process would be terribly inefficient.

Slide 14

Slide 15

Most of us can easily recognize today’s goods and services, such as those listed.

Slide 16

Promises of future goods and services act like promises of future energy supplies. This happens because creating goods and services that people can actually use requires energy supplies of the appropriate type.

When people get cash or a check, they expect to use it to buy goods and services. Creating these goods and services requires energy consumption. If there is no energy of the right type available, the goods and services won’t be available to fulfill the promises.

Slide 17 – Larger image at this link.

Promises of future goods and services tend to grow faster than actual goods and services because it is these promises that, in some sense, “pull the economy along.” For example, if a young person gets a loan, (s)he can often buy a new car. The fact that a new car is being purchased leads to more jobs in the supply line leading up to new car production. Or, if a business takes out a loan or sells shares of stock, it can use the proceeds to hire employees. It is these growing wages that keep the system operating.

As long as the economy is growing rapidly, the mismatch between growing debt and actual output doesn’t become apparent. As the economy slows, some workers find themselves working fewer hours. Some businesses become less profitable and lay off workers to try to restore profitability. The catch is, with fewer workers, the economy slows even more. It usually takes more debt, at lower interest rates, to get out of such an economic slowdown.

Slide 18

Slide 19

There is a lot of confusion about prices. “Demand” is what people, through their wages and debt, can afford. As economists tell us, price depends on supply and demand.

In the short term, prices tend to bounce around a lot. The short term buyers of oil are oil refineries. They need to keep their employees busy. If they see a shortage of oil, they may bid up the price of oil to allow their workers to continue to be employed.

Over the longer term, prices of all energy products tend to depend on consumers’ ability to afford finished products, like cars, homes and cell phones. Producing these objects and shipping them takes energy. They also use energy as they operate.

Slide 20 – Larger image at this link.

The various energy prices shown here are simply a few of the many, many energy prices that we see around the world. Strangely enough, prices of all energy products tend to fluctuate together, over the longer term. Prices depend on affordability of end products, such as cars, homes, computers, food and clothing. Our problem since about 2012 has been lack of affordability of end products.

The primary way of raising affordability is by increasing productivity. Increased productivity is made possible by increasingly leveraging human labor with devices that are built with energy and are operated using energy. For example, a worker with a ditch digging machine is much more productive than a ditch digger with only a shovel. An analyst is more productive with a computer and Internet access than with only pencil and paper.

With higher productivity, more goods are produced in total. As long as not too much of this productive output is skimmed off the top (by governments, or by business hierarchy, or to pay for the devices and their fuel), it is possible for each worker to afford more goods and services, raising total demand.

An alternative way of raising affordability is by adding more debt at ever-lower interest rates. This approach tends to make goods such as cars, homes, and factories appear more affordable because their monthly payments are lower. This added-debt approach only works as long as the economy is growing quickly enough. If the economy slows too much, the added debt leads to financial crashes of many types.

Slide 21

Slide 22

Many people think that they know the amount of oil that can be extracted based on the current technology and the assumption that prices will eventually rise high enough to extract all of the fossil fuels that seem to be available. For example, the International Energy Agency has prepared reports in which it shows expected oil availability if oil prices rise to $300 per barrel.

The catch is that even if oil prices can bounce high, it is not clear that they can stay very high. The current price of oil is only in the $55 to $65 per barrel range. A price of $300 per barrel will allow oil extraction using very advanced technology. We don’t have any evidence that oil prices can stay this high because demand comes primarily from wages. Prices cannot stay high without adequate support from wage levels.

Of course, the issue is not just oil prices staying sufficiently high. Natural gas, coal, uranium and electricity prices all have difficulty rising high enough and staying high enough. Commodity prices such as copper and steel have the same issue.

Slide 23

There are many people who say, “Of course, oil prices will rise. Oil is a necessity.” They forget that it is really a two way tug of war between producers getting a high enough price to be profitable and consumers getting a low enough price to be affordable. There will be a winner and a loser.

People also forget that most commodity use is hidden. We see the fuel we buy for our personal vehicles, but there are a huge quantity of oil products required for shipping goods, paving roads, growing food, and for many other uses that we are not aware of. While we might be able to pay a little more to fill our gasoline tank, most of us would not be able to simultaneously pay more for food, transported goods of all kinds and road maintenance.

Slide 24 – Larger image at this link.

Economists often assume that if energy prices rise, wages will rise, as well. If we look at the data historically, however, it doesn’t work that way at all. What happens is the opposite: average wages tend to rise as long as oil prices stay low. Once oil prices spike, average wages tend to flatten out.

The amounts shown on Slide 24 are average wages, computed by taking the total inflation-adjusted wages for the population in total and dividing by population. When oil prices spike, recession soon sets in. The reason why average wages fall is partly because more people become unemployed. Other workers find it necessary to accept lower-paying jobs.

Slide 25 – Larger image at this link.

Many people focus on the run-up in oil prices to July 2008. An equally important point is the fact that the world economy has not been able to maintain these high prices since July 2008. The general price trend has been downward. The cuts by OPEC have not had a material impact.

Slide 26

Citizens of the United States, Europe, and Japan are used to thinking of high energy prices as being a problem because they are from countries that require substantial imported energy to maintain their GDP. For example, Greece will sell fewer trips on its tour boats, if oil prices are high. This will have an adverse impact on employment and the ability to repay debt with interest.

If a country is an oil exporting country, low oil prices are an even worse problem. This happens because oil exporting countries tend to earn a large share of their revenue from taxes on the sale of oil. These taxes can be much higher if oil is selling for, say, $120 per barrel than if it is selling for $60 per barrel. These tax dollars are used to provide subsidies to offset the high cost of imported food. They are also used to build industry and infrastructure to provide employment to the population.

If oil prices are too low, oil exporting countries will tend to cut back on oil production. In fact, this has been happening for OPEC for the entire year of 2019.

Similar problems occur if commodity prices of any kind (coal, natural gas, uranium, steel, copper, etc.) stay too low for an extended period. Producers go bankrupt, or they stop production, or they pay their employees so poorly that the employees go on strike. Sometimes, they may even start rioting. Many of the riots around the world today are related to low commodity prices.

Slide 27

Slide 28 – Larger image at this link.

The world experienced spiking oil prices in the period leading up to mid-2008. These high prices caused a recession and much lower prices followed. The chart on Slide 28 gives a somewhat exaggerated view of what goes wrong with high oil prices.

If the price of oil suddenly spikes to two or three times its previous price, both the price of food and gasoline are likely to increase. This change tends to lead to a big shift in a family’s budget. Debt payments, such as for a home and car, are pretty much fixed, so the big increase in food and gasoline prices must be taken out of the budget earmarked for everything else. This leads to cutbacks in discretionary spending such as vacations, restaurant meals, and charitable contributions.

In a short time, there are layoffs in discretionary sectors. Those who are laid off are more prone to defaults on loan payments. The problem soon escalates to a recession, with high unemployment and low oil prices.

Slide 29

Strangely enough, central banks push back against high oil prices as well. They know that high oil prices lead to high food prices. Citizens of energy-importing countries will be unhappy with elected officials if oil and food prices rise. Thus, central banks tend to raise short-term interest rates, as soon as they become concerned about high oil and food prices.

The recession that follows will quickly bring food and energy prices back down. If food and energy prices fall, the low prices will be the problem of the energy producers. Oil exporters will find their tax revenue too low, but the high-price problem of oil importers will be gone.

Figure 29b- Slide from a different presentation, showing the trend in interest rates. Larger image at this link.

You will recall that the rapid energy consumption growth periods were 1961 to 1970 and 1951 to 1960. During these periods, the economy was growing almost too quickly. The Federal Reserve was able to keep raising interest rates, as a way of holding down economic growth. It was not until 1981 that the pattern changed from raising interest rates to falling interest rates.

Since 1981, the US Federal Reserve and other central banks have been reducing interest rates. Lowering interest rates and rising debt levels, as mentioned previously, makes goods appear more affordable because of lower monthly payments. The concern now is that interest rates are about as low as they can go. Central banks no longer have room to offset recessionary tendencies (because of slow growth in energy consumption) by lowering short-term interest rates.

Slide 30

Most people never consider the possibility of low energy prices leading to collapse. It looks to me like this is the danger facing us today. Let’s start by looking back at what happened in 1991.

Slide 31 – Larger image at this link.

When the central government of the Soviet Union collapsed in 1991, the individual republics making up the Soviet Union were left on their own to find new currencies and new trading partners. Satellite countries of the Soviet Union were affected as well. Slide 31 shows that the consumption of many types of resources dropped for many years for the whole area. The low point was not reached until 1998.

Slide 32 -Larger image at this link.

If we look back to see what had happened previously, the Soviet Union was an oil producer and exporter. When oil prices were high in the 1973 to 1980 period, the Soviet Union prospered. But then low prices came along, at least partly because the US Federal Reserve raised interest rates to almost 20% in the 1980-1981 period. (See Figure 29b.)

The long-term low oil prices, in some sense, indicated that the world economy was producing too much oil; some inefficient area(s) of production needed to leave. The Soviet Union may have been singled out by the self-organizing economy because it used energy products in a less efficient manner than other economies. Its adverse outcome may also have reflected the fact that its cost of production was higher, leaving less of the sale price for reinvestment and taxes.

Slide 33

The Soviet Union is an example of what can happen if oil prices stay too low for several years. The central government of such an economy can collapse.

Slide 34

When commodity prices are too low, the economies of countries exporting those commodities are stressed. This is why we see so many uprisings in commodity-producing countries right now. Iraq with its oil has been having protests. Chile, with its copper and lithium exports, has been seeing protests. South Africa with its exports of coal, precious metals and gems has been having riots. With some escalation, any of these low-price situations could lead to an overturned government.

Slide 35

Slide 36

In Slide 36, I give an example of two different kinds of ingredients in a cake:

  1. Ones that are substitutable: the flavoring, which can be vanilla, almond, or something else
  2. Ones that are not substitutable: the flour, which is the energy product

With too small a quantity of flour, all we can do is make a smaller cake. Perhaps we can substitute a different energy product, but electricity most certainly will not do! Some bacteria eat electricity, but humans do not. Substitutability is limited, even within energy products/carriers.

Economists make models focusing on the special case when a material is not essential for the economy. This gives a misleading impression. If they had looked back at what happened when energy supplies were low relative to population growth, as we saw on Slide 6, they could make much better models.

Slide 37

We seem to be sitting on the edge of some form of collapse for at least parts of the world economy, right now.

Without enough energy consumption growth, top-level organizations, such as the European Union, the United Nations and the World Trade Organization, are especially at risk of collapse.

Slide 38

Slide 39

One of our big problems today is excessive wage disparity. High-wage workers rarely have trouble being able to afford homes, cars, vacations, and air conditioning. It is non-elite workers, the ones who have not been able to find high-paying jobs, who have an affordability problem.

The wage disparity problem is an outgrowth of how the physics of the economy works. If there are not enough goods and services to go around, the physics of the economy effectively “freezes out” some of the workers. Under this arrangement, there will be some survivors even if there is not quite enough for everyone. In some sense, the “best adapted” are able to survive. If the inadequate supply of finished goods and services were spread around evenly, there might be no survivors at all.

Slide 41

The thing that is key is that workers need to be able to afford finished goods and services produced by the economy. If too large a share of wages goes to high paid workers, or to owners of robots, there is not enough left over for the “regular” employees.

Slide 42

Many workers have seen their jobs disappear as their employers moved production to another country where wages were lower. Or, jobs can remain, but the wages will fall from the low-wage competition.

Slide 43

US income disparity seems to be as great as it was in about 1930, at the time of the Great Depression.

Slide 44

Slide 45 -Larger image at this link.

If we look at historical world energy consumption by fuel, we observe that it has been rising the vast majority of the time. The little dip that we see about 2008-2009 occurred at the time of the Great Recession. It doesn’t take much of a cutback in energy consumption to cause a major problem.

Back at Slide 20, I remarked,

The primary way of raising affordability is by increasing productivity. Increased productivity is made possible by increasingly leveraging human labor with devices that are built with energy and are operated using energy.

The world economy requires growing energy supply, of suitable kinds, to operate. If the quantity of energy available is reduced, productivity is likely to nosedive. This is true even if the reduction is intentional and seems to be for a good cause, such as reducing CO2 emissions.

We seem to be heading for a contraction in energy supplies now because of continued low energy prices. Fossil fuels are, in some sense, leaving us, whether we like it or not. World coal production has been flat to falling since 2012. IPCC scenarios assume a very different  pattern: Fossil fuel use, especially coal, will grow indefinitely, presumably because of high prices and improved technology.

Many people are hoping that wind, solar, and hydroelectric will someday replace fossil fuels. I consider this highly unlikely because all three are made using fossil fuels. Furthermore, these “renewables” in total represented only 10% of world energy supply in 2018. The 10% is divided as follows: wind, 2%; solar, 1% and hydroelectric 7%.

Slide 46 – Larger image at this link.

There clearly is a correlation between GDP growth and energy consumption growth. China with its growing coal use was pulling the world economy along, especially in the 2002 to 2012 period. Recently, it has lost much of this ability.

In my opinion, Trump’s tariffs are not the cause of our current trade problems. Tariffs seem to be enacted whenever growth in energy consumption per capita is very low. Tariffs were enacted both immediately before the US Civil War and at the time of the Great Depression. The problem is that jobs that pay well indirectly require significant energy consumption. When growth in energy consumption per capita is low, it becomes impossible to find enough jobs that pay well for everyone. Tariffs are used in an attempt to keep jobs that pay well at home.

Slide 47

We don’t know quite what will happen. The closest analogy is the Great Depression of the 1930s. More financial problems seem likely. In fact, they could escalate quite quickly. More strikes, such as those currently going on in France, seem likely. The situation is likely to play out a little differently in various countries.

The physics of the situation seems to try to keep some parts of the system operating, if at all possible. But, as mentioned at Slide 10, the self-organizing system deletes parts of the economy that are no longer needed. We no longer have an economy that can operate with horse and buggy, for example. We can’t just “go backwards” to an economy of an earlier era.

Slide 48

We are already seeing changes in this direction. Hong Kong’s protests are in the news practically daily. Germany is experiencing job layoffs. We know that in an interconnected world, a recession that starts in one large country is likely to eventually affect much of the rest of the world.

Now we are in a waiting period, waiting to see what happens next. Major changes seem likely over the next five years, but they could happen much sooner.

This entry was posted in Financial Implications and tagged , , , , , by Gail Tverberg. Bookmark the permalink.

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.

638 thoughts on “Recession Ahead: An Overview of Our Predicament

  1. Haven’t read it all yet but the section on interest rates is particularly interesting. Past recessions seem to have followed periods of relatively high interest rates but rates now are not particularly high (indeed, are still on the decline in many countries), so a recession would be impossible to counter with lower interest rates (though I can’t really get my head around negative interest rates).

    • Negative interest rates imply that investments are losing money, even without taking into account the “normal” loss through inflation. The government gets funding (sort of like extra taxes) by lending money out at negative interest rates. In fact, it demands that banks take its debt at negative interest rates. So banks are in deeper and deeper holes, unless they can figure out some way to earn money to offset this loss. It is hard to see how this can work.

  2. Another good article. Unfortunately extrapolated forward the conclusions are not good. Have you explored whether the so-called “generation four” (or “Gen4”) nuclear reactors might be able to help?

    • It takes a long time to get nuclear reactors into operation. Also, uranium has the same problem with “too low prices for producers” as other fuels. So it is hard to see it as a solution.

    • I saw a clip of Bill Gates touting, glibly, that the gen4 company he’s backing has already solved all the technical problems and it’s now just matter of deployment. I looked it up and it turns out they’re asking for $20 billion from the government for a proof of concept. If Bill Gates was half as sure as he sounded he would have put in all that money himself (he would still have several times that amount left over for more fun and games.) Like cold fusion, this seems to be just another grift.

      Gail, he claims that the fuel is a waste product of current plants, so it should be practically free. Typical of a grift.

        • Yes, this has been discussed / stressed here in almost every article’s comment section. France was very close but abandoned the project, Russia is the only entity with operational industry scale chain of fission + breeder type NPPs + recycling fuel facilities for it all in the world. Nowadays China and S. Korea seems active in this sphere as well. Obviously this could be all easily shared / licensed out, but both the public opinion and gov position of the other major IC hubs (namely in the W) are not interested, more over they are actively sabotaging Russian nuclear industry.

          More over, there is simply no manpower to scale such a thing quickly, perhaps only under the scenario of “hard socialists” (red or brown variety) taking over most branches of gov and shifting mil-industrial complex to this manuf program as top national priority instead. This is impossible in current social-economic and political setting existing within the US and Europe. And when it will be theoretically possible say in ~10-20yrs after major turmoils by that time the on the ground situation won’t likely be feasible for such huge scale-complex industrial projects anyway / anymore..

      • Recycling nearly always sounds a lot better than it is. There are costs associated with it, and they can be very high. If the new process is a lot better/cheaper than the old process, we would expect to have a problem obtaining enough of the material to be recycled. And, of course, there is an assumption that we will have fossil fuels to fix roads, build all of the devices, and do whatever else needs to be done to keep the system going.

        • Recycling is a feel good, joke. In my area SW Florida, the recycling company put out a letter which listed all the things you can and cannot recycle, you know because people want to do the right thing.

          So here’s what can be recycled: Soda bottles and newspaper or junk mail. And we have to wash the inside of the bottles and remove the labels from the soda bottles. So to do my part “to save the planet”, i’m now throwing everything in the trash. Why should I waste precious water resources to recycle bottles? And pretty much all of the plastic and paper waste products are sold to Asian countries.

          So here’s what can’t be recycled: Everything else. That means medicine bottles, milk jugs, empty bottled water containers, cardboard, waxed paper.

        • Recycling is in the realm of NPPs a bit misleading term.
          In fact it works more like opening further layers of untapped energy potential in the only partially used fuel pellets so far. Yes, you are correct it is added cost (vs. initial situation of rich Uranium deposits), but given the situation with fresh uranium mines now (and laying spent “waste” around sucking resources anyway), it’s a good extension..

      • Grift indeed. It makes no difference whether the “waste” is stored in the output bins of one nuclear plant or the input bins of another; it is still very radioactive, very dangerous, and very expensive to keep even marginally safe.

  3. very excellent post, thank you…

    after slide 5 you write:

    “2. Additional energy investments required to offset diminishing returns”

    I know your posts can get long (not too long) and you can’t go into detail about everything, but the implications of this point #2 are massive…

    it has become fairly obvious that diminishing returns on extraction of all resources is unstoppable, and of course this goes for energy resources as well… almost all the best coal has been mined, oil extraction is getting more costly in money AND in energy needed to extract the energy etc…

    if anything, the future scenario is worse than stated…

    recession ahead… yes, and soon, and severe…

    • You are right. It is diminishing returns, both from depleting mines/wells/fresh water supplies and also from rising population relative to arable land. I was temped to write more about this, but I didn’t even mention it in the slides, so I didn’t think I could say much.

    • ” …diminishing returns on extraction of all resources is unstoppable, …”

      Quite true, with our present methods of extraction. Mine the most concentrated resource first, then the next most concentrated, and so on. It should have been obvious long ago (and indeed it was obvious, to William Stanley Jevons in 1862) that this is a classic Red Queen’s Race. But there is an answer, and a sustainable one: mine the most dilute resource, because that is the one continually being replenished by entropy.

      The question the is, how? By the same means that living creatures have used for billions of years: microorganisms and sunlight. That’s what built our limestone cliffs; that’s what created the bog iron the Vikings used; that’s what produced the nitrogen fertiliser for the three field system. Once again: work with Nature, not against her. But can we get back there? That is the hard problem behind the solution.

      • The solution will present itself for us, the question is if we can stomach it in a sensible way, or if it get shoved down our collective self entitled throats as a big bitter gulp of poverty and misery.

  4. “There are many people who say, “Of course, oil prices will rise. Oil is a necessity.” They forget that it is really a two way tug of war between producers getting a high enough price to be profitable and consumers getting a low enough price to be affordable. There will be a winner and a loser.”

    or perhaps it’s a lose/lose scenario…

    the situation we now have is that the price is too low for many producers (shale oil, heavy oil, maybe deep water oil) and too high for an increasing percentage of common citizens…

    • It is a free fall race to the bottom. The last one hitting rock bottom is the “winner”. Not that it makes any difference.

      The consumerism has reached the logical conclusion.

      • “Rock bottom” is relative. It may consist of a simpler lifestyle – no commuting, fewer electronic toys, no eating out at restaurants, no consumerism, a return to making products that last forever, more walking/less driving, eating more local and seasonally available foods.

        When you put it that way, it doesn’t sound so bad.

        • Without fossil fuels, there can’t be very many of us. Forget simpler lifestyle; the situation is vastly worse than this, I expect (unless somehow, some economies can hold on for a while longer). Electricity will disappear early on, perhaps before oil.

          The idea of wind and solar allowing electric cars is over the top absurd, as far as I can see. Our big problems are paving roads and keeping electricity transmission up. Wind and solar do nothing for these issues. They allow politicians to look like they are doing something.

          • the missing factor with electric cars, is having somewhere to go to, and a reason to go there

            travelling uses energy, it does not produce wages—an almost impossible concept to put over

          • But if energy affordability is the issue, then surely it doesn’t all become unaffordable at once. The world’s energy mix isn’t all delivered at one single price, but at a range of prices and volumes from very cheap to very expensive. My view is that higher-cost energy will be shed from the system first, then next highest-cost, and so on, over time. We won’t go from 100 to 0, but in step changes down from 100 to 90, then to 80, then 70, etc. Each step change will be jarring and as each tranche of unaffordable energy is shed, out will be tossed complex structures and technologies, and probably a portion of the planet’s population will be jettisoned one way or another as well. The down-steps won’t be evenly distributed around the planet. The peripheries will shrink, to keep the centers somewhat-alive. Countries that have secure access to cheaper energy, food supply, and weaponry, might muddle through. I would not want to be in a place like India or China 40 years from now – both are massively dependent on food and energy imports. This doesn’t bode well in a world where the pie is shrinking.

            • if you live in a tent city in LA, then your drastic energy-shedding has already happened

              Seems to me that the result when it all gets to really large scale will be wars of denial—the scale of the wars being relative to available energy

              USA civil war seems inevitable, various factions screaming conspiracy and all expecting Jesus to fix things, refusal to accept they have an energy problem and not a god-problem

              same applies everywhere else, just with different labels attached according to where you live

              Infinite growth forever—and so on.

              Maybe climate will shut us down. If the oceans get heat-choked then humankind is done for.

              But it could happen in any one of a number of ways.

              The only certainty is that it will be somebody else’s fault

        • “Rock Bottom” is what the dinosaurs found, some 65 million years ago. But be of good cheer: their decendents, the birds, are still with us, and will be, unless they are all chopped apart by those “sustainable” windmills.

  5. “We don’t know quite will happen. The closest analogy is the Depression of the 1930s. More financial problems seem likely. In fact, they could escalate quite quickly. More strikes, such as those currently going on in France, seem likely. The situation is likely to play out a little differently in various countries.”

    True enough, we don’t know exactly what will happen. I keep thinking it’s going to lead to a world war, because it’s in our nature to seek out someone or a culture or a country to blame, because otherwise we end up blaming ourselves and that’s like admitting wrongdoing and people always resist that beyond anything else. In this case there probably isn’t anyone to blame, it’s just the depleted end of the oil age, but they’ll still seek out one’s to blame, locally, regionally, nationally and internationally. Even when there are much fewer people in the aftermath of conflict, people will still be seeking out one’s to blame, maybe even because of someone being a baby boomer. “Hey, your generation caused all this to happen!”

    • Wars are, historically, mostly very rational: looking to get hold of land and resources, carry away gold and jewels. Although in the Middle Ages war was a form of outdoor sport as well, for the aristocracr who needed something to do.

      Germans in the 20th century blamed the other earlier imperial powers for keeping them from their share of all the goodies of the planet, and WW1 and 2 were their attempts to get hold of them by force (the Germans have done much better for themselves using the Eurozone to grow wealthy without the use of force).

      So, when we see conflict between states, it will likely have a rational cause in the struggle for resources – as for instance in Iraq and Afghanistan.

      The inter-generational blame-game now being encouraged, telling even very little children that all those older than themselves are to blame for climate change – and their imminent deaths – is potentially very dangerous, not to mention psychologically damaging.

      ‘Take that! Boomer!’ is not unlikely……. Or perhaps the young will just take to drugs to quell the misery – a wise government might supply them in some form as a pacifier.

      • Xabier, I agree. The nest war will most probably be an intergenerational one. All over the world, pension (or social security) schemes are flat bankrupt, and cannot pay what they have promised. But older people have influence, and power, and votes, so they will rob the young until the bitter end to extract their “entitlements”. And a whole generation of politicians, many of whom have no children of their own, will enable them.

        • Your conclusions, Robert and Xabier, are logical, but there is also another side to it. Those pensions and investments held by older persons also tend to underlie the inheritances of their heirs. Declining wealth of parents is declining future wealth of their children. And it affects younger generations in the present, too. As it becomes more difficult financially for older generations, they cannot help their younger family members financially and may even need to depend on them for support. One or both of you have given such examples of how this worked in pre-industrial times. Pensions, retirement schemes, and Social Security programs are almost as much benefit to the young (through decreasing/eliminating the need to support elders) as they are to the old. So there might not be as much inter-generational conflict as we might expect as the pool of resources shrinks.

          • Thank you, DB, an excellent point. Perhaps I was too influenced by those RV bumper stickers that read “we are spending out children’s inheritance”. But this much I do believe: as long as older people do not have to rely on their own children, but can rely on other people’s thanks to the State, they will have far less incentive to help the next generation. As our resource base shrinks, this will become an ever bigger problem.

    • When I looked at the financial data associated with World War II, I was shocked at how beneficial it seemed to be from the point of the US. Borrowing jumped and GDP jumped. Many women joined the labor force. Energy consumption started growing. The US was finally able to leave the Great Depression behind completely.

      • Yep, the negative side of it recycled mil-industrial nazis (re-)entered the perennial “deep state” as Ike from first hand knowledge warned about.. the last course correction attempt by JFK ended up in classic banana republic style.. and the rest is history incl. the late 1970s early 1980s trick with reversing interest rates and winning the cold war against Soviets, but “loosing it” now against China and Russia (I hear you you they could go down first scenario again). These processes took longer than expected, but from “3rd/4th turnings” macro zoomed out perspective it’s all fast development..

      • Hi Gail! I am very interested in the topic. Would you mind saying where you found the data?

  6. Super post. The interest rate chart is fascinating. It’s the line in the sand between real growth and (unsustainable) debt fuelled growth.

    When rates go negative we’re into real contraction, not that negative rates can ever make any sense.

    Doesn’t look like we have much time left.

    • “ Doesn’t look like we have much time left.”

      We have been saying that for a long, long time and yet here we are. Probably the better saying is: “things will continue, until they can’t”.

      • Yeah, it has seemed, since the GFC, that the next recession will be even deeper and will be happening very soon, but somehow the world has muddled along, giving the impression of growth. I’m not sure how but maybe someone could offer a reason for why a global recession seems to have been avoided for so long?

        • “but somehow the world has muddled along, giving the impression of growth.”

          Because the world’s central banks are now running the eCONomy or in other words we could refer to it as 3 card Monty. It’s all rigged so as long as they have plan C,D,E,F,G,H, etc they can keep the system afloat. The current plan is near zero or negative interest rates.

          If that doesn’t work, they’ll try something else and if that doesn’t work they’ll try something, something else until nothing works. That’s when the saying will have meaning: “things will continue until they can’t”.

  7. Everyone is familiar with the driving force of Industrial Civilisation – to increase GDP. The data shows that that can only be done with increased energy use. 90% of that energy is fossil fuels, which produces the CO2 emissions that are killing the planet. So effectively IC increases CO2 emissions and kills us.

    There is only one way to stop this. We must all STOP BUYING STUFF. If you don’t buy the stuff, the producers will go bust and stop producing. This will cut fossil fuel consumption and cut CO2 emissions. Its very simple, stop buying stuff. It is not the politicians who make us buy the stuff, it is YOU and ME.

    You won’t hear this at COP-25, but that’s because no one wants to give up buying stuff, especially with Christmas coming up.

    • If we stop buying stuff, it will bring down prices further. Jobs will disappear. This is what makes collapses happen. People stop buying stuff, if there are too many people with low wages. Or too many people required to spend large parts of their income on high-priced homes, high-priced autos, high-priced health insurance and other necessities.

      • If sawing through the branch you are sitting on is the only job in town, that’s what you do.

        BAU and consumerism until it can’t go on any longer = Collapse.

      • Either serious climate change or collapse WILL happen anyway. An early collapse will at least sweep the rotten system away and give the world options with some resources still available.

        • Getting rid of the rotten system would get rid of antibiotics and the computers that run hospitals. No trucks, so no food in the store. Is this what you want?

          • Very good point. However, note that our present rotten system has pretty much destroyed the effectiveness of antibiotics through massive and gratuitous overuse in factory farming. That’s why my (imaginary) bet is on the White Horse.

    • If we stop buying stuff, this country reverts to an economy based on small time farming with us all living in little cottages, the default position we always had prior to my grandparents’ generation. Unfortunately our climate means we’re prone to potato blight.

      • We don’t have the little cottages or the tools to do small time farming. We don’t have the skills or the seeds, either. It is very difficult to go backward.

        We know that hunting and gathering (probably with a predominance of gathering, and most hunting being for fish) happened first. Humans’ ability to cook food started over one million years ago. We have to have some way of cooking our food. There are not enough forest to cut down, especially if we try to use wood both for fuel and for smelting metals. Without a way of cooking our food, we need bigger teeth and guts and a smaller brain. Humans would revert to looking more like chimpanzees.

        • The conclusion remark – observation was true and funny.

          Nevertheless the bottom line is the required know how (low tech – no till – perennial agri), tools, and people are there dispersed already (yes tiny minority yet distributed). Those people and their plants and animals will have to restart it. Surely, it’s unlikely this could be turned on a dime feeding ~8B pop, hence the future lower population and social arrangement taking shape of some derivative of early patronage-feudalism or perhaps other modes..

    • Yeah, you start by stopping buying stuff and to procreating. I am sure you will gather a rather substantial following (sarc).

      No, the only way is to hike energy prices and make the redundant protoplasm of consumerists find out that a prosperous future just isn’t going to happen.

      The financial system can be patched up to accommodate for the upheaval. One good starting point would be to dismantle the unholy government corporate complex.

    • “90% of that energy is fossil fuels, which produces the CO2 emissions that are killing the planet.”

      Do you realize CO2 is literally plant food? More is better for life on the planet. This climate doomer view of CO2 is absurd. I *facepalm* every time I see a statement like this.

    • wholly appropriate comment on the severe global recession which is almost upon us…

  8. We could buy a little time if the government pumped money directly into production and to consumers. It won’t cause large inflation if the goverment prints it’s own money. That would keep prices up for producers too. Theoretically it could work until there are enough rescourses. Debt jubilee worked in ancient civilizations. Today’s system is way too complex, so even a small disturbance can wreak havoc.

    • I am sure that many things will be tried. Giving more money to consumers is likely to be one of those things. Maybe we can push the problem off a while. One of OFW’s commenters compared debt to coffee or amphetamines. When we don’t have enough energy, we can try more coffee or amphetamines. It may help us feel better for a while. But it really isn’t a substitute in the long run.

        • interestingly though, many “top/influential” socialists don’t like UBI at all, they believe a mere policy change could transform the trajectory and restore past peak (~1960s) prosperity and income distribution by a mandate.

          If the current trends hold, after extrapolation the mid term future will retain this discrepancy, say socialist taking over govs, and UBI proponents going slightly up holding 10-20% of votes..

          But it is indeed possible in some regions/countries they might go on top and actually attempt/phase in UBI, but I doubt it will be any major IC hub before ~2035.

        • Fossil fuels is already our UBI. The thing most people in IC occupy themselves with is fake “work” through large and expensive government military corporate complex jobs programs which can be shut down by the stroke of a pen.

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