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. in the middle of UK election fever right now

    trying to point out that you can’t vote for infinite prosperity is an excercise in futility

    Yet this is the regular bleat from voters I talk with—that this or that political party will somehow ‘fix things’ and deliver some kind of normality.

    We have an energy crisis, not a political crisis—occasionally someone ‘gets it’—or seems to. Then meeting up again a week later and finding their mindset has ‘reset’—that it’s all about politics. (and all my fault for suggesting otherwise)

    • There is this oversight, too:

      “For all the marked policy differences between the different parties in the UK election, they share a common blindspot. They all seem to assume that the UK is the sole determiner of its economic fate.

      “There is nothing in the party manifestos about how they would respond to the very real threat of another major downturn.”

    • There has to be a story that people can tell that allows a better tomorrow than today. Assuming a different political leader can solve the problem is really wishful thinking.

    • I have been making the same point as Norman in my pre-election chats with fellow Brits. Nobody has gotten it yet.

      In response to my energy crisis argument, my dear brother assured me that “the planet is a huge dynamo wind and solar being the minor contributors and tidal the great wealth everything is waiting for the will to commit to it. But those in power fear a new order where they lose control and will resist the necessary change until the people of the world insist on it.”

      Could you have a word with him, Norman? I don’t have the heart to get into a scrummage with him about the planetary dynamo and tidal power.

      • It’s the common fault of imposing a moral and emotional narrative on what is a physical issue.

        Only vested interests and corrupt elites stand in the way of Utopia; all we need is will-power: ‘All could be perfect but for them….’ etc

      • Your dear brother sounds like my dear brother—could it be the same person, and we are actually related? A mixup in the maternity ward perhaps?

        The certainty persists that ‘they’ are going to fix things

        • I regret raising such issues with my family at all. I thought that, even if some the details seemed abstruse, the basic common sense proposition that you cannot have an infinite growth paradigm on a planet of finite resources would resonate.

          But of course they looked at me like I needed sectioning. 😀

        • As I look at it, the members of each generation in each culture all start out with the same “factory settings”—the basic conventional education—and most of us don’t get very far in reprogramming ourselves.

          The working class obsession with this shadowy “they” is very widespread. “They” are either going to fix things”, or else they are “fixing” things in their own interest and making everyone else’s life a misery in the process. “They” are simultaneously the core of the problem and the core of the solution.

  2. “As a historian, you have to be conscious of the fact that every civilization that has ever existed has ultimately collapsed. . . . one has to live with a sense of the inevitability of tragedy. As a statesman, one has to act on the assumption that problems must be solved.”
    Henry Kissinger.

    Nice post Gail.

    One of the most important take always is higher energy cost depresses wages. So it delusional to believe the economy can repay its obligations with rising energy costs. They need to be falling. Actually they’re too high now.

    Limits to Growth predicted this situation. Because of scarcity and depletion more “capitol” would need to go into the energy sector limiting industrial output.

    Perhaps the expression “capital” was too difficult for economists to understand. Childishly they think it is only money. Rather it is a basket of resources that can be applied to the system. It includes knowledge labor infrastructure transportation. As these are steered into one activity or another it depletes other competing activities.

    One of the most depleted of the resources is knowledge. Discovery of oil fields was paid for long ago. For example the Permian basin was well known for decades. That knowledge is now gone it’s been exploited.

    Entropy is nothing more or less than the loss of information

    • Thanks for your fine comment.

      I figured out several years ago that higher energy costs depress wages. This was one of my “ah-ha” moments. We cannot live on higher-priced resources, unless we can somehow offset the higher prices with efficiency gains. Of course, we still have entropy issues to deal with as well. The efficiency gains are net of entropy losses. This is what is the killer.

      We may think of this as the information age, but as you say, “Entropy is nothing more or less than the loss of information.” All of these super-complex systems we put together are subject to failure. One of the biggest sources of failure is the inability of customers to pay for them. For example, the 5G network will theoretically provide benefits to certain customers, such as those who want and can afford self-driving cars. But to the average internet user, placing an Amazon order or reading email, it will make no difference. Average internet users cannot afford to pay more for this better service. If internet rates are raised for average customers, it will push the system toward collapse because they will have fewer funds to spend on food, clothing, heating and other necessities.

      • The quote is actually available twice: in a October, 1974 N. Y. Times interview, and in a 1976 N. Y. Times article called The Gloomy Side of Historian Henry A. Kissenger.

        The New York Times article says Mr. Kissinger probably best summed up his own view of history in an interview with The New York Times in October 1974, a time when he was deeply concerned about the ability of the West to mailtain unity in the face of worldwide recession and inflation caused by the Arab oil embargo and subsequent steep price rises; When Portugal, Italy, Spain, Greece and Turkey all seemed in precarious political situations.

        Asked if he considered himself “essentially tragic,” Mr. Kissinger replied:

        “I think of myself as a historian more than as a statesman. As a historian, you have to be conscious of the fact that every civilization that has ever existed has ultimately collapsed.

        “History is a tale of efforts that failed, or aspirations that weren’t realized, or wishes that were fulfilled and then turned out to be different from what one expected. So as a historian, one has to live with a sense of the inevitability of tragedy. As a statesman, one has to act on the assumption that problems must be solved.”

        The original interview can be found at this link:

        • “History … is indeed little more than the register of the crimes, follies, and misfortunes of mankind.” – Edward Gibbon (1737 to 1794)

  3. While I do regard all Gail’s posts as a must-see, I did find this one very long. Gail seemed to be re-telling the whole story, which is well known to her regulars, before reaching her newer insights, so I found my attention flagging before I reached the end.. For that reason, I think the post could have been cut to around a quarter or a third of the length. Tim Morgan’s posts on his Surplus Energy blog are generally somewhat shorter, because he does not repeat the whole story each time. I regard both blogs as essential reading, however.

    Gail is of course a highly original thinker and probably unique, so I will always read her posts. And the fact that she is a former actuary, with experience of whole systems across various disciplines, makes her a particularly formidable thinker. This is just to highlight how much I do value Gail’s insights and to stress that my criticism above is to do with presentation, not content, so I hope it doesn’t come across as too harsh, and I do look forward to all her posts.

    • I agree in some senses that there is much repeated here, and that many of Gail’s posts fall into the category of “telling the same story again.” If only more people were ready and getting the story! However, I have to disagree with you here, because although this post is long, I think it is one of her best recent posts, in that it ties the larger repeated story to the current goings on in the economy and links it all back to global trends including historical patterns. In that sense this is one of the most complete posts in some time, and if I were to flag one to share with the uninitiated this one would be a good one to share, because it does included the repeated narrative, but it breaks new ground in applying these to our current predicament, especially with respect to the pervasive turmoil we are witnessing across the globe right now. I am never convinced that these it one explanatory model that explains social or economic reality, but Gail makes a good case for the foundations of much of this global turmoil. We can’t overcome physics, but does that mean we are doomed to fall into this next recession, and what can we do to soften the landing or build more resilient systems for the future?

      • Why telling the same story? Because the story makes sense! Gail retells the story everypost often addressing a topic in the MSM or current event. And it always fits. You go girl. Tellyour story. I for one will be always waiting for the next post.

    • I expect that some people will feel this way.

      I do not have a book out, so the only way people can understand the whole story is by being regular and diligent readers. While you have been able to do this, and a few hundred or thousand others have been able to do this, I thought I needed to write up the whole story in a way that people who had seen only parts of the story could understand the full context. In some sense, it might be considered a “book substitute.”

      • While I read most of what you write, Gail, and believe I have at least a fundamental understanding of the points you make, I appreciated that you shared “the whole story” in this post. Most of us can benefit from reviewing what we may already know. Additionally, there likely are new readers who gained further understanding of “our finite world.”

        • Thanks! I hadn’t realized you were taking the time to read my posts.

          Linda is a friend from long ago. Our parents were neighbors back when we were children.

          • Critics told Gibbon his History of the Decline and Fall of the Roman Empire was too long. Mind you it did run to six fat tomes. Eventually, one hopes to see Tverberg’s History of the Decline and Fall of the Industrialized World, at least in a paperback edition.

            • The Everyman edition of Gibbon’s “Decline and fall” is 3980 pages long. It covers a span of time from 98 to 1590, or almost 1500 years. At 2.6 pages per year, it does not seem too long!

              Marcel Proust, by contrast, needed seven volumes to cover 14 years, and produced one of the most terminally boring “masterpieces” in literature.

  4. V.A. Bykovskii writes in a 2011 research paper:
    In 1969, the USSR gas and oil industry found itself in a difficult situation, because the increase in the volume of proven reserves was falling behind the rise in the oil extraction volumes, which was caused by the systematic insufficiency of capital investment in thedevelopment of the industry and the totally unsatisfactory material and technical supply. The situation was further complicated by the fact that most of the major oilfields had reached their maximum production capacity and at some of them the production was even reducing. This made it necessary to intensify the development of new oil production facilities in the north of Western Siberia. At the same time, the formation of the country’s new oil and gas base was hindered by the insufficient capital investment and the meager supply of equipment and materials (the situation was especially difficult with the supply of OCTG (Oil Country Tubular Goods), technical equipment, and transport facilities) and housing shortage for workers in the sector.

    In the 1980s, the problems not only remained serious but were becoming increasingly urgent. The oil industry was developing in accordance with the central planning directives regulating the level of oil production and the limits of the allocated funds, as well as material and technical resources. This situation led to the unbalanced management of production processes in many respects. As a result, the sustainable functioning of oil producing regions and industry as a whole became impossible. The operational difficulties were aggravated by the inflated plans of oil production established by the country’s political leadership. All this led to a drop in the level of oil production. While in 1988 oil production was estimated at 408.6 million tons, as soon as 1990, the state order was not fulfilled and the oil extraction volume fell by 18 million tons.

    A graph in the above publication shows that there was an over-production of oil between 1970 and the mid 80s (peak oil in Western Siberia), violating the “technological modes of production”. In other words the oil fields were damaged by overzealous party apparatchiks so typical for communist regimes.

    A 2006 Brookings paper writes:

    By the mid-1970s both oil and gas had become vital to the Soviet Union’s domestic and foreign policies. Oil, which had always been a key raw material for military purposes, began to be used increasingly as an instrument of so-called soft power, especially in Eastern
    Europe. The Soviet Union deliberately created dependency on its oil by forcing its Eastern European satellites to transform their heavy industries to run on oil (instead of, for example, abundant coal in the case of Poland), then supplying Soviet oil almost free of cost. The value of that subsidy skyrocketed as world oil prices rose sharply in the mid-1970s. Once the dependency had been created, any reduction in supply threatened the stability of the regimes. Hence the Soviets had no choice but to keep producing more and more oil to supply them. In effect, both the satellites and the Soviet Union itself were addicted to oil.

    Click to access 2006russia.pdf

    • Thanks very much. I made note of the Brookings article for further reference.

      At the time when Russia created the dependency on Russian oil, the selling prices of oil and coal were not very different. They were both very low. And the world hadn’t reached “Peak oil” in the US, so that was not as foremost in people’s minds. So the dependency wasn’t quite a bizarre as it sounds today.

  5. If we agree that mass demonstrations, unclear democratic majorities, strong migration, civil war, and right populist as much as authoritarian governments are a sign of “dissatisfaction” then we have an alarming number of states with “dissatisfied” citizens. Countries that just come to my mind are: Poland, Hungary, Germany, Italy, Austria, France, Spain, United Kingdom, Belgium, Russia, White Russia, Ukraine, Serbia, Romania, Bulgaria, Malta, Turkey, Chechenia, Irak, Iran, Syria, Israel, Egypt, Libya, Saudi-Arabia, Sudan, Hongkong, Bolivia, Columbia, Venezuela, Cuba – and probably the USA. “Dissatisfaction” is nearly everywhere related to economic stress on the masses, and a broken promise of upward mobility. I am not sure “collapse” will be a singular catastrophic event. Maybe “collapse” is already here – as a long slow and hidden downturn and a bottomless shrinkage of life standard for the masses.

    • “I am not sure “collapse” will be a singular catastrophic event. Maybe “collapse” is already here – as a long slow and hidden downturn and a bottomless shrinkage of life standard for the masses.”

      I think you’re right, however in my opinion there is slow collapse coupled with step down assisted collapse. 2008 great recession was a step down. Once we’re into another recession that will be another step down, but it’s unlikely the CB’s will be in a position to do as much as they did in 08 to buy more BAU time. That will speed up slow collapse and at some point it will become obvious, it’s fast collapse. Then the blame game will be in full swing.

      With 7.7 billion people (as of Dec. 2019) all stressed out in a riot raging, super harsh, fast collapse, a nuclear war might be merciful in a sense, because it will end the misery quickly for billions rioting for a few crumbs and a splash of drinking water.

      • I am afraid you are right. I am afraid the choice we have is not between too much CO2 and a sustainable future. Instead, it is a choice of which way we degrade the world environment. A major nuclear war would be a different way of degrading the world environment.

  6. Pingback: Recession Ahead: An Overview of Our Predicament –

  7. So basically the whole system regarding energy and economicgrowth is a huge ponzi scheme

    • Yes, unfortunately! In fact, I have used the term Ponzi Scheme myself to describe the problem. But I thought that talking to a group of people who had never run into this issue before, I should stay away from making the point quite this bluntly.

      • Are you sure that Ponzi is the right term? Isn’t it more like a pay-as-you-go plan – you use the resources available to you at the time they’re available to you, growing and shrinking what you use in line with how much of it you can afford?

        • No. Humans became adapted to using supplemental energy over one million years ago, when we learned to cook part of our food. We now are biologically adapted to requiring some cooked food in our diet. (Perhaps a blender might sort of replace some of this.) The availability of cooked food allowed our teeth, jaws, and gut to be smaller. It allowed our brain to be bigger. It allowed human population to grow and push out other populations, since hunter gatherer days. See my post, Supplemental Energy Puts Humans in Charge. The population of humans could grow as other populations shrank.

          The reason we need fossil fuels now is because there are so many of us. For a long time, we could get along with only wood and other biomass for fuel, by pushing other species out. Now there are so many of us that we have no choice but use fossil fuels or see our population drop dramatically. No one wants to mention this not so minor issue.

          • Thanks. My personal response to this centers on building (which I’m convinced is the major driver of climate change). It is (albeit not entirely avoidable) vicious to build anything using any but discarded industrial materials. Not earth, not rocks, not wood. The things that go into landfills need to go into built structures.

            • Over the long term, discarded industrial materials will decline. Also, transportation of these discarded industrial materials will be a problem in many areas where building is needed. Then we will have to go back to using local materials, such as branches that have fallen from trees and sod. Nails will not be available, most likely.

            • I suppose that some massive change (which I can’t define) will necessitate a trend to reducing population within a modified socioeconomic system. I of course have only intuition to go on, but it seems the current system, unmodified, must end soon. I don’t sense that civilization (and industrial production and therefore industrial waste) will end at the same time. I expect there will be an overlap between the end of this exact version of the system and some sort of industrial production. The choice, it would appear, is whether we get a dystopia where capitalists make money off trash and just about kill the rest of us, bringing the system down…OR something more rational that allows for more equity and ability to endure.

    • ponzi schemes can only continue to function if the suckers at the bottom keep paying in more and more to support those at the top creaming off the profits

      I was taken to task the other day for saying bitcoin was a ponzi scheme

      • Let’s refine it a bit more.
        Actually such ponzies as ours need (apart from both extremes: owners of the scheme and the bottom suckers layer) a lot of the mid-upper level “suckers” functioning as pillars and conduits for daily public visibility reference point aka “wealth fountain illusions” as well. That’s why these people being targeted-placated by QE didn’t panic in full force after GFC_I, that was crucial. But even they (globally not in just one country) will be eventually triggered at some future next GFC_verXY event..

      • Oh no! At least Ponzi had willing investors, even if duped, greedy, and stupid. US Social Security is a Ponzi scheme the hapless workers are forced to join, just as That Thug FDR intended. And it was deliberately skewed to give the early retirees far more than they had contributed, to ensure it could be neither reformed nor repealed. He sowed the wind, but the present generation of workers will reap the whirlwind.

        It is said that the Devil was the first Whig. Maybe so, but FDR runs him close.

        • Right! And actuaries preside over this Ponzi Scheme. The actuaries are a slightly different variety than I am. They specialize in life insurance and pensions. I am from the branch (casualty) that specializes in other stuff. I happened to be working in fairly long-term risks with respect to medical malpractice and workers compensation. I figured out that the assumptions actuaries were making made no sense, before I left consulting. But I didn’t think I could write about the subject, as long as I worked for a company (now called Willis Towers Watson (WTW)) that does pension consulting among other things.

          On a slightly related topic, I recently figured out something about WTW’s own pension plan. It is not funded at all! I presume that WTW accrues for it on its balance sheet, if Ireland, where it is now domiciled, requires it. I figured this out because I could not make sense of the materials sent to me in the mail with respect to WTW’s funding; these implied the balance in one fund was going to zero, about now. I sent emails to a few retired actuaries who were higher-up in the organization than I was.

          One of them made an inquiry of current management to see exactly what was going on. They found out that separate pension funding, per se, had been discontinued some time ago. Existing balances are being run down to zero. Instead, the company makes payments out of current funds each year. As long as WTW is a going concern, pension funding will continue. If it ceases operating, perhaps (??) its US liabilities roll over to the Pension Benefit Guaranty Corporation (PBGC).

          But the PBGC is not set up to handle any big influx of pension claims. It charges pension plans a small amount for its services. It does not accrue for future claims. It needed to get funding from a congressional appropriation in 2019. It doesn’t really provide much of a guarantee, if there are widespread defaults.

          • Thank you, Gail, for a most interesting insider’s view. It is a great temptation for organisations to abandon the classical economics concept of a “sinking fund”, and move to pay as you go. Of course, it meant that if the company folds, you lose your job and your father loses his pension, so essentially the risk was transferred to the workers, past and present.

            The PBGC, by the way, is already in debt by over $50 billion, so we again see the absurd MMT system that organisations in debt are “guaranteed” by organisations with an order of magnitude more debt; a system that globalisation has made international. But who will bail out Planet Earth?

    • Any a six-year old can understand the basic concept of basing infinite growth on a planet with finite resources is nothing else than an inevitable disaster in the making.

  8. “South Africa’s state power utility Eskom is one of the biggest challenges facing the country. Mess up Eskom, and you mess up the country. And it looks as though key players are doing just that…

    “What we see in Chile, where public anger has spilled out onto the streets, is what can be expected to emerge as ordinary South Africans experience the true implications of this failure to decisively resolve the crisis. are responsible for triggering a crisis that will be resolved on the streets.”

  9. Don’t think that we will see much public policy going towards ….
    Any abrupt policy shifts risk severely disrupting current investment strategies, U.N.-backed Principles of Responsible Investing (PRI), a group representing investors with $86 trillion of assets under management, said in a report.
    “As the realities of climate change catch up, social pressure mounts, and low carbon solutions get cheaper, it’s highly improbable that governments will be allowed to let the world sleep-walk into greater rises in temperature without being compelled into forceful action sooner,” PRI Chief Executive Fiona Reynolds said.
    “This poses huge threats for assets and for the wider system.”
    Most exposed is the fossil fuel sector which could lose one third of its current value, the report said. Fossil fuels account for around two thirds of global greenhouse gas emissions.
    Coal firms could lose as much as 44% in value, while the world’s top oil and gas companies risk losing up to 31% of their current market share, according the report which forecasts oil demand peaking around 2027.
    The analysis showed that broad index-based funds such as the iShares MSCI ACWI ETF could lose up to 4.5% or $2.3 trillion in its value under the most extreme scenario.
    The shift would nevertheless also lead to winners.
    Auto makers heavily invested in electric vehicles and electric utility firms using low-carbon power could more than double their values, the report said.
    The report came out as world leaders meet in Madrid for the 2019 United Nations climate change conference, known as COP25.

    Ah, wishful thinking regarding electric cars and low carbon utilities….makes good press.

    So does this

    16-year-old activist Greta Thunberg made a second visit to the UN climate COP25 held in Madrid, on a day that focuses on “sustainable finance”.
    After a brief speech, she gave the floor to the other young climate activists from different parts of the world. “Their stories must be heard”, she said. Thunberg explained that the purpose of the event was to create a platform “to share the stories that needed to be shared”.
    The activist also mentioned the importance of listening to indigenous peoples because of their valuable knowledge about nature.
    Thunberg will attend later the high-level event promoted by UNICEF “Children and Young People, Against Climate Change,”. Former Chilean President Michelle Bachelet and Ireland’s former President Mary Robinson will also be present.
    The climate emergency “is not a future problem, it is something that is already affecting us, people are suffering and dying for it today”, said the Swede during her opening speech

    Too bad Gail isn’t addressing the Climate Summit….that would something!
    Thanks, Gail, for the write-up and keeping the discussion going.

    • Thank you, Herbie, for a compelling roundup of the latest bout of international insanity. So we now have to use less coal and oil to save the planet? No, no: we have to use more coal and oil to pad the balance sheets of the coal and oil companies, otherwise their value will plummet! So we have a choice: freeze while poor, or boil while rich.

      And enter “sustainable finance”. In the last analysis, all money is a promise to deliver goods of value; all goods of value can be produced only with energy. Therefore, without sustainable energy there can be no sustainable finance. Yes, they really should invite Gail to pop their balloons of hopium.

  10. It is interesting to add to the theory of dissipative structures, the theory of maximum speed in the production of entropy, proposed by Rod Swenson.
    According to this theory, dissipative structures will have the maximum possible entropy production that circumstances allow.
    This theory prevents society (as a dissipative structure) from being able to make an orderly transition to lower energy consumption. We will devour all the energy we have at our fingertips at the maximum possible rate in compliance with the principle proposed by Swenson.

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