Today’s energy predicament is a strange situation that most modelers have never really considered. Let me explain some of the issues I see, using some charts.
[1] It is probably not possible to reduce current energy consumption by 80% or more without dramatically reducing population.
A glance at energy consumption per capita for a few countries suggests that cold countries tend to use a lot more energy per person than warm, wet countries.
Figure 1. Energy consumption per capita in 2019 in selected countries based on data from BP’s 2020 Statistical Review of World Energy.
This shouldn’t be a big surprise: Our predecessors in Africa didn’t need much energy. But as humans moved to colder areas, they needed extra warmth, and this required extra energy. The extra energy today is used to build sturdier homes and vehicles, to heat and operate those homes and vehicles, and to build the factories, roads and other structures needed to keep the whole operation going.
Saudi Arabia (not shown on Figure 1) is an example of a hot, dry country that uses a lot of energy. Its energy consumption per capita in 2019 (322 GJ per capita) was very close to that of Norway. It needs to keep its population cool, besides running its large oil operation.
If the entire world population could adopt the lifestyle of Bangladesh or India, we could indeed get our energy consumption down to a very low level. But this is difficult to do when the climate doesn’t cooperate. This means that if energy usage needs to fall dramatically, population will probably need to fall in areas where heating or air conditioning are essential for living.
[2] Many people think that “running out” of oil supplies should be our big worry. I believe that lack of the “demand” needed to keep oil and other energy prices up should be at least as big a worry.
The events of 2020 have shown us that a reduction in energy demand can occur very quickly, in ways we would not expect.
Oil demand can fall from less international trade, from fewer international air flights, and from fewer trips by commuters. Demand for electricity (made mostly with coal or natural gas) is likely to fall if fewer buildings are occupied. This will happen if universities offer courses only online, if nursing homes close for lack of residents who want to live there, or if young people move back with their parents for lack of jobs.
In some ways, the word “appetite” might be a better word than “demand.” Either high or low appetite can be a problem for people. People with excessive appetite tend to get fat; people with low appetite (perhaps as a side-effect of depression or of cancer treatments) can become frail.
Similarly, either high or low energy appetite can also be a problem for an economy. High appetite leads to high oil prices, as occurred back in 2008. These are distressing to oil consumers. Low appetite tends to lead to low energy prices. These are distressing to energy producers. They may cut back on production, as OPEC nations have done in the recent past, in an attempt to get prices back up. Some energy producers may file for bankruptcy.
Figure 2. Weekly average spot oil prices for Brent, based on data of the US Energy Information Administration.
Just as people can die from indirect effects of too little appetite, an economy can fail if it cannot keep its energy prices (appetite) up. In fact, an economy will probably collapse quite quickly if it cannot keep oil and other energy prices up. The cost of mining or otherwise extracting energy supplies tends to increase over time because the cheapest, easiest-to-extract supplies are taken first. The selling price of energy products needs to keep rising as well, in order for producers to be able to make a profit and, therefore, be able to continue production.
We know that historically, many economies have collapsed. Revelation 18:11-13 tells us that in the case of the collapse of ancient Babylon, the problem at the time of collapse was inadequate demand for the goods produced. There was not even demand for slaves, which was the type of energy available for purchase at that time. This lack of demand (or low appetite) is similar to the low oil price problem we are encountering today.
[3] The big reduction in energy appetite since mid-2008 has particularly affected the US, EU, and Japan.
We would expect lower energy prices to eventually lead to a decline in energy production because producers will find production unprofitable. On a world basis, however, we don’t see this pattern occurring except during the Great Recession itself (Figure 3).
Figure 3. World per capita energy consumption, based on data from BP’s 2020 Statistical Review of World Energy. On a worldwide basis, energy production and consumption are virtually identical because storage is small compared to production and consumption.
Note that in Figure 3, energy consumption is on a “per capita” basis. This is because energy is required for making goods and services; the higher the population, the greater the quantity of goods and services required to maintain a given standard of living. If energy consumption per capita is rising, there is a good chance that living standards are rising.
The countries of the US, EU, and Japan have not been very successful in keeping their energy consumption per capita level since the big drop in oil prices in mid-2008.
Figure 4. Per capita energy consumption for the US, EU, and Japan, based on data from BP’s 2020 Statistical Review of World Energy.
The falling per capita energy consumption for the US, EU, and Japan is what one would expect if economic conditions were getting worse in these countries. For example, this pattern might be expected if young people are having difficulty finding jobs that pay well. It might also happen if repayment of debt starts interfering with young people being able to buy homes and cars. When fewer goods of these types are purchased, less energy consumption per capita is required.
The pattern of falling energy consumption per capita cannot continue for long without reaching a breaking point because people with low wages (or no jobs at all) will become more and more distressed. In fact, we started seeing an increasing number of demonstrations related to low wage levels, low pension levels, and lack of government services starting in 2019. This problem has only gotten worse with layoffs related to the pandemic in 2020. These layoffs corresponded to substantial further reduction in energy consumption per capita.
[4] China, India, and Vietnam are examples of countries whose energy consumption per capita has risen in recent years.
Not all countries have done as poorly as the major economies in recent years:
Figure 5. Some examples of countries with rising energy consumption per capita, based on data from BP’s 2020 Statistical Review of World Energy.
These Asian countries could outcompete the US, EU, and Japan in several ways:
- Big undeveloped coal reserves. These resources could be used as an inexpensive fuel to compete with countries that had depleted their own coal resources. Coal tends to be less expensive than other types of energy, especially if pollution problems are ignored.
- Warmer climate, so these countries did not need much fuel for heating. Even Southern China does not heat its buildings in winter.
- Pollution was generally ignored.
- New, more efficient factories could be built.
- Lower wages because of
- Milder climate
- Inexpensive fuel supply
- Lower medical costs
- Lower standard of living
The developed economies were concerned about reducing their own CO2 emissions. Moving heavy industry to these Asian nations meant that the developed economies could benefit in three ways:
- Their own CO2 emissions would fall, whether or not world emissions fell.
- Pollution problems would be moved offshore.
- The cost of finished goods for consumers would be lower.
Moving heavy industry to these and other Asian countries meant the loss of jobs that had paid fairly well in the US, Europe, and Japan. While new jobs replaced the old jobs, they generally did not pay as well, leading to the falling energy consumption per capita pattern seen in Figure 4.
[5] The growing Asian economies in Figure 5 are now reaching coal limits.
While these economies were built on coal reserves, these reserves are becoming depleted. All three of the countries shown in Figure 5 have become net coal importers.
Figure 6. Coal production versus consumption in 2019 for China, India and Vietnam based on data from BP’s 2020 Statistical Review of World Energy.
[6] World coal production has remained on a bumpy plateau since 2011, suggesting that its extraction is reaching limits. (Figure 7)
Figure 7. World energy consumption by type, based on data from BP’s 2020 Statistical Review of World Energy. “Renewables” represents renewables other than hydroelectricity. Total world consumption is approximately equal to total world production, since stored amounts are small.
Figure 8, below, shows that growth in China’s coal production was the major reason for the big rise in world coal consumption between 2002 and 2011. In fact, this rise in production started immediately after China joined the World Trade Organization in 2001.
Figure 8. World coal production by country based on data from BP’s 2020 Statistical Review of World Energy.
China’s rapid growth in coal production stopped in 2011. The problem was that extraction from an increasing share of coal mines became unprofitable: The cost of extraction rose but coal prices did not rise to match these higher costs. China could build new mines in locations more distant from where the coal was to be used, but transportation costs would tend to make this coal higher-cost as well. China could increase its coal consumption by importing coal, but that would also be more expensive.
Figure 9. Coal production for selected areas based on data from BP’s 2020 Statistical Review of World Energy.
In Figure 9, above, we see how dramatically higher China’s coal production has been, in comparison to coal production in other areas of the world. After China’s coal production stalled about 2011, it bounced back in 2018 and 2019 as the country opened mines in the north of the country, farther from industrial use.
Figure 9 indicates that the US’s coal production was on a long plateau between 1990 and 2008; more recently, the US’s production has fallen. Coal production for Europe was falling even before 1981, but the data available for this chart only goes back to 1981. Declining production again results from the cost of production rising above the prices producers could obtain from selling the coal.
Whether or not world coal production will increase in the future remains to be seen. Normally, a person would expect a long bumpy plateau in coal production, such as the world has experienced since 2011, to precede a fall in production. This would be similar to the pattern observed in the US’s coal production. This pattern would also be similar to the shape modeled by geophysicist M. King Hubbert for many types of resource production.
Figure 10. M. King Hubbert symmetric curve from Nuclear Energy and the Fossil Fuels.
[7] World oil production through 2019 has continued upward in an amazingly steady pattern, despite low prices. Its major problem has been unprofitability for producers.
Figure 7 above shows the total amount of oil produced has continued upward in almost a straight line, except for a dip at the time of the Great Recession.
In fact, every person needs goods and services made with energy products. Rising energy consumption per capita will mean that, on average, every person is getting the benefit of more energy supplies. Figure 11 shows information similar to that on Figure 7, except on a per-capita basis.
Figure 11. World per capita energy consumption by type based on data from BP’s 2020 Statistical Review of World Energy. Total world consumption is approximately equal to total world production, since stored amounts are small.
Figure 11 indicates that on a per capita basis, oil supply has been approximately flat. In a way, this should not be surprising. Oil is absolutely essential in many ways. It is used for agriculture, transportation and construction. Oil is also used for its chemical properties in medicines, herbicides, pesticides, lubricants, and many other products. Oil is very energy dense and can be easily stored.
Because of its special properties, many people have assumed that oil prices will always rise. We saw in Figure 2 that this doesn’t actually happen. Low prices have continued for long enough now that they are becoming a serious problem for producers. Many companies are seeking bankruptcy. One analysis shows that 230 oil and gas producers and 214 oilfield services companies have filed for bankruptcy since 2015.
Oil exporters find their countries in financial difficulty, because at low prices, the taxes that they can collect are not sufficient to maintain the programs needed for their people. If the programs cannot be maintained, citizens may become unhappy and revolt.
At this point, oil production during 2020 is down. Figure 12 shows OPEC’s estimate of oil production through July 2020. World oil production is reported to be down about 12%. The highest month of supply was about November 2018.
Figure 12. OPEC and world oil production, in a chart made by OPEC, from the August 2020 OPEC Monthly Oil Market Report.
Figure 13 shows oil production for selected areas of the world through 2019.
Figure 13. Oil production for selected areas of the world based on data from BP’s 2020 Statistical Review of World Energy. Europe includes Norway. Russia+ is the Commonwealth of Independent States.
Middle East production tends to bounce up and down. If prices are low, the tendency is to reduce production, as occurred in 2019.
US production rose rapidly between 2008 and 2019, but dipped in 2016, as prices dropped way too low.
Europe’s oil production (including Norway) reached its highest point in the year 2000. It has been declining since then, causing concern for governments.
The production of what I call Russia+ dropped with the collapse of the central government of the Soviet Union in 1991. Oil prices had been very low between 1981 and 1991. It appears to me that these low prices were instrumental in the collapse of the central government of the Soviet Union. Production was able to rise again in the early 2000s when prices rose. My concern now is that a similar collapse will happen for some oil exporters in the next few years, due to low prices, and it will lead to a major decline of world oil production.
[8] Natural gas is the fuel that seems to be available in abundant supply, if only the price could be made to rise to a high enough level for producers.
Natural gas production can be seen to be rising on both Figures 7 and 11. The fact that natural gas consumption is rising on a per capita basis in Figure 11 indicates that production is rising robustly–enough to offset weakness in coal production and perhaps help increase the world standard of living, to some extent.
We can see from Figure 14 below that the increase in natural gas production is coming from quite a number of different areas, including the US, Russia and its affiliates, the Middle East, and Australia. Again, Europe (including Norway) seems to be in decline.
Figure 14. Natural gas production for selected areas of the world based on data from BP’s 2020 Statistical Review of World Energy. Europe includes Norway. Russia+ is the Commonwealth of Independent States.
The problem for natural gas is again a price problem. It is difficult to get the price up to a high enough level to cover the cost of both the extraction of natural gas and the infrastructure and fuel needed to transport the natural gas to its destination.
We used to talk about “stranded natural gas,” that is, natural gas that can be extracted, but whose cost of transportation is simply too high to make the overall transaction economic. In fact, historically, a lot of natural gas has simply been burned off as a waste product (flared) or re-injected into oil wells, to keep up pressure, because there was no hope of selling it profitably at a distance. It is this formerly stranded natural gas that is now being produced.
Figure 15. Historical natural gas prices based on data from BP’s 2020 Statistical Review of World Energy. LNG is liquefied natural gas transported by ship. German imported natural gas is mostly by pipeline. US Henry Hub gas is natural gas without overseas transport costs included.
The increase in investment in natural gas production in recent years has been based on the hope that prices would rise high enough to cover both the cost of extraction and transportation. In fact, prices have tended to fall with crude oil prices, making the overall price far too low for most natural gas producers. Prices in 2020 have been even lower. For example, recent Japan LNG prices have been about $4 per million Btu. Thus, natural gas seems to have exactly the same problem as coal and oil: Prices are far too low for producers.
[9] The world economy is a self-organizing system, powered by energy. It can be expected to behave in a very strange way when diminishing returns become too much of a problem.
In the language of physics, the world economy is a dissipative structure. This has been known at least since 1996. The economy is a self-organizing system powered by energy; it is not possible to significantly reduce energy consumption without a major collapse.
The economy has many parts to it. I have illustrated the situation in the following way:
Figure 16. Chart I used in a talk given at a meeting of the Casualty Actuarial Society.
The fact that consumers are also employees means that if wages fall too low (for a significant share of the population), then consumption will also tend to fall too low.
Prices are set by the market. Contrary to the popular view, prices are not based primarily on scarcity. Instead, they are based on the quantity of finished goods and services that consumers in the aggregate can afford. If wage disparity gets to be too great a problem, commodity prices of all types will tend to fall too low.
[10] Economists and modelers of all kinds have completely misunderstood how the economy actually operates.
Our academic communities each seem to exist in separate ivory towers. Economists don’t talk to physicists. Physicists know that dissipative structures cannot last indefinitely. Humans are dissipative structures; they each have limited lifetimes. Hurricanes are also dissipative structures that last only a limited time.
Most economists and modelers have never considered the possibility that today’s economy, like that of ancient Babylon, could be reaching collapse because of low demand, and thus, low prices.
Economists don’t realize that once energy resources become too depleted, energy prices are not likely to rise high enough for producers to make a profit; instead, the overall system will tend to collapse. Central banks have been trying, without success, to get commodity prices up to the point where they can be profitable for producers, but they have not been successful to date. I am doubtful that even more new tricks, such as Universal Basic Income, will work, either.
The erroneous belief systems of most economists and modelers leads to all kinds of strange results. The economy is modeled as if it will grow indefinitely. Most modelers assume that if we have oil, coal, or natural gas in the ground, plus the technical capability to pull these resources out, we will eventually pull them out. Perhaps a later civilization, built on the remains of our current civilization, can do this, but our current civilization cannot.
Climate change models are applied to fossil fuel assumptions that are absurdly high, given the problems with low energy prices that we are currently encountering. No one stops to model what will happen to the climate if fossil fuel consumption is decreased very quickly, which seems to be a real possibility in 2020. The loss of aerosol emissions (smog, for example) from fossil fuels will tend to spike world temperatures, even with reduced CO2 emissions from fossil fuels.
We are led to believe that an economy similar to today’s economy can operate solely on renewables. This is simply absurd. Figures 7 and 11 show that there are nowhere near enough renewables to support today’s population, even if substitution were possible for fossil fuels. In fact, we need fossil fuels to make and maintain solar panels, wind turbines, electric transmission lines, hydroelectric plants, and nuclear power plants.
If we cannot keep fossil fuels operating because of continued low prices, today’s economy can expect a disturbing change for the worse.
