Energy Is the Economy; Shrinkage in Energy Supply Leads to Conflict

It takes energy to accomplish any of the activities that we associate with GDP. It takes energy to grow food: human energy, solar energy, and–in today’s world–the many types of energy used to build and power tractors, transport food to markets, and provide cooling for food that needs to be refrigerated. It takes energy to cook food and to smelt metals. It takes energy to heat and air condition offices and to power the internet. Without adequate energy, the world economy would come to a halt.

We are hitting energy limits right now. Energy per capita is already shrinking, and it seems likely to shrink further in the future. Reaching a limit produces a conflict problem similar to the one in the game musical chairs. This game begins with an equal number of players and chairs. At the start of each round, a chair is removed. The players must then compete for the remaining chairs, and the player who ends the round without a chair is eliminated. There is conflict among players as they fight to obtain one of the available chairs. The conflict within the energy system is somewhat hidden, but the result is similar.

A current conflict is, “How much energy can we spare to fight COVID-19?” It is obvious that expenditures on masks and vaccines have an impact on the economy. It is less obvious that a cutback in airline flights or in restaurant meals to fight COVID-19 indirectly leads to less energy being produced and consumed, worldwide. In total, the world becomes a poorer place. How is the pain of this reduction in energy consumption per capita to be shared? Is it fair that travel and restaurant workers are disproportionately affected? Worldwide, we are seeing a K shaped recovery: The rich get richer, while the poor get poorer.

A major issue is that while we can print money, we cannot print the energy supplies needed to run the economy. As energy supplies deplete, we will increasingly need to “choose our battles.” In the past, humans have been able to win many battles against nature. However, as energy per capita declines in the future, we will be able to win fewer and fewer of these battles against nature, such as our current battle with COVID-19. At some point, we may simply need to let the chips fall where they may. The world economy seems unable to accommodate 7.8 billion people, and we will have no choice but to face this issue.

In this post, I will explain some of the issues involved. At the end of the post, I include a video of a panel discussion that I was part of on the topic of “Energy Is the Economy.” The moderator of the panel discussion was Chris Martenson; the other panelists were Richard Heinberg and Art Berman.

[1] Energy consumption per person varies greatly by country.

Let’s start with a little background. There is huge variability in the quantity of energy consumed per person around the world. There is more than a 100-fold difference between the highest and lowest countries shown on Figure 1.

Figure 1. Energy consumption per capita in 2019 for a few sample countries based on data from BP’s 2020 Statistical Review of World Energy. Energy consumption includes fossil fuel energy, nuclear energy and renewable energy of many types. It omits energy products not traded through markets, such as locally gathered wood and animal dung. This omission tends to somewhat understate the energy consumption for countries such as India and those in Middle Africa.

I have shown only a few example countries, but we can see that cold countries tend to use a lot of energy, relative to their populations. Iceland, with an abundant supply of inexpensive hydroelectric and geothermal electricity, uses it to heat buildings, grow food in greenhouses, mine “bitcoins” and smelt aluminum. Norway and Canada have both oil and gas supplies, besides being producers of hydroelectricity. With abundant fuel supplies and a cold climate, both countries use a great deal of energy relative to the size of their population.

Saudi Arabia also has high energy consumption. It uses its abundant oil and gas supplies to provide air conditioning for its people. It also uses its energy products to enable the operation of businesses that provide jobs for its large population. In addition, Saudi Arabia uses taxes on the oil it produces to subsidize the purchase of imported food, which the country cannot grow locally. As with all oil and gas producers, some portion of the oil and gas produced is used in its own oil and gas operations.

In warm countries, such as those in Middle Africa and India, energy consumption tends to be very low. Most people in these countries walk for transportation or use very crowded public transport. Roads tend not to be paved. Electricity outages are frequent.

One of the few changes that can easily be made to reduce energy consumption is to move manufacturing to lower wage countries. Doing this reduces energy consumption (in the form of electricity) quite significantly. In fact, the rich nations have mostly done this, already.

Figure 2. World electricity generation by part of the world, based on data from BP’s 2020 Statistical Review of World Energy.

Trying to squeeze down energy consumption for the many countries around the world will be a huge challenge because energy is involved in every part of economies.

[2] Two hundred years of history shows that very slow growth in energy consumption per capita leads to bad outcomes.

Some readers will remember that I have pieced together data from different sources to put together a reasonable approximation to world energy consumption since 1820. In Figure 3, I have added a rough estimate of the expected drop in future energy consumption that might occur if either (1) the beginning of peak fossil fuels is occurring about now because of continued low fossil fuel prices, or (2) world economies choose to leave fossil fuels and move to renewables between now and 2050 in order to try to help the environment. Thus, Figure 3 shows my estimate of the pattern of total world energy consumption over the period of 1820 to 2050, at 10-year intervals.

Figure 3. Estimate by Gail Tverberg of World Energy Consumption from 1820 to 2050. Amounts for earliest years based on estimates in Vaclav Smil’s book Energy Transitions: History, Requirements and Prospects and BP’s 2020 Statistical Review of World Energy for the years 1965 to 2019. Energy consumption for 2020 is estimated to be 5% below that for 2019. Energy for years after 2020 is assumed to fall by 6.6% per year, so that the amount reaches a level similar to renewables only by 2050. Amounts shown include more use of local energy products (wood and animal dung) than BP includes.

The shape of this curve is far different from the one most forecasters expect because they assume that prices will eventually rise high enough so all of the fossil fuels that can be technically extracted will actually be extracted. I expect that oil and other fossil fuel prices will remain too low for producers, for reasons I discuss in Section [4], below. In fact, I have written about this issue in a peer reviewed academic article, published in the journal Energy.

Figure 4 shows this same information as Figure 3, divided by population. In making this chart, I assume that population drops only half as quickly as energy consumption falls after 2020. Total world population drops to 2.8 billion by 2050.

Figure 4. Amounts shown in Figure 3, divided by population estimates by Angus Maddison for earliest years and by 2019 United Nations population estimates for years to 2020. Future population estimated to be falling half as quickly as energy supply is falling.

In Figure 4, some parts of the curve are relatively flat, or even slightly falling, while others are rising rapidly. It turns out that rapidly rising times are much better for the economy than flat and falling times. Figure 5 shows the average annual percentage change in energy consumption per capita, for ten-year periods ending the date shown.

Figure 5. Average annual increase in energy consumption per capita for 10-year periods ended the dates shown, using the information in Figure 4.

If we look back at what happened in Figure 5, we find that when the 10-year growth in energy consumption is very low, or turns negative, conflict and bad outcomes are typical. For example:

  • Dip 1: 1861-1865 US Civil War
  • Dip 2: Several events
    • 1914-1918 World War I
    • 1918-1920 Spanish Flu Pandemic
    • 1929-1933 Great Depression
    • 1939-1945 World War II
  • Dip 3: 1991 Collapse of the Central Government of the Soviet Union
  • Dip 4: 2020 COVID-19 Pandemic and Recession

Per capita energy consumption was already growing very slowly before 2020 arrived. Energy consumption took a big step downward in 2020 (estimated at 5%) because of the shutdowns and the big cutback in air travel. One of the important things that energy consumption does is provide jobs. With severe cutbacks intended to contain COVID-19, many people in distant countries lost their jobs. Cutbacks of this magnitude quickly cause problems around the world.

For example, if people in rich countries rarely dress up to attend meetings of various kinds, there is much less of a market for dressy clothing. Many people in poor countries make their living manufacturing this type of clothing. With the loss of these sales, workers suddenly found themselves with much reduced income. Poor countries generally do not have good safety nets to provide food for those who are out of work. As a result, the diets of people subject to loss of income became inadequate, leading to greater vulnerability to disease. If the situation continues, some may even die of starvation.

[3] The pattern of world energy consumption between 2020 and 2050 (modeled in Figures 3, 4 and 5) suggests that a very concerning collapse may be ahead.

My model suggests that world energy consumption may fall to about 28 gigajoules per capita per year by 2050 (for a reduced population of 2.8 billion). This is about the level of world energy consumption per capita for the world in 1900.

Alternatively, 28 gigajoules per capita is a little lower than the per capita energy consumption for India in 2019. Of course, some parts of the world might do better than this. For example, Mexico and Brazil both had energy consumption per capita of about 60 gigajoules per capita in 2019. Some countries might be able to do this well in 2050.

Using less energy after 2020 will lead to many changes. Governments will become smaller and provide fewer services such as paved roads. Often, these governments will cover smaller areas than those of countries today. Businesses will become smaller, more local, and more involved with goods rather than services. Individual citizens will be walking more, growing their own food, and doing much less home heating and cooling.

With less energy available, it will be necessary to cut back on fighting unfortunate natural occurrences, such as forest fires, downed electricity transmission lines after hurricanes, antibiotic resistant bacteria, and constantly mutating viruses. Thus, life expectancy is likely to decline.

[4] It is “demand,” and how high energy prices can be raised, that determines how large an energy supply will be available in the future.

I keep making this point in my posts because I sense that it is poorly understood. The big problem that we should be anticipating is energy producers going out of business because energy prices are chronically too low. I see five ways in which energy prices might theoretically be raised:

  1. A truly booming world economy. This is what raised prices in the 1970s and in the run up to 2008. If there are truly more people who can afford homes and new vehicles, and governments that can afford new roads and other infrastructure, companies extracting oil and coal will build new facilities in higher-cost locations, and thereby expand world supply. The higher prices will help energy companies to be profitable, despite their higher costs. Such a scenario seems very unlikely, given where we are now.
  2. Government mandates and subsidies. Government mandates are what is maintaining demand for renewables and electric vehicles. Conversely, government mandates are part of what is keeping down tourist travel. Indirectly, this lack of demand relating to travel leads to low oil prices. A government mandate for people to engage in more travel seems unlikely.
  3. Much reduced wage disparity. If everyone, rich or poor, can afford nice homes, automobiles, and cell phones, commodity prices will tend to be high because buying and operating goods such as these requires the use of commodities. Governments can attempt to fix wage disparity through more printed money, but I am doubtful that this approach will really work because other countries are likely to be unwilling to accept this printed money.
  4. More debt, sometimes leading to collapsing debt bubbles. Spending can be enhanced if it becomes easier for citizens to buy goods such as homes and vehicles on credit. Likewise, businesses can borrow money to build new factories or, alternatively, to continue to pay wages to workers, even if there isn’t much demand for the goods and services sold. But, if the economy really is not recovering rapidly, these approaches can be expected to lead to crashes.
  5. Getting rid of COVID-19 inefficiencies and fearfulness. Economies around the world are being depressed to varying degrees by continued inefficiencies caused by social distancing requirements and by fearfulness. If these issues could be eliminated, it might boost economies back up to the already somewhat depressed levels of early 2020.

In summary, the issue we are facing is that oil demand (and thus prices) were far too low for oil producers because of wage disparity before the COVID-19 crisis arrived in March. Trying to get demand back up through more debt seems likely to lead to debt bubbles, which will be in danger of collapsing. There may be temporary price spikes, but a permanent fix is virtually impossible. This is why I am forecasting the severe drop in energy consumption shown in Figures 3 and 4.

[5] We humans don’t need to figure out how to fix the economy optimally between now and 2050.

The economy is a self-organizing system that will figure out on its own the optimal way of “dissipating” energy, to the extent possible. In physics terms, the economy is a dissipative structure. If the energy resource is food, energy will be dissipated by digesting the food. In the case of fossil fuel, energy will be dissipated by burning it. We may like to think that we are in charge, but we really are not. It is the laws of physics, or perhaps the Power behind the laws of physics, that is in charge.

Dissipative structures are not permanent. For example, hurricanes and tornadoes are dissipative structures. Plants and animals are dissipative structures. Eventually, new smaller economies, encompassing smaller areas of the world, may replace the existing world economy.

[6] This is a recent video of a panel discussion on “Energy Is the Economy.”

Chris Martenson is the moderator. Art Berman, Richard Heinberg and I are panelists. The Peak Prosperity folks were kind enough to provide me a copy to put up on my website.

Video of Panel Discussion “Energy Is the Economy,” created in October 2020 by Peak Prosperity. Chris Martenson (upper right) is the moderator. Richard Heinberg (upper left), Art Berman (lower left) and Gail Tverberg (lower right) are panelists.

A transcript of this panel discussion can be accessed at this link:

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

2,764 Responses to Energy Is the Economy; Shrinkage in Energy Supply Leads to Conflict

  1. Harry McGibbs says:

    “What Janet Yellen’s appointment as US Treasury Secretary would mean for markets:

    “…She is seen as someone who’ll coordinate well with the Federal Reserve and be market friendly, Deutsche Bank said.”

    • Harry McGibbs says:

      “In 2020, it’s just another week for a global-markets machine that has managed to keep humming through some of the largest shocks in economic history…

      “But the danger is that all this year’s drama may have desensitized the investing world, resulting in a rally which spits out records regardless of fundamentals. Complacency, not COVID-19, could be the new threat to returns.”


  2. Harry McGibbs says:

    “Michel Barnier has told MEPs he is prepared for a further four days of make-or-break Brexit negotiations, with growing scepticism among EU member states about the utility of further talks.”

    [The EU has a habit of making 11th hour accommodations, so we shall see. My guess FWIW is that we shall have a patchy deal of *some* kind because the economic consequences of no-deal on top of Covid are just too dire for both the UK and the EU. Surely?!].

    • Harry McGibbs says:

      “Four out of five companies are not ready for the end of the Brexit transition period, according to the “alarming” results of the latest polling.

      “With little more than a month until the UK leaves the single market and customs union, of more than 1,700 businesses surveyed by EY, 80pc did not “know the full extent of Brexit risks” or “have sufficient preparations in place”.

      “One in five firms said that they expected the UK’s final departure from the EU to present “a bump in the road” with normal service resuming shortly afterwards.

      “But whether or not a UK-EU trade deal is reached, change will be “inevitable and protracted”, the consultancy firm cautioned.”

  3. Harry McGibbs says:

    Covid’s economic carnage also costs lives: Unemployment is soaring and Britain’s debt pile is a mountain.

    “…For our central bank to be hoovering up so much debt, so quickly, is simply unprecedented. And there’s little sign of serious thinking about how this monetary experiment will end.”

  4. Harry McGibbs says:

    “Hundreds marched through downtown Calgary [Canada] on Saturday to protest against mandated masks and other public health measures intended to prevent the spread of COVID-19, the same day record highs in new cases and hospitalizations were reported in the province.”

    • Harry McGibbs says:

      “More than 150 people have been arrested as anti-lockdown protesters clashed with police in central London after officers sought to break up the demonstration.”

      • Harry McGibbs says:

        “German anti-lockdown protests shift to Polish border:

        “Objectors of coronavirus curbs have converged on Frankfurt-an-der-Oder on Germany’s border with Poland. Meanwhile, at viral hot spot Hildburghausen in Thuringia state, the local county chief is under police protection.”

        • Robert Firth says:

          It is not Germany’s border with Poland: it is Germany’s border with Polish occupied Germany. Another historical injustice I hope soon to be rectified.

          • Big historical events move boundaries.
            Soviet’s “gift to Poland” when rolling back Adolf boyz erased thousands yrs of German presence in Eastern Prussia and Silesia, .. moving the boundary (and most of the inhabitants) several hundreds km westward. It was classic snap back reaction.

            Not sure, how and by whom this could be rectified though. Today’s Germany shows even less auto immune reaction to mushrooming caliphate cells within the state than Austria, which is kind of peculiar.

            Given the key caliphate strongholds are southern Swedish, British, Benelux (and French) cities, I doubt that even worsening German situation will focus on this eastern vector anytime soon. They will have other “duking out” running priorities in next decades elsewhere.

            Also in the very unlikely case the western pop finally wakes up and performs “reconquista” – this will be long internal process, again most likely with no bearing on the eastern flank. Actually, plenty of Poles, Magyars, Bavarians, Baltics, .. would be gladly volunteering to join the melee and help their neighbors..

            Not sure what was your angle, perhaps I’m missing something you might add..

          • Thanks to Woody Wilson who listened to the Poles and Czechs in USA.

            Soon, the Czechs will disappear, while Poland will once again be partitioned.

  5. Harry McGibbs says:

    “Police and demonstrators have clashed in Paris as tens of thousands took the streets to protest against new security legislation, a controversy intensified by the beating and racial abuse of a Black man by officers that shocked France.”

  6. Harry McGibbs says:

    “After weeks of political instability, protests and three president changes, Peru announced this week a risky economic move.

    “The South American nation, for the first time in its history, decided to launch an economic bond for more than 100 years, one of the few nations in the world that has achieved such a deadline for its debt.”

  7. Yoshua says:

    “Profit at China’s industrial firms grew 28.2% YoY in Oct, fastest since 2011, almost triple 10.1% in Sept, indicting the economic recovery is gathering pace.
    Electronics sector’s contribution is particularly prominent, with profits up 12.6% in Jan-Oct”

    What’s China doing wrong? No Covid…no riots…no economic ruin.

    China didn’t get the elite message?

  8. Yoshua says:

    China doesn’t like competition. They don’t play by the rules.

    There’s still enough energy resorces in the world that can be produced economically to power China. There isn’t enough energy resources for everyone in the world.

    By releasing a virus into the world that does damage health and economies, they destroy other nations consumption and steal it for them selves.

    • That’s feasible scenario, why should there be any monopoly on dastardly “false flags” right? At this moment I’d not put it in highest %probability scenario cat though, but it is surely moving up on the top list.

  9. Mirror on the wall says:

    Re: ROI Poll

    Sinn Féin has risen to 30% in the latest ROI poll, and consolidated its place as the opposition party in Ireland.

    ROI governments were dominated by Fine Gael and Fianna Fáil, two right wing parties, for decades after the 1921 partition of Ireland. ROI politics has now realigned to a more usual left-right dichotomy, with FG as the Irish TP and with SF dominating the left, social democratic side. Either wing is on about 45% at present, and the rest are independent TDs.

    SF are up 5 points on their Feb. 2020 GE performance and they are now firmly established as the opposition party. It is the largest party on an all-island basis, and it is committed to a border poll on Irish unity. The next ROI GE is not until 2025, by which time Scotland is likely to have had its referendum on Scottish independence.

    In government in NI, and the established opposition in ROI, SF is about as well placed as it could hope to be in preparation for 2025.

    > Sinn Féin surge to record poll high as Fine Gael lose ground New warning signs for embattled Fianna Fáil as it trails in fourth place in Dublin in the latest Business Post/Red C poll

    Sinn Féin’s support has risen to its highest level since Red C began polling in 2003

    Sinn Féin’s support has surged to a record high at the expense of Fine Gael, in the latest Business Post/Red C poll.

    The party has increased its support by three points to 30 per cent, which is the highest level it has reached since Red C began polling in 2003. It is also well ahead of the 25 per cent share of the vote that the party secured in last February’s general election.

    In contrast, Fine Gael’s support has dropped by four points to 33 per cent since last month’s Red C poll. This follows a controversy about Tánaiste Leo Varadkar’s leaking of a draft GP contract to a friend in a doctors’ union.

    Fine Gael has also been facing questions about how Seamus Woulfe, the former Attorney General in the Fine Gael-led minority government, was appointed to the Supreme Court last July.

    Sinn Féin’s surge in support means that it is the second most popular party in the state, significantly ahead of Fianna Fáil, which is up by one point to 12 per cent. The Green Party is down by one point to 5 per cent.

    According to the Red C Poll, Sinn Féin is broadening its support base which in the past was concentrated among young age groups. It still has far more support among voters aged 18-34 (41 per cent) than Fine Gael (19 per cent ) or Fianna Fáil (10 per cent).

    Sinn Féin also has 38 per cent of the first preferences among 45-54 year olds, which is more than Fine Gael (30 per cent) and Fianna Fáil (11 per cent). Sinn Féin is level with Fianna Fáil when it comes to voters aged over 55 (15 per cent) but it trails Fine Gael (47 per cent)….

Comments are closed.