When the Economy Gets Squeezed by Too Little Energy

Posted on March 5, 2023 by Gail Tverberg

Most people have a simple, but wrong, idea about how the world economy will respond to “not enough energy to go around.” They expect that oil prices will rise. With these higher prices, producers will be able to extract more fossil fuels so the system can go on as before. They also believe that wind turbines, solar panels and other so-called renewables can be made with these fossil fuels, perhaps extending the life of the system further.

The insight people tend to miss is the fact that the world’s economy is a physics-based, self-organizing system. Such economies grow for many years, but ultimately, they collapse. The underlying problem is that the population tends to grow too rapidly relative to the energy supplies necessary to support that population. History shows that such collapses take place over a period of years. The question becomes: What happens to an economy beginning its path toward full collapse?

One of the major uses for fossil fuel energy is to add complexity to the system. For example, roads, electricity transmission lines, and long-distance trade are forms of complexity that can be added to the economy using fossil fuels.

Figure 1. Chart by author pointing out that energy consumption and complexity are complementary. They operate in different directions. Complexity, itself, requires energy consumption, but its energy consumption is difficult to measure.

When energy per capita falls, it becomes increasingly difficult to maintain the complexity that has been put in place. It becomes too expensive to properly maintain roads, electrical services become increasingly intermittent, and trade is reduced. Long waits for replacement parts become common. These little problems build on one another to become bigger problems. Eventually, major parts of the world’s economy start failing completely.

When people forecast ever-rising energy prices, they miss the fact that market fossil fuel prices consider both oil producers and consumers. From the producer’s point of view, the price for oil needs to be high enough that new oil fields can be profitably developed. From the consumer’s point of view, the price of oil needs to be sufficiently low that food and other goods manufactured using oil products are affordable. In practice, oil prices tend to rise and fall, and rise again. On average, they don’t satisfy either the oil producers or the consumers. This dynamic tends to push the economy downward.

There are many other changes, as well, as fossil fuel energy per capita falls. Without enough energy products to go around, conflict tends to rise. Economic growth slows and turns to economic contraction, creating huge strains for the financial system. In this post, I will try to explain a few of the issues involved.

[1] What is complexity?

Complexity is anything that gives structure or organization to the overall economic system. It includes any form of government or laws. The educational system is part of complexity. International trade is part of complexity. The financial system, with its money and debt, is part of complexity. The electrical system, with all its transmission needs, is part of complexity. Roads, railroads, and pipelines are part of complexity. The internet system and cloud storage are part of complexity.

Wind turbines and solar panels are only possible because of complexity and the availability of fossil fuels. Storage systems for electricity, food, and fossil fuels are all part of complexity.

With all this complexity, plus the energy needed to support the complexity, the economy is structured in a very different way than it would be without fossil fuels. For example, without fossil fuels, a high percentage of workers would make a living by performing subsistence agriculture. Complexity, together with fossil fuels, allows the wide range of occupations that are available today.

[2] The big danger, as energy consumption per capita falls, is that the economy will start losing complexity. In fact, there is some evidence that loss of complexity has already begun.

In my most recent post, I mentioned that Professor Joseph Tainter, author of the book, The Collapse of Complex Societies, says that when energy supplies are inadequate, the resulting economic system will need to simplify–in other words, lose some of its complexity. In fact, we can see that such loss of complexity started happening as early as the Great Recession in 2008-2009.

The world was on a fossil fuel energy consumption per capita plateau between 2007 and 2019. It now seems to be in danger of falling below this level. It fell in 2020, and only partially rebounded in 2021. When it tried to rebound further in 2022, it hit high price limits, reducing demand.

Figure 2. Fossil fuel energy consumption per capita based on data of BP’s 2022 Statistical Review of World Energy.

There was a big dip in energy consumption per capita in 2008-2009 when the economy encountered the Great Recession. If we compare Figure 2 and Figure 3, we see that the big drop in energy consumption is matched by a big drop in trade as a percentage of GDP. In fact, the drop in trade after the 2008-2009 recession never rebounded to the former level.

Figure 3. Trade as a percentage of world GDP, based on data of the World Bank.

Another type of loss of complexity involves the drop in the recent number of college students. The number of students was rising rapidly between 1950 and 2010, so the downward trend represents a significant shift.

Figure 4. Total number of US full-time and part-time undergraduate college and university students, according to the National Center for Education Statistics.

The shutdowns of 2020 added further shifts toward less complexity. Broken supply lines became more of a problem. Empty shelves in stores became common, as did long waits for newly ordered appliances and replacement parts for cars. People stopped buying as many fancy clothes. Brick and mortar stores did less well financially. In person conferences became less popular.

We know that, in the past, economies that collapsed lost complexity. In some cases, tax revenue fell too low for governments to maintain their programs. Citizens became terribly unhappy with the poor level of government services being provided, and they overthrew the governmental system.

The US Department of Energy states that it will be necessary to double or triple the size of the US electric grid to accommodate the proposed level of clean energy, including EVs, by 2050. This is, of course, a kind of complexity. If we are already having difficulty with maintaining complexity, how do we expect to double or triple the size of the US electric grid? The rest of the world would likely need such an upgrade, as well. A huge increase in fossil fuel energy, as well as complexity, would be required.

[3] The world’s economy is a physics-based system, called a dissipative structure.

Energy products of the right kinds are needed to make goods and services. With shrinking per capita energy, there will likely not be enough goods and services produced to maintain consumption at the level citizens are used to. Without enough goods and services to go around, conflict tends to grow.

Instead of growing and experiencing economies of scale, businesses will find that they need to shrink back. This makes it difficult to repay debt with interest, among other things. Governments will likely need to cut back on programs. Some governmental organizations may fail completely.

To a significant extent, how these changes happen is related to the maximum power principle, postulated by ecologist Howard T. Odum. Even when some inputs are inadequate, self-organizing ecosystems try to maintain themselves, as best possible, with the reduced supplies. Odum said, “During self-organization, system designs develop and prevail that maximize power intake, energy transformation, and those uses that reinforce production and efficiency.” As I see the situation, the self-organizing economy tends to favor the parts of the economy that can best handle the energy shortfall that will be taking place.

In Sections [4], [5], and [6], we will see that this methodology seems to lead to a situation in which competition leads to different parts of the economy (energy producers and energy consumers) being alternately disadvantaged. This approach leads to a situation in which the human population declines more slowly than in either of the other possible outcomes:

  • Energy producers win, and high energy prices prevail – The real outcome would be that high prices for food and heat for homes would quickly kill off much of the world’s population because of lack of affordability.
  • Energy consumers always win, and low energy prices prevail – The real outcome would be that energy supplies would fall very rapidly because of inadequate prices. Population would fall quickly because of a lack of energy supplies (particularly diesel fuel) needed to maintain food supplies.

[4] Prices: Competition between producers and customers will lead to fossil fuel energy prices that alternately rise and fall as extraction limits are hit. In time, this pattern can be expected to lead to falling fossil fuel energy production.

Energy prices are set through competition between:

[a] The prices that consumers can afford to pay for end products whose costs are indirectly determined by fossil fuel prices. Food, transportation, and home heating costs are especially fossil fuel price sensitive. Poor people are the most quickly affected by rising fossil fuel prices.

[b] The prices that producers require to profitably produce these fuels. These prices have been rising rapidly because the easy-to-extract portions were removed earlier. For example, the Wall Street Journal is reporting, “Frackers Increase Spending but See Limited Gains.”

If fossil fuel prices rise, the indirect result is inflation in the cost of many goods and services. Consumers become unhappy when inflation affects their lifestyles. They may demand that politicians put price caps in place to somehow stop this inflation. They may encourage politicians to find ways to subsidize costs, so that the higher costs are transferred to a different part of the economy. At the same time, the producers need the high prices, to be able to fund the greater reinvestment necessary to maintain, and even raise, future fossil fuel energy production.

The conflict between the high price producers need and the low prices that many consumers can afford is what leads to temporarily spiking energy prices. In fact, food prices tend to spike, too, since food is a kind of energy product for humans, and fossil fuel energy products (oil, especially) are used in growing and transporting the food products. In their book, Secular Cycles, researchers Peter Turchin and Sergey Nefedov report a pattern of spiking prices in their analysis of historical economies that eventually collapsed.

With oil prices spiking only temporarily, energy prices are, on average, too low for fossil fuel producers to afford adequate funds for reinvestment. Without adequate funds for reinvestment, production begins to fall. This is especially a problem as fields deplete, and funds needed for reinvestment rise to very high levels.

[5] Demand for Discretionary Goods and Services: Indirectly, demand for goods and services, especially in discretionary sectors of the economy, will also tend to get squeezed back by the rounds of inflation caused by spiking energy prices described in Item [4].

When customers are faced with higher prices because of spiking inflation rates, they will tend to reduce spending on discretionary items. For example, they will go out to eat less and spend less money at hair salons. They may travel less on vacation. Multiple generation families may move in together to save money. People will continue to buy food and beverages since these are essential.

Businesses in discretionary areas of the economy will be affected by this lower demand. They will buy fewer raw materials, including energy products, reducing the overall demand for energy products, and tending to pull energy prices down. These businesses may need to lay off workers and/or default on their debt. Laying off workers may further reduce demand for goods and services, pushing the economy toward recession, debt defaults, and thus lower energy prices.

We find that in some historical accounts of collapses, demand ultimately falls to close to zero. For example, see Revelation 18:11-13 regarding the fall of Babylon, and the lack of demand for goods, including the energy product of the day: slaves.

[6] Higher Interest Rates: Banks will respond to rounds of inflation described in Item [4] by demanding higher interest rates to offset the loss of buying power and the greater likelihood of default. These higher interest rates will have adverse impacts of their own on the economy.

If inflation becomes a problem, banks will want higher interest rates to try to offset the adverse impact of inflation on buying power. These higher interest rates will tend to reduce demand for goods that are often bought with debt, such as homes, cars, and new factories. As a result, the sale prices of these assets are likely to fall. Higher interest rates will tend to produce the same effect for many types of assets, including stocks and bonds. To make matters worse, defaults on loans may also rise, leading to write-offs for the organizations carrying these loans on their balance sheets. For example, the used car dealer Caravan is reported to be near bankruptcy because of issues related to falling used car prices, higher interest rates, and higher default rates on debt.

An even more serious problem with higher interest rates is the harm they do to the balance sheets of banks, insurance companies, and pension funds. If bonds were previously purchased at a lower interest rate, the value of the bonds is less at a higher interest rate. Accounting for these organizations can temporarily hide the problem if interest rates quickly revert to the lower level at which they were purchased. The real problem occurs if inflation is persistent, as it seems to be now, or if interest rates keep rising.

[7] A second major conflict (after the buyer/producer conflict in Item [4], [5], and [6]) is the conflict in how the output of goods and services should be split between returns to complexity and returns to basic production of necessary goods including food, water, and mineral resources such as fossil fuels, iron, nickel, copper, and lithium.

Growing complexity in many forms is something that we have come to value. For example, physicians now earn high wages in the US. People in top management positions in companies often earn very high wages. The top people in large companies that buy food from farmers earn high wages, but farmers producing cattle or growing crops don’t fare nearly as well.

As energy supply becomes more constrained, the huge chunks of output taken by those with advanced degrees and high positions within the large companies gets to be increasingly problematic. The high incomes of citizens in major cities contrasts with the low incomes in rural areas. Resentment among people living in rural areas grows when they compare themselves to how well people in urbanized areas are doing. People in rural areas talk about wanting to secede from the US and wanting to form their own country.

There are also differences among countries in how well their economies get rewarded for the goods and services they produce. The United States, the EU, and Japan have been able to get better rewards for the complex goods that they produce (such as banking services, high-tech medicine, and high-tech agricultural products) compared to Russia and the oil exporting countries of the Middle East. This is another source of conflict.

Comparing countries in terms of per capita GDP on a Purchasing Power Parity (PPP) basis, we find that the countries that focus on complexity have significantly higher PPP GDP per capita than the other areas listed. This creates resentment among countries with lower per-capita PPP GDP.

Figure 5. Average Purchasing Power Parity GDP Per Capita in 2021, in current US dollars, based on data from the World Bank.

Russia and the Arab World, with all their energy supplies, come out behind. Ukraine does particularly poorly.

The conflict between Russia and Ukraine is between two countries that are doing poorly on this metric. Ukraine is also much smaller than Russia. It appears that Russia is in a conflict with a competitor that it is likely to be able to defeat, unless NATO members, including the US, can give immense support to Ukraine. As I discuss in the next section, the industrial ability of the US and the EU is waning, making it difficult for such support to be available.

[8] As conflict becomes a major issue, which economy is largest and is best able to defend itself becomes more important.

Figure 6. Total (not per capita) PPP GDP for the US, EU, and China, based on data of the World Bank.

Back in 1990, the EU had a greater PPP GDP than did either the US or China. Now, the US is a little ahead of the EU. More importantly, China has come from way behind both the US and EU, and now is clearly ahead of both in PPP GDP.

We often hear that the US is the largest economy, but this is only true if GDP is measured in current US dollars. If differences in actual purchasing power are reflected, China is significantly ahead. China is also far ahead in total electricity production and in many types of industrial output, including cement, steel, and rare earth minerals.

The conflict in Ukraine is now leading countries to take sides, with Russia and China on the same side, and the United States together with the EU on Ukraine’s side. While the US has many military bases around the world, its military capabilities have increasingly been stretched thin. The US is a major oil producer, but the mix of oil it produces is of lower and lower average quality, especially if obtaining diesel and jet fuel from it are top priorities.

Figure 7. Chart by OPEC, showing the mix of liquids that now make up US production. Even the “Tight crude” tends to be quite “light,” making it less suitable for producing diesel and jet fuel than conventional crude oil. Chart from OPEC’s February 2023 Monthly Oil Market Report.

Huge pressure is building now for China and Russia to trade in their own currencies, rather than the US dollar, putting pressure on the US financial system and its status as the reserve currency. It is also not clear whether the US would be able to fight on more than one front in a conventional war. A conflict with Iran has been mentioned as a possibility, as has a conflict with China over Taiwan. It is not at all clear that a conflict between NATO and China-Russia is winnable by the NATO forces, including the US.

It appears to me that, to save fuel, more regionalization of trade is necessary with the Asian countries being primary trading partners of each other, rather than the rest of the world. If such a regionalization takes place, the US will be at a disadvantage. It currently depends on supply lines stretching around the world for computers, cell phones, and other high-tech devices. Without these supply lines, the standards of living in the US and the EU would likely decline quickly.

[9] Clearly, the narratives that politicians and the news media tell citizens are under pressure. Even if they understand the true situation, politicians need a different narrative to tell voters and young people wondering about what career to pursue.

Every politician would like a “happily ever after” story to tell citizens. Fortunately, from the point of view of politicians, there are lots of economists and scientists who put together what I call “overly simple” models of the economy. With these overly simple models of the economy, there is no problem ahead. They believe the standard narrative about oil and other energy prices rising indefinitely, so there is no energy problem. Instead, our only problem is climate change and the need to transition to green energy.

The catch is that our ability to scale up green energy is just an illusion, built on the belief that complexity can scale up indefinitely without the use of fossil fuels.

We are left with a major problem: Our current complex economy is in danger of degrading remarkably in the next few years, but we have no replacement available. Even before then, we may need to do battle, in new ways, with other countries for the limited resources that are available.

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Ramping up wind turbines, solar panels and electric vehicles can’t solve our energy problem

Posted on February 3, 2023 by Gail Tverberg

Many people believe that installing more wind turbines and solar panels and manufacturing more electric vehicles can solve our energy problem, but I don’t agree with them. These devices, plus the batteries, charging stations, transmission lines and many other structures necessary to make them work represent a high level of complexity.

A relatively low level of complexity, such as the complexity embodied in a new hydroelectric dam, can sometimes be used to solve energy problems, but we cannot expect ever-higher levels of complexity to always be achievable.

According to the anthropologist Joseph Tainter, in his well-known book, The Collapse of Complex Societies, there are diminishing returns to added complexity. In other words, the most beneficial innovations tend to be found first. Later innovations tend to be less helpful. Eventually the energy cost of added complexity becomes too high, relative to the benefit provided.

In this post, I will discuss complexity further. I will also present evidence that the world economy may already have hit complexity limits. Furthermore, the popular measure, “Energy Return on Energy Investment” (EROEI) pertains to direct use of energy, rather than energy embodied in added complexity. As a result, EROEI indications tend to suggest that innovations such as wind turbines, solar panels and EVs are more helpful than they really are. Other measures similar to EROEI make a similar mistake.

[1] In this video with Nate Hagens, Joseph Tainter explains how energy and complexity tend to grow simultaneously, in what Tainter calls the Energy-Complexity Spiral.

Figure 1. The Energy-Complexity Spiral from 2010 presentation called The Energy-Complexity Spiral by Joseph Tainter.

According to Tainter, energy and complexity build on each other. At first, growing complexity can be helpful to a growing economy by encouraging the uptake of available energy products. Unfortunately, this growing complexity reaches diminishing returns because the easiest, most beneficial solutions are found first. When the benefit of added complexity becomes too small relative to the additional energy required, the overall economy tends to collapse–something he says is equivalent to “rapidly losing complexity.”

Growing complexity can make goods and services less expensive in several ways:

  • Economies of scale arise due to larger businesses.
  • Globalization allows use of alternative raw materials, cheaper labor and energy products.
  • Higher education and more specialization allow more innovation.
  • Improved technology allows goods to be less expensive to manufacture.
  • Improved technology may allow fuel savings for vehicles, allowing ongoing fuel savings.

Strangely enough, in practice, growing complexity tends to lead to more fuel use, rather than less. This is known as Jevons’ Paradox. If products are less expensive, more people can afford to buy and operate them, so that total energy consumption tends to be greater.

[2] In the above linked video, one way Professor Tainter describes complexity is that it is something that adds structure and organization to a system.

The reason I consider electricity from wind turbines and solar panels to be much more complex than, say, electricity from hydroelectric plants, or from fossil fuel plants, is because the output from the devices is further from what is needed to fill the demands of the electricity system we currently have operating. Wind and solar generation need complexity to fix their intermittency problems.

With hydroelectric generation, water is easily captured behind a dam. Often, some of the water can be stored for later use when demand is high. The water captured behind the dam can be run through a turbine, so that the electrical output matches the pattern of alternating current used in the local area. The electricity from a hydroelectric dam can be quickly added to other available electricity generation to match the pattern of electricity consumption users would prefer.

On the other hand, the output of wind turbines and solar panels requires a great deal more assistance (“complexity”) to match the electricity consumption pattern of consumers. Electricity from wind turbines tends to be very disorganized. It comes and goes according to its own schedule. Electricity from solar panels is organized, but the organization is not well aligned with the pattern of consumers prefer.

A major issue is that electricity for heating is required in winter, but solar electricity is disproportionately available in the summer; wind availability is irregular. Batteries can be added, but these mostly mitigate wrong “time-of-day” problems. Wrong “time-of-year” problems need to be mitigated with a lightly used parallel system. The most popular backup system seems to be natural gas, but backup systems with oil or coal can also be used.

This double system has a higher cost than either system would have if operated alone, on a full-time basis. For example, a natural gas system with pipelines and storage needs to be put in place, even if electricity from natural gas is only used for part of the year. The combined system needs experts in all areas, including electricity transmission, natural gas generation, repair of wind turbines and solar panels, and battery manufacture and maintenance. All of this requires educational systems and international trade, sometimes with unfriendly countries.

I also consider electric vehicles to be complex. One major problem is that the economy will require a double system, (for internal combustion engines and electric vehicles) for many, many years. Electric vehicles require batteries made using elements from around the world. They also need a whole system of charging stations to fill their need for frequent recharging.

[3] Professor Tainter makes the point that complexity has an energy cost, but this cost is virtually impossible to measure.

Energy needs are hidden in many areas. For example, to have a complex system, we need a financial system. The cost of this system cannot be added back in. We need modern roads and a system of laws. The cost of a government providing these services cannot be easily discerned. An increasingly complex system needs education to support it, but this cost is also hard to measure. Also, as we note elsewhere, having double systems adds other costs that are hard to measure or predict.

[3] The energy-complexity spiral cannot continue forever in an economy.

The energy-complexity spiral can reach limits in at least three ways:

[a] Extraction of minerals of all kinds is placed in the best locations first. Oil wells are first placed in areas where oil is easy to extract and close to population areas. Coal mines are first placed in locations where coal is easy to extract and transportation costs to users will be low. Mines for lithium, nickel, copper, and other minerals are put in the best-yielding locations first.

Eventually, the cost of energy production rises, rather than falls, due to diminishing returns. Oil, coal, and energy products become more expensive. Wind turbines, solar panels, and batteries for electric vehicles also tend to become more expensive because the cost of the minerals to manufacture them rises. All kinds of energy goods, including “renewables,” tend to become less affordable. In fact, there are many reports that the cost of producing wind turbines and solar panels rose in 2022, making the manufacture of these devices unprofitable. Either higher prices of finished devices or lower profitability for those producing the devices could stop the rise in usage.

[b] Human population tends to keep rising if food and other supplies are adequate, but the supply of arable land stays close to constant. This combination puts pressure on society to produce a continuous stream of innovations that will allow greater food supply per acre. These innovations eventually reach diminishing returns, making it more difficult for food production to keep up with population growth. Sometimes adverse fluctuations in weather patterns make it clear that food supplies have been too close to the minimum level for many years. The growth spiral is pushed down by spiking food prices and the poor health of workers who can only afford an inadequate diet.

[c] Growth in complexity reaches limits. The earliest innovations tend to be most productive. For example, electricity can be invented only once, as can the light bulb. Globalization can only go so far before a maximum level is reached. I think of debt as part of complexity. At some point, debt cannot be repaid with interest. Higher education (needed for specialization) reaches limits when workers cannot find jobs with sufficiently high wages to repay educational loans, besides covering living costs.

[4] One point Professor Tainter makes is that if the available energy supply is reduced, the system will need to simplify.

Typically, an economy grows for well over one hundred years, reaches energy-complexity limits, and then collapses over a period of years. This collapse can occur in different ways. A layer of government can collapse. I think of the collapse of the central government of the Soviet Union in 1991 as a form of collapse to a lower level of simplicity. Or one country conquers another country (with energy-complexity problems), taking over the government and resources of the other country. Or a financial collapse occurs.

Tainter says that simplification usually doesn’t happen voluntarily. One example he gives of voluntary simplification involves the Byzantine Empire in the 7th century. With less funding available for the military, it abandoned some of its distant posts, and it used a less costly approach to operating its remaining posts.

[5] In my opinion, it is easy for EROEI calculations (and similar calculations) to overstate the benefit of complex types of energy supply.

A major point that Professor Tainter makes in the talk linked above is that complexity has an energy cost, but the energy cost of this complexity is virtually impossible to measure. He also makes the point that growing complexity is seductive; the overall cost of complexity tends to grow over time. Models tend to miss necessary parts of the overall system needed to support a highly complex new source of energy supply.

Because the energy required for complexity is hard to measure, EROEI calculations with respect to complex systems will tend to make complex forms of electricity generation, such as wind and solar, look like they use less energy (have a higher EROEI) than they actually do. The problem is that EROEI calculations consider only direct “energy investment” costs. For example, the calculations are not designed to collect information regarding the higher energy cost of a dual system, with parts of the system under-utilized for portions of the year. Annual costs will not necessarily be reduced proportionately.

In the linked video, Professor Tainter talks about the EROEI of oil over the years. I don’t have a problem with this type of comparison, especially if it stops before the recent change to greater use of fracking, since the level of complexity is similar. In fact, such a comparison omitting fracking seems to be the one that Tainter makes. Comparison among different energy types, with different complexity levels, is what is easily distorted.

[6] The current world economy already seems to be trending in the direction of simplification, suggesting that the tendency toward greater complexity is already past its maximum level, given the lack of availability of inexpensive energy products.

I wonder if we are already starting to see simplification in trade, especially international trade, because shipping (generally using oil products) is becoming high-priced. This might be considered a type of simplification, in response to a lack of sufficient inexpensive energy supply.

Figure 2. Trade as a percentage of world GDP, based on data of the World Bank.

Based on Figure 2, trade as a percentage of GDP hit a peak in 2008. There has been a generally downward trend in trade since then, giving an indication that the world economy has tended to shrink back, at least in some ways, as it has hit high-price limits.

Another example of a trend toward lower complexity is the drop in US undergraduate college and university enrollment since 2010. Other data shows that undergraduate enrollment nearly tripled between 1950 and 2010, so the shift to a downtrend after 2010 presents a major turning point.

Figure 3. Total number of US full-time and part-time undergraduate college and university students, according to the National Center for Education Statistics.

The reason why the shift in enrollment is a problem is because colleges and universities have a huge amount of fixed expenses. These include buildings and grounds that must be maintained. Often debt needs to be repaid, as well. Educational systems also have tenured faculty members that they are obligated to keep on their staff, under most circumstances. They may have pension obligations that are not fully funded, adding another cost pressure.

According to the college faculty members whom I have talked to, in recent years there has been pressure to improve the retention rate of students who have been admitted. In other words, they feel that they are being encouraged to keep current students from dropping out, even if it means lowering their standards a little. At the same time, faculty wages are not keeping pace with inflation.

Other information suggests that colleges and universities have recently put a great deal of emphasis on achieving a more diverse student body. Students who might not have been admitted in the past because of low high school grades are increasingly being admitted in order to keep the enrollment from dropping further.

From the students’ point of view, the problem is that jobs that pay a sufficiently high wage to justify the high cost of a college education are increasingly unavailable. This seems to be the reason for both the US student debt crisis and the drop in undergraduate enrollment.

Of course, if colleges are at least somewhat lowering their admission standards and perhaps lowering standards for graduation, as well, there is a need to “sell” these increasingly diverse graduates with somewhat lower undergraduate achievement records to governments and businesses who might hire them. It seems to me that this is a further sign of the loss of complexity.

[7] In 2022, the total energy costs for most OECD countries started spiking to high levels, relative to GDP. When we analyze the situation, electricity prices are spiking, as are the prices of coal and natural gas–the two types of fuel used most frequently to produce electricity.

Figure 4. Chart from article called, Energy expenditures have surged, posing challenges for policymakers, by two OECD economists.

The OECD is an intergovernmental organization of mostly rich countries that was formed to stimulate economic progress and foster world growth. It includes the US, most European countries, Japan, Australia, and Canada, among other countries. Figure 4, with the caption “Periods of high energy expenditures are often associated with recession” is has been prepared by two economists working for OECD. The gray bars indicate recession.

Figure 4 shows that in 2021, prices for practically every cost segment associated with energy consumption tended to spike. Electricity, coal, and natural gas prices were all very high relative to prior years. The only segment of energy costs that was not very out of line relative to costs in prior years was oil. Coal and natural gas are both used to make electricity, so high electricity costs should not be surprising.

In Figure 4, the caption by the economists from OECD is pointing out what should be obvious to economists everywhere: High energy prices often push an economy into recession. Citizens are forced to cut back on non-essentials, reducing demand and pushing their economies into recession.

[8] The world seems to be up against extraction limits for coal. This, together with the high cost of shipping coal over long distances, is leading to very high prices for coal.

World coal production has been close to flat since 2011. Growth in electricity generation from coal has been almost as flat as world coal production. Indirectly, this lack of growth in coal production is forcing utilities around the world to move to other types of electricity generation.

Figure 5. World coal mined and world electricity generation from coal, based on data from BP’s 2022 Statistical Review of World Energy.

[9] Natural gas is now also in short supply when growing demand of many types is considered.

While natural gas production has been growing, in recent years it hasn’t been growing quickly enough to keep up with the world’s rising demand for natural gas imports. World natural gas production in 2021 was only 1.7% higher than production in 2019.

Growth in the demand for natural gas imports comes from several directions, simultaneously:

  • With coal supply flat and imports not sufficiently available, countries are seeking to substitute natural gas generation for coal generation of electricity. China is the world’s largest importer of natural gas partly for this reason.
  • Countries with electricity from wind or solar find that electricity from natural gas can ramp up quickly and fill in when wind and solar aren’t available.
  • There are several countries, including Indonesia, India and Pakistan, whose natural gas production is declining.
  • Europe chose to end its pipeline imports of natural gas from Russia and now needs more LNG instead.

[10] Prices for natural gas are extremely variable, depending on whether the natural gas is locally produced, and depending on how it is shipped and the type of contract it is under. Generally, locally produced natural gas is the least expensive. Coal has somewhat similar issues, with locally produced coal being the least expensive.

This is a chart from a recent Japanese publication (IEEJ).

Figure 6. Comparison of natural gas prices in three parts of the world from the Japanese publication IEEJ, dated January 23, 2023.

The low Henry Hub price at the bottom is the US price, available only locally. If supplies are high within the US, its price tends to be low. The next higher price is Japan’s price for imported liquefied natural gas (LNG), arranged under long-term contracts, over a period of years. The top price is the price that Europe is paying for LNG based on “spot market” prices. Spot market LNG is the only type of LNG available to those who did not plan ahead.

In recent years, Europe has been taking its chances on getting low spot market prices, but this approach can backfire badly when there is not enough to go around. Note that the high price of European imported LNG was already evident in January 2013, before the Ukraine invasion began.

A major issue is that shipping natural gas is extremely expensive, tending to at least double or triple the price to the user. Producers need to be guaranteed a high price for LNG over the long term to make all of the infrastructure needed to produce and ship natural gas as LNG profitable. The extremely variable prices for LNG have been a problem for natural gas producers.

The very high recent prices for LNG in Europe have made the price of natural gas too high for industrial users who need natural gas for processes other than making electricity, such as making nitrogen fertilizer. These high prices cause distress from the lack of inexpensive natural gas to spill over into the farming sector.

Most people are “energy blind,” especially when it comes to coal and natural gas. They assume that there is plenty of both fuels to be cheaply extracted, essentially forever. Unfortunately, for both coal and natural gas, the cost of shipping tends to be very high. This is something that modelers miss. It is the high delivered cost of natural gas and coal that makes it impossible for companies to actually extract the amounts of coal and natural gas that seem to be available based on reserve estimates.

[10] When we analyze electricity consumption in recent years, we discover that OECD and non-OECD countries have had amazingly different patterns of electricity consumption growth since 2001.

OECD electricity consumption has been close to flat, especially since 2008. Even before 2008, its electricity consumption was not growing rapidly.

The proposal now is to increase the use of electricity in OECD countries. Electricity will be used to a greater extent for fueling vehicles and heating homes. It will also to be used more for local manufacturing, especially for batteries and semiconductor chips. I wonder how OECD countries will be able to ramp up electricity production sufficiently to cover both current uses of electricity and planned new uses, if past electricity production has been essentially flat.

Figure 7. Electricity production by type of fuel for OECD countries, based on data from BP’s 2022 Statistical Review of World Energy.

Figure 7 shows that coal’s share of electricity production has been falling for OECD countries, especially since 2008. “Other” has been rising, but only enough to keep overall production flat. Other is comprised of renewables, including wind and solar, plus electricity from oil and from burning of trash. The latter categories are small.

The pattern of recent energy production for non-OECD countries is very different:

Figure 8. Electricity production by type of fuel for non-OECD countries, based on data from BP’s 2022 Statistical Review of World Energy.

Figure 8 shows that non-OECD countries have been rapidly ramping up electricity production from coal. Other major sources of fuel are natural gas and electricity produced by hydroelectric dams. All these energy sources are relatively non-complex. Electricity from locally produced coal, locally produced natural gas, and hydroelectric generation all tend to be quite inexpensive. With these inexpensive sources of electricity, non-OECD countries have been able to dominate the world’s heavy industry and much of its manufacturing.

In fact, if we look at the local production of fuels generally used to produce electricity (that is, all fuels except oil), we can see a pattern emerge.

Figure 9. Energy production of fuels often used for electricity production for OECD countries, based on data from BP’s 2022 Statistical Review of World Energy.

With respect to extraction of fuels often associated with electricity, production has been closed to flat, even with “renewables” (wind, solar, geothermal, and wood chips) included. Coal production is down. The decline in coal production is likely a big part of the lack of growth in OECD’s electricity supply. Electricity from locally produced coal has historically been very inexpensive, bringing the average price of electricity down.

A very different pattern emerges when the production of fuels used to generate electricity for non-OECD countries is viewed. Note that the same scale has been used on both Figures 9 and 10. Thus, in 2001, the production of these fuels was about equal for OECD and non-OECD countries. Production of these fuels has about doubled since 2001 for non-OECD countries, while OECD production has remained close to flat.


Figure 10. Energy production of fuels often used for electricity production for non-OECD countries, based on data from BP’s 2022 Statistical Review of World Energy.

One item of interest on Figure 10 is coal production for non-OECD countries, shown in blue at the bottom. It has been barely increasing since 2011. This is part of what is now tightening world coal supplies. I am doubtful that spiking coal prices will add very much to long-term coal production because truly local supplies are becoming depleted, even in non-OECD countries. The spiking prices are much more likely to lead to recession, debt defaults, lower commodity prices, and lower coal supply.

[11] I am afraid that the world economy has hit complexity limits as well as energy production limits.

The world economy seems likely to collapse over a period of years. In the near term, the result may look like a bad recession, or it may look like war, or possibly both. So far, the economies using fuels that are not very complex for electricity (locally produced coal and natural gas, plus hydroelectric generation) seem to be doing better than others. But the overall world economy is stressed by inadequate cheap-to-produce local energy supplies.

In physics terms, the world economy, as well as all of the individual economies within it, are dissipative structures. As such, growth followed by collapse is a usual pattern. At the same time, new versions of dissipative structures can be expected to form, some of which may be better adapted to changing conditions. Thus, approaches for economic growth that seem impossible today may be possible over a longer timeframe.

For example, if climate change opens up access to more coal supplies in very cold areas, the Maximum Power Principle would suggest that some economy will eventually access such deposits. Thus, while we seem to be reaching an end now, over the long-term, self-organizing systems can be expected to find ways to utilize (“dissipate”) any energy supply that can be inexpensively accessed, considering both complexity and direct fuel use.

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2023: Expect a financial crash followed by major energy-related changes

Posted on January 9, 2023 by Gail Tverberg

Why is the economy headed for a financial crash? It appears to me that the world economy hit Limits to Growth about 2018 because of a combination of diminishing returns in resource extraction together with rising population. The Covid-19 pandemic and the accompanying financial manipulations hid these problems for a few years, but now, as the world economy tries to reopen, the problems are back with a vengeance.

Figure 1. World primary energy consumption per capita based on BP’s 2022 Statistical Review of World Energy. Same chart shown in post, Today’s Energy Crisis Is Very Different from the Energy Crisis of 2005.

In the period between 1981 and 2022, the economy was lubricated by a combination of ever-rising debt, falling interest rates, and the growing use of Quantitative Easing. These financial manipulations helped to hide the rising cost of fossil fuel extraction after 1970. Even more money supply was added in 2020. Now central bankers are trying to squeeze the excesses out of the system using a combination of higher interest rates and Quantitative Tightening.

After central bankers brought about recessions in the past, the world economy was able to recover by adding more energy supply. However, this time we are dealing with a situation of true depletion; there is no good way to recover by adding more energy supplies to the system. Instead, the only way the world economy can recover, at least partially, is by squeezing some non-essential energy uses out of the system. Hopefully, this can be done in such a way that a substantial part of the world economy can continue to operate in a manner close to that in the past.

One approach to making the economy more efficient in its energy use is by greater regionalization. If countries can start trading almost entirely with nearby neighbors, this will reduce the world’s energy consumption. In parts of the world with plentiful resources and manufacturing capability, the economy can perhaps continue without major changes. Another way of squeezing out excesses might be through the elimination (at least in part) of the trade advantage the US obtains by using the dollar as the world’s reserve currency. In this post, I will also mention a few other ways that non-essential energy consumption might be reduced.

I believe that a financial crash is likely sometime during 2023. After the crash, the system will start squeezing down on the less necessary parts of the economy. While these changes will start in 2023, they will likely take place over a period of years. In this post, I will try to explain what I see happening.

[1] The world economy, in its currently highly leveraged state, cannot withstand both higher interest rates and Quantitative Tightening.

With higher interest rates, the value of bonds falls. With bonds “worth less,” the financial statements of pension plans, insurance companies, banks and others holding those bonds all look worse. More contributions are suddenly needed to fund pension funds. Governments may find themselves needing to bail out many of these organizations.

At the same time, individual borrowers find that debt becomes more expensive to finance. Thus, it becomes more expensive to buy a home, vehicle, or farm. Debt to speculate in the stock market becomes more expensive. With higher debt costs, there is a tendency for asset prices, such as home prices and stock prices, to fall. With this combination (lower asset prices and higher interest rates) debt defaults are likely to become more common.

Quantitative Tightening makes it harder to obtain liquidity to buy goods internationally. This change is more subtle, but it also works in the direction of causing disruptions to financial markets.

Other stresses to the financial system can be expected, as well, in the near term. For example, Biden’s program that allows students to delay payments on their student loans will be ending in the next few months, adding more stress to the system. China has had huge problems with loans to property developers, and these may continue or get worse. Many of the poor countries around the world are asking the IMF to provide debt relief because they cannot afford energy supplies and other materials at today’s prices. Europe is concerned about possible high energy prices.

This is all happening at a time when total debt levels are even higher than they were in 2008. In addition to “regular” debt, the economic system includes trillions of dollars of derivative promises. Based on these considerations alone, a much worse crash than occurred in 2008 seems possible.

[2] The world as a whole is already headed into a major recession. This situation seems likely to get worse in 2023.

The Global Purchasing Managers Index (PMI) has been signaling problems for months. A few bullet points from their site include the following:

  • Service sector output declined in October, registering the worst monthly performance since mid-2020.
  • Manufacturing output meanwhile fell for a third consecutive month, also declining at the steepest rate since June 2020.
  • PMI subindices showed new business contracting at the quickest rate since June 2020, with the weak demand environment continuing to be underpinned by declining worldwide trade.
  • The global manufacturing PMI’s new export orders index has now signaled a reduction in worldwide goods exports for eight straight months.
  • Price inflationary pressures remained solid in October, despite rates of increase in input costs and output charges easing to 19-month lows.

The economic situation in the US doesn’t look as bad as it does for the world as a whole, perhaps because the US dollar has been at a relatively high level. However, a situation with the US doing well and other countries doing poorly is unsustainable. If nothing else, the US needs to be able to buy raw materials and to sell finished goods and services to these other countries. Thus, recession can be expected to spread.

[3] The underlying issue that the world is starting to experience is overshoot and collapse, related to a combination of rising population and diminishing returns with respect to resource extraction.

In a recent post, I explained that the world seems to be reaching the limits of fossil fuel extraction. So-called renewables are not doing much to supplement fossil fuels. As a result, energy consumption per capita seems to have hit a peak in 2018 (Figure 1) and now cannot keep up with population growth without prices that rise to the point of becoming unaffordable for consumers.

The economy, like the human body, is a self-organizing system powered by energy. In physics terminology, both are dissipative structures. We humans can get along for a while with less food (our source of energy), but we will lose weight. Without enough food, we are more likely to catch illnesses. We might even die, if the lack of food is severe enough.

The world economy can perhaps get along with less energy for a while, but it will behave strangely. It needs to cut back, in a way that might be thought of as being analogous to a human losing weight, on a permanent basis. On Figure 1 (above), we can see evidence of two temporary cutbacks. One was in 2009, reflecting the impact of the Great Financial Crisis of 2008-2009. Another related to the changes associated with Covid-19 in 2020.

If energy supply is really reaching extraction limits, and this is causing the recent inflation, there needs to be a permanent way of cutting back energy consumption, relative to the output of the economy. I expect that changes in this direction will start happening about the time of the upcoming financial crash.

[4] A major financial crash in 2023 may adversely affect many people’s ability to buy goods and services.

A financial discontinuity, including major defaults that spread from country to country, is certain to adversely affect banks, insurance companies and pension plans. If problems are widespread, governments may not be able to bail out all these institutions. This, by itself, may make the purchasing of goods and services more difficult. Citizens may find that the funds they thought were in the bank are subject to daily withdrawal limits, or they may find that the value of shares of stock they owned is much lower. As a result of such changes, they will not have the funds to buy the goods they want, even if the goods are available in shops.

Alternatively, citizens may find that their local governments have issued so much money (to try to bail out all these institutions) that there is hyperinflation. In such a case, there may be plenty of money available, but very few goods to buy. As a result, it still may be very difficult to buy the goods a family needs.

[5] Many people believe that oil prices will rise in response to falling production. If the real issue is that the world is reaching extraction limits, the problem may be inadequate demand and falling prices instead.

If people have less to spend following the financial crash, based on the reasoning in Section [4], this could lead to lower demand, and thus lower prices.

It also might be noted that both the 2009 and 2020 dips in consumption (on Figure 1) corresponded to times of low oil prices, not high. Oil companies cut back on production if they find that prices are too low for them to expect to make a profit on new production.

We also know that a major problem as limits are reached is wage disparity. The wealthy use more energy products than poor people, but not in proportion to their higher wealth. The wealthy tend to buy more services, such as health care and education, which are not as energy intensive.

If the poor get too poor, they find that they must cut back on things like meat consumption, housing expenses, and transportation expenses. All these things are energy intensive. If very many poor people cut back on products that indirectly require energy consumption, the prices for oil and other energy products are likely to fall, perhaps below the level required by producers for profitability.

[6] If I am right about low energy prices, especially after a financial discontinuity, we can expect oil, coal, and natural gas production to fall in 2023.

Producers tend to produce less oil, coal and natural gas if prices are too low.

Also, government leaders know that high energy prices (especially oil prices) lead to high food prices and high inflation. If they want to be re-elected, they will do everything in their power to keep energy prices down.

[7] Without enough energy to go around, more conflict can be expected.

Additional conflict can be expected to come in many forms. It can look like local demonstrations by citizens who are unhappy about their wages or other conditions. If wage disparity is a problem, it will be the low-wage workers who will be demonstrating. I understand that demonstrations in Europe have recently been a problem.

Conflict can also take the form of wide differences among political parties, and even within political parties. The difficulty that the US recently encountered electing a Speaker of the House of Representatives is an example of such conflict. Political parties may splinter, making it difficult to form a government and get any business accomplished.

Conflict may also take the form of conflict among countries, such as the conflict between Russia and Ukraine. I expect most wars today will be undeclared wars. With less energy to go around, the emphasis will be on approaches that require less energy. Deception will become important. Destruction of another country’s energy infrastructure, such as pipelines or electricity transmission, may be part of the plan. Another form of deception may involve the use of bioweapons and supposed cures for these bioweapons.

[8] After the discontinuity, the world economy is likely to become more disconnected and more regionally aligned. Russia and China will tend to be aligned. The US seems likely to be another center of influence.

A major use of oil is transporting goods and people around the globe. If there is not enough oil to go around, one way of saving oil is to transport goods over shorter distances. People can talk by telephone or video conferences to save on oil used in long distance transportation. Thus, increased regionalization seems likely to take place.

In fact, the pattern is already beginning. Russia and China have recently been forging long-term alliances centered on providing natural gas supplies to China and on strengthening military ties. Being geographically adjacent is clearly helpful. Furthermore, major US oil companies are now focusing more on developments in the Americas, rather than on big international projects, according to the Wall Street Journal.

Countries that are geographically close to Russia-China may choose to align with them, especially if they have resources or finished products (such as televisions or cars) to sell. Likewise, countries near the US with suitable products to sell may align with the United States.

Countries that are too distant, or that don’t have resources or finished products to sell (goods, rather than services), may largely be left out. For example, European countries that specialize in financial services and tourism may have difficulty finding trading partners. Their economies may shrink more rapidly than those of other countries.

[9] In a regionally aligned world, the US dollar is likely to lose its status as the world’s reserve currency.

With increased regionalization, I would expect that the US dollar’s role as the world’s reserve currency would tend to disappear, perhaps starting as soon as 2023. For example, transactions between Russia and China may begin to take place directly in yuan, without reference to a price in US dollars, and without the need for US funds to allow such transactions to take place.

Transactions within the Americas seem likely to continue taking place using US dollars, especially when they involve the buying and selling of energy-related products.

With the US dollar as the reserve currency, the US has been able to import far more than it exports, year after year. Based on World Bank data, in 2021 the US imported $2.85 trillion of goods (including fossil fuels, but excluding services) and exported $1.76 trillion of goods, leading to a goods-only excess of imports over exports of $1.09 trillion. When exports of services are included, the excess of imports over exports shrinks to “only” $845 billion. It is hard to see how this large a gap can continue. Such a significant difference between imports and exports would tend to shrink if the US were to lose its reserve currency status.

[10] In a disconnected world, manufacturing of all kinds will fall, especially outside of Southeast Asia (including China and India), where a major share of today’s manufacturing is performed.

A huge share of today’s manufacturing capability is now in China and India. If these countries have access to oil from the Middle East and Russia, I expect they will continue to produce goods and services. If there are not enough of these goods to go around, I would expect that they would primarily be exported to other countries within their own geographic region.

The Americas and Europe will be at a disadvantage because they have fewer manufactured goods to sell. (The US, of course, has a significant quantity of food to export.) Starting in the 1980s, the US and Europe moved a large share of their manufacturing to Southeast Asia. Now, when these countries talk about ramping up clean energy production, they find that they are largely without the resources and the processing needed for such clean energy projects.

Figure 2: New York Times chart based on International Energy Agency data. February 22, 2022.

In fact, ramping up “regular” manufacturing production of any type in the US, (for example, local manufacturing of generic pharmaceutical drugs, or manufacturing of steel pipe used in the drilling of oil wells) would not be easy. Most of today’s manufacturing capability is elsewhere. Even if the materials could easily be gathered into one place in the US, it would take time to get factories up and running and to train workers. If some necessary items are lacking, such as particular raw materials or semiconductor chips, transitioning to US manufacturing capability might prove to be impossible in practice.

[11] After a financial discontinuity, “empty shelves” are likely to become increasingly prevalent.

We can expect that the total quantity of goods and services produced worldwide will begin to fall for several reasons. First, regionalized economies cannot access as diverse a set of raw materials as a world economy. This, by itself, will limit the types of goods that an economy can produce. Second, if the total quantity of raw materials used in making the inputs declines over time, the total amount of finished goods and services can be expected to fall. Finally, as mentioned in Section [4], financial problems may cut back on buyers’ ability to purchase goods and services, limiting the number of buyers available for finished products, and thus holding down sales prices.

A major reason empty shelves become can be expected to become more prevalent is because more distant countries will tend to get cut out of the distribution of goods. This is especially the case as the total quantity of goods and services produced falls. A huge share of the manufacturing of goods is now done in China, India, and other countries in Southeast Asia.

If the world economy shifts toward mostly local trade, the US and Europe are likely to find it harder to find new computers and new cell phones since these tend to be manufactured in Southeast Asia. Other goods made in Southeast Asia include furniture and appliances. These, too, may be harder to find. Even replacement car parts may be difficult to find, especially if a car was manufactured in Southeast Asia.

[12] There seem to be many other ways the self-organizing economy could shrink back to make itself a more efficient dissipative structure.

We cannot know in advance exactly how the economy will shrink back its energy consumption, besides regionalization and pushing the US dollar (at least partially) out of being the reserve currency. Some other areas where the physics of the economy might force cutbacks include the following:

  • Vacation travel
  • Banks, insurance companies, pension programs (much less needed)
  • The use of financial leverage of all kinds
  • Governmental programs providing payments to those not actively in the workforce (such as pensions, unemployment insurance, disability payments)
  • Higher education programs (many graduates today cannot get jobs that pay for the high cost of their educations)
  • Extensive healthcare programs, especially for people who have no hope of ever re-entering the workforce

In fact, the population may start to fall because of epidemics, poor health, or even too little food. With fewer people, limited energy supply will go further.

Governments and intergovernmental agencies may start to fail because they cannot get enough tax revenue. Of course, the underlying issue for the lack of tax revenue is likely to be that the businesses within the governed area cannot operate because they cannot obtain enough inexpensive energy resources for operation.

[13] Conclusion.

If the world economy experiences major financial turbulence in 2023, we could be in for a rough ride. In my opinion, a major financial crash seems likely. This is could upset the economy far more seriously than the 2008 crash.

I am certain that some mitigation measures can be implemented. For example, there could be a major push toward trying to make everything that we have today last longer. Materials can be salvaged from structures that are no longer used. And some types of local production can be ramped up.

We can keep our fingers crossed that I am wrong but, with fewer oil and other energy resources available per person, moving goods shorter distances makes sense. Thus, the initial trends we are seeing toward regionalization are likely to continue. The move away from the US dollar as the reserve currency also looks likely to continue. Moreover, if the changes I am talking about don’t occur in 2023, they are likely to begin in 2024 or 2025.

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The economy is moving from a tailwind pushing it along to a headwind holding it back

Posted on December 16, 2022 by Gail Tverberg

The problem is hitting limits in the extraction of fossil fuels

We know that historically, many economies around the world have collapsed. We also know that there is a physics reason why this happens. Growing economies require a growing supply of energy to keep up with a growing population. At some point, the energy supply and other resource needs cannot grow rapidly enough to keep up with population growth. When this happens, economies tend to collapse.

In their book Secular Cycles, researchers Peter Turchin and Sergey Nefedov found that economies tend go through four distinct phases in each cycle, with each stage lasting for quite a few years:

  1. Growth
  2. Stagflation
  3. Crisis
  4. Inter-cycle

Based on my own analysis, the world economy was in the Growth Stage for much of the time between the Industrial Revolution and 1973. In late 1973, oil prices spiked, and the world was put on notice that the energy supply could not continue rising as rapidly as in the past. Between 1973 and 2018, the world economy was in the Stagflation Stage. Based on current data, the world economy seems to have entered the Crisis Stage about 2018. This is the reason for saying that headwinds are beginning to hold the economy back in the title of this article .

When the Crisis Stage occurs, there are fewer goods and services per capita to go around, so some participants in the world economy must come out behind. Conflict of all kinds becomes more likely. Political leaders, if they happen to discover the predicament the world economy is in, have little interest in making the predicament known to voters, since doing so would likely lead them to lose the next election.

Instead, the way the physics-based self-organizing economic system works is that alternative narratives that frame the situation in a less frightening way gain popularity. Political leaders may not even be aware of how dependent today’s economy is on fossil fuels. Researchers may not be aware that their “scientific” models are misleading because they look at too small a portion of the overall system and make unwarranted assumptions.

In this post, I show evidence that the economy is reaching energy limits. In the last section, I explain how my view differs from the standard narrative, which says that there is almost an unlimited amount of fossil fuels available to burn, if we choose to utilize these fossil fuels. According to this view, humans can prevent climate change by voluntarily moving away from fossil fuels.

The standard narrative proposes a reasonable plan for citizens of parts of the world without adequate fossil fuels (cut back on buying fossil fuels), but without telling citizens what the real problem is. The standard narrative also gives the impression that there is a near-term clean energy alternative. In my opinion, this is wishful thinking for the reasons I describe in Sections [6] and [7]. Section [2] also sheds light on the reasonableness of moving to renewable energy.

[1] The world has been warned, at least twice, that collapse might occur about now.

Back in the 1950s, several physicists, including M. King Hubbert, became interested in the limits that the world was up against. The military became interested in the problem, as well. In 1957, Admiral Hyman Rickover of the US Navy gave a very insightful speech. One thing Admiral Rickover said was, “With high energy consumption goes a high standard of living.” Another thing he said was, “A reduction of per capita energy consumption has always in the past led to a decline in civilization and a reversion to a more primitive way of life.”

Regarding the future, he said,

For it is an unpleasant fact that according to our best estimates, total fossil fuel reserves recoverable at not over twice today’s unit cost are likely to run out at some time between the years 2000 and 2050, if present standards of living and population growth rates are taken into account. 

The issue Admiral Rickover is pointing out is that as extraction costs rise, fossil fuels become increasingly unaffordable. If citizens cannot afford food, housing, and other basic goods made with high-cost fossil fuels, those fossil fuels will be left in the ground. If politicians try to pass the high cost of extraction on to consumers, it will cause inflation. Citizens will become unhappy with politicians and will vote them out of office. This is basically our problem today.

A second analysis that pointed to the current time frame for the world hitting fossil fuel limits is given in the 1972 book, The Limits To Growth by Donella Meadows and others. This analysis used computer modeling to look at several alternative future scenarios, considering resources available and population trends. The base scenario showed resource limits in general hitting sometime around 2020. The economy would collapse over a period of years after resource limits were hit.

[2] The Industrial Revolution in England is an example of how an economy changes for the better when fossil fuel energy is added.

Figure 1 shows a chart E. A. Wrigley shows in his book, Energy and the English Industrial Revolution:

Figure 1. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Wrigley

Wrigley observes that when coal was added to the economy, it was possible to make far more metal tools than had been made in the past. With the use of metal tools instead of wood tools, farmers could be three times as productive. Thus, there didn’t need to be as many farmers, freeing some farmers for other occupations. Also, roads to coal mines were paved, in an era when few roads were paved. These paved roads were beneficial to other businesses and to the economy as a whole.

Another reason for coal to be of interest was because of increased deforestation near cities, as the population grew. This deforestation led to a need to transport firewood over long distances. Coal was more compact, and so easier to transport. Furthermore, the use of coal prevented having to cut down as many trees, helping the environment.

Figure 1 shows that energy from wind and water were only a tiny part of the economy, both before and after coal was added. They did not directly provide heat energy, which was a significant share of what the economy needed at that time.

[3] The period between the end of World War II and 1973 was another period when energy consumption per capita was rising rapidly. We might say the economy then had an “energy tailwind.”

Figure 2 shows that US energy consumption per capita was rising rapidly in the 1949 to 1973 period. Growing oil, coal and natural gas consumption all contributed to the overall rise in fossil fuel use.

Figure 2. Energy consumption by type of energy, on a per capita basis. Energy amounts as provided by US EIA data. Population based on 2022 United Nations population estimates by country.

In fact, BP data (only available from 1965 onward) shows energy consumption per capita rising for most parts of the world between 1965 and 1973. During this period, oil, coal and natural gas consumption per capita were all rising.

Figure 3. Energy consumption per capita from 1965 to 1973 for selected parts of the world based on BP’s 2022 Statistical Review of World Energy.

A major thing that pushed oil consumption along was its low price (Figure 4). According to BP data, the inflation-adjusted price was only $11.99 per barrel in 1970. In 1971, it averaged $14.30 per barrel. The comparable price today is about $79 per barrel.

Figure 4. World oil production and Brent equivalent price, adjusted for inflation to 2021, based on BP’s 2022 Statistical Review of World Energy.

The average price for 1973 rose to the equivalent of $19.73 per barrel, which is still incredibly low relative to today’s prices. It is an annual average price, reflecting a low price at the beginning of the year and a much higher price toward the end of the year.

There were multiple issues behind the rise in oil prices, starting at the end of 1973. Part of the problem was the fact that US oil production began to fall in 1971, necessitating the use of more imported oil, year after year. Another issue was that world oil production could not keep up with the high demand, given the low price that oil was selling for. The Office of the Historian of the US writes the following:

By 1973, OPEC had demanded that foreign oil corporations increase prices and cede greater shares of revenue to their local subsidiaries. In April, the Nixon administration announced a new energy strategy to boost domestic production to reduce U.S. vulnerability to oil imports and ease the strain of nationwide fuel shortages. That vulnerability would become overtly clear in the fall of that year.

Without higher oil prices, it would be hard for local producers to make the investments needed to ramp up production. Also, taxes for governments in the areas where the oil was produced were falling too low, given the low prices that oil was selling for on the international market. Indirectly because of these problems, but supposedly also because of support for Israel by certain countries in the 1973 Arab-Israeli war, the Arab members of OPEC initiated an oil embargo. This embargo cut off exports to the US, Netherlands, Portugal, and South Africa from November 1973 until March 1974. It was at that time that world oil prices rose to a much higher level, and oil consumption per capita began to fall.

One thing that is striking about the period between World War II and 1973 is the huge advances in wages made by both the bottom 90% and the top 10% (Figure 5).

Figure 5. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis of IRS data, published in Forbes.

Between 1948 and 1968, inflation-adjusted income of both the bottom 90% and the top 10% increased by roughly 80%. This meant that many people in the bottom 90% could afford to buy cars and their own homes for the first time. Even in the period between 1968 and 1982, inflation-adjusted incomes kept up with inflation, something that low-income earners today have difficulty with. It was not until after about 1982 that wage disparity started to increase.

Most people remember the 1950s and 1960s as a favorable period for ordinary workers. Because of the higher wages of ordinary citizens and growing US manufacturing capabilities, the number of cars registered in the US rose from 25.8 million in 1945 to 75.3 million in 1965. The US initiated the 41,000 mile Interstate Highway System in 1956, so that auto owners would have multilane, limited access roads to travel on.

Electricity was sold in a conservative way, called the Utility Pricing System, which would hopefully assure that the whole system would be properly maintained. Utilities were typically owners of electricity generation units, plus all other local infrastructure, including transmission lines. Each utility would compute a total required rate for all its needs, including enough funds to install new generating capacity, provide fuel, and install and maintain transmission lines. A government regulator would approve the rates, but there was no real competition.

[4] In the period between 1973 and 2018, many changes were to increase energy efficiency and to lower the perceived cost to users. Unfortunately, some of these changes, when taken to the extremes they were taken to later in the period, tended to make the economy brittle and thus more subject to collapse.

Up until 1973, oil was being put to uses for which substitution could easily be made. One of these was electricity generation; another was home heating. An easy change in electricity generation was to build new generating facilities using an alternate fuel (coal, natural gas, or nuclear). Home heating could often be changed to natural gas or electricity.

Also, Japan already had automobiles that were smaller and more fuel efficient than American automobiles. These could be substituted for some of the large cars produced in the US.

Especially with the Reagan and Thatcher administrations starting shortly after 1980, there was more interest in cutting costs in electricity generation. “Competitive rating” instead of utility rating became popular in places where electricity prices were high. Utilities were broken up, and the various parts were encouraged to compete.

Of course, competitive rating, when taken to its extreme, can lead to the neglect of infrastructure. It was recently reported that California’s utility company, Pacific Gas and Electric, now finds that it must raise $50 billion for wildfire prevention, after years of neglecting maintenance on the long distance transmission lines used for hydroelectric generation and other long distance transmission. Now it needs to raise money to bury many of these lines underground.

It has long been known that added complexity can be helpful in working around problems of inadequate energy supply. Complexity involves many things including using more advanced technology and international trade. It involves bigger organizations to take advantage of economies of scale. It tends to require higher education for at least some of its workers.

One major disadvantage of growing complexity is the increasing wage disparity it tends to produce. Wages for less educated workers often fall quite low. Work in whole industries may disappear overseas, leaving workers to start over, in new lines of work, at lower pay scales.

Unfortunately, having many workers at low wages tends to push an economy toward collapse. The big issue is that these workers cannot afford goods like cars and new homes. Their lack of purchasing power tends to hold down commodity prices, such as the price of fossil fuels. Prices don’t rise high enough to justify new investment to raise production, so production slows down and eventually stops.

Another approach that gained popularity starting about 1981 was the increased use of debt and more exotic financial approaches. Interest rates were very high in 1981. Central banks could make monthly payments for goods such as homes and cars more affordable by lowering interest rates. This approach works for a while, but it reaches limits when interest rates fall too low relative to inflation rates. Furthermore, if an economy slows down, a major increase in debt defaults becomes likely, as became clear in 2008. With the high level of debt in the world economy today, the default problem could become even worse in 2023 or 2024 than it was in 2008, if the economy slows again.

[5] Since 2015, oil and natural gas investments have remained at low levels because oil prices have not been high enough to justify drilling in the remaining places.

Figure 6. US world oil prices, adjusted to 2021 US$, based on data from BP’s 2022 Statistical Review of World Energy.

In my opinion, oil companies really need quite high oil prices, probably $120 per barrel or higher, on a consistent basis, to justify drilling in sufficient new locations to ramp up oil production. Since 2014, prices have generally remained far below that level. There was a major drop in oil prices in 2014 and 2015. In response to the lower oil prices, oil and gas companies cut back on investment in “Exploration and Production” (E&P). (Figure 7)

Figure 7. Global Oil and Gas Exploration and Production Investments in chart by Rystad Energy.

After a drop in E&P investments, oil production does not drop immediately. Instead, 2018 was the single highest year of oil production. Production looks likely to drop further because of the continued lack of investment (Figure 8).

Figure 8. Figure 1 from my most recent post. It shows world primary energy consumption per capita based on BP’s 2022 Statistical Review of World Energy.

[6] If we look across the major types of energy supply, we discover that “Wind and Solar” is the only category rising significantly faster than world population. Others tend to be flat or falling, on a per capita basis.

Figure 9. Energy per capita worldwide, for selected types of energy, based on data from BP’s 2022 Statistical Review of World Energy.

In Figure 9, the star performer is the category “Wind + Solar.” The main attraction of wind and solar today is the subsidies they get, and the mandates that require utilities to move away from fossil fuels. Unfortunately, wind and solar really aren’t terribly helpful as far as I can see, except from the point of view of the benefit of the subsidies they provide.

One of the problems with intermittent wind and solar is that they tend to drive nuclear electricity providers out of business because of the favorable rates they receive when wind and solar are allowed to go first, in competitive rating schemes. With this arrangement, the wholesale rates that nuclear providers receive often fall to negative amounts. Nuclear providers cannot close down for short periods with negative rates, so they tend to need subsidies to remain open. Figure 9 shows that the supply of nuclear electricity has been dropping since at least 2001. In fact, of all the energy types shown on Figure 9, nuclear’s production (relative to population) is dropping fastest.

In my opinion, our primary energy concern should be food production and transport. Diesel, made from oil, is the major fuel for agriculture. It will be decades before farming machinery and transport of food can be changed over to electricity, assuming this can be done at all. Until this happens, electricity’s role in getting food to the shelves of grocery stores will be limited.

Solar energy comes primarily in the summer but, unfortunately, in many places, the big need for heat energy is in the winter. People in Europe, with their many wind turbines and solar panels, are worried about possibly freezing in the dark this winter if natural gas supplies prove inadequate. We don’t have batteries for storing solar or wind energy for months on end, so they cannot be counted on for winter heat.

When homeowners put solar panels on their roofs, the electricity they sell to the utility is often “net metered” (credited with the full retail value of electricity that this home would pay). This is a huge subsidy to the owners of the solar panels because the value of the intermittent electricity to the utility is far less than this, probably closer to the cost of the natural gas or other fuel saved.

To make up for the loss of revenue caused by the overly generous compensation to solar panel owners, the utility is forced to raise rates for those without solar panels. Studies show that homeowners with solar panels tend to be wealthier than the renters and others who do not have the opportunity to add these subsidized solar panels. Thus, this is an example of a benefit for rich homeowners being paid for by less wealthy buyers of electricity.

I would also argue that the BP data I used to produce Figure 9 tends to give an overly optimistic view of the value of wind and solar. The approach used indirectly assumes that they fully replace the entire system of dispatchable electricity used today, rather than providing only intermittent electricity. The less generous approach (giving a little less than half as much credit) is used by the International Energy Association and by many researchers.

Furthermore, solar panels tend to pollute ground water when they are disposed of, so they are not very clean. Wind turbines are noisy, take up farmland, and kill bats and birds, so they have serious drawbacks as well.

Wind and solar are made and transported using fossil fuels. They cannot last any longer than today’s fossil fuel industry. In fact, roads and transmission lines require fossil fuels to continue. The whole system is likely to go down at approximately the same time.

It seems to me that the main reason why we hear so much about intermittent wind and solar is because there needs to be a hopeful narrative for politicians to provide to voters, and for educators to provide to students. Otherwise, the situation shown on Figure 9 looks grim. The fact that fossil fuel prices have been spiking in 2022 and regulators are trying to get these prices back down again is testimony to the fact that we are running short of cheap-to-produce fossil fuel energy.

[7] The incorrect narrative provided by mainstream media (MSM) is that climate change is our worst problem. To lessen this problem, citizens need to move quickly away from fossil fuels and transition to renewables. The real narrative is that we are running short of fossil fuels that can be profitably extracted, and renewables are not adequate substitutes. However, this narrative is too worrisome for most people to handle.

I expect most readers will say, your view can’t be right. We don’t read this story in the news. All we hear about is climate change and the need to reduce fossil fuel usage to prevent climate change.

In many ways, the narrative presented by MSM is less frightening to the public than a narrative in which fuels are already being stretched too thin. The MSM narrative sounds like a situation that we can perhaps live with and work around. It sounds like careers that people study for today will be useful in the future. It also sounds like homes, cars and factories built today will be useful in the future.

One major difference in the MSM view, relative to my view, is with respect to the amounts of fossil fuels that can be extracted. The standard narrative says we will extract all the fossil fuels that we have the technology to extract unless we make a concerted effort not to extract these fuels. For this to happen, demand (a favorite word of economists) must keep rising to keep prices high enough for businesses to want to continue extraction from fields plagued by depletion.

History shows that when an economy approaches limits, what tends to happen is that demand tends to fall too low. This happens because the physics of the way the economy works: Wage and wealth disparities tend to spike as energy resources are increasingly stretched thin. In fact, the great wealth of the top 1%, relative to that of the remaining 99%, is a major problem in the world today. When increasing wage and wealth disparity occurs, a growing number of poor workers find themselves with inadequate wages to buy food, homes, cars and other goods made with commodities, including oil.

There are so many of these poor workers that their lack of demand tends to bring down commodity prices without government intervention. If these low wages are not sufficient to hold down commodity prices, politicians will raise interest rates to try to get commodity prices down, so they can be re-elected. It is low fossil fuel prices that will drive fossil fuel providers out of business.

Of course, another part of the MSM narrative is the view that renewables can save the system. I explained in Section [6] why this cannot be the case for wind and solar. I didn’t say much about hydroelectricity, but it is already built out in most of the developed world. Electricity from hydroelectric plants tends to be intermittent, with the greatest supply coming in the spring, when snow melts. Like wind and solar, hydroelectric generation plants are built and repaired using fossil fuels. These facilities, and their transmission lines, will last only until parts break that cannot be repaired.

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Today’s Energy Crisis Is Very Different from the Energy Crisis of 2005

Posted on November 17, 2022 by Gail Tverberg

Back in 2005, the world economy was “humming along.” World growth in energy consumption per capita was rising at 2.3% per year in the 2001 to 2005 period. China had been added to the World Trade Organization in December 2001, ramping up its demand for all kinds of fossil fuels. There was also a bubble in the US housing market, brought on by low interest rates and loose underwriting standards.

Figure 1. World primary energy consumption per capita based on BP’s 2022 Statistical Review of World Energy.

The problem in 2005, as now, was inflation in energy costs that was feeding through to inflation in general. Inflation in food prices was especially a problem. The Federal Reserve chose to fix the problem by raising the Federal Funds interest rate from 1.00% to 5.25% between June 30, 2004 and June 30, 2006.

Now, the world is facing a very different problem. High energy prices are again feeding over to food prices and to inflation in general. But the underlying trend in energy consumption is very different. The growth rate in world energy consumption per capita was 2.3% per year in the 2001 to 2005 period, but energy consumption per capita for the period 2017 to 2021 seems to be slightly shrinking at minus 0.4% per year. The world seems to already be on the edge of recession.

The Federal Reserve seems to be using a similar interest rate approach now, in very different circumstances. In this post, I will try to explain why I don’t think that this approach will produce the desired outcome.

[1] The 2004 to 2006 interest rate hikes didn’t lead to lower oil prices until after July 2008.

It is easiest to see the impact (or lack thereof) of rising interest rates by looking at average monthly world oil prices.

Figure 2. Average monthly Brent spot oil prices based on data of the US Energy Information Administration. Latest month shown is July 2022.

The US Federal Reserve began raising target interest rates in June 2004 when the average Brent oil price was only $38.22 per barrel. These interest rates stopped rising at the end of June 2006, when oil prices averaged $68.56 per barrel. Oil prices on this basis eventually reached $132.72 per barrel in July 2008. (All of these amounts are in dollars of the day, rather than being adjusted for inflation.) Thus, the highest price was over three times the price in June 2004, when the US Federal Reserve made the decision to start raising target interest rates.

Based on Figure 2 (including my notes regarding the timing of the interest rate rise), I would conclude that raising interest rates didn’t work very well at bringing down the price of oil when it was tried in the 2004 to 2006 period. Of course, the economy was growing rapidly, then. The rapid growth of the economy likely led to the very high oil price shown in mid-2008.

I expect that the result of the US Federal Reserve raising interest rates now, in a low-growth world economy, might be quite different. The world’s debt bubble might pop, leading to a worse situation than the financial crisis of 2008. Indirectly, both asset prices and commodity prices, including oil prices, would tend to fall very low.

Analysts looking at the situation from strictly an energy perspective tend to miss the interconnected nature of the economy. Factors which energy analysts overlook (particularly debt becoming impossible to repay, as interest rates rise) may lead to an outcome that is pretty much the opposite result of the standard belief. The typical belief of energy analysts is that low oil supply will lead to very high prices and more oil production. In the current situation, I expect that the result might be closer to the opposite: Oil prices will fall because of financial problems brought on by the higher interest rates, and these lower oil prices will lead to even lower oil production.

[2] The purpose of the US Federal reserve raising target interest rates was to flatten the growth rate of the world economy. Looking back at Figure 1, the growth in energy consumption per capita was much lower after the Great Recession. I doubt that now in 2022, we want even lower growth (really, more shrinkage) in energy consumption per capita for future years.*

Looking at Figure 1, growth in energy consumption per capita has been very slow since the Great Recession. A person wonders: What is the point of governments and their central banks pushing the world economy down, now in 2022, when the world economy is already barely able to maintain international supply lines and provide enough diesel for all of the world’s trucks and agricultural equipment?

If the world economy is pushed downward now, what would the result be? Would some countries find themselves unable to afford fossil fuel energy products in the future? This might lead to problems both in growing and transporting food, at least for these countries. Would the whole world suffer a major crisis of some sort, such as a financial crisis? The world economy is a self-organizing system. It is difficult to forecast precisely how the situation would work out.

[3] While the growth rate in energy consumption per capita was much lower after 2008, the price of crude oil quickly bounced back to over $120 per barrel in inflation-adjusted prices in the 2011-2013 time frame.

Figure 3 shows that oil prices immediately bounced back up after the Great Recession of 2008-2009. Quantitative Easing (QE), which the US Federal Reserve began in late 2008, helped energy prices to shoot back up again. QE helped keep the cost of borrowing by governments low, allowing governments to run larger deficits than might otherwise have been possible without interest rates rising. These higher deficits added to the demand for commodities of all types, including oil, thus raising prices.

Figure 3. Average annual oil prices inflation-adjusted oil prices based on data from BP’s 2022 Statistical Review of World Energy. Amounts shown are Brent equivalent spot prices.

The chart above shows average annual Brent oil prices through 2021. The above chart does not show 2022 prices. The current Brent oil price is about $91 per barrel. So, oil prices today are a little higher than they have been recently, but they are nowhere nearly as high as they were in the 2011 to 2013 period or in the late 1970s. The extreme reaction we are seeing is very strange. The problem seems to be much more than oil prices, by themselves.

[4] High prices in the 2006 to 2013 period allowed the rise of unconventional oil production. These high oil prices also helped keep conventional oil production from falling after 2005.

It is difficult to find detail on the precise amount of unconventional oil, but some countries are known for their unconventional oil production. For example, the US has become a leader in the extraction of tight oil from shale formations. Canada also produces a little tight oil, but it also produces quite a bit of very heavy oil from the oil sands. Venezuela produces a different type of very heavy oil. Brazil produces crude oil from under the salt layer of the ocean, sometimes called pre-salt crude oil. These unconventional types of extraction tend to be expensive.

Figure 4 shows world oil production for various combinations of countries. The top line is total world crude oil production. The bottom gray line approximates world total conventional oil production. Unconventional oil production has been rising since, say, 2010, so this approximation is better for years 2010 and subsequent years on the chart, than it is for earlier years.

Figure 4. Crude and condensate oil production based on international data of the US Energy Information Administration. The lower lines subtract the full amount of crude and condensate production for the countries listed. These countries have substantial amounts of unconventional oil production, but they may also have some conventional production.

From this chart, it appears that world conventional oil production leveled off after 2005. Some people (often referred to as “Peak Oilers”) were concerned that conventional oil production would reach a peak and begin to decline, starting shortly after 2005.

The thing that seems to have kept production from falling after 2005 is the steep rise in oil prices in the 2004 to 2008 period. Figure 3 shows that oil prices were quite low between 1986 and 2003. Once oil prices began to rise in 2004 and 2005, oil companies found that they had enough revenue that they could start adopting more intensive (and expensive) extraction techniques. This allowed more oil to be extracted from existing conventional oil fields. Of course, diminishing returns still set in, even with these more intensive techniques.

These diminishing returns are probably a major reason that conventional oil production started to fall in 2019. Indirectly, diminishing returns likely contributed to the decline in 2020, and the failure of the oil supply to bounce back up to its 2018 (or 2019) level in 2021.

[5] A better way of looking at world crude oil production is on a per capita basis because the world’s crude oil needs depend on world population.

Everyone in the world needs the benefit of crude oil, since it is used both in farming and in transporting goods of all kinds. Thus, the need for crude oil rises with population growth. I prefer analyzing crude oil production on a per capita basis.

Figure 5. Per capita crude oil production based on international data by country from the US Energy Information Administration.

Figure 5 shows that on a per capita basis, conventional crude oil production (gray bottom line) started declining after 2005. It was only with the addition of unconventional oil that crude oil production per capita could remain fairly level between 2005 and 2018 or 2019.

[6] Unconventional oil, if analyzed by itself, seems to be quite price sensitive. If politicians everywhere want to hold oil prices down, the world cannot count on extracting very much of the huge amount of unconventional oil resources that seem to be available.

Figure 6. Crude oil production based on international data for the US Energy Information Administration for each of the countries shown.

On Figure 6, crude oil production dips in 2016 – 2017 and also in 2020 – 2021. Both the 2016 and the 2020 dips are related to low prices. The continued low prices in 2017 and 2021 may reflect start-up problems after a low price, or they may reflect skepticism that prices can stay high enough to make continued extraction profitable. Canada seems to show similar dips in its oil production.

Venezuela shows a fairly different pattern. Information from the US Energy Information Administration mentions that the country started having major problems once the world oil price started falling in 2014. I am aware that the US has had sanctions against Venezuela in recent years, but it seems to me that these sanctions are closely related to Venezuela’s oil price problems. If Venezuela’s very heavy oil could really be extracted profitably, and the producers of this oil could be taxed to provide services for the people of Venezuela, the country would not have the many problems that it has today. The country likely needs a price between $200 and $300 per barrel to allow for sufficient funds for extraction plus adequate tax revenue.

Brazil’s oil production seems to be relatively more stable, but its growth has been slow. It has taken many years to get its production up to 2.9 million barrels per day. There is also some pre-salt oil production just now getting started in Angola and other countries of West Africa. This type of oil requires a high level of technical expertise and imported resources from around the world. If world trade falters, this type of oil production is likely to falter, as well.

A large share of the world’s oil reserves are unconventional oil reserves, of one type or another. The fact that rising oil prices are a real problem for citizens means that these unconventional reserves are unlikely to be tapped. Instead, we may be dealing with seriously short supplies of products we need for operating our economies, including diesel oil and jet fuel.

[7] Figure 1 at the beginning of this post indicated falling energy consumption per capita. This problem extends to more than oil. On a per capita basis, both coal and nuclear energy consumption are falling.

Practically no one pays any attention to coal consumption, but this is the fuel that allowed the Industrial Revolution to start. It is reasonable to expect that since the world economy started using coal first, it might be the first to deplete. Figure 7 shows that world coal consumption per capita hit a peak in 2011 and has declined since then.

Figure 7. World coal consumption per capita, based on data from BP’s 2022 Statistical Review of World Energy.

Many of us have heard about Aesop’s Fable, The Fox and the Grapes. According to Wikipedia, “The story concerns a fox that tries to eat grapes from a vine but cannot reach them. Rather than admit defeat, he states they are undesirable. The expression ‘sour grapes’ originated from this fable.”

In the case of coal, we are told that coal is undesirable because it is very polluting and raises CO2 levels. While these things are true, coal has historically been very inexpensive, and this is important for people buying coal. Coal is also easy to transport. It could be used for fuel instead of cutting down trees, thus helping local ecosystems. The negative things that we are being told about coal are true, but it is hard to find an adequate inexpensive substitute.

Figure 8 shows that world nuclear energy per capita is also falling. To some extent, its fall has stabilized since 2012 because China and a few other “developing nations” have been adding nuclear capacity, while developed nations in Europe have tended to remove their existing nuclear power plants.

Figure 8. World nuclear electricity consumption per capita, based on data from BP’s 2022 Statistical Review of World Energy. Amounts are based on the amount of fossil fuels that this electricity would theoretically replace.

Nuclear energy is confusing because experts seem to disagree on how dangerous nuclear power plants are, over the long term. One concern relates to proper disposal of spent fuel after its use.

[8] The world seems to be at a difficult time now because we don’t have any good options for fixing our falling energy consumption per capita problem, without greatly reducing world population. The two choices that seem to be available both seem to be far higher-priced than is feasible.

There are two choices that seem to be available:

[A] Encourage large amounts of fossil fuel production by encouraging very high fossil fuel prices. With such high prices, say $300 per barrel for oil, unconventional crude oil in many parts of the world would be available. Unconventional coal, such as that under the North Sea, would also be available. With sufficiently high prices, natural gas production could be raised. This natural gas could be shipped as liquefied natural gas (LNG) around the world at great cost. Additionally, many processing plants could be built, both for supercooling the natural gas to allow it to be shipped around the world and for re-gasification, when it arrives at its destination.

With this approach, food costs would be very high. Much of the world’s population would need to work in the food industry and in fossil fuel production and shipping. With these priorities, citizens would not have time or money for most things we buy today. They likely could not afford a vehicle or a nice home. Governments would need to shrivel in size, with the usual outcome being government by a local dictator. Governments wouldn’t have sufficient funds for roads or schools. CO2 emissions would be very high, but this likely would not be our most serious problem.

[B] Try to electrify everything, including agriculture. Greatly ramp up wind and solar. Wind and solar are very intermittent, and their intermittency does not match up well with human needs. In particular, one of the world’s primary needs is for heat in winter, but solar energy comes in summer. It cannot be saved until winter with today’s technology. Spend enormous amounts and resources on electricity transmission lines and batteries to try to somewhat work around these problems. Try to find substitutes for the many things that fossil fuels provide today, including paved roads and chemicals used in agriculture and in medicine.

Hydroelectricity is also a renewable form of electricity generation. It cannot be expected to ramp up much because it has mostly been built out already.

Figure 9. World consumption of hydroelectricity per capita, based on data from BP’s 2022 Statistical Review of World Energy.

Even if greatly ramped up, wind and solar electricity production would likely be grossly inadequate by themselves to try to operate any kind of economy. In addition, at a minimum, natural gas, shipped at very high cost as LNG around the world, would likely be needed. Also, huge quantity of batteries would be needed, leading to a short supply of materials. Huge quantities of steel would be needed to make new electrical machines to try to replace current oil-power machines. A minimum 50-year transition would likely be needed.

I am doubtful that this second approach would be feasible in any reasonable timeframe.

[9] Conclusion. Figure 1 seems to imply that the world economy is headed for troubled times ahead.

The world economy is a self-organizing system, so we cannot know precisely what form changes in the next few years will take. The economy can be expected to shrink back in an uneven pattern, with some parts of the world and some classes of citizens, such as workers versus the elderly, doing better than others.

Leaders will never tell us that the world has an energy shortage. Instead, leaders will tell us how awful fossil fuels are, so that we will be happy that the economy is losing their usage. They will never tell us how worthless intermittent wind and solar are for solving today’s energy problems. Instead, they will lead us to believe that a transition to vehicles powered by electricity and batteries is just around the corner. They will tell us that the world’s worst problem is climate change, and that by working together, we can move away from fossil fuels.

Again, the whole situation reminds me of Aesop’s Fables. The system puts a “good spin” on whatever frightening changes are happening. This way, leaders can convince their citizens that everything is fine when, in fact, it is not.

NOTE

*If the US Federal Reserve raises its target interest rate, central banks of other countries around the world are forced to take a similar action if they do not want their currencies to fall relative to the US dollar. Countries that do not raise their target interest rates tend to be penalized by the market: With a falling currency, the local prices of oil and other commodities tend to rise because commodities are priced in US dollars. As a result, citizens of these countries tend to face a worse inflation problem than they would otherwise face.

The country with the greatest increase in its target interest rate can, in theory, win, in what is more or less a competition to move inflation elsewhere. This competition cannot go on indefinitely, however, because every country depends, to some extent, on imports from other countries. If countries with weaker economies (i. e. those that cannot afford to raise interest rates) stop producing essential goods for world trade, it will tend to bring the world economy down.

Raising interest rates also raises the likelihood of debt defaults, and these debt defaults can be a huge problem, especially for banks and other financial institutions. With higher interest rates, pension funding becomes less adequate. Businesses of all kinds find new investment more expensive. Many businesses are likely to shrink or fail completely. These indirect impacts are yet another way for the world economy to fail.

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