How the World’s Energy Problem Has Been Hidden

We live in a world where words are very carefully chosen. Companies hire public relations firms to give just the right “spin” to what they are saying. Politicians make statements which suggest that everything is going well. Newspapers would like their advertisers to be happy; they certainly won’t suggest that the automobile you purchase today may be of no use to you in five years.

I believe that what has happened in recent years is that the “truth” has become very dark. We live in a finite world; we are rapidly approaching limits of many kinds. For example, there is not enough fresh water for everyone, including agriculture and businesses. This inadequate water supply is now tipping over into inadequate food supply in quite a few places because irrigation requires fresh water. This problem is, in a sense, an energy problem, because adding more irrigation requires more energy supplies used for digging deeper wells or making desalination plants. We are reaching energy scarcity issues not too different from those of World War I, World War II and the Depression Era between the wars.

We now live in a strange world filled with half-truths, not too different from the world of the 1930s. US newspapers leave out the many stories that could be written about rising food insecurity around the world, and even in the US. We see more reports of conflicts among countries and increasing gaps between the rich and the poor, but no one explains that such changes are to be expected when energy consumption per capita starts falling too low.

The majority of people seem to believe that all of these problems can be fixed simply by increasingly taxing the rich and using the proceeds to help the poor. They also believe that the biggest problem we are facing is climate change. Very few are even aware of the food scarcity problems occurring in many parts of the world already.

Our political leaders started down the wrong path long ago, when they chose to rely on economists rather than physicists. The economists created the fiction that the economy could expand endlessly, even with falling energy supplies. The physicists understood that the economy requires energy for growth, but didn’t really understand the financial system, so they weren’t in a position to explain which parts of economic theory were incorrect. Even as the true story becomes increasingly clear, politicians stick to their belief that our only energy problem is the possibility of using too much fossil fuel, with the result of rising world temperatures and disrupted weather patterns. This can be interpreted as a relatively distant problem that can be corrected over a fairly long future period.

In this post, I will explain why it appears to me that, right now, we are dealing with an energy problem as severe as that which seems to have led to World War I, World War II, and the Great Depression. We really need a solution to our energy problems right now, not in the year 2050 or 2100. Scientists modeled the wrong problem: a fairly distant energy problem which would be associated with high energy prices. The real issue is a very close-at-hand energy shortage problem, associated with relatively low energy prices. It should not be surprising that the solutions scientists have found are mostly absurd, given the true nature of the problem we are facing.

[1] There is a great deal of confusion with respect to which energy problem we are dealing with. Are we dealing with a near-at-hand problem featuring inadequate prices for producers or a more distant problem featuring high prices for consumers? It makes a huge difference in finding a solution, if any.

Business leaders would like us to believe that the problem to be concerned with is a fairly distant one: climate change. In fact, this is the problem most scientists are working on. There is a common misbelief that fossil fuel prices will jump to high levels if they are in short supply. These high prices will allow the extraction of a huge amount of coal, oil and natural gas from the ground. The rising prices will also allow high-priced alternatives to become competitive. Thus, it makes sense to start down the long road of trying to substitute “renewables” for fossil fuels.

If business leaders had stopped to look at the history of coal depletion, they would have discovered that expecting high prices when energy limits are encountered is incorrect. The issue that really happens is a wage problem: too many workers discover that their wages are too low. Indirectly, these low-wage workers need to cut back on purchases of goods of many types, including coal to heat workers’ homes. This loss of purchasing power tends to hold coal prices down to a level that is too low for producers. We can see this situation if we look at the historical problems with coal depletion in the UK and in Germany.

Coal played an outsized role in the time leading up to, and including, World War II.

Figure 1. Figure by author describing peak coal timing.

History shows that as early coal mines became depleted, the number of hours of labor required to extract a given amount of coal tended to rise significantly. This happened because deeper mines were needed, or mines were needed in areas where there were only thin coal seams. The problem owners of mines experienced was that coal prices did not rise enough to cover their higher labor costs, related to depletion. The issue was really that prices fell too low for coal producers.

Owners of mines found that they needed to cut the wages of miners. This led to strikes and lower coal production. Indirectly, other coal-using industries, such as iron production and bread baking, were adversely affected, leading these industries to cut jobs and wages, as well. In a sense, the big issue was growing wage disparity, because many higher-wage workers and property owners were not affected.

Today, the issue we see is very similar, especially when we look at wages worldwide, because markets are now worldwide. Many workers around the world have very low wages, or no wages at all. As a result, the number of workers worldwide who can afford to purchase goods that require large amounts of oil and coal products for their manufacture and operation, such as vehicles, tends to fall. For example, peak sales of private passenger automobile, worldwide, occurred in 2017. With fewer auto sales (as well as fewer sales of other high-priced goods), it is difficult to keep oil and coal prices high enough for producers. This is very similar to the problems of the 1914 to 1945 era.

Everything that I can see indicates that we are now reaching a time that is parallel to the period between 1914 and 1945. Conflict is one of the major things that a person would expect because each country wants to protect its jobs. Each country also wants to add new jobs that pay well.

In a period parallel to the 1914 to 1945 period, we can also expect pandemics. This happens because the many poor people often cannot afford adequate diets, making them more susceptible to diseases that are easily transmitted. In the Spanish Flu epidemic of 1918-1919, more than 50 million people worldwide died. The equivalent number with today’s world population would be about 260 million. This hugely dwarfs the 3.2 million COVID-19 deaths around the world that we have experienced to date.

[2] If we look at growth in energy supply, relative to the growth in population, precisely the same type of “squeeze” is occurring now as was occurring in the 1914 to 1945 period. This squeeze particularly affects coal and oil supplies.

Figure 2. The sum of red and blue areas on the chart represent average annual world energy consumption growth by 10-year periods. Blue areas represent average annual population growth percentages during these 10-year periods. The red area is determined by subtraction. It represents the amount of energy consumption growth that is “left over” for growth in people’s standards of living. Chart by Gail Tverberg using energy data from Vaclav Smil’s estimates shown in Energy Transitions: History, Requirements and Prospects, together with BP Statistical Data for 1965 and subsequent years.

The chart above is somewhat complex. It looks at how quickly energy consumption has been growing historically, over ten-year periods (sum of red and blue areas). This amount is divided into two parts. The blue area shows how much of this growth in energy consumption was required to provide food, housing and transportation to the growing world population, based on the standards at that time. The red area shows how much growth in energy consumption was “left over” for growth in the standard of living, such as better roads, more vehicles, and nicer homes. Note that GDP growth is not shown in the chart. It likely corresponds fairly closely to total energy consumption growth.

Figure 3, below, shows energy consumption by type of fuel between 1820 and 2010. From this, it is clear that the world’s energy consumption was tiny back in 1820, when most of the world’s energy came from burned biomass. Even at that time, there was a huge problem with deforestation.

Figure 3. World Energy Consumption by Source, based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP’s Statistical Review of World Energy data for 1965 and subsequent years. (Wind and solar are included with biofuels.)

Clearly, the addition of coal, starting shortly after 1820, allowed huge changes in the world economy. But by 1910, this growth in coal consumption was flattening out, leading quite possibly to the problems of the 1914-1945 era. The growth in oil consumption after World War II allowed the world economy to recover. Natural gas, hydroelectric and nuclear have been added in recent years, as well, but the amounts have been less significant than those of coal and oil.

We can see how coal and oil have dominated growth in energy supplies in other ways, as well. This is a chart of energy supplies, with a projection of expected energy supplies through 2021 based on estimates of the IEA’s Global Energy Review 2021.

Figure 4. World energy consumption by fuel. Data through 2019 based on information from BP’s Statistical Review of World Energy 2020. Amounts for 2020 and 2021 based on percentage change estimates from IEA’s Global Energy Review 2021.

Oil supplies became a problem in the 1970s. There was briefly a dip in the demand for oil supplies as the world switched from burning oil to the use of other fuels in applications where this could easily be done, such as producing electricity and heating homes. Also, private passenger automobiles became smaller and more fuel efficient. There has been a continued push for fuel efficiency since then. In 2020, oil consumption was greatly affected by the reduction in personal travel associated with the COVID-19 epidemic.

Figure 4, above, shows that world coal consumption has been close to flat since about 2012. This is also evident in Figure 5, below.

Figure 5. World coal production by part of the world, based on data of BP’s Statistical Review of World Energy, 2020.

Figure 5 shows that coal production for the United States and Europe has been declining for a very long time, since about 1988. Before China joined the World Trade Organization (WTO) in 2001, its coal production grew at a moderate pace. After joining the WTO in 2001, China’s coal production grew very rapidly for about 10 years. In about 2011, China’s coal production leveled off, leading to the leveling of world coal production.

Figure 6 shows that recently, growth in the sum of oil and coal consumption has been lagging total energy consumption.

Figure 6. Three-year average annual increase in oil and coal consumption versus three-year average increase in total energy consumption, based on a combination of BP data through 2019 from BP’s Statistical Review of World Energy, 2010 and IEA’s 2020 and 2021 percentage change forecasts, from its Global Energy Review 2021.

We can see from Figure 6 that the only recent time when oil and coal supplies grew faster than energy consumption in total was during a brief period between 2002 and 2007. More recently, oil and coal consumption has been increasingly lagging total energy consumption. For both coal and oil, the problem has been that low prices for producers cause producers to voluntarily drop out of coal or oil production. The reason for this is two-fold: (1) With less oil (or coal) production, perhaps prices might rise, making production more profitable, and (2) Unprofitable oil (or coal) production isn’t really satisfactory for producers.

When determining the required level of profitability for these fuels, there is a need to include the tax revenue that governments require in order to maintain adequate services. This is especially the case with oil exporters, but it is also true in general. Energy products, to be useful, produce an energy surplus that can be used to benefit the rest of the economy. The way that this energy surplus can be transferred to the rest of the economy is by paying relatively high taxes. These taxes allow changes that aid economic growth, such as improvements in roads and schools.

If energy prices are chronically too low (so that an energy product requires a subsidy, rather than paying taxes), this is a sign that the energy product is most likely an energy “sink.” Such a product acts in the direction of pulling the economy down through ever-lower productivity.

[3] Governments have chosen to focus on preventing climate change because, in theory, the changes that are needed to prevent climate change seem to be the same ones needed to cover the contingency of “running out.” The catch is that the indicated changes don’t really work in the scarcity situation we are already facing.

It turns out that the very fuels that we seem to be running out of (coal and oil) are the very ones most associated with high carbon dioxide emissions. Thus, focusing on climate change seems to please everyone. Those who were concerned that we could keep extracting fossil fuels for hundreds of years and, because of this, completely ruin the climate, would be happy. Those who were concerned about running out of fossil fuels would be happy, as well. This is precisely the kind of solution that politicians prefer.

The catch is that we used coal and oil first because, in a very real sense, they are the “best” fuels for our needs. All of the other fuels, even natural gas, are in many senses inferior. Natural gas has the problem that it is very expensive to transport and store. Also, methane, which makes up the majority of natural gas, is itself a gas that contributes to global warming. It tends to leak from pipelines and from ships attempting to transport it. Thus, it is doubtful that it is much better from a global warming perspective than coal or oil.

So-called renewable fuels tend to be very damaging to the environment in ways other than CO2 emissions. This point is made very well in the new book Bright Green Lies by Derrick Jensen, Lierre Keith and Max Wilbert. It makes the point that renewable fuels are not an attempt to save the environment. Instead, they are trying to save our current industrial civilization using approaches that tend to destroy the environment. Cutting down forests, even if new trees are planted in their place, is especially detrimental. Alice Friedemann, in her new book, Life after Fossil Fuels: A Reality Check on Alternative Fuels, points out the high cost of these alternatives and their dependence on fossil fuel energy.

We are right now in a huge scarcity situation which is starting to cause conflicts of many kinds. Even if there were a way of producing these types of alternative energy cheaply enough, they are coming far too late and in far too small quantities to make a difference. They also don’t match up with our current coal and oil uses, adding a layer of time and expense for conversion that needs to be included in any model.

[4] What we really have is a huge conflict problem due to inadequate energy supplies for today’s world population. The powers that be are trying to hide this problem by publishing only their preferred version of the truth.

The situation that we are really facing is one that often goes under the name of “collapse.” It is a problem that many civilizations have faced in the past when a given population has outgrown its resource base.

Needless to say, the issue of collapse is not a story any politician wants to tell its citizens. Instead, we are told over and over, “Everything is fine. Any energy problem will be handled by the solutions scientists are finding.” The catch is that scientists were not told the correct problem to solve. They were told about a distant problem. To make the problem easier to solve, high prices and subsidies seemed to be acceptable. The problem they were asked to solve is very different from our real energy problem today.

Many people think that taxing the rich and giving the proceeds to the poor can solve our problem, but this doesn’t really solve the problem for a couple of reasons. One of the issues is that our scarcity issue is really a worldwide problem. Higher taxation of the rich in a few rich countries does nothing for the many problems of poor people in countries such as Lebanon, Yemen, Venezuela and India. Furthermore, taking money from the rich doesn’t really fix scarcity problems. Rich people don’t really eat a vastly disproportionate amount of food or drink more water, for example.

A detail that most of us don’t think about is that the military of many different countries has been very much aware of the potential conflict situation that is now occurring. They are aware that a “hot war” would require huge use of fossil fuel energy, so they have been trying to find alternative approaches. One approach military groups have been working on is the use of bioweapons of various kinds. In fact, some groups might even contemplate starting a pandemic. Another approach that might be used is computer viruses to disrupt the systems of other countries.

Needless to say, the powers that be do not want the general population to hear about issues of these kinds. We find ourselves with narrower and narrower news reports that provide only the version of the truth that politicians and news media want us to read. Citizens who have developed the view, “All I need to do to find out the truth is read my home town newspaper,” are likely to encounter more and more surprises, as conflict situations escalate.

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We can’t expect COVID-19 to go away; we should plan accordingly

Can the world achieve “herd immunity” with respect to COVID-19? Anthony Fauci has said that 80% of the population needs to be vaccinated in order to reach herd immunity. My view is that using vaccines is unlikely to achieve this result, something I discussed in my August 2020 post, We Need to Change Our COVID-19 Strategy. Now, the news arm of the prestigious journal Nature has published a similar view: Five reasons why COVID herd immunity is probably impossible.

In this post, I explain why, in my view, COVID-19 seems likely to become endemic, like the flu. The vaccines won’t be enough to make it go away completely. I will also look at the issue of how we should respond to the cases of COVID-19 that we will almost certainly experience in the future.

To a significant extent, what we can and should do in the future is an energy issue. If we plan to transition to a green energy future, or if we simply plan to reduce usage of fossil fuels in future years, we probably need to scale back our plans for vaccines. In fact, any treatment that would be given in today’s emergency rooms is likely to become less and less possible as energy supplies deplete.

We will need to focus more on what our bodies can do for us, and what we can do to assist them in this effort. We also need to think about what simple changes to our environment (such as windows that open) can do for the prevention of both COVID-19 and the many other communicable diseases that we can expect to encounter in the future. The big issue will be changing expectations.

[1] Why herd immunity is unlikely

[1.1] Viruses don’t pay any attention to the geography of humans. As long as there are active cases anywhere, they will tend to spread to other countries.

Over the past year, we have seen how ineffective cutting off travel between countries is in stopping the path of the virus. Even New Zealand, far out in the Pacific Ocean, has been battling this issue. The country has found that occasional cases slip through, even with a required two-week stay in managed isolation after arrival.

Furthermore, there are hidden costs with staying this removed from the rest of the world; New Zealand’s only oil refinery has been losing money, given its low use of oil. This refinery has laid off about a quarter of its staff and is considering the option of quitting refining in 2022. New Zealand would then need to import a full range of refined products if it wants to continue having industry. Perhaps being too cut off from the rest of the world is a problem, rather than a solution.

[1.2] The cost of vaccines is high, especially for poor countries.

We can get a rough idea of the cost involved by looking at a news article about Israel’s dispute with Pfizer regarding its vaccine purchases. We can also see what goes wrong politically.

Israel recently made news for failing to pay Pfizer for the last 2.5 million vaccine doses that it purchased from the company. Pfizer retaliated by cutting off future vaccine shipments to Israel. The article linked above doesn’t tell us exactly how much Israel paid for Pfizer’s vaccine, but a calculation based on information in the article seems to indicate that future doses from a mixture of vendors would cost about $35 per dose, on average. We also know that US Medicare is paying $40 per dose for administering each dose of the vaccine. Putting these two amounts together, we can estimate that the purchase and administration of a single dose of COVID-19 vaccine costs about $75. Thus, a two-dose series costs about $150, with the high-tech vaccines Israel is now using (Pfizer, Moderna, and AstraZeneca).

We also know that Israel was planning to administer two doses per person, every six months, based on an early review of how well immunity was holding up for the vaccines. If it is really necessary to repeat the two-dose regimen every six months, then the annual per-person cost of the vaccine would be approximately 2 times $150, or $300 per person. Benjamin Netanyahu favors buying all of these doses, quite possibly because it might make him popular with voters. Netanyahu’s opposition does not, which seems to be why payment has not been forthcoming.

A cost of $300 per person would amount to 0.7% of Israel’s 2019 GDP, which is theoretically feasible. But for poorer countries, the relative cost would be much higher. For South Africa, it would amount to 5% of 2019 GDP. For Yemen, it would come to 40% of 2019 GDP. (These are my calculations, using World Bank GDP in current US$.) For countries with severe financial problems, any payment for vaccines would almost certainly be a problem.

There are less expensive vaccines being made, but their percentages of efficacy in fighting the virus that causes COVID-19 seem to be lower. Thus, it would be even more difficult to greatly reduce the number of cases down to the point where the disease would simply disappear for lack of an adequate number of victims to infect, using these vaccines.

[1.3] The fact that the disease can infect animals further adds to the problem of getting rid of the disease completely.

The disease supposedly jumped from an animal to humans to begin with. We know that the virus that causes COVID-19 can infect animals of many types, including ferrets and cats. While the disease jumping from animals to humans is supposedly unusual, we know that the disease spreads easily among humans with inadequate immunity. Having a reservoir of disease among animals raises the likelihood of this happening again. Having a reservoir of vulnerable people (not immune and in poor health) also increases such a risk.

[1.4] Microbes of all types mutate frequently. We are fighting a losing battle to stay even with them. This is especially a problem for narrowly targeted vaccines.

We know that whenever we try to reduce the population of microbes, scientists can find solutions that work for a while, but eventually we start losing the battle. Scientists can develop antibiotics against bacteria, but eventually some bacteria will evolve in a way that allows them to resist the effects of the antibiotic. In fact, antibiotic resistance is becoming a greater and greater problem. Similarly, scientists can develop weed killers, but weeds soon develop resistance to whatever we develop. The situation seems to be similar with vaccines, unfortunately.

In this case, scientists have developed vaccines that target the RNA of the spike protein of the virus that causes COVID-19. In some sense, this approach is very precise, leading to a high proportion of COVID-19 cases being stopped. The drawback is that it is very easy for small mutations in the spike protein to make the vaccine not work well. We end up needing to obtain booster shots of slightly revised versions of the vaccine quite often, perhaps every six months. If booster shots are not given, the vaccine is likely to become less effective against the new mutations that arise.

One danger is that manufacturers cannot keep up with all of changes needed to match the new mutations. Another is that the cost of trying to keep up with this whole process will become prohibitive. The medical care system may be forced to give the vaccine process up, leaving citizens worse off than they might have been if we hadn’t “flattened the curve” and kept the virus around for an extended period of time, allowing all of these mutations.

[1.5] There are very real reasons for people’s reluctance to accept the vaccine, when it is offered to them. Because of this, it is difficult to get very close to 100% acceptance (or even 80% acceptance) of the vaccines.

There seem to be any number of reasons why people are reluctant to get the new vaccine. Some are afraid of the pain involved with the shot. Others are afraid that they will be somewhat ill afterward, causing them to miss work. If employees are paid on an hourly basis and they barely have enough income as it is, this, by itself, could be a reason for avoiding the shot. Financial incentives might help with these issues.

Others who are reluctant have followed the situation more closely. They realize that important steps in the normal vaccine approval process have been skipped, making it difficult to identify adverse effects that occur fairly infrequently. Even worse, it becomes impossible to discover problems that take many months or years to become evident. Over 100 doctors and scientists from 25 countries have signed a letter saying that offering vaccines that are as radically different from what has been used in the past, without more testing, is unethical.

One concern is the likelihood of blood clots in the immediate period after the vaccine is received. Blood clots have also been observed with the AstraZeneca and Johnson & Johnson vaccines, and may be a concern with other vaccines, as well. There seem to be several related conditions, including sudden blindness, heart attacks, and sudden deaths of elderly people in nursing homes. These issues seem to be fairly rare, but people worry about them without adequate data on their frequency. If the issue is blood clots, it would seem as if simple adjustments such as taking low-dose aspirin for the time period of risk might be a partial solution.

We know that in some cases, vaccines can inadvertently make later exposure to somewhat different versions of the virus worse, rather than stopping these infections. The virus that causes the illness SARS is very similar to the virus that causes COVID-19. When an attempt was made at a vaccine for SARS in 2012, a study on mice showed that exposure at a later date to a slightly different virus led to blood clots forming in the lungs. We already know that blood clots can be an issue for COVID-19 vaccines. Will COVID-19 vaccine recipients who are later exposed to mutations have an adverse reaction such as blood clots in the lungs? We don’t know. There have been no animal studies with respect to the vaccines for COVID-19.

Another risk of COVID-19 vaccinations would seem to be auto-immune problems, especially in people who are already predisposed to such issues. Not much research has been done yet to clarify this issue.

A related issue is allergic reactions to vaccines, including anaphylaxis. The possibility of allergic reactions is one reason vaccine recipients are asked to stay for 15 minutes after receiving their immunizations. Even with precautions, some deaths are occurring because severe allergic reactions can take up to 150 minutes to become apparent. It is impractical to keep vaccine recipients this long.

The very long-term effects of both the COVID-19 illness and vaccines to prevent the COVID-19 illness are unknown. The Alzheimer’s Association recommends studies to see whether people who contract COVID-19 have a long-term increase in dementia-type illnesses. In theory, the vaccines could also lead to similar issues because of prion-like structures that are formed, both with the vaccine and the disease. Without long-term studies, we don’t know whether either of these concerns is valid. If dementia is an issue, will repeated vaccinations raise the long-term risk of dementia? We don’t know. If the disease itself and vaccines can both lead to dementia, is there an optimal strategy?

Without a better understanding of what the risks are, it is hard to convince young people, especially, to take the vaccine. Their chances of a severe outcome from the disease are low to begin with. What is the point of taking a vaccine that may raise their risk of serious injury or death? The vaccine may be appropriate for people aged 80 and over, but is the risk really necessary for young people? Without better data, it is hard to know for certain.

[2] Why a change away from dependence on vaccines is needed

The Nature article referred to earlier says in its concluding paragraph, “It’s time for realistic expectations. . . we need to think of how we can live with the virus.”

Also, as I mentioned in the introduction, we are reaching energy limits. Even if in theory we could vaccinate everyone on the planet twice a year for COVID-19, we do not have the resources to do this. In some ways, the problem looks like a cost problem (poor countries especially cannot afford to buy high-priced vaccines), but it is just as much a resource problem. We cannot devote enough resources to this project without taking them away from other necessary projects. The vaccines are very much a product of today’s fossil fuel economy. We can’t expect to make vaccines with intermittent electricity.

Because of limited resources, we may encounter something similar to the “empty shelf” problem in the grocery stores. We may find that only limited doses of vaccine are available because too many doses were accidentally ruined in production. Or, not enough of the right reagents were available. Or, more doses are needed in the country where the vaccine is manufactured, leaving less for use elsewhere. Or, there is a war in a country integral to vaccine supply lines, interfering with production.

In fact, obtaining promised supplies of vaccines is already a problem. Trying to scale up production at the same time that resources in general are squeezed is likely to make this type of problem increase.

[3] Learning to live with COVID-19 and diminishing resources per capita

If we can’t really fix the COVID-19 problem with endless vaccines for everyone, we need to look at other options.

[3.1] Strengthening our own immune systems

Our bodies come with built-in immune systems. It is the action of the immune system that tends to lead to a low incidence of and low severity of COVID-19 in some people, compared to others. Some of the things that seem to be helpful include the following:

  • Being young
  • Getting plenty of sleep at night
  • Not being overweight. Proper exercise and diet are helpful in this regard.
  • Maintaining a healthy microbiome. Our bodies need good microbes to help fight the “bad” microbes. Antibiotics, excessive antibacterial cleaners and a lack of exposure to “good” bacteria could be problems. Staying away from everyone and wearing masks, indefinitely, is not necessarily helpful.
  • Getting adequate vitamin D through sun exposure, eating of foods that are high in vitamin D and/or supplementation. Dark skinned people living away from the equator are especially at risk for inadequate vitamin D.
  • Getting adequate vitamin C from fruits and vegetables and perhaps supplementation.

Researchers need to be actively looking into optimal strategies to advise citizens. Schools might start teaching about these issues in health classes.

[3.2] Changing our customs and infrastructure to try to reduce the problem of communicable diseases in general, not just for COVID-19.

Customs for greetings among people vary greatly around the world. Some people use hugs and handshakes, others greet with bows. We may need to adopt more distant physical greetings, simply to help reduce the transmission of disease. Of course, hugging at home is still fine.

In the last 100 years, the emphasis increasingly has been on building tighter, more energy-efficient buildings. This is good from a point of saving energy, but it doesn’t work in a world with many communicable diseases. We need to move toward much more ventilation, often based on open windows. Because of energy constraints, we likely cannot expect to keep heating and cooling our buildings as much in the future. We will need to dress more for outdoor temperatures, indoors.

Some leaders have suggested rapid electric rail is the way of the future, but rail transport also needs to be well ventilated. It is also likely that we will be dealing with more intermittency of electricity supply in the future. We need to plan as if we are dealing with an electricity constrained future, as much as an oil and vaccine constrained future.

[3.3] Finding low energy ways to deal with the likely COVID-19 cases that do occur.

The approach in the “rich world” to date in looking for ways to deal with COVID-19 has been to look for new, high technology drugs and vaccines that might have a two-fold benefit (a) help sick people and (b) help the pharmaceutical industry. What we really need are technologies that are low cost and can be used at home. Repurposed old drugs, such as steroids, are ideal, especially if they can be made locally without dependence on international supply lines.

If COVID-19 doesn’t really disappear, we can expect recurring instances of having inadequate medical facilities to treat all of the patients in a given area. Countries need to plan strategies for dealing with this likely long-term problem. Should there be an upper age limit on patients using these facilities, for example, especially when demand is high? Or can the richest citizens have the ability to buy services, when others cannot? Should there be a lottery for beds? Ordering everyone to remain at home is sort of a temporary solution, but it is very damaging to the economy as a whole.

[3.4] Finding leadership that can think in a direction other than “more technology will save us.” Unfortunately, this is pretty much impossible.

Back in 1979, Jimmy Carter tried to change the direction of the US economy when he gave his famous Sweater Speech. In this speech, he told people that they needed to adjust their thermostats and drive their vehicles less because there was an energy crisis. We all know that Jimmy Carter was not reelected after this speech. Instead, Ronald Reagan was elected. He cut taxes and raised debt levels, temporarily delaying our need to deal with our energy problem.

When Anthony Fauci took on the COVID-19 issue, he led us in the direction of spending more money on vaccines and pharmaceuticals. His own financial interests and his work interests were in the direction of helping the vaccine and pharmaceutical interests. He certainly didn’t stop to think, “This is not a battle that we can win. There are too many instances of transmission of the virus by people who have no symptoms. Our track record at wiping out diseases with vaccines has been pretty dismal in the past. Stopping COVID-19 in one part of the world won’t stop the long-term problem.”

I expect that President Biden will continue on his current path until the economy “runs off the cliff.” I wrote in my recent post, Headed for a Collapsing Debt Bubble, that the economy was reaching a point where a major discontinuity would occur. Interest rates are about as low as they can go, and debt levels are reaching an upper bound.

Figure 1. Ten-year and three-month US Treasury interest rates as of March 1, 2021.

Ronald Reagan’s administration started to decrease interest rates shortly after he took office in 1981. This drop in interest rates has hidden rapidly rising debt and energy problems for many years. We are now running out of room on both energy and debt. When the world’s debt bubble collapses, our ability to fight COVID-19 with vaccines will likely go downhill quickly. We will then need to find new strategies. Unfortunately, considering new strategies in advance is almost impossible.

[4] Conclusion

While it is possible to see what change in direction seems to be needed with respect to COVID-19 and infectious diseases in general, it is not something that those in leadership positions will be able to implement. Instead, we will likely “go off the cliff” at full speed. Changing expectations in advance is almost impossible.

At most, a few interested people can try to explain to their fellow citizens what is happening. Perhaps, in our own little spheres of influence, we can make some small changes in the right direction, starting with strengthening our own immune systems.

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Headed for a Collapsing Debt Bubble

A $1.9 trillion stimulus package was recently signed into law in the United States. Can such a stimulus bill, plus packages passed in other countries, really pull the world economy out of the downturn it has been in since 2020? I don’t think so.

The economy runs on energy, far more than it operates on growing debt. Our energy problems don’t appear to be fixable in the near term, such as six months or a year. Instead, the economy seems to be headed for a collapse of its debt bubble. Eventually, we may see a reset of the world financial system leading to fewer interchangeable currencies, far less international trade and falling production of goods and services. Some governments may collapse.

[1] What Is Debt?

I understand debt to be an indirect promise for future goods and services. These future goods and services can only be created if there are adequate supplies of the right kinds of energy and other materials, in the right places, to make these future goods and services.

I think of debt as being a time-shifting device. Indirectly, it is a promise that the economy will be able to provide as many, or more, goods and services in the future compared to what it does at the time the loan is taken out.

Common sense suggests that it is much easier to repay debt with interest in a growing economy than in a shrinking economy. Carmen Reinhart and Ken Rogoff unexpectedly ran across this phenomenon in their 2008 working paper, This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises. They reported (p. 15), “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.” In other words, their analysis of 800 years of governmental debt showed that default was almost inevitable if a country stopped growing or started shrinking.

The IMF estimates that the world economy shrank by 3.5% in 2020. There are many areas with even worse indications: Euro Area, -7.2%; United Kingdom, -10.0%; India, -8.0%; Mexico, -8.5%; and South Africa, -7.5%. If these situations cannot be turned around quickly, we should expect to see collapsing debt bubbles. Even the US, which shrank by 3.4%, needs a rapid return to growth if it is to keep its debt bubble inflated.

[2] The Inter-Relationship Among (a) Growing Debt, (b) Growing Energy Consumption and a (c) Growing Economy

When we are far from energy limits, growing debt seems to pull the economy along. This is a graphic I put together in 2018, explaining the situation. A small amount of debt is helpful to the system. But, if there gets to be too much debt, both oil prices and interest rates rise, bringing the braking system into action. The bicycle/economy rapidly slows.

Figure 1. The author’s view of the analogy of a speeding upright bicycle and a speeding economy.

Just as a two-wheeled bicycle needs to be going fast enough to stay upright, the economy needs to be growing rapidly enough for debt to do what it is intended to do. It takes energy supply to create the goods and services that the economy depends on.

If oil and other energy products are cheap to produce, their benefit will be widely available. Employers will be able to add more efficient machines, such as bigger tractors. These more efficient machines will act to leverage the human labor of the workers. The economy can grow rapidly, without the use of much debt. Figure 2 shows that the world oil price was $20 per barrel in 2020$, or even less, prior to 1974.

Figure 2. Oil price in 2020 dollars, based on amounts through 2019 in 2019$ from BP’s 2020 Statistical Review of World Energy, the inflationary adjustment from 2019 to 2020 based on CPI Urban prices from the US Department of Labor and the average spot Brent oil price for 2020 based on EIA information.

Figure 3 below shows the historical relationship between the growth in US energy consumption (red line) and the dollar increase in US debt growth required to add a dollar increase in GDP (blue line). This chart calculates ratios for five-year periods because ratios for individual years are unstable.

Figure 3. Comparison of five-year average growth in US energy consumption based on EIA data with five-year average amount of added debt required to add $1 of GDP.

Based on Figure 3, the US average annual growth in energy consumption (red line) generally fell between 1951 and 2020. The quantity of debt that needed to be added to create an additional $1 dollar of GDP (blue line) has generally been rising.

According to Investopedia, Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Notice that there is no mention of debt in this definition. If businesses or governments can find a way to make large amounts of credit available to borrowers who are not very credit worthy, it becomes easy to sell cars, motorcycles or homes to buyers who may never repay that debt. If the economy hits turbulence, these marginal buyers are likely to default, causing a collapse in a debt bubble.

[3] Analyzing Energy Consumption Growth, Debt Growth and Economic Growth for Broader Groupings of Years

To get a better idea what is happening with respect to energy growth, debt growth, and GDP growth, I created some broader groupings of years, based primarily on patterns in Figure 2, showing inflation-adjusted oil prices. The following groupings of years were chosen:

  • 1950-1973
  • 1974-1980
  • 1981-2000
  • 2001-2014
  • 2015-2020

Using these groupings of years, I put together charts in which it is easier to see trends.

Figure 4. Average annual increase in energy consumption for period shown based on EIA data versus average increase in real (inflation-adjusted) GDP for the period shown based on data of the US Bureau of Economic Analysis.

Figure 4 shows that for the US, there has been a general downward trend in the annual growth of energy consumption. At same time, real (that is, inflation-adjusted) GDP has been trending downward, but not quite as quickly.

We would expect that lower energy consumption would lead to lower growth in real GDP because it takes energy of the appropriate kinds to make goods and services. For example, it takes oil to ship most goods. It takes electricity to operate computers and keep the lights on. According to the World Coal Association, large quantities of coal are used in producing cement and steel. These are important for construction, such as is planned in stimulus projects around the world.

Also, on Figure 4, the period 1981 to 2000 shows an uptick in both energy consumption growth and real GDP growth. This period corresponds to a period of relatively low oil prices (Figure 2). With lower oil prices, businesses found it affordable to add new devices to leverage human labor, making workers more productive. The growing productivity of workers is at least part of what led to the increased growth in real GDP.

Figure 5. Dollars of additional debt required to add $1 dollar of GDP growth (including inflation), based on data of the US Bureau of Economic Analysis.

Figure 5, above, is disturbing. It strongly suggests that the US economy (and probably a lot of other economies) has needed to add an increasing amount of debt to add $1 of GDP in recent years. This pattern started long before President Biden’s $1.9 trillion stimulus package in 2021.

To make matters worse, GDP growth in Figure 5 has not been reduced to remove the impact of inflation. On average, removing the impact of inflation reduces the above GDP growth by about half. In the period 2015 to 2020, it took about $4.35 of additional debt to add one dollar of GDP growth, including inflation. It would take about double that amount, or $8.70 worth of debt, to create $1.00 worth of inflation-adjusted growth. With such a low return on added debt, it seems unlikely that the $1.9 trillion stimulus package will increase the growth of the economy very much.

[4] Falling interest rates (Figure 6) are a major part of what allowed the rapid growth in debt after 1981 shown in Figure 5.

Figure 6. 10-Year and 3-Month US Treasury Rates through February 2021, in a chart prepared by the Federal Reserve of St. Louis.

Clearly, debt is more affordable if the interest rate is lower. For example, auto loans and home mortgages have lower monthly payments if the interest rate is lower. It is also clear that governments need to spend less of their tax revenue on interest rate payments if interest rates are lower. Changes made by US President Ronald Reagan when he took office 1981 also encouraged the use of more debt.

A major concern with respect to today’s debt bubble is the fact that interest rates are about as low as they can go without going negative. In fact, the interest rate on 10-year Treasury bonds is now 1.72%, which is higher than the February 2021 average rate shown on the chart. As interest rates rise, it becomes more costly to add more debt. As interest rates rise, businesses will be less likely to take on debt in order to expand and hire more workers.

[5] Interest expense is a major expense of governments, businesses, and homeowners everywhere. Energy costs are another major expense of governments, businesses, and homeowners. It makes sense that falling interest rates can partly hide rising energy prices.

A trend toward lower interest rates was needed starting in 1981 because the US could no longer produce large amounts of crude oil that were profitable to sell at less than $20 per barrel, in inflation-adjusted prices. Lower interest rates made adding debt more feasible. This added debt could smooth the transition to an economy that was less dependent on oil, now that it was high-priced. The lower interest rates helped all segments of the economy adjust to the new higher cost of oil and other fuels.

[6] The US experience shows precisely how helpful having a rapidly growing supply of inexpensive to produce oil could be to an economy.

US oil production, excluding Alaska (blue “remainder” in Figure 7), rose rapidly after 1945 but began to decline not long after hitting a peak in 1970. This growing oil production had temporarily provided a huge boost to the US economy.

Figure 7. US crude oil production, based on data of the US Energy Information Administration.

Up until almost 1970, US oil production was rising rapidly. Figure 8 shows that during this period, incomes of both the bottom 90% of workers and the top 10% of workers increased rapidly. Over a period of about 20 years, incomes for both groups grew by about 80%, after adjusting for inflation. On average, workers were about 4% better off each year, with the rapid growth in very inexpensive-to-produce oil, all of which stayed in the US (rather than being exported). US imports of inexpensive-to-produce oil also grew during this period.

Once oil prices were higher, income growth for both the lower 90% and the top 10% slowed. With the changes made starting in 1981, wage disparities quickly started to grow. There suddenly became a need for new, high-tech approaches that used less oil. But these changes were more helpful to the managers and highly educated workers than the bottom 90% of workers.

Figure 8. 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.

[7] Most of the world’s cheap-to-extract oil sources have now been exhausted. Our problem is that the world market cannot get prices to rise high enough for producers to cover all of their expenses, including taxes.

Based on my analysis, the world price of oil would need to be at least $120 per barrel to cover all of the costs it needs to cover. The costs that need to be covered include more items than an oil company would normally include in its costs estimates. The company needs to develop new fields to compensate for the ones that are being exhausted. It needs to pay interest on its debt. It also needs to pay dividends to its shareholders. In the case of shale producers, the price needs to be high enough that production outside of “sweet spots” can be carried on profitably.

For oil exporters, it is especially important that the sales price be high enough so that the government of the oil exporting country can collect adequate tax revenue. Otherwise, the exporting country will not be able to maintain food subsidy programs that the population depends on and public works programs that provide jobs.

[8] The world can add more debt, but it is difficult to see how the debt bubble that is created will really pull the world economy forward rapidly enough to keep the debt bubble from collapsing in the next year or two.

Many models are based on the assumption that the economy can easily go back to the growth rate it had, prior to COVID-19. There are several reasons why this seems unlikely:

  • Many parts of the world economy weren’t really growing very rapidly prior to the pandemic. For example, shopping malls were doing poorly. Many airlines were in financial difficulty. Private passenger auto sales in China reached a peak in 2017 and have declined every year since.
  • At the low oil prices prior to the pandemic, many oil producers (including the US) would need to reduce their production. The 2019 peak in shale production (shown in Figure 7) may prove to be the peak in US oil production because of low prices.
  • Once people became accustomed to working from home, many of them really do not want to go back to a long commute.
  • It is not clear that the pandemic is really going away, now that we have kept it around this long. New mutations keep appearing. Vaccines aren’t 100% effective.
  • As I showed in Figure 5, adding more debt seems to be a very inefficient way of digging the economy out of a hole. What is really needed is a growing supply of oil that can be produced and sold profitably for less than $20 per barrel. Other types of energy need to be similarly inexpensive.

I should note that intermittent wind and solar energy is not an adequate substitute for oil. It is not even an adequate substitute for “dispatchable” electricity production. It is simply an energy product that has been sufficiently subsidized that it can often make money for its producers. It also sounds good, if it is referred to as “clean energy.” Unfortunately, its true value is lower than its cost of production.

[9] What’s Ahead?

I expect that oil prices will rise a bit, but not enough to raise prices to the level producers require. Interest rates will continue to rise as governments around the world attempt more stimulus. With these higher interest rates and higher oil prices, businesses will do less and less well. This will slow the economy enough that debt defaults become a major problem. Within a few months to a year, the worldwide debt bubble will start to collapse, bringing oil prices down by more than 50%. Stock market prices and prices of buildings of all kinds will fall in inflation-adjusted dollars. Many bonds will prove to be worthless. There will be problems with empty shelves in stores and gasoline stations with no products to sell.

People will start to see that while debt is a promise for the equivalent of future goods and services, it is not necessarily the case that those who make the promises will be able to stand behind these promises. Paper wealth generally can be expected to lose its value.

I can imagine a situation, not too many years from now, when countries everywhere will establish new currencies that are not as easily interchangeable with other currencies as today’s currencies are. International trade will dramatically fall. The standard of living of most people will fall precipitously.

I doubt that the new currencies will be electronic currencies. Keeping the electricity on is a difficult task in economies that increasingly need to rely solely on local resources. Electricity may be out for months at a time after an equipment failure or a storm. Having a currency that depends on electricity alone would be a poor idea.

Posted in Financial Implications | 3,106 Comments

Why Collapse Occurs; Why It May Not Be Far Away

Collapse is a frightening subject. The question of why collapse occurs is something I have pieced together over many years of study from a number of different sources, which I will attempt to explain in this post.

Collapse doesn’t happen instantaneously; it happens many years after an economy first begins outgrowing its resource base. In fact, the resource base likely declines at the same time from multiple causes, such as soil erosion, deforestation and oil depletion. Before collapse occurs, there seem to be warning signs, including:

  • Too much wage disparity
  • Riots and protests by people unhappy with low wages
  • Prices of commodities that are too low for producers that need to recover their costs of production and governments that require tax revenue to fund programs for their citizens
  • An overstretched financial system; conditions ripe for debt defaults
  • Susceptibility to epidemics

Many people have the misimpression that our most important problem will be “running out” of oil. Because of this, they believe that oil prices will rise high if the system is reaching its limits. Since oil prices are not very high, they assume that the problem is far away. Once a person understands what the real issue is, it is (unfortunately) relatively easy to see that the current economy seems to be quite close to collapse.

In this post, I provide images from a recent presentation I gave, together with some comments. A video of the presentation is available on the Uncomfortable Knowledge Hub, here. A PDF of the presentation can be downloaded here:

Slide 1
Slide 2
Slide 3
Slide 4

In some ways, a self-organizing system is analogous to a dome that might be built with a child’s toy building set (Slide 4). New layers of businesses and consumers are always being added, as are new regulations, more or less on top of the prior structure. At the same time, old consumers are dying off and products that are no longer needed are being discontinued. This happens without central direction from anyone. Entrepreneurs see the need for new products and try to satisfy them. Consumers decide on what to buy, based upon what their spendable income is and what their needs are.

Slide 5

Resources of many kinds are needed for an economy. Harnessing energy of many types is especially important. Early economies burned biomass and used the labor of animals. In recent years, we have added other types of energy, such as fossil fuels and electricity, to supplement our own human energy. Without supplemental energy of various kinds, we would be very limited in the kinds of goods and services that could be produced. Our farming would be limited to digging in the ground with a stick, for example.

The fact that there is almost an equivalence between employees and consumers is very important. If the wages of consumers are high, relative to the prices of the goods and services available, then consumers are able to buy many of those goods and services. As a result, citizens tend to be happy. But if there are too many low paid workers, or people without work at all, consumers are likely to be unhappy because they cannot afford the basic necessities of life.

Slide 6

The problem civilizations are facing is a two-sided problem: (1) Growing population and (2) Resources that often degrade or deplete. As a result, the amount of resources per person falls. If this were carried to the limit, all of us would starve.

Slide 7

As resources deplete and population grows, local leaders can see that problems are on the horizon. At first, adding technology, such as a new dam to provide water to make farms more productive, helps. As more and more technology and other complexity is added, there is less and less “bang for the buck.” We can easily see this in the healthcare field. Early antibiotics had a very big payback; recent medical innovations that help a group of 500 or 1000 people with a particular rare disease can be expected to have a much smaller payback.

A second issue with added complexity is that it increasingly leads to a society of the very wealthy plus many very low paid workers. Joseph Tainter identified the combination of these two issues as leading to collapse in his book, The Collapse of Complex Societies.

Slide 8

Françios Roddier is an astrophysicist who writes primarily in French. His book Thermodynamique de l’évolution was published in 2012; it is now available in English as well.

The issue of starving people in Yemen is an issue today. In fact, hunger is an increasing problem in poor countries around the world. The world tourism industry is dead; the industry of making fancy clothing for people in rich countries is greatly reduced. People who formerly made a living in these industries in poor countries increasingly find it difficult to earn an adequate living with other available jobs. Rich countries tend to have better safety nets when there are widespread reductions in job-availability.

Slide 9

Businesses often make long lasting goods such as machines to be used in factories or automobiles to be used by consumers. Governments often make long-lasting goods such as paved roads and school buildings. When making these goods, they take some combination of commodities, built machinery, and human labor to make goods and services that people will use for many years into the future. The future value of these goods is hoped to be significantly greater than the value of the inputs used to create these goods and services.

There are at least three reasons that time-shifting devices are needed:

  1. Workers need to be paid as these goods are made.
  2. Businesses need to build factories in advance.
  3. Businesses, governments and individuals are all likely to find the future payments more manageable, even with interest added, than they are as a single payment upfront.

I don’t mention the issue in Slide 9, but once time-shifting devices are created, they become very easy to manipulate. For example, no one knows precisely what the future value of a particular investment will be. Governments, especially, are prone to make investments in unneeded infrastructure, simply to provide jobs for people. We also know that there are diminishing returns to added technology, but stocks of technology companies tend to be valued as if complexity will save the world. Third, interest rate manipulations (lower!) and the offering of debt to those who seem unlikely to be able ever to repay the debt can be used to make the economy of a country appear to be in better shape than it really is. Many of us remember the collapse of the US subprime housing debt bubble in 2008.

Slide 10

The purpose of a financial system is to allocate goods and services. High wages allocate a larger share of the output of an economy to a particular person than low wages. Appreciation in asset values (such as prices of shares of stock, or value of a home or piece of land) also act to increase the share of the goods and services produced by the economy to an individual. Payment of interest, dividends and rents are other ways of allocating goods and services that the economy makes. Governments can print money, but they cannot print goods and services!

As the economy gets more complex, the non-elite workers increasingly get left out of the distribution of goods and services. For one thing (not mentioned on Slide 10), as the economy becomes more complex, an increasing share of the goods and services produced by the economy need to go into making all of the intermediate goods that make that industrial economy work. Intermediate goods would include factories, semi-trucks, hydroelectric dams, oil pipelines and other goods and services that don’t directly benefit an individual consumer. They are needed to make the overall system work.

As the economy gets bigger and more complex, the non-elite workers increasingly find themselves left out. Besides losing an increasing part of the output of the intermediate goods and services mentioned in the prior paragraph, there are other pieces that take slices of the total output of goods and services:

  • High paid workers take their quite-large slices of the total output. These individuals tend to be the ones who get the benefit of asset appreciation, as well.
  • Pension programs and other programs to help the elderly and unemployed take a cut.
  • Health insurance costs, in the US at least, tend to be very high, relative to wages, for lower-paid workers.
  • The work of some employees can be replaced by low-paid overseas employees or by robots. If they are to keep their jobs, their wages need to be suitably low to compete.

With all of these issues, the workers at the bottom of the employment hierarchy increasingly get left out of the distribution of goods and services made by the economy.

Slide 11

We know some of the kinds of things that happen when economies are close to collapse from the writings of researchers such as Peter Turchin, lead author of Secular Cycles, and Joseph Tainter, mentioned earlier. One approach is for governments to try to work around the resource problem by starting wars with other economies whose resources they might gain. Probably a more likely outcome is that these low-resource-per-capita economies become vulnerable to attack by other economies because of their weakened condition. In any event, more conflict is likely as resource limits hit.

If the low incomes of non-elite workers persist, many bad outcomes can be expected. Local riots can be expected as citizens protest their low wages or pensions. Governments are likely to find that they cannot collect enough taxes. Governments will also find that they must cut back on programs, or (in today’s world) their currencies will sink relative to currencies of other countries. Intergovernmental organizations may fail for lack of funding, or governments may be overthrown by unhappy citizens.

Debt defaults can be expected. Governments have a long history of defaulting on their debts when conditions were bad according to Carmen Reinhart and Kenneth Rogoff in This Time Is Different: Eight Centuries of Financial Folly.

It becomes very easy for epidemics to take hold because of the poor eating habits and the close living quarters of non-elite workers.

With respect to inflation-adjusted commodity prices, it is logical that they would stay low because a large share of the population would be impoverished and thus not able to afford very many of these commodities. A person would expect gluts of commodities, as occurred during the Great Depression in the 1930s in the United States because many farmers and farm-hands had been displaced by modern farming equipment. We also find that the book of Revelation from the Bible seems to indicate that low prices and lack of demand were problems at the time of the collapse of ancient Babylon (Revelation 18:11-13).

Slide 12

Much of what peak oil theory misunderstands is what our society as a whole misunderstands. Most people seem to believe that our economy will grow endlessly unless we somehow act to slow it down or stop it. They cannot imagine that the economy comes with built-in brakes, provided by the laws of physics.

Armed with a belief in endless growth, economists assume that the economy can expand year after year at close to the same rate. Modelers of all kinds, including climate modelers, miss the natural feedback loops that lead to the end of fossil fuel extraction without any attempt on our part to stop its extraction. A major part of the problem is that added complexity leads to too much wage and wealth disparity. Eventually, the low wages of many of the workers filter through to oil and other energy prices, making prices too low for producers.

Collapse isn’t instantaneous, as we will see on Slide 26. As resources per capita fall too low, there are several ways to keep problems hidden. More debt at lower interest rates can be added. New financial techniques can be developed to hide problems. Increased globalization can be used. Corners can be cut on electricity transmission, installation and maintenance, and in the building of new electricity generating structures. It is only when the economy hits a bump in the road (such as a climate-related event) that there suddenly is a major problem: Electricity production fails, or not enough food is produced. In fact, California, Florida, and China have all encountered the need for rolling blackouts with respect to electricity in the past year; China is now encountering difficulty with inadequate food supply, as well.

Economists have played a major role in hiding problems with energy with their models that seem to show that prices can be expected to rise if there is a shortage of oil or other energy. Their models miss the point that adequate supplemental energy is just as important for demand as it is for supply of finished goods and services. The reason energy is important for demand is because demand depends on the wages of workers, and the wages of workers in turn depend on the productivity of those workers. The use of energy supplies to allow workers to operate tools of many kinds (such as computers, trucks, electric lights, ovens, and agricultural equipment) greatly influences the productivity of those workers.

A person who believes energy prices can rise endlessly is likely to believe that recycling can increase without limit because of ever-rising prices. Such a person is also likely to believe that the substitution of intermittent renewables for fossil fuels will work because high prices for scarce electricity will enable an approach that is inherently high-cost, if any continuity of supply is required.

Thus, the confusion isn’t so much that of peak oilers. Instead, the confusion is that of economists and scientists building models based on past history. These models miss the turning points that occur as limits approach. They assume that future patterns will replicate past patterns, but this is not what happens in a finite world. If we lived in a world without limits, their models would be correct. This confusion is very much built into today’s thinking.

In fact, we are living in an economic system/ecosystem that has brakes to it. These brakes are being applied now, even though 99%+ of the population isn’t aware of the problem. The system will protect itself, quite possibly using the approach of evicting most humans.

Slide 13

The opinions expressed in Slide 13 reflect some of the views I have heard expressed speaking with peak oilers and with people looking into issues from a biophysical economics perspective. Obviously, views differ from person to person.

Many people believe that resources in the ground provide a good estimate of the quantity of fossil fuels that can be extracted in the future. Peak oilers tend to believe that the available resources will need to have sufficiently high “Energy Returned on Energy Invested” (EROEI) ratios to make extraction feasible. Politicians and climate modelers tend to believe that prices can rise endlessly, so low EROEI is no obstacle. They seem to believe that anything that we have the technical skill to extract, even coal under the North Sea, can be extracted.

If a person believes the high estimates of fossil fuel resources that seem to be available and misses the point that the economy has built-in brakes, climate change becomes the issue of major concern.

My view is that most of the resources that seem to be available will be left in the ground because of low prices and problems associated with collapse, such as failing governments and broken supply lines. In any event, we do not really have the ability to fix the climate; the laws of physics will provide their own adjustment. We will simply need to live with whatever climate is provided. Humans lived through ice-ages in the past. Presumably, whatever humans remain after what seems to be an upcoming bottleneck will be able to live in suitable areas of the world in the future.

Slide 14

On Slide 14, note that today’s industrial economy must necessarily come to an end, just as the lives of hurricanes and of people come to an end.

Also note that with diminishing returns, the cost of producing many of the things listed on Slide 14 is rising. For example, with rising population, dry areas of the world eventually need to use desalination to get enough fresh water for their growing populations. Desalination is expensive. Even if the necessary workaround is simply deeper wells, this still adds costs.

With diminishing returns affecting many parts of the economy simultaneously, it becomes increasingly difficult for efforts in the direction of efficiency to lead to costs that are truly lower on an inflation-adjusted basis. Advanced education and health care in particular tend to have an ever-rising inflation-adjusted costs of production. Some minerals do as well, as the quality of ores depletes.

Slide 15

An important issue to note is that wages need to cover all the rising costs, even the rising cost of health care. The paychecks of many people, especially those without advanced education, fall too low to meet all of their needs.

Slide 16

Slides 16 and 17 describe some of the reasons why oil prices don’t necessarily rise with scarcity.

Slide 17
Slide 18

I was one of the co-authors of the Ke Wang paper mentioned in Slide 18. We developed three different forecasts of how much oil would be extracted in China, depending on how high oil prices would be able to rise. The Red Line is the “Stays Low” Scenario, with prices close to $50 per barrel. The Yellow Line is the “Ever-Rising Prices” Scenario. The Best Estimate reflects the expectation that prices would be in roughly the $100 to $120 barrel range, from 2015 onward.

Slide 19

In fact, oil prices have stayed fairly low, and China’s oil production has declined, as our paper predicted.

Slide 20
Slide 21

Note that the chart on Slide 21 shows wage disparity only in the US. On this basis, the share of wages going to the top 1% and top 0.1% are back at the levels that they were in the 1920s. Now, our economy is much more global. If we consider all of the low income people in the world, the worldwide wage disparity is much greater.

Slide 22

There are two things to note on Slide 22. The first is that producers, in inflation-adjusted terms, seem to need very high prices, approximately $120 per barrel or more. This is based on a presentation made by Steve Kopits, which I wrote up here: Beginning of the End? Oil Companies Cut Back on Spending.

The other thing to note is that oil prices tend to bounce around a great deal. Prices seem to depend on the amount of debt and on interest rates, as well as the wages of workers. The peak in oil prices in mid-2008 came precisely at the time the debt bubble broke with respect to mortgage and credit card debt in the US. I wrote about this in an article in the journal Energy called, Oil Supply Limits and the Continuing Financial Crisis.

The US instituted Quantitative Easing (QE) at the end of 2008. QE acted to lower interest rates. With the help of QE, the price of oil gradually rose again. When the US discontinued QE in late 2014, oil prices fell. Recently, there has been a great deal of QE done, as well as direct spending by governments, but oil prices are still far below the $120 per barrel level. Middle Eastern oil producers especially need high oil prices, in order to collect the high tax revenue that they depend upon to provide programs for their citizens.

Slide 23

Coal prices (Slide 23) tend to follow somewhat the same pattern as oil prices (Slide 22). There is very much the same balancing act with coal prices as well: Coal prices need to be high enough for producers, but not too high for customers to buy products made with coal, such as electricity and steel.

China tries to keep its coal prices relatively high in order to encourage production within the country. China has been limiting imports to try to keep prices high. The relatively high coal prices of China make it an attractive destination for coal exporters. There are now a large number of boats waiting outside China hoping to sell coal to China at an attractive price.

Slide 24

The blue line on Figure 24 represents total energy consumption up through 2020. The red dotted line is a rough guesstimate of how energy consumption might fall. This decline could happen if people wanting energy consumption coming only from renewables were able to succeed by 2050 (except I am doubtful that these renewable energy types would really be of much use by themselves).

Alternatively, this might also be the decline that our self-organizing economy takes us on. We are already seeing a decrease in energy consumption related to the current pandemic. I think governmental reactions to the pandemic were prompted, in part, by the very stretched condition of our oil and other energy supplies. Countries were experiencing riots over low wages. They also could not afford to import as much oil as they were importing. Shutdowns in response to COVID-19 cases seemed like a sensible thing to do. They helped restore order and saved on energy imports. Strangely enough, the pandemic may be a part of the collapse that our self-organizing economy is arranging for us.

Slide 25

Slide 25 takes the blue line from Slide 24 and looks at what happened in more detail. On Slide 25, we are looking at the average annual increase in energy consumption, for a given 10 year period. This is split between the rate of population growth (blue), and the energy consumption growth that went into other things, which I equate to change in “standard of living” (red). The big red humps represent very good times, economically. The post-World War II bump is especially high. The valleys are times of disturbing changes, including wars and the collapse of the Soviet Union.

Of course, all of these situations occurred during periods when energy consumption was generally rising. If these unfortunate things happened when oil consumption was rising, what might possibly happen when energy consumption is falling?

Slide 26

We now seem to be hitting the Crisis Stage. In the past, collapse (which takes place in the Crisis Stage) has not been instantaneous; it has taken place over quite a number of years, typically 20 or more. The world economy is quite different now, with its international trade system and heavy use of debt. It would seem likely that a collapse could happen more quickly. A common characteristic of collapses, such as avalanches, is that they often seem to start off fairly slowly. Then, suddenly, a large piece breaks away, and there is a big collapse. Something analogous to this could possibly happen with the economy, too.

Slide 27

One of the major issues with adding intermittent renewables to the electric grid is a pricing problem. Once wind and solar are given subsidies (even the subsidy of “going first”), all of the other types of electricity production seem to need subsidies, as well. It is the pricing systems that are terribly detrimental, although this is not generally noticed. In fact, researchers who are looking only at energy may not even care if the pricing is wrong. Ultimately, the low pricing for electricity can be expected to bring the electric grid down, just as inadequate prices for fossil fuels can be expected to lead to the closure of many fossil fuel producers. Both Texas and California are having difficulty because they have not been collecting enough funds from customers to build resilient systems.

Slide 28
Slide 29

The focus of EROEI research is often with respect to whether the EROEI of a particular type of energy production is “high enough,” relative to some goal, such as 3:1 or 10:1. I believe that there needs to be more focus on the total quantity of net energy produced. If there is an EROEI goal for highly complex energy types, it needs to be much higher than for less complex energy types.

Slide 30

Today, it is common to see the EROEIs of a number of different types of energy displayed side-by-side as if they were comparable. This type of comparison is also made with other energy metrics, such as “Levelized Cost of Electricity” and “Energy Payback Period.” I think this approach makes highly complex types of energy production, such as intermittent wind and solar, look better than they really are. Even intermittent hydroelectric power generation, such as is encountered in places with rainy seasons and dry seasons and in places that are subject to frequent droughts, is not really comparable to electricity supply that can be provided year-around by fossil fuel providers, if adequate storage is available.

Slide 31

Earlier in this post, I documented a number of reasons why we should expect low rather than high energy prices in the future. I am reiterating the point here because it is a point energy researchers need especially to be aware of. Production is likely to come to an end because it is unprofitable.

Slide 32

One characteristic of human-made complexity is that it has very little redundancy. If something goes wrong in one part of one system, it is likely to ripple through that system, as well as other systems to which the first system is connected. An outage of oil is likely to indirectly affect electricity because oil is needed to fix problems with electricity transmission lines. An electricity outage may cause disruption in oil drilling and refining, and even in filling up automobiles at service stations. An international trade disruption can break supply lines and leave shipping containers at the wrong end of the globe.

We know that collapse tends to lead to less complex systems. We should expect fewer jobs requiring advanced education. We should expect to start losing battles against infectious diseases. We should expect a reduction in international trade; in the future, it may primarily take place among a few trusted partners. Some intergovernmental organizations are likely to disappear. Peak oil cannot happen by itself; it can only happen with disruptions and shrinkage in many other parts of the economy, as well.

Slide 33

The climate is indeed changing. Unfortunately, we humans have little ability to change what is happening, especially at this late date. Arguably, some changes could have been made much earlier, for example in the 1970s when the modeling included in the 1972 book The Limits to Growth by Donnela Meadows and others showed that the world economy was likely to hit limits before 2050.

It is clear to many people that the world economy is now struggling. There is too much debt; young people are having trouble finding jobs that pay well enough; people in poor countries are increasingly more food insecure. Leaders everywhere would like solutions. The “easy” solution to offer is that intermittent wind and solar will solve all our problems, including climate change. The closer a person looks at the situation, the more the solution seems like nonsense. Wind and solar work passably well at small concentrations within electric systems, if it is possible to work around their pricing problems. But they don’t scale up well. Energy researchers especially should be aware of these difficulties.

The book Rare Earth: Why Complex Life Is Uncommon in the Universe by Peter Ward and Donald Brownlee points out that there have been an amazing number of what seem to be coincidences that have allowed life on Earth to flourish for four billion years. Perhaps these coincidences will continue. Perhaps there is an underlying plan that we are not aware of.

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Where Energy Modeling Goes Wrong

There are a huge number of people doing energy modeling. In my opinion, nearly all of them are going astray in their modeling because they don’t understand how the economy really operates.

The modeling that comes closest to being correct is that which underlies the 1972 book, The Limits to Growth by Donella Meadows and others. This modeling was based on physical quantities of resources, with no financial system whatsoever. The base model, shown here, indicates that limits would be reached a few years later than we actually seem to be reaching them. The dotted black line in Figure 1 indicates where I saw the world economy to be in January 2019, based on the limits we already seemed to be reaching at that time.

Figure 1. Base scenario from 1972 Limits to Growth, printed using today’s graphics by Charles Hall and John Day in “Revisiting Limits to Growth After Peak Oil,” with dotted line added corresponding to where I saw the world economy to be in January 2019, based on how the economy was operating at that time.

The authors of The Limits to Growth have said that their model cannot be expected to be correct after limits hit (which is about now), so even this model is less than perfect. Thus, this model cannot be relied upon to show that population will continue to rise until after 2050.

Many readers are familiar with Energy Return on Energy Invested (EROEI) calculations. These are favorites of many people following the Peak Oil problem. A high ratio of Energy Returned to Energy Invested is considered favorable, while a low ratio is considered unfavorable. Energy sources with similar EROEIs are supposedly equivalent. Even these similarities can be misleading. They make intermittent wind and solar appear far more helpful than they really are.

Other modeling, such as that by oil companies, is equally wrong. Their modeling tends to make future fossil fuel supplies look far more available than they really are.

This is all related to a talk I plan to give to energy researchers later in February. So far, all that is pinned down is the Summary, which I reproduce here as Section [1], below.

[1] Summary: The economy is approaching near-term collapse, not peak oil. The result is quite different.

The way a person views the world economy makes a huge difference in how one models it. A big issue is how connected the various parts of the economy are. Early researchers assumed that oil was the key energy product; if it were possible to find suitable substitutes for oil, the danger of exhaustion of oil resources could be delayed almost indefinitely.

In fact, the operation of the world economy is controlled by the laws of physics. All parts are tightly linked. The problem of diminishing returns affects far more than oil supply; it affects coal, natural gas, mineral extraction in general, fresh water production and food production. Based on the work of Joseph Tainter, we also know that added complexity is also subject to diminishing returns.

When a person models how the system works, it becomes apparent that as increasing complexity is added to the system, the portion of the economic output that can be returned to non-elite workers as goods and services drops dramatically. This leads to rising wage disparity as increasing complexity is added to the economy. As the economy approaches limits, rising wage disparity indirectly leads to a tendency toward low prices for oil and other commodities because a growing number of non-elite workers are unable to afford homes, cars and even proper nutrition. 

A second effect of added complexity is growing use of long-lasting goods available through technology. Many of these long-lasting goods are only affordable with financial time-shifting devices such as loans or the sale of shares of stock. As non-elite workers become increasingly unable to afford the output of the economy, these time-shifting devices provide a way to raise demand (and thus prices) for commodities of all types, including oil. These time-shifting devices are subject to manipulation by central banks, within limits.

Standard calculations of Energy Returned on Energy Invested (EROEI) ignore the fact that added complexity tends to have a very detrimental impact on the economy because of the diminishing returns it produces. To correct for this, today’s EROEI calculations should only be used to compare energy systems with similar complexity. The least complex energy systems are based on burned biomass and power from animals. Fossil fuels represent a step upward in complexity, but they still can be stored until their use is required. Intermittent renewables are far ahead of fossil fuels in terms complexity: they require sophisticated systems of storage and distribution and therefore cannot be considered equivalent to oil or dispatchable electricity.

The lack of understanding of how the economy really works has led to the failure to understand several important points:

(i) Low oil prices rather than high are to be expected as the economy reaches limits,

(ii) Most fossil fuel reserves will be left in the ground because of low prices,

(iii) The economy is experiencing the historical phenomenon of collapse, rather than peak oil, and 

(iv) If the economy is not to collapse, we need energy sources providing a larger quantity of net energy per capita to offset diminishing returns.   

[2] The world’s energy problem, as commonly understood by researchers today

It is my observation that many researchers believe that we humans are in charge of what happens with future fossil fuel extraction, or with choosing to substitute intermittent renewables for fossil fuels. They generally do not see any problem with “running out” in the near future. If running out were imminent, the problem would likely be announced by spiking prices.

In the predominant view, the amount of future fossil fuels available depends upon the quantity of energy resources that can be extracted with available technology. Thus, a proper estimate of the resources that can be extracted is needed. Oil seems to be in shortest supply based on its reserve estimates and the vast benefits it provides to society. Thus, it is commonly believed that oil production will “peak” and begin to decline first, before coal and natural gas.

In this view, demand is something that we never need to worry about because energy, and especially oil, is a necessity. People will choose energy over other products because they will pay whatever is necessary to have adequate energy supplies. As a result, oil and other energy prices will rise almost endlessly, allowing much more to be extracted. These higher prices will also enable higher cost intermittent electricity to be substituted for today’s fossil fuels.

A huge amount of additional fossil fuels can be extracted, according to those who are primarily concerned about loss of biodiversity and climate change. Those who analyze EROEI tend to believe that falling EROEI will limit the quantity of future fossil fuels extracted to a smaller total extracted amount. Because of this, energy from additional sources, such as intermittent wind and solar, will be required to meet the total energy demand of society.

The focus of EROEI studies is on whether the EROEI of a given proposed substitution is, in some sense, high enough to add energy to the economy. The calculation of EROEI makes no distinction between energy available only through highly complex systems and energy available from less complex systems.

EROEI researchers, or perhaps those who rely on the indications of EROEI researchers, seem to believe that the energy needs of economies are flexible within a very wide range. Thus, an economy can shrink its energy consumption without a particularly dire impact.

[3] The real story seems to be that the adverse outcome we are reaching is collapse, not peak oil. The economy is a self-organizing system powered by energy. This makes it behave in very unexpected ways.

[3a] The economy is tightly connected by the laws of physics.

Energy consumption (dissipation) is necessary for every aspect of the economy. People often understand that making goods and services requires energy dissipation. What they don’t realize is that almost all of today’s jobs require energy dissipation, as well. Without supplemental energy, humans could only gather wild fruits and vegetables and hunt using the simplest of tools. Or, they could attempt simple horticulture by using a stick to dig a place in the ground to plant a seed.

In physics terms, the economy is a dissipative structure, which is a self-organizing structure that grows over time. Other examples of dissipative structures include hurricanes, plants and animals of all types, ecosystems, and star systems. Without a supply of energy to dissipate (that is, food to eat, in the case of humans), these dissipative structures would collapse.

We know that the human body has many different systems, such as a cardiovascular system, digestive system and nervous system. The economy has many different systems, too, and is just as tightly connected. For example, the economy cannot get along without a transportation system any more than a human can get along without a cardiovascular system.

This self-organizing system acts without our direction, just as our brain or circulatory system acts without our direction. In fact, we have very little control over these systems.

The self-organizing economy allows common belief systems to arise that seem to be right but are really based on models with many incorrect assumptions. People desperately need and want a “happily ever after” solution. The strong need for a desirable outcome favors the selection of models that lead to the conclusion that if there is a problem, it is many years away. Conflicting political views seem to be based on different, equally wrong, models of how world leaders can solve the energy predicament that the world is facing.

The real story is that the world’s self-organizing economy will determine for us what is ahead, and there is virtually nothing we can do to change the result. Strangely enough, if we look at the long term pattern, there almost seems to be a guiding hand behind the result. According to Peter Ward and Donald Brownlee in Rare Earth, there have been a huge number of seeming coincidences that have allowed life on Earth to take hold and flourish for four billion years. Perhaps this “luck” will continue.

[3b] As the economy reaches limits, commodities of many types reach diminishing returns simultaneously.

It is indeed true that the economy reaches diminishing returns in oil supply as it reaches limits. Oil is very valuable because it is energy dense and easily transported. The oil that can be extracted, refined, and delivered to needed markets using the least amount of resources (including human labor) tends to be extracted first. It is later that deeper wells are built that are farther from markets. Because of these issues, oil extraction does tend to reach diminishing returns, as more is extracted.

If this were the only aspect of the economy that was experiencing diminishing returns, then the models coming from a peak oil perspective would make sense. We could move away from oil, simply by transferring oil use to appropriately chosen substitutes.

It becomes clear when a person looks at the situation that commodities of all kinds reach diminishing returns. Fresh water reaches diminishing returns. We can add more by using desalination and pumping water to where it is required, but this approach is hugely expensive. As population and industrialization grows, the need for fresh water grows, making diminishing returns for fresh water a real issue.

Minerals of all kinds reach diminishing returns, including uranium, lithium, copper and phosphate rock (used for fertilizer). The reason this occurs is because we tend to extract these minerals faster than they are replaced by the weathering of rocks, including bedrock. In fact, useable topsoil tends to reach diminishing returns because of erosion. Also, with increasing population, the amount of food required keeps increasing, putting further pressure on farmland and making it harder to retain an acceptable level of topsoil.

[3c] Increased complexity leads to diminishing returns as well.

In his book, The Collapse of Complex Societies, Joseph Tainter points out that complexity reaches diminishing returns, just as commodities do.

As an example, it is easy to see that added spending on healthcare reaches diminishing returns. The discovery of antibiotics clearly had a huge impact on healthcare, at relatively little cost. Now, a recent article is entitled, The hunt for antibiotics grows harder as resistance builds. The dollar payback on other drugs tends to fall as well, as solutions to the most common diseases are found, and researchers must turn their attention to diseases affecting only, perhaps, 500 people globally.

Similarly, spending on advanced education reaches diminishing returns. Continuing the medical example above, educating an increasing number of researchers, all looking for new antibiotics, may eventually lead to success in discovering more antibiotics. But the payback with respect to the education of these researchers will not be nearly as great as the payback for educating the early researchers who found the first antibiotics.

[3d] Wages do not rise sufficiently so that all of the higher costs associated with the many types of diminishing returns can be recouped simultaneously.

The healthcare system (at least in the United States) tends to let its higher costs flow through to consumers. We can see this by looking at how much higher the Medical Care Consumer Price Index (CPI) rises compared to the All Items CPI in Figure 2.

Figure 2. Consumer price index for Medical Care versus for All Items, in chart made by the Federal Reserve of St. Louis.

The high (and rapidly rising) cost of advanced education is another cost that is being passed on to consumers–the students and their parents. In this case, loans are used to make the high cost look less problematic.

Of course, if consumers are burdened with higher medical and educational costs, it makes it difficult to afford the higher cost of energy products, as well. With these higher costs, young people tend to live with their parents longer, saving on the energy products needed to have their own homes and vehicles. Needless to say, the lower net income for many people, after healthcare costs and student loan repayments are deducted, acts to reduce the demand for oil and energy products, and thus contributes to the problem of continued low oil prices.

[3e] Added complexity tends to increase wage disparities. The reduced spending by lower income workers tends to hold down fossil fuel prices, similar to the impact identified in Section [3d].

As the economy becomes more complex, companies tend to become larger and more hierarchical. Elite workers (ones with more training or with more supervisory responsibility) earn more than non-elite workers. Globalization adds to this effect, as workers in high wage countries increasingly compete with workers in lower wage countries. Even computer programmers can encounter this difficulty, as programming is increasingly moved to China and India.

Figure 3. Figure by Pew Research Center in Trends in Income and Wealth Inequality, published January 9, 2020. https://www.pewsocialtrends.org/2020/01/09/trends-in-income-and-wealth-inequality/

Individuals with low incomes spend a disproportionately large share of their incomes on commodities because everyone needs to eat approximately 2,000 calories of food per day. In addition, everyone needs some kind of shelter, clothing and basic transportation. All of these types of consumption are commodity intensive. People with very high incomes tend to buy disproportionately more goods and services that are not very resource intensive, such as education for their children at elite universities. They may also use part of their income to buy shares of stock, hoping their value will rise.

With a shift in the distribution of incomes toward those with high earnings, the demand for commodities of all types tends to stagnate or even fall. Fewer people are able to buy new cars, and fewer people can afford vacations involving travel. Thus, as more complexity is added, there tends to be downward pressure on the price of oil and other energy products.

[4] Oil prices have been falling behind those needed by oil producers since 2012.

Figure 4. Figure created by Gail Tverberg using EIA average monthly Brent oil price data, adjusted for inflation using the CPI Index for All Items for Urban Consumers.

Back in February 2014, Steven Kopits gave a presentation at Columbia University explaining the state of the oil industry. I wrote a post describing this presentation called, Beginning of the End? Oil Companies Cut Back on Spending. Oil companies were reporting that prices had been too low for them to make an adequate profit for reinvestment, back as early as 2012. In inflation-adjusted terms, this was when oil prices were about $120 per barrel.

Even Middle Eastern oil exporting countries need surprisingly high oil prices because their economies depend on the profits of oil companies to provide the vast majority of their tax revenue. If oil prices are too low, adequate taxes cannot be collected. Without funds for jobs programs and food subsidies, there are likely to be uprisings by unhappy citizens who cannot maintain an adequate standard of living.

Looking at Figure 4, we see that there has been very little time that Brent oil prices have been above $120 per barrel. Even with all of the recent central bank stimulus and deficit spending by economies around the world, Brent oil prices remain below $60 per barrel.

[5] Interest rates and the amount of debt make a huge difference in oil prices, too.

Based on Figure 4, oil prices are highly irregular. Much of this irregularity seems to be associated with interest rate and debt level changes. In fact, in July 2008, what I would call the debt bubble associated with subprime housing and credit cards collapsed, bringing oil prices down from their peak abruptly. In late 2008, Quantitative Easing (QE) (aimed at bringing interest rates down) was added just prior to an upturn on prices in 2009 and 2010. Prices fell again, when the United States discontinued QE in late 2014.

If we think about it, increased debt makes purchases such as cars, homes and new factories more affordable. In fact, the lower the interest rate, the more affordable these items become. The number of purchases of any of these items can be expected to rise with more debt and lower interest rates. Thus, we would expect oil prices to rise as debt is added and fall as it is taken away. Now, there are many questions: Why haven’t oil prices risen more, with all of the stimulus that has been added? Are we reaching the limits of stimulus? Are interest rates as low as they can go, and the amount of debt outstanding as high as it can go?

[6] The growing complexity of the economy is contributing to the huge amount of debt outstanding.

In a very complex economy, a huge number of durable goods and services are produced. Examples of durable goods would include machines used in factories and pipelines of all kinds. Durable goods would also include vehicles of all types, including both vehicles used for businesses and vehicles used by consumers for their own benefit. As broadly defined here, durable goods would include buildings of all types, including factories, schools, offices and homes. It would also include wind turbines and solar panels.

There would also be durable services produced. For example, a college degree would have lasting benefit, it is hoped. A computer program would have value after it is completed. Thus, a consulting service is able to sell its programs to prospective buyers.

Somehow, there is a need to pay for all of these durable goods. We can see this most easily for the consumer. A loan that allows durable goods to be paid for over their expected life will make these goods more affordable.

Similarly, a manufacturer needs to pay the many workers making all of the durable goods. Their labor is adding value to the finished products, but this value will not be realized until the finished products are put into operation.

Other financing approaches can also be used, including the sale of bonds or shares of stock. The underlying intent is to provide financial time-shifting services. Interest rates associated with these financial time-shifting services are now being manipulated downward by central banks to make these services more affordable. This is part of what keeps stock prices high and commodity prices from falling lower than their current levels.

These loans, bonds and shares of stock are providing a promise of future value. This value will exist only if there are enough fossil fuels and other resources to create physical goods and services to fulfill these promises. Central banks can print money, but they cannot print actual goods and services. If I am right about collapse being ahead, the whole debt system seems certain to collapse. Shares of stock seem certain to lose their value. This is concerning. The end point of all of the added complexity seems to be financial collapse, unless the system can truly add the promised goods and services.

[7] Intermittent electricity fits very poorly into just-in-time supply lines.

A complex economy requires long supply lines. Usually, these supply lines are operated on a just-in-time basis. If one part of a supply line encounters problems, then manufacturing needs to stop. For example, automobile manufacturers in many parts of the world are finding that they need to suspend production because it is impossible to source the necessary semiconductor chips. If electricity is temporarily unavailable, this is another way of disrupting the supply chain.

The standard way to work around temporary breaks in supply chains is to build greater inventory, but this is expensive. Additional inventory needs to be stored and watched over. It likely needs financing, as well.

[8] The world economy today seems to be near collapse.

The self-organizing economy is now pushing the economy in many strange ways that indirectly lead to less energy consumption and eventually collapse. Even prior to COVID-19, the world economy appeared to be reaching growth limits, as indicated in Figure 1, which was published in January 2019. For example, recycling of many renewables was no longer profitable at lower oil prices after 2014. This led China to discontinue most of its recycling efforts, effective January 1, 2018, even though this change resulted in the loss of jobs. China’s car sales fell in 2018, 2019, and 2020, a strange pattern for a supposedly rapidly growing country.

The response of world leaders to COVID-19 has pushed the world economy further in the direction of contraction. Businesses that were already weak are the ones having the most difficulty in being able to operate profitably.

Furthermore, debt problems are growing around the world. For example, it is unclear whether the world will require as many shopping malls or office buildings in the future. A person would logically expect the value of the unneeded buildings to drop, reducing the value of many of these properties below their outstanding debt level.

When these issues are combined, it looks likely that the world economy may not be far from collapse, which is one of my contentions from Section [1]. It also looks like my other contentions from Section [1] are true:

(i) Low oil prices rather than high are to be expected as the economy reaches limits,

(ii) Most fossil fuel reserves will be left in the ground because of low prices, and

(iv) If the economy is not to collapse, we need energy sources providing a larger quantity of net energy per capita to offset diminishing returns. 

Regarding (iv), the available energy supply from wind and solar (net or otherwise) is tiny relative to the total energy required to operate the world economy. This issue, alone, would disqualify a Great Reset using wind and solar from truly being a solution for today’s problems. Instead, plans for a Great Reset tend to act as a temporary cover-up for collapse.

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