No one will win in the Russia-Ukraine conflict

Most people have a preconceived notion that there will be a clear winner and loser from any war. In their view, the world economy will go on, much as before, after the war is “won” by one side or the other. In my view, we are basically dealing with a no-win situation. No matter what the outcome, the world economy will be worse off after the fighting stops.

The problem the world economy is up against is the depletion of many kinds of resources simultaneously. This depletion is made worse by rising population, meaning that the resources available need to provide an adequate living for an increasing number of world inhabitants. Because of depletion, the world economy is reaching a point where it can no longer grow in the way it has in the past. Inflation, food shortages and rolling blackouts are likely to become increasing problems in many parts of the world. Eventually, the population is likely to fall.

We are living in a world that is beginning to behave like the players scrambling for seats in a game of musical chairs. In each round of a musical chairs game, one chair is removed from the circle. The players in the game must walk around the outside of the circle. When the music stops, all the players scramble for the remaining chairs. Someone gets left out.

Figure 1. Circle of chairs arranged for a game of musical chairs. Source

In this post, I will try to explain some of the issues.

[1] In a world with inadequate resources relative to population, conflicts are likely to become increasingly common.

The Russia-Ukraine conflict is one example of a resource-associated conflict. The allies underlying the NATO organization have chosen to escalate the Russia-Ukraine conflict, in part, because the existence of the conflict helps to hide resource shortages and accompanying high prices that are already taking place. No matter how the war is stopped, the underlying resource shortage issue will continue to exist. Therefore, the conflict cannot end well.

If sanctions lead to less trade with Russia (or even worse, less trade with Russia and China), the world economy will have an even greater problem with inadequate resources after the war is over. In fact, many parts of the current economic system are in danger of failing, primarily because depletion is leading to too little energy and other resources per capita. For example, the US dollar may lose its reserve currency status, the world debt bubble may pop, and globalization may take a major step backward.

[2] There is a huge resource depletion issue that authorities in many countries have known about for a very long time. The issue is so frightening that authorities have chosen not to explain it to the general population.

Mainstream media (MSM) practically never mentions that there is a major issue with resource depletion. Instead, MSM tells a narrative about “transitioning to a lower carbon economy,” without mentioning that this transition is out of necessity: The world is up against extraction limits for many kinds of resources. Besides oil, coal and natural gas, resources with limits include many other minerals, such as copper, lithium, and nickel. Other resources, including fresh water and minerals used for fertilizer are also only available in limited supply. MSM fails to tell us that there is no evidence that a transition to a low carbon economy can actually be made.

[3] The big depletion issue is affordability of end products made with high priced resources. The cost of extraction rises, but the ability of the world’s citizens to pay for end products made using these high-cost resources doesn’t rise. Commodity prices do not rise enough to cover the rising cost of extraction. When this affordability limit is hit, it is the resource extracting countries, such as Russia, that find themselves in a terrible situation with respect to the financial well-being of their populations.

The big issue that hits because of depletion is a price conflict. Businesses extracting resources need high prices so that they can reinvest in new mines, in ever more costly locations, but consumers cannot afford these high prices.

In a sense, the higher cost is because of “inefficiency.” As a result of depletion, it takes more hours of labor, more machine time, and a greater use of energy products to extract the same quantity of a given resource that was previously extracted elsewhere. Growing efficiency tends to help wages, but growing inefficiency tends to work the opposite way: Wages don’t rise, certainly not as rapidly as prices of end products.

As a result, commodity exporters, such as Russia, are caught in a bind: They cannot raise prices enough to make new investments profitable. The problem is that the world’s consumers cannot afford the resulting high prices of essentials such as food, electricity and transportation. Russia reports very high reserve amounts, especially for natural gas and coal. It is doubtful, however, that these reserves can actually be extracted. Over the long term, selling prices cannot be maintained at a sufficiently high level to cover the huge cost of extracting, transporting and refining these resources.

The success of a country’s economy can, in some sense, be measured by the country’s per capita GDP. Russia’s GDP per capita has tended to lag far behind that of the US (Figure 2).

Figure 2. Inflation-adjusted per capita GDP of the United States, Russia and Ukraine. Amounts are as provided by the World Bank, using Purchasing Power Parity GDP in 2017 International Dollars.

Russia’s inflation-adjusted GDP per capita fell after the collapse of the central government of the Soviet Union in 1991. It was able to grow again, once oil prices began to rise in the early 2000s. Since 2013, Russia’s GDP per capita growth has again fallen behind that of the US, as increases in oil and other commodity prices again lagged the rising cost of production. Given these difficulties with depletion, Russia is becoming increasingly unwilling to ignore poor treatment it receives from Ukraine.

There may be another factor, as well, leading especially to the escalation of the conflict. The US seems to covet Russia’s resources. Some powers behind the throne seem to believe that Western forces supporting Ukraine can quickly win in this conflict. If such an early win occurs, the aim is for Western forces to step in and inexpensively ramp up Russian resource extraction, allowing the world a new source of cheap-to-produce fossil fuels and other minerals.

In this context, Russia launched an attack on Ukraine on February 24, 2022. Ukraine has presented Russia with problems for many years. One issue has been transit fees for natural gas passing through the country; is Ukraine taking too much gas out? Another problem area has been the rise of the far-right Azov regiment. Russia has also expressed concern that NATO has been training soldiers within Ukraine, even though Ukraine is not a member of NATO. Russia doesn’t want military, trained by NATO, at its doorstep.

[4] World economic growth very much depends on growing energy consumption.

There are two ways of measuring world GDP. The standard one is with the production of each country measured in inflation-adjusted US$, with the changing relative value to the US$ considered. The other approach uses “Purchasing Power Parity” GDP. The latter is supposedly not affected by the changing level of the dollar, relative to other currencies. Inflation-Adjusted Purchasing Power Parity GDP is only available for 1990 and subsequent years. Figure 3 shows the high correlation between energy consumption and PPP GDP during the period from 1990 through 2020.

Figure 3. X,Y graph of world energy consumption for the period 1990 to 2020, based on energy data from BP’s 2021 Statistical Review of World Energy and world Purchasing Power Parity GDP in 2017 International Dollars, as published by the World Bank.

The reason for a strong association between GDP growth with energy consumption growth is a physics-based reason. Producing goods and providing services requires the “dissipation” of energy products because the laws of physics tell us that energy is required to move any object from one place to another, or to heat any object. In the latter case, it is the individual molecules within a substance that move faster and faster as they get hotter. The economy is a “dissipative structure” in physics terms because of the need for energy dissipation to provide the work needed to make the system operate.

Human beings are also dissipative structures. The energy that humans get comes from the dissipation of the energy found in foods of every kind. Food energy is commonly measured in Calories (technically, kilocalories).

[5] World economic growth also seems to depend on factors besides energy consumption.

The fitted equation on Figure 3 (the equation beginning with “y”) implies that GDP is rising much more rapidly than energy consumption, almost twice as rapidly. Over the entire 30-year period, the actual growth rate in energy consumption averages about 1.8% a year. If energy consumption growth had really been 1.8% per year, the fitted equation implies that growth in GDP would have greatly sped up over the period. (In fact, the growth rate in energy consumption was falling over the 30-year period, but GDP grew at closer to a constant rate. In terms of the fitted equation, these two conditions are equivalent.)

Figure 4. Calculated expected GDP growth rate if energy consumption grows at a constant 1.8% per year, based on the fitted equation shown in Figure 3.

How can GDP rise so much more rapidly than energy dissipation? There seem to be several ways such a higher rate of increase can occur, on a temporary basis:

[a] A worldwide trend toward an economy using more services. The production of services tends to require less energy consumption than the production of essential goods, such as food, water, housing and local transportation. As the world economy gets wealthier, it can afford to add more services, such as education, healthcare, and childcare.

[b] A worldwide trend toward more wage and wealth disparity. Such a trend tends to happen with more specialization and more globalization. Strangely enough, a trend to more wage disparity allows the world economy to continue to grow without adding a proportionately greater amount of energy consumption use because of the different spending patterns between low-paid workers and high-paid workers.

Analyzing the situation, the world is filled mostly with low-paid workers. To the extent that the pay of these low-paid workers can be squeezed down, it can prevent these workers from buying goods that tend to use relatively high amounts of energy products, such as automobiles, motorcycles and modern homes. At the same time, growing wage disparity allows the higher-paid workers to be paid more. These higher-paid workers tend to spend a disproportionate share of their income on services, such as education and healthcare, which tend to consume less energy.

Thus, greater wage disparity tends to shift spending away from goods and toward services. The main beneficiaries are the top 1% of workers (who buy mostly services, requiring little energy consumption), rather than the remaining 99% (who would really like goods such as a car and their own home, which require much more energy consumption).

[c] Improvements in technology. Improvements in technology are helpful in raising GDP because technological improvements tend to make finished goods and services more affordable. With greater affordability, more people can afford goods and services. This effect is favorable for allowing the economy, as measured by GDP, to grow more quickly than energy consumption.

There is a catch associated with using improved technology to make goods and services more affordable. Improved technology tends to increase wage disparity because it nearly always leads to owners and a few highly educated workers being paid more, while workers doing the more routine parts of processes are paid less. Thus, it tends to lead to the problem discussed above: [b] A trend toward wage and wealth disparity.

Also, with improved technology, available resources tend to be depleted more quickly than without improved technology. This happens because finished goods are less expensive, so more people can afford them. Once resources start getting exhausted, improved technology can’t fix the situation because resource extraction costs are likely to rise more rapidly than can be offset with the impact of new technology.

[d] A worldwide trend toward more debt at ever-lower interest rates.

We all know that the monthly payment required to purchase a car or home is lower if the interest rate on the debt used to finance the purchase is lower. Thus, falling interest rates can make paychecks go further. Both businesses and citizens can afford to purchase more goods and services using credit, so the overall level of debt tends to rise with falling interest rates.

If we are only considering the period from 1990 to the present, the trend is clearly toward lower interest rates. These lower interest rates are part of what is making the GDP growth higher than what would be expected if interest rates and debt levels remained constant.

Figure 5. 3-month and 10-year US Treasury interest rates through February 28, 2022. Chart by FRED of the St. Louis Federal Reserve.

[6] The world economy now seems to be reaching limits with respect to many of the variables allowing world economic growth to continue as it has in the past, as discussed in Sections [4] and [5], above.

Figure 6. World per capita GDP based on Purchasing Power Parity GDP in 2017 International Dollars calculated using World Bank data.

Figure 6 shows that there have been two major step-downs in world inflation-adjusted per capita PPP GDP. The first one occurred in the 2008-2009 period; the second one occurred in 2020. Figure 7 shows the sharp dips in energy consumption occurring in the same time periods.

Figure 7. World per capita energy based on data of BP’s 2021 Statistical Review of World Energy.

In 2021, energy prices started to rise rapidly when the world economy tried to reopen. This rapid rise in prices strongly suggests that energy extraction limits are being reached.

Another clue that energy production limits are being reached comes from the fact that the group of oil exporters, OPEC+, found that they couldn’t actually ramp up their oil production as quickly as they promised. Once oil production is cut back because of inadequate prices, it is hard to get production to rise again, even if prices temporarily rise because the many pieces of the chain supporting this extraction are broken. For example, trained workers leave and find jobs elsewhere, and contractors go out of business because of inadequate profits.

If we think about it, Items [5a], [5b], [5c] and [5d] are all reaching limits as well. Item [5d] is probably clearest: Interest rates can no longer be lowered. In fact, nearly everyone says that interest rates should now be raised because of the high inflation rates. If interest rates are raised, commodity prices, including prices for fossil fuels, will fall.

With lower fossil fuel prices, there will be pressure for oil, gas and coal producers to reduce their production, even from today’s lower levels. Because of the tight connection between energy and GDP, lower energy production will tend to push economies further toward contraction. Of course, this will make resource exporters, such as Russia, worse off.

As the world economy enters recession, we can expect that Item [5a], the shift from goods toward services, to turn around. People with barely enough money for necessities will reduce their use of services such as haircuts and music lessons. Item [5b], globalization and related wage disparity, is already under pressure. Countries are finding that with broken supply chains, more local production is needed. In the US, recent wage gains have tended to go to the lowest-paid workers. Item [5c], technology growth, cannot ramp up as resources needed from around the world are increasingly unavailable, due to broken supply chains and depletion.

[7] We are likely facing a collapsing world economy because of the limits being reached. Adding sanctions against Russia will further push the world economy in the direction of collapse.

Many sources report that Russian exports of wheat, aluminum, nickel, and fertilizers will be “temporarily” disrupted. A few sources note that Russia plays an important role in the processing of uranium fuel used in nuclear power plants. According to the Conversation:

Most of the 32 countries that use nuclear power rely on Russia for some part of their nuclear fuel supply chain.

We have become used to efficient air travel, but sanctions against Russia make this less possible, especially for flights to Southeast Asia. A Bloomberg article called Siberian Detour Requires Airlines to Retrace Cold War Era Routes gives the example of direct flights from Finland to Southeast Asia being canceled because they have become too expensive and are too time-consuming with the required detours. It becomes necessary to fly indirect connecting routes if a person wants to travel. Many other routes have similar problems.

Figure 8. Source: Bloomberg, “Siberian detour requires airlines to retrace cold war era routes.”

US President Joseph Biden is warning that food shortages are likely in many parts of the world as a result of the sanctions placed against Russia.

According to a video shown on Zerohedge,

“It’s going to be real. The price of the sanctions is not just imposed upon Russia. It’s imposed upon an awful lot of countries as well, including European countries and our country as well.”

If the world economy were doing well, and if Russia were a tiny part of the world economy, perhaps the sanctions could be tolerated by the world economy. As it is, the Russia-Ukraine conflict acts to hide the underlying resource shortage problem. This is possible because, with the conflict, the resource shortages can be described as “temporary” and “necessary” in the context of the terrible things the Russians are doing. The way the West frames the problem provides a scapegoat to deflect anger toward, but it doesn’t fix the problem.

Russia started out being very disadvantaged because commodity prices, in recent years, have not been rising high enough to ensure an adequate living for Russian citizens and high enough tax revenue for the Russian government. Adding sanctions against Russia will simply make Russia’s problems worse.

[8] There is little reason to believe that Russia will “give up” in response to sanctions imposed by the United States and other countries.

The attacks by Russia of Ukrainian sites seems to be occurring for many related reasons. Russia can no longer tolerate being inadequately compensated for the resources it is extracting and selling to Ukraine and the rest of the world. It is tired of being “pushed around” by the rich economies, especially the United States, as NATO adds more countries. It is also tired of NATO training Ukrainian soldiers. Russia seems to have no plan to gain the entire territory of Ukraine; it is more of a temporary police action.

Russia’s underlying problem is that it can no longer produce commodities that the world wants as inexpensively as the world demands. Building all the infrastructure needed to extract and ship more fossil fuel resources would take more capital spending than Russia can afford. The selling price will never rise high enough to justify these investments, including the cost of the Nord Stream 2 pipeline. Russia has nothing to lose at this point. The current situation is not working; going back to it is no incentive for stopping the current conflict.

Russia is in some ways like a heavily armed, suicidal old man, who can no longer earn an adequate living. The economic system of Russia is no longer working as it should. Russia is incredibly well-armed. The situation reminds a person of the story of Samson, in his old age, taking down the temple of the Philistines and losing his own life at the same time. Russia has no reason to back down in response to sanctions.

Figure 9. Figure showing that Russia has a higher inventory nuclear warheads than the US. Figure by the Federation of American Scientists. Source

[9] Leaders of the world, including Joe Biden, appear to be oblivious to the situation we are facing.

Leaders of the world have created ridiculous narratives that overlook the critical role commodities play. They seem to believe that it is possible to cut off purchases from Russia with, at most, temporary harm to the rest of the world economy.

The history of the world shows that the populations of many civilizations have outgrown their resource bases and have collapsed. Physics points out that this outcome is almost inevitable because of the way the Universe is constructed. Everything is constantly evolving, even economies. The climate is constantly evolving, as are the species inhabiting the Earth.

Elected leaders need a story of everlasting growth that they can tell their citizens. They cannot even consider the physics-based way the world economy operates, and the resulting expected pattern of overshoot and collapse. Modelers of what are intended to be long-lasting structures cannot accept this outcome either.

Limits which are defined based on affordability of end products are incredibly difficult to model, so creative narratives have been developed suggesting that humans can move away from fossil fuels if they so desire. No one stops to think that economies cannot continue to exist using a much lower quantity of energy, any more than an adult human can get along on 500 calories a day. Both are dissipative structures; the ongoing energy requirement is built in. Factories close when electricity, diesel and other energy products are cut off.

[10] The sanctions and the Russia-Ukraine conflict cannot end well.

The world economy is already on the edge of collapse because of the resource limits it is hitting. Intentionally stopping Russia’s output of resources like fertilizer and processed uranium is certain to make the situation worse, not better. Once Russia’s output is stopped, it is likely to be impossible to restart Russia’s production at the same level. Trained workers who lose their jobs will likely find jobs elsewhere, for one thing. The shortfall in output will affect countries around the world.

The United States dollar is now the world’s reserve currency. The sanctions being applied indirectly encourage countries to use other currencies to work around the sanctions. There seems to be a substantial chance that the US economy will lose its role as the center of international trade. If such a change takes place, the US will no longer be able to import far more than it exports, year after year.

A major issue is the huge amount of debt most countries of the world have. With a rapidly slowing world economy, repaying debt with interest will become impossible. Debt defaults will further wreak havoc with the world economic system.

We don’t know the exact timing of how this will play out, but the situation does not look good.

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Russia’s attack on Ukraine represents a demand for a new world order

Russia’s attack on Ukraine represents a demand for a new world order that, over the long term, will support higher prices for fossil fuels, especially oil. Such an economy would probably be centered on Russia and China. The rest of the world economy, to the extent that it continues to exist, will largely have to get along without fossil fuels, other than the fossil fuels that countries continue to produce for themselves. Population and living standards will fall in most of the world.

If a Russia-and-China-centric economy can be developed, the US dollar will no longer be the world’s reserve currency. Trade will be in the currency of the new Russia-China block. Outside of this block, local currencies will play a dominant role. Most of today’s debt will ultimately be defaulted upon; to the extent that this debt is replaced, it will be replaced with debt in local currencies.

As I see the situation, the underlying problem is the fact that, on a world basis, energy consumption per capita is shrinking. Energy consumption is essential for creating goods and services.

Figure 1. Energy of various types is used to transform raw materials (that is resources) into finished products.

The shrinking amount of energy per person means that, on average, fewer and fewer finished goods and services can be produced for each person. Some countries do better than average; others do worse. With low fossil fuel prices, Russia has been faring worse than average; it wants to remedy the situation with long-term higher energy prices. If Russia can start transferring its energy exports to China, perhaps the new Russia-China economy, with limited support from the rest of the world, can afford to pay Russia the high prices for fossil fuels that Russia requires to maintain its economy.

In this post, I will try to explain what I see is happening.

[1] It appears that Russia now fears that it is near collapse, not too different from the collapse of the central government of the Soviet Union in 1991. Such a collapse would lead to a huge drop in Russia’s living standards, even from today’s relatively low level.

If we look back at the Soviet Union’s energy consumption, we see a strange pattern. The Soviet Union’s energy consumption rose rapidly in the period after World War II. It became a military rival of the US, as its energy consumption grew in the 1965 to 1985 period. Its energy consumption leveled off before the central government collapsed in 1991. In fact, energy consumption has never gotten back to its level in the late 1980s.

Figure 2. Former Soviet Union (FSU) energy consumption by fuel, based on data of BP’s Statistical Review of World Energy 2018.

[2] The thing that seems to have been behind the 1991 collapse is the same thing that seems to be behind Russia’s current fear of collapse: continued low oil prices.

When we look back at inflation-adjusted oil prices, we see that a long period of low prices preceded this collapse. These low prices were harmful in many ways. They reduced funds for reinvestment, which led to the collapse in oil supply. They reduced the funds available to pay wages. They also reduced the tax revenue that the Soviet Union could collect.

Figure 3. Oil production and price of the former Soviet Union (FSU), based on BP’s Statistical Review of World Energy 2015.

I believe that these chronically low oil prices ultimately brought down the top layer of the government of the Soviet Union. This is because of the physics of the situation. It takes energy to provide the services of the top level of the government. As the total energy that could be purchased by the system fell because of low prices received for exports, it became impossible to support this top level of governmental services. This top layer was less essential than the lower levels of government, so it fell away.

In recent times, there has also been a long period of low prices, since about 2013:

Figure 4. Inflation adjusted Brent Oil prices in 2020$, based on data of the US Energy Information Administration.

Unless this pattern of low prices can be reversed quickly, Russia as a political entity could collapse. Exports of all of the goods it now produces would likely fall.

[3] While oil prices depend on “supply and demand,” as a practical matter, demand is very dependent on interest rates and debt levels. The higher the debt level and the lower the interest rate, the higher the price of oil can rise.

If we look back at Figure 4, we can see that before the US subprime housing bubble popped in 2008, inflation-adjusted oil prices were able to rise to $157 per barrel, adjusted to the 2020 price level. Once the debt bubble popped, inflation-adjusted oil prices fell to $49 per barrel. It was at this low point (and correspondingly low prices for many other commodities) that the US started its program of Quantitative Easing (QE) to lower interest rates.

After two years of QE, oil prices were back above $140 per barrel, in inflation-adjusted prices, but these soon started sliding down. By the time oil prices dropped to $120 per barrel, oil companies started to complain that prices were falling too low to meet all of their needs, including the need to drill in ever less productive areas. Now we are at a point where interest rates are about as low as they can go. Short-term interest rates are near zero, which is where they were in the late 1930s.

Figure 5. 3-month and 10-year US Treasury interest rates, through February 28, 2022. Chart by FRED of the St. Louis Federal Reserve.

The quantity of funds in people’s checking and savings accounts is at an extraordinarily high level, as well. This is partly because of the availability of debt at these low interest rates.

Figure 6. M2 Real (Inflation-Adjusted) Money Stock in chart by FRED of the St. Louis Federal Reserve.

Thus, even before the Ukrainian invasion, oil prices were raised about as high as they could go, through low interest rates and generous debt availability. With all this stimulus, Brent Spot Oil prices averaged $86.51 in January 2022. Even now, with all the disruption of the attack by Russia against Ukraine, oil prices are below the $120 threshold that producers seem to need. This price issue, plus the corresponding low-price issues for natural gas and coal, is the problem that Russia is concerned about.

Prices for imported coal and natural gas have bounced very high in the last few months, but no one expects these high prices to last. For one thing, they are too high for the European manufacturers that use imported coal or natural gas to stay in business. For example, producers that create urea fertilizer using natural gas find that the price of fertilizer produced in this way is way too high for farmers to afford. For another, the electricity produced by burning the high-priced natural gas or coal tends to be too expensive for European households to afford.

[4] The fundamental problem behind recent low oil prices is the fact that the current mix of consumers cannot afford goods and services produced using the high oil prices that producers, such as Russia, need to operate, pay high enough wages, and do adequate reinvestment.

When the price of oil was very low, back before 1970 (see Figure 3), it was relatively easy for consumers to afford goods and services made with oil. This was the period when the world economy was growing rapidly, and many people could afford to purchase automobiles and buy the oil products needed to operate them.

Once the cost of oil extraction started rising because of depletion, it became more and more difficult to keep prices both:

  1. High enough for oil producers, such as Russia, and
  2. Low enough to make affordable goods for consumers, as was possible prior to 1970

To try to hide the increasingly difficult problem of keeping prices both high enough for producers and low enough for consumers, central banks have lowered interest rates and encouraged the use of more debt. The idea is that if a person can buy a fuel-efficient car at a low enough interest rate and over a long enough term, perhaps this will make the vehicle more affordable. Similarly, interest rates on home mortgages have fallen to very low levels. All of this, plus the fact that debt is used to finance new factories and mines, leads to the relationship we saw in Figure 4 between oil prices and debt availability, related to interest rates.

[5] No one knows precisely how much oil, coal and natural gas can be extracted because the quantity that can be extracted depends on the extent of the price rise that can be tolerated without plunging the economy into recession.

If prices of these fossil fuels can rise very high (say, $300 per barrel for oil, and correspondingly high prices for other fossil fuels), a huge amount of fossil fuel can be extracted. Conversely, if energy prices cannot stay above the equivalent of $80 per barrel oil for very long without a serious recession, then we may already be very close to the end of available fossil fuel extraction. Both oil and gas producers and coal producers can be expected to go out of business because prices do not leave a sufficient margin for the required investment in new fields to offset the depletion of existing fields. Renewables will falter, as well, because both building and maintaining renewables requires fossil fuels.

The amount of resources of any kind (fossil fuels and minerals such as lithium, uranium, copper and zinc) that can be extracted depends upon the extent of depletion that the economy can tolerate. Depletion of any kind of resource means that a bigger effort (more workers, more machinery, more energy products) is required to extract a given quantity of each resource. It is clear that the entire economy cannot be transferred to the extraction of fossil fuels and mineral resources. For example, some workers and resources are needed for growing and transporting food. This puts a limit on how much depletion can be tolerated.

What Russia (as well as every other oil producer) would like is a way to get the tolerable oil price up significantly higher, for example, to $150 per barrel, so that more oil can be extracted. The hope is that a Russia-and-China-centric economy might be able to do this. Ideally, the tolerable maximum price for coal and natural gas would rise, as well.

[6] Europe, in particular, cannot afford high oil prices. If interest rates are increased soon, this will make the problem even worse. China seems to have definite advantages as an economic partner.

Europe is already having difficulty tolerating very high prices of imported natural gas and coal. Rising oil prices will add even more stress. Central banks are planning to raise interest rates. These higher interest rates will make loan payments more expensive. These higher interest rates will tend to push Europe’s economy further toward recession.

Given the problems with Europe as an energy importer, China would seem to have the possibility of being a better customer that can perhaps tolerate higher prices. For one thing, China is more efficient in its use of energy products than Europe. For example, many homes in the southern half of China are not heated in winter. People instead dress warmly inside their homes in winter. Also, homes and businesses in northern China are sometimes heated with waste heat from nearby coal-fired electricity plants. This is a very efficient approach to heating.

China also uses more coal in its energy mix than Europe. Historically, coal has been much less expensive than oil. What is needed is a low average price of energy. A small amount of high-priced oil can be tolerated in an economy that uses mostly coal in its energy mix. When all costs are counted, wind and solar are very high-priced energy sources, which contributes to Europe’s problems.

In recent years, China’s consumption of energy products has been growing very rapidly. Perhaps, in the view of Russia, China can use high-priced fossil fuel better than other parts of the world.

Figure 7. Energy consumption per capita for the world, the Asia-Pacific Region, and China based on data from BP’s 2021 Statistical Review of World Energy.

[7] Russia realized that the rest of the world is utterly dependent upon its fossil fuel exports. Because of this dependency, as well as the physics-based connection between the burning of fossil fuels and the making of finished goods and services, Russia holds huge power over the world economy.

The world economy should have known about the importance of fossil fuels and the likelihood that the world economy would face depletion issues in the first half of the 21st century, ever since a speech by Rear Admiral Hyman Rickover in 1957. In this speech, Rickover said,

We live in what historians may someday call the Fossil Fuel Age. . .With high energy consumption goes a high standard of living. . . A reduction of per capita energy consumption has always in the past led to a decline in civilization and a reversion to a more primitive way of life. 

Current estimates of fossil fuel reserves vary to an astonishing degree. In part this is because the results differ greatly if cost of extraction is disregarded or if in calculating how long reserves will last, population growth is not taken into consideration; or, equally important, not enough weight is given to increased fuel consumption required to process inferior or substitute metals. We are rapidly approaching the time when exhaustion of better grade metals will force us to turn to poorer grades requiring in most cases greater expenditure of energy per unit of metal.

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

I suggest that this is a good time to think soberly about our responsibilities to our descendants – those who will ring out the Fossil Fuel Age. Our greatest responsibility, as parents and as citizens, is to give America’s youngsters the best possible education [including the energy problem of a world with finite resources].

Many people today would conclude that world leaders have done their best to ignore this advice. The likely problem with fossil fuels has been hidden behind an imaginative, but false, narrative that our biggest problem is climate change caused primarily by fossil fuel extraction that can be expected to extend until at least 2100, unless positive steps are made to hold back this extraction.

In this false narrative, all the world needs to do is to move to wind and solar for its energy needs. As I discussed in my most recent post, titled Limits to Green Energy Are Becoming Much Clearer, this narrative of success is completely false. Instead, we seem to be hitting energy limits in the near term because of chronically low prices. Wind and solar are doing very little to help because they cannot be depended upon when needed. Furthermore, the quantity of wind and solar available is far too low to replace fossil fuels.

Few people in America and Europe realize that the world economy is entirely dependent upon Russia’s exports of oil, coal and natural gas. This dependency can be seen in many ways. For example, in 2020, 41% of world natural gas exports came from Russia. Natural gas is especially important for balancing electricity from wind and solar.

North America has historically played only a very small role in natural gas exports; it is questionable whether North America can ramp up its total natural gas production in the future, given the depletion problems being experienced with respect to the extraction of oil and the associated natural gas from shale formations. Continuously high oil prices are necessary to justify ramping up production outside of sweet spots. If drillers consider long-term prospects for oil prices to be too low, the associated natural gas will not be collected.

Figure 8. Natural gas exports by part of the world, considering only exports outside of a given region. Based on data of BP’s 2021 Statistical Review of World Energy.

Europe is especially dependent upon natural gas imports (Figure 9). Its imports of natural gas exceed the exports of Russia and its affiliated countries in the Commonwealth of Independent States, referred to as Russia+ in Figures 8 and 9.

Figure 9. Natural gas imports by part of the world, considering only exports outside of a given region. Based on data of BP’s 2021 Statistical Review of World Energy.

Without the natural gas exports of Russia and its close affiliates, there is no possibility of supplying adequate natural gas exports to the rest of the world.

Diesel fuel, created by refining oil, is another energy product that is in critically short supply, especially in Europe. Diesel fuel is used to power trucks and farm tractors, as well as many European automobiles. An Argus Media report indicates that Russian supplies account for 50% to 60% of Europe’s seaborne imports of diesel and other gasoil, amounting to 4 to 6 million tons of fuel per month. It likely would be impossible to replace these imports, using supplies from elsewhere, without bidding the price of these imported fuels up to a much higher price level than today. Even then, countries outside Europe would be left with inadequate diesel supplies.

[8] Russia’s attack on Ukraine seems to have been made for many reasons.

Russia was clearly frustrated with the current situation, with NATO becoming increasingly assertive within Ukraine itself, even though Ukraine is not itself a NATO member. Russia is also aware that in some sense, it has far more power over the world economy than most people realize because the world economy is utterly dependent on Russia’s fossil fuel exports (Section 7). Sanctions against Russia will likely hurt the countries making the sanctions as much or more than they hurt Russia.

There were also several concerns that were specifically Ukrainian giving rise to the attack on Ukraine. There had been long standing conflicts about natural gas pipelines. Was Ukraine taking too much natural gas out as a transit fee? Was it paying the correct fee for the natural gas it used? Ukraine also seems to have mistreated quite a few Russian-speaking Ukrainians over the years.

Russia has become increasingly frustrated with the small share of the world’s output of goods and services that it receives. The way the economic system works today, those who provide “services” seem to receive a disproportionate share of the world’s output of goods and services. Russia, with its extraction of minerals of many kinds, including fossil fuels, has not been well compensated for the great wealth that it brings to the world as a whole.

Over the years, Russia’s great strength has been its military. Perhaps Ukraine would not be too large a country to do battle over. Russia might be able to eliminate some of its irritations with Ukraine. At the same time, it might be able to make changes that would help to raise what have become chronically low fossil fuel prices. The sanctions that other countries would make would tend to push the required changes along more quickly.

If the sanctions really did push Russia down, the result would tend to push the whole world economy toward collapse, because the rest of the world is extremely dependent upon Russia’s fossil fuel exports. In Figure 1, the laws of physics say that there is a proportional response to the quantity of energy “dissipated”; if a greater output of goods and services is desired, more energy input is required. Efficiency changes can somewhat help, but efficiency savings tend to be offset by the higher energetic needs of the more complex system required to achieve these savings.

If energy prices do not rise high enough, we will somehow need to get along with very little or no fossil fuels. It is doubtful that renewables will last very long either because they depend upon fossil fuels for their maintenance and repair.

[9] If higher energy prices cannot be achieved, there is a significant chance that the change in the world order will be in the direction of pushing the world economy toward collapse.

We are living in a world today with shrinking energy resources per capita. We should be aware that we are reaching the limits of fossil fuels and other minerals that we can extract, unless we can somehow figure out a way to get the economy to tolerate higher prices.

The danger that we are approaching is that the top levels of governments, everywhere in the world, will either collapse or be overthrown by their unhappy citizens. The reduced amounts of energy available will push governments in this way. At the same time, programs such as government-funded pension plans and unemployment plans will disappear. Electricity is likely to become intermittent and then fail completely. International trade will shrink back; economies will become much more local.

We were warned that we would be reaching a time period with serious energy problems about now. The first time came in the 1957 Rickover speech discussed in Section 7. The second warning came from the 1972 book, The Limits to Growth by Donella Meadows and others, which documented a computer modeling approach to the problem of limits of a finite world. The Ukraine invasion may be a push in the direction of more serious energy problems, emerging primarily from the fact that other countries will want to punish Russia. Few people will realize that punishing Russia is a dangerous path; a serious concern is that today’s economy cannot continue in its current form without Russia’s fossil fuel exports.

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Limits to Green Energy Are Becoming Much Clearer

We have been told that intermittent electricity from wind and solar, perhaps along with hydroelectric generation (hydro), can be the basis of a green economy. Things are increasingly not working out as planned, however. Natural gas or coal used for balancing the intermittent output of renewables is increasingly high-priced or not available. It is becoming clear that modelers who encouraged the view that a smooth transition to wind, solar, and hydro is possible have missed some important points.

Let’s look at some of the issues:

[1] It is becoming clear that intermittent wind and solar cannot be counted on to provide adequate electricity supply when the electrical distribution system needs them.

Early modelers did not expect that the variability of wind and solar would be a huge problem. They seemed to believe that, with the use of enough intermittent renewables, their variability would cancel out. Alternatively, long transmission lines would allow enough transfer of electricity between locations to largely offset variability.

In practice, variability is still a major problem. For example, in the third quarter of 2021, weak winds were a significant contributor to Europe’s power crunch. Europe’s largest wind producers (Britain, Germany and France) produced only 14% of installed capacity during this period, compared with an average of 20% to 26% in previous years. No one had planned for this kind of three-month shortfall.

In 2021, China experienced dry, windless weather so that both its generation from wind and hydro were low. The country found it needed to use rolling blackouts to deal with the situation. This led to traffic lights failing and many families needing to eat candle-lit dinners.

In Europe, with low electricity supply, Kosovo has needed to use rolling blackouts. There is real concern that the need for rolling blackouts will spread to other parts of Europe, as well, either later this winter, or in a future winter. Winters are of special concern because, then, solar energy is low while heating needs are high.

[2] Adequate storage for electricity is not feasible in any reasonable timeframe. This means that if cold countries are not to “freeze in the dark” during winter, fossil fuel backup is likely to be needed for many years in the future.

One workaround for electricity variability is storage. A recent Reuters article is titled Weak winds worsened Europe’s power crunch; utilities need better storage. The article quotes Matthew Jones, lead analyst for EU Power, as saying that low or zero-emissions backup-capacity is “still more than a decade away from being available at scale.” Thus, having huge batteries or hydrogen storage at the scale needed for months of storage is not something that can reasonably be created now or in the next several years.

Today, the amount of electricity storage that is available can be measured in minutes or hours. It is mostly used to buffer short-term changes, such as the wind temporarily ceasing to blow or the rapid transition created when the sun sets and citizens are in the midst of cooking dinner. What is needed is the capacity for multiple months of electricity storage. Such storage would require an amazingly large quantity of materials to produce. Needless to say, if such storage were included, the cost of the overall electrical system would be substantially higher than we have been led to believe. All major types of cost analyses (including the levelized cost of energy, energy return on energy invested, and energy payback period) leave out the need for storage (both short- and long-term) if balancing with other electricity production is not available.

If no solution to inadequate electricity supply can be found, then demand must be reduced by one means or another. One approach is to close businesses or schools. Another approach is rolling blackouts. A third approach is to permit astronomically high electricity prices, squeezing out some buyers of electricity. A fourth balancing approach is to introduce recession, perhaps by raising interest rates; recessions cut back on demand for all non-essential goods and services. Recessions tend to lead to significant job losses, besides cutting back on electricity demand. None of these things are attractive options.

[3] After many years of subsidies and mandates, today’s green electricity is only a tiny fraction of what is needed to keep our current economy operating.

Early modelers did not consider how difficult it would be to ramp up green electricity.

Compared to today’s total world energy consumption (electricity and non-electricity energy, such as oil, combined), wind and solar are truly insignificant. In 2020, wind accounted for 3% of the world’s total energy consumption and solar amounted to 1% of total energy, using BP’s generous way of counting electricity, relative to other types of energy. Thus, the combination of wind and solar produced 4% of world energy in 2020.

The International Energy Agency (IEA) uses a less generous approach for crediting electricity; it only gives credit for the heat energy supplied by the renewable energy. The IEA does not show wind and solar separately in its recent reports. Instead, it shows an “Other” category that includes more than wind and solar. This broader category amounted to 2% of the world’s energy supply in 2018.

Hydro is another type of green electricity that is sometimes considered alongside wind and solar. It is quite a bit larger than either wind or solar; it amounted to 7% of the world’s energy supply in 2020. Taken together, hydro + wind + solar amounted to 11% of the world’s energy supply in 2020, using BP’s methodology. This still isn’t much of the world’s total energy consumption.

Of course, different parts of the world vary with respect to the share of energy created using wind, hydro and solar. Figure 1 shows the percentage of total energy generated by these three renewables combined.

Figure 1. Wind, solar and hydro as a share of total energy consumption for selected parts of the world, based on BP’s 2021 Statistical Review of World Energy data. Russia+ is Russia and its affiliates in the Commonwealth of Independent States (CIS).

As expected, the world average is about 11%. The European Union is highest at 14%; Russia+ (that is, Russia and its Affiliates, which is equivalent to the members of the Commonwealth of Independent States) is lowest at 6.5%.

[4] Even as a percentage of electricity, rather than total energy, renewables still comprised a relatively small share in 2020.

Wind and solar don’t replace “dispatchable” generation; they provide some temporary electricity supply, but they tend to make the overall electrical system more difficult to operate because of the variability introduced. Renewables are available only part of the time, so other types of electricity suppliers are still needed when supply temporarily isn’t available. In a sense, all they are replacing is part of the fuel required to make electricity. The fixed costs of backup electricity providers are not adequately compensated, nor are the costs of the added complexity introduced into the system.

If analysts give wind and solar full credit for replacing electricity, as BP does, then, on a world basis, wind electricity replaced 6% of total electricity consumed in 2020. Solar electricity replaced 3% of total electricity provided, and hydro replaced 16% of world electricity. On a combined basis, wind and solar provided 9% of world electricity. With hydro included as well, these renewables amounted to 25% of world electricity supply in 2020.

The share of electricity supply provided by wind, solar and hydro varies across the world, as shown in Figure 2. The European Union is highest at 32%; Japan is lowest at 17%.

Figure 2. Wind, solar and hydro as a share of total electricity supply for selected parts of the world, based on BP’s 2021 Statistical Review of World Energy data.

The “All Other” grouping of countries shown in Figure 2 includes many of the poorer countries. These countries often use quite a bit of hydro, even though the availability of hydro tends to fluctuate a great deal, depending on weather conditions. If an area is subject to wet seasons and dry seasons, there is likely to be very limited electricity supply during the dry season. In areas with snow melt, very large supplies are often available in spring, and much smaller supplies during the rest of the year.

Thus, while hydro is often thought of as being a reliable source of power, this may or may not be the case. Like wind and solar, hydro often needs fossil fuel back-up if industry is to be able to depend upon having electricity year-around.

[5] Most modelers have not understood that reserve to production ratios greatly overstate the amount of fossil fuels and other minerals that the economy will be able to extract.

Most modelers have not understood how the world economy operates. They have assumed that as long as we have the technical capability to extract fossil fuels or other minerals, we will be able to do so. A popular way of looking at resource availability is as reserve to production ratios. These ratios represent an estimate of how many years of production might continue, if extraction is continued at the same rate as in the most recent year, considering known resources and current technology.

Figure 3. Reserve to production ratios for several minerals, based on data from BP’s 2021 Statistical Review of World Energy.

A common belief is that these ratios understate how much of each resource is available, partly because technology keeps improving and partly because exploration for these minerals may not be complete.

In fact, this model of future resource availability greatly overstates the quantity of future resources that can actually be extracted. The problem is that the world economy tends to run short of many types of resources simultaneously. For example, World Bank Commodities Price Data shows that prices were high in January 2022 for many materials, including fossil fuels, fertilizers, aluminum, copper, iron ore, nickel, tin and zinc. Even though prices have run up very high, this is not an indication that producers will be able to use these high prices to extract more of these required materials.

In order to produce more fossil fuels or more minerals of any kind, preparation must be started years in advance. New oil wells must be built in suitable locations; new mines for copper or lithium or rare earth minerals must be built; workers must be trained for all of these areas. High prices for many commodities can be a sign of temporarily high demand, or it can be a sign that something is seriously wrong with the system. There is no way the system can ramp up needed production in a huge number of areas at once. Supply lines will break. Recession is likely to set in.

The problem underlying the recent spike in prices seems to be “diminishing returns.” Such diminishing returns affect nearly all parts of the economy simultaneously. For each type of mineral, miners produced the easiest-t0-extract materials first. They later moved on to deeper oil wells and minerals from lower grade ores. Pollution gradually grew, so it too needed greater investment. At the same time, world population has been growing, so the economy has required more food, fresh water and goods of many kinds; these, too, require the investment of resources of many kinds.

The problem that eventually hits the economy is that it cannot maintain economic growth. Too many areas of the economy require investment, simultaneously, because diminishing returns keeps ramping up investment needs. This investment is not simply a financial investment; it is an investment of physical resources (oil, coal, steel, copper, etc.) and an investment of people’s time.

The way in which the economy would run short of investment materials was simulated in the 1972 book, The Limits to Growth, by Donella Meadows and others. The book gave the results of a number of simulations regarding how the world economy would behave in the future. Virtually all of the simulations indicated that eventually the economy would reach limits to growth. A major problem was that too large a share of the output of the economy was needed for reinvestment, leaving too little for other uses. In the base model, such limits to growth came about now, in the middle of the first half of the 21st century. The economy would stop growing and gradually start to collapse.

[6] The world economy seems already to be reaching limits on the extraction of coal and natural gas to be used for balancing electricity provided by intermittent renewables.

Coal and natural gas are expensive to transport, so if they are exported, they primarily tend to be exported to countries that are nearby. For this reason, my analysis groups together exports and imports into large regions where trade is most likely to take place.

If we analyze natural gas imports by part of the world, two regions stand out as having the most out-of-region natural gas imports: Europe and Asia-Pacific. Figure 4 shows that Europe’s out-of-region natural gas imports reached peaks in 2007 and 2010, after which they dipped. In recent years, Europe’s imports have barely surpassed their prior peaks. Asia-Pacific’s out-of-region imports have shown a far more consistent growth pattern over the long term.

Figure 4. Natural gas imports in exajoules per year, based on data from BP’s 2021 Statistical Review of World Energy.

The reason why Asia-Pacific’s imports have been growing is to support its growing manufacturing output. Manufacturing output has increasingly been shifted to the Asia-Pacific Region, partly because this region can perform this manufacturing cheaply, and partly because rich countries have wanted to reduce their carbon footprint. Moving heavy industry abroad reduces a country’s reported CO2 generation, even if the manufactured items are imported as finished products.

Figure 5 shows that Europe’s own natural gas supply has been falling. This is a major reason for its import requirements from outside the region.

Figure 5. Europe’s natural gas production, consumption and imports based on data from BP’s 2021 Statistical Review of World Energy.

Figure 6, below, shows that Asia-Pacific’s total energy consumption per capita has been growing. The new manufacturing jobs transferred to this region have raised standards of living for many workers. Europe, on the other hand, has reduced its local manufacturing. Its people have tended to get poorer, in terms of energy consumption per capita. Service jobs necessitated by reduced energy consumption per capita have tended to pay less well than the manufacturing jobs they have replaced.

Figure 6. Energy consumption per capita for Europe compared to Asia-Pacific, based on data from BP’s 2021 Statistical Review of World Energy.

Europe has recently been having conflicts with Russia over natural gas. The world seems to be reaching a situation where there are not enough natural gas exports to go around. The Asia-Pacific Region (or at least the more productive parts of the Asia-Pacific Region) seems to be able to outbid Europe, when local natural gas supply is inadequate.

Figure 7, below, gives a rough idea of the quantity of exports available from Russia+ compared to Europe’s import needs. (In this chart, I compare Europe’s total natural gas imports (including pipeline imports from North Africa and LNG from North Africa) with the natural gas exports of Russia+ (to all nations, not just to Europe, including both by pipeline and as LNG).) On this rough basis, we find that Europe’s natural gas imports are greater than the total natural gas exports of Russia+.

Figure 7. Total natural gas imports of Europe compared to total natural gas exports from Russia+, based on data from BP’s 2021 Statistical Review of World Energy.

Europe is already encountering multiple natural gas problems. Its supply from North Africa is not as reliable as in the past. The countries of Russia+ are not delivering as much natural gas as Europe would like, and spot prices, especially, seem to be way too high. There are also pipeline disagreements. Bloomberg reports that Russia will be increasing its exports to China in future years. Unless Russia finds a way to ramp up its gas supplies, greater exports to China are likely to leave less natural gas for Russia to export to Europe in the years ahead.

If we look around the world to see what other sources of natural gas exports are available for Europe, we discover that the choices are limited.

Figure 8. Historical natural gas exports based on data from BP’s 2021 Statistical Review of World Energy. Rest of the world includes Africa, the Middle East and the Americas excluding the United States.

The United States is presented as a possible choice for increasing natural gas imports to Europe. One of the catches with growing natural gas exports from the United States is the fact that historically, the US has been a natural gas importer; it is not clear how much exports can rise above the 2022 level. Furthermore, part of US natural gas is co-produced with oil from shale. Oil from shale is not likely to be growing much in future years; in fact, it very likely will be declining because of depleted wells. This may limit the US’s growth in natural gas supplies available for export.

The Rest of the World category on Figure 8 doesn’t seem to have many possibilities for growth in imports to Europe, either, because total exports have been drifting downward. (The Rest of the World includes Africa, the Middle East, and the Americas excluding the United States.) There are many reports of countries, including Iraq and Turkey, not being able to buy the natural gas they would like. There doesn’t seem to be enough natural gas on the market now. There are few reports of supplies ramping up to replace depleted supplies.

With respect to coal, the situation in Europe is only a little different. Figure 9 shows that Europe’s coal supply has been depleting, and imports have not been able to offset this depletion.

Figure 9. Europe’s coal production, consumption and imports, based on data from BP’s 2021 Statistical Review of World Energy.

If a person looks around the world for places to get more imports for Europe, there aren’t many choices.

Figure 10. Coal production by part of the world, based on data from BP’s 2021 Statistical Review of World Energy.

Figure 10 shows that most coal production is in the Asia-Pacific Region. With China, India and Japan located in the Asia-Pacific Region, and high transit costs, this coal is unlikely to leave the region. The United States has been a big coal producer, but its production has declined in recent years. It still exports a relatively small amount of coal. The most likely possibility for increased coal imports would be from Russia and its affiliates. Here, too, Europe is likely to need to outbid China to purchase this coal. A better relationship with Russia would be helpful, as well.

Figure 10 shows that world coal production has been essentially flat since 2011. A country will only export coal that it doesn’t need itself. Thus, a shortfall in export capability is an early warning sign of inadequate overall supply. With the economies of many Asia-Pacific countries still growing rapidly, demand for coal imports is likely to grow for this region. While modelers may think that there is close to 150 years’ worth of coal supply available, real-world experience suggests that coal limits are being reached already.

[7] Conclusion. Modelers and leaders everywhere have had a basic misunderstanding of how the economy operates and what limits we are up against. This misunderstanding has allowed scientists to put together models that are far from the situation we are actually facing.

The economy operates as an integrated whole, just as the body of a human being operates as an integrated whole, rather than a collection of cells of different types. This is something most modelers don’t understand, and their techniques are not equipped to deal with.

The economy is facing many limits simultaneously: too many people, too much pollution, too few fish in the ocean, more difficult to extract fossil fuels and many others. The way these limits play out seems to be the way the models in the 1972 book, The Limits to Growth, suggest: They play out on a combined basis. The real problem is that diminishing returns leads to huge investment needs in many areas simultaneously. One or two of these investment needs could perhaps be handled, but not all of them, all at once.

The approach of modelers, practically everywhere, is to break down a problem into small parts, and assume that each part of the problem can be solved independently. Thus, those concerned about “Peak Oil” have been concerned about running out of oil. Finding substitutes seemed to be important. Those concerned about climate change were convinced that huge amounts of fossil fuels remain to be extracted, even more than the amounts indicated by reserve to production ratios. Their concern was finding substitutes for the huge amount of fossil fuels that they believed remained to be extracted, which could cause climate change.

Politicians could see that there was some sort of huge problem on the horizon, but they didn’t understand what it was. The idea of substituting renewables for fossil fuels seemed to be a solution that would make both Peak Oilers and those concerned about climate change happy. Models based on the substitution of renewables for fossil fuels seemed to please almost everyone. The renewables approach suggested that we have a very long timeframe to deal with, putting the problem off, as long into the future as possible.

Today, we are starting to see that renewables are not able to live up to the promise modelers hoped they would have. Exactly how the situation will play out is not entirely clear, but it looks like we will all have front row seats in finding out.

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2022: Energy limits are likely to push the world economy into recession

In my view, there are three ways a growing economy can be sustained:

  1. With a growing supply of cheap-to-produce energy products, matched to the economy’s energy needs.
  2. With growing debt and other indirect promises of future goods and services, such as rising asset prices.
  3. With growing complexity, such as greater mechanization of processes and supply lines that extend around the world.

All three of these approaches are reaching limits. The empty shelves some of us have been seeing recently are testimony to the fact that complexity is reaching a limit. And the growth in debt looks increasingly like a bubble that can easily be popped, perhaps by rising interest rates.

In my view, the first item listed is critical at this time: Is the supply of cheap-to-produce energy products growing fast enough to keep the world economy operating and the debt bubble inflated? My analysis suggests that it is not. There are two parts to this problem:

[a] The cost of producing fossil fuels and delivering them to where they are needed is rising rapidly because of the effects of depletion. This higher cost cannot be passed on to customers, without causing recession. Politicians will act to keep prices low for the benefit of consumers. Ultimately, these low prices will lead to falling production because of inadequate reinvestment to offset depletion.

[b] Non-fossil fuel energy products are not living up to the expectations of their developers. They are not available when they are needed, where they are needed, at a low enough cost for customers. Electricity prices don’t rise high enough to cover their true cost of production. Subsidies for wind and solar tend to drive nuclear electricity out of business, leaving an electricity situation that is worse, rather than better. Rolling blackouts can be expected to become an increasing problem.

In this post, I will explore the energy-related issues that are contributing to the recessionary trends that the world economy is facing, starting later in 2022.

[1] World oil supplies are unlikely to rise very rapidly in 2022 because of depletion and inadequate reinvestment. Even if oil prices rise higher in the first part of 2022, this action cannot offset years of underinvestment.

Figure 1. Crude oil and liquids production quantities through 2020 based on EIA data. “IEA Estimate” adds IEA indicated increases in 2021 and 2022 to historical EIA liquids estimates. Tverberg Estimate relates to crude oil production.

The IEA, in its Oil Market Report, December 2021, forecasts a 6.4-million-barrel increase in world oil production in 2022 over 2021. Indications through September of 2021 strongly suggest that there was only a small rebound (about 1 million bpd) in the world’s oil production in 2021 compared to 2020. In my view, the IEA’s view that liquids production will increase by a huge 6.4 million barrels a day between 2021 and 2022 defies common sense.

The basic reason why oil production is low is because oil prices have been too low for producers since about 2012. Companies have had to cut back on developing new fields in higher cost areas because oil prices have not been high enough to justify such investments. For example, producers from shale formations could add new wells outside the rapidly depleting “core” regions if the oil price were much higher, perhaps $120 to $150 per barrel. But US WTI oil prices averaged only $57 per barrel in 2019, $39 per barrel in 2020, and $68 per barrel in 2021, so this new investment has not been started.

Recently, oil prices have been over $80 per barrel, but even this is considered too high by politicians. For example, countries are releasing oil from their strategic oil reserves to try to force oil prices down. The reason why politicians are interested in low oil prices is because if the price of oil rises, both the price of food and the cost of commuting are likely to rise, since oil is used in farming and in commuting. Inflation is likely to become a problem, making citizens unhappy. Wages will go less far, and politicians who allow high oil prices will be voted out of office.

[2] Natural gas production can be expected to rise by 1.6% in 2022, but this small increase will not be enough to meet the needs of the world economy.

Figure 2. Natural gas production though 2020 based on data from BP’s 2021 Statistical Review of World Energy. For 2020 and 2021, Tverberg estimates reflect increases similar to IEA indications, so only one indication is shown.

With natural gas production growing at a little less than 2% per year, a major issue is that there is not enough natural gas to “go around.” Natural gas is the smallest of the fossil fuels in quantity. We are depending on its growth to solve many problems, simultaneously:

  • To increase natural gas imports for countries whose own production is declining
  • To provide quick relief from inadequate production by wind turbines and solar panels, whenever such relief is needed
  • To offset declining coal consumption related to a combination of issues (depletion, high pollution, climate change concerns)
  • To help increase world electricity supply, as transportation and other processes are gradually electrified

Furthermore, the rate at which natural gas supply increases cannot easily be speeded up because (a) the development of new fields, (b) the development of transportation structures (pipeline or Liquefied Natural Gas (LNG) ships), and (c) the development of storage facilities all require major upfront expenditures. All of these must be planned years in advance. They require huge amounts of resources of many kinds. The selling price of natural gas must be high enough to cover all of the resource and labor costs. For those familiar with the concept of Energy Returned on Energy Invested (EROEI), the basic problem is that the delivered EROEI falls too low when all of the many parts of the system are considered.

Storage is extremely important for natural gas because fluctuations tend to occur in the quantity of natural gas the overall system requires. For example, if stored natural gas is available, it can be used when wind turbines are not producing enough electricity. Also, a huge amount of energy is needed in winter to keep homes warm and to keep the lights on. If sufficient natural gas can be stored for months at a time, it can help provide this additional energy.

As a gas, natural gas is difficult to store. In practice, underground caverns are used for storage, assuming caverns of the right type are available. Trying to build storage, if such caverns are not available, is almost certainly an expensive undertaking. In theory, importing natural gas by pipeline or LNG can transfer the storage problem to LNG producers. This is not a satisfactory solution, however. Without adequate storage available to sellers, this means that natural gas can be extracted for only part of the year and LNG ships can only be used for part of the year. As a result, return on investment is likely to be poor.

Now, in 2022, we are hitting the issue of very slowly rising natural gas production head-on in many parts of the world. Countries that import natural gas without long-term contracts are facing spiking prices. Countries in Europe and Asia are especially affected. The United States has mostly been isolated from the spiking prices thanks to producing its own natural gas. Also, only a small portion of the natural gas produced by the US is exported (9% in 2020).

The reason for the small export percentage is because shipping natural gas as LNG tends to be very expensive. Long-distance LNG shipping only makes economic sense if there is a several dollar (or more) price differential between the buyer’s price and the seller’s costs that can be used to cover the high transport costs.

We now seem to be reaching a period of spiking natural gas prices, especially for countries importing natural gas without long-term contracts. If natural gas prices rise, this will tend to make electricity prices rise because natural gas is often burned to produce electricity. Products made with high-priced electricity will be less competitive in a world market. Individual citizens will become unhappy with their high cost of heat and light.

High natural gas prices can have very adverse consequences. In areas with high prices, products made using natural gas as a raw material will tend to be squeezed out. One such product is urea, used as a nitrogen fertilizer. With less nitrogen fertilizer available, food production is likely to fall. If food prices rise in response to short supply, consumers will tend to reduce discretionary spending to ensure that there are sufficient funds for food. A reduction in discretionary spending is one way recession starts.

Inadequate growth in world natural gas production can be expected to hit poor countries especially hard. For example, a recent article mentions LNG suppliers backing out of planned deliveries of LNG to Pakistan, given the high prices available elsewhere. Another article indicates that Kosovo, a poor country in Europe, is experiencing rolling blackouts. Eventually, if natural gas available for export remains limited in supply, electricity blackouts can be expected to spread more widely, to less poor parts of Europe and around the world.

[3] World coal production can be expected to decline, further pushing the world economy toward recession.

Figure 3 shows my estimate for world coal production, next to a recent IEA forecast.

Figure 3. Coal production through 2020 based on data from BP’s 2021 Statistical Review of World Energy. “IEA Estimate” adds IEA indicated increases to historical BP coal quantities. Tverberg Estimate provides lower estimates for 2021 and 2022, considering depletion issues.

Figure 3 shows that world coal consumption has not been rising for about a decade.

Coal seems to be having the same problem with rising costs as oil. The cost of producing the coal is rising because of depletion, but citizens cannot afford to pay more for end products made with coal, such as electricity, steel and solar panels. Coal producers need higher prices to cover their higher costs, but it becomes increasingly difficult to pass these higher costs on to consumers. This is because politicians want to keep electricity prices low to keep their citizens and businesses happy.

If the cost of electricity rises, the cost of goods made with high-priced electricity will tend to rise. Businesses will find their sales falling in response to higher prices. In turn, they will tend to lay off workers. This is a recipe for recession, but a slightly different one than the ones mentioned earlier. It also is a good way for politicians not to get re-elected. As a result, politicians will try to hide rising coal costs from customers. For example, laws may be enacted capping electricity prices that can be charged to customers. Because of this, some electricity companies may be forced out of business.

The decrease in coal production I am showing for 2022 is only 1%, but when this small reduction is combined with the growth problems shown for coal and oil and the rising world population, it means that world coal supplies will be stretched.

China is the world’s largest coal producer and consumer. A major concern is that the country has serious coal depletion problems. It has experienced rolling blackouts since the fall of 2020. It has tried to encourage its own production by limiting coal imports, thus keeping wholesale coal prices high for local producers. It also limits the extent to which high coal costs can be passed on to electricity customers. As a result, the 2021 profits of electricity companies are expected to be reduced.

[4] The US may have some untapped coal resources that could be tapped, if there is a plan to ship more natural gas to Europe and other areas in need of the fuel.

The possibility of additional US coal production occurs because coal production in the US seems to have occurred because of competition from incredibly inexpensive natural gas (Figure 4). To some extent, this low natural gas price results from laws prohibiting oil and gas companies from “flaring” (burning off) natural gas that is too expensive to produce relative to the price it can be sold for. Prohibitions against flaring are a type of mandated subsidy of natural gas production by the oil-producing portion of “Oil & Gas” companies. This required subsidy leads to part of the need for high oil prices, especially for companies drilling in shale formations.

Figure 4. US coal production amounts through 2020 are from BP’s 2021 Statistical Review of World Energy. Amounts for 2021 and 2022 are estimated based on forecasts from EIA’s Short Term Energy Outlook. Natural gas prices are average annual Henry Hub spot prices per million Btus, based on EIA data.

A major reason why US coal extraction started to decline about 2009 is because a very large amount of shale gas production started becoming available then as a byproduct of oil production from shale. Oil producers were primarily interested in extracting oil because it (hopefully) sold for a high price. Natural gas was a byproduct whose collection was barely economic, given its low selling price. Also, the economy didn’t have uses, such as trucks powered by natural gas, for all of this extra natural gas production. Figure 4 suggests that wholesale natural gas prices dropped by close to half, in response to this extra supply.

With these low natural gas prices, as well as coal pollution concerns, a significant amount of US electricity production was switched from coal to natural gas. It is my view that this change left coal in the ground, potentially for later use. Thus, if natural gas prices rise again, US coal production could perhaps rise again. The catch, of course, is that many coal-fired electricity-generating plants in the US have been taken out of service. In addition, coal mines have been closed. Any increase in future coal production would likely take place very slowly because of the need for many simultaneous changes.

[5] On a combined basis, using Tverberg Estimates for 2021 and 2022, fossil fuel production in total takes a step down in 2020 and doesn’t rise much in 2021 and 2022.

Figure 5. Sum of Tverberg Estimates related to oil, coal, and natural gas. Oil includes natural gas liquids but not biofuels. Historical amounts are from BP’s 2021 Statistical Review of World Energy.

Figure 5 shows that on a combined basis, the overall energy being provided by fossil fuels is likely to remain lower in 2021 and 2022 than it was in 2018 and 2019. This is concerning, because the economy cannot go back to its 2019 level of “openness” and optional travel for sightseers, without a big step up in energy supply, especially for oil.

This same figure shows that the production of the three fossil fuels is somewhat similar in quantity: Oil is the highest, coal is second, and natural gas comes in third. However, oil shows a step down in 2020’s production from which it has not recovered. Coal shows a smoother pattern of rise and eventual fall. So far, natural gas has mostly been rising, but not very steeply in recent years.

[6] Alternatives to fossil fuels are not living up to early expectations. Electricity from wind turbines and solar panels is not available when it is needed, requiring a great deal of back-up electricity generated by fossil fuels or nuclear. The total quantity of non-fossil fuel electricity is far too low. A transition now will simply lead to electricity blackouts and recession.

Figure 6 shows a summary of non-fossil fuel energy production for the years 2000 through 2020, without a projection to 2022. For clarification, wind and solar are part of the electrical renewables category.

Figure 6. World energy production for various categories, based on data from BP’s 2021 Statistical Review of World Energy.

Figure 6 shows that nuclear electricity production has been declining at the same time that the production of electrical renewables has been increasing. In fact, a significant decrease in nuclear electricity is planned in Europe in 2022. This reduction in nuclear electricity is part of what is causing the concern about electricity supply for Europe for 2022.

The addition of wind and solar to an electrical grid seems to encourage the closure of nuclear electricity plants, even if they have many years of safe production still ahead of them. This happens because wind and solar are given the subsidy of “going first,” if they happen to have electricity available. Wind and solar may also be subsidized in other ways.

The net result of this arrangement is that wholesale electricity prices set through competitive markets quite frequently fall too low for other electricity producers (apart from wind and solar). For example, wind and solar electricity that is produced during weekends may be unneeded because many businesses are closed. Electricity produced by wind and solar in the spring and fall may be unneeded because heating and cooling needs tend to be low at these times of the year. Wind and solar electricity providers are not asked to cut back supply because their production is unneeded; instead, low (or negative) prices encourage other electricity producers to cut back supply.

Nuclear electricity producers are particularly adversely affected by this pricing arrangement because they cannot save money by cutting back their output when wind and solar are over-producing electricity, relative to demand. This strange pricing arrangement leads to unacceptably low profits for many nuclear electricity providers. They may voluntarily choose to be closed. Local governments find that if they want to keep their nuclear electricity producers, they need to subsidize them.

Wind and solar, with their subsidies, tend to look more profitable to investors, even though they cannot support the economy without a substantial amount of supplementary electricity production from other electricity providers, which, perversely, they are driving out of business through their subsidized pricing structure.

The fact that wind and solar cannot be depended upon has become increasingly obvious in recent months, as coal, natural gas and electricity prices have spiked in Europe because of low wind production. In theory, coal and natural gas imports should make up the shortfall, at a reasonable price. But total volumes available for import have not been increasing in the quantities that consumers need them to increase. And, as mentioned above, nuclear electricity production is increasingly unavailable as well.

[7] The total quantity of non-fossil fuel energy supplies is not very large, relative to the quantity of fossil fuel energy. Even if these non-fossil fuel energy supplies increase at a trend rate similar to that in the recent past, they do not make up for the projected fossil fuel production deficit.

Figure 7. Total energy production, based on the fossil fuel estimates in Figure 5 together with non-fossil fuels in Figure 6.

With respect to anticipated future non-fossil fuel electricity generation, one issue is how much nuclear is being shut off. I would imagine these current closure schedules could change, if countries become aware that they may be facing rolling blackouts without nuclear.

A second issue is the growing awareness that renewables don’t really work as intended. Why add more if they don’t really work?

A third issue is new studies suggesting that prices being paid for locally generated electricity may be too generous. Based on such an analysis, California is proposing a major reduction to its payments for renewable-generated electricity, starting July 1, 2022. This type of change could reduce new installations of solar panels on homes in California. Other locations may decide to make similar changes.

I have shown two estimates of future non-fossil fuel energy supply in Figure 7. The high estimate reflects a 4.5% annual increase in the total supply, in line with recent past increases for the group in total. The lower one assumes that 2021 production is similar to that in 2020 (because of more nuclear being closed, for example). Production for 2022 represents a 5% decrease from 2021’s production.

Regardless of which assumption is made, growth in non-fossil fuel electricity supply is not very important in the overall total. The world economy is still mostly powered by fossil fuels. The share of non-fossil fuels relative to total energy ranges from 16% to 18% in 2020, based on my low and high estimates.

[8] The energy narrative we are being told is mostly the narrative that politicians would like us to believe, rather than the narrative that historians and physicists would develop.

Politicians would like us to believe that we live in a world of everlasting economic growth and that the only thing we should fear is climate change. They base their analyses on models by economists who seem to think that an “invisible hand” will fix all problems. The economy can always grow; enough fossil fuels and other resources will always be available. Governments seem to be able to print money; somehow, this money will be transformed into physical goods and services. With these assumptions, the only problems are distant ones that central banks and carbon taxes can handle.

The realists are historians and physicists. They tell us that a huge number of past economies have collapsed when their populations attempted to grow at the same time that their resource bases were depleting. These realists tell us that there is a high probability that our current economy will eventually collapse, as well.

Figure 8. The Seneca Cliff by Ugo Bardi

The general shape that economic growth is likely to take is that of a “Seneca Curve” or “Seneca Cliff.” In the words of Lucius Annaeus Seneca in the first century CE, “Increases are of sluggish growth, but the way to ruin is rapid.” If we think of the amount graphed as the total quantity of goods and services received by citizens, the amount tends to rise slowly, gradually plateaus and then falls.

We now seem to be encountering lower energy supply while population continues to rise. It takes energy for any activity that we think of as contributing to GDP to occur. We should not be surprised if we are at the edge of a recession. If we cannot get our energy problems solved, the downturn could be very long-lasting.

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Merry Christmas to All

I plan to write a new post in a few days. For now, I will just leave an open thread.

I hope everyone has happy holidays of whatever type you celebrate. This is a good time to be with family and friends.

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