How Energy Transition Models Go Wrong

I have written many posts relating to the fact that we live in a finite world. At some point, our ability to extract resources becomes constrained. At the same time, population keeps increasing. The usual outcome when population is too high for resources is “overshoot and collapse.” But this is not a topic that the politicians or central bankers or oligarchs who attend the World Economic Forum dare to talk about.

Instead, world leaders find a different problem, namely climate change, to emphasize above other problems. Conveniently, climate change seems to have some of the same solutions as “running out of fossil fuels.” So, a person might think that an energy transition designed to try to fix climate change would work equally well to try to fix running out of fossil fuels. Unfortunately, this isn’t really the way it works.

In this post, I will lay out some of the issues involved.

[1] There are many different constraints that new energy sources need to conform to.

These are a few of the constraints I see:

  • Should be inexpensive to produce
  • Should work with the current portfolio of existing devices
  • Should be available in the quantities required, in the timeframe needed
  • Should not pollute the environment, either when created or at the end of their lifetimes
  • Should not add CO2 to the atmosphere
  • Should not distort ecosystems
  • Should be easily stored, or should be easily ramped up and down to precisely match energy timing needs
  • Cannot overuse fresh water or scarce minerals
  • Cannot require a new infrastructure of its own, unless the huge cost in terms of delayed timing and greater materials use is considered.

If an energy type is simply a small add-on to the existing system, perhaps a little deviation from the above list can be tolerated, but if there is any intent of scaling up the new energy type, all of these requirements must be met.

It is really the overall cost of the system that is important. Historically, the use of coal has helped keep the overall cost of the system down. Substitutes need to be developed considering the overall needs and cost of the system.

The reason why the overall cost of the system is important is because countries with high-cost energy systems will have a difficult time competing in a world market since energy costs are an important part of the cost of producing goods and services. For example, the cost of operating a cruise ship depends, to a significant extent, on the cost of the fuel it uses.

In theory, energy types that work with different devices (say, electric cars and trucks instead of those operated by internal combustion engines) can be used, but a long delay can be expected before a material shift in overall energy usage occurs. Furthermore, a huge ramp up in the total use of materials for production may be required. The system cannot work if the total cost is too high, or if the materials are not really available, or if the timing is too slow.

[2] The major thing that makes an economy grow is an ever increasing supply of inexpensive-to-produce energy products.

Food is an energy product. Let’s think of what happens when agriculture is mechanized, typically using devices that are made and operated using coal and oil. The cost of producing food drops substantially. Instead of spending, for example, 50% of a person’s wages on food, the percentage can gradually drop down to 20% of wages, and then to 10% of wages for food, and eventually even, say, to 2% of wages for food.

As spending on food falls, opportunity for other spending arises, even with wages remaining relatively level. With lower food expenditures, a person can spend more on books (made with energy products), or personal transportation (such as a vehicle), or entertainment (also made possible by energy products). Strangely enough, in order for an economy to grow, essential items need to become an ever decreasing share of everyone’s budget, so that citizens have sufficient left-over income available for more optional items.

It is the use of tools, made and operated with inexpensive energy products of the right types, that leverages human labor so that workers can produce more food in a given period of time. This same approach also makes many other goods and services available.

In general, the less expensive an energy product is, the more helpful it will be to an economy. A country operating with an inexpensive mix of energy products will tend to be more competitive in the world market than one with a high-cost mix of energy products. Oil tends to be expensive; coal tends to be inexpensive. This is a major reason why, in recent years, countries using a lot of coal in their energy mix (such as China and India) have been able to grow their economies much more rapidly than those countries relying heavily on oil in their energy mixes.

[3] If energy products are becoming more expensive to produce, or their production is not growing very rapidly, there are temporary workarounds that can hide this problem for quite a number of years.

Back in the 1950s and 1960s, world coal and oil consumption were growing rapidly. Natural gas, hydroelectric and (a little) nuclear were added, as well. Cost of production remained low. For example, the price of oil, converted to today’s dollar value, was less than $20 per barrel.

Once the idyllic 1950s and 1960s passed, it was necessary to hide the problems associated with the rising cost of production using several approaches:

  • Increasing use of debt – really a promise of future goods and services made with energy
  • Lower interest rates – permits increasing debt to be less of a financial burden
  • Increasing use of technology – to improve efficiency in energy usage
  • Growing use of globalization – to make use of other countries’ cheaper energy mix and lower cost of labor

After 50+ years, we seem to be reaching limits with respect to all of these techniques:

  • Debt levels are excessive
  • Interest rates are very low, even below zero
  • Increasing use of technology as well as globalization have led to greater and greater wage disparity; many low level jobs have been eliminated completely
  • Globalization has reached its limits; China has reached a situation in which its coal supply is no longer growing

[4] The issue that most people fail to grasp is the fact that with depletion, the cost of producing energy products tends to rise, but the selling prices of these energy products do not rise enough to keep up with the rising cost of depletion.

As a result, production of energy products tends to fall because production becomes unprofitable.

As we get further and further away from the ideal situation (oil less than $20 per barrel and rising in quantity each year), an increasing number of problems crop up:

  • Both oil/gas companies and coal companies become less profitable.
  • With lower energy company profits, governments can collect less taxes from these companies.
  • As old wells and mines deplete, the cost of reinvestment becomes more of a burden. Eventually, new investment is cut back to the point that production begins to fall.
  • With less growth in energy consumption, productivity growth tends to lag. This happens because energy is required to mechanize or computerize processes.
  • Wage disparity tends to grow; workers become increasingly unhappy with their governments.

[5] Authorities with an incorrect understanding of why and how energy supplies fall have assumed that far more fossil fuels would be available than is actually the case. They have also assumed that relatively high prices for alternatives would be acceptable.

In 2012, Jorgen Randers prepared a forecast for the next 40 years for The Club of Rome, in the form of a book, 2052, with associated data. Looking at the data, we see that Randers forecast that world coal consumption would grow by 28% between 2010 and 2020. In fact, world coal consumption grew by 0% in that period. (This latter forecast is based on BP coal consumption estimates for 2010 and 2019 from BP’s Statistical Review of World Energy 2020, adjusted for the 2019 to 2020 period change using IEA’s estimate from its Global Energy Review 2021.)

It is very easy to assume that high estimates of coal resources in the ground will lead to high quantities of actual coal extracted and burned. The world’s experience between 2010 and 2020 shows that it doesn’t necessarily work out that way in practice. In order for coal consumption to grow, the delivered price of coal needs to stay low enough for customers to be able to afford its use in the end products it provides. Much of the supposed coal that is available is far from population centers. Some of it is even under the North Sea. The extraction and delivery costs become far too high, but this is not taken into account in resource estimates.

Forecasts of future natural gas availability suffer from the same tendency towards over-estimation. Randers estimated that world gas consumption would grow by 40% between 2010 and 2020, when the actual increase was 22%. Other authorities make similar overestimates of future fuel use, assuming that “of course,” prices will stay high enough to enable extraction. Most energy consumption is well-buried in goods and services we buy, such as the cost of a vehicle or the cost of heating a home. If we cannot afford the vehicle, we don’t buy it; if the cost of heating a family’s home rises too high, thrifty families will turn down the thermostat.

Oil prices, even with the recent run-up in prices, are under $75 per barrel. I have estimated that for profitable oil production (including adequate funds for high-cost reinvestment and sufficient taxes for governments), oil prices need to be over $120 per barrel. It is the lack of profitability that has caused the recent drop in production. These profitability problems can be expected to lead to more production declines in the future.

With this low-price problem, fossil fuel estimates used in climate model scenarios are almost certainly overstated. This bias would be expected to lead to overstated estimates of future climate change.

The misbelief that energy prices will always rise to cover higher costs of production also leads to the belief that relatively high-cost alternatives to fossil fuels would be acceptable.

[6] Our need for additional energy supplies of the right kinds is extremely high right now. We cannot wait for a long transition. Even 30 years is too long.

We saw in section [3] that the workarounds for a lack of growing energy supply, such as higher debt and lower interest rates, are reaching limits. Furthermore, prices have been unacceptably low for oil producers for several years. Not too surprisingly, oil production has started to decline:

Figure 1 – World production of crude oil and condensate, based on data of the US Energy Information Administration

What is really needed is sufficient energy of the right types for the world’s growing population. Thus, it is important to look at energy consumption on a per capita basis. Figure 2 shows energy production per capita for three groupings:

  • Tier 1: Oil and Coal
  • Tier 2: Natural Gas, Nuclear, and Hydroelectric
  • Tier 3: Other Renewables, including Intermittent Wind and Solar
Figure 2 World per capita energy consumption by Tier. Amounts through 2019 based on BP Statistical Review of World Energy 2020. Changes for 2020 based on estimates provided by IEA Global Energy Review 2021.

Figure 2 shows that the biggest drop is in Tier 1: Coal and Oil. In many ways, coal and oil are foundational types of energy for the economy because they are relatively easy to transport and store. Oil is important because it is used in operating agricultural machinery, road repair machinery, and vehicles of all types, including ships and airplanes. Coal is important partly because of its low cost, helping paychecks to stretch further for finished goods and services. Coal is used in many ways, including electricity production and making steel and concrete. We use coal and oil to keep electricity transmission lines repaired.

Figure 2 shows that Tier 2 energy consumption per capita was growing rapidly in the 1965 to 1990 period, but its growth has slowed in recent years.

The Green Energy sources in Tier 3 have been growing rapidly from a low base, but their output is still tiny compared to the overall output that would be required if they were to substitute for energy from both Tier 1 and Tier 2 sources. They clearly cannot by themselves power today’s economy.

It is very difficult to imagine any of the Tier 2 and Tier 3 energy sources being able to grow without substantial assistance from coal and oil. All of today’s Tier 2 and Tier 3 energy sources depend on coal and oil at many points in the chain of their production, distribution, operation, and eventual recycling. If we ever get to Tier 4 energy sources (such as fusion or space solar), I would expect that they too will need oil and/or coal in their production, transport and distribution, unless there is an incredibly long transition, and a huge change in energy infrastructure.

[7] It is easy for energy researchers to set their sights too low.

[a] We need to be looking at the extremely low energy cost structure of the 1950s and 1960s as a model, not some far higher cost structure.

We have been hiding the world’s energy problems for years behind rising debt and falling interest rates. With very high debt levels and very low interest rates, it is becoming less feasible to stimulate the economy using these approaches. We really need very inexpensive energy products. These energy products need to provide a full range of services required by the economy, not simply intermittent electricity.

Back in the 1950s and 1960s, the ratio of Energy Earned to Energy Investment was likely in the 50:1 range for many energy products. Energy products were very profitable; they could be highly taxed. The alternative energy products we develop today need to have similar characteristics if they truly are to play an important role in the economy.

[b] A recent study says that greenhouse gas emissions related to the food system account for one-third of the anthropogenic global warming gas total. A way to grow sufficient food is clearly needed.

We clearly cannot grow food using intermittent electricity. Farming is not an easily electrified endeavor. If we do not have an alternative, the coal and oil that we are using now in agriculture really needs to continue, even if it requires subsidies.

[c] Hydroelectric electricity looks like a good energy source, but in practice it has many deficiencies.

Some of the hydroelectric dams now in place are over 100 years old. This is nearing the lifetime of the concrete in the dams. Considerable maintenance and repair (indirectly using coal and oil) are likely to be needed if these dams are to continue to be used.

The water available to provide hydroelectric power tends to vary greatly over time. Figure 3 shows California’s hydro electricity generation by month.

Figure 3. California hydroelectric energy production by month, based on data of the US Energy Information Administration.

Thus, as a practical matter, hydroelectric energy needs to be balanced with fossil fuels to provide energy which can be used to power a factory or heat a home in winter. Battery storage would never be sufficient. There are too many gaps, lasting months at a time.

If hydroelectric energy is used in a tropical area with dry and wet seasons, the result would be even more extreme. A poor country with a new hydroelectric power plant may find the output of the plant difficult to use. The electricity can only be used for very optional activities, such as bitcoin mining, or charging up small batteries for lights and phones.

Any new hydroelectric dam runs the risk of taking away the water someone else was depending upon for irrigation or for their own electricity generation. A war could result.

[d] Current approaches for preventing deforestation mostly seem to be shifting deforestation from high income countries to low income countries. In total, deforestation is getting worse rather than better.

Figure 4. Forest area percentage of land area, by income group, based on data of the World Bank.

Figure 4 shows that deforestation is getting rapidly worse in Low Income countries with today’s policies. There is also a less pronounced trend toward deforestation in Middle Income countries. It is only in High Income countries that land areas are becoming more forested. In total (not shown), the forested area for the world as a whole falls, year after year.

Also, even when replanting is done, the new forests do not have the same characteristics as those made by natural ecosystems. They cannot house as many different species as natural ecosystems. They are likely to be less resistant to problems like insect infestations and forest fires. They are not true substitutes for the forest ecosystems that nature creates.

[e] The way intermittent wind and solar have been added to the electric grid vastly overpays these providers, relative to the value they add to the system. Furthermore, the subsidies for intermittent renewables tend to drive out more stable producers, degrading the overall condition of the grid.

If wind and solar are to be used, payments for the electricity they provide need to be scaled back to reflect the true value that they add to the overall system. In general, this corresponds to the savings in fossil fuel purchases that electricity providers need to make. This will be a small amount, perhaps 2 cents per kilowatt hour. Even this small amount, in theory, might be reduced to reflect the greater electricity transmission costs associated with these intermittent sources.

We note that China is making a major step in the direction of reducing subsidies for wind and solar. It has already dramatically cut its subsidies for wind energy; new subsidy cuts for solar energy will become effective August 1, 2021.

A major concern is the distorting impact that current pricing approaches for wind and solar have on the overall electrical system. Often, these approaches produce very low, or negative, wholesale prices for other providers. Nuclear providers are especially harmed by such practices. Nuclear is, of course, a low CO2 electricity provider.

It seems to me that in each part of the world, some utility-type provider needs to be analyzing what the overall funding of the electrical system needs to be. Bills to individuals and businesses need to reflect these actual expected costs. This approach might avoid the artificially low rates that the current pricing system often generates. If adequate funding can be achieved, perhaps some of the corner cutting that leads to electrical outages, such as recently encountered in California and Texas, might be avoided.

[8] When I look at the requirements for a successful energy transition and the obstacles we are up against, it is hard for me to see that any of the current approaches can be successful.

Unfortunately, it is hard for me to see how intermittent electricity can save the world economy, or even make a dent in our problems. We have searched for a very long time, but haven’t yet found solutions truly worth ramping up. Perhaps a new “Tier 4 approach” might be helpful, but such solutions seem likely to come too late.

Posted in Energy policy | Tagged fossil fuels, low oil prices, solar energy, wind energy | 3,781 Comments

Don’t expect the world economy to resume its prior growth pattern after COVID-19

Most people seem to think that the world economy is going through a temporary disruption, caused by a novel coronavirus. As soon as COVID-19 goes away, they expect the economy will be back to normal. I think that this assessment is overly optimistic. The way I see the situation, the world economy was already having severe growth problems, caused indirectly by resource problems, even before COVID-19 hit.

In a growing world economy, a person might expect that workers would be getting richer, so that they could afford an increasing quantity of goods and services. What we really see is something very different. The number of new automobiles sold was falling in many major countries long before COVID-19 hit, even as population was generally rising. Clearly, something was seriously wrong.

Figure 1. Auto sales for selected countries, based on data of CarSalesBase.com.

As I see the situation, the world has a resource problem. Resources of many kinds, including fresh water, energy products, and minerals of many kinds were becoming more difficult (and expensive) to extract, even before 2020. Substitution might have worked if the problem were only one or two resources, but not with several major resources. Cutting back was the only answer.

Thus, the shutdowns for COVID-19 came at a convenient time, allowing economies that were already doing poorly to shut down. Needless to say, there was no world leader who was willing to explain this hidden issue to the world population. Instead, world leaders used standardized code words such as “we need to move to renewables” or “we need to reduce carbon use by 2050 to prevent climate change.” Unfortunately, the ability to move to alternatives in this time frame is simply an illusion, allowing world leaders to avoid mentioning the serious resource issues that the world economy is really facing.

I expect that within a few months, a new crisis of some sort (perhaps financial) will come along, further reducing resource use. This will happen, whether or not the problem of the novel coronavirus is solved. In this post, I will try to explain the situation.

[1] The world’s economy is a self-organizing system, powered by the laws of physics. It requires a mix of resources, including energy resources, to operate.

The laws of physics require that energy be “dissipated” whenever activities we associate with generating GDP take place. For example, if a person is to drive a truck, he/she will need to eat food for his/her own personal energy. This food is “dissipated” by digestion. If the truck is to transport goods, it will need to burn some type of fuel, such as diesel. This fuel is dissipated by burning. If a computer is to operate, it will need to dissipate electricity. If a room (or a liquid) is to be heated or cooled, some sort of energy dissipation will be required.

The world economy grows in a very orderly manner. It gradually adds population, as more babies are born than people die. All of these people need food and fresh water; they also need some type of housing and clothing to protect them from the elements. Ideally, they need some type of transportation in addition to walking. Businesses are formed to enable access to goods and services that fill these needs. Governments are also formed to provide services used by all and to regulate the system. A financial system is formed to facilitate transactions, among other things.

The world economy cannot slow down and quickly restart. This is especially the case for an economy that had already started slowing, even before the 2020 pandemic. If not enough resources of the right kinds were available to enable true economic growth before the pandemic, it is hard to see how the situation would be very much improved a year later.

One key to understanding how a self-organizing economy works is to understand that the economy is multi-sided. Businesses need to make an adequate profit, to continue in operation. Workers need to earn an adequate wage to raise a family. Customers need affordable prices. Shortages of inexpensive-to-extract resources can lead to many different problems: lack of profitability for producers, or too much wage disparity among workers, or too high prices for customers. Resource shortages can also lead to people with inadequate wages wanting to migrate. They can also lead to empty shelves in stores.

[2] Depleted coal mines near population centers in China have adversely affected the Chinese economy more than it tells the outside world.

China joined the World Trade Organization (WTO) in December 2001. The Kyoto Protocol mandated that 37 industrialized nations cut their greenhouse gas emissions. More than 100 developing countries, including China and India, were exempt from the treaty. This combination of events allowed China to greatly ramp up its economy, building many new roads, factories and housing units from concrete, with little competition from the 37 industrialized economies.

China had very large coal resources, which it ramped up (Figure 2). Of course, this greatly increased world coal consumption, an effect precisely the opposite of the stated purpose of the Kyoto Protocol–to reduce world CO2 emissions.

Figure 2. World and China coal consumption, based on data of BP’s Statistical Review of World Energy 2020. China imported 7.4% of its coal supply in 2019, so China’s coal production would be similar, but it would hit limits a bit sooner and harder.

The problem that China ran into about 2013 was that its coal mines, especially those near population centers, began depleting. The cost of extraction started rising because the thickest coal seams, closest to the surface, were badly depleted. In theory, there was still a great deal more coal available from those mines if the price would rise sufficiently high. Coal from new mines that were more distant from population centers might also be used if the price would rise high enough to include overland transport costs.

Coal prices didn’t rise to match the higher cost of production. If they had risen, they would have raised the cost of many goods manufactured for export, making these industries less profitable. Because coal prices stayed too low for coal producers, over 70% of China’s coal companies were reported to be unprofitable by the first half of 2014.

China closed unprofitable mines and added new mines at more distant locations. China’s coal production has struggled in recent years. A constant problem has been keeping coal prices high enough to cover the rising cost of extraction and delivery to population centers. There are recent indications that coal supply is inadequate: Parts of China experienced rolling blackouts in the winter of 2020-2021, and warnings have been given to expect possible electricity shortages this summer. China has been accepting few coal imports, largely because it wants to keep its local prices sufficiently high that its own coal producers can be profitable.

China uses coal in many ways, including generating electricity, making steel, and manufacturing cement, which is the most important ingredient in concrete. Concrete is used in producing roads, bridges and buildings of all types, including high rise buildings used in many places in China.

Figure 3 shows that China’s cement production fell at a time similar to that at which coal production “flattened out.” This would not be surprising if a shortage of coal led China to cut back on its use of cement in order to save coal for electricity production.

Figure 3. Cement production for the World and China based on USGS data.

China, like other countries, has been seeing its population rise. Figure 4 shows coal and cement amounts for China on a per capita basis. This approach shows that, viewed on a per person basis, both coal consumption and concrete production have been falling since about 2013-2014. In fact, coal consumption began to fall slightly before cement production, suggesting that the fall in coal consumption is the cause of the fall in cement production.

Figure 4. Cement production from the USGS and coal consumption from BP’s Statistical Review of World Energy 2020, divided by population from the World Population Prospects 2019 by the United Nations.

[3] A decrease in new home building in the United States after 2008, as well as the recent difficulty in ramping construction back up again, are further evidence that the world is reaching resource limits of some kind.

Figure 5. New US privately owned single-family housing units divided by US population, multiplied by a constant. This gives a measure of per capita growth in new single-family housing units. Chart prepared by the St. Louis Federal Reserve.

Figure 5, above, shows that the number of new single-family housing units, relative to population, dropped dramatically after late 2005, early 2006. (This was when US Federal Reserve target interest rates rose, leading to higher borrowing costs for both builders and purchasers.) New home building plunged before and during the Great Recession. Building of new units has not ramped up very much, since then.

Even in 2020 and early 2021, the number of new units being started is very low by historical standards. It certainly wouldn’t be surprising if a lack of resources is part of what is depressing new home production. It may also be causing the spurt in resource prices (for example, lumber and copper) when new-home production does try to ramp up.

[4] World oil production seems to be falling for the same reason that China’s coal production stopped growing: Prices are too low for producers because of depletion issues. Oil producers cannot make an adequate profit, so they are reducing production.

Figure 6. World oil production through 2020 based on data of the US Energy Information Administration.

World crude oil production was at its highest level ever in 2018. It has fallen ever since.

Figure 7 shows that oil production has been falling in many parts of the world in recent years.

Figure 7. Crude and condensate oil production for selected areas of the world, based on data of the US Energy Information Administration.

The shining star of crude oil production, at least until recently, has been the United States with its shale oil production.

Figure 8. US crude and condensate oil production for the 48 states, Alaska, and for shale basins, based on data of the US Energy Information Administration.

Unfortunately, with low prices, US shale oil is unprofitable. Shale production fell in 2020, and indications for the year 2021 are down as well.

Worldwide, the oil industry seems to require a price of $120 per barrel or more to make investment in new production profitable, and current prices are far below this. Part of this high price is required to provide adequate tax revenue for oil exporting countries that are dependent on this revenue.

[5] Relative to population, worldwide oil and coal consumption reached its highest level in 2007. It has fallen recently.

Figure 9. World per capita energy consumption, separated between “oil + coal” and all other. Data for 2019 and prior based on BP’s Statistical Review of World Energy 2020. Figures for 2020 reflect percentage changes anticipated by the International Energy Agency in its Global Energy Review 2021.

Figure 9 shows that on a per capita basis, combined oil and coal consumption reached its highest level in 2007 and dipped during the Great Recession. It reached somewhat of a plateau in the 2011 to 2013 period, but started slipping in 2014 and had fallen ever since. Those who follow oil prices closely will notice that combined oil and coal consumption per capita tends to be high when oil prices are high relative to other goods; consumption tends to be low when oil prices are low. The lower per capita oil and coal consumption since 2007 would be expected to hold back the production of “goods” of many kinds, including houses, automobiles, roads and electrical transmission lines.

The “All Other” category is really not a stand-alone category. It depends on oil and coal for its pipelines and electrical transmission, among other things. Without concrete bases, it would be difficult to have wind turbines. Solar panels without steel supports wouldn’t work well either. In theory, if a huge amount of transition were done, perhaps steel and concrete could be produced in reasonable quantities with only the “All Other” types of energy, but someone would need to figure out precisely how this could be accomplished, including the timeframe required.

[6] Inadequate fresh water supplies are a problem in many parts of the world.

The standard approach to getting fresh water has been to tap underground aquifers and tap them at rates far greater than they are refreshed. In some places, this leads to saltwater intrusion; in others, it leads to a falling water table. Some examples of areas with water problems include California, Saudi Arabia, India, China, and Cuba.

There are ways to work around these problems:

  • Digging deeper wells
  • Piping fresh water from a distance, nearly always uphill
  • Desalination

Implementing any of these workarounds for water shortages takes energy of different kinds, mostly coal (to make steel) and oil (for transporting goods and extracting metal ores). These workarounds make the cost of fresh water higher. Higher water costs are especially a problem for agriculture and for poor families, struggling with budgets that cover little more than the price of food and water.

If fixes for the fresh water supply problem cannot be found, irrigation will need to be cut back. Such a change would likely lead to a fall in world food supply.

[7] We are probably kidding ourselves if we think that production of semiconductor chips can be ramped up significantly in the future.

China is now a major producer for rare earth minerals, and it is practically the only processor of rare earth minerals. Semiconductor chips are created using rare earth minerals, water and huge amounts of heat in an exceptionally clean environment. The leading producer of chips is Taiwan, using raw materials from China. There is a long lead time required for building new factories. My concern arises because of the resource issues China and the rest of the world is facing.

We use semiconductor chips in many things, including computers, cell phones, automobiles and “smart” appliances. Without a ramp up in semiconductor chip production, many high-tech dreams for the future will likely remain only dreams.

[8] With a falling supply of coal and oil per capita and inadequate fresh water in many parts of the world, we have already reached the point where some types of “optional” activities need to be cut back.

An early optional activity that was cut back on was recycling. Oil prices fell in 2014, making the recycling of many types of goods, especially plastics, non-economic because the resale value of recycled products dropped with oil prices. China cut back greatly on its recycling efforts, effective January 1, 2018. Other countries have followed suit. China’s cutbacks on recycling allowed it to save its coal supplies (which were no longer growing, see Figures 2 and 4) for other activities that had the possibility of being more profitable.

In early 2020, cutbacks associated with the pandemic gave the world economy some “breathing room” with respect to resource shortages. Cutbacks in travel left more oil for other uses. Oil prices could drop back. This was especially helpful to countries that are big importers of oil, such as those in Figure 10, below. It is not surprising that some of the countries with the biggest oil import problems have been the most enthusiastic about travel cutbacks related to COVID-19.

Figure 10. Quantity of oil imported for selected countries, calculated in barrels of oil per person per year. Oil imports determined based on data from BP’s Statistical Review of World Energy 2020; population is from World Population Prospects 2019 by the United Nations.

[9] The world economy has a very serious resource problem. There seem to be three different approaches to hiding the problem, none of which will really solve the problem.

The serious problem that the world economy is encountering is the fact that the supply of both coal and oil are running short, especially when viewed on a per capita basis. The world is also very short of fresh water. China is affected as much, or more than, other countries by these problems. As a result, China’s future growth prospects are likely quite low, even though few are expecting this change. Without a continued strong forward “pull” from China, the world economy may be headed for “collapse,” a condition which has affected many civilizations in the past.

There seem to be three different approaches to doing something about the world’s resource limits problem, without mentioning the nature of the real underlying problem:

[a] Develop a “fear of future climate change” story by creating models that assume we have huge amounts of fossil fuels that can be burned in the future, even though the evidence is very much the opposite: We are “running out” of coal and oil right now, but in a different way than economists have theorized (low price, rather than high price). At the same time, argue that a transition to renewables (particularly intermittent wind and solar) is possible in the next 30 years. The fact that essential minerals for such a change, including copper and lithium, are themselves in short supply relative to the incredibly large quantities required, is overlooked. No one stops to calculate the true cost, measured in energy products and other materials, required by such a transition, either.

[b] Create a “fear of the coronavirus” story, and use it to keep people inside and away from traveling as much as possible. Emphasize the possibility of mutations. If people cut back on traveling, it saves oil. If they cut back on eating out and large celebrations such as weddings, it reduces food wastage. If a pandemic takes place, politicians can use it as an excuse to mitigate problems of many kinds:

  • Reduce the need for imported oil, by keeping citizens at home
  • Keep factories closed, without disclosing that the factories could not really operate at full capacity because of inadequate orders or missing raw materials
  • Use shutdowns to keep order in areas disrupted by uprisings related to low wages
  • Hide the problem of many failing stores and businesses behind a new “temporary” problem
  • Give the politician a new sense of control with new rules related to the epidemic

It is disturbing that back in 2010, the Rockefeller Foundation was looking at using pandemics to control people when the foundation was examining possible workarounds for too large a population relative to resources.

[c] Hide the existing resource problem with more debt, to the extent possible. In fact, having a circulating coronavirus has assisted in this effort because everyone can see the need for more debt on a temporary basis, “until this problem goes away.” Of course, the resource problem is not going away, which means the world is likely headed for serious financial problems when the economy tries to ramp up again. See my post, Headed for a Collapsing Debt Bubble.

[10] My expectation is that the world economy will try to bounce back from this pandemic, but it won’t really be able to bounce back.

There really aren’t enough resources of any kind to pull the world economy much farther forward. A day of reckoning seems to be coming, probably in the next few months. The financial system looks like it is the weakest link. If the world economy dramatically slows, borrowers will not be able to repay debt with interest. There may be rapid shifts in currency relativities, disrupting derivatives markets. International trade will become less and less possible, perhaps taking place only among a few trusted partners.

We seem to be headed for a rapidly changing world economy, and unfortunately not for the better.

Posted in Financial Implications | Tagged China coal, economic growth, oil prices, resource shortages | 3,576 Comments

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.

Posted in Financial Implications | Tagged high oil prices, low oil prices, media reporting, water scarcity | 3,735 Comments

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.

Posted in Financial Implications | Tagged herd immunity, vaccine | 3,514 Comments

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.

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