Tag Archives: unemployment

Inflation, Deflation, or Discontinuity?

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A question that seems to come up quite often is, “Are we going to have inflation or deflation?” People want to figure out how to invest. Because of this, they want to know whether to expect a rise in prices, or a fall in prices, either in general, or in commodities, in the future.

The traditional “peak oil” response to this question has been that oil prices will tend to rise over time. There will not be enough oil available, so demand will outstrip supply. As a result, prices will rise both for oil and for food which depends on oil.

I see things differently. I think the issue ahead is deflation for commodities as well as for other types of assets. At some point, deflation may “morph” into discontinuity. It is the fact that price falls too low that will ultimately cut off oil production, not the lack of oil in the ground.

Even with little oil, there will still be some goods and services produced. These goods and services will not necessarily be available to holders of assets of the kind we have today. Instead, they will tend to go to those who produced them, and to those who win them by fighting over them.

Up and Down Escalator Economies

It seems to me that economies operate on two kinds of escalators–an up escalator, and a down escalator. The up escalator is driven by a favorable feedback cycle; the down escalator is driven by an unfavorable feedback cycle.

For a long time, the US economy has been on an up escalator, fueled by growth in the use of cheap energy. This growth in cheap energy led to rising wages, as humans learned to use external energy to leverage their own meager ability to “perform work”–dig ditches, transport goods, perform computations, and do many other tasks that machines (powered by electricity or oil) could do much better, and more cheaply, than humans.

Debt helped lever this growth up even faster than it would otherwise ramp up. Continued growth in debt made sense, because growth seemed likely for as far in the future as anyone could see. We could borrow from the future, and have more now.

Unfortunately, there is also a down escalator for economies, and we seem to be headed in that direction now. Such down escalators have hit local economies before, but never a networked global economy. From this point of view, we are in uncharted territory.
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Energy Leveraging: An Explanation for China’s Success and the World’s Unemployment

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If an employer wants to maximize profits, it will want to leverage its use of high-priced energy sources.  From an employer’s point of view, there are basically three kinds of energy, from most to least expensive:

  1. Human energy
  2. Petroleum energy
  3. Everything else

If an employer wants to keep its costs low, it needs to minimize its use of expensive energy sources. The primary way it does this is by leveraging expensive energy sources with cheaper energy sources that help keep overall energy costs in line with what competitors (including overseas competitors) are paying. Thus, employers will want to use as little human and petroleum energy as possible, instead using cheap energy to substitute.

Human Energy

Human energy is the most expensive form of energy. It is very expensive because an employer needs to pay the employee enough to live on. This amount includes the cost of energy to fulfill the human’s needs, plus enough extra to cover taxes to cover the cost of energy for those who for some reason cannot work, plus taxes for maintenance of public infrastructure. An employer can keep his cost of human energy low by

  1. Substituting mechanical or electrical energy, which is usually cheaper.
  2. Hiring humans whose wage costs are low. Usually this means is humans who use little energy in their personal lives, and what energy is used, is cheap energy.
  3. Hiring in areas where taxes are low, usually reflecting a lack of benefits to employees. Continue reading →

Renewables Are Overrated, We Need Cheap Oil – Interview with Gail Tverberg

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This article originally appeared at Oilprice.com.

What does our world’s energy future look like? Does renewable energy feature as much in the energy production mix as many hope it will? Will natural gas and fracking help reduce our dependence upon oil and how will the world economy and trade fare as supplies of cheap oil continue to dwindle?

To help us take a look at this future scenario we had a chance to chat with Gail Tverberg – a well-known commentator on energy issues and author of the popular blog, Our Finite World

In the interview Gail talks about:

•    Why natural gas is not the energy savior we were hoping for
•    Why renewable energy will not live up to the hype
•    Why we shouldn’t write off nuclear energy
•    Why oil prices could fall in the future
•    Why our energy future looks fairly bleak
•    Why the government should be investing less in renewable energy
•    Why constant economic growth is not a realistic goal

Gail Tverberg is an independent researcher who examines questions related to oil supply, substitutes, and their impact on the economy. Her background is as a casualty actuary, making financial projections within the insurance industry. She became interested in the question of oil shortages in 2005, and has written and spoken about the expected impact of limited oil supply since then to a variety of audiences: insurance, academic, “peak oil”, and more general audiences. Her work can be found on her website, Our Finite World.

Interview conducted by James Stafford of Oilprice.com

Oilprice.com: Do you believe that shale gas is the energy savior we have been hoping for and can deliver all that has been promised? Or have we been oversold on its potential? Continue reading →