Increased Violence Reflects an Energy Problem

Why are we seeing so much violence recently? One explanation is that people are sympathizing with those in the Minneapolis area who are upset at the death of George Floyd. They believe that a white cop used excessive force in subduing Floyd, leading to his death.

I believe that there is a much deeper story involved. As I wrote in my recent post, Understanding Our Pandemic – Economy Predicament, the problem we are facing is too many people relative to resources, particularly energy resources. This leads to a condition sometimes referred to as “overshoot and collapse.” The economy grows for a while, may stabilize for a time, and then heads in a downward direction, essentially because energy consumption per capita falls too low.

Strangely enough, this energy crisis looks like a crisis of affordability. The young and the poor, especially, cannot afford to buy goods and services that they need, such as a home in which to raise their children and a vehicle to drive. Trying to do so leaves them with excessive debt. If the affordability problem changes for the worse, the young and the poor are likely to protest. In fact, these protests may become violent. 

The pandemic tends to make the affordability problem worse for minorities and young people because they are disproportionately affected by job losses associated with lockdowns. In many cases, the poor catch COVID-19 more frequently because they live and/or work in crowded conditions where the disease spreads easily. In the US, blacks seem to be especially hard hit, both by COVID-19 and through the loss of jobs. These issues, plus the availability of guns, makes the situation particularly explosive in the US.

Let me explain these issues further.

[1] Energy is required for all aspects of the economy.

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Debunking ‘Lower Oil Supply Will Raise Prices’

We often hear the statement, “When oil supply is lower, oil prices will rise because of scarcity.” Now, we are getting to see firsthand whether oil prices really do rise, as oil supplies become more scarce.

Figure 1. Figure from the OPEC Monthly Oil Market Report for August 2019 showing world and OPEC oil production by month.

Figure 1 shows that world oil supply hit a peak in November 2018 and has declined since then, mostly because of a decline in OPEC’s production. So, total oil production seems to be down for about eight months, relative to the peak in November 2018.

Despite this big cutback by OPEC in its oil production, prices have not responded as OPEC had hoped:

Figure 2. Average monthly spot Brent Oil prices, based on EIA data.

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The World’s Fragile Economic Condition – Part 1

Where is the world economy heading? In my opinion, a large portion of the story that we usually hear about how the world economy operates and the role energy plays is not really correct. In this post (to be continued in Part 2 in the near future), I explain how some of the major elements of the world economy seem to function. I also point out some relationships that tend to make the world’s economic condition more fragile.

Trying to explain the situation a bit further, the economy is a networked system. It doesn’t behave the way nearly everyone expects it to behave. Many people believe that any energy problem will be signaled by high prices. A look at history shows that this is not really the case: fighting and conflict are also likely outcomes. In fact, rising tariffs are a sign of energy problems.

The underlying energy problem represents a conflict between supply and demand, but not in the way most people expect. The world needs rising demand to support the rising cost of energy products, but this rising demand is, in fact, very difficult to produce. The way that this rising demand is normally produced is by adding increasing amounts of debt, at ever-lower interest rates. At some point, the debt bubble created to provide the necessary demand becomes overstretched. Now, we seem to be reaching a situation where the debt bubble may pop, at least in some parts of the world. This is a very concerning situation.

Context. The presentation discussed in this post was given to the Casualty Actuaries of the Southeast. (I am a casualty actuary myself, living in the Southeast.) The attendees tended to be quite young, and they tended not to be very aware of energy issues. I was trying to “bring them up to speed.” This is a link to the presentation: The World’s Fragile Economic Condition.

Slide 1

Slide 2

This post covers only Items 1, 2, and 3 from the Outline in Slide 2. I will save Items 3 through 6 for a post called “The World’s Fragile Economic Condition-Part 2.”

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How energy shortages really affect the economy

Many people expect energy shortages to lead to high prices. This is based on their view of what “running out” of oil might do to the economy.

In this post, I look at historical data surrounding inadequate energy supply. I also consider some of the physics associated with the situation. I see a strange coincidence between when coal production peaked (hit its maximum production before declining) in the United Kingdom and when World War I broke out. There was an equally strange coincidence between when the highest quality coal peaked in Germany and when World War II broke out. A good case can be made that inadequate energy supply is associated with conflict and fighting because leaders recognize how important an adequate energy supply is.

Some of my previous analysis has shown that if we view energy in terms of average energy supply per person, the world as a whole may be again entering into a period of inadequate energy supply. If my view is correct that inadequate energy supply leads to increased conflict, the recent discord that we have been seeing among world leaders may be related to today’s low supply of energy. (My energy analysis considers the combined energy supply available per person from fossil fuels, nuclear, and renewables. It is not simply an oil-based analysis.)

The physics of the low energy situation may be trying to “freeze out” the less efficient portions of the economy. If successful, the outcome might be analogous to the collapse of the central government of the Soviet Union in 1991, after oil prices had been low for several years. Total energy consumption of countries involved in the collapse dropped by close to 40%, on average. The rest of the world benefitted from lower oil prices (resulting from lower total demand). It also benefitted from the oil that remained in the ground and consequently was available for extraction in recent years, when we really needed it.

The idea that oil prices can rise very high seems to be based on the oil price increases of the 1970s and of the early 2000s. While oil prices can temporarily rise very high, it is hard to make a case that they can remain high for an extended period. For one thing, high oil prices tend to cause recessions and lower employment. In such an environment, affordability of energy products is lower, and oil prices tend to fall. For another, it is easy for the Federal Reserve to get oil prices back down by raising interest rates. In fact, the Federal Reserve is raising interest rates right now.

In my opinion, we should be more concerned about low oil prices than high because we live in a world economy with huge debt bubbles. Debt bubbles are part of what enable today’s high employment. Debt bubbles support employers that are close to the edge financially; they also support buyers who would not be able afford automobiles or college educations, if loans were to become more expensive because of higher interest rates. Employment in the affected industries would be cut back, leading to recession.

Because of these issues, pricking the debt bubble is likely to lead to a major recession and, indirectly, lower energy prices, as in late 2008 (Figure 12). These lower prices are not good news because energy providers of all kinds need fairly high energy prices to survive–probably equivalent to oil at $80 per barrel or higher. If energy prices stay persistently low, the world is likely to see much lower oil supply, in part because oil exporters need the tax revenue that they obtain from high-priced oil to fund their programs.  Continue reading

Nine Reasons Why Globalization Can’t Be Permanent

Since the late 1990s, globalization has seemed to be the great hope for the future. Now this great hope seems to be dimming. Globalization sets up conflict in the area of jobs. Countries around the world compete for development and jobs. If there is not enough cheap-to-produce energy to go around, huge wage disparity is likely to result.

We know from physics and history that economies need to grow, or they collapse. The wage disparity that high-wage countries have been experiencing in recent years is evidence that the world economy is already reaching energy limits. There are no longer enough jobs that pay well to go around. Any drop in energy supply is likely to worsen the job situation.

Most observers miss this problem, because they expect high oil prices to signal energy limits. This time, the signal is low wages for a significant group of workers, rather than high oil prices. This situation is possible in a networked economy, but it is not what most people look for.

Unhappy citizens can be expected to react to the wage disparity problem by electing leaders who favor limits to globalization. This can only play out in terms of reduced globalization.

History and physics suggest that economies without adequate energy supply can be expected to collapse. We have several recent examples of partial collapses, including the Great Depression of the 1930s and the collapse of the Soviet Union. Such collapses, or even more extensive collapses, might occur again if we cannot find energy alternatives that can be quickly scaled up to replace oil and coal in the very near term. These replacements need to be cheap-to-produce, non-polluting, and available in huge quantities.

The story that the economy doesn’t really need a growing supply of very cheap-to-produce energy is simply a myth. Let’s look at some of the pieces of this story. Continue reading