No politician wants to tell us the real story of fossil fuel depletion. The real story is that we are already running short of oil, coal and natural gas because the direct and indirect costs of extraction are reaching a point where the selling price of food and other basic necessities needs to be unacceptably high to make the overall economic system work. At the same time, wind and solar and other “clean energy” sources are nowhere nearly able to substitute for the quantity of fossil fuels being lost.
This unfortunate energy story is essentially a physics problem. Energy per capita and, in fact, resources per capita, must stay high enough for an economy’s growing population. When this does not happen, history shows that civilizations tend to collapse.
Politicians cannot possibly admit that today’s world economy is headed for collapse, in a way similar to that of prior civilizations. Instead, they need to provide the illusion that they are in charge. The self-organizing system somehow leads politicians to put forward reasons why the changes ahead might be desirable (to avert climate change), or at least temporary (because of sanctions against Russia).
In this post, I will try to try to explain at least a few of the issues involved.
[1] Citizens around the world can sense that something is very wrong. It looks like the economy may be headed for a serious recession in the near term.
Consumer sentiment is at an extraordinarily low level, worse than during the 2008-2009 great recession according to a chart (Figure 2) shown on the University of Michigan Survey of Consumers website. According to the same website, nearly 48% of consumers blame inflation for eroding their standard of living. Food prices have risen significantly. Over the past year, the cost of car ownership has escalated, as has the cost of buying or renting a home.
The situation in Europe is at least as bad, or worse. Citizens are worried about possibly “freezing in the dark” this winter if electricity generation cannot be maintained at an adequate level. Natural gas supplies, mostly purchased from Russia by pipeline, are less available and high-priced. Coal is also high-priced. Because of the fall of the Euro relative to the US dollar, the price of oil in euros is as high as it was in 2008 and 2012.
Many other countries, besides those in the Eurozone, are experiencing low currencies relative to the dollar. Some examples include Argentina, India, Pakistan, Nigeria, Turkey, Japan, and South Korea.
China has problems with developers of condominium homes for its citizen. Many of these homes cannot be delivered to purchasers as promised. As a protest, buyers are withholding payments on their unfinished homes. To make matters worse, the prices of condominium homes have started to fall, leading to a loss of value of these would-be investments. All of this could lead to serious problems for the Chinese banking industry.
Even with these major problems, central banks in the US, the UK and the Eurozone are raising target interest rates. The US is also implementing Quantitative Tightening, which also tends to raise interest rates. Thus, central banks are intentionally raising the cost of borrowing. It doesn’t take much insight to see that the combination of price inflation and higher borrowing costs is likely to force consumers to cut back on spending, leading to recession.
[2] Politicians will avoid talking about possible future economic problems related to inadequate energy supply.
Politicians want to get re-elected. They want citizens to think that everything is OK. If there are energy supply problems, they need to be framed as being temporary, perhaps related to the war in Ukraine. Alternatively, any issue that arises will be discussed as if it can easily be fixed with new legislation and perhaps a little more debt.
Businesses also want to minimize problems. They want citizens to place orders for their goods and services, without the fear of being laid off. They would like the news media to publish stories saying that any economic dip is likely to be very mild and temporary.
Universities don’t mind problems, but they want the problems to be framed as solvable ones that will offer their students opportunities for jobs that will pay well. A near-term, unsolvable predicament is not helpful at all.
[3] What is wrong is a physics problem. The operation of our economy requires energy of the correct type and the right quantity.
The economy is something that grows through the “dissipation” of energy. Examples of dissipation of energy include the digestion of food to give energy to humans, the burning of fossil fuels, and the use of electricity to power a light bulb. A rise in world energy consumption is highly correlated with growth in the world economy. Falling energy consumption is associated with economic contraction.
In physics terms, the world economy is a dissipative structure, just as all plants, animals and ecosystems are. All dissipative structures have finite lifespans, including the world economy.
This finding is not well known because academic researchers seem to operate in ivory towers. Researchers in economic departments aren’t expected to understand physics and how it applies to the economy. In fairness to academia, the discovery that the economy is a dissipative structure did not occur until 1996. It takes a long time for findings to filter through from one department to another. Even now, I am one of a very small number of people in the world writing about this issue.
Also, economic researchers are not expected to study the history of the many smaller, more-localized civilizations that have collapsed in the past. Typically, the population of these smaller civilizations increased at the same time as the resources used by the population started to degrade. The use of technology, such as dams to redirect water flows, may have helped for a while, but eventually this was not enough. The combination of declining availability of high quality resources and increasing population tended to leave these civilizations with little margin for dealing with the bad times that can be expected to occur by chance. In many cases, such civilizations collapsed after disease epidemics, a military invasion, or a climate fluctuation that led to a series of crop failures.
[4] Many people have been confused by common misunderstandings regarding how an economy really works.
[a] Standard economics models foster the belief that the economy can continue to grow without a corresponding increase in energy supply.
When economic models are designed with labor and capital being the important inputs, energy supply doesn’t seem to be needed, at all.
[b] People seem to understand that legislation capping apartment rents will stop the building of new apartments, but they do not make the same connection with steps taken to hold down fossil fuel prices.
If efforts are made to bring down the prices of fossil fuels (such as raising interest rates and adding oil from the US petroleum reserves to increase total oil supply), we need to expect that extraction will be adversely affected. One article reports that Saudi Arabia does not seem to be using recent record profits to quickly raise reinvestment to the level that seemed to be required a few years ago. This suggests that Saudi Arabia needs prices that are quite a bit higher than $100 per barrel in order to take significant steps toward extracting the country’s remaining resources. This would seem to contradict published reserves that, in theory, take current prices into consideration.
Reuters reports that Venezuela has reneged on its promise to send more oil to Europe, under an oil for debt deal. It wants oil product swaps instead, since it is lacking in its ability to make finished products from its oil itself. It would take a long run of prices much higher than today’s level for Venezuela to be able to sufficiently invest in infrastructure to do such refining. Venezuela reports the highest oil reserves in the world (303.8 thousand million barrels), even higher than Saudi Arabia’s reported 297.5 thousand million barrels, but neither country can be counted on to take major steps to raise supply.
Similarly, there have been reports that US shale drillers are not investing to keep production growing, despite what seem to be sufficiently high prices. There are simply too many issues. The cost of new investment is very high, outside of the already drilled sweet spots. Also, there is no guarantee the price will stay high. There are also supply line issues, such as whether appropriate steel drilling pipes and fracking sand will be available, when needed.
[c] Published information suggests that there is a huge amount of fossil fuels remaining to be extracted, given today’s level of technology. If we assume that technology will get better and better, it is easy to believe that any fossil fuel limit is hundreds of years in the future.
The way the economy works, the extraction limit is really an affordability issue. If the cost of extraction rises too high, relative to what people around the world have for spendable income, production will stop because demand (in terms of what people can afford) will drop too low. People will tend to cut back on discretionary spending, such as vacation travel and meals in restaurants, cutting back on demand for fossil fuels.
[d] How “demand” works is poorly understood. Very often, researchers and the general public assume that demand for energy products will automatically remain high.
A surprisingly large share of demand is tied to the need for food, water, and basic services such as schools, roads, and bus service. Poor people require these basics just as much as rich people do. There are literally billions of poor people in the world. If the wages of poor people fall too low relative to the wages of rich people, the system cannot work. Poor people find that they must spend nearly all their income on food, water and housing. As a result, they have little left to pay taxes to support basic governmental services. Without adequate demand from poor people, the prices of commodities tend to fall too low to encourage reinvestment.
The majority of fossil fuel use is by commercial and industrial users. For example, natural gas is often used in making nitrogen fertilizer. If the price of natural gas is high, the price of fertilizer will rise higher than farmers are willing to pay for the fertilizer. Farmers will cut back on fertilizer use, reducing yields for their crops. The farmers’ own costs will be lower, but there will be less of the desired crops grown, perhaps indirectly raising overall food prices. This is not a connection that economic modelers build into their models.
The lockdowns of 2020 show that governments can indeed ramp up demand (and thus prices) for energy products by sending out checks to citizens. We are now seeing that the approach seems to produce inflation rather than more energy production. Also, countries without energy resources of their own may see their currencies fall with respect to the US dollar.
[e] It is not true that energy types can easily be substituted for one another.
In energy modeling, such as in calculating “Energy Return on Energy Invested,” a popular assumption is that all energy is substitutable for other energy. This isn’t true, unless a person accounts for all of the details of the transition, and the energy needed to make such a transition possible.
For example, intermittent electricity, such as that generated by wind turbines or solar panels, is not substitutable for load-following electricity. Such intermittent electricity is not always available when people need it. Some of this intermittency is very long-term. For example, wind-generated electricity may be low for more than a month at a time. In the case of solar energy, the problem tends to be storing up enough electricity during summer months for use in winter. A naive person might assume that adding a few hours of battery backup would fix intermittency problems, but such a fix turns out to be very inadequate.
If people are not to freeze in the dark in winter, longer-term solutions are needed. One standard approach is to use a fossil fuel system to fill in the gaps when wind and solar are not available. The catch, then, is that the fossil fuel system really needs to be a year-around system, with trained staffing, pipelines and adequate fuel storage. A modeler needs to consider the need to build a whole double system instead of a single system.
Because of intermittency issues, electricity from wind and solar only substitute for fuels (coal, natural gas, uranium) that operate our current system. Publications often talk about the cost of intermittent electricity being at “grid parity” when its temporary cost seems to match the cost of grid electricity, but this is matching “apples and oranges.” The cost comparison needs to be in comparison to the average cost of fuel for plants producing electricity, rather than to electricity prices.
Another popular assumption is that electricity can be substituted for liquid fuels. For example, in theory, every piece of farm equipment could be redesigned and rebuilt to be based on electricity, rather than diesel, which is typically used today. The catch is that there would need to be an enormous number of batteries built and eventually disposed of for this transition to work. There would need also need to be factories to build all this new equipment. We would need an international trade system operating extraordinarily well, to find all the raw materials. Likely, there would still not be enough raw materials to make the system work.
[f] There is a great deal of confusion about expected oil and other energy prices, as an economy reaches energy limits.
This issue is closely related to [4][d], with respect to the confusion about how energy demand works. A common assumption among analysts is that “of course” oil prices will rise, as limits are approached. This assumption is based on the standard supply and demand curve used by economists.
The issue is that the availability of inexpensive energy products very much affects demand as well as supply. Jobs that pay well are only available if inexpensive energy products can leverage human labor. For example, surgeons today perform robotic surgery, requiring, at a minimum, a stable source of electricity for each operation. Furthermore, the equipment used in the surgery is created using fossil fuels. Surgeons also use anesthetic products that require fossil fuels. Without today’s fancy equipment, surgeons would not be able to charge nearly as much they do for their services.
Thus, it is not immediately obvious whether demand or supply would tend to fall faster, if energy supply should hit limits. We know that Revelation 18:11-13 in the Bible provides a list of a number of commodities, including humans sold as slaves, for which prices dropped very low at the time of the collapse of ancient Babylon. This suggests that at least sometimes during prior collapses, the problem was too low demand (and too low prices), rather than too low supply of energy products.
[5] The International Energy Agency and politicians around the world have recommended a transition to the use of wind and solar to try to prevent climate change for quite a few years. This approach seemed to have the approval of both those concerned about too much burning of fossil fuels causing climate change and those concerned about too little fossil fuel energy causing economic collapse.
A rough estimate of what the decline in energy supply might look like under the rapid shift to renewables proposed by politicians is shown in Figure 6.
If a person understands the connection between energy consumption and the economy, such a rapid drop in energy supply looks like something that would likely be associated with economic collapse. The goal of politicians seems to be to keep citizens from understanding how awful the situation really is by reframing the story of the decline in energy supply as something politicians and economists have chosen to do, to try to prevent climate change for the sake of future generations.
The rich and powerful can see this change as a good thing if they themselves can profit from it. When there is not enough energy, the physics of the situation tends to lead to increasing wage and wealth disparities. Wealthy individuals see this outcome as a good thing: They can perhaps personally profit. For example, Bill Gates has amassed about 270,000 acres of farmland in the United States, including newly purchased farmland in North Dakota.
Furthermore, politicians see that they can have more control over populations if they can direct citizens in a way that will use less energy. For example, bank accounts can be linked to some type of social credit score. Politicians will explain that this is for people’s own good–to prevent the spread of disease or to prevent undesirables from using too much of the available resources.
One way of dramatically reducing energy consumption is by mandating shutdowns in an area, purportedly to prevent the spread of Covid-19, as China has been doing recently. Such shutdowns can be explained as being needed to stop the spread of disease. These shutdowns can also help hide other problems, such as not having enough fuels to prevent rolling blackouts of electricity.
[6] We are living in a truly unusual time, with a major energy problem being hidden from view.
Politicians cannot tell the world how bad the energy situation really is. The problem with near-term energy limits has been known since at least 1956 (M. King Hubbert) and 1957 (Hyman Rickover). The problem was confirmed in the modeling performed for the 1972 book, The Limits to Growth by Donella Meadows and others.
Most high-level politicians are aware of the energy supply issue, but they cannot possibly talk about it. Instead, they choose to talk about what would happen if the economy were allowed to speed ahead without limits, and how bad the consequences of that might be.
Militaries around the world are no doubt well aware of the fact that there will not be enough energy supplies to go around. This means that the world will be in a contest for who gets how much. In a war-like setting, we should not be surprised if communications are carefully controlled. The views we can expect to hear loudly and repeatedly are the ones governments and influential individuals want ordinary citizens to hear.
By Gail Tverberg
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