By Gail Tverberg: Why Energy-Economy Models Produce Overly Optimistic Indications

Gail Tverberg’s essay today provides an excellent summary of why collapse of civilization is inevitable and not too far in the future.

I remain fascinated by how almost all experts, leaders, and citizens deny what is going on.

https://ourfiniteworld.com/2017/03/29/why-energy-economy-models-produce-overly-optimistic-indications

Here are a few key ideas from the essay:

Producers and consumers of energy products are both important

  • Energy prices can be too high for consumers
  • Energy prices can be too low for producers

Both problems are equally important

  • World economy cannot operate without both being satisfied
  • Either a too low or a too high price is a problem

4-price-problem-only-appears-near-limit

We often hear about “Supply and Demand.” A better name for “demand” might be “amount affordable.”

The situation we have now is very much like a Ponzi Scheme. We need to keep adding more debt to keep wages and commodity prices high enough. At the same time, interest rates need to stay very low, to keep payments manageable, and keep the whole system from collapsing.

The balance sheets of insurance companies, banks, and pension plans include much debt. If these institutions are to make good on their promises to those with bank accounts, insurance policies, and pension plans, it is necessary for this debt to be repaid with interest. Back many years ago, debt jubilees were often given to selected debtors. These are out of the question now, because banks, insurance companies, and pension plans depend upon the future payments that this debt represents.

Growing debt is one of the waste outputs. Since we voluntarily seek out debt, we think of debt as an input. But if we think about the situation, debt is really is an adverse output. Required interest payments tend to pull funds out of the system that could otherwise be used to pay workers. Also, the rising use of debt tends to concentrate the ownership of “tools” among the already wealthy. Debt can grow for a while, but it has limits, because of the adverse impacts it creates for the economy.

Growing wage disparity occurs because of the increased specialization required by ever-rising use of tools and technology. Some people receive the benefit of advanced education and learning to use tools such as computers; others receive much less benefit. As a result, their wages lag behind. Wage disparity is another limit of the system. If a large share of the workers cannot afford to buy the output of the economy, “demand” falls too low, and commodity prices tend to fall.

Trying to run the economy on solar electricity alone (or solar plus wind plus water) is a futile exercise. One reason is that it would require massive changes to allow long-haul trucks and airplanes to operate on electricity.

Also, electricity is a high-cost energy product. Today, our economy operates on a mix of high and low cost energy products, with low cost energy products keeping the average cost down. Trying to run the economy on electricity alone is a bit like trying to run the economy using only PhDs. In theory it could be done, but it would be expensive to have PhDs waiting on tables in restaurants and delivering mail.

There is a different kind of EROEI that seems to me to be at least as likely, or more likely, to be the first limit that we will reach. That is the return that workers who are selling their labor simply as labor (without advanced education or supervisory responsibility) obtain. If these workers find that their wages drop too low, this will be a limit on the operation of the economy. Low wages will prevent these workers from buying houses and cars. If the wages of the large number of non-elite workers fall too low, commodity prices will tend to fall, and the system will tend to collapse because producers cannot make a profit at such a low price.

Biologists have been studying the return on the labor of animals for many years, because their populations tend to collapse, when animals are forced to expend too much labor in finding food. EROEI based on wages of non-elite workers would seem to be a closer parallel to the animal return on labor than fossil fuel EROEI.

We have multiple problems:

Problem 1. No dissipative structure can last forever.

Problem 2. As a dissipative structure, our economy seems to be reaching its end.

  • Partly because of slowing growth in energy consumption
  • Partly because of growing wage disparity.

Problem 3. We have ramped up recycling of debt as assets to an amazing level.

  • This debt recycling prevents debt jubilees
  • Leads to the likelihood that insurance companies, banks, and pension plans will fail, if the economy fails

Problems appear to be not far in the future:

Financial system is likely to be center of the storm

  • Most EROEI analysts miss this point

Economy cannot shrink without debt defaults

Economy doesn’t have the ability to go backward

  • Transition to using horses for transportation would be difficult

Theory says that new somewhat similar dissipative structures are likely to eventually form

  • Depends on how many can survive the coming contraction
  • Also, how depleted resources are
  • If contraction too severe, no new economy may be possible

3 thoughts on “By Gail Tverberg: Why Energy-Economy Models Produce Overly Optimistic Indications”

      1. Thanks. That’s a good paper that I have not seen before.

        I interpret tinkering with the pump as a form of denial because it permits us to blame a human controlled force like central banks, and to assume one can survive and maybe even profit from a temporary economic depression, rather than acknowledging that the laws of physics are in control and that there will be no recovery.

        Like

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