By Gail Tverberg: Elephants in the Room Regarding Energy and the Economy

6-price-problem-appears-only-near-limit

Here is the latest version of Gail Tverberg’s thesis that limits to growth are causing too low energy prices which in turn will cause a decrease in energy extraction which in turn will cause the economy to collapse.

https://ourfiniteworld.com/2017/05/05/why-we-should-be-concerned-about-low-oil-prices/

The economists’ choice of the word “demand” is confusing. A person cannot simply demand to buy a car, or demand to go on a vacation trip. The person needs some way to pay for these things.

Falling resources per capita makes it harder to earn an adequate living. Think of farmers trying to subsist on ever-smaller farms. It would become increasingly difficult for them to earn a living, unless there is a big improvement in technology.

Or think of a miner who is extracting ore that is gradually dropping from 5% metal, to 2% metal, to 1% metal content, and so on, because the best quality ore is extracted first. The miner needs to work an increasing number of hours, to produce the ore needed for 100 kilograms of the metal. The economy is becoming in some sense “worse off,” because the worker is becoming “inefficient” through no fault of his own. The resources needed to provide benefits simply are less available, due to diminishing returns. This problem is sometimes reported as “falling productivity per worker.”

Falling productivity per worker tends to lower wages. And lower wages put downward pressure on commodity prices, because of affordability problems.

We seem to have already gone though a long period of stagflation, since the 1970s. The symptoms we are seeing today look as if we are approaching a steep downslope. If we are approaching a crisis stage, our crisis stage may be much shorter than the 20 to 50 years observed historically. Earlier civilizations (from which these timeframes were observed), did not have electricity or the extensive international trade system we have today.

The big problem that occurs is that non-elite workers become too poor to afford the output of the economy. Adding robots to replace workers looks efficient, but leaves many unemployed. Unemployment is even worse than low pay.

Peak oilers recognized one important point: our use of oil products would at some point have to come to an end. But they did not understand how complex the situation is. Low prices, rather than high, would be the problem. We would see gluts rather than shortages, as we approach limits. Much of the oil that seems to be technologically extractable, will really be left in the ground, because of low prices and other problems.

Many people miss the point that economy must keep growing. (…) As the economy grows, we tend to need more energy. Growing efficiency can only slightly offset this. Thus, as a practical matter, energy per capita needs to stay at least level for an economy to grow.

The fact that energy prices can, and do, fall below the cost of production is something that has been missed by many modelers. Prices can go down, even when the cost of production plus taxes needed by governments rises!

It takes energy to have an intergovernmental organization, such as the European Union. In fact, it takes energy to operate any kind of government. When there is not enough surplus energy to go around, citizens decide that the benefits of belonging to such organizations are less than the costs involved. That is the reason for the Brexit vote, and the reason the question is coming up elsewhere.

Oil prices have been too low for producers since at least mid-2014. It is possible to hide a problem with low prices with increasing debt, for a few years, but not indefinitely. The longer the low-price scenario continues, the more likely a collapse in production is. Also, the tendency of international organizations of government to collapse (Slide 38) takes a few years to manifest itself, as does the tendency for civil unrest within oil exporters (Slide 39).

Once an incorrect understanding of our energy problem becomes firmly entrenched, it becomes very difficult for leaders to understand the real problem.

2 thoughts on “By Gail Tverberg: Elephants in the Room Regarding Energy and the Economy”

  1. A comment by JT Roberts, one of Tverberg’s readers, was particularly insightful and I copy it here to give it the visibility it deserves.

    Good Post Gail

    I’m sure that most find the thought of declining oil price as a result of limits very hard to accept because it’s counter intuitive. This is common for example if you ask the majority of people which is heavier moist wet air or dry air they’ll answer moist wet. However water vapor H2O is lighter then N2 and a good thing too because it is the water cycle that forms clouds. The point is once a wrong thought has been entrenched it is almost impossible to unwind.

    People are convinced that supply and demand fix prices. Under this false notion prices will rise to meet demand. This creates a false sense of security. The reality is the cost of production creates markets and sets the price of production.

    For example Apple introduced the IPhone there was no demand it created a market. It’s cost was fixed to production including future product development costs. Interestingly Apple finds itself in an odd position with $250 billion in the bank. The reason is they are past peak unable to create a new market so the cash is a reflection of failure in development. The same thing happened with Microsoft. So soon Apple will start buying to extend growth. This is a form of contraction.

    From a macro view we start to get the sense that the global economic system is vastly interdependent and will resist any specific sector failure buy absorbing surpluses until we reach neutrality.

    This is demonstrated by the high risk unconventional oil investment by pension systems. It is a subsidized industry to maintain BAU. The same as the Oil Majors stock buyback and debt growth. All surpluses will be consumed eventually all equity will be pure speculation. I.e. Tesla, Uber, Amazon etc.

    We’re likely in full contraction now. For example retailers are announcing record store closures and their stock prices still rise. This illustrates a complete disconnect with fundamentals. Instead everyone is chasing stock value increases regardless of sales price ratios. The climate since 2000 has created an acceptance of losses as standard business models. Contraction is now being rewarded chasing speculative valuations. This is completely absurd from any rationale.

    How long can it last? Likely until all equity is consumed at that point only debt will remain without leverage meaning there is no real valuations no security.

    This is happening socially. A crises is forming from all the kids who moved back home living with their parents because of the inability to provide for themselves. As the parents die off the children are left with no means of life because the equity has been consumed. In a macro level this is happening globally.

    Like

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