By Paul Arbair: The World in 2018 (part 4)

I just stumbled on Paul Arbair. I’m very impressed.

I now need two hands to count the number of people in the world that understand and regularly write about the reality of our predicament. Although apparently Paul Arbair is a pen name (his avatar is a Polar Bear), so maybe one hand will continue to suffice.

Here Arbair explains the history and centrality of energy to the success of humans, how economics (and all the other social sciences) are embarrassingly ignorant of this vital relationship, how we have used debt to mask a decline in the quality of energy and to accelerate ecosystem damage, and how we are fast approaching an unpleasant end game.

I note that Arbair concludes his essay by discussing our near universal denial of reality.

Following are a few paragraphs I extracted from the essay, but I recommend you read the whole thing.

https://wordpress.com/read/blogs/102935372/posts/1485

The issues with conventional economic theories and models are many, varied and complex. They include a number of flaws and blind spots, which have been laid bare by the Great Financial Crisis and its aftermath. Most importantly, they include the almost complete ignorance – or rather voluntary omission – of the fundamental biophysical foundations of the economic process. This ignorance of how the flows of energy and matter underpin economic activity – and economic growth – results from the evacuation of the natural world from mainstream economic thought, which occurred in the 20^thcentury, when it suddenly looked like homo sapiens had managed to conquer nature and the curse of resource scarcity had been all but defeated.

Losing thrust at high altitude

However, in advanced economies this energy boost started to wear out in the 1970s, for several reasons. First, energy use ran into a classic phenomenon of diminishing returns: the low-hanging fruits of economic growth had been picked first, many large-scale infrastructure investments with a high economic multiplier effect (including electrification) had already been made, and in many industries and sectors maximum machine speed/velocity was already being reached. Just like the average speed of automobiles, motorbikes or planes, the average speed of industrial machines in many sectors increased much faster until the late 1960s/early 1970s than after that. The physical and economic limits to energy-based speed-ups thus probably played a role in the sudden slowdown in productivity growth at the turn of the 1970s. Second, increasing concerns about the atmospheric and ground pollution resulting from fossil energy use – and from material use made possible by fossil fuels – triggered the adoption at the beginning of the 1970s of the first set of environmental regulations in Western countries, which established some constraints on the further expansion of energy use. Third, oil depletion in the U.S. – until then the world’s largest producer – and a subsequent realignment of energy geopolitics lead to a dramatic rise in the price of oil (i.e. the 1973 oil crisis), which rapidly reverberated across the economy. This triggered a considerable slowdown of the rate of increase of energy consumption, resulting in much slower economic growth. The combination of economic stagnation and soaring price inflation came to be known as ‘stagflation’, and lasted until the beginning of the 1980s, when oil prices finally started to decrease. After a sharp growth slowdown in the 1970s, world energy use per capita started to decline slightly in the 1980s and 1990s, an only picked up again at the beginning of the 21^st century, as a result of China’s rapid expansion and massive use of domestic coal resources.

Oil depletion and its effects have remained a constant source of concern – and of geopolitical tensions – since the oil crises of the 1970s. The threat of oil supply shortages was partly alleviated in the 1980s and 1990s by the discovery and exploitation of new major oil fields in North America (Alaska) and Europe (North Sea), but it resurfaced in the 2000s when wars disrupted production in the Middle East, oil prices spiked, and fears of an imminent peak and decline of global oil production (‘peak oil’) grew. These fears have since then receded, largely as a result of the exploitation of ‘tight oil’ (also called ‘shale oil’) in North America, using hydraulic fracturing (‘fracking’) and horizontal drilling, as well as to other ‘unconventional’ sources (oil sands, deepwater oil) and to the use of enhanced recovery techniques in conventional oil fields. These are however temporary fixes: shale oil production is expected to peak in just a few years time, and global oil discoveries have fallen to their lowest point since the 1940s, prompting rising fears of a supply crunch – and possible price spike – around 2020.

While concerns about oil depletion – and fossil fuels depletion in general – tend to mostly focus on quantitative aspects (i.e. availability and affordability), qualitative aspects are often overlooked. Yet they are as, or even more, significant. In fact, depletion means that it is getting more and more difficult, costly, resource-intensive and polluting to get oil – and other fossil fuels – out of the ground. It also means that the energetic quality (measured in terms of exergy) and productivity (measured in terms of net energy or EROI) of what is extracted tends to go down, resulting in a decreasing capacity to power useful and productive work, and in a decreasing ability to provide ‘surplus energy’ to society (i.e. energy that can effectively be used for doing other things than finding, extracting, processing, converting, transporting and distributing energy). According to some estimates the EROI of global oil and gas has declined by nearly 50% in the last two decades, meaning that new technology and production methods (deep water or horizontal drilling) help to maintain production but appear insufficient to counter the decline in the energetic productivity of conventional oil and gas. In other words, we are now entering the age of ‘crappy oil’, or at least we are clearly heading that way…

The declining energetic quality and productivity of fossil energy resources has resulted in the last decades in a rising energy intensity of the global energy system. According to the International Energy Agency (IEA), the share of the world’s Total Primary Energy Supply (TPES) used by the energy supply sector (which comprises all energy extraction, conversion, storage, transmission, and distribution processes that deliver final energy to end users) expanded from 24% in 1973 to 31% in 2015, while the share available for Total Final Consumption (TFC) by other sectors of the economy went down from 76% to 69%. Overall, the quantity of energy supplied to end-use sectors (i.e. industry, transport, residential, services, agriculture, etc.) rose by 101% over the period, but the quantity of energy that had to be used by the energy system to supply this energy to end users increased by 196% (source: IEA Key World Energy Statistics 2017). Overall, a rising share of the fossil energy we get out of the ground therefore ends up being used by the energy system itself – or in other words the ‘energy cost of energy’ (ECOE) is rising, and the trend is accelerating. This relative energetic productivity decline not only constrains the growth the amount of ‘net energy’ that the global energy system can make available for use by other sectors, it also increases the share of those sectors’ output that has to be consumed by the energy sector. As the energy sector becomes less productive, it indeed tends to consume not only more energy but also more materials, more labour, more services, etc. A rising share of the output of other sectors has to be dedicated to servicing the needs of the energy sector, which ends up constraining economic growth and eroding economic prosperity (i.e. the capacity for societies to dedicate a rising fraction of economic output to discretionary uses).

Therefore, starting in the 1970s fossil energy progressively ceased to boost global economic growth as it had done since the dawn of the Industrial Revolution, and most particularly during the post-WWII period. The world’s energy-based growth engines, it suddenly appeared, were losing thrust, exposing the global economy to growing and hazardous turbulence while flying fast and at high altitude…

We are now in the tail end of what arguably constitutes the biggest bubble in economic history, the ‘everything bubble’ that has been blown in response to the Great Financial Crisis. This ‘everything bubble’ concerns all asset classes, and its effects directly or indirectly extend to the whole of the global economy. There is no single activity, sector, firm, household or public body in advanced economies – as well as in most emerging economies – whose current economic and financial situation is not either determined, underpinned or heavily influenced by the ‘everything bubble’, and not a single of them will remain unaffected when the bubble pops. To some extent, it could be argued that it’s the global economic and financial system itself that has now become the bubble. Most of us fail to understand or acknowledge it, probably because the bubble is so massive and so extended this time that it is paradoxically more difficult to recognise than more circumscribed and classic asset bubbles. Probably, as well, because our collective intoxication with technology and with the promises of a techno future is increasingly blinding us to the reality of the economic system we’re living in. Probably, also, because the consequences of our global economy being predicated on the existence and perpetuation of an all-encompassing financial bubble are too uncomfortable to contemplate. Yet we are inevitably approaching the unavoidable denouement of our bubble cycle, and the slight economic recovery about which we have been rejoicing of late might now be bringing us there faster as it puts pressure on central banks to tighten monetary policies more rapidly and decisively, thus getting us closer to the point where the bubble edifice starts to unravel.

Debt accumulation and financialisation, globalisation, liberalisation and ‘technologisation’ have thus largely failed, over the last four decades, to adequately compensate the global economy’s waning fossil energy boost. They have nevertheless lifted economic growth enough to continuously push up the use of fossil fuels and of other natural resources, as well as the environmental damage resulting from this use. Half of all oil burned by the human race has been burned since the collapse of the Soviet Union, and almost one-third of all human emissions of greenhouse gases occurred in the last twenty years. After remaining flat during the 2014-16 period, these emissions started to rise again in 2017 as economic growth was picking up. CO2 concentrations in the atmosphere have been rising increasingly fast over the last decades, destabilising the planet’s climate system and setting in motion a climate change dynamic that we only partly understand, that we cannot control, and that we already know we will be unable to fully mitigate. And if climate change is probably the major threat facing humanity, it is also just one of the symptoms of the destabilisation of the Earth system that is occurring and accelerating as a result of homo sapiens’ relentless activity. Every year we consistently increase our use of non-renewable resources, thus drawing down our reserves, degrading our environment and crowding out other life forms ever faster. Earth Overshoot Day (EOD), i.e. the date on which humanity’s resource consumption for the year exceeds the planet’s capacity to regenerate those resources that year, now falls in early August, vs. the end of December at the beginning of the 1970s. Our demand for renewable natural resources and the services they provide is now equivalent to that of more than 1.5 Earths, and is on track to require the resources of two planets well before mid-century. All this, it needs to be remembered, is only occurring because of the burning of fossil fuels and the energy and material input into human activity that it makes possible. Scaling back our use of fossil fuels as quickly as possible, and eradicating it before the end of the 21^st century, has now become the only way for humans to avoid terminal environmental catastrophe.

‘The World in 2018’, hence, is a world that has been unable to find adequate substitutes to the long-term economic boost it received from exploiting fossil energy, and that has merely managed to substitute genuine economic growth with debt accumulation and financial manipulation. It is a world that has been deceiving itself through financial leverage about the essence of its economic growth and progress, and that is still very much in denial about the scale of the consequences of the energy and resources binge this growth and progress have entailed. It is a world that has now left itself just a few decades to stop using the energy sources that underpin its modern economy and even modern civilization – or that risks seeing this modern economy crashing down and modern civilization burn itself to the ground. All this, of course, is not exactly how economists and policy makers typically talk about the state of the world or of the economy. It is also not exactly what dominates most people’s perceptions of their economic and financial conditions, which remain largely based on shorter-term considerations. Yet it is nevertheless the reality of our world – a reality that increasingly influences and shapes the course of events around us, and that will increasingly impose itself to all of us over the coming years. A reality, as well, that determines or at least significantly constrains the economic, social and political prospects and options we now have. We will start looking at these prospects and options in more details in the next instalment of this series.