By Tim Watkins: The Three Vortices of Doom (energy, debt, state)

The Net Energy Cliff

 

Tim Watkins today published a superb big picture essay explaining the troubling trends in our economy that everyone sees but few understand.

It’s a great primer for anyone curious why the stories they hear from their leaders and news media don’t make sense.

If you’re the kind of person that needs hope, Watkins advises to pray for a very large discovery of low-cost oil or a breakthrough in nuclear energy.

Or, if you’re the kind of person that likes to know the most probable outcome they should prepare for, Watkins advises to get used to living with less in a more local economy.

http://consciousnessofsheep.co.uk/2018/09/13/the-three-vortices-of-doom/

Despite the cheerleading efforts of the legacy media, the economic storm clouds are growing on the horizon.  Oil – the economic “master resource” – passed $80 per barrel yesterday.  Meanwhile, central banks around the world have begun to unwind the stimulus packages used to bail out the economy in the aftermath of the 2008 crash.  And all the while, governments are struggling to balance the need to manage their borrowing while maintaining the value of their currencies.  Add to that the politics of the new nationalism and you have a recipe for turbulent economic times in the very near future.

By far the biggest blind spot in economics, however, is its treatment of energy as just another cheap resource to be exploited.  In fact, energy should be treated as a separate category alongside capital, labour and resources in any model that seeks to explain the way the real world works.  This is because energy is the transformative force that allows us to (temporarily) defy the second law of thermodynamics, which says that things move from order to chaos; they break down not up.  As Steve Keen puts it:

“Capital without energy is a statue; labour without energy is a corpse.”

Another way of understanding this is to see that for a mere $80 dollars we get more than $350,000 worth of work (if we had to pay a human the average wage to do it).  This also explains why relatively small changes in the price of energy (particularly oil because its use is ubiquitous) have such a dramatic impact on the monetary economy.  Just three years ago, for every $40 spent on oil, companies were returning $350,000 worth of productive work.  Today, the same $40 is returning just $175,000 of productive work; something that largely explains the so-called “productivity puzzle,” as well accounting for why ten of last eleven recessions were preceded by a spike in the price of oil.

Without the net energy to allow for genuine economic growth, sovereign debt becomes as unpayable as consumer and corporate debt.  It can be defaulted or it can be inflated away; but it can never be repaid in real terms.  States, however, are unlikely to concede this point until it is too late. To put it another way, states will use all of the power at their disposal to maintain the exchange rate of their currencies even if this results in economic ruin for their national economies and their citizens.

These, then are the three vortices which (in the absence of some new high-EROEI energy source) are gradually choking the life out of our global industrial civilisation.  As the net energy remaining to us declines, an ever greater proportion of our currency and useable energy will be sucked into them until such time as our economy consists of nothing else but the growing of food and the generation of energy in the service of an ever more capricious state.  This process will inevitably involve the acceleration of the decline in living standards that those at the bottom of the income ladder have been experiencing since the 1970s.  It will also result in a re-localising of economies as the energy required to maintain global supply chains disappears.  In this respect, the conservative nationalism of Brexit and Trump may simply be the relatively benign early manifestation of the politics of our energy-starved future.

By Tom Murphy: The Energy Trap (we all scream for ice cream)

The Energy Trap

A friend reminded me of this 2011 essay written by the brilliant physicist Tom Murphy.

I read it when Murphy first published it but I had forgotten how good it was so I’ve dusted it off in the hope that it sees more daylight.

https://dothemath.ucsd.edu/2011/10/the-energy-trap/

Many Do the Math posts have touched on the inevitable cessation of growth and on the challenge we will face in developing a replacement energy infrastructure once our fossil fuel inheritance is spent. The focus has been on long-term physical constraints, and not on the messy details of our response in the short-term. But our reaction to a diminishing flow of fossil fuel energy in the short-term will determine whether we transition to a sustainable but technological existence or allow ourselves to collapse. One stumbling block in particular has me worried. I call it The Energy Trap.

In brief, the idea is that once we enter a decline phase in fossil fuel availability—first in petroleum—our growth-based economic system will struggle to cope with a contraction of its very lifeblood. Fuel prices will skyrocket, some individuals and exporting nations will react by hoarding, and energy scarcity will quickly become the new norm. The invisible hand of the market will slap us silly demanding a new energy infrastructure based on non-fossil solutions. But here’s the rub. The construction of that shiny new infrastructure requires not just money, but…energy. And that’s the very commodity in short supply. Will we really be willing to sacrifice additional energy in the short term—effectively steepening the decline—for a long-term energy plan? It’s a trap!

 

In the parallel world of economics, an energy decline likely spells deep recession. The substantial financial investment needed to carry out an energy replacement crash program will be hard to scrape together in tough times, especially given that we are unlikely to converge on the “right” solution into which we sink our bucks.

Politically, the Energy Trap is a killer. In my lifetime, I have not witnessed in our political system the adult behavior that would be needed to buckle down for a long-term goal involving short-term sacrifice.  Or at least any brief bouts of such maturity have not been politically rewarded.  I’m not blaming the politicians. We all scream for ice cream. Politicians simply cater to our demands. We tend to vote for the candidate who promises a bigger, better tomorrow—even if such a path is untenable.

The only way out of the political trap is for a substantial fraction of our population to understand the dimensions of the problem: to understand that we’ve been spoiled by the surplus energy available through fossil fuels, and that we will have to make decade-level sacrifices to put ourselves on a new track. The only way to accomplish this is through sober education, which is what Do the Math is all about. It’s a trap! Spread the word!

 

Tom Murphy stopped writing in 2013 after (I think) he realized that no amount of education will change the behavior of the majority.

By Tim Garrett: The Global Economy, Heat Engines, and Economic Collapse

BP Energy Consumption

Thanks to Apneaman for bringing my attention to a new blog by Tim Garrett.

Garrett is the most important and least recognized physicist in the world, having explained and quantified the relationship between energy consumption and economic wealth. You can find other work by Garrett that I’ve posted here.

This most recent essay provides a nice overview of Garrett’s theory and its implications.

http://nephologue.blogspot.com/2018/08/the-global-economy-heat-engines-and.html

Because the Gross World Product (GWP) exists, we grow, and then use our growth to access more energy which we can then consume with the higher infrastructure demands. The relevant equation is that every 1000 dollars of year 2005 inflation-adjusted gross world product requires 7.1 additional Watts of power capacity to be added, independent of the year that is considered.

Right now, energy consumption is continuing to grow rapidly, sustaining an ever larger GWP. But it is not the rate of energy consumption that supports the GWP, but the rate of growth of energy consumption that supports the GWP.

This important distinction is flat out frightening. The implication is that if we cease to grow energy and raw material consumption globally, then the global economy must collapse. But if don’t cease to grow energy consumption and raw material consumption then we still collapse due to climate change and environmental destruction.  Is there no way out?

By James Kunstler: The Uncomfortable Hiatus

The Next Financial Crisis Lurks Underground

I haven’t posted anything by Kunstler for a while. When he’s occasionally good, he’s really good, like today.

http://kunstler.com/clusterfuck-nation/the-uncomfortable-hiatus/

And so the sun seems to stand still this last day before the resumption of business-as-usual, and whatever remains of labor in this sclerotic republic takes its ease in the ominous late summer heat, and the people across this land marinate in anxious uncertainty. What can be done?

Some kind of epic national restructuring is in the works. It will either happen consciously and deliberately or it will be forced on us by circumstance. One side wants to magically reenact the 1950s; the other wants a Gnostic transhuman utopia. Neither of these is a plausible outcome. Most of the arguments ranging around them are what Jordan Peterson calls “pseudo issues.” Let’s try to take stock of what the real issues might be.

Energy: The shale oil “miracle” was a stunt enabled by supernaturally low interest rates, i.e. Federal Reserve policy. Even The New York Times said so yesterday (The Next Financial Crisis Lurks Underground). For all that, the shale oil producers still couldn’t make money at it. If interest rates go up, the industry will choke on the debt it has already accumulated and lose access to new loans. If the Fed reverses its current course —say, to rescue the stock and bond markets — then the shale oil industry has perhaps three more years before it collapses on a geological basis, maybe less. After that, we’re out of tricks. It will affect everything.

The perceived solution is to run all our stuff on electricity, with the electricity produced by other means than fossil fuels, so-called alt energy. This will only happen on the most limited basis and perhaps not at all. (And it is apart from the question of the decrepit electric grid itself.) What’s required is a political conversation about how we inhabit the landscape, how we do business, and what kind of business we do. The prospect of dismantling suburbia — or at least moving out of it — is evidently unthinkable. But it’s going to happen whether we make plans and policies, or we’re dragged kicking and screaming away from it.

Corporate tyranny: The nation is groaning under despotic corporate rule. The fragility of these operations is moving toward criticality. As with shale oil, they depend largely on dishonest financial legerdemain. They are also threatened by the crack-up of globalism, and its 12,000-mile supply lines, now well underway. Get ready for business at a much smaller scale.

Hard as this sounds, it presents great opportunities for making Americans useful again, that is, giving them something to do, a meaningful place in society, and livelihoods. The implosion of national chain retail is already underway. Amazon is not the answer, because each Amazon sales item requires a separate truck trip to its destination, and that just doesn’t square with our energy predicament. We’ve got to rebuild main street economies and the layers of local and regional distribution that support them. That’s where many jobs and careers are.

Climate change is most immediately affecting farming. 2018 will be a year of bad harvests in many parts of the world. Agri-biz style farming, based on oil-and-gas plus bank loans is a ruinous practice, and will not continue in any case. Can we make choices and policies to promote a return to smaller scale farming with intelligent methods rather than just brute industrial force plus debt? If we don’t, a lot of people will starve to death. By the way, here is the useful work for a large number of citizens currently regarded as unemployable for one reason or another.

Pervasive racketeering rules because we allow it to, especially in education and medicine. Both are self-destructing under the weight of their own money-grubbing schemes. Both are destined to be severely downscaled. A lot of colleges will go out of business. Most college loans will never be paid back (and the derivatives based on them will blow up). We need millions of small farmers more than we need millions of communications majors with a public relations minor. It may be too late for a single-payer medical system. A collapsing oil-based industrial economy means a lack of capital, and fiscal hocus-pocus is just another form of racketeering. Medicine will have to get smaller and less complex and that means local clinic-based health care. Lots of careers there, and that is where things are going, so get ready.

Government over-reach: the leviathan state is too large, too reckless, and too corrupt. Insolvency will eventually reduce its scope and scale. Most immediately, the giant matrix of domestic spying agencies has turned on American citizens. It will resist at all costs being dismantled or even reigned in. One task at hand is to prosecute the people in the Department of Justice and the FBI who ran illegal political operations in and around the 2016 election. These are agencies which use their considerable power to destroy the lives of individual citizens. Their officers must answer to grand juries.

As with everything else on the table for debate, the reach and scope of US imperial arrangements has to be reduced. It’s happening already, whether we like it or not, as geopolitical relations shift drastically and the other nations on the planet scramble for survival in a post-industrial world that will be a good deal harsher than the robotic paradise of digitally “creative” economies that the credulous expect. This country has enough to do within its own boundaries to prepare for survival without making extra trouble for itself and other people around the world. As a practical matter, this means close as many overseas bases as possible, as soon as possible.

As we get back to business tomorrow, ask yourself where you stand in the blather-storm of false issues and foolish ideas, in contrast to the things that actually matter.

On Oil

Oil

JTRoberts recently made an important and insightful observation which I paraphrase and elaborate here.

Oil is a non-renewable resource that we extract from the earth. Oil companies are motivated by profit so they start with low-cost reservoirs and as those deplete they move to increasingly higher cost sources like water injection, offshore, tar sands, and fracking.

All economic activity depends on energy, as the laws of thermodynamics explain, and as the near perfect correlation between wealth and energy consumption confirms.

Oil is the keystone energy because oil is required to extract or capture all other forms of energy including food, coal, natural gas, wood, solar, wind, nuclear, and hydroelectric energy.

The cost of oil can be viewed as a tax on economic activity. Our economy is configured to operate profitably on about $20 per barrel oil. We have already captured most feasible energy efficiency gains making it difficult for our economy to operate profitably on oil over $20.

Thus, as the cost of extraction due to depletion of low-cost reserves pushes the price of oil above $20, the difference must be made up with debt.

At today’s $70 oil, which we burn about 96 million barrels per day, that works out to 96 * 365 * ($70-$20) = $1.8 trillion, which as predicted, is about the rate that global debt is increasing.

If you believe we have many years of oil left, then you must also believe that debt can continue to increase much faster than our income for many years without consequence on the value of money.

Money has value because we have confidence that the debt which creates our money will be repaid with interest, which can only occur when the economy grows, which can only occur when the quantity of energy we burn grows, which due to continually increasing extraction costs, can only occur when debt grows faster than the economy, which at some point will erode our confidence, which will reduce the value of money, which will reduce the amount of energy we can afford to burn, which will reduce economic activity, which will further erode our confidence in the value of money.

Do you see our energy and climate predicament?

Do you see why our leaders deny we have a problem?

Do you see why the longer we deny the problem the worse the outcome will be?

Additional Thoughts (30-Jul-2018)

Most people do not think we have an imminent oil problem because they’ve read in the news that there is 50 years or more of unconventional oil left to extract. While probably true, this fact is misleading.

What does it mean to say oil is depleted?

Depleted does not mean that all the oil is gone. Depleted means that all the oil we can afford to extract and purchase is gone. Big difference.

To be a little more precise, depleted is the point at which the cost to extract oil exceeds the price that our economy can pay and still grow.

Today we are paying the price and achieving a little growth, but it is taking a lot of debt at a very low interest rate to do so, and each year it takes more debt.

The ability of our global debt-backed fractional reserve monetary system to function (i.e. not collapse), and the high standard of living we enjoy, and the high capital things we invest in like modern infrastructure and technology, all fundamentally depend on economic growth. If growth stops our system will collapse, and our monetary system will have to be replaced with a different design, such as an asset-backed full reserve system, which will mean much lower standards of living, and much less availability of many things we currently take for granted.

I wrote an essay on economic growth which I recommend you read because many people think they know why we want economic growth but in fact don’t know the main and much more important reason.

So what evidence exists that oil is getting close to being depleted?

  1. Our economy in aggregate is losing money. Debt is growing much faster than the economy. It now takes over $3 of debt to generate $1 of growth. This is not sustainable. A sustainable economy invests $1 of debt to create more than $1 of growth, as we did prior to 1970.  It’s important to note that this state of affairs exists despite the interest rate (i.e. the cost of money) being historically low (in some cases zero). It’s also important to note that this is a global phenomenon. So we can’t blame bad leaders, or the political system, or the culture. Every country in the world is growing their debt in an unsustainable manner, or wants to. The common denominator is energy which is the most important thing that drives every economy in the world. And the price of energy has been trending up for 5 decades simultaneous with our debt.
  2. The US central bank is starting to increase interest rates for their money that the world uses to buy oil. There are many different ways to interpret this action. My own speculation is they are worried about confidence in their money and want to maintain or strengthen its purchasing power for oil. Looking through the other side of the lens, this is the same as saying the Fed wants to lower the price of oil because they are worried about inflation since oil is required to make almost everything. If the price of oil drops, the supply of oil will drop.
  3. Most companies that extract high-cost oil are struggling. For example, the majority of US fracking companies are losing money.
  4. Countries that are highly dependent on profits from their high-cost oil reserves are struggling. For example, Venezuela with the largest unconventional oil reserves in the word seems to be collapsing.
  5. Countries with large low-cost reserves are behaving oddly for countries that used to be fantastically wealthy. For example, Saudi Arabia has implemented aggressive austerity and wanted to sell a portion of their state oil company to raise money. They’ve recently backed off from this sale, possibly because it would have required them to submit to an independent audit of their remaining reserves, which some smart people speculate are much lower than stated.
  6. War-like behavior is increasing towards countries that have large low-cost oil reserves and that are not viewed as close friends. For example, Russia and Iran.
  7. Weak countries that lack the ability to borrow US$ needed to buy oil are struggling.
  8. Our central banks, economists, and politicians appear to have no clue about what is causing our persistent global economic problems. I speculate this is a combination of the fact that they’ve never needed to understand thermodynamics until now, and the fact that they deny unpleasant realities as explained by Varki’s MORT theory. I do find it very telling that not one senior leader anywhere in the world has spoken publicly about this issue. A few must understand our predicament and they must be terrified.

 

On Shock and Awe

Shock and Awe (2017)

 

I watched the new movie Shock and Awe which dramatizes the American government’s use of fabricated intelligence to justify its war with Iraq. The producers made a good case that the decision to attack Iraq was made well in advance of finding any evidence of an Iraqi military or terrorism threat.

I found the movie to be a little stiff and ham-fisted so did not enjoy it very much. It did however provide another good example of the ubiquity of denial in our culture.

Shock and Awe was more interesting for what it didn’t say than what it said.

Not once did the producers ask or attempt to answer the question why did senior American leaders decide to attack Iraq?

How is it possible that the only question that matters is the only question that is not asked?

It isn’t, of course, unless you’re in denial and don’t want to know the answer.

Put yourself in the shoes of an American leader in the few years leading up to the 2003 Iraq war.

Your best minds are predicting a peak in global conventional oil production somewhere around 2005. The 2008 crash and resulting zero interest rate that enabled the unprofitable fracking industry to increase oil production has not yet occurred and was not predicted by the idiot economists that advise you. Iraq has the second best reserves of high quality oil left on the planet and is led by a dictator who is no longer friendly and is starting to sell oil to your enemies in euros which might undermine your reserve currency which enables your country to live far beyond its means. Your economy is totally dependent on imported oil and you have no chance of being re-elected if there is a recession and gas shortages.

Now the Iraq war makes more sense.

But you won’t learn any of this from Shock and Awe.

By Alice Friedemann – On Fake Peak Oil Demand

oil pump

Friedemann here argues that leaders understand the threat and intractability of peak oil and thus actively mislead their citizens.

She might be right but I think it more probable that our leaders are as deeply in denial as their citizens about our predicament. After all, the inherited behaviors of leaders are the same as the inherited behaviors of their citizens.

While it’s true that leaders have more access to peak oil data and analysis, I know from many years of close observations that data and analysis do not shift the beliefs of most people, especially when it involves unpleasant realities their genes wish to deny like mortality, climate change, peak oil, and overshoot.

I see evidence everywhere that our leaders are in denial.

How is it possible that not one leader anywhere in the world speaks frankly about peak oil, even after leaving office? Jimmy Carter, the one leader that tried to prepare society, is silent in his latest book in which he frankly discusses most big problems except peak oil.

If leaders understand peak oil and its implications, how is it possible that not one leader anywhere advocates population reduction, degrowth, or Colin Campbell’s depletion protocol. These policies would help with all of our overshoot issues and thus could be sold without even mentioning peak oil.

How is it possible that (aware) leaders continue to invest in projects like airports, highways, and pipelines? It would be easy to impede these wasteful projects that will strand precious resources without publicly acknowledging peak oil.

How is it possible that political parties with an environmental and sustainability foundation, like the Green Party, and that have no chance of winning and thus nothing to lose, do not address the implications of peak oil in their platforms?

How is it possible that (aware) leaders of countries that still have some surplus oil to export, like Canada and Saudi Arabia, do not quietly implement policies to reduce exports to buffer the future for their own citizens?

 

Since the goal of fake peak oil news is to prevent panic and social disorder, and there’s little governments or businesses can do to prevent a die-off during the transition from fossils back to biomass and muscle power (extreme overshoot of carrying capacity), I can’t help but wonder if I were in charge if I might also put out stories like this to keep fossil fueled civilization going as long as possible. Offering hope, such as renewables, carbon sequestration, and so on, is one way to hold things together as long as possible. Why crash civilization before it will happen anyhow? And why bother to tell people the truth since they won’t believe it anyway (best books on this: Fantasyland: How America Went Haywire: A 500-Year History, Too Much Magic: Wishful Thinking, Technology, and the Fate of the Nation)

As an observer of the biggest and most tragic event in human history, past or future (until the sun expands and swallows the Earth anyhow), I am just one of many journalists following the story as it unfolds, and hope that future historians will find articles debunking peak oil demand of interest.

There have been dozens of articles about Peak Oil Demand and the end of Peak Oil lately, often due to electric cars or other technology saving us. Here are just a few from 2017:

No, peak demand will happen because of peak oil when we’re forced to cut our demand as it declines exponentially at 6% a year. In capitalist countries, it will be the poor first (already happening since the financial crash), then middle class, and finally upper middle class. Even the rich won’t be able to continue driving whenever they want because social unrest will be so high they won’t dare leave the gates of their armed compounds. Only the military will have oil to the very end…

The idea that electric cars are lowering demand is ridiculous. Electric cars haven’t made a dent, just a small scratch in oil demand. Electric cars are only 0.2% of light-duty vehicles, and cost so much only the upper 5% can afford them, even with subsidies.

Meanwhile, consumption of oil in developing countries is increasing at a fast pace. There’s no sign of peak demand. And they’re not buying electric cars in India, Brazil, and other nations where the electric grid comes down a lot.

Only in Europe is demand slightly dropping, but that’s because their governments are so much more far-sighted, less corrupt, and peak oil aware than nation’s elsewhere. Europe began planning for oil decline decades ago, especially since they don’t have much oil of their own or a giant military to grab it from oil producing nations. Mass transit is so fantastic and cheap in many European cities that people don’t drive. For example, in Munich, Germany, the rail, tram, and bus systems run very often, and we spent just 6 euros a day to ride their quiet and modern trains, trams, and buses. When I came back to San Francisco, BART and other mass transit here looked like they were from a third world country, with their very infrequent service, filthiness, and on BART, enough decibels to harm hearing.

I suspect the peak oil demand idea is one more attempt by the wealthy and powerful to hide peak oil, because peak oil studies have shown that if peak oil were acknowledged, stock markets all over the world would crash since the economy would be shrinking from then on and debts couldn’t be repaid. Credit would freeze and dry up. Panic and social disorder would follow. Michael Lynch and other analysts have been trying for years to quench the idea of peak oil and Lynch even used to float his peak-oil denial theories on peak oil yahoo groups to learn what the counter-arguments might be.

http://energyskeptic.com/2018/robert-rapier-oil-demand-is-growing-not-shrinking-there-is-no-peak-oil-demand-in-sight/