#77. The picture refined


After a long concentration on financial issues, the focus of this discussion is on energy.

The issues of energy and the economy are, of course, intimately connected. As a stagnant global economy goes on piling up debt to no useful purpose, it is reasonable to ask, not just why economic policy is turning into such a grotesque failure, but whether energy trends are contributing to that process. One conclusion of this discussion is that they are.

In this context, the explanation for policy failure seems breathtakingly simply. Ultimately, the economy isn’t a monetary system, but an energy equation – so trying to fix the real economy using monetary manipulation is like trying to fix an ailing pot-plant with a spanner.

It is not surprising, then, that the economy simply has not performed as the authorities have expected. Ever since 2000, debt has grown much more rapidly than economic output, giving rise to a strong presumption that reported “growth” has, in reality, been nothing more than the simple spending of borrowed money. Experimental, “unconventional” monetary policy has failed to deliver the expected stimulus. We face a world that is awash with debt, whilst pension and other provisions for the future are being destroyed before our eyes.

Where does energy fit into this picture?

Critical connections

In a bizarre economic situation, it is imperative to point out two things, both illustrated in fig. 1.

First, there is a remarkably close correlation between energy supply and economic output.

Second the rising energy cost of energy – the proportion of accessed energy that is consumed in the access process – correlates very closely indeed with the explosion in borrowing. In other words, the rising trend in the real cost of energy is pushing us ever deeper into debt. Recognition of this linkage enables us to distinguish between debt taken on out of choice before 2008, and borrowing now being undertaken out of necessity.

Fig. 1: energy, growth and debt77-1

These issues will be addressed later – but we should note, from the outset, that policy failure will continue for as long as the authorities persist in seeking monetary rather than energy-based explanations for what is happening to the economy.


A review of energy requires a lot of myth-busting. A widely-accepted narrative today is that there is nothing to worry about, because the world will make a seamless transition from fossil fuels to renewables. Some even argue that the oil, gas and coal industries are already all but dead-and-buried.

The facts simply do not square with this facile interpretation. Renewables, despite very welcome progress, still account for just under 3% of global primary energy consumption, whilst fossil fuels supply 86%. A transition to renewables will happen, and must – but it is going to take a lot longer than the glib popular narrative tends to assume. Looking ahead to 2030, the renewables component will, of course, be very much larger – but the workhorses of the economy will remain oil, gas and coal.

Within the overall energy slate, the cost of energy (measured as the proportion of accessed energy consumed in the access process) remains on a strong uptrend. This means that, even if gross energy supply can be maintained, the net amount of energy available for us to use is poised to decline, presenting major economic challenges.

Energy prices – extended cyclicality and the myth of “seamless transition”

The slump in oil and other energy prices since 2014 is widely misunderstood. The price crash is cyclical, and followed directly from a lengthy period of enormous investment, which necessarily created a big supply surplus as soon as the economy faltered.

Now, though, investment has collapsed, such that depletion of supply will in due course restore equilibrium, even if the economy does not improve.

An improvement in the economy actually looks pretty unlikely. The economy remains in “secular stagnation” despite the use of truly extraordinary monetary gymnastics in order to produce a semblance of “business as usual”. Surplus energy – that is, the difference between energy accessed and the energy consumed in the access process – continues to deteriorate, yet few recognise the connection between this erosion and the deterioration in economic growth, the weakening in productivity and the ever-growing reliance on the spending of borrowed money.

Perhaps because we live in an age of sound-bites, so-called “social media” and diminished attention-spans, there is a tendency to leap to glib conclusions that do not stack up under proper analysis. Nowhere is this more striking than in the widespread assumption that a quick and painless transition to renewables beckons. Renewables are indeed the future – but it is not a future to which we can transition quickly, let alone painlessly.

Some cautions against exuberance and complacency are needed. First, replacing today’s fossil fuel consumption with solar power would require carpeting an area the size of Austria with solar panels. Second, electric vehicles do not eliminate the dependency on primary energy, but simply displace it, at significant cost in terms of system losses. Petroleum, in particular, offers a concentration of energy-to-weight and energy-to-volume that will, for the foreseeable future, remain unrivalled. Producing a 747-sized aircraft powered by electricity remains a pipe-dream.

Price dynamics

The impression that a quick transition is taking place has been fostered by the slump in oil prices which, at around $47/b, are more than 50% below their 2013 average of $109/b.

The reality, as fig. 2 shows, is that this slump fits into an extended cyclical pattern spanning decades. The crisis-induced oil price excesses of the 1970s (1) prompted both demand reduction and huge investment in exploration and development, resulting in oversupply and a lengthy period of low prices (2). Debt-fuelled economic expansion, together with rapid growth in China and the Far East, then brought about a new era of high prices (3). This era has been ended decisively by a combination of massive energy investment (most obviously in shales) and economic weakness (4).

Fig. 2: real crude oil prices since 1965


Today, investment in exploration and development has collapsed, with well over $400bn of previously-planned investment now either deferred, or cancelled altogether. The outlook for shale investment is particularly significant, because the ultra-fast depletion rates characteristic of shales dictate a continuing need for investment capital. This has already become difficult to obtain, and could become even more so if there is a major correction away from inflated values and minimal yields in debt and equity markets.

At current prices, neither shales, nor hydrocarbons more generally, can earn the kind of returns normally required by capital markets.

Though economic weakness may make this period of low prices a prolonged one, it is a pretty safe assumption that under-investment will in due course create the conditions for a sharp rise in prices. Until profitability is restored by higher prices, capital investment will continue to languish – and, until investment can be increased, the erosion of supply capacity will continue.

Energy prices and costs – underlying trends

Fig. 3 imposes a trend-line onto the cyclical pattern of oil prices, a trend calibrated in terms of the rising Energy Cost of Energy (ECoE) of the global oil production slate.

The concept of ECoE recognises the fact that energy is never free, but comes at a cost. Though this cost can be expressed in money, it makes far more sense to examine, within any given quantity of energy accessed, how much of that energy is consumed in the access process. This, expressed as a percentage of the gross amount, is the Energy Cost of Energy.

Fig. 3: actual and trend oil prices since 1965

77-3 The secular trend in ECoE is upwards, as it has been for decades. The reason for this is that, as huge, ultra-low-cost sources of fossil fuels are exhausted, costlier and often unconventional supplies account for an ever-growing proportion of total energy consumption.

Technology can blunt this progression, but cannot stop the underlying rise in costs, let alone reverse it. Shale development typifies this equation. Innovation has made shale oil much cheaper to extract today than shale oil would have been ten or even five years ago. What technology cannot – ever – do is make shales cheaper than the super-giant conventional fields of the past.

Much the same can be said of renewables. Prior to the collapse in crude prices, the best renewables were capable of producing energy at costs lower than oil and gas being brought on stream today.  Commercially, that is all they need to do. But what they will not do is bring back an age of super-abundance.

Fig. 4 completes the price cyclicality picture by showing estimated aggregates for all primary energy, calibrated in constant dollars per barrel of oil-equivalent in order to facilitate comparisons with earlier charts. Again, a trend has been superimposed, based on estimated ECoE

Fig. 4: actual and trend energy prices since 1965


If this trend is correct, energy prices are now drastically below underlying replacement cost, a situation explicable in terms of two factors – a long (roughly 2000-14) investment boom, resulting in excess capacity; and the weakness of the economy.

This suggests that a sharp upward move in energy prices – to or beyond the trend – is inevitable. What it does not tell us, given the weakness of the economy, is how long this might take.

Energy cost – gross and net supply

Since energy is never “free”, there has always been a cost of energy, and this is expressed here as ECoE.

In times past, a super-abundance of cheap-to-produce energy made this cost small enough to ignore. More recently, however, the upwards progression of trend ECoEs has become the true “elephant in the room”, the missing factor which explains the supposed “mystery” of decelerating growth. Moreover, the trend rise in ECoEs is an exponential progression, as depicted in figs. 3 and 4.

ECoE can be factored in to the supply equation by expressing energy volumes in two forms – the gross amount of energy accessed, and the net amount which is available for us to use once ECoE has been deducted.

This equation is pictured in fig. 5, which shows estimates of gross and net energy supply since 1965, including projections out to 2030.

Fig. 5: gross and net energy supply since 1965 (I)

77-5As you can see, the difference between gross and net supply has only started to become meaningful in comparatively recent years. In 2000, for instance, gross supply of 9.4 billion tonnes of oil equivalent (bn toe) equated to a net amount of 9.2 bn toe, the difference (ECoE) being pretty modest at 0.2 bn toe. By 2015, this gap had widened to the point where a gross quantity of 13.4 bn toe yielded net supplies of 12.6 bn toe, with ECoE now equivalent to 0.8 bn toe.

This divergence between gross and net is hugely important going forward. As fig. 6 shows, it is likely that gross supplies of energy can be maintained out to 2030, with growth in renewables matching, and perhaps exceeding, a decline in the gross availability of fossil fuels, a decline which – courtesy in part of an investment slump – looks likely to commence pretty soon.

By 2030, gross energy output may be about 13.7 bn toe, up from 13.4 bn toe last year. Over that period, the renewables contribution is likely to rise briskly, accounting for 7.1% of total supply in 2030 up from 3% last year.

On a net basis, however, the trend in overall energy supply is downwards – even if gross supply can be pushed up, the rising trend in ECoEs is set to more than cancel out any such growth at the net level.

Fig. 6: gross and net energy supply since 1965 (II)


Within the gross energy “mix”, these forecasts equate to a compound annual rate of growth of 5.5% in renewables output over the coming fifteen years. This may seem low – and is an easy-to-beat number now (when growth rates are appreciably higher, but from a very low base) – but will become progressively more demanding as the denominator gets ever larger. Renewables output might grow faster than this, of course, but by the same token the rate of decline in fossil fuels output might be more pronounced than is assumed here.

This is put into context in fig. 7, which divides gross and net supply into separate components.

Fig. 7: composition of gross and net energy supply 77-7

Between today and 2015, aggregate gross energy supply is projected broadly flat (B), despite an assumed gradual erosion in the fossil fuels component (B). Growth in renewables output looks pretty spectacular (C) – until it is rebased (D) onto the same vertical (quantity) axis as the aggregate and fossil fuels charts.

The outlook, then, is for stable or slightly higher gross energy supply, with renewables gradually displacing fossil fuels. On a net basis, however, the outlook is very challenging – and, where the economy is in concerned, it is net supply that matters.

Economic implications

The main focus of this discussion has been energy, so that comments on economic issues must necessarily be kept brief, at least pending a planned comprehensive review of this issue. The key points to note, however, are as follows:

  1. There is a close relationship between economic output and the consumption of primary energy, as set out in fig. 8. The curve in real GDP has seemed to move ahead of the aggregate supply of energy over the last decade or so, but this reflects, at least in part, the impulse temporarily imparted to GDP by the spending of borrowed money.
  2. Looking ahead, the likelihood that the gross availability of primary energy will be flat makes a return to brisk economic growth look difficult.

Fig. 8: energy and economic output since 1980 (I)


  1. This difficulty is reinforced if we shift our assessment from gross to net energy availability, which is what really matters. This is set out in fig. 9.

Fig. 9: energy and economic output since 1980 (II)


  1. The rise in the trend cost of energy correlates pretty closely with annual borrowing, as illustrated in fig. 10. This chart portrays both the trend cost of energy and estimated annual net borrowing in constant dollars. The clear implication is that, whilst debt growth before 2008 was a discretionary choice, borrowing since then has been forced on the system by the need to accommodate the drag effect of rising trend ECoEs.

Fig. 10: Borrowing and the trend cost of energy


Some technical points need to be made before concluding this article. First, global GDP expressed in US dollars is surprisingly tricky to calculate, as data is reported on two bases of currency conversion – market and PPP (purchasing power parity) – which produce extremely divergent results. The basis used here is Standard Constant GDP, a methodology designed to overcome these difficulties.

Second, GDP calculation includes the cash cost of energy access – not least because one company’s cost is someone else’s revenue – but fails to incorporate the economic rent imposed by rising ECoEs. Another way to look at this is to observe that GDP does not capture what else money could have been spent on if it were not required for investment in energy access.

In conclusion, we can state that economic stagnation and rising trend ECoEs are by no means coincidental events.

We can also conclude that rising ECoEs are, by cramping the scope for non-energy expenditures, forcing us to increase debt. The best metric for examining this relationship is probably that between average incomes and the cost of essentials, since these essentials are the prime means of whereby changes trend energy costs impact prosperity.

Finally, rising ECoEs, and the likely erosion of net energy availability in the future, indicate that there can be no easy or pain-free way of escaping from the combination of stagnating output and rising debt.


19 thoughts on “#77. The picture refined

  1. There’s a lot to digest in this, Tim. We see little of the energy-debt equation in this article, but it is a fundamental one. We read lots about debt, but which debt is the important one? It has to be the resources dependant one, not the debt involved in derivatives speculation or asset inflation let alone “Government Debt” which is not really a debt at all, but deposits held in central banks.

    • Thanks. There is far too much material for a single article, and I’ve started a follow-up on the economic dimension.

      I use the definition “real economy debt”, called “total non-financal credit” by the BIS. This excludes inter-bank or “financial” debt.

      Government debt is controversial. Governments around the world try to control their deficits, trying to match spending with taxes. Often, taxation is economically damaging, suggesting they wouldn’t do this if they didn’t feel it necessary?

    • I see no controversy here. Only misunderstanding. “Government Debt” is simply savings deposits held as bonds in the Federal Reserve or Central Bank. A federal government has absolutely zero need for this money, being monetarily sovereign. It neither needs it nor does anything with it except offers a safe place to store spare funds in the private sector and earn interest for the privilege. The bank has several reasons for offering bonds. Usually it is because the silly, dumb politicians want their “debt” to be covered by selling bonds [which the UK does under Lisbon]. However no federal MS government spends this money and thus repayment at maturity is a simple operation of reversing book entries. People just have to eliminate any idea of the Fed acting like a household.

      Thanks for the definition of debt by the BIS.

  2. interesting article as usual: but i think that there is another factor the article don’ t keep in account: energy per capita: if in place of total energy we make the calculation based on net energy and gdp on capita, probably we fund that the gap on dept start soon and is worst.
    it’s a suspect but maybe that pre industrial civilization fall in a malthusian trap when popolation growth more than food production, industrial civilization when population growth more than net energy.

    • Yes, per capita energy is important. Statistically, though, the ratio “per capita GDP to per capita energy” would be the same as “GDP to energy”, so as you say, it is the relative rates of growth and population that are critical. It is difficult to avoid the implication that population growth has been, and is, part of the problem. It’s difficult to know how to tackle this, however – China has been widely criticised (though not by me) for its “one child policy”……

    • well: for pre-industrial civilization the secular cycle is: Stability,peace and internal security lead to prosperity. prosperity lead to population increase, population increase lead to overpopulation. overpopulation lead to lower wages higher land rents and falling per capita income for the commoners. the lower part of population start to degrowth. this lead to increasing concentration of wealth, but as elite growth proportionately more then commoner this lead to even elite suffer falling income, and elite start to turn on state for additional income, drive up expenditure at the sime time tax revenue decline. when state finance collapse army and police are out of control. elite turn to civil war and lower on open rebellions. famine. war, pestilence reign. population decline increase. when the overdimensioned elite are absorbed, the order resume with a commoner “gold age” allowing internal order resume. with internal security, stability and peace the cycle start again. we found this in every pre-industrial civilization: from Rome to 1800 this work. the trouble on the 1 child China program is that was based on wealth: you can have more than one if you pay: so this intensified the elite overproduction trouble: as an example in the Hundred Years period noble in France was 2% of population at the half of XIII century but 3.2% after the black death. in uk around 40% of total population dead, but peer lose only 8%: (secular cycle came from P.turchin war and peace and war)

  3. It seems that we have a cocktail of factors that are militating against growth: demographics; a slackening of innovation and now, as you point out, a rising cost of energy.

    Demographics and energy are what might be termed secular trends whilst innovation could be a cyclical matter, but one can never be certain about this; one cannot predict innovation.

    What this does is reinforce the view that we will never return to the sort of rates of growth experienced fifty years ago and that policy is aiming at a situation which cannot exist; effectively debt is a substitute for the down side factors but, as you say, this cannot really continue; you cannot print your way to prosperity.

    As before this leads me to the conclusion that this extremely unpalatable message will not be aired and that the system will be driven on to destruction at which point the TPTB will say “we never saw this coming” and that sacrifices will then be extracted from a cowed populace and we will then “rinse and repeat”.

    • to have revolutionary innovation, we need revolutionary teory: from 1969 what of revolutionary have on table? so maybe there is same new application on old teory but a game changer have a very very low probality, i agree on your point on demografy, but this cycle is common in every empire we know on history and every time the degrowth of population is a advice of hard time to came: check as an example middle age from 1250 to 1450 in UK and France: population start to degrowth 50 years before black death. another advice is (i not have sure data on this outside Italy) if the fall in population is proportionately more high in lower income class: if the reply is yes (and in Italy is) the political instability is a consequence of elite overproduction

    • There is an interplay of factors here – some I call “situations”, and others “choices”. This is a new way of thinking about things, and something that might be a future article.

      “Situations” today include: population numbers in relation to resources; rising energy costs (ECoEs); and climate change, certainly as it influences ability to grow food. I define these as “situations” because they demand choices.

      “Choices” are how we respond to “situations”. The problem with innovation is not that it is lacking, but that (a) it is not incentivised, and (b) it is not put to useful purposes – that is, innovation is a victim of wrong “choices”.

      Consumerism is a “choice” and, in the context of the resource and energy “situations”, it is the wrong choice – just one of many wrong choices.

      Technological innovation is being used for advertising, rather than for delivering new products and services – a wrong choice. Fiscal and monetary policies favour speculation over innovation – a wrong choice. In response to 2008, we chose not to accept a one-off hit, but to play “extend and pretend” – another wrong choice.

      Making wrong choices isn’t new. But, in the past, “siituations” were more tolerant of wrong “choices”. Energy was cheaper, population was smaller, and so on. Now, there is a premium on right “choices”, but our system is making wrong ones. This is one reason for the growing popular backlash against the so-called “liberal elites”.

      I hope this line of thinking is helpful?

    • Hi Tim

      Yes I agree with this; in my view innovation has to be one of the main hopes of getting us out of these difficulties but, as you say, it is not properly incentivised.

      Another issue is that some of it is double edged. Robotics, which is already well under way in many countries, is fine but it does cut the number of jobs by definition. So what happens to the unemployed? You make goods cheaper but you create a political problem, and potentially a huge one. Chinese goods become cheaper but what to the Chinese government do with the unemployed? This is not a minor consideration.

      What never ceases to amaze me is that issues such as demographics, robotics and ECOE are neither arcane nor small issues and provide a huge undertow to the economic systems of the World right now – not in the future, these are contemporary issues – but they rarely figure in any analysis or commentary, certainly not in the mainstream.

    • Thanks, and I saw his reply to your comment. He’s right that we don’t have all the data we need, though I’ve been beavering away on SEEDS (“surplus energy economics data system”) and am very pleased with the results. These have not been published, yet anyway, but are used routinely in my articles.

      I need to go much more into the economics, but could not fit both energy and economics into one article. The debt/ECoE tie-up is a new discovery for me, and one I need to explore more. So another article may follow.

      Also, I’m considering downloadable stat sheets, giving data at 5-year intervals for principal energy and economic categories.

    • Yes, I thought since you both are on a similar topic and also both well regarded that a cross pollination might be useful.

      For me we are on a downward path to ending our civilization. It can be seen as ordained now and the energy equation is a definitive cause. Gail Tverberg also says energy if too cheap or too expensive is definitive and irreversibly damaging.

      I don’t think money will be the trigger except as collateral damage. MS governments have unlimited scope to buy debts, and in extremis, without regard to inflation or any other limit. They are bordering on it now, but not yet with regard to resources, the acid test.

      The corporate world, hell bent on total dominance of the world economy is only going to trash resources faster than now and any victory they might gain with TTP TISA etc will be in vain, long term.

  4. It looks like your EcoE ratios are based on well-head efficiency. My guess is that improvements in scale and technology have been able to exceed drops in well-head efficiency until ~2000, keeping the end efficiency (total energy used vs tons of whatever moved x miles) slightly improved. Since then, depletion and central bank driven economic development have been the driving forces.

    With the development of unconventional and deep ocean crude we hit some unconventional concepts: 1) much greater exploration/development cost per barrel equivalent harvested 2) the use of otherwise uneconomic fuel (mostly NG far from pipelines) used on site to generate what would otherwise be uneconomic fuel. Without taxes on pollution or CO2 or resource depletion, EROEI can go very low and still supply large amounts of net energy for the decades it would take to deplete these resources. The first is touched on but I think it deserves more (it’s not just money invested, but energy!) while the second is inexplicably unmentioned and I wonder if it (along with flared or vented NG) is even really accounted for in your (well-head?) EcoE analysis. Similarly, we may consider the case of brown coal, which is out of favor due to environmental reasons but can provide many decades of cheap energy. I feel, when faced with economic deterioration, the public will favor utilizing these sources to delay the inevitable drop in standard of living. Whether the people in charge can continue the environmental trend (which I think is the correct course) is debatable but unlikely in my opinion.

    The other big factor that seems missing from your analysis is the energy used to manufacture, distribute, install, and maintain renewables and all of the infrastructure required for their (extensive) use. A large push on RE will necessarily instantaneously widen the gap between gross and net energy. If that RE energy is installed in useful places and kept operational for decades it will return surplus energy (even including infrastructure upgrades) but it still necessarily increases energy use today (and therefore prices and reduces GDP and resources in general). I’m optimistic that the first world countries can sustain 3% annual drops in per capita energy use for the next couple decades (ex RE production) but I doubt that will be enough to rework society around renewables and certainly not if net supply has to drop at the rates you predict.

    I feel like the only possible solution is to heavily tax pollution and resource depletion. Take advantage of non renewable price drops by replacing them (somewhat) with taxes and give society a long term, stable pricing view to plan on. Make sure to apply equivalent tariffs on imports based on worst-case assumptions of embodied energy (and resource depletion) unless proven otherwise and watch the dirtiest companies clean up or even return to America. Allocate revenues raised to help assist the poor (who will otherwise be hit hardest by this plan). Utilities, seeing these 30-year plans, will start adding high efficiency RE infrastructure or working with others to connect to other grids that are better endowed. Businesses will start to relocate to grids with better mixes, and will alter their practices to accommodate demand response (rather than waiting to see how things unfold before making investment decisions). Individuals will follow businesses and also trend to living closer to work/life and ditching their (inefficient) vehicles for bicycles, ridesharing, and public transit. Everything will organically re-orient to what will be our eventual future anyway, if we are to have one (that in any way resembles a first world lifestyle).

  5. I’m not sure the correlation between the real economy and the real cost of energy isn’t just the ‘rolex watch effect’. ie there is a positive correlation between the wearing of rolex watches and deaths from heart attacks on gold courses. Energy costs are as yet of second order magnitude.

    It wasn’t high energy costs that forced Tecumseh to stop making stationery engines in America..or Hoover to cease manufacture of vacuum cleaners in the Uk. They just could not compete with China on price to begin with ..then quality. But it is the loss of these kinds of jobs that is hollowing out the economy.

    Short sightedness, naivety, stupidity and the lack of an effective industrial policy are more significant reasons for the collapse of the real economy of useful goods and services.

    • I like to think that my book demonstrates that the economy is an energy equation.

      The cost component is in two parts – cash spent, and “economic rent”, i.e. the cost levied on our activities by the resource set.

      The linkage even to cash cost is complicated. GDP accounting treats the costs incurred in accessing energy as a positive – a source of added value – whereas arguably the cost of energy should be measured as a deduction from the value added by all other industries. (The same point has been made about some financial services – does banking add value to the economy, or does it simply act as a drag, i.e. a cost to everyone else? Dmitri Orlov advocates reversing the banking component from a +ve to a -ve. I can see a case for simply excluding it from GDP computations).

      Ultimately, money spent on accessing energy is money that, ideally, we would spend on other things.

      This is an area that is going to require an article dedicated to the subject, I think.

    • Mr Morgan, just a question; what’s GDP when it’s being propped up by unlimited fiat? Don’t focus on GDP. Fiat currencies, created out of debt, is the shadow that makes the world looking in the wrong direction. For decades, and counting.

      Fiat money is airconditioning for overheated bacteria in a petri dish.

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