#120: The need for new ideas

PLANNING THE POST-GROWTH SOCIETY

This article explores an issue that is always at or near the centre of where the economy is going. Worldwide, the long years of growing prosperity are over, and this change fundamentally invalidates many things that government, business and the public have always taken for granted.

The reason why growth is over, of course, is that we no longer have access to cheap energy. Where geographical expansion and economies of scale once drove down the cost of accessing energy, the driving factor now is depletion, which is pushing costs upward, and is doing so in an exponential way.

Though no abrupt plunge in global prosperity is on the cards, there is scant comfort in that. Prosperity in most Western developed economies has already passed its peak. Our economic and financial systems are extremely vulnerable, because they are predicated on perpetual growth.

Thus far, and in spite of all the accumulating evidence, we haven’t recognised that growth in prosperity is over. Rather, we’ve tried to delude ourselves, by using cheap and easy debt, and latterly ultra-cheap money as well, to pretend that perpetual growth remains alive and well. In themselves, these expedients are harmful in ways that can be managed. Efficiency is being undermined by keeping sub-viable entities afloat, and a major crash in asset values has become an inevitably. Neither of these problems is existential in itself.

But changes are happening, too, in ways that are fundamental. A system dependent on ever-growing consumption and ever-increasing profitability is becoming invalidated. The very concept of debt is becoming untenable, because the process depends on growth in borrowers’ income, something which is no longer happening.

These effects have profound political and social as well as economic and financial implications. As growth unwinds, so does tolerance of inequality – that’s why “populists” have enjoyed an ascendancy, and why trends are moving strongly in favour of the collectivist Left.

The dangers of complacency

If you’re a regular visitor to this site, you’ll know that world prosperity, as measured by the Surplus Energy Economics Data System (SEEDS), is projected broadly flat out to 2030. To put some numbers on this, global average prosperity per person is estimated at $11,050 in 2016, and is expected to be very little changed in 2030, at $11,360 (in 2016 PPP dollars).

There are a lot of reasons, however, not to be lured into any form of complacency by this flat trajectory. First, our economic system isn’t geared to stable-state, but is predicated on perpetual expansion – and that’s a huge problem, now that the conditions which favoured growth in the past are breaking down. Though we can be pretty sure that the era of meaningful growth in prosperity has ended, we cannot know how much collateral damage will result from the challenge of trying to adapt to that change.

Second, the projected global figure for 2030 disguises a wide regional divergence of experience. China, for example, is on the positive side of the equation. Prosperity may not be growing at anything like the rate depicted by GDP per capita, but Chinese citizens are continuing to become better off. For 2016, prosperity is estimated at 30,800 RMB per person – roughly double the equivalent number for 2003 – and the SEEDS projection for 2030 is 42,225 RMB, an improvement of 37%. Improvement is likely, too, in India.

But prosperity in the developed West, already in decline, is set to deteriorate steadily. Comparing 2030 with 2016, prosperity is likely to be 7% lower in the United States, for example, and 10% lower in Britain. These projected declines are in addition to the deterioration that has already happened – prosperity has already peaked in the US, Canada, Australia and most European countries.

Third, and even in countries where prosperity trends are positive, current economic policies suggest that both debt and deficiencies in pension provision will go on growing a lot more rapidly than prosperity.

Worldwide, we’re subsidising an illusory present by cannibalising an already-uncertain future. We’re doing this by creating debt that we can’t repay, and by making ourselves pension promises that we can’t honour. So acute is this problem that our chances of getting to 2030 without some kind of financial crash are becoming almost vanishingly small.

Finally, any ‘business as usual’ scenario suggests that we’re not going to succeed in tackling climate change. This is an issue that we examined recently. Basically, each unit of net energy that we use is requiring access to more gross energy, because the energy consumed in the process of accessing energy (ECoE) is rising. This effect is cancelling out our efforts to use surplus (net-of-cost) energy more frugally.

The exponential nature of the rise in ECoEs is loading the equation ever more strongly against us. This is why “sustainable development” is a myth, founded not on fact but on wishful thinking.

The lure of denial

These considerations present us with a conundrum. With prosperity declining, do we, like Pollyanna, try to ignore it, whistling a happy tune until we collide with harsh reality? Or do we recognise where things are heading, and plan accordingly?

There are some big complications in this conundrum. Most seriously, if we continue with the myth of perpetual growth, we’re not only making things worse, but we may be throwing away our capability to adapt.

You can liken this to an ocean liner, where passengers are beginning to suspect that the ship has sprung a leak. The captain, wishing to avoid panic, might justifiably put on a brave face, reassuring the passengers that everything is fine. But he’d be going too far if he underlined this assurance by burning the lifeboats.

The push for electric vehicles threatens to become a classic instance of burning the lifeboats. Here’s why.

We know that supplies of petroleum are tightening, that the trend in costs is against us, and that burning oil in cars isn’t a good idea in climate terms. Faced with this, the powers-that-be could do one of two things. They could start to wean us off cars, by changing work and habitation patterns, and investing in public transport. Alternatively, they can promise us electric vehicles, conveniently ignoring the fact that we don’t, and won’t, have enough electricity generating capacity to make this plan viable, and that we’d certainly need to burn in power stations at least as much oil as we’d take out of fuel tanks. At the moment, every indication is that they’re going to opt for the easy answer – not the right one.

This is just one example, amongst many, of our tendency to avoid unpalatable issues until they are forced upon us. The classic instance of this, perhaps, is the attitude of the democracies during the 1930s, who must have known that appeasement was worse than a cop-out, because it enabled Germany, Italy and Japan to build up their armed forces, becoming a bigger threat with every passing month. Hitler came to power in 1933, and could probably have been squashed like a bug at any time up to 1936. By 1938, though, German rearmament reduced us to buying ourselves time.

Burying one’s head in the sand is actually a very much older phenomenon than that. The English happily paid Danegeld without, it seems, realising that each such bribe made the invaders stronger. It’s quite possible that the French court could have defused the risk of revolution by granting the masses a better deal well before 1789. The Tsars compounded this mistake when they started a reform process and then slammed it into reverse. History never repeats itself, but human beings do repeat the same mistakes, and then repeat their surprise at how things turn out.

Needed – vision and planning 

The aim here is simple. There is an overwhelming case for preparation.  With this established, readers can then discuss what might constitute a sensible plan, and try to work out how any plan at all is going to be formulated in a context of ignorance, denial and wishful thinking.

Let’s start with a basic premise. For more than a millennium, the population of the earth has increased, a process that has become exponential since we first tapped fossil fuels. The population exponential has been paralleled by trends in food and water supply, and in economic activity and complexity.

The “master exponential” driving all the others has been energy consumption. Basic physics dictates the primacy of energy in this mix. If we hadn’t grown our access to energy, we couldn’t have expanded our foods supplies, our population, our economic activity or the complexity of our societies.

For much of the era since 1760, energy has got cheaper. The petroleum industry, for instance, didn’t limit itself to Pennsylvania, but spread its reach across the globe, most notably finding huge oil resources in the Middle East. The same broadening process benefited coal and natural gas. As the energy industries expanded, they harnessed huge economies of scale. A third positive factor, in addition to reach and scale, was technology.

Since a high-point in the post-1945 decades, however, the trend of energy costs has crossed a climacteric. Reach ceased to help, and economies of scale reached a plateau. The new driver became depletion, an entirely logical consequence of using the most profitable resources first, and leaving less profitable ones for later. The role of technology changed, from boosting gains to mitigating decline. The extent to which technology can mitigate the cost of depletion is limited by the envelope of physics.

Only in science fiction, or in wishful thinking, can we get a quart of energy out of a pint pot.

The cost uptrend (and by ‘cost’, of course, is meant the energy consumed in accessing energy) hasn’t stopped growth in aggregate access to primary energy – yet. So far, we’ve been able to offset worsening cost ratios by using more energy. This said, cost is likely to make it harder to grow total supplies in the future. Fundamentally, as the energy consumed in the energy supply process rises, the amount of value that we get from each unit of energy diminishes, just as we hit limits to our ability to use greater volume to offset reduced value.

In petroleum, at least, we are now scraping the bottom of the barrel. If there were lots of gigantic, technically-easy fields still to be developed, we simply wouldn’t be bothering with shales, or crudes so heavy that they have to be mined rather than pumped. It’s become difficult to find a price that is high enough for producers without being too high for customers. Cost, rather than scarcity of reserves, is the factor that’s going to cause “peak oil”.

Renewable energies, though desirable, don’t offer an instant escape, not least because we have to use legacy fossil fuel energy to build wind turbines, solar panels and the infrastructure that renewables require. We once believed that nuclear energy would be “too cheap to meter”, and would free us from dependency on oil, gas and coal. We’re in danger of repeating that complacency with renewables. We need to assume that energy will get costlier, just as growing the absolute quantities available to us is getting tougher.

Growth – the bar keeps rising

As the cost of energy rises, economic growth gets harder. We’ve come up against this constraint since about 2000, and our response to it, thus far, has been gravely mistaken, almost to the point of childish petulance. We seem incapable of thinking or planning in any terms that aren’t predicated on perpetual growth. We resort to self-delusion instead.

First, we thought that we could create growth by making debt ever cheaper, and ever easier to obtain. Even after 2008, we seem to have learned nothing from this exercise in credit adventurism.

Since the global financial crisis (GFC), we’ve added monetary adventurism to the mix. In the process, we’ve crushed returns on investment, crippling our ability to provide pensions. We’ve accepted the bizarre idea that we can run a “capitalist” economic system without returns on capital. We’ve also accepted value dilution, increasingly resorting to selling each other services that are priced locally, that add little value, and that, in reality, are residuals of the borrowed money that we’ve been pouring into the economy.

We seem oblivious of the obvious, which is that money, having no intrinsic worth, commands value only as a claim on the output of a real economy driven by energy. When someone hands in his hat and coat at a reception, he receives a receipt which enables him to reclaim them later. But the receipt itself won’t keep him warm and dry. For that, he needs to exchange the receipt for the hat and coat. Money is analogous to that receipt.

The first imperative, then, is recognition that the economy is an energy system, not a financial one, in which money plays a proxy role as a claim on output. In this sense, money is like a map of the territory, whereas energy is the territory itself – and geographical features can’t be changed by altering lines on a map.

It’s fair to assume that the reality of this relationship will gain recognition in due course, the only question being how many mistakes and how much damage has to happen before we get there. No amount of orthodoxy can defy this reality, just as no amount of orthodoxy could turn flat earth theories into the truth.

With the energy dynamic recognised, we’ll need to come to terms with the fact that growth cannot continue indefinitely. Rather, growth has been a chapter, made possible by the bounty of fossil fuels, and that bounty is losing its largesse as the relationship between energy value and the cost of access tilts against us.

In one sense, it’s almost a good thing that this is happening. If we suddenly discovered vast oil reserves on the scale of another Saudi Arabia, we would probably use them to destroy the environment.

Undercutting the rationale – consumption, profit and debt

With growth in prosperity no longer guaranteed, a lot of other assumptions lose their validity. One of the first will be the nexus of consumerism and corporate profit, where we assume that consumption by the public must always increase, and, over time, profits must always grow.

We’ll find ourselves in a situation where consumption doesn’t keep growing, and will decrease in per capita terms at a pace which at least matches the rate at which population numbers are growing. In this situation, expecting suppliers to keep on expanding, and carry on increasing their profits, becomes unreasonable. Businesses which insist on trying to maintain profits growth in this context will probably have to resort to cheating, both exploiting consumers and falsifying information. It may well be that this process has already started.

Meanwhile, the invalidation of the growth assumption will have profound implications for debt, and may indeed make the whole concept unworkable. If borrowing and lending ceased to be a viable activity, the consequences would be profound.

To understand this, we need to recognise that debt only works when prosperity is growing. For A to borrow from B today, and at a future date repay both capital and interest, A’s income must have increased over that period. Without that growth, debt cannot be repaid.

There are two routes to the repayment of capital and the payment of interest, and both depend on growth. First, if A has put borrowed capital to work, the return on that investment both pays the interest, and also, hopefully, leaves A with a profit. Alternatively, if A has spent the borrowed money on consumption, A’s income has to increase by at least enough to for him to repay the debt, and pay interest on it.

In an ex-growth situation, both routes break down. Invested debt isn’t going to yield a sufficient return, because purchases by consumers have ceased to expand. A’s income, on the other hand, won’t have increased, because prosperity has stopped growing.

This scenario – in which repayment of debt becomes impossible – isn’t a future prediction, but a current reality, and a reality that is already in plain sight.

We need to be clear that the slashing of rates to almost zero happened because earning enough on capital to be able to pay real rates of interest has become impossible.

Businesses which aren’t growing cannot – ever – pay off their debts, and neither can individuals whose prosperity is deteriorating.

Critically, prosperity, which drives both profits and incomes, is declining.  This is evident, not just in real wages (which, in many developed economies, haven’t grown since 2008), but also in the adverse relationship between nominal incomes and the cost of essentials.

To reiterate, if borrowers’ incomes don’t grow, they cannot pay off their debts, and are likely to go under because they cannot carry indefinitely the burden of compounding interest.

The politics of inequality

Financial exercises in denial (including escalating debt, ultra-cheap money and the impairment of pension provision) have already created a stark division between “haves” and “have-nots”. Essentially, the “haves” are those who already owned assets before the value of those assets was driven upwards by monetary policy. The “have-nots” are almost everyone else, especially the young.

Critically, the cessation of growing prosperity creates a fundamental change in attitudes towards inequality. Someone whose own prosperity is increasing is likely to be pretty tolerant towards a richer neighbour. Put prosperity into reverse, though, and that tolerance evaporates.

Again, this isn’t forecast, but fact. It’s one of the reasons why “populist” politicians are doing so well, and it also lays the foundations for a return to ascendancy by the collectivist Left. For this to happen, left-of-centre parties need to purge themselves of the centrists whose logic ceased to function when prosperity stopped growing.

The need to do this isn’t exactly rocket-science, and it’s already happening. We know that Hillary Clinton failed to see off Donald Trump, but we can’t know whether Bernie Sanders might have succeeded. We cannot know whether Labour under Jeremy Corbyn can win power in Britain, but we can be pretty sure that a Labour party led by a returning Tony Blair, or by someone else with the same “New” Labour policies, could not.

This stacks up to the return of division. The reason for this is that it’s becoming impossible for parties of opposition to accept big chunks of the incumbency’s economic agenda. As ordinary people become poorer, and as their ability to carry their debt burdens diminishes, the focus on inequality will intensify. The “politics of envy” will become “the politics of indignation”. Questions will start to be asked about how much money any one individual actually needs. The deterioration in the ability of the state to provide public services will intensify the politics of division.

To be clear about this, collectivism won’t solve our fundamental economic problems, and neither will a system which mutates Adam Smith’s free and fair competition into something akin to the law of the jungle. Deregulated capitalism is failing now, just as emphatically as Marxist collectivism failed in the past.

A logical conclusion, then, is that we need a new form of politics, just as much as we need a new understanding of economics, new models for business and a new role for finance. Co-operative systems might succeed where corporatism – both the state-controlled and the privately-owned variants – have failed.

All of these new ideas need to be grounded in reality, not in wishful thinking, denial or ideological myopia. But reality becomes a hard sell when it challenges preconceived notions – and no such notion is more rooted in our psyche than perpetual growth.

#119: A predicament in pictures

MAPPING THE ENERGY ECONOMY

A picture may or may not be (as the old saying has it) “worth a thousand words”, but what follows is a story told in eight pictures. Essentially, it’s a by-product of work on Energy and Prosperity, the planned guide to Surplus Energy Economics.

Before we start, a word about the charts. Though all start in 1965, the first four finish in 2016 whilst the latter four include projections out to 2030. All are global numbers and, with two exceptions, are expressed in trillions of dollars at constant 2016 values, with non-American amounts converted using the purchasing power parity (PPP) convention. The exceptions are the final pair of charts, which show global per capita equivalents in thousands of dollars.

The charts may be hard to read in the blog format, so a downloadable PDF version can be found at the end of this article. It’s hoped that the commentary will make the charts easier to understand.

Fig. 1 shows GDP (in blue) for the period between 1965 and 2016. Superimposed on it, in black, is what GDP would have looked like if it had simply tracked world energy consumption. Essentially, GDP in 2016 is depicted 3.6x what it was in 1965, because that’s the increase in primary energy consumption over the same period.

As you’ll see, GDP and energy consumption tracked very closely until the late 1990s. Since then, however, the two have diverged. Between 1997 and 2016, GDP increased by 91%, which is a lot faster than the expansion in energy consumption (+49%) between those years.

Of course, this divergence might simply be a matter of getting more value out of each tonne of energy consumed. Fig. 2, though, suggests that something very different might have been going on.

In this chart, two new elements are superimposed. The first, shown in red, is annual net borrowing. The second, in orange, adds the estimated annual under-provision of pensions, an issue addressed here before on a number of occasions. The huge leap shown after the global financial crisis (GFC) of 2008 is the massive one-off impairment to pension provision created by the collapse of returns on investment, when central banks slashed interest rates to all-but-zero, creating an escalation in capital values and a corresponding slump in returns.

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What this second chart seems to be telling us, then, is that we didn’t, from the late 1990s, suddenly discover new ways of getting more economic activity out of each tonne of energy. Rather, what happened was that we started juicing GDP by running up ever bigger debts, a process described here as credit adventurism.

After 2008, we added monetary adventurism to the mix, adopting policies which boosted apparent activity by destroying pension provision. This is why, as a recent WEF report showed, pension provision in an eight-country group had soared to an estimated $67 trillion by 2015, and is likely reach $428tn by 2050, a number which dwarfs any conceivable level of world GDP at that date.

This interpretation is supported by fig.3. This differs from the previous chart, because it shows debt, and the estimated shortfall in pension provision, as end-of-year totals, rather than annual increments. The post-GFC leap in pension deficiencies is again visible, where the onset of monetary adventurism crushed future returns on existing investments.

Fig. 4 again shows GDP (in blue), and an equivalent of GDP tracking energy volumes (black), but adds a third series. Shown in red, this deducts the trend energy cost of energy (ECoE) from the energy-based line. This adjustment expresses trend-energy GDP for the cost of energy supply, so the red line is indicative of the resources available for all purposes other than energy supply.

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Essentially, this is an indicator of aggregate prosperity. Because these two charts are side by side, what can be seen here is the divergence between prosperity, on the one hand, and the aggregates of debt and pension deficiency, on the other.

The insight here is that we are deluding ourselves about economic output, using the proceeds of borrowing and pensions erosion to create a GDP number increasingly out of kilter with reality.

This helps explain why typical wages aren’t keeping up with GDP, and why incomes are being eroded by the rising cost of household essentials, most of which are energy-intensive. It also helps explain why an increasing proportion of recorded GDP consists of residual, locally-priced services of questionable real value, whilst output in solid, globally-priced activities such as manufacturing and construction keeping shrinking as a share of GDP.

The bottom line is that prosperity and GDP are diverging, with results which are showing up both structurally and in on-going balance sheet impairment.

It should be added that the inflated values of assets (such as stocks, bonds and property) do not offset these trends – these values cannot be monetised by their owners selling assets to each other. Any significant attempt to monetise them – and a panic rush to do exactly that can’t be ruled out – would cause values to collapse.

The obvious question arising from this is “what happens next?” – and this is addressed in the next pair of charts, which extend these data series out to 2030. Fig. 5 shows how reported GDP (in blue) looks set to go-on outpacing core activity (black), whilst prosperity (red) drifts ever further away from trend activity as ECoEs carry on increasing. In fig. 6, the much larger vertical scale should be noted. Unless there is a fundamental change of tack, the massive miss-match between income and liabilities is set to balloon exponentially.

 

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If you think that the progression pictured in fig. 6 can’t happen, by the way, then you’re almost certainly right. According to the projections used in this chart, the aggregate of debt and pension shortfalls by 2030 will be close to $800tn (at 2016 values), dwarfing even claimed GDP ($193tn), let alone trend output ($100tn) or underlying prosperity ($89tn).

The only realistic conclusion which can be drawn from fig. 6 is that a very serious crash is extremely likely to occur at some point well before 2030.

The final pair of charts converts these numbers into their per-capita equivalents. The takeaway from figs. 7 and 8 is that, if we go on deluding ourselves about economic output, we’re going to travel ever further into a world in which smoke and mirrors can no longer disguise the difference between GDP and prosperity, and cannot reconcile the triangle of consumption, output and the destruction of the balance sheet.

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#119 charts set

#118: Good idea, bad idea

THE MERITS OF RENEWABLES, THE FOLLY OF EV

Whilst there seems no limit to the new and valuable insights that can come from looking at the economy through the lens of surplus energy, there are limits to the time and resources than can be applied to following up these leads.

This is making selection of subjects an increasingly tricky task. The preceding analysis of the American economy is a case in point. Data exists to apply the same treatment to the United Kingdom, and can be obtained for the Euro Area. But these are not being pursued, because the critical point has, it is hoped, been made. Essentially, ‘growth’, being geared towards residually-priced services which we can sell only to each other, is adding very little real value to the Western economies in return for the trashing of their balance sheets.

Some time ago, it was recognised that the topics of renewable energy and electric vehicles (EVs) needed to be discussed here. The following assessment condenses a great deal of analysis into a format that, it is hoped, will explain, succinctly, why conclusions on these issues are starkly different.

In short, whilst the case for maximising renewables seems irrefutable, the logic supposedly backing conversion to EVs is hopelessly flawed. We need to start by looking at why renewable energy is such a good idea, before turning to why EVs are such a bad one.

An existential imperative

The case for maximising the development of renewables (such as solar and wind power) is wholly compelling. Failure to do this would condemn the world economy to stagnation in the near-term, with prosperity deteriorating steadily in the developed world whilst making little progress in the emerging economies. In the longer term, continued reliance on fossil fuels would be a recipe for economic disaster.

This conclusion is dictated by an appreciation of two critical issues. The first is the umbilical linkage between energy access and economic output. The second is the accelerating rate at which the costs of energy access are rising across the fossil fuel mix that continues to deliver the vast majority of the global energy slate.

Put at its simplest, investing in solar and wind power is imperative, and is one of the most important issues that society needs to address. It ranks in importance alongside tackling climate change, and raising living standards in emerging economies.

Renewables are vital because they offer the only plausible way of escaping the economic trap posed by the rising energy costs of fossil fuels. We’re not about to “run out of” oil, gas or coal, but the value that these energy sources contribute to prosperity is already coming under severe pressure.

The ECoE trap

What really matters to prosperity isn’t how much energy we can access, but how much energy is consumed in the process of accessing it. This is measured here as ECoE (the energy cost of energy).

Some figures will illustrate the nature of this trap. For starters, the ECoE of the existing energy mix is rising exponentially, because it remains biased overwhelmingly towards oil, gas and coal. Over the fourteen years between 2002 and 2016, the estimated trend ECoE of fossil fuels rose from 4.4% to 8.4%, but this increase is just a mild foretaste of what’s to come – over the next fourteen years, fossil fuel ECoEs are set to rise to over 13%.

This represents a huge qualitative as well as quantitative change. In recent years, rising ECoEs have rendered economic growth all but impossible in the developed world, leading to the use of credit and monetary adventurism to fake an expansion in prosperity that is no longer possible. Even in the emerging economies, sustaining growth in the face of increasing ECoEs has required a growing recourse to debt.

Put very simply, when higher ECoEs collide with growth imperatives, ‘something has to give’ – and that ‘something’ is futurity, where we are destroying pension capability as well as racking-up ever larger amounts of debt.

Meanwhile, the environmental downside of rising ECoEs is that, to maintain net quantities of energy at any given level, we have to keep increasing the gross quantities that we access. As we have seen, this upwards trend is already more than sufficient to cancel out efforts to use energy more efficiently.

Looking ahead, further rises in ECoEs aren’t just going to act as a road-block to growth, but, in the developed world at least, are going to put growth into reverse. Credit and monetary exercises in denial are creating an enormous bubble, and it’s likely that supply constraints in energy will burst this one, just as the surge in oil prices (from $20/b to a peak of $147/b) was the real trigger for the previous crash. After the burst, reality will begin to dawn on anyone who believed in a ‘recovery’ based on cheap debt, cheap money, and residually-priced ‘activity’ that inflates recorded GDP whilst very little real value to economic output.

The energy equation

To see what rising ECoEs mean, it’s necessary to compare total (gross) energy consumption with surplus (net-of-ECoE) amounts. The split here is that the ECoE component of gross energy pays for energy access, whilst the net-of-ECoE surplus pays for everything else.

Between 2002 and 2016, the gross amount of fossil fuel energy accessed increased by 35%, from 8.4 bn tonnes of oil equivalent (toe) to 11.4 bn toe. Adjusted for the 17% rise in the world population over the same period, this equated to growth of 15% in the gross quantity of fossil fuels consumed per person.

But the increase in the ECoEs over that same fourteen-year period translated a 35% increase in gross supply into a rise of only 29% at the net-of-ECoE level. That difference may not seem huge, but it’s already had a big impact in per capita terms. Whereas gross fossil fuel consumption per person increased by 15% over that period, net fossil fuel energy use grew by only 10%.

Perhaps most tellingly of all, fossil fuel supply per person has already peaked (in 2013).

Looking ahead, the exponential upwards trend in fossil fuel ECoEs is poised to cripple surplus energy access, but for two main reasons, not one. Obviously, rising ECoEs are undermining the net (surplus) energy available from any given gross quantity.

Less obviously, energy availability at the gross level is likely to be depressed as well, because higher ECoEs simultaneously undercut the viability of production whilst increasing the cost to the consumer. In petroleum, we are already reaching a situation where any price high enough for producers is too high for consumers. A recent report by the China University of Petroleum forecast an imminent switch from oil to coal consumption in China, citing deteriorating EROEIs (energy returns on energy invested) as a key factor. This issue won’t be confined to China – and neither will it be confined to oil.

Quantifying the trap

Here are some illustrative numbers for what is likely to happen over the next fourteen years. First, gross supplies of fossil fuels, which increased by 35% between 2002 and 2016, are unlikely to rise at all looking out to 2030.

Gas availability is likely to increase further, but not by enough to offset a probable decrease in supplies of oil. Output from low-cost ‘legacy’ fields is declining at between 7% and 8% annually. New discoveries, required to offset this decline, are at record lows, whilst a combination of price and cost pressures continues to restrict development. By 2030, meanwhile, shale production will be well past its peak. Energy from coal is likely to diminish slightly, not least because the energy content per tonne mined is continuing to deteriorate.

In per capita terms, the implications of these trends are stark. Comparing 2030 with 2016, gross access to fossil fuels per person is projected to have declined by 14%. Higher ECOEs, of course, will exacerbate this problem at the net level – fossil energy per person, available for all purposes other than energy supply, is likely to be 19% lower by 2030 than it was in 2016.

Two final statistics are necessary to put this into context. First, fossil fuels continue to account for 86% of primary energy supply – hardly changed at all over two decades, from 87% in 1996 – whilst renewables still deliver only 3.2% of the total. (The remaining 11% comes from nuclear and hydroelectricity).

Second, 97% of all transport continues to be fuelled by petroleum, with the only significant exception (electrified rail) delivered, overwhelmingly, by gas- and coal-fired generation, not renewables.

Electricity – a yawning gap

Even without large-scale adoption of EVs, demand for electricity is growing more rapidly than our use of primary energy. Between 2002 and 2016, when total energy consumption increased by 37%, electricity use rose by 52%, with the result that we now consume 28% of all energy as electricity, compared with 25% in 2002, and only 22% back in 1996. Perhaps more tellingly, the proportion of all coal, gas and oil supply used for power generation has risen from 26% to 36% over that same period.

Looking ahead – and ignoring, for now, EVs – demand for electricity is rising at about 2.5% annually, well ahead of the rates at which either population numbers or total energy consumption are increasing. By 2030, we are likely to need 35,000 terawatt hours (TWH), an increase of 41% compared with 2016 (24,800 TWH).

The critical question is where that extra 10,200 TWH is going to come from. Between them, nuclear and hydro may contribute 19% of the required increment, though that might be a hard target to hit. About 45% of the increase in demand might be met by renewables, with output likely to rise from 1,854 TWH in 2016 to 4,600 TWH in 2030.

That still leaves us needing to source 3,700 TWH, or 36% of the required increase, from fossil fuels. These projections would mean that renewables would contribute 18% of electricity (and 10% of all primary energy) by 2030, compared with 7% of electricity (and 3% of all energy) in 2016.

Of course, there are some who believe that renewables output can grow a lot more rapidly than the 3.5-fold increase projected here. In support of this, some cite annual rates of growth, which, for all renewables, was 14.4% in 2016.

But this rate of growth is already slackening – from 19.7% in 2011, and 17.7% in 2013 – for the simple and obvious mathematical reason that rates of growth from an extremely low base are neither indicative nor sustainable. In 2011, renewables output increased by 148 TWH on a base of just 752 TWH. In 2016, the increase was a lot bigger (234 TWH), but so was the base number (1,621 TWH). By 2020, we are likely to be adding renewables output at rates of over 300 TWH annually, a number that is projected to increase to 475 TWH by 2030. These equate to projected annual rates of growth of 11% in 2020 and 8% in 2030.

A more fundamental reason for caution about the rate at which renewables output can grow is that these technologies are derivatives of fossil fuels. Building wind turbines and solar panels requires the use of materials which can be accessed only by courtesy of existing fuel sources, most importantly oil. Everything from humble steel and copper to many of the more sophisticated components relies on fossil fuel energy, all the way from extraction and processing to manufacture and delivery.

This consideration reinforces the case for developing renewables as rapidly as possible, because we need to use our dwindling legacy resources of net energy to create the alternative sources of the future. But it also adds to the bottlenecks likely to be encountered in the development process.

A further twist here is that, to the extent that they are derivatives of a fossil fuel set whose ECoEs are rising, there is likely to be upwards pressure on the ECoEs of renewables themselves. Thanks to two main factors – early-stage technical improvement (“low hanging fruit”), and economies of scale – we have become accustomed to declining unit costs in the development of renewables. Costs are likely to continue to fall, but at a decelerating rate, as the scope for ‘easy’ technical improvement diminishes, economies of scale benefits reach plateau, and the ECoE of inputs rises.

Finally, on this score, we need to note that, by 2030, renewables supply would need to multiply, not by the 3.5x projected here, but by 5.5x, just to keep the fossil fuel requirement for power generation constant at current levels. Delivering enough additional power from renewables to start reducing hydrocarbon-based generation looks extraordinarily difficult – and that’s even before we start adding to electricity demand by switching to EVs.

EV – the wrong road

As we have seen, realistic assessment of the outlook for expansion in renewables supply suggests that growing demand for electricity is likely to require increases, not decreases, in the amount of fossil fuels needed for power generation. If we add EVs into the mix, the increase in the need for oil, gas and coal for electricity supply escalates dramatically.

Many in government and industry seem to think that society can make a complete transition of road transport from internal combustion (IC) power to EV by 2040. The assumption made here is that, for this target to be met, switchover will need to have reached 66% by 2030. If we remain a long way short of two-thirds conversion by then, the target date of 2040 is unlikely to be met, requiring a rethink of the objective.

Accomplishing 66% conversion to EV by 2030 would reduce annual petroleum consumption by 1,670bn toe over that period. But the corresponding increase in electricity demand would be 7,350 TWH. Now, instead of requiring additional generating capacity of 10,160 TWH (+41%) by 2030 just to meet growing baseline demand, we would need to find extra capacity totalling 17,500 TWH (+71%).

The base case (ex-EV) used here already includes maximised development of renewables, so conversion to EV isn’t going to create additional incentives (or capital) for a purpose that is already imperative. Therefore, of the greatly-increased increment required by EV conversion, renewables are likely to supply only 26%, with a further 11% coming from nuclear and hydro. All the rest – 63%, or 11,060 TWH – would have to come from fossil fuels.

EVs and renewables – a false linkage

At this point, we need to note a number of mistaken assumptions which are sometimes made in creating a false relationship between EVs and renewables.

First, and as we have noted, EVs are not an essential driver for investment in renewables – this investment will (and must) happen anyway, even if EVs prove a blind alley.

Second, expansionary investment in renewables is not going to make EVs an appropriate strategy. Just like nuclear in an earlier era, renewables are not going to supply energy in such abundance that it will be “too cheap to meter”. We are going to need every KWH of renewable output just to keep up with growth in the baseload (non-EV) need for electricity.

Third, and unlike renewables, EVs are not going to make a positive contribution, let alone a major one, to stemming climate change. The fossil fuel currently burned in IC-powered transport will simply be displaced from vehicle engines to power stations. Battery technologies raise their own pollution and emissions issues, and some of today’s ultra-optimistic expectations for the life efficiency of batteries are already starting to look somewhat questionable.

Wisdom and folly

If it is accepted that EVs are as bad an idea as renewables are a good one, an inescapable conclusion has to be that EVs are likely to divert both effort and capital in ways that are wasteful. This risk would intensify were governments to allow themselves to be talked into subsidising EVs.

If the case for EVs is so flimsy (and, at the least, is so very far from proven) the question which remains is this – why are industry and government so determined to push ahead with conversion?

Beyond the human fascination with the new, the shiny and the technological, the reasons why we are likely to invest huge sums of our scarce energy-legacy capital into pursuing the chimaera of EVs are simple enough.

First, leadership in government and business still fails to recognise the challenge posed by the mounting cost pressures jeopardising the energy (and hence) economic future.

Second, EVs are a form of denial over the really pressing need, which is to readdress and redesign patterns of travel and habitation that are being rendered unsustainable by energy pressures.

Before the Second World War, and despite the efforts of Henry Ford in America and Volkswagen in Germany, cars were a luxury item, affordable only by the wealthy, and often more expensive to purchase than a house. Since 1945, we have pushed ahead, from the target of one car per household to something pretty close to one car per person. Efforts to tackle the energy, pollution and congestion consequences of the proliferation of car ownership have been half-hearted at best.

Whole patterns of work and habitation have been shaped by mass vehicle ownership, in much the same way that living and employment structures were transformed by railways in the Victorian era. The norm has become suburban and exurban sprawl, rather than the greater housing densities of earlier times. If we were ever forced to put the spread of car ownership into reverse, we would – quite apart from selling the idea to the public – have to redesign working practices and the structure of habitation.

These are issues that, for wholly understandable reasons, the public, government and industry have been extremely unwilling to confront. But the logic of rising ECoEs, climate change and a faltering energy-based economy is that we will have to face these challenges, whether we want to or not.

This implies that the push for all-out conversion to EVs is an exercise in denial, along much the same lines as the economic denial implicit in debt proliferation, pensions destruction and monetary adventurism.

We may not – yet, anyway – need to adopt a ‘one car per household’ strategy along the lines of China’s “one child” policy. But, at the very least, we need to be rethinking housing and transport patterns, and investing in incremental automotive technologies.

Leaner-burning engines, tighter (and strongly-enforced) emissions restrictions, hybrids, the increased use of engineering plastics and the imposition of a limit of, perhaps, 1.5 litres on engine sizes might be a better idea than building a new generation of heavyweight vehicles designed to harness an abundance of electricity which simply isn’t going to happen.