#139: The surplus energy economy

HOW THE SYSTEM REALLY WORKS

According to conventional interpretation, the world economy faces no problems more serious than sluggish growth and rising tensions over trade. Though debt is high and asset prices are inflated, these issues are manageable within a monetary context that remains “accommodative” (meaning cheap).

Surplus Energy Economics offers a radically different and far more disturbing interpretation. Fundamentally, it states that global prosperity per person is now declining. This is a game-changer in terms not just of economics and finance but of politics and government, too. Deteriorating prosperity means that current debt levels are wholly unsustainable, and makes an asset market crash inescapable, even if the authorities persist with policies of ultra-cheap money.

This take on the economy could hardly be more starkly at odds with the consensus position. With due apologies to those regular readers for whom much of this is familiar fare, what follows is a synopsis of how the economic system is understood here. In stark contrast to conventional interpretations which portray the economy as a financial system, this article explains how, in reality, all economic activity is a function of energy.

As you will see, this simple observation turns the key in the door to an understanding of  how the economy has evolved in recent times, and where it is likely to go next.

Ever since the millennium, we have been engaged in trying to apply futile financial fixes to a deteriorating secular trend in energy-based prosperity. That’s akin to trying to fix an ailing pot-plant with a spanner. These efforts have bought us some time, but have caused serious economic, political and social harm without in any way changing the economic fundamentals.

Where planning and policy are concerned, we are in a truly peculiar situation. Those of us who understand prosperity know that the ongoing downturn is going to have profound consequences – but, as societies, we cannot even start crafting responses whilst consensus interpretation remains in a state of profound denial.

The energy economy

Surplus Energy Economics is a radically different interpretation which recognises that the economy is driven by energy, not by money. Energy is required for the supply of literally all of the goods and services that constitute the economy. Money, on the other hand, acts simply as an exchangeable claim on the products of the energy-based system.

Unfortunately, long habituation to economic expansion has led us into the false assumption that growth is a perpetual phenomenon on which the physical limitations of our planet have no bearing. The harder reality is that the characteristics of the earth as a resource package are the envelope which imposes boundaries on the scope for growth.

Human activity has always been an energy system, starting with the simple balancing of the inputs of nutritional energy with the outputs of labour energy required to obtain this nutrition. This equation was leveraged in our favour by the greater efficiencies introduced by agriculture, though the vast majority of labour remained dedicated to the supply of food. Only when the heat-engine enabled us to harness the vast energy potential of fossil fuels did we create conditions in which the securing of nutrients and other essentials became a minority activity.

The equation governing the value obtained from exogenous (non-human) forms of energy has two components.

The first is the total or gross quantity of energy to which we have access.

The second is the proportion of that total energy which is consumed in the process of accessing it, and therefore is not available for other purposes. The quantity consumed in the access process is described in Surplus Energy Economics as the Energy Cost of Energy (ECoE).

The difference between the gross energy quantity and ECoE is surplus energy. Because this is the source of all goods and services other than the supply of energy itself, this surplus determines prosperity.

We can, of course, deploy this surplus with greater or lesser efficiency. But we cannot escape from the prosperity parameters imposed by the surplus energy dynamic.

The energy cost equation

The quantity of surplus energy-based prosperity available to us is determined by the relationship between energy resources and the technology we apply to them.

At the gross level, the limits to potential are determined, not by the resources available, but by the quantities which can be accessed in ways where ECoE is less than the total energy value obtained. This means that the concept of “running out of” oil, gas or coal is not meaningful. Rationally, reserves of oil, gas or coal whose ECoE exceeds their gross energy value are not worth accessing, so will remain in the ground.

Where fossil fuels are concerned (though the principle is universal), four factors determine ECoE. Over an extended period, ECoE was driven downwards by geographical reach and economies of scale. Once these processes had been maximised, however, the new governing factor became depletion, a consequence of having accessed lowest-cost resources first, and leaving costlier alternatives for later.

The fourth determinant, technology, operates within the physical envelope of resource characteristics. During the phase where reach and scale dominated, technology accelerated the downwards trend in ECoE. Now that depletion has become the primary factor, technology acts to mitigate the rate at which ECoE is rising.

It must clearly be understood, however, that technology cannot breach the resource envelope determined by physical characteristics. For example, new techniques have made shale oil cheaper to extract now than that same resource would have been at an earlier time. But what technology has not done is to imbue shale reservoirs with the same characteristics as a simple, giant oil field like Saudi Arabia’s Al Ghawar. Technology works within the laws of physics, but it cannot change those laws.

It is mathematically demonstrable that, like any type of linear progression, the ECoE curve is exponential. Population numbers illustrate the exponential function. If a population of 1,000,000 people increases by 5% in any given period, the addition in that period is 50,000. Once the base number rises to 10,000,000, however, the increment is 500,000, even though the rate of change remains 5%. When charted, exponential progressions appear as ‘j-curve’ or ‘hockey-stick’ patterns, their apparent shapes determined only by the scale of the quantity axis.

The ECoE trap

Energy sources such as oil, gas and coal have matured to the point where the maximum benefits of reach and scale have been attained, and depletion has become the dominating driver. Fossil fuel ECoEs reached the low point of their parabola in the two decades after 1945, and have since been rising exponentially.

According to the SEEDS model, the fossil fuel ECoE progression has been as follows:

  • 1980: 1.7%
  • 1990: 2.6%
  • 2000: 4.1%
  • 2010: 6.7%
  • 2020E: 10.5%
  • 2030E: 13.5%

Renewable energy sources remain at an immature stage at which ECoEs are falling. Taken together, the ECoE progression for renewables is stated by SEEDS at:

  • 1980: 16.7%
  • 1990: 14.2%
  • 2000: 13.3%
  • 2010: 12.1%
  • 2020E: 11.1%
  • 2030E: 10.2%

In pure calorific terms, the ECoEs of renewables are likely to become lower than those of fossil fuels at some point within the early 2020s.

This does not, however, mean that transitioning to renewables will enable us to escape from the fossil fuel “ECoE trap”. There are three main factors which make this unlikely.

First, renewables account for just 3.6% of all primary energy consumption, with fossil fuels continuing to contribute 85% (and the remaining 11% coming from nuclear and hydroelectric power).

Second, renewables remain to a large extent derivates of the fossil fuel economy, requiring inputs which can be supplied only with the use of energy from oil, gas or coal. This imposes a linkage between the ECoEs of renewables and those of fossil fuels.

Third, and relatedly, it is unlikely that the ECoEs of renewables can fall far enough to restore the efficiencies enjoyed in the early stages of fossil fuel abundance. The overall ECoE of renewables is projected by SEEDS to fall to 10.2% by 2030, but this remains drastically higher than the ECoE of fossil fuels as recently as 2000 (4.1%), let alone back in 1980 (1.7%).

The world ECoE trend for all form of primary energy is as follows:

  • 1980: 1.7%
  • 1990: 2.6%
  • 2000: 3.9%
  • 2010: 5.9%
  • 2020E: 8.3%
  • 2030E: 9.8%

 

Economic implications

With the economy understood as a surplus energy equation, the history of economic development fits a logical pattern.

Throughout the period from 1760 to 1965 – roughly speaking, from the start of the Industrial Revolution to the post-1945 low-point of the ECoE parabola – the world economy was characterised by rapid growth in aggregate prosperity. This translated into steady improvement in personal prosperity despite the huge growth in population numbers over that period.

This era was characterised by (i) expansion in the gross amounts of energy consumed, and (ii) reductions in ECoE caused by reach, scale and technology. Surplus energy per person was thus on a strongly rising trajectory, growing at rates faster than the expansion in aggregate energy supply. The world became accustomed to growth, which came to be regarded as a natural phenomenon, even though some economists have conceded that our understanding of what makes growth happen is imperfect.

After about 1965, though the bottom of the cost parabola had been passed, ECoEs remained very low, rising from about 1.0% in the mid-1960s to 1.7% in 1980. This rise was modest enough not to impair the trajectories of growth in energy use, economic output, aggregate prosperity and population numbers.

Latterly, however, as the upwards trend in ECoE has become exponential, the scope for further expansion in prosperity has been undermined. It is probable that the rise in trend ECoE between about 1990 (2.6%) and 2000 (3.9%) marked a significant turning-point after which growth became ever harder to attain.

Because the 1990s had been regarded as a propitious period in economic terms – with expansion robust and inflation low – the onset of deteriorating growth was improperly understood. Indeed, this misunderstanding was inevitable given the absence of the ECoE factor from mainstream economic interpretation.

Responses to secular deceleration were required, for two main reasons. First, the public has long regarded growing prosperity as both a norm and an entitlement. Second, the world financial system is entirely predicated on perpetual expansion in the economy. Debt can only ever be repaid if the prosperity of the borrower increases over time.

With the consensus firmly established that the economy was a financial system, it was inevitable that financial solutions would be sought to address secular deceleration. This process began with making credit ever easier to obtain, a process furthered both by deregulation and by reducing real interest rates.

For some years, this expedient appeared to have been successful, as reported economic output boomed between 2000 and 2007. It transpired, of course, that this was a credit-induced boom, a familiar phenomenon, though one in which, this time, inflation was concentrated in asset markets rather than in consumer prices.

When this process led, inevitably, to the 2008 global financial crisis (GFC), the response once again was a financial one. In fairness to decision-makers, this response was largely forced upon them by the rapid expansion of debt – the only way in which a debt default crash could be prevented was by making debt ultra-cheap, both to service and to roll over.

Accordingly, policy rates were slashed to sub-inflation levels, whilst huge amounts of newly-created QE money were used to force up the prices of bonds, thus driving yields to extremely low levels.

It was always predictable – and is now becoming evident – that the monetary expedients adopted after the GFC would be no more effective than the ones which caused that crisis. Debt has continued to expand, asset prices have continued to inflate, and a series of adverse economic consequences have emerged as side-effects of the process.

In short, just as the process of credit adventurism operative between 2000 and 2007 led directly to the GFC, the subsequent policy of monetary adventurism must lead inevitably to a second financial crisis (“GFC II”).

Because the mechanism leading to GFC II has been different from the mechanism operative before the 2008 crisis, GFC II is likely to differ in important respects from its predecessor, with money, rather than just the banking (credit) system, at the eye of the storm. GFC II is likely, also, to be much larger than GFC I, with SEEDS indicating that exposure now is roughly four times the size of exposure in 2007.

The financial dimension

One of the most important lessons of recent economic history is that it is impossible to alter the course of an energy-determined economy using purely financial tools.

The reason for this mismatch is quite straightforward. Having no intrinsic worth, money commands value only as a claim on the goods and services supplied by a physical economy driven by energy. Though financial claims can be created at will, the creation of additional claims does not expand the quantities of goods and services for which these claims can be exchanged.

Inflation has long been understood as a monetary phenomenon, in which prices are forced upwards where the supply of money (“claims”) expands at rates faster than the pace of growth in economic output. Two significant qualifications are required to this statement. The first is that the velocity of money (the speed at which it changes hands) is as important as the stock of money in circulation. The second is that inflation may occur in a variety of locations, including asset prices as well as consumer prices. With these caveats stated, inflation is indeed “always and everywhere a monetary phenomenon”.

The relationship between two quantities – (i) the output of the physical economy, and (ii) the quantum of claims exercisable against that output – plays a critical role in determining financial conditions.

The economic experience since 2000 has been one in which claims have been created at levels far in excess of the rate of expansion in output. This statement has profound economic and financial implications.

Initially, excess claims were created primarily in the form of debt. Latterly, this process has been compounded by the creation of excessive monetary amounts. Stated in PPP-converted US dollars at constant 2017 values (the convention used throughout this discussion), aggregate debt expanded by $53 trillion between 2000 and 2007, and by $99tn between 2007 and 2017.

The increase in debt since 2007 has been accompanied by a rise of similar magnitude in the deficiency of pension provision, a process driven by the collapse of returns on investment which has itself been a function of ultra-cheap money. According to a study published by the World Economic Forum, real returns on US bond holdings have slumped to just 0.15% from a historic norm of 3.6%, whilst returns on equities have fallen from a historic 8.6% to only 3.45%.

This has more than doubled the rate of savings required to achieve any given level of pension provision at retirement. For the vast majority, levels of saving required to deliver pension adequacy have become unaffordable. The pension gap “timebomb” is likely, in due course, to become a hugely important economic and political issue.

These developments, most obviously the escalation in debt levels, have created huge increases in the prices of assets such as bonds, stocks and property. Put simply, bond prices are the inverse of the market yield requirement established by the cost of money, whilst equity pricing is driven by considerations similarly linked to interest rates. Property prices, too, are largely determined by the equation of inverse interest rates applied as a multiple to the median payment capabilities of purchasers.

That bubble conditions prevail across asset markets seems beyond dispute. But the mere existence of a bubble does not on its own imply an imminent crisis. The scale of risk associated with a bubble depends primarily on two issues, not one.

The first of these is the monetary context going forward (a bubble may be sustainable, and may indeed continue to inflate, so long as credit remains both cheap and easy to access). The second is the prosperity of borrowers. The latter, ultimately, is a function of the energy-based economy.

Another way to look at this is that, if monetary conditions tighten, asset prices are likely to fall, perhaps rapidly. Meanwhile, if the prosperity of borrowers diminishes, so does their ability both to service existing debts and to take on additional indebtedness, even if credit remains cheap. Under these conditions, supportive monetary policy is not guaranteed to prevent asset price falls

What this means is that forecasting the future cost of money is not a sufficient way of anticipating crashes in asset prices. In addition, we have to understand trends in borrower prosperity – but this metric is not provided by conventional econometrics.

Calibrating the energy economy

During the period between 2000 and 2007, aggregate debt expanded by $53tn whilst world GDP rose by $25tn. Between 2007 and 2017, growth in GDP was $29.7tn whereas debt increased by $99tn. In the earlier period, therefore, $2.08 was borrowed for each $1 of recorded growth, whilst the ratio in the latter period was $3.33 of borrowing for each growth dollar.

Over the last decade, credit has expanded at the rate of 9% of GDP, roughly three times the pace at which GDP has increased.

Conventional interpretation of the relationship between debt and GDP omits a critical connection between the two. Within any given amount of money borrowed, a significant proportion necessarily finds its way into economic activity. An economy which takes on substantial additional debt will, therefore, experience apparent “growth” in GDP, created by the spending of that borrowed money.

This credit effect is artificial, in the sense that (i) the apparent rate of growth would not continue in the absence of continued increases in debt, and (ii) growth would be put into reverse if the incremental debt was paid down.

This interpretation is reinforced by observation of the type of “growth” supposedly enjoyed. The experience of the United States in the decade between 2007 and 2017 illustrates this point.

Over that period, reported GDP expanded by $2.5tn, to $19.4tn in 2017 from $16.9tn (at 2017 values) in 2007. The combined output of manufacturing, construction, agriculture and the extractive industries contributed just 1.9% of that growth ($48bn). A further 7% came from increased net exports of services. But the vast majority – 91% – of all growth came from services that Americans can sell only to each other.

We need to be clear about what this means. The products of manufacturing, farming and extraction are traded globally and are priced by world market competition, so these activities can be grouped together as GMO (globally marketable output). But internally consumed services (ICS) are priced locally, so are residuals of consumer spending capability.

In short, what was happening during this decade was that American GMO was stagnant, not even increasing in line with population numbers. But ICS activities – residuals which Americans sell only to each other – increased markedly. This is wholly consistent with the fact that, during this period in which GDP increased by $2.5tn, debt expanded by $10.2tn. Money pushed into the economy by cheap borrowing shows up almost entirely in residual ICS activities.

The credit effect is so important that, in order to measure prosperity, it is necessary to arrive at a ‘clean’ measure of output from which this effect has been excluded. The ultra-loose credit conditions of recent years have created a large and widening gap between ‘clean’ (or financially sustainable) output, and recorded GDP numbers inflated by the credit effect.

For instance, within global growth of $25.3tn between 2000 and 2007, the SEEDS algorithms identify clean growth of $10.3tn and a credit effect of $15tn. The $29.7tn of growth recorded between 2007 and 2017 comprised a credit effect of $19.4tn and clean growth of $10.3tn. Therefore, the credit effect accounted for 59% of all reported growth in the earlier period, and 65% in the latter.

Once clean GDP has been identified by the exclusion of the credit effect, what results is a measure of sustainable output, something which equates to the aggregate of financial resources available for deployment. But the first call on these resources is the cost of energy supply because, if this economic rent is not paid, energy supply dries up, and activity grinds to a halt.

Therefore, prosperity is identified by deducting trend ECoE from clean GDP. This calibration is the primary purpose of SEEDS, the Surplus Energy Economics Data System.

Principal findings

Aggregate prosperity furnishes us with personal prosperity data, and also provides a critical denominator against which all other financial metrics can be measured. Here are some of the most important conclusions emerging from this process.

First, prosperity is already in marked decline in almost all Western economies, typically having peaked between 2000 and 2007. The only significant exception to this pattern is Germany, largely because of the benefits conferred on the Germany economy by the euro system.

Deteriorating prosperity, in conjunction with monetary manipulation adopted in failed efforts to counter it, have built huge risk into the financial system. The Western economies where risk is most acute are Ireland, the United Kingdom and Italy.

Most emerging market (EM) economies are at an earlier stage in the prosperity curve, and continue to enjoy increasing personal prosperity. But progress is now slowing markedly, not least because of the impoverishment of Western trading partners. China has grown its debt at a particularly dramatic pace in order to sustain activity and employment, and must be regarded as extremely risky.

Prosperity deterioration is already having a palpable effect on political sentiment in most Western countries. Popular dissatisfaction is eroding support for the ‘globalist liberal’ elites which have been in government for most of the last thirty years, and insurgent (sometimes called “populist”) movements have been the main beneficiaries of this process. At the same time, the decline in prosperity has started to erode the tax base.

Future domestic policy directions are likely to focus on (i) redistribution and (ii) opposition to immigration. We should assume that voters will turn increasingly to parties committed to these policies. We should also anticipate growing opposition to globalisation.

These, of course, are just some of the more important consequences of the downturn in prosperity. Critically, an understanding of the energy basis of the economy explains issues which necessarily baffle conventional interpretation which remains predicated on purely financial assumptions.

 

116 thoughts on “#139: The surplus energy economy

  1. Tim – again unfortunately with all the anger – hatred and rage being displayed from politicians – journalists and the public – this sort of level headed informative analysis is probably going to be ignored by most.

    Perhaps in 100 – 200 years time historians will look back and just shake their heads in despair at how basically undeveloped humans were.

    Thanks for the post anyway.

    • Because I didn’t have a ready answer to the question ‘where can I find a synopsis of SEE?’, this article seemed well worth doing, even though it’s familiar territory to regular readers. They, I hope, will find a one-place summary helpful, and this article does include some new material.

      I agree that the powers that be aren’t going to listen to this sort of thing, or, at least, won’t until things get very much worse.

      But I, and I hope you too, find it useful to know what’s happening long before ‘the world and his dog’ understand it.

    • Hi I find all of your post helpful – it just frustrates me that I don’t seem to be able to get anyone else interested when I post links to your site on the Telegraph in an attempt to point out that there are other things going on which reduce Brexit to something of less importance.

      The Telegraph itself is deliberately printing articles designed to inflame tempers and stoke up ill feeling. It comes across as a digital version of 1984’s squealer.

  2. Thank you again for a clear evaluation of the economic situation. You have gone into details with SEEDs which quantitatively, and mathematically, illustrates the principles of forthcoming problems.

    However, your ideas also correspond to the natural, evolutionary processes that have occurred throughout human history. Mankind has survived and become more prosperous by utilising various forms of energy.

    Currencies, however and particularly fiat versions, have short lives, are a figment of the imagination and sometimes can have a temporary existence – like Bitcoin.

  3. Tim, Thanks for the reminder.
    I as well as others I’m sure are wondering where exactly does this leave me and my family. I have thought about this ever since I started to read your blog a few years ago. I read and ‘get’ what you are saying and where we are collectively going.

    I have come to the point where I believe wilful denial is the only thing anyone who tries to bring this up will get in return. There is even a book called “Willful Denial” which I have read. Realizing this, that making course change impossible, and while I do not believe in sticking my head in the sand I am focusing on enjoying my life and what time I may have. I will do what I can personally to prepare and also to leave this planet in as best shape as I can, I do not believe in any form of salvation from our collective comeuppance, what ever that will entail.

  4. Dr. Morgan
    An excellent summary. I will make another prediction, which is most applicable to the US because the US has the highest medical expenses in the world, but some of the worst health outcomes among the developed countries.

    The unlimited allocation of our dwindling resources into the treatment of chronic diseases will be forced through a gut wrenching readjustment. Those suffering from diabetes, for example, will be told, one way or the other, that they are responsible for their own cure. The current practice of keeping diabetics on maintenance for decades will cease.

    Telling people that they themselves are to blame for their predicament isn’t likely to foster the success of democracy. We may see a further shift in the direction of authoritarianism.

    As a moment of levity in the midst of the sober reality. A young woman doctor in Canada is about to publish Oh, Sh*t. (The actual title is what you think it is.) A treatise on how to evaluate your poop as the poor man’s way of diagnosing what ails you and guiding you to treat your own problems. This is in stark contrast to our current emphasis on using supercomputers to analyze your feces. As she says, ‘not everyone has a lot of money to spend’.

    Don Stewart

    • Is the average diabetic THAT expensive?

      My uninformed guess would be that extending the life of hopeless cases costs at least as much as life long medicination of otherwise “healthy ” workers.

  5. Property Taxes
    Here is an interesting article about property taxes in the US and the problems of selling obsolescent big box stores:
    https://www.citylab.com/equity/2018/11/property-tax-dark-store-theory-retail-apocalypse-walmart/574123/

    So long as everything was on an upward trajectory, property valuations were fairly straight forward. But in 2009 my house was worth much less than the valuation. I appealed. The assessment board showed me that I was valued the same as all my neighbors. In other words, we were all over-valued based on the 2009 market. I considered taking it to court, looked at the costs, and what I might save, and decided not to go legal. The local market recovered quickly and the discrepancy disappeared.

    But what about the Big Box stores? We have in the US a huge surplus of shopping centers. Is a Mall worth what it would be converted into store front churches and dance schools for girls? Even if it is currently still fully occupied by paying tenants?

    As Dr. Morgan’s scenario plays out, expect more of the same.

    Don Stewart

  6. Tim, to get my head around this long post can you show the workings you use to, say, establish the ECoE of 3’9% in 2000 and as well what the maximum workable ECoE would have been, and the ‘cushion’ we have spare which has allowed growth to continue?
    I think the financial world can adjust because money is flexible and can be set at whatever it needs to be. The only limit to this flexibility is real resources. The FIRE sector could easily be written off with limited real damage.
    Michael Hudson discusses the FIRE sector in his books such as ‘Junk Economics’ and now ‘And Forgive them their Debts”. worth following up as it gives the history of debt dependency across the last 3+ millenia. and how it led to the destruction of the Roman Empire. We are in the same boat.

    • Well, ultimately the FIRE sector (along with some others like healthcare) is just an overhead on the energy economy. Modeled from that perspective it matches Hudson’s conception as far as I can tell.

    • John

      Thank you. I can address some of these issues in a future article.

      I’m sure you’ll understand that, if the interpretation here is correct, then conventional economic interpretation is wrong – and I would add that its failings are becoming ever more apparent. If that’s right, then the financial ‘biog battalions’ are going to need a similar system,. In order not to hand it to them on a plate, I keep back a few technical details, but these don’t inhibit reader understanding of the processes and principles.

  7. Excellent article – as usual… but it seems that you are tending to the conclusion that, sooner or later, we must reconcile our economies with zero growth. This is similar to the views of the Greens, is it not?

  8. Given my interpretation of prosperity, I find ongoing events in France fascinating. According to SEEDS, French prosperity per capita is eroding very slowly, and fell by 7.1% between 2000 and 2017. This is not as bad as the trends in, for instance, Britain and Italy. But it has proved enough to provoke anger, and protests are now broadening from the fuel tax topic to wider prosperity issues.

    The only solutions likely to pacify protestors seem to involve redistribution, but even ‘taking from the rich to give to the ordinary’ has its limits.

    So there are reasons for thinking that social unrest is likely to follow from deteriorating personal prosperity, and by no means only in France.

  9. @ Donald
    I wouldn’t get too frustrated in not being able to get the message across, because, despite Dr Morgans excellent analysis, what has to, also, be remembered is that our monetary and financial systems are faith based. As soon as a certain number of people become aware of this situation another human dynamic rapidly comes into play.

    • I can actually imagine panic setting in – but meanwhile it’s still BAU with the birds singing and people going about their lives.

    • I take it you’re not in Paris, then, Donald?

      Seriously, though, I’m far more fascinated by this than depressed by it. The sun is shining here, too, and ‘every prospect pleases’.

      On the French situation, it seems to me that, unless prosperity trends are understood, popular grievances cannot be understood either. There’s no point in telling people they’re better off (‘look at GDP per capita’) when they know they’ve less money in their pockets after essentials now than they used to have, and are further in debt.

      Whilst there are no doubt some agitators stirring things up, Macron really does have to listen, and stop promoting policies of ‘liberalisation’ that are unpopular with ‘ordinary’ working people. As I understand it, voters cannot get rid of him until 2024.

    • I’ve been reading about the events in Paris obviously many are discontent. Perhaps if Macron told them the truth and what need to be done – but I suppose he wants to avoid widespread panic on top of the protests. (I’m assuming here that his Government is aware of what you are aware of which is why they’re trying to cut down on diesel use)

      Just been watching Michael Grove on the Andrew Marr show – poor Andrew could hardly get a word in at times.

      I suspect the deal might just creep through.

    • I can’t see the Parliamentary arithmetic for that, but I agree. Maybe Labour might abstain ‘in the national interest’?

      My worry is that they might rely on financial chaos after rejection to get a hurried re-vote to pass it – rather like what happened in Congress with TARP, though there are significant differences.

    • Well whatever happens Tim – certainly one of liveliest (frightening?) times I’ve lived through.

    • One of the ‘amazing’ things is that the Daily Mail is now on the side of May and her deal. Obviously the new Editor is behind all this as I can’t imagine Dacre would have been so supportive

    • But next time people lose faith what can they do?

      They used to flee to gold, dollars, government bonds or whatever.

      But now we’re all stuck in this global fiat paper system with nowhere to hide.

    • If everyone did that we would get hyperinflation.

      But most have no money or negative net worth (excluding house and pension, those can’t be sold).

      And the few percent that could move money out of the system would quickly reach a life time supply of stuff.

  10. What about infrastructure?

    If average depreciation time is 20 years, then if maintainance is cut to minimum, peak surplus energy per capita should be possible to hide for many years before disposable income/energy shrinks.

    • That means railways – hospitals – schools – people’s homes and cars etc all falling apart.

      On the subject of saving energy then these smart meters must be the biggest waste of energy for a long time. The Government thinks that you may save £18 a years. Compare that against production – maintenance – replacement costs.

    • Peoples homes are likely the most overbuilt/maintained infrastructure. Question is if housing will be of use or just a sink keeping heated and functioning.

    • Ever since 2008, we’ve been engaged in a process of economic cannibalisation, sacrificing the future to sustain an increasingly illusory present. That includes neglecting the maintenance of infrastructure.

      Policies such as interest rates are economic signals. Zero or negative real rates signal to people ‘don’t save’. After the WEF report about the “global pension timebomb”, I calculated that somebody who previously saved 10% of income would now need to save 27% to get the same pension pot on retirement – and this, of course, isn’t practical. This is where the WEF’s huge pension gap comes from, and it’s part of a broader “don’t save” signalling system. Essentially, we’re telling people not to save because the real economy can no longer afford both saving AND current consumption. If and when the public becomes fully aware of the pensions disaster, recent events in Paris could look like a picnic.

    • Donald:

      HS2 and Hinkley are disasters. Decisions about new nuclear capacity needed to be taken by 2000, but were put off for more than a decade. Because of an ideological opposition to public investment, the need to find a private provider pushed the UK into the wrong reactor at the wrong price, and financed in the wrong way.

      HS2 looks to me like delusions of grandeur, because what is really needed is more capacity in the near term, not faster speeds in the very distant future. It’s not unlike building two new aircraft carriers when you can’t afford enough frigates and destroyers.

    • My Dad used to be very vocal about the lack of investment in Nuclear power in the early 2000’s.

      I haven’t read one report about HS2 which has much good to say about it. Local buses – rail bottlenecks – rolling stock – all need more investment yet we’re going to waste on something we might not be able to maintain.

      Perhaps it’ll end up being a low speed goods track in the future.

    • Smart meters are the mechanism to introduce rationing (no way of controlling an old style meter apart from cutting you off not so with a smart meter)

      They will be mandatory soon as the take up rate is very poor

  11. Tim, I think that zero interest rates also signal something else: a tacit admission that it is no longer possible to make money by investing money in the real economy, I.e. that the real economy is already in decline An interest rate is an assumed baseline rate of return. A zero interest rate is therefore a signal to the rentiers, and a sign of the fact, that the only way to make money from money is financial engineering, casino bets aka derivatives and outright predation.

    • ‘Outright predation’ Well the massive increases in rent by the company who purchased the properties previously owned by Network Rail might qualify.

      Not exactly good for businesses. I suspect Network Rail may squander their new pocket money.

  12. The so called “sharing economy” , like uber and airbnb, is also nothing more than business stealing business, while outsourcing capital cost and insurance costs and risks

    • There are many examples of non-profit sharing systems. I recently helped my daughter’s family move. She used a sharing app to freely redistribute used packing boxes, unneeded furniture and appliances to other people in the community. She has long used similar applications to freely exchange age appropriate children’s toys, clothes and books between families.

    • We live in an age of euphemism.

      “Sponsorship” should mean (for example) supporting youngsters running a half marathon for charity, not getting ads plastered over a sporting event. “Sharing” should not involve payment. The “gig” economy has rock-star connotations, but really means casual and insecure employment. “Reform” and “liberalisation” often mean undermining workers’ rights. And so on.

      The objection to Uber, Airbnb and so on is that they put established taxi and hotel businesses at an unfair disadvantage because they seem not to be subject to the same regulation. The solution to that seems straightforward, if the will is there. For instance, a taxi firm in the UK has to have a higher level of vehicle inspection, more extensive insurance and the licensing of drivers including criminal records checks. Make ride “sharing” subject to the same rules and a level playing field is restored.

    • The dock workers of 1920s queuing every morning, to see if they could get work for the day to feed their families, weren’t the past, they were the future. The hip, zero hours, gig economy. Sounds so cool doesn’t it?

  13. Possibly Off Topic But Too Good To Pass Up
    This is the list of one day workshops at the Organic Grower’s School in Asheville, North Carolina, USA, this coming March. Many people agree that collapse is real, but stoutly deny that there is anything that can be done about it. I call your attention to these workshops:

    https://organicgrowersschool.org/conferences/spring/pre-conference-workshops/

    How to pick your land. How to feed 100 people, year around, on 3.5 acres (less than 2 hectares). How to deal with water, the indispensable resource. The integration of animals and plant crops.

    If you don’t have anything like this where you live, cash in your savings and buy a plane ticket and come to the North Carolina mountains.

    Don Stewart
    PS Full conference schedule still a work in progress. From elderly hippie homesteaders to young couples with children…inspiring.

  14. Tim. Thanks for the up to date synopsis. Excellent for helping introduce people to the subject.

  15. Hi Tim

    Thanks for another informative article.

    I must admit the more I think about this the more I’m convinced that it is demographics that is at the root of all this. Imagine that the World population was now half what it is (with an obvious commensurate growth in prior years): would the energy situation be anywhere as dire as your predictions? In view of the fact that energy is used to satisfy human wants the answer must be no -less people, less energy use, less depletion, lower ECoE.

    The main factor is that there must be a finite limit to World population consistent with sustainability. Technology can assist us but can it come to the rescue? The way I see it – no; and your figures with the escalating cost of extraction seem to confirm that; usage (population) is running ahead of availability.

    It seems to that things would undoubtedly be easier with a reduced population but can this be managed or is it reliant on the traditional method of plague to wipe out large numbers? The Chinese had a go with the “one child policy” but that has had apparently mixed results. Can we actually manage something consensually which is at the heart of human emotion or will it be an enforced version of “Logan’s Run” or the slightly better method used in that Japanese film “The Ballad of Narayama” where all those over 70 went up the mountain to die? As I am 73 the latter is not my preferred method.

    • Yes, population growth has been a critical part of this problem. The Malthusian proposition was that excessive population growth would self-correct through famine, disease and strife, but Malthus didn’t, and couldn’t, know about the transformative potential of fossil fuels. Unless we find something to replace them, as a new low-ECoE source of power, he might yet be proved right after all. I think it was James Lovelock who predicted a future carrying capacity of 1.5bn.

      I think it highly likely that population pressure, combined with deteriorating prosperity, will prompt rising political opposition to immigration. I can foresee governments being forced by public opinion into a zero net immigration posture.

  16. Wonderfully lucid post, as ever. A perfect introduction to the economics of decline.

    As for immigration policy, I suspect the call will be not merely for zero net, but a move towards mass expulsions, particularly of Muslims in Europe – this is what is in the air.

    An Italian friend assures me that racist fascism is very much resurging in Italy, and I see that an openly racist and neo-Francoist party, Vox, new on the scene, has done very well in the elections in Andalucia – formerly as Socialist stronghold. The platform? Unity of Spain, Catholic values, and the expulsion of immigrants. And of course the Brexit vote has similar roots, as well as economic distress and dislike of the tendencies of the Brussels project. .

    Malthus will, of course, be proved right, and the population of human animals will undoubtedly shrink to the merest fraction of what it is in now, in a time-frame which will surprise us; most probably living in degraded circumstances due to the environmental catastrophe brought about by globalised industrialism – although, of course, there will be pockets of greater fertility and ease.

    It’s odd that Malthus has been mis-portrayed as a hater of the poor: his writings show him to have been, if not an egalitarian, a humane man, horrified by poverty and the suffering it inflicted. When travelling in Norway, he found a community in dire straits due to the collapse of an industry which had encouraged them to have large families, as it had paid
    very well.

    I suppose his approach contradicted Millennarian Socialism – the belief that with redistribution of wealth, the abolition of cruel social hierarchies, and the harnessing of science and industry, an earthly paradise could be made for the masses – an experiment we have tried since WW2, which has had great success in many ways, and which is now failing due to energy constraints, in the shadow of ecological catastrophe. This is a bet which I am sure Malthus would rather not have won.

    • Thank you. I did feel that we need an easy-to-access summary.

      Where immigration is concerned, I feel we’re treading a fine line. My point – and I stress my ONLY point – is economic. In the Western economies, human physical labour provides less than 1% of the energy that produces goods and services. So the argument that population growth doesn’t dilute prosperity (because more consumers also means more producers) doesn’t wash. Rather, we need to consider how much energy a country can access, how skillfully it can deploy that energy, and how many share the result. That makes the case for attracting people with particular skills, but not those without such skills. This also means – Mrs Merkel please note – that there is no economic logic supporting large-scale immigration.

      Once people have entered the country, they need to be treated as wholly equal in every respect. The West often seems confused about this. The aims should be integration and equality, not the formation of pockets distinguished by race, faith or language. Where PC so often goes wrong is in the emphasis that it places on difference rather than sameness.

      Once upon a time, Malthus visited a parish where the vicar had a sense of humour – he ensured that, during the visit, no children, or women of childbearing age, should be seen. Malthus was not amused….

  17. Malthus; Socialism; Financial Capitalism; Rising ECoE
    Gunnar Rundgren has written a nice article which you can find by searching on
    The Singularity is already here – it is the market

    To the neoliberal economist, when people get what they want, everything is perfect. What people want is dictated in large part by anciently evolved neural pathways. There are three particular tendencies we should note:
    *Plants and animals are adept at manipulating other plants and animals into doing things which are not in the best interests of the manipulated. Sometimes there is true collaboration, but frequently there is real aggression. In terms of human behavior, a fly fisherman is quite adept at getting a trout to strike at a tempting morsel which will have deadly consequences for the trout.
    *The artificial intelligence that Rundgren fears is focused on the short term. That it, it doesn’t have any intention of teaching the human trout how to make wise long term decision…instead it becomes expert in learning how to entice the human into striking at the bait. Humans are quite good at discerning the intention of a used car salesman, but it seems apparent that the fishermen are evolving at a faster rate than the trout…as evidenced by the facts that such a high percentage of the wealth is now concentrated in so few hands, and that global trade is now dominated by a similarly very small fraction of the leaders of giant corporations.
    *The wealth that the one tenth of one percent own, and the debt that sustains governments, is used as a leverage point against any human who tries to break out of the vicious circle. Suppose, for example, that a recent college graduate comes to the realization that they have mostly been taught to lure other recent college graduates into situations as deadly as those of the fisherman and the trout. Our hypothetical student decides to decamp to some poverty stricken backwater and live a meaningful life of poverty but neighborliness. Catch 22 strikes, and he or she finds that all that student debt can only be made to disappear by a coffin. Debt is how the system keeps the peasants nose to the grindstone. And ordinary Madison Avenue smarts plus the new AI pursued by the Tech Giants keeps most people buying things they do not actually have the money to pay for. And the Central Banks keep expanding the money supply so that asset bubbles keep the price of necessities higher than they need to be, which reinforces the felt need to go into debt.

    As ECoE rises, then the thermodynamic factors which have enabled the above system to operate begin to go into reverse. Therefore the system must contract. Whether the system can contract without disintegrating into a bazillion pieces is a good question.

    Don Stewart

    • Extreme neoliberalism is very stunted intellectually, arguing that acquisitiveness is the dominating (and almost the only) human motivation. This is so crass that I sometimes wonder whether the start point is the desire for some sort of philosophy justifying the current system, followed by the selective pursuit of arguments making this case.

      Purist socialism is equally stunted, when it bases its case on altruism and the perfectability of society. I think it was Shaw who said that “any man under twenty-one who isn’t a socialist has no heart; any man over twenty-one who is a socialist has no head”.

  18. Another excellent article from Tim, that summarises as succinctly as possible the grim reality of the state were in.

    Regarding the ECOE of renewable energy sources, does this estimate take into account the cost of storage and other measures needed to allow intermittent energy supply to meet demand? On paper, utility grade solar power plants and wind farms now have one of the lowest levelised costs of energy of all of the major electricity sources.

    However, the picture looks far less favourable if large scale storage is needed to match supply to demand. If the need for storage and back-up is minimised by some sort of intelligent demand management, and some users are able to tolerate occasional power cuts, then the prospects for renewable energy are much better than they would be if we attempt to maintain the same supply-demand arrangements that we have today. Another issue that may muddy the water is that wind and solar power produce electricity, which has a high exergy value, whereas fossil fuels must undergo combustion in a thermodynamic machine to yield power, hence a low exergy value.

    One of the things that place a floor under renewable energy ECOE is the low power density of most renewable energy sources. Whereas the simplicity of renewable energy systems, mass production and rapid build all stand in favour of wind and solar power; the power density of wind energy is limited to about 3W/m2 and that of solar power is limited to about 20W/m2. These are hard limits that are imposed by nature. To generate the same amount of power using a wind farm requires a much greater mass of equipment than, say, a nuclear reactor. The analysis linked below indicates that 1MWe of sustained power using wind energy, will require between 10 and 50 times more steel and concrete than a nuclear power reactor, depending upon which type of nuclear technology is considered. And even this comparison does not account for the embodied energy and losses associated with storage.

    https://fhr.nuc.berkeley.edu/wp-content/uploads/2014/10/05-001-A_Material_input.pdf

    • Tony, power is also something I have been contemplating recently.

      Even if we moved to a hypothetical 100% renewable and clean energy situation we may still struggle to maintain alot of our high power applications.

      Historically, before fossil fuels anything that needed alot of instantaneous power required situating near water courses and even then was not guaranteed.

      A lump of coal, or volume of petrol, when being used to power electrical machines is in effect a high power battery, because you can turn that dense chemical energy into work in a short amount of time. P = E/t.

      This is the other aspect of fossil fuels which makes it so great. Achieving the same thing with batteries means many batteries in parallel to allow higher current and hence higher power P=IV. The electric car requires high instantaneous power for acceleration son has many battery cells in parallel rather than a one big battery.

      But then you need high power to mine and fabricate the stuff we need for batteries and then associated control technologies.

      So we need fossil fuels to create batteries so we don’t need fossil fuels..🤔

  19. Photosynthesis creates hydrogen when it ‘burns’ the oxygen in H20. Photosynthesis occurs at ambient temperatures, but utilizes quantum effects that humans have usually had to achieve at temperatures near absolute zero.

    Could they have figured out how to do a human version of photosynthesis? It is also curious that they recycle the water. Have they harnessed the power of Structured Water?

    Don Stewart

  20. Very interesting article.

    Is it possible to find a breakdown by country of “clean GDP”, or even better of clean GDP change over a number of years?

    • Clean GDP is calculated for 26 of the 27 countries on the system – the only exception is Iran (lack of data) – plus the world total.

      Data required for this calculation is patchy before 2000, but there seems to have been little ‘financial adventurism’ before then, so 2000 is when the series starts. Generally, SEEDS has far more economic (and energy) data than I ever use on this site.

      SEEDS does have clean rates of growth (which are very low in most instances).

      Examples for 2017 include:

      US: 0.7%
      France: 0.2%
      Germany: 2.9%
      Russia: 0.6%
      UK: 0.4%
      South Africa: 0.2%
      Australia: 0.8%
      China: 2.8%
      India: 6.5%
      World: 1.5%

      Some of these are lower than rates of population change.

      Germany’s numbers are remarkable – essentially, the country borrows very little, so clean growth is close to reported growth. The benefit of Euro membership is huge, and visible in borrowing data, which isn’t where most people would look for it. This said, whether Germany can ever collect the near-EUR1tn owed to it by Spain and Italy through Target2 credits has to be doubtful. So I sometimes use a parallel – and lower – clean growth rate for Germany, which tries to ex-out the EUR effect. This is why forecasts of clean growth rates for Germany going forward are lower than the historic calculation.

      China’s number might look low, but isn’t. Over the past decade, when China’s reported growth has been 6-7%, debt has been expanding at over 30% of GDP annually, meaning that most Chinese “growth” is borrowing-based. That’s why I worry about China…..

    • Thank you for the data. Where can I find the statistics?

      >This said, whether Germany can ever collect the near-EUR1tn owed to it by Spain and Italy through Target2 credits has to be doubtful.

      Haha, as an Italian in the Netherlands (a country with a higher pro-capita contribution to Target2 than Germany) I try to explain my co-workers that the trade surplus they are so proud of is only a bunch of paper assets that we Italians are not able nor willing to pay back. And the pension system they are so proud of (best in the world!) is based on those same paper assets.

    • The stats are not published as such, as I’m still not sure how best to make them available.

      The clean growth rate for Italy in 2017 was negative at -0.5%. Netherlands is +0.7%. Clean GDP in Italy is still lower than it was in 2007.

      Please see https://surplusenergyeconomics.wordpress.com/2018/05/22/127-quantum-of-risk-part-three/ about Italy

      I agree entirely about the German situation re. paper assets. Italy owes the Target2 system (meaning Germany) almost EUR 500bn. In 2019, the Italian government will need to raise EUR 275bn in new debt, both to finance the deficit and to repay existing debt, taken together. So I cannot see how the Target2 balance can be paid by Italy – or by Spain, for that matter.

      Personally, I think the EUR system is gravely faulty. Combining a single monetary policy with multiple sovereign budgets makes no sense. Also, there are no automatic stabilisers, as there are within single currency areas like USD, GBP etc..

      Because countries like Italy cannot devalue, they are forced into what I call ‘internal devaluation’ (wage & cost cuts) instead – that’s the real reason for “austerity”. My feeling is that Italians sense this, and dislike it – as, too, it seems, do the French…..

    • I agree on the Euro. it is generally accepted that the Euro was created as an incomplete currency, only to be completed with a EZ budget and social stabilizers after the first major crisis. That is, at least, what people like Prodi and Kohl used to say.

      I wonder however if that is really so. The Germans were not keen on a Transferunion back then, even with the guilt related to WWII, and have gotten increasingly less keen since. That was already clear at the time of Maastricht: Kohl seems to have said that he wanted the Euro right away, because he knew that the next generation of politicians would not be as pro-Europe as himself.

      So how could he and other European politicians trust the next generation of politicians to complete the Euro? I wonder what the real motives were.

      Thank you for the link to the Italy post, and thank you for not perpetuating the lazy Italian trope. I also found the link to the resources, which is what I was looking for.

    • @discwrites

      “I agree on the Euro. it is generally accepted that the Euro was created as an incomplete currency, only to be completed with a EZ budget and social stabilizers after the first major crisis. That is, at least, what people like Prodi and Kohl used to say”

      I’m sure you’re right here and this is what gets me about the Euro. Knowing full well that the original conception is flawed they rely on a crisis to complete the job. Meanwhile we have how many extra youth unemployed added in the interim as “collateral damage”? This is unconscionable and sums up why the EU will ultimately fail.

  21. You don’t take into account the new possibilities of cryptocurrencies (maybe not the current ones) to solve monetary adventurism of fiat QE and financial artificial growth. At the end electricity (i.e. computer processing or energy) is the value of bitcoin. That open a real chance to adequate economic value to real energy economics.

    • Cryptos aren’t a topic I’ve written about here, yet anyway.

      One implication of current trends is a crisis of confidence in fiats. The 2008 crash was a banking event, because it resulted from what I call ‘credit adventurism’. I identify ‘monetary adventurism’ as the component which will make GFC II different from GFC I, as well as much bigger.

      Logically, something will replace fiats if they fail – with cryptos one obvious possibility for that role.

  22. Dr. Morgan

    Regarding your fossil fuel estimates of ECoE for year 2020 of 10.5%, and 2030 of 13.5%. Can these be expressed as ratios, in a similar manner as the EROI concept from Dr. Charles Hall and others? My understanding from memory is that you have inferred ECoE from broad economic data, rather than a study of begin-to-end energy costs for fossil fuel operations etc.

    Of course, I am wondering about the equivalency to the concept of EROI. Dr. Hall has in the past said we needed an EROI of at least 10:1 to take care of the minimum requirements of society, and 15:1 for a modern civilization. (He emphasized those were estimates)

    Second question. By projecting an ECoE estimate for fossil fuels for y2030 of 13.5%, are you assuming we can continue current gross energy production levels (or increase them) to y2030? A significant downturn in oil production seems possible if U.S. Shale production drops off sharply in the next 5 years (as some have suggested), and decline rates finally show up in some of the big middle eastern oil fields. The next financial/money crisis would also seem to be a challenge to production levels. Of course, there have been many projections about the peak of oil and coal production and we have mostly worked around them so far….

    Regards

    • The short answer is that the thinking with ECoE is similar to EROEI – that part of any energy accessed is consumed in the access process. Let me say that Charles Hall, with whom I have corresponded, is quite brilliant. This does not mean that the ECoE numbers cited here are necessarily comparable with his or others’.

      His numbers, as you say, are estimates, and so are mine – and, indeed, so are anyone’s. I have indeed looked at economic data, and energy cost and price data, and over very long timescales, which is why I stress that ECoEs used here are trends. Saying that, for instance, ‘world ECoE in 2017 was xx% higher than it was in 2007’ is more useful (for economics) than ‘ECoE in 2017 was x.x%’. There are overall economic as well as fuel-by-fuel patterns. Then there are comparative trends between countries – their economies, energy use patterns and so on. This was a huge project and took a long time.

      My observation is that, when ECoE moves above about 4%, true economic growth seems to become very difficult. That’s consistent with economic trends witnessed since about 2000. We’re a long way beyond 4% now, so much (maybe most) reported “growth” now is financial manipulation.

      On your second question, I think we’re at or very near ‘peak oil use’ now, but I don’t mean that that’s because of scarcity per se (“peak oil supply”), or because consumers want something different (“peak oil demand”). I think we’re at “peak oil viability“, if that makes sense. This is something I need to write about here. Can we continue to find prices that work both for producers and for consumers? I think not – because rising ECoEs take away an energy “profit” element previously shared between the two.

      Shale liquids economics can politely be called ‘debatable’. Because of rapid per-well decline rates, drilling cost requirements exceed cash flow from production, even at prices above $100/b. Shale has been financed because of cheap money and investor sentiment.

    • Well its details are the ones that new Atlas reported on – still seems too good to be true

  23. @Donald
    Take a look at pages 202 and 203 in McFadden and Al-Khalili. They describe a 2011 paper by Marlan Scully of Texas A&M and Princeton. The paper, plus a follow up paper, describe highly efficient quantum heat engines. We know that, in plants, the photosynthesis process is virtually 100 percent efficient…it is the most efficient system ever studied. So when the Electriq people start using words reminiscent of photosynthesis, and when they want to recycle the water, then I get interested. It may be another ‘cold fusion’ or it might be the real thing.

    Don Stewart

  24. After spending some weeks back in Germany, I found my Faith in SEE faultering.
    Not only am I preaching to the deaf over there, but all the “evidence” in Germany points against what I am saying.
    The Germans with their booming economy, are totally seduced by their “Energie Wende”, and are totally sold on Renewables. ( Nuclear & Coal: Baa-aad ; Wind & Solar Goo-ood ! )
    As I said, I found my faith ebbing.
    I am sure that even John the Baptist must have had a few moments of self-doubt at times.
    However, your timely article here, Dr. Tim, has restored my belief.
    By going back to basics, I can see the facts, and I can follow and understand the rational.
    I believe that SEE is telling us the true nature of our world.
    In any case, for years many of the world’s brightest minds were convinced that Light needed a medium for its propagation, the “Luminiferous Ether”. All the world’s greatest scientists were sold on the idea, until somebody came up with a different idea that proved them all wrong.
    Intelligent people are not always right. Nobody is born with all the right answers in their head.
    Today, all the world’s greatest Economists, ( sorry, I nearly wrote Alchemists there – much the same thing really ), think that they have a true understanding of how the world works.
    But very soon the public will awaken to SEE, and see the world in the way that it truly is.
    This will come as a great shock to many, especially the Germans. They are about the only ones left wearing rose-tinted glasses, I think other parts of Europe know something is wrong, although they cannot yet identify what it is.
    Admittedly, I have been holding my breath waiting for the imminent collapse of the UK economy – it has not happened so far. Maybe I will not get to see it after all, maybe the UK can struggle on for longer that I can.
    If the UK economy does go down, I’m sure it eventually will, then I can see it taking the rest of Europe with it. Germany might get away with a few economic bruises and broken ribs, but Italy and now France are both looking dire.
    I really do hope I am still around to see the looks upon the German’s faces.
    It’s not quite Schadenfreude, it’s more a kind of, “I told you so !”

    • From here in the UK I am looking forward to us being able to claim we are making the greatest progress towards our emissions reductions, deindustrialisation, and environmental recovery.

      It may all be due to our economy tanning, no investment in business, and our unmaintained infrastructure and waste ground rewilding before our eyes.

      We’ll be world leaders in something again! 😜

    • Kevin:

      It was interesting to hear a spokesman for the UK steel industry on Radio 4 this morning, explaining the pivotal importance of steel to the economy, and the huge disadvantages imposed on the UK steel sector by energy costs far higher than in competitor countries like Germany. This is very relevant to ECoE-based interpretation.

    • I’m not sure that the German economy really is booming any more, or that the switch to renewables has worked – isn’t there a trend back towards coal?

      More broadly, I’m glad you find this article timely. I think we can now present a pretty good case for SEE. I can’t – myself, anyway – see faults in the logic; the SEE ‘narrative’ for current and recent events seems more persuasive than the ‘consensus’ explanations; and SEEDS provides data to back it up.

      A key point going forward, I think, could be the erosion of faith in conventional economics. If you’re in government, business of finance you are a ‘customer’ of the economics ‘industry’ – and it wouldn’t surprise me if the faith of these ‘customers’ in the ‘product’ is waning.

      Slightly off topic, but this page has a chart showing the impact of the French 2018-19 budget by income percentile – it shows how the biggest winners are the wealthiest 1%. Is this Macron in a nutshell?

      https://www.bbc.com/news/world-europe-46437904

  25. You may be right; I saw a survey of employment prospects for Spanish graduates, and economists face far worse prospects now than they did before 2008, with very few opportunities.

    Does that, I wonder, count as good news? Will conventional economists be discredited as, say, alchemists with the advent of the Enlightenment?

    Far from an Enlightenment, I fear we face a dramatic growth in irrationality and violence as conditions worsen and the -stressed and uncomprehending – masses demand a return to conditions which can no longer be recreated: the material ease of the fabled 1960’s, the incredible false boom of 2000-08.

    Suitable thoughts for a dank and sodden December morning in East Anglia.

    • I spent six years in Cambridge and more than ten in Norfolk, so I sympathise about East Anglian winter weather – standing on the sea front at Cromer facing a bitter north-easter sleet is not something to be experienced.

      I’d better not mention the weather here in the Med today.

    • ‘Standing on the sea front at Cromer facing a bitter north-easter sleet is not something to be experience’

      Harsher condition than Mars – although hiking to the top of the Old Man’ on a bitterly cold day with a howling wind probably comes close.

      My fingers got stuck to my metal camera when I was trying to get a decent group shot.

  26. The discrediting of every institution – ‘professional’ politicians sinking even lower than usual in public estimation; disbelief in the formerly authoritative; fragmented, radicalised, legislatures and deepening poverty is of course the perfect soil for tyranny, grasped at desperately as a ‘solution’.

    An Italian friend was saying that what he previous respected and liked about Britain – in contrast to Italy – was the reasonableness of the place, but that this seems to have evaporated with the antagonisms generated by Brexit.

    I wonder myself, when I listen to the Brexit or Bust crowd foaming about the mouth at the thought of ‘traitors’ (very Spanish, that!) and watching others parade about painted Brussels blue with stars on, preening themselves on moral superiority, where this can all end…….

  27. @Donald
    First, I notice that I gave the wrong pages in M and K. It should be 302 and 303. Here are some references:

    M.O. Scully Quantum heat engine power can be increased by noise-induced coherence. Proceedings of the National Academy of Sciences, vol. 108.

    K.E. Dorfman Photosynthetic reaction center as a quantum heat engine. PNAS, vol. 110

    N. Killoran Enhancing light-harvesting power with coherent vibrational interactions: a quantum heat engine picture. arXiv preprint

    I’m not a physicist, so beware of my explanation. Plants doing photosynthesis can use both regular rhythmic vibrations but also sudden bursts of noise to aid in overcoming the energy barriers. The stunning result is quantum effects, including coherence and tunneling, in warm, wet, crowded living tissue. The plants are using quantum computing to find the way through the maze.

    What the plants are doing is not at all like human engineers trying to cool things to near absolute zero in a sterile environment. The plants are using enzymes which increase the speed of the chemical reactions by huge factors.

    While the chemical reaction is extraordinarily efficient in terms of energy used, the plant uses only a tiny amount of the total solar energy. So a human would be focused on trying to get something like the efficiency of the plant, but also to increase the percentage of the solar energy utilized. As I have observed here before, the plant gets enough energy to cover the world with a canopy, which is all it can practically use. Humans want a lot more than that.

    Up until now, plants have been the only critters capable of ‘burning’ the oxygen in water. If the Israeli/ Australian team have figured out how to do that, without resorting to energy intensive cooling, and utilizing more of the solar energy, then it might be a game changer.

    For example, the current post by Alice Friedemann reviews a current article showing that there is not enough land in most countries to provide the space required for PV panels to generate the current level of electricity or total energy usage. But a ‘photosynthesis-like’ process which used all of the solar spectrum with very high efficiency to produce liquid fuels would give quite a different perspective.

    Don Stewart

    • Thank you – plenty of interest t read through. If this is the real deal the you’re quite right – it will be a game changer

    • This reminds me of the plan to cultivate kerogen (the petroleum precursor in the fossil fuels formation process) in vats using solar power, as a different form of biofuel – to the best of my knowledge, the science sound good but it didn’t work out.

  28. @Dr. Morgan
    Search on:
    7,286 viewsNov 14, 2018, 04:16pm
    Electriq~Global Says Its Water-Based Fuel Can Power Your Car But Details Are Thin

    So they demonstrate an electric bicycle and have apparently supplied a prototype for a trucking company. There is money invested by the US Dept of Energy and the Israel Dept of Energy. The company claims significant sums of private money. Separately, they show a roll out which includes targeting the bus and truck industries, with a prototype airplane in 2019 and a portable generator in 2019. I imagine that they think it would take quite a bit longer for personal automobiles.

    Don Stewart

    • Don – if it works for trucks then it has huge ramifications because so far there’s been nothing to really replace diesel.

      I like to see results of real World tests and if it can be scaled up economically.

    • Seeing the economy as I do, GFC II seems inescapable. I’m quite convinced that efforts to ‘normalize’ rates will be stopped in their tracks, but I don’t accept that the low cost of money can alone prevent a crash. The other issue is borrower prosperity. I don’t think this issue is properly understood. Market pricing reflects the sum of investor knowledge at a particular time – but, as we know, this knowledge is very incomplete.

      A significant event in recent weeks has been the downturn in the so-called “tech” stocks – at one point, six of these accounted for 17% of the total value of the US equity market. From my perspective, these stocks priced-in perpetual growth in sales, which would have been unrealistic even without the deterioration in consumer prosperity.

      In any case, I don’t see Mr Trump calling a halt to the trade war – I suspect that “don’t throw in a winning hand” is one of his mottoes.

    • Hi Tim
      You’re right about low interest rates not saving the economy. The property market in the UK is going off the boil very rapidly despite very low (and still getting lower as far as some mortgage rates are concerned) rates. Confidence is a key factor and it’s now slipping.

  29. Yes I’d noticed the tech stocks decline. I’ll be very interested to see how stocks in general perform in the New year.

    • I have to say I’ve been expecting the downturn in “tech”.

      Apple makes good products but they’re pricey, and don’t seem to be all that long-lived (which is why I don’t buy them, by the way). The market seemed to be pricing in perpetual sales growth, but then Apple ceased reporting unit sales numbers, and suppliers cut projections due to lower orders from ‘a major customer’, which everyone knew must be Apple.

      Google and FB must be close to saturation in the on-line ads market, and advertising generally seems to have flattened out, with big ad spenders adopting ‘zero-based budgeting’ (freeze spending unless there are compelling reasons for increasing). These, like Amazon, have big enough market shares to attract regulatory interest at some point, not just in the US but in the EU. I wouldn’t want to own FB stock, not least because I suspect youngsters might start to go for alternative, more ‘hip’ platforms than the one used by their parents. Google, too, faces competition from search engines which don’t collect user data.

      In other words, it looks a lot like the end of a ‘sweet spot’ for “tech”.

      Finally, I say “tech” because, to me, technology means advanced pharma research, electronics, materials sciences and so on – not flogging ad space on the net.

    • On the subject of products not lasting that long we might be forced into making electronic goods far more robust in the future because the energy costs – although probably higher – would be far less than the costs needed to replaces something.

      I haven’t factored in recycling of ‘defunct’ goods though.

  30. Some suggestions from the ignorant to the inquisitive

    Can we really use water as a fuel to drive trucks?

    One of the things about the Electriq material which caught my attention was the recycling of the water. Who wants to collect and recycle water? Which set off alarms for me because of Gerald Pollack’s books on Structured Water. Most recently, The Fourth Phase of Water. You can also find YouTube talks. I will warn you that Pollack doesn’t like to be drawn into discussions about ‘saving humanity’, so if that is your goal you usually have to extrapolate from his findings.

    Let’s start with the observation that a hydrophilic surface has the ability to separate pure water into positive and negative regions. The negative regions will cluster near the hydrophilic surface and the positive regions (which are hydrogen ions,,,protons) will be farther away from the hydrophilic surface. The energy which drives the separation is light from the sun. But it may be ‘second hand’ light, such as infrared from a surface which was heated by the sun. In fact, the most effective method for charging the battery is infrared.

    On page 82: ‘we will see how that charge can provide energy for driving diverse processes, ranging from chemical reactions to hydraulic flows. Indeed, the EZ battery could be a versatile supplier of much of nature’s energy.’ (The term EZ refers to the exclusion zone, the area near the hydrophilic surface where ordinary water is most strongly excluded.)

    Now if you think that providing energy for cellular processes in the body of a plant or animals is not at all the same as powering a steel mill, you may want to stop reading now. It is also true that Pollack says in one of his You Tube talks that they have only been able to produce pitiful amounts of electricity using EZ batteries…as yet.

    But I will make a couple of observations which might persuade the gullible to continue to think about this:
    *The EZ battery can operate on ‘waste heat’. In fact, it will operate best on waste heat or ambient heat in the Sahara. Conventional thermodynamics takes a back seat.
    *The EZ battery requires pure water…low level of solutes. If Electriq has had to go to the energetic expense of desalinizing sea water, then they will be interested in recycling it.

    If you believe all of the experiments from Pollack’s lab, we can assert:
    *EZ water is easily produced by heat and an appropriate containment vessel.
    *The EZ water provides a ready source of protons (Hydrogen)
    *It would make sense to collect the used water and recharge it with protons.

    Electriq may be using some combination of EZ water and quantum effects to do the magic they claim is possible, but perhaps that’s not what they are doing at all.

    Pollack talks about redwood trees which are 100 meters tall, and how they get water from the soil to the top. Many contorted explanations have been offered, but Pollack finds them all lacking. His explanation is very simple. What is rising in the tree is EZ water. It clings to the tubes in which it rises. Since the electrical forces are much stronger than gravity, the water clings easily. So the tree does not have to pump water 100 meters into the sky. The properties of the EZ water do the heavy lifting.

    Don Stewart

  31. Another author on EZ water:

    ‘Thus, Pollack (2015) demonstrates not only that EZ water can drive vascular flow in plants, but also rectifies the paradox of why pressure gradients across human capillary beds are negligible—radiant energy helps impel flow through capillaries, which would otherwise necessitate high driving pressure to overcome total peripheral resistance and enable red blood cells to navigate capillaries with smaller diameters than the cells themselves. In a sense, then, both sauna therapy and sunlight exposure constitute previously unexplored sources of vascular force via their contribution to the construction of the body’s structured water zones (Pollack, 2015).’

    Pollack’s book shows a picture of a blood vessel with a red blood cells which is larger than the diameter of the vessel going through it. Calculations show that the beating of the heart is not enough to drive the red blood cells through the restricted size of the blood vessel. But the energy generated by the sun, working through the EZ water, is sufficient.

    I’m convinced that EZ water is important at these micro levels, from our blood vessels to the xylem in the redwoods. Whether it can be used to facilitate the production of fuel to drive a truck is a big question mark.

    Sauna is the latest and greatest ‘natural health’ promoter. Studies in Finland show that people who use saunas regularly are considerably more healthy. The sauna, of course, sends infra-red heat directly into the cells. Poor people can get the same effects by working out in the hot sunshine. Rich people can lounge on tropical beaches. I dare you to soak up some rays on a tropical beach and fail to believe in the power of EZ water.

    Don Stewart

  32. Sorry to mention ‘Brexit’ – but if this article from CapX is correct then I think May’s deal should be voted down to force the EU into renegotiation.

    Now the EU said they will not improve on the deal – but given the shock to all economies if a no deal is allowed to happen – I think they’ll be forced into being a little more pragmatic.

    https://capx.co/the-brexit-legal-advice-confirms-leavers-worst-fears/?omhide=true&utm_source=CapX+briefing&utm_campaign=ec06dde17d-EMAIL_CAMPAIGN_2017_07_17_COPY_02&utm_medium=email&utm_term=0_b5017135a0-ec06dde17d-241858649

    • I suspect the line of thinking might run like this – ‘Parliament rejects the deal, markets tumble, and a chastened Parliament, in a panic, relents’. This is pretty much what happened when Congress voted against TARP. But I hope this isn’t the thinking, because it’s dangerous.

      I also hope that the fat-heads in Brussels do offer Mrs May a better deal – with France facing popular revolt, yellow vest protests apparently spreading to Holland and Belgium, and the Italian confrontation set to worsen, has the EU really nothing better to do than punish the British electorate?

    • The quality of new builds in the UK is indeed quite shocking. I recently started training as a carpenter (in case actuaries become redundant in the post growth/low carbon world), and one of the running jokes between some of the apprentices on my course is the quality of these ‘houses’, many of which are built on ‘reclaimed land’, aka floodplains.

  33. Britain = shoddy, in almost every respect these days. It’s terribly sad.

    A leaking tub named Brexit, heading out into the cruel ocean on a course plotted by idiots…….

    • We’ve addressed the subject here before. But, for the benefit of anyone new, the UK economy is in a parlous state.

      Over the past decade, each £1 of reported “growth” in GDP has been accompanied by £5.10 of net new borrowing. The energy cost of energy (ECoE) – a critical determinant of prosperity – has climbed to 8.7%, a growth-killing level. Prosperity per capita has fallen by more than 10% from its peak in 2003. Debt – which has increased by £1tn in real terms since the GFC – may be “only” 257% of GDP, but it’s 361% of prosperity. More worryingly, financial assets now stand at 1580% of prosperity (rather than 1130% of GDP, which is bad enough in itself).

      The biggest single danger now is that international investors turn negative – that could trigger a sharp fall in GBP, forcing rates up and property prices down. That would make “Brexit” look like a picnic.

  34. The scrabble for fossil fuels continues – the USGS has just announced a large new oil and gas resource in Texas & New Mexico:

    https://www.sciencedaily.com/releases/2018/12/181206135643.htm

    The last sentence of the linked article amused me: “Whether or not it is profitable to produce these resources has not been evaluated.” They’ve very nearly summed up industrial civilisation’s predicament in that one sentence 🤫.

    • Wll of course they’re going to be profitable – they just need to hide all their debt issuances off balance sheet.

  35. I see the dreaded inverted yield curve appeared in the US earlier in the week, adding to circumspection. Here in the UK, I fear (speaking as a ‘private pensions specialist adviser’, ahem) we will soon reap the rewards of the introduction of so-called ‘Pensions Freedom’. Since the introduction of mass flexi-access drawdown – as opposed to the rather more restrictive pre April 2015 drawdown regime – some £21.7bn has been withdrawn from defined contribution pension plans in the UK.

    In quarter 3 of 2018, a further £2bn was withdrawn, generating a £400m income tax windfall for HM Treasury (which is what I have always thought this was all about – a ‘tax grab’). The majority of private pension plan holders invest through life assurance companies, although ‘self-invested’ personal pensions (SIPPs) have gained traction in recent years. The vast majority of the former are invested in mediocre ‘managed’ funds, typically invested in a 60/40 equity/bond split (with exceptions, of course) and rather a lot of the latter are invested in opaque funds ‘managed’ by ‘discretionary managers’, most of whom produce terrible returns for their investors, but generate high fees for themselves.

    Whilst I arrange SIPPs, these tend to hold closed-ended funds (investment trusts) with track records going back 150 years now, but I also arrange annuities. I think that the recent uptick in annuity sales, whether as part of a ‘blended strategy’ with flexi-access drawdown or as a ‘final’ pension purchase, will continue. Rates have improved by about 20% in the last year or so (from a 300-year low base) and no-one, at all, has ever not received their annuity payments.

    If the markets really tumble, those in drawdown, unless they have been very wise or lucky, might rue the day they dismissed an annuity.

    • This is something which has been on my radar too (Pension Freedoms). Remaining largely invested in equities via the income draw-down product (after taking out a decent sized chunk) does seem quite bold to me, especially given how high the markets have been lately, and the various other economic indicators (not that I’m qualified to give financial advice).

      Worries that people would withdraw their entire pot and blow it on a Lambo don’t seem to have materialised yet, but there’s certainty a conduct risk that concerns some insurers.

      The equity release product is another interesting one, seemingly priced on the grounds that house prices will increase in value indefinitely (at ~4% per year). Given the illiquidy of these assets, the no negative equity guarantees and associated uncertainty over longevity trends, the insurance sector’s increasing exposure to these liabilities is a real concern, especially as much of this risk tends to be concentrated across a relatively small number of companies.

    • I would steer you both towards the Global Pensions Timebomb analysis by the World Economic Forum.

      Essentially, real returns on bonds have slumped to 0.15% from a historic 3.4%, and on equities to 3.45% from over 8%. My own calculation is that somebody formerly saving 10% of his or her income would now need to save 27% to get the same result on retirement – and this, obviously, is impossible for most.

      The WEF calculated the pensions black hole for just eight countries at $67tn at end 2015, and forecasts a rise to $427tn by 2050. My own estimates put the world equivalent gap at over $120tn now – most of which has emerged since 2008. The gap is growing at about 5% annually. In the US, it is worsening by $3tn annually, roughly five times what America spends on defence.

      To state the obvious, this is a direct consequence of ZIRP, which crashed returns on invested capital. It won’t be long before it becomes apparent that, for the vast majority, a comfortable retirement has become a thing of the past.

      When the public finds out about this, their anger could make the current French unrest look like a picnic.

  36. As for building quality in the UK, my barber comes from a family of builders, and his son is a plasterer.

    When his son submitted a quote for a job to his dad, the latter was appalled at the cost:

    ‘Where’s a discount for your old dad?!’

    ‘You’ve got one: but I’m doing a proper job for you, not the crap I do on building sites.’

    My Polish builder told me that Britain has the lowest standards of building control he has seen anywhere,and he has worked across Europe – Germany being the highest, and the inspections very careful and thorough.

    • The UK housing situation is dire enough without an increasing amount of poorly built dwellings. Sound deadening and heat insulation have always bottom of the list in construction.

      There’s a certain irony in the fact that here we are trying to leave the EU but ensuring that most of our new homes are Jerry-built.

  37. Tim,

    Super post. I appreciate these as they reinforce my understanding.

    One question: you mention the ECoE curve is exponential, yet the projected rise from 2020-2030 is less than 2010-2020. How can this be?

  38. Pingback: #141: England’s Glory or ship of fools? | Surplus Energy Economics

  39. I like to think of money as the lubricant that allows the energy-driven engine of the economy to run more efficiently, but the lubricant only increases the engine’s efficiency up to a point. The engine has begun to burn fuel less efficiently (with a lower EROEI) and central bankers, seeing the engine’s falling performance but not understanding how it works, have added more lubricant in the hope that this will increase its performance. Instead the engine has developed problems of over-lubrication (bubbles) and is being damaged by this (malinvestment).

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