#181. The castaway’s dilemma, part one

MAPPING THE REAL ECONOMY

Of what value are facts?

If this question arises with unparalleled force now, it’s because of the enormous, perhaps unprecedented divergence between the economy (and many other issues) as they are perceived and presented to us, and these same things as they actually are.

Starting with perception, the generally accepted narrative is that the Wuhan coronavirus pandemic is something which struck ‘out of a blue sky’, and could not have been anticipated. In due course, we’re assured, the economy will stage a ‘full recovery’, returning to pretty much its previous size, shape and direction, with monetary policy assisting this ‘return to normal’. Even the lasting damage inflicted on the economy can be made good over time. Life must go on, especially in politics, whilst most of the West’s incumbent regimes are making a pretty good fist of handling the pandemic-induced crisis.

This ‘consensus’ line on our current predicament is wrong, in almost every particular. Far from being unpredictable, the pandemic was anticipated by leading scientists whose prescient advice is, for the most part, still being ignored. Any economic ‘recovery’ from here will be largely cosmetic, the shape of the economy is going to be very different indeed, and monetary gimmickry can no more rehabilitate economic prosperity than central banks can ‘print antibodies’. Conventional, ‘business as usual’ party politics matter very little in this situation, and incumbent governments are, in general, making an unholy mess of the coronavirus crisis. When you look at what’s unfolding in, for example, Britain and America, you very literally ‘couldn’t make it up’.

A bad time for reality?

This situation – in which perception and presentation are at a premium, and factual analysis at a hefty discount – is not propitious for the subject-matter of this discussion, which outlines new developments which enable the SEEDS model to map the economy and some of its broader ramifications, the latter including the environmental harm caused by economic activity.

Part of the problem, of course, is an established insistence on the fallacy that the economy is a wholly monetary system, from which it follows that energy is ‘just another input’, and that “[t]he world can, in effect, get by without natural resources”.

Had Daniel Defoe’s Robinson Crusoe, shipwrecked on his desert island, only known about classical economics, he wouldn’t have wasted his efforts finding water, food, firewood and shelter, but would instead have spent his time accumulating bits of coloured paper. Indeed, had computers existed in 1719, he wouldn’t even have needed the paper.

In challenging this absurdity, those of us who understand that the economy is an energy system, and not a financial one, can sometimes feel as isolated as Robinson Crusoe himself. Some comfort can be drawn, though, from the reflection that reality usually wins out in the end, and that pre-knowledge of the outcome has considerable value.  

The energy economy

The energy interpretation of the economy is simply stated, and need only be reiterated in brief here for the information of anyone new to the logic of Surplus Energy Economics.

First, all of the goods and services which constitute the economy are products of the application of energy. Nothing of any economic value (utility) whatsoever can be supplied without it. An economy cut off from the supply of energy would collapse within days. (If they were denied energy, conventional economists would lose the ability to publish learned papers telling us how unimportant energy really is).

Second, whenever energy is accessed for our use, some of that energy is always consumed in the access process, meaning that it’s unavailable for any other economic purpose. This ‘consumed in access’ component is known here as the Energy Cost of Energy, or ECoE, and its roles include defining the difference between output and prosperity.

Third, money has no intrinsic worth, and commands value only as a ‘claim’ on the output of the energy economy. Creating monetary claims that exceed the delivery capability of the economy itself must, therefore, result in the destruction of the supposed ‘value’ represented by those excess claims.

To be clear about this, money is a valid subject of study, so long as we never allow ourselves to be persuaded that to understand the human artefact of money is to understand the economy. Likewise, studying the lore and laws of cricket may be rewarding, but it won’t help you to understand a game of baseball.   

The importance of this very different way of understanding the economy is that it points to conclusions drastically at variance from the comforting narrative generally presented to us.

Well before the coronavirus pandemic, it was evident that prior growth in global average prosperity per person had gone into reverse, and that we were encountering limits to the ability to use financial manipulation to disguise economic deterioration in the advanced economies of the West. The narrative of an ‘economy of more’ – more “growth”, more vehicles on the world’s roads, more flights, more consumption, more profitability and more use of energy – was already well on the way to being discredited. The pandemic crisis merely accelerates trends that had been evident for quite some time.

Critically, this process invalidates a raft of assumptions and of expectations founded entirely on the false presumption of ‘growth in perpetuity’.    

Mapping the real economy

From the outset, the aims of the SEEDS model were (a) to interpret the economy from an energy perspective, and (b) to present this interpretation in the financial language in which debate is customarily conducted.

Development of SEEDS has reached the point where the reality of the energy-driven economy can be mapped. This can best be understood if it is stated as an ability to answer a string of critically-important questions, of which the following are examples.

First, how much economic value do we extract from each unit of primary energy that we consume, and where is this conversion efficiency relationship heading?

Second, from the value thus generated from the use of energy, how much ECoE must be deducted, now and in the future, to define the amount available for all other economic purposes?

Third, what can trends in ECoE tell us about the quantity and mix of energy likely to be available to us in the future? 

Fourth, how, using this knowledge, can we best maximise prosperity whilst minimizing the environmental harm caused by our use of energy?   

This list helps identify a short series of questions of which most can now be addressed as equations. These equations, together with a number of supplementary measurements, can be used mathematically to map the ‘real’ economy of energy and the environment in a way that can be pictured representationally as follows.

The equations

The following summary, though it doesn’t go too far into dry theory, is intended to provide an overview of the SEEDS mapping process.

Equation #1: measuring output

To calibrate the efficiency with which we turn energy use into economic value, we need to start by identifying a meaningful measure of economic output.

GDP cannot serve this purpose because it is subject to extreme monetary distortion. Essentially, reported “growth” is exaggerated by the use of credit and monetary activities which inflate apparent activity. The funding of anticipatory activity, and the inflation of the supposed value of asset-related transactions, are two of the ways in which this happens.

Reflecting this, reported average GDP “growth” of 3.6% between 1999 and 2019 was a direct function of net borrowing which averaged 9.8% of GDP over the same period.

Examination of the processes involved enables the calibration of this distortion, thereby identifying rates of growth in underlying or ‘clean’ output (C-GDP), which are far lower than their reported equivalents. The right-hand chart in fig. 1 illustrates how the insertion of a ‘wedge’ between debt and GDP has inserted a corresponding distortion between reported and underlying economic output.   

Fig. 1: economic output

Equation #2: calibrating economic efficiency

Measured on the basis of C-GDP, economic output per tonne of oil equivalent (toe) of energy consumed has declined steadily, from $7,400 in 1999 to $6,730 last year, reflecting the observation that C-GDP has increased by only 40% over a period in which primary energy consumption expanded by 54%.

This deterioration in conversion efficiency may seem counter-intuitive, but has several important inferences, in addition to the obvious statement that we are using energy less, rather than more, effectively over time.

Specifically, changes in the ‘mix’ of the energy slate seem to be trending towards lesser conversion efficiency, whilst technology has concentrated much more on finding additional applications for energy than on the more efficient use of energy itself.  

Fig. 2: economic efficiency

Equations #3 & 4: ECoE and volume

Trend ECoEs have been rising since a nadir that was enjoyed in the two decades or so after 1945, a period that also – although this was no coincidence at all – witnessed remarkably robust growth in world prosperity.

Latterly, though, a relentless rise in the ECoEs of fossil fuels has driven the overall trend sharply upwards. Optimists believe that the steady fall in the ECoEs of renewable sources of energy (REs) will solve this problem, but this expectation owes far more to hope and extrapolation than it does to realistic interpretation.

Though ECoEs play a critical role in the conversion of economic output into prosperity, they are relevant, too, for the quantities of energy likely to be available to the economy in the future. Hitherto, the consensus expectation has been that energy supply – including the amounts provided by fossil fuels – will continue the steady growth experienced in the past. In comparison with recent levels, this consensus sees us using 10-12% more oil, 30-32% more gas and about the same amount of coal in 2040, with total primary energy supply rising by about 20%.

The reality, though, is that a combination of two factors, both of them related to rising ECoEs, is starting to exert adverse effects on the volume outlook. First, rising costs are increasing the prices required by producers. Second, the upwards trend in ECoEs is, by undermining prosperity, reducing the amounts that consumers can afford to pay for energy.

Accordingly, SEEDS has now adopted a much more cautious scenario which projects little or no growth in aggregate energy supply, combined with a steady decrease in the availability of fossil fuels.      

You’ll appreciate at this point that, if energy volumes cease growing, and if conversion efficiency fails to recover, then real annual economic value output can only trend downwards.

Fig. 3: ECoE and energy supply

Equation #5: measuring prosperity

Properly understood, the economic output value that we derive from energy is not the same thing as prosperity, because the first call on this output is the cost component – ECoE – required for the provision of energy itself.

ECoE defines a proportion of output which, being required for energy supply, is not available for any other economic purpose. Accordingly, the deduction of ECoE from output determines prosperity, whether this is expressed as an aggregate or as a per capita amount.

At the aggregate level, rising ECoEs have inserted a widening wedge between underlying output (C-GDP) and prosperity. Since the rate of annual progression in aggregate prosperity has now fallen below the rate at which population numbers continue to increase, world prosperity per capita has now turned downwards from a lengthy plateau, with the coronavirus crisis seemingly accelerating the pace of deterioration.

Regionally, prosperity per capita in almost all Western advanced economies has already been trending downwards over an extended period, which helps explain why so many of these economies have long seemed moribund despite the increasing use of financial manipulation to present a semblance of continuing “growth”.

This might even make us feel some sympathy for politicians who feel obliged to offer voters “growth” when, on the only criterion that really matters – prosperity – growth has ceased to be feasible.

In the EM (emerging market) countries, prosperity growth was already, pre-pandemic, decelerating markedly towards an inflection point anticipated by SEEDS to occur between 2020 and 2022. This climacteric may have been brought forward by the coronavirus crisis.  

Fig. 4: ECoE and prosperity

Equation #6: economics and the environment

Though global temperature changes (and their causation) remain to a certain extent controversial, broader consideration, taking into account issues such as ecological loss and air quality, make it clear that human activity is harming the environment. By ‘activity’, of course, is meant the use of energy, and it’s surely obvious that we can only co-relate economic and environmental considerations if we place energy use in its proper place as the factor common to both.

Artificially-inflated measurement, such as recorded GDP, not only exaggerates apparent prosperity, but also supplies false comfort over environmental trends. As shown by a comparison of the period between 1999 and 2019 on a global basis, the false metric of GDP can be, and often is, used to assert that we are increasing the quantities of economic value achieved for each tonne of climate-harming CO² emitted into the atmosphere. Rebased to a C-GDP basis, however, it becomes apparent that CO² emissions have expanded by 48% whilst underlying economic output has increased by only 40%.

Moreover, rising ECoEs are worsening the relationship between prosperity and environmental harm. Critically, CO² emissions are related to gross amounts of energy used (including ECoE), whereas net amounts (excluding ECoE) determine prosperity.         

 Fig. 5: The environmental dimension

Equation #7: deviation from the real

The final mapping equation – in fact, a set of equations – cross-references the economy as it is to the version of the situation as it is presented to us.

Essentially, two components intervene between underlying prosperity and the version presented to the public as GDP. The first of these is ECoE, which conventional econometrics ignores. The second is the credit effect which arises where monetary policies are used to promote anticipatory activity, and to inflate the apparent value of asset-related transactions (as well as inflating asset values themselves).

SEEDS analysis enables us to quantify these distortions, and this, amongst other things, helps us to identify the adverse leverage in the mechanisms by which faltering prosperity is represented as expanding output.

From a purist perspective, this is something that we might ignore, concentrating our efforts on the identification of the ‘fact’ of prosperity.

In practical terms, however, this disparity is of the greatest importance, because it identifies the widening gap between semblance and substance.  

For anyone engaged in economic planning – whether in government, in business or in finance and investment – it can be argued that this is the most important equation of them all.

Fig. 6: reality and presentation

151 thoughts on “#181. The castaway’s dilemma, part one

  1. One more point about Hill’s Group Model
    The more I thought about the issue of using ‘deflated GDP’ the more I became convinced that when we deflate something we are essentially removing the debt used to generate the current number. But the debt is one of the elephants in the room…how can we pretend that it doesn’t exist? Yet most modelers just automatically use the deflated numbers.

    I have never done it, but I thought at the time about figuring it on a ‘per capita debt slave’ basis. Suppose I am paid 1 percent of the GDP for my labor. GDP is a claim on future energy. How much energy claim have I received? If I use that energy slave to generate mobility or transport of loads, at what percentage efficiency is the slave utilized?…and that percentage turns out to be very small when I use ICEs, especially if one factors in all the overhead including things like roads and bridges and vehicle accidents and insurance and all the other trappings of civilization. (The Circular Economy people estimated it for automobiles in Europe, and came up with zero efficiency…when I go somewhere in a car all of the energy slaves are used just to get me there…there is nothing left. This may be a tautology. Discussions with a professional economist left me unsatisfied.) Further deduct the energy slave cost of the energy slaves produced, including hauling all that sand and water for fracking, and the numbers get very small indeed. We are definitely producing a lot of friction, but the benefits are elusive.

    Don Stewart

  2. I realized early this morning that my “analysis” conflated reserves with the amount produced. Reserves may be depleting but it is possible to maintain the same output or a slower declining output for a time. This was what Ugo Bardi realized when he analyzed the collapse of fishing stocks and coined the term Seneca Cliff. As the stock begins to seriously deplete, the fishermen deploy better technology and intensify efforts just to maintain a constant supply, delaying the inevitable. However, this just depletes the remaining stock faster so when the peak deferral is reached production falls off a cliff and declines very rapidly. Instead of a nice bell curve like Hubbert envisioned, we get a cliff.

    Re hills group etc, while i think that a thermodynamic analysis would be definitive the data needed (e.g., the water cut) is not available. Both Hill and the German physicist therefore have to use assumptions and proxies to make the analysis. Hill seems to gave relied on GDP, the German physicist on price per barrel similar to Steve Ludlum’s “Triangle of Doom,” which has been successful in predicting where breaking points occur in the price of oil. While the insights and ultimate conclusions of the thermodynamic model are undeniable, and set the theoretical physical limits of oil usage, the time frame it predicts is not trustworthy IMO.

    • @Tagio
      The Hill’s model has two components, which are independent of each other. The oil supply component is a typical thermodynamic model which defines how a resource degrades over time or usage. But the second part is the curve which determines how much society can afford to pay for the oil. I had some discussions with Mr. Hill in which he agreed that IF the way we use oil changed, then the second curve would change. Suppose, for example, that we have two sources of energy: oil and wind/solar. Today, for all practical purposes, oil is the sole source used. So whatever curve we develop applies to a world where wind/solar are only minor players. But now suppose that wind/solar become realistic energy sources for half of what we used to do with oil alone. Now we have a specialized niche for oil and a specialized niche for wind/solar. When a production system goes the route of specialization, it is usually because the efficiency of the process increases. That would change the shape of the second equation. Neither Ludlum nor the German physicist address such a possibility, to my knowledge. Hill never addressed it explicitly, either. But he did acknowledge it in conversation.

      If we consider agriculture, many people claim that ‘agriculture is really all about oil’. That is largely true today…but not necessarily true tomorrow. Given some oil (and plastics) to take care of certain bottleneck technologies, we might greatly reduce the use of oil in agriculture. The alternative source of energy in this case would be sunshine. So we would have a hybrid oil and sunshine agricultural system with a different ‘second curve’.

      Hill’s second equation held true over many decades, because those decades were a very long period of time where sunshine was declining in importance and oil was increasing in importance for the total economy. For example, a hundred years ago houses were built to take advantage of the sun in the winter and shield the residents from sun in the summer. But we steadily stopped doing that, as oil became more abundant. Which yields a pretty stable curve. But the stability of the curve is not evidence that it will be stable in the future, especially if people are getting accurate feedback and can feel the necessity for change.

      Don Stewart

  3. Oil and Charles Smith
    Charles’ weekend letter to his patrons takes on the issue of oil, and predicts an unstable market. One of his points is that John D. Rockefeller became fabulously wealthy by figuring out how to sell ALL of a barrel of oil for a profit…everything from very light gas up to road asphalt. While a refinery can tweak its output, it does not have infinite flexibility. If some particular product is in oversupply, there is no way to make up the difference in lost revenue. Since the combination of Covid 19 and ballooning debt are changing demand patterns for the products the refineries produce, the profit potential in a barrel of oil is damaged. Couple the declining value of the barrel with the increasing cost of producing the barrel and the subsequent refining process, distribution, etc. and we have a prescription for unstable markets. Unstable markets do not support the long term planning which is required to develop new fields.
    Don Stewart
    PS. Sometimes Charles turns these weekend essays into publicly available articles.

  4. @Tagio
    Regarding the potential emergence of hybrid systems. The ‘small battery’ cars now being developed use petroleum products as the major motive force, but also have a small battery (e.g., small relative to the huge batteries in a Tesla) which materially adds to performance during acceleration. The result is a car which gets considerably better gas mileage while also not using the huge and hugely expensive batteries

    Now think of an agricultural system which is, let’s say, 80 percent powered by sunshine and 20 percent powered by fossil fuels. (That’s a pretty good description of most Permaculture systems or other systems which emphasize microbes and carbon in the soil, such as Agroecology.)

    The point is that such hybrids have the potential to allow us to pay more for the oil. If we consider a wheat field which is today using 20 barrels of oil and producing 100 units of wheat and paying 50 dollars per barrel for the oil with the wheat being sold for 200 dollars per unit. We have revenue equals 2000 dollars and petroleum cost being 1000 dollars. But suppose a hybrid system is installed using 4 barrels of oil, still producing 100 units of wheat, and still selling the wheat for 200 dollars per unit. Then we have revenue equals the same 2000 dollars, the cost of the sunshine (actually, the human cost of utilizing the sunshine) is perhaps 50 dollars. The farm could afford to pay up to 950 dollars for the 4 barrels of oil and still break even.

    Of course, those are all just numbers pulled out of the air, but they do illustrate the point, I think. If we think about the economic system most likely to generate that outcome, it is classical economics along with some political recognition of the fact that petroleum is a depleting and polluting resource which is extremely useful in small quantities, and the price of the petroleum needs to reflect that. It seems to me that some of the major oil companies have come around to that understanding.

    If that is a true assessment of our situation, then every industry needs to be given the correct message, so that the massive overhaul in the way we produce can get underway.

    Don Stewart

  5. Thanks, Don, very illuminating. The German physicist does make a nod in that direction because he has a caveat that if the oil industry can harness an energetically cheaper source to extract and process oil, the inevitable can be forestalled beyond 2025. Not knowing anything about the oil and gas business, I don’t know how realistic it is to use less oil to get and process oil and to switch to natgas (or coal?) for these activities Further thoughts along the lines you outline could be very helpful.

    Part of the problem in predicting where a real discontinuity in the oil business will occur is that we don’t really know what Leibig’s minimum is in the whole petroleum production system. The oil price is an obvious focal point but it may not be the key to the tipping point.

    • Regarding thermodynamic analysis of oil production from the Hills Group, etc. and the forecast for a cessation in oil production by 2020- 2025 or so….

      My interpretation of that forecast was that it was really about the cessation of the current oil production and distribution and financial SYSTEM, not oil production per se. Oil extraction and distribution and burning will continue, in a way and in places where it is energetically viable to do so. So, oil will still be pumped from high ERoI fields such as those in the Middle East. But the Global production and distribution and financial system we have today will go away, to be replaced by another system organized around a lower level of oil production and a distribution system that energetically less costly. ( I said something like the above to Mr. Hill in Peak Oil News blog comments and he more or less agreed as I recall. I cannot find that set of comments this morning.)

      As I understand it, The Hills Group Model is an thermodynamic model about global production and use based on global averages of cost inputs such as water cuts and well depths. So roughly, at the point where the model predicts that oil production is no longer energetically profitable (including its burning in the 1Billion plus combustion engines moving across the planet), one-half of the individual fields and wells will still be energetically profitable.

      Don Stewart, you spent some time on this model, feel free to advise if you think my understanding above is wrong.

    • @Shawn
      I have a comment which is currently being considered for publication here. But, in general, I agree with your assessment. When a complex system, such as the global oil and production and financial system reaches a thermodynamic limit, many things go wrong. It is like the collapse of the USSR. In the case of the USSR, the collapse was contained at a fairly high level, and the Russian part began to recover after a couple of lost decades. Some people, notably Gail Tverberg, think that a global collapse will be much more severe. I have suggested that what we may see, if we are smart, is a phase change in sectors of the economy, yielding something more like the USSR collapse.
      Don Stewart

  6. Found this link at Art Bermans twitter:
    “Banks tightening credit b/c of lower margins after Fed rate cuts & trimming credit card limits after expiry of Cares Act $600/week payments.”
    https://www.barrons.com/t.co/Oe58AYa2IV

    I’ve also seen quite a few articles on the popularity of
    SPACs lately…

  7. Shawn,
    Completely agree. The general thermo model predicts the point when the oil market ceases to be a global market and fractures into whatever sub markets remain energetically viable, each ruled by its own dynamics. There won’t be a world price at that point

    The scarcity and constitution of refineries will be complicating factors. As I understand it many oil producing countries have limited refining facilities. A lot of oil is shipped to the US for the processing then shipped out again. Also refineries are optimized for both certain types and volumes of oil; they may not work well with reduced amounts or different densities of oil

    • Far as I understand it, that particular report by The Hills Group was debunked as being too simplistic.

  8. I am struggling with several questions where you, Tim, or the team on this blog may be able to help.

    Carbon Brief has analyzed BP’s new Annual Outlook (https://www.resilience.org/stories/2020-09-24/analysis-world-has-already-passed-peak-oil-bp-figures-reveal/) and according to this analysis, the BP Outlook gives the impression that it will be relatively easy for the world to transition away from oil.

    Referring to their analysis, Tom Whipple, in today’s Energy Bulletin Weekly (https://www.resilience.org/stories/2020-09-28/the-energy-bulletin-weekly-28-september-2020/), writes, “BP notes that demand could soon fall rapidly in the face of more decisive climate action – by at least 10 percent this decade and by as much as 50 percent over the next 20 years.” Admittedly, there is also a BAU scenario in the BP Outlook, but even in that scenario demand would decrease by 10% by 2050. I find it baffling that they present something that might well upend the global economy as we know it as if it was an easy transition, mostly driven by climate action.

    Next, Tom Whipple reports, “ ExxonMobil, Chevron, ConocoPhillips, BP, Shell, Total, Eni, and Equinor may have to divest combined resources of up to 68 billion barrels of oil equivalent in various geographies, with an estimated value of US$111 billion and spending commitments in 2021 totaling US$20 billion, according to a study by Rystad Energy. The companies in the survey have pledged various commitments to become net-zero energy companies and significantly expand their renewable energy portfolios. For example, BP said in its new strategy last month that it would reduce its oil and gas production by 40 percent by 2030 and would not enter exploration in new countries.” Again, this sounds as if it was a well-laid-out plan and a relatively smooth process. Is this realistic?

    At the same time, today’s Energy Bulletin Weekly also says, “Africa: Exploration is not dead. It is especially not dead in Africa—a hot spot in oil and gas before the pandemic. This month, French Total and the Uganda government signed a deal to build a pipeline that will carry Ugandan oil to Kenya’s coast. Overall the picture appears to be better in Africa’s frontier oil regions than in legacy producing parts of the world.” How does this go together with the transition away from oil? Are these already fragmented markets?

    I find it hard to wrap my head around all this…

    • Martin, watch what they do, not what they say. There are different sets of interests here. Oil companies cannot always show the back of their tongue; shareholders. Oil companies have shareholders. Politicians have voters. Pensioners have ‘fixed income’. Central banks need 2% inflation. Banks need more yield than what they pay central banks for overnight deposits.

      Point is, everything works in ‘growth’, while it all stops working in de-growth.

      It just stops working. But they won’t tell you, because “full faith & credit”.

      Our petri dish was placed under a shower of surplus fossil energy and boatloads of credit, but suddenly someone put the lid on it.

      When we look up we see the mark of Batman, and we think we’re saved.

      What we really see are the flashlights of interests

  9. @Kleiber
    It was criticized as being too simplistic, as being way too complex, and as being inconsistent with economic theory. BUT, it was one of the first predictions that lower prices would devour the oil industry…which is what we see happening. When it first surfaced, Exxon Mobil and the Russians were exploring for oil in the Arctic Ocean, and Rex Tillerson from Exxon said that they were confident that oil would soon be at 200 dollars per barrel, and thus make Arctic drilling profitable. To say that, on the contrary, oil would sink to zero because the economy could not produce a surplus both because the cost of extraction and processing was increasing and because the efficiency with which the economy used oil was declining was radical…but looks consistent with what has happened. To see a continuation of the story that prices have to rise very soon, see the current interview between James Kunstler and Charlie Hall:
    https://kunstler.com/podcast/kunstlercast-334-chatting-with-charlie-hall-about-biophysical-economics/

    My own take is that prices will rise at the expense of phase changes in a number of industries toward radically lower use of commercial energy. To give Hall his due, he does try to correct Kunstler by pointing out that the sun actually supplies us with a lot more energy than oil. But Kunstler doesn’t want to talk about that, and hones in on oil. But agriculture may be on the verge of a large scale phase change back to sunshine and rain and earthworms and microbes. If enough phase changes occur, then I agree that the price of oil could rise significantly because the thermodynamics of the total economy would be more favorable.

    Don Stewart

  10. Charles Smith on Phase Change in the Larger Economy
    https://www.oftwominds.com/blogsept20/rituals-meaningless9-20.html

    Charles thinks that many consumption rituals are actually not very satisfying, and the deteriorating prosperity in the economy will kill them. This trend (if it is true as Charles thinks it is) is an example of the sort of phase change that the Hill’s Group model suggested to me. If increased oil usage was getting more expensive and not producing as much in terms of prosperity, then the price could sink as demand disappeared. Of course, the devil is in the details. Almost everyone is in debt, and debt tends to keep us in our rut, hitched to everyone else. Governments defend the sanctity of debt repayment by individuals…but corporations are allowed to go bankrupt. So people have more trouble adjusting to new reality than corporations. Look at all the student debt. I expect governments to do everything in their power to keep the consumption illusion operational. See the Wolf Street report on the Fed’s new schemes for direct distribution of money to individuals:
    https://wolfstreet.com/2020/09/27/the-wolf-street-report-whats-behind-the-feds-project-to-send-free-money-to-people-directly/

    Don Stewart

  11. On the topic of the debunking of the Hills Group’s thermodynamic study of the oil production system. Maybe not worth discussing here, but my quick take below.

    There is a lengthy history to those discussions. Don Stewart probably tracked those discussions better than I did, but the general response from the Hills Group to criticism of the study was that their work was an engineering study, not a scientific paper, and the standard for evaluating the study whether or not the study was useful/skillful in the back-casting and forecasting of oil price etc. In correspondence to me a few (5?) years past, Dr. Nafeez Ahmed said he had discussed it with several qualified folks and they had dismissed it. Around the same time, I made a comment on Ugo Bardi’s blog review of the Hills Group study, that even if Hills Group study was wrong, it seemed like it would be possible and useful to conduct a correct thermodynamic study of the oil production and burning system, and that somebody should attempt such a study. From memory, Ugo Bardi’s response to my comment was that such a study would not be useful.

    Which I thought was strange, since Ugo Bardi is the biggest advocate for the Limits to Growth studies made circa 1972. Those studies/scenarios contain assumptions about the increasing physical (capital) costs over time of extracting natural resources as those resources deplete. As I understand it, this is implicitly an increasing energy cost.

    I mostly moved on from the Hills Group study and their (sometimes odd) comments to the Peak Oil News web site, and found other folks that connected the physical world to the human situation, such as Dr. Morgan’s Surplus Energy Economics.

    However, it still seems to me that some of the general ideas behind The Hills Group study were directionally correct. The value of oil viewed from within a closed thermodynamic system from extraction from the reservoir to use as refined fuels in combustion engines. The average value of oil goes down as the capital costs to extract go up. The size of the oil production part of the economy increases in relation to the non-oil part of the economy for a period of time. The price of oil, in the current global oil production system, goes down as the value of oil in that system diminishes. (The idea of a declining prices of oil is originally from Gail Tverberg.) At some point, there is insufficient value/price to warrant extraction.

    Whether the Hills Group study was correct or not, it seems possible that a projection could be made of a theoretical “dead” energy state in the future for average global oil production in the current oil extraction, distribution, and combustion = work/waste system. However, whether that theoretical dead state is now, 2025, or 2030, it seems more likely that the global system will respond to diminishing surplus energy and begin to change to a new system before we hit that dead point. Perhaps it is changing rapidly now.

    The above leaves out discussion of other physical constraints on our systems. The LTG BAU scenario from 1972 still seems a good guide to that big picture.

    • Shawn,
      We seem to have read similar pieces and reached similar standpoints (I too appreciate Tims work as well as Nate H, Ian Schindler and some others).

      Another, related point is the idea of peak oil as an event that will cause acute food shortages etc. in the near term. Higher food prices yes but the main problem is more likely to be the end of “BAU-growth” that affect living standards and incomes, i.e. discretionary spending will suffer (or already have).

      The higher cost of extracting oil or other forms of energy is not a problem in the short term for producing food or distributing it. Those sectors make up a low share of the exergy consumption. Food is a necessity for all other activities in the society (“economy”) and whatever quantity is available is likely to first be used for this purpose first. Poor countries can experience food shortages early if they are import dependent, as they are outcompeted by affluent societies. This was evident during the food price crises when EU/US et al. converted what could have been food crops into biofuels.

      On a final note, the limits to growth’s World3 model is still used in research but it has been updated a number of times. The current models are much more complex than the old ones. The basic conclusions are roughly the same although the collapse takes place at a later point in time. However, the projected collapse is partly a result of the assumptions – it is assumed that feedback loops are delayed and that the system will not adapt its inherent dynamics. I’m not saying this is wrong but such assumptions will result in collapse and there is not a need for a complex model to show it.

    • Shawn:

      What you have summarized here is all plausible. Generally and qualitatively the conclusions from the Hill’s Group report make sense (and are supported by findings of many others). What I still find really unclear is how they calculate the “Total Production Energy”, E_TP. I see how they do the math but I do not see what kind of effect it actually is that determines this energy cost of oil production. What is the energy effect (meaning: energy cost) of moving a certain amount of oil from a high-temperature reservoir to a new environment that is at a lower temperature?

    • Shawn, Martin:

      Work on Part Two is pointing towards two conclusions which might be relevant to what you discuss.

      First, a contracting economy – and changes in the relationships between labour, ECoE and discretionary versus essential purchases – suggest that the products and services of the future might be more “crafted” (more use of skilled labour), and less profligate with energy itself, and with energy-enabled inputs.

      This could put the trend towards ‘the throwaway society’ into reverse. We would be buying products with a larger labour input, and a comparatively smaller material component. This suggests products of higher quality, that we replace less often. The same would apply to services. For instance, we would fly less often, and fares would be higher, but the quality of the experience might improve.

      Second, a ‘managed retreat’ in the economy, whilst it might not be ‘bad’ as such, will leave much of the over-expanded financial system cut adrift. This calls for a ‘managed retreat’ from leverage and financialization, as a more practical solution than the ‘mad mantra’ of ever-cheaper credit.

    • Tim,

      You are more optimistic than I am about rationality kicking in. When short term pressures and bottlenecks occur, emotional heat rises as the reptilian brain dominates nearly all of us. Those with great emotional distance are the exceptions. Some are on the autism spectrum. (Asperger’s)

  12. @Shawn
    reservoir heat, etc.
    Hill got his equations out of a textbook. You may recall that Ugo Bardi and some others said that what he was doing was ‘impossible’. He pointed to the textbook, and used the equations from it. The equations give a comprehensive solution. But I was never convinced that all of the piece-parts were actually relevant. Hill plugged some ‘reasonable estimates’ in to deal with inputs required by the equations which were not actually known with precision and probably aren’t affecting the outcome very much.

    One of his critical decisions was to make the cost of petroleum extraction, processing, and distribution an exponential curve. If I am not mistaken, Dr. Morgan also uses an exponential curve for the fossil fuels…but with another curve representing the cost of wind and solar which intersects and defines the ‘least cost’ function.

    One of the interesting things about the Federal Reserve building a capacity for direct distribution of money. If one thinks that, just like in the 1930s, less than full employment will be a big problem due to:
    *automation/ artificial intelligence
    *sector upheavals as companies cut costs
    *more retired people
    then distributing money per capita is a way to ensure that the money gets spent on whatever is available, boosting employment. Wolf emphasizes the desire for inflation…but the thought occurred to me that the real concern may be unemployment.

    Don Stewart

  13. Responses to comments above, and a few more thoughts on The Hills Group, Report “Depletion: A determination for the world’s petroleum reserve”

    Jeff: “The higher cost of extracting oil or other forms of energy is not a problem in the short term for producing food or distributing it.” Not sure that would be true? I have the sense that “system” has spent enormous resources – debt – to maintain itself in its current structure. If we are at peak oil production, and have been cannibalizing existing capital for some time in order to maintain the existing economic structure, then there may not be that much energy to move from non-essential consumption to water, food, etc. as we might assume. And a rapid reduction in total energy production might effect all sectors of the economy. Oil production is down globally 10% from the peak? That is LOT of energy removed from the global economy. There are empty spaces already at my grocery stores now. Maybe that is just about COVID. We will see.

    Jeff: “World3 model is still used in research but it has been updated a number of times” I was aware there were updates (other than the updates from the original LTG team), but was thinking there were not publicly available? One review of that original LTG study done in 2014 supports that we are on track to match the LTG LTG Business As Usual scenario. https://sustainable.unimelb.edu.au/__data/assets/pdf_file/0005/2763500/MSSI-ResearchPaper-4_Turner_2014.pdf
    Interesting, perhaps astonishingly, the LTG BAU scenario constructed in 1972 seems to capture well what may be happening today with the global economy. “With significant capital subsequently going into resource extraction, there is insufficient capital available to fully replace degrading capital within the industrial sector itself. Consequently, despite heightened industrial activity attempting to satisfy multiple demands from all sectors and the population, actual industrial output (per capita) begins to fall precipitously from about 2015, while pollution from the industrial activity continues to grow.”

    Martin: “What is the energy effect (meaning: energy cost) of moving a certain amount of oil from a high-temperature reservoir to a new environment that is at a lower temperature?” It is not intuitive to think that this would be an important issue. As far as I know, Thermodynamics is not intuitive. But temperature changes in the system would be fundamental to any analysis. Your question seems well answered here https://limitstogrowth.de/wp-content/uploads/2020/01/Mar_2020_Thermo_EN_09.pdf, although I don’t have the skills to do all the math. I have not yet studied this updated ETP model paper from Berndt Warm that was posted here in the comments of the last blog post Dr. Morgan. Has anyone else and are there comments?

    On the post peak simplification: One of the interesting insights I gleamed – I think – from the Hills Group study, is that we have built this massive energy system to extract, refine, distribute, and burn oil. At the end of this system, there are, according to some references, more than one (1) billion or more combustion engine vehicles now moving across the earth’s surface and through its lower atmosphere using fuels refined from oil. In a comment above I said it seemed more likely that this system would begin to change as surplus energy diminished. But what if there is calculable “dead” energy state ahead for this system, as it locks up under the demands of those 1 Billion machines and the thermodynamic limits of any energy system? Then we would know that we need to build a different system. And soon.

    Too late now, though, I think.

    • Shawn,
      On energy consumption in agriculture. I don’t know an estimate of the global average but I’ve seen estimates for various countries from 5% to 15%. This includes direct energy use (e.g. diesel used in a tractor) and indirect use (e.g. energy embedded in fertilizers). An example from US of 15.7% for the food system can be found at https://www.nrcs.usda.gov/Internet/FSE_DOCUMENTS/nrcs141p2_023113.pdf . However, remember that the US is a net food exporter.

      So, perhaps the food system consumes 10% of the global final energy use? It seems like in the right ballpark at least. It is off course possible to reduce the energy use as current diets (in the west at least) are energy intensive. But even if we keep our current habits, it is still possible to have declining fossil fuel output and use the vast majority of available exergy outside the agriculture sector for quite some time.

      In general, the intensity of fossil fuels in ag has increased over time (https://link.springer.com/article/10.1007/s41247-020-00074-3) this implies i) the sector is likely able to pay more for the fossil fuel inputs now than before and ii) a physical supply disruption of fossil fuel inputs would have larger consequences for the outputs (i.e. food).

      Regarding the LTG study. The curves have so far mainly followed exponential growth trajectories. Scenario studies (and other projections) should not only be validated based on if their results are in agreement with the outcome but also the assumptions. Cf. everyone can say that I will rain tomorrow but even if it rains that does not make them an accurate meteorologist. Validating all the assumptions will not be possible until after the (eventual) collapse. On updates, you can google “world 6 model”, they publish results but I do not think the model/code is publically available.

  14. Shawn, Martin, Don,
    People have trouble with the Hill Group analysis for a variety of reasons but many seem to be put off by the fact that he attempts to attribute a number to the total PPS (petroleum production system). The report was not aided by the fact that Mr. Hill, although obviously insightful and intelligent, is an an engineer and explaining things like a teacher to the unschooled or setting forth a rigorous scientific paper were not his forte.

    Having said that, I found his detractors very glib and dismissive, and short on explanations about why Hill’s approach, at least directionally, was wrong.

    If you look at his approach, he divided the thermodynamic realms into the below the ground level and above-ground level. Making a number of (as Don says) reasonable assumptions, he calculated the energy lost / increase in entropy by getting the oil to the surface. Since oil no longer comes shooting out of the earth when you drill a hole, that amount may be taken as a measure of work we do and energy that we use to get the oil. The total PPS energy CANNOT BE LESS than this energy loss/ increase in entropy, although it can be more. IMO Mr. Hill would have garnered more attention if he made this simple claim instead of purporting to model what the energy cost of the whole PPS actually is, because no one believes you can actually model that.

    However, I agree with Shawn and Tim that the economic consequences of rising energy cost of getting oil and energy are likely to precipitate collapse/drastic changes well before we reach the thermodynamic limits of the process.

  15. Anyone who expects sanity from Mankind going into this may be safely deemed deficient in that quality themselves: just look around and what is being done and said now, in only the early stages. Consult the archaeological record……

    Regarding the end of the ‘throw-away culture’, one of the most wasteful aspects of production -and this is a trend which has only deepened recently – is the manufacture of goods and machines, made using a great deal of oil-derived materials and metal, which simply cannot be repaired, even when of high quality and lasting a reasonable length of time – unlike the Asian junk that often almost immediately packs in after little use.

    ‘Designed obsolescence’ must end, too -it is a moral and environmental crime. The Dutch oven that can be bequeathed in a will must be the ideal and the norm, not the exception as today.

    Simplifying goods – wherever produced – so that they can be repaired, or recycled (ie melt down the metals) locally on a modest scale, would greatly reduce horrifying levels of waste and environmental poisoning, and encourage new and purposeful employment: ‘Here comes the tinker, ladies, to stuff up your holes and solder your cracks’ in the words of the song from Merrie England….

    More goods and machines, too, must be shared and used communally, avoiding unnecessary replication.

    However, we should not be deluded, this runs directly in opposition to the so-called ‘smart’ world of inter-connected devices, behind which is ALL the money and all the governmental interest.

    These ‘smart’ devices, when discarded, go on to poison the very poorest who recycle them (as the mining of materials also kills them) something about which the rich and the arrogant techno-freaks care not one jot, and may they rot in Hell for it.

    At the moment, ironically, it is only the wealthy who can afford to buy well-made, long-lasting, artisan products, clothes, etc.

    • A future of labour abundance, energy (and hence materials) scarcity, reduced consumer discretionary spending capability and the ability to teach skills – not to mention environmental concerns – does suggest that a ‘crafted, long-lasting’ approach, rather than a ‘cheaply-produced, quickly-trashed’ one, makes sense. But I don’t underestimate opposition to any such rational idea.

    • As we see tribalism in growth already, i wonder what awaits us.

      In my opinion, sanity is not the correct answer, as is collectivism. To me it seems we are just a bunch of bacteria with a brain quantity overload that keeps on eating its host until there’s nothing left.

      Nothing new under the sun.

  16. A Curious Thing about the Hill’s Group study
    As I recall, Hill used the price of oil as the indicator of the cost of producing, processing, and distributing oil products. He excluded the prices during the Arab Oil Embargo as indicative of artificial scarcity and not reliable indicators of cost.

    Now, we are currently in a period when OPEC+ is artificially restraining production. What would the price be if OPEC+ were producing at full bore? My guess is just about zero. Which is what Hill’s graphs indicate for right about now. Now if we unpack it a little bit, we find that Hill’s ‘dead state’ included the cost of finding, producing, processing and distributing. Which would imply that searching for oil would be the first thing sacrificed. Companies would continue to produce what they already had and process it and distribute it. That is pretty close to what the majors have recently said their strategy is. Of course, they weave ‘carbon neutrality’ into it all, but we can be forgiven for inferring that profitability may also be on their minds.

    Which would imply a falling supply of oil as depletion happens, along with declining GDP and wealth (which was a cumulative with depreciation in Hill’s model).

    I think that there is some confusion about what the thermodynamic dead state is in Hill’s model. It does not mean that the barrel of oil which comes out of Ghawar is unable to produce energy. What it means is that the barrel of oil is no longer able to generate the revenue that our existing economic system demands in order to reproduce itself. If the existing economic system changes, then the revenue needed to reproduce the consumed barrel might exist again. One can think of a military system or a Spartan regime focused on production rather than consumption (e.g., China for several decades).

    Don Stewart

    • Another curious thing
      Max and Stacey recently used a graph which showed the distribution of assets in American companies. It used to be real stuff. Now it is about 80 percent ‘intangibles’. Of course, they think the intangibles are fluff generated by monetary adventurism and bubble blowing. But if you believe that the current situation is just fine, then perhaps we have reached such a state of economic sophistication that we don’t need anything real as an asset…we are in financial heaven?

      Can physically based systems be consigned to the dust bin of history?
      Don Stewart

  17. One more ancient memory
    Hill and I also talked some about the marginal barrel. For our purposes, let’s use the Arctic barrel at 200 dollars posited by Rex Tillerson. Could our present economy produce 200 dollars to pay for that Arctic barrel? If it can’t, and a barrel is depleting somewhere else, then it is likely that production will fall. In HIll’s system, that spelled declining GDP and declining wealth and social and financial and political chaos.

    My suspicion back in those days was that some of the people so anxious to bury the model were actually scared it might be basically correct. Best to babble on about renewables.

    Don Stewart

  18. For another dose of reality, rather than ‘De-growth’ fantasies, just look at the housing plans in the UK: yet more -shoddily-built – infrastructure, built with no planning restrictions or guidance, which it will be impossible to maintain in even the near future, more precious farmland lost to concrete and asphalt (when it should be revived and refertilised), more massacres of the remaining wildlife (which started to revive during the beautiful peace of lock-down):

    When Liverpool and London meet
    And there’s nothing left of the country;
    Save a straight road through
    A housing estate,
    And a single specimen tree.’

    If the building happens, this will indeed be the fate of southern England.

    They will pour concrete and force their unwanted 5G ‘improvements’ on us until the biosphere collapses. Unstoppable, in my opinion.

  19. Is China still Spartan?
    If a Spartan economy is required in order to be able to produce the kind of money necessary to pay 200 dollars for oil, is China still a Spartan country?
    https://electrek.co/2020/08/20/gm-mini-electric-car-price-orders/
    The car is backed by General Motors (China is their largest market) and is priced at 4,000 dollars. The car has quickly become the most popular EV in China, with the Tesla Model 3 in second place.

    I don’t live in China, so really can’t comment with any wisdom on the overall Zeitgeist in that country. But I will observe that those living in a country that can provide mobility for 4,000 dollars is better positioned to compete for that 200 dollar oil than those living in a country wedded to huge SUVs bought with debt. (The presence of the Reserve Currency, of course, is a very heavy thumb on the scale.)
    Don Stewart

    • You are restating the old saw: that ‘the rich man is he who reduces his wants and needs.’

      It’s certainly a good strategy.

  20. Don, I am going to say one more thing about thermodynamic models and then shut up because I feel it is a dead end, and the only reason to talk about it is so that people don’t (like I originally did when Hills Group report came out) assume it has some kind of predictive function, and overreact to the doomsday scenario that it points to.

    I think the fundamental flaw, which I only just formulated as my new hypothesis, is that it endeavors to link a thermodynamic analysis (physical) to the monetary system, which has no physical constraints, and no necessary connection to the physical world. It’s apples and oranges, and the linkage is unverifiable and fundamentally unsupportable. A purely thermodynamic analysis would be energy on one side of the equation and energy outcome on the other side of the equation — apples to apples — not energy results on one side and monetary outcome (oil price) on the other, apples to oranges. A purely thermodynamic analysis would pinpoint the total amount of all oil extracted after which it will take the entire energy of a barrel of oil to get, process and deliver the oil, i.e., the point beyond most oil production must, energetically, cease, regardless of how much money one throws at the problem. Fundamentally, while interesting, this strictly thermo analysis is useless, because the economy will break down long before this point, because rising ECoE will induce breakdowns and discontinuities. Tim’s analysis, while very illuminating, cannot predict where and when these discontinuities occur, Tim can only extend the exponential function(s) he is using. Personally, I think the reaction to COVID is a response to the rising ECoE we’ve already experienced; it is radical break with the past and is resulting in a step down in total energy use by the “system.”

    Hill’s analysis, based on his equations, showed a “connection” between his energy model and price for a long period of time leading one to believe in predictability based on the time-honored human impulse to assume the present will be just like the past, but as you point out, there are all kinds of possible monetary gimmicks that make this questionable. However, scientifically, I think the attempt to marry thermodynamics to prices or money flows is invalid.

    • Tagio,
      RE:
      ” A purely thermodynamic analysis would pinpoint the total amount of all oil extracted after which it will take the entire energy of a barrel of oil to get, process and deliver the oil, i.e., the point beyond most oil production must, energetically, cease, regardless of how much money one throws at the problem.”

      All good except that energy to “get, process and deliver” could come from other energy sources than oil. Maybe you mean equivalent to a barrel of oil. Note that energy from methane, coal, biomass, etc. could be used to get oil at an energy loss as it is critical for many other economic processes besides transport, electricity generation, heating…

    • @Tagio
      I think I partially agree with you. Any analysis which assumes that the present will continue into the future is almost certainly going to be wrong when circumstances change…either disclosing amazing new opportunities (e.g., Europe discovering the Americas) or confronting us with deadly peril (e.g., credit exhaustion or Insectmageddon). It seems to me that Dr. Morgan’s work sort of straddles the divide between the conservative assumptions necessary for continuation into the future and the radical assumptions necessary to believe in fundamental change….e.g., the world will go on with a mix of fossil fuels and renewables. But I don’t know exactly how much change he expects will be necessary. As I hope I have made clear, my own instincts are to go into some detail to look at specific sectors which seem ripe for either severe size pruning or else conversion to sunlight and biomass as the energy source. If things turn out as I hope, we will have enough of the very dense energy of fossil fuels to do what we need to do in order to make more sunlight/ biomass sectors work efficiently.

      In defense of Mr. Hill, I think he understood that change would be required. He consistently said that we were headed into a box canyon, that change would be necessary, that his model would not guide us through that change…just alert us to the necessity. He once told me he had worked on many ‘desperate mines’…heavily depleted but still capable of producing something useful.

      Don Stewart

    • To be clear, what SEEDS aims to do is to (a) model the economy from an energy perspective, and (b) express its results in the financial language in which, for better or worse, the debate is conducted.

      SEEDS can model various forms of trajectory, and can – as it seems to be demonstrating this year – handle step-changes.

      But no system can calibrate wisdom or folly. At best it can supply the information on which decisions can be based.

      By way of illustration, SEEDS demonstrates that the financial system has grown far too big for the ‘real’ economy, and too big, even, for the economy as misrepresented by conventional metrics such as GDP. This gives us a choice between (a) re-trenching the financial system, or (b) going further down the rabbit-hole with ‘press on, because we don’t know how to turn back’ expedients (typified by the demonstrable idiocies of NIRP). We can outline how the financial system could re-trench – but we cannot influence the decisions that are made.

      Likewise, we can put forward constructive proposals for the ‘real’ economy itself – but the decisions are not in our (or my) hands.

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