#213. A moment of truth

THE ARRIVAL OF ECONOMIC CONSTRAINT

Some of us have long understood that the economy is an energy system, and is not – as orthodox economics insists – wholly a financial one.

We’ve identified credit and monetary adventurism as futile efforts to deny this reality, efforts which, whilst not ‘fixing’ low and reversing “growth”, have exacerbated financial risk by driving a wedge between the ‘real’ economy of goods and services and the ‘financial’ economy of money and credit.

We’ve highlighted relentless rises in ECoEs (the Energy Costs of Energy) as the process by which expansion in economic output peters out, and prior growth in prosperity goes into reverse.

Recent sharp rises in the price of energy might look like just one aspect of the current worsening economic predicament, a predicament which is ‘a crisis in all but name’. Other adverse factors can be cited, but all of them, ultimately, are traceable to a fading energy dynamic.

We’ve built a large, complex and increasingly inter-dependent economy on the predicate that money can drive ‘growth in perpetuity’.

We’re now in the process of discovering that this predicate is false.

From here on, prosperity will continue to deteriorate, whilst rises in the real cost of essentials will leverage this decline into a more rapid erosion of discretionary prosperity.

The good news is that these processes can be understood and modelled, projected and managed.

The bad is that, so far at least, this reality is not being grasped.    

It has to be said that no ideology is more rooted than ‘neoliberalism’ in the doctrine that the economy is a financial system, with limitless capability for growth.

This is why those economies most wedded to the ultra-liberal ‘super-fallacy’ are being hardest hit by the harsh reality that neither ‘demand’ nor ‘incentive’ can create low-cost resources.       

A new model crisis

Despite the most lacklustre of recoveries from the pandemic-induced downturn, the global economy has collided with the reality of energy constraint.

Natural gas, in particular, is in short supply, but the effects of supply shortages are rippling, too, across the markets in electricity, oil and coal. Almost unthinkably, China – widely regarded as the powerhouse of the world economy – is having to ration supplies of energy to its industrial sectors, whilst grappling with the fall-out from exuberant financial expansion.

Consumer energy and fuel prices are surging, a process as adverse for industry as it’s uncomfortable for households. Though the rise in domestic energy costs is the most conspicuous aspect of energy price escalation, deeper consequences will be felt through sharp increases in the costs of supply to businesses.

All inputs, from minerals and chemicals to food and water, are functions of the energy used to extract and process them. If the supply of energy tightens, and its costs rise, the same happens across the entirety of economic activity.  

This, in short, looks like the moment when the reality of energy and broader resource constraint makes itself felt, and the conceit of perpetual growth on a finite planet is revealed as fallacy.

We need to be clear that, insofar as this is an “energy crisis”, it has nothing in common with previous such crises. Neither can it be blamed on after-effects of the pandemic crisis, on gamesmanship (by Russia, or anyone else), on ‘little local difficulties’ (like “Brexit”), or even on the distorting effects of gargantuan financial stimulus, harmful though that has been. Least of all can it be ascribed to ‘brisk economic growth’, since the global economy is unlikely to be any larger in 2021 than it was in 2019.

Rather, what we are experiencing is a predictable – though, in general, not a predictedcollision between resource limitations and a desire for never-ending “growth”.  

The economy has hitherto experienced two energy crises (or three, if we include the oil price spike experienced in the American Civil War), but what’s happening now is profoundly different.

During the 1973-74 embargo crisis, and the 1978-79 Iranian revolution, there was no physical shortage of oil, or of energy more generally. These were crises of management, and of trade imbalances and international relations, not of supply fundamentals. Fossil fuel ECoEs remained below 2% in the 1970s, but are nearly 10% now. Even if renewable energy sources (REs) can take over fully from fossil fuels in the future (and this is unlikely), they certainly can’t do so now.

A moment of truth

From an economic perspective, this is a watershed. What we are witnessing is decisive proof that the economy is indeed an energy system, and is not – as orthodox opinion has so long insisted – wholly a matter of money. Pouring yet more money – in econo-speak, demand – into the system isn’t going to create huge new supplies of oil, gas, coal or any other form of primary energy. 

All of the world’s decision-making processes – most obviously in government, business and finance – are predicated on an assumption which is turning out to have been fallacious. The economy isn’t, after all, a ‘perpetual growth machine, powered and shaped by money’.

Rather, it’s an energy system, in which material prosperity is a function of the availability, value and ECoE-cost of energy.

With its emphasis on incentive, and its disdain both for government planning and for non-financial motivation, the ideology sometimes called ‘neoliberalism’ is most exposed to the discovery that the economy cannot, after all, be managed in purely financial terms.

This helps explain why those countries most wedded to the idea of ‘leave it to the market’ – and, with it, of accepting inequality as ‘the price of efficiency’ – face the toughest futures. Britain, most conspicuously, is experiencing the consequences of the liberal ‘super-fallacy’ now, but the United States, in particular, won’t be far behind.

Of course, hype – no less than hope – “springs eternal”. But surges in the direct household costs of energy and fuel are now impacting economies, and indirect, second-order effects (traceable to the rising cost of energy to industry) are already making themselves felt in supply shortages and inflation.

For those countries worst affected by energy supply strains, pious promises to “build back better” and to “level up” won’t remove the need to make tough, unpopular decisions. “Green growth” is going to have to transition into “green resilience”. Decades of denial – enacted through monetary gimmickry, and backed up by excessive faith in the alchemy of technology – threaten severe financial and broader consequences.

A rocky road

As the energy interpretation of the economy moves from left-field theory to demonstrable reality, theories and models based on the contrary assumption are breaking down. The economy is moving in directions not anticipated by orthodox theory, invalidating much, and arguably most, of the projections, methodologies, models and policies hitherto accepted as valid.    

Those of us who understand the economy as an energy system can predict some, at least, of the consequences of present trends.

First, material prosperity will deteriorate. Properly understood, this has long been an established trajectory in the West, glossed over – but not changed – by increasingly desperate, illogical and hazardous exercises in credit and monetary adventurism. SEEDS analysis makes it clear that the average person in almost all Western economies has been getting poorer since well before the 2008-09 GFC (global financial crisis), and that an increasing number of EM (emerging market) economies, too, are reaching the climacteric at which rises in ECoEs put prior growth in prosperity into reverse. 

The rates of decline in top-line prosperity itself look manageable. But rising ECoEs are set to drive up the real costs of essentials (including household necessities and public services). Together, the combined effects of falling prosperity, and the rising cost of essentials, are exerting a tightening squeeze on the scope for discretionary (non-essential) consumption.

This downwards pressure on discretionary prosperity is going to be unpopular, with consumers and with discretionary suppliers alike, and this may prompt efforts to prop up discretionary consumption with yet more reliance on credit expansion.

Denial, for the moment, remains unchallenged. In Britain, for example, households are likely to face further and even larger rises in the cost of gas and electricity, and the price of anything (which means everything) made using energy is going to rise as well. Discretionary consumption cannot continue unchecked through this process.

To be sure, wages might rise to accommodate these cost increases but this, if it happens, will simply fuel an inflationary cycle. The task of repairing the public finances will become harder with each worsening twist in the cost cycle.

Despite this, few yet anticipate contraction in the scope for everything from travel and leisure to the payment of subscriptions and the purchase of the latest gadget. Fewer still have grasped the read-across from deteriorating prosperity to the pricing of property and other assets.  

Around the world, these processes in turn imply, not just that inflation will rise, but that the financial system will come under increasing stress. Together, discretionary sectors, and businesses that rely on the ‘stream of income’ model, are going to be in the eye of the storm.

The ‘basics’ of the situation – deteriorating top-line and discretionary prosperity, rising inflation and worsening financial stress – are simply the first-order effects of the deteriorating energy-prosperity equation. More complex processes can be anticipated, some of them identifiable in a taxonomy which sees businesses simplifying their products and processes, de-layering their supply chains, and trying to work around the challenges of falling utilization rates and the loss of critical mass. Popular priorities can be expected to change, intersecting with a deterioration in the affordable resources of governments.

These are issues on which we can reflect and which, to some extent, we can model and predict.

For now though, the imperative is that the realities of resource (and environmental) constraint are recognized, and that plans and assumptions are re-thought accordingly.       

 

 

189 thoughts on “#213. A moment of truth

  1. Are humans capable of transforming from an expansionary economy to one that co-exists with nature?

    That issue will be discussed with Carey King in a couple of weeks. I can’t give you a link, because it is a very small group discussion. But after the fact, I think I can post a synopsis of what was said.

    Don Stewart

  2. Private Equity Funds, Sensing Profit in Tumult, Are Propping Up Oil.

    These secretive investment companies have pumped billions of dollars into fossil fuel projects, buying up offshore platforms, building new pipelines and extending lifelines to coal power plants.

    (No paywall)

    P.s might explain where QE goes!

    • Not all private equity funds are guilty of this, Mr Gwynne. There is a common misconception the all private equity investors are vultures, but that is far from the truth, in my opinion. I find listed private equity funds (structured as closed-ended investment trusts) a useful non-correlated asset class for a modest portion of a long-term portfolio.

      Admittedly, private equity is a specialist area, in which capital is invested in unlisted private companies, or listed companies are taken over in order to take them private. The key differentiating factor in private equity is that the fund manager takes ownership control of companies they invest in, and plays a major role in setting the strategy, appointing and incentivising management, and decides when to sell the business to crystallise investment returns. These transactions are often referred to as ‘buy-outs’.

      Such funds, at the moment (those available to UK retail investors) tend to hold investments in business services, industrial automation, healthcare, communications, waste management services, pet supplies, etc. A simple example might be a company such as Minimax Viking, a leading global provider of fire protection systems, or Leaf Home Solutions, one of the largest home improvement companies in the US, specialising in guttering. Another might be Domusvi, the third largest nursing home operator in Europe, with market-leading positions in France and Spain.

      Interesting area, is private equity.

    • Some high-profile – i.e. newsworthy – PE buy-outs have had a bad press, especially where they are perceived to have bought a company “using its own money” (i.e. with loans secured against the assets of the target company).

      This is, in reality, a function of a system – not designed by PE funds, but by policy-makers – where the cost of debt is lower than returns on assets. Generally, this repression of the cost of money has been a damaging policy, but we can hardly blame it on those who play by the rules set by others. PE funds aren’t responsible for policies conceived in desperation.

      As you say, PE funds can provide useful innovations.

    • While there are many PE firms that are “vulture funds” of the Mitt Romney variety that take over a company that they can extract money from by loading it with debt and restructuring it, leading many times to eventual bankruptcy after the PE company has pulled out all possible cash, there are some PE firms that seek a more long-term form of ownership for a bigger payoff. “Capitalists” like nothing more than to own a chokepoint or to be in a position to gate access to a necessary good or service. It is why, among other things, we occasionally hear about privatizing water rights. Control enough of these nodes, and you control the market and have effective monopoly pricing, being able to charge the most that the market will bear.

      It does not surprise me that, in the light of the perspective that declining fossil fuels are going to present unique profit opportunities for securing access to a dwindling resource, PE firms will be some of the first to secure these advantages. I am sure that the problems Europe is having with nat gas and China with coal are opening PE eyes and causing them to think that the time is now ripe to get in early on this.

      Their biggest risk is eventual nationalization – but even there they would have serious political clout via their lobbyists and political donations. Even if the resources and infrastructure were eventually nationalized, they would be in a position to receive a huge payoff (under the 5th amendment – no taking of property without just compensation) and they would likely receive lucrative long-term contracts to administer and manage the nationalized base.

    • Steve G, please see “Growing through Sabotage – Energizing Hierarchical Power” on the capitalaspower.com website

  3. Strike action by Public and Commercial Services union at DVLA has caused a backlog of 50,000 HGV licences.

    They are now considering further strikes!

    ……

    The critical shortage of HGV drivers is set to get worse, with union members set to vote on further strike action at the Driver and Vehicle Licensing Agency.

    The Road Haulage Association warned on Wednesday night that the possible industrial action “could not come at a worse time” and would aggravate the driver shortage that has led to empty supermarket shelves and a fuel crisis.

    The DVLA said any strike action would hold “millions of drivers to ransom”. The Government agency is currently working through a backlog of a reported 50,000 vocational driving licences stretching back more than two months.

    But the Public and Commercial Services union (PCS) at the DVLA’s offices in Swansea will vote in the coming weeks on further industrial action over fears that 2,500 staff working in its offices are at risk of Covid.

    https://www.telegraph.co.uk/news/2021/10/13/lorry-driver-crisis-could-deepen-amid-threat-new-strike-action/?WT.mc_id=e_DM1505398&WT.tsrc=email&etype=Edi_FAM_New_ES&utmsource=email&utm_medium=Edi_FAM_New_ES20211014&utm_campaign=DM1505398

  4. Reading the numerous postings about Putin caused me to revisit a question I’ve asked myself many times. How long can democratic governance survive, as we progress down the energy descent path? More to the point, what should replace it, if (or more likely when) the current structures start to fall apart?

    A second related question, is how long can the centralised governance model continue?
    Central government in its modern form has a very big mouth to feed, and that simply won’t be affordable as the rising energy cost of energy starts to inflict real pain on society.

    I don’t have a comprehensive answer, but I’m sure it’s inevitable that governance will become more and more localised through necessity. The break-up of large nation states seems very likely at some point in the medium term. Modern Europe emerged out of city states. Maybe that’s what it will revert to.

    Just for the record, I’m not taken in by Mr Putin’s apparent statesmanlike posturing. He’s an intelligent, but totally ruthless political operator, who seems to still be carrying a chip on his shoulder about the demise of the Soviet Union. He appears to continue seeking revenge on those who betrayed the cause. Here in Britain we have been subject to series of attacks on some of these defectors, which has also resulted in death and injury to completely innocent citizens. Technically, the Salisbury attack could be construed as chemical warfare, but I don’t think the government would ever want to use that phrase, for obvious reasons.

  5. UK life expectancy is inexorably declining, on average, said several MSM headlines of late. So, what’s new?

    In my experience, actuarial science – step forward Edmund Halley – has known this for 10-15 years, and this can be seen very simply in the pricing of life insurance products and annuities. For example, if you wish to purchase a guaranteed lifetime income stream via an annuity and happen to live in, say, Blackpool, the insurers have masses of evidence to say that your life expectancy is much less – on average – than if you live in leafy Surrey, for instance. So, an annuitant in Blackpool will likely achieve a higher level of income, by as much as 2.5%-5% per annum, than one in Guildford, simply because he or she is going to be paid for less time. The so-called ‘postcode lottery’ is, in truth, just based on ‘the numbers’. Such annuity pricing determined by postcodes, lifestyle and health disclosures were introduced in the mid-1990s by an actuary called Anderton of The Pension Annuity Friendly Society, long subsumed into what is now a business called ‘Just’.

    However, the Blackpool resident is likely to pay a bit more for income protection, critical illness insurance, and life assurance than our imaginary Guildford resident, as he/she is rather more likely to make a claim.

    Whilst one can become very moralistic about ‘pooling of risk’ and ‘discrimination’, the differences that can be seen with annuities and personal protection insurances, are priced to offer fair returns to policyholders, pay claims that arise (and they certainly do pay claims) and allow the life office to make a profit – otherwise they would simply go out of business.

  6. Yields on Chinese US dollar denominated junk bonds are going ballistic. They are a fraction under 20%, having more than doubled since the start of the year. Chinese property developers look to be in really big trouble. It’s not just the de-facto default of Evergrande, some other big property developers have either defaulted or had shares suspended. The problems in China will surely ripple out. Since the summer, the yield on US junk bonds has also been on an upward trajectory.

    Could this be the snowflake that starts the avalanche?

    • There’s a general problem here, largely unrecognized, but no less serious for that.

      The ‘financial’ economy of money and credit has grown, artificially, whilst the underlying ‘real’, physical or energy economy of goods and services has stopped growing or, in some cases such as China, has decelerated.

      If, in the case of China, we compare 2020 with 2010, we can observe the following real rates of change:

      – GDP – +93%
      – Underlying (credit-adjusted) C-GDP – +47%
      – Prosperity (C-GDP less ECoE) – +42%
      – Total debt – +310%

      This means that financial claims have been growing much faster than the economy which, ultimately, is expected to meet these claims.

      China has decided to act now, rather than kicking the can down the road.

      They’ve identified real estate – plus some other sectors – as areas where ultimately-unmeetable ‘excess claims expansion’ needs to be tackled. Letting some conspicuous failures happen is complementary to this policy.

      My guess is that customer creditors – those who’ve paid for homes not supplied – will be made good (though the homes they get may still be less than they paid for them).

      A logical view is that junk bonds ought to have very high yields – that’s what “junk” implies.

      The question of contamination really comes down to how long can other countries stave off reality?

      If, for instance, we compare property prices with incomes minus essentials, ratios have blown out. This is even more the case when we look at how even these incomes have been inflated by aggregate borrowing.

      As things stand, households are being hit by rising energy and fuel costs, other (though energy-related) cost of living increases, and higher taxes. Rates are likely to start moving upwards as well. Put another way, affordability is being compressed.

      This means that (a) property prices are under downwards pressure, and (b) mortgage debt is exposed. We can read-across to other asset classes, and compound this with the observation that the stocks and bonds of discretionary-sector entities have significant downside.

    • the ratio of; average houseprice to (average income minus essentials) sounds interesting,
      can average rents be substituted for houseprices, are incomes nett, after tax,
      could this also be applied to commercial enterprises i.e. leases of commercial premises,

      ratios are a pretty visual way of seeing how viable working for a living or running an SME has become.

      to get a guide on rents each Local Authority sets an LHA, a local housing allowance, in my authority it’s currently £600 pcm per person and you really have to search to find a single bedroom flat available at that rate,

      thinking about going self employed and launching an SME seems a good idea until you look at commercial leases and it suddenly looks like you’ll be working to support your landlord,
      this is why the supposed boom in self employment turns out to be dog walkers, mobile hairdressers and tradesmen working out of vans.

  7. Thanks TIm, for putting some metrics on the China situation. Your remark about the Chinese authorities letting some conspicuous failures happen is worthy of comment. Isn’t that the very essence of capitalism, to allow failed enterprises to actually… fail? Creative destruction as it’s called. This is happening in a one party communist state, whereas in the USA and the UK, which are supposedly at the forefront of free market capitalism, many failed enterprises have been kept afloat with government bail-outs. The GFC1 seemed to set a precedent for this, and it’s become almost a policy response.

    What a strange world we live in.

  8. “People like you are still living in what we call the reality-based community. You believe that solutions emerge from your judicious study of discernible reality. That’s not the way the world really works anymore. We’re an empire now, and when we act, we create our own reality. And while you are studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors, and you, all of you, will be left to just study what we do.” Karl Rove?? 2002ish

    Dear All
    This site is very much a “reality-based community”. And you seem to think “that solutions emerge from your judicious study of discernible reality”.
    I, for one, think you may all be in very great danger of forgetting that “that’s not the way the world really works anymore”. History’s actors are firmly in charge now, from 11/9 through to this really, really deadly pandemic/sarc.
    I’m a retired Chartered Engineer so I’m good at spotting things that are “engineered”. Personally, I’m preparing for the longest, coldest, darkest winter in living memory which will of course be engineered as well. There will be no wind over W. Europe for several months, all designed to collapse the present paradigm and speed up our return to feudalism.

    • @Paul Downey

      Interesting take on where we’re coming from Paul. There’s always a danger of sub-consciously drifting into an unhealthy amount of “Groupthink”, so it’s refreshing to have some new and different input.

    • Hi Paul,
      I agree being firmly rooted in reality is a pretty Utopian position to take but I’m afraid I can’t afford to occupy Karl Rove’s parallel universe,

      this year I’ve invested in an additional stone or two in body mass as a hedge against winter,
      my central heating thermostat is set at 18*C, it hasn’t kicked in yet and I still feel comfortable so it looks like this investment was worthwhile!

      years ago I took a year out and lived cheap in a caravan on a tumbledown smallholding, during a pretty decent snowfall in the winter I added several of those old woollen hospital blankets to the top of my bedding and it was like an Indian sweat lodge inside when I woke up to discover that the christmas cake made for me by my mother in a tin had frozen solid!

      today it’s like going back to growing up as a kid in the 1970’s, Mum used to boil a kettle and pour it in the bathroom sink so I could wash before going to school, central heating was one of those new fangled things you saw on American tv shows.
      I remember the power cuts in the 70’s, do you expect them to make a comeback?

    • You are almost certainly correct, Paul!

      The elites of the Bio-Digital Military Financial Complex do not need to ‘wake up’ to the over-population, energy and resource crisis of the 21st century. Nor to the end of the current financial system and mass consumerism.

      They did so ages ago.

      Their revolutionary plan to deal with this and still stay on top and in control was put into effect at the end of 2019 with a silent coup d’etat, after at least a decade of careful preparation (see the boards and panels, ‘global leaders’ etc, of the WEF).

      Of course, they are deluded – as so many elites have been – and are doomed to fail, as they are adding immense complexity, depending on 24/7 energy flows, to a failing complex system.

      But not before the gates of their Totalitarian Techno-Dystopia have clanged shut on us, for a few years at least.

      Many are already in the modern Gulag.

      See Lithuania, Italy, France, Australia, New Zealand……

  9. Cooperation, Competition, and Survival
    When we perceived the world as ’empty’ and natural resources as ‘free to be exploited’, Neo-liberalism made a lot of sense. Just as a corporation can dangle money in front of people and get them to do work they don’t want to do, governments could print money which enabled anybody with a reasonable idea to get funding to try it. The fact that most of these ideas failed was of little consequence. Nobody counted the ‘wasted’ effort. Now, we are slowly discovering that Ronald Reagan was wrong, and that it was not really Morning in America. The world is indeed ‘full’, and we exploit shrinking natural resources at our peril.

    Before the Pandemic, the loudest noises were about the perils of CO2 filling the air and ocean. And the promise of governments dangling money in front of corporations to develop CCS (carbon capture and storage) was assumed to be able to generate a solution. But CCS looks more and more like a mirage:
    https://energyskeptic.com/2021/carbon-capture-and-storage/
    “Several papers are summarized below. The most important is by Sekera and Lichtenberger (2020). This is the most complete, up-to-date review of where carbon capture stands today. They shown that the two most popular carbon dioxide removal methods likely to be funded, with taxpayer money, generate more CO2 than they capture. No private investor would spend a penny on this. ”

    The point about cooperation I would like to make is that it does seem to me that nuclear is the only way out of the debacle. I’m not smart enough to crunch the numbers on nuclear, so take the following as speculative.
    *Suppose that nuclear has an ECoE of 20 percent.
    *That means that we cannot continue to operate an economy with the complexity and waste of the current economy. Which spells the death of classical neoliberalism. We will have to substitute a system of global cooperation for one of unbridled competition.
    *What Putin has been promoting the last few years seems like a reasonable way to go about it. We can see how it is playing out in Russia: a national energy policy featuring declining oil, gas, and coal with increasing nuclear and the deployment of small nuclear plants. It is not clear to me what Russia thinks about transportation. In one of their recent presentations, they talked about putting a small nuclear plant at a mine. I would like to know if they foresee large scale electrification of the mining operation.
    *Thousands of little nuclear plants around the globe, in a world full of drones, gives me certain misgivings. Isn’t it easy for some mad engineer (or teenager) working out of his basement to cause an awful lot of damage? If there are risks along those lines, then we need to address them globally.
    *Russia, having achieved what it thinks is mutual assured destruction, has made it clear that the defense budget will shrink rather than expand. The US seems intent on an ever increasing military budget in search of first strike capability. If what I just wrote is true, then the US is the destabilizing force. Again, if we can’t find a way to cooperate, we will continue to circle the drain.

    These are my thoughts about the sea change we need to have in terms of governance. The best thinking (that I have read) from the evolutionary biologists is in Weinstein and Heying’s book A Hunter-Gatherer’s Guide to the 21st Century. They call it the Fourth Frontier. Don’t expect a play by play for how to get there. Similar to what Carey King thinks.

    Don Stewart

  10. Really excellent overview of supply chain problems and inadequate responses of the authorities by Michael Every of Rabobank posted on Zerohedge this morning – “Rabobank: The Problem Is No Central Bank Can Bail Out The Physical Economy From Shortages”

  11. Timm,

    I didn’t mean to simplify your thesis because for the most part, here in America, we live in the Rockefeller duopoly, finance and fossil fuels. But there is a bigger power infrastructure that underlies and enables all the FF burning – hydroelectric power on the West Coast.

    John D viciously stomped out any competition to his Standard Oil. All of the pretenders to the three FFFs have had to come from the State public works. And these things like dams were mostly built during the New Deal. (Wonder if the low-tax regime the billionaires have imposed, save for road-building, isn’t to head off any chance of toppling the three FFFs with public works projects.)

    I think you might want to broaden your energy survey to include the role that hydroelectric power has played in the development of California and now China. Sure, these colossal works are based on the FF extraction to power the machines, mine the quarries etc. but their simple return on Energy is too narrow of an equation to really justify their construction.

    Giant public works projects like dams must function on a half dozen levels to get built in the first place – job creation, flood control, water retention, irrigation, power generation, leisure and recreation (on the giant reservoirs) and even transportation corridors.

    Take the Columbia River, which has several large dams all the way up into Canada. Its now tamed waters gets sea-going barges that can put into ports several hundred miles up stream. The water taken from behind the dams by industrial farmers has made the sage-brush desert bloom with any number of water-thirsty crops, like apples and hay, which goes to the nearby cattle herds.

    Why do I bring up this regional hydropower system, which is fragile and suffering from benign neglect, as most of it was built almost a century ago. Because ALL of the growth in the US over the last forty years has come from the West Coast, and specifically California. In real GDP terms, CA grew at a 10% clip over this timeline, while the rest of the US accounted for just over 1%.

    West Coast electricity does not come from coal-fired power plants, for the most part. FFFs seem like a primary challenge, but it is only a pretty bauble on an exhausted and shrivelling system that would collapse if the dams stop turning out the electricity. (people forget that all gas pumps run on electricity and are stunned during blackouts that there is no gas to be had)

    The loss of water behind those dams may be even more devastating as snow packs wither and the underlying glacial ice disappears. Since it hasn’t snowed in the Sierra Nevadas for more than two years, many rivers in Northern California are running dry. If the Colorado River goes dry, and all the power that is generated for the those big cities in the desert runs out, FFs are going be the last thing to worry about.

  12. An interview was just put up on Youtube “Steve St. Angelo: The World is Heading for an Energy Cliff”. It seems consonant with the themes in this thread. Can anyone point out any areas of disagreement?

    • it’s a brief sprint over a huge amount of ground trying to explain it all in fairly layman terms but it does grasp the gist of the situation,

      the most important thing is he grasps that the only way out of this predicament is degrowth,
      it makes a good speed intro, but you could easily spend months looking into all the different aspects in closer detail.

      probably the real kicker is that the last time we lived off what the planet could provide, on a year by year basis, there were less than a billion humans alive,
      and the planet was in a lot better shape too.

    • Steve quotes some numbers about the increase in tonnage of water and sand that are now being hauled. He suggests that having to buy all that diesel will undercut the stimulative effect of the increase in price. I don’t know whether that is correct or not. What has happened in the last 6 months is a huge increase in the price of energy stocks. Investors are obviously assuming that if the price of WTI increases from 50 dollar to 80 dollars, another 30 dollars is going into earnings. It’s a complicated relationship which I can’t calculate with any accuracy.

      I have also heard that the reason production did not fall as much as Art Berman predicted was because people were completing the DUCs…drilled but uncompleted. The inventory of DUCs should be declining, which will give us a better picture of the current profitability per barrel.

      I am grateful to Steve for pointing to the massive tonnage of sand and water which has to be moved to produce a barrel of oil. We can easily be fooled into thinking that we have disengaged GDP from the necessity to do the dirty work.

      Don Stewart

  13. Thoughts on degrowth:
    From an accounting perspective all assets have an estimated useful life, lack of inputs decreases this useful life, energy is the obvious.
    Educations: if there is not enough energy to cause it to be used, it is less worth less than carried on the personal balance sheet.
    Real assets: same as education, plot decline of energy availability to appreciate asset value after depreciation – need to accelerate in most instances.

    Trick is to find those assets with depreciation rates closest to reality.

    Question of day, what is the depreciation rate for information assets? If the information cannot be used without energy, they the asset is economically useless. Claud Shannon again.

    Dennis L.

    • I know a guy who studied law at Harvard, but he ended up owning a coffee shop in San Francisco and he was really proud of having completed the official training course to operate a Gaggia espresso machine,

      I remember a USMC Colonel commenting that the Saudi Army is ‘the largest static display of military equipment in the world’

      I’m on my 2nd Windows 10 PC, the first thing I do out of the box is download and install a tiny program called Windows Update Blocker, this stops Microsoft from making any changes to my PC and instantly reduces everything they produce and send out to a value of 0% for me.

      I use AdBlock-Plus set to maximum intolerance, permanently, for me the online advertising and marketing industry doesn’t exist,

      I no longer have any social media accounts, from my perspective Facebook shares are worth $0.00

      everything that people don’t know how to use, don’t want to use or can’t afford to use could simply cease to exist without being noticed,

      imagine being the CEO of some corporation which provides a discretionary product or service which is about to become the next Kodak?

      I can remember learning to tie my shoelaces as a kid, it took a while to perfect, but I use that skill every day and it’s not lost any of it’s value in 50 years.

      if house prices are no longer rising faster than inflation does the asset start becoming a liability due to it’s upkeep costs?

    • I like your comment about the Saudi army. I was once told, by a US officer (not USAF), “don’t underestimate the Stealth Bomber – it can get in, find the wrong target, and miss it, before anyone even knows it’s coming”.

      For me, current energy and broader supply shortages are not ‘the after-effects of covid’, or ‘products of rapid recovery’. They are the point of impact between (a) finite resources and infinite ambition, and (b) the financial and the energy interpretations of economics.

      From here, huge changes start happening, not least in an ‘Emperor’s new clothes moment’ about discretionary goods and services. I’m optimistic that, properly managed, economies can carry on providing the essentials for a long time to come. But I find confidence about the continuity (and, indeed, the growth) of discretionaries hard to fathom.

  14. I just did a Google search of the term:
    ECoC
    I suggest you do the same, Read it and weep, Then to increase the pain enter:
    Energy Cost of Energy.
    That’s right, this isn’t even on Google’s radar.

    The chances of you talking to someone about this and not have them look at you like speaking FInnish, or to have them respond with gibberish is about 99%

    • Try EROI. This is the traditional term for ECoE and there are a lot of results. They essentially mean the same thing, but EROI came first and is more widespread. I don’t know why Dr Morgan chose ECoE.

    • EROI, sometimes EROEI, is the original, and quite brilliant, recognition that a proportion of accessed energy is consumed in the energy access process.

      If I remember correctly, I adopted ECoE when I started work on SEEDS, i.e. after Life After Growth.

      From my background in investment banking, ROI means Return on [Capital] Investment. The costs of energy supply aren’t just capital costs, but operating costs as well. I wanted to incorporate “cost” into the terminology.

  15. @Dr. Morgan
    operating costs…
    As breakdowns happen around the world, I am being forcefully reminded that the cost of applying energy to practical goals is an operating cost. Let me illustrate with a simple example:
    *if I want to be warm, all I have to do is go outside and lay in the sunshine. Operating cost is close to zero.
    *If I want a thermostat on the wall to keep me warm, then a vast array of technology and primary energy has to be marshaled to bring that about. A break in the array at any point can bring the whole system down. The distinction between capital and operating costs gets blurred. If I want to rely on a sensor with chips in it, then the US Navy will tell me that they are a part of the essential infrastructure which keeps those chips coming. And since the Navy is part of the US government, I have to keep paying my taxes…otherwise, no chips and no thermostat and I freeze.
    *At an intermediate level, if I want the iron stove to keep me warm, I have to go into the woods with my saw and cut some dead limbs into firewood. The saw and the stove don’t have any moving parts and no chips. If I am really clever, I can start the fire in the stove without matches. Matches are definitely handy…but they don’t have any chips in them. They do involve what is undoubtedly a complicated supply chain.

    These thoughts lead me to suspect that there is really no defense against supply chain problems as things start going downhill. Which implies resetting to the passive solar or the primitive machines level. Are we sharks that have to keep moving forward?

    Don Stewart

  16. Kunstler (see his latest post, Poster Boy, today) seems to think we are near to a real, hard turning point here in America. Not sure about that, but he does live outside the bubble zone in upstate NY, so he may be more right than wrong.

    “The vax mandate is doing a stellar job of wrecking every other public service from sea to shining sea as police, firemen, EMTs, 911 operators, and soldiers in the US military demur from the shots. And, of course, there are all he private companies going along suicidally with the scheme: the airlines, the railroads, the truckers, the retailers, you name it, all shedding employees and the ability of the companies to function. Naturally, the news media is trying to hide the damage, but in another week the net effect will be of the world’s biggest-ever general strike. Every activity in the country will stand still; some activities will just crash-and-burn; and many will not return to their prior states-of-operation.

    This is not just a matter of the kiddies missing their Christmas presents. That’s just a dumb-ass sentimental ruse to divert your attention from the entire armature of American life imploding at warp speed. Christmas presents! How about no food, no gasoline, no heat, no money, and no public safety? That’s where this is taking us, and in the fast lane. And it hardly matters whether the financial markets manage to stay artificially levitated. Reality has already discounted the financial markets because they have forfeited their basic function, which is to signal the true price of everything. The true price of a society lying to itself about everything will be the sickness and death of the society.

    We must be very close to a clear majority of the people in America recognizing the danger we are in and identifying the source of that danger. When that moment arrives, will we be able to do anything about it? It may take extraordinary measures not seen before in our political history.”

    Similarly, Karl Denninger’s site posted an article by “Ishmael” (“Unexpected Allies”) the other day regarding the effect of vaccine mandates causing people to walk or be fired, based on the 80/20 rule – 80% of the key work of an organization is done by 20% of its people. Lose a bunch of the 20%, and the organization is screwed, contrary to management’s assumption that everyone is a replaceable widget.

    • Jim’s blog is great – a few months ago I was the guest on one of his podcasts.

      My focus, of course, is on the economics of situations. From this perspective, the US is in serious trouble. Economic trends tend to spill over into broader issues, including politics.

      I was amused by Jim’s remark about Christmas presents. Periodically, we read that officials and others are trying to “save Christmas”, much as they were earlier trying to “save the summer”. Christmas and “the summer” don’t need saving, of course – they turn up, regular as clock-work. The issue is saving the peaks of discretionary consumption. As prosperity erodes, and the cost of essentials rises, everything discretionary is being squeezed.

      It’s remarkable that official and consensus thinking seems unaware of this. I’m not political. If I was, though, my ‘platform’ would be to ensure that the essentials are accessible and affordable for everyone.

  17. Grade A1 reading collected by Dave Pollard:
    https://howtosavetheworld.ca

    The current post is Links of the Quarter. Much of it is about dissecting and reassembling our ways of thinking about what is happening. Beginning with a Peak Energy article.

    I’ll philosophize a little about Bill Rees’ argument that Climate Change is not the problem. As a companion piece to Bill’s article, take a look on YouTube for Walter Jehne’s talks about how we can cool the planet, and our city, by restoring the water cycle. We can’t do anything about the accumulated CO2, but we can cool things off with intelligent water cycle management. So why do we throw time, effort, bluster, and money at Climate Change? Why not focus on the water cycle, which we can do something about? The answer to why we persist in bloviating about the wrong problem is a deep mystery for which I can’t really provide any plausible explanation.

    Lots of good stuff here to distract your attention from collapsing supply chains.

    Don Stewart

    • are we obliged by the media to be distressed about ‘collapsing supply chains’?

      I’m heartened by it, surely it’s the onset of reducing complexity and simplification?
      degrowth has started,

      finding Walter Jehne was a ‘watershed’ moment for me, he really gets to the core of the matter and offers a practical and workable plan.

    • or the govt, persisting in pursuing growth at all costs and constantly heralding an imminent recovery that will never come,
      is creating a rod for it’s own back?

    • Growth at all costs is obviously your shtick creation since it is not part of the Conservative manifesto.

      https://www.conservatives.com/our-plan

      Growth within the manifesto is linked to productivity growth through State investment in skills, education, infrastructure and research. It is also linked to geographical disparities.

      The net zero transition will clearly create some growth, especially if renewables supplement the existing energy mix with pseudo climate change fixes like carbon capture, gigabattery factories and the production of electric cars.

      The alternative is to minimise replacement technologies and allow UK carbon energy descent to intentionally contract the UK economy whilst the rest of the world economy intentionally grows.

      Would the political platform of ‘martyr for the cause’ be a vote winning platform. Clearly not, so a party that promises growth will win instead.

      Therefore the great problem for energy economics (the elephant in the room) is how to overcome the national democracy paradox without a unified global consensus on peak energy prosperity which would entail globally distributing national fair shares of available economic development. In other words, some form of global socialism.

      Thus, what presents as a Global Commons Dilemma is being used as a stick to beat governments despite global efforts like COP21.

      In terms of energy efficiency, is it better to use the energy that powers the world wide web to create useless politically motivated sticks or use that energy to brainstorm solutions for the multitude of energy paradoxes that we face.

  18. @Steve Gwynne
    Do you consider Bill Rees’ decades of work ‘creating a stick by which to beat the government’? Do you consider Walter Jehne’s elucidation of the problems in the water cycle and the loss of the fungal networks to be political posturing?
    Don Stewart

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