#213. A moment of truth


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.       



326 thoughts on “#213. A moment of truth

  1. Reprint of a comment I made on Our Finite World blog.

    A nuclear/ renewable energy transition could be accomplished. But it needs to be done intelligently, in a way that maximises whole system exergy efficiency. We need to think in terms of gradually reducing reliance on fossil fuels, rather than on revolutionary transitions. In Northern Europe and North America, a sensible strategy might look something like this:

    1) Extend the life of nuclear power plants as much as possible and build as many new ones as possible. These will provide a level of baseload electricity supply, which is highly valuable. Restart research programmes into closed fuel cycle reactors, breeder and high conversion ratio reactors.

    2) Focus renewable energy systems development on onshore and offshore wind power (which have better whole system EROI than solar PV) and biomass, with wind power providing electricity and biomass providing storable solid fuel.

    3) Use stone, brick, concrete and rammed earth to build some onshore wind turbine towers, reducing embodied energy and providing employment for builders and masons. Use wood and wood based composites for turbine blades, reducing embodied energy for small to medium size turbines. Consider options for building wind turbines that generate compressed air or compressed hydraulic fluid, with multiple turbines driving a single central generating station. This reduces system complexity and reduces the demand for copper and rare earth elements. In some cases, mechanical equipment can be directly powered by compressed hydraulic liquids.

    4) Build thermal energy storage power plants, using hot rock energy storage and supercritical steam cycles close to to onshore and offshore wind farms. These can absorb and partially smooth intermittent electricity production, before it is put onto the long-distance grid connection. This provides both long-term energy storage and ensures better utilisation of transmission infrastructure. Rock based thermal stores have low capital cost and low embodied energy and can be sized to store days worth of electric power without the high capital cost that batteries would incur for such a task. The steam turbines can provide spinning reserve to smooth out grid frequency fluctuations.

    5) Biomass will mostly be harvested at the end of summer and in autumn. Wind power produces most energy in autumn, winter and spring. Use excess wind based energy to heat and decompose biomass into gas, liquids and char. Store the liquids as storable fuels for gas turbine powerplants. Use excess wind power to produce hydrogen, which is then reacted (without needing to store it) with the wood gas and char to produce storable liquid methanol.

    6) Much of the energy we need is in the form of heat, especially in autumn, winter and spring, when wind power is at its greatest. Heat can be stored relatively cheaply in hot water or hot rock. Convert as many end use heat loads as possible to grid connected storage heaters. These can either be grid operator controlled or activated on rising grid frequency. Some large users could store heat in hot rock reservoirs and use a small steam plant to sell electricity back to the grid, using the waste heat for heating purposes. Try to cluster high temperature heat users around central thermal stores.

    7) Having done all of this, electricity supply to non-heat loads will be less variable. However, there will be some long-term lulls in wind power generation causes by high pressure systems that may overwhelm thermal storage capacity. To cover these occasional lulls, we need a storage option that has very low capital cost, since we are going to rely on it only for a small number of hours throughout the year. Efficiency is of less importance. The cheapest storage option is a liquid fuel in a welded steel tank (either fossil or biomass derived) attached to an open gas turbine. These have capital cost of just a few hundred dollars per installed kW and new models are around 40% efficient.

    8) Forget about BEVs and stop subsidising them. The demand spikes caused by charging will ultimately crash any grid that hasn’t massively overinvested in generating capacity. Instead, develop a nodalised electrified rail based freight and human transportation system. BEVs and other stored energy vehicles (I.e. hydrogen and biogas gas bag) can provided short range transport (no more than a few tens of km) to and from nodes – a task to which they are better suited.

    9) Develop farming methods that are organic or focus on using synthetic fertilisers and pesticides more sparingly. Heavy work functions should be adapted to grid electric connected machinery or short range stored energy systems. This will require some creative solutions.

    10) Use waste heat from nuclear reactors and grid scale thermal energy storage for agricultural production. Use it to heat greenhouses, ponds and frames, to extend growing season and reduce the need for imported food.

    • This is a fantastic, constructive comment. Thanks for posting, Tony. I would add that Organic Rankine Cycles may be more compatible with thermal energy storage than steam systems since ORC can produce power efficiently from lower temperature heat sources. Perhaps ORC systems could be used in combination with thermal storage + steam systems in order to scavenge the lower temperature portion of the stored heat, thereby increasing the capacity of the overall system?

      Point 1 is the center piece of the plan, there’s no viable solution to the dual energy and climate problem which isn’t centered around increased nuclear.

      As a related point, I saw this from the Washington Post recently:

      Lower expectations is also essential to a viable solution and it’s interesting to see this idea being introduced by mainstream publications.

    • Organic Rankine cycles, using a dense working fluid like butane or propane, are an interesting option for converting heat into useful electric power. In this case, we would probably do away with the low pressure steam turbine (which is a big component with high capital cost) and put the condenser (in this case supplying the ORC evaporator with heat) aft of the MP turbine. Butane has a much higher molecular weight than water, so would permit more compact (and hopefully cheaper) power generation equipment. So the ORC could reduce capital cost, as well as improving efficiency.

      One of the problems with attempting to generate power from low grade heat, like solar heat or waste heat, is that thermal efficiency tends to be very poor, much poorer than Carnot efficiency would suggest is achievable. There always has to be a thermal gradient across a heat exchanger to achieve heat transfer. When the temperature difference between hot and cold sources is low anyway, this further diminishes the effective temperature difference between hot and cold source. Making heat exchangers larger reduces this problem, but increases capital cost and reduces effective system power density. There are additional parasitic losses associated with pumping the condensed working fluid back into the evaporator. The smaller the effective temperature difference, the greater mass flux must pass through the turbine for each unit of power, so pumping losses end up being greater. Finally, with smaller the temperature difference between hot and cold, the smaller the pressure drop across the turbine will be, requiring a larger turbine per unit power.

      A well optimised system must carefully balance the often competing expenses of capital and operating cost. Likewise, there are design choices that balance embodied energy against energy efficiency. One option that is worth exploiting where the situation is suitable, is combined heat and power.
      A smaller thermal storage plant built into a district heating system or even an individual building, could return energy as say 30% electricity and 70% hot water, for heating and other uses. This gives an exergy efficiency probably as good as 70%. It also reduces the capital cost of the turbine, which can be smaller. Multi-GW thermal storage plants are less suitable for combined heat and power, but have the advantage of greater economy of scale. We would build these on coasts, where deep ocean water can be sourced for the condenser. This would allow the working fluid to condense at temperatures only slightly above 0°C, improving cycle efficiency and maximising the pressure drop across the turbine.

  2. “Oil System Collapsing so Fast it May Derail Renewables, Warn French Government Scientists – Byline Times”

    Their research found that 15.5% – more than a tenth – of the energy produced from oil worldwide is already necessary to keep producing all the oil.

    By 2024 – within the next four years – the amount of energy we are using for global oil production is going to increase to 25% of energy production. In other words, the world will be using a quarter of the energy produced from oil just to keep producing that oil.

    This tendency is having massive consequences on long-term economic growth that few mainstream economists acknowledge today. The key issue is that the more energy we need to extract energy itself, the less energy is available for other areas of the economy and society.

    As economists Professor Tim Jackson and Dr Andrew Jackson of the University of Surrey have shown, there is now abundant scientific evidence that the decline in EROI is an underlying driver of the decline in economic growth.


  3. Pingback: What is Surplus Energy? – Olduvai.ca

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