#229. In the Eye of the Perfect Storm – 2

The previous article set out what was intended to be a short but comprehensive guide to the economy understood as a surplus energy system. It’s been pointed out that, however comprehensive that report may be, it’s far from being “short”.

Here, then, is “the short version”. The intention is to make both versions available as downloads.


With economies stumbling, the cost of living rising at rates not seen in forty years, and world markets gripped by nervousness, there are two ways in which we can try to make sense of current economic turbulence.

We can, if we wish, see all of this as temporary – caused by the lasting effects of the pandemic, latterly compounded by the war in Ukraine – and assure ourselves that the ‘normality’ of continuous economic “growth” will return once these crises are behind us.

The alternative is to face facts.

Ultimately, the economy is an energy system, not a financial one, because literally nothing that has any economic value whatsoever can be supplied without the use of energy.

The vast and complex economy as we know it today was built on energy from coal, oil and natural gas, in a process whose origins can be traced to 1776, when James Watt completed the first really efficient engine for the conversion of heat into work.

Whenever energy is accessed for our use, some of that energy is always consumed in the access process. For much of the time since 1776, this Energy Cost of Energy (ECoE) declined, driven downwards by economies of scale, technological progress and a worldwide search for lowest-cost energy resources.

Latterly, though, the positive impetus of scale and geographic reach has faded out, leaving depletion – the process of using lowest-cost resources first, and leaving costlier alternatives for later – to push fossil fuel ECoEs back upwards.

Technical innovation continues, but it should never be forgotten, even in an age obsessed with technology, that the scope for technological progress is limited by the laws of physics.

This is particularly pertinent to the assumed “transition” to renewable energy sources (REs). Instead of unthinking extrapolation from past reductions in their costs, we need to note that renewables, too, have their technical limitations.

One of these is the Shockley-Queisser limit which determines the maximum potential efficiency of solar panels. Another is Betz’s Law, which does the same for wind turbines. Best practice is already close to these theoretical limits.

Moreover, dramatic expansion in RE capacity will make huge demands on material resources, including steel, concrete, copper, cobalt and lithium. For the foreseeable future, these resources, even if they exist at all in the quantities required, can only be made available through the use of legacy energy from oil, gas and coal.

To be clear about this, we most emphatically should make every effort to transition to renewables, not just on environmental grounds, but for economic reasons as well.

But we cannot assume that the ECoEs of REs will ever fall to levels low enough to replicate the economic value of fossil fuels.

Environmental “sustainability” is a practical, no-brainer objective. But “sustainable growth” is no more than wishful thinking, and the probabilities are heavily stacked against it.

I drew attention to the implications of the energy economy when I was head of research at Tullett Prebon, publishing the Perfect Storm report back in 2013. Since then, I’ve carried on exploring this concept at Surplus Energy Economics, as well as building SEEDS, an economic model which runs on energy rather than financial principles.

What has emerged is that, as trend ECoEs have risen relentlessly, prior economic growth has petered out before going into reverse.

Throughout a quarter-century precursor zone that has preceded the onset of economic contraction, we’ve become adept at deluding ourselves that we can continue to rely on ‘infinite growth on a finite planet’.

Because GDP measures financial activity rather than material prosperity, we’ve been able to create an artificial simulacrum of “growth” by pouring vast quantities of cheap credit – and, latterly, cheap money as well – into the system.

Ultimately, of course, money has no intrinsic worth, but commands value only as a ‘claim’ on the goods and services produced by the energy economy. Prolonged financial gimmickry – sorry, “innovation” – has had the effect of driving a wedge between the ‘real’ or material economy of energy and the ‘financial’, ‘claim’ or proxy economy of money and credit.

Because prices are the point at which these two economies intersect, inflation is a logical outcome of this divergence between the material and the monetary.

Whether we carry on letting inflation run hot, or raise interest rates in an effort to tame it, the end result is that we get poorer, either through an economic slump, or through the inflationary destruction of the purchasing power of money.

And there’s a sting in this tail (or tale), too. Most of those products and services that we deem “essential” – including water, food, housing, infrastructure and the transport of people and products – are energy-intensive, meaning that the real costs of necessities will continue to rise, even as overall prosperity erodes.

This means that the affordability of discretionary (non-essential) goods and services – those things that consumers might want, but do not need – will contract, with obvious implications for large swathes of the economy.

Orthodox economics continues to deny all of this, asking us to believe that there is no material shortage that cannot be overcome by using financial “demand” to push prices upwards.

The reality, though, is that no amount of demand, and no increase in price, can produce anything that does not exist in nature. Neither can any amount of technological genius overcome the laws of physics in general, or the laws of thermodynamics in particular.

Recent trends, albeit overshadowed by concerns over covid and Ukraine, are confirming that the “precursor zone” has ended; that economic contraction has begun; and that even the myth of perpetual “growth” can no longer be sustained.

Beyond high inflation, deteriorating prosperity and the erosion of discretionary consumption, this also means that the financial system faces a process of drastic downsizing, a process that can be expected to be disorderly.  

The debate – between orthodox ‘perpetual growth’ and material (and environmental) physical constraint – may run for some time yet, but the outcome is now beyond dispute.

The question now devolves into one of preparation and adaptation, which can only start once the reality of economic limits is grasped.      

47 thoughts on “#229. In the Eye of the Perfect Storm – 2

  1. Reblogged this on The Crowsnest Alliance and commented:
    The title of this and its previous, more elaborated version is “The Perfect Storm”, however another title, “The Expected Storm” might serve equally well for those who are familiar with the arguments advanced by Dr. Timothy Morgan since (at least) 2013. This shorter version provides an excellent entry point for those who are trying to find their way forward through manifest social, economic and familial uncertainties. Dr. Morgan’s preference is, ” . . . to face facts”, which he does very well. I encourage everyone reading this comment to also visit Dr. Morgan’s website, Surplus Energy Economics, and give due consideration to the observations and arguments advanced there.

    • There is a lot of resistance to government price controls at the moment, portrayed as something certain to make things worse. Could you perhaps write something about the difference between generalized price controls and securing peoples’ basic needs?

    • I’m not quite sure what kind of price controls you have in mind but, generally, they create problems.

      If you cap the prices that, say, gas or electricity companies can charge customers, you can drive them out of business by fixing selling prices below their purchase costs. To make this work, you’d have to subsidise suppliers, to which the obvious alternative might instead be to subsidise consumers, which at least enables you to help those in greatest need.

      The question becomes one of ‘to subsidise or not to subsidise?’, and how is this to be funded? We can no longer ‘fix’ this by creating new money, a resort now ruled out by inflation. If we’re going to have to spend more on food, energy and other essentials, then we have to spend less on discretionaries. Better off person A might have to spend less on discretionaries if worse-off person B is to be helped with the cost of essentials.

      This is a mine-field which politicians would prefer not to enter. This makes it tempting to say that these are only “temporary” problems, caused by covid, Ukraine, etc etc etc., and to say that renewables will ‘fix’ it.

      My view is that these are structural problems, not temporary ones, meaning that denial is no solution, and to add that renewables can’t ‘fix’ it. This points, ultimately, to (a) in economic terms, a structural shift away from discretionaries and (b) politically, a bigger state and more redistribution. Politically, this sort of stuff is dynamite, and I’m glad I’m not a politician………..

    • @Dr. Morgan
      Biden’s Tough Talk
      The US official deficit (which excludes a lot of promises) is up to 33 trillion and still going up like a rocket. My perception is that at least Biden and Putin and probably the leadership in China think that their particular backs are to the wall. I can’t imagine that the Security State is not warning Biden about resources (e.g., diesel and nitrogen fertilizer) and also the threat to the petro-dollar from the deficits and money printing. Putin clearly sees that the wolves are circling. China must regard efforts to contain it with trans-Pacific agreements and the potential for US seizure of its money and assets in the US as mortal threats. It’s like 3 gunfighters in the old west all aiming at each other with loaded six-guns. My perception is that Europe still doesn’t understand what is going on. But perhaps the messy business of dealing with issues like the diesel crisis will wake them up?
      Don Stewart

    • I try to steer clear of party politics, but obviously these political issues are important. As ever, a lot of geopolitical stuff is speculative.

      I was no fan of Mr Trump but, with that point of neutrality made clear, I’m very underwhelmed by Mr Biden. The Afghanistan withdrawal was worryingly bungled. In foreign policy I see no sense of direction. In economics, the prior policy of using QE and ZIRP to prop up markets cannot be continued.

      My hunch – and I stress that word – is that China’s economy is in very big trouble, not least because debt exposure is enormous, plus the rising cost of energy is a huge problem, plus hardship in export markets undermines China’s economic model.

      On Europe, I think I’ll limit myself to remarking that some European economies are in serious trouble.

      Maybe the big picture is that, just as the extreme collectivist model failed in the USSR at the end of the 1980s, maybe the extreme liberal model in the West is failing now, a failure that has been building over a lengthy period.

    • I don’t usually reblog, so I wasn’t sure if your question was for me or for Dr. Morgan. I went directly to the Surplus Energy Economics website and was relieved to see your question posted there as well. If it hadn’t been, I would’ve sent you a message suggesting you write directly to him, as I a hardly qualified to answer your question — though like you I am very interested in possible answers to it, especially in the Canadian context.

    • Thank you!
      And what does a ‘bigger state’ mean to you? If more redistribution is needed while budgets are getting tighter, might states be forced to shrink their bureaucracies to at least pay for part of it? (Looking for a silver lining here…)

    • I’ll have to re-read the post to find the ‘bigger state’ reference, but I suspect it will mean different things in different jurisdictions. You simply cannot ignore the suffering of the people I definitely without getting stung. For me, a potential silver lining might be that a few more people ‘wake up’ to [the new] reality.

    • Paul, Michael

      I think the best way I can address this is to use SEEDS to write an article on the outlook and options for government.

    • Michael, about price controls, it really is quite simple.

      In Venezuela, they put a few soldiers on the doorstep of a shop. TV’s should cost no more as B140,- (Bolivar)

      As soon as the tv’s were sold out, the shop owner didn’t have the money to buy more.

      Sold out, closed shop. That is what fiat currencies do. Make a few rich on the way up, and screw you on the way down. And make you vote so can’t see the difference.

    • Don Stewart.

      I think that these are dangerous times.

      Will “The West” and the USA in particular, decide to pull the trigger!!???

      Will they decide that one last throw of the dice to get control of Russia’s resources is a better bet than having a contracting economy?

      War may seem like the best option for the hawks in Washington.

      In a collapsing/de-growth world, the USA has the furthest to fall.

  2. Pretty Good Essay

    He is referring to abandonment of the US dollar as the reserve currency. I will just add that I don’t see things exactly this way. I see it more as the rest of the world ganging up on the countries with essential raw materials. But this is a “tangled bank” (to quote Darwin), and it is worthwhile to check one’s opinions against other theories and look for indicators.

    Don Stewart

    • I have to wonder about the ECOE for this one? There is a long history of alchemists turning water into things like fuel or wine as well as lead into gold. So far, just snake oil salesmen or some such grifter.

    • It has negative EROEI, as it is a way to turn electric power into fuel.
      Not that it is not nice to have as it provides (it seems) a quite efficient way to turn CO2+H into fuel.
      I expect that the Idea is to use the new carriers oversized nuclear power generation to produce fuel
      for the other ships in a battlegroup.

      It’s like hydrogen production, it’s not an energy source, but an energy vector.

    • Jackson Howard, exactly so. What we have is effectively a more efficient catalyst for the reserve gas shift reaction:
      CO2 + H2 = CO + H2O

      Carbon monoxide is then further reduced to produce either methane or methanol:
      CO + 2H2 = CH3OH
      CO + 3H2 = CH4 + H2O

      The problem is that for each mol of methanol or methane produced, some 3 or 4 mols (respectively) of hydrogen are needed. That hydrogen can be produced by electrolysis (using electrical energy) or steam reforming of natural gas (which would completely undermine the point). Methanol can be converted to dimethyl ether by passing it over a zeolite catalyst and can even be used to create alkenes, building up long-chain synthetic hydrocarbons and even serving as feedstock for polymers.

      So essentialy, this process allows the manufacture of energy dense synthetic fuels using hydrogen, without having to store hydrogen as fuel directly, which is impractical for most applications. One still needs to produce hydrogen using electrolsis for the process to make any sense in substituting for fossil fuels. And that has high energy cost.
      The price to pay for synthetic hydrocarbon fuels over pure hydrogen, is additional energy losses in the fuel synthesis process. To cut a long story short, synthetic fuels cost more energy but are much easier to handle than hydrogen and are compatible with existing infrastructure.

      Synthetic fuels only make sense if we have a really cheap source of electricity that can be expanded at scale. Maybe large Gen 4 nuclear reactors if we ever build enough of them for scale economies to really apply. Wind and solar power really are a dead end as energetic drivers for the process, because the EROI of both are too low for such an inefficient use of energy as synthetic fuel production.

    • Re: Energy Crisis by Ed Conway
      Here is the direct link to the youtube version

      Fossil fuels woven into virtually everything we eat.

  3. Europe and Diesel
    From Doomberg
    “The dire diesel supply situation predates the Russian invasion of Ukraine. While global oil demand hasn’t yet reached its pre-pandemic level, global diesel consumption surged to a fresh all-time high in the fourth quarter of 2021. The boom reflects the lopsided Covid-19 economic recovery, with transportation demand spiking to ease supply-chain messes.

    European refineries have struggled to match this revival in demand. One key reason is pricey natural gas. Refineries use gas to produce hydrogen, which they use to remove sulphur from diesel. The spike in gas prices in late 2021 made that process prohibitively expensive, cutting diesel output.”

  4. Where does your bread come from?

    Top 10 Wheat Producing Countries (in tons of wheat produced 2020)*
    China — 134,254,710
    India — 107,590,000
    Russia — 85,896,326
    United States — 49,690,680
    Canada — 35,183,000
    France — 30,144,110
    Pakistan — 25,247,511
    Ukraine — 24,912,350
    Germany — 22,172,100
    Turkey — 20,500,000

    Then there is this little nugget:
    The White House has become increasingly aware of the “worrisome decline” in diesel inventories in the Northeast. According to sources cited by CNN, the White House is considering a release of strategic stockpiles to combat the crisis. Given the reduction in East-coast diesel inventories of ~45mb, and given the size of the strategic “home heating oil reserve” of ~1mb, its unlikely the measure will fix existing imbalances.


    • Australia had a wheat harvest of 36.3m tonnes in 2021-22(still being revised upwards), 2020 was a drought year. Total grain harvest was 61.9m tonnes when including barley, oats, canola etc.

  5. Peak oil – the point when industrial civilisation was extracting more oil from the ground than it had ever done before… and would ever do again, occurred in November 2018. The slow decline in output through 2019 was already causing an economic slowdown even before governments around the world over-reacted to the Covid. The over-reaction though, rapidly accelerated the process of decline, causing production to be lost as wells were shut down – some of them permanently – when economic activity crashed during the first round of lockdowns. And when the economy finally reopened, the sudden and massive increase in demand could not be matched by supply, and prices shot up into the stratosphere. The same went for gas, whose use in balancing modern electricity grids and as a feedstock for fertiliser, has left us looking desperately short of both food and power.

    In 2022, the world is having to get by on four million barrels of oil a day less than we were consuming prior to the pandemic:


    • “19:17 we’re gonna lose four to five million barrels a day of Russian crude and another million barrels a day of kazakh
      19:22 crude within the next two months and it’s just going to be gone so that’s the single largest disruption
      19:29 to oil markets ever and it’s just around the corner . . . “?

  6. The proper role of private enterprise
    I will propose that our ability to adjust to a lower net energy world is dependent on private enterprise. But that the financialization of everything has distorted private enterprise beyond recognition.

    Let’s start with this guy trying to hang a gate to protect his garden from critters, in a world where resources are rapidly rising in cost:

    Now let’s go to the mysterious foundations of physics where the passage of time becomes ambiguous:

    I will also point you to the Constructal Law, proposed by Professor Adrian Bejan, a professor of physics at Duke University and the author of thermodynamics textbooks. I don’t have a short video to show you, but you will find plenty of examples on the internet if you are interested. Bejan thinks that the principle of least action is simply a law of Nature. It cannot be further explained. Bejan applies the law to everything from a droplet of water seeking the ocean to the functioning of “Walk” lights at intersections.

    I suggest that the human brain is also subject to the principle of least action. The human brain is by far the most complex organism in the universe that we know anything about. Subject to the limitations of our own physiology and the help we get from symbionts (e.g., the gut bacteria) and the resources in the environment, we do the best we can. The guy who invented the plastic bracket which turns a humble T post into a successful place to hang a gate has found a way to solve the problem using less energy (as represented by money). In a world trending down in terms of energy availability, the pursuit of least action motivated by, first, human nature seeking a lower energy way to get to the goal and also some ability to make some money by selling the solution to other people seems essential, at least to me. However, a Central Banker would look aghast at the solution. GDP has been destroyed. Perhaps we can inject more debt into the system to support the buying of more expensive solutions??? And perhaps society, recognizing that its foundations are being eroded, will deride the cheaper solution as “not up to our community standards”???

    A key point here is accurate feedback. The little bracket to hang the gate either works or it doesn’t. Absent feedback, it will never be adopted. And the goal of governments, especially since 2006 in the US, has been to obscure feedback. A country (the US) which has piled up 33 trillion dollars in debt is definitely trying to obscure feedback.

    Why are governments so blind? The answer that occurs to me is that they are blinded by the ability to create more debt…particularly the US which has the advantage of the Reserve Currency. I am not an expert on China, but my suspicion there is that they became too confident in extrapolating the curve from 1970 to 2010 into the future. Again, not responsive to real world feedback, but subject to the delusions of financialization.

    Don Stewart

  7. Don, I like this theory of everything POLITICAL much, much better. It explains why governments are “blind.”

    “Failure is their superpower.”

    Everyone needs to stop assuming and pretending that governments exist to take care of the general welfare, and that is their “proper” role. Their “failure” to see the long-term consequences and impending events is not a bug, it’s a feature of the the extractive, plundering mindset. In fact, the terrible consequences are simply opportunities to develop new sources of power with which to take things. Water scarcity is an opportunity to control and monetize water supplies. Ditto, food scarcity. Ditto energy scarcity.

    See also, Alfred J. Nock, “Our Enemy, The State.”
    “[T]he State ‘turns every contingency into a resource’ for accumulating power in itself, always at the expense of social power.”

    • Tagio
      It’s a terrifying thought. But I will admit that the evidence doesn’t disprove it.
      Don Stewart

  8. Taking ‘capacity’ into account?
    “ . . . 7:44 is that natural gas and
    7:48 hydro would be far far more expensive
    7:52 than wind solar and batteries
    7:54 and if you calculate these numbers
    7:57 correctly
    7:58 so we need it so it’s important to make
    8:00 the right investment decisions to get
    8:02 the best value
    8:04 when we build a power plant have i got
    8:05 that correct yeah so so this is
    8:07 this is even it gets even more
    8:09 interesting markham because
    8:11 even with inaccurate lcoes for
    8:14 conventional
    8:15 generation the cost solar uh
    8:18 in wind are already the cheapest sources
    8:21 of energy on the planet . . .
    9:49 so in the case of gas in 2020
    9:53 when you correct the lcoe gas is 60%
    9:56 higher than published reports coal is
    9:59 four times higher than published report
    10:03 wind i mean hydroelectric
    10:06 is three times higher than reported
    10:10 so again even with inaccurate
    10:13 wildly lower than reality lcoes
    10:17 solar and wind and batteries are still
    10:19 cheaper but the gap
    10:20 is widening by a lot when you correct
    10:23 for the lcoe of conventional generation . . . “

    • Seba glosses over the necessity for firm capacity, which is utilities pay for in addition to energy. He casually refers to solar and wind as being “nearly firm” when they have four hours of associated storage, but although four hours of storage can promote output smoothing and shifting of any output to peak evening load, it would be better described as “barely firm” or “negligibly firm”.

      I once worked at a combined cycle power plant as operations manager. Our income was based on our sale of energy and also our sale of firm capacity to the local utility. The payment for firm capacity alone was enough to cover the debt service for the plant. We could pay off our loans even if we didn’t generate any energy at all. That’s how important firm capacity is to a utility.

      There are many factors that go into paying for capacity, including ease of dispatch, ramp rate, time required to come on line, forced outage performance and others. Here’s a reasonably good discussion of the issues involved in evaluating capacity from variable generation like wind and solar. https://en.wikipedia.org/wiki/Capacity_credit

  9. That is, while there may be roughly as much fossil fuel in the ground as we have consumed in the course of three centuries of industrialisation, we also burned our way through the cheap and easy deposits first. Consider this an issue of “socially necessary exergy” – nobody was going to buy or even extract oil from deep beneath the North Sea or from hydraulically fractured shale deposits while it was still possible to obtain all the oil you needed by knocking a pipe into the ground. We will, of course, continue to extract ever more difficult and expensive fossil fuels, but their extraction will remorselessly consume an ever-greater part of the exergy previously available to the wider economy. Which, in turn, means that the wider economy is going to shrink… and we have no economic theory to explain how we are going to handle this.


    • “and we have no economic theory to explain how we are going to handle this.”
      We may not need a theory to handle it. The predicament will handle us.

    • Red.

      The article is a really interesting take on the role of energy.

      It’s got me thinking, what else is a product of the harnessing of fossil fuels???

      The end of feudalism.

      The rise of universal suffrage.

      High literacy levels.

      Health Care.

      Contraception/ birth control.

      Most science.

      The end of superstition.

      Liberalisation of social values.

      Decline in religious participation.

      So much of the world we inhabit has been shaped by the “one off” bonanza of harnessing the energy in fossil fuels.

    • What I find interesting in the current situation is what hasn’t happened (yet, anyway).

      Markets haven’t tumbled, as they did in second-half 2008 (GFC) and first-quarter 2020 (pandemic). House price bubbles haven’t burst.

      Instead of panic, there’s a sort of eerie calm.

      Logically, what we’re seeing now ought to be far worse for asset prices than 2008 or early 2020. Discretionary consumption and household affordability are under huge downwards pressures. There’s little or no scope for fiscal or monetary support.

      I can see only two ways in which this makes sense.

      First, ‘all the bad news is priced in’. Rates will rise, but not by more than is already pencilled in. Covid dislocation is behind us. The war will end and, eventually, trade with Russia will recover (either that or ‘we’ll manage just fine without Russian energy and commodities’).

      Second, ‘won’t get fooled again’. Investors swallowed an ‘end of the world’ scenario post-Lehman, and again in the early days of covid, and lost big money both times. They’re determined not to fall for gloom narratives this time.

    • Dr Tim.

      I think that this is the calm before the storm.

      The financial markets, house prices etc will stay stable until the squeeze on people’s discretionary spending starts to bite.

      Then unemployment shoots up as the discretionary sector contracts.

      Mortgage defaults follow. The housing market then goes in reverse.

      This then tips the financial economy over the edge.

      I think all this is inevitable, with a rising ECoE.

      Whether we are nearing that point though is an open question.

      The markets haven’t crashed because people still see the latest “waves/disruption” as temporary. Russia/Ukraine etc. This could be true, but will the Russia/Ukraine crisis end in the “West’s” favour or will Russia permanently pivot away from the rest of Europe?
      Maybe “regime change” is the West’s only hope?

      Without access to Russian resources, Europe is going to struggle. This in tern effects USA’s global position.

      If Russia starts to make significant gains in Ukraine, which I think it is about to, then the Western response is going to be interesting to see!!!!!
      I’m worried the “hawks” in Washington are going to “go for it”!☹️

    • Thanks – these are things I’m thinking through at the moment.

      I’ve heard this morning that a US bank has put out a research report warning of an “existential” crisis for GBP.

      I’d be interested to know if anyone has seen this.

      SEEDS assessment is that the UK is indeed in big economic trouble, though of course there are nuances around this.

  10. Latest Nate Hagens Interview/discussion.
    Very interesting.
    Energy at the heart of EVERYTHING

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  13. If you just want to smell your own guffs, and have a small group around you chuff them too, then this blog is great.

    However, if you want to spread your ideas to a wider audience, can I suggest writing a little more succinctly? Drop the big words and explain like it really is thermodynamic.

    I wish you would because it does seem that you have something important to say.

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