#177. Poorer, angrier, riskier

MODELLING THE CRUNCH

It became clear from a pretty early stage that the Wuhan coronavirus pandemic was going to have profoundly adverse consequences for the world economy. This discussion uses SEEDS to evaluate the immediate and lasting implications of the crisis, some of which may be explored in more detail – and perhaps at a regional or national level – in later articles.

Whilst it reinforces the view that a “V-shaped” rebound is improbable, this evaluation warns that we should beware of any purely cosmetic “recovery”, particularly where (a) unemployment remains highly elevated (there is no such thing as a “jobless recovery”), and (b) where extraordinary (and high-risk) financial manipulation is used to create purely statistical increases in headline GDP.

The bottom line is that the prosperity of the world’s average person, having turned down in 2018, is now set to deteriorate more rapidly than had previously been anticipated.

Governments, which for the most part have yet to understand this dynamic, are likely inadvertently to worsen this situation by setting unrealistic revenue expectations based on the increasingly misleading metric of GDP, resulting in a tightening squeeze on the discretionary (“left in your pocket”) prosperity of the average person.

Exacerbated by crisis effects, the average person’s share of aggregate government, household and business debt is poised to rise even more rapidly than had hitherto been the case.

These projections are summarised in the first set of charts.

Fig. 1

Consequences

The implication of this scenario for governments is that revenue and expenditure projections need to be scaled back, and priorities re-calibrated, amidst increasing popular dissatisfaction.

Businesses will need to be aware of deteriorating scope for consumer discretionary spending, and could benefit from front-running some of the tendencies (such as simplification and de-layering) which are likely to characterise “de-growth”.

The environmental focus will need to shift from ‘big ticket’ initiatives to incremental gains.

Amidst unsustainably high fiscal deficits, and the extreme use of newly-created QE money to monetise existing government debt, we need also to be aware of the risk that, in a reversal of the 2008 global financial crisis (GFC) sequence, a financial crash might follow, rather than precede, a severe economic downturn.

Methodology – the three challenges

Regular readers will be familiar with the principles of the surplus energy interpretation of the economy, but anyone needing an introduction to Surplus Energy Economics and the SEEDS system can find a briefing paper at the resources page of this site. What follows reflects detailed application of the model to the conditions and trends to be expected after the coronavirus crisis.

Simply put, SEE understands the economy as an energy system, in which money, lacking intrinsic value, plays a subsidiary (though important) role as a medium of exchange. A critical factor in the calibration of prosperity is ECoE (the Energy Cost of Energy), which determines, from any given quantity of accessed energy, how much is consumed (‘lost’) in the access process, and how much (‘surplus’) energy remains to power all economic activities other than the supply of energy itself.

Critically, the depletion process has long been exerting upwards pressure on the ECoEs of fossil fuel (FF) energy, which continues to account for more than four-fifths of the energy used in the economy. The ECoEs of renewable energy (RE) alternatives have been falling, but are unlikely ever to become low enough to restore prosperity growth made possible in the past by low-cost supplies of oil, gas and coal.

Accordingly, global prosperity per capita has turned downwards, a trend which can be disguised (but cannot be countered) by various forms of financial manipulation.

This means that, long before the coronavirus pandemic, the onset of “de-growth” was one of three main problems threatening the economy and the financial system. The others are (b) the threat of environmental degradation – which will never be tackled effectively until the economy is understood as an energy system – and (c) the over-extension of the financial system which has resulted from prolonged, futile and increasingly desperate efforts to overcome the physical, material deterioration in the economy by immaterial and artificial (monetary) means.

On these latter issues, the slump in economic activity has had some beneficial impact on climate change metrics, whilst we can expect a crisis to occur in the financial system because its essential predicate – perpetual growth – has been invalidated. The global financial system has long since taken on Ponzi characteristics and, like all such schemes, is wholly dependent on a continuity that has now been lost.

Top-line aggregates

With these parameters understood, the critical economic issue can be defined as the rate of deterioration in prosperity, for which the main aggregate projections from SEEDS are set out in fig. 2. Throughout this report, unless otherwise noted, all amounts are stated in constant international dollars, converted from other currencies using the PPP (purchasing power parity) convention.

During the current year, world GDP is projected to fall by 13%, recovering thereafter at rates of between 3% and 3.5%. This rebound trajectory, though, assumes extraordinary levels of credit and monetary support, reflected, in part, in an accelerated rate of increase in global debt.

Within debt projections, the greatest uncertainties are (a) the possible extent of defaults in the household and corporate sectors, and (b) the degree to which central banks will monetise new government issuance by the backdoor route of using newly-created QE money to buy up existing debt obligations.

This is a point of extreme risk in the financial system, where a cascade of defaults – and/or a slump in the credibility and purchasing power of fiat currencies – are very real possibilities, particularly if the ‘standard model’ of crisis response starts to assume permanent characteristics.

Fig.2

Looking behind the distorting effects of monetary intervention, it’s likely that underlying or ‘clean’ output (C-GDP) will fall by about 17% this year and, after some measure of rebound during 2021 and 2022, will revert to a rate of growth which, at barely 0.2%, is appreciably lower than the rate (of just over 1.0%) at which world population numbers continue to increase. Additionally, ECoEs can be expected to continue their upwards path, driving a widening wedge between C-GDP and prosperity.

These effects are illustrated in fig. 3, which highlights, as a pink triangular wedge, the way in which ever-looser monetary policies have inflated apparent GDP to levels far above the underlying trajectory. This is the element of claimed “growth” that would cease if credit expansion stalled, and would go into reverse in the event of deleveraging. The gap between C-GDP and prosperity, meanwhile, reflects the relentless rise of trend ECoEs. This interpretation, as set out in the left-hand chart, is contextualised by the inclusion of debt in the centre chart.

Fig. 3

Fig. 3 also highlights, in the right-hand chart, a major problem that cannot be identified using ‘conventional’ methods of economic interpretation. Essentially, rapid increases in debt serve artificially to inflate recorded GDP, such that ratios which compare debt with GDP have an intrinsic bias to the downside during periods of rapid expansion in debt.

Rebasing the debt metric to prosperity – which is not distorted by credit expansion – indicates that the debt ratio already stands at just over 350% of economic output, compared with slightly under 220% on a conventional GDP denominator. As the authorities ramp up deficit support – and, quite conceivably, make private borrowing even easier and cheaper than it already is – the true scale of indebtedness will become progressively higher, thus measured, than it appears on conventional metrics.

Personal prosperity – a worsening trend

The per capita equivalents of these projections are set out in fig. 4, which expresses global averages in thousands of constant PPP dollars per person. After a sharp (-18%) fall anticipated during the current year, prosperity per capita is expected to recover only partially before resuming the decline pattern that has been in evidence since the ‘long plateau’ ended in 2018, and the world’s average person started getting poorer.

Meanwhile, each person’s share of the aggregate of government, household and business debt is set to rise markedly, not just in 2020 but in subsequent years. By 2025, whilst prosperity per capita is set to be 17% ($1,930) lower than it was last year, the average person’s debt is projected to have risen by nearly $17,900 (45%).

These, in short, are prosperity and debt metrics which are set to worsen very rapidly indeed. The world’s average person, currently carrying a debt share of $40,000 on annual prosperity of $11,400, is likely, within five years, to be trying to carry debt of $58,000 on prosperity of only $9,450.

This may simply be too much of a burden for the system to withstand. We face a conundrum, posed by deteriorating prosperity, in which either debt becomes excessive in relation to the carrying capability of global prosperity, and/or a resort to larger-scale monetisation undermines the credibility and purchasing power of fiat currencies.

Fig. 4

In fig. 5 – which sets out some per capita metrics in chart form – another adverse trend becomes apparent. This is the fact that taxation per capita has continued to rise even whilst the average person’s prosperity has flattened off and, latterly, has turned down.

What this means is that the discretionary (“left in your pocket”) prosperity of the average person has become subject to a squeeze, with top-line prosperity falling whilst the burden of tax continues to increase.

Fig. 5

This also means that, in addition to deteriorating prosperity itself, there are two leveraging processes which are accelerating the erosion of consumers’ ability to make non-essential purchases.

The first of these is the way in which taxation is absorbing an increasing proportion of household prosperity, and the second is the rising share of remaining (discretionary) prosperity that has to be allocated to essential categories of expenditure.

These are not wholly new trends – and they help explain the pre-crisis slumps in the sales of non-essentials such as cars and smartphones – but one of the clearest effects of the crisis is to increase the downwards pressure on consumers’ non-essential expenditures.

Governments – the hidden problem

This has implications for any business selling goods and services to the consumer, particularly where their product is non-essential. It also sets governments a fiscal problem of which most are, as yet, seemingly wholly unaware.

As can be seen in fig. 6, governments have, over an extended period, managed to slightly more than double tax revenues whilst maintaining the overall incidence of taxation at a remarkably consistent level of about 31% of GDP.

This has led them to conclude that the burden of taxation has not increased materially, even though their ability to fund public services has expanded at trend annual real rates of slightly over 3%. When – as has happened in France – the public expresses anger over taxation, governments seem genuinely surprised by popular discontent.

The problem, of course, is that, over time, GDP has become an ever less meaningful quantification of prosperity. When reassessed on the denominator of prosperity, the tax incidence worldwide has risen from 32% in 1999, and 39% in 2009, to 51% last year (and is higher still in some countries). On current trajectories, the tax ‘take’ from global prosperity per capita would reach almost 70% by 2030, a level which the public are unlikely to find acceptable, especially in those high-tax economies where the incidence would be even higher.

Conversely, if (as in the right-hand chart in fig. 6) taxation was to be pegged at the 51% of prosperity averaged in 2019, the resulting ‘sustainable’ path would see taxation fall from an estimated $43tn last year to $38tn (at constant values) by 2030. At -12%, this may not seem a huge fall in fiscal resources, but it is fully 27% ($14tn) lower than where, on the current trajectory, tax revenues otherwise would have been.

Fig. 6

Politically, there seems little doubt that the widespread popular discontent witnessed in many parts of the world during the coronavirus crisis has links to deteriorating prosperity. Historically, clear connections can be drawn between social unrest and the related factors of (a) material hardship and (b) perceived inequity.

At the same time, the sharp deterioration in prosperity seems certain to exacerbate international tensions, where countries competing for dwindling prosperity may also seek confrontation as a distraction technique. These are amongst the reasons why a world that is becoming poorer is also becoming both angrier and more dangerous.

#172. Orchestra, lights, beginners!

THE CORONAVIRUS AS DRESS REHEARSAL

As recently as January, the word coronavirus would have conveyed no meaning to the vast majority of the general public, whilst outside China very few, other than geographers, would ever have heard of Wuhan. All this has changed, of course, since the pandemic spread around the world in the early months of 2020.

Those of us who understand the economy as an energy system, and those people who are most concerned about environmental risk, had no reason to be any more prescient about this than anybody else.

Almost nobody saw this coming.

But energy and environmental understanding does serve to cast the current crisis into a very different light.

In short, and unless you believe in perpetual growth, the economic impact of the coronavirus pandemic can be seen as a dress rehearsal for the main event. That ‘main event’ is the onset of “de-growth”. One of the most interesting aspects of the pandemic is the light that it sheds on our ability – or, in a disturbing number of cases, our inability – to cope with fundamental change.

The energy economics perspective puts our situation into long-term context. Simply stated, the modern world was created when, in the late 1700s, the invention of the first efficient heat-engines enabled us to access the vast energy resources contained in coal, oil and natural gas. Population numbers, and the economic means of their support, have expanded exponentially since we ceased to depend entirely on the energy of food and the labour of humans and animals. This relationship, illustrated below, surely demonstrates, beyond dispute, the relationship between energy use and the quantum of population and economic activity.

Whether or not this relationship is understood defines the differences between two schools of thought.

For the majority of those who comment on these things, and who influence commercial and policy decisions, the economy is an entirely monetary system. Since we can create money at will, this means that there need be no limit to the scale of our economic activity (and the numbers of people which that activity sustains).

For a minority of us, though, the finite nature of the Earth and its resources implies an eventual cessation of economic and population growth. Some think that environmental considerations put limits to the scope for ‘carrying on as we are’. Others, recognising that low-cost energy is a finite resource, observe that the energy cost of energy (ECoE) is now rising in a way that is putting an end to “growth”, however much we might try to fake continuity by pouring cheap credit and cheaper money into the system.

In recent weeks, the main effort here has been to quantify, so far as is possible, the potential impact of the coronavirus crisis on economic activity and the financial system.

The detailed conclusions of these studies would probably give you far more information than you need or want to know, though the outlook for sixteen advanced economies, fourteen EM countries and the global average is illustrated here:

The bottom line is that economic activity – and the prosperity of the average person around the world – are going to be savaged by the coronavirus crisis, and that any subsequent recovery is going to be painfully slow, and incomplete. It’s by no means clear that a financial system wholly predicated on perpetual growth can survive this severe check to continuity.

This much is probably common ground with the ‘conventional’ interpretation. The difference is that, from an energy or an environmental perspective, the pandemic crisis isn’t a stand-alone incident.

It’s the first instalment of “de-growth”.

Rational responses to risk?

Members of the medical profession provide an excellent service in diagnosing our ailments and, when appropriate, prescribing treatment, but few of us would expect or want them to give economic advice. Simple courtesy suggests that we should reciprocate, confining ourselves here to economic and related issues, and leaving health matters to the experts.

It’s interesting, though, that there seems to have emerged an open rift between the British authorities and some, at least, of the experts advising them on coronavirus policy. Simply put, and with new infections continuing at a daily rate of about 8,000, some scientists think that the government is exercising insufficient caution as it lifts lockdown restrictions. It’s probable that similar debates are taking place elsewhere, though few countries seem to be as deeply enmeshed in the pandemic, or to be handling it quite as ineptly, as Britain and the United States.

Scientific interpretation is best left to the experts, and governments have other (including economic) considerations to weigh in the balance. From a lay-person’s point of view, the issue seems to be whether or not relaxation of restrictions risks triggering a serious “second wave” of infections, which could in turn force a return to lockdowns.

The operative term here is “risk”. We cannot accurately calibrate the probability of a second wave, but we can reach a pretty effective estimation of the consequences should it happen.

The subsidiary question is whether there are “right” and “wrong” – “prudent” or “irresponsible” – ways of emerging from lockdown.

It’s almost impossible to overstate the economic implications of a second wave. China aside, the coronavirus struck most countries’ economies in late March, so first quarter output was only reduced by about 3-5%. In a second quarter wholly overshadowed by the pandemic, activity is likely to have fallen by between 40% and 50%.

A cautious, incremental approach might see this year-on-year gap narrowed to perhaps -30% by the fourth quarter, with something close to normality being restored by the end of 2021. This might only be “close to” normal, because there are some sectors which it would be imprudent to reopen until the virus risk is very largely behind us.

Unduly rapid exit, on the other hand, risks triggering a second wave of infections, at which point economies would be forced back into lockdown.

Any ‘lockdown 2.0’ would be far worse than the original one. It would probably have to last a lot longer than the first version. As well as forcing economic activity sharply back downwards, this would strip people of much of the hope that has sustained them through the period of restriction. It would throw government and commercial planning into disarray, and would risk both severing supply lines and triggering a full-blown financial crash.

Any recovery thereafter would be very gradual indeed, and might take too long to avoid permanent, perhaps even existential, economic and financial damage.

Issues of responsibility

It cannot be emphasised too strongly that no encroachment on the preserves of the medics is intended here. The world already has more than enough ‘instant experts’ on the coronavirus, and certainly doesn’t need any more.

The aim is simply to examine the possible economic consequences of allowing the system to risk being hit by a second wave of infections. The implication, though, is that purely economic probabilities favour caution.

Of course, it can be objected – and quite correctly – that official consideration needs to be given to matters that are neither medical nor economic. Lockdowns restrict freedoms, are stressful, and have extremely painful human consequences, including physical (though not, strictly speaking, social) isolation from relatives and friends. Nobody wants to stay in lockdown any longer than is necessary.

This doesn’t mean, though, that exit strategies can’t be prudent, and nuanced to remove the worst human and economic consequences whilst also minimising the risk of a second wave. It seems logical that the authorities could decide what should, and what should not, be reopened, on the combined basis of importance, and of comparative safety. If people can work, or meet, at safe distances, there seems no reason for stopping them from doing so. Cramming people onto beaches or into aircraft seems far less advisable.

This discussion has probably reached – or passed – the point at which some readers riposte that the coronavirus ‘is no worse than flu’, ‘only affects the elderly’ and ‘leaves no lasting health impairments’ (though each of these points seems unproven). Others might reference ‘herd immunity’ (although, even in badly-hit England, official survey data indicates that only 6.78% of the public have antibodies).

These are opinions, to which anyone is entitled. But the problem with such arguments is that none of us makes decisions for himself or herself alone. We might, as individuals, think that risk is low, so we’re relaxed about crowded spaces, and pay little attention to precautionary guidelines. It can be argued that we have a right to make that choice, always presupposing that we accept the risk that we might be wrong.

But the risks of such decisions are not confined to those who take them. During the Second World War, night-time blackouts were imposed, to make it harder for enemy bombers to find their targets. This would have been pointless if even a small minority, disagreeing with the blackout policy, had kept their homes lit up like Christmas trees.

At issue here is collective responsibility, and the question of adhering to rules with which we, as individuals, might disagree.

The intelligence factor

The merits or demerits of rapid or cautious “exit strategies” from lockdown are not intended to be the main focus of discussion here.

Rather, the issue of greatest significance is the way in which, collectively, we have responded to this ‘dress rehearsal’ for de-growth.

The view expressed here is that de-growth has become very probable indeed. For purposes of explanation – and with a new downloadable summary of surplus energy economics in preparation – it might suffice to note that all economic activity is a function of energy, and that the energy cost of energy (ECoE) determines how much of any accessed energy is consumed in the access process, and how much remains for all economic purposes other than the supply of energy itself. Needless to say, no tinkering with the financial system of ‘claims’ on economic output can change the fundamental energy (not financial) dynamic which determines our prosperity.

Analysis of these trends indicates that de-growth had already started, well before the economy was hit by the pandemic. During 2018-19, sales of everything from cars and smartphones to chips and components had turned down. Unmistakable signs of stress were already starting to appear right across the financial system.

The arrival of de-growth finds us with a financial system that has been rendered unnecessarily fragile by futile efforts to counter “secular stagnation” – and, latterly, de-growth – with monetary gimmickry. Not content with allowing escalating debt to create cosmetic activity and “growth”, the authorities had already resorted to monetary policies which, as well as paying people and businesses to borrow, had destroyed returns on invested capital, with particularly adverse consequences for pensions.  The following charts illustrate the extent of financial exposure.

You can take your pick between escalating ECoEs and worsening environmental risk as the primary drivers, but the onset of de-growth looks inescapable.

This, simply put, poses a challenge unprecedented since the start of the Industrial Age. There have always been recessions, of course, and depressions have occurred at longer intervals. But these events, however severe, have never amounted to a permanent cessation and reversal of economic growth.

Another way to state the case is that de-growth has put an end to ‘business as usual’. Have we the intelligence, individually and collectively, to adapt to this drastic change? Moreover, do our societies and our institutions have the systemic intelligence to respond rationally?

This isn’t the place to revisit what de-growth is likely to mean, but we can expect fundamental change in economic, political and other areas. Economically, products and services are likely to be simplified, with the same happening to supply processes (as part of a wider trend towards unwinding the complexity created during more than two centuries of growth). Whole sub-sectors are likely to be de-layered out of existence. Any culture in which people derive their sense of self-worth from material affluence is likely to be undermined. Current distributions of income and wealth might not be tenable in a shrinking economy.

It remains to be discovered whether we have the intelligence (which is not the same thing as cleverness) to adapt ourselves to such fundamental changes.

Seen as a dress rehearsal for de-growth, the coronavirus crisis gives us scant reason to trust that “it’ll be alright on the night”.

 

 

#167. Tests and correctives

VALUE AT RISK, OIL PRICES CRUSHED – A SYSTEM ON TRIAL

In any moment of crisis, it’s easy to be pulled two ways, between the immediate and the fundamental. But it helps when, as now, we can recognise that both themes meet at the same point.

In this sense, “the 2020 Wuhan crisis” (or whatever it ends up being called) has acted as a catalyst for severe risks built into the system over a protracted period of mismanagement, incomprehension, self-interest, hubris and sheer folly.

Just so that you know what’s coming, this discussion is going to concentrate on two issues.

The first of these is the scope for value destruction in the current situation. Here I believe that the use of an independent benchmarking system – based on energy economics – provides an advantage over the monocular, ‘the economy is money’, way of looking at these things.

The main theme here, though, is energy in general, and oil in particular.

On the one hand, the consensus assumption is that we’ll be doing more of every sort of activity (including driving and flying) that depends on having more energy (and more petroleum) in the future than we have now.

On the other, however – and even before the recent slump in oil markets – crude prices simply can’t support even the maintenance of oil supply, let alone the 10-12% increase seemingly required by consensus expectations.

What I aim to do here is to explore this contradiction.

Before we start, though, I’d like to apologise to anyone who, over the past two weeks or so, has wondered why their comments seem to have vanished into the ether, or why there seems to have been much less debate here than usual. What appears to have happened – for no apparent reason, and wholly outside my control – has been that most notifications of comments awaiting approval have ceased to reach me. For the time being, and as frequently as possible, I’m going to review the list of outstanding comments manually.

Short shock, long folly, value exposed

Right now, as markets and sentiment gyrate wildly, we’re watching a fascinating intersection between the immediate and the fundamental playing out before our eyes.

The system that’s being shocked by the coronavirus crisis was a system that was already in very bad shape, and we can be pretty certain that, if the catalyst hadn’t (or maybe hasn’t yet) come from Wuhan, it would have (or assuredly will) come from somewhere else.

As somebody might have said, ‘if you build a monster, don’t be surprised if it bites you’ – and as somebody once did say, “some days you eat the bear, some days the bear eats you, and other days you both go hungry”. I’ll leave it to you to decide what roles greed, incomprehension and sheer folly have played in the building of the financial monster.

One of the critical issues now has to be the potential for ‘value destruction’ in the current crisis. Amongst the advantages of having an alternative, non-financial (energy) approach to economics is that it provides a second basis of measurement (in this case, the SEEDS prosperity benchmark) for just this kind of contingency.

‘Value’ really falls into two categories. The first is largely ‘notional’, and covers assets such as equities and property. Since nobody could ever monetise the entirety of either asset class, these ‘values’ are functions of the changing narratives that we tell ourselves about what things are ‘worth’. No money actually leaves somebody’s bank account because of a slump in the market price of his or her property or share portfolio.

‘Real’ value, on the other hand, consists of defined commitments which may become incapable of being honoured. The obvious example now is debt, on which businesses or households may be forced to default because their sources of income have dried up.

My approach here has been to use the Surplus Energy Economics Data System (SEEDS) to scroll back through the long years of financial excess in search of reference point ratios more sustainable than those of today.

Without burdening you with too much detail on this, SEEDS-based calculations suggest that up to 60% of the world’s private debt could be at risk, with the exposure of the broader structure of other financial assets at about 70%. My calculations are that up to $70 trillion of debts, and as much as $190tn of broader financial commitments, may be exposed.

Huge though they are, it must be emphasised that these are estimates of the scope for ‘value destruction’ – and how much of this scope turns into real losses depends upon many variables, chief amongst them being the duration and severity of the virus crisis, and the policies adopted by the monetary and fiscal authorities.

Assuming that these authorities act with more wisdom than they’ve exhibited so far – and stop firing off their scant remaining rate policy ammunition before the target comes over the hill – then the outcome isn’t likely to be anywhere nearly this bad, and a full-blown cascade of defaults can be avoided. Meanwhile, it’s possible to see stock markets settling perhaps 40% below their pre-crisis levels, with property prices down by 30%.

This, of course, presupposes that decision-makers don’t resort to putting so much gas back into the balloon that it really does detonate, leaving us scattered with the fragments of exploded hubris. In essence, do we use this event to re-group, or do we insist on ‘irrationality as usual’, regardless of cost?

After all, with the levers of the system in the hands of people who actually think that over-inflated stock markets, and over-priced property markets, are both ‘good’ things, there’s almost no degree of folly that can wholly be ruled out.

Energy – cutting away the foundations

Properly considered, there are two separate market crises happening now, both of them linked to the Wuhan coronavirus event.

One of these is the wave of falls in global stock markets, which the Fed and other central banks are trying, Canute-style, to stem. It would be far better if markets were left to get on with it, with the official effort concentrated on getting businesses and households through the hiatus in their cash flows.

The other crisis – linked to the epidemic by the anticipated sharp fall in petroleum demand, though triggered by a spat between major producers – is the sharp fall in the price of crude oil.

Some observers have suggested that the fall in oil prices will offer some relief for consuming economies, whilst others point out that the oil sector itself is going to be hit by a wave of financial failures, just as much the same thing might be poised to happen across vast swathes of the rest of the economy. The real issue, though, is how much damage this is going to inflict on the oil and gas industry, and where it leaves the industry’s ability to invest.

For those of us who understand that the economy is an energy system, the link between these events takes on a fundamental significance. Oil may be “only” 34% of global primary energy consumption, but it continues to account for a lot more than 90% of all energy used in transport applications. Fossil fuels (FFs), meanwhile, still provide more than four-fifths of world energy supply, a number that has changed only fractionally over decades.

Enthusiasts and idealists might talk about a post-fossil economy, just as the airline industry tells us that it can continue to grow whilst moving towards zero net carbon emissions. But, in both of these instances, as in others, there’s a very big gap between aspiration and actuality.

In search of neutral ground, we can do worse than look at long-range energy demand projections from the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and OPEC.

All three publish central case forecasts, essentially mixing consensus-based economic assumptions with the mix of policies in place around the world. In broad terms, all three are agreed that, unless there are changes to these central parameters, we’re going to be using 10-12% more oil in 2040 than we use today.

‘Please sir, can I have some more?’

If you look at these projections in greater detail, it further emerges that we’re going to be doing a lot more of the things for which oil, and energy more broadly, are pre-requisites.

We are, for example, going to be driving more, even though electrification should keep the rise in oil demand for road use pegged at single-digit percentages. By 2040, there are expected to be more than a billion (74%) more vehicles on the world’s roads than there are today. It seems to be assumed that, by then, about 40% of the global fleet will have been converted to EVs, but that will still see us using more oil on our roads – not less.

We’re also, it seems, going to be flying a lot more than we already do, requiring a lot more petroleum, despite an assumed pace of energy efficiency gains seemingly running at about 1.5% annually. My interpretation suggests that passenger-miles flown are expected to rise by about 90% over that same period, though, thanks to compounding efficiency gains, petroleum use in aviation is expected to rise by “only” about 38%.

Within the overall energy position, the expectation is that our consumption of primary energy will be about 28% greater in 2040 than it was in 2018. Within this increment (of 3,900 million tonnes of oil equivalent), about 12% (450 mmtoe) is expected to come from hydro, and 44% (1,720 mmtoe) from wind, solar and other forms of renewable energy (RE). Nuclear might chip in another 5% of the extra energy that we’re going to need.

But the remaining 39% or so of the required increase is going to have to come from expanded use of fossil fuels, some of it from oil though most of it from gas (though it’s also noteworthy that no reduction in our consumption of coal seems to be anticipated). From the above, it will hardly be a surprise (though it is certainly disturbing) that annual rates of CO2 emissions from the use of energy are expected to carry on rising.

If any of this is remotely likely, though, why are oil prices languishing around $30/b?

To be sure, we know that demand is going to be impacted by Wuhan, and that producers including Saudi and Russia are scrapping over who should absorb this downside. But oil prices were hardly robust, typically around $65/b, even before the epidemic became a significant factor.

The fact of the matter is that we simply cannot square oil prices of $30, or $60, or even $100, for that matter, with any scenario calling for increases in supply.

We all know that global oil supply has been supported by American shale production, which has in turn relied on subsidies from investors and lenders. Now, though, it’s becoming ever more apparent (as was set out in a recent official report from Finland) that even ‘conventional’ oil supply is in big economic trouble.

It’s a sobering thought that, were capital flows to dry up to the point where there was a complete cessation of new drilling, US shale liquids output would fall by about 50% within twelve months. But it’s an even more disturbing thought that, unless capital investment can be ramped up dramatically, conventional oil supply is going to erode, less spectacularly, perhaps, but relentlessly.

So here’s the question – how, under this scenario, are we supposed to find sources for an increase in oil supply going forward? More broadly, and with oil and gas generally produced by the same companies, can we really increase the supply of natural gas by more than 30% over the coming twenty years? And can we – and, for that matter, should we – be using just as much coal in 2040 as we do now?

No ‘get out of gaol free’ cards

Two suggestions tend to be offered in answer to such questions, so let’s get both of them out of the way now.

One of these is that the use of renewables – whose output is currently projected to rise from 560 mmtoe in 2018 to more than 2,280 mmtoe by 2040 – can grow even more rapidly than is currently assumed.

But the reality seems to be that meeting current assumptions – boosting hydro-electricity supply by 50%, and quadrupling power from other renewable sources – is already a tough ask. The unlikelihood of these ambitious targets being beaten is underscored in the figures.

Energy transition has been costed by IRENA at between $95 trillion and $110tn, the latter equivalent to 720x today’s equivalent of what it cost America to put a man on the Moon. This time, of course, it isn’t just rich countries that have somehow to find this level of investment, but poorer and middle-income nations, too.

Annual capital investment in REs was, in real terms, lower in 2018 than it had been back in 2011, mainly because prior subsidy regimes have tended not to be scalable in line with expansion. Yearly capacity additions, too, stalled in 2018.

The really critical snag with “big bang” transition is simple, but fundamental. RE technology has yet to prove itself truly “renewable”, because capacity creation, and the building of the related infrastructure, cannot yet be undertaken without the extensive use of fossil fuel energy in the supply of materials and components.

The second notion – which is that we can somehow “de-couple” the economy from the use of energy – is risible, even in an era in which we often seem to have “de-coupled” economic policy from reality. The EEB was surely right to liken the search for “de-coupling” to “a haystack without a needle”.

Until somebody can demonstrate how we can drive more, fly more, manufacture more goods and ship them around the world, build more capital equipment, and supply more of basics such as food and water, without using more energy, “de-coupling” will continue to look like a punch-line in search of a gag.

This is really a matter of physical limitations – and there’s no “app” for that.

Stand back………….

On the principle that “what can’t happen won’t happen”, we need to stand back and consider the strong possibility that the consensus of expectations for future energy supply is simply wrong.

Let’s assume, for working purposes, that RE supply does, as expected, expand by 2,170 mmtoe by 2040, and that hydro and nuclear, too, perform in line with consensus projections. In this scenario, supply of non-fossil fuel energy would, as specified, be higher by about 2,370 mmtoe in 2040 than it was in 2018.

At the same time, though, let’s make some rather more cautious assumptions, well supported by probabilities, about fossil fuels.

For starters, let’s assume that shale oil production doesn’t slump, and that other forms of oil production remain robust enough to keep total supplies roughly where they are now. This would mean that oil supply won’t have fallen by 2040, but neither will it have delivered the widely-assumed increase of 10-12%. Let’s further assume that gas availability rises by 15%, rather than by 30%, and that the use of coal falls by 10%.

In this illustrative scenario, fossil fuels supply remains higher in 2040 than it was in 2018, but by only about 300 mmtoe (+3%), instead of the generally-expected increase of 1,540 mmtoe (+13%). This in turn would mean that, comparing 2040 with 2018, total energy supply would be higher, not by the projected 28%, but by only about 19%.

…..and do less?

My belief is that this is a more realistic set of parameters than the ‘more of everything’ consensus about our energy future. If energy supply does grow by less than is currently assumed, growth in many of the things that we do with energy is going to fall short of expectations, too.

Let’s unpack this somewhat, to see where it might lead. First, if expectations for RE are achieved, we can carry on using more electricity, though not at past annual rates of expansion.

But less-than-expected access to oil would have some very specific consequences. With population numbers still growing, we’ll need to keep on increasing the supply of petroleum products to essential activities, such as the production, processing and distribution of food. You’ll know that my expectations for “de-growth” anticipate a lot of simplification and ‘de-layering’ of industrial processes, and there’s no reason why this shouldn’t apply to food supply. But it remains hard to see how we can supply more food from less oil.

In short, there are reasons to suppose that oil supply constraint is going to have a disproportionate and leveraged impact on the discretionary (non-essential) applications in which petroleum is used. At the same time, faltering energy supply – and a worsening trend in surplus energy, reflecting the rise in ECoEs – is likely to leave us a lot less prosperous than conventional, ‘economics is money’ projections seem to assume.

From here, it’s a logical progression to question, in particular, whether the assumption of continued rapid expansion in travel might, in reality, not happen. We could take – but, so far, haven’t taken – ameliorative actions, including limiting car engine sizes, and promoting a transition to public transport. My conclusion – which is tentative, but firming – is that we might be a lot nearer to ‘peak travel’ than anyone yet supposes.

The assumption right now seems to be that, as and when the virus crisis is behind us, we’ll go back to buying more cars and using them more often, flying more each year than we did the year before and, perhaps, rediscovering a taste for taking cruise-ship holidays.

Let’s just say that such an assumption might well prove to be a long way wide of the mark.

 

#163. Tales from Mount Incomprehension

THE FALSE DICHOTOMY CLINGS ON

There was more than a grain of logic in the observation by US treasury secretary Steven Mnuchin that climate activist Greta Thunberg should save her advice until “[a]fter she goes and studies economics in college”. If the authorities were to consent to her demand for the immediate cessation of the use of fossil fuels, the economy would crash and, quite apart from the misery that this would inflict on millions, we would have abandoned any capability to invest in a more sustainable way of life.

This said, taking a course in economics, as it is understood and taught conventionally, would not enhance, in the slightest, her understanding of the critical issues. Conventional economics teaches that economics is ‘the study of money’, and that energy is ‘just another input’. These claims cannot be called ‘contentious’. They are simply wrong.

Worse still, her audience at Davos – the Alpine pow-wow of the world’s political and economic high command – are almost wholly persuaded by a false interpretation which states that action on climate risks carries a “cost”, meaning that doing what she asks would be costlier than carrying on as we are, with an economy powered by oil, gas and coal.

This is a folly every bit as absolute as the argument that we must immediately cease all use of the energy sources on which the economic growth of the past two centuries has been based. Continued reliance on fossil fuels might or might not destroy the environment, but it would certainly condemn the economy to collapse.

A commonality of interests

Because I have an extensive ‘to-do’ list – and in the hope that readers might appreciate some brevity on this issue – let me be absolutely clear that neither side of the debate over the economy and the environment understands how these processes really work. Worse still, it seems that neither side wants to understand this reality.

There’s a hugely damaging false dichotomy around the assumption that there’s some kind of trade-off between our environmental and our economic best interests. If “Davos man” thinks that the economy can prosper so long as we cherry-pick the profitable bits of the environmental agenda (like carbon trading, and forcing everyone to buy a new car), and pour bucket-loads of greenwash over the rest of it, he (or she) could not be more wrong

Because literally none of the goods and services which comprise the economy could be produced without energy, it should hardly be necessary to point out that the economy is an energy system. Equally, it should be obvious that, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This access component is known here as the Energy Cost of Energy (ECoE), and it forms a critical part of the equation which determines our prosperity.

The third part of this ‘trilogy of the blindingly obvious’ is that money has no intrinsic worth, and commands value only as a ‘claim’ on the products of energy. I make no apology for repeating that air-dropping cash (or any other form of money) to a person stranded in the desert, or cast adrift in a lifeboat, would bring him or her no assistance whatsoever.

Money is simply a medium of exchange, valid only when there is something for which it can be exchanged.

The complexity trap

The modern industrial economy is not only enormous by historic standards, but is extraordinarily complex as well. Scale and complexity make the modern economy high-maintenance in energy terms. Output grew rapidly in the period (roughly between 1945 and 1965) when trend ECoEs were at their historic nadir, but has struggled since then, as ECoEs have risen.

Analysis undertaken using SEEDS (the Surplus Energy Economics Data System) indicates that prosperity in the Advanced Economies (AEs) of the West ceased to grow when ECoEs hit a range between 3.5% and 5%. Less complex Emerging Market (EM) economies have greater ECoE tolerance, but they, too, start to become less prosperous once ECoEs reach levels between 8% and 10%. Both China and India have now entered this ‘growth killing ground’.

Back in the high-growth post-War decades, ECoEs were between 1% and 2%. By 2000, though, global trend ECoE had reached 4.1%, which is why the advanced West was already encountering something which bewildered economists labelled “secular stagnation”, though they were at a loss to explain why it was happening. By 2008 – when ECoE had reached 5.6% – efforts at denial based on credit adventurism had achieved nothing other than an escalation in risk which brought the credit (banking) system perilously close to the brink.

Since then, and whilst futile exercises in denial have segued into monetary adventurism, ECoE has continued its relentless rise. Last year, world trend ECoE broke through the 8% threshold at which prior growth in EM prosperity goes into reverse. This, ultimately, explains why global trade in goods is deteriorating, and why sales of everything from cars and smartphones to chips and components are sliding.

The average person in the West has been getting poorer for more than a decade, and, increasingly, he or she knows it, whatever claims to the contrary are made by decision-makers who, for the most part, still don’t understand how the economy really works.

Something very similar now looms for EM countries and their citizens – and, when evidence of EM economic deterioration becomes irrefutable, the myth of “perpetual growth” in the world economy will be exploded once and for all.

When that happens, all of the false assumptions on which a bloated financial system relies will crumble away.

Tenacious irrationality

The irony here is that, far from avoiding economy-damaging “costs”, continued reliance on fossil fuels would be a recipe for economic oblivion. The destructive upwards ratchet in ECoEs is driven by fossil fuels, which still provide four-fifths of our energy supply, and whose costs are rising exponentially now that depletion has taken over from scale and reach as the primary driver of cost. Far from imposing “costs” that will push us towards economic impoverishment, transitioning away from fossil fuels is the best way of minimising future hardship.

This means that economic considerations, when they are properly understood, support, rather than undermine, the arguments put forward by environmentalists.

But we should be equally wary of claims that renewable energy (RE) can usher in some kind of economic nirvana. The ECoEs of REs are highly unlikely ever to fall below 10%, a point far above prosperity maintenance thresholds (of 3.5-5% in the West, and 8-10% in the EMs), let alone give us a return to the ultra-low ECoEs of the post-1945 era of high growth.

Critically, transition to REs would require vast amounts of inputs whose supply relies almost entirely on the use of FFs. The idea that we can somehow “de-couple” economic activity from the use of energy, meanwhile, is utterly asinine.

The only logical conclusion is that we should indeed transition towards REs, but should not delude ourselves that doing this can spare us from deteriorating prosperity, or from other processes (such as de-complexification and de-layering) associated with it. The one-off gift of vast surplus energy from fossil sources is fading away, which, from an environmental point of view, might be just as well. What matters now is that we manage, in a pragmatic and equitable way, the transition to lower levels of energy use and gradually eroding prosperity.

It’s a disturbing thought that our economic and environmental futures are trapped in a slanging match between green fanaticism and Davos-typified cynicism. It’s a truism, of course, that people tend to believe what they want to believe – but this is a point at which the reality of energy as the critical link between prosperity and the planet needs to force its way to the fore.

If there’s cause for optimism here, it is that reality usually triumphs over wishful thinking. The only real imponderables about this are the duration of the transition to reality, and the scale of the damage that protracted delusion will inflict.

#161. A welcome initiative

MR CUMMINGS’ BOLD ENDEAVOUR

As we’ve been discussing here, Dominic Cummings, senior policy advisor to British premier Boris Johnson, has issued a clarion call for “data scientists, project managers, policy experts, assorted weirdos” and others to join an effort to transform the workings of government.

Here is how Mr Cummings defines his objectives:

“We want to improve performance and make me much less important — and within a year largely redundant. At the moment I have to make decisions well outside what Charlie Munger calls my ‘circle of competence’ and we do not have the sort of expertise supporting the PM and ministers that is needed. This must change fast so we can properly serve the public”.

Let me start by making two points about this initiative. The first is to commend Mr Cummings for taking it. New thinking is needed as never before in government, not just in Britain but around the World.

The second is that I think Mr Cummings has a better-than-evens chance of success. He’s not the first person in government to try to think “the unthinkable” or “outside the box”, but conditions do look propitious.

The long-running political guerrilla war over “Brexit” has had a numbing effect in numerous important areas, not just on policy but on constructive debate, so there’s a lot of catching up to do. My hunch (and it’s not much more than that) is that Mr Johnson is more open than his predecessors to genuinely new thinking. Additionally, of course, his large Parliamentary majority will help very considerably.

So, too, will the fact that his Labour opponents are in such disarray that they might even replace Mr Corbyn with somebody who still thinks that trying to stymy the voters’ decision over leaving the EU was a good idea. Labour, it should be said, has a vital part to play in the political discourse, but cannot do this effectively until it reinstalls issues of economic inequality at the top of its agenda.

Lastly, and notwithstanding the kind (and beyond-my-merits) encouragement of some contributors here, I’m not going to be sending my CV to Downing Street. This, at least, frees me to muse on what I would be saying if I were submitting an application.

First and foremost, I’d urge Mr Cummings to recognize that the economy is an energy system. This will require no explanation to regular visitors here, but I would add that this interpretation can enable us to place our thinking about economics on a scientific footing. The ‘conventional’ form of economics which portrays the economy in purely financial terms may or may not be “gloomy”, but it certainly isn’t a “science”. We’ve spent the best part of two decades finding out that ‘tried and tested’ financial paradigms range from the incomplete to the outright mistaken, and that pulling financial levers doesn’t work.

Mr Cummings won’t need me to tell him that paying people to borrow (as we’ve been doing ever since 2008), whilst penalising savers, is a very bad idea. I’m sure he will appreciate, too, that trying to run a supposedly “capitalist” system without positive returns on capital is a contradiction in terms. Moreover, those of us who believe in the proper working of markets cannot applaud a situation in which asset prices are propped up by intervention. Any country which deliberately supports over-inflated property prices ought to face tough questioning from the younger members of the electorate.

Second, I’d suggest to Mr Cummings that recognition of the energy-determined character of the economy reframes the debate about the environment. I would steer him towards sources which debunk the illogical notion that we can “de-couple” the economy from the use of energy. Economic prosperity, and the broader well-being embodied in environmental and ecological issues, share the common axis of energy.

Getting into the nitty-gritty, and being wholly candid about the situation, I would go on to contend that the energy equation, which hitherto has driven our prosperity upwards, has turned against us. That, after all, is why we’ve been trying one financial gimmick after another in an effort to convince ourselves that “growth” in our prosperity is continuing, when a huge amount of evidence surely demonstrates that it is not.

In the United Kingdom, “growth” (of 26%) between 2003 and 2018 added £430 billion to GDP, but at the cost of £2.16 trillion in net borrowing. You don’t need a degree in advanced mathematics to recognize that borrowing £5 in order to purchase “growth” of £1 isn’t a sustainable plan.

In Britain, as in most other Western countries, a very large part of the “growth” recorded in recent years has been a simple function of spending borrowed money. If we stopped borrowing (leaving debt where it is now), rates of growth would gravitate to somewhere barely above zero. Trying to reduce debt to its level at some earlier time would eliminate a lot of the “growth” recorded in the past into reverse, leaving GDP a lot lower than it is today.

Adding rising ECoEs into the equation, I would seek to demonstrate that the prosperity of the average Western citizen has been deteriorating for more than a decade. Increasing taxation, meanwhile, has been making this worse. Over a fifteen-year period in which the average British person has become £2,570 (10%) less prosperous, his or her burden of tax has increased by £2,240.

Of course, one cannot expect statistical, model-based numbers to make a wholly persuasive case, especially when the techniques involved avowedly ditch conventional notations. But I would urge Mr Cummings to look at a range of other indicators in order to triangulate some conclusions. Such indicators would include homelessness, the relentless rise of consumer credit, the dependency of the economy on credit-funded consumption, the associated symptoms of debt distress, and the millions generally recognized to be “just about managing”. He could reflect, too, on correlations that can be drawn between adverse trends in prosperity and rising public discontent, whether on the streets of Paris or in the voting booths of the United States and much of Europe.

Finally, none of this would be presented as a cause for despair. Accepting that government cannot make people richer doesn’t involve concluding that it cannot make them more contented.

The smart move at this point is to recognize what’s really happening, steal a march on those still in ignorance and denial, and work out how to improve the quality, both of people’s lives and of the society in which they live.

#157. Trending down

THE ANATOMY OF DEGROWTH – A SEEDS ANALYSIS

Unless you’ve been stranded on a desert island, cut off from all sources of information, you’ll know that the global economy is deteriorating markedly, whilst risk continues to increase. Even the most perennially optimistic observers now concede that the ultra-loose policies which I call ‘monetary adventurism’, introduced in response to the 2008 global financial crisis (GFC), haven’t worked. Popular unrest is increasing around the world, even in places hitherto generally regarded as stable, with worsening hardship a central cause.

As regular readers know, we’ve seen this coming, and have never been fobbed off by official numbers, or believed that financial gimmickry could ‘fix’ adverse fundamental trends in the economy. Ultimately, the economy isn’t, as the established interpretation would have us believe, a financial system at all. Rather, it’s an energy system, driven by the relationship between (a) the amount of energy to which we have access, and (b) the proportion of that energy, known here as ECoE (the Energy Cost of Energy), that is consumed in the access process.

Properly understood, money acts simply as a ‘claim’ on the output of the energy economy, and driving up the aggregate of monetary claims only increases the scope for their elimination in a process of value destruction.

We’ve been here before, most recently in 2008, and still haven’t learned the brutal consequences of creating financial claims far in excess of what a deteriorating economy can deliver.

The next wave of value destruction – likely to include collapses in the prices of stocks, bonds and property, and a cascade of defaults – cannot much longer be delayed.

What, though, is happening to the real, energy-driven economy? My energy-based economic model, the Surplus Energy Economics Data System (SEEDS), is showing a worsening deterioration, and now points to a huge and widening gap between where the economy really is and the narrative being told about it from the increasingly unreal perspective of conventional measurement.

The latest iteration, SEEDS 20, highlights the spread of falling prosperity, with the average person now getting poorer in 25 of the 30 countries covered by the system, and most of the others within a very few years of joining them..

To understand why this is happening, there are two fundamental points that need to be grasped.

First, the spending of borrowed money doesn’t boost underlying economic output, but simply massages reported GDP into apparent conformity with the narrative of “perpetual growth”.

Second, conventional economics ignores the all-important ECoE dimension of the energy dynamic that really drives the economy.

Overstated output – GDP and borrowing

Ireland is an interesting (if extreme) example of the way in which the spending of borrowed money, combined in this case with changes of methodology dubbed “leprechaun economics”, has driven recorded GDP to levels far above a realistic appraisal of economic output.

According to official statistics, the Irish economy has grown by an implausible 62% since 2008, adding €124bn to GDP, and, incidentally, giving the average Irish citizen a per capita GDP of €66,300, far higher than that of France (€36,360), Germany (€40,340) or the Netherlands (€45,050).

What these stats don’t tell you is that, over a period in which Irish GDP has increased by €124bn, debt has risen by €316bn. It’s an interesting reflection that, stated at constant 2018 values, Irish debt is 85% higher now (at €963bn) than it was on the eve of the GFC in 2007 (€521bn).

When confronted with this sort of mix of GDP and debt data, two questions need to be asked.

First, where would growth be if net increases in indebtedness were to cease?

Second, where would GDP have been now if the country hadn’t joined in the worldwide debt binge in the first place?

Where Ireland is concerned, the answers are that trend growth would fall to just 0.4%, and that underlying, ‘clean’ GDP (C-GDP) would be €212bn, far below the €324bn recorded last year.

In passing, it’s worth noting that this 53% overstatement of economic output has dramatic implications for risk, driving Ireland’s debt/GDP ratio up from 297% to 454%, and increasing an already-ludicrous ratio of financial assets to output up from 1900% to a mind-boggling 2890%.

These ratios are rendered even more dangerous by a sharp rise in ECoE, but we can conclude, for now, that the narrative of Irish economic rehabilitation from the traumas of 2008 is eyewash. Indeed, the risk module incorporated into SEEDS in the latest iteration rates the country as one of the riskiest on the planet.

Though few countries run Ireland close when it comes to the overstatement of economic output, China goes one further, with GDP (of RMB 88.4tn) overstating C-GDP (RMB 51.1tn) by a remarkable 73%. Comparing 2018 with 2008, Chinese growth (of RMB 47.2tn, or 115%) has happened on the back of a massive (RMB 170tn, or 290%) escalation in debt. SEEDS calculations put Chinese trend growth at 3.1% – and still falling – versus a recorded 6.6% last year, and put C-GDP at RMB 51tn, 42% below the official RMB 88.4tn. Essentially, 62% (RMB 29tn) of all Chinese “growth” (RMB 47tn) since 2008 has been the product of pouring huge sums of new liquidity into the system.

In each of the last ten years, remarkably, Chinese net borrowing has averaged almost 26% of GDP, a calculation which surely puts the country’s much-vaunted +6% rates of “growth” into a sobering context. After all, GDP can be pretty much whatever you want it to be, for as long as you can keep fuelling additional ‘activity’ with soaring credit. Even second-placed Ireland has added debt at an annual average rate of ‘only’ 13.5% of GDP over the same period, with Canada third on this risk measure at 11.5%, and just three other countries (France, Chile and South Korea) exceeding 9%. China and Ireland are the countries where cosmetic “growth” is at its most extreme.

Fig. 1 sets out a list of the ten countries in which GDP is most overstated in relation to underlying C-GDP. The table also lists, for reference, these countries’ annual average borrowing as percentages of GDP over the past decade, though it’s the relationship between this number and recorded growth which links to the cumulative disparity between GDP and C-GDP.

Fig. 1

Of course, C-GDP is a concept unknown to ‘conventional’ economics, to governments or to businesses, which is one reason why so much “shock” will doubtless be expressed when the tide of credit-created “growth” goes dramatically into reverse.

Those of us familiar with C-GDP are likely to be unimpressed when we hear about an “unexpected” deterioration in, and a potential reversal of, “growth” of which most was never really there in the first place.

The energy dimension – ECoE and prosperity

Whilst seeing through the use of credit to inflate apparent economic output is one part of understanding how economies really function, the other is a recognition of the role of ECoE. The Energy Cost of Energy acts as a levy on economic output, earmarking part of it for the sustenance of the supply of energy upon which all future economic activity depends.

As we have discussed elsewhere, depletion has taken over from geographic reach and  economies of scale as the main driver of the ECoEs of oil, gas and coal. Because fossil fuels continue to account for four-fifths of the total supply of energy to the economy, the relentless rise in their ECoEs dominates the overall balance of the energy equation.

Renewable sources of energy, such as wind and solar power, are at an earlier, downwards point on the ECoE parabola, and their ECoEs are continuing to fall in response to the beneficial effects of reach and scale. The big difference between fossil fuels and renewables, though, is that the latter are most unlikely ever to attain ECoEs anywhere near those of fossil fuels in their prime.

Whereas the aggregated ECoEs of oil, gas and coal were less than 2% before the relentless effects of depletion kicked in, it’s most unlikely that the ECoEs of renewables can ever fall below 10%. One of the reasons for this is that constructing and managing renewables capacity continues to depend on inputs from fossil fuels. This makes renewable energy a derivative of energy sourced from oil, gas and coal. To believe otherwise is to place trust in technology to an extent which exceeds the physical capabilities of the resource envelope.

This, it must be stressed, is not intended to belittle the importance of renewables, which are our only prospect, not just of minimizing the economic impact of rising fossil fuel ECoEs, but of preventing catastrophic damage to the environment.

Rather, the error – often borne of sheer wishful thinking – lies in believing that renewables can ever be a like-for-like replacement for the economic value that has been provided by fossil fuels since we learned to harness them in the 1760s. The vast quantities of high-intensity energy contained in fossil formations gave us a one-off, albeit dramatic, economic impetus. As that impetus fades away, it would be foolhardy in the extreme to assume that the economy can, or even must, continue to behave as though that impetus can exist independently of its source.

For context, SEEDS studies show that the highly complex economies of the West become incapable of further growth in prosperity once their ECoEs enter a range between 3.5% and 5.5%.

As fig. 2 shows, the first major Western economy to experience a reversal of prior growth in prosperity per capita was Japan, whose deterioration began in 1997. This was followed by downturns in France (from 2000), the United Kingdom (2003), the United States (2005) and, finally, Germany, with the deterioration in the latter deferred to 2018, largely reflecting the benefits that Germany has derived from her membership of the Euro Area.

Fig. 2

Less complex emerging economies have greater ECoE tolerance, and are able to continue to deliver growth, albeit at diminishing rates, until ECoEs are between 8% and 10%. These latter levels are now being reached, which is why prosperity deterioration now looms for these economies as well.

As fig. 3 illustrates, two major emerging economies, Mexico and Brazil, have already experienced downturns, commencing in 2008 and 2013 respectively. Growth in prosperity per person is projected to go into reverse in China from 2021, with South Korean citizens continuing to become more prosperous until 2029. The latter projected date, however, may move forward if the Korean economy is impacted by worldwide deterioration to a greater extent than is currently anticipated by SEEDS.

Fig. 3

Consequences – rocking and rolling

As we’ve seen, then – and for reasons simply not comprehended by ‘conventional’ interpretations of the economy – worldwide prosperity has turned down, a process that started with the more complex Western economies before spreading to more ECoE-tolerant emerging countries.

For reasons outlined above, no amount of financial tinkering can change this fundamental dynamic.

At least three major consequences can be expected to flow from this process. Though these lie outside the scope of this analysis, their broad outlines, at least, can be sketched here.

First, we should anticipate a major financial shock, far exceeding anything experienced in 2008 (or at any other time), as a direct result of the widening divergence between soaring financial ‘claims’ and the reality of an energy-driven economy tipping into decline. SEEDS 20 has a module which provides estimates of exposure to value destruction, though its indications cannot do more than suggest orders of magnitude. Current exposure is put at $320tn, far exceeding the figure of less than $70tn (at 2018 values) on the eve of the GFC at the end of 2007. This suggests that the values of equities, bonds and property are poised to fall very sharply indeed, something of a re-run of 2008, though with the critical caveat that, this time, no subsequent recovery is to be anticipated.

Second, we should anticipate a rolling process of contraction in the real economy of goods and services. This subject requires a dedicated analysis, but we are already witnessing two significant phenomena.

Demand for “stuff” – ranging across a gamut from cars and smartphones to chips and components – has started to fall, a trend likely to be followed by falling requirements for inputs.

Meanwhile, whole sectors of industry, including retailing and leisure, have experienced severe downturns in profitability. Utilization rates and interconnectedness are amongst the factors likely to drive a de-complexifying process that is a logical concomitant of deteriorating prosperity. This in turn suggests that a widening spectrum of sectors will be driven to and beyond the threshold of viability.

Finally, the political challenge of deteriorating prosperity is utterly different from anything of which we have prior experience, and it seems evident that this is already contributing to worsening unrest, and to a challenge to established leadership cadres. This process is likely to relegate non-economic agendas to the lower leagues of debate, and has particular implications for policy on redistribution, migration, taxation and the provision of public services.

My intention now is to use SEEDS to provide ongoing insights into some of the detail on issues discussed here. If we’re right about the economic direction of travel, what lies ahead lies quite outside the scope of past experience or current anticipation.   

 

#153. One for the sceptics

THE STRICTLY ECONOMIC CASE FOR ENERGY TRANSITION

We need to be rather careful about the term “opinion is divided”.

When English league champions Manchester City were drawn to play fourth-tier minnows Newport County in the F.A. Cup, the opinions of football-watchers over the expected outcome probably were “divided” – but only in the sense that, whilst 99% expected the giants to win, only 1% hoped (in vain, as it turned out) for a miracle.

The same caution should apply to any claim that informed opinion is “divided” over the threat to the environment. Even if you’re not convinced by the concept of climate change, or of human activity as one of its main causes, you’d struggle to dismiss species extinction, water supply exhaustion, land degradation, desertification, melting glaciers or simple pollution as figments of the imagination.

We don’t, after all, have to assume that absolutely everything ever stated by ‘the establishment’ or the mainstream media is a pack of porky-pies, even if quite a lot of it is.

There’s one point, though, which really does need to be addressed. This is the widespread assumption that environmental and economic objectives are opposed, and that tackling environmental imperatives will have an economic “cost”.

This is a wholly false dichotomy. Far from ensuring ‘business as usual’, continued reliance on fossil fuel energy would have devastating economic consequences. As is explained here, the world economy is already suffering from these effects, and these have prompted the adoption of successively riskier forms of financial manipulation in a failed effort to sustain economic ‘normality’.

If you take just one point from this discussion, it should be that a transition to sustainable forms of energy is every bit as important from an economic as from an environmental imperative.

“What if?” A contrarian hypothesis

To explain this, what follows begins from a hypothetical basis that ‘there’s no truth in the story of man-made climate damage’.

Just for the moment, I’d like you to suspend your disbelief – as, writing this, I’ve had to suspend mine – and adopt the starting position that human activity, and in particular our use of energy, isn’t threatening the planet.

If they were of this persuasion, what conclusions might be reached by decision-makers in government and business?

It’s probable that, stripped of the environmental imperative, the case for transitioning our supplies of energy, away from fossil fuels and towards renewable sources such as solar and wind power, would either be dismissed altogether, or watered down to the point of irrelevance.

Even as things stand, efforts to transition to sustainable sources of energy are faltering.

Once persuaded that we could do so safely, there would be considerable support – reinforced by the human traits of self-interest, conservatism and inertia – for taking a “business as usual” approach, in which oil, gas and coal remained, as they are now, the source of fourth-fifths of the energy that we consume.

From this start-point, a great deal of inconvenience could be prevented. We wouldn’t need to change our practices, or our way of life. We could carry on travelling in gasoline- or diesel-powered vehicles. Holidaying abroad would remain an activity with a future. We needn’t expend huge sums in plastering our countryside with wind turbines and solar panels. We’d be likely to abandon vastly-expensive, technically unproven plans to switch over almost entirely to EVs (electric vehicles), confining them instead to marginal urban use. By heading off the need for drastic increases in power supply, this in turn would make it easier for industry to keep on coming up with new products and processes (like drones and robotics) which call for increases in our use of electricity.

In short, in a purely hypothetical situation in which it could be proved that the environmental activists were wrong, there’d be a huge collective sigh of relief, from government, business and the general public alike. Few people, after all, really like change and disruption.

The energy reality of the economy

What has to be emphasized – indeed, it cannot be stressed too strongly – is that, even if it were environmentally safe to carry on relying on fossil fuels, doing so could be expected to cripple the economy within, at most, twenty-five years.

Indeed, the process of economic deterioration is already well under way.

That this is not generally understood results primarily from the mistaken view that the economy is ‘a financial system’.

It has long been traditional for us to think of the economy in this way. This, in part, is a legacy of the founders of economics, men like Adam Smith, David Ricardo and James Mill. They established what are called the “laws” of economics from a financial perspective. They demonstrated the way in which the pricing process determines supply and demand. Specifically, they contended that, if there’s a shortage of something, the solution is to raise its price, thereby encouraging increased supply. All of their work, then, was expressed in the notation of money.

We should be in no doubt that these founding fathers of economic interpretation have bequeathed us invaluable lessons, of which none is more important than the role of free, fair and uncluttered competition in promoting economic progress. The successors to the early pioneers have added new economic interpretations, of course, but almost all of these are money-based theories, which perpetuate the idea that the economy is a financial system.

But the founders of classical economics lived in a world totally different to that of today. Smith died in 1790, Ricardo in 1823, and Mill in 1836, and even Mill’s son, John Stuart passed away in 1873, which was 99 years before the publication of The Limits To Growth. In their era, there was little or no reason for anyone (other than the maverick Thomas Malthus) to think about physical limitations, still less of the environmental issues that have entered our consciousness over the last twenty-five years or so.

They were right to state that higher prices can stimulate the supply of shoes or beer – but no increase in price can conjure forth new, giant and low-cost oil fields where these do not exist.

There can be few, if any, other matters of twenty-first-century importance which are tackled on the basis of eighteenth-century precepts. Neither, logically considered, is there any reason for clinging on to monetary interpretations of the economy.

If, as in fig. 1, we look at the relationship between, on the one hand, global population numbers (and related economic activity), and, on the other, the use of energy, we can see an unanswerable case for linking the two. It’s no coincidence at all that the exponential upturn in the world’s population took off at the same time that, thanks to James Watt’s 1776  invention of the first effective heat-engine, we learned how to harness the vast energy potential contained in fossil fuels.

Not just the size of the world economy, but its prosperity and complexity, too, are products of the Prometheus unleashed by Watt and his fellow inventors.

Fig. 1.

Moreover, observation surely tells us that literally everything that constitutes the ‘real’ economy of goods and services relies entirely on energy. Without energy supplies, the economy would grind to a halt, and the society built on it would disintegrate.

After all, if you were adrift in a lifeboat in mid-Atlantic, and a passing aircraft dropped you a huge pile of banknotes, but no water or food, you’d soon realize that money has no intrinsic worth, but commands value only in terms of the things for which it can be exchanged.

Money, then, acts simply as a claim on the products of an economy which, itself, is an energy system.

The cost component

Anyone who understands the energy basis of the economy knows that the supply of energy is never cost-free, though the relevant measure of cost needs to be stated in energy rather than financial terms. Drilling a well, digging a mine, building a refinery or laying a pipeline requires the use of energy inputs, as, for that matter, does installing a wind-turbine or a solar panel, or constructing an electricity distribution grid.

This divides the aggregate of available energy into two streams – the energy which has to be consumed in providing a continuity of energy supply, and the remaining (“surplus”) energy which powers all other economic activity.

The cost component is known here as the Energy Cost of Energy (ECoE). This is the critical determinant of the ability of surplus energy to drive economic activity. Low ECoEs provide a large surplus on which to build prosperity, but rising ECoEs erode this surplus, making us poorer.

Further investigation reveals that, where fossil fuels are concerned, four factors determine the level of ECoE.

One of these is geographic reach – by extending its operations from its origins in Pennsylvania to places as far afield as the Middle East and Alaska, the oil industry lowered ECoE by finding new, low-cost sources of supply.

A second is economies of scale – a plant handling 300,000 b/d (barrels per day) of oil is a lot more cost-efficient than one handling only 30,000 b/d.

Now, though, the maturity of the oil, gas and coal industries is such that the benefits of scale and reach have arrived at their limits. This is where the third factor steps in to determine ECoE – and that factor is depletion.

What depletion means is that the lowest-cost sources of any energy resource are used first, leaving costlier alternatives for later.

The crux of our current predicament is that ‘later’ has now arrived. There are no new huge, low-cost sources of oil, gas or coal waiting to be developed.

From here on, ECoEs rise.

To be sure, advances in technology can mitigate the rise in ECoEs, but technology is limited by the physical properties of the resource. Advances in techniques have reduced the cost of shale liquids extraction to levels well below the past cost of extracting those same resources, but have not turned America’s tight sands into the economic equivalent of Saudi Arabia’s al Ghawar, or other giant discoveries of the past.

Physics does tend to have the last word.

Unravelling economic trends

Once we understand the processes involved, we can see recent economic history in a wholly new way. The narrative since the late 1990s can be summarised, very briefly, as follows.

According to SEEDS – the Surplus Energy Economics Data System – world trend ECoE rose from 2.9% in 1990 to 4.1% in 2000. This increase was more than enough to stop Western prosperity growth in its tracks.

Unfortunately, a policy establishment accustomed to seeing all economic developments in purely financial terms was at a loss to explain this phenomenon, though it did give it a name – “secular stagnation”.

Predictably, in the absence of an understanding of the energy basis of the economy, recourse was made to financial policies in order to ‘fix’ this slowdown in growth.

The first such initiative was credit adventurism. It involved making debt easier to obtain than ever before. This approach was congenial to a contemporary mind-set which saw ‘deregulation’ as a cure for all ills.

The results, of course, were predictable enough. Expressed in PPP-converted dollars at constant 2018 values, the world economy grew by 36% between 2000 and 2008, adding $26.8 trillion to recorded GDP. Unfortunately, though, debt escalated by $61.5tn over the same period, meaning that $2.30 had been borrowed for each $1 of “growth”. At the same time, risk proliferated, and became progressively more opaque. Excessive debt and diffuse risk led directly to the 2008 global financial crisis (GFC).

With depressing inevitability, the authorities once again responded financially, this time adding monetary adventurism to the credit variety that had created the GFC. In defiance of a minority who favoured letting market forces work through to their natural conclusions (and who probably were right), the authorities opted for ZIRP (zero interest rate policy). They implemented it by slashing policy rates to all-but-zero, simultaneously driving market rates down by using newly-created money to buy up the prices of bonds.

This policy bailed out reckless borrowers and rescued imprudent lenders, but did so at a horrendous price. Since 2008, we’ve been adding debt at the rate of $3.10 for each $1 of “growth”. The proper functioning of the market economy has been crippled by the distortions of monetary manipulation. The essential regenerative process of ‘creative destruction’ has been stopped in its tracks by policies which have allowed ‘zombie’ companies to stay afloat. Asset prices have soared to stratospheric levels, supported by a tide of debt which can never be repaid, and can be serviced only on the assumption of perpetual injections of negatively-priced credit. The collapse in returns on invested capital has blown a gigantic hole in pension provision. As the Federal Reserve is in the process of discovering, no route exists for a restoration of monetary normality. We are, in short, stuck with monetary adventurism until it reaches its point of termination.

The relentless rise of ECoE   

Back in the real economy, meanwhile, ECoEs keep rising. SEEDS calculates that global trend ECoE has risen from 4.1% in 2000, and 5.6% in 2008 (the year of the GFC), to 8.1% now. Critically, the upwards trajectory of ECoE has become exponential, with each incremental increase bigger than the one before.

As this trend has progressed, prosperity has turned downwards, initially in the advanced economies of the West.

To understand this process, we need first to look behind GDP figures which have been inflated by the simple spending of borrowed money. In the decade since 2008, an increase of $34tn in world GDP has been accompanied by a $106tn surge in debt. What this means is that most of the reported “growth” in GDP has been bogus. Rates of apparent “growth” would slump to, at best, 1.5% if we stopped pouring in new credit, and would go into reverse if we ever tried to deleverage the world’s balance sheet.

Once we’ve established the underlying rate of growth – as a “clean” measure of GDP which excludes the effects of credit injection – we can apply ECoE to see what’s really been happening to prosperity.

In the West, people have been getting poorer over an extended period. Prosperity per capita has fallen by 7.2% in the United States since 2005, and by 11.3% in Britain since 2003. Deterioration in most Euro Area economies has been happening for even longer. Not even resource-rich countries like Canada or Australia have been exempt. As an aside, this process of impoverishment, often exacerbated by taxation, can be linked directly to the rise of insurgent political movements sometimes labelled “populist”.

The process which links rising ECoE to falling prosperity is illustrated in figs. 2 and 3. In America, prosperity per person turned down when ECoE hit 5.5%, whereas the weaker British economy started to deteriorate at an ECoE of just 3.4%.

Fig. 2 & 3.

World average prosperity per capita has declined only marginally since 2007, essentially because deterioration in the West has been offset by continued progress in the emerging market (EM) economies. This, though, is nearing its point of inflexion, with clear evidence now showing that the Chinese economy, in particular, is in very big trouble.

As you’d expect, these trends in underlying prosperity have started showing up in ‘real world’ indicators, with trade in goods, and sales of everything from cars and smartphones to computer chips and industrial components, now turning down. As the economy of “stuff” weakens, a logical consequence is likely to be a deterioration in demand for the energy and other commodities used in the supply of “stuff”.

Simply stated, the economy has now started to shrink, and there are limits to how long we can hide this from ourselves by spending ever larger amounts of borrowed money.

Safe to continue?

Let’s revert now to our hypothetical situation in which, unconcerned about the environment, we remain resolutely committed to an economy powered by fossil fuels.

The critical question becomes that of what then happens to the economy moving forwards.

Unfortunately, the ECoEs of fossil fuels will keep rising. SEEDS puts the combined ECoE of fossil fuels today at 10.7%, a far cry from the level in 2008 (6.5%), let alone 1998 (4.2%). Projections show fossil fuel ECoEs hitting 12.5% by 2024, and 14.5% by 2030.

For context, SEEDS studies indicate that, in the advanced economies of the West, prosperity turns down once ECoEs reach a range between 3.5% and 5.5%. Because of their lesser complexity, EM countries enjoy greater ability to cope with rising ECoEs, but even they have their limits. SEEDS analysis identifies an ECoE band of between 8% and 10% within which EM prosperity turns down. Sure enough, China’s current travails coincide with an ECoE which hit 8.7% last year, and is projected to rise from 9.0% in 2019 to 10.0% by 2025. A similar climacteric looms for South Korea  (see figs. 4 & 5).

Figs. 4 & 5

In short, then, continued reliance on fossil fuels would condemn the world economy to levels of ECoE which would destroy prosperity.

Hidden behind increasingly desperate (and dangerous) financial manipulation, the world as a whole has been getting poorer since ECoE hit 5.5% in 2007. As more of the EM economies hit the “downturn zone” (ECoEs of 8-10%), the so-far-gradual impoverishment of the average person worldwide can be expected to accelerate.

After that, various adverse consequences start to impact the system. The financial structure cannot be expected to cope with much more of the strain induced by denial-driven manipulation. The political and geopolitical consequences of worsening prosperity, exacerbated perhaps by competition for resources, can be left to the imagination. Economic systems dependent on high rates of capacity utilization can be expected to fail.

This, then, is the grim outlook for a world continuing to rely on fossil fuels. Even if this continued reliance on oil, gas and coal won’t destroy the environment, it can be expected, with very high levels of probability, to wreck the economy.

Even as things stand today, the energy industries seem almost to have stopped trying to keep up. Capital investment in energy, stated at constant 2018 values, was 20% lower last year (at $1.59tn) than it was back in 2014 ($2tn), and is not remotely sufficient to provide continuity of supply. Even shale investment only keeps going courtesy of investors and lenders who are prepared to support “cash-burning” companies.

Critically, what this means is that the supposed conflict between environmental imperatives, on the one hand, and economic (“cost”) considerations, on the other, is a wholly false dichotomy.

For the economy, no less than for the environment, there is a compelling case for transition. But the implications of the future trend in ECoEs go a lot further than that.

As the ECoEs of fossil fuels have risen inexorably, those of renewable alternatives have fallen steadily. It is projected by SEEDS that these will intersect within the next two to three years, after which renewables will be “cheaper” (in ECoE terms) than their fossil alternatives.

At this point, it would be comforting to assume that, as the ECoEs of renewables keep falling, and the extent of their use increases, we can make a relatively painless transition.

Unfortunately, there are at least three factors which make any such assumption dangerously complacent.

First, we need to guard against the extrapolatory fallacy which says that, because the ECoE of renewables has declined by x% over y number of years, it will fall by a further x% over the next y. The problem with this is that it ignores the limits imposed by the laws of physics.

Second, renewable sources of energy remain substantially derivative of fossil fuels inputs. At present, we can only construct wind turbines, solar panels and their associated infrastructure by using energy sourced from fossil fuels.  Until and unless this can be overcome, sources termed ‘renewable’ might better be described as ‘secondary applications of primary energy from fossil fuels’.

Third, and perhaps most disturbing of all, there can be no assurance that the ECoE of a renewables-based energy system can ever be low enough to sustain prosperity. Back in the ‘golden age’ of prosperity growth (in the decades immediately following 1945), global ECoE was between 1% and 2%. With renewables, the best that we can hope for might be an ECoE stable at perhaps 8%, far above the levels at which prosperity deteriorates in the West, and ceases growing in the emerging economies.

Policy, reality and the false dichotomy

These cautions do not, it must be stressed, undermine the case for transitioning from fossil fuels to renewables. After all, once we understand the energy processes which drive the economy, we know where continued dependency on ever-costlier fossil fuels would lead.

There can, of course, be no guarantees around a successful transition to renewable forms of energy. The slogan “sustainable development” has been adopted by the policy establishment because it seems to promise the public that we can tackle environmental risk without inflicting economic hardship, or even significant inconvenience.

It is, therefore, far more a matter of assumption than of verifiable practicality.

Even within the limited scope of declared plans for “sustainable development”, efforts at transition are faltering. Here are some examples of this disturbing insufficiency of effort:

–   According to the International Energy Agency (IEA), additions of new renewable generating capacity have stalled, with 177 GW added last year, unchanged from 2017. Moreover, the IEA has stated that additions last year needed to be at least 300 GW to stay on track with objectives set out in the Paris Agreement on climate change.

–   The IEA has also said that capital investment in renewables, expressed at constant values, was lower last year (at $304bn) than it was back in 2011 ($314bn). Even allowing for reductions in unit cost, this reinforces the observation that renewables capacity simply isn’t growing rapidly enough.

–   In 2018, output of electricity generated from renewable sources increased by 314 TWH (terawatt hours), but total energy consumption grew by 938 TWH, with 457 TWH of that increase – a bigger increment than delivered by renewables – sourced from fossil fuels.

The latter observation is perhaps the most worrying of all. Far from replacing the use of fossil fuels in electricity supply, additional output from renewables is failing even to keep pace with growth in demand. Where power generation is concerned, this has worrying implications for our ability to transition road transport to EVs without having to burn a lot more oil, gas and coal in order to do so.

The deceleration in the rate at which renewables capacity and output are being added seems to be linked to decreases in subsidies. These, though affordable enough at very low rates of take-up, have been scaled back as the magnitude of the challenge has increased.

This calls for a thoroughgoing review of energy policy, and it seems bizarre that a system which can provide financial support for the banking system cannot do the same for the far more important matter of energy. Even within the fossil fuels arena, the continued growth of American shale production has relied on cheap capital, channelled into loss-making shale producers by optimistic investors and seemingly-complacent lenders.

We need to understand that, when an individual pays for electricity, or puts fuel in a car’s tank, this represents only a small fraction of what he or she spends on energy. The vast majority of energy expenditure isn’t undertaken as direct purchasing by the consumer, but is embedded in literally all of his or her outlays on goods and services. The scope for direct purchasing is determined by the scale of embedded use.

As prosperity deteriorates, then, the ability of the consumer to purchase energy is reduced. There is every likelihood that energy suppliers could find themselves trapped between the Scylla of rising costs and the Charybdis of impoverished customers.

We should, accordingly, be prepared for the failure of a system which relies almost entirely on commercial enterprise for the supply of energy. Far from prices soaring in response to tightening supplies, it’s likely that the impoverishment of consumers keeps prices below costs, resulting in a shrinkage of energy supply as part of a broader deterioration in economic activity.

As the situation develops, we may need to think outside the “comfort zone” of current policy parameters. For instance, the promise that the public can exchange their current vehicles for EVs may prove not to be capable of fulfilment, forcing us to evaluate alternatives, including electric trams and rail.

For now, though, one imperative predominates. It is that we must stop believing in the false dichotomy in which the environmental need for a transition to renewables is “moderated” by wholly false considerations of “cost”.

Simply put, we’re likely to pay a quite extraordinarily high price for a continuation of the assumption that the economy, demonstrably an energy system, is characterised by, and can be managed using, purely financial interpretation.

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SEEDS environment report July 2019