#124: Riddle, mystery, enigma

SEEDS AND THE RUSSIAN ECONOMIC RIDDLE

Winston Churchill famously described Russia as “a riddle, wrapped in a mystery, inside an enigma”, but he also suggested that the key to the riddle might be “Russian national interest”.

It is hard to disagree with either of his conclusions.

What follows is an assessment of Russia, and the rouble, from a strictly economic and financial perspective. If nothing else, we can at least hope to reach a balanced appraisal, which shows that the Russian economy is neither a giant nor a pigmy.

In fact, Russia emerges pretty well from the SEEDS process.

We cannot hope to understand Russia if we accept the forex markets’ long-established distaste for the rouble. What FX markets think about a currency isn’t science, of course, but the simple application of market exchange rates to rouble numbers can lead to conclusions which make no sense whatsoever. On this misleading basis, it is sometimes said, for example, that Russia has an economy ‘the size of Holland’, and her defence expenditure isn’t much bigger than that of France or Britain. Neither statement is meaningful.

An intriguing point to emerge from SEEDS analysis is that the rouble deserves a lot more respect than it tends to get. Unlike America, Britain, the Euro Area or Japan, Russia hasn’t spent a decade gaming her currency through “monetary adventurism”. Neither, for that matter, has she ever adopted the Western practice of “credit adventurism”.

Russia’s private and public debt equates to just 91% of aggregate national prosperity, at a time when ratios for the Big Four range between 340% for the US dollar and 456% for the Japanese yen. Russian exposure to the banking system is small, too – total financial assets stand at 192% of prosperity, nowhere near America’s 660%, let alone Britain’s 1580%.

Like other developed economies, Russia has in recent years experienced a deterioration in prosperity per capita, but this decline has been extremely modest, and SEEDS projects little or no ongoing deterioration, which – again – is in stark contrast to America, Britain or the Euro Area.

Russia, in fact, is one of the few countries which can look ahead to the prospect of the next crash (GFC II) with comparative equanimity.

SEEDS analysis puts this equanimity into perspective. Growth in reported GDP since 2007 may have been pretty modest, at 12%, but this growth has been genuine, because Russia hasn’t emulated the Western practice of pouring debt-fuelled consumption into the system. Over the last decade, each RUB 1 of reported growth has been accompanied by only RUB 3.28 of incremental debt, a ratio lower than the United States (4.33:1), Britain (5.45:1) or the Euro Area (5.97:1), let alone Japan (13.9:1).

As you would expect, Russia’s trend ECoE (energy cost of energy) is low, estimated at 4.9% in 2017, versus a world average that is not only far higher (at 7.7%) but is also rising a lot more rapidly – by 2025, when the global ECoE is likely to have reached a growth-throttling 9.6%, Russia should still be at (or just below) 5%.

Also in 2025, the average Russian can expect prosperity to be pretty much the same as it was in 2017, a far cry from the rates of deterioration to be anticipated in Britain (-5%) or the United States (-6%). It’s worth remembering, too, that the average Russian is about 9% more prosperous now than he or she was back in 2007, again in stark contrast to America (-7%) or the United Kingdom (-9%).

On a longer perspective, Russians remain 75% more prosperous now than they were back in the dark days of 2000, and rampant inflation (which reached 72% in 1999) has been confined to the history-books.

In short, it’s easy for critics to ascribe the popularity of Mr Putin to crude nationalism or electoral chicanery – but SEEDS analysis suggests that prosperity, and economic resilience, might have rather a lot to do with it.

 

 

#123: Quantum of risk, part one

SEEDS IS COMPLETE – IN TIME FOR GFC II

More than four years in the making, SEEDS – the Surplus Energy Economics Data Systemis complete.

Though geographical coverage may be extended further (with Indonesia, Iran and Turkey as possible additions), the system itself is complete. This, under the circumstances, is just as well, because evidence is mounting that GFC II, the sequel to the global financial crisis of 2008 (GFC I), is drawing nearer. So we’re likely to need whatever insights SEEDS may provide.

This discussion sets the scene for what SEEDS can tell us about risk. Future articles will investigate national economies in groups, with the Euro Area countries likely to be addressed first. Each of the succeeding articles is likely to include downloadable summaries of the most important data.

SEEDS – capturing the surplus energy dimension

For those unfamiliar with the project, the ambition for SEEDS was to recalibrate economic measurement – and interpretation and forecasting, too – on the understanding that the real economy of goods and services is an energy system, and not, primarily, a financial one.

For practical purposes, achieving this means that we can use prosperity, instead of GDP, as the denominator for calibrating risk.

Aside from purely methodological issues, GDP has two grave handicaps where economic interpretation and prediction are concerned.

First, it fails to discriminate between organic growth, on the one hand, and, on the other, the simple spending of borrowed money. Though a very important recent report, by BIS luminaries Hervé Hannoun and Peter Dittus, highlights precisely this issue in its description of “the debt driven growth model”, conventional economics still fails to connect debt (stock) and GDP (flow) to the point where the effects of artificial, debt-induced activity can be factored in to interpretations.

For reference, and expressed in PPP-converted dollars at constant 2017 values, SEEDS puts world GDP growth since 2007 at $29.8 trillion, but notes that this was accompanied by a $103tn increase in debt, meaning that $3.50 was borrowed for each dollar of “growth”.

In the absence of this simple spending of borrowed money, growth over the decade since 2007 is estimated by SEEDS at just $10.3tn, with the remaining $19.5tn of reported increments to GDP ascribed to the debt effect.

Moreover, the debt-growth sleight of hand did not begin in 2007. Over time, the gap between GDP and prosperity has widened markedly. Last year, according to SEEDS, ‘clean’ GDP was $90.4tn, a long way (29%) below the reported $127tn.

Second, conventional economics ignores the energy basis of all economic activity. The reality is that everything we do requires energy, and energy can never be accessed free of charge – whenever we tap any form of energy, we always consume energy in the process.

In SEEDS, this cost is known as ECoE (the energy cost of energy), which is measured as a trend, and applied as an economic rent. For reasons discussed here, trend ECoE is rising exponentially, and is acting as an increasingly important obstacle to growth.

The British experience – prosperity versus GDP

Here’s a simple worked example of how SEEDS calibrates prosperity. Between 2007 and 2017, the GDP of the United Kingdom increased from £1.83tn to £2.0tn, a rise of 11%, or 3.3% in per capita terms.

But the increase in GDP between those years (of £206bn) was far exceeded by a £1.13tn surge in aggregate debt. Adjustment for this reduces growth to just £30bn, and puts clean GDP for 2017 at £1.6tn.

Over the same period, according to SEEDS, the UK’s overall ECoE increased from 4.8% to 8.6%, a sharp rise which, in part, reflects energy issues specific to Britain.

Aggregate prosperity, therefore, was barely changed in 2017 (£1,462bn) from 2007 (£1,494bn). But the population did increase between those years, by 7.7%.

In per capita terms, then, the average British citizen was 9.2% less prosperous in 2017 (at £22,300) than he or she had been back in 2007 (£24,370). Apparent growth in GDP per capita was much more than cancelled out by higher debt, and by the rising trend cost of energy.

This is why people feel poorer – whatever assurances they are given to the contrary.

Prosperity, policy and risk

This deterioration in prosperity is by no means unique to the United Kingdom, of course – Greece and Italy have fared worse, and prosperity has eroded since 2007 in every major developed economy with the solitary exception of Germany (+1.0%).

There are three main ways in which the divergence between GDP and prosperity is highly relevant to GFC II.

First, measurement of aggregate prosperity can be used to recalibrate ratios around risk categories such as debt, and exposure to financial asset toxicity. Debt may be ‘only’ 218% of world GDP, but it’s 336% of global prosperity, compared with 236% at the start of GFC I.

Second, prosperity analysis identifies dependency on incremental borrowing going forward, an extremely important consideration if there is any likelihood of access to new credit drying up.

Third, trends in individual prosperity have important implications for politics, and the scope for policy.

On this latter point, it’s worth noting what SEEDS can tell us about recent political trends.

When Donald Trump was elected in 2016, the average American was already 7.2% less prosperous than he or she had been ten years earlier. Also in 2016, the “Brexit” vote in Britain might have come as less of a shock to the “experts” if they’d known that voters were, on average, 8% poorer than they had been back in 2007.

The rejection of all established parties in the first round of the French presidential election might not have been unrelated to a peaking of per capita prosperity in France as long ago as 2000.

The high point of prosperity was more recent in Italy (2007) than in France, but the decline since then has been particularly pronounced (-10%), helping to explain the appeal of populism to Italian voters.

Looking ahead, then, one of the criteria SEEDS can help us to measure is the likelihood, or otherwise, of voters acquiescing in any repeat ‘rescue plan’ along the lines of the response to GFC I.

For most Western countries, the conclusion from SEEDS analysis is that any government which tries to repeat the 2008 combination – rescues for the banks, monetary inflation for the owners of assets, and austerity for everyone else – is going to get short shrift from the voters.

And, given the outcome of the post-2008 policy prescription, this might be just as well…………

 

#122: A tale of two ditties

WHY A CRISIS IS GETTING NEARER

In The Arabian Nights, the heroine Scheherazade told one thousand and one tales. We, on the other hand, need only choose between two songs.

The first, cheerfully whistled by the consensus, is that the world economy is enjoying “synchronised growth”. We needn’t worry about debt and other measures of financial exposure, because a financial crash is very unlikely – and, even if it happened, the authorities would know what to do about it.

The alternative refrain is that most of the “growth” claimed by the authorities is cosmetic; that we really should worry about financial stress indicators; that a crash will happen, because it’s hard-wired into the system; and that plans for dealing with it probably won’t work.

Which of these is the true music – and which is off-key?

The aim here is to weigh the evidence, which comes in many shapes and sizes. The first conclusion is that the consensus view is a Pollyanna song (and Pollyanna, you might remember, found “something to be glad about in every situation, no matter how bleak it may be”). The optimistic consensus is every bit as complacent now as it was back in 2007, when growth was to be celebrated – and debt, we were told, didn’t matter.

The second conclusion is that the odds are shortening on a crisis happening a lot sooner than most people think – it could, indeed, happen latter this year.

Third, and from what we can surmise about them, the plans for responding to a crisis probably won’t work.

GDP – eggs in one basket

When you come down to it, the optimistic consensus is based on a single indicator – growth in GDP. This puts a lot of eggs in one basket, but the conventional line is that GDP is the only basket which matters.

If GDP is growing – and is expanding at a rate faster than population numbers, so that per capita GDP is rising, too – then people are becoming more prosperous. (It’s worth remembering that, for an individual or a household, prosperity increases when income grows more rapidly than essential outgoings such as housing, food and the cost of energy and travel – in short, prosperity is that “discretionary” income which you can spend as you choose).

Rising GDP serves to offset fears about expanding debt, because what matters about debt isn’t the quantum amount, but the ability of the borrower to service and repay it.

Put simply, the assumption – and an article of faith in conventional economics – is that growth in per capita GDP makes people better off. This means that productive output is increasing. Rising GDP gives people more money to spend on things that they want, rather than simply need.

This is great for anyone supplying these wants, so retailers, restauranteurs and other ‘customer-facing’ businesses are in clover when consumers are getting more prosperous. Growing prosperity also means that demand is expanding, which, if you’re a producer, makes a compelling case for investing in expansion. As well as spending more day-to-day, the prospering consumer is likely to buy more capital items, like cars or domestic appliances. The prospering person may or may not increase how much he or she saves for the future, but is certainly unlikely to need to take on more credit.

All in all, then, growth in prosperity, as betokened by increasing GDP per capita, is a cheerful situation. Consumers are happy, having (and spending) more money. It’s great for producers of anything from cars to chocolate bars, whilst shopkeepers, restauranteurs and others have “never had it so good”. Happy and prospering citizens may not express gratitude towards politicians – and politics is a thankless task – but they’re unlikely to turn rebelliously against the establishment that has presided over all this prosperity.

A true note?

It’s interesting, to put it mildly, that this happy refrain, played on the magic flute of growing GDP, isn’t exactly what we’re seeing in the world around us.

Far from raking in bigger profits, customer-facing businesses like shops and restaurants are going through a firestorm, with even the survivors typically closing sites, laying off workers and renegotiating rents downwards. New York’s Madison Avenue hasn’t had this many vacant storefronts since 2008.

This, by the way, cannot be blamed on rising on-line purchases – the numbers don’t add up, and no one has yet found a way to eat or drink through a laptop or a smartphone. Incidentally, too, sales of smartphones themselves seem to have peaked.

Sales of cars, meanwhile, aren’t expanding – indeed, are shrinking in many markets. Car makers are cutting their production lines and trimming their rosters of distributors. The boom in car purchases fuelled by specialised credit seems to have peaked.

If customer demand is increasing, as growth in GDP says it must be, then commercial space should be rising in cost, but evidence strongly suggests the onset of severe downwards pressure on rents – and this, moreover, is bad news for any investment or debt predicated on future streams of rental incomes.

Meanwhile, business should be in an expansionary mood. In fact, the trend now is towards cost-cutting and “zero-based budgeting”, something particularly evident in advertising expenditure, which is an important lead-indicator.

The growth in prosperity indicated by rising GDP should have financial as well as commercial implications. People should be putting aside more money for the future, yet a ground-breaking report by the WEF (World Economic Forum), studying a group of eight large economies, identifies an unprecedented shortfall in pension provision, a “global pension timebomb” set to expand from $67tn in 2015 to $428tn by 2050. In the United States alone, says the WEF report, the gap is worsening by $3tn annually, which is 17% of 2015 GDP, and roughly five times what the US spends on defence.,

Politically, the West’s happy and prospering voters, far from letting the establishment get on with building a materialist’s nirvana, are kicking that establishment in the teeth whenever they get the chance, be it Mr Trump, “Brexit”, votes in France and Italy, or even in Germany. The establishment, of course, routinely derides its insurgent opponents as “populists” – which, presumably, means acceptance that established politicians and parties have become unpopulist.

Governments, too, are acting in ways consistent with hardship, not prosperity.  Protectionism and trade wars are a hallmark of seeking someone else to blame, whilst geopolitical belligerence is a time-dishonoured way of distracting the domestic electorate from hardship. Both protectionism and belligerence were rife in the depression conditions of the 1930s. Additionally, and as Charles Hugh Smith has explained in an excellent article, protectionism is a wholly logical consequence of “financial repression” as incorporated into the policy responses to the GFC.

A numbers racket

How, then, can we square the evidence around us with the claim that, because of rising GDP, people are prospering? After all, final data for 2017 is likely to confirm that the world economy (measured in PPP dollars at constant values) has grown by 29% since 2008, equivalent to growth of 17% at the per capita level after allowing for the 11% increase in population numbers over that period.

Regular readers, of course, will know the answers, which needn’t be spelled out in detail here. (Anyone wanting a refresher should read Interpreting the post-growth economy, a guide to Surplus Energy Economics which you can download here).

Essentially, we’ve been faking “growth” by pouring ultra-cheap credit into the economy. Each $1 of growth since 2008 has been accompanied by $3.40 of net new debt, and has also been accompanied, according to SEEDS estimates, by $3.40 of erosion of pension provision. We’ve been keeping up the illusion of “growth” by spending borrowed money and raiding our savings.

Anyone who thinks that this is sustainable needs to re-imagine economic reality.

As we’ve seen, hardly any (in America, less than 1%) of this “growth” has shown up in manufacturing, construction, agriculture or the extractive industries put together. We’re moving money around more rapidly, through finance, real estate and insurance activities. Government is spending more, and people increasingly are “taking in each others’ washing” through low-value service activities, which are saleable only at home.

This pattern of activity is wholly consistent with boosting statistical measures of activity using borrowed money. It is not consistent with “growth” in any meaningful sense of that word.

This cheap money, of course, has created huge bubbles in asset markets such as stocks, bonds and property. These are no offset to debt, of course, because they cannot be monetised. The only people to whom a nation’s housing stock can be sold are the same people to whom it already belongs, so you can’t turn the theoretical value of that stock into money. Using marginal transaction prices to put a value on the aggregate stock of assets is pure sleight of hand.

As regular readers will also know, the SEEDS system generates underlying output numbers, and these are diverging ever further from reported GDP. According to SEEDS, the estimated end-2017 measure, which puts world debt at about 218% of GDP, rises to 336% when debt is measured against aggregate prosperity.

When?………..

We can’t really predict the timing of economic or financial shocks, because they wouldn’t be shocks if we could. We may not get advance warning from stock markets, because debt-financed buy-backs, and relaxed investor attitudes towards “cash-burn”, might not change until after the roof has started to cave in.

But the strong likelihood now is that hardship in sectors like retailing and restaurants will broaden out into other customer-facing activities, perhaps including travel bookings, car rentals, hotel occupancy and other areas of “discretionary” spending.

A strong downtrend may already have set in where commercial rents are concerned, and we need to watch for vulnerabilities in commercial as well as consumer debt.

The critical point, however, is that what is already happening is likely to prove to be enough to discredit the “growth and prosperity” mantra underpinning consensus complacency.

It’s also worth remembering that complacency reached its previous peak in 2007. It may be, in the natural world, “always darkest just before the dawn” but, in the economy, it can often seem “brightest just before the crash”.

……and what (can be done)?

Finally, what might the authorities do if the GDP-based ballad of complacency gives way to the discordant reality of weakening prosperity and escalating debt?

It seems reasonable to surmise that policy rates will be cut, though rates are now so close to zero that cuts of the magnitude of 2008-09 are no longer possible. We can expect a lot more QE, though, like most drugs, its effectiveness diminishes as doses rise. Governments can also be expected to try to underpin the banks, but this is made harder by sharp increases in governments’ own indebtedness since the GFC.

Additionally, this time, we might expect “bail-ins”, which amount to taking money from depositors to plug gaps left by failed borrowers. If implemented, bail-ins would probably have lower limits (to protect the poor), and upper limits (to protect the rich). The authorities might also resort to the blatant monetisation of their debts (and it’s worth remembering that the Japanese central bank has already purchased almost half of all outstanding Japanese government bonds, using money newly created for the purpose).

If these are the plans for coping with a crisis, there are at least two reasons why they won’t work.

First, the assumption is likely to be that the main stresses will be confined largely to banks, as they were in 2008. But the GFC put the pressure on banks because it was a crisis caused by “credit adventurism”.

This time around, though, the main cause of a crisis is likely to be the “monetary adventurism” practised since 2008. The implication is that, in the next crisis, fiat currencies might be in the front line – especially if bail-ins and debt monetisation are invoked.

Second, governments are likely to assume public acquiescence in their rescue plans. But politics has changed fundamentally since 2008 – and any government which thinks it can sell another “rescue of the bankers” to the public is probably practising one of the worst types of complacency imaginable.

 

 

 

 

#121: Interpreting the post-growth economy

THE GUIDE TO SURPLUS ENERGY ECONOMICS

For some time now, it’s been clear that we need a succinct (though sufficient) guide to Surplus Energy Economics (SEE), something that summarises the thinking and is suitable for sharing with others. Such a guide needs to combine readability with comprehensive coverage of relevant points.

This guide is now complete. It is entitled Interpreting the post-growth economy. You can download it in PDF form at the end of this article.

Readers will already be familiar with Part One of this report, which is based on the previous article. Part Two adds an extensive commentary on many of the issues involved in applying the principles of SEE to our current circumstances and outlook.

It is hoped that readers will find this document useful and informative. As ever, comments will be most welcome.

Surplus Energy Economics – Interpreting the post-growth economy

#120: The need for new ideas

PLANNING THE POST-GROWTH SOCIETY

This article explores an issue that is always at or near the centre of where the economy is going. Worldwide, the long years of growing prosperity are over, and this change fundamentally invalidates many things that government, business and the public have always taken for granted.

The reason why growth is over, of course, is that we no longer have access to cheap energy. Where geographical expansion and economies of scale once drove down the cost of accessing energy, the driving factor now is depletion, which is pushing costs upward, and is doing so in an exponential way.

Though no abrupt plunge in global prosperity is on the cards, there is scant comfort in that. Prosperity in most Western developed economies has already passed its peak. Our economic and financial systems are extremely vulnerable, because they are predicated on perpetual growth.

Thus far, and in spite of all the accumulating evidence, we haven’t recognised that growth in prosperity is over. Rather, we’ve tried to delude ourselves, by using cheap and easy debt, and latterly ultra-cheap money as well, to pretend that perpetual growth remains alive and well. In themselves, these expedients are harmful in ways that can be managed. Efficiency is being undermined by keeping sub-viable entities afloat, and a major crash in asset values has become an inevitably. Neither of these problems is existential in itself.

But changes are happening, too, in ways that are fundamental. A system dependent on ever-growing consumption and ever-increasing profitability is becoming invalidated. The very concept of debt is becoming untenable, because the process depends on growth in borrowers’ income, something which is no longer happening.

These effects have profound political and social as well as economic and financial implications. As growth unwinds, so does tolerance of inequality – that’s why “populists” have enjoyed an ascendancy, and why trends are moving strongly in favour of the collectivist Left.

The dangers of complacency

If you’re a regular visitor to this site, you’ll know that world prosperity, as measured by the Surplus Energy Economics Data System (SEEDS), is projected broadly flat out to 2030. To put some numbers on this, global average prosperity per person is estimated at $11,050 in 2016, and is expected to be very little changed in 2030, at $11,360 (in 2016 PPP dollars).

There are a lot of reasons, however, not to be lured into any form of complacency by this flat trajectory. First, our economic system isn’t geared to stable-state, but is predicated on perpetual expansion – and that’s a huge problem, now that the conditions which favoured growth in the past are breaking down. Though we can be pretty sure that the era of meaningful growth in prosperity has ended, we cannot know how much collateral damage will result from the challenge of trying to adapt to that change.

Second, the projected global figure for 2030 disguises a wide regional divergence of experience. China, for example, is on the positive side of the equation. Prosperity may not be growing at anything like the rate depicted by GDP per capita, but Chinese citizens are continuing to become better off. For 2016, prosperity is estimated at 30,800 RMB per person – roughly double the equivalent number for 2003 – and the SEEDS projection for 2030 is 42,225 RMB, an improvement of 37%. Improvement is likely, too, in India.

But prosperity in the developed West, already in decline, is set to deteriorate steadily. Comparing 2030 with 2016, prosperity is likely to be 7% lower in the United States, for example, and 10% lower in Britain. These projected declines are in addition to the deterioration that has already happened – prosperity has already peaked in the US, Canada, Australia and most European countries.

Third, and even in countries where prosperity trends are positive, current economic policies suggest that both debt and deficiencies in pension provision will go on growing a lot more rapidly than prosperity.

Worldwide, we’re subsidising an illusory present by cannibalising an already-uncertain future. We’re doing this by creating debt that we can’t repay, and by making ourselves pension promises that we can’t honour. So acute is this problem that our chances of getting to 2030 without some kind of financial crash are becoming almost vanishingly small.

Finally, any ‘business as usual’ scenario suggests that we’re not going to succeed in tackling climate change. This is an issue that we examined recently. Basically, each unit of net energy that we use is requiring access to more gross energy, because the energy consumed in the process of accessing energy (ECoE) is rising. This effect is cancelling out our efforts to use surplus (net-of-cost) energy more frugally.

The exponential nature of the rise in ECoEs is loading the equation ever more strongly against us. This is why “sustainable development” is a myth, founded not on fact but on wishful thinking.

The lure of denial

These considerations present us with a conundrum. With prosperity declining, do we, like Pollyanna, try to ignore it, whistling a happy tune until we collide with harsh reality? Or do we recognise where things are heading, and plan accordingly?

There are some big complications in this conundrum. Most seriously, if we continue with the myth of perpetual growth, we’re not only making things worse, but we may be throwing away our capability to adapt.

You can liken this to an ocean liner, where passengers are beginning to suspect that the ship has sprung a leak. The captain, wishing to avoid panic, might justifiably put on a brave face, reassuring the passengers that everything is fine. But he’d be going too far if he underlined this assurance by burning the lifeboats.

The push for electric vehicles threatens to become a classic instance of burning the lifeboats. Here’s why.

We know that supplies of petroleum are tightening, that the trend in costs is against us, and that burning oil in cars isn’t a good idea in climate terms. Faced with this, the powers-that-be could do one of two things. They could start to wean us off cars, by changing work and habitation patterns, and investing in public transport. Alternatively, they can promise us electric vehicles, conveniently ignoring the fact that we don’t, and won’t, have enough electricity generating capacity to make this plan viable, and that we’d certainly need to burn in power stations at least as much oil as we’d take out of fuel tanks. At the moment, every indication is that they’re going to opt for the easy answer – not the right one.

This is just one example, amongst many, of our tendency to avoid unpalatable issues until they are forced upon us. The classic instance of this, perhaps, is the attitude of the democracies during the 1930s, who must have known that appeasement was worse than a cop-out, because it enabled Germany, Italy and Japan to build up their armed forces, becoming a bigger threat with every passing month. Hitler came to power in 1933, and could probably have been squashed like a bug at any time up to 1936. By 1938, though, German rearmament reduced us to buying ourselves time.

Burying one’s head in the sand is actually a very much older phenomenon than that. The English happily paid Danegeld without, it seems, realising that each such bribe made the invaders stronger. It’s quite possible that the French court could have defused the risk of revolution by granting the masses a better deal well before 1789. The Tsars compounded this mistake when they started a reform process and then slammed it into reverse. History never repeats itself, but human beings do repeat the same mistakes, and then repeat their surprise at how things turn out.

Needed – vision and planning 

The aim here is simple. There is an overwhelming case for preparation.  With this established, readers can then discuss what might constitute a sensible plan, and try to work out how any plan at all is going to be formulated in a context of ignorance, denial and wishful thinking.

Let’s start with a basic premise. For more than a millennium, the population of the earth has increased, a process that has become exponential since we first tapped fossil fuels. The population exponential has been paralleled by trends in food and water supply, and in economic activity and complexity.

The “master exponential” driving all the others has been energy consumption. Basic physics dictates the primacy of energy in this mix. If we hadn’t grown our access to energy, we couldn’t have expanded our foods supplies, our population, our economic activity or the complexity of our societies.

For much of the era since 1760, energy has got cheaper. The petroleum industry, for instance, didn’t limit itself to Pennsylvania, but spread its reach across the globe, most notably finding huge oil resources in the Middle East. The same broadening process benefited coal and natural gas. As the energy industries expanded, they harnessed huge economies of scale. A third positive factor, in addition to reach and scale, was technology.

Since a high-point in the post-1945 decades, however, the trend of energy costs has crossed a climacteric. Reach ceased to help, and economies of scale reached a plateau. The new driver became depletion, an entirely logical consequence of using the most profitable resources first, and leaving less profitable ones for later. The role of technology changed, from boosting gains to mitigating decline. The extent to which technology can mitigate the cost of depletion is limited by the envelope of physics.

Only in science fiction, or in wishful thinking, can we get a quart of energy out of a pint pot.

The cost uptrend (and by ‘cost’, of course, is meant the energy consumed in accessing energy) hasn’t stopped growth in aggregate access to primary energy – yet. So far, we’ve been able to offset worsening cost ratios by using more energy. This said, cost is likely to make it harder to grow total supplies in the future. Fundamentally, as the energy consumed in the energy supply process rises, the amount of value that we get from each unit of energy diminishes, just as we hit limits to our ability to use greater volume to offset reduced value.

In petroleum, at least, we are now scraping the bottom of the barrel. If there were lots of gigantic, technically-easy fields still to be developed, we simply wouldn’t be bothering with shales, or crudes so heavy that they have to be mined rather than pumped. It’s become difficult to find a price that is high enough for producers without being too high for customers. Cost, rather than scarcity of reserves, is the factor that’s going to cause “peak oil”.

Renewable energies, though desirable, don’t offer an instant escape, not least because we have to use legacy fossil fuel energy to build wind turbines, solar panels and the infrastructure that renewables require. We once believed that nuclear energy would be “too cheap to meter”, and would free us from dependency on oil, gas and coal. We’re in danger of repeating that complacency with renewables. We need to assume that energy will get costlier, just as growing the absolute quantities available to us is getting tougher.

Growth – the bar keeps rising

As the cost of energy rises, economic growth gets harder. We’ve come up against this constraint since about 2000, and our response to it, thus far, has been gravely mistaken, almost to the point of childish petulance. We seem incapable of thinking or planning in any terms that aren’t predicated on perpetual growth. We resort to self-delusion instead.

First, we thought that we could create growth by making debt ever cheaper, and ever easier to obtain. Even after 2008, we seem to have learned nothing from this exercise in credit adventurism.

Since the global financial crisis (GFC), we’ve added monetary adventurism to the mix. In the process, we’ve crushed returns on investment, crippling our ability to provide pensions. We’ve accepted the bizarre idea that we can run a “capitalist” economic system without returns on capital. We’ve also accepted value dilution, increasingly resorting to selling each other services that are priced locally, that add little value, and that, in reality, are residuals of the borrowed money that we’ve been pouring into the economy.

We seem oblivious of the obvious, which is that money, having no intrinsic worth, commands value only as a claim on the output of a real economy driven by energy. When someone hands in his hat and coat at a reception, he receives a receipt which enables him to reclaim them later. But the receipt itself won’t keep him warm and dry. For that, he needs to exchange the receipt for the hat and coat. Money is analogous to that receipt.

The first imperative, then, is recognition that the economy is an energy system, not a financial one, in which money plays a proxy role as a claim on output. In this sense, money is like a map of the territory, whereas energy is the territory itself – and geographical features can’t be changed by altering lines on a map.

It’s fair to assume that the reality of this relationship will gain recognition in due course, the only question being how many mistakes and how much damage has to happen before we get there. No amount of orthodoxy can defy this reality, just as no amount of orthodoxy could turn flat earth theories into the truth.

With the energy dynamic recognised, we’ll need to come to terms with the fact that growth cannot continue indefinitely. Rather, growth has been a chapter, made possible by the bounty of fossil fuels, and that bounty is losing its largesse as the relationship between energy value and the cost of access tilts against us.

In one sense, it’s almost a good thing that this is happening. If we suddenly discovered vast oil reserves on the scale of another Saudi Arabia, we would probably use them to destroy the environment.

Undercutting the rationale – consumption, profit and debt

With growth in prosperity no longer guaranteed, a lot of other assumptions lose their validity. One of the first will be the nexus of consumerism and corporate profit, where we assume that consumption by the public must always increase, and, over time, profits must always grow.

We’ll find ourselves in a situation where consumption doesn’t keep growing, and will decrease in per capita terms at a pace which at least matches the rate at which population numbers are growing. In this situation, expecting suppliers to keep on expanding, and carry on increasing their profits, becomes unreasonable. Businesses which insist on trying to maintain profits growth in this context will probably have to resort to cheating, both exploiting consumers and falsifying information. It may well be that this process has already started.

Meanwhile, the invalidation of the growth assumption will have profound implications for debt, and may indeed make the whole concept unworkable. If borrowing and lending ceased to be a viable activity, the consequences would be profound.

To understand this, we need to recognise that debt only works when prosperity is growing. For A to borrow from B today, and at a future date repay both capital and interest, A’s income must have increased over that period. Without that growth, debt cannot be repaid.

There are two routes to the repayment of capital and the payment of interest, and both depend on growth. First, if A has put borrowed capital to work, the return on that investment both pays the interest, and also, hopefully, leaves A with a profit. Alternatively, if A has spent the borrowed money on consumption, A’s income has to increase by at least enough to for him to repay the debt, and pay interest on it.

In an ex-growth situation, both routes break down. Invested debt isn’t going to yield a sufficient return, because purchases by consumers have ceased to expand. A’s income, on the other hand, won’t have increased, because prosperity has stopped growing.

This scenario – in which repayment of debt becomes impossible – isn’t a future prediction, but a current reality, and a reality that is already in plain sight.

We need to be clear that the slashing of rates to almost zero happened because earning enough on capital to be able to pay real rates of interest has become impossible.

Businesses which aren’t growing cannot – ever – pay off their debts, and neither can individuals whose prosperity is deteriorating.

Critically, prosperity, which drives both profits and incomes, is declining.  This is evident, not just in real wages (which, in many developed economies, haven’t grown since 2008), but also in the adverse relationship between nominal incomes and the cost of essentials.

To reiterate, if borrowers’ incomes don’t grow, they cannot pay off their debts, and are likely to go under because they cannot carry indefinitely the burden of compounding interest.

The politics of inequality

Financial exercises in denial (including escalating debt, ultra-cheap money and the impairment of pension provision) have already created a stark division between “haves” and “have-nots”. Essentially, the “haves” are those who already owned assets before the value of those assets was driven upwards by monetary policy. The “have-nots” are almost everyone else, especially the young.

Critically, the cessation of growing prosperity creates a fundamental change in attitudes towards inequality. Someone whose own prosperity is increasing is likely to be pretty tolerant towards a richer neighbour. Put prosperity into reverse, though, and that tolerance evaporates.

Again, this isn’t forecast, but fact. It’s one of the reasons why “populist” politicians are doing so well, and it also lays the foundations for a return to ascendancy by the collectivist Left. For this to happen, left-of-centre parties need to purge themselves of the centrists whose logic ceased to function when prosperity stopped growing.

The need to do this isn’t exactly rocket-science, and it’s already happening. We know that Hillary Clinton failed to see off Donald Trump, but we can’t know whether Bernie Sanders might have succeeded. We cannot know whether Labour under Jeremy Corbyn can win power in Britain, but we can be pretty sure that a Labour party led by a returning Tony Blair, or by someone else with the same “New” Labour policies, could not.

This stacks up to the return of division. The reason for this is that it’s becoming impossible for parties of opposition to accept big chunks of the incumbency’s economic agenda. As ordinary people become poorer, and as their ability to carry their debt burdens diminishes, the focus on inequality will intensify. The “politics of envy” will become “the politics of indignation”. Questions will start to be asked about how much money any one individual actually needs. The deterioration in the ability of the state to provide public services will intensify the politics of division.

To be clear about this, collectivism won’t solve our fundamental economic problems, and neither will a system which mutates Adam Smith’s free and fair competition into something akin to the law of the jungle. Deregulated capitalism is failing now, just as emphatically as Marxist collectivism failed in the past.

A logical conclusion, then, is that we need a new form of politics, just as much as we need a new understanding of economics, new models for business and a new role for finance. Co-operative systems might succeed where corporatism – both the state-controlled and the privately-owned variants – have failed.

All of these new ideas need to be grounded in reality, not in wishful thinking, denial or ideological myopia. But reality becomes a hard sell when it challenges preconceived notions – and no such notion is more rooted in our psyche than perpetual growth.

#119: A predicament in pictures

MAPPING THE ENERGY ECONOMY

A picture may or may not be (as the old saying has it) “worth a thousand words”, but what follows is a story told in eight pictures. Essentially, it’s a by-product of work on Energy and Prosperity, the planned guide to Surplus Energy Economics.

Before we start, a word about the charts. Though all start in 1965, the first four finish in 2016 whilst the latter four include projections out to 2030. All are global numbers and, with two exceptions, are expressed in trillions of dollars at constant 2016 values, with non-American amounts converted using the purchasing power parity (PPP) convention. The exceptions are the final pair of charts, which show global per capita equivalents in thousands of dollars.

The charts may be hard to read in the blog format, so a downloadable PDF version can be found at the end of this article. It’s hoped that the commentary will make the charts easier to understand.

Fig. 1 shows GDP (in blue) for the period between 1965 and 2016. Superimposed on it, in black, is what GDP would have looked like if it had simply tracked world energy consumption. Essentially, GDP in 2016 is depicted 3.6x what it was in 1965, because that’s the increase in primary energy consumption over the same period.

As you’ll see, GDP and energy consumption tracked very closely until the late 1990s. Since then, however, the two have diverged. Between 1997 and 2016, GDP increased by 91%, which is a lot faster than the expansion in energy consumption (+49%) between those years.

Of course, this divergence might simply be a matter of getting more value out of each tonne of energy consumed. Fig. 2, though, suggests that something very different might have been going on.

In this chart, two new elements are superimposed. The first, shown in red, is annual net borrowing. The second, in orange, adds the estimated annual under-provision of pensions, an issue addressed here before on a number of occasions. The huge leap shown after the global financial crisis (GFC) of 2008 is the massive one-off impairment to pension provision created by the collapse of returns on investment, when central banks slashed interest rates to all-but-zero, creating an escalation in capital values and a corresponding slump in returns.

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What this second chart seems to be telling us, then, is that we didn’t, from the late 1990s, suddenly discover new ways of getting more economic activity out of each tonne of energy. Rather, what happened was that we started juicing GDP by running up ever bigger debts, a process described here as credit adventurism.

After 2008, we added monetary adventurism to the mix, adopting policies which boosted apparent activity by destroying pension provision. This is why, as a recent WEF report showed, pension provision in an eight-country group had soared to an estimated $67 trillion by 2015, and is likely reach $428tn by 2050, a number which dwarfs any conceivable level of world GDP at that date.

This interpretation is supported by fig.3. This differs from the previous chart, because it shows debt, and the estimated shortfall in pension provision, as end-of-year totals, rather than annual increments. The post-GFC leap in pension deficiencies is again visible, where the onset of monetary adventurism crushed future returns on existing investments.

Fig. 4 again shows GDP (in blue), and an equivalent of GDP tracking energy volumes (black), but adds a third series. Shown in red, this deducts the trend energy cost of energy (ECoE) from the energy-based line. This adjustment expresses trend-energy GDP for the cost of energy supply, so the red line is indicative of the resources available for all purposes other than energy supply.

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Essentially, this is an indicator of aggregate prosperity. Because these two charts are side by side, what can be seen here is the divergence between prosperity, on the one hand, and the aggregates of debt and pension deficiency, on the other.

The insight here is that we are deluding ourselves about economic output, using the proceeds of borrowing and pensions erosion to create a GDP number increasingly out of kilter with reality.

This helps explain why typical wages aren’t keeping up with GDP, and why incomes are being eroded by the rising cost of household essentials, most of which are energy-intensive. It also helps explain why an increasing proportion of recorded GDP consists of residual, locally-priced services of questionable real value, whilst output in solid, globally-priced activities such as manufacturing and construction keeping shrinking as a share of GDP.

The bottom line is that prosperity and GDP are diverging, with results which are showing up both structurally and in on-going balance sheet impairment.

It should be added that the inflated values of assets (such as stocks, bonds and property) do not offset these trends – these values cannot be monetised by their owners selling assets to each other. Any significant attempt to monetise them – and a panic rush to do exactly that can’t be ruled out – would cause values to collapse.

The obvious question arising from this is “what happens next?” – and this is addressed in the next pair of charts, which extend these data series out to 2030. Fig. 5 shows how reported GDP (in blue) looks set to go-on outpacing core activity (black), whilst prosperity (red) drifts ever further away from trend activity as ECoEs carry on increasing. In fig. 6, the much larger vertical scale should be noted. Unless there is a fundamental change of tack, the massive miss-match between income and liabilities is set to balloon exponentially.

 

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If you think that the progression pictured in fig. 6 can’t happen, by the way, then you’re almost certainly right. According to the projections used in this chart, the aggregate of debt and pension shortfalls by 2030 will be close to $800tn (at 2016 values), dwarfing even claimed GDP ($193tn), let alone trend output ($100tn) or underlying prosperity ($89tn).

The only realistic conclusion which can be drawn from fig. 6 is that a very serious crash is extremely likely to occur at some point well before 2030.

The final pair of charts converts these numbers into their per-capita equivalents. The takeaway from figs. 7 and 8 is that, if we go on deluding ourselves about economic output, we’re going to travel ever further into a world in which smoke and mirrors can no longer disguise the difference between GDP and prosperity, and cannot reconcile the triangle of consumption, output and the destruction of the balance sheet.

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#119 charts set

#118: Good idea, bad idea

THE MERITS OF RENEWABLES, THE FOLLY OF EV

Whilst there seems no limit to the new and valuable insights that can come from looking at the economy through the lens of surplus energy, there are limits to the time and resources than can be applied to following up these leads.

This is making selection of subjects an increasingly tricky task. The preceding analysis of the American economy is a case in point. Data exists to apply the same treatment to the United Kingdom, and can be obtained for the Euro Area. But these are not being pursued, because the critical point has, it is hoped, been made. Essentially, ‘growth’, being geared towards residually-priced services which we can sell only to each other, is adding very little real value to the Western economies in return for the trashing of their balance sheets.

Some time ago, it was recognised that the topics of renewable energy and electric vehicles (EVs) needed to be discussed here. The following assessment condenses a great deal of analysis into a format that, it is hoped, will explain, succinctly, why conclusions on these issues are starkly different.

In short, whilst the case for maximising renewables seems irrefutable, the logic supposedly backing conversion to EVs is hopelessly flawed. We need to start by looking at why renewable energy is such a good idea, before turning to why EVs are such a bad one.

An existential imperative

The case for maximising the development of renewables (such as solar and wind power) is wholly compelling. Failure to do this would condemn the world economy to stagnation in the near-term, with prosperity deteriorating steadily in the developed world whilst making little progress in the emerging economies. In the longer term, continued reliance on fossil fuels would be a recipe for economic disaster.

This conclusion is dictated by an appreciation of two critical issues. The first is the umbilical linkage between energy access and economic output. The second is the accelerating rate at which the costs of energy access are rising across the fossil fuel mix that continues to deliver the vast majority of the global energy slate.

Put at its simplest, investing in solar and wind power is imperative, and is one of the most important issues that society needs to address. It ranks in importance alongside tackling climate change, and raising living standards in emerging economies.

Renewables are vital because they offer the only plausible way of escaping the economic trap posed by the rising energy costs of fossil fuels. We’re not about to “run out of” oil, gas or coal, but the value that these energy sources contribute to prosperity is already coming under severe pressure.

The ECoE trap

What really matters to prosperity isn’t how much energy we can access, but how much energy is consumed in the process of accessing it. This is measured here as ECoE (the energy cost of energy).

Some figures will illustrate the nature of this trap. For starters, the ECoE of the existing energy mix is rising exponentially, because it remains biased overwhelmingly towards oil, gas and coal. Over the fourteen years between 2002 and 2016, the estimated trend ECoE of fossil fuels rose from 4.4% to 8.4%, but this increase is just a mild foretaste of what’s to come – over the next fourteen years, fossil fuel ECoEs are set to rise to over 13%.

This represents a huge qualitative as well as quantitative change. In recent years, rising ECoEs have rendered economic growth all but impossible in the developed world, leading to the use of credit and monetary adventurism to fake an expansion in prosperity that is no longer possible. Even in the emerging economies, sustaining growth in the face of increasing ECoEs has required a growing recourse to debt.

Put very simply, when higher ECoEs collide with growth imperatives, ‘something has to give’ – and that ‘something’ is futurity, where we are destroying pension capability as well as racking-up ever larger amounts of debt.

Meanwhile, the environmental downside of rising ECoEs is that, to maintain net quantities of energy at any given level, we have to keep increasing the gross quantities that we access. As we have seen, this upwards trend is already more than sufficient to cancel out efforts to use energy more efficiently.

Looking ahead, further rises in ECoEs aren’t just going to act as a road-block to growth, but, in the developed world at least, are going to put growth into reverse. Credit and monetary exercises in denial are creating an enormous bubble, and it’s likely that supply constraints in energy will burst this one, just as the surge in oil prices (from $20/b to a peak of $147/b) was the real trigger for the previous crash. After the burst, reality will begin to dawn on anyone who believed in a ‘recovery’ based on cheap debt, cheap money, and residually-priced ‘activity’ that inflates recorded GDP whilst very little real value to economic output.

The energy equation

To see what rising ECoEs mean, it’s necessary to compare total (gross) energy consumption with surplus (net-of-ECoE) amounts. The split here is that the ECoE component of gross energy pays for energy access, whilst the net-of-ECoE surplus pays for everything else.

Between 2002 and 2016, the gross amount of fossil fuel energy accessed increased by 35%, from 8.4 bn tonnes of oil equivalent (toe) to 11.4 bn toe. Adjusted for the 17% rise in the world population over the same period, this equated to growth of 15% in the gross quantity of fossil fuels consumed per person.

But the increase in the ECoEs over that same fourteen-year period translated a 35% increase in gross supply into a rise of only 29% at the net-of-ECoE level. That difference may not seem huge, but it’s already had a big impact in per capita terms. Whereas gross fossil fuel consumption per person increased by 15% over that period, net fossil fuel energy use grew by only 10%.

Perhaps most tellingly of all, fossil fuel supply per person has already peaked (in 2013).

Looking ahead, the exponential upwards trend in fossil fuel ECoEs is poised to cripple surplus energy access, but for two main reasons, not one. Obviously, rising ECoEs are undermining the net (surplus) energy available from any given gross quantity.

Less obviously, energy availability at the gross level is likely to be depressed as well, because higher ECoEs simultaneously undercut the viability of production whilst increasing the cost to the consumer. In petroleum, we are already reaching a situation where any price high enough for producers is too high for consumers. A recent report by the China University of Petroleum forecast an imminent switch from oil to coal consumption in China, citing deteriorating EROEIs (energy returns on energy invested) as a key factor. This issue won’t be confined to China – and neither will it be confined to oil.

Quantifying the trap

Here are some illustrative numbers for what is likely to happen over the next fourteen years. First, gross supplies of fossil fuels, which increased by 35% between 2002 and 2016, are unlikely to rise at all looking out to 2030.

Gas availability is likely to increase further, but not by enough to offset a probable decrease in supplies of oil. Output from low-cost ‘legacy’ fields is declining at between 7% and 8% annually. New discoveries, required to offset this decline, are at record lows, whilst a combination of price and cost pressures continues to restrict development. By 2030, meanwhile, shale production will be well past its peak. Energy from coal is likely to diminish slightly, not least because the energy content per tonne mined is continuing to deteriorate.

In per capita terms, the implications of these trends are stark. Comparing 2030 with 2016, gross access to fossil fuels per person is projected to have declined by 14%. Higher ECOEs, of course, will exacerbate this problem at the net level – fossil energy per person, available for all purposes other than energy supply, is likely to be 19% lower by 2030 than it was in 2016.

Two final statistics are necessary to put this into context. First, fossil fuels continue to account for 86% of primary energy supply – hardly changed at all over two decades, from 87% in 1996 – whilst renewables still deliver only 3.2% of the total. (The remaining 11% comes from nuclear and hydroelectricity).

Second, 97% of all transport continues to be fuelled by petroleum, with the only significant exception (electrified rail) delivered, overwhelmingly, by gas- and coal-fired generation, not renewables.

Electricity – a yawning gap

Even without large-scale adoption of EVs, demand for electricity is growing more rapidly than our use of primary energy. Between 2002 and 2016, when total energy consumption increased by 37%, electricity use rose by 52%, with the result that we now consume 28% of all energy as electricity, compared with 25% in 2002, and only 22% back in 1996. Perhaps more tellingly, the proportion of all coal, gas and oil supply used for power generation has risen from 26% to 36% over that same period.

Looking ahead – and ignoring, for now, EVs – demand for electricity is rising at about 2.5% annually, well ahead of the rates at which either population numbers or total energy consumption are increasing. By 2030, we are likely to need 35,000 terawatt hours (TWH), an increase of 41% compared with 2016 (24,800 TWH).

The critical question is where that extra 10,200 TWH is going to come from. Between them, nuclear and hydro may contribute 19% of the required increment, though that might be a hard target to hit. About 45% of the increase in demand might be met by renewables, with output likely to rise from 1,854 TWH in 2016 to 4,600 TWH in 2030.

That still leaves us needing to source 3,700 TWH, or 36% of the required increase, from fossil fuels. These projections would mean that renewables would contribute 18% of electricity (and 10% of all primary energy) by 2030, compared with 7% of electricity (and 3% of all energy) in 2016.

Of course, there are some who believe that renewables output can grow a lot more rapidly than the 3.5-fold increase projected here. In support of this, some cite annual rates of growth, which, for all renewables, was 14.4% in 2016.

But this rate of growth is already slackening – from 19.7% in 2011, and 17.7% in 2013 – for the simple and obvious mathematical reason that rates of growth from an extremely low base are neither indicative nor sustainable. In 2011, renewables output increased by 148 TWH on a base of just 752 TWH. In 2016, the increase was a lot bigger (234 TWH), but so was the base number (1,621 TWH). By 2020, we are likely to be adding renewables output at rates of over 300 TWH annually, a number that is projected to increase to 475 TWH by 2030. These equate to projected annual rates of growth of 11% in 2020 and 8% in 2030.

A more fundamental reason for caution about the rate at which renewables output can grow is that these technologies are derivatives of fossil fuels. Building wind turbines and solar panels requires the use of materials which can be accessed only by courtesy of existing fuel sources, most importantly oil. Everything from humble steel and copper to many of the more sophisticated components relies on fossil fuel energy, all the way from extraction and processing to manufacture and delivery.

This consideration reinforces the case for developing renewables as rapidly as possible, because we need to use our dwindling legacy resources of net energy to create the alternative sources of the future. But it also adds to the bottlenecks likely to be encountered in the development process.

A further twist here is that, to the extent that they are derivatives of a fossil fuel set whose ECoEs are rising, there is likely to be upwards pressure on the ECoEs of renewables themselves. Thanks to two main factors – early-stage technical improvement (“low hanging fruit”), and economies of scale – we have become accustomed to declining unit costs in the development of renewables. Costs are likely to continue to fall, but at a decelerating rate, as the scope for ‘easy’ technical improvement diminishes, economies of scale benefits reach plateau, and the ECoE of inputs rises.

Finally, on this score, we need to note that, by 2030, renewables supply would need to multiply, not by the 3.5x projected here, but by 5.5x, just to keep the fossil fuel requirement for power generation constant at current levels. Delivering enough additional power from renewables to start reducing hydrocarbon-based generation looks extraordinarily difficult – and that’s even before we start adding to electricity demand by switching to EVs.

EV – the wrong road

As we have seen, realistic assessment of the outlook for expansion in renewables supply suggests that growing demand for electricity is likely to require increases, not decreases, in the amount of fossil fuels needed for power generation. If we add EVs into the mix, the increase in the need for oil, gas and coal for electricity supply escalates dramatically.

Many in government and industry seem to think that society can make a complete transition of road transport from internal combustion (IC) power to EV by 2040. The assumption made here is that, for this target to be met, switchover will need to have reached 66% by 2030. If we remain a long way short of two-thirds conversion by then, the target date of 2040 is unlikely to be met, requiring a rethink of the objective.

Accomplishing 66% conversion to EV by 2030 would reduce annual petroleum consumption by 1,670bn toe over that period. But the corresponding increase in electricity demand would be 7,350 TWH. Now, instead of requiring additional generating capacity of 10,160 TWH (+41%) by 2030 just to meet growing baseline demand, we would need to find extra capacity totalling 17,500 TWH (+71%).

The base case (ex-EV) used here already includes maximised development of renewables, so conversion to EV isn’t going to create additional incentives (or capital) for a purpose that is already imperative. Therefore, of the greatly-increased increment required by EV conversion, renewables are likely to supply only 26%, with a further 11% coming from nuclear and hydro. All the rest – 63%, or 11,060 TWH – would have to come from fossil fuels.

EVs and renewables – a false linkage

At this point, we need to note a number of mistaken assumptions which are sometimes made in creating a false relationship between EVs and renewables.

First, and as we have noted, EVs are not an essential driver for investment in renewables – this investment will (and must) happen anyway, even if EVs prove a blind alley.

Second, expansionary investment in renewables is not going to make EVs an appropriate strategy. Just like nuclear in an earlier era, renewables are not going to supply energy in such abundance that it will be “too cheap to meter”. We are going to need every KWH of renewable output just to keep up with growth in the baseload (non-EV) need for electricity.

Third, and unlike renewables, EVs are not going to make a positive contribution, let alone a major one, to stemming climate change. The fossil fuel currently burned in IC-powered transport will simply be displaced from vehicle engines to power stations. Battery technologies raise their own pollution and emissions issues, and some of today’s ultra-optimistic expectations for the life efficiency of batteries are already starting to look somewhat questionable.

Wisdom and folly

If it is accepted that EVs are as bad an idea as renewables are a good one, an inescapable conclusion has to be that EVs are likely to divert both effort and capital in ways that are wasteful. This risk would intensify were governments to allow themselves to be talked into subsidising EVs.

If the case for EVs is so flimsy (and, at the least, is so very far from proven) the question which remains is this – why are industry and government so determined to push ahead with conversion?

Beyond the human fascination with the new, the shiny and the technological, the reasons why we are likely to invest huge sums of our scarce energy-legacy capital into pursuing the chimaera of EVs are simple enough.

First, leadership in government and business still fails to recognise the challenge posed by the mounting cost pressures jeopardising the energy (and hence) economic future.

Second, EVs are a form of denial over the really pressing need, which is to readdress and redesign patterns of travel and habitation that are being rendered unsustainable by energy pressures.

Before the Second World War, and despite the efforts of Henry Ford in America and Volkswagen in Germany, cars were a luxury item, affordable only by the wealthy, and often more expensive to purchase than a house. Since 1945, we have pushed ahead, from the target of one car per household to something pretty close to one car per person. Efforts to tackle the energy, pollution and congestion consequences of the proliferation of car ownership have been half-hearted at best.

Whole patterns of work and habitation have been shaped by mass vehicle ownership, in much the same way that living and employment structures were transformed by railways in the Victorian era. The norm has become suburban and exurban sprawl, rather than the greater housing densities of earlier times. If we were ever forced to put the spread of car ownership into reverse, we would – quite apart from selling the idea to the public – have to redesign working practices and the structure of habitation.

These are issues that, for wholly understandable reasons, the public, government and industry have been extremely unwilling to confront. But the logic of rising ECoEs, climate change and a faltering energy-based economy is that we will have to face these challenges, whether we want to or not.

This implies that the push for all-out conversion to EVs is an exercise in denial, along much the same lines as the economic denial implicit in debt proliferation, pensions destruction and monetary adventurism.

We may not – yet, anyway – need to adopt a ‘one car per household’ strategy along the lines of China’s “one child” policy. But, at the very least, we need to be rethinking housing and transport patterns, and investing in incremental automotive technologies.

Leaner-burning engines, tighter (and strongly-enforced) emissions restrictions, hybrids, the increased use of engineering plastics and the imposition of a limit of, perhaps, 1.5 litres on engine sizes might be a better idea than building a new generation of heavyweight vehicles designed to harness an abundance of electricity which simply isn’t going to happen.