Putting the Real Story of Energy and the Economy Together

Off the keyboard of Gail Tverberg

Follow us on Twitter @doomstead666
Friend us on Facebook

Published on Our Finite World on April 15, 2015

oilwell

Discuss this article at the Energy Table inside the Diner

What is the real story of energy and the economy? We hear two predominant energy stories. One is the story economists tell: The economy can grow forever; energy shortages will have no impact on the economy. We can simply substitute other forms of energy, or do without.

Another version of the energy and the economy story is the view of many who believe in the “Peak Oil” theory. According to this view, oil supply can decrease with only a minor impact on the economy. The economy will continue along as before, except with higher prices. These higher prices encourage the production of alternatives, such wind and solar. At this point, it is not just peak oilers who endorse this view, but many others as well.

In my view, the real story of energy and the economy is much less favorable than either of these views. It is a story of oil limits that will make themselves known as financial limits, quite possibly in the near term—perhaps in as little time as a few months or years. Our underlying problem is diminishing returns—it takes more and more effort (hours of workers’ time and quantities of resources), to produce essentially the same goods and services.

We don’t measure our investment results with respect to the quantity of end product produced (barrels of oil produced, liters of fresh water produced, kilos of copper produced, or number of workers provided with sufficient education to work in high tech industries), so we don’t realize that we are becoming increasingly inefficient at producing desired end products. See my post “How increased inefficiency explains falling oil prices.”

Figure 2. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

Wages, viewed in terms of the product produced–oil in this case–can be expected to decrease as well. This change isn’t evident in usual efficiency statistics, because some of the workers are providing new kinds of services, such as fracking services, that weren’t required before.

Figure 3. Wages per worker in units of oil produced, corresponding to amounts shown in Figure 2.

Even investment is becoming increasingly inefficient. It takes more and more investment to extract a given quantity of oil or other energy product. This investment needs to stay in place longer as well. The ultra-low interest rates we have been experiencing reflect the poor returns investments are now making.

The myth exists that prices of all of the scarce goods and services will rise high and higher, as the economy encounters scarcity. The real story, though, is that the inflation-adjusted purchasing power of common workers is falling lower and lower, especially in the United States, Europe, and Japan. Not only can these workers afford to buy less, but they can also afford to borrow less. This means that their ability to purchase expensive goods created from commodities is falling.

At some point, this lack of purchasing power can be expected to affect the financial markets, and the prices of many commodities can be expected to fall. In fact, this already seems to be happening.

The likely impact of such a fall in commodity prices is not good. If low oil prices cannot be “turned around,” they will lead to debt defaults, and these debt defaults are likely to lead to failing financial institutions. Failing financial institutions have the potential to bring down the system, because it becomes very difficult for businesses to continue if they are not supported by a banking system that allows a company to pay its employees. Workers also need the banking system to pay for goods and to save for a “rainy day.”

A big part of what has allowed the economy to grow to the size it is today is increasing debt levels. These rising debt levels play many roles:

  • They make high-priced goods more affordable to consumers.
  • They create greater demand for goods, allowing more end-product goods to be produced.
  • They create more demand for commodities required to make end-product goods, allowing the price of these commodities to rise, so that more businesses have more incentive to create/extract these commodities.

At some point, debt levels stop rising as fast as they have in the past (because of a lack of growth in purchasing power because of diminishing returns in investment), and the whole system tends to fall toward collapse. We seem to have reached this point in the middle of 2014. China was raising its total debt level rapidly up until the early part of 2014, then suddenly moderated its growth in debt level in mid 2014. At about the same time, the US scaled back and eliminated it program of quantitative easing (QE). Oil prices dropped starting in mid-2014, at the time debt levels started moderating. Other commodity prices started falling as early as 2011, indicating likely affordability problems.

We are now in the period when many people still believe everything is going well. Oil prices and other commodity prices are low—what is “not to like”? The answer is that the system in not at all sustainable—profits of oil companies and other commodity businesses are down, just as wages of common workers in developed countries are down in inflation-adjusted terms. Companies are cutting back in investment in oil production. Soon oil production will drop. With lower oil supply, the economy will face huge challenges.

Many people believe that oil prices can bounce back up again, but this really isn’t the case, because of growing inefficiency related to limits we are reaching–the need to use more advanced techniques to produce oil; the need for desalination for water in some places; the need for more pollution control equipment that doesn’t really increase the finished goods and services we are producing but instead makes goods more expensive to produce.

Each worker is, on average, producing less and less of the finished goods we really need. Whether we like it or not, standards of living will have to fall. The amount of debt workers can afford decreases rather than increases. This new reality can be expected to manifest itself in debt defaults and increasing financial system problems.

Even if oil prices bounce back up again, it is doubtful that shale oil drillers will be able to again borrow at a sufficiently high rate to increase their production again—what lender will believe that oil prices will remain high indefinitely?

The China Connection

I have been trying to put the real story of energy and the economy together over a period of years. Prof. Lianyong Feng of Petroleum University of China, Beijing, hired me to put together a short course (eight sessions, each lasting about 1.5 hours) on the nature of our current problems for students majoring in “Energy Economics and Management.” The course would be open to everyone choosing this major, including freshman, so I needed to assume a fairly low level of background knowledge. Actual attendees included a number of graduate students and faculty, attending the course without credit.

I put together a series of lectures, which I gave during the second half of March 2015. PDFs of my lectures are also now available on my Presentations/Podcasts page.

These lectures were videotaped by Prof. Feng’s staff, and I am in the process of making You Tube Videos from them, in addition to the original MP4 format. (YouTube videos cannot be seen in China.) My current plan is to give a brief discussion of these lectures, in future posts.

Following the lecture series, I visited several places in China, to see how the economic slowdown is playing out in China. This included visits to Northwest China (Hohhot and Hardin), Northeast China (Daqing and Harbin), and Southeast China (Wenzhou area). In Wenzhou, I visited three different companies attempting to sell electrical equipment on the world market.

From these visits, we could see how the world economic slowdown is affecting China, and how China’s own slowdown in debt growth is adding to the world slowdown. We could also see that the slowdown has not yet run its course China–growth in housing continues, even as the need for it seems to be slowing. College students are finding it difficult to find high-paying jobs in oil and other commodity sectors. The lack of growth in high-paying jobs will provide downward pressure on housing prices as well.

I plan to write a post about this situation as well.

Knarf plays the Doomer Blues

https://image.freepik.com/free-icon/musical-notes-symbols_318-29778.jpg

Support the Diner
Search the Diner
Surveys & Podcasts

NEW SURVEY

Renewable Energy

VISIT AND FOLLOW US ON DINER SOUNDCLOUD

" As a daily reader of all of the doomsday blogs, e.g. the Diner, Nature Bats Last, Zerohedge, Scribbler, etc… I must say that I most look forward to your “off the microphone” rants. Your analysis, insights, and conclusions are always logical, well supported, and clearly articulated – a trifecta not frequently achieved."- Joe D
Archives
Global Diners

View Full Diner Stats

Global Population Stats

Enter a Country Name for full Population & Demographic Statistics

Lake Mead Watch

http://si.wsj.net/public/resources/images/NA-BX686_LakeMe_G_20130816175615.jpg

loading

Inside the Diner

Only one for copper wire, and only one for satellite, but in both cases the one is the Government - the Department of Communications.  They know nothing about the internet, so they choose a sub-contractor to do the work for them. There's a strong bias ...

My Pine Grove home is 17 years old and still going strong!  [...

Quote from: luciddreams on Today at 04:42:27 PMQuote from: RE on December 12, 2017, 05:23:13 AMQuote from: Eddie on December 12, 2017, 05:06:49 AMThe more major mistake woul...

Quote from: knarf on Today at 04:03:56 PMCongressional dysfunction may do what the pot-hating attorney general hasn’t managed to do all year: Remove protections for the booming legal weed industry.A year ago, whe...

EcoWatchToyota Urged to Reject Tainted 'Partnership' Claimed by Destructive EPA ChiefBy ...

Blog Commentary
Recent Facebook Posts

Trump Set To Fire Mueller On December 22: Seth Abramson Explains What This New Rumor In Congress Means For America

New from Samuel Warde:

4 hours ago

This Is The Daily Stormer's Playbook

This Is The Daily Stormer’s Playbook A leaked style guide reveals they’re Nazis about grammar (and about Jews).

5 hours ago

Trip to Club Morphine

Fresh posts from the Diner blog:

6 hours ago

Nieman Journalism Lab

7 hours ago

Retweeted shauna (@goldengateblond): When the bots and Pepes swarm, demanding Mueller’s head (and oh they will), use these screenshots like..

11 hours ago

Diner Twitter feed

Knarf’s Knewz
Diner Newz Feeds
  • Surly
  • Agelbert
  • Knarf
  • Golden Oxen
  • Frostbite Falls

Doomstead Diner Daily 12/16[html] [...]

Quote from: Eddie on December 15, 2017, 08:01:18 A [...]

Quote from: Surly1 on December 15, 2017, 03:44:57 [...]

Doomstead Diner Daily 12/15[html] [...]

Quote from: agelbert on December 14, 2017, 11:28:1 [...]

[/center]Goldman Says Big Oil Is Poised for Its Be [...]

TRNN Exclusive: The man that "shoed" Bus [...]

My understanding is Ethereum is The Blockchain (pu [...]

Thanks Palloy, A topic of much current interest an [...]

QuoteGO is my friend. I can still disagree with hi [...]

Quote from: monsta666 on December 06, 2017, 07:48: [...]

I just wanted GO to know that I agree with the poi [...]

Bacon & Cheese Stuffed Butterfly Mangalitsa Po [...]

Quote from: RE on December 15, 2017, 07:25:58 PMQu [...]

Alternate Perspectives
  • Two Ice Floes
  • Jumping Jack Flash
  • From Filmers to Farmers

The Psyops of “The Silence Breakers” Meme By Cognitive Dissonance Time magazine just named their wid [...]

Issues, Problems, (Social) Media and the Manipulation Thereof By Cognitive Dissonance   Back when I [...]

Taking a Pass on Gas – Wood Preferred - Part 2 By High Desert Homesteading   Part 1 of this article [...]

The Latest Sign of the Coming Apocalypse By Cognitive Dissonance   On occasion Mrs. Cog accuses me o [...]

Taking a Pass on Gas – Wood Preferred By High Desert Homesteading   We recently bought a 22 year old [...]

Event Update For 2017-12-14http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.html Th [...]

Event Update For 2017-12-13http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.html Th [...]

Event Update For 2017-12-12http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.html Th [...]

Event Update For 2017-12-11http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.html Th [...]

Event Update For 2017-12-10http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.html Th [...]

You know things have taken a turn for the desperate when women have started to drive. Or rather, whe [...]

From Filmers to Farmers is re-launched on the astounding open source blogging platform Ghost! [...]

The blogging scene is admittedly atrocious. Is there really no option for a collapse blogger to turn [...]

Daily Doom Photo

man-watching-tv

Sustainability
  • Peak Surfer
  • SUN
  • Transition Voice

The Climate Bums"The US is only pledging about 20% of its fair share. The EU is pledging about 50% of its fair [...]

Causation"Physical realities are very slow to change. Minds can change instantly."Bapu's Chark [...]

The Diamond Cutter at Apache Pass, Part 4: Permaculture"There is epigenetic asynchrony in this biome." This is the fourth and last installment in [...]

The Diamond Cutter at Apache Pass, Part 3: Vajracchedikā Prajñāpāramitā"The things that are seen are temporal; the things that are unseen are eternal. — Saul of Tarsi [...]

The Diamond Cutter at Apache Pass, Part 2: Passage to India"Blindfolded, he spoke eloquently on the nature of emptiness."This is the second installme [...]

The folks at Windward have been doing great work at living sustainably for many years now.  Part of [...]

 The Daily SUN☼ Building a Better Tomorrow by Sustaining Universal Needs April 3, 2017 Powering Down [...]

Off the keyboard of Bob Montgomery Follow us on Twitter @doomstead666 Friend us on Facebook Publishe [...]

Visit SUN on Facebook Here [...]

Americans are good on the "thoughts and prayers" thing. Also not so bad about digging in f [...]

In the echo-sphere of political punditry consensus forms rapidly, gels, and then, in short order…cal [...]

Discussions with figures from Noam Chomsky and Peter Senge to Thich Nhat Hanh and the Dalai Lama off [...]

Lefty Greenies have some laudable ideas. Why is it then that they don't bother to really build [...]

Democracy and politics would be messy business even if all participants were saints. But America doe [...]

Top Commentariats
  • Our Finite World
  • Economic Undertow

I was just speaking to someone who is driving a coal powered car --- and another person with panels [...]

And last spring and summer it never stopped raining. What's going on!!!! This has NEVER happene [...]

Pentagon hss decided to disclose the U.F.O phenomena. https://mobile.nytimes.com/2017/12/16/us/polit [...]

For once, concur with you I do. Trump is (and was), as Steve from Virginia put it, a heel. Someone t [...]

I find it interesting that those who talk of renewables replacing FF always talk of the cost in $, b [...]

Question for Steve or anyone else who would like to chime in; Do you think that the Federal Reserves [...]

http://peakoil.com/consumption/the-biggest-bubble-ever-in-three-charts I have no idea what the meani [...]

@dolph - disensus = good. The more the merrier. You are hung up on scale [...]

There's nothing we can do, we are slaves with information. Alright, not quite nothing - we can [...]

RE Economics

Going Cashless

Off the keyboard of RE Follow us on Twitter @doomstead666...

Simplifying the Final Countdown

Off the keyboard of RE Follow us on Twitter @doomstead666...

Bond Market Collapse and the Banning of Cash

Off the microphone of RE Follow us on Twitter @doomstead666...

Do Central Bankers Recognize there is NO GROWTH?

Discuss this article @ the ECONOMICS TABLE inside the...

Singularity of the Dollar

Off the Keyboard of RE Follow us on Twitter @doomstead666...

Kurrency Kollapse: To Print or Not To Print?

Off the microphone of RE Follow us on Twitter @doomstead666...

SWISSIE CAPITULATION!

Off the microphone of RE Follow us on Twitter @doomstead666...

Of Heat Sinks & Debt Sinks: A Thermodynamic View of Money

Off the keyboard of RE Follow us on Twitter @doomstead666...

Merry Doomy Christmas

Off the keyboard of RE Follow us on Twitter @doomstead666...

Peak Customers: The Final Liquidation Sale

Off the keyboard of RE Follow us on Twitter @doomstead666...

Collapse Fiction
Useful Links
Technical Journals

It is often stated that short-term precipitation of synoptical weather is related to trends or inter [...]

The livestock sector is vulnerable to climate change and related policy in two ways. First, livestoc [...]

Climate change can have serious impacts on human health, resulting in increased healthcare utilizati [...]

Follow on our http://www.doomsteaddiner.net/forum/