Responding to Collapse, Part 10: the future of the power grid

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Published on The Easiest Person to Fool on July 17, 2019

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In this series of posts I've been advising my readers that moving to a small town remote from large population centres, in an area that can supply the basic necessities of water, food and firewood, is a prudent way of coping with the ongoing collapse of BAU (Business as Usual). With the caveat that some advance preparation will be needed to ensure successful use of those resources.



In the next few posts in this series, we'll look at some of the details of how BAU will collapse and how you can prepare to weather that collapse. In the immediate future infrastructure breakdowns will get more frequent and longer until finally it's no longer practical to rely on BAU for the necessities of life. It seems to me that supplies of electrical power, diesel fuel and money will be at the heart of many of the troubles that lie ahead, so I'll concentrate on those areas.

And while I'll mainly be talking about infrastructure breakdowns we should remember that interruptions of service can occur for a couple of other reasons.

The first has to do with the way our economy is organized and how we choose to provide vital services such as power, water, sewers, housing, food, communications, transportation, education, health care and so forth.

Today most of the world's nations are capitalistic, with a distinct neo-liberal flavour. Under such conditions, companies are operated to make a profit and other goals, such as the public good, are strictly secondary. So when a "for profit" company finds its business becoming less profitable they must find ways to increase their charges or to supply less for the same fees or to quit supplying customers in less profitable areas altogether. And if they don't do those things they will either be bought out by companies that will, or they'll suffer bankruptcy. If there doesn't appear to be much chance that another company could make a good profit in the same business then it will never be reestablished. And if the public was relying on that company to provide vital services, then we are just out of luck.

Of course there are other ways of organizing an economy, and in particular other ways of setting up companies to provide infrastructure services. But the argument is often made that for profit companies operating in a free market are more efficient. I would question if there has ever been any such thing as a free market, and whether it would function as predicted in any case. Efficiency in this case is defined as the amount of return on share holders' investments, and has nothing to do with providing a high quality and reliable service to your customers.

But perhaps we should set all that aside in order to focus on the really critical thing, which is the difference between the way such companies work in growing economies versus contracting economies. In a growing economy it is relatively easy to make a profit and do so while supplying a service for the public good. But when the economy begins to contract that becomes more and more difficult for "for profit" companies.

Governments can set up non-profit organizations whose primary goal is to provide services for the public good and they are likely to last longer in a contracting economy. In my experience, contrary to typical capitalist propaganda, they can also be quite efficient. But as the economy contracts so will tax revenues and eventually governments will have to cut back on the services they provide. With good planning though, they can do this in a controlled manner with lots of advanced warning, and give people time to adapt to the situation.

As the economy gets even weaker, co-operatives organized by the people who need the services hold considerable promise. I'll have more to say about this over the next few posts.

The second thing is that if you rely on BAU to make a living, you will find that your own economic circumstances are declining. When you can no longer afford the services you have come to rely on, you'll have find ways to provide them for yourself, and in the process learn how to get by with less, like it or not.

I can consume along with the best of them, and there are certainly all kinds of things that it would be useful to have as we try to become more self reliant. But don't worry too much if you can't afford some of the shiny toys I'll be mentioning in future posts. As well trained consumers we may feel that buying things must be the solution to the problems that face us, but it isn't. Actually, there is no solution to the fix the world is in at the moment, and the best we can do is adapt to the changing conditions. Part of that is learning to get by while consuming less. This is hard for me and I'll bet it's hard for you too. That's why I talked first about preparing by become part of your new community (in posts 7 and 8 of this series), rather that the less important preparations that involve accumulating "stuff".

Back 2012, when I started this blog, the authorities recommended that you be prepared to weather emergencies lasting for as long as three days (72 hours). They were basically saying, "don't rely on us to be there immediately—it may take as long as 72 hours before help arrives." In the meantime, this has been changed to two weeks in some areas. Is emergency response capability declining, or are they expecting more lengthy and severe emergencies? I suspect both. Of course serious "preppers" are laughing at this—they'd recommend that you have supplies on hand for a year or two. I don't disagree, but you have to start somewhere. And as collapse deepens those longer intervals to prepare for will come to seem more reasonable.

Power Outages

Power outages will probably be the most frequent infrastructure failure you'll have to cope with. Short outages have relatively minor impacts, but because electricity is at the heart of so much that goes on in modern civilization, as outages stretch out they start to effect more and more things.

Eventually, it seems very likely that the power grid in many, if not most, areas will cease to function. I encounter two different responses to this idea. Many people cannot conceive that their 24 hour a day, essentially infinite supply of power could every come to an end. Others are fixated on the idea of a sudden and hard crash which will bring the whole of industrial civilization to an end, including the power grid.

I'm somewhere in between, holding what I think is a more detailed and nuanced opinion. Most of the rest of this post is going to be spent talking about how the slow decline of the power grid will go, leaving the responses I would recommend for the next post.

Power outages can be as simple as a utility pole getting knocked over during a traffic accident, to as complex as the grid failures that happened in northeastern North America in 1965 and 2003. And to take it even further, EMPs (electromagnetic pulses) from nuclear weapons or coronal mass ejections (solar flares) can do huge damage to electrical girds which may be very hard to recover from. But I think some of the most common and serious problems with the grid will come from three specific areas:

  • The first is equipment failure due to age and/or lack of maintenance, aggravated by overloads such as air conditioning load during summer heat waves. As the economy continues to contract power companies are going to find themselves short of capital and less able to invest in their own systems, leaving those systems more susceptible to failure. /li>
  • The second will be damage due to storms that are growing more frequent and more intense due to climate change—things like high winds, tornados and ice storms in particular. Lengthy outages will happen when there are widespread weather related problems combined with shortages of spare parts and limited manpower to install them. Those latter two problems will come mainly from cash strapped utilities trying to save money.
  • The third is sabotage. The grid is very exposed to a saboteur who knows what he is doing, and because of its geographically diffuse nature, very hard to secure. As collapse intensifies, there will be increased civil unrest—more angry people looking for easy targets that symbolize the establishment. The grid is certainly one such target.

Of course, these concerns apply to the grid as it exists today, using conventional generation. It seems there is going to be a serious attempt to switch from fossil fuels to renewable energy, primarily solar and wind. Those who are pushing for a "Green New Deal" are telling people that we can use wind and solar to replace fossil fuels, and that in the process more jobs will be created and we'll actually end up more prosperous. This is a very unrealistic dream and just off the top of my head I can think of four serious problems with it:

  1. What solar and wind produce is electricity. But electricity supplies only 18 to 20% of our current energy use. Most of the rest comes directly from coal, oil and natural gas, and those fuels are used in ways that will be difficult, if not outright impossible, to replace with electricity.










    The main issue is that a battery is not nearly as effective a way to store energy as a tank of diesel fuel. And there are definite physical limitations on how much better batteries can get— we can probably improve them by a factor of two, but that's about it. Despite what we keep hearing in the news, it simply isn't practical to use batteries to power airplanes or long distance heavy transport by road, rail or sea. The quantity of batteries needed, and the size and weight of those batteries, is the problem.

    There are many industrial processes that use coal or natural gas for heat. Replacing those fuels with electricity may be theoretically possible but we haven't, for the most part, even started to develop ways to do so, much less begun to implement them.

  2. Phasing out fossil fuels would require using renewables to supply much larger quantities of electricity than we are currently using. But there are fundamental problems with using renewables to produce even part of the comparatively small amount of electricity we use now.

    One aspect of running a power grid that the general public is largely unaware of is that generation must be matched exactly to the load. Since load is something the grid operator cannot control to any great extent, generation that is "dispatchable"—that can be turned on and off on demand and ramped up and down as required—is very important. Conventional generation is dispatchable to varying degrees but renewable energy sources such as solar and wind are intermittent and for the most part not under the control of the grid operator—the very opposite of dispatchable. As such, renewables only exacerbate the problems of running a grid, especially given the lack of feasible large scale storage technologies. Yes, I know there are a number of storage technologies available but none of them are economical to use on the scale that would be required for use in a power grid with intermittent renewable energy sources like solar and wind.

    The concept of a "smart grid" which gives greater control of both generation and load offers hope of addressing these problems to some minor degree, but only at the price of adding complexity to the system. And adding complexity never increases reliability.

  3. The immediate reason for switching away from fossil fuels is to reduce the amount of CO2 being released into the atmosphere in order to combat climate change. But no one seems to be thinking of the carbon footprint of switching away from carbon. The switchover to renewables would be a massive undertaking powered mainly by fossil fuels, and the amount of CO2 being released would greatly increase during that effort.

    Much of this construction effort would also require large quantities of steel and concrete. Making steel and concrete involves the release of CO2, regardless of where the energy comes from—it's inherent to the chemistry of the processes involved.

    So it is by no means obvious that we can get off fossil fuels and onto renewables without creating an even worse climate crisis that the one we are currently facing.

  4. Renewables have a very low EROEI (energy returned on energy invested). A high EROEI is essential to the functioning of a modern industrial economy–money is just accounting, energy is really what makes the economy go. Any country which adds a large quantity of renewables to its energy mix will lower its overall average EROEI, making it more difficult to support a growing economy and a high tech industrial society. So even if we could somehow manage to switch over entirely to renewables, we'd have trouble sustaining a high enough level of technology to maintain and repair solar and wind generation facilities. And replacing them when they wear out would be a real stretch. Switching to renewables is something we might be able to do once, but then we'd be in big trouble.


All this is of course based on not having to change our lifestyles, not having to accept a lower level of prosperity and consumption. Indeed one frequently hears people talking about increasing economic growth in order to bring the poor parts of the world up to our level of consumption. It is clear to me that this is not going to happen and that what we really need to do is reduce our levels of consumption down to what can be supported without fossil fuels, using local, sustainable, low tech renewables. It is also clear to me that we will not do this voluntarily, that the majority of our efforts will go into maintaining business as usual regardless of the consequences.

Give all these factors time to work and it will become difficult to continue running the power grid as a whole. Some parts of the gird will simply quit working. Others that have proved unreliable, which place the grid as a whole at risk, will eventually have to be excluded from the grid. These islands will grow until the grid as we know it falls apart.

There will be a few areas where generating equipment will continue to function for a long time and will be able to supply local load. Again, the matching generation and load will be a problem since most such generation comes in large chunks and is a long way from large amounts of load. The most hopeful situations are small hydro (water) powered generators, which can be run at less than full capacity and adjust quickly to match varying loads.

Anyway, it seems clear that we can indeed expect more frequent and longer power outages. But what are the effects of these outages, and what can we do to mitigate them?

The effects of power outages

When the power goes out, you lose the lights, heat, cooling, cooking equipment, refrigeration and so forth in your own home. Even most oil, gas and wood heating systems rely on electricity for control, ignition and circulating fans. Then there are all the services that comes to you from outside your home, that you rely on to just work, but which need electricity to do that.

In general, the most critical services run off batteries which are kept fully charged as long as the power is on. When the power goes out, these services keep right on running as if nothing had happened, at least until the batteries are discharged. The batteries for the controls in power stations are rated for eight hours. The batteries in cell phone towers are rated for two to four hours.

Everything I'm finding on the internet says that the central switching stations for land line telephone service should keep working even during long power outages, which implies both batteries and backup generators. I have some doubts about this, and I'll be keeping an eye out for more detailed information.

Many slightly less critical services have generators that start automatically with only a brief interruption when the power goes out and run as long as there is fuel (usually diesel fuel) in the tank. If arrangements have been made to refill that tank, then this can go on for quite a long time.

Even less critical services than these can have a portable generator hooked up to them if need be. This would include facilities operating on battery power, if the power is off so long that the batteries need to be recharged.

Most service stations don't have backup power so you likely won't be able to get fuel (gasoline, diesel, propane) while the power is off. During long outages the many supply chains that are powered by gasoline and/or diesel fuel will be in trouble.

Natural gas pipelines have to be pressurized to keep to gas flowing through them. Some of the pumps used to do this are powered by natural gas, some by electricity. And I suspect that at least some of the controls for the gas powered pumps are electrical. So your natural gas supply, at least in some areas, will be compromised during electrical outages.

The pumps in municipal water and sewage systems need electrical power too. Some may have backup generators, but not all. If you live on a farm or in a very small town, your toilet is likely gravity feed into a septic system and weeping bed, and will work as long as you have water to flush them. Or perhaps you have already set up a composting toilet which requires no power at all. Your water supply is probably from you own well, with a pump driven by an electric motor that uses 240V AC (if you are in North America). Even if you have a generator, you may need an electrician to help you hook it up to that motor.

Refrigeration of food in grocery stores and pharmaceuticals in pharmacies and hospitals will be jeopardized. Fortunately our local hospital does have a backup generator.

Radio and TV can be important sources of information during emergencies. But you will likely find that only a very few of your local stations are set up to keep broadcasting during power outages.

It would also be great if internet service could continue during power outages. I understand it some areas it does, but we get our internet through the local cable TV company, and even short outages to their facilities knock out our internet connection and our cable TV service, even if the power is still on at our place. Your situation may be different—I hope so.

Oddly, or so it seems to me, most traffic lights aren't backed up in any way and stop working when the power is off.

ATMs won't be working, nor the systems that allows us to pay for things by credit and debit cards. Even if you do have cash in hand, you may find many retail outlets are unable to sell you anything when their cash registers and product code scanners aren't working. Many of them may just lock their doors for the duration of the outage.

Not all of them, though—I was quite impressed during a recent outage when I saw the guy behind the counter at a nearby convenience store beavering away with a cash box, battery operated calculator and a notebook to record sales in. It can be done, but one hopes the prices are marked clearly on items rather than encoded in UPCs. This is an example of an individual (or maybe his manager) taking the situation in hand and keeping things working rather than sitting back and letting them fall apart.

No doubt I am missing many of the potential effects of long power outages, but I think this gives you the flavour of what you'll be facing. Next time I'll talk about how you can mitigate the effects of power outages, both short and long, and what your community can do to cope when it finally finds itself permanently isolated from the grid.

Links to the rest of this series of posts, Preparing for (Responding to) Collapse:


Responding to collapse, Part 3: Declining Surplus Energy


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Published on The Easiest Person to Fool on October 26, 2018

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In my last post I talked about responding to changes in our "natural" environment caused by climate change. Today I'll be talking about responding to changes in the human part of our environment, the part that we have created, both the "built" physical environment and the social environment.

We are social animals and also technological (tool using) animals. For the last few million years our ancestors evolved to live in groups and use technology. In one way of looking at it, our techniques for working together in groups are an organizational technology that greatly amplifies what we could do alone.

At any rate, for a long time now we have been dependent on technology—we certainly aren't much good alone, naked and empty handed. Technology needs energy to make it work and for most of our history that energy has come from food via muscles (human or animal), biomass (mainly firewood), and to a lesser extent wind, moving water and the sun. But over the last couple of centuries we've added cheap and abundant fossil fuels to that mix of energy sources. We've gradually become dependent on a global network of complex technology powered by those fuels for the very necessities of life.

This is a cause for concern—what if energy were to become more expensive and/or less abundant? As it certainly seems likely to do in the near future. Well, in short, the way we live would have to change, becoming less energy intensive, and it seems very likely that the planet would no longer be able to support so very many of us. It can barely support the number of us that are alive today, so this would mean a significant dieoff of the human population. And the climate change related problems we talked about last time will only make this worse.

Of course this is nothing new. I've discussed the ideas of carrying capacity, overshoot and dieoff many times over the years on this blog. But the devil, as they say, is in the details and if we are to discuss strategies for living through collapse, we need to look closely at those details.

The economy is a major and critically important part of the modern human environment and one that is fueled by energy, so I see depletion of fossil fuel energy resources (often referred to as Peak Oil) as the major challenge as far as the human built environment goes. To really understand that challenge, it is important to understand a bit about "biophysical" or "surplus energy" economics. Have a look at those links for more detail, but I'll try to explain in brief.

First, why is energy so critical to the functioning of the economy? Modern industrial processes are significantly more productive than the cottage industry of just a few hundred years ago, and it requires a lot of energy to make them work. The energy that drives these processes is worth far more in terms of the goods it produces than the price that industry pays for it. As such, energy is far more than just another commodity. And it must be abundant and cheap, if industry is to be profitable and the economy is to continue growing.

Second, why are fossil fuels such an important source of energy? Basically because they have been abundant, cheap and convenient to use. When I say cheap, I am not just talking about the cost in dollars, but in the amount of energy it takes to access fossil fuel energy. This is defined as the "Energy Returned on Energy Invested" (EROEI). Early in the twentieth century, when oil came into prominence as an energy source, it took just one barrel of oil to get 100 barrels of oil out of the ground—the EROEI was 100. The "surplus energy" was over 99% and this was a tremendous stimulus for economic growth.

Since we have developed fossil fuel resources on a "lowest hanging fruit" basis, the easiest to access, highest quality sources have gradually been used up. Modern oil discoveries rarely have an EROEI better than 10. Unconventional sources of oil, such as fracking and tar sands, have even lower EROEIs. And sadly, the renewable energy sources that are being considered to replace fossil fuels also have very low EROEIs. Even lower if you add in the energy storage required if intermittent sources like wind and solar are to be put into practical use.

The important thing to understand here is that there is a very clear link between the average EROEI of a country's energy sources and the strength of its economy. As that average EROEI goes down, industry starts to become less and less profitable. Below 15 this gets very serious—it becomes difficult to raise capital to start new endeavours and existing businesses find it hard to stay profitable. As the average EROEI decreases further, infrastructure replacement and even routine maintenance of infrastructure becomes difficult to fund. Industrial civilization starts to crumble and the kinds of heroic efforts it would take to save it are beyond its capabilities.

Conventional economists are blind to this and assume that as one energy source runs out, demand will successfully fuel efforts to find a substitute. Without a clear understanding of EROEI, evaluating the merits of such substitutes can be very difficult. Already we are seeing "energy sprawl" as wind turbines and solar panels are springing up everywhere, but with such low EROEIs that they are actually lowering the average EROEIs of the systems they are being added to.

Some people argue that there are huge reserves of unconventional fossil fuels, enough to last for centuries, "so where's the problem?" The problem is that these unconventional hydrocarbons have such low EROEIs that they are not a solution—pursuing them just makes things worse.

The same is true of nuclear fission—lots of fuel, but such a low EROEI (around 9) that it's no help. If at some point we manage to design practical fusion reactors, it is pretty clear that they will be so complex that their EROEI will be even lower than fission reactors, making the abundance of fusion fuel a moot point.

The essence of our situation here in the early twenty first century is that the problem of declining surplus energy doesn't have a solution. Of course, in addition to that underlying and insoluble problem, there are lots of things wrong with our social/governmental/economic systems that make the situation even worse. Definitely it would help to fix these problems, but it is important to keep in mind that, even if they were all fixed, everything wouldn't suddenly be OK—the main problem would still exist. And because of declining surplus energy, it's going to get harder and harder to fix anything.

So, what to do? Well, we just have to adapt to these new realities. Here I am going to borrow some ideas from Prof. Jem Bendell's essay "Deep Adaptation", particularly his three Rs.

Bendell is mainly concerned with climate change and after doing a review of the current findings of climate science, he concludes that "collapse is inevitable, catastrophe is likely and extinction is possible". Considering declining surplus energy and the resulting economic contraction as well as climate change leads me to the same conclusions, maybe more so. Even without any catastrophic events, the slow collapse of industrial civilization, brought on by the falling EROEI of its energy sources, is surely an inevitability. And we should be planning our response to such a slow and tedious collapse, which will require a great deal of adaptation to our new circumstances.

There are many forms of denial that people fall into when faced with the certainly of collapse. Not surprisingly, most people see their continued livelihood and their feelings of self-worth as being dependent on the possibility of ongoing material progress. This is the "religion of progress" which is so central to our modern society. Collapse, of course, means the end of material of progress, and immersion in a complex predicament beyond our control. Admitting this is even possible has, at least initially, a crushing effect on most people.

But, for those who have overcome their denial, Bendell's three Rs hold the key to successful adaptation.

First comes "Resilience". This means having the personal resources—emotional toughness to keep going in the face of collapse and the willingness to adapt to conditions that we have been taught are simply unacceptable (involving a significant reduction in our level of comfort and convenience). I am currently reading Resilience, by Rick Hanson, which gives an abundance of advice on achieving a greater degree of personal, internal resilience.

The alternative is to continue with denial, or having accepted the reality of the situation, give up and abandon any attempt to adapt. To do so is a great pity, since the situation is potentially survivable. Not to minimize the rigors of collapse, especially of the kind of dieoff we will eventually be facing, but there is good reason to think that some of us will survive, find a livelihood and maintain a sense of self worth even with drastically reduced consumption of energy and material goods.

In order to be among those who survive, resilience also involves having accumulated some physical and social resources which will tide us through when the system that currently supports us falls apart, allowing us to hang in there long enough so that we have a chance to adapt. These are the things we will decide we do really need to keep in order to meet our basic needs—safety, satisfaction and connection. Our ancestors did this for millions of years without the help of industrial civilization, so I think there is some chance we can do so as well.

Next comes "Relinquishment". This means deciding what we need to let go of in order to not make matters worse. Clearly, many aspects of modern industrial society cannot be sustained and will have to be abandoned.

Lastly comes "Restoration". This means deciding what can we bring back to help us with the coming difficulties and tragedies. In building our modern world there is much that we have set aside, old things that can brought back and put to good use in our low energy future.

I could spend one or more posts looking at the details of these three Rs, and it is likely that I will. I think there are many different approaches that should be tried, and of those, quite a few that will be successful to some degree. The main thing is that people actually give it a try.

So, we started out to have a closer look at the details of collapse in order to gain a better perspective on strategies for living through collapse and after it. I think an understanding of surplus energy's role in economics and the three Rs outlined above is a good start. But to delve deeper into this, I think we need to take a look at mankind's disturbing tendency to group together in ever large settlements. We tend to focus on the advantages of living in cities and to ignore what it takes to make a city work, how it can stop and what might happen when it does.

Cities rely on long supply lines and extensive infrastructure to supply their inhabitants. Our failure to maintain that infrastructure and its resulting decay is already leading to intermittent outages of services for which there is no local alternative. At some point the line between outage and catastrophe blurs and not long after that it becomes unavoidably clear that collapse is really happening.

Now I am a country boy, so perhaps I am biased, but it is my contention that cities are going to be very hard hit by collapse, even the sort of slow collapse that I am talking about. I think that escaping to a more rural area before collapse progresses much further would be a good idea.

The key question, though, is why do I think things will be any better in rural areas?

There is no doubt in my mind that the crises related to supplies of energy, water and food (the basic necessities), which will no doubt occur as industrial civilization crumbles, will effect rural areas just as much as urban ones. People in rural areas are just as much a part of "Business As Usual" as people in the city, just as dependent on long supply chains and complex systems. And when there are disasters, relief efforts are likely to be focused on large population centres, ignoring the rural areas just on the basis of what will help the most people with the least effort.

But we are already seeing the US federal government tapering back on relief efforts in response to hurricanes and passing the responsibility off to the private sector. There is little reason to believe they will do any better. And not far down the road local communities, be they urban or rural, will find themselves essentially on their own when the going gets tough.

The good news is that there are many rural areas where:

  • adequate energy can be had locally in the form of firewood which can be cut by hand
  • potable water can be accessed from already existing wells that can be converted to hand or wind driven pumps and surface water that can be used with fairly simple filtration or treatment
  • sufficient food for the local population can be grown on existing farmland within walking distance of town, without fossil fuel powered machinery

Sure, it will require some degree of advance preparation and a willingness to adapt our lifestyles, but it is all quite doable. This is not the case in the city, where local resources for self-sufficient living are simply not available.

When I speak of rural areas, let me make it clear that I am talking about small towns of a few hundred to a few thousand people, surrounded by farmland, not isolated farmsteads. It will take more than a single family or two to make this work. Indeed isolation is one of the most debilitating conditions that you can find yourself in as a human being.

During the last few decades neoliberalism, in its endless search for profit, has done its best to monetize every human relationship and to isolate individuals from each other. The declining economy is leading to increased under employment and unemployment, poverty and homelessness all of which stresses our communities and isolates their individual members. And civil unrest is growing as inequality between the upper and lower classes increases and the degree to which the lower classes are being abandoned becomes more obvious.

But many small towns are a long way behind cities on that curve and their communities are still intact enough that co-operation is possible when it becomes clear what is required. And during a slow collapse it will gradually become more clear what the situation really is. To enough people, at least, that those advance preparations will get made. Collapse aware people have an important role to play there.

For a long time now, young people have been moving from areas like the one where I live to the cities in order to get an education and find work. The day will come (as I understand it already has as conditions have worsened in Greece) when the situation in the cities will be so bad, they will start to come home to take advantage of the somewhat better situation in the country. They will be able to pitch in and help their families adapt to collapse.

So far I have been talking about adapting during a slow and steady collapse. But of course catastrophic events can by no means be ruled out. In particular, our financial systems are largely virtual and as such are subject to extremely fast collapse when they fail. They will be the first to go, and that will have a negative effect on everything else.

It appears to me that most real economic growth ended in the 1990s and since then growth has largely taken the form of financial bubbles, fueled by debt instead of energy. Those who have money are desperate to find somewhere to invest it at a good return, but profitable, growing businesses are becoming rare, so instead they invest in ever more speculative endeavours. That's fine as long as the price is going up, but every such bubble is looking for a pin to burst it. A few months ago I said that we can expect a financial crash of greater magnitude than 1929 or 2008, sometime in the next few years and nothing has happened since then to change my opinion.

Already we have had a minor spike in the price of oil, trouble for the currencies of emerging market countries, and some indication that the long running bull market may be coming to an end. We are in the middle of this and it isn't yet clear if this is the start of a recession, or if the economy will rally and put off the big crash for some months or years yet.

When that crash does happen, I think that even in cities most of the population will survive the initial days of a financial collapse, mainly because of heroic efforts on the part of individuals in shop floor and low level management positions in supply chain and infrastructure organizations. The people at the tops of those organizations will be largely paralyzed, or at worst doing exactly the wrong thing. But even a worldwide financial collapse will hit some areas harder than others and will proceed, as I have said before, unevenly, unsteadily and unequally. And that's a good thing, because it means when things get really bad locally, there may well be someplace to go where things are better.

I expect there will be some reduction in our population due to supply chain failures following financial crashes. But the big dieoff that lies ahead of us will happen when industrial scale agriculture (both conventional and organic) comes hard up against resource limits—mainly fossil fuels and mineral fertilizers.

Still, it is possible that in the wake of a financial crash the stereotype of a city full of people starving in the dark with no help in sight will occur occasionally. For the vast majority of the unprepared people in that city this will not a survivable scenario. For anyone who really has no other choice but to stay in the city for now, it might be best to have a few weeks of food, water, etc. on hand and plan to stay at home during such a situation, keeping a very low profile, until things settle down and only then head for the country.

But you and I, of course, will have long since moved to a small town at a safe distance from the city. The standard trope in discussions of collapse involves our little town being overrun with roving hordes of hungry people engaged in looting and other forms of violence. I think this is unlikely. The key is to be farther away from the city than most of its population can walk on empty stomachs, which is not that great a distance. Thirst and starvation are debilitating and most people will not think to head out until they are quite desperate.

A few people will no doubt make it through though. It is my opinion that it would be better for everyone involved to welcome them with food and medical assistance, rather than fight them off with guns. It will be a bit of a trick to be set up to do that and in my next post I will look at the practicalities of moving to a small town in the country and getting ready to cope as the pace of collapse increases.


How the World Works: Part II

Off the keyboard of Geoffrey Chia

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Published on the Doomstead Diner on August 10, 2015

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Geoffrey Chia is an Australian physician who has written many provocative articles including "The Brisbane Institute is a Brisbane Prostitute". The reader is encouraged to fact check for yourself everything written here.

The Good, the Bad and the Ugly

How can we reconcile the exploitative behaviour of the AngloAmerican colonial empires of the past, with their later acts of defeating Nazism followed by the generous postwar reconstruction of Germany and Japan, and later, the Clinton intervention to save the victims of atrocities in Kosovo and Bosnia? Human beings are complicated animals, sometimes showing great brutality and sometimes showing great compassion, although generally tending to act in their own self interest most of the time. Self interest has certainly been the most consistent theme in US policy, specifically the interests of the US corporations and banks, masquerading as "US National" interest. It is ever so today. Some may view US history as a progressive trajectory from the brutish genocidal behaviour of the colonial past (their actions towards Native Americans were undoubtedly genocidal), eventually moving toward greater social enlightenment, with the abolition of slavery, universal suffrage and the civil rights movement. If we expected more and better social justice outcomes with the passage of time, our hopes have been dashed since the turn of the century, as exemplified by the criminal invasion of Iraq on the basis of lies, the multiple human rights abuses by the Bush/Cheney regime, escalating gun crime and racial conflict in the US with excessive incarceration of the African American population and the increasing impoverishment of ordinary Americans (and Southern Europeans) by parasitic bankers who control compliant governments. The fact is that the background US agenda of exploitation of the vulnerable has continued unabated since the end of WW2, albeit disguised by the Orwellian newspeak and misrepresentations, indeed barefaced lies, perpetrated by their mainstream media. A guaranteed outcome of the current arrangements will be the collapse of industrial civilisation with massive human die-off and a possible outcome may be near term human extinction.


Predatory Capitalism

If mechanised industry represented the hardware of our brave new world, it was another Western invention, Predatory Capitalism, which represented the software, which governed the workings of the entire edifice. To use another metaphor: capitalism was the nervous system, industry was the musculoskeletal system and petroleum was the lifeblood which fuelled it all. If the electrical impulses in your nerves are interrupted, then even if your muscles are strong and are receiving plenty of blood, you will be paralysed. Financial/economic collapse can paralyse societies and curtail basic services (food, water, energy, sanitation) just as surely as resource depletion can, however the former tends to happen much more suddenly.

Predatory capitalism is the ideology of "infinite growth on a finite planet", driven by limitless greed, the idea that enough is never enough. It confers upon its privileged practitioners tremendous short term material benefits, but in the long term promotes the behaviour of a malignant cancer or a relentless planetary parasite hellbent on killing its host. Capitalism was primarily an AngloAmerican invention13 (also enthusiastically embraced by the Dutch), although Hayek and the Austrian school of economics also became highly influential. Margaret Thatcher herself famously waved Hayek's book "The Constitution of Liberty" about, like some kind of bible, proudly professing her fundamentalist faith. Events have proved beyond any shadow of doubt that the doctrine of neoclassical economics, despite brandishing all sorts of impressive mathematical equations, is a delusional ideology based on flawed assumptions, which, although initially apparently beneficial to a country, ultimately concentrates wealth among a select few while exploiting the many. It disregards the environmental damage it causes. These "externalisations" are willfully ignored by the blinkered adherents of this ideology.

The economic enslavement of Greece (with other PIIGS countries on the chopping block) by the European troika (European Commission, ECB and IMF – the latter being headquartered in the US) represents the beginning of the endgame for Predatory Capitalism, a system fated to voraciously consume itself in the long run. We are witnessing one power bloc beginning to cannibalise itself, starting with its most vulnerable members at the periphery. In the Great Game, nowadays even a "left wing greenie" female politician can play, no Chaplinesque moustache or goose-stepping required (admittedly though, she is German).


Money, the Petrodollar and the exponential growth of the real economy on the upside of Hubbert's curve

Before we proceed it is important to remind ourselves of some basic definitions.

Economics is commonly defined as the study of how goods and services are produced and distributed. In a sane world, economics should also require the study of how waste is generated and disposed of, and the necessary costs for proper disposal must be factored in. Unfortunately this last issue has largely been ignored, particularly by the so-called neoclassical economic "experts". They therefore gave Industry a free pass to treat the environment as a toilet. If we lack solutions to safely dispose of or neutralize certain hazardous waste, then the true economic cost of generating that waste approaches infinity and any sane person must conclude that such waste should not be generated in the first place. This is why nuclear power generation, properly considered, must be regarded as insane14. Refusal to acknowledge the harm caused by industrial activities such as carbon emissions lies at the heart of the failure of our economic system. Denialism leads to death, and in our case, possible near term extinction. Naomi Klein put it starkly: Capitalism is at war with life on Earth.

Finance refers to how economic processes are funded. Money, the stockmarket, banks and governments (which print fiat currency and allow banks to create cyber currency out of nothing in the fractional reserve banking system) are the major components of the financial system. Herd behaviour of the public, driven by greed and fear, is the main driver of the stockmarket. Fraud and deceit lie at the heart of the failure of our financial system.

Money represents the promise of delivery of future useful goods and services (FUGS). The operative word here is useful. If I have a voucher which I can only exchange for homeopathic lotions or Tarot readings, ie future useLess goods and services (FULGS), then that voucher is in reality worthless, it is not real money. Some silly people may argue that homeopathic lotions and Tarot readings represent value for money to them. During the height of tulip mania in Holland, some silly people paid the equivalent value of a house to buy a tulip bulb. Such people are the suckers who feed the bogus economy, the figures for which are then added to the real economy in an undifferentiated manner, which then distorts any true information as to what is actually happening in the real, worthwhile economy.

Money is a promise of FUGS, nothing more. In itself, money is intrinsically worthless, whether in the form of banknotes, cyberdigits in your bank account or shares in the stockmarket. Only the ability to transform those types of money into FUGS gives value to your money. If that promise cannot be fulfilled, if confidence in the money is lost, then the value of your money evaporates and it becomes worthless.

What gives us confidence in our money? Before the Ponzi scheme of fractional reserve banking was invented, fiat currency was physically backed up by adequate gold reserves stored in bank vaults. However gold itself does not confer any FUGS either. Apart from limited applications in dentistry and electronics, gold is intrinsically worthless ("bling" does not count, in this essay we value substance over style). Gold is merely another form of money, merely a promise of FUGS. Physical gold was previously useful to back up paper currency because being rare, it has high "value density" (small quantities can represent large FUGS), it is non-perishable (it can be stored indefinitely without deterioration) and it is not consumed (not generally eaten, combustible or otherwise used up).

Contrast the gold standard with the detergent standard of currency. Boxes of detergent were used as defacto money in the hyperinflation period of Zimbabwe, when a trillion zim dollar banknote would not even buy a loaf of bread. Detergent does have intrinsic value, but it delivers just one service: cleanliness. Zimbabweans would however happily exchange a box of detergent for a few loaves of bread because both had intrinsic value. However detergent has low "value density". It may be possible to purchase a bicycle with one gold coin, however it may take a large, heavy crate of detergent to make the same purchase. Furthermore detergent can dissolve and perish if exposed to damp (it cannot be stored indefinitely) and detergent is a consumable commodity. Despite these drawbacks, the "detergent standard" of money did work when the "paper standard" of money failed.


Bretton Woods: In July 1944 in the dying days of WW2, the Allies got together in Bretton Woods, New Hampshire, to plan and shape global postwar redevelopment and trade. It led to the eventual formation of the IMF, GATT (later WTO) and IBRD (later World Bank). It also led to the designation of the US dollar as the global reserve currency to which other currencies would be pegged, backed up by gold kept in US vaults (The US held almost 80% of the physical gold in the world then). Unfortunately as the years went by, the temptation by the US to print more money than was backed up by the real gold proved too great. By the late 1960s, the US was living beyond its means, with massive trade deficits. With doubts about the US being able to service their debts, other nations were demanding to exchange their greenbacks for real gold from the US coffers, demands which ultimately could not be honoured. The game was up. Nixon decoupled the American greenback from the gold standard in 1971, overturning Bretton Woods and turning the US dollar into a 100% fiat currency. This provoked a crisis of confidence in the US dollar and drastic drop in demand for the greenback, hence a drastic drop in its value. It raised the question by the international community whether the US dollar should remain the global reserve currency. How could the global financial system then subsequently function on pure fiat US currency, indeed how did the global economy expand exponentially as it did from 1971 till the 2000s, without gold backing?


The Petrodollar: In 1973 the Arabs were defeated yet again by Israel in the Yom Kippur war. In retaliation, the Arabs, by way of OPEC, imposed an oil embargo, triggering the first international oil crisis to punish the West who had supported Israel. Nixon and Kissinger devised a "solution" to this situation, as well as the US dollar crisis, which was a stroke of brilliance. It not only addressed the USA's concerns about future secure access to foreign oil, it restored confidence in the greenback as the global reserve currency and most of all, it enabled the US to effortlessly accumulate mind bogglingly immense wealth in the decades to follow. It was a first class ticket on the richest gravy train of all time. If most non-Americans today actually understood this scheme, there would be international outrage to demand it be overturned immediately. It was the US Petrodollar.

The US negotiated this agreement with the Saudis: They would defend the Saudis against any future Israeli or other foreign attacks, they would defend the Saudi oilfields and they would provide the Saudis with abundant high tech weaponry. This amounted to the solid entrenchment of power for the Saudi Royal family, an offer they could not refuse. In return the Saudis simply had to sell their oil only in US dollars (refusing any other currency) and after Saudi domestic expenditure, excess oil profits were to be used to purchase US debt securities, to be held in Western banks (later known as Petrodollar recycling).

It was essentially a protection racket.

This scheme encouraged the US to maintain Israel, their nominal ally, as the bogeyman in the Middle East, which also involved selling high tech US weaponry to Israel. A sweet deal for the US military industrial complex, who were selling weapons to both sides, weapons which would require frequent upgrading in this arms race.

By 1975, the USA had persuaded the other OPEC countries to sign up to this deal.

For the US, what did the Petrodollar mean? It meant they could get oil essentially free from the Middle East, simply by printing US dollars, a privilege enjoyed by no other country. It meant that US debt would be underwritten by foreign investments. It meant that other countries which needed oil (ie everyone else) had to buy US dollars first, either very expensively in the foreign exchange market or more cheaply by exporting their goods to the US and obtaining US dollars in return. The latter meant that the US could obtain foreign manufactured goods (eg high quality Japanese cars) for free, simply by printing US dollars.

To the rest of the world, the US dollar represented the promise of access to petroleum, the keystone commodity which fueled the industrial economy (and industrial agriculture), which enabled raw materials to be mined and manufactured into products, and enabled services (especially transportation services) to be delivered. The Petrodollar was the new guarantee to the rest of the world that a US dollar represented FUGS and hence no longer needed gold backing. Gone was the crisis of confidence in the US dollar. Indeed this scheme created a huge surge in demand for the greenback, strongly raising its value against other currencies, hence the world was happy for it to remain the global reserve currency.

We can therefore understand how the US was able to accumulate huge material wealth (wealth being defined as easy access to a wide variety of high quality goods and services) beyond the wildest dreams of avarice, not by being a particularly productive country, but by running a protection racket known as the Petrodollar. It also explains the heavy US military presence in the Persian Gulf and all the oil rich Middle Eastern countries not aligned with Russia. It also explains just about all US foreign policy with respect to the Middle East since the 1970s, especially the invasion of Iraq.

If the oil rich Middle East was politically stable, they would not need military protection and the Petrodollar would be unnecessary and irrelevant. Hence the US had a vested interest in keeping the Middle East unstable. Divide and profiteer.


Petroleum and real economic growth: The upslope of the Hubbert curve for world conventional oil production from the 1850s till the peak in 2005 approximated an exponential curve. It was this increasing availability of high net energy sources (or Hi-NES – if you are unfamiliar with this concept, please read appendix first before proceeding), over those 150 years which enabled the exponential increase of the real economy during that time. More Hi-NES enabled more widgets to be produced and more people to be employed making them. More businesses could open and all businesses could grow as the pie expanded. Growing businesses meant growing profits, hence the original startup business loans could be paid off with interest. High EROEI oil fed industrial agriculture, which fed an increasing population, who were the workers and customer base for the growing economy. The originally pristine environment was able to cope with our toxic discharges with apparent impunity in the beginning, however pollution ultimately represents another limit to growth. Even if we had unlimited Hi-NES, the MIT Limits to Growth models showed that pollution was another factor which would inevitably curtail our growth, then force a reversal, as the residents of the polluted cities of China can tell you. However we do not have unlimited Hi-NES and it was the plateuing of conventional oil since 2005 which has caused the stagnation of the global real economy.

To the Neoclassical economists, economic growth was the only thing they ever knew in their lifetimes and was the only thing that their limited imaginations could conceive of. If high EROEI conventional oil depleted, they said, human ingenuity would just find something else to replace it. Wrong. Newsflash: low EROEI unconventional oil is no substitute, it is a fools' errand.

The fractional reserve banking, money printing, growth dependent, interest dependent, debt dependent, inflationary, neoclassical economic paradigm was only possible in a world with increasing Hi-NES availability on the upslope of the Hubbert curve (and also required an uncrowded planet, unpolluted environment and stable climate). All that has changed. The growth economy is now just a memory in the rearview mirror, it is deceased, buried, kaput, gone, decomposed, ended, terminated. That parrot is stone cold dead and no amount of Pythonesque denial will change that fact. We now face global economic contraction and innumerable challenges which cannot and will not be met by discredited blinkered economic "experts" with old, deluded ideas and no understanding of energy and the limits to growth.


Greece: The basic understanding of money and its ultimate dependence on Hi-NES outlined above are required for us to understand, at least in part, the Greek crisis. Some people wonder why Greece cannot simply exit from the Euro and print their own Drachma and continue to function happily. If Greece had its own Hi-NES (eg a newly discovered "Leviathan" gas field) to back the Drachma, they would have no problem (at least not till climate change renders Greece about as habitable as the Sahara desert). However Greece has to import virtually all its energy and most of its food from abroad. From the moment the Drachma is printed it will have no value, as it is backed by nothing. Few Greeks and no foreigners will accept the Drachma as a promise for any FUGS, it will become "funny money". Greeks in good times and bad will still seek (and trade with) Euros or US dollars, regarded as "hard currency". What gives the Euro its value, in contrast to the worthless Drachma? The Euro is backed by the agri-industrial capacity of Germany and France, which can confer FUGS. This capacity is fueled primarily by petroleum and to a lesser extent by other fossil fuels such as gas and coal. In France, nuclear powered electricity plays a role, but grid based electricity can never offer all the flexible services and secondary products (eg petrochemicals, pharmaceuticals) that petroleum can. Furthermore the mining, transportation and enrichment of uranium and maintenance of the nuclear power stations requires fossil fuels. Hence ultimately all value of the Euro stems from European access to fossil fuels, petroleum being the most important. If Germany and France are starved of fossil fuels, the Euro too will become worthless.

What mechanism controls the flow of petroleum to the Eurozone? Primarily the Petrodollar system, now that the North Sea Oil fields are all but depleted, although Russia is becoming an increasingly important energy source for Europe.

It is astounding that conventional economists fail to acknowledge that an ongoing Hi-NES is absolutely essential for industrial economies to function. It is astounding that they fail to acknowledge that Peak Oil means the end of real (as opposed to bogus) economic growth worldwide. It is astounding that they fail to acknowledge that the inevitable decline of Hi-NES, irrespective of oil price, means the inevitable decline of the worldwide economy. This economic decline, now merely beginning, is a permanent trend. Hardships will become ever worse as time goes by until the global die-off of excess humans15 is completed. All of those conventional economists and those sheep brained politicians bleat on about "eventual return to growth". Those who truly believe such nonsense are fools. Those who understand the situation but make false public declarations about future growth to "maintain confidence in the share market" are liars. Which one is Joe Hockey?


Debt, the Bogus Economy and Financial bubbles

What is debt? If I give you an IOU note, that note is my promise of delivery of future useful goods or services or FUGS to you by me, to the value indicated on the note. Confidence in that IOU may be gained from my track record of previously repaying my debts on time, and my projected future earning power, but ultimately the debt can only be guaranteed by my assets, which must be at least equivalent in value to the debt, ie. collateral. Solvent debt assumes you are able to seize that collateral if I default payment.

In the absence of collateral goods, the creditor, if sufficiently powerful and mean spirited, may demand that the insolvent debtor repay the debt in the form of future services (better described as servitude) according to the terms defined by the creditor, until that debt is discharged to the creditor's satisfaction (ie never). In other words, the debtor becomes a debt slave. This is what has happened in Greece, along with the forced fire sale of many Greek assets at bargain basement prices.

What will be the fate of debt slaves? They may either curl up and die, which will be the fate of Greece (unless they default and align with the BRICS), or they may instigate a World War (as was the case with Germany, burdened with punitive debt after the treaty of Versailles and then faced with the Great Depression).

If debt represents FUGS, and if, as we previously mentioned, money represents FUGS, then surely debt = money ?

Indeed, it is this idea that debt is a form of money, that debt can be included on a balance sheet as an asset, which has driven the "credit" card (better described as "debt" card), consumption based economic expansion of the last few decades. The bogus debt based economy now exceeds the numerical value of the real physical economy many times over. Nicole Foss' summary data show that global debt is 100 times larger than global production of real goods and services. This debt is clearly irredeemable, we would be lucky to get one cent on the dollar if it was all called in tomorrow. A more realistic outcome, given the workings of our system, is that a tiny minority ("the elite") will get 90 cents to the dollar and the vast majority of creditors will get nothing. We are playing musical chairs with just one chair per hundred people.

Bankers had major incentives to persuade everyone to rack up debt, because the bankers' salaries and bonuses were tied to their creation of new loans and mortgages, regarded in the finance world as creating new money. This is why you received so many letters from the banks encouraging you to increase the limit on your "credit" (=debt) card. This is why you there are so many advertisements in the media encouraging you to access "easy" money from all sorts of loan companies.

In the good old days when most bankers had ethics, loans and mortgages could not be granted unless the debtor demonstrated a solid ability to repay and had adequate collateral (or a guarantor with collateral). The bankers have since however manipulated the system to overturn such regulatory mechanisms. From the early 2000s, predatory lending by greedy US bankers to naive people with few or no assets (NINJA loans – No Income, No Jobs or Assets) to buy overpriced properties, created irredeemable debts. Those debts were bundled and repackaged as CDOs (collateralised debt obligations) to hide their origins. CDOs were certainly debt obligations, but they were far from collateralised. Corrupt ratings agencies classified CDOs as triple A rated assets, when they were in fact massive liabilities. Corrupt insurance agencies with insufficient funds pretended to insure the CDOs against default with CDSs (credit default swaps), another illusory derivative. Fraud, deceit and corruption lay at the root of the subprime mortgage scam, which led to the financial crash of 2008.

The trigger for that crash was the spike in oil price to $147/- per barrel as a result of Peak Oil. High oil prices caused living expenses to skyrocket and net incomes to crash, rendering many people unable to service their mortgages, leading to an epidemic of defaults.

The perpetrators of the Global Financial Crisis (AKA GFC), the predatory bankers, flew in their private jets to meet Obama to find "solutions". The result was the diversion of almost a trillion dollars of US taxpayers money (which would normally be used to fund social services) to bail out those "too-big-to-fail" banks. Other new government financial commitments to stabilise the system amounted to trillions more. The mortgage holders at the bottom of the heap lost of their equity deposits (often amounting to their life savings), faced foreclosure and lost their houses. Those actions can be summarised by the phrases, "privatise the profits and socialise the losses", or if you like, "screw the common people".

Why have none of those corrupt "banksters" ever gone to jail? Why have they been allowed to carry on unpunished? Why has systemic banking reform not been implemented by the US government?

When the private banks have bankrolled the election of the US President, (the banksters fund both red and blue parties, hence they win either way), when they have bought off all the congress members and judges, when they employ swarms of lobbyists in Washington, when they are allowed to create cybercurrency from nothing in the fractional reserve system, when they control the purse-strings which fund the entire military-industrial complex, those bankers hold ultimate power. When they claim to be "too big to fail" and threaten to bring down the entire global economy unless bailed out by the US government, the banksters become untouchable.

Let us not even get into the "Libor" scam.

Those who are not utterly outraged by this state of affairs are either cluelessly comatose or are sociopathic beneficiaries of this monumental swindle, this daylight robbery of the poor to benefit the rich.

The Eurozone is of course an integral part of the Western Predatory Capitalist system. Predatory lending by French and German banks (who ignored due diligence) to deceitful Greek governments (who lied about their ability to pay), also created irredeemable debt, which lies at the root of the Greek crisis. Banksters at both ends benefited personally, but it was the Greek banks which held the loans and the Greek public who are burdened with the debt. The current bailouts from the ECB are not going to the Greek people but are going to the Greek banks to prevent them collapsing. If the Greek banks collapse, the existing trickle flow of Euros to the Greeks which is enabling them to barely limp along at this time, will cease completely. Greek society will then grind to a halt and descend into chaos, with mayhem and murder on the streets. The first people to be killed will be the refugees from Africa, being vulnerable scapegoats and easy targets. Golden Dawn will have its golden dawn, bathed in blood.

Such corrupt lending and borrowing practices lie at the root of the irredeemable debts affecting all the PIIGS countries. They are Ponzi scams (or more precisely, conduit scams) which are guaranteed to collapse, notwithstanding multiple efforts by the troika to "kick the can down the road". The longer they delay the collapse (by offering yet more irredeemable loans to the debtor countries' banks as temporary bailouts), the harder the fall will be. The troika refuse to consider writing off any of the debt, which ultimately is an act of suicide. They are well aware that the inevitable debt default will cause the collapse of the German and French banks and the Euro financial system, with a domino effect involving the entire global financial system.

You can bet those banksters have contingency plans in place for the inevitable collapse. You can bet their plans were devised behind closed doors and will never be disclosed to you. You can bet their plans involve protecting themselves and screwing the public.

Predatory lending by greedy investment bankers and energy ignorant investors (AKA suckers) to finance US shale oil developers (and other unconventional oil sources) has also created massive irredeemable debt and a bogus junk bond and derivatives market. This bubble is also guaranteed to burst, the process being accelerated by current low oil prices. However even at higher oil prices, collapse would be inevitable anyway, because the low EROEI of shale oil could never generate sufficient profits to repay the original investment loans, much less the interest on those loans. Shale oil was a Ponzi scheme from the get go. Conventional oil wells typically take several decades to reach peak output after initial drilling, and post peak may decline by 4 to 6% per year, if extraction techniques are not abused. Shale oil "plays", if at all productive, usually reach peak output less than a decade (maybe 5 years) after initial fracking and by the first year after peak production typically decline by 70% and by the third year post peak typically decline by 85%, a shocking rate of depletion.16

Collapse of the investment banks would not matter much to ordinary people, if it is only the speculators and bankers who lose their money and if the savings accounts of ordinary people are quarantined from such a collapse. However that is no longer the case. Certainly in the US, mechanisms such as Glass-Steagall which previously protected ordinary savings accounts, have long since been dismantled due to the influence of the corrupt banksters on their "bought and paid for" politicians and legislators.

In Australia, Kevin Rudd pledged immediately after the GFC that 100% of savings accounts in the major Australian banks would be 100% protected from any losses. Nowadays since the end of the mining boom, with Australian balance sheets permanently in the red, we are only "guaranteed" protection of the first 250K of savings and even that may be revised to a lower ceiling or no ceiling in future. The seizure (=theft) of part of the savings deposits of ordinary Cypriots by their government, to bail out the Cypriot banks in 2013 (which were then sold cheaply to Greek banks), was a tiny taste of what lies ahead for all of us17. Nicole Foss has described a savings deposit as "your unsecured loan to the bank". Security of savings may not be a concern to those people who have no savings at all and may mostly be in chronic debt. They may hold out the hope that their superannuation may provide some financial security for their retirement. However, if one's superannuation is in the form of shares, as it is for the majority of Australians, then its value could fall from 250K to zero over just a week, following a share market collapse. Keeping assets in the share market is a worse option.

The inevitable future collapses of numerous fraudulent bubbles will lead to share market collapse, which will threaten the investment banks, and once again lead to the bailout of the too-big-to-fail banks by purloining taxpayers money (hence further shortchanging social services) and pilfering the savings accounts of ordinary people.

For those holding loans or mortgages who may harbour some hope of debt forgiveness or debt writeoff in the future, it is best not to hold your breath. History has shown that the only people who were offered debt forgiveness were the corrupt architects of this system, who were bailed out by their bought-and-paid-for governments. Poor people who were duped into signing irredeemable mortgages lost their life savings and were evicted from their houses. In the USA, not even death allows the writeoff of government student loans: the family will be forced to eventually pay in full, even while mourning the death of that young person.

Even at the level of Nation States, it is the corrupt predatory bankers in the richer countries who dictate the terms, turning entire peripheral countries into debt slaves. On an individual basis, come the economic collapse, the 0.1% will continue to live high on the hog, protected by armed mercenaries AKA "private security firms". Ordinary people will be turned into debt slaves and become either workers on the land or in sweatshops, or be conscripted by their governments on behalf of the military industrial complex to serve as cannon fodder, pursuing the last remaining Hi-NES in foreign adventures.


Financial collapses from periphery to core

We already alluded to the self cannibalisation of Europe, starting at the fringes. When the inevitable default of the PIIGS countries occurs, the French and German banks will collapse and the Euro will collapse as a currency. No one knows exactly when this will occur. It seems likely that the British, who are bringing forward their Eurovote from 2017 to 2016, will opt to abandon ship before the Eurotanic sinks.

All countries around the world without exception will face economic and industrial collapse in the long run, due to the decline of Hi-NES (and other factors eg climate chaos, ecodestruction). The US will try its best to be the "last man standing". Given that Wall Street lies at the core of the Western financial system and the US dominates over the Eurozone by virtue of the Petrodollar, and given the elites' intent to sacrifice the "peripheries" to preserve their "core" for as long as possible, here is a possible sequence of financial collapses from periphery to centre:


1. Collapse of Cypriot banks, while attempting to preserve Greek banks (the plunder of Cypriot savings and fire sale of Cypriot banks to Greek banks has already occurred)

2. Default of Greece, collapse of Greek banks, while attempting to preserve German & French banks

3. If the British are smart, they will exit the Eurozone between 1 and 2, although time is very short and 2 may happen soon.

4. Default of other PIIGS countries with collapse of their banks, immediately followed by

5. Collapse of German & French banks, complete collapse of the Euro, while attempting to preserve AngloAmerican banks

6. Collapse of the AngloAmerican banks and the end of the entire Western financial system.

The timescale of events will be nonlinear, starting off relatively slowly then picking up speed as the dominoes fall over.

The above is purely hypothetical. It is possible the 16 trillion dollars or so of insolvent US debt, if called in by creditors, may cause the core to implode sooner rather than later. The above also assumes the Western Financial system is a universe unto itself which is obviously incorrect. The global nature of complicated financial webs means any country plugged into the Western Financial system eg China or other BRICS countries or other East Asian countries, will also collapse unless they can establish their own independent financial network ASAP. If the BRICS can create a financial network independent of and saner than the Western debt based endless growth Ponzi system, there is a chance that they, and the other countries which sign up to their network, may continue to plod along even as the West implodes and descends into chaos.

What will Australia do? Given cultural sentiment, blind faith and deep ignorance, the likelihood is that Australia will stay with the Western Bloc till the bitter end.


The Petrodollar today and possible plans of the BRICS

American industry is a mere shadow of its former self. Manufacturing has been outsourced from developed countries to developing countries in the process of Globalisation, a process which will inevitably cease with the depletion of affordable transport fuels. Even though China is now the world's industrial powerhouse, America remains the dominant financial player by virtue of the US Petrodollar system, which controls the availability of most Hi-NES, which power the industrial economies.

Conventional economists fantasize they can maneuvre their way out of this global depression by tweaking the knobs of the economic machine to stimulate growth again. One tactic was zero interest rate policy or ZIRP. Another maneuvre was repeated massive "quantitative easing" (AKA magically creating cybermoney out of nothing) by the US government to boost liquidity in the banks, who should in theory then be encouraged to loan out those funds, to stimulate economic activity. Runaway inflation of the US dollar has not yet happened because that QE cyber funny-money has not yet been fully released into general circulation. Furthermore as the greenback is the defacto international currency and US dollars are widely distributed worldwide, that money pool is far larger than any other single currency and can cope with a much larger injection of funny money before inflation actually bites. Being an international money pool, the hardships of future greenback inflation will therefore be borne not just by Americans but by everyone around the world who holds US dollars. These are unique abilities of the USA by virtue of it being the only global hegemon: to print new international money out of nothing, to shift the burden of creating the value for that money onto others and to export the hardships of future inflation to the rest of the world. Parasitic profiteering.They know they are on to a good thing and will defend this cozy set of arrangements to the bitter end.

Individual countries can do nothing to change the Petrodollar system. Saddam, who tried to sell his oil in Euros, was invaded and killed. The very first "reform" by the US invaders was then to sell Iraqi oil in US dollars once again. Since 2003 Iran has been selling much of its oil in Euros and faced increasing international sanctions via blockades imposed by the US, with repeated threats of bombing. The US has tried to play hardball with Iran since 1979 using proxy warfare and all sorts of dirty tricks and has failed miserably. Heavy handed tactics have not worked. Einstein's definition of insanity was doing the same thing over and over and expecting a different result. Obama is not insane, unlike his predecessor (although his successor may well be). Obama's softer touch, combined with the current decline and uncertainty of the Euro (which now brings into question the wisdom of trading oil in Euros) may just persuade the Iranians to once again trade their oil in Petrodollars. On the other hand, those smart Iranians have also been intensely negotiating with the BRICS.


Future scenarios


Medium to Long term: With regard to global finance and economics, the flat availability of Hi-NES (ie Peak Oil) has now caused economic stagnation. We may desperately try to tread water for a while by eliminating wasteful practices, but ultimately Hi-NES depletion and the contraction of the real physical economy is inevitable ie. output of real goods will decrease and delivery of real services will decrease, with massive closures of factories and businesses and massive job losses. No amount of smoke and mirrors to puff up the bogus economy (eg overpriced snake oil projects, other subprime loan scams, tulip bulbs as expensive as houses) will change that. The advent of permanent global economic depression is an inescapable fact as sure as the law of gravity is a fact. Collapse of companies which use oil will mean a reduction in demand for petroleum or "demand destruction", which can lead to a lower oil prices (if the demand destruction outpaces the rate of Hi-NES depletion). Collapse of multiple extant Ponzi schemes will mean debt defaults, resulting in contraction of the money supply ie deflation, which again means lower prices in general. This will not necessarily be a good thing, as everything will actually be less affordable (prices corrected for deflation will show that the real costs of commodities will in fact have increased). Printing money and QE may maintain the illusion of stable prices for a while, but will not change the fact of reduced affordability. Once demand destruction has pared down the economy to just essential activities (eg food production and distribution), further depletion of Hi-NES combined with QE will lead to hyperinflation. Ultimately the "endless growth" predatory capitalist system is doomed.

Quite apart from financial/economic issues, the following are physical realities today, these events are currently underway right now:

1. Frequent extreme weather events due to runaway global warming, which will eventually lead to an ice-free hothouse Earth which will be largely unfit for human habitation

2. Peaking and depletion of other crucial resources eg NPK fertilisers, various metal ores etc

3. Befoulment of our environment with toxins (fracking and tar sand projects probably being the worst culprits), radioactivity (eg Fukushima – an ongoing issue, with radioactive coolant water going directly into the Pacific) and non-degradable waste (eg the plastic "gyres" in all the oceans, innumerable landfills and waste dumps)

4. The sixth global mass extinction which, from the selfish human point of view, will result in biological impoverishment of our planet and loss of ecosystem "services" which we previously took for granted.


In the long run, everyone is screwed. If Homo Stupidus do not go extinct by the end of this century, human numbers will certainly be drastically reduced, perhaps down to a few million or even just a few thousand in the few climate-favourable pockets remaining around the Earth. Life for the survivors will be nasty, brutish and short.


Short term: What will happen in the short term depends on how the Great Game of today plays out. The most important players grappling with the Western Power Bloc will be China, Russia and Iran, the latter because it will be one of the last few nations to possess substantial Hi-NES and is at the crossroads of East and West, a pivot state between Russia and China.


Russia Here are a few names to test your pattern recognition: Anna Politkovskaya, Alexander Litvinenko, Boris Nemtsov.

Vladimir Putin is almost certainly a cold blooded murderer, as is probably the case with many heads of state around the world. In fact, given their system, it may actually be impossible to become and remain the leader of Russia without killing a "few" opponents (?dozens ?hundreds). Nevertheless he is a rank amateur if compared with the most vile mass murderer of the 21st century to date: the execrable monstrosity known as Dick Cheney.

Putin is riding a wave of popularity in his own country, being the champion of a newly emboldened Russia, unafraid to call the bluffs of the Western Power Bloc. His trump card is of course the remaining substantial reserves of Russian Hi-NES. Thus any economic troubles at present are perceived as temporary. Russians are used to hardship and deprivation anyway, unlike those morbidly obese squidgy Americans.

In recent years Washington has been turning the screws on Moscow in all sorts of ways: positioning new cruise missiles in NATO countries bordering Russia, encouraging the Saudis to maintain maximum oil output to try to cripple the Russian economy, and being involved in all sorts of skullduggery in Ukraine, directly undermining Russia's sphere of influence. Russia has pushed back, particularly with their re-acquisition of Crimea to maintain possession of the only warm water Russian port.


China Current debt to GDP ratio in China is around 300%. In early August, at the time of writing of this article, there has been a 30% plunge in the Shanghai Stock Exchange over the past few weeks (after a bull run of more than a year). What is their risk of an endogenous financial implosion, unrelated to collapse of the Western financial system? If we regard Western sharemarket activities to be as clear as mud, what goes on in the Chinese sharemarket is as transparent as concrete. Whether the ability of the central totalitarian Chinese government to intervene in their sharemarket, banking system and currency is beneficial or detrimental remains to be seen.

On the positive side however, China is a major creditor nation and in theory if they mobilised their assets (eg US government bonds they previously purchased, China's massive foreign exchange reserves), China could subtantially service its debts. The debts owed to China by other nations such as the USA are however largely worthless irredeemable debts, a US pretence of solvency which can never and will never be honoured.

Unlike Russia, China lacks substantial reserves of Hi-NES but they have labour and industrial capacity on a scale Russia lacks. Hence this is an ideal partnership to spearhead the development of the Russian Far East, specifically the coast opposite the Kamchatka peninsula, which appears to be a done deal. The New Silk Road transport infrastructure projects extending from China to Russia are also on their books. If they hurry, they may just be able to complete such projects before depletion of Hi-NES renders them obsolete. Never mind, perhaps they can harness camels to tow those rail cars. Will Siberia become suitable for agriculture in the new hothouse Earth? Another possible joint project.

After prolonged insistence by the US that Japan should contribute armed forces for foreign "initiatives", the Abe government is overturning the pacifist constitution of Japan which was enshrined in Japanese law since WW2. This is a direct provocation to China.


BRICS The BRICS countries held their latest conference, incorporating SCO and EEU meetings, in Ufa, Russia in July 2015, a hugely important occasion which largely went unreported in the Western media. Apart from multilateral trade and financial deals between the BRICS countries and their establishment of the New Development Bank, the other question is whether the BRICS will be able to use their own currencies to directly trade in oil. The US will do its utmost to sabotage such a prospect, as this will directly undermine the US Petrodollar. If the US loses its Petrodollar advantage, its pretend economy based on parasitic bloodsucking will inevitably collapse.

One major outcome in Ufa was the treaty that any attack on Iran, projected to be the BRICS most important supplier of Hi-NES, will be regarded as an attack on the BRICS itself, who will then come to Iran's defence. American Neocons, be on notice. How nasty can things get? Global thermonuclear war is not outside the realm of possibility.

The BRICS, in their interactions with each other, have adopted the Chinese slogan of "win-win" respectful relationships. This implies that previous US – foreign interactions were "I win – you lose" disrespectful relationships, the behaviour of a bully.


The outgoing US administration: Our praise of Obama can largely be couched in negative adjectives: he is not stupid, he is not insane, he is not a global warming denier, he did not bomb Iran, he did not bomb Syria (actually no credit to him there as he was foiled by Putin18). He has fended off the extremist demands of a yammering Netanyahu. The theme of his administration was "don't do stupid things". As such, Obama was undoubtedly superior to the stupid, evil, criminal Neoconartists who preceded him. Our criticism of Obama can also be couched in negative terms: he failed to prosecute the fraudulent bankers, reform Wall Street and reinstitute Glass-Steagall (Dodd-Frank offers little reassurance). We cannot judge him too harshly on that score however, because he would almost certainly be assassinated if he attempted such reform. Is Obama a liar? His speeches promoting the fracking industry and predicting US energy independence can be regarded as laughable comedy skits. Is Obama a murderer? He ordered far more drone strikes than Bush ever did (including on US citizens abroad), with far more collateral innocent deaths, which may number in the hundreds or thousands. His targeted assassination of bin Laden might possibly be defensible as justifiable homocide in a court of law.

If the only choices for next US President are Jeb and Hilary, who are both insipid quisling tools of their byzantine establishment, we can expect a reversion to the doctrine of American Exceptionalism. This is characterised by an exceptional sense of entitlement to pilfer everything on behalf of their elite, while screwing vulnerable Americans and the rest of the world. Those who fail to comply can expect to be brutalised by the police and imprisoned (if in America) or bombed/droned (if overseas). The bombing of a BRICS/SCO ally country by the US or by a US proxy will not be tolerated by Russia or China and could easily escalate into global thermonuclear war.

Michelle Obama for President, anyone?


Conclusion: We certainly live in interesting times.




13. Adam Smith was largely credited as the founder of classical economic theory. However he would turn in his grave if he knew how the modern day amoral neoclassical economists have hijacked, distorted and misquoted his ideas to suit their purposes. Smith himself was a strong advocate for social justice and in fact wrote his essay the "the theory of moral sentiments" before his more famous essay on the wealth of nations.

14. Private insurance companies have carefully done the hard calculations and ALL refuse to insure nuclear power plants, which therefore must be underwritten by Governments (ie the tax paying public). If the private sector, supposedly the driver of the "free market", considers nuclear power to be too risky, uninsurable and a nonstarter, why then do so many "free market" economists advocate nuclear power? Because their view of the "free market" is one which is free to purloin profits for private interests, but which imposes all risks on the public. Privatise the profits and socialise the losses.

15. Who are the excess humans? Anyone whose food and fresh water acquisition are dependent on fossil fuel input, ie. pretty much everyone in modern industrial society (the author included). If you can source enough food and water to survive without the need for fossil fuel input anywhere along the supply chain, and can do so on a sustainable basis, then you are not an excess human.

16. and


18. Obama's threat to bomb Syria was foiled by Putin in 2013, however as of 4 August 2015 it appears Obama is going to bomb Syria anyway, in support of "Sunni rebels" (however these "rebels" cannot be clearly differentiated from ISIS, hence US bombing may actually support ISIS. Perhaps Obama is insane).




Energy Returned Over Energy Invested (EROEI or EROI) is a concept absolutely essential to the understanding of why and how our Industrial Civilisation is unraveling. To survive, any organism must gain more food calories than it expends in the process of acquiring that food (eg hunting or grazing). If an organism is highly efficient, say 50% efficient, in absorbing and converting the food it has acquired into the metabolic processes of living, it will need to gather at least 2X calories of food for every X calories it has expended in gathering that food, merely to exist. Put another way, it's food gathering activities must provide EROEI >2:1 to barely survive, not even taking into account the basal metabolic energy expenditure between meals.

For humans, pristine conventional oil wells offered EROEI of about 100:1, facilitating extraordinary industrial growth and population overshoot over the past 160 years. However, as a conventional oil well depletes, the EROEI declines. The well loses positive pressure and energy is actually required to extract the remaining oil (by horizontal drilling and saline and CO2 injection). Worldwide, conventional oil EROEI is now less than 15:1 because the majority of the giant oilfields are well past peak production. It has been calculated that we need EROEI of at least 10:1 for industrial society to barely function at its simplest level. World EROEI is scheduled to fall off a cliff after this year. By 2030, high EROEI sources will have all but vanished (see graph below). Furthermore, the export land model also suggests that due to domestic demand within the overpopulated oil producing nations, there will be no petroleum available for oil importing countries by 2030, just 15 years from now. Whichever way we look at it, industrial society will have completely collapsed by 2030. If some people are able to urgently transition, right now, to superefficient energy conservation and can use local renewable energy sources, then some communities may be able to maintain a semblance of stable society in the medium term (but there will be no prospect of large scale industry).

Unconventional oil sources offer EROEI of around 3:1 or less (tar sands are around 1.5:1) and impose horrific environmental costs, hence they are not viable options, they are dead ends, they are fool's errands. We must focus our attention on "high EROEI" or "high net energy" sources which I have abbreviated to Hi-NES. These are now rapidly depleting worldwide. We cannot blindly accept the total liquid hydrocarbon output graphs as published by the EIA or IEA or CERA which are at best meaningless and at worst misleading. For example, ethanol from Nebraskan corn is an insane project, providing EROEI of barely 1:1 (probably less) and should not be included in the total because it is an energy loser.

Furthermore, we need to focus on oil affordability rather than on oil price. "Low" oil prices are meaningless if the consumer cannot afford it due to demand destruction and economic deflation. If the price of oil drops by half but your salary drops by two thirds, that oil is actually more expensive for you despite the "cheaper" price. Declining Hi-NES inevitably leads to economic contraction (ie job losses and salary cuts) and inevitably leads to declining affordability of fuel, irrespective of price.


Making Sense of the US Oil Story

Off the keyboard of Gail Tverberg

Follow us on Twitter @doomstead666
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Published on Our Finite World on August 6, 2014


Discuss this article at the Energy Table inside the Diner

We frequently see stories telling us how well the United States is doing at oil extraction. The fact that there are stories in the press about the US wanting to export crude oil adds to the hype. How much of these stories are really true? If we believe the stories, the US is now the largest producer of oil liquids in the world. In fact, it has been the largest producer since the fourth quarter of 2012.

Figure 1. US Total Liquids  production, including crude and condensate, natural gas plant liquids, "other liquids," and refinery expansion.

Oil “Extenders”

One of the issues is that a few years ago, the US created a new oil-related grouping, combining valuable products with much less valuable (lower energy content, less dense) products. Using this new grouping, the US was able to show much improved growth in total “oil” supply. The US EIA now calls the grouping “Total Oil Supply.” I refer to it as “Total Liquids,” a name I find more descriptive. Besides “crude and condensate,” the mixture includes “other liquids,” “natural gas plant liquids,” and “refinery expansion.”

“Crude and condensate” is the original grouping. Often, it is just referred to as “crude oil.”

“Other liquids” is primarily ethanol from corn. If we produced coal-to-liquids, it would be in this category as well.

Natural gas plant liquids (NGPL) are the liquids that condense out of natural gas when they are chilled and compressed in the natural gas processing plant.

Refinery expansion occurs when a refinery breaks long chain hydrocarbons into shorter ones. The resulting products take up more volume, but don’t really have more energy content. In some ways, the process is like making whipped cream out of whipping cream–more volume, but not really more product. The new products tend to be more valuable–say, diesel and lubricating oil made from something close to asphalt.

The process of breaking (cracking) long hydrocarbon chains is a valuable service to those producing heavy oils, because it makes valuable products from crude that otherwise would not have been useful for most purposes. The cracking process uses natural gas. Because natural gas in the US is inexpensive relative to its price in most other countries, the US can perform this process more cheaply than other countries. Because of this, it makes financial sense for the US to import heavy crude oil and process it in this way, whether or not US citizens can afford to buy the finished products. (Cracking is not useful on very light oil, such as Bakken oil, since it has primarily short chains to begin with.) If US citizens can’t afford the finished products, they are exported to others.

Whether or not the US should be credited with this expansion of volume is somewhat “iffy,” since the process doesn’t add energy content. Quite a bit of the oil processed in this way uses imported oil, such as oil from the Canadian oil sands.

If we look at the base figure reported by the US Energy Administration, that is, “Crude and Condensate”(Figure 2), the US does not come out as well in original comparison (Figure 1).

Crude and Condensate Prodution US Saudi Russia

The United States makes much greater use of extenders than do Russia and Saudi Arabia. If we calculate the ratio of extenders to the base (crude and condensate), the ratios are as follows:

Figure 3. Extenders as a percentage of crude oil production.

Both Russia and Saudi Arabia have much lower ratios of extenders. For both of these countries, the extenders are Natural Gas Plant Liquids.

Natural Gas Plant Liquids (NGPL), have varied in price. For a while, the price was up with the price of crude, but as supply increased, the US price dropped during 2011 (Figure 4).

Figure 4. Price Comparison per Million Btu for Oil (West Texas Intermediate), Natural gas plant liquids, and natural gas, based on EIA data.

This drop  in NGPL price occurred because the US market for at least some components of this grouping became saturated. With too much supply for demand, prices dropped. Excess ethane, for example, could be sold to be burned as natural gas, putting a floor under its price. As a result, recent prices seem to be influenced by changes in natural gas prices.

With the drop in NGPL prices, we hear more talk about the need for exports. We don’t really have use for all of the low value products that are being produced, other than to burn them as part of natural gas. Perhaps someone else does. If someone else does, it might get the price back up.

What is the Real US Trend in Production/ Consumption?

The US EIA makes fuel comparisons based on Btu energy content. This approach makes it easy to see how much of our fuel is US produced, and how much is imported (Figure 5).

Figure 5. Comparison of US production and consumption of oil plus NGPLs, based on EIA data.

Production is indeed rising, but it is still far below consumption–about 55% of consumption in 2013. Many articles make this situation confusing.

The emphasis in most news reports is the drop in imports–that is the difference between the blue line and the red line in Figure 5. If we look at the chart, though, we see that a big reason for the drop in imports is a drop in consumption, with the big step down coming in 2007 and 2008. Oil use is associated with jobs. It takes oil to make and transport goods. Also, workers with good jobs can afford cars and the oil to operate their cars. If they remain students forever, they can’t afford cars.

A person can better see the drop in consumption by looking at consumption on a per capita basis.

Figure 6. US per capita oil and Natural Gas Plant Liquids production and consumption, based on EIA data.

If prices don’t fall, consumers don’t feel the effect of more production. What they do feel the effect of is falling consumption-the top line. Young people especially have been finding it hard to get good paying jobs. With all of their student loans, it is hard to be able to afford to get married and buy a house. This holds down demand for new homes, and all of the things that go into new homes.

If we look at total per capita energy production and consumption in the US, we see even more of this trend. While production per capita is rising, an even bigger issue is falling consumption.

Figure 7. Total per capita energy production and consumption for the US, based on EIA data.

US per capita energy consumption has been dropping since 2000. 2000 is the year of peak US employment, as a percentage of the total population.

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census.  2012 is partial year estimate.

With a smaller percentage of the US population employed (and lagging salaries for those employed), US consumers cannot afford to buy as large a quantity of energy products. Rising US oil production is not really helping US consumers, because at its high price, we cannot really afford it.

Rising oil production has not brought down oil price, making it more affordable. In fact, the situation is the reverse–high prices are needed for today’s oil production. It is questionable whether today’s prices are even high enough. Oil companies have to  keep adding debt, to keep extracting oil.  The EIA recently wrote an article about the situation called, As cash flow flattens, major energy companies increase debt, sell assets. Steven Kopits shows this chart of cash flows for Independent Oil Companies in a recent post.

Figure 9. Image by Steven Kopits showing Free Cash Flow of US independent oil and gas producers, from Platts Guest Blog.

With negative cash flows, companies have to keep increasing their debt levels–something that eventually becomes impossible.

When those producing the oil see that US oil prices are at times not as high as world oil price (Brent), they hope that selling their crude to world export markets, they will be able to get higher prices for their crude. If they are successful, there will be less crude available sold to US producers, perhaps raising the price of this crude sold in this country as well. The net impact may be higher prices for US consumers, making the US consumers even less able to afford the oil products.

Energy Growth is Needed for Economic Growth

There is a close tie between energy consumption and economic growth. Perhaps my statement “Energy growth is needed for economic growth,” in the header is a little too strong. Perhaps if energy consumption is flat, with the benefit of technological progress and efficiency changes, there can still be economic growth. There is definitely a connection, though. Energy of the right type is needed for every process we can think of–getting to work, shipping goods, operating our computers, heating metals when they are refined.

The problem comes when what we are facing in shrinkage of energy consumption, over and above what can be accommodated by technological progress and efficiency. Figure 7 hints that this is already happening. Then we have danger of a collapsing financial system, as the low energy consumption growth pushes the economy toward contraction. The economy has been held together since 2008 with quantitative easing and zero interest rates. The plan has been to allow consumers more income to spend, by keeping interest rates artificially low. I heard an excellent presentation on this subject recently called Global Financial System on Life Support by Roger Boyd.


I wrote a post recently called The Absurdity of US Natural Gas Exports. The situation with exports of crude oil is not quite as absurd. The issue is that current oil refineries are not configured for the influx of very light oil. Many of them are busy “cracking” long hydrocarbon chains, often using imported oil as their energy source. If US oil producers have the option of selling their crude oil abroad, perhaps they can get a higher price for it. If US oil producers can get higher prices for their oil, this may very well filter through to higher oil prices for US consumers, and less oil consumption by US consumers, but this is not the concern of oil companies.

A major concern with falling per-capita energy consumption it that the financial system may soon reach limits where it is stretched beyond what it can stand. The economy needs energy growth to grow, but the economy is not getting it.

The Absurdity of US Natural Gas Exports

Off the keyboard of Gail Tverberg

Follow us on Twitter @doomstead666
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Published on Our Finite World on March 31, 2014


Discuss this article at the Energy Table inside the Diner


1. How much natural gas is the United States currently extracting?

(a) Barely enough to meet its own needs
(b) Enough to allow lots of exports
(c) Enough to allow a bit of exports
(d) The United States is a natural gas importer

Answer: (d) The United States is a natural gas importer, and has been for many years. The EIA is forecasting that by 2017, we will finally be able to meet our own natural gas needs.

Figure 1. US Natural Gas recent history and forecast, based on EIA's Annual Energy Outlook 2014 Early Release Overview

Figure 1. US Natural Gas recent history and forecast, based on EIA’s Annual Energy Outlook 2014 Early Release Overview

In fact, this last year, with a cold winter, we have had a problem with excessively drawing down amounts in storage.

Figure 2. US EIA's chart showing natural gas in storage, compared to the five year average, from Weekly Natural Gas Storage Report.

Figure 2. US EIA’s chart showing natural gas in storage, compared to the five year average, from Weekly Natural Gas Storage Report.

There is even discussion that at the low level in storage and current rates of production, it may not be possible to fully replace the natural gas in storage before next fall.

2. How much natural gas is the United States talking about exporting?

(a) A tiny amount, less than 5% of what it is currently producing.
(b) About 20% of what it is currently producing.
(c) About 40% of what it is currently producing.
(d) Over 60% of what it is currently producing.

The correct answer is (d) Over 60% what it is currently producing. If we look at the applications for natural gas exports found on the Energy.Gov website, we find that applications for exports total 42 billion cubic feet a day, most of which has already been approved.* This compares to US 2013 natural gas production of 67 billion cubic feet a day. In fact, if companies applying for exports build the facilities in, say, 3 years, and little additional natural gas production is ramped up, we could be left with less than half of current natural gas production for our own use.

*This is my calculation of the sum, equal to 38.51 billion cubic feet a day for Free Trade Association applications (and combined applications), and 3.25 for Non-Free Trade applications.

3. How much are the United States’ own natural gas needs projected to grow by 2030?

a. No growth
b. 12%
c. 50%
d. 150%

If we believe the US Energy Information Administration, US natural gas needs are expected to grow by only 12% between 2013 and 2030 (answer (b)). By 2040, natural gas consumption is expected to be 23% higher than in 2013. This is a little surprising for several reasons. For one, we are talking about scaling back coal use for making electricity, and we use almost as much coal as natural gas. Natural gas is an alternative to coal for this purpose.

Furthermore, the EIA expects US oil production to start dropping by 2020 (Figure 3, below), so logically we might want to use natural gas as a transportation fuel too.

Figure 3. US Annual Energy Outlook 2014 Early Release Oil Forecast for the United States.

Figure 3. US Annual Energy Outlook 2014 Early Release Oil Forecast for the United States.

We currently use more oil than natural gas, so this change could in theory lead to a 100% or more increase in natural gas use.

Many nuclear plants we now have in service will need to be replaced in the next 20 years. If we substitute natural gas in this area as well, it would further send US natural gas usage up. So the EIA’s forecast of US natural gas needs definitely seem on the “light” side.

4. How does natural gas’s production growth fit in with the growth of other US fuels according to the EIA?

(a) Natural gas is the only fuel showing much growth
(b) Renewables grow by a lot more than natural gas
(c) All fuels are growing

The answer is (a). Natural gas is the only fuel showing much growth in production between now and 2040.

Figure 4 below shows the EIA’s figure from its Annual Energy Outlook 2014 Early Release showing expected production of all types of fuels.

Figure 4. Forecast US Energy Production by source, from US EIA's Annual Energy Outlook 2014 Early Release.

Figure 4. Forecast US Energy Production by source, from US EIA’s Annual Energy Outlook 2014 Early Release.

Natural gas is pretty much the only growth area, growing from 31% of total energy production in 2012 to 38% of total US energy production in 2040. Renewables are expected to grow from 11% to 12% of total US energy production (probably because the majority is hydroelectric, and this doesn’t grow much). All of the others fuels, including oil, are expected to shrink as percentages of total energy production between 2012 and 2040.

5. What is the projected path of natural gas prices:

(a) Growing slowly
(b) Ramping up quickly
(c) It depends on who you ask

It depends on who you ask: Answer (c). According to the EIA, natural gas prices are expected to remain quite low. The EIA provides a forecast of natural gas prices for electricity producers, from which we can estimate expected wellhead prices (Figure 5).

Figure 5. EIA Forecast of Natural Gas prices for electricity use from AEO 2014 Advance Release, together with my forecast of corresponding wellhead prices. (2011 and 2012 are actual amounts, not forecasts.)

Figure 5. EIA Forecast of Natural Gas prices for electricity use from AEO 2014 Advance Release, together with my forecast of corresponding wellhead prices. (2011 and 2012 are actual amounts, not forecasts.)

In this forecast, wellhead prices remain below $5.00 until 2028. Electricity companies look at these low price forecasts and assume that they should plan on ramping up electricity production from natural gas.

The catch–and the reason for all of the natural gas exports–is that most shale gas producers cannot produce natural gas at recent price levels. They need much higher price levels in order to make money on natural gas. We see one article after another on this subject: From Oil and Gas Journal; from Bloomberg; from the Financial Times. The Wall Street Journal quoted Exxon’s Rex Tillerson as saying, “We are all losing our shirts today. We’re making no money. It’s all in the red.”

Why all of the natural gas exports, if we don’t have very much natural gas, and the shale gas portion (which is the only portion with much potential for growth) is so unprofitable? The reason for all of the exports is too pump up the prices shale gas producers can get for their gas. This comes partly by engineering higher US prices (by shipping an excessive portion overseas) and partly by trying to take advantage of higher prices in Europe and Japan.

Figure 6. Comparison of natural gas prices based on World Bank "Pink Sheet" data. Also includes Pink Sheet world oil price on similar basis.

Figure 6. Comparison of natural gas prices based on World Bank “Pink Sheet” data. Also includes Pink Sheet world oil price on similar basis.

There are several catches in all of this. Dumping huge amounts of natural gas on world export markets is likely to sink the selling price of natural gas overseas, just as dumping shale gas on US markets sank US natural gas prices here (and misled some people, by making it look as if shale gas production is cheap). The amount of natural gas export capacity that is in the approval process is huge: 42 billion cubic feet per day. The European Union imports only about 30 billion cubic feet a day from all sources. This amount hasn’t increased since 2005, even though EU natural gas production has dropped. Japan’s imports amounted to 12 billion cubic feet of natural gas a day in 2012; China’s amounted to about 4 billion cubic feet. So in theory, if we try hard enough, there might be a place for the 42 billion cubic feet per day of natural gas to go–but it would take a huge amount of effort.

There are other issues involved, as well. The countries that are importing huge amounts of high-priced natural gas are not doing well financially. They aren’t going to be able to afford to import a whole lot more high-priced natural gas. In fact, a big part of the reason that they are not doing well financially is because they are paying so much for imported natural gas (and oil).

If the US has to pay these high prices for natural gas (even if we produce it ourselves), we won’t be doing very well financially either. In particular, companies who manufacture goods with electricity from high-priced natural gas will find that the goods they make are not competitive with goods made with cheaper fuels (coal, nuclear, or hydroelectric) in the world marketplace. This is a problem, whether the country produces the high-priced natural gas itself or imports it. So the issue is not an imported fuel problem; it is a high-priced fuel problem.

Another issue is that with shale gas, we are the high cost producer. There is a lot of natural gas production around the world, particularly in the Middle East, that is cheaper. If we add our high cost of shale gas to the high cost of shipping LNG long-distance across the Atlantic or Pacific, we will most definitely be the high cost producer. Other producers with lower costs (even local shale gas producers) can undercut our prices. So at best those shipping LNG overseas are likely to make mediocre profits.

And there would seem to be great temptation to stir up trouble, to encourage Europe to buy our natural gas exports, rather than Russia’s. Of course, our ability to provide this natural gas is not entirely clear. It makes a good story, with lots of “ifs” involved: “If we can really extract this natural gas. If the price can really go up and stay up. If you can wait long enough.” The story makes the US look more rich and powerful than it really is. We can even pretend to offer help to the Ukraine.

Perhaps the best outcome would be if virtually none of this natural gas export capacity ever gets built–approval or no approval. If it is really possible to get the natural gas out, we need it here instead. Or leave it in the ground.

Diminishing Returns, Energy Return on Energy Invested, and Collapse

Off the keyboard of Gail Tverberg

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Published on Our Finite World on December 6. 2013


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What do diminishing returns, energy return on energy invested (EROI or EROEI), and collapse have to do with each other? Let me start by explaining the connection between Diminishing Returns and Collapse.

Diminishing Returns and Collapse

We know that historically, many economies that have collapsed were ones that have hit “diminishing returns” with respect to human labor–that is, new workers added less production than existing workers were producing (on average). For example, in an agricultural economy, available land might already have as many farmers as the land can optimally use. Adding more farmers might add a little more production–perhaps the new workers would keep weeds down a bit better. But the amount of additional food the new workers would produce would be less than what earlier workers were producing, on average. If new workers were paid on the basis of their additional food production, they would find that their wages dropped relative to those of the original farmers.

Lack of good paying jobs for everyone leads to a need for workarounds of various kinds. For example, swamp land might be drained to add more farmland, or irrigation ditches might be added to increase the amount produced per acre. Or the government might hire a larger army might to conquer more territory. Joseph Tainter (1990) talks about this need for workarounds as a need for greater “complexity.” In many cases, greater complexity translates to a need for more government services to handle the problems at hand.

Turchin and Nefedof (2009) in Secular Cycles took Tainter’s analysis a step further,  analyzing financial data relating to historical collapses of eight agricultural societies in operation between the years 30 B.C. E. and 1922 C. E.. Figure 1 shows my summary of the pattern they describe.

Figure 1. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov.

Figure 1. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov.

Typically, a civilization developed a new resource which increased food availability, such as clearing a large plot of land of trees so that crops could be planted, or irrigating an  existing plot of land. The economy tended to expand for well over 100 years, as the population grew in size to match the potential output of the new resource. Wages were relatively high.

Eventually, the civilization hit a period of stagflation, typically lasting 50 or 60 years, as the population hit the carrying capacity of the land, and as additional workers did not add proportionately more output. When this happened, the wages of common workers tended to stagnate or decrease, resulting in increased wage disparity. The price of food tended to spike. To counter these problems, the amount of government services rose, as did the amount of debt.

Ultimately, what brought the civilizations down was the inability of governments to collect enough taxes for expanded government services from the increasingly impoverished citizens. Other factors played a role as well–more resource wars, leading to more deaths; impoverished common workers not being able to afford an adequate diet, so plagues were more able to spread; overthrown or collapsing governments; and debt defaults. Populations tended to die off.  Such collapses took place over a long period, typically 20 to 50 years.

For those who are familiar with economic theory, the shape of the curve in Figure 1 is very similar to the production function mentioned in Two Views of our Current Economic and Energy Crisis. In fact, the three main phases are the same as well. The issue in both cases is diminishing returns ultimately leading to collapse.

There seems to be a parallel to the current world situation. The energy resource that we learned to develop this time is fossil fuels, starting with coal about 1800. World population was able to expand greatly because of additional food production permitted by fossil fuels and because of improvements in hygiene. A period of stagflation began in the 1970s, when we first encountered problems with US oil production and spiking oil prices.  Now, the question is whether we are approaching the Crisis Stage as described by Turchin and Nefedov.

Why Might an Economy Collapse?

Let’s think about how an economy operates. It is built up from many parts, over time. It includes one or more governments, together with the laws and regulations they pass and together with their financial systems. It includes businesses and consumers. It includes built infrastructure, such as roads and electricity transmission lines. It even includes traditions and customs, such as whether savings are held in gold jewelry or in banks, and whether farms are inherited by the oldest son. As each new business is formed, the owners make decisions based on the business environment at that time, including competing businesses, supporting businesses, and the number of customers available. Customers also make decisions on which product to buy, based on the choices available and the prices of these products.

Over time, the economy gradually changes. Some parts of the economy gradually wither and are replaced by new parts of the system. For example, as the economy moved from using horses to cars for transportation, the number of buggy whip manufacturers decreased, as did the number of businesses raising horses for use as draft animals. Customs and laws gradually changed, to reflect the availability of automobiles rather than horses for transportation. In some cases, governments changed over time, as increased wealth allowed more generous social programs and wider alliances, such as the European Union and the World Trade Organization.

In the academic field of systems science, an economy can be described as a complex adaptive system. Other examples of complex adaptive systems include ecosystems, the biosphere, and all living organisms, including humans. Because of the way the economy is knit together, changes in one part of the system tend to affect other parts of the system. Also, because of the way the system is knit together, the system has certain requirements–requirements which are gradually changing over time–to keep the economy operating. If these requirements are not met, the economy may collapse, just as the eight economies studied by Turchin and Nefedov collapsed. In many ways such a collapse is analogous to an animal dying, or climate changing, when conditions are not right for the complex adaptive systems that they are part of.

Clearly one of the requirements that an economy has, is that it needs to be wealthy enough to afford the government services that it has agreed to. Scaling back those government services is one option, but when these services are really needed because citizens are getting poorer and finding it harder to find a good-paying job, this is hard to do. The other option, unfortunately, seems to be collapse.

The wealth of an economy is very much tied to the availability of cheap energy. A huge uplift is added to an economy when the (value added to society) by an energy resource such as oil greatly exceeds its (cost of production). Over time, the cost of production tends to rise, something measured by declining EROI. The uplift added by the difference between (value added to society) and (cost of production) is gradually lost. Some would hypothesize that the falling gap between (value added to society) and the (cost of production) can be compensated for by technology changes and improvements in energy efficiency, but this has not been proven.

Our Economy is Already in a Precarious Position

As I indicated in my most recent post, if a person computes average wages by dividing total US wages by total US population (not just those employed), the average wage has flattened in recent years as oil prices rose. Median wages (not shown on Figure 2) have actually fallen. This is the same phenomenon observed in the 1970s, when oil prices rose. This is precisely the phenomenon that is expected when there are diminishing returns to human labor, as described above.

Figure 2. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

Figure 2. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

The reason for the flattening wages is too complicated to describe fully in this post, so I will only mention a couple of points. When consumers are forced to spend more for oil for commuting and food, they have less to spend on discretionary spending. The result is layoffs in discretionary sectors, leading to lower wage growth. Also, goods produced with high-priced oil are less competitive in the world market, if sellers try to recoup their higher costs of production. As a result, fewer of the products are sold, leading to layoffs and thus lower average wages for the economy.

In the last section, I mentioned that the economy is a complex adaptive system. Because of this, the economy acts as if there are hidden laws underlying the system, parallel to the laws of thermodynamics underlying physical systems. If oil supplies are excessively high-priced, very few new jobs are formed, and those that are created don’t pay very well. The economy doesn’t grow much, but it does stay in balance with the high-priced oil that is available.

The Government’s Role in Fixing Low Wages and Slow Economic Growth

The government ends up being the part of the economy most affected by slow economic growth and low job formation. This happens because tax revenue is reduced at the same time that government programs to help the poor and unemployed need to grow. The current approach to fixing the economy is (1) deficit spending and (2) interest rates that are kept artificially low, partly through Quantitative Easing.

The problem with Quantitative Easing is that it is a temporary “band-aid.” Once it is stopped, interest rates are likely to rise disproportionately. (See the recent Wall Street Journal editorial,” Janet Yellen’s Greatest Challenge.”) Once this happens, the economy is likely to fall into severe recession. This happens because higher interest rates lead to higher monthly payments for such diverse items as cars, homes, and factories, leading to a cutback in demand. Oil production may fall, because the cost of production will rise (because of higher interest rates), while the amount consumers have to spend on oil will fall–quite possibly reducing oil prices.  If interest rates rise, the amount the government will need to collect in taxes will also rise, because interest on government debt will also rise.

So we are already sitting on the edge, waiting for something to push the economy over. The Affordable Care Act (“Obamacare”) may provide a push in that direction. Inability to pass a federal budget could provide a push as well.  So could a European Union collapse. Debt defaults are another potential problem because debt defaults are likely to increase dramatically, as economic growth shrinks, as discussed in the next section.

Debt is Major Part of our Current Precarious Financial Situation

If an economy is growing, it is easy to add debt. People find it easy to find and keep jobs, so they can pay back debt. Businesses and governments find that their operations are growing, so borrowing from the future, even with interest, “makes sense.”

It is as also easy to add debt if the economy is not growing, but there is an ample supply of cheap oil that can be extracted if increasing debt can be used to ramp up demand. For example, after World War II, it was possible to ramp up demand for automobiles and trucks by allowing purchasers to use debt to finance their purchases. When this increased debt led to increased oil consumption, it greatly benefited the economy, because the (value to society) was much greater than the (cost of extraction). Governments were able to tax oil extraction heavily, and were also able to build new roads  and other infrastructure with the cheap oil. The combination of new cars, trucks, and roads helped enable economic growth. With the economic growth that was enabled, paying back debt with interest was relatively easy.

The situation we are facing now is different. High oil prices–even in the $100 barrel range–tend to push the economy toward contraction, making debt hard to pay back. (This happens because we are borrowing from the future, and the amount available to repay debt in the future will be less rather than more.) The problem can be temporarily covered up with deficit spending and Quantitative Easing, but is not a long-term solution. If interest rates rise, there is likely to be a large increase in debt defaults.

The Role of Energy Return on Energy Invested (EROI or EROEI)

EROI is the ratio of energy output over energy input, a measure that was developed by Professor Charles Hall. To calculate this ratio, one takes all of the identifiable energy inputs at the well-head (or where the energy product is produced) and converts them to a common basis. EROI is then the ratio of the gross energy output to total energy inputs. Hall and his associates have shown that EROI of oil extraction has decreased in recent years (for example, Murphy 2013), meaning that we are using increasing amounts of energy of various kinds to produce oil.

In previous sections, I have been discussing diminishing returns with respect to human labor. Oil and other energy products are forms of energy that we humans use to leverage our own human energy. So indirectly, diminishing returns with respect to the extraction of oil and other energy products, as measured by declining EROI, will be one portion of the diminishing returns with respect to human labor. In fact, declining EROI may be the single largest contributor to diminishing returns with respect to human labor. This will happen if, in fact, low EROI correlates with high oil price, and high oil prices leads to diminished wages (Figure 2). This may be the case, because David Murphy (2013) indicates that the relationship between EROI and the price of oil is in fact inverse, with oil prices rising rapidly at low EROI levels.

Contributors to Declining Return on Human Labor

Human labor is the most basic form of energy. We humans supplement our own energy with energy from many other sources. It is this combination of energy from many sources that is reflected in the productivity of humans. For example, we take it for granted that we will have tools made using fossil fuels and that we will have electricity to power computers. Before fossil fuels, humans supplemented their energy with energy from animals, burned biomass, wind, and flowing water.

What besides declining EROI of fossil fuels would lead to diminishing returns with respect to human labor? Clearly, the same problems that were problems years ago continue to be problems. For example, growing world population tends to lead to diminishing returns with respect to human labor, because resources such as arable land and fresh water are close to fixed. Greater world population means that on average, each gets person less. Oil production is not rising as rapidly as world population, so the quantity available per person tends to drop as world population rises.

Soil degradation is another issue, according to David Montgomery, in Dirt: The Erosion of Civilizations (2007). Declining quality of ores for metals is another issue. The ores that are cheapest to extract are extracted first. We later move on to poorer quality ores, and ores in less accessible locations. These require more oil and other fossil fuels for extraction, leaving less for other purposes.

There are other more-modern issues as well. Growing populations in areas where water is scarce lead to the need for desalination plants. These desalination plants use huge amounts of fossil fuel resources (oil in the case of Saudi Arabia) (Lee 2010), leaving less energy resources for other purposes.

Globalization is another issue. As the developing world uses more oil, less oil is available for the part of the world that historically has used more oil per capita. The countries with falling oil consumption tend to be the ones that recently have had the most problems with recession and job loss.

Figure 3. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 3. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

An indirect part of diminishing returns with respect to human labor has to do with what proportion of the citizens is actually able to find full-time work in the paid labor force, and whether the jobs available are actually using their training and abilities. The Bureau of Labor Statistics calculates increases in output per hour of paid labor. I would argue that this is not a broad enough measure. We really need a measure of output per available full-time worker.

Obviously, there are potential offsets. We hear much about technology improvements and increased efficiency offsetting whatever other problems may occur. To me, the real test of whether there is diminishing returns with respect to human labor is how wages are trending, especially median wages. If these are not keeping up with inflation, there is a problem.


We don’t often think about the return on human labor, and how the return on human labor could reach diminishing returns. In fact, human labor is the most basic source of energy we have. Stagnating wages and higher unemployment of the type experienced recently by the United States, much of Europe, and Japan look distressingly like diminishing returns to human labor.

Stagnation of wages is happening despite attempts by governments to prop up the economy using deficit spending, artificially low interest rates, and Quantitative Easing. Without these interventions, the results would likely be even worse. If QE is removed, or if interest rates rise on their own, there seems to be a distinct possibility that these countries will be reaching the “crisis” phase as described by Turchin and Nefedov.

Historical experience suggests that a major danger of diminishing returns to human labor is that governments costs will rise so high, and wages will drop so low, that it will be impossible for the government to collect enough taxes from wage-earners. In fact, there seems to be evidence we are already headed in this direction. Figure 4 (below) shows that  the US ratio of government spending to wages has been rising since 1929. Government receipts have leveled off in recent years.

Figure 4. Based on Table 2.1 and Table 3.1 of Bureau of Economic Analysis data. Government spending includes Federal, State, and Local programs.

Figure 4. Based on Table 2.1 and Table 3.1 of Bureau of Economic Analysis data. Government spending includes Federal, State, and Local programs.

Adding more health care services under the Affordable Care Act will only increase this trend toward growing government expenditures.

One issue is how the financial benefit of human labor (together with the energy sources leveraging this labor) is split among businesses, governments, and humans. Businesses have the most control in this. If an endeavor is not profitable, they can discontinue it. If cheaper labor is available elsewhere, they can cut hold down wages in countries with higher wages. They also have the option of increased mechanization. Humans and governments both tend to get shortchanged. As the overall return of the system reaches limits, wages of humans tend to stagnate. Governments find themselves with greater and greater costs, and more and more difficulty collecting funds from increasingly impoverished citizens.

Most authors of academic articles assume that the challenge we are facing is one that can be solved over the next, say, fifty years. They also seem to believe that the fixes required are simply small adjustments to our current economy. This assumption seems optimistic, if we are really approaching financial collapse.

If we are in fact near the crisis stage described by Turchin and Nefedov, we will need to do something much closer to “start over”. We need to build a new economy that will work, rather than just “tweak” the current one. New (or radically changed) government and financial systems will likely be needed–ones that are much less expensive for taxpayers to fund. We are also likely to need to cut back on basic services, including maintaining paved roads and repairing long-distance electricity transmission lines.

Because of these changes, whole new ways of doing things will be needed. EROI analyses that have been to date represent analyses of how our current system operates. If major changes are needed, their indications may no longer be relevant. We cannot simply go backward, because methods that worked in the past, such as using draft horses and buggy whips, will no longer be available without a long development period. We are truly facing an unprecedented situation–one that is very hard to prepare for.

Podcast: Nicole Foss (Stoneleigh) on Energy-Part 2

Off the microphones of Nicole Foss, RE & Monsta

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Aired on the Doomstead Diner on September 7, 2013


Discuss at the Podcast Table inside the Diner

In this Podcast, Nicole, RE and Monsta discuss the Energy issues confronting Industrial Society as the Age of Oil comes to a close.

We delve into the economic and environmental issues surrounding both Nuclear Energy and Renewable Energy resources such as Solar, Wind and Hydro power.  How will credit contraction affect the development of future energy resources?  How will the Waste Disposal and decomissioning problems for the current generation of Nuclear Power Plants be handled?  Is Thorium Nuclear a viable option?

What are the true calculations for EROEI for Renewables?  How is the Renewable paradigm being pursued now, and is there a better way to develop these resources?

All this and much much more in the Podcast!


Energy Products: Return on Investment is Already Too Low

Off the keyboard of Gail Tverberg

Published on Our Finite World on June 24, 2013


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My major point when I gave my talk at the Fifth Biophysical Economics Conference at the University of Vermont was that our economy’s overall energy return on investment is already too low to maintain the economic system we are accustomed to. That is why the economy is showing signs of heading toward financial collapse. Both a PDF of my presentation and a podcast of the talk are available on Our Finite World, on a new page called Presentations/Podcasts.

My analysis is with respect to the feasibility of keeping our current economic system operating. It seems to me that the problems we are experiencing today–governments with inadequate funding, low economic growth, a financial system that cannot operate with “normal” interest rates, and stagnant to falling wages–are precisely the kinds of effects we might expect, if energy sources are providing an inadequate energy return for today’s economy.

Commenters frequently remark that such-and-such an energy source has an Energy Return on Energy Invested (EROI) ratio of greater than 5:1, so must be a helpful addition to our current energy supply. My finding that the overall energy return is already too low seems to run counter to this belief. In this post, I will try to explain why this difference occurs. Part of the difference is that I am looking at what our current economy requires, not some theoretical low-level economy. Also, I don’t think that it is really feasible to create a new economic system, based on lower EROI resources, because today’s renewables are fossil-fuel based, and initially tend to add to fossil fuel use.

Adequate Return for All Elements Required for Energy Investment

In order to extract oil or create biofuels, or to make any other type of energy investment, at least four distinct elements described in Figure 1: (1) adequate payback on energy invested,  (2) sufficient wages for humans, (3) sufficient credit availability and (4) sufficient funds for government services. If any of these is lacking, the whole system has a tendency to seize up.

Figure 1. One sheet from Biophysical Economics Conference Presentation

Figure 1. One sheet from Biophysical Economics Conference Presentation

EROI analyses tend to look primarily at the first item on the list, comparing “energy available to society” as the result of a given process to “energy required for extraction” (all in units of energy). While this comparison can be helpful for some purposes, it seems to me that we should also be looking at whether the dollars collected at the end-product level are sufficient to provide an adequate financial return to meet the financial needs of all four areas simultaneously.

My list of the four distinct elements necessary to enable energy extraction and to keep the economy functioning is really an abbreviated list. Clearly one needs other items, such as profits for businesses. In a sense, the whole world economy is an energy delivery system. This is why it is important to understand what the system needs to function properly.


What Happens as Oil Prices Rise

When oil prices rise, wages for humans seem to fall, or at least stagnate (Figure 2, below). The comparison shown uses per capita wages, so takes into account changes in the proportion of people with jobs as well as the level of wages.

Figure 2. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.

Figure 2. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban

In fact, if we analyze Figure 2, we see that virtually all of the rise in US wages came in periods when oil prices were below $30 per barrel, in inflation-adjusted terms. The reason why this happens is related to the drop in corporate profits that can be expected if oil prices rise, and businesses fail to respond. Let me explain this further with Figure 3, below.

Figure 3. Illustration by author of ways oil price rise could squeeze wages. Amounts illustrative, not based on averages.

Figure 3. Illustration by author of ways oil price rise could squeeze wages. Amounts illustrative, not based on averages.

Figure 3 is a bit complicated. What happens initially when oil prices rise, is illustrated in the black box at the left. What happens is that the business’ profits fall, because oil is used as one of the inputs used in manufacturing and transportation. If the cost of oil rises and the sales price of the product remains unchanged, the company’s profits are likely to fall. Additionally, there may be some reduction in demand for the product, because the discretionary income of consumers is reduced because of rising oil prices. Clearly, the business will want to fix its business model, so that it can again make an adequate profit.

There are three ways that a business can bring its profits back to a satisfactory level, illustrated in the last three columns of Figure 3. They are

  • Automation. Human energy is the most expensive type of energy a business can employ, because wages to paid to humans to do a given process (such as putting a label on a jar) are far higher than the cost of an electricity-based process to perform the same procedure. Thus, if a firm can substitute electrical or oil energy for human energy, its cost of production will be lower, and profits can be improved. Of course, workers will be laid off in the process, reducing total wages paid.
  • Outsourcing to a Country with Lower Costs. If part of the production cost can be moved to a country where wage costs are lower, this will reduce the cost of manufacturing the product, and allow the business to offset (partially or fully) the impact of rising oil prices. Of course, this will again lead to less US employment of workers.
  • Make a Smaller Batch. If neither of the above options work, another possibility is to cut back production across the board. Even if oil prices rise, there are still some consumers who can afford the higher prices. If a business can cut back in the size of its operations (for example, close unprofitable branches or fly fewer airplanes), it can cut back on outgo of many types: rent, energy products used, and wages. With reduced output, the company may be able to make an adequate profit by selling only to those who can afford the higher price.

In all three instances, an attempt to fix corporate profits leads to a squeeze on human wages–the highest cost source of energy services that there is. This seems to be Nature’s  attempt way of rebalancing the system, toward lower-cost energy sources.

If we look at the other elements shown in Figure 1, we see that they have been under pressure recently as well. The availability of  credit to fund new energy investment is enabled by profits that are sufficiently high that they can withstand interest charges incurred in the payback of debt. Debt use is also enabled by growth, since if profits will be higher in the future, it makes sense to delay funding until the future. In recent years, central governments have seen a need to put interest rates at artificially low levels, in order to encourage borrowing. To me, this is a sign that the credit portion of the system is also under pressure.

Government’s ability to fund its own needs has been under severe stress as well. Part of the problem comes from the inability of workers to pay adequate taxes, because their wages are lower. Part of the problem comes from a need for governments to pay out more in benefits, such as disability income, unemployment, and food stamps. The part that gets most stressed is the debt portion of government funding. This really represents the intersection of two different areas mentioned in Figure 1: (3) Adequacy of credit availability and (4) Funding for government services.

The constellation of energy problems we are now experiencing seems to me to be precisely what might be expected, if energy return is now, on average, already too low.

The Role of Energy Extraction in this Squeeze

When any energy producer decides to produce energy of a given type (say oil or uranium), the energy producer will look for the resource that can be extracted at lowest cost to the producer.

Figure 4. Resource triangle, with dotted line indicating uncertain financial cut-off.

Figure 4. Resource triangle, with dotted line indicating uncertain financial cut-off.

Initially, production starts where costs are most affordable–not much energy is required for extraction; governments involved do not require too high taxes; and the cost of human labor is not too high. The producer may need debt financing, and this must also be available, at an affordable cost.

As the least expensive energy is extracted, later producers wishing to extract energy must often settle for higher cost extraction. In some cases, technology advancements can help bring costs back down again. In others, such as recent oil extraction, the higher costs are firmly in place. Higher sales prices available in the market place enable production “lower in the triangle.”  The catch is that these higher oil prices lead to stresses in other systems: human employment, government funding, and ability for credit markets to work normally.

What Is Happening on an Overall Basis

Man has used external energy for a very long time, to raise his standard of living. Man started over 1,000,000 years ago with the burning of biomass, to keep himself warm, to cook food, and for use in hunting.  Gradually, man added other sources of energy. All of these sources of energy allowed man to accomplish more in a given day. As a result of these greater accomplishments, man’s standard of living rose–he could have clothes, food which had been cooked, sharper tools, and heat when it was cold.

Over time, man added additional sources of energy, eventually including coal and oil. These additional sources of energy allowed man to leverage his own limited ability to do work, using his own energy.  Goods created using external energy tended to be less expensive than those made with only human energy,  allowing prices to drop, and wages to go farther. Food became more available and cheaper, allowing population to rise. Money was also available for public health, allowing more babies to live to maturity.

What happened shortly after the year 2000 was a sharp “bend” in the system. Instead of goods becoming increasingly inexpensive, they started becoming relatively more expensive relative to the earnings of the common man. There seem to be two reasons for this: (1) In the early 2000s, oil prices started rising, and these higher prices started exerting an upward force on the price of goods. At the same time, (2) globalization took off, providing downward pressure on wages. The result was that suddenly, workers found it harder to keep a job, and even when they were working, wages were stagnant.

It seems to me that prior to the year 2000, part of what buoyed up the system was the large difference between:

A. The cost of extracting a barrel of oil

B. The value of that barrel of oil to society as a whole, in terms of additional human productivity, and hence additional goods and services that barrel of oil could provide.

As oil prices rose, this difference started disappearing, and its benefit to the world economy started going away.  The government became increasingly stressed, trying to provide for the many people without jobs while tax revenue lagged.  Slower economic growth made the debt system increasingly fragile. The economy was gradually transformed from one which provided perpetual growth, to one where citizens were becoming poorer and poorer. This pushed the economy in the direction of collapse.

A More Complete List of Inputs that Need Adequate Returns

My original list was

  1. Energy counted in EROI calculation–mostly fossil fuels, sometimes biomass used as a fuel
  2. Human labor
  3. Credit system
  4. Cost of government

To this we probably need to add:

  1. Profits for corporations involved in these processes
  2. Rent for land used in the process – this cost would be highest in biofuel operations.
  3. Costs to prevent pollution, and mitigate its effects – not charged currently, except as mandated by law
  4. Compensation for mineral depletion and degradation of soil. Degradation of soil would likely be an issue for biofuels.
  5. Energy not counted in EROI calculations. This is mostly “free energy” such as solar, wind, and wave energy, but can include energy which is of limited quantity, such as biomass energy.

Given the diversity of items in this list, it is not clear that simply keeping EROI above some specified target such as 5:1 is likely to provide enough “margin” to cover the financial return needed to properly fund all of these elements. Also, because the need for government services tends to increase over time as the system gets more stressed, if there is an EROI threshold, it needs to increase over time.

It might also be noted that the amounts paid for government services are surprisingly high for fossil fuels. Barry Rodgers gave some figures regarding “government take” (including lease fees as well as other taxes and fees) in the May 2013 Oil and Gas Journal. According to his figures, the average government take associated with an $80 barrel of US tight oil is $33.29 per barrel. This compares to capital expenditures of $22.60 a barrel, and operating expenditures of $7.50 a barrel. If we are to leave fossil fuels, we would need to get along without the government services funded by these fees, or we would need to find a different source of government funding.

Source of the EROI 5:1 Threshold

To my knowledge, no one has directly proven that a 5:1 threshold is sufficient for an energy source to be helpful to an economy. The study that is often referred to is the 2009 paper, What is the Minimum EROI that a Sustainable Society Must Have? (Free for download), by Charles A. S. Hall, Steven Balogh, and David Murphy. This paper analyzes how much energy needs to provided by oil and coal, if the energy provided by those fuels is to be sufficient to pay not just for the energy used in its own extraction, but also for the energy required for pipeline and truck or train transportation to its destination of use. The conclusion of that paper was that in order to include these energy transportation costs for oil or coal, an EROI of at least 3:1 was needed.

Clearly this figure is not high enough to cover all costs of using the fuels, including the energy costs to build devices that actually use the fuels, such as private passenger cars, electrical power plants and transmission lines, and devices to use electricity, such as refrigerators. The ratio required would probably need to be higher for harder-to-transport fuels, such as natural gas and ethanol. The ratio would also need to include the energy cost of schools, if there are to be engineers to design all of these devices, and factory workers who can read basic instructions. If the cost of government in general were added, the cost would be higher yet. One could theoretically add other systems as well, such as the cost of maintaining the financial system.

The way I understood the 5:1 ratio was that it was more or less a lower bound, below which even looking at an energy product did not make sense. Given the diversity of what is needed to support the current economy, the small increment between 3 and 5 is probably not enough–the minimum ratio probably needs to be much higher. The ratio also seems to need to change for different fuels, with many quite a bit higher.

The Add-On Problem for Fossil Fuel Based Renewables

With renewables made using fossil fuels, such as hydroelectric, wind turbines, solar PV, and ethanol, the only way anyone can calculate EROI factors is as add-ons to our current fossil fuel system. These renewables depend on the fossil fuel system for their initial manufacture, for their maintenance, and for the upkeep of all the systems that allow the economy to function. There is no way that these fuels can power the whole system, based on what we know today, within the next hundred years. Thus, any EROI factor is misleading if viewed as the possibility what might happen if these fuels were to attempt to operate on a stand-alone basis. The system simply wouldn’t work–it would collapse.

A related issue is the front-ended nature of the fossil fuels used in creating most of today’s renewables. People today think of “financing” any new investment, with easy payments over a period of years. The catch (as Tom Murphy pointed out in his BPE talk) is that Nature Doesn’t Do Financing. Nature demands up-front payment in terms of any fossil fuels used. Thus, if we build a huge new hydroelectric dam, such as the Three Gorges Dam in China, the fossil fuels required to make the concrete and to move huge amounts of soil come at the beginning of the project. This is also true if we make a huge number of solar panels. The saving we get are all only theoretical, and will take place only if we are actually able reduce the use of  other fossil fuel energy sources in the future, because of the energy from the PV panels or other new renewable.

In nearly all cases, adding renewables requires increasing fossil fuel use for this reason. We could, in theory, reduce fossil fuel use elsewhere, to try to cover the greater fossil fuel use to add renewables, but this would mean cutting industries and jobs currently using the fuel, something that many find objectionable. Several readers have suggested that we could greatly ramp-up solar PV. Yes, we could, but we would have to greatly ramp up fossil fuel usage (mostly coal in China, if current manufacturing approaches are used) to create these panels. Any future savings would be theoretical, depending on how long we keep the new system operating, and how much fossil fuel energy consumption is actually reduced as a result of the new panels.

How Resource Limits Lead to Financial Collapse

Off the keyboard of Gail Tverberg

Published on Our Finite World on March 29, 2013

Discuss this article at the Epicurean Delights Smorgasbord inside the Diner

Resource limits are invisible, so most people don’t realize that we could possibility be approaching them. In fact, my analysis indicates resource limits are really financial limits, and in fact, we seem to be approaching those limits right now.

Many analysts discussing resource limits are talking about a very different concern than I am talking about. Many from the “peak oil” community say that what we should worry about is a decline in world oil supply. In my view, the danger is quite different: The real danger is financial collapse, coming much earlier than a decline in oil supply. This collapse is related to high oil price, and also to higher costs for other resources as we approach limits (for example, desalination of water where water supply is a problem, and higher natural gas prices in much of the world).

The financial collapse is related to Energy Return on Energy Invested (EROEI) that is already too low. I don’t see any particular EROEI target as being a threshold–the calculations for individual energy sources are not on a system-wide basis, so are not always helpful. The issue is not precisely low EROEI. Instead, the issue is the loss of cheap fossil fuel energy to subsidize the rest of society.

If an energy source, such as oil back when the cost was $20 or $30 barrel, can produce a large amount of energy in the form it is needed with low inputs, it is likely to be a very profitable endeavor. Governments can tax it heavily (with severance taxes, royalties, rental for drilling rights, and other fees that are not necessarily called taxes). In many oil exporting countries, these oil-based revenues provide a large share of government revenues. The availability of cheap energy also allows inexpensive roads, bridges, pipelines, and schools to be built.

As we move to energy that requires more expensive inputs for extraction (such as the current $90+ barrel oil), these benefits are lost. The cost of roads, bridges, and pipelines escalates. It is this loss of a subsidy from cheap fossil fuels that is significant part of what moves us toward financial collapse.

Renewable energy generally does not solve this problem. In fact, it can exacerbate the problem, because the cost of its inputs tend to be high and very “front-ended,” leading to a need for subsidies. What is really needed is a way to replace lost tax revenue, and a way to bring down the high cost of new bridges and roads–that is a way to get back to the cost structure we had when oil (and other fossil fuels) could be extracted cheaply.


The Way Resource Extraction Reaches Financial Limits

Figure 1. Illustration of why resource limits are very hard to seeFigure 1. Illustration of why resource limits are very hard to see

When a company decides to extract a resource such as oil, gold, or fresh water, it looks for the least expensive source available. After many years of extraction, the least expensive sources become depleted, and the company must move on to more expensive resources. It always looks like there are plenty of resources left; they are just increasingly expensive to extract. Eventually an extraction limit is reached; this limit is a price limit.

As easy to extract resources become more depleted, it becomes necessary to invest more resources of every type in extraction (for example, manpower, oil, natural gas, fresh water), in order to extract a similar amount of the resource. I have called this the Investment Sinkhole problem.

The need to use greater resources in the process of resource extraction leaves fewer resources available for other purposes. Prices adjust to reflect this out of balance. If there is no substitute available for the resource that is reaching limits, the economy adjusts by contracting to match the amount of resource that is available at an affordable price. Some economists might call the situation “reduced demand at high price”. What the situation looks like, in terms most of us are used to using, is recession or depression.

Part of the confusion is that many people completely miss the fact that there is a close connection between cheap energy supply of the exact type needed (for example, gasoline for cars, diesel for trucks, electricity for many factory applications) and the ability of the world economy to make goods and services.

If the price of energy of the type a particular manufacturer or service provider uses increases (say gasoline or diesel or natural gas or electricity), that manufacturer or service provider in the short term has no choice but to pay the increased price, because there is no substitute for energy of the right type. If the manufacturer or service provider tries to pass these higher costs on to its customers, there is likely to be a cutback in demand, leading to a need for layoffs. Alternatively, with longer lead time, the company may be able to find a way around the problem of increased costs, by using more automation, or by outsourcing production to a country where costs are cheaper. Any of these responses leads to reduced US employment and recessionary impacts.

What History Says about Prior Collapses

Until fossil fuels came into widespread use, civilizations regularly grew until they reached limits of some sort, and then collapsed. There are many books looking at this issue. David Montgomery, in Dirt: The Erosion of Civilizations talks about the role soil erosion and soil degradation play in bringing civilizations down. Sing Chew, in The Recurring Dark Ages, talks about how ecological stress, deforestation, and climate change have led to long periods of collapse and low economic activity. Joseph Tainter, in The Collapse of Complex Societies, talks about how increasingly complex solutions to the problems of the day lead to ever-higher administrative costs that eventually become too expensive to afford.

Peter Turchin and Surgey Nefedov in the book Secular Cycles take more of an analytical approach. They look at how cycles actually played out, based on financial and other detailed records of the day. Their analysis considered eight economies, the earliest of which began in 350 B. C. E.. The pattern they found looks disturbingly like the pattern that the world has been going through since the widespread use of fossil fuels began about 1800: A civilization starts its existence when a new resource becomes available, for example by deforesting land to be used for agriculture (or in our case, finding ways fossil fuels could be used). A civilization experiences Growth for 100+ years as the population is able to grow with the new resource available to it.

Eventually the civilization reaches a Stagflation period. This happens when the civilization starts reaching limits. Population is much higher, the size of the governing class is much larger, and feedbacks like erosion and soil depletion start to play a role. In my view, Stagflation period began for the United States around 1970, when US oil production began to fall.

Turchin and Nefedov found that during the Stagflation period, population growth slows and wages stop rising. Wage disparity increases, and debt grows. The cost of food and other resources becomes more variable, and begins to spike. The level of required taxes grows, as the number of government administrators grows and as armies increase in size. (Joseph Tainter refers to this growth in government services as a product of increased complexity.)

Eventually, after 50 or 60 years, a Crisis Phase begins, when it is no longer possible to raise taxes enough to cover all of the governmental costs. In this period, wages of commoners drop to such a low level that nutrition declines, leading to epidemics and a higher death rate. Commoners often revolt, leading to government collapses. Wars for resources are sometimes fought. The Crisis Phase lasts a variable length of time, typically 20 to 50 years, with the length of time seeming to be shorter in the more recent cycles analyzed. There is considerable die-off from illness and warfare in the Crisis Phase.

It seems to me that the United States, most of Europe, and Japan are now very close to the point where they will enter the Crisis Phase of a similar cycle.

The Nature of the Financial Predicament We Are Reaching

At the beginning of this post, I mentioned that rising investment costs lead to what I call an investment sinkhole problem, as we extract fuels and ores that require increasingly expensive inputs near the bottom of Figure 1. An examples might be tight oil, that is extracted using “fracking”. While we hear much about the hoped-for higher supply, we don’t hear that the newer types of oil are available only because oil prices are high. They can’t be expected to bring oil prices down. An investment sinkhole means that our dollar of investment doesn’t go as far; it is precisely the opposite of increased productivity.

When we were still far from reaching resource limits, efficiency improvements could more than make up for the loss of efficiency that comes from the Investment Sinkhole effect. But as we get closer to limits, the situation is reversed. Efficiency improvements are outweighed by the ratcheting up of extraction costs, because of the Investment Sinkhole effect. This means that instead of increased wealth being added to the system by efficiency improvements over time, we find the Sinkhole effect predominates. The common worker needs to spend an increasing proportion of his paycheck on necessities, leaving less for discretionary items. The result is recession, or very slow economic growth.

When the Investment Sinkhole problem starts to predominate, financial models suddenly don’t work very. Central banks react by cutting interest rates, in an attempt to stimulate economic growth. They also try to stimulate the economy by Quantitative Easing. This adds more money to the economy, and attempts to reduce longer-term interest rates. Of course, if the problem is really structural, there is no bounce-back to economic growth. The temporary fix becomes a bridge to nowhere.

A Long-Term View of our Financial Problems

In the previous section, we talked about our immediate problems. But what about our longer-term problems?

Figure 2. Author's view of how various limits might work together to produce different symptoms.Figure 2. Author’s view of how various limits might work together to produce different symptoms, of the type seen by Turchin and Nefedov.

Today’s financial system is based on the assumption that individuals and businesses can make and keep financial promises. This system worked well, when resource prices were flat or declining, as was the case prior to 2000. It was possible for businesses and governments to take out loans under the expectation of continued prosperity, and for individuals to buy houses and cars under the expectation that they would continue to have jobs, so that they could continue to make auto loan or mortgage payments.

The situation changes dramatically, if the long-term expectation is for oil prices and other commodity prices to keep ratcheting upward. We don’t really have substitutes for oil and other commodities, so if we want to keep obtaining them, we need to pay the ever-higher cost. Even devices such as more efficient cars are affected by higher prices, because they too, use fossil fuels in their construction, and depend on ever more expensive technology.

In a period when commodity prices are ratcheting upward, businesses find it increasingly difficult to forecast whether new facilities will continue to be economic 10, 20 or 40 years. Businesses find that customers gradually have less discretionary income, instead of more, so it becomes increasingly difficult for these customers to afford the products which are being sold. This makes business planning much more difficult.

If a bank makes a long-term loan, it needs to include a much larger provision for the expected cost of loan write-offs. These higher loan write-off provisions causes interest rates to rise, making long-term loans unaffordable for many (or most) people and businesses. Governments are hugely affected as well.

Without access to cheap loans, and with resource prices (especially oil, but sometimes desalinated water instead of well water, and natural gas) ratcheting upward, business failures rise. This leads to more layoffs, and more defaults on mortgages and auto loans. Interest rates on these can be expected to rise as well.

All of these effects mean that debt-financing becomes much less attractive. Debt defaults, such we have just seen in Cyprus and Greece, become more common. This is not a temporary passing phase; it is a permanent long-term situation, caused by the ratcheting up of oil and other commodity prices, as resource extraction becomes more expensive.

In such an environment, the amount of goods and services available tends to decline over time. Continued economic growth changes to continued economic contraction. If governments issue fiat money, it declines in value over time as well. (Money is sometimes defined as a “store of value,” but this becomes less possible.) One way this decline could occur is if those holding money have an expectation for continued inflation. Alternatively, money can be subject to an automatic downward adjustment that reduces its value on a monthly or annual basis.

With such a system, individuals discover that if they have money, the best strategy is to spend it immediately, rather than to try to save for retirement or some distant goal. Investments in stock markets, or in stocks of new companies, are likely to decline.

Without the availability of debt at a reasonable cost, businesses find it much more difficult to expand or to begin from scratch. New businesses tend to be small ones, that can finance their own operations by bootstrapping–that is, self-financing by using the profits on early sales to pay for materials needed for later sales, and hopefully for a little expansion as well.

All of these issues mean that if there is a financial collapse, picking ourselves up afterward will be quite difficult. Our current financial system would need substantial modification to work in such a system. The size of the current financial sector would likely shrink dramatically.

If the various countries of the world set up different financial systems to deal with the new realities, connecting them into a world system is likely to be difficult. Political stability is likely to be lower in a system such as this. How does one arrange long-term contracts, when there is a very real possibility that the government of the country that is party to an agreement may have collapsed, prior to the end of the contract?

What Brings the Whole System Down?

It is easy to think of a long list of things that might bring the system down. In fact, there are so many contenders that if any one of them starts the collapse, it seems likely others will push it on its way.

Clearly one of the issues is the wide gap between US Federal Government revenue and government expenditures.

Figure 3. US Federal Government Receipts and Expenditures (including Social Security, etc.) based on Table 3.2 of the US Bureau of Economic Analysis.Figure 3. US Federal Government Receipts and Expenditures (including Social Security, etc.) based on Table 3.2 of the US Bureau of Economic Analysis.

If the US government (or the government of any of the many countries who are having difficulty balancing their budgets) tries to raise taxes or cut benefits, to get revenue and expense back in line, the outcome is likely to be more recession and more layoffs. Debt defaults are likely to rise, putting banks into financial difficulty. There will then be a need for more bank bailouts, and a rerun of the problems we saw in 2008, but with governments in poorer financial condition to solve these problems.

Another possible way the system could be brought down is by rising interest rates for governments, perhaps because of all of the failures elsewhere around the globe. Rising interest rates will mean that a government’s budget is even more unbalanced than it was before, because the higher interest rates translate to higher government expenses.

These higher government interest rates would quickly be reflected in other interest rates, such as mortgage interest rates and interest on corporate loans. Sale of homes would drop dramatically, as interest rates rise. Prices of homes would likely drop as well. Business investment would drop dramatically. Much of the “stimulus” that the government has put in place would disappear. We likely would be headed back into major recession.

A third possibility relates to the Quantitative Easing that has been done recently, and the artificially low interest rates that have resulted, even for longer-term loans. Investors who have to contend with these low interest rates will try to find ways around them, and in the process, create bubbles in asset prices. These bubbles invariably burst, with bad outcomes. For example, the WSJ recently published an article titled, “Investors pile into housing, this time as landlords.” Of course, when something goes wrong (like mis-estimating returns, or oil prices rising higher, leading to more pressure on renters’ ability to pay), the same investors are likely to pile right back out, puncturing the new bubble. Commercial investors rushing out will pull down property values, leading to yet more mortgage defaults as homeowners again find their loans “underwater”.

A fourth possibility is that oil prices will ratchet upward again. Alternatively, natural gas may rise from its current artificially low price level in the US, to more like European or Japanese levels. Either of these would lead to more financial pressures on citizens, and more debt defaults. Banks would likely again be in difficulty, needing bail outs.

A fifth possibility is that the Euro ceases to be a currency. Alternatively, some of the debtor nations could drop out of the Euro, allowing the Euro to rise for remaining nations, thus putting the remaining nations in a worse position for selling their exports. In either of these scenarios, the European crisis could be exported to the US, partly as reduced demand for our goods, and partly through exposure of banks to European defaults.

A sixth possibility is the effects of ObamaCare will destabilize an already weak economy, as businesses attempt to circumvent its effects by substituting more part-time workers for full-time workers.

A seventh possibility is that pensions start running into real financial difficulty, because of artificially low interest rates. The US government may be called in to bail out pension funds, or the Pension Benefit Guaranty Corporation, at high cost.

An eighth possibility is that states start leaving the United States, because they feel that they would be better off on their own, as taxes and mandatory programs (such as ObamaCare) become increasingly difficult to deal with.

What does the shape of the decline look like?

Many people who base their views on geological depletion of oil expect that the decline will be somewhat slow, matching geological decline. I don’t think geological decline rates will have much to do with the shape of the decline, except for perhaps setting an upper bound as to how well things might, in theory, work out.

The big question in my mind is how well the international financial system will hold together. There is a close corollary question: How successful will be at replacing it on a timely basis if it does fall apart? My concern is that if banks are suddenly closed, businesses of all types will fail. This could include companies extracting oil as well as companies selling electric power and companies providing fresh water.

If there are long-term problems with the financial system, international trade is likely to be greatly reduced. Businesses making trades are likely to want greater assurances that they will actually be paid than is the case today. This could take the form of bilateral trade with trusted partners, or “I’ll ship you Product A if you will ship me Product B,” as a form of barter.

A slowdown in world trade could have dramatic repercussions quickly with respect to our ability to keep basic services in good repair, because we are now dependent on international trade for replacement parts of products we use every day (such as cars and trucks). Nearly everything that is manufactured today incorporates raw materials from around the world, and uses machines that depend on parts from around the world.

Another question is whether there will be huge political disruptions. If banks are closed, someone usually is blamed. We have seen many ways these political disruptions can take place. Some examples might include Syria, Egypt, the Former Soviet Union, and Greece.

One scenario I can imagine is that some parts of a country are subject to more disruption than others. In one part of the country, banks may be closed, while in another part, states may be able to reopen closed banks. Or electricity outages may occur following a storm, and never be repaired, while other locations nearby are doing fairly well. There may be political riots, but these are often located in areas where politicians are located, not in other areas.

Perhaps it is just as well that we don’t know exactly what the decline will look like. Not knowing gives us some chance for optimism.

Net Energy End Game Theory…

Off the keyboard of Steve from Virginia

Published on Economic Undertow on January 23, 2013

The time frame is less than two years: the world becomes net energy negative. At that point there is no turning the clock back.

Discuss this article at the Epicurean Delights Smorgasbord inside the Diner

Gregor Macdonald discusses the end of inexpensive crude oil and the so-called production ‘Revolution’ hoopla with Chris Martenson’s (Peak Prosperity).

Gregor makes the point that the increase in crude prices after 1998 took a lot of analysts by surprise. Many predicted a decline to historical levels with drillers simply adding to output from inventory. This is a critical idea that remains in force to this day: that crude production is essentially low-cost, that crude is mis-priced, that manipulation is forcing prices higher, that prices will return to historical levels once manipulators are ‘surgically removed’ from the marketplace.

A fundamental principle of industrial modernity is oil can be wasted because it is cheap, it’s cheap because the only thing it’s good for is waste. The waste process is monetized, it is collateral for loans which ratchet the wasting process further along. After we borrow the first time, we borrow additional amounts in order to waste more as well as to service and roll-over the previous rounds of loans … Both the loans and the waste compound exponentially along with pressure on resources, the entire economy becomes saturated with debts and waste products while resources are exhausted.

What’s there not to like?

Problems emerge when crude oil is depleted and it becomes too costly to waste. If oil isn’t ‘waste-ably cheap’ customers cannot afford it, if the crude is not costly enough there are no returns for the driller. Our economic infrastructure has been built assuming cheap petroleum into the far distant future, our empire of ‘stuff’ is stranded by the high-priced variety … meanwhile, costly, difficult to extract crude is all that remains! Cost is the reef upon which the modern world has run aground: there isn’t enough margin remaining after paying the fuel bill to offer as collateral for new loans or to service debts … the fuel bill has to be very high or there is no more fuel!

A hundred years into the petroleum era and there are no ‘innovative’ scalable economic uses for crude other than to burn it! Despite massive conversion losses, cheap oil provides energy returns sufficient to support current living standards, not-wasting under the current regime doesn’t provide anything. Because of the absence of imagination and a shortage of high-cost/real value uses, the exhaustion of low-cost crude means the end of waste-based modernity: there is no ‘Plan B’.
Triangle of Doom 012113

Figure 1: From TFC Charts, continuous Brent monthly contract (click on for big). The top line represents what customers are able to pay, above that price there are no petroleum sales and price must decline as producers holding petroleum products cut their losses. The bottom line represents the ‘floor’ price that drillers must receive otherwise they cannot afford to bring new crude oil to the marketplace. There are a few things to keep in mind at all times:

– Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.

– The gross amount of incremental credit available is the amount that the so-called customers are able to service at any time of roll-over credit that the establishment can cajole from lenders including central banks over a period of time. This incremental ‘serviceability’ or productivity of debt is decreasing … due to the negative feedback effects of high crude prices over time. See Charles A. S. Hall: ‘discretionary’ spending declines because more funds are diverted toward obtaining energy and away from the consumption of other goods and debt service, (PDF warning) Even though finance is creating more credit, that added credit is bringing less crude to the marketplace.

– It doesn’t matter how many discretionary dollars the establishment is able to cajole: at all times, the producer’s dollar is the same as the consumer’s dollar! Alternatively, the gallon of diesel fuel used by the driller is the same gallon (identical energy density) burned by the customer.

A change of the customer’s condition will have an adverse effect on the driller. The customer’s leverage or ability to borrow is increased at the expense of the driller’s leverage … and vice-versa … This is because money represents the same ‘energy cost’ to both.

Currency is nothing more than a proxy for the fuel used by the customer … which is the same fuel required by the driller to bring more crude into the marketplace. The driller cannot use one kind of dollar to gain fuel while the customer uses a different kind to waste the fuel.

Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Gregor suggests workers were able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, the productivity of credit is diminished.

There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. It costs more for the driller because he is constrained by geology while the customer is limited only by access to credit itself/wasting infrastructure. The relationship between the sets of borrowers conforms to game theory:
Crude Game Theory 1

Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrow or don’t borrow. Not borrowing by either meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices!

There was no need to allocate between drillers or customers, they could ‘have it all’: by March, 1999 the world was …


Economist Cover 1

The famous cover for the Economist Magazine: it was an ugly cover … it was also incorrect about the future.

From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Crude Game Theory 2

Figure 3: Post-1998, brutal new game, new mutually-assured-destruction theory!

Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers.

– When drillers borrow alongside customers for diminished return, borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by credit costs.

– The choice is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller must compete for the same credit dollar: one gains at the expense of the other. The customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers:
Bakken 012013

Figure 4: Bakken output declines by Darwinian: when drillers cannot borrow, local oversupply of crude cannot be sold to meet costs, the drillers retire drilling rigs. Meanwhile, Bakken wells deplete rapidly, there is no way for drillers to ‘catch up’ after they have stopped drilling. If crude is not affordable now it will be less affordable — to both customers and drillers — tomorrow.

A few more things to keep in mind as we descend into the net-energy rat hole:

– Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.

– The inability of drillers to meet costs or to borrow sufficiently is illustrated by Royal Dutch Shell’s pathetic efforts to drill exploratory wells in the Chukchi and Beaufort Seas, (Rolling Stone):


The year closed on a particularly low note when, on New Year’s Eve, the Kulluk – one of two drilling rigs Shell sent to the Arctic – broke free from its tow ship in rough weather and ran agroundon the rocky coast of Stikalidak Island while carrying more than 150,000 gallons of diesel. But even before this mishap, the experiment had already been a severe disappointment to the company. In July, the Kulluk’s sister ship, the Noble Discoverer, slipped its anchorage and narrowly avoided a similar fate. Construction problems and equipment failures delayed drilling; just a day after work finally began in September, the Noble Discoverer had to stop again to make way for an incoming ice floe more than 30 miles long. An oil spill containment dome failed a required safety inspection, “crushed like a beer can” by underwater pressure. The Coast Guard, which is already investigating the Noble Discoverer for criminally inadequate pollution and safety controls, is now launching an investigation of the Kulluk incident. And in further bad news for Shell (and the Arctic), the Environmental Protection Agency announced yesterday that both the Kulluk and the Noble Discoverer repeatedly violated the Clean Air Act during the 2012 season.


The Kulluk is a 30-year old drilling barge that had been mothballed for 20 years before being brought back into service, the Noble Discoverer is 37-year old rust-bucket intended for duty in the relatively placid Gulf of Mexico. Shell’s Arctic effort is an improvised, cost- and corner-cutting jury rig rather than a serious effort, which would cost tens of billions of dollars and require many years of preparation that Shell seems unwilling to invest.

– Pretty much all the oil that has been- recovered since 1858 has been wasted in automobiles and to fight wars. When shortages appear, the contestants for the oil that remains will be militaries and drivers.

– When net energy becomes negative — when the cost to extract oil cannot be met by the customer — there will be physical shortages. These shortages will be permanent: oil that cannot be afforded by customers in the present will not be magically affordable when these customers are poorer in the future. There will be no further rationing by access to credit, reduced amounts of oil will not deliver additional credit.

– Oil producing states tend to be autocratic: look for Norway, Denmark, the US, Canada and Mexico to become single-party states like Saudi Arabia or Iran. Because of autocrats ability to control access to energy, they will gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between driving a car or having a functioning republic.

– Oil shortages will manifest themselves as food shortages: even though there is likely to be plenty of food in general, there will be areas without food due to distribution problems.

– The time frame is less than two years then the world becomes net energy negative. At that point there is no turning the clock back. Not every oil producing region is showing diminished returns, these exceptions are the remaining large conventional fields that offer equal- or greater returns for each energy-dollar invested in them. At current rates of draw, these fields are being depleted rapidly. It is not necessary to note the field or the rate of decline, only to note the price of crude relative to the ability of the customer to meet that price. The time that remains to our current way of doing business is how long it takes for these last conventional fields to decline.

– This in turn is the time remaining to ‘prepare’: to move yourself or your family to a more pleasant place, to become an activist, to find a less petroleum-dependent job, to learn a post-petroleum skill or gain a post-petroleum avocation. When the US becomes net energy negative, the amounts of fuel available will diminish sharply. So to will be the ability of ordinary citizens to access that fuel … this will be so until a new allocation regime is in place, likely to be some form of hard rationing. In the new regime, the only citizens that will be free from the reach of authorities will be those who do not use fossil fuels or petroleum at all.

EDIT: Coal, nuclear, hydro-power, solar and wind, natural gas and other prime movers are dependent upon cheap, plentiful supplies of petroleum to power the necessary ships, trucks, trains and other forms of transportation. When supplies of petroleum diminish (finger cutting across throat gesture).


Energy: Part II

Off the keyboard of Monsta666

Discuss this article at the Energy Table inside the Diner.

In the first part of this two part series we discussed how the sheer amount of energy coupled by its cheap cost enabled society to increase the amount of work that could be produced at a much reduced cost. It was this cheap energy subsidy that made the process of arbitrage between human labour and fossil powered capital very profitable as the price difference between hiring labour “energy” and capital “energy” was so vast.

This huge energy subsidy not only provided great wealth to the ruling classes who owned the factories and other capital infrastructure it also enabled the workers to become more materially wealthy as the cost of producing items was reduced drastically. This happened because all work requires energy to transform a basic resource into a commodity that is of economic value. If the energy cost is reduced and the supply of energy is greatly increased then the amount of work that can be achieved by a society will greatly expand and thus the items produced well sell at lower price due to the principles of supply of demand. What is important when discussing these matters of energy availability and will become increasingly important going forward is the concept of net energy. To understand this concept it would be wise to understand the laws of thermodynamics, more precisely the first law of thermodynamics. This law was originally described as:

“In all cases in which work is produced by the agency of heat, a quantity of heat is consumed which is proportional to the work done; and conversely, by the expenditure of an equal quantity of work an equal quantity of heat is produced.” Rudolf Clausius, 1850[1]

For the mathematically inclined the following

formula captures the law of conservation as

any heat input will equal the work done.


dU = dQ – dW[2]

where U =Internal energy of system, Q = Heat input,

 W = work done

To many this statement may seem a little unwieldy and rather abstract but it basically describes the concept that energy cannot be created or destroyed and all energy transactions are merely conversions of one form of energy source to another. This idea is an important one to grasp since we can never actually generate energy; we merely extract it from existing sources.

This statement may seem rather obvious but since terms such as energy production and energy generation are so widespread it is easy to forget this fact. If we were to take such statements as energy production on a literal level they would be a clear violation of the first law of thermodynamics. Perhaps it can be argued this is just an argument over semantics and most people will know you cannot actually create energy but let us not underestimate the power of language and how it can shape conversations and narratives; over time people will believe such statements at face value as true even if they are patently false. This is especially relevant today when we hear so much talk about the US becoming not only energy independence but also becoming the top energy producer in the world.

But I digress, the main thing to take home is no form of energy extraction, be it from coal, nuclear fission (fusion for the optimists) and wind or solar actually generates energy. It just utilises existing energy sources. In the above examples energy is extracted either through nuclear fission/fusion reactions, potential chemical energy in coal/oil/gas or wind and solar energy. Another concept that will come from this basic idea and one that perhaps even more relevant is that it takes energy to get energy. This concept while important is something that rarely (if ever) gets discussed in the mainstream media. Much of the talk about oil, coal or gas “production” only refers to the amount of total energy that can be obtained from burning or utilising a given resource. This amount is merely the gross energy obtained from the ground. If we wish to determine the amount of useful energy available for greater society however we need to subtract the amount of energy used to obtain the resource in the first place. This is because it is only this energy that gets to be used by society for other economy activities. Thus for us to work out net energy we subtract the gross energy by the energy needed to extract the resource as described in the formula.

Gross energy = Total amount of energy obtained from energy source.*

Net energy = Gross energy – Energy required to obtain energy source.

* = Energy maybe expressed in other ways such as barrels of oil or million short tons of coal.

As a note net energy should not be confused with the similar but different term EROEI (Energy Return On Energy Invested) which describes the potential energy return from an energy source. The terms maybe used interchangeably by other commentators in the blogosphere but it would be a mistake to think they are the same thing. The way to calculate EROEI is quite different as demonstrated below:

EROEI =Gross energy / Energy required to obtain energy source.


EROEI = (Net energy/ Energy required to obtain energy source.) + 1

NOTE: Net energy is the energy available to society and thus something greater society would be interested in whereas EROEI is more of a potential concern for the person who wishes to see a return on their investment.

Since it is only net energy that gets used by the greater economy it is this value that we should be interested in knowing about rather than the gross amount. For example it is quite possible for our total gross energy to increase while our total net energy is actually in decline. If this were to happen we could easily see a scenario where we are getting materially poorer even though our total energy output is increasing. This process of increasing gross energy but declining net energy comes about due to the principle of low hanging fruit. That is the easiest and most favourable economic sources of energy – which yield the highest net energy – are extracted first and as those resources are depleted we move onto progressively worse and worse sources. It is this fact that the decline in net energy will be much steeper than gross energy decline.

This trend of declining net energy has likely already past as the newest sources of energy, a lot of which is touted as the energy source that will give the US energy independence actually yield poor amounts of new net energy. This is despite the fact this new energy sources (shale oil/gas) increase the amount of gross energy expended by the economy quite substantially. As a result from an economic standpoint these new sources of energy will deliver less economic benefit to society than would otherwise be believed as the extra net energy available will be more limited. It this reason why we should exercise caution when listening to claims that these sources of energy can offer a panacea to our economic troubles. In fact when hearing such claims it is useful to know the energy returns on energy for various sources as while this is not net energy which is ultimately the most important metric to gauge the EROEI can still provide an insight on how useful these sources will be:

As the graph clearly demonstrates; early sources of energy yielded a very high return of energy on energy invested. These high returns came about because early sources of energy such as shallow coal mines did not need much capital investment to extract the resource furthermore once these resources were obtained they would yield high quality energy such as light sweet oil or in the case of coal high quality anthracite. It is this reason in fact why net energy or EROEI has largely been ignored as historically gross energy for all intents and purposes equalled net energy.

In recent years however this has not been the case and the difference between gross and net energy is sufficiently large to warrant greater attention. Moreover another troubling fact to take note is that once EROEI reaches about 10:1 or lower the graph goes into steep decline. This steep decline means the available net energy that can be used by society will begin dropping at an alarming rate if current trends of extracting lower quality energy sources continue. If we take a recent major discovery of shale oil we discover the EROEI for this resource is 5.[3] In net energy terms this represents 20% of the total gross energy being used to extract the energy source. So from this information we can say that if all existing resources of energy were replaced by sources that were to yield returns equivalent to shale oil then our total net energy available to society would decline by 20%. This assumes there are no efficiency gains in how we utilised this energy and total gross energy remained constant. If that is the case then this would effectively mean we are 20% poorer as less energy would be available for economic transactions.

Off course what is more likely to happen is the EROEI and thus net energy will decline even faster than suggested in the previous paragraph as worse and worse sources of energy come online to replace existing high EROEI resources. As a result we are likely to see a steep decline in net energy available to society and we can say with some certainty that this decline in net energy will be faster than the rate of efficiency gains which has been around 1.7-3.0% per annum since the 1970s.[4] [5]

What is more due to the rebound effect (see this article for more info) it is likely that any efficiency gains made will need to exceed declines in available net energy by a few percentage points each year if we want sustain economic growth (which is a requirement for the financial system to remain stable). This all seems unlikely particularly if we consider that energy efficiency and conservation strategies will see diminishing rates of return as it becomes harder to increase energy efficiency after each progressing year. After all no economic activity can ever achieve 100% efficiency. Speaking of 100% efficiency this leads on nicely to the second law of thermodynamics which states:

“That the entropy of an isolated system never decreases, because isolated systems spontaneously evolve towards thermodynamic equilibrium — the state of maximum entropy.”

Like the first law, this sentence describing the second law can seem a little unwieldy. In fact it is best to breakup this statement into two sentences as the quotation above addresses two very relevant points the first of which is displayed below:

“No process is possible in which the sole result is the absorption of heat from a reservoir and its complete conversion into work.”William Thomson, 1st Baron Kelvin, 1851[6]

In other words no energy transaction can ever be 100% efficient meaning some energy will always be lost when converting energy into some form of work. This point while blatantly obvious is often overlooked in the contexts of economics and broader society. It is this reason why there will always be a limit to amount of economic growth that can be realised as the planet has a finite number of resources and there are limits to the amount of efficiency that can be achieved. Another major consequence that does derive from the second law of thermodynamics comes from this statement:

“Heat can never pass from a colder to a warmer body without some other change, connected therewith, occurring at the same time.” – Rudolf Clausius, 1850[7]

While at first glance, the concept of heat transfers may seem a little out there this statement does pertain to one important idea. That is over time all bodies and structures go from a process of order to disorder. For those that are really curious about this process and wish to learn more about the exact mechanics of this process please look up entropy. If this idea still seems a bit out there consider the fact that all structures, be it capital or labour, degrade over time and require maintenance to allow proper functioning. This maintenance always requires energy and thus some resources will always be needed to maintain current capital or labour.



The entropy of a system can be calculated by applying the following formula:

dS = dQ / T[6]

where S = entropy, Q = Heat input, T = Temperature of system.

If we use the formula from the first law of thermodynamics and

rearrange the formula

shown above this statement can be derived:

dU + dW = TdS

 *4 basic thermodynamic relationships develop out of this math


Internal Energy dU=TdS-PdV+ΣμdN

Enthalpy (Heat) dH=TdS+Vdp+ΣμdN

Hemholtz Free Energy dF=-TdS-pdV+ΣμdN

Gibbs Free Energy dG=-TdS+Vdp+ΣμdN


If you do a little basic algebra, you get


This equation gives the Free Energy available in a system as a function of the

Heat Content, the Temperature and the Entropy in the system. Only reactions

with positive dG can go forward without Heat Input.

*from RE

In the case of labour humans need food to stay alive and remain functioning while capital requires some energy inputs to prevent it from degrading and evening breaking down over time. What is more the greater the complexity of a structure the more energy will be required for maintenance. This is because a more complex structure has a greater degree of order and since things naturally go from a state of order to disorder then more energy will be needed to prevent overcome this natural process.

This is another weakness with applying the logic that technology will save the day as increasing the complexity of technology not only increases the existing maintenance cost due to the second laws of thermodynamics; the cost of producing such items increases as more energy per unit weight are needed in the manufacture of the product. To demonstrate this example a car requires something in the region of 12-25 barrels of oil to build a car depending on the weight of the car but a computer – on a weight by weight basis – requires 10 times the amount of energy to manufacture.[9] A similar cost will be borne in maintaining these two pieces of capital. While in theory there can be energy savings on a production basis as less energy will be consumed despite the increased weight for weight costs (we do not need 1000kg+ worth of computers after all) what will increase significantly are maintenance costs of more complex infrastructure. To give a better idea of this concept at work consider healthcare. As the capital becomes increasingly complex capital then the maintenance costs will rise for the reasons described above.

To summarise this article and the one before it; when we wish to engage in a discussion on energy we need to be aware of range of things. First we need to understand the sheer amount of energy fossil fuels provide. It is truly immense and is a miracle resource and there needs to be a greater appreciation just how much energy they can deliver. From this we can truly grasp the scale of the task an energy transition (if it is even possible) will be. It is seems unlikely to me any combination of renewable or nuclear energy can fill the gap left by fossil fuels. That is not to say renewables cannot make life easier, they do have their uses but we would be setting our expectations too high if we expect them to maintain our current industrial lifestyles.

The other important points that need to be considered is the point we should be interested in not only the quantity of energy delivered but also the quality of energy. At the end of the day it is net energy or EROEI we are really interested in as it is this energy that gets used for greater society. Finally we need to be aware that due to the increasingly complexity of society our maintenance costs will rise due to the second law of thermodynamics so these costs need to be accounted for.


[1] = Clausius, R. (1850). Ueber die bewegende Kraft der Wärme und die Gesetze, welche sich daraus für die Wärmelehre selbst ableiten lassen, Annalen der Physik und Chemie (Poggendorff, Leipzig), 155 (3): 368-394, particularly on page 373, translation here taken from Truesdell, C.A. (1980), pp. 188-189.

[2] = 2.1 First Law of Thermodynamics (MIT)

[3] = EROI on the Web part 2 of 6, (Provisional Results Summary, Imported Oil, Natural Gas) (The Oil Drum)

[4] = Our Common Future, Chapter 7: Energy: Choices for Environment and Development – VI. Energy Efficiency: Maintaining the Momentum (UN)

[5] = Experts tangle over energy-efficiency ‘rebound’ effect (Nature)

[6] = 5.1 Concept and Statements of the Second Law (Why do we need a second law? (MIT)

[7] = The Mechanical Theory of Heat – with its Applications to the Steam Engine and to Physical Properties of Bodies

[8] = Cash for Clunkers: The Environmental Cost of a New Car (The Truth About Cars)

[9] = The monster footprint of digital technology (Low-tech Magazine)

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