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Oil, War and the Future Prospects for Peace – Our World

Oil, War and the Future Prospects for Peace – Our World.

A British firing party provides cover for Royal Engineers building a temporary bridge near Ramadi, Iraq, 1 June 1941. Public Domain photo: UK Government.

A British firing party provides cover for Royal Engineers building a temporary bridge near Ramadi, Iraq, 1 June 1941. Public Domain photo: UK Government.

We live in a time of amazing technological, economic and social progress where large segments of global society have attained relative prosperity and improved living conditions. We are interconnected like never before and by historical comparison the world is more peaceful than it has ever been.

At the same time, there are hundreds of millions of people still living in abject poverty and hunger. We have been making a concerted effort to try to alleviate their situation and bring more and more people out of extreme poverty under the framework of the Millennium Development Goals. As we go forward, surely we will not let this progress slip away.

But there is always that niggling doubt. How can we sustain a complex global society in a finite world with exponentially growing numbers of people and an economy that consumes vast resources just to keep running on the spot?

I worry about whether we will allow ourselves to get pushed beyond the limits to growth that Dennis and Donella Meadows warned us about back in 1972. We have done very little to alter that trajectory and my concern is that we will find ourselves fighting over a declining resource base as some like Michael Klare suggest.

Richard Heinberg is one of those rare insightful individuals with foresight and a sound understanding of contemporary affairs. His 2003 book, The Party’s Over – Oil, War and the Fate of Industrial Societies, published at the start of the Iraq War, explores the notion of a world without cheap oil and the potential for resource related wars. In response to this possibility, he recommends that the world implement a global programme of resource conservation and cooperation. The alternative is too dreadful to think about since it may represent the breakdown of modern civilization.

But how is it that oil became so strategically important and why is it linked to wars? Why is it that a world with less oil is viewed as analogous with the decline or even collapse of industrial societies? To better understand, we need to look back by around 100 years.

1914–1918 Great War

This year is the 100th anniversary of the Great War and a time that European nations in particular are commemorating those tragic events and the terrible loss of life. It is hard to imagine what the world looked like in 1914. It was a time dominated by European empires stretching across the globe connected by major shipping routes to support the trade in raw materials from the colonies and manufactured goods from the colonizers.

Britain was prosperous and London was a hub of global commerce, connected to the world via wireless telegraphy. The British had not been involved in a conflict on the European continent since the 1853–56 Crimean War, although colonial wars were frequent.

The 1814–1815 Congress of Vienna (precursor to the League of Nations or even the United Nations), where the major powers had come together to redraw national boundaries, had proved successful. The balance of power in Europe had been maintained and prolonged periods of war had been avoided (the exception being the 1870–71 Franco-Prussian War). Some at the time may have hoped that there would never be another war in Europe.

In school we were taught that it was the assassination of Austria’s Archduke Franz Ferdinand in Serbia on 28 June 1914 that ignited World War I, although we now appreciate that this assertion is too simplistic. Another possibility is that the Germans wanted and had been preparing for this war. We can certainly point to the 1905 Schlieffen Plan that illustrated how Germany could rise victorious from a war fought on two fronts: France to the west, Russia to the east.

But perhaps one of the most provocative recent analyses comes from the British historian, Niall Ferguson. In his 2000 book entitled The Pity of War, Ferguson argues that fear was a key factor in shaping European sentiments at that time. The Russians wanted to reassert themselves after their embarrassing defeat to Japan in 1905. The Germans and Austrians feared a growing Russia, and the French and British feared a powerful Germany.

He also presents another possible explanation. He argues, in an essay entitled “Complexity and Collapse — Empires on the Edge of Chaos” that the Great Powers and empires were complex systems and that they operated in a state “somewhere between order and disorder”.

“Such systems,” he continues, “can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems ‘go critical’. A very small trigger can set off a ‘phase transition’ from a benign equilibrium to a crisis.” The end result can be war, revolutions, financial crashes and imperial collapse. In this context, our world today is not very different from that of 1914.

The Great Oil Game begins

It was Winston Churchill, then Britain’s First Lord of the Admiralty, who made oil the strategically important fuel that it is. Together with Lord John Fisher, he proposed in 1911 that the British Royal Navy switch from coal powered ships to oil. The change was necessary in order to keep pace with the German naval build-up, with oil being viewed as a superior fuel. The conversion took seven years to complete and resulted in the maintenance of oil supplies becoming a strategic military objective.

The first target for investment was the Anglo-Persian Oil Company (APOC) that had been set up in 1908 to explore and extract oil from what is now southern Iran. On 14 June 1908, just weeks before the commencement of hostilities in Europe, Winston Churchill succeeded in getting the British Government to invest £2.2 million in APOC, as explained by Daniel Yergin in The Prize – The Epic Quest for Oil, Money and Power.

Clearly, the British were not alone in recognizing oil’s potential and there are some who argue that Germany’s proposal to construct the Berlin to Baghdad railway as well as their close ties with the Ottoman Empire caused great concerns for the British. This could explain why, within months of the war beginning, British troops landed in Mesopotamia (now Iraq) in November 1914 to defend the APOC oilfields around Basra.

The strategic significance of oil was to remain constant throughout the Second World War. For instance, the Japanese in 1941, facing oil embargoes from the West, attacked Pearl Harbor and invaded the Dutch East Indies for the oil resources. Likewise, the Germans, having limited local oil resources, sought to capture the Baku oil fields in the former Soviet Union in 1942.

Following the Second World War, we have other examples. At the time of the first oil crisis in 1973, we see that the United States Congress, seriously concerned about the potential for oil supplies to be cut off, ordered an investigation into how it may be possible to use military force to gain access to oil supplies in the event of a supply disruption.

The report, published in 1975 and entitled “Oil Fields as Military Objectives” concluded that the risks associated with military action in the Middle East were too high, the prospects of success were poor and the consequence of failure would be disastrous. One unknown factor in this assessment was the possibility of a Soviet response to US military interventions.

The party’s over

The picture looked very different in 1991 during Operation Desert Storm and even more so in 2003 with the full invasion of Iraq, where the oil fields were occupied quickly. The Soviet Union was no longer a threat thereby reducing the risks of such operations. As former Chairman of the US Federal Reserve Alan Greenspan was to admit in 2007, the invasion of Iraq was all about oil. And that is what makes Heinberg’s 2003 book even more compelling. What Heinberg suggested in his book was that we are close to a peak in global oil production. Although this assertion has been contested, very recently there have been a number of studies that appear to confirm Heinberg’s claims.

In January 2012, for example, James Murray and David King published a paper entitled “Oil’s tipping point has passed” in which they note that global crude oil production has been capped at about 75 million barrels per day since 2005 — even in the face of continued price increases. As oil prices go up, you would normally expect that it would be profitable to produce more oil and supply should increase. For this not to happen, something must be fundamentally wrong.

More recently, in January 2014 the UK Royal Society published “The Future of Oil Supply” that looked at all the data and concluded that a “sustained decline in global conventional production appears probable before 2030 and there is a significant risk of this beginning before 2020”.

Third, Steven Kopits from Douglas-Westwood, one of the world’s top energy research groups, gave a lecture in February 2014 explaining how oil production by the major oil firms has faltered in recent years (dropping from 16 million barrels per day in 2006 to 14 million in 2012) while capital expenditure doubled (from US$109 billion to US$262 in the same period). Consequently, some high cost exploration and extraction projects are being abandoned. This led Gail Tverberg, a researcher and commentator on energy issues, to ask whether we are witnessing the beginning of the end of the oil industry as we know it.

What does this mean for the future?

Back in 2005, in his book The Long Emergency, James Howard Kunstler explored the consequences of a peak in world oil production and the fact that this would coincide with the forces of climate change, resurgent diseases, water scarcity, global economic instability and warfare. He essentially portrayed our future with less oil as a long, drawn-out and painful emergency.

More recently, international security scholar Nafeez Mosaddeq Ahmed, writing in the Guardian newspaper on 28 February 2014 explained contemporary riots as being symptomatic of a world without cheap fossil fuels. He argues that the financial crisis and food riots of 2008, the Arab Spring in 2010–11 in Tunisia, Libya and Egypt, and the 2013–14 riots in Venezuela, Bosnia, Ukraine, Iceland and Thailand are symptoms of the long emergency unfolding before our eyes.

Other commentators have come to the same conclusion. The military in different countries have been warning of tensions around the world in the face of declining oil supplies. The US Joint Forces Command’s “Joint Operating Environment Report” is a good example as well as another from the German Bundeswehr Transformation Center. Both reports were published in 2010.

But what does this mean for nation states? Jorg Friedrichs of the University of Oxford explores how countries might respond to fuel scarcity in his 2013 book The Future Is Not What It Used to Be. He argues that we should look at the past experience of Japan, North Korea and Cuba to draw lessons about what different nations may do when they have reduced access to oil supplies.

As mentioned above, in the period from 1918 to 1945, Japan faced oil and other resource embargoes from the Western Powers and was presented with two options: economic collapse or militaristic expansion to grab those resources. We know how that turned out.

In the 1990s, both North Korea and Cuba faced a situation of fuel scarcity after the collapse of the Soviet Union. In North Korea the governing class turned towards totalitarian retrenchment while in Cuba we witnessed a far more positive form of socio-economic adaptation (more local production of food, widespread adoption of permaculture, and adoption of a diet containing less meat).

Friedrich concludes the following with respect to how countries will respond to fuel scarcity. First, those with a strong military potential and the perception that force is more effective than the free market in protecting access to vital resources are more likely to adopt predatory militarism.

Second, countries with less experience of humanism, pluralism and liberal democracy, are more likely to have elites willing and able to impose a policy of totalitarian retrenchment on their population.

Finally, countries with less exposure to individualism, industrialism and mass consumerism, are more likely to pursue adaptive regression to community-based values and a subsistence lifestyle.

Avoiding collapse

But surely there is another path based on enhanced international cooperation. If we understand that we all lose when we fight over diminishing resources, then the answer is to avoid conflict at all costs and to set up mechanisms for this purpose. Today, we are living in a complex, chaotic world, and we will need to struggle to stop it from “going critical”.

The challenge we face is how best to avoid collapse in these circumstances. In this context, the writings of Dmitry Orlov in his 2008 book Reinventing Collapse – The Soviet Experience and American Prospects may be very insightful. If we can learn from the Soviet Union’s experience of collapse, might it be possible to somehow mitigate the worst impacts caused by the peaking of global oil production?

Orlav shares with us what he calls five stages of collapse. The first is financial collapse and many of us experienced this directly in 2008 such that we began to lose faith in “business as usual”. The second is commercial collapse, where we lose faith in ability of markets to provide for all our needs and this was perhaps experienced in parts of Portugal, Italy, Greece and Spain – the PIGS – from 2009 onwards.

The third stage is political collapse where faith in the government taking care of you is lost. Today this can be found in the many failed states around the world but mainly in Africa including Somalia, the Democratic Republic of the Congo and South Sudan.

The next stage is social collapse where you no longer believe that “your people” will take care of you and the sense of community is lost. The final stage is cultural collapse where you lose faith in the goodness of humanity. At that point, what we think of as civilized life has all but disappeared.

Ensuring a peaceful future

While most of us appreciate that we will face some pretty major problems going forward from here, it is also true that nobody can know for sure how things will play out. But is it inevitable that things will get worse?

Professor Steven Pinker in his 2012 book, The Better Angels of Our Nature, argues convincingly that we are living in the most peaceful times in human history. He describes the very powerful forces explaining why this is the case.

These are, first of all, the rise of the nation state and judiciary that work to reduce the individual need/temptation to use violence to resolve disputes. Second, the role of commerce and particularly the way that the exchange of goods and services interconnect people so that we care about “others”. Third, there is the feminization of the world with increased respect paid for the interests and values of women.

Fourth, there is the role of cosmopolitanism and the rise of literacy, mobility and mass media. Fifth, there is something described as the “escalator of reason”, which is the application of knowledge and rationality in human affairs forcing people to recognize the futility of violence and war as a means to solve our problems.

In his engaging 2013 lecture at the University of Edinburgh where Pinker explained his ideas in detail, he was asked by a member of the audience whether we might solve the resource/climate challenges through global cooperation, or whether violence, chaos and anarchy would result, as in the past.

He responded thoughtfully by saying “maybe (we would face violence, chaos and anarchy) but not necessarily”. The research seems to show big wars in the past have not been fought primarily over resources, but more as a result of other factors — fear, revenge and ideology.

So how can resource related wars be avoided? The answer is to invest in what works and that is clearly the five forces that have made the world more peaceful.

Now there will be those who argue that nation states have pursued violent paths in the past, that the judiciary can be corrupt, that commerce can lead to exploitation, that women leaders can be as warlike as men, or that the media can distort the truth. But it is essential to focus on the overall direction of change which has been positive, even when in some cases we have witnessed significant problems along this road.

We have to continue to invest in what works because that will increase our ability to adapt socio-economically. This is an important contribution to the energy transition debate that tends to be focused on either technological solutions or community-based responses. The basic line of thinking is that our overriding objective has to be to continue to ensure that we maintain peace and social progress. We have to focus on what makes the world a better place and in what has been historically proven to make the world more peaceful and less violent. This is naive, idealistic and simplistic I suppose, but what is the alternative?

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Oil, War and the Future Prospects for Peace by Brendan Barrett is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

The Peak Oil Crisis: A Winter Update

The Peak Oil Crisis: A Winter Update.

Posted Feb 20, 2014 by Tom Whipple

As the years go by, those studying peak oil are beginning to develop a better understanding of what has been happening since the concept of limits to oil production came to widespread attention. First of all, it is important to understand that in one sense, production of what had been thought of as “conventional oil” really did peak back in 2005. While there has been growth in certain sectors of the “oil” industry in the last nine years it has come in what are known as “unconventional liquids”; and, as we shall see, the maintenance of existing conventional oil production has come at a very high price.

The recent growth in the “oil” production has been nowhere near what had been normal prior to the “Great Recession,” so that if anyone should wonder why our economy has been stagnant in recent years, one can take the price and availability of oil as a good starting point. US consumption has been falling at 1.5 percent a year since 2005 as opposed to a normal growth rate of 1.8 percent in prior years.
In the last decade global oil production grew by only 7.5 percent and not the 23 percent that would have been needed to support the growth in the world’s GDP at a rate we would have liked to have seen. Since 2005, total “oil” production has grown by 5.8 million b/d, of which 1.7 million consists of natural gas liquids (NGL). While NGL’s are valuable and a useful form of what we now call “oil” they do not contain the same energy as crude and have a more limited range of uses, thereby contributing less to economic growth.
US unconventional liquids (shale oil and NGL’s) are up by 5.1 million b/d since 2005. Along with an additional million b/d from the Canadian tar sands, North American non-conventional liquids constitute nearly all the growth in the world’s oil supply in recent years. Production of conventional crude has remained essentially flat during the period. Moreover, OPEC production has dropped by nearly two million b/d in the last three years largely due to wars, insurgencies, and embargoes, and another 1.7 million b/d of its “oil” production has been NGL’s and not crude.
The world’s existing fields are depleting at rate of circa 4 million b/d each year, so without constant drilling of new wells in new fields global production will quickly wither and prices will climb still more. A good estimate is that the oil which now costs about $110 a barrel will be at $140 or above by the end of the decade unless some major geopolitical upheaval sends it still higher.
To keep the oil flowing, the world’s oil companies have invested some $4 trillion in the last nine years to drill for oil. About $2.5 trillion of this was spent on simply replacing production from existing oil fields. Even this gigantic expenditure was not enough since conventional oil production fell by 1 million b/d during the period.
About $350 billion went to drill shale oil and gas wells in the US, and increase Canadian oil sands production. This was clearly a bargain as compared to maintaining conventional oil production which is now focused on ultra-expensive deep water wells.
Recent announcements by the major oil companies indicate that they have reached their limit. Profits and production are falling. Expenditures for finding and developing oil fields have tripled in the last decade and the return from these expenditures has not been enough to justify the costs. Nearly all of the major oil companies have announced major reductions in their exploration and drilling programs and several are selling off assets as they are caught in a trap between steady oil prices and rapidly rising operating costs.
Note that the major oil companies do not constitute the whole oil industry as most of the world’s oil production is now in the hands of state-owned companies and small independent producers. These firms are obviously facing the same problems as the large publicly traded companies, without as much publicity.
What is going to happen in the next few years? First, investments in future production are going down, meaning that in a few years depletion likely will overwhelm new production and output of conventional oil will drop.
Then we have the Middle East which, to put it mildly, is coming unglued. Oil exports from several countries have nearly disappeared and the spreading sectarian violence is likely to reduce exports from other countries before the decade is out.
Venezuela, from which the US still imports some 800,000 barrels of crude a day, is not transitioning to the post-Chavez era gracefully. The current student riots could easily morph into reduced oil exports.
With much of the growth in global oil production coming from US shale producers, a fair question is just how long fracked shale oil production will continue to grow. Opinions vary. Some foresee the possibility that growth will slow considerably this year, while others think there are two or three years of large production increases ahead. The three months of extremely cold and snowy weather we have had this winter is already hurting production, but most believe production will rebound in the spring.
Even though production of conventional oil peaked nine years ago, massive investment and a five-fold increase in oil prices has allowed the economical production of shale and deepwater oil at a profit since 2005. Further growth in shale oil production, however, clearly has a half-life, be it one, three or five years.
Recent news concerning deepwater oil production is not encouraging. Brazil’s deepwater oil fields which are thought to contain many billions of barrels of oil are not looking too good at the minute due to the very high costs and risks of production. All in all, the recent news from the oil industry tends to be one of growing pessimism.
Originally published at Falls Church News-Press
Barnett peak image via Post Carbon Institute

Limits to Growth–At our doorstep, but not recognized | Our Finite World

Limits to Growth–At our doorstep, but not recognized | Our Finite World.

How long can economic growth continue in a finite world? This is the question the 1972 book The Limits to Growth by Donella Meadows and others sought to answer. The computer models that the team of researchers produced strongly suggested that the world economy would collapse sometime in the first half of the 21st century.

I have been researching what the real situation is with respect to resource limits since 2005. The conclusion I am reaching is that the team of 1972 researchers were indeed correct. In fact, the promised collapse is practically right around the corner, beginning in the next year or two. In fact, many aspects of the collapse appear already to be taking place, such as the 2008-2009 Great Recession and the collapse of the economies of smaller countries such as Greece and Spain. How could collapse be so close, with virtually no warning to the population?

To explain the situation, I will first explain why we are reaching Limits to Growth in the near term.  I will then provide a list of nine reasons why the near-term crisis has been overlooked.

Why We are Reaching Limits to Growth in the Near Term

In simplest terms, our problem is that we as a people are no longer getting richer. Instead, we are getting poorer, as evidenced by the difficulty young people are now having getting good-paying jobs. As we get poorer, it becomes harder and harder to pay debt back with interest. It is the collision of the lack of economic growth in the real economy with the need for economic growth from the debt system that can be expected to lead to collapse.

The reason we are getting poorer is because hidden parts of our economy are now absorbing more and more resources, leaving fewer resources to produce the goods and services we are used to buying. These hidden parts of our economy are being affected by depletion. For example, it now takes more resources to extract oil. This is why oil prices have more than tripled since 2002. It also takes more resource for many other hidden processes, such as deeper wells or desalination to produce water, and more energy supplies to produce metals from low-grade ores.

The problem as we reach all of these limits is a shortage of physical investment capital, such as oil, copper, and rare earth minerals. While we can extract more of these, some, like oil, are used in many ways, to fix many depletion problems. We end up with too many demands on oil supply–there is not enough oil to both (1) offset the many depletion issues the world economy is hitting, plus (2) add new factories and extraction capability that is needed for the world economy to grow.

With too many demands on oil supply, “economic growth” is what tends to get shorted. Countries that obtain a large percentage of their energy supply from oil tend to be especially affected because high oil prices tend to make the products these countries produce unaffordable. Countries with a long-term decline in oil consumption, such as the US, European Union, and Japan, find themselves in recession or very slow growth.

Figure 1. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 1. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

Unfortunately, the problem this appears eventually to lead to, is collapse. The problem is the connection with debt. Debt can be paid back with interest to a much greater extent in a growing economy than a contracting economy because we are effectively borrowing from the future–something that is a lot easier when tomorrow is assumed to be better than today, compared to when tomorrow is worse than today.

We could not operate our current economy without debt. Debt is what has allowed us to “pump up” economic growth. Consumers can buy cars, homes, and college educations that they have not saved up for. Businesses can set up factories and do mineral extraction, without having past profits to finance these operations. We can now operate with long supply chains, including many businesses that are dependent on debt financing. The ability to use debt allows vastly more investment than if potential investors could only the use of after-the-fact profits.

If we give up our debt-based economic system, we lose our ability to extract even the oil and other resources that appear to be easily available. We can have a simple, local economy, perhaps dependent on wood as it primary fuel source, without debt. But it seems unlikely that we can have a world economy that will provide food and shelter for 7.2 billion people.

The reason the situation is concerning is because the financial situation now seems to be near a crisis. Debt, other than government debt, has not been growing very rapidly since  2008. The government has tried to solve this problem by keeping interest rates very low using Quantitative Easing (QE). Now the government is cutting back in the amount of QE.  If interest rates should rise very much, we will likely see recession again and many layoffs. If this should happen, debt defaults are likely to be a problem and credit availability will dry up as it did in late 2008. Without credit, prices of all commodities will drop, as they did in late 2008. Without the temporary magic of QE, new investment, even in oil, will drop way off. Government will need to shrink back in size and may even collapse.

In fact, we are already having a problem with oil prices that are too low to encourage oil production. (See my post, What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs.) Other commodities are also trading at flat to lower price levels. The concern is that these lower prices will lead to deflation. With deflation, debt is strongly discouraged because it raises the “inflation adjusted” cost of borrowing. If a deflationary debt cycle is started, there could be a huge drop in debt over a few years. This would be a different way to reach collapse.

Why couldn’t others see the problem that is now at our door step?

1. The story is a complicated, interdisciplinary story. Even trying to summarize it in a few paragraphs is not easy. Most people, if they have a background in oil issues, do not also have a background in financial issues, and vice versa.

2. Economists have missed key points. Economists have missed the key role of debt in extracting fossil fuels and in keeping the economy operating in general. They have also missed the fact that in a finite world, this debt cannot keep rising indefinitely, or it will grow to greatly exceed the physical resources that might be used to pay back the debt.

Economists have missed the fact that resource depletion acts in a way that is equivalent to a huge downward drag on productivity. Minerals need to be separated from more and more waste products, and energy sources need to be extracted in ever-more-difficult locations. High energy prices, whether for oil or for electricity, are a sign of economic inefficiency. If energy prices are high, they act as a drag on the economy.

Economists have missed the key role oil plays–a role that is not easily substituted away. Our transportation, farming and construction industries are all heavily dependent on oil. Many products are made with oil, from medicines to fabrics to asphalt.

Economists have assumed that wages can grow without energy inputs, but recent experience shows the economies with shrinking oil use are ones with shrinking job opportunities. Economists have built models claiming that prices will rise to handle shortages, either through substitution or demand destruction, but they have not stopped to consider how destructive this demand destruction can be for an economy that depends on oil use to manufacture and transport goods.

Economists have missed the point that globalization speeds up depletion of resources and increases CO2 emissions, because it adds a huge number of new consumers to the world market.

Economists have also missed the fact that wages are hugely important for keeping economies operating. If wages are cut, either because of competition with low-wage workers in warm countries (who don’t need as high a wages to maintain a standard of living, because they do not need sturdy homes or fuel to heat the homes) or because of automation, economic growth is likely to slow or fall. Corporate profits are not a substitute for wages.

3. Peak Oil advocates have missed key points. Peak oil advocates are a diverse group, so I cannot really claim all of them have the same views.

One common view is that just because oil, or coal, or natural gas seems to be available with current technology, it will in fact be extracted. This is closely related to the view that “Hubbert’s Peak” gives a reasonable model for future oil extraction. In this model, it is assumed that about 50% of extraction occurs after the peak in oil consumption takes place. Even Hubbert did not claim this–his charts always showed another fuel, such as nuclear, rising in great quantity before fossil fuels dropped in supply.

In the absence of a perfect substitute, the drop-off can be expected to be very steep. This happens because population rises as fossil fuel use grows. As fossil fuel use declines, citizens suddenly become much poorer. Government services must be cut way back, and government may even collapse. There is likely to be huge job loss, making it difficult to afford goods. There may be fighting over what limited supplies are available.What Hubbert’s curve shows is something like an upper limit for production, if the economy continues to function as it currently does, despite the disruption that loss of energy supplies would likely bring.

A closely related issue is the belief that high oil prices will allow some oil to be produced indefinitely. Salvation can therefore be guaranteed by using less oil. First of all, the belief that oil prices can rise high enough is being tested right now. The fact that oil prices aren’t high enough is causing oil companies to cut back on new projects, instead returning money to shareholders as dividends. If the economy starts shrinking because of lower oil extraction, a collapse in credit is likely to lead to even lower prices, and a major cutback in production.

4. Excessive faith in substitution. A common theme by everyone from economists to peak oilers to politicians is that substitution will save us.

There are several key points that advocates miss. One is that if a financial crash is immediately ahead, our ability to substitute disappears, practically overnight (or at least, within a few years).

Another is key point is that today’s real shortage is of investment capitalin the form of oil and other natural resources needed to manufacture the new natural gas powered cars and the fueling stations they need. A similar shortage of investment capital plagues plans to change to electric cars. Wage-earners of modest means cannot afford high-priced plug in vehicles, especially if the change-over is so fast that the value of their current vehicle drops to $0.

Another key point is that the alternatives we looking at are limited in supply as well. We use far more oil than natural gas; trying to substitute natural gas for oil will lead to a shortfall in natural gas supplies quickly. Ramping up electric cars, solar, and wind will lead to a shortage of the rare earth minerals and other minerals needed in their production. While more of these minerals can be accessed by using lower quality ore, doing so leads to precisely the investment capital shortfall that is our problem to begin with.

Another key point is that electricity does not substitute for oil, because of the huge need for investment capital (which is what is in short supply) to facilitate the change. There is also a timing issue.

Another key point is that intermittent electricity does not substitute for electricity whose supply can be easily regulated. What intermittent electricity substitutes for is thefossil fuel used to make electricity whose supply is more easily regulated. This substitution (in theory) extends the life of our fossil fuel supplies. This theory is only true if we believe that  coal and natural gas extraction is only limited by the amount those materials in the ground, and the level of our technology. (This is the assumption underlying IEA and EIA  estimates of future fossil use.)

If the limit on coal and natural gas extraction is really a limit on investment capital (including oil), and this investment capital limit may manifest itself as a debt limit, then the situation is different. In such a case, high investment in intermittent renewables can expected to drive economies that build them toward collapse more quickly, because of their high front-end investment capital requirements and low short-term returns.

5. Excessive faith in Energy Return on Energy Investment (EROI) or Life Cycle Analysis (LCA) analyses. Low EROI returns and poor LCA returns are part of our problem, but they are not the whole problem.  They do not consider timing–something that is critical, if our problem is with inadequate investment capital availably, and the need for high returns quickly.

EROI analyses also make assumptions about substitutability–something that is generally not possible for oil, for reasons described above. While EROI and LCA studies can provide worthwhile insights, it is easy to assume that they have more predictive value than they really do. They are not designed to tell when Limits to Growth will hit, for example.

6. Governments funding leads to excessive research in the wrong directions and lack of research in the right direction. Governments are in denial that Limits to Growth, or even oil supply, might be a problem. Governments rely on economists who seem to be clueless regarding what is happening.

Researchers base their analyses on what prior researchers have done. They tend to “follow the research grant money,” working on whatever fad is likely to provide funding. None of this leads to research in areas where our real problems lie.

7. Individual citizens are easily misled by news stories claiming an abundance of oil. Citizens don’t realize that the reason oil is abundant is because oil prices are high, debt is widely available, and interest rates are low. Furthermore, part of the reason oil appears abundant is because low-wage citizens still cannot afford products made with oil, even at its current price level. Low employment and wages feed back in the form of  low oil demand, which looks like excessive oil supply. What the economy really needs is low-priced oil, something that is not available.

Citizens also don’t realize that recent push to export crude oil doesn’t mean there is a surplus of crude oil. It means that refinery space for the type of oil in question is more available overseas.

The stories consumers read about growing oil supplies are made even more believable by forecasts showing that oil and other energy supply will rise for many years in the future. These forecasts are made possible by assuming the limit on the amount of oil extracted is the amount of oil in the ground. In fact, the limit is likely to be a financial (debt) limit that comes much sooner. See my post, Why EIA, IEA, and Randers’ 2052 Energy Forecasts are Wrong.

8. Unwillingness to believe the original Limits to Growth models. Recent studies, such as those by Hall and Day and by Turner, indicate that the world economy is, in fact, following a trajectory quite similar to that foretold by the base model of Limits to Growth. In my view, the main deficiencies of the 1972 Limits to Growth models are

(a) The researchers did not include the financial system to any extent. In particular, the models left out the role of debt. This omission tends to move the actual date of collapse sooner, and make it more severe.

(2) The original model did not look at individual resources, such as oil, separately. Thus, the models gave indications for average or total resource limits, even though oil limits, by themselves, could bring down the economy more quickly.

I have noticed comments in the literature indicating that the Limits to Growth study has been superseded by more recent analyses. For example, the article Entropy and Economics by Avery, when talking about the Limits to Growth study says, “ Today, the more accurate Hubbert Peak model is used instead to predict rate of use of a scarce resource as a function of time.” There is no reason to believe that the Hubbert Peak model is more accurate! The original study used actual resource flows to predict when we might expect a problem with investment capital. Hubbert Peak models overlook financial limits, such as lack of debt availability, so overstate likely future oil flows. Because of this, they are not appropriate for forecasts after the world peak is hit.

Another place I have seen similar wrong thinking is in the current World3 model, which has been used in recent Limits to Growth analyses, including possibly Jorgen Randers’2052. This model assumes a Hubbert Peak model for oil, gas, and coal. The World3 model also assumes maximum substitution among fuel types, something that seems impossible if we are facing a debt crisis in the near term.

9. Nearly everyone would like a happy story to tell. Every organization from Association for the Study of Peak Oil groups to sustainability groups to political groups would like to have a solution to go with the problem they are aware of. Business who might possibly have a chance of selling a “green” product would like to say, “Buy our product and your problems will be solved.” News media seem to tell only the stories that their advertisers would like to hear. This combination of folks who are trying to put the best possible “spin” on the story leads to little interest in researching and telling the true story.

Conclusion

Wrong thinking and wishful thinking seems to abound, when it comes to overlooking near term limits to growth. Part of this may be intentional, but part of this lies with the inherent difficulty of understanding such a complex problem.

There is a tendency to believe that newer analyses must be better. That is not necessarily the case. When it comes to determining when Limits to Growth will be reached, analyses need to be focused on the details that seemed to cause collapse in the 1972 study–slow economic growth caused by the many conflicting needs for investment capital. The question is: when do we reach the point that oil supply is growing too slowly to produce the level of economic growth needed to keep our current debt system from crashing?

It seems to me that we are already near such a point of collapse. Most people have not realized how vulnerable our economic system is to crashing in a time of low oil supply growth.

A Forecast of Our Energy Future; Why Common Solutions Don’t Work | Our Finite World

A Forecast of Our Energy Future; Why Common Solutions Don’t Work | Our Finite World.

In order to understand what solutions to our energy predicament will or won’t work, it is necessary to understand the true nature of our energy predicament. Most solutions fail because analysts assume that the nature of our energy problem is quite different from what it really is. Analysts assume that our problem is a slowly developing long-term problem, when in fact, it is a problem that is at our door step right now.

The point that most analysts miss is that our energy problem behaves very much like a near-term financial problem. We will discuss why this happens. This near-term financial problem is bound to work itself out in a way that leads to huge job losses and governmental changes in the near term. Our mitigation strategies need to be considered in this context. Strategies aimed simply at relieving energy shortages with high priced fuels and high-tech equipment are bound to be short lived solutions, if they are solutions at all.

OUR ENERGY PREDICAMENT

1. Our number one energy problem is a rapidly rising need for investment capital, just to maintain a fixed level of resource extraction. This investment capital is physical “stuff” like oil, coal, and metals.

We pulled out the “easy to extract” oil, gas, and coal first. As we move on to the difficult to extract resources, we find that the need for investment capital escalates rapidly. According to Mark Lewis writing in the Financial Times, “upstream capital expenditures” for oil and gas amounted to  nearly $700 billion in 2012, compared to $350 billion in 2005, both in 2012 dollars. This corresponds to an inflation-adjusted annual increase of 10% per year for the seven year period.

Figure 1. The way would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

Figure 1. The way would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

In theory, we would expect extraction costs to rise as we approach limits of the amount to be extracted. In fact, the steep rise in oil prices in recent years is of the type we would expect, if this is happening. We were able to get around the problem in the 1970s, by adding more oil extraction, substituting other energy products for oil, and increasing efficiency. This time, our options for fixing the situation are much fewer, since the low hanging fruit have already been picked, and we are reaching financial limits now.

Figure 2. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

Figure 2. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

To make matters worse, the rapidly rising need for investment capital arises is other industries as well as fossil fuels. Metals extraction follows somewhat the same pattern. We extracted the highest grade ores, in the most accessible locations first. We can still extract more metals, but we need to move to lower grade ores. This means we need to remove more of the unwanted waste products, using more resources, including energy resources.

Figure 3. Waste product to produce 100 units of metal

Figure 3. Waste product to produce 100 units of metal

There is a huge increase in the amount of waste products that must be extracted and disposed of, as we move to lower grade ores (Figure 3). The increase in waste products is only 3% when we move from ore with a concentration of .200, to ore with a concentration .195. When we move from a concentration of .010 to a concentration of .005, the amount of waste product more than doubles.

When we look at the inflation adjusted cost of base metals (Figure 4 below), we see that the index was generally falling for a long period between the 1960s and the 1990s, as productivity improvements were greater than falling ore quality.

Figure 4. World Bank inflation adjusted base metal index (excluding iron).

Figure 4. World Bank inflation adjusted base metal index (excluding iron).

Since 2002, the index is higher, as we might expect if we are starting to reach limits with respect to some of the metals in the index.

There are many other situations where we are fighting a losing battle with nature, and as a result need to make larger resource investments. We have badly over-fished the ocean, so  fishermen now need to use more resources too catch the remaining much smaller fish.  Pollution (including CO2 pollution) is becoming more of a problem, so we invest resources in  devices to capture mercury emissions and in wind turbines in the hope they will help our pollution problems. We also need to invest increasing amounts in roads,  bridges, electricity transmission lines, and pipelines, to compensate for deferred maintenance and aging infrastructure.

Some people say that the issue is one of falling Energy Return on Energy Invested (EROI), and indeed, falling EROI is part of the problem. The steepness of the curve comes from the rapid increase in energy products used for extraction and many other purposes, as we approach limits.  The investment capital limit was discovered by the original modelers ofLimits to Growth in 1972. I discuss this in my post Why EIA, IEA, and Randers’ 2052 Energy Forecasts are Wrong.

2. When the amount of oil extracted each year flattens out (as it has since 2004), a conflict arises: How can there be enough oil both (a) for the growing investment needed to maintain the status quo, plus (b) for new investment to promote growth?

In the previous section, we talked about the rising need for investment capital, just to maintain the status quo. At least some of this investment capital needs to be in the form of oil.  Another use for oil would be to grow the economy–adding new factories, or planting more crops, or transporting more goods. While in theory there is a possibility of substituting away from oil, at any given point in time, the ability to substitute away is quite limited. Most transport options require oil, and most farming requires oil. Construction and road equipment require oil, as do diesel powered irrigation pumps.

Because of the lack of short term substitutability, the need for oil for reinvestment tends to crowd out the possibility of growth. This is at least part of the reason for slower world-wide economic growth in recent years.

3. In the crowding out of growth, the countries that are most handicapped are the ones with the highest average cost of their energy supplies.

For oil importers, oil is a very high cost product, raising the average cost of energy products. This average cost of energy is highest in countries that use the highest percentage of oil in their energy mix.

If we look at a number of oil importing countries, we see that economic growth tends to be much slower in countries that use very much oil in their energy mix. This tends to happen  because high energy costs make products less affordable. For example, high oil costs make vacations to Greece unaffordable, and thus lead to cut backs in their tourist industry.

It is striking when looking at countries arrayed by the proportion of oil in their energy mix, the extent to which high oil use, and thus high cost energy use, is associated with slow economic growth (Figure 5, 6, and 7). There seems to almost be a dose response–the more oil use, the lower the economic growth. While the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are shown as a group, each of the countries in the group shows the same pattern on high oil consumption as a percentage of its total energy production in 2004.

Globalization no doubt acted to accelerate this shift toward countries that used little oil. These countries tended to use much more coal in their energy mix–a much cheaper fuel.

Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU - PIIGS means "EU-27 minus PIIGS')

Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU – PIIGS means “EU-27 minus PIIGS’)

Figure 6. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 6. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 7. Average percentage consumption growth between 2004 and 2011, based on BP's 2013 Statistical Review of World Energy.

Figure 7. Average percentage consumption growth between 2004 and 2011, based on BP’s 2013 Statistical Review of World Energy.

4. The financial systems of countries with slowing growth are especially affected, as are the governments. Debt becomes harder to repay with interest, as economic growth slows.

With slow growth, debt becomes harder to repay with interest. Governments are tempted to add programs to aid their citizens, because employment tends to be low. Governments find that tax revenue lags because of the lagging wages of most citizens, leading to government deficits. (This is precisely the problem that Turchin and Nefedov noted, prior to collapse, when they analyzed eight historical collapses in their book Secular Cycles.)

Governments have recently attempt to fix both their own financial problems and the problems of their citizens by lowering interest rates to very low levels and by using Quantitative Easing. The latter allows governments to keep even long term interest rates low.  With Quantitative Easing, governments are able to keep borrowing without having a market of ready buyers. Use of Quantitative Easing also tends to blow bubbles in prices of stocks and real estate, helping citizens to feel richer.

5. Wages of citizens of  countries oil importing countries tend to remain flat, as oil prices remain high.

At least part of the wage problem relates to the slow economic growth noted above. Furthermore, citizens of the country will cut back on discretionary goods, as the price of oil rises, because their cost of commuting and of food rises (because oil is used in growing food). The cutback in discretionary spending leads to layoffs in discretionary sectors. If exported goods are high priced as well, buyers from other countries will tend to cut back as well, further leading to layoffs and low wage growth.

6. Oil producers find that oil prices don’t rise high enough, cutting back on their funds for reinvestment. 

As oil extraction costs increase, it becomes difficult for the demand for oil to remain high, because wages are not increasing. This is the issue I describe in my post What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs.

We are seeing this issue today. Bloomberg reports, Oil Profits Slump as Higher Spending Fails to Raise Output. Business Week reports Shell Surprise Shows Profit Squeeze Even at $100 Oil. Statoil, the Norwegian company, is considering walking away from Greenland, to try to keep a lid on production costs.

7. We find ourselves with a long-term growth imperative relating to fossil fuel use, arising from the effects of globalization and from growing world population.

Globalization added approximately 4 billion consumers to the world market place in the 1997 to 2001 time period. These people previously had lived traditional life styles. Once they became aware of all of the goods that people in the rich countries have, they wanted to join in, buying motor bikes, cars, televisions, phones, and other goods. They would also like to eat meat more often. Population in these countries continues to grow adding to demand for goods of all kinds. These goods can only be made using fossil fuels, or by technologies that are enabled by fossil fuels (such as today’s hydroelectric, nuclear, wind, and solar PV).

8. The combination of these forces leads to a situation in which economies, one by one, will turn downward in the very near future–in a few months to a year or two. Some are already on this path (Egypt, Syria, Greece, etc.)

We have two problems that tend to converge: financial problems that countries are now hiding, and ever rising need for resources in a wide range of areas that are reaching limits (oil, metals, over-fishing, deferred maintenance on pipelines).

On the financial side, we have countries trying to hang together despite a serious mismatch between revenue and expenses, using Quantitative Easing and ultra-low interest rates. If countries unwind the Quantitative Easing, interest rates are likely to rise. Because debt is widely used, the cost of everything from oil extraction to buying a new home to buying a new car is likely to rise. The cost of repaying the government’s own debt will rise as well, putting governments in worse financial condition than they are today.

A big concern is that these problems will carry over into debt markets. Rising interest rates will lead to widespread defaults. The availability of debt, including for oil drilling, will dry up.

Even if debt does not dry up, oil companies are already being squeezed for investment funds, and are considering cutting back on drilling. A freeze on credit would make certain this happens.

Meanwhile, we know that investment costs keep rising, in many different industries simultaneously, because we are reaching the limits of a finite world. There are more resources available; they are just more expensive. A mismatch occurs, because our wages aren’t going up.

The physical amount of oil needed for all of this investment keeps rising, but oil production continues on its relatively flat plateau, or may even begins to drop. This leads to less oil available to invest in the rest of the economy. Given the squeeze, even more countries are likely to encounter slowing growth or contraction.

9. My expectation is that the situation will end with a fairly rapid drop in the production of all kinds of energy products and the governments of quite a few countries failing. The governments that remain will dramatically cut services.

With falling oil production, promised government programs will be far in excess of what governments can afford, because governments are basically funded out of the surpluses of a fossil fuel economy–the difference between the cost of extraction and the value of these fossil fuels to society. As the cost of extraction rises, the surpluses tend to dry up.

Figure 8. Cost of extraction of barrel oil, compared to value to society. Economic growth is enabled by the difference.

Figure 8. Cost of extraction of barrel oil, compared to value to society. Economic growth is enabled by the difference.

As these surpluses shrink, governments will need to shrink back dramatically. Government failure will be easier than contracting back to a much smaller size.

International finance and trade will be particularly challenging in this context. Trying to start over will be difficult, because many of the new countries will be much smaller than their predecessors, and will have no “track record.” Those that do have track records will have track records of debt defaults and failed promises, things that will not give lenders confidence in their ability to repay new loans.

While it is clear that oil production will drop, with all of the disruption and a lack of operating financial markets, I expect natural gas and coal production will drop as well. Spare parts for almost anything will be difficult to get, because of the need for the system of international trade to support making these parts. High tech goods such as computers and phones will be especially difficult to purchase. All of these changes will result in a loss of most of the fossil fuel economy and the high tech renewables that these fossil fuels support.

A Forecast of Future Energy Supplies and their Impact

A rough estimate of the amounts by which energy supply will drop is given in Figure 9, below.

Figure 9. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 9. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

The issue we will be encountering could be much better described as “Limits to Growth” than “Peak Oil.” Massive job layoffs will occur, as fuel use declines. Governments will find that their finances are even more pressured than today, with calls for new programs at the time revenue is dropping dramatically. Debt defaults will be a huge problem. International trade will drop, especially to countries with the worst financial problems.

One big issue will be the need to reorganize governments in a new, much less expensive  way. In some cases, countries will break up into smaller units, as the Former Soviet Union did in 1991. In some cases, the situation will go back to local tribes with tribal leaders. The next challenge will be to try to get the governments to act in a somewhat co-ordinated way.  There may need to be more than one set of governmental changes, as the global energy supplies decline.

We will also need to begin manufacturing goods locally, at a time when debt financing no longer works very well, and governments are no longer maintaining roads. We will have to figure out new approaches, without the benefit of high tech goods like computers. With all of the disruption, the electric grid will not last very long either. The question will become: what can we do with local materials, to get some sort of economy going again?

NON-SOLUTIONS and PARTIAL SOLUTIONS TO OUR PROBLEM

There are a lot of proposed solutions to our problem. Most will not work well because the nature of the problem is different from what most people have expected.

1. Substitution. We don’t have time. Furthermore, whatever substitutions we make need to be with cheap local materials, if we expect them to be long-lasting. They also must not over-use resources such as wood, which is in limited supply.

Electricity is likely to decline in availability almost as quickly as oil because of inability to keep up the electrical grid and other disruptions (such as failing governments, lack of oil to lubricate machinery, lack of replacement parts, bankruptcy of companies involved with the production of electricity) so is not really a long-term solution to oil limits.

2. Efficiency. Again, we don’t have time to do much. Higher mileage cars tend to be more expensive, replacing one problem with another. A big problem in the future will be lack of road maintenance. Theoretical gains in efficiency may not hold in the real world. Also, as governments reduce services and often fail, lenders will be unwilling to lend funds for new projects which would in theory improve efficiency.

In some cases, simple devices may provide efficiency. For example, solar thermal can often be a good choice for heating hot water. These devices should be long-lasting.

3. Wind turbines. Current industrial type wind turbines will be hard to maintain, so are  unlikely to be long-lasting. The need for investment capital for wind turbines will compete with other needs for investment capital. CO2 emissions from fossil fuels will drop dramatically, with or without wind turbines.

On the other hand, simple wind mills made with local materials may work for the long term. They are likely to be most useful for mechanical energy, such as pumping water or powering looms for cloth.

4. Solar Panels. Promised incentive plans to help homeowners pay for solar panels can be expected to mostly fall through. Inverters and batteries will need replacement, but probably will not be available. Handy homeowners who can rewire the solar panels for use apart from the grid may find them useful for devices that can run on direct current. As part of the electric grid, solar panels will not add to its lifetime. It probably will not be possible to make solar panels for very many years, as the fossil fuel economy reaches limits.

5. Shale Oil. Shale oil is an example of a product with very high investment costs, and returns which are doubtful at best. Big companies who have tried to extract shale oil have decided the rewards really aren’t there. Smaller companies have somehow been able to put together financial statements claiming profits, based on hoped for future production and very low interest rates.

Costs for extracting shale oil outside the US for shale oil are likely to be even higher than in the US. This happens because the US has laws that enable production (landowner gets a share of profits) and other beneficial situations such as pipelines in place, plentiful water supplies, and low population in areas where fracking is done. If countries decide to ramp up shale oil production, they are likely to run into similarly hugely negative cash flow situations. It is hard to see that these operations will save the world from its financial (and energy) problems.

6. Taxes. Taxes need to be very carefully structured, to have any carbon deterrent benefit. If part of taxes consumers would normally pay to the government are levied on fuel for vehicles, the practice can encourage more the use of more efficient vehicles.

On the other hand, if carbon taxes are levied on businesses, the taxes tend to encourage businesses to move their production to other, lower-cost countries. The shift in production leads to the use of more coal for electricity, rather than less. In theory, carbon taxes could be paired with a very high tax on imported goods made with coal, but this has not been done. Without such a pairing, carbon taxes seem likely to raise world CO2 emissions.

7.  Steady State Economy. Herman Daly was the editor of a book in 1973 calledToward a Steady State Economy, proposing that the world work toward a Steady State economy, instead of growth. Back in 1973, when resources were still fairly plentiful, such an approach would have acted to hold off  Limits to Growth for quite a few years, especially if zero population growth were included in the approach.

Today, it is far too late for such an approach to work. We are already in a situation with very depleted resources. We can’t keep up current production levels if we want to–to do so would require greatly ramping up energy production because of the rising need for energy investment to maintain current production, discussed in Item (1) of Our Energy Predicament. Collapse will probably be impossible to avoid. We can’t even hope for an outcome as good as a Steady State Economy.

7. Basing Choice of Additional Energy Generation on EROI Calculations. In my view, basing new energy investment on EROI calculations is an iffy prospect at best. EROI calculations measure a theoretical piece of the whole system–”energy at the well-head.” Thus, they miss important parts of the system, which affect both EROI and cost. They also overlook timing, so can indicate that an investment is good, even if it digs a huge financial hole for organizations making the investment. EROI calculations also don’t consider repairability issues which may shorten real-world lifetimes.

Regardless of EROI indications, it is important to consider the likely financial outcome as well. If products are to be competitive in the world marketplace, electricity needs to be inexpensive, regardless of what the EROI calculations seem to say. Our real problem is lack of investment capital–something that is gobbled up at prodigious rates by energy generation devices whose costs occur primarily at the beginning of their lives. We need to be careful to use our investment capital wisely, not for fads that are expensive and won’t hold up for the long run.

8. Demand Reduction. This really needs to be the major way we move away from fossil fuels. Even if we don’t have other options, fossil fuels will move away from us. Encouraging couples to have smaller families would seem to be a good choice. 

Rising Energy Costs Lead to Recession; Eventually Collapse | Our Finite World

Rising Energy Costs Lead to Recession; Eventually Collapse | Our Finite World. (source)

How does the world reach limits? This is a question that few dare to examine. My analysis suggests that these limits will come in a very different way than most have expected–through financial stress that ultimately relates to rising unit energy costs, plus the need to use increasing amounts of energy for additional purposes:

  • To extract oil and other minerals from locations where extraction is very difficult, such as in shale formations, or very deep under the sea;
  • To mitigate water shortages and pollution issues, using processes such as desalination and long distance transport of food; and
  • To attempt to reduce future fossil fuel use, by building devices such as solar panels and electric cars that increase fossil fuel energy use now in the hope of reducingenergy use later.

We have long known that the world is likely to eventually reach limits. In 1972, the bookThe Limits to Growth by Donella Meadows and others modeled the likely impact of growing population, limited resources, and rising pollution in a finite world. They considered a number of scenarios under a range of different assumptions. These models strongly suggested the world economy would begin to hit limits in the first half of the 21st century and would eventually collapse.

The indications of the 1972 analysis were considered nonsense by most. Clearly, the world would work its way around limits of the type suggested. The world would find additional resources in short supply. It would become more efficient at using resources and would tackle the problem of rising pollution. The free market would handle any problems that might arise.

The Limits to Growth analysis modeled the world economy in terms of flows; it did not try to model the financial system. In recent years, I have been looking at the situation and have discovered that as we hit limits in a finite world, the financial system is the most vulnerable part because of the system because it ties everything else together. Debt in particular is vulnerable because the time-shifting aspect of debt “works” much better in a rapidly growing economy than in an economy that is barely growing or shrinking.

The problem that now looks like it has the potential to push the world into financial collapse is something no one would have thought of—high oil prices that take a slice out of the economy, without anything to show in return. Consumers find that their own salaries do not rise as oil prices rise. They find that they need to cut back on discretionary spending if they are to have adequate funds to pay for necessities produced using oil. Food is one such necessity; oil is used to run farm equipment, make herbicides and pesticides, and transport finished food products. The result of a cutback in discretionary spending is recession or near recession, and less job availability. Governments find themselves in  financial distress from trying to mitigate the recession-like impacts without adequate tax revenue.

One of our big problems now is a lack of cheap substitutes for oil. Highly touted renewable energy sources such as wind and solar PV are not cheap. They also do not substitute directly for oil, and they increase near-term fossil fuel consumption. Ethanol can act as an “oil extender,” but it is not cheap. Battery powered cars are also not cheap.

The issue of rising oil prices is really a two-sided issue. The least expensive sources of oil tend to be extracted first. Thus, the cost of producing oil tends to rise over time. As a result, oil producers tend to require ever-rising oil prices to cover their costs. It is the interaction of these two forces that leads to the likelihood of financial collapse in the near term:

  1. Need for ever-rising oil prices by oil producers.
  2. The adverse impact of high-energy prices on consumers.

If a cheap substitute for oil had already come along in adequate quantity, there would be no problem. The issue is that no suitable substitute has been found, and financial problems are here already. In fact, collapse may very well come from oil prices not rising high enough to satisfy the needs of those extracting the oil, because of worldwide recession.

The Role of Inexpensive Energy

The fact that few stop to realize is that energy of the right type is absolutely essential for making goods and services of all kinds.  Even if the services are simply typing numbers into a computer, we need energy of precisely the right kind for several different purposes:

  1. To make the computer and transport it to the current location.
  2. To build the building where the worker works.
  3. To light the building where the worker works.
  4. To heat or cool the building where the worker works.
  5. To transport the worker to the location where he works.
  6. To produce the foods that the worker eats.
  7. To produce the clothing that the worker wears.

Furthermore, the energy used needs to be inexpensive, for many reasons—so that the worker’s salary goes farther; so that the goods or services created are competitive in a world market; and so that governments can gain adequate tax revenue from taxing energy products. We don’t think of fossil fuel energy products as being a significant source of tax revenue, but they very often are, especially for exporters (Rodgers map of oil “government take” percentages).

Some of the energy listed above is paid for by the employer; some is paid for by the employee. This difference is irrelevant, since all are equally essential. Some energy is omitted from the above list, but is still very important. Energy to build roads, electric transmission lines, schools, and health care centers is essential if the current system is to be maintained. If energy prices rise, taxes and fees to pay for basic services such as these will likely need to rise.

How “Growth” Began

For most primates, such as chimpanzees and gorillas, the number of the species fluctuates up and down within a range. Total population isn’t very high. If human population followed that of other large primates, there wouldn’t be more than a few million humans worldwide. They would likely live in one geographical area.

How did humans venture out of this mold? In my view, a likely way that humans were able to improve their dominance over other animals and plants was through the controlled use of fire, a skill they learned over one million years ago  (Luke 2012).  Controlled use of fire could be used for many purposes, including cooking food, providing heat in cool weather, and scaring away wild animals.

The earliest use of fire was in some sense very inexpensive. Dry sticks and leaves were close at hand. If humans used a technique such as twirling one stick against another with the right technique and the right kind of wood, such a fire could be made in less than a minute (Hough 1890). Once humans had discovered how to make fire, they could use it to leverage their meager muscular strength.

The benefits of the controlled use of fire are perhaps not as obvious to us as they would have been to the early users. When it became possible to cook food, a much wider variety of potential foodstuffs could be eaten. The nutrition from food was also better. There is even some evidence that cooking food allowed the human body to evolve in the direction of smaller chewing and digestive apparatus and a bigger brain (Wrangham 2009). A bigger brain would allow humans to outsmart their prey. (Dilworth 2010)

Cooking food allowed humans to spend much less time chewing food than previously—only one-tenth as much time according to one study (4.7% of daily activity vs. 48% of daily activity) (Organ et al. 2011). The reduction in chewing time left more time other activities, such as making tools and clothing.

Humans gradually increased their control over many additional energy sources. Training dogs to help in hunting came very early. Humans learned to make sailboats using wind energy. They learned to domesticate plants and animals, so that they could provide more food energy in the location where it was needed. Domesticated animals could also be used to pull loads.

Humans learned to use wind mills and water mills made from wood, and eventually learned to use coal, petroleum (also called oil), natural gas, and uranium. The availability of fossil fuels vastly increased our ability to make substances that require heating, including metals, glass, and concrete. Prior to this time, wood had been used as an energy source, leading to widespread deforestation.

With the availability of metals, glass, and concrete in quantity, it became possible to develop modern hydroelectric power plants and transmission lines to transmit this electricity. It also became possible to build railroads, steam-powered ships, better plows, and many other useful devices.

Population rose dramatically after fossil fuels were added, enabling better food production and transportation. This started about 1800.

Figure 1. World population based on data from "Atlas of World History," McEvedy and Jones, Penguin Reference Books, 1978  and Wikipedia-World Population.

Figure 1. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and UN Population Estimates.

 

All of these activities led to a very long history of what we today might call economic growth. Prior to the availability of fossil fuels, the majority of this growth was in population, rather than a major change in living standards. (The population was still very low compared to today.) In later years, increased energy use was still associated with increased population, but it was also associated with an increase in creature comforts—bigger homes, better transportation, heating and cooling of homes, and greater availability of services like education, medicine, and financial services.

How Cheap Energy and Technology Combine to Lead to Economic Growth

Without external energy, all we have is the energy from our own bodies. We can perhaps leverage this energy a bit by picking up a stick and using it to hit something, or by picking up a rock and throwing it. In total, this leveraging of our own energy doesn’t get us very far—many animals do the same thing. Such tools provide some leverage, but they are not quite enough.

The next step up in leverage comes if we can find some sort of external energy to use to supplement our own energy when making goods and services.  One example might be heat from a fire built with sticks used for baking bread; another example might be energy from an animal pulling a cart. This additional energy can’t take too much of (1) our human energy, (2) resources from the ground, or (3) financial capital, or we will have little to invest what we really want—technology that gives us the many goods we use, and services such as education, health care, and recreation.

The use of inexpensive energy led to a positive feedback loop: the value of the goods and service produced was sufficient to produce a profit when all costs were considered, thanks to the inexpensive cost of the energy used. This profit allowed additional investment, and contributed to further energy development and further growth. This profit also often led to rising salaries. The additional cheap energy use combined with greater technology produced the impression that humans were becoming more “productive.”

For a very long time, we were able to ramp up the amount of energy we used, worldwide. There were many civilizations that collapsed along the way, but in total, for all civilizations in the world combined, energy consumption, population, and goods and services produced tended to rise over time.

In the 1970s, we had our first experience with oil limits. US oil production started dropping in 1971. The drop in oil production set us up as easy prey for an oil embargo in 1973-1974, and oil prices spiked. We got around this problem, and more high price problems in the late 1970s by

  1. Starting work on new inexpensive oil production in the North Sea, Alaska, and Mexico.
  2. Adopting more fuel-efficient cars, already available in Japan.
  3. Switching from oil to nuclear or coal for electricity production.
  4. Cutting back on oil intensive activities, such as building new roads and doing heavy manufacturing in the United States.

The economy eventually more or less recovered, but men’s wages stagnated, and women found a need to join the workforce to maintain the standards of living of their families.  Oil prices dropped back, but not quite a far as to prior level. The lack of energy intensive industries (powered by cheap oil) likely contributed to the stagnation of wages for men.

Recently, since about 2004, we have again been encountering high oil prices. Unfortunately, the easy options to fix them are mostly gone. We have run out of cheap energy options—tight oil from shale formations isn’t cheap. Wages again are stagnating, even worse than before. The positive feedback loop based on low energy prices that we had been experiencing when oil prices were low isn’t working nearly as well, and economic growth rates are falling.

The technical name for the problem we are running into with oil is diminishing marginal returns.  This represents a situation where more and more inputs are used in extraction, but these additional inputs add very little more in the way of the desired output, which is oil. Oil companies find that an investment of a given amount, say $1,000 dollars, yields a much smaller amount of oil than it used to in the past—often less than a fourth as much. There are often more up-front expenses in drilling the wells, and less certainty about the length of time that oil can be extracted from a new well.

Oil that requires high up-front investment needs a high price to justify its extraction. When consumers pay the high oil price, the amount they have for discretionary goods drops.  The feedback loop starts working the wrong direction—in the direction of more layoffs, and lower wages for those working. Companies, including oil companies, have a harder time making a profit. They find outsourcing labor costs to lower-cost parts of the world more attractive.

Can this Growth Continue Indefinitely?

Even apart from the oil price problem, there are other reasons to think that growth cannot continue indefinitely in a finite world.  For one thing, we are already running short of fresh water in many parts of the world, including China, India and the Middle East.  Topsoil is eroding, and is being depleted of minerals. In addition, if population continues to rise, we will need a way to feed all of these people—either more arable land, or a way of producing more food per acre.

Pollution is another issue. One type is acidification of oceans; another leads to dead zones in oceans. Mercury pollution is a widespread problem. Fresh water that is available is often very polluted. Excess carbon dioxide in the atmosphere leads to concerns about climate change.

There is also an issue with humans crowding out other species. In the past, there have been five widespread die-offs of species, called “Mass Extinctions.” Humans seem now to be causing a Sixth Mass Extinction. Paleontologist Niles Eldredge  describes the Sixth Mass Extinction as follows:

  • Phase One began when first humans began to disperse to different parts of the world about 100,000 years ago. [We were still hunter-gatherers at that point, but we killed off large species for food as we went.]
  • Phase Two began about 10,000 years ago, when humans turned to agriculture.

According to Eldredge, once we turned to agriculture, we stopped living within local ecosystems. We converted land to produce only one or two crops, and classified all unwanted species as “weeds”.  Now with fossil fuels, we are bringing our attack on other species to a new higher level. For example, there is greater clearing of land for agriculture, overfishing, and too much forest use by humans (Eldredge 2005).

In many ways, the pattern of human population growth and growth of use of resources by humans are like a cancer. Growth has to stop for one reason or other—smothering other species, depletion of resources, or pollution.

Many Competing Wrong Diagnoses of our Current Problem

The problem we are running into now is not an easy one to figure out because the problem crosses many disciplines. Is it a financial problem? Or a climate change problem? Or an oil depletion problem? It is hard to find individuals with knowledge across a range of fields.

There is also a strong bias against really understanding the problem, if the answer appears to be in the “very bad to truly awful” range. Politicians want a problem that is easily solvable. So do sustainability folks, and peak oil folks, and people writing academic papers. Those selling newspapers want answers that will please their advertisers. Academic book publishers want books that won’t scare potential buyers.

Another issue is that nature works on a flow basis. All we have in a given year in terms of resources is what we pull out in that year. If we use more resources for one thing–extracting oil, or making solar panels, it leaves less for other purposes. Consumers also work mostly from the income from their current paychecks. Even if we come up with what looks like wonderful solutions, in terms of an investment now for payback later, nature and consumers aren’t very co-operative in producing them. Consumers need ever-more debt, to make the solutions sort of work. If one necessary resource–cheap oil–is in short supply, nature dictates that other resource uses shrink, to work within available balances. So there is more pressure toward collapse.

Virtually no one understands our complex problem. As a result, we end up with all kinds of stories about how we can fix our problem, none of which make sense:

“Humans don’t need fossil fuels; we can just walk away.” – But how do we feed 7 billion people? How long would our forests last before they are used for fuel?

“More wind and solar PV” – But these use fossil fuels now, and don’t fix oil prices.

“Climate change is our only problem.”—Climate change needs to be considered in conjunction with other limits, many of which are hitting very soon. Maybe there is good news about climate, but it likely will be more than offset by bad news from limits not considered in the model.

 

‘Musing’: Local Growth Myth

Giant tailings waste "pond" produced by the Suncor Millenium and Steepbank operations.

Giant tailings waste “pond” produced by the Suncor Millenium and Steepbank operations, Alberta.

I have made use of our local community newspaper (Stouffville Sun-Tribune) to voice my opinion on a number of issues. From a guest editorial to letters to the editor (see this and this  as examples). And, when one of the columns writers threw out a challenge to  readers to share visions of all the positive changes that the Town should envision as we continue to grow at one of the highest rates in all of Canada (see this), I had to respond. The following is the text of that response:

Re your Off the Top column, More to the east, please.
I just want to challenge the implicit assumption in your column regarding input from citizens on future growth ideals. Your framing of the question, with only ‘positive’ attributes as examples of the consequences of growth, implies that growth is solely a positive force, something that always benefits us.
I would have to challenge that presumption. There is accumulating evidence that, in fact, growth is detrimental to the planet and society in general.
The ‘growth culture’ we have as an unstated assumption about how the world works is based on only a couple of centuries of quick sociopolitical and economic change on a global scale. More and more are arguing that this phenomenal growth has been due to the extraction and exploitation of cheap and easily-accessible fossil fuels. The rapid use of this resource has resulted in a number of consequences, some intended and some not. There have been amazing technological changes and healthcare ‘advances,’ but there has also been greater wealth disparity, environmental degradation, and violence on a global scale.
In any kind of discussion on growth, we need to not only be aware of these negative consequences (and these cannot be avoided, otherwise they would have been by now), but we also need to include them in our worldview and question the prevailing assumption that growth is good.
The late Donella Meadows, co-writer of a very respected study in 1972 entitled The Limits to Growth, wrote in a book on Complexity Theory, that humans often discount the negative aspects of growth, focusing instead in the immediate, short-term gains that can be made; and, that we often push growth in the wrong direction, making worse the social ‘issues’ we try to ‘fix’ through increased growth.

So, a question I’d like to pose to readers in this discussion is this: given the other side of the coin, do we really want the growth targets imposed by the ‘state?’ Or do we tell our leaders to stop now, while there is some ‘country’ left in the Town.

Dr. Albert Bartlett (1923-2013)

Copy of a guest editorical sent to my local community newspaper today (Sept 22, 2013):

Al Bartlet, University of Colorado

______

This past month a person of some importance passed away but my bet is that many, if not all, people reading this will have never heard of him. His name was Albert Bartlett. He was a Professor Emeritus in nuclear physics at the University of Colorado.

Why do I say of some importance? Well, he holds a ‘record,’ of sorts, for giving his presentation–entitled Arithmetic, Population, and Energy: Sustainability 101–1742 times across the globe. But what I find more impressive are the almost five million hits one of his lectures has received on youtube.

We agree upon little in this world. Did the Syrian government or the ‘rebels’ use chemical weapons? Are central bank monetary policies good for the economy or will they lead to high inflation, possibly hyperinflation? Have we passed Peak Oil or is there nothing to worry about with respect to fossil fuel depletion? Climate change is occurring but is it anthropogenic (mad-made) or a natural fluctuation or both?

However, we can agree that two times two is four and this is the basis Dr. Bartlett uses so convincingly to show, as he puts it, that “the greatest shortcoming of the human race is our inability to understand the exponential function.”

Why is this important? The exponential function deals with steady growth, something we have been conditioned to desire, especially for the economy.

Dr. Bartlett simplifies the concept by looking at doubling time (the time it takes for something to grow by 100%) and then shows how quickly ANY steady growth can overwhelm a system.

What is the relevance of this for the Town of Whitchurch-Stouffville?  I raise this startling reality as the Town has been the fastest growing community in the country the past few years, growing 54.3% over the five years of 2006-2011, just over a 9% increase per year.

This rate of increase requires just over 7 and 3/4 years to double, 15 and 1/2 years to quadruple, and in one person’s average lifetime of 80 years at this rate, Stouffville will have doubled its population over ten times, from the 2006 number of 24,390 to over 12 million.

Obviously this will not happen in the next 80 years since it would be next to impossible for the Town to host so many, unless we build straight up. However, if we wish to see what the ‘Country Close to the City’ will look like in just a few years, travel into Toronto and you’ll see.

It’s not what I had in mind when I moved into the area almost twenty years ago but I guess I can thank our town’s council, region, and province for the result.

And, if you wish to understand this concept of exponential growth better, watch Dr. Bartlett’s presentation on his website http://www.albartlett.org. It’s worth the time to help better understand some of the predicaments humans will face in the coming years.

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