"When the Economy Gets Squeezed by Too Little Energy"
Our introduction to an October 2022 link to Our Finite World (Here at Climateer Investing We Recycle!):
....This piece by Gail Tverberg
runs a bit contra to the Russell Napier interview that was making the
rounds a couple weeks ago with his capex boom optimism but Gail is an
actuary, she has to deal with the cold, hard reality of numbers and
she's been applying that gimlet eye to the nexus of energy and finance
for a long time....
From Gail Tverberg's Our Finite World blog, March 5:
Most people have a simple, but wrong, idea about how the world
economy will respond to “not enough energy to go around.” They expect
that oil prices will rise. With these higher prices, producers will be
able to extract more fossil fuels so the system can go on as before.
They also believe that wind turbines, solar panels and other so-called
renewables can be made with these fossil fuels, perhaps extending the
life of the system further.
The insight people tend to miss is the fact that the world’s economy
is a physics-based, self-organizing system. Such economies grow for many
years, but ultimately, they collapse. The underlying problem is that the population tends to grow too rapidly relative to the energy supplies necessary to support that population.
History shows that such collapses take place over a period of years.
The question becomes: What happens to an economy beginning its path
toward full collapse?
One of the major uses for fossil fuel energy is to add complexity to
the system. For example, roads, electricity transmission lines, and
long-distance trade are forms of complexity that can be added to the
economy using fossil fuels.
Figure
1. Chart by author pointing out that energy consumption and complexity
are complementary. They operate in different directions. Complexity,
itself, requires energy consumption, but its energy consumption is
difficult to measure.
When energy per capita falls, it becomes increasingly difficult to
maintain the complexity that has been put in place. It becomes too
expensive to properly maintain roads, electrical services become
increasingly intermittent, and trade is reduced. Long waits for
replacement parts become common. These little problems build on one
another to become bigger problems. Eventually, major parts of the
world’s economy start failing completely.
When people forecast ever-rising energy prices, they miss the fact
that market fossil fuel prices consider both oil producers and
consumers. From the producer’s point of view, the price for oil needs to
be high enough that new oil fields can be profitably developed. From
the consumer’s point of view, the price of oil needs to be sufficiently
low that food and other goods manufactured using oil products are
affordable. In practice, oil prices tend to rise and fall, and rise
again. On average, they don’t satisfy either the oil producers or the
consumers. This dynamic tends to push the economy downward.
There are many other changes, as well, as fossil fuel energy per
capita falls. Without enough energy products to go around, conflict
tends to rise. Economic growth slows and turns to economic contraction,
creating huge strains for the financial system. In this post, I will try
to explain a few of the issues involved.
[1] What is complexity?
Complexity is anything that gives structure or organization
to the overall economic system. It includes any form of government or
laws. The educational system is part of complexity. International trade
is part of complexity. The financial system, with its money and debt, is
part of complexity. The electrical system, with all its transmission
needs, is part of complexity. Roads, railroads, and pipelines are part
of complexity. The internet system and cloud storage are part of
complexity.
Wind turbines and solar panels are only possible because of
complexity and the availability of fossil fuels. Storage systems for
electricity, food, and fossil fuels are all part of complexity.
With all this complexity, plus the energy needed to support the
complexity, the economy is structured in a very different way than it
would be without fossil fuels. For example, without fossil fuels, a high
percentage of workers would make a living by performing subsistence
agriculture. Complexity, together with fossil fuels, allows the wide
range of occupations that are available today.
[2] The big danger, as energy consumption per capita falls,
is that the economy will start losing complexity. In fact, there is some
evidence that loss of complexity has already begun....
