Energy constraints will collapse global economic recovery

We may rail against the regulators, politicians, and others who failed to understand and manage past  risks, but we are just as culpable for our  failure to engage with severe, well-signposted, imminent ones. Impassioned arguments over bank nationalisation, the austerity-stimulus debate, and NAMA  consume us today, but in reality may be little more than a Lilliputian tussle over the fag-end of our globalised economy. But it seems we cannot see our own predicament.

Recent reports from sources as diverse as Lloyds Insurance and Chatham House, the UK Peak Oil Task Force, and US and German military think-tanks are the latest in a long list of warnings that we are at, or close to, a peak in global oil production. Peak oil refers to the time of the maximum rate of global oil production after which terminal decline sets in.

In a 2005 report for the US Department of Energy, the analyst Robert Hirsch wrote that: The peaking of world oil production presents … the world with an unprecedented risk management problem … The economic, social and political costs will be unprecedented … Timely, aggressive risk management will be essential. He suggested we would need at least twenty years pre-peak to manage those risks, an estimate that some of us who study these risks think optimistic. Hirsch then gave his advice to Forfas for their study on Ireland’s oil dependency.

Yet here we are, five years later, with a high probability that we are around the peak and no attempt at risk management. Certainly some political and public figures have mentioned peak oil, though clearly with limited understanding and always as a longer term issue. In its five year strategy, published this year, the Sustainable Energy Authority of Ireland  ignores it entirely. The ESRI, those cardinals of the status quo, recently published some very limited work on the implications of high oil prices for  the Irish economy, but only when Siemens Ireland prodded them into doing so.

Ireland is not unique in ignoring the subject, though things are changing elsewhere. The UK’s Observer recently reported that government ministers were far more concerned about peak oil than they had admitted and were involved in secret talks between the The Department of Energy and Climate Change, The Ministry of Defence, and the Bank of England.

The standard retort to the threat of peak oil is that rising oil prices will encourage substitutes, new technologies, and conservation. While these are presented as truths, they are in fact contingent observations born out of the energy surpluses that facilitated economic growth over the last two centuries. We have neither the time nor resources to adapt, and economies cannot pay arbitrarily high oil prices.

More particularly, it matters little what technologies are in the pipeline, the potential of wind power in some choice location, or that the European Commission has a target: if a severe economic and structural collapse occurs before their enactment, then they may never happen.

Even those who claim to be enacting policy to manage the implications of peak oil are clearly confused. Large-scale grid upgrades, electrification of transport, smart energy technology, and wave power are probably a waste of money and effort. The assumptions contained in their planning and technology are predicated on a globalised growth economy.

So what might peak oil mean? The recently leaked German army report, drawing upon research by The Risk/ Resilience Network and Feasta, argues: Investment will decline and debt service will be challenged, leading to a crash in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains-because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse.

They are not referring to what we currently perceive of as  fragile states, but to advanced complex societies, finely integrated into the global economy.  Indeed, it is the de-localisation of our basic welfare and the integration and complexity of the globalised economy that magnifies our risks.  A systemic collapse is posited that would leave no area of life unaffected and overwhelm the ability of governments to manage.

So how are we to understand such large impacts from what might seem to be small declines in global oil production? The first thing to be aware of is that peak oil is not a simple transport  and petrochemical problem, but a systemic predicament. All systems; life, economies and civilisations require flows of concentrated energy to maintain their structure and to allow growth. If we do not maintain the flows of energy through the systems we depend upon, they decay.

As humans, energy in the form of food allows us to live. Our civilisation and the economy that supports it similarly need flows of energy to function. The crucial difference is that once humans reach maturity their energy intake stabilises, while our globalising economy has adapted to continuous growth and thus, rising energy flows. Declining oil production will force a continual economic contraction. That is, unless we could deploy efficiency measures and substitutes at the correct scale, quality and with appropriate timing to counter the effects of declining oil production; a very long shot.

Oil also has an impact on the most non-discretionary of purchases, namely food. Food production is already becoming strained as ecological degradation, water constraints, and the burgeoning effects of climate change push against a rising population and changing diets. But the most significant development of the Green Revolution of the 1950’s and 1960’s was to put food production on a fossil fuel platform. This expanded food production and drove down prices. The result was population expansion which drove more ecological degradation and resource demands. The result is that now even more people are dependent upon an even less diverse and more fragile resource base. Declines in oil production are likely not only to reduce global food production, but to undermine the economic systems that made food accessible and affordable.

While we may directly understand our economic position through our work or shopping, or through the psychodrama of national economic argument, our actual welfare is maintained through our integration with the globalised economy. The things we rely upon such as our food, IT systems, banking, monetary stability, transport, electricity services and the viability of our own jobs are dependent upon trillions of productive efforts and economic transactions which criss-cross the planet.

There are two sides to this myriad network of exchange. The first is the goods and services produced, which always require energy and resource flows. The second side is the flow of money and credit that enables the transactions. Money has no intrinsic value, you cannot eat or wear it, but it makes a claim on real things. And credit, from the Latin root to believe is indeed also an act of faith.

Credit is at the foundation of our monetary and economic system, and by extension the complex supply-chains that integrate a globalised economy. People only lend because they expect that you can service the principal plus interest into the future. While this makes sense in a growing economy, it becomes untenable in a terminally contracting one. In other words, reduced energy flows cannot maintain the economic production required to service debt. Debt outstanding cannot be repaid in real terms, leaving only default and hyper-inflation.

Of course the debt-burden and deficits of many countries are already unsustainable at.. Furthermore, in our integrated globalised economy the profligate and parsimonious are tied together. A contagious default of some Euro-zone countries could initiate deep trouble for the UK and US economies; imperilling German banks and Chinese exports. So the global economy could begin to topple before we see spikes in oil prices.

Alternatively, if we can, through faith, even more borrowing and stimulus, hold up the economy just a little longer, we are going to hit declines in oil production. Oil and food prices may rise, contracting the economy and making the un-sustainability of our debt-burden obvious even to the most clueless.

In either case, many of the economic implications may be similar. The effects of de-leveraging would drive reductions in energy demand, not constraints on production. Food, energy, debt servicing and other essentials would take up more and more of peoples’ available and declining purchasing power. Businesses will close and jobs will be lost in the discretionary economy. Already-battered banks will lose capital, and sky-high interests rates will reflect their negative perception of the future credit worthiness of the economy. Asset prices will fall, and the cost of debt servicing will rise relative to the shrinking money supply in the economy. Defaults, bank runs, mass unemployment and collapses in government finances will ensue. Purchasing power will drop further, more jobs are lost, and so on. These processes are well-understood debt deflation dynamics.

Crucially, energy demand could fall dramatically and with that, prices. The lack of affordable credit, low and volatile prices, and an overhang of spare capacity in oil, gas and coal production will dry up investment in new production including renewable energy. The result is that if growth were to pick up again some decade hence, it would again be constrained by reduced purchasing power and much lower energy caps. The latter will be set by natural decline in established production, lack of investment in new production, and the decay of energy and other infrastructure through years of non-use and lack of maintenance.

It takes the technical, social, infrastructural, and economic resources of an optimised globalised economy at its peak to extract and use our current energy flows, and even then oil production cannot be maintained.  There may indeed be plenty of fossil fuels left in the ground, but following a major systemic collapse, most may remain there as that capacity dies away.

Ultimately the deflationary pressures will start to give way to currency re-issues, currency devaluations, inflation and hyper-inflation. Bank intermediation, credit, and confidence in money holding value are the foundation of the complex trade networks upon which we rely. With their failure we could see supply-chain collapse.

The risks extend to the complex infrastructures such as the grid and IT networks, transport, sewage and water. Their dependence on large economies of scale, the purchasing power within economies, and continual re-supply through highly complex resource intensive and specialised supply-chains will be challenged. Furthermore their co-dependency may mean that failure in one will cause cascading failure.

Finally, the integration and complexity of the globalised economy means that no country will avoid some level of collapse. The principal risk management challenge is not about how we introduce the energy infrastructure and conservation measures to maintain the systems we depend upon, but about how we deal with not having the energy and other resources to maintain those systems.

We are not talking about abstract consequences in an abstract future. They are growing real-time risks that may have a rapid on-set. This is an urgent societal issue, and although there are many things we can do if we accept the risks, we cannot say we were not warned.

David Korowicz is director of the Risk/ Resilience Network, a member of Feasta, The Foundation for the Economics of Sustainability,and author of Tipping Point: Near-term Systemic Implications of a Peak in Global Oil Production. This article also appeared in ‘Village’ magazine.

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15 Responses to Energy constraints will collapse global economic recovery

  1. Pope Epopt says:

    David,

    The systems / complexity collapse angle has not been anywhere sufficiently fully discussed, but I would like more evidence for some of the statements in your post.

    Large-scale grid upgrades, electrification of transport, smart energy technology, and wave power are probably a waste of money and effort. The assumptions contained in their planning and technology are predicated on a globalised growth economy.

    Why are they predicated on a growth economy? Is it not possible to envisage spending some of what remains of the fossil fuels we have available to build (and build to last) a large scale renewables grid and then make that part of a steady-state / falling material consumption infrastructure? Granted it presumes a great deal about political stability.

  2. Pope Epopt says:

    Bank intermediation, credit, and confidence in money holding value are the foundation of the complex trade networks upon which we rely. With their failure we could see supply-chain collapse.

    Again, not necessarily.

    It’s perfectly possible to envisage the disappearance of an over-complex international financial system (which, let’s face it, mainly acts as a system for funneling resources from the poor of the present and the future to the present rich) with a simple peer-to-peer intermediation based on say, mobile phones.

    David is underestimating the inventiveness of capitalism, let alone that of post-capitalism.

  3. Richard says:

    It seems to me that the existential vastness of this problem is paralysing people. Rather in the same way people put the thought of their own mortality of their mind people are putting peak oil and climate change out of their mind. The intellectual points made here are not engaging with society´s emotional intelligence. Worryingly, the most adept at communicating issues of emotional intelligence are right wing commentators and religious groups. I have long said conservatism is the politics of emotion and it speaks to people in an way more appealing than progressive´s language of facts and figures. Progressives need a valid language that speaks to people´s emotions without frightening them. The message “The end is nigh and here are the facts” just makes people´s minds close down.

  4. Pope Epopt says:

    We have neither the time nor resources to adapt.

    Possibly, possibly not. I remain agnostic until I have seen some figures.

  5. Pope Epopt says:

    @Richard

    You have a good point. I do think David’s contentions are possibly the most serious one’s we face, and are an invaluable contribution. Because I take them seriously, I am inclined to critique the.

    One criticism, which is partly addressed in the conclusion of the entire paper, would be that the paper is part of a fashion for generalising evolutionary theory, systems theory, game theory etc. These are all useful fields in themselves, full of exiting results, but we have to be careful about their applicability and predictive value.

    But back to your point – this is not a message that would inspire anyone (except those of us with a wierd fascination with staring catastrophe in the face) to take action. Instead we have to build institutional structures and cultures based on core human values of solidarity and inventiveness in the face of adversity.

    To be fair the conclusion to the larger paper also refers to the human opportunities as well as the risks.

  6. Pope Epopt says:

    s/the./them/
    s/one’s/ones/

    Null points for proof-reading!

  7. David Korowicz says:

    Hi Pope, Richard,

    Thanks for your comments.

    Pope,

    There is quite a lot of background in these remarks-the article was written as a pretty broad sweep overview. Fundamentally it is a dynamic view, about how thing change in real-time, acknowledging the complex system behavior of the real world.

    It is possible to envisage many things- but envisaging don’t make it so. We cannot sustain a steady-state economy on a declining energy and food base-unless at a very low level of economic activity. And in the collapse process alluded to- we will not have the wealth (there are other reasons also) to be putting in renewable infrastructure.

    And trust in money surely is very important-look what happened in Wiemar germany in the 1920’s, and in Zimbabwe just a few years ago. And access to money is also very important-food was thrown away during the Great Depression while people starved-because they had no money. It is only the rich and secure who say money is not important.

    ‘neither the time or resources to adapt”- check out the UK Energy Research Council report (2009) by Sorrell & Speirs; Heinberg, R (2009) ‘Searching for a Miricle’; and quite a few others.

    For more on the complexity stuff see: http://www.feasta.org/documents/risk_resilience/Tipping_Point.pdf and also (plug..plug…) Fleeing Vesuvius: Managing the Risk of Environmental and Economic Collapse, a collection of essays out next month which should be available through the Feasta site.

    You might also like Thomas Homer-Dixon’s The Upside of Down.

    Richard,

    I think you are correct, we do need a popular language to communicate these issues-I’m an analyst, though. It needs others to contribute their communication skills. I think the Transition Initiatives are one path where this is happening.

    I take issue with your statement ”…without frihtening them”. Fear, as a human emotion evolved because it served us well as a spur to manage risks. Fear is an appropriate respones. These are real, near term risks. I have spoken quite doomish stuff at public lectures over the years, and my experience is that most ‘ordinary’ people are very resilient. In fact some are pleased on the level that it confirms what they have already intuited- that something is profoundly wrong. It helps in then giving a meaningful focus on prepardness.

    Those involved in public diplomacy on climate change debated on the merits of scaring people or enticing people to take action. Both were done, nothing substantive happened.

    Time’s up I’m afraid!
    David

  8. Pope Epopt says:

    It is only the rich and secure who say money is not important.

    Duh – well if by money you mean cultural tokens which sequester access to resources, well, sure. I’m not talking about ‘money’ being dispensable, but about the mountain of ‘innovative instruments’ developed by finance capital as it has developed since the 1970s. However, the issue is too important to take offense.

  9. gillies macbain says:

    i suggest the aerial spraying issue as one that is literally visible to everyone – even people whose knowledge of the world is derived from television news. don’t tell them anything – ask : why are we being sprayed ? what are we being sprayed with ? why are we not being told ? if they say that the trails in the sky are just the usual planes flying london to new york, ask them why everyone flew on friday and saturday this week, and no one on monday and tuesday ? the weather was much the same, so why no trails in the sky monday 11th, tuesday 12th (october 2010) ?

    and another matter to consider. you talk about telling the people, how to get the message across. another more powerful and active sector of global political society has clearly seen, or think they have seen, ways forward which require n o t telling the people.

    the aerial spraying issue is a focus for this. it undermines the often stated view that the global political elite are in denial about peak oil, global warming, and overpopulation – and are doing nothing.

    these threats are all abstract concepts. if you want to tell the people, try first with the concrete facts under their nose – or in the case of aerial spraying, over their heads. you don’t need a newspaper, magazine, or a telly. just say “wake up. look up. think. ask.”

  10. denis says:

    @Pope Epopt——even if we spent all our remaining fossil fuel energy on building alternate energy machines such as wind, wave, solar, and tidal, we could never come even close to making a self sustaining energy system that could provide the energy [ never mind the liquid fuels, the chemicals and feedstocks ] that we now get from fossil fuels.
    These systems would degrade quickly over time, and without the energy to renew them, would soon fall into disrepair and fail in their already puny outputs.
    The energy return on energy invested [EROEI] is, despite erroneous claims to the contrary, too poor to make these alternative energy systems viable.
    The Government will learn this to their cost, and our increasing poverty, in the not too distant future.
    For much more discussion on these subjects, view theoildrum.com, and seek out the articles by Jeff Vail in particular.

  11. Pope Epopt says:

    @denis

    Point me at figures to prove your assertions.

    To my knowledge the current figure for ERoEI on onshore wind is 18:1. Unfortunately I can’t find figures for ongoing maintenance or grid re-configuring and maintenance.

    Anyone who knows where they can be found should post a link.

  12. denis says:

    @Pope Epopt—The 18:1 figure [ or any other you care to mention ] has probably been pulled out of thin air by the wind industry.
    A far more likely figure is discussed by Jeff Vail in his detailed analysis of EROEI in an article posted on the oildrum.http://www.jeffvail.net/2009/07/renewables-hump-8-concluding-thoughts.html.
    A lot more work needs to be done on the question of EROEI, especially when it comes to making claims about the efficacies of alternative energy generating systems.
    To truely evaluate these systems, the EROEI of the backup systems and the percentage of time these have to be used to give a steady output to the grid has to also be considered.
    The most damning thing about wind power is of course, that it has to be manufactured and installed using high quality fossil fuel, backed up using fossil fuel, but only gives out low quality electricity, ie electricity that is delivered only when the wind deems fit, not when the consumer actually wants it.
    As a substitute for fossil fuel, it is virtually usless—-try making an economic liquid replacment for diesel or petrol out of wind generated electricity.
    It is high time the hype about wind power was shown up for what it really is, and we should come to our senses and stop wasting our precious resources on promoting this most expensive non solution to our coming energy shortage.

  13. Orson says:

    Let me say BUNK! Peak oil has been called time and time again, and just when it seems so reasonable, everyone is saying it, along come new supplies of energy. Such is the case with natural gas, made exploitable with hydraulic fracturing or fracing, and suddenly a 20 years supply is a century – maybe two.
    Say it again-‘peak oil’ is bunk!

  14. Ian says:

    What if you’re wrong Orson?

  15. John Gibbons says:

    Peak oil has been called before. As has peak water, peak food, peak population and peak pollution. And yet, on every single front, the noose gets tighter and tighter with every passing month. Reminds me of the story of the farmer who went out to the shed to find his prize 20,000 gallon-a-year cow stretched out dead. “Well, she never did that before” was his response.

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