“Once we understand the ‘real issue’ we will grasp why the current economy is close to collapse.” —
No 2718 Posted by fw, March 11, 2021 —
“Collapse is a frightening subject. The question of why collapse occurs is something I have pieced together over many years of study from a number of different sources, which I will attempt to explain in this post. Collapse doesn’t happen instantaneously; it happens many years after an economy first begins outgrowing its resource base. In fact, the resource base likely declines at the same time from multiple causes, such as soil erosion, deforestation and oil depletion. Before collapse occurs, there seem to be warning signs, including: Too much wage disparity; Riots and protests by people unhappy with low wages; Prices of commodities that are too low for producers that need to recover their costs of production and governments that require tax revenue to fund programs for their citizens; An overstretched financial system; conditions ripe for debt defaults; and Susceptibility to epidemics. Many people have the misimpression that our most important problem will be “running out” of oil. Because of this, they believe that oil prices will rise high if the system is reaching its limits. Since oil prices are not very high, they assume that the problem is far away. Once a person understands what the real issue is, it is (unfortunately) relatively easy to see that the current economy seems to be quite close to collapse.” —Gail Tverberg, Our Finite World
Gail Tverberg is an actuary interested in finite world issues – oil depletion, natural gas depletion, water shortages, and climate change.
“Oil limits,” notes Gail, “look very different from what most expect — high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.”
Articles about the economy can be a cognitive challenge for the untutored, which includes most of us, including myself. Gail faults economists for the much of the confusion: “Armed with a belief in endless growth, economists assume that the economy can expand year after year at close to the same rate. … Economists have played a major role in hiding problems with energy with their models that seem to show that prices can be expected to rise if there is a shortage of oil or other energy.”
So, dear reader, be prepared for a rough ride through Gail’s collection of slides that, in my opinion, do not end in a coherent tale of collapse. The prize — with effort, an improved understanding of the factors that help to explain “why the current economy is close to collapse,” — best taken in bite-size bits.
Below is my repost of an updated version of Gail Tverberg’s thesis that limits to growth are causing too low energy prices, which in turn will cause a decrease in energy extraction, which in turn will cause the economy to collapse. In her text, Gail provides images from a recent presentation she gave. A PDF of the presentation can be downloaded here: Tverberg-Collapse-Presentation-Final-1.
My report below includes Gail’s complete report and copies of all 33 of her slides. I have added my subheadings, text highlighting, some hyperlinks, and some bulleted formatting. To read her original piece on her website, click on the following linked title.
Why Collapse Occurs; Why It May Not Be Far Away by Gail Tverberg, Our Finite World, February 25, 2021
Why collapse occurs — piecing together the story over many years of study
Collapse is a frightening subject. The question of why collapse occurs is something I have pieced together over many years of study from a number of different sources, which I will attempt to explain in this post.
Early warning signs of collapse
Collapse doesn’t happen instantaneously; it happens many years after an economy first begins outgrowing its resource base. In fact, the resource base likely declines at the same time from multiple causes, such as soil erosion, deforestation and oil depletion. Before collapse occurs, there seem to be warning signs, including:
Running out of oil will not be our most important problem
Many people have the misimpression that our most important problem will be “running out” of oil. Because of this, they believe that oil prices will rise high if the system is reaching its limits. Since oil prices are not very high, they assume that the problem is far away.
Once we understand the “real issue” we will grasp why the current economy is close to collapse
Once a person understands what the real issue is, it is (unfortunately) relatively easy to see that the current economy seems to be quite close to collapse.
Our economy is a self-organizing physics-based system
In some ways, a self-organizing system is analogous to a dome that might be built with a child’s toy building set (Slide 4).
Harnessing many types of energy drives economic growth
Resources of many kinds are needed for an economy. Harnessing energy of many types is especially important. Early economies burned biomass and used the labor of animals. In recent years, we have added other types of energy, such as fossil fuels and electricity, to supplement our own human energy. Without supplemental energy of various kinds, we would be very limited in the kinds of goods and services that could be produced. Our farming would be limited to digging in the ground with a stick, for example.
Workers are happy when they have the money to buy and consume goods and services
The fact that there is almost an equivalence between employees and consumers is very important. If the wages of consumers are high, relative to the prices of the goods and services available, then consumers are able to buy many of those goods and services. As a result, citizens tend to be happy. But if there are too many low-paid workers, or people without work at all, consumers are likely to be unhappy because they cannot afford the basic necessities of life.
Civilizations’ problem – growing population and degraded or depleted resources
The problem civilizations are facing is a two-sided problem: (1) Growing population and (2) Resources that often degrade or deplete. As a result, the amount of resources per person falls. If this were carried to the limit, all of us would starve.
Over time, technological fixes and other added complexity deliver diminishing returns
As resources deplete and population grows, local leaders can see that problems are on the horizon. At first, adding technology, such as a new dam to provide water to make farms more productive, helps. As more and more technology and other complexity is added, there is less and less “bang for the buck.” We can easily see this in the healthcare field. Early antibiotics had a very big payback; recent medical innovations that help a group of 500 or 1000 people with a particular rare disease can be expected to have a much smaller payback.
And added complexity increases wealth disparity between the classes
A second issue with added complexity is that it increasingly leads to a society of the very wealthy plus many very low paid workers. Joseph Tainter identified the combination of these two issues as leading to collapse in his book, The Collapse of Complex Societies.
The unequal distribution of resources is a function of individual, group, societal, global survival fitness
The issue of starving people in Yemen is an issue today. In fact, hunger is an increasing problem in poor countries around the world. The world tourism industry is dead; the industry of making fancy clothing for people in rich countries is greatly reduced. People who formerly made a living in these industries in poor countries increasingly find it difficult to earn an adequate living with other available jobs. Rich countries tend to have better safety nets when there are widespread reductions in job-availability.
Increasing complexity drives the need for a financial system to manage the shifting value of goods and services over time
Businesses often make long lasting goods such as machines to be used in factories or automobiles to be used by consumers. Governments often make long-lasting goods such as paved roads and school buildings. When making these goods, they take some combination of commodities, built machinery, and human labor to make goods and services that people will use for many years into the future. The future value of these goods is hoped to be significantly greater than the value of the inputs used to create these goods and services.
There are at least three reasons that time-shifting devices are needed:
I don’t mention the issue in Slide 9, but once time-shifting devices are created, they become very easy to manipulate. For example, no one knows precisely what the future value of a particular investment will be. Governments, especially, are prone to make investments in unneeded infrastructure, simply to provide jobs for people. We also know that there are diminishing returns to added technology, but stocks of technology companies tend to be valued as if complexity will save the world. Third, interest rate manipulations (lower!) and the offering of debt to those who seem unlikely to be able ever to repay the debt can be used to make the economy of a country appear to be in better shape than it really is. Many of us remember the collapse of the US subprime housing debt bubble in 2008.
With all the issues created by a financial system in a complex society, workers at the bottom are the losers
The purpose of a financial system is to allocate goods and services.
With all of these issues, the workers at the bottom of the employment hierarchy increasingly get left out of the distribution of goods and services made by the economy.
As resource limits take root, more conflict is likely
We know some of the kinds of things that happen when economies are close to collapse from the writings of researchers such as Peter Turchin, lead author of Secular Cycles, and Joseph Tainter, mentioned earlier. One approach is for governments to try to work around the resource problem by starting wars with other economies whose resources they might gain. Probably a more likely outcome is that these low-resource-per-capita economies become vulnerable to attack by other economies because of their weakened condition. In any event, more conflict is likely as resource limits hit.
Low incomes of non-elite workers trigger bad outcomes
If the low incomes of non-elite workers persist, many bad outcomes can be expected.
Most people seem to believe that our economy will grow endlessly
Much of what peak oil theory misunderstands is what our society as a whole misunderstands. Most people seem to believe that our economy will grow endlessly unless we somehow act to slow it down or stop it. They cannot imagine that the economy comes with built-in brakes, provided by the laws of physics. Armed with a belief in endless growth, economists assume that the economy can expand year after year at close to the same rate.
Low workers’ wages can drive down energy prices too low for producers
Modelers of all kinds, including climate modelers, miss the natural feedback loops that lead to the end of fossil fuel extraction without any attempt on our part to stop its extraction. A major part of the problem is that added complexity leads to too much wage and wealth disparity. Eventually, the low wages of many of the workers filter through to oil and other energy prices, making prices too low for producers.
As resources-per-capita fall, ways are found to keep problems hidden from citizens
Collapse isn’t instantaneous, as we will see on Slide 26. As resources per capita fall too low, there are several ways to keep problems hidden.
But major problems, especially climate-related events, are difficult to hide
It is only when the economy hits a bump in the road (such as a climate-related event) that there suddenly is a major problem:
Economists have played a major role in hiding energy-related problems with their models
Economists have played a major role in hiding problems with energy with their models that seem to show that prices can be expected to rise if there is a shortage of oil or other energy.
Models can miss or overlook importance of supplemental energy
Their models miss the point that adequate supplemental energy is just as important for demand as it is for supply of finished goods and services. The reason energy is important for demand is because demand depends on the wages of workers, and the wages of workers in turn depend on the productivity of those workers. The use of energy supplies to allow workers to operate tools of many kinds (such as computers, trucks, electric lights, ovens, and agricultural equipment) greatly influences the productivity of those workers.
Substitution of renewables for fossil energy is inherently high cost if continuity of supply is required
A person who believes energy prices can rise endlessly is likely to believe that recycling can increase without limit because of ever-rising prices. Such a person is also likely to believe that the substitution of intermittent renewables for fossil fuels will work because high prices for scarce electricity will enable an approach that is inherently high-cost, if any continuity of supply is required.
Confusion is caused by building models based on past history
Thus, the confusion isn’t so much that of peak oilers. Instead, the confusion is that of economists and scientists building models based on past history. These models miss the turning points that occur as limits approach. They assume that future patterns will replicate past patterns, but this is not what happens in a finite world. If we lived in a world without limits, their models would be correct. This confusion is very much built into today’s thinking.
Few are aware that we are living in an economic system/ecosystem on a finite planet with built-in brakes
In fact, we are living in an economic system/ecosystem that has brakes to it. These brakes are being applied now, even though 99%+ of the population isn’t aware of the problem.
The system will protect itself, quite possibly using the approach of evicting most humans.
Mistaken beliefs of “peak oilers” and biophysical economists
The opinions expressed in Slide 13 reflect some of the views I have heard expressed speaking with peak oilers and with people looking into issues from a biophysical economics perspective. Obviously, views differ from person to person.
Gail Tverberg shares her view
My view is that
More thought from Gail
On Slide 14, note that
Low-wage workers will be hard-pressed to cover all rising costs
An important issue to note is that wages need to cover all the rising costs, even the rising cost of health care. The paychecks of many people, especially those without advanced education, fall too low to meet all of their needs.
Slides 16 and 17 describe some of the reasons why oil prices don’t necessarily rise with scarcity.
2015 oil study forecast future prices in $100 to $120 per barrel range
I was one of the co-authors of the Ke Wang paper mentioned in Slide 18. We developed three different forecasts of how much oil would be extracted in China, depending on how high oil prices would be able to rise. The Red Line is the “Stays Low” Scenario, with prices close to $50 per barrel. The Yellow Line is the “Ever Rising Price” Scenario. The Best Estimate reflects the expectation that prices would be in roughly the $100 to $120 barrel range, from 2015 onward.
In fact, oil prices have stayed fairly low, and China’s oil production has declined, as our paper predicted.
Wage disparity today is back to what it was in 1920s before the Great Crash of 1929
Note that the chart on Slide 21 shows wage disparity only in the US. On this basis, the share of wages going to the top 1% and top 0.1% are back at the levels that they were in the 1920s. Now, our economy is much more global. If we consider all of the low income people in the world, the worldwide wage disparity is much greater.
In inflation adjusted terms, oil producers seem to need very high prices of ~ $120 per barrel
There are two things to note on Slide 22. The first is that producers, in inflation-adjusted terms, seem to need very high prices, approximately $120 per barrel or more. This is based on a presentation made by Steve Kopits, which I wrote up here: Beginning of the End? Oil Companies Cut Back on Spending.
Oil prices tend to bounce around a great deal
The other thing to note is that oil prices tend to bounce around a great deal. Prices seem to depend on the amount of debt and on interest rates, as well as the wages of workers. The peak in oil prices in mid-2008 came precisely at the time the debt bubble broke with respect to mortgage and credit card debt in the US. I wrote about this in an article in the journal Energy called, Oil Supply Limits and the Continuing Financial Crisis.
Despite recent Quantitative Easing, oil prices are far below the $120 per barrel level predicted in 2015 study
The US instituted Quantitative Easing (QE) at the end of 2008. QE acted to lower interest rates. With the help of QE, the price of oil gradually rose again. When the US discontinued QE in late 2014, oil prices fell. Recently, there has been a great deal of QE done, as well as direct spending by governments, oil prices are still far below the $120 per barrel level. Middle Eastern oil producers especially need high oil prices, in order to collect the high tax revenue that they depend upon to provide programs for their citizens.
Coal prices also need to be high enough for producers but not too high for consumers
Coal prices (Slide 23) tend to follow somewhat the same pattern as oil prices (Slide 22). There is very much the same balancing act with coal prices as well: Coal prices need to be high enough for producers, but not too high for customers to buy products made with coal, such as electricity and steel.
China keeps its coal prices high to support local producers, but high prices attract coal exporters
China tries to keep its coal prices relatively high in order to encourage production within the country. China has been limiting imports to try to keep prices high. The relatively high coal prices of China make it an attractive destination for coal exporters. There are now a large number of boats waiting outside China hoping to sell coal to China at an attractive price.
Limiting energy consumption solely to renewables would likely drive down consumption
The blue line on Figure 24 represents total energy consumption up through 2020. The red dotted line is a rough guesstimate of how energy consumption might fall. This decline could happen if people wanting energy consumption coming only from renewables were able to succeed by 2050 (except I am doubtful that these renewable energy types would really be of much use by themselves).
Might the pandemic be part of a coming collapse caused by our self-organizing economy?
Alternatively, this might also be the decline that our self-organizing economy takes us on.
Graph reflects distressing impact of slowdown of energy production as reflected in standard of living from 1830 to 2020
Slide 25 takes the blue line from Slide 24 and looks at what happened in more detail. On Slide 25, we are looking at the average annual increase in energy consumption, [in 10-year intervals from 1830 to 2020]. This is split between the rate of population growth (blue), and the energy consumption growth that went into other things, which I equate to change in “standard of living” (red). The big red humps represent very good times, economically. The post-World War II bump is especially high. The valleys are times of disturbing changes, including wars and the collapse of the Soviet Union.
If bad things happened when oil consumption was rising, what might happen when energy consumption falls?
Of course, all of these situations occurred during periods when energy consumption was generally rising. If these unfortunate things happened when oil consumption was rising, what might possibly happen when energy consumption is falling?
We now seem to be hitting the Crisis Stage – In past crisis times, collapse took 20 or more years
We now seem to be hitting the Crisis Stage. In the past, collapse (which takes place in the Crisis Stage) has not been instantaneous; it has taken place over quite a number of years, typically 20 or more.
But the world economy is quite different now, and collapse could happen more quickly
The world economy is quite different now, with its international trade system and heavy use of debt. It would seem likely that a collapse could happen more quickly. A common characteristic of collapses, such as avalanches, is that they often seem to start off fairly slowly. Then, suddenly, a large piece breaks away, and there is a big collapse. Something analogous to this could possibly happen with the economy, too.
Low pricing of electricity from intermittent renewables can bring down the electric grid
One of the major issues with adding intermittent renewables to the electric grid is a pricing problem. Once wind and solar are given subsidies (even the subsidy of “going first”), all of the other types of electricity production seem to need subsidies, as well. It is the pricing systems that are terribly detrimental, although this is not generally noticed. In fact, researchers who are looking only at energy may not even care if the pricing is wrong. Ultimately, the low pricing for electricity can be expected to bring the electric grid down, just as inadequate prices for fossil fuels can be expected to lead to the closure of many fossil fuel producers. Both Texas and California are having difficulty because they have not been collecting enough funds from customers to build resilient systems.
Why measures of energy returned on energy invested can be misleading
The focus of ERoEI [Energy Returned on Energy Invested] research is often with respect to whether the ERoEI of a particular type of energy production is “high enough,” relative to some goal, such as 3:1 or 10:1. I believe that there needs to be more focus on the total quantity of net energy produced. If there is a EROEI goal for highly complex energy types, it needs to be much higher than for less complex energy types.
Today, it is common to see the ERoEIs of a number of different types of energy displayed side-by-side as if they were comparable. This type of comparison is also made with other energy metrics, such as “Levelized Cost of Electricity” and “Energy Payback Period.”
Going forward, low rather than high energy prices should be expected because the economy is in decline
Earlier in this post, I documented a number of reasons why we should expect low rather than high energy prices in the future. I am reiterating the point here because it is a point energy researchers need especially to be aware of. Production is likely to come to an end because it is unprofitable.
Vulnerability accompanies human-made complexity
One characteristic of human-made complexity is that it has very little redundancy [back-up].
Moreover, collapse is followed by less complex systems
We know that collapse tends to lead to less complex systems.
It’s too late for humans to stop climate change
The climate is indeed changing. Unfortunately, we humans have little ability to change what is happening, especially at this late date. Arguably, some changes could have been made much earlier, for example in the 1970s when the modeling included in the 1972 book The Limits to Growth by Donnela Meadows and others showed that the world economy was likely to hit limits before 2050.
And evidence abounds that the world economy is struggling
It is clear to many people that the world economy is now struggling.
Intermittent wind and solar will not be our salvation
The “easy” solution to offer is that intermittent wind and solar will solve all our problems, including climate change. The closer a person looks at the situation, this solution is simply nonsense.
The book Rare Earth: Why Complex Life Is Uncommon in the Universe by Peter Ward and Donald Brownlee points out that there have been an amazing number of what seem to be coincidences that have allowed life on earth to flourish on earth for four billion years. Perhaps these coincidences will continue.
Perhaps there is an underlying [self-organizing] plan that we are not aware of.
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