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Energy & The Economy - Crash Course Chapter 22

Why society will be forced to become less complex
Friday, November 21, 2014, 9:17 PM

Chapter 22 of the Crash Course is now publicly available and ready for watching below.

In the past few chapters on Energy Economics, Peak Cheap Oil, and the false promise of Shale Oil, we've gone into great detail to show how our economic growth is deeply dependent on our energy systems.

Here’s how it all sums up. There are some knowns:

We know that energy is required for both growth and complexity.  We know that surplus energy is shrinking.  We know that the age of cheap oil is over.  And we know that because of this oil costs will consume an ever-greater proportion of our total budget.

And with these known facts, come along specific risks.  There is the risk that our exponential money system will cease to operate in a world of declining energy surplus.  It is designed for a world without limits – a world of endless growth.

And there is the risk that our society will be forced to become less complex - a loaded statement if ever there was one.

Each one of these known facts adds to each one of the stated risks and that is what The Crash Course is about: assessing those risks and deciding what, if anything, a prudent adult should do about adapting to these realities and facing these risks. 

Putting these together, the predictions in video below become so easy to make they don't feel like predictions at all; just inevitable facts.

For the best viewing experience, watch the above video in hi-definition (HD) and in expanded screen mode

Coming next Friday: Chapter 23: Energy & The Environment: Depleting Resources

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

Transcript: 

OK – now we are ready to complete our tying of the Economy to Energy. Finally!

Economics has been defined as the   science of satisfying unlimited human demands with limited resources. 

Given our druthers, most humans would choose to live the life of a billionaire; but this is clearly not possible even with our current massive abundance of surplus energy.   

Luckily for us, we’ve had massive amounts of surplus energy to work with over the past 100 years and many people enjoy lifestyles that would be the envy of kings and queens not too long ago.

Okay - here’s where the story gets really interesting.  Remember   all these exponential graphs?

In theory there’s nothing problematic with living in a world full of exponential growth and depletion curves – as long as the world does not have any boundaries. 

However, exponential functions take on enormous importance when they approach a physical boundary   as seems to be the case for oil, water, soil and numerous other essential resources in the near future. 

As in our stadium example where the fixed volume of the facility dictated that the last few minutes would be very exciting to anyone sill handcuffed to their bleacher seat, there are numerous examples from the natural world where fixed limits are in plain sight.

Population, Money and Oil demand are all exhibiting exponential behavior. 

Of the three we can make a very strong case that both population and our money system are utterly dependent on   the continued expansion of oil energy.  It’s not the other way around.

And here are   the questions that arise from that line of thinking.   What if our exponentially based economic and monetary systems, rather than being the sophisticated culmination of human evolution, are really just   an artifact of oil? 

What if all of our rich societal complexity, advanced technology, and all of our trillions of dollars of currency and debt simply are the human expression of surplus energy pumped from the ground? 

As a scientist, there is no doubt in my mind that we owe nearly all of our progress over the past 150 years to our discovery and use of fossil fuels.

We are perfectly within our rights to wonder what will happen when, not if, but when the total net, or surplus, energy from oil   begins to decline.  What will happen to our exponential, debt-based money system during this period? 

Is it even possible for it to function in a world without constant growth?  The evidence so far says that the answer to that question is “no!”

My opinion is that the financial instability we are now experiencing is due at least in part to the early stages of this process. 

Our complex monetary and associated economic system only knows growth and it is now struggling with low growth, and the adaptation process is proving to be confusing and difficult. 

I can even drum up some sympathy for the various economists at the world’s central banks who are certainly confused by why their massive monetary injections have not worked as they expected. 

These poor folks have never studied energy. They are unfamiliar with hard limits, and have no models that include declining net energy and therefore no way of knowing the real reason their policies are increasingly impotent.

By placing oil consumption on a 4 thousand year timeline, all sorts of troubling questions become apparent   especially when we overlay a population curve on top of it.

These overlaid charts say that the most important conversation we need to be having globally pertains to population. 

We should have some idea of exactly how many people can be supported in a post fossil fuel world and then figure out how to get there equitably and humanely.

Perhaps those studies will show that we can support 7, or 8 or even 10 billion people.  Or perhaps they will show a far lower number. 

The point I am making is that no such official investigating is being undertaken, and at this point, we’re flying blind.

But, given the fact that there are 10 fossil fuel calories baked into every food calorie, a betting person would place money on the idea that there’s a large and worrisome gap between even the current world population and how many could be fed without the aid of fossil fuels.

And another thing… isn’t it a remarkable coincidence that an exponential form of central bank monetary creation just happened to come into maturity at precisely the same time that the world’s most important abundant and exponentially exploitable energy source had come into being?

Fiat money systems have come and gone but this one had a trillion-barrel energy tailwind that allowed it’s mathematical unsustainability to carry on for far longer than usual.

Distributing ever-larger shares of money during a period of constant growth is a pleasant job that enjoys broad political and popular support. 

Operating in a world of declining energy is an utterly new prospect   for every single political and financial institution. 

It makes the science of meeting unlimited demand with limited resources even trickier - if not impossible - if the people in charge of operating the system are not up to the task.

In the absence of any coherent national or global discussion about the implications of all this, it is up to you and me to wonder what we should expect in the future from a money system that assumes infinite growth.

What if the assumption   “that the future will not just be bigger but exponentially bigger, than the present” is incorrect?   What then?

This assumption is on full display in the debt chart of the US as compared to GDP.  The red circle betrays a profound belief that the future will be much, much larger than the present. 

Consider that at the end of 2013 the GDP of the US was just over $16 trillion dollars while the total credit market debt of the US stood at more than $57 trillion dollars. 

Lop off a few zeros and round things off and this is the same as considering making a loan of $57 thousand dollars to a person earning $16 thousand dollars. 

To continue an earlier metaphor, if we knew that the current tax bracket of that borrower was going to double and then triple, would we be more or less inclined to make that loan? 

To our nation the end of cheap oil means, a sustained and permanent reduction in our after-tax take home pay.

My question is, who in their right mind loans more and more money to someone whose earnings are all but guaranteed to decline?

Here’s how it all sums up. There are some knowns. 

We know that energy is required for both growth and complexity.  We know that surplus energy is shrinking.  We know that the age of cheap oil is over.  And we know that because of this oil costs will consume an ever-greater proportion of our total budget.

And with these known facts, come along specific risks.  There is the risk that our exponential money system will cease to operate in a world of declining energy surplus.  It is designed for a world without limits – a world of endless growth.

And there is the risk that our society will be forced to become less complex - a loaded statement if ever there was one.

And finally there is the risk that even as oil winds down, the momentum of the money system will create conditions ripe for hyperinflation.

Each one of these known facts adds to each one of the stated risks and that is what this course is about; Assessing those risks and deciding what, if anything, a prudent adult should do about adapting to these realities and facing these risks. 

When I put these together I feel comfortable making   the following predictions.  Remember, I reserve the right to change these with the arrival of new information at a later date. 

Number 1:  The status quo will be preserved at all costs.  Politicians will hide the truth, economic statistics will become even fuzzier, and central banks will continue to throw more and more money at a system that, at its core, is out of tune with reality. 

Number 2: given the likely responses by those in power, the most likely eventual result will be hyperinflation.  The price of anything   is a function of how many dollars are floating around matched against how much of that product, or good, happens to be available. 

Because literally every single failed fiat currency regime has failed for the same reasons, we can reasonably conclude that   the future will be filled with ever more dollars.  At the same time, declining surplus energy will assure that there are fewer   goods floating around. 

Together, these spell inflation.

Number 3: Standards of living will decline.  This is the logical product of #1 and #2. However, I am living proof that even as ones standard of living declines one’s quality of life can go up.

So this is not a story with a certain and tragic ending, it is a story of change.  For those who can see the changes coming and position themselves for it, I am convinced that a fulfilling, enjoyable, and prosperous life awaits.

Yes, it is entirely possible that the issues I have raised here will play out over many years, or even decades, and almost certainly will be influenced by changes in behavior and technology.  

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8 Comments

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 654
Energy and Economy

Once again I refer our community to my prior posts about The Colder War: How the Global Energy Trade Slipped from America's Grasp.

The following article is an example of how the on-going and seemingly "eternal" wars in the Middle East will keep on playing into Putin's hands--he LOVES haven't the USA bogged down there while he continues to accumulate more and more energy sources, creating a stranglehold on energy supplies to either the West or the East, just imagine if gas is cut off to Europe in the winter!!

How the United States can counter the ambitions of Russia and China

The unraveling of the Middle East under the weight of the Sunni-Shiite rivalry and the rise of the Islamic State is enough of a national security challenge to keep the United States busy for a decade or more. But with more and more American advisers on the ground in Iraq — and a steady stream of videotaped atrocities on the Internet — there is a risk that Washington will once again revert to a foreign policy focused disproportionately on that region.

Read full article >>

 

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 654
Do all of you read the NYTimes everyday?

Just in case you are too busy or do not partake, here is a REALLY GOOD one for our concerns:

"Fed Has Plan to Tighten Commodities Regulation," by Nathaniel Popper.  Warren and even McCain and Levin are on the right tract.  The Graham-Leach-Bliley Act of 1999 MUST re restored.

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 654
OOOOPs

That bill referred to above should be RESCINDED, in other words, we need to RESTORE the legal provision that separated investment banking and commercial banking, and take away the ability of banks to jump into holding physical commodity assets.

Sorry, guys.

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 492
But, given the fact that

But, given the fact that there are 10 fossil fuel calories baked into every food calorie, a betting person would place money on the idea that there’s a large and worrisome gap between even the current world population and how many could be fed without the aid of fossil fuels.

I started a back-of-the-envelope calculation along these lines with regards to biofuels, and I hope to fine tune it a bit later (I'm a debt save myself and have little free time -- my darn electric car). It's quite a bit simpler than the food calculation because food has so many variables involved and more complex consumer energy inputs.

Basically, I wanted to see if it would be possible to continue something like the industrial high production agriculture we enjoy today, when we run out of fossil fuel inputs. Could we take the increased production of biofuels from industrial agriculture, and divert a portion of that back into the farm to keep the increased yields going, but also allow an excess of biomass (energy) to be net available to the rest of society? After all, fertilizers are nitrogen, not carbon. The answer seems to be no, or little. The amount of energy required to keep that biofuel farmland producing at full crank (energy needed for machinery, fertilizers, and then you also have to account for an efficiency factor needed to convert that biomass into useful hydrocarbons that can be used by future fertilizers and equipment), and you basically get a closed loop. All the energy available from harvest would have to go back into feeding the inputs. Of course, while ecologically possible, economically this is impossible because there would be no revenue stream to pay for all the fertilizers and equipment..., since the farm would net produce no energy or biomass. But I want to firm this calculation up before making any grand claims.

treebeard's picture
treebeard
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Joined: Apr 18 2010
Posts: 609
complexity?

I think that we need to rethink what we mean by complexity. Old wine in new skins. We are using more "complex" means to maintain a blunt and unconscious view of the world.  Think of a combine running across a field guided by GPS. There is complexity in the computer system the guides the equipment, complexity in the machinery itself, complexity in the system that extracts and delivers the fuel that allows the machine to run.  Complexity in the lab the creates the genetically modified seeds.  But is there complexity in the relationship between the man in the air conditioned combine cab and the soil below the machine?  What is all this complexity for?  Are all complex systems alike?  Are not natural systems complex to the point they defy our understanding?

They say that a New York City side walk has more biological complexity than an Iowa corn field.  Industrial agriculture has rendered the soil a lifeless medium that now only provides physical support for the plants that grow upon it.  The complex biology of the land has been destroyed along with the relationship with those who live and worked on it.  Our supposed "complexity" has created a barren wasteland of "simplicity".  Why?

We have certainly reached a level of understanding that has allowed us to gain the power to inflict our wills on the world and each other. But these only have seemed to create a level of violence, destruction and despair that the world has never seen before.  We have lurched from the fear of self inflicted nuclear annihilation to the fear of creating an uninhabitable planet through climate change.  Is this the result of increased complexity or is there something else going on.  Why has the increased supposed "complexity" of human systems created so much conflict with the complex natural systems that support us?  If energy is removed from human created systems will the complex natural system regain there vigor and abundance.  Will present mass extinction that is underway stop, will the assault on biological diversity stop?  What is appears to be simple is complex and what appears to be complex is simple. 

 

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 492
Interesting thoughts
Interesting thoughts Treebeard. My understanding of the concept of "complexity" would be that back in Medieval times, before we had much in the way of technology and readily available energy, we as a species were no different than hares or any other animal -- most all of our energy came from plants that grew on the land. There was little or no artificial agricultural stimulation like we have today, so plant production was limited, and therefore so was our population. Toiling in the fields to eek out an existence required a lot of manual labour and this is what provided a lot of jobs for people, along with being a blacksmith or carpenter; everything took a lot of labour since it was all done by hand, with limited amounts of external energy slaves doing the work for us.
 
Then along came technology and fossil fuels. Which is the chicken vs. the egg I'm not sure but they came hand in hand. This had a couple effects on the labour market. One was that they "freed up" a lot of the labour required to do the previous manual jobs, like being a blacksmith, carpenter, or farmer. Automation greatly increased the productivity of an hour of human labour. Of course all this automation required more energy to run, i.e. fossil fuels. This "freed up" labour would otherwise now go unemployed, except that the other effect of an abundance of fossil fuels was that it provided a place for those people to get jobs doing things not directly related to toiling away at the natural world or its products; they could instead work at jobs that made society more "complex".
 
So there were two ways to address this newfould unemployment from the twin gifts of automation and fossil fuels: 1) economic growth, so that we "produced" a lot more stuff to offset the increased efficiency of an hour of human labour. Along with this, we had to find jobs for all the newly unemployed so that increased demand for those products would match increased production. This is something all economists are proud of and point to as what we should be striving for today. Of course, this has had predictable results on the biosphere which supports all that growth. 2) Those unemployed people moved into other, more "complex" modern jobs that weren't directly tied to manufacturing by hand the essentials of life -- a lot of them went on to jobs researching how to get additional natural resources out of the ground in the increasingly challenging resource depleted world. Other things like mindless entertainment for the masses, and IT (which really serves little purpose in terms of improving our material lives - it is in large part a diversion for most people) sucked up a lot of labour. Bureaucracy also took a lot of that labour. And of course, finance is now a huge portion of the workforce, which all has its roots in the new usurious monetary system that requires exponential growth to function. The point I think is that all of these extra "complex" jobs increasingly had less and less closeness with the fundamentals of life that most everyone used to work at.
 
John Michael Greer on The Archdruid Report has put out a series of posts lately characterizing how society falls from this complexity as resources decline. I actually disagree with him in a fundamental sense since he argues that it is this burden of parasitic bureaucracy, which he labels as "unproductive", which has to be supported by the "productive" people working in, say, agriculture, that can't be maintained as resources become scarce. I disagree with him because he is resting his argument on my pet peeve of differentiating between "productive" vs. "unproductive" labour, when in fact there is no difference. No labour "produces" anything; only plants do. And the "productivity" of a modern farmer, in terms of how many hours are required to "produce" a bushel of corn, is now higher than it's ever been, so the ability of that farmer to support "unproductive" bureaucracy is now higher than it's ever been.
 
I argue that this complex bureaucracy is not only not nearly as burdensome as some suggest, but is actually essential right now to keeping society together. Otherwise all those people would be unemployed. He suggests that this extra burden of bureacracy will have to be dismantled as energy runs short. I disagree since I haven't seen an explanation of why this bureaucracy is so burdensome to the rest of society when it is basically just clothing and feeding people that would otherwise be on welfare. We are not so short of energy right now that we cannot keep people fed and clothed (in fact, energy "production" has been increasing lately). Yet the "burden" of bureaucracy seems to be getting out of hand, which I argue is instead the result of the final stages of our current exponential monetary system in its dying days. This is the culmination of decades of wealth concentration into the hands of a few, resulting in dying consumer demand from the middle class. Also, Peak Oil causes prices to go up, which also kills demand. With less GDP, then the amount of tax revenues and intermediate money flows available to support the complex jobs decreases -- demand for some of the more useless high tech things like Playstations decreases, and as growth stops then the usurious financial system implodes and all those people lose their jobs. But the problem is, those people just end up on welfare and need to be supported there instead. So it's actually about wealth distribution, not total wealth, which is causing the bureaucracy to fail. Basically, the way the system is structured, wealth is only distributed to a large chunk of the population, say 50%, if the economy is growing. If it's not, then those people are out of luck. Simply put, the unemployment rate (whether that's manifested in parasitic bureaucracy or in welfare recipients) will not go down until technological automation reverses. The only other solution is to kill 50% of the population. This ultimately harks back to the fact that we are overpopulated.
 
Instead, I envision that this complex bureaucracy will actually at some point be PULLED apart as energy becomes scarce because then human labour will become more competitive against machines that do the work (but which require energy). So what we will probably see is a return to increased labour required to do things in the fields, or in blacksmithing. The one complication of this, though, is that human labour also requires energy in the form of food. So I'm not quite sure how this will play out.
darturtle's picture
darturtle
Status: Bronze Member (Offline)
Joined: Nov 24 2014
Posts: 29
Nuclear Energy

Like or not, regardless how Americans and Germans think, there are nations still embrace nuclear energy such as China and India.

Russia has a program that if you buy a nuclear power plant from it, Russia will help you dealing nuclear waste by allowing you to ship radio active waste back to Russia.

Can nuclear energy be used in automobile? yes and no. It can be done indirectly. For instance, it can be sued as energy source to convert corn or sugar cane into ethanol. Or, it can provide energy to electrolyte water into hydrogen and oxygen.

China simply doesn't play your game.

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 492
daturtle, many people are

daturtle, many people are pinning their hopes on nuclear energy. However, it must still pass the net energy return test in order to be of any use. That means that when you add up all the energy required to design, build, maintain, and provide fuel to the reactor (and all the components that went into it), that must still be significantly less than the amount of new energy it provides to us. That remains a big question mark, and since nuclear reactors aren't profitable right now without subsidies, it seems that they aren't very good net energy providers.

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