Crash Course Chapter 22: Energy & The Economy

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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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