RSS

Advertisement

Reality Check: We’re In a Bad Spot

  • Written by Syndicated Publisher No Comments Comments
    October 25, 2012

    After traveling some, speaking with lots of people, reading, and digesting, I cannot escape the conclusion that things remain hopelessly off track.  Whatever form of ‘recovery’ is being sought here simply will not arrive.

    The core of my views is shaped by the idea that the very thing being sought, more economic growth (and exponential growth, at that), is exactly the root of the problem.  I suppose I would take a similarly dim view of an alcoholic trying to drink their way back to health as I do the increasingly interventionist central bank and associated political policies the world over.

    Go on then, drink more, but I think we all know what the result will be.

    The most pressing concept at the center of it all is the idea of net energy, or the energy returned on energy invested.  As I explained in the Crash Course, the price of energy is not really the most pressing that we need to keep track of.  Instead, what we care about is the net, or surplus, energy that is returned from our energy exploration and production efforts for society to do with as it wishes.

    Figure 1:  This hypothetical chart reveals the energy returned (green area) on energy invested (red part) and postulates what trying to live in a world of 3:1 energy returns would look like visually.  Where petroleum finds of just a few decades ago where offering 95% or greater returns on energy invested, a future of 3:1 oil offers just a 66% return.

    The above chart reveals the world towards which we are rapidly moving with new petroleum finds being deeper, tighter, smaller, and generally more difficult to get to and extract, thereby offering lower net energy returns than in the past.

    If there’s less ‘green area’ in which to organize ourselves, then we will simply have to do fewer things.  However, the idea that we are going to get increasing amounts of exponentially-growing economy in conjunction with falling net energy is simply nuts.  It is insane, or at least developmentally immature.

    Predictions for a World of Declining Net Energy

    The world around me makes a lot more sense when I think about it in terms of net energy and where we are in that story.   Everywhere I go, I simply see oil, oil, and more oil, expressed in jets in the air, cars and trucks on the road, abundant and varied food types at every time of the year, and stores crammed with consumer goods from hither and yon.  We truly live in the age of abundance.

    Yet that abundance is heavily subsidized by petroleum as well as other fossil fuels.

    Where the prior 150 years were defined by ever-increasing amounts of both gross and net energy, a remarkable experience unlikely to ever again be replicated, the next 150 will be defined by its exact opposite.

    The predictions for living in such a world are impossible to make in terms of timing and magnitude, but the trends and direction can be pinned down.

    The big picture items are these:

    • Living standards are going to fall.  Ever-rising gross and net amounts of energy provide the essential building blocks for rising living standards, both directly through the goods and services brought to our doorsteps, such as food and warmth and mobility, and indirectly by allowing lots and lots of people to deploy their talents to things other than securing the basics.  In fact, this process has already begun; it will follow the ‘outside in’ model where the weaker elements of society and the weaker nation states will absorb the first effects of ‘less than there used to be.’
    • Inflation will come.  Because of the tendency of humans to try and print their way out of trouble, and because the system is now so saturated with debt that ‘allowing’ it to crumble to meet the realities of a world of less would risk a catastrophic systemic collapse of institutions and ruling parties, there’s not much doubt that sooner or later all this will end in a very scary round of inflation.  Some currencies will not survive at all, and the areas served by them will experience hyperinflation first and complete monetary destruction second.
    • Stocks and bonds will fail to generate real returns.  Real returns, meaning positive growth in the value of stocks and bonds after inflation is subtracted, are an impossibility in a world where the economy is not growing in real terms.  You have to have real growth in the economy if you want real growth in stocks and bonds (in aggregate, that is).  Stripping away all of the gobbledy-gook, real GDP growth is simply not possible without real increases in real things – and those depend, in very large measure, on how much net energy there is to go around.  With declining net energy, there will fewer things to sell and do.
    • Retirements will be postponed, if they happen at all.  It is only the very recent generations that have been afforded the reality of this thing called ‘retirement,’ which is the idea that you can live off of one’s prior savings and investments for a decade or three, consuming and not producing the whole time.  Not so coincidentally (to me, at any rate), retirement and the exploitation of fossil fuels came along at roughly the same time.  That is, with enough ‘green area,’ we humans can do anything at all that we want with all that surplus energy. We can go to the moon, we can take long holidays to distant places, we can host Olympics, we can retire or do any of a billion other things.  For many, especially those at the margins of society, retirement will simply not be an option.  Retirement as a concept, and these individuals specifically, will be casualties of circumstances.
    • We’re just going to do fewer things and produce less stuff.  What exactly will go away as the green area gets pinched downwards is impossible to predict, as much will depend on decisions that have not yet been made.  Perhaps we’ll do something completely surprising with our remaining energy, channel the spirits of Easter Island, and build some huge yet frivolous monuments to ourselves.  Perhaps we’ll squander the last bits of good energy on bad wars that end up destroying infrastructure that could only be built when there was enough surplus to go around.  Or maybe we’ll get it right and choose a future that we can strive for and use our remaining resources wisely to achieve those dreams. While the exact features are impossible to predict, we can say that the map of our territory will shrink.  We won’t be able to do everything, or even very many things as compared to before.
    • More resources will be dedicated to and consumed by the energy sector.  One easy observation to make is that if net energy is declining, then we are going to be spending more of our energy wealth on the process of obtaining more energy.  This is one great field to be in, whether in the production side or the efficiency side.  If it takes more and more energy to get energy, what does that mean?  It means more drilling, pipelines, processing facilities, and all of the thousands of job types and millions of parts and components that are needed to get the energy out of the ground and to market.  As prices inevitably rise, the desire (if not the necessity) of using energy more efficiently will skyrocket.  Everything in the entire “built” environment, from commercial and residential buildings, to factories, to how we move ourselves around, and the water we drink will be targets for improvements and enhancements.  If you are thinking of a career to move into, the energy sector is a great place to start.

    Eyes Wide Shut

    I think we’re in a bad spot.  I mean the globe here, but the developed economies in particular.  I am losing hope that we will navigate towards anything other than a hard landing at some point because even with copious amounts of data accumulating suggesting that the old ways are not working, I cannot detect even the slightest hint of original thinking or new thoughts coming out of the marbled halls of power.

    Business-as-usual and more-of-the-same seem to be the only operative ideas right now.  And that’s not really unexpected; systems always try to preserve themselves long after it should be obvious that a new tack is in order.  So there’s nothing really surprising here about where things seem to be headed.

    But what is a bit startling to me is the number of individuals that have not yet caught onto the idea that things have permanently and irrevocably changed.

    In Part II: If We’re Ever Going to Take Control of Our Destiny, the Time is Now we take a deeper look at the dangers of inaction and explore the key question: What steps should we be taking right now to enter this new future at any other trajectory than a collision course?

    Click here to read Part II of this report (free executive summary; paid enrollment required for full access).

    Images: Flickr (licence attribution)

    About the Author

    Executive summary: Father of three young children; author; obsessive financial observer; trained as a scientist; experienced in business; has made profound changes in his lifestyle because of what he sees coming.

    First of all, I am not an economist. I am trained as a scientist, having completed both a PhD and a post-doctoral program at Duke University, where I specialized in neurotoxicology. I tell you this because my extensive training as a scientist informs and guides how I think. I gather data, I develop hypotheses, and I continually seek to accept or reject my hypotheses based on the evidence at hand. I let the data tell me the story.

    It is also important for you to know that I entered the profession of science with the intention of teaching at the college level. I love teaching, and I especially enjoy the challenge of explaining difficult or complicated subjects to people with limited or no background in those subjects. Over the years I’ve gotten pretty good at it.

    Once I figured out that most of the (so-called) better colleges place “effective teacher” pretty much near the bottom of their list of characteristics that factor into tenure review, I switched gears, obtained an MBA from Cornell (in Finance), and spent the next ten years working my way through positions in both corporate finance and strategic consulting. From these experiences I gather my comfort with numbers and finance.

    Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedInPin on PinterestShare on RedditShare on TumblrDigg thisBuffer this pageFlattr the authorEmail this to someonePrint this page

Advertisement