Aggregate total surplus energy (EROI) of all global energy sources has fallen to a catastrophically low level. The impact on the global economy over the last few decades has been an exponential increase in debt of all kinds, endless QE by central banks, and interest rates steadily declining to below zero.
The combination of energy and resource depletion coupled with the rapidly increasing debt load is causing the real global economy to contract, and this is totally incompatible with the “global financial money-creation-by-debt-with-compound-interest” system which has been in place for several centuries. This process is leading toward a structural failure of the global financial and economic system. No wonder that global financial authorities are increasingly talking about and planning for a “Financial Reset”
World-changing events are on the horizon. The storm of all storms is gathering. Ireland is one of the most indebted nations and will suffer very negative consequences from these changes.
Why is it that never before in human history has there been so much debt? “Government debt, corporate debt, shadow-banking debt, and consumer debt are all at record levels – not just in the US but all over the world”.
Why has it been necessary for Global Central Banks to print (QE) new debt amounting to almost $20 trillion since 2008, during a “recovery” and with no end to QE policy in sight?
Why is global debt increasing at a rate of approximately 4.5 X that of global GDP, an unbridgeable unpayable gap that has been continually exponentially increasing for the last 20 years?
Why, at the same time, have interest rates been steadily falling, and why are they now at an all-time low with widespread use of zero or negative interest rates? Why is the global economy patently struggling with low “growth rates” despite these drastic and in some case unprecedented financial stimulation measures? Why are many countries in or on the verge of recession and/or experiencing social upheaval? Why are an increasing number of experts and institutions warning of an impending catastrophic financial crisis?
Beneath layers of complexity often lie simple fundamentals. In the same way that a carpet with a complex pattern is made from a small number of coloured threads; the disintegrating fabric of our global economic and financial system is comprised of a few primary unravelling threads which are causing irreversible economic decline; a process which has profound implications regarding the very structure of the global financial system and our future wellbeing.
The story begins in the 17th C with the start of the industrial revolution. This was powered by increasing rates of discovery and use of fossil fuels; but also just as significantly, by the simultaneous widespread adoption of a financial system characterised by money creation by private and central banks in the form of “debt with compound interest”. Because debt with interest must be “repaid” on money that has been effectively imagined into existence, economies must continuously grow in order to pay the interest plus the “debt”. Thus the financial system requires, and cannot function without, continuous economic growth.
The Energy Factor
Without energy there can be no economy. The last three hundred years of exponential growth of the global industrial economy has been made possible by the apparently endless supply of cheap high-quality energy; and this bonanza has enabled the financial “debt-with-interest fractional reserve money creation system” to function and grow to its present enormous size (global debt approx. $250 trillion vs global GDP approximately $ 75 trillion).
The Primary Energy Source
Of all our energy sources, oil is still indisputably the primary energy source for the global economy (see reference to Government of Finland research mentioned later in this essay). Oil powers about 95% of all transport and provides the intense concentrated energy which enables most primary economic activities including resource extraction, agriculture, and infrastructure construction. All other energy production and use is also dependent on oil since it is required to mine, extract, manufacture, install and distribute the materials required for all other forms of energy production especially coal (35% of primary energy use), but including the wide range of “non-renewable, renewable energy harvesting machines” comprising hydro electricity generation, nuclear power stations, solar panels, wind turbines and biomass energy systems (which in total contribute less than 10% of global primary energy production). Even natural gas production is dependent on oil (extraction, equipment manufacture, pipelines, refining etc).
EROI = Surplus Energy
The production and use of energy requires energy. Whereas the amount of energy required to produce a barrel of oil from the Spindletop oil well in the USA in 1901 was minimal (oil gushed from the ground under pressure); the quality of oil has declined and it is increasingly difficult to extract and produce. Increasing amounts of energy, equipment, materials and manpower are required to produce the same nett amount of oil/energy required by the economy. In other words, a larger and larger fraction of the energy contained in a barrel of oil is required to produce it. This is known as EROI – Energy Return On (Energy) Invested or “Surplus Energy”.
As the easy cheap good-quality oil and other non-renewable energy sources is used up first, what is left requires more and more effort and energy to find, extract, refine and deliver the same amount of final (Net) energy – leaving less for the economy.
EROI/surplus energy of fossil fuels is now at very low levels.
Whereas the oil produced from Spindletop in 1901 had an EROI of around 200/250:1, a recent study by researchers at the University of Leeds UK (2), found that the EROI of all fossil fuels globally has now dropped to the horrifyingly low level of 6:1.
They found that the “average energy return on investment for all fossil fuels at the finished fuel stage declined by roughly 23 per cent in the 16 year period (we) considered. This decline will lead to constraints on the energy available to society in the not-so-distant future, and these constraints might unfold in rapid and unexpected ways”. This research is confirmed by others who show the EROI of various oil producers, some of which have EROI well below 6:1.
As EROI decreases, oil companies need to spend more on energy and materials, and the result of this trend is that the industry is under increasing financial pressure – especially those exploiting reserves of unconventional oil (US shale oil, Canadian tar sands), but including some of the largest global oil companies as exemplified by this recent report:
“ExxonMobil faces a crisis. ExxonMobil reported disappointing earnings for the fourth quarter and continues to cover its dividend by selling off assets and taking on debt. Goldman Sachs cut its outlook for Exxon to Sell from Neutral, and the bank raised doubts about Exxon’s long-term returns. Other analysts piled on. “Shareholder returns are poor, and debt is rising in a way that suggests that attractive dividends yields are unsustainable,” Paul Sankey of Mizuho Securities USA LLC said in a note to clients. The oil major’s share price is at a 10-year low.”
A report published on January 16 from the Institute for Energy Economics and Financial Analysis has found that the oil majors are experiencing similar free cash flow problems to the fracking industry:
“Since 2010, the world’s largest oil and gas companies have failed to generate enough cash from their primary business – selling oil, gas, refined products and petrochemicals – to cover the payments they have made to their shareholders. ExxonMobil, BP, Chevron, Total, and Royal Dutch Shell (Shell), the five largest publicly traded oil and gas firms, collectively rewarded stockholders with $536 billion in dividends and share buybacks since 2010, while generating $329 billion in free cash flow over the same period. The companies made up the $207 billion cash shortfall—equal to 39 percent of total shareholder distributions—primarily by selling assets and borrowing money” “This practice reflects an underlying weakness in the fundamentals of contemporary oil and gas business models: revenues from the supermajors’ operations are not covering their core operational expenses and capital expenditures.”
The problem is that global oil prices exceeding $70-80/barrel cause recession, but this price is (far) too low for business as usual for most oil companies (see previous “End of Oilocene” posts), and debt in this sector is increasing at an unsustainable rate. Surplus energy available for the economy at a price the economy can afford is depleting rapidly due to resource depletion and the increasingly poor quality of remaining resources, and this has major implications for the global monetary-financial system. Slowing global economic output causes a fall in oil consumption, which in turn causes downward pressure on oil prices – exacerbating their financial problems.
This is starkly outlined in a February 2020 report by the government of Finland as reported by Nafeez Ahmed:
“A government research report produced by Finland warns that the increasingly unsustainable economics of the oil industry could derail the global financial system within the next few years.
The new report is published by the Geological Survey of Finland (GTK), which operates under the government’s Ministry of Economic Affairs. GTK is currently the European Commission’s lead coordinator of the EU’s ProMine project, its flagship mineral resources database and modelling system.
The report was produced as an internal research exercise for the Finnish government, which until 2019 held the Presidency of the Council of the European Union.
Signed off by GTK’s director of scientific research Dr Saku Vuori, the report is written by GTK senior scientist Dr Simon Michaux of the Ore Geology and Mineral Economics Unit. It conducts a comprehensive global assessment of scientific research into the state of the global oil industry with goal of determining how the risks of a global supply gap could impact mining and mineral production.
The peer-reviewed report calls for the European Commission to consider oil as the world’s most important “critical raw material.” Despite offering a scathing critique of conventional peak oil theory, the report arrives at the shock conclusion that the economic viability of the entire global oil market could come undone within the next few years”
Energy fundamentals and the madness of economic theory
We have now reached the last act of this drama, in which failing energy fundamentals cause the financial and economic system to unravel at an increasing pace.
Incredibly, economic theory does not accept the fundamental role of energy; categorising it simply as one of several “inputs” such as labour, or materials. This paradigm is now unravelling as we reach the end of the age of cheap/abundant energy and as the surplus energy required for economic activity depletes to low levels. Without surplus energy there can be no activity and no economy. Economist Tim Morgan explains (2019 extracts from www.surplusenergyeconomics.wordpress.com):
The first principle of surplus energy economics is that everything that constitutes the economy is a function of energy. Literally nothing – goods, services, infrastructure, travel, information – can be supplied without it. Even in the most basic aspects of our lives, everything that we need – including somewhere to live, food and water – is a product of the application of energy. The more complex a society becomes, the more energy it requires, even if this is sometimes masked when energy-intensive activities are outsourced to other countries. The idea that we can somehow “decouple” economic activity from the use of energy has been debunked comprehensively by the European Environmental Bureau as “a haystack without a needle”.
You need only picture a society even temporarily deprived of energy to see the reality of this. Without energy, food cannot be grown, processed or delivered, water fails when the pumps stop working, our homes and places of work become cold and dark, and schools and hospitals cease to function. Without continuity of energy, machinery falls silent, nothing can move from where it is to where it is needed, individuals lose the mobility that we take for granted, and, in a pretty short time, social order fails and chaos reigns.
Ironically, financial systems are amongst the first to collapse when the energy plug is pulled. People cannot even write learned papers telling us that energy is ‘just another input’ when their computer screens have just gone down.
The second principle of surplus energy economics is that, whenever energy is accessed, some of that energy is always consumed in the access process. Stated at its simplest, you cannot drill an oil or gas well, excavate a mine, or manufacture a wind turbine or a solar panel without using energy. Much of this energy goes into the provision of materials, of which just one example is copper. This is now extracted at ratios as low as one tonne of copper from five hundred tonnes of rock. Supplying copper, then, cannot be done with human or animal labour – and, of course, even if this were possible, the need for nutritional energy would keep the circular, ‘in-out’ energy linkage wholly in place.
Taken together, these principles dictate a division of available energy into two streams or components.
The first is the energy consumed in the access process, known here as the Energy Cost of Energy (ECoE).
The second – constituting all available energy other than ECoE – is known as Surplus Energy. This powers all economic activity, other than the supply of energy itself.
This makes ECoE an extremely important component, because, the higher ECoE is, the less surplus energy remains for those activities which constitute prosperity.
Surplus (ex-ECoE) energy is the source of all economic activity other than the supply of energy itself. In other words, prosperity is a function of surplus energy”
Whilst EROI of oil has been falling since the day Spindletop began operation, it is only in the last few decades that it has been seriously impacting the global economy. Most developed countries, as Tim Morgan explains, are now experiencing declining prosperity which is reflected by decreasing standards of living in turn causing societal stress and unrest. This occurred in over a dozen countries in 2019, many of them sparked by fuel price rises.
“By 2000, when World trend ECoE had reached 4.5%, Advanced Economies were already starting to face an insurmountable obstacle to further growth. Prosperity turned down in Japan from 1997 (when ECoE there was 4.4%) and has been declining in America since 2000 (4.5%).
SEEDS studies demonstrate that prosperity in advanced Western countries turns down once ECoE enters a band between 3.5% and 5%. EM economies, by virtue of their lesser complexity, are less ECoE-sensitive, with prosperity going into reverse once ECoEs enter a range between 8% and 10%. Ominously, ECoE has now reached 8.2% in China, 10.0% in India and 8.1% in the EM countries as a group.
The key point about rising ECoEs is that there is nothing we can do about it. This in turn means that global prosperity has entered de-growth. The idea that we can somehow “decouple” economic activity from the use of energy is utter wishful thinking – not surprisingly, because the economy, after all, is an energy system.
This presents us with a clear choice between obfuscation and denial on the one hand, and by acceptance and accommodation, on the other. Our present position is one of ‘denial by default’, in that the decision-making process continues to be based on the false paradigm that ‘the economy is money’, and that energy is “just another input”.
Properly understood, money acts simply as a ‘claim’ on the output of the energy economy and driving up the aggregate of monetary claims only increases the scope for their elimination in a process of value destruction.
We’ve been here before, most recently in 2008, and still haven’t learned the brutal consequences of creating financial claims far in excess of what a deteriorating economy can deliver. The next wave of value destruction – likely to include collapses in the prices of stocks, bonds and property, and a cascade of defaults – cannot much longer be delayed.
Where we are now
Since 2008 the global economic and financial system has experienced illusory growth rates maintained solely by financial engineering imposed by global central banks in the form of massive liquidity or printing of new debt money (QE=debt), and use of low, zero, and negative interest rates; policies that have never been successful. This process has in turn caused the inflation of the largest asset bubbles of all time (stocks/shares, property and bonds) and a rapidly widening wealth gap.
There has been no systemic solution to the crisis of 2008, and the global financial system becomes more imbalanced and precarious with each passing day. The situation is summarised well by Tuomas Malinen. CEO and Chief Economist of GnS Economics and an Adjunct Professor of Economics at the University of Helsinki:
“Staring at the Financial Abyss (GnS Economics Sept 2019)
Thus, in their efforts to “save” the world economy, central banks have created a monster: a dysfunctional, extremely-speculative and highly-leveraged financial sector. All that is needed for it to unravel are rising rates in some important, if obscure, corner of the capital markets—just like the repo-markets.
The (US) Fed has been engaged in a desperate battle to avert this through its repo and “Not QE” programs since September. However, even if successful, it’s very likely that these programs, not to speak of an “actual QE”, will just further aggravate the distortions in the financial markets, until they become unbearable.
Then we’ll be staring into the financial abyss. Beware!
Into the Abyss (GnS Economics, Dec 2019)
Currently, the Fed is engaged in an epic battle to postpone the collapse of the bubble in financial assets, which it has helped to create. But, while the repo-market is a harbinger of coming financial calamity, it’s not the only ‘canary in the coal mine’.
The International Monetary Fund has warned that in a global downturn corporate debt at risk of default would rise to $19 trillion in eight major economies. Investors also faced record “duration risk” in the global bond markets.
So, tremors in the credit markets have started. It’s noticeable that the “Not QE” T-bill purchase program the Fed enacted in October has done practically nothing to calm them. This means that the tremors are likely to spread until a full financial market rout commences.
This should not come as a surprise as artificial liquidity from the central banks cannot sustain the markets if the real economy falls away beneath them. This was the big lesson of the ‘Great Crash’ of 1929. Artificial liquidity can, however, sustain the markets longer than real economic fundamentals would suggest, thus making their eventual collapse worse.”
No way out for the current financial/monetary system
It seems clear that 2008 effectively marks the end of the energy and resource driven global economic/energy/financial paradigm of the last few centuries.
Since 2008, debts of all kinds have exploded to unprecedented levels and the economic system is being maintained solely by financial engineering and manipulation by global central banks on a massive scale. These policies are in turn necessary (and will increase) to sustain the illusion of continuous economic growth at a rate that will sustain capitalism; because degrowth is NOT compatible with a capitalist money creation through debt with interest system. On the other hand, QE and the creation of trillions of new money as debt, plus use of zero/negative interest rates are also NOT compatible with a capitalist economic system. Nor is printed (debt) money a substitute for thermodynamic energy realities.
Energy decline (decline of high net oil energy at an affordable price) = economic decline. There is no solution to this conundrum within the current structure of the financial system.
· The crucial aspect of the financial system we need to understand is that it requires perpetual economic growth, without which, (compound) interest charged on debt cannot be sustained and the system collapses.
· Supply of energy to the economy requires the expenditure of energy (extraction, refining, transport etc). The economy is fuelled by “surplus energy” available after all energy and material inputs required in its production.
· The most important factor in economics (which economic theory fails to account for) is the need for surplus energy, without which there can be no real economic activity.
· The quality of global energy sources (EROI) and the amount of surplus energy available to the economy has fallen precipitously over the last 30 years and is now at a very low level.
The continuous decline in surplus energy available to the economy is a prime factor limiting economic growth. The other main factor is high levels of debt.
· Without economic growth, the global monetary/financial debt-with-interest money creation system is not viable and cannot be sustained.
We are on the cusp of tumultuous times. The longer the policies of make-believe and delusion are maintained, the more serious the consequences.
Warnings of the next recession abound.
Global financial and monetary authorities such as the BIS, IMF, World Bank, are warning of potentially epochal changes in the global financial system (monetary reset etc). Something fundamental will have to change because this system no longer works. What solutions can there be for an economic and financial system operating within a declining negative economic growth environment?
What comes next?
The future is one of decreasing surplus energy and increasing debt accompanied by decline and degrowth coupled with resource depletion and environmental destruction. This trend will lead to increasing societal chaos and conflict on a global scale.
Pressures of this magnitude usually result in abrupt changes.
The struggle for control of the last of the high-quality high EROI cheap fossil energy reserves (mainly in Russia, Iran and other Mid-East countries) is well underway with EU direct and indirect compliance with aggressive US foreign policy (removal of nuclear arms control, demonisation of target countries), and a catastrophic outcome is increasingly likely (reminder to elites: a nuclear war would be global and would return the few survivors back to the stone-age).
Ireland is very exposed
Ireland is currently a prosperous and relatively happy country (one of the highest UNDev index 2019 and one of the only countries globally where the middle-class is growing). But we live in a fairy-tale world of extreme and growing debt with no consequences, eerily reminiscent of the “Celtic-Tiger” years. Ireland national debt is Eu 203bn (Eu 41K/person), the highest per capita in the world, increasing at a rate of Eu 1,000 every 3 seconds, ireland, and its all-sector debt is over Eu 2 trillion. We are hugely exposed to the approaching global financial crisis. Tourism and many of our exports are very recession-sensitive; and we are heavily dependent on fossil fuel imports.
Do the math and frighten yourself by watching Irelands debt clock perform in “these good times”. As I write, it just passed Eu 203,483,500,000. Increasing at a rate of about Eu 20,000 per minute. Check it out as you read this essay.
Is anyone paying attention?
Meanwhile, economists and politicians spout their usual mantra of eternal growth (reminder: The ESRI were projecting high economic growth rates until the day of the banking collapse in 2008 which devastated Ireland’s finances). More debt is seen as the solution to unmanageable debt, and every sector of the economy is increasing its exposure and liabilities; private, household, corporate and banking. Ireland prospers as an off-shore (low corporate tax) EU business haven for mainly US corporations; seemingly without a thought to the catastrophic wider global trends available for all to see. National policies of renewable energy development are far too little too late. Sustainability is an abused catch-phrase that is used as cover to maintain business-as-usual policies.
Compared to 2008, the next crisis will be turbo-charged. When this comes, Ireland will be impoverished and the country will be asset-stripped by its debtors. Harsh austerity measures will be imposed. Social services including education, pensions, healthcare and infrastructure spending will be unaffordable, and poverty will grow to levels reminiscent of 100 years ago.
There is no mainstream discussion about these issues – let alone what to do when the SHTF. With policy-heads firmly buried in the sand or immersed in clouds, and with the gathering storm clouds approaching fast, the future does not bode well. In the meantime, every business-as-usual day is to be celebrated as one more day to prepare on an individual and community basis.
Edit on February 16: the introductory paragraphs were added.
Featured image: storm clouds. Author: Christopher Libert. Source: https://www.freeimages.com/photo/storm-1314040
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Tim was born in Sri Lanka and lived there for much of his early life. His father Mike was the manager of a tea estate, and a man well before his time; keen on conservation and sustainability who initiated many successful initiatives including improving the condition of dwellings, and an adventurer and conservationist who delighted in Sri Lanka’s wildlife and natural environment, especially its beautiful jungles and rivers. Tim was observer and beneficiary of all this.
The turning point for him came in 1980 on a visit to India when he read “The Limits to Growth”. The implications were so obvious and clear that he resolved to work in the field of renewable energy and on his return to UK, joined an innovative small company developing Biogas Systems. After a decade working in R/D and assisting development of new projects and technology (including being one of the first in the UK to run his car on biogas), he left to establish a new company which successfully implemented many digester systems of his own novel design in several countries in Europe. Since moving to Dingle in 1997, he has worked as an independent consultant (www.wasteworks.ie) designing and implementing biogas and reedbed/wetland wastewater systems worldwide. He has at the same time studied the interactions between global energy/oil/financial systems, and made a number of presentations warning of unsustainable trends.