Rising Energy Costs Lead to Recession; Eventually Collapse

How does the world reach limits? This is a question that few dare to examine. My analysis suggests that these limits will come in a very different way than most have expected–through financial stress that ultimately relates to rising unit energy costs, plus the need to use increasing amounts of energy for additional purposes:

• To extract oil and other minerals from locations where extraction is very difficult, such as in shale formations, or very deep under the sea;
• To mitigate water shortages and pollution issues, using processes such as desalination and long distance transport of food; and
• To attempt to reduce future fossil fuel use, by building devices such as solar panels and electric cars that increase fossil fuel energy use now in the hope of reducing energy use later.

We have long known that the world is likely to eventually reach limits. In 1972, the book The Limits to Growth by Donella Meadows and others modeled the likely impact of growing population, limited resources, and rising pollution in a finite world. They considered a number of scenarios under a range of different assumptions. These models strongly suggested the world economy would begin to hit limits in the first half of the 21^st century and would eventually collapse.

The indications of the 1972 analysis were considered nonsense by most. Clearly, the world would work its way around limits of the type suggested. The world would find additional resources in short supply. It would become more efficient at using resources and would tackle the problem of rising pollution. The free market would handle any problems that might arise.

The Limits to Growth analysis modeled the world economy in terms of flows; it did not try to model the financial system. In recent years, I have been looking at the situation and have discovered that as we hit limits in a finite world, the financial system is the most vulnerable part because of the system because it ties everything else together. Debt in particular is vulnerable because the time-shifting aspect of debt “works” much better in a rapidly growing economy than in an economy that is barely growing or shrinking.

The problem that now looks like it has the potential to push the world into financial collapse is something no one would have thought of—high oil prices that take a slice out of the economy, without anything to show in return. Consumers find that their own salaries do not rise as oil prices rise. They find that they need to cut back on discretionary spending if they are to have adequate funds to pay for necessities produced using oil. Food is one such necessity; oil is used to run farm equipment, make herbicides and pesticides, and transport finished food products. The result of a cutback in discretionary spending is recession or near recession, and less job availability. Governments find themselves in  financial distress from trying to mitigate the recession-like impacts without adequate tax revenue.

One of our big problems now is a lack of cheap substitutes for oil. Highly touted renewable energy sources such as wind and solar PV are not cheap. They also do not substitute directly for oil, and they increase near-term fossil fuel consumption. Ethanol can act as an “oil extender,” but it is not cheap. Battery powered cars are also not cheap.

The issue of rising oil prices is really a two-sided issue. The least expensive sources of oil tend to be extracted first. Thus, the cost of producing oil tends to rise over time. As a result, oil producers tend to require ever-rising oil prices to cover their costs. It is the interaction of these two forces that leads to the likelihood of financial collapse in the near term:

1. Need for ever-rising oil prices by oil producers.
2. The adverse impact of high-energy prices on consumers.

If a cheap substitute for oil had already come along in adequate quantity, there would be no problem. The issue is that no suitable substitute has been found, and financial problems are here already. In fact, collapse may very well come from oil prices not rising high enough to satisfy the needs of those extracting the oil, because of worldwide recession.

The Role of Inexpensive Energy

The fact that few stop to realize is that energy of the right type is absolutely essential for making goods and services of all kinds.  Even if the services are simply typing numbers into a computer, we need energy of precisely the right kind for several different purposes:

1. To make the computer and transport it to the current location.
2. To build the building where the worker works.
3. To light the building where the worker works.
4. To heat or cool the building where the worker works.
5. To transport the worker to the location where he works.
6. To produce the foods that the worker eats.
7. To produce the clothing that the worker wears.

Furthermore, the energy used needs to be inexpensive, for many reasons—so that the worker’s salary goes farther; so that the goods or services created are competitive in a world market; and so that governments can gain adequate tax revenue from taxing energy products. We don’t think of fossil fuel energy products as being a significant source of tax revenue, but they very often are, especially for exporters (Rodgers map of oil “government take” percentages).

Some of the energy listed above is paid for by the employer; some is paid for by the employee. This difference is irrelevant, since all are equally essential. Some energy is omitted from the above list, but is still very important. Energy to build roads, electric transmission lines, schools, and health care centers is essential if the current system is to be maintained. If energy prices rise, taxes and fees to pay for basic services such as these will likely need to rise.

How “Growth” Began

For most primates, such as chimpanzees and gorillas, the number of the species fluctuates up and down within a range. Total population isn’t very high. If human population followed that of other large primates, there wouldn’t be more than a few million humans worldwide. They would likely live in one geographical area.

How did humans venture out of this mold? In my view, a likely way that humans were able to improve their dominance over other animals and plants was through the controlled use of fire, a skill they learned over one million years ago  (Luke 2012).  Controlled use of fire could be used for many purposes, including cooking food, providing heat in cool weather, and scaring away wild animals.

The earliest use of fire was in some sense very inexpensive. Dry sticks and leaves were close at hand. If humans used a technique such as twirling one stick against another with the right technique and the right kind of wood, such a fire could be made in less than a minute (Hough 1890). Once humans had discovered how to make fire, they could it to leverage their meager muscular strength.

The benefits of the controlled use of fire are perhaps not as obvious to us as they would have been to the early users. When it became possible to cook food, a much wider variety of potential foodstuffs could be eaten. The nutrition from food was also better. There is even some evidence that cooking food allowed the human body to evolve in the direction of smaller chewing and digestive apparatus and a bigger brain (Wrangham 2009). A bigger brain would allow humans to outsmart their prey. (Dilworth 2010)

Cooking food allowed humans to spend much less time chewing food than previously—only one-tenth as much time according to one study (4.7% of daily activity vs. 48% of daily activity) (Organ et al. 2011). The reduction in chewing time left more time other activities, such as making tools and clothing.

Humans gradually increased their control over many additional energy sources. Training dogs to help in hunting came very early. Humans learned to make sailboats using wind energy. They learned to domesticate plants and animals, so that they could provide more food energy in the location where it was needed. Domesticated animals could also be used to pull loads.

Humans learned to use wind mills and water mills made from wood, and eventually learned to use coal, petroleum (also called oil), natural gas, and uranium. The availability of fossil fuels vastly increased our ability to make substances that require heating, including metals, glass, and concrete. Prior to this time, wood had been used as an energy source, leading to widespread deforestation.

With the availability of metals, glass, and concrete in quantity, it became possible to develop modern hydroelectric power plants and transmission lines to transmit this electricity. It also became possible to build railroads, steam-powered ships, better plows, and many other useful devices.

Population rose dramatically after fossil fuels were added, enabling better food production and transportation. This started about 1800.