Why energy prices are ultimately headed lower; what the IMF missed

We have been hearing a great deal about IMF concerns recently, after the release of its October 2016 World Economic Outlook and its Annual Meeting October 7-9. The concerns mentioned include the following:

• Too much growth in debt, with China particularly mentioned as a problem
• World economic growth seems to have slowed on a long-term basis
• Central bank intervention required to produce artificially low interest rates, to produce even this low growth
• Global international trade is no longer growing rapidly
• Economic stagnation could lead to protectionist calls

These issues are very much related to issues that I have been writing about:

• It takes energy to make goods and services.
• It takes an increasing amount of energy consumption to create a growing amount of goods and services–in other words, growing GDP.
• This energy must be inexpensive, if it is to operate in the historical way: the economy produces good productivity growth; this productivity growth translates to wage growth; and debt levels can stay within reasonable bounds as growth occurs.
• We can’t keep producing cheap energy because what “runs out” is cheap-to-extract energy. We extract this cheap-to-extract energy first, forcing us to move on to expensive-to-extract energy.
• Eventually, we run into the problem of energy prices falling below the cost of production because of affordability issues. The wages of non-elite workers don’t keep up with the rising cost of extraction.
• Governments can try to cover up the problem with more debt at ever-lower interest rates, but eventually this doesn’t work either.
• Instead of producing higher commodity prices, the system tends to produce asset bubbles.
• Eventually, the system must collapse due to growing inefficiencies of the system. The result is likely to look much like a “Minsky Moment,” with a collapse in asset prices.
• The collapse in assets prices will lead to debt defaults, bank failures, and a lack of new loans. With fewer new loans, there will be a further decrease in demand. As a result, energy and other commodity prices can be expected to fall to new lows.

Let me explain a few of these issues.

The Need For Energy to Operate the Economy

On a worldwide basis, it takes energy to make the economy grow. This is evident, regardless of what time period we look at.