The Afghanistan Fiasco (and Today’s High Level of Conflict) Reflect an Energy Problem

There is a saying, “Everything happens for a reason.” The fiasco in Afghanistan is no exception to this rule. Even though it is not obvious, the United States is up against energy limits. It needed to pull back from Afghanistan to try to have enough energy to continue in its other roles, such as providing benefits for its growing army of retirees, and building infrastructure to mitigate the COVID-19 downturn.

The fundamental problem is that governments can add debt and other indirect promises of resources that create goods and services, but they cannot actually create the low-cost energy, water and mineral resources needed to fulfill those promises.

The way energy limits play out is not at all intuitive. Most people assume that we will run out of oil, leading to a spike in oil prices. We will then transition to renewables. As I see it, this understanding is completely wrong. Limited energy supply first leads to a need for simplification: Stepping back from Afghanistan would be one such type of simplification. It would save energy supplies and reduce the need for greater tax revenue or added debt.

In this post, I will try to explain some pieces of the problem.

[1] Afghanistan was, and continues to be, in some sense a “handicapped country.“

Everyone knows that the way a country can succeed in the world market is by providing needed goods or services to other economies at low cost. Afghanistan is a landlocked country. It also doesn’t have any big rivers it can use to transport goods out of the country. It isn’t a member of a trade alliance such as the EU to allow smooth transport of goods out of the country. The difficulty of transit into and out of the country adds a layer of costs that tends to make the country uncompetitive in the world market. No matter how much investment any country makes in Afghanistan, this handicap will still persist.

Also, Afghanistan has too high a population relative to its resources. We know that most wars are resource wars. The fact that Afghanistan has been involved in wars for many years hints at this problem. According to UN 2019 estimates, Afghanistan’s population was 7.8 million in 1950, 21.6 million in 2001, and 38.9 million in 2020, which is about five times the 1950 population. Water needs, in particular, tend to escalate as population rises.

[2] The US doesn’t know how to fight a guerrilla war.

The weapons developed by the US are too complex to be used in a guerrilla war. They tend to break down and require replacement parts. Needless to say, these parts are not available in Afghanistan. Even if Afghan soldiers are trained to use these weapons, they may not be available or suitable when needed.

George W. Bush should have known from the outcome of the 20-year Vietnam conflict (1955-1975) that any guerrilla war was likely to have a bad ending. In Afghanistan, the plan was to train Afghan soldiers, thus keeping US citizens out of the battlefield. This strategy kept the Afghan conflict off the front page of US newspapers, but the overall result seems to be similar.

[3] When George W. Bush took office in 2001, he seems to have had access to more funds than he knew what to do with. Starting a war in Afghanistan probably seemed like a good use for these funds. He could perhaps build military bases, and perhaps raise the standard of living of the people there.

The price of oil was especially low in the 1998 to 2001 period. This allowed tax revenue to “go farther” in providing benefits to the economy, allowing a temporary budget surplus. With such a surplus, getting funds appropriated for any purpose would likely have been easy.

Even more importantly, with a fairly young population, the Social Security system had been collecting funds in advance of when they were needed, with the plan of building up the plan’s Trust Fund for use when a bulge in retirements was expected, starting about 2010. Figure 2 shows one chart that roughly illustrates the overfunding and planned use for the funds. Unfortunately, Figure 2 doesn’t treat investment income in the way it is actually collected; it leaves out past investment income and uses discounted cash flow assumptions for the future, so a person cannot readily estimate net contributions to the Trust Fund balance by year from this chart.

Figure 2 indicates that there was considerable overfunding starting in the late 1980s. The thing that actuaries (and others) didn’t consider is the fact that there is a real difference between debt and the physical resources that will be needed when these older people retire. Retirees will need food, water and energy to heat their homes. They will need medicine and long term care institutions. They should also be able to provide their share of the upkeep of roads and electricity transmission networks.

Debt is a promise of future funds to purchase goods and services, but it doesn’t make the resources required to create these goods and services materialize out of “thin air.” To keep these promises, oil needs to be extracted, refined, and delivered to farmers. There needs to be enough fresh water available to irrigate adequate farmland to produce the required food. There need to be supply lines that are working to deliver the required food. There need to be enough young people who are willing to work on farms and in care centers for the aged. The wages for these young workers need to be high enough so that they too can have food, shelter and other things that we consider necessities.

When the extra Social Security funds were collected, the officials who collected them figured out that as a practical matter, there was little that they could do with them besides spend them at the time they were collected. They couldn’t set up warehouses with food, clothing, building materials and energy resources to keep on hand for 30 or 40 years. If they invested the money in the stock market, the money would simply cause a bubble in stock prices. If they built new factories or nursing homes, they would be unfairly competing with existing businesses.

I am not sure that there is any good record of how these extra funds were spent. My understanding is that they provided a very large slush fund that allowed expanded military activities among other things. From an accounting point of view, non-marketable government debt was substituted for the funds that were spent. Thus, when an actuary looks at the Trust Fund, it is fully funded. It is just that it is funded with more US government debt.

The catch is that the non-marketable US government debt doesn’t actually correspond to any resources. Any food used in 2022 (or 2050) will need to be grown in that year, using resources available in that year. Most clothing used in a given year will need to be produced with resources available at that time. Putting together a model that assumes business as usual forever tends to give a rosy picture because it leaves out this detail.

The 2020 OSDAI Trustees Report provides actual income, outgo, and interest income through 2019. From this report, it can be concluded that the extra Social Security slush fund is rapidly disappearing. In fact, it seems to be turning to a hidden source of required year-by-year funding starting as soon as 2020 or 2021.

In some sense, the “real economy” operates on a “cash basis,” rather than an “accrual basis.” This has not been recognized in our accounting or our models. Ignoring the way the system really works likely leads to a hidden crunch, starting about 2021. We know that retirements were high in 2020, adding to the potential problem. I am certain that President Biden and his advisors are aware of this issue, even though it is never reported on the front pages of newspapers.

[4] There is really a two-sided energy price problem. Consumers can afford only low energy prices but, as the result of depletion and population growth in oil exporting countries, producers need high oil prices.

Figure 3 is a chart I prepared a few years ago. In it, there is a pattern of rapidly rising wages when oil prices were very low. Workers became more productive with new factory equipment and vehicles, produced with oil, and operated using oil products. As a result, their wages rose.

On the other hand, when oil prices spiked, the prices of many goods, including food, airline tickets, and the fuel used for commuting to work, rose. People cut back on discretionary income, such as eating in restaurants and vacation travel. Businesses with fewer customers laid off workers. The workers who could find jobs often found lower-paid or part time jobs. The result was a dip in average wages, both in the 1970s and at the time of the Great Recession of 2007-2009.

We now live in a world with depleted resources. The oil and other types of energy that are available are high in cost, but the prices tend to stay too low for producers when all costs are included. Oil resources from the Middle East and Venezuela, especially, need a higher oil price because the governments of these countries need very high taxes on oil revenue to support their large populations. Even shale oil from the United States needs a higher price than is available today.

If we want OPEC to supply the rest of the world with more oil, the price will need to rise much higher than today’s Brent oil price of about $73. It likely will need to rise to at least $100 per barrel and show that it can stay at this high level. Otherwise, the supposed reserves of OPEC will mostly stay in the ground.

Even the US needs a higher oil price. Its oil, gas and coal production fell during the pandemic in 2020. Through May 2021 (and even later using weekly data, not shown), oil and natural gas production has not rebounded to the 2019 level.

Any modeler who tries to take into account the fact that resources deplete and the overall population keeps rising will quickly come to the conclusion that, at some point, every economy will have to collapse. This has been known for a very long time. Back in 1957, Admiral Hyman Rickover of the US Navy said,

Surplus energy provides the material foundation for civilized living – a comfortable and tasteful home instead of a bare shelter; attractive clothing instead of mere covering to keep warm; appetizing food instead of anything that suffices to appease hunger. . .

For it is an unpleasant fact that according to our best estimates, total fossil fuel reserves recoverable at not over twice today’s unit cost, are likely to run out at some time between the years 2000 and 2050, if present standards of living and population growth rates are taken into account.

Now, in 2021, as it looks as if this problem is starting to hit us. But no one (since Jimmy Carter, who was not re-elected) has dared tell the general public. Instead, accrual accounting with more and more debt is used in financial statements, including GDP statements. Actuaries put together Social Security funding estimates as if the resources to provide the promised benefits will really be there. Climate change models are prepared as if business as usual can go on for the next hundred years. Everything published by the mainstream media is based on the underlying assumption that we will have no problems other than climate change for the next 100 years.

[8] About all that can be done now is to start cutting back on the less necessary parts of the economy.

President Biden’s abrupt pullout from Afghanistan reflects a reality that increasingly has to take place in the world. The US needs to start pulling back because there are too many people and not enough inexpensive to extract resources to fulfill all of the commitments that the US has made. As mentioned earlier, there are a number of obstacles to success in Afghanistan. Thus, it is a good place to start.

With the need to pull back, there is a much higher level of conflict, both within and between countries. The big issue becomes who, or what, is going to be “voted off the island” next. Is it the elderly or the poor; the military or the oversized US medical establishment; university education for a large share of students or classroom teaching for young children?

We don’t seem to have a good way out of our current predicament. This seems to be what is behind all of the recent internet censorship. Renewables and nuclear require fossil fuel energy for their production and maintenance. The powers that be don’t want anyone to know that nearly all of the “happily ever after using renewables” stories we hear are based on wishful thinking.