The world’s self-organizing economy can be expected to act strangely, as energy supplies deplete

It is my view that when energy supply falls, it falls not because reserves “run out.” It falls because economies around the world cannot afford to purchase goods and services made with energy products and using energy products in their operation. It is really a price problem. Prices cannot be simultaneously high enough for oil producers (such as Russia and Saudi Arabia) to ramp up production and remain low enough for consumers around the world to buy the goods and services that they are accustomed to buying.

Central bank officials felt it was important to stop inflation in oil prices (and indirectly in food prices) back in the 2004 to 2006 period. This indirectly led to the 2008-2009 recession as parts of the world debt bubble started to collapse and many jobs were lost. We should not be surprised if a much worse version of this happens in the future.

The 2020 shutdowns were characterized in most news media as a response to Covid-19. Viewed on an overall system basis, however, they really were a response to many simultaneous problems:

• Covid-19
• A hidden shortage of fossil fuels that was not reflected as high enough prices for producers to ramp up production
• Hidden financial problems that threatened a new version of the 2008 financial collapse
• Factories in many parts of the world that were operating at far less than capacity
• Workers demonstrating in the streets with respect to low wages and low pensions
• Airlines with financial problems
• Citizens frustrated by long commutes
• Very many old, sick people in care homes of various types, passing around illnesses
• An outsized medical system that still desired to increase profits
• Politicians who wanted a way to better control their populations–perhaps rationing of output would work around an inadequate total supply of goods and services

Shutting down non-essential activities for a while would temporarily reduce demand for oil and other energy products, making it easier for the rest of the system to appear profitable. It would give an excuse to increase borrowing (and money printing) to hide the financial problems for a while longer. It would keep people at home, reducing the need for oil and other energy products, hiding the fossil fuel shortage for a while longer. It would force the medical system to reorganize, offering more telephone visits and laying off non-essential workers. Many individual citizens could reduce time lost to commuting, thanks to new work-from-home rules and internet connections. The homebuilding and home remodeling industries were stimulated, offering work to those who had been laid off.

The impacts of the shutdowns were greatest on poor people in poor countries, such as those in Central and South America. For example, many people in the vacation and travel industries were laid off in poor countries. People making fancy clothing for people going to conferences and weddings were laid off, as were people raising flowers for fancy events. These people had trouble finding new employment. They are at increased risk of dying, either from Covid-19 or inadequate nutrition, making them susceptible to other illnesses.

We should not be surprised if some near-term problems echo what has happened in the past. Debt defaults and falling home prices are very real possibilities, for example. Also, making a new crisis a huge focal point and scaring the population into staying at home has proven to be a huge success in temporarily reducing energy consumption without actual rationing. Some people believe that monkeypox or a climate change crisis will be the next area of focus in an attempt to reduce energy consumption, and thus lower oil prices.

[5] There is likely to be more conflict in a world with not enough goods and services to go around.

With a shrinking amount of finished goods and services, we should not be surprised if we see more conflict in the world. Many wars are resource wars. The conflict between Russia and Ukraine, with other countries indirectly involved, certainly could be considered a resource war. Russia wants higher prices for its exports of many kinds, including energy exports. I wrote about the conflict issue in a post I wrote in April 2022: The world has a major crude oil problem; expect conflict ahead.

World War I and World War II were almost certainly about energy resources. Peak coal in the UK seems to be closely related to World War I. Inadequate coal in Germany and lack of oil in Japan (and elsewhere) seem to be related to World War II.

[6] We seem to be facing a new set of problems in addition to the problems that gave rise to the Covid-19 shutdowns. These are likely to shape how any new crisis plays out.

Some recently added problems include the following:

• Debt has risen to a high level, relative to 2008. This debt will be harder to repay with higher interest rates.
• The US dollar is very high relative to other currencies. The high level of the US dollar causes problems for borrowers from outside the US in repaying their loans. It also makes energy prices very high outside the US.
• Oil, coal and natural gas are all in short supply world-wide, leading to falling productivity of the overall system Item 1. If extraction is to continue, prices need to be much higher.
• Difficulties with broken supply lines make it hard to ramp up production of manufactured goods of many kinds.
• Inadequate labor supply is an increasing problem. Baby boomers are now retiring; not enough young people are available to take their place. Increased illness, associated with Covid-19 and its vaccines, is also an issue.

These issues point to a situation where rising interest rates seem likely to send the world economy downward because of debt defaults and failing businesses of many kinds.

The high dollar relative to other currencies leads to the potential for the system to break apart under stress. Alternatively, the US dollar may play a smaller role in international trade than in the past.

[7] Many parts of the economy are likely to find that the promised payments to be made to them cannot really take place.

We have been taught that money is a store of value. We have also been taught that government promises, such as pensions, unemployment insurance and health insurance can be counted on. If there are fewer goods and services available in total, the whole system must change to reflect the fact that there are no longer enough goods and services to go around. There may not even be enough food to go around.

As the world economy hits limits, we cannot assume that the money we have in the bank will really be able to purchase the goods we want in the future. The goods may not be available to purchase, or the government may put a restriction (such as $200 per week) on how much we can withdraw from our account each week, or inflation may make goods we currently buy unaffordable.

If we think about the situation, the world will be producing fewer goods and services each year, regardless of what promises that have been made in the past might say. For example, the number of bushels of wheat available worldwide will start falling, as will the number of new cars and the number of computers. Somehow, the goods and services people expected to be available will start disappearing. If the problem is inflation, the affordable quantity will start to fall.

We don’t know precisely what will happen, but these are some ideas, especially as higher interest rates become a problem:

• Many businesses will fail. They will default on their debt; the value of their stock will go to zero. They will lay off their employees.
• Employees and governments will also default on debts. Banks will have difficulty remaining solvent.
• Pension plans will have nowhere nearly enough money to pay promised pensions. Either they will default or prices will rise so high that the pensions do not really purchase the goods that recipients hoped for.
• The international system of trade is likely to start withering away. Eventually, most goods will be locally produced with whatever resources are available.
• Many government agencies will become inadequately funded and fail. Intergovernmental agencies, such as the European Union and the United Nations, are especially vulnerable.
• Governments are likely to reduce services provided because tax revenues are too low. Even if more money is printed, it cannot buy goods that are not there.
• Citizens may become so unhappy with their governments that they overthrow them. Simpler, cheaper governmental systems, offering fewer services, may follow.

[8] It is likely that, in inflation-adjusted dollars, energy prices will not rise very high, for very long.

We are likely dealing with an economy that is basically falling apart. Factories will produce less because they cannot obtain financing. Purchasers of finished goods and services will have difficulty finding jobs that pay well and loans based on this employment. These effects will tend to keep commodity prices too low for producers. While there may be temporary spurts of higher prices, finished goods made with high-cost energy products will be too expensive for most citizens to afford. This will tend to push prices back down again.

[9] Conclusion.

We are dealing with a situation that economists, politicians and central banks are ill-equipped to handle. Raising interest rates may squeeze out a huge share of the economy. The economy was already “at the edge.” We can’t know for certain.

Virtually no one looks at the economy from a physics point of view. For one thing, the result is too distressing to explain to citizens. For another, it is fashionable for scientists of all types to produce papers and have them peer reviewed by others within their own ivory towers. Economists, politicians and central bankers don’t care about the physics of the situation. Even those basing their analysis on Energy Return on Energy Invested (EROEI) tend to focus on only a narrow portion of what I explained in Section [1]. Once researchers have invested a huge amount of time and effort in one direction, they cannot consider the possibility that their approach may be seriously incomplete.

Unfortunately, the physics-based approach I am using indicates that the world’s economy is likely to change dramatically for the worse in the months and years ahead. Economies, in general, cannot last forever. Populations outgrow their resource bases; resources become too depleted. In physics terms, economies are dissipative structures, not unlike ecosystems, plants and animals. They can only exist for a limited time before they die or end their operation. They tend to be replaced by new, similar dissipative structures.

While the current world economy cannot last indefinitely, humans have continued to exist through many bottlenecks in the past, including ice ages. It is likely that some humans, perhaps in mutated form, will make it through the current bottleneck. These humans will likely create a new economy that is better adapted to the Earth as it changes.