The rally in fossil fuel prices continues unabated: natural gas in Europe costs five times more than it used to in previous years this time around, oil is above $80 per barrel, and coal is traded at absolute record prices never seen in history. This had (and continues to have) a devastating impact on the world economy, resulting shut downs in various industries. The natural gas crunch in Europe already forced agricultural fertilizer production to a halt, ensuring record price levels next spring and adding a further boost to food indexes already at dangerous heights.
A perfect storm seems to be forming on the horizon. Yet mainstream media outlets seems to remain calm, almost silent about the issue. Only the industry related columns are filled with a slight sense of dread about the events. According to their narrative however, all of this will be solved in a matter of years and the economy will recover. The energy transition, markets, supply magically appearing, etc. will eventually solve everything. The question no one dares to ask: is this a beginning of a long recession?
Well, it seems Saudis cannot increase production, and might not even want to, as they need oil prices above 76 USD to balance their budgets and finance their massive welfare program. It’s worth noting here that Saudi Arabia is a net food importer: if food prices rise (due to higher fertilizer costs for e.g.), their breakeven price for oil rises too... posing a huge security risk for them. If they fail to generate high enough revenues for a long enough time from oil they will be forced to make (further) cuts to public welfare. In a later stage of resource depletion they might no longer be able to provide enough food and water (desalinated using oil) to their relatively young population. (Not to mention air conditioning in a country posed to hit hard by global heating.) It’s no wonder then, that they try to attract foreign investors to help them “develop” their otherwise uneconomic and costly to extract gas and oil fields... The show must go on — at all costs, as long as possible.
Before we run ahead too much into the future of the Middle East, there is another part of the world, which has already started to feel the effects of a serious (and permanent) resource decline: Europe. Once the powerhouse of the industrial revolution this overpopulated peninsula of Asia is now in the painfully slow process of running out of oil and gas. The North Sea reservoirs are depleting fast, together with the once huge Gröningen gas field in the Netherlands — all contributing to the current price hike of natural gas. (Not to mention coal, which now needs to be imported too.) This leaves Europe with “renewables” and importing almost all of its energy resources from Russia. A country which might have already passed its own peak of oil production and struggles to provide enough natural gas to meet demand on both ends of the continent — not to mention their domestic needs. Is it a coincidence then, that the “net zero by 2050” message was pushed so hard in Europe recently?
“Net zero by 2050” is what you will get — although not quite exactly as you have wished for.
Talking about the other end of the World Island, China is struggling to keep their coal “production” leveled (not to mention growing it), to meet an ever increasing energy demand from the growing economy. They have spent the last decade tossing in everything they had into the mix (hydro, nuclear, “renewables”, oil and gas) to increase electricity generation. With blackouts all across the country it seems that they too have reached their own limits to growth. Remember: energy is the economy. There is no growth without a cheap and readily expandable energy base to serve all sectors in the economy.
The net zero idea popped up just recently in China. Before the announcement in late 2020 they couldn’t care less about pollution — suddenly, they plan to peak their carbon emissions in 2025… Knowing how little “renewable” energy resources they have (863 TWh, 2% of their 40405 TWh total energy demand) and how inadequate these intermittent sources are to power an economy, 2025 (if not something earlier) will mark the peak of their industrial output too.
In the absence of an energy dense and cheap alternative, and in order to save coal for the winter, a number industrial activities had to be shut down. Including metallurgical silicon production: the raw material for microchips — extending the semiconductor shortage even further into the future and raising prices even higher. Microchip manufacturing is the canary in the coal mine (pun intended). A very resource intensive activity, requiring rare exotic materials, high energy inputs and a very-very stable manufacturing environment — none of which can be provided on an intermittent or otherwise constrained basis.
China’s economic hardships are not something new however. Manufacturing and mining industries were already unwilling to invest months before the energy crunch. Uncertainty, high raw material prices, rising labor costs, and as a result dwindling profits, together with a tightening market for their goods were already posing serious problems.
The re-opening myth
In this context shutdowns due to Covid-19 and the subsequent re-opening was a moderately good cover story for a crisis long in the making. Conventional oil extraction has peaked in 2005 leading to an oil price spike and a commodity rally in the upcoming 3 years, which together with excessive lending and rising interest rates caused the great financial crisis in 2008. World total oil “production” (conventional + unconventional) has peaked in November, 2018 — sixteen months before the first wave of lockdowns in March 2020. The deliberate “shut down” of the global economy helped to hide this fact from plain sight and diverted our very limited attention away from an economic crisis, and turned it towards a health crisis.
The lock-down induced oil price crash has resulted in the shut-ins of a number of wells still producing, the bankruptcy of many shale operators, the disappearance of the work force, and a depressed investment worldwide in drilling new wells. A decreased flow of oil upon re-opening was all but guaranteed. Crude oil consumption still haven’t (couldn’t?) reach pre-pandemic levels — not to mention it’s peak in 2018.
This doesn’t mean that oil prices will climb sky high or stay there long however; quite the contrary. The world economy will reach a snapping point sooner: where rising energy prices will turn our present (although fictive) “growth” into a true recession. Due to rising food and energy prices people will have much less to spend on expensive products like cars, fancy electronic gadgets, clothes and bigger houses. This tightening of markets, combined with high uncertainty, will force companies producing these goods to lower their volumes. They will lose their economies of scale as a result, eventually leading to bankruptcies and huge consolidations (mergers) to spread overhead costs… And this time, it will raise unemployment among the managerial elites as well — a veritable source of political instability. Due to disappearing demand as a result commodity prices (including fossil fuels) will sink back to their previous, uneconomic levels — driving “producers” like Saudi Arabia bankrupt in turn — making increases in extraction of any resource wishful thinking only.
From a systems perspective these are the feedback loops that will put an end to an anomaly we call economic growth — if not now, then somewhere in the coming years. As energy resources become to expensive to extract, their supply decreases, driving their prices up, which in turn kills economic activities. The resulting crash lowers the price of said resources, making them even more uneconomic to recover. Rinse and repeat.
Again, this is not something new: it was clear half a century ago, that as we reach a point where half of the resources are still underground, their extraction will become gradually uneconomic and growth will tip over into recession. The cake served on the 50th anniversary to the Limits to Growth study next year might just have “we told you so” painted on it. Too bad no one cared to listen.
Until next time,
Note: I’m experimenting with writing shorter articles, and as a result will post irregularly in the coming weeks, until I find a new rhythm. Stay tuned: hit Follow, or subscribe via e-mail.