During the past year we have seen a total collapse of the EU’s once renowned democratic institutions, burying the continent’s last vestiges of independence together with its journalistic ethics and traditions of free thinking beneath the rubble. It has become harder than ever to peel back the many layers of triumphalist pro-war propaganda flooding all information channels and suppressing dissent in every given opportunity — even if its statements are in direct conflict with reality, let alone simple logic. Reality has started to filter through though. Paraphrasing James Howard Kunstler: history is a series of decisions, all of which seemed to be a good idea at the time… And, if I may add, many of which were rooted in a very poor understanding of the physical realities of our world. As we are about to experience it in a first hand manner in Europe — and later on in the States as well — idealism is a weak substitute for critical thinking based on reality.
Energy is the economy — understand this and it will be whole lot easier to understand what’s going on in the world. Since fossil fuels still provide 85% of our energy needs, and make the remaining 15% possible, let’s take a look around on this front first. Despite an unusually warm winter — a result of releasing all that carbon into the atmosphere in the past centuries — the news are still not so promising for Europe. A natural gas supply crunch is still on the horizon later this year.
In such an atmosphere Europe’s industries understandably try to keep a low profile in fear of prices starting to rise again. I’m sure that by now German industrialist are getting tinnitus from the famous The Clash song: Should I Stay or Should I Go? They are facing a tough dilemma: a) restart production of nat gas guzzling fertilizer manufacturing and metal smelting, risking driving energy prices up again as result, or b) leave Europe and invest elsewhere, where businesses seem to stand on more stable grounds.
This hesitancy leaves Europe with a damaged industry, but high nat gas storage levels and low LNG prices on the flip side. I can imagine the faces of decision makers asking themselves: ‘Now what the F should I do with all this extremely expensive gas I put in storage last year? I can’t sell it for peanuts…! On the other hand neither can I prefill storage for the next winter from cheap(ish) gas from the market!’
US gas drillers are not so hesitant though, and now openly contemplate cutting back on production. So much for replacing lost pipeline quantities with LNG... Political considerations aside, there is another factor at work here. As rich fields keep slowly depleting, it isn’t worth tapping into reserves further away, requiring an extension to pipelines on US soil and drilling in ever more challenging locations…
Getting the next batch of gas will always be more energy intensive — and more expensive — than the last one. It will continue to take (ever more) energy to get energy, and if Europeans are not willing to pay the price of it, they won’t get it. Canada has also found itself in a similar place:
Canada’s energy industry are now expected to decline 19% over the course of 2023 compared to previous projections of a more modest 8% decline. The biggest reason for the poorer outlook is falling gas prices, which have hit Canadian oil and gas companies particularly hard.
We are rapidly approaching a point where nat gas (and also oil) prices are either too high, killing demand, or too low, discouraging investment in supply. It increasingly looks like that the World can no longer have both low prices and a steady (let alone growing) supply.
As I explained earlier:
As scarcity hits, prices go up, then demand gets destructed within a couple of months or years. Prices go down as a result, stymieing investment in ever more complex mining and drilling operations (deep water, anyone?). Lacking adequate replacement projects to substitute for depleting old mines and wells, a new supply bottleneck arises, and prices go up again, killing another bunch of businesses and households together with high prices and hopes of replacing newly depleted mines. Rinse and repeat, till we hit the bottom in a couple of decades, a century at most.
Such is the nature of resource depletion. It is not a sudden event leading to an immediate loss of supply, but a long slow descent back into a pre-fossil fuel future. So far this process was hidden by cheap debt, and a relative abundance of low cost alternatives. As these both slowly run out, so will growth in energy use cease, putting an end to a relentless increase in economic prosperity. Capitalism seems to end itself not with a big fancy crash, or a deliberate attempt made at inventing a better system, but by simple investment decisions. Running industrial civilization slowly stops being profitable and soon it won’t worth continuing it anymore.
This is the part of reality no contemporary leader is willing to ponder. We have burned through the best of the cheap stuff and there is no replacement. Energy is the economy and as of today all proposed substitutes like renewables and nuclear depend hopelessly on fossil fuels for their very existence. Not that we will not try: we will keep deploying these technologies as long as we have cheap enough oil and cheap enough metals to do so, but as we slowly run out of both so will we abandon such ideas of a clean green Technutopia.
Oil companies are very well aware of this — together with the fact that their ‘products’ are causing climate change — and have duly started to ramp down their ‘renewable’ initiatives, together with investment in expanding oil supplies. Instead they are rather buying back their own stocks and increase shareholder returns.
‘Drill, baby, drill’ is dead. Now we found ourselves at a retirement party.
Now enter the high priests of the sacred order of monetary theory, who after putting a definitive end to the ‘happy hour’ of cheap credit, now preach how they mastered inflation with their magic wand, called interest rates. There are bad news on the horizon though. According to a recent study, and very much contrary to long held orthodoxies, high interest rates are actually driving inflation higher, not lower.
The reason is simple and is called the cost plus model. Simply put businesses need to raise their prices in line with interest rates in order to remain solvent. They have to build them into their costs (and add profits on top, hence the name: cost plus), otherwise they face bankruptcy. At the same time they cut back on investments in new production, drilling, mining etc. — feeding back to the resource and energy death spiral explained above.
All this is happening in parallel with households being forced into spending less due to their increased mortgage payments and rampant inflation. One shouldn’t be surprised that this self reinforcing process is leading to dropping quantities of production, while revenues seem to remain stable (i.e.. selling less units for more) — upholding the fakery of GDP “growth” through under-reported real inflation… (Another reason why measuring economic power in currencies is a bad idea.) A lot of money is changing hands as if nothing bad were going on, but the amount of goods sold silently drops dead behind the scenes.
Translated to employment figures, this could all too easily lead to letting people — previously staffing 2nd and 3rd production shifts — go, and running most factories in a one-shift mode. As a result we wouldn’t see too much foreclosures, yet people would still lose their jobs in droves. Governments are thus paying a hell-of-a-money to prevent this from happening, keeping the lights on in many companies and paying them to keep unnecessary workforce at the ready on furlough schemes. In other words:
Our elites are burying the problem — inadequate energy supply leading to deindustrialization — under a pile of cash.
How long they can keep doing this, is anyone’s guess.
Access to cheap resources is key to understand not only economic development but also military advances on the battlefield. All political considerations aside, it is safe to assume that those who have the most resources (minerals, energy, manpower, technology etc) at hand have a much higher chance of winning on the long term.
Achieving quick wins on previously evacuated cow pasture and ghost towns is a poor substitute for attrition brought on by relentless artillery fire and countless waves of missiles. The former can be achieved with a quickly cobbled up military striking on temporary weak spots, the later can only be done with a suitable war economy. And when one side uses more resources (manpower, guns, shells, missiles, equipment etc.) faster than these can be replenished, while the other suffers from no apparent shortages, then a decisive end to the conflict is only a matter of time.
Keeping all this in mind (together with the fact that Europe has permanently lost a good portion of its gas supply together with a considerable chunk of its heavy industry, and that the US is about to experience the same due to resource depletion) it is rather unnerving to read the news nowadays.
The Financial Times reports: “A year of war in Ukraine has left Europe’s armouries dry — Reality of sustaining Kyiv’s army through a long, bloody conflict is dawning on the west.” Or take these snippets of reality from Reuters:
“The war also cast a spotlight on the lack of industrial capacity necessary to ramp up production quickly, after decades of dwindling government orders saw many production lines vanish.”
“But the pace of deliveries to Ukraine, where Kyiv’s troops are firing up to 10,000 artillery shells daily, has drained Western inventories and exposed holes in the efficiency, speed and manpower of supply chains.”
“‘If Europe were to fight Russia, some countries would run out of ammunition in days’ a European diplomat told Reuters.”
The Royal United Services Institute (RUSI), “the world’s oldest and the UK’s leading defence and security think tank” effectively admits that Russia is winning the ammunition war against the entire combined West:
“…Ukraine is not using excessive amounts of artillery shells compared with historical conflicts. These shortages are instead a stark demonstration of the hollowing-out of Nato since the end of the Cold War. Now, lifting munitions production cannot be done with an on-off switch — it will require several issues to be resolved concurrently….”
I’m not a military expert, but what chances does NATO have without ammo? What will we send to Ukraine in a couple of months time then to fight Russia? Horses and sabres…?
Not that the West wasn’t given warnings — already in last June. Yes, it was clear as daylight already back then: the west is simply unequipped to fight and win a war fought on an industrial scale. During recent decades Western arms manufacturing was geared towards small scale local conflicts against poor people armed with smuggled machine guns and riding Toyota pick-ups — not fighting a war machine churning out state of the art missiles, tanks, warplanes, and nuclear subs on an industrial scale, while having access to vast mineral and energy resources on its own territory to continue this for decades more.
This is not about morals or who shot first (that is worthy discussion of its own). Its about the very basics. Energy is not only the economy. Energy is war, and war is energy. And without access to cheap fossil fuels and other mineral resources there will be no chance on Earth to rebuild those industries required to crunch out the missing shells and ammo. There can be no responsible leadership without this realization. Perhaps, if this came earlier, the whole conflict could have been avoided from the get go (from 2008, when NATO expansion was seriously pushed eastward).
Despite this simple logic and countless warnings though, denial, group think, idealism and an inability to question authority in the West has led to what we are witnessing now: the complete demilitarization of Europe and a total destruction of a nation which definitely deserved a better future. And what do European elites do in response to all this? Investigate the US for blowing up Nordstream in act of war against their economy (1)?
No, they ban toilets for Russia. That will do.
Until next time,
B
Notes:
(1) If you still had the illusion that the UN is independent body who could investigate the case… then forget about it.
