Inching closer

Putting energy into perspective

In my previous post I’ve made an attempt at filling the narrative gap between what traditional economics tells us and what is really going on in the real world of goods and services. I’ve highlighted the importance of energy in our economy — stating that in fact energy is the economy. There is no mining, manufacturing, agriculture or services without spending a tremendous amount of energy. In 2019 alone, before the pandemic hit, we have consumed a mind boggling 173,340 Terawatt-hours (that is 173 thousand trillion Watt-hours), yet moneywise spent only an estimated 8% of the world GDP on it.

Why does this matter?

There are multiple reasons:

  1. In order to make this huge amount energy available to the economy we still need to burn fossil fuels (more than 80% of our energy comes from these sources — see the chart above).
  2. Burning fossil fuels causes climate change — no questions. We need to stop using them within a couple of decades to avoid reaching a catastrophic level of global heating.
  3. It is impossible to replace these fuels with human labor, neither from a physical, nor from an economical standpoint… Unless you can melt steel with your gaze, carry three hundred metric tons of rock on your back, or plough ten acres (four hectares) a day on your feet. “Renewables” simply cannot make up this vast difference either.
  4. Fossil fuels are finite, non-renewable resources. Due to geological reasons their depletion starts soon after we have eaten up roughly half of the total reserves ever discovered. This means, production (ahem, extraction) cannot be expanded further after this point, unless an unreasonable amount of energy is spent during the process; making the whole undertaking unprofitable in the end. It looks like we have already reached this point — meaning that extraction will first slowly, then ever more drastically decrease in the coming decades. And not because of the lack of demand.
  5. When a resource becomes scarce its price starts to increase. This is what we see today with all fossil fuels, and as a result with the price of electricity — and everything else. Yes, there is a spill over at the money printing machine too — but consider this: if energy supplies could be readily expanded this should not be a problem. If traditional economic theory were true, supply would magically appear shortly and all would be fine — except for the carbon pulse caused by this sudden burst of growth. Thing is, this money printing gimmickry never worked on the large scale. It only worked in the last decade, when enough investors could be fooled to believe in the shale oil miracle — a business which was never really cash flow positive and which failed to replicate in places other than the US. Result: sluggish growth do to the lack of exponential expansion of the underlying energy-base to support it. In the real world there is no way to print cheap and easy to access energy. Once you burn the good stuff, laid down several hundred million years ago, it’s gone forever… It is now back in the atmosphere where it is now doing it’s job restoring the tropical conditions which made it’s deposition possible in the first place.
  6. Rising energy prices will first stop, then eventually kill businesses. Usually the most energy intensive ones will go first (e.g.: fertilizer production) which then causes a range of other businesses (the entire agriculture and food sector) to struggle. This plays out in many fields (e.g.: mining and metallurgy) similarly, until finally the chain breaks at the weakest link — then off we go with another Merry-go-around of recession and slow recovery… with industrial output never reaching previous levels again.
  7. Since fossil fuels still account for more than 80% of our energy consumption, their decline will inevitably force us to give up 80% of the economy, including critical industries like steel, concrete, mining, or large scale agriculture… feeding 8 billion of us. Then, without heavy machinery and high heat processes to support it, the remaining 20% will go as well — leaving us nothing with, but wood and hay to burn. The industrial age has used up its cheap fuels and now it must face its own demise. It will be a long, slow — and very much necessary — goodby to this planet-wrecking lifestyle of ours.

The end of Growth

Evergrande’s growth was financed from debt, because the underlying economic growth (i.e.: growth in consumption and thus the growth in energy usage) was not there to support such high increases in the housing stock. People and companies had to rely more and more on debt to buy that bigger house, that new plot of land, but their incomes could not grow fast enough to cover their needs. Of course, with near zero interest rates mortgage was cheap. On the flip side more debt meant higher monthly installments… Since the real economy itself could not grow fast enough due to the lack of cheap enough energy, higher monthly payments could not be supported… This is what we start to see now around the world. There are limits to growth everywhere — even when it comes to financing.

In search for answers

Traditional economic theory holds, that this energy supply issue is due to chronic under-investment in the energy sector. This begs the question however: why is that so? And why now? There are a number of official reasons according these industry experts cited above:

  1. Capital restraint. Capital somehow managed to refrain from being invested into dirty energy sources. Investors were afraid buying into assets which might go stranded (i.e.: forced to stand idle before paying back the investment). OK, but why is that so?
  2. Green energy. “If the greening of energy production goes according to plan, who will then buy oil?” — goes their argument, but this is magical thinking in many ways. First electricity generation is only a mere 20% of total energy use in itself. Western countries started to utilize more and more “renewable” sources, that is true, but the process is still decades away from completion… Presuming, that we have the resources (which we don’t) and are able to solve the intermittency problem without fossil fuels on a hundred thousand trillion watt-hour scale (which we can’t). Second, we would still need oil, gas and coal for “hard-to-electrify” businesses (the remaining 80% of our energy use). Like high heat applications requiring 1000°C or higher temperatures (e.g.: steel and cement production) and transportation of goods around the globe (using aircraft, container ships, large trucks etc.), not to mention mining equipment (dumpers, excavators)… OK, let’s assume that investors were misled on the quick and easy advent of green-energy. Most of them — unfortunately — does not give a rat’s hind leg about our green future however, and would be eager to invest in anything provided there is a profit to be realized. Why are fossil fuel investments drying up still?
  3. Carbon-tax. Because of bad policy!” — true, governments around the western world are trying to use the “free-market” to “encourage” the use of “renewables” by taxing emissions from fossil fuels. Note, however how this is a last attempt to prop up failing government revenues and tax something which is no longer taxable.
  4. Regulations. Methane is a potent greenhouse gas — regulating it’s emission is of utmost importance to slow climate change. Obeying these tighter regulations however costs money, equipment — and you guessed: energy… making fossil fuel extraction even more expensive and less profitable.

The d-word

Sure, all of the factors above play a significant role in diminishing investments for fossil fuels and a resulting “supply-crunch” (as if it were a temporary situation). Take note though, how the forbidden word (depletion) is avoided at all costs even in articles written by professionals, who have spent their entire career in the oil and gas industry and should know it better (just hit ctrl+F and type ‘depletion’ in any of the linked articles).

The rest of the economy

Needless to say, the world economy already struggles under high energy prices. It is already a great headache for China, and it is no wonder that they are stopping all coal power plant project outside their boarders — to reduce future international coal demand and thus ease the burden on their economy. (Russia, in the meantime, prepares for the end of the oil era… maybe, they know something.)

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A critic of modern times - offering ideas for honest contemplation.