How declining net energy causes a debt crisis

[GliderGuider]

Here are extracts from a very interesting blog post/preview paper by George Mobus, an associate professor in the Institute of Technology the University of Washington in Tacoma. His personal interests are in global challenges and sapience.

The Dynamics of an Abstract Economic System



The three colored regions between net energy and assets represent three distinct phases in economic activities. The green region, labeled ‘debt payback feasible’ represents a phase in which net energy is growing faster than production can add to the asset base by the above equation. During this time it is easy to imagine how expectations that future periods will always have a capacity for growth in asset production arise and lead to the institutionalization of debt financing. From the perspective of agents making decisions about how and when to create new asset wealth, the fact that there will be more such wealth in the future can be taken for granted. Debts can presumably be paid back with interest. The form of modern capitalism relies on such an assumption.

The yellow region represents a phase in which net energy is decelerating and converging with still growing asset accumulation. This convergence and ultimate cross-over is a period in which the potential to pay back loans, based on future work, is coming to an end. Once net energy is no longer in exponential growth, the expansion of assets also goes into deceleration. Agents within this phase may or may not recognize the problems associated with decelerating work capacity. One might speculate that such agents, having been so successful at using debt-based financing for wealth production in the past (green phase) would be tempted to elaborate more abstract debt instruments in an attempt to continue at least the appearance of wealth production growth. Various forms of financial bubbles might appear followed by collapse since it would become progressively harder to create real physical wealth (assets) due to decreasing available net energy. For agents that sensed a change in the general milieu there was incentive to change the organization of work processes in order to reduce costs — ultimately energy costs of production — such as moving manufacturing to regions of cheaper labor. The yellow region represents a period of adaptation, where possible, to decelerating net energy flow.

Eventually, however, once net energy production falls below the asset accumulation curve, the capacity for paying back debt-based obligations is no longer. Indeed, in the red region it is not even possible to create legitimate debt instruments since all net energy production should be now going strictly to maintenance work. No new assets can be created without ignoring the maintenance of current assets (and the concentration of wealth in the hands of the most powerful agents) and all work is geared toward fighting entropy and struggles to supply consumption processes (one imagines this to be chiefly oriented toward maintaining food production).

The vertical line marked ‘today’ is an arbitrarily placed marker for peak oil, presumed to have already happened (reports on various energy web sites strongly suggest this). If this is the case, then we are already into the red region where it is impossible to create debt-based financing (legitimately) since there is absolutely no possibility of paying off that debt with future work resulting in greater asset accumulation. Is it possible that this is exactly the problem we are seeing in our heavily debt reliant economy today? Our financial systems have clearly gotten out of sync with our real asset producing economy. We are in the throes of debt-unwind and very possibly massive defaults as nations, corporations, and individuals (who have no jobs) are incapable of promising to work more in the future to pay back their obligations. Those who would loan money (claims on assets) to those who propose to create new wealth would do well to reconsider since the model suggests that it will be impossible to even get back the principal, let alone the interest.

Mobus recognizes that the real global economy is not 100% reliant on fossil fuels, and that the economy is to some degree hobbling along past the net-energy peak for oil with the help of electricity from coal (god help us all), hydro and (for a while longer) nuclear power. Much drama remains to be played out in the energy arena. Nevertheless, this is an approach that strikes me as worth thinking about.

[ret5hd]

1. very interesting...

i haven't seen this represented this way before. clear, concise, very plausible.

[azul]

2. A clear abstraction that our dulled mental teeth can get a hold of.

The lemming trajectory of unbridled capitalism.

Odd to imagine that China's communist planning controls and Islamic lending restrictions on debt financing may be required to prevent extinction.

[izquierdista]

3. Flap-flap-flap-flap-flap

More economic arm-flapping, akin to Icarus trying to stay aloft instead of plunging to Earth. Now it may be that the good professor's model explains some features of the real world situation it is trying to model, but it is just that, a model. This model makes the shocking proposition that if production is greater than consumption, then assets will increase, but if it's the other way around they won't. Brilliant. :think:

I would point out that nowhere in this model is there anything close to what is mathematically required for a proof. No axioms, no rigorous definitions of variables and concepts to be developed, no lemmas building a foundation to the logic, no clearly stated theorem, and no corollaries that follow logically. The appeal to thermodynamics is done via pseudo-science, NOT by using axiomatic definitions of energy, enthalpy, and entropy. (You can tell bullshit thermo from real thermo, since bullshitter don't know how to use "enthalpy" in a sentence.)

I did notice the disclaimer that "this version only gives the background and main conclusions to be found in that paper, oriented toward general readers", but I would be willing to bet that the detailed body of research would be just as lacking in rigor. This is why economics is called the "dismal science", because they try to imitate the motions of real mathematicians and scientists, but somehow, they just can't seem to get results that work. Richard Feynman wrote about these people; he called them "cargo cult" science.

[GliderGuider]

5. Can't please everyone, eh?

You might have had legitimate room for complaint if you had read his research papers, but slagging a guy off for not putting rigorous mathematical proofs into a blog post seems a little over-reactive.

You could take a look at his research interests before you write him off completely: http://faculty.washington.edu/gmobus/research.html . He has several, generally classified as "Biophysical Economics and Energy Systems", "Evolutionary, Cognitive Neuro-Psychology" and a variety of computational project including "Adaptive, Autonomous, Artificial Agents/Architecture".

The section on "Biophysical Economics" reads as follows:

Ecological economics does attend to energy matters in economics, but not as a main feature. Biophysical economics puts much more focus on energy and its flow through economic systems to better understand the nature of wealth production, growth, and resource depletion. Energy is an extremely important aspect because, for the modern industrial economies, over 80% of our energy comes from fossil fuels, and in the case of oil, the "king pin" energy, we have reached the peak of global production. The consequences of this phenomenon are just now beginning to be understood from a scientific perspective.

My research in this arena involves the development of a biophysical model of something I call an abstract economy. The main feature of the model is that it deals very explicitly with the physics of extracting energy from a fixed, finite reserve of fuel and the increasing energy cost of doing so. The EROEI associated with oil production has been in steady decline for the past one hundred years due to the increasing costs associated with finding and pumping more oil from exotic (e.g. continental shelves) locations. Far more energy is used up producing the infrastructure for obtaining this harder to reach oil. Today, for every BTU of oil that is obtained from these locations, we use up 1/20th of a BTU of previously pumped oil. Oil pumped from shallow wells in Pennsylvania or West Texas, nearly 100 years ago only required about 1/100th of a BTU for each BTU we obtained.

To date my model has made it clear that the net energy flow (the gross energy less the energy cost), which is the energy that is used in the rest of the economy, has been in decline for the past thirty years or so. From this it is not hard to link this decline in net energy with many of the economic phenomena that have been plaguing our world over that time. We even have a way of explaining globalization as a response to declining net energy! Several papers are in process which will explicate these phenomena.

[izquierdista]

8. I've read economic "research" papers

And I come up with the same set of complaints: poor definitions of terms, lack of mathematical rigor, analogies to scientific concepts that can't be substantiated, etc. I don't see anything here to inform me to the contrary that this computer science professor has great insights into economics or mathematics. He would do well to add some Richard Feynman to his list of readings on sapience. He seems to have forgotten Feynman's fist rule which is "the easiest person to fool is yourself".

[azul]

7. You are right, but economics is not a science.

There are too many unknown and variable factors to make accurate mathematical predictions of future economic activity.

So we can just look at models where the factors are limited and quantified to make estimates of the consequences of trends or actions.

Can you give a more convincing argument or model that would help investors in economic activity to decide if putting money into an unsustainable energy-business-lending scheme is wise?

But beyond that, can the love of money be overcome by the fear of ruin when emotion rules rationality, even if facts could be proven true? Do we let irrational investors run the economy off a cliff just because they have a track record of promoting growth?

[eallen]

4. How many joules are in a dollar?

Does embedded energy really determine the relative worth of iPhones, steaks, eye glasses, and clothing? I want to see the studies that show that. Because otherwise, any equation that puts "assets" and "energy" on the same axis is naive. The crux of these kind of models is not whether the economy is "100% reliant on fossil fuels," but on the notion that the relationship between assets and joules is linear and fixed. Which is what Mobus's graphs assume.

:hippie:

[GliderGuider]

6. The concept of "relative worth" is pretty subjective. However,

The link between energy use and overall economic activity is pretty solid. Here is a scatter plot of 170 countries' GDP vs their primary energy consumption in 2010:

.

Of course not all GDP results in asset formation. However, the proportion that is related to assets (called "Gross Capital Formation") has been fairly constant at between 22% and 24% of GDP for at least the last 30 years:



If just GCF was plotted against energy use in the first graph the picture would remain the same.

[azul]

10. Ah, but are these assets tools or dinosaurs?

Did we spend all this energy and labor to make SUV's or to make solar panels and energy efficient homes? Should we be preparing for when this energy source burns out or spend dwindling resources on driving aggressive lethal weapons of debt-financing in territorial circles?

It seems to be a battle of salesmen for what makes us feel safe.

[eallen]

24. "In 2010." What's needed is to prove that slope is constant with time.

Yes, rich nations will consume more energy. And more cars. And more computers. For practical purposes, you could omit the last word of the first sentence.

Mobus's model needs something much stronger than that. He assumes that the relationship between assets and energy is <i>fixed over time.</i> The fact that rich nations consume more energy than poor nations does <i>not</i> show that rich nations or poor nations will be consuming the same number of joules per constant dollar (or other asset measure) in 2050 as in 2010.

:hippie:

[kristopher]

9. I don't think he is going to find the answers he is looking for...

...in the place he appears to be looking (the mind of the individual).


Interesting though.

[GliderGuider]

11. Perhaps not.

I keep hoping that more wisdom will help at some level, but you might be right that it won't. I'm pretty sure it won't hurt, though.

Mobus and I have a very similar outlook in one fundamental sense - we both believe that this cycle of civilization has screwed itself into the floor. As a result we're both looking for ways to make the next cycle a little less damaging, and wisdom seems to be the only thing that might flow through the bottleneck. It's a slim hope, but we all have to do something - action is part of our Buddha nature, after all. Wisdom won't hurt, and might help. what do we have to lose by trying?

[kristopher]

12. From my perspective...

...a hard focus on the individual mind in the search for an answer to cultural questions is akin to trying to determine the adaptive behavior of a complex organism with a focus on the anatomy of cells.

Culture itself is an adaptive mechanism that transcends the guiding paramenters of its constituent elements. YMMV

[GliderGuider]

14. I don't think he's looking for answers to cultural questions in the individual.

Mobus has looked into the state of the resource infrastructure and has seen the inevitability of devolution.

He's convinced that this culture is going into the dustbin of history, and is trying to foster the most useful thing he can in the individuals that will move on from it - a bit of wisdom. It seems like a noble effort, given his conclusions about the near future. I'd rather foster consciousness and wisdom than stockpile canned food and ammo myself.

[kristopher]

15. You rejected what I said and then you said the same thing

You denied what I said and then said the same thing in a clumsy fashion that indicates you either don't have a very firm grasp of the material you'er exploring or you just want to be contrary - or both.

The problem as you state it is "this culture is going into the dustbin of history"; therefore the problem is indeed one of "culture". And what would you call his search for "wisdom" if not looking for the answers at the individual level?

[GliderGuider]

16. To me the word problem implies a solution.

That's why I use the word "predicament" when I talk about the cultural-ecological-resource difficulties we are in. I don't think the predicament has a a solution. Everything I do on that level isn't aimed at solving a problem, it's aimed at finding useful ideas to apply once the predicament has resolved of its own accord. Looking for wisdom in light of that seems eminently sensible. The people I know who have "wised up" aren't thinking about how to prevent or mitigate it before the resolution - they're thinking about how to respond to it and how to go forward after it's over. Of course, that's self-fulfilling, because I define any actions aimed at preventing the natural resolution of the clusterfuck as "unwise".

Things like permaculture, spiritual anarchy, awareness of how gift societies function, knowing that treating the world like a bag of resources is a bad idea - all these may have some applicability before the shift, but it's not going to solve any of the problems. They will, however, be crucial once we've passed through whatever bottleneck is coming.

[kristopher]

17. And to me you are incredibly inept at the use of language.

All you've done is illegitimately redefine the word problem to enable you to excuse your very poor knowledge base and the shoddy reasoning that goes with it.

[GliderGuider]

18. I'm just trying to explain the way I see it.

I've used the distinction between a soluble problem and an insoluble predicament before, in exactly this way - as do other writers such as Greer and Kunstler. I'm sorry it seems opaque to you, but I assure you I'm writing in good faith here.

I understand it if my position upsets you - many people who are deeply invested in finding solutions find my viewpoint intolerable. I've noticed that it tends to bring out the ad homs in otherwise reasonable discussions.

[Name removed]

19. Deleted message

Message removed by moderator. Click here to review the message board rules.

[GliderGuider]

20. Deep breath, kris. It's an internet discussion, not the fate of the world. nt

[kristopher]

21. And that is your third line of bull.

Implying that someone who disagrees with you is too invested in the discussion is another standard line you use when you can't conduct a discussion like an adult.

[kristopher]

28. Now you are blaming me for your lack of ...

... a substantive response. Being too invested in "finding solutions" has nothing to do with the poor reactions of others to your ideas; it is your preference for avoiding actual discussion of criticisms with the kind of word games that are more often found in discussions with those inclined towards a literal interpretation of biblical texts. The farcical distinction you drew between "problem" and "predicament" is a case in point.

[bananas]

29. GG, you ever study Oswald Spengler and the Decline of the West?

http://en.wikipedia.org/wiki/Oswald_Spengler

<snip>

A new culture starts, Spengler held, when persons in a dying, static, or purposeless society—at first only a few visionaries, often widely isolated—begin to see their surroundings from a new perspective. This intruding viewpoint, he suggests, becomes a driving force that grows to dominate their thinking like a Jungian archetype. Step by step the increasing influence of this new point of view transforms that entire society—its political and social structures, its business organizations and commercial practices, its technologies, mathematics, religious beliefs, music and visual arts, and architecture—to exemplify this unique outlook; he terms it the culture’s “prime symbol.”

The process, always similar, takes 1000–1200 years to run its course. In their final 200–300 years, Spengler said, all civilizations stiffen into rigidity and formalism; creativity dies out and cynicism surges, the countryside empties and cities grow gigantic, and continuous warfare ends in coalescence of a political-economic world state. Writing in 1910-1915, he evaluated Western Civilization as already embarked well into this phase.

Spengler made detailed analyses of six cultures, illustrating in charts of parallel columns how five passed through the same changes at corresponding stages in their development. Spengler described the dominating viewpoints of these cultures as:
Egyptian—An arrow-straight path into eternity.
Chinese—An indirect, seemingly meandering path towards life’s goal.
Hindu—Prime symbol not diagnosed by Spengler. Possibly nirvana, extinction through fulfillment. (The mathematical concept of zero was invented by the Hindu culture, which passed it to the West via Arabic mathematicians).
Classical (Greek-Roman)—The tangible, free-standing object, exemplified by the nude statue.
Magian (early Christianity, Mohammedanism)—A magical closed cavern, from whose upper reaches divine grace descends like a golden mist.
Western (present culture, born in Western Europe about 1000 A.D.)—A spiritual reaching out into boundless space.

Spengler also suggests a 'Prime Symbol' for the (recently born):
Russian Culture—The unlimited horizontal plane.

Our present Western Culture, Spengler estimated, is one or two centuries from its demise, which he does not see necessarily as obliteration—the civilization of Ancient Egypt, he pointed out, continued in fellaheen form for centuries.

The ossified forms of exhausted cultures, he wrote, can persist like pyramids for thousands of years. A new culture may emerge from their detritus or from within a society hitherto lacking a prime symbol. If the new culture’s start overlaps a dominant but dying culture, its early development will be masked and for a time, warped by that prior culture.

<snip>

[GliderGuider]

30. Thanks. I hadn't gotten to Spengler yet.

Given my opinions, "Decline of the West" should be added to my reading pile. I can already see a few areas where I'll have disagreements with it, but it looks like a must-read for collapsists :-)

[bbinacan]

13. Interesting article.n/t

[wtmusic]

22. He lost me at, "The second law (of thermodynamics) has ultimate influence

over the...entropic decay of all forms of assets."

I guess I'm supposed to Question Everything - except for that. :D

[pscot]

23. The model may not be mathematically corrrect

but it seems to reflect our present reality. A tinker toy model of an atom is one way of making atoms comprehensible. Whining irritably that atoms are not like that at all misses the point. It's a damned metaphor. I am not a scientist, nor do I play one on the internet.

[wtmusic]

26. Backwards - he's trying to explain tinker toy ideas

using particle physics. Kind of pointless.

[Eddie Haskell]

25. Nothing new, but the graph

Damn, we're in a tight spot.

US DOE 2005 Hirsch Report Conclusions:

World oil peaking is going to happen, and will likely be abrupt.
World production of conventional oil will reach a maximum and decline thereafter.
Some forecasters project peaking within a decade; others contend it will occur later.
Peaking will happen, but the timing is uncertain.
Oil peaking will adversely affect global economies, particularly the U.S.
Over the past century the U.S. economy has been shaped by the availability of low-cost oil.
The economic loss to the United States could be measured on a trillion-dollar scale.
Aggressive fuel efficiency and substitute fuel production could provide substantial mitigation.
Oil peaking presents a unique challenge.
Without massive mitigation, the problem will be pervasive and long-term.
Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary.
Oil peaking will be abrupt and revolutionary.
The problem is liquid fuels for transportation.
The lifetimes of transportation equipment are measured in decades.
Rapid changeover in transportation equipment is inherently impossible.
Motor vehicles, aircraft, trains, and ships have no ready alternative to liquid fuels.
Mitigation efforts will require substantial time.
Waiting until production peaks would leave the world with a liquid fuel deficit for 20 years.
Initiating a crash program 10 years before peaking leaves a liquid fuels shortfall of a decade.
Initiating a crash program 20 years before peaking could avoid a world liquid fuels shortfall.
Both supply and demand will require attention.
Sustained high oil prices will cause forced demand reduction (recession and unemployment).
Production of large amounts of substitute liquid fuels can and must be provided.
The production of substitute liquid fuels is technically and economically feasible.
It is a matter of risk management.
The peaking of world oil production is a classic risk management problem
Mitigation efforts earlier than required may be premature, if peaking is long delayed.
On the other hand, if peaking is soon, failure to initiate mitigation could be extremely damaging.
Government intervention will be required.
The economic and social implications of oil peaking would otherwise be chaotic.
Expediency may require major changes to existing administrative and regulatory procedures.
Economic upheaval is not inevitable.
Without mitigation, the peaking of world oil production will cause major economic upheaval.
Given enough lead-time, the problems are soluble with existing technologies.
New technologies will help, but on a longer time scale.
More information is needed.
Effective action to combat peaking requires better understanding of the issues.
Risks and possible benefits of possible mitigation actions need to be examined.

[kristopher]

27. There is no crisis in the transportation sector.

Since 2005 the electric auto has entered the market and natural gas supplies have soared. Battery electric can handle the personal transportation sector and natural gas burned in internal combustion engines (eventually moving to electric from fuel cells) can replace diesel in the trucking sector. Biofuels work for the agricultural sector and eventually shipping and air.

The crisis ins't too little petroleum and energy security, it is too much petroleum and its associated carbon emissions. Fortunately both concerns can be addressed with the same technological path.

We are not "in a tight spot".