End of the Oilocene: the roar of the oil-fizzle dragon king

EROI, the oil industry, the global economy, debt, decline and economic collapse

(The term “Oil fizzle Dragon King” (OFDK) was coined by Dr Louis Arnoux.)

The global industrial economic/energy system is heading toward structural failure.

“As fossil fuel deposits with abundant net energy are exhausted and have to be replaced by deposits with lower net energy, a larger and larger fraction of the total energy available to an industrial society has to be diverted from all other economic uses to the process of keeping the energy flowing. Thus it’s not enough to point to high total energy production and insist all is well; the logic of NET energy has to be applied”

“The blindness to whole systems needs to be overcome in order to make meaningful sense of energy issues”

“What is unsustainable cannot be sustained”
(JM Greer, Dark Age America, 2017)

1.0 Where we are now

The world stands on the brink of a structural collapse of the energy and economic system that has operated for the last two hundred years or more.

There are an increasing number of warnings about the next financial crash and the fact that it will be far worse than 2008. [Refs 1-13]. Global debt is expanding at a rate far faster than GDP (global increase of about 4 units of debt to one of GDP growth). Global national and private oil company debts are expanding faster than revenues, and most entities have shrinking balance sheets. This is especially true of the US fracking industry which has since 2012 been the global swing producer making up for the crucial shortfall in global oil production since the peaking of conventional oil supply around 2005; an industry which even the New York Times recently revealed as a PONZI scheme, belatedly stating the increasingly obvious. The US shale industry is and always has been a financial mirage which has never been profitable, demands annually huge amounts of new capital, and is now approaching the limits of credibility. [Refs 22-27]. Since the 2014 collapse in the oil price, the HSBC Bank and many others are warning that underinvestment in the global oil sector over the last 3 years and other factors will cause a supply shortage/increase in price within the next couple of years; a sentiment echoed by many in the industry [Refs 14-21].

Only a few understand that the underlying root cause of this unfolding historic structural crisis is energy.

Economists do not understand the role of energy in the economy [Refs 28-29]. Least of all do they understand that actually what drives economic activity is not energy per se – but NET energy – the surplus energy available to power the economy after deducting the energy inputs required to extract, refine and deliver energy (especially oil). The fact that NET energy from oil/gas is declining very rapidly and is now at levels that are far below what is required to sustain our complex energy intensive industrial economy is not understood, nor is the devastating fundamental effect of this decline on the trajectory of the global economy. These trends are unequivocal and as clear as day.

Unsustainably low global and US interest rates which are the culmination of an inexorable falling trend since 1980, cannot be raised to buck this trend. Central Banks that have printed money to escape the day of reckoning after the global financial collapse of 2008, now find themselves in an impossible position. Their attempts to raise rates against this trend are causing a rapidly developing Emerging Market Crisis and will, if not reversed, hasten the collapse. Many countries (Italy, Spain, Argentina, Turkey) teeter on the verge of financial collapse due to unpayable interest on debts, and huge banks such as Deutsch Bank are on life-support – each one able to cause a Lehmann Bros moment. Also waiting in the wings is the bursting of the largest financial bubble of all time (the everything bubble) comprising many global stock markets especially the US which is at its highest ever (fuelled by $100s of billions of destabilising share-buy-backs which were outlawed after the 1929 crash but subsequently slipped in under the radar), plus many national real-estate/property bubbles, and national bonds.

The 2008 global financial crisis was primarily an energy-driven crisis caused by the peaking of cheap, high-quality conventional oil in 2005 (Refs 30-31). This led to a rapid oil price rise to $140/barrel, and the subsequent events that followed. The structural causes of this crisis have not been addressed. 2008 was a warning ignored. The Irish economy is highly exposed. Our policymakers seem to have no idea of this predicament. The 2008 global crisis (which was predicted by many), caused huge damage to the country. We urgently need to start talking about what is coming and the reasons why, and how to survive it as a society.

2.0 Introduction

Industrial economies require huge amounts of energy and the world appears to be awash with fossil and renewable energy resources. At the same time, the global economy is increasingly debt-ridden, and economic growth is more and more difficult to achieve. Economists the world over believe that economic growth can be maintained with the right policies; but growth is elusive. Now an increasing number of people are warning of an imminent global financial collapse worse than that of 2008. What is the problem?

The key to understanding this issue is Energy. Specifically NET Energy, and its relationship to the economic system/GDP, and the financial system/debt/interest.

NET energy, or EROI, is the energy surplus available to do work after deducting the energy required to produce that energy. In the case of oil this includes exploration, extraction, refining, storage and delivery, plus the energy required by a huge supporting global oil industry infrastructure and its support systems.

Before and during most of the 20th century, global industrial economies grew at a rapid pace – supported by the seemingly infinite availability of cheap stored fossil energy accumulated over millions of years. But by the latter part of the 20th century, the most abundant low-cost high-quality, high net-energy fuels had already been consumed. Net energy available from the world’s most important fossil fuels, oil and gas, is now at much lower levels and declining steadily (whilst renewables have low net energy and comprise a fraction of global primary energy use, e.g. wind+solar account for <3% of total global primary energy use).

Around 1980, all industrial economies and the world as whole passed a crucial turning point. The EROI of the most important primary energy sources – crucially oil – fell below an average of 30:1 which is the net energy threshold that Charles Hall and others have estimated is required to sustain our energy-hungry wasteful economies. Since then, debt has grown faster than GDP for the US, the G7 and the world as a whole; and this debt/GDP disparity has since increased at a steady exponential rate such that globally debt is now increasing at over 4 times the rate of GDP growth. At the same time, the EROI of oil and gas, our major fuels, comprising approximately 65% of global primary energy, has declined steadily since the early 1980’s is now approximately 15:1 and falling.

Economic growth is directly proportional to and dependent on growth in primary energy use. We are using ever more total energy – but global net energy supply is falling. Our gross total energy needs are increasingly provided by production of low EROI fuels which have EROI of 5:1 (including shale oil, tar sands and bituminous oil). This level of EROI is far too low to sustain our complex industrial society.

Low EROI = high cost of production. Most US shale oil and Canadian Tar Sands companies for instance have rapidly increasing debts and negative free cashflows. As EROI of global oil sources declines, so does the financial status of the world’s oil companies. The national budgets of oil exporting nations deteriorates inexorably and the sovereign wealth funds of the big global oil producers Norway and Saudi Arabia are shrinking rapidly. Without huge amounts of debt at low interest rates supporting production of these low EROI fuels, global oil production would be falling and the global economy would be in a rather more obvious state of contraction.

How much longer can rapidly increasing amounts of debt relative to GDP be sustained by a global industrial economy in which gross primary net energy is falling rapidly – especially that of oil?

A crucial point in the process of decline was the peaking in the rate of production of conventional oil around 2005 which in turn led to the price of oil reaching nearly $140/barrel. Oil price increases are understood by economists as being inflationary – so the US Federal Reserve raised interest rates (against the long-term trend in their decline) and this led to the exposure of the mortgage-backed securities fraud which was endemic in the US banking system. It was primarily an energy driven crisis when the increasingly strained energy-debt system of the previous 30 years failed. It is notable that since then there has been no attempt to address the structural faultlines in the economy except to print money and further lower interest rates. Since 2008 – unrestrained issuance of debt has enabled the global industrial world to overshoot to an extraordinary extent.

What is unsustainable cannot be sustained, and the system we have known for the last two centuries is approaching the next stage in its descent – a systemic malfunction in which the overall decline in net energy available to power the global economy causes (requires) debts to increase to levels that are impossible to sustain.

Lets look at these issues in more detail: EROI, the growth of debt, oil company problems, falling interest rates and the fatal collision between these irreversible trends.
 

3.0 The Big Question

A crucial debate is gathering momentum. On its outcome hangs the fate of the global industrial world economy and the immediate prospects for all humanity. On the one side there are the serried ranks of mainstream economists, government policymakers and even renewable energy professors who believe in the comforting statements of the EIA, IEA, BP, etc that there are plentiful supplies of fossil fuels extending many years hence, to be replaced gradually by a shift towards renewables; that today’s economic woes are a temporary blip of the business cycle, and we can economically perpetually grow our way to a new tomorrow. A belief that tomorrow will simply be a projection of today’s business as usual.

On the other side are the thermodynamicists, whole systems analysts, alternative economists, and ecologists who are trying to warn society that the deep structural problems in our energy and economic system are increasingly grave and dangerous. In particular the problem of Net Energy and its relationship to the functioning and state of the global economy, as indicated by the ratio debt/GDP, interest rates and other financial indicators. By Net Energy we mean EROI = energy return on energy invested. This principle applies to all global energy supplies, especially oil – which powers over 95% of global transport – and natural gas. They together comprise over 65% of global primary energy.

If the “mainstream” is wrong, they have sealed the fate of the inhabitants of this planet to economic and energy crises that will cause strife and hardship on an unimaginable scale – crises which are already well under way including just a few;

– irreversible exponential growth of debts of all kinds escalating to many times GDP with interest payments (even at current low levels) consuming an ever larger portion of economic output;
– rapid deterioration in the financial status of major global oil companies and of oil producing nations;
– growing political and social instability and an increasing number of “failed and failing” states; with increasingly desperate political and warlike manoeuvres against those nations hosting reserves of high EROI oil and gas;
– increasing inequity (1% own 40% of global wealth/assets); collapsing wealth of the middle and lower classes especially in those countries dependent on high levels of energy and material consumption; deteriorating status of social provisions, welfare systems, and pension funds; and increasing militarisation, fake news from the mainstream, and growth of the internal “security apparatus”.

4.0 EROI falling

“I conclude that, as the EROI of the average barrel of oil declines, long-term economic growth will become harder to achieve and come at an increasingly higher financial, energetic and environmental cost” D.Murphy 2014.

Oil is the flexible high net energy foundation of the global industrial world. It powers >95% of all transport, and powers the world’s industrial food production system. Economic growth is intimately and proportionally linked to its use. Oil comprises over 35% of global primary energy use, and production of virtually all commodities and other energy sources (coal, natural gas, renewable energy systems including nuclear power and hydro); are also dependent on oil in their production chain. No other energy source comes anywhere close in its ability to provide these services to humanity. The global industrial economy needs oil like humans need food.

As with any business whose gross profits are a function of the gross value of production minus the costs of production, it is not total gross energy production that ultimately powers the economy – but the amount of net energy (ie energy profit) which is available to do work. Energy “costs” of oil include exploration, extraction, refining, storage and delivery AND the energy required by a huge supporting global oil industry infrastructure and its support systems (think energy required to build operate and maintain super-tankers, oil rigs, refineries, oil pipelines and the energy needs of all the people involved). EROI is simply a measure of the amount of energy available for use by the wider economy after deducting the amount of energy used to produce it, as illustrated by the following image (Dr. Charles A.S. Hall to ASPO USA 2012 “Peak Oil, Declining EROI and the New Energy-Economic Reality”).

Click on image to enlarge

 Whilst it is difficult to exactly determine the EROI of a fuel source, mainly due to selection of appropriate system boundaries, the following images illustrate the falling trend of EROI of oil and gas.

“The EROI for the production of oil and gas globally by publicly traded companies has declined from 30:1 in 1995 to about 18:1 in 2006 (Gagnon et al., 2009). The EROI for discovering oil and gas in the US has decreased from more than 1000:1 in 1919 to 5:1 in the 2010s, and for production from about 25:1 in the 1970s to approximately 10:1 in 2007 (Guilford et al., 2011). Alternatives to traditional fossil fuels such as tar sands and oil shale (Lambert et al., 2012) deliver a lower EROI, having a mean EROI of 4:1 (n of 4 from 4 publications) and 7:1 (n of 15 from 15 publications)”: Charles A.S. Hall, Jessica G. Lambert, Stephen B. Balogh. 2014 “EROI of different fuels and the implications for society”, Energy Policy 64: 141-152.

Historically easy to produce high quality energy sources were naturally exploited first. Production now continues to get more difficult and expensive. Net energy available to the economy from oil production has calamitously declined by 50% over the first 15 years of this 21st century. The combined EROI of oil and gas – our major fuels comprising over 65% of primary energy supply are now in the region of 15:1 or less. Remaining oil reserves yield even lower net energy values. The following image illustrates the point.

Source:USGS


Source: dicalle.com


Click on image to enlarge. Source: “Energy Return on Investment (EROI) of Oil Shale” by Cutler J. Cleveland and Peter A. O’Connor, Sustainability 2011, 3(11), 2307-2322; https://doi.org/10.3390/su3112307.

The USGS estimates that about 70% of the world’s total proven oil reserves comprise Canadian tar sands, bituminous oils, and various other types of heavy oil. The EROI of these energy sources is very low (Tar sands 5:1 dicalle.com, shale oil 2:1 Cleveland:O’Connor 2011). We are increasingly using these low quality – low EROI and expensive to produce resources because the store of high net liquid energy that has powered the global economy (and vastly increased its output for over a century), is nearly all gone; with nothing remotely in sight to replace it.

5.0 Oil and the economy

Around 1980, the global industrial economy passed a crucial point in its history. Debt started to grow faster than economic output (GDP) in the G7, the US, and the world as whole. By 2017, the amount of debt required to produce one dollar GDP growth in the US and globally is shown in the following images; trends that are increasing exponentially.

Source: SRSrocco report.


Source: SRSrocco report.

Simultaneously in the decade 1970-1980 the net energy yield (EROI) of oil which is the main driver of the economy (95% of all transport), dropped below an average ratio of 30:1, the level that Charles Hall and others have calculated to be the minimum level required to sustain our energy hungry industrial economic system.

In the following images, the growth of (GDP) and debt (Global, US and G7), are charted against approximate average global EROI of oil. All charts show that in the decade 1970-1980 onwards – the average EROI of oil fell below 30:1, and from that time all major industrial economies and the global economy have needed increasing amounts of debt to produce growth; such that it now takes many monetary units of debt to create 1 unit of economic growth.

Source: SRSrocco report.



To accommodate increasing debt, interest rates need to be proportionally lowered to enable the consumer economy to survive. Accordingly, the next images show that in the US and globally, interest rates also peaked soon after 1980, since when they have been steadily declining to current low levels.

Click on image to enlarge


Source: graph compiled by author from data at http://www.tradersnarrative.com/emerging-markets-as-global-growth-engines-4260.html, derived from World Bank data.


There is an inescapable downward trend to ZERO of both trends, and the date at which this occurs is NOW. We have now reached the bottom of the barrel – there is nowhere left for rates to go. Central banks anticipating this next cataclysm are attempting to raise interest rates and this will do to the global economy as it did before. It is no co-incidence that projections by Charles Hall, the Hillsgroup, Louis Arnoux, and others have shown that on average, global net energy production from global oil production is simultaneously on average trending to zero.

6.0 Oil industry woes

6.1 Lower EROI = Higher Cost of Production

In 2005, the rate of production of conventional high EROI-oil peaked, and is now in decline. What remains is increasingly difficult to extract, of lower quality, and more expensive to produce. As a result, “Business as Usual” operating costs of the global oil industry have risen very quickly over the last 15 years. This is causing rapidly deteriorating balance sheets of global oil companies and of many oil producing nations. This applies also to many natural gas resources. The following images indicate very serious trends in the cost of production.

Click on image to enlarge

6.2 Oil company financial status: the industry is sustained by increasing unsustainable debt


The global oil industry that is the lifeblood of the world’s industrial economic system is under increasing financial stress due to shrinking EROI (net energy) available from global oil resources and other energy sources, and the consequences of increasing cost of production. This process started many decades ago and is reaching critical stages. The following image clearly shows the deteriorating financial health of the world’s major oil companies charted over the last 15 years, derived from their annual financial reports (chart SRSRocco; to which I have added a simple extrapolation of the trend).

 


Important points to note:

➢ In 2004-5 when the global oil price was low (av $38/bbl), oil companies were making plenty of money.
➢ Increasing cost of production over the next few years rapidly ate into their profits.
➢ During 2011-2014, when the oil price was a high average $110/bbl, net revenues were falling.
➢ Now at current price in the range of $55-$60/bbl, the net income of the major global oil companies is heading rapidly into the red.

The following chart re-enforces the point. At current oil prices, capital spending by the global oil industry will soon on average yield a negative return on investment. As in the above chart, note the continuing decline that occurred during the three years period of high oil prices 2011-2014.

Click on image to enlarge

If the financial status of these companies was clearly deteriorating while oil prices were ~110/bbl, it is conclusive that oil companies now need a price which is greater than this to support BAU; a conclusion that has been amply made by many analysts. A quick look at the oil shale (tight oil) industry in the US illustrates the point. Even during years 2012-2014, when the oil price was at $110/bbl, net revenues were falling.

Source: http://crudeoilpeak.info/no-number-crunching-in-alan-kohler-opinion-piece-on-premature-peak-oil-death

Fracking requires large numbers of rigs to inject huge quantities of water and chemicals and sand under pressure to split oil-bearing rock to extract tight oil in relatively small quantities per rig compared to what was previously available from huge underground lakes of high quality liquid energy just under the surface. Production from each well declines rapidly so that new wells/rigs are continuously required = continuous capital injection to maintain output. Is it any wonder the EROI of shale (tight) oil is so low and costs are high! Production of this type of oil is sustained only by continuous injections of cheap debt. Its EROI is far lower than that required to sustain our (phenomenally wasteful) industrial economic system; yet it is touted by the US establishment as being the energy source that will make the US energy independent. Without the contribution of US fracking, global oil production would be in an obvious state of contraction.

Click on image to enlarge

 6.3 The oil industry already has HUGE debts.

Borrowing more money to keep oil companies in business is not likely to be sustainable for more than a few years: “A report published in October by the Group of 30 (G30), a Washington DC-based financial advisory group run by executives of the world’s biggest banks, warns investors that the entire global oil industry has expanded on the basis of an unsustainable debt bubble. The industry’s long-term debts now total over $2 trillion, the report concludes, half of which “will never be repaid because the issuing firms comprehend neither how dramatically their industry has changed nor how these changes threaten to soon engulf them.”

Again note the same pattern – even during years 2011-2014, when the oil price was at $110/bbl, debts in the oil/gas sector were increasing and Norway’s wealth fund (and other sovereign wealth funds such as Saudi Arabia’s) were falling.

It is clear that the financial prospects for the global oil-industry and oil producing countries are rapidly deteriorating. The response of mainstream economists to this trend is; “Oil prices will soon rise and everything will be OK”. Unfortunately this is far from the case.

6.4 Oil prices and the global economy

Global oil consumption is tightly coupled with GDP growth. Any interruption in supply or cost has a devastating impact on the global economy. Five out of six major economic recessions have been due to this factor. Over the years there have been many studies showing that the global economy is based on cheap oil energy, and that any significant rise in oil price tends toward recession.

Source: Gail Tverburg

Any significant rise in oil price tends toward recession. A recent study of oil price/economic data from the last 40 years, shows that during economic recessions, the oil price tops $60/bbl, but during economic growth remains below $40/bbl. This means that prices above $60 will induce recession. The study concludes that to avoid recession “the oil price should not exceed a threshold located somewhat between $40/bbl [per barrel] and $50/bbl, or possibly even lower” This is echoed by UBS Bank that states “the global sweet spot seems to be between $50-70/barrel” [Refs 32-33]. As pointed out above, this is FAR lower than the prices the oil industry needs to do BAU. Oil companies know this and that is why they are unable to invest in future production to the extent that they need – especially bearing in mind that production from more than 80% of all existing global oil reserves are in decline.

Those who believe that the economy can sustain an increase in oil prices to anywhere near what the industry needs to survive need to be reminded that the global economy is already….

➢ straining at the limits of indebtedness and credibility. At a staggering total in excess of $230 trillion (hugely more in unfunded liabilities) the total global debt burden today stands at about 250 % of annual global GDP. The debt amounts to approximately $30,000 for every person living today; increasing daily.
➢ dependent on continued sustained printing of money as debt by central banks issued at low or zero interest rates,
➢ an economy in which (due to money printing by central banks) all major stores of value; stocks, bonds, and real-estate in many high GDP countries (especially Canada, Australia, the USA and China) are at levels which are now higher than all previous peaks since 1929.

As David Stockman points out “Global GDP has expanded from about $3 trillion to $80 trillion since 1970 or by 26X. By contrast, the balance sheets of central banks has exploded by around 275X. In June 1970, US GDP was $1.1 trillion and it has since expanded by 18X to $19.6 trillion. By contrast, total public and private debt outstanding was $1.58 trillion and has since expanded by 42X to $67 trillion. In effect, the law of compounding eventually rules. That’s because to extend these unsustainably divergent trends for even another decade would lead to an outright absurdity. (In the US alone), ten years from now nominal GDP would total $35 trillion and total public and private debt would reach $150 trillion”.

Many financial experts are warning that the current situation is unsustainable. For instance in October 2016 “The International Monetary Fund urged governments to take action to tackle a record $152tn debt mountain before it triggers a fresh global financial and economic crisis. They say “Central Banks are bearing too much of the burden for sustaining growth”. The McKinsey Institute (2017) says “Global debt is ($199 trillion) and unsustainable and all major economies have higher levels of borrowing relative to GDP” than in 2007.

Sustainable economic growth is a thing of the past. The illusion of economic growth in the world economy is now being maintained by printing exponential amounts of money as debt issued at (currently) low/zero interest rates; and this imbalance has caused the largest economic bubble of all time occurring simultaneously in all major sectors: stocks, bonds and property, as illustrated by the situation in the US.

Bubbles tend to burst! As Chris Martensen of Peak Prosperity (www.peakproperity.com) says (03/12/17) “So now we are at the apex of the most incredible nest of financial bubbles in all of human history. These bubbles – blown by central bankers serially addicted to creating them (and then riding to the rescue to fix them) – are the largest in all of history. That means they’re going to be the most destructive in history when they finally let go” http://www.zerohedge.com/news/2017-12-02/youre-just-not-prepared-whats-coming.

7.0 Collapsing NOW.

GDP is an illusory indicator of economic output. If we deduct debt from GDP we see that in fact the major economies of the world are already in obvious collapse mode with growth static and debts accelerating.

Click on image to enlarge. Source: Awara Group

In the last decade, western economies have not grown, they have massively inflated debt at an increasingly unsustainable rate. Globally, if we extrapolate the exponential growth rate of debt since 1990, we see collapse guaranteed well before its near vertical ascent by 2030.

Increasing debt to gdp ratio; exponentially increasing total debts; ultra low interest rates; financial bubbles; collapsing financial status of the oil industry; the shrinking financial reserves of oil producing nations; and more. These are all indisputable indicators of a global economic system in irreversible rapid decline and heading for a systemic crisis.

The hidden factor that is remorselessly driving this process is the inexorable contraction in total NET energy of the world’s energy sources – mainly oil.

The global industrial economy is trapped in a tightening vice of opposing trends. Exponentially Increasing amounts of debt are required to sustain marginal economic growth; such as production of low EROI fuels that would otherwise be uneconomical to produce; and to support many other unsustainable activities needed to maintain our complex industrial economies. If central banks stop printing debt, any illusion of economic growth will cease and the global economy will crash. If they don’t stop printing, debt will continue to increase to impossible levels and the economy will crash.

2008 was a fundamental systemic net energy-debt based crisis. This occurred soon after conventional oil production peaked; causing a rise in oil price and inflation. Central Banks responded by increasing interest rates which quickly impacted “sub-prime” borrowers in the US causing the collapse of financial institutions which had indulged in a corrupt orgy of financial manipulation. This was echoed by financial institutions in other countries including Ireland.
 
“None of the problems of 2008 were fixed. Instead, trillions of dollars of bad private debt was transferred to the public. In effect, the chain of dominoes that connected sub-prime borrowers to private banks and insurers in 2008 extends to currencies and governments in 2018. The risk is that this time around, a “preventative” hike in interest rates will trigger a collapse that not only takes down multinational banks, but destroys national currencies and bankrupts national governments. If this were to happen, then everything that was “too big to fail” in 2008 will prove to be too big to save this time around” (Tim Watkins: Consciousness of Sheep 2018).

7.1 The Age of Trickle UP: financialisation and the growing gap between the rich few and the rest.

One of the classic indicators of the collapse of the Roman Empire (and many others) was the growing wealth gap between the elites and the rest of society. 1% of the global population now own >40% of the worlds assets/wealth (excluding the hidden assets!). We are reaching the apex of an era of financialisation in which more and more of the money (debt) created by the elites who own the banks, the corporations and the means of production, becomes available for their use and filters back upwards to them. There is no longer trickle-down – it is an age of trickle UP. Political and economic decisions of all kinds made by the elites are influenced by them and designed to favour them. The corporations which are owned by them disburse trillions of bonus payments and dividends to themselves. Corruption is endemic (corporate theft of pension schemes, offshore tax havens enabling personal and corporate tax evasion etc etc).

Meanwhile the rest of the world increasingly descends into debt-ridden chaos of destitution and environmental and social degradation – and people wonder why! The average life expectancy in the US and UK is now in decline, as are a host of social provisions; healthcare, pensions, and public services. Employment is increasingly insecure with declining benefits; housing and property is unaffordable for the millennials who are being forced back into their family home. Student debt is astronomical and unpayable. Unemployment is endemic and the state apparatus of surveillance and repression is growing everywhere. The EU is staggering under the onslaught of refugees from collapsing mid-east states; collapse which they themselves caused (Iraq, Libya, Syria). Political discourse is becoming increasingly degraded, and there is outright manipulation of the mass media which is owned and controlled by a few wealthy individuals; and is a growing platform for deception and mind control.

These societal indicators are reaching levels of obscenity equivalent to the apex of the French aristocracy and the last century of the Roman Empire. And they are all trending negative.

7.2 Depleting essential natural resources

In addition to fossil energy reserves, the quantity and quality of all major mineral resources is in marked decline. Of key natural resources upon which the world depends, forests are vanishing and fisheries are depleting. Fresh water is becoming scarce and polluted. Top-soils are eroding.

Myriad indicators of catastrophic global environmental, economic and social decline are accelerating within only a few decades; caused primarily by an insane adherence to the flawed economic paradigm – growth at all costs – underpinned by a financial system based on the issuance of debt with interest.

8.0 Conclusion

The global industrial economy was founded on and depends on high quality low-cost energy. GDP and oil/energy are tightly linked.

Source: Charles Hugh Smith 2017 in blog: https://snbchf.com/2017/07/hugh-smith-american-revolution/

Until 1980, industrial economies could expand faster than the growth of debt (ie debts were repayable). The easy oil was used first (in common with all natural resource consumption patterns) so that as time progressed, more energy and resources were required to produce oil (eg well-depth increased as did the amount of water), so that the EROI has steadily been falling. We are now dependent on low quality low EROI oil from tar sands and oil-shale and bituminous oils. 

In the following images, Dr Louis Arnoux shows that despite steadily increasing global oil production, NET oil energy has been falling rapidly since 1980 and is heading toward zero; at which point it will take more energy to extract and produce and deliver oil to the global economy – than is contained within the barrel of oil.

Without large amounts of cheap NET energy from oil (and gas) the industrial economic system as we know it cannot function. Falling NET energy delivered to the global economy is the prime cause of a failing economic system that is now supported only by increasing amounts of debt far in excess of GDP. To keep the economy going is requiring increasing amounts of debt at lower and lower interest rates. This trend is reaching terminal stages.

We can see this clearly as follows. Around 1980, a crucial turning point occurred. The EROI of oil and gas combined fell below the 30:1 level estimated to be required to sustain energy hungry industrial economies. As the following images show- FROM THIS TIME ONWARDS, the growth of debt has outstripped economic (GDP) growth, and interest rates have steadily declined to currently unsustainable low levels.

EROI and DEBT, former friends of industrial economies, are now its implacable foes. These have united to set the stage for an imminent systemic crisis far worse than 2008.

Economists do not factor Net Energy into their equations. The IEA and other organisations continue to trot out total gross oil supply projections which wilfully ignore the realities of the EROI/price implications. Ignorance, hyperbole, economist smoke and mirrors and outright deception are being used to cover up the true state of economic and energy realities. But the causes of the trends outlined in this essay are merciless. As overshoot grows, so does the distance to fall. The coming crisis will expose the economic unsustainability of production and use of low EROI fuels, and these industries (ie US fracking industry, Canadian oil sands etc) will probably be amongst the first dominoes to fall, initiating the contraction in oil production, which will in turn exacerbate the rate and severity of consequent economic-debt-energy contractions.

Political ramifications

Declining energy resources and global economies are of course causing international relations to become increasingly stressed. It is interesting to note that in its desperation to prop up their shale oil/gas industry, the US is resorting to outright blackmail by the use of economic sanctions against oil producing countries outside of its control such as Iran and Russia. Examples include fabricating false narratives against Russia to isolate it, pressuring Germany not to proceed with Nord-Stream 2 gas pipeline (so that that Europe is forced to instead purchase more expensive US shipments of LNG/LPG); and the US/UK’s utterly immoral determination to pursue regime change in Mid-East countries, to complete their devastation of Syria, followed by Iran. Why Iran? Because it has some of the largest remaining global reserves of high-quality high EROI oil. The stakes are high.

Why is the USA embarking on trade wars? Why are they (and the UK) meddling in the middle east? Its because these economies are in serious decline. Associated with energy decline – one of the reasons for this and the political trends mentioned is that the “boondoggle” known as the petrodollar – the so-called global reserve currency – is under increasing pressure. This accounting fraud has enabled the USA to live like a parasite on the back of the world economy since the end of WW2. This inequitable system requires countries – especially oil trading ones, to buy US Dollars WITH INTEREST simply in order to trade with each other – resulting in trillions of unearned income to the US. This sleight of hand has enabled the US economy to live far above its means, to become completely dependent on imports, and to spend trillions on a military-industrial complex which enables it to enforce global compliance. The US economy is now in sharp decline with rapidly increasing debts, out-of-control financial institutions, and an increasingly impoverished middle class; it is now reaping what it sowed.

To escape this inequity, many Nation States such as China and Russia are increasingly divesting from the dollar, and trading in Yuan, roubles and other national currencies; and these actions are causing the elite in Washington (and UK) to bring the world to the brink of war.

If we somehow avoid a catastrophic and pointless nuclear war fighting over the last scraps of high EROI energy (bringing a terminal end to global industrial civilisation), this process of net energy decline and economic contraction will reduce the average standard of living of industrial economies to low levels concomitant with the average EROI of economically viable available fuels and energy sources. The principle that arises from this analysis can be stated simply:

“If the average EROI of all major energy sources is less than the societal EROI, the economic system is unsustainable and will collapse toward a lower level of activity that matches the available net energy”.

We are already witnessing the unwelcome truth of this inflexible thermodynamic and economic principle, which has in turn been the primary cause of collapse of many civilisations before us. In this respect I recommend J M Greer’s “Dark Age America” as a sobering discourse on the decline of industrial civilisation as it pertains to the US but also to the world.

Meanwhile Ireland’s policymakers exist in an insulated bubble; congratulating themselves on reducing the debt-GDP ratio and high employment due to the sleight of hand of low corporate tax rates. On a per capita basis we are the second most indebted nation in the world (after Japan). We are HUGELY vulnerable to a global financial downturn – let alone a systemic crisis. Talk of a “Celtic Phoenix” excites dull short memories, and another property bubble is in the making. This little ship gaily floats on the surface of the swimming pool of the Titanic whilst an iceberg approaches. History will before long repeat itself as tragedy.

In 2005 I gave a lecture in Tralee titled “Peak Oil = Peak Money”. The simple exposition being that when conventional oil production peaked, there would be a rise in oil price and a financial crisis. This is EXACTLY what occurred. Conventional oil production DID peak in 2005, and there WAS a deep structural financial crisis. Subsequently in 2014, I gave a seminar to the Deans and Post Doctoral students at Limerick University Business School titled “Systemic Change” warning of a deterioration in energy prospects and that of the global economy. This was followed by the oil price crash of 2014; which was in turn predicted by graphs I showed in that lecture derived from the petroleum consulting Hillsgroup and separately by Dr Louis Arnoux of N-Geni. (http://www.thehillsgroup.org/ is absolutely essential reading)

We are now faced with the logical corollary of these inexorable trends. Since the 2008 financial crisis which followed the peak in conventional oil production, to prevent collapse and maintain a semblance of economic growth, the worlds central banks have printed trillions of debt-based money from thin air which has enabled us to throw more and more money at this problem because unconventional oil (shale oil, tar sands, and expensive other sources such as very deepwater and polar) cannot be produced within a framework of the current economic system; they are too expensive to produce because they have low EROI of 5:1 – which is also far too low a net energy ratio to sustain the global industrial economy.

Having fooled ourselves with central bank QE, hoping we can print money indefinitely, these chickens are coming home to roost. Economists do not understand that energy is the BASIS of industrial economies, not a subset of it; There IS no replacement for oil. The idea that renewable energy (which currently comprises a tiny fraction of global primary energy use) can substitute for fossil fuels is a fantasy which ignores the reality that ALL forms of “renewable” energy require huge amounts of fossil fuels in their manufacture, deployment and maintenance and do themselves have EROI not much different to unconventional oil supplies.

In 1972, the Club of Rome published their groundbreaking report “Limits to Growth” that warned of these trends. It was of course ridiculed, but recent analysis (https://www.theguardian.com/commentisfree/2014/sep/02/limits-to-growth-was-right-new-research-shows-were-nearing-collapse) indicates the trends they predicted as BAU are on course. Since 1972 a large number of ecologists, alternative economists and environmentalists have also shouted the same message. The Irish organisation FEASTA is one of these; with highly informed publications such as Before the Wells Run Dry and subsequently “Fleeing Vesuvius”; and essays such as David Korowicz’s “Tipping Point”. .

Increasingly strident voices and predictions of the next global financial crisis and its severity point to many different issues: out of control banks, out of control debt, political instability etc; but these are mere indicators/symptoms of a deeper hidden malaise which is the cause of them all which is Net Energy – especially that of oil. This is trending downwards rapidly. There are no magic bullets to replacing the incredible high net energy of oil/gas that was available in the last century on which the global industrial economy was constructed. We need to get real quickly, understand the global (and our) predicament, and put on our thinking caps to create ways that a few years ago we would have called “the prosperous way down” but that now can at best avoid the very worst of what the future will bring to this country.

We need to prepare for the coming storm. It is too late to avoid serious consequences, but perhaps the worst impacts could be avoided here in Ireland if we anticipated the coming course of events and started planning accordingly (if we have time). The 2008 global crisis (which was predicted by many), caused huge damage to this country. The next global systemic economic crisis will be far worse and is imminent. It will cause huge chaos as the economy goes into freefall with the creation of massive unemployment and social unrest caused by the collapse of the financial basis of government social provisions; pensions, health, education, etc.

We urgently need to start talking about what is coming, the reasons why, and how to survive it as a society. Plan B is urgently needed, and new very creative policies urgently need to be devised around the core question of initially how to survive the coming crisis, and subsequently to maintain a hopefully reasonable standard of living and economic activity using a fraction of the energy and resources we currently use.

For example: the coming financial crisis will be far-reaching and devastating and we should prepare to have an alternative financial system in place (such as Italy is planning, and Greece thought of doing!). Thomas Hanna of the Democracy Collaborative USA says. “Instead of bailing out banks when the next global financial crisis hits, we need to be prepared to nationalize them and create a public banking sector, which will not only be a way out of the crisis, but will also help prevent future crises”. This will be an essential policy to plan for NOW. There is already a strong movement for a public banking system in Ireland. When the crisis hits, we need to be ready for it. Ireland will be totally bankrupted. We cannot repeat the 2008 catastrophe and bail out the financial institutions. My urgent suggestion is that a group of business leaders and academics is formed to evaluate these trends and to create ideas and policies to present to the Irish Government. Time is short.

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References/links

Current imminent financial crisis warnings (1-13)

Global Policy Watch
https://www.globalpolicywatch.org/blog/2018/06/14/warnings-global-financial-crisis/
Ann Pettifor
http://www.stuff.co.nz/business/money/102939290/ann-pettifor-predicted-the-global-financial-crisis–now-shes-predicting-the-sequel
IMF https://www.zerohedge.com/news/2017-10-30/second-crash-warning-imf-%E2%80%93-time-its-about-vol
Ahmed Nafeez. China Risk.
https://medium.com/insurge-intelligence/the-next-financial-crash-is-imminent-and-chinas-resource-crisis-could-be-the-trigger-be108b2731e9
Prof Robert Reich
https://www.newsweek.com/robert-reich-we-might-be-heading-crash-bad-1929-opinion-1101869
Gordon Brown – UK
https://www.theguardian.com/politics/2018/sep/12/we-are-in-danger-of-sleepwalking-into-a-crisis-gordon-brown
Prof Nouriel Roubinihttps://www.theguardian.com/business/2018/sep/13/recession-2020-financial-crisis-nouriel-roubini
Bond Market
https://www.rt.com/business/410317-bond-market-crash-prediction/
Stock market
https://www.thestreet.com/opinion/why-a-global-stock-market-crash-is-coming-14566852
Banks
https://www.ineteconomics.org/perspectives/blog/how-the-largest-banks-are-leading-us-to-a-new-financial-crisis
David McWilliams – Ireland
http://www.davidmcwilliams.ie/we-may-be-on-verge-of-a-global-financial-crisis/
Niall Ferguson – S-China morning post
http://www.scmp.com/comment/insight-opinion/article/2120679/another-global-financial-crisis-imminent-and-here-are-four
Real News Network
https://therealnews.com/series/the-next-global-financial-crisis-is-inevitable

Oil – energy shock/financial crisis (14-21)

http://thesimplerway.info/OilSituation.htm
https://www.theenergymix.com/2018/02/18/troubled-global-oil-market-could-be-headed-for-the-next-price-crash/
https://oilprice.com/Energy/Energy-General/The-Approaching-US-Energy-Economic-Crisis.html
https://www.rt.com/business/434192-regulation-could-push-oil-200/
https://seekingalpha.com/article/4085295-looming-energy-shock
https://oilprice.com/Energy/Crude-Oil/Oil-Prices-At-Risk-Of-Economic-Downturn.html
https://www.cnbc.com/2018/07/13/risks-rising-that-oil-prices-will-cause-next-recession.html
https://shipandbunker.com/news/world/449519-ubs-latest-bank-to-warn-of-100-oil-and-a-us-recession

Fracking (22-27)

https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html
https://srsroccoreport.com/future-u-s-production-will-collapse-just-quickly-increased/
https://srsroccoreport.com/the-coming-collapse-of-u-s-shale-oil-production/
https://www.zerohedge.com/news/2018-09-09/bill-bonner-americas-oil-boom-fraud
https://m.youtube.com/watch?v=YOeFzK85zq8#
https://oilprice.com/Energy/Energy-General/Are-We-Sleepwalking-Into-The-Next-Oil-Crisis.html

Economists don’t get energy (28-29)

https://www.resilience.org/stories/2018-03-28/the-world-in-2018-part-four/
https://medium.com/age-of-awareness/you-probably-dont-understand-economics-because-they-didn-t-teach-you-about-entropy-992beb7cab35

 
2008 oil shock (30-31)

https://oilprice.com/Finance/the-Economy/Oils-Role-in-the-Global-Economic-Crisis.html
https://blogs.wsj.com/economics/2009/04/03/did-the-oil-price-boom-of-2008-cause-crisis/
Recessions – oil price (Refs 26-28)
Oil-economy (32-33)
https://arxiv.org/ftp/arxiv/papers/1610/1610.07298.pdf
https://medium.com/insurge-intelligence/brace-for-the-financial-crash-of-2018-b2f81f85686b.  

Featured image: fire. Source: https://www.freeimages.com/photo/fire-1-1404355