End of the Oilocene – all change!

(What happened, what is coming, and why.)
(Note to readers: To fully understand the implications of this essay, it is necessary to read the links.)

Introduction

Before the current Covid-triggered global economic slowdown began, the global economy was already perched on the edge of a major correction. There were plenty of warnings. As more time passes since the start of the slowdown, people are beginning to understand that the media-hyped narrative of “recovery” is not possible as quickly as was projected, if at all, due to the enormous number of job losses, failed businesses, and bailouts (more debt), and the world is now entering an extended period of economic contraction; a “greater depression”.

This is the third global economy-shattering crisis in the last 20 years; and this latest one has not finished playing out. In between these events, debts of all kinds have escalated exponentially, and interest rates have plummeted. What is going on?

This essay describes a systemic and fundamental problem with the global economy which is getting more serious as time passes; showing that continuous on-going economic contraction is from now on baked into the cake of our global industrial economic system.

It is more than ever vitally important for us to understand the root cause(s) of the economic malaise to help prepare ourselves, our families, communities and businesses, and plan appropriate strategies for the future.

Where we are now

Increasingly urgent warnings are being issued by notable independent economists including:

Professor Tuomas Malinen:

“The coronavirus has delivered a devastating blow to a fragile global economy. Most analysts, politicians and economists still seem to be in denial about the severity of the economic crisis we are facing. But they are slowly awakening. This crisis has been brewing for some time. ..The deleterious impact of the coronavirus pandemic on the economies with the most fragile banking sectors, Italy and Spain, is very likely to set in motion an European banking crisis, which will become a global issue due to the high concentration of G-SIBs, or global systemically important banks, in Europe. What this all means is that we will, most likely, soon face a financial crisis of epic proportions…..Many are slowly awaking to the fact that the economy will not see a V-shaped recovery—just as we have been warning. There is still some time to prepare, but soon enough the focus will shift to survival”

Nobel Prize-winning economist Daniel Roubini:

“These ten risks, already looming large before COVID-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimize many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression”.

Alasdair Macleod – Head of research at goldmoney.com:

“The escalation of bankruptcies and of non-performing loans worldwide will almost certainly take the banking system down. It will be a watershed, a wake-up call to all those who expect a return to normality after the coronavirus passes. For the moment, central banks are throwing money at the problem; money which remains stuck in financial assets, inflating them even further, and not being transmitted to the non-financial economy by banks already over-leveraged to failing borrowers….We can be certain central bankers and government treasury departments are only now grasping the enormity of these problems, but they are still behaving as if chucking money at them is a viable solution. They will only destroy their unbacked fiat currencies, and that destruction, starting with the dollar, is already in progress.”

What is the cause of the problem?

Over the last 20 years or so, despite exponentially increasing debt and plummeting interest rates, the global economy has had three major financial crises. In between these events, debts of all kinds have escalated exponentially, and interest rates have plummeted to zero and below. These unsustainable trends are illustrated in the following schematic.

You do not need to be an economist to see that the global economy has a fundamental problem! The following image from thermodynamic researcher and expert Dr Louis Arnoux, former head of New Zealand Government Alternative Energy Research in the 1980s, indicates that it is fundamentally an energy problem.

Most economists do not understand that the economy runs on energy – not money! Money is a claim on goods and services that are created by the use of energy. Without energy there can be no human economic activity.

IN 2019, “a government research report produced by Finland warn[ed] that the increasingly unsustainable economics of the oil industry could derail the global financial system within the next few years”[1]

Of all the planet’s energy sources, oil plays a fundamental role in the economy, partly because it powers 95% of all transport, 100% of shipping and air transport, and is key to production of most mineral resources and the majority of global food supply.

Net energy

What the report does not mention is the crucial aspect of net (or surplus) energy.

In the same way that the health of a business is determined by its profits rather than its turnover, the world economy depends on surplus energy (energy profit) rather than on the total energy produced. Whilst total gross global oil production has been rising in tandem with GDP, NET energy/EROI of oil (and gas) has been declining catastrophically since the 1980s.

“In the early twentieth century, the EROI of fossil fuels was sometimes as high as 100:1. This means that a single unit of energy would be enough to extract a hundred times that amount. But since then, the EROI of fossil fuels has dramatically reduced. Between 1960 and 1980, the world average value EROI for fossil fuels declined by more than half, from about 35:1 to 15:1. It’s still declining, with latest estimates putting the value at between 6:1 and 3:1.”[2] (TC vital note – this is too low to sustain advanced industrial economies).

The relationship between EROI and the symptoms of economic decline is illustrated in the following image.

The world is now in the unshakeable iron grip of net-energy and resource decline. This is described in three essays under the title “End of the Oilocene” published by FEASTA in 2017, 2018 and 2019. The last of these essays (July 2019) presciently warned of an imminent systemic economic collapse. It includes an accompanying pdf presentation.

The first manifestation of serious trouble ahead was the global financial collapse of 2008. Whilst this was described as a “credit crisis”, it was immediately preceded by the highest oil price in history, which caused the US FED to increase interest rates – thereby precipitating the crisis. Since then, the extend and pretend polices of the last 12 years (Central Bank QE, low/negative interest rates, and massive debt stimulus at all levels from personal to corporate) led the world economy further toward a systemic economic crisis (as so many warned), and this has now arrived courtesy of the C-19 black swan.

The economic tide of the last 250 years has now turned; global net energy supply is contracting fast; and this will be accompanied by declining production and availability of so many energy-dependent resources. The oil industry is contracting fast; with bankruptcies, debt and financial problems growing at a rapid pace. There is a large amount of information on the current collapse of oil production and its knock-on effect on the global economy.

See also the recent piece by Arthur Berman (one of the most experienced global oil analysts) re US oil production collapse and the economy.

For the big picture regarding global resources and the economy, view the last two posts of Gail Tverberg, a long-time systems analyst of the global energy/economic/financial system – again saying the same thing.

Note especially paras 6,7,8: “The COVID-19 actions taken to date, together with the poor condition the economy was in previously, lead me to believe that the world economy is headed for a major reset”.

and see here.

As vital additional background to understanding the problem, I refer you to the blog of Dr Tim Morgan – former head of research at Global Financial Consultancy Tullett Prebon.

Now what?

In order to try to stem the rate of the economic slowdown, global central banks have embarked on an orgy of money printing (debt creation) dwarfing the policies of 2008-2020. “The embrace of QE Infinity by the world’s most powerful central bank is a defining moment not only in this crisis but the history of central banking; a testament to the severity of the collapse in activity reverberating through the global economy and the financial system that sustains it.”

Many experienced financial commentators and economists are warning that unlimited QE policy of most central banks will lead to disaster. Warnings include predictions of a Euro area banking collapse, a calamitous derivative crisis, and runaway inflation resulting in the end of fiat currencies.

The system is “between a rock and a hard place”. Stop QE and the system collapses; continue with QE and destroy the correct functioning of the economic system and the value of currencies.

“Few mainstream commentators understand the seriousness of the economic and monetary situation. from a V-shaped rapid return to normality towards a more prolonged recovery phase. The fact that a liquidity crisis developed in US money markets five months before the virus hit America has been forgotten. Only a rising gold price stands testament to a deeper crisis, comprised of contracting bank credit while central banks are trying to rescue the economy, fund government deficits and keep the market bubble inflated…..The next problem is a crisis in the banks, wholly unexpected by investors and depositors. At a time when lending risk is soaring off the charts, their financial condition is more fragile than before the Lehman crisis. Failures in European G-SIBs in the next month or two are almost impossible to avoid, leading to a full-blown monetary and credit crisis which promises to undermine asset values, government financing and fiat currencies themselves…We can now discern the path leading to the destruction of fiat currencies and take reasonable guesses as to timing”[3]

4: Conclusion

What is happening now in the global economy was predicted by the 1974 publication “Limits to Growth” which showed that if “business as usual” policies continued, energy and resource depletion accompanied by environmental degradation and pollution would cause global economic growth to cease around the year 2010 and go into long-term decline. Recent studies have confirmed these trends; and the financial collapse of 2008 followed by the last 12 years during which the global economy was propped up by increasing feats of financial engineering have also proved the timing as correct.

These warnings were systematically ridiculed and ignored in favour of continuing the short-term unsustainable paradigm of “endless economic growth”. But there is no escaping thermodynamic realities and resource limits. Ours is a finite planet and no amount of “money” can change that – as we shall see over the coming years.

The current hope is that shifting the economy toward sustainability and “green growth” will save the economy. Essential though these measures are “the rhetoric of green-growth decoupling resource and energy depletion (and their associated environmental impact) from GDP growth has recently been proven utterly false“. In other words, greening the economy will NOT enable further economic growth.

The inescapable fact is that the exponential economic growth of the last 250 years or so, made possible by the “money-creation as debt-with-interest” Ponzi scheme, and powered by the seemingly endless bonanza of cheap high-net energy fossil fuels, is now over.

We have entered a new challenging era of permanent net-energy contraction and economic decline characterised in the initial stages during the next couple of years of “the greatest ever global depression” by a rapid drop down the Seneca curve with the probability of major disruptions to global supply chains including food production, and the failure of banks and currencies.

This process will be accelerated by a positive feedback loop of energy and resource decline.
As an example, as Arthur Berman’s article describes, the financial collapse of the US shale oil sector – which provided approximately 15% of global oil production, is well under way. This sector has always been unprofitable and has exceptionally low net energy; it was only sustained by financial engineering; debt and low interest rates.

As economist Tim Watkins puts it

“What neither Johnson nor Starmer and the (UK) parties they represent, seem able to grasp is that the global economy was already in a period of accelerating de-growth by the start of 2020 anyway.  The pandemic, and the unplanned (and in the UK’s case, cack-handed) response to it, has merely accelerated a crisis which had already begun.  Crucially – and despite the claims of economists who don’t know any better – the price of oil – the primary energy source which drives the global economy – is only low because demand has fallen off a cliff.  As economies begin to unlock, demand will rise and the current stockpiles will soon be gone.  When that happens – most likely in the autumn when the government support programmes also come to an end – we will be faced with a sharp shortage which cannot quickly be made up by an oil industry which has lost considerable capacity as a result of the lockdown.  In the short-term, this means a sharp price spike which will be unaffordable to an economy which is already severely weakened.

Because we have been conditioned to believe that energy is just another input to the economy, very few people understand the danger that we now face.  In previous downturns when there was plenty of cheap oil beneath the ground, a temporary increase in price would result in additional drilling leading to more extraction.  Since 2005, though, the price of oil has failed to rise high enough to make new conventional extraction viable.  The one exception to the downward trend has been a US fracking industry which accounts for all of the global growth in oil extraction since 2010.  But the apparent success of the US fracking industry owes more to investors desperately searching for returns in an artificially low-interest environment than it does to the economics of fracking itself.  For the most part, fracking has involved pumping billions of dollars into an industry that extracts millions of dollars of oil in return.  There is only so long that investors – and likely soon the US state itself – can maintain this subsidy before the whole house of cards comes tumbling down”

As the Hills Group and others have pointed out, this contango between the economy, global oil production and oil price (the interaction between thermodynamics, net or surplus energy and the economy) means that apart from occasional price spikes, permanent low oil prices are here to stay. This will increasingly impact the viability of the oil sector as the so-called goldilocks zone (the price difference between what the oil companies need for BAU and the price the global economy can afford) widens by the day.

This equation summaries the situation:

Energy contraction = economic contraction = more energy contraction = more economic contraction.

To keep the ship afloat, central banks have promised to throw more and more “money (debt) at the problem, which will cause “fiat” currencies to hyperinflate and banks to collapse under the weight of non-performing loans. Thus, a complete reset of the financial system is inevitable. This reset is now being openly discussed by the WEF, the BIS and other global financial institutions.

Do not be misled by the hyperbole. As pointed out, greening of the economy will not enable continued economic growth. These initiatives are designed to preserve and strengthen the position and status of the few. The reality is that as economies contract, people and countries will be increasingly impoverished and societal unrest will grow. Is it any surprise that all over the world governments are now instigating drastic surveillance and social control measures in the name of C-19 which match the fantasies of Sci-Fi buffs?

Most people in Ireland and the world over have no idea what is about to hit them.

Our policy makers here, busy firefighting what they believe is a conventional fire of recession and determined at all costs to create more growth, appear to have no understanding of the root causes of the gathering global economic collapse, and no idea how incredibly serious this will get. This is partly because up to now nations have relied on mainstream economists dominated by Keynesian monetarists, who do not appreciate the crucial, key fundamental role of energy – let alone that of net/surplus energy. Without understanding the root causes of the problem, how can appropriate strategies possibly be planned and put in place?

If we do not recognise that radical global economic degrowth is now baked into the cake; crucial decisions taken by governments, and by all levels of society will be wrong; and this will exacerbate the ultimate scale of the decline and drastically increase the hardship that accompanies it. For instance, struggling at all costs to maintain the exploitive money-creation by debt-with-interest financial system, which has financed economic growth until now, will fail and make things so much worse because this system is NOT compatible with degrowth. Unfortunately this is the likely route the world and Ireland will take as global privately owned central banks print trillions of new debt-money which they can conjure out of “thin” air, and this straw is seized gratefully by drowning governments, businesses and people….with the inevitable consequences outlined in the links above.

It is vital that serious discourse starts in this country at all levels of society regarding the causes and management of the impending systemic economic and financial (and energy) collapse, and at the same time, re-imagine and plan a rapid transition to a new economic paradigm. We need think-tanks of open-minded people in every sector who are ready to view everything through a new lens and think outside the box as we head into the increasingly stormy and uncharted waters of a multi-decade era of global energy and resource depletion, and economic contraction.

Edited on July 13 to remove a quote referring to a G7 meeting which, we have since learnt, did not take place.

Endnotes

1. https://www.vice.com/en_us/article/8848g5/government-agency-warns-global-oil-industry-is-on-the-brink-of-a-meltdown
2. https://mondediplo.com/outsidein/covid-19-oil
3. https://www.goldmoney.com/research/goldmoney-insights/the-path-to-monetary-collapse
4. https://www.goldmoney.com/research/goldmoney-insights/anatomy-of-a-fiat-currency-collapse

Featured image source: https://www.freeimages.com/photo/beware-gap-1533079