The Financial Jigsaw Part 2 - The End of Growth - How and Why our Global Economy is Failing

My book covers all this and more: https://www.researchgate.net/publication/358117070_THE_FINANCIAL_JIGSAW_-_PART_1_-_4th_Edition_2020 

"Surplus Energy Economics" by Dr Tim Morgan PhD – explains Energy Returned on Energy Invested (EROEI).  Source: https://surplusenergyeconomics.wordpress.com/ NOTE: My additions: […..] – Peter J Underwood 2020

Although I’ve spent many years as an analyst of energy, economics and strategy, I am probably best known for my work as head of research at: https://www.tullettprebon.com/ a role I left in early August.  Though my research covered a wide range of subjects, my main interest is in a wholly new way of looking at the economy.

At its simplest, this radical approach argues that there are two economies, not one.  The first is the real economy of energy, labour, resources, goods and services. This real economy is a function of surplus energy.  Mankind began to create surplus energy through the development of agriculture, which freed up a small proportion of the population for non-subsistence activities.  A much bigger step forward came when we discovered the heat-engine, which enabled us to tap vast reserves of fossil fuel energy. [Note that a gallon of petrol contains enough energy to replace approximately 54 days of human labour!]

The financial economy runs in parallel with the real one. Money has no intrinsic worth, but possesses value only as a claim on the real economy. The financial economy consists of a series of claims on the real economy, claims which include cash, debt and other forms of supposed value.  For the most part, the financial economy has been an indispensable tool for the better management of the real one.   Markets allow us to price assets, inputs, outputs, risk and return.  They also allow us to undertake essential longer-term projects, such as building a power-station, a school, a road or a house.

But the financial economy has an essential anticipatory character. Every time someone lends, borrows, invests or takes out an insurance policy, he or she has to work to some collective expectation for the future.  Based on 200 years of experience, our default assumption has been that the future will be much like the recent past – that is, it will be characterised by growth in the real economy. If, for any reason, growth does not pan out as we expect, the assumptions underpinning the financial economy system of claims cease to be valid, and claims may prove impossible to honour.

That’s where we are now. We’re nowhere near “running out” of energy, but what is critical here is the surplus energy equation.  This is an equation which compares accessed energy with the energy consumed in the accessing process, and is known as the 'Energy Return on Energy Invested', or EROEI. This ratio is now deteriorating rapidly, and has fallen to the point where growth in the real economy has ceased. [It is estimated that the ratio in 2019 was 10:1 and is now unable to sustain our current western economy.]

Unfortunately, the accumulation of financial economy claims has continued regardless, meaning that we are now burdened by excess claims – claims, that is, that an ex-growth economy cannot honour. This is most visible, of course, in the vast amount of debt with which the global economy is burdened.

Two things, then, will be obvious. First, we have to get used to an economy that doesn’t grow in the way to which we’ve become accustomed.  Second, excess claims – not just debt, but other forms of supposed value that cannot be honoured – will need to be destroyed.  These challenges are not impossible, but they do need a radical change in how we do things, starting with an imperative need to look at the economy in a very different way. [This is the basis of Part 2 of the Financial Jigsaw.  [Dr Tim Morgan's 2013 book is available at: https://www.amazon.co.uk/Life-After-Growth-global-economy-ebook/dp/B00F3D8M2C

THE PROPOSITION of the 'renewables' and 'green camp' is that we can replace fossil fuels, particularly oil and coal, with nuclear, wind, solar, geothermal, tidal and hydro sources.  But first let's see what the amazing energy density of oil has given us to drive the staggering economic growth in the 20th century.  Actually in Orkney, tidal power is giving this small community a surplus in electrical energy generation. This is another live example of what a localised economy can achieve as a replacement for our centralised grid system which is highly inefficient.

It has been argued and debated often about 1 barrel of oil equating to 25,000 hours of human labour (12.5 years at 40 hours per week). Here is some simple math. 1 barrel equates to 6.1 Gigajoules (5.8 million BTUs). Depending on the work, humans use roughly 100 -700 kilocalories per hour. 1 kilocalorie (Kcal) = 4,184 joules. So 1 barrel of oil has 6.1 billion/4,184 = 1,454,459 Kcals. By using a range of 100-700 Kcals per human hour of work these result in a range 2,078 and 14,544 hours per barrel of oil. At 2,000 hours per year (40*50), this is would then be in the range 1.0 - 7.25 years per barrel.

But we aren't robots, although the globalist technocrats under their '4th Industrial Revolution' seem to think we are, we do need to eat, sleep, breathe (we exhale energy), maintain life etc.  So a wide boundary analysis would require other calories not devoted to doing work - thereby increasing the disparity between human work and a barrel of oil.

Also there is the quality issue. Though we could expend enough calories to chop down a tree or carry a cord of firewood by hand, there are many activities which would be physically impossible for humans to directly accomplish; for example: there wouldn't be enough room for the number of humans required to stand behind a heavy lorry and push it down the highway at 50 mph or fly a jet plane.

The United Kingdom consumes an amazing 1,583,896 barrels of oil per day (B/d) as at 2016. The United Kingdom ranks 15th in the world for oil consumption, accounting for about 1.6% of the world's total consumption of 97,103,871 barrels per day.

Clearly if oil is to be replaced and we are to maintain our existing economic model we will need sources of energy to match our present oil equivalent output – it can't happen because there is no renewable source to come close to the energy density of oil.  It is not difficult to project that we will need a new economic model which provides balanced sustainable energy consumption and this has to be a localised system which I have described in recent articles.

The most interesting question, by far, when viewed from 10,000 feet is why do none of our political, intellectual or business leaders understand the most important influence (energy) on the thing they care most about (economic growth)? The answer of course is that the human species evolved to deny unpleasant realities. https://un-denial.com/denial-2/theory-short/

As an aside, recall that Eric Weinstein, the brilliant physicist/hedge fund manager is a case study in denial and believes correctly that economic growth and scientific advancement slowed in the late 70’s, but he doesn’t understand the cause despite thinking about it a lot. It’s no wonder that the much lesser intellects of almost all economists don’t have a clue about what's happening.

Art Berman has a great analysis of all this for those wishing to examine the details. Berman’s analysis is consistent with the conclusions of the other leading minds on the energy-economy relationship: Gail Tverberg, Tim Morgan, Nate Hagens, and Tim Garrett. Here is what Gail Tverberg reported recently: https://ourfiniteworld.com/ and here is a short video:

Berman believes that our economy, being a dissipative structure, will either collapse or spontaneously re-organize itself into a simpler form that uses less energy. I suppose the virus lockdown is a good example of a spontaneous lower energy re-organization. I put my money though on some form of collapse in the not too distant future. Despite a surfeit of entitled citizens, we could weather a significant reduction in living standards because in the developed world we consume so much more than we need to survive, however, the unprecedented debt bubble we have created by denying reality blocks a civil contraction. https://un-denial.com/2020/09/07/by-art-berman-stop-expecting-oil-and-the-economy-to-recover/

The fallacy of 'Renewables'; this was all predicted long ago but has been ignored. http://www.feasta.org/2019/06/08/propaganda-for-renewables-a-critique-of-a-report-by-oil-change-international/   This is an extract from the above article posted in June 2019 by FEASTA:  Creating wind and solar equipment requires lots of fossil fuels and fossil fuels are also heading into a period of depletion. Consider this passage which gives a flavour of the issues:

“Electricity simply doesn’t substitute for all the uses of fossil fuels, so windmills will never be able to reproduce themselves from the energy they generate — they are simply not sustainable. Consider the life cycle of a wind turbine – giant diesel powered mining trucks and machines dig deep into the earth for iron ore, fossil-fuelled ships take the ore to a facility that will use fossil fuels to crush it and permeate it with toxic petro-chemicals to extract the metal from the ore. Then the metal will be taken in a diesel truck or locomotive to a smelter which runs exclusively on fossil fuels 24 x 7 x 365 for up to 22 years (any stoppage causes the lining to shatter, so intermittent electricity won’t do).

There are over 8,000 parts to a wind turbine which are delivered over global supply chains via petroleum-fuelled ships, rail, air, and trucks to the assembly factory. Finally diesel cement trucks arrive at the wind turbine site to pour many tons of concrete and other diesel trucks carry segments of the wind turbine to the site and workers who drove gas or diesel vehicles to the site assemble it.” Source: http://energyskeptic.com/2019/wind/ See also: https://www.energycentral.com/c/ec/can-you-make-wind-turbine-without-fossil-fuels

Note that it is not just that wind turbines (and solar panels) depend on a fossil fuel economy; it is also that fossil fuels are in depletion. This is invisible to orthodox theorists who use figures about gross energy supply in their considerations. But part of the supply of oil/gas/coal must be used to generate energy to be used in extracting more oil, gas and coal.

Building a rig takes energy, as does drilling, as does fracking, as does refining and transferring gross fuel from the extraction site to its place of refinement to its point of sale and use. What the depletion process involves is the necessity of using inferior sources of fossil fuels in more inaccessible places that are more costly to extract. This increasing cost of extraction is not only in money, it is also energy usage.

What matters is the net energy that the fossil fuel industry transfers to the rest of the economy. And the point is that with depletion, the energy cost of energy (ECoE), is rising and delivering a smaller proportion of gross energy to the rest of the economy because a bigger fraction of gross energy must be used in the extraction and refinement and delivery process to supply energy in the first place. It is not gross energy that matters, it is net energy and net energy has been falling since 2000.  Dr Tim Morgan, who keeps track of this with a “Surplus Energy Economics Data System” calculates that the energy cost of energy is as follows:  1980 – 1.7%; 1990 – 2.6%; 2000 – 4.1%; 2010 – 6.7%; 2020E – 10.5% and 2030E – 13.5%. (E is for estimates) https://surplusenergyeconomics.wordpress.com/2018/12/01/139-the-surplus-energy-economy/ )

Financialisation has destroyed the real economy.  In my book, 'Chapter 8 – Financial Engineering' I describe how and why our global economy is finally collapsing after decades of money printing, having accelerated after the 2008 GFC and the 2020 engineered scamdemic. This essay examines and defines what financialisation is, identifies what has enabled it to rise above all other economic activity in stature, and binds together financialisation with the role it plays in this higher order design for the world.

It is necessary background towards a comprehensive understanding of how financialisation is ultimately regressive, dehumanizing, and will not lead to a better collective tomorrow – rather, it will serve as an evolutionary societal dead end for the bulk of humanity. Read on: https://www.theburningplatform.com/2020/09/30/financialization-and-the-road-to-zero/

Given an understanding of this relatively simple formula, it is clear that our complex world is undergoing changes of a magnitude which mankind has never faced in the whole of history; the outcome of which is already baked into the cake.  This is a process and not yet an event so the slow-burn pain is likely to extend for some time until a phase transition is reached as happens to all complex adaptive systems.  Think about a grid lock on motorways when, for no apparent reason, your car reaches blocked traffic.  This is caused by just one extra vehicle joining the motorway, pushing it beyond its capacity limits. The same thing happens with a pile of sand or the freezing of water.

Sri Lanka is a good indicator of where this is all going. Food and fuel protests are followed by Sri Lanka extending its nationwide curfew through to last Thursday morning, with the army threatening to shoot anyone who damages property after protests for weeks over food and fuel shortages turned violent earlier this week. https://www.dailymaverick.co.za/article/2022-05-11-food-and-fuel-protests-sri-lanka-army-ordered-to-shoot