A friend on Facebook asked me a couple of questions: one about why wages have been stagnant for so long and one about the effects of divestment on the global economy. My response offers a brief overview of our energy-constrained economy, which perhaps adds a little to the essay in the ‘About’ section. These are huge issues and my analysis is necessarily a little trite but here it is:
As far as I can see, the global economy has self-organised over 250 years to depend on fossil fuels, as these have been the most convenient and energy-dense fuel sources available to us, and the human collective is always going to want as much comfort, convenience, choice, novelty etc. for as little expenditure as possible.
Oil, gas and coal provide around 85% of our energy needs directly and are intrinsic to the production, maintenance etc of nuclear, hydro and renewables that make up the remaining 15%.
Since around the turn of the century, less and less ‘energy profit’ has been flowing through the system from these fossil fuels. Oil in particular has been growing more and more expensive to extract, and we can see this in the rapid fall-off in capex productivity that the major oil firms have experienced since around 2000, with each barrel of oil getting more and more expensive to produce. [The image to the left is somewhat old now. Brent has fallen substantially since, whilst costs continue to rise].
This is important because the global economy is an energy system upon which we superimpose a monetary system (and then pretend that it is the money that matters). Standard neo-classical economics completely overlooks the centrality of energy in economic growth but it is common sense if you really think about it. In the natural world, an organism needs to earn more calories than it expends in sourcing its food or it will die of starvation. Likewise, no economic activity can take place without energy and no economic exchange is worthwhile unless there is an ‘energy profit’ embedded in it.
The global economy as whole needs to be growing at a rate of around 3% per annum, and (bar the odd recession) has been doing so since around 1850. If it falls below this level of growth for too long, the financial system is likely be paralysed by loss of faith in fiat currencies and cascading defaults.
Unfortunately we are now deep into an era defined by *energy-constraints*, and indeed by a wide variety of resource-constraints and other growth-limiting factors like pollution and climate change.
“The stagnant wages you mention are a symptom of this insufficient energy-profit. So is the increasing surreality and complexity of our financial system, as it tries to compensate and maintain growth. Zero and negative interest rates are a tacit admission that some economies can no longer offer a return on investment. The political polarisation and geopolitical/trade friction we are seeing are also symptomatic of too many claims on a shrinking/degrading resource-base.
Unfortunately workers with stagnant wages find it hard to afford the goods and services into which energy products (primarily fossil fuels) go. They can add debt or buy things on long-term payment plans but sooner or later they start getting tapped out. I believe we are about at that point now. This in turn weakens demand for energy products and oil, coal and gas prices fall too low for producers. Again we are seeing this now. The danger is that we get sucked into a deflationary death-spiral.
Divestment, well intentioned though it may be, can only exacerbate this problem. Oil companies are already self-liquidating and drowning in debt. Oil producing nations are in varying degrees of pain with Venezuela being in the most notably dire straits – but even Saudi is struggling. I haven’t done any research into the figures so I can’t comment on the extent to which divestment may be harming energy companies and energy producing nations.
This is not a debate I generally get involved in because there are no good solutions. Fossil fuels are of course quickly rendering the planet non-viable for humans but if we attempt to wean ourselves off them we will ‘starve’ the global economy into a disorderly and extreme contraction, and obliterate the supply-chains that keep most of us fed, watered and warm. What can you do?
¯\_(ツ)_/¯
Here is T.G. Congdon’s ‘take’. Conditions may have changed?
“Does economic punditry have to be akin to horror films? The last six years have been the most stable in the past four decades . . .
The International Monetary Fund brings together data from its 189 member countries to give numbers for the level and growth rate of world output, with the series in its current database starting in 1980. They show that in the 38 years inclusive from 1980 to 2017 the average growth rate of world output was 3.5 per cent. . . .
In 2012 world output rose by 3.5 per cent, in 2013 by 3.5 per cent, in 2014 by 3.6 per cent, in 2015 by 3.4 per cent, in 2016 by 3.2 per cent and in 2017 by 3.6 per cent. The main feature of the recent past is not the severe instability of growth, but its remarkable stability. In fact, the last six years have been the most stable in the entire 38-year period covered by readily-available IMF statistics.
Sure enough, the Great Recession of a decade ago was a blot on the escutcheon. But the Great Recession was the exception, not the norm. Indeed, in one respect it was totally unlike the Great Depression of the 1930s with which it is sometimes compared. Whereas the 1930s suffered mass unemployment in North America and much of Europe, the decade since the Great Recession has delivered strong employment growth. Western societies may not have the degree of social cohesion that members of the World Economic Forum regard as right and proper, but unemployment rates in several advanced countries are close to 25- or 30-year lows. . . .
The anxiety may arise because the world’s impressive economic stability and prosperity has been achieved only at the cost of increased inequality. ”
Tim Congdon
Marketplace
29/01/2018
https://standpointmag.co.uk/issues/february-2018/marketplace-february-2018-tim-congdon-economic-punditry-horror-films/
Well, it’s a contrarian viewpoint. He talks about the remarkable stability of growth in recent years but in a sense this is pseudo-growth based on unprecedented central bank interventions, which have left us close to debt-saturated and with grossly inflated asset prices. This is not a sustainable situation, as we are now finding out. Employment may have risen – wages not so much.