I am often asked on social media what I think are sure signs of imminent collapse, specifically due to crashing SURPLUS ENERGY…. lately I’ve been pointing at the end of the war in Afghanistan as such a sign. Then along comes this excellent post by Gail Tverberg which describes this in her usual detailed fashion…..
Posted on August 30, 2021 by Gail Tverberg
There is a saying, “Everything happens for a reason.” The fiasco in Afghanistan is no exception to this rule. Even though it is not obvious, the United States is up against energy limits. It needed to pull back from Afghanistan to try to have enough energy to continue in its other roles, such as providing benefits for its growing army of retirees, and building infrastructure to mitigate the COVID-19 downturn.
The fundamental problem is that governments can add debt and other indirect promises of resources that create goods and services, but they cannot actually create the low-cost energy, water and mineral resources needed to fulfill those promises.
The way energy limits play out is not at all intuitive. Most people assume that we will run out of oil, leading to a spike in oil prices. We will then transition to renewables. As I see it, this understanding is completely wrong. Limited energy supply first leads to a need for simplification: Stepping back from Afghanistan would be one such type of simplification. It would save energy supplies and reduce the need for greater tax revenue or added debt.
In this post, I will try to explain some pieces of the problem.
[1] Afghanistan was, and continues to be, in some sense, a “handicapped country.”
Everyone knows that the way a country can succeed in the world market is by providing needed goods or services to other economies at low cost. Afghanistan is a landlocked country. It also doesn’t have any big rivers it can use to transport goods out of the country. It isn’t a member of a trade alliance such as the EU to allow smooth transport of goods out of the country. The difficulty of transit into and out of the country adds a layer of costs that tends to make the country uncompetitive in the world market. No matter how much investment any country makes in Afghanistan, this handicap will still persist.
Also, Afghanistan has too high a population relative to its resources. We know that most wars are resource wars. The fact that Afghanistan has been involved in wars for many years hints at this problem. According to UN 2019 estimates, Afghanistan’s population was 7.8 million in 1950, 21.6 million in 2001, and 38.9 million in 2020, which is about five times the 1950 population. Water needs, in particular, tend to escalate as population rises.
[2] The US doesn’t know how to fight a guerrilla war.
The weapons developed by the US are too complex to be used in a guerrilla war. They tend to break down and require replacement parts. Needless to say, these parts are not available in Afghanistan. Even if Afghan soldiers are trained to use these weapons, they may not be available or suitable when needed.
George W. Bush should have known from the outcome of the 20-year Vietnam conflict (1955-1975) that any guerrilla war was likely to have a bad ending. In Afghanistan, the plan was to train Afghan soldiers, thus keeping US citizens out of the battlefield. This strategy kept the Afghan conflict off the front page of US newspapers, but the overall result seems to be similar.
[3] When George W. Bush took office in 2001, he seems to have had access to more funds than he knew what to do with. Starting a war in Afghanistan probably seemed like a good use for these funds. He could perhaps build military bases, and perhaps raise the standard of living of the people there.
The price of oil was especially low in the 1998 to 2001 period. This allowed tax revenue to “go farther” in providing benefits to the economy, allowing a temporary budget surplus. With such a surplus, getting funds appropriated for any purpose would likely have been easy.
Even more importantly, with a fairly young population, the Social Security system had been collecting funds in advance of when they were needed, with the plan of building up the plan’s Trust Fund for use when a bulge in retirements was expected, starting about 2010. Figure 2 shows one chart that roughly illustrates the overfunding and planned use for the funds. Unfortunately, Figure 2 doesn’t treat investment income in the way it is actually collected; it leaves out past investment income and uses discounted cash flow assumptions for the future, so a person cannot readily estimate net contributions to the Trust Fund balance by year from this chart.
Figure 2 indicates that there was considerable overfunding starting in the late 1980s. The thing that actuaries (and others) didn’t consider is the fact that there is a real difference between debt and the physical resources that will be needed when these older people retire. Retirees will need food, water and energy to heat their homes. They will need medicine and long term care institutions. They should also be able to provide their share of the upkeep of roads and electricity transmission networks.
Debt is a promise of future funds to purchase goods and services, but it doesn’t make the resources required to create these goods and services materialize out of “thin air.” To keep these promises, oil needs to be extracted, refined, and delivered to farmers. There needs to be enough fresh water available to irrigate adequate farmland to produce the required food. There need to be supply lines that are working to deliver the required food. There need to be enough young people who are willing to work on farms and in care centers for the aged. The wages for these young workers need to be high enough so that they too can have food, shelter and other things that we consider necessities.
When the extra Social Security funds were collected, the officials who collected them figured out that as a practical matter, there was little that they could do with them besides spend them at the time they were collected. They couldn’t set up warehouses with food, clothing, building materials and energy resources to keep on hand for 30 or 40 years. If they invested the money in the stock market, the money would simply cause a bubble in stock prices. If they built new factories or nursing homes, they would be unfairly competing with existing businesses.
I am not sure that there is any good record of how these extra funds were spent. My understanding is that they provided a very large slush fund that allowed expanded military activities among other things. From an accounting point of view, non-marketable government debt was substituted for the funds that were spent. Thus, when an actuary looks at the Trust Fund, it is fully funded. It is just that it is funded with more US government debt.
The catch is that the non-marketable US government debt doesn’t actually correspond to any resources. Any food used in 2022 (or 2050) will need to be grown in that year, using resources available in that year. Most clothing used in a given year will need to be produced with resources available at that time. Putting together a model that assumes business as usual forever tends to give a rosy picture because it leaves out this detail.
The 2020 OSDAI Trustees Report provides actual income, outgo, and interest income through 2019. From this report, it can be concluded that the extra Social Security slush fund is rapidly disappearing. In fact, it seems to be turning to a hidden source of required year-by-year funding starting as soon as 2020 or 2021.
In some sense, the “real economy” operates on a “cash basis,” rather than an “accrual basis.” This has not been recognized in our accounting or our models. Ignoring the way the system really works likely leads to a hidden crunch, starting about 2021. We know that retirements were high in 2020, adding to the potential problem. I am certain that President Biden and his advisors are aware of this issue, even though it is never reported on the front pages of newspapers.
[4] There is really a two-sided energy price problem. Consumers can afford only low energy prices but, as the result of depletion and population growth in oil exporting countries, producers need high oil prices.
Figure 3 is a chart I prepared a few years ago. In it, there is a pattern of rapidly rising wages when oil prices were very low. Workers became more productive with new factory equipment and vehicles, produced with oil, and operated using oil products. As a result, their wages rose.
On the other hand, when oil prices spiked, the prices of many goods, including food, airline tickets, and the fuel used for commuting to work, rose. People cut back on discretionary income, such as eating in restaurants and vacation travel. Businesses with fewer customers laid off workers. The workers who could find jobs often found lower-paid or part time jobs. The result was a dip in average wages, both in the 1970s and at the time of the Great Recession of 2007-2009.
We now live in a world with depleted resources. The oil and other types of energy that are available are high in cost, but the prices tend to stay too low for producers when all costs are included. Oil resources from the Middle East and Venezuela, especially, need a higher oil price because the governments of these countries need very high taxes on oil revenue to support their large populations. Even shale oil from the United States needs a higher price than is available today.
If we want OPEC to supply the rest of the world with more oil, the price will need to rise much higher than today’s Brent oil price of about $73. It likely will need to rise to at least $100 per barrel and show that it can stay at this high level. Otherwise, the supposed reserves of OPEC will mostly stay in the ground.
Even the US needs a higher oil price. Its oil, gas and coal production fell during the pandemic in 2020. Through May 2021 (and even later using weekly data, not shown), oil and natural gas production has not rebounded to the 2019 level.
Note that oil and gas production also dipped in 2016. Figure 3 shows that oil prices were also low then. If prices are too low, would-be producers leave them in the ground.
Adding in nuclear and renewables (hydroelectric, ethanol, wood, wind, solar and geothermal) still leaves a large dip in recent production.
President Biden is no doubt aware of the fact that the US’s production of energy products, especially crude oil, is now low. In fact, earlier in August he asked OPEC and its allies to increase their oil production to try to keep prices from rising too much. Why would OPEC want to increase its production, if the US can’t increase its own production at the current price level? All of the producers need a higher price level; it is consumers who cannot afford the higher price level.
[5] The world seems to have already begun shifting to a falling energy consumption per capita situation.
The amount of energy required tends to rise with population because all of the people require food, housing and transportation. Energy, especially oil and coal, are needed for these.
Many countries, including the United States, have been able to hold down their internal energy consumption per capita by moving much of their industry to China and India.
Figure 7 shows that US industrial production reached its peak in 1973, which was shortly after US oil production started to turn down in 1971. This partly reflects auto manufacturing moving to Japan and Europe, where smaller, more fuel-efficient cars were already being sold. Home heating and electricity generation also shifted away from oil to other fuels.
The issue now is that “Ex. Industrial” consumption has been falling since the Great Recession. In some sense, the economy has been losing strength since 2008 and continues to lose strength. Fewer and fewer people can feel like they are really getting ahead. They are saddled with low wage jobs and too much debt.
Figure 8 shows similar patterns for the European Union and Japan. Energy consumption per capita was rising until a few years before the Great Recession, and then it plateaued. It has been declining since.
The pattern shown on Figure 8 suggests that energy prices are still too high for consumers, even though they are, at the same time, too low for producers. Travel restrictions imposed by governments may also be contributing to this pattern.
GDP data indications are prepared on an accrual basis. In other words, they reflect the impact of added debt. If missing energy can be replaced with a promise of debt to pay for more goods and services in the future, made with future energy, then perhaps all will be well. The quantity of debt that is required, relative to the GDP impact, keeps rising, suggesting this substitution is not working very well.
With the addition of growing amounts of debt, GDP increases are reported to be much larger than expected growth, based only on the growth in energy consumption.
[6] We now seem to be reaching the end of the line with respect to what can be done with added debt to make the economy seem like it is performing adequately well.
Interest rates show a very distinct pattern. They rise until about 1981, and then they decline.
When the US economy was growing rapidly, it could withstand high and rising interest rates. Since 1981, the general pattern has been one of falling interest rates, making a larger quantity of debt affordable. Indirectly, these falling interest rates also helped prop up asset prices, such as those of homes and shares of stock. In recent years, interest rates have fallen about as far as they can go. To some extent, these lower rates were made possible by Quantitative Easing (QE). But at some point, QE needs to be stopped.
Today, interest rates are approximately at the level they were during the Great Depression of the 1930s. This makes sense; interest rates to some extent reflect the return an investor can expect to make. Right now, without a lot of government support programs, “Main Street” businesses around the world are struggling. This indicates that the economy is doing very poorly. There are too many people who cannot afford even basic goods and services. Indirectly, this feeds back to commodity prices that are not high enough for producers of energy products.
Recently, governments of many countries have tried a different approach. Instead of loans, they are providing something closer to giveaways. Renters are allowed to stay rent-free in their apartments. Or, checks are given to all citizens earning below some specified amount. What we seem to be finding is that these giveaways produce inflation in the price of goods that poor people buy most frequently, such as food and used cars.
The giveaways don’t actually produce more of the required goods and services, however. Instead, would-be workers decide that they really don’t want to take a low-paid job if the giveaways provide nearly as much income. The loss of workers then acts to reduce production. With lower production of goods and services, a smaller quantity of oil is required, so the oil price tends to fall. The price certainly does not rise to the level needed by oil producers.
[7] In a finite world, longer-term models need to take into account the fact that resources deplete and the population keeps rising.
Any modeler who tries to take into account the fact that resources deplete and the overall population keeps rising will quickly come to the conclusion that, at some point, every economy will have to collapse. This has been known for a very long time. Back in 1957, Admiral Hyman Rickover of the US Navy said,
Surplus energy provides the material foundation for civilized living – a comfortable and tasteful home instead of a bare shelter; attractive clothing instead of mere covering to keep warm; appetizing food instead of anything that suffices to appease hunger. . .
For it is an unpleasant fact that according to our best estimates, total fossil fuel reserves recoverable at not over twice today’s unit cost, are likely to run out at some time between the years 2000 and 2050, if present standards of living and population growth rates are taken into account.
Now, in 2021, as it looks as if this problem is starting to hit us. But no one (since Jimmy Carter, who was not re-elected) has dared tell the general public. Instead, accrual accounting with more and more debt is used in financial statements, including GDP statements. Actuaries put together Social Security funding estimates as if the resources to provide the promised benefits will really be there. Climate change models are prepared as if business as usual can go on for the next hundred years. Everything published by the mainstream media is based on the underlying assumption that we will have no problems other than climate change for the next 100 years.
[8] About all that can be done now is to start cutting back on the less necessary parts of the economy.
President Biden’s abrupt pullout from Afghanistan reflects a reality that increasingly has to take place in the world. The US needs to start pulling back because there are too many people and not enough inexpensive to extract resources to fulfill all of the commitments that the US has made. As mentioned earlier, there are a number of obstacles to success in Afghanistan. Thus, it is a good place to start.
With the need to pull back, there is a much higher level of conflict, both within and between countries. The big issue becomes who, or what, is going to be “voted off the island” next. Is it the elderly or the poor; the military or the oversized US medical establishment; university education for a large share of students or classroom teaching for young children?
We don’t seem to have a good way out of our current predicament. This seems to be what is behind all of the recent internet censorship. Renewables and nuclear require fossil fuel energy for their production and maintenance. The powers that be don’t want anyone to know that nearly all of the “happily ever after using renewables” stories we hear are based on wishful thinking.
