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necron99
09-28-12, 06:28 PM
Huh. I was browsing a free forum thread called "Have We Reached the End of Economic Growth" which quoted a very interesting article in the Washington Post:
http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/11/have-we-reached-the-end-of-economic-growth/

I wrote up a comment about it, for which I spent a good hour relocating links I'd read in the past. And then during the time I was writing my reply, the thread got shifted from the "Free" section to the "Paid" section somehow. I didn't realize somebody could do that. At this point I can't even remember who posted the original thread.

[Yeah, yeah, I know, I've been a forum member for years now, I really should have a paid subscription by now. Someday I may yet get one. The thing is, I don't have any real investments to speak of, so it's hard to justify the expense. I just come here for the articles, not the stock tips!]

Anyway, here is my comment on the other thread, (I always copy and save before posting!!) So I hope people can benefit from the research I've gathered.

--------------------------------------------------------

Thanks to everyone for commenting on this great thread because each point you raise could be a whole thread in itself.

I have some links for people who are interested in analyzing economics from this viewpoint, which I think has a lot of truth and relevance to our situation. In my opinion this basically turns our entire understanding of economics upside-down. I'm an Engineer, not an Economist, so maybe I'm in over my head. But in my current job I have to deal with economists and produce numbers to support economic analysis every single day, so I do have some understanding of this. This is a brief summary in my own words of some articles and discussions I have been following:

When economists analyze the economic growth of a country, the concrete inputs they tend to measure are capital and labor. When we separate out those components from the economic growth of an advanced country like the US, the dollar value of capital and labor inputs explain just under 50% of the dollar value of the economic growth. More than 50% of economic growth seemingly just appears from nowhere. If you ask a classical or neo-classical economist to explain this, they say that wealth is created through technology and human innovation. Those general terms seem to have the power to create measurable wealth out of thin air (plus a small supply of labor and capital).

However, some economists are not satisfied with that explanation. A few (links below) have tried to bring energy, specifically energy consumption, into the equation. According to Reiner Kummel and other economists, if you assign a realistic dollar value to the burning of energy -- not just the value of the fuel as it comes out of the ground, but the actual use of the energy itself after it is produced -- in fact you get a very close fit to the curve of economic growth, and it causes the economic growth curve to track such events as the 1970s Oil Embargo very, very precisely. This suggests that most of modern economics itself is based on a mis-perception -- economics is not actually tracking money per se as an independent measure of wealth, but at least in part (the majority part) economics is tracking energy _use_. The more energy we burn, the faster we burn it, the more the economy grows. The past century and a half of rapid economic growth has actually tracked with growing energy use, as we burn more and more concentrated sources of energy (i.e., as we moved away from wood to coal then to oil and nuclear, etc.)

Now here at iTulip we have all discussed the idea of "peak cheap energy". Even though the world is a long way away from "running out" of fossil fuels and other energy sources, we have picked off most all the low-hanging fruit, so energy extraction is basically just going to get less and less economical, more and more costly from here. Combined with the above, this tells us a few things.

The idea, or maybe more accurately the "hope" or "belief", that in the long-term future, technology and innovation can maintain our economies and our standard of living at present levels in the face of diminishing energy supplies is probably false. In this analysis, it does not appear that technology creates wealth out of thin air -- except insofar as it helps us extract and burn energy faster. When the energy dries up, so does economic growth, and despite much talk we haven't seen real concrete evidence that any new energy source can replace fossil fuels on the worldwide, general-purpose scale that fossil fuels are used.

Nor can we make up the energy shortfall and maintain our present lifestyles simply by working harder (despite what our managers and bosses may believe). Labor and capital are not the majority components of econmic growth of an advanced country, they are less than 50%.

Therefore, the concept of "peak cheap energy" implies that economic growth will indeed come to an end (possibly already has).

(Side tangent, on the other hand, this also helps explain why human happiness and satisfaction don't track well with economic gain. After a certain point, if you are simply burning more energy for the sake of burning energy, it doesn't really make you happier. You're just running in circles and wasting energy.)

(Another side tangent, we first-worlders tend to assume that 2nd- or 3rd-world countries like Mexico or some African nations have primitive economies because they are somehow "backwards" in terms of technology, or education, or they just plain aren't as "innovative" as Americans. Once again this analysis would belie that conclusion. Technology is everywhere; even people in 3rd world countries often have access to cell phones, and they can be clever about using them. We look on their economies as primitive because their infrastructure isn't set up for the majority of the population to burn heaps of concentrated energy on a nationwide scale, like first-world countries are.)

I first heard this analysis from a guy named Charles Hall from SUNY: (video)
http://www.extraenvironmentalist.com/2012/05/03/charles-hall-energy-returns/

He's not an economist, but he was quoting some foreign economists such as Reiner Kummel:
http://books.google.co.uk/books/about/The_Second_Law_of_Economics.html?id=YletVzzoqxcC
http://www.sciencedirect.com/science/article/pii/0360544282900445
http://www.slideshare.net/benjaminwarr/economic-growth-models-and-the-role-of-physical-resources

The video with Charles Hall was an interview for a podcast called The Extra-Environmentalist, which I have come to respect quite a lot. These are two relatively young journalists who investigate such issues and I think they have a great, relaxed, yet penetrating interview style. Despite discussing these weighty matters, they maintain optimism -- their motto is "All The Doom Without The Gloom"! They have often done episodes about Growth, energy, alternative Economics, the creation of money, and resource depletion. The following are links to the episode pages of some relevant podcast episodes, which of course are MP3 audio files you would need to download (from the page) then listen to on a computer or MP3 player. Check 'em out!

http://www.extraenvironmentalist.com/2012/07/01/episode-44-evolving-innovation/
http://www.extraenvironmentalist.com/2012/04/22/episode-39-debunking-economics/
http://www.extraenvironmentalist.com/2012/07/11/episode-45-opening-money/ (http://www.extraenvironmentalist.com/2012/07/11/episode-45-opening-money/)
http://www.extraenvironmentalist.com/2012/05/27/episode-41-surviving-progress/
http://www.extraenvironmentalist.com/2012/03/04/episode-37-techno-fix/
http://www.extraenvironmentalist.com/2012/02/01/episode-35-ecology-alcohol/
http://www.extraenvironmentalist.com/2011/12/15/episode-31-simplifying-complexity/
http://www.extraenvironmentalist.com/2011/11/22/episode-29-creating-wealth/
http://www.extraenvironmentalist.com/2011/11/10/episode-28-at-growths-end/

c1ue
09-29-12, 11:28 AM
The problem with the curve fits vs. energy is that it is curve fitting.

You can apply similar curve fits of economic growth vs. population growth, electricity growth, food growth, etc etc and get similar correlation.

As for inputs vs. economic output - technology is a category under automation, while innovation contributes to technology but can also contribute by creating new avenues of economic growth. Let's also not forget FIRE and hedonics: both are ways by which fictitious as well as real economic growth can occur.

Finally the concept of peak cheap energy is valid, but the problem is that simply even if we've hit peak cheap energy - this does not in any way guarantee that growth is stalled.

If you study the whale oil by products industry (primarily for lighting, lubrication, etc) in the period in which 'peak cheap whale oil' had already passed (i.e. whalers were having to literally sail thousands of miles in order to access supply), the industry was growing very nicely despite crystal clear indications of finite nature of the whale oil supply.

What actually happened is that the industries which used whale oil but which could not absorb the rising costs either closed up shop or found substitutes - and eventually the entire industry found a substitute in the form of mineral oil.

In the case of peak cheap energy, I fully expect something similar to occur. There are plenty of areas in which cheap energy in various forms is used because it is cheap - as energy costs increase, these uses will either find alternatives or cease.

touchring
09-29-12, 02:23 PM
The problem with the curve fits vs. energy is that it is curve fitting.

You can apply similar curve fits of economic growth vs. population growth, electricity growth, food growth, etc etc and get similar correlation.

As for inputs vs. economic output - technology is a category under automation, while innovation contributes to technology but can also contribute by creating new avenues of economic growth. Let's also not forget FIRE and hedonics: both are ways by which fictitious as well as real economic growth can occur.

Finally the concept of peak cheap energy is valid, but the problem is that simply even if we've hit peak cheap energy - this does not in any way guarantee that growth is stalled.

If you study the whale oil by products industry (primarily for lighting, lubrication, etc) in the period in which 'peak cheap whale oil' had already passed (i.e. whalers were having to literally sail thousands of miles in order to access supply), the industry was growing very nicely despite crystal clear indications of finite nature of the whale oil supply.

What actually happened is that the industries which used whale oil but which could not absorb the rising costs either closed up shop or found substitutes - and eventually the entire industry found a substitute in the form of mineral oil.

In the case of peak cheap energy, I fully expect something similar to occur. There are plenty of areas in which cheap energy in various forms is used because it is cheap - as energy costs increase, these uses will either find alternatives or cease.


So what do you expect to replace mineral oil? Biodiesel? So far, I don't see a new energy source that can replace gasoline. Electric vehicles? But batteries are very expensive.

c1ue
09-29-12, 07:06 PM
So what do you expect to replace mineral oil? Biodiesel? So far, I don't see a new energy source that can replace gasoline. Electric vehicles? But batteries are very expensive.

For one thing, oil isn't going to run out overnight.

For another thing, there are a number of alternatives: CNG and coal to liquids prominent among them.

BadJuju
09-29-12, 07:11 PM
For one thing, oil isn't going to run out overnight.

For another thing, there are a number of alternatives: CNG and coal to liquids prominent among them.

And the most important and simplest way to address a diminishing supply and rising prices: conservation.

c1ue
09-29-12, 07:46 PM
And the most important and simplest way to address a diminishing supply and rising prices: conservation.

This would be more credible if such a strategy has worked even once in any historical scenario.

Don't get me wrong, I do think conservation is nice. But conservation isn't going to change the reality that the average American consumes many times as much natural resources as the 'average' person around the world. Cutting back 80% as someone else noted is what is necessary - and that isn't easy at all.

BadJuju
09-29-12, 08:33 PM
Don't get me wrong, I do think conservation is nice. But conservation isn't going to change the reality that the average American consumes many times as much natural resources as the 'average' person around the world. Cutting back 80% as someone else noted is what is necessary - and that isn't easy at all.

It may not be easy, but it can be done and without really sacrificing that much. It doesn't require us to adopt third world standards. It just requires a new way of doing things and different expectations.

c1ue
09-30-12, 02:47 PM
It may not be easy, but it can be done and without really sacrificing that much. It doesn't require us to adopt third world standards. It just requires a new way of doing things and different expectations.

You keep saying this, but I'd like to see some proof.

For example: Do you consume 2,900 calories each day? That's the world average.

The US average is 3,500.

Do you consume less than 22 barrels of oil a year? That's the average for the United States.

The world's per capita average is 4.54 barrels a year.

Each barrel of oil represents roughly 20 gallons of gasoline. A world average oil consumption - gasoline portion would thus be 90 gallons of gasoline.

At 30 mpg - this is 2,700 miles = 7.4 miles/day.
At 50 mpg, this is 4,500 miles = 12.3 miles/day.

Present average US driving per car = 41 miles/day.

How many miles do you drive in a year?

BadJuju
09-30-12, 02:57 PM
You keep saying this, but I'd like to see some proof.

For example: Do you consume 2,900 calories each day? That's the world average.

The US average is 3,500.

Do you consume less than 22 barrels of oil a year? That's the average for the United States.

The world's per capita average is 4.54 barrels a year.

How many miles do you drive in a year?


Calorie consumption is a difficult one. When I work out, I typically consume a fair amount, but certainly less than 3,500 calories a day. Probably 3,000, but it is balanced out by me dieting for a few months a year. When I am not working out, I average around 2,000 calories per day. If I am dieting, around 1,500-1,800

I do not personally drive, so it would be impossible for me to say how much oil I consume with regards to food and such. Still, the amount of oil I consume for driving is 0.

shiny!
09-30-12, 02:59 PM
You keep saying this, but I'd like to see some proof.

For example: Do you consume 2,900 calories each day? That's the world average.

The US average is 3,500.

Do you consume less than 22 barrels of oil a year? That's the average for the United States.

The world's per capita average is 4.54 barrels a year.

Each barrel of oil represents roughly 20 gallons of gasoline. A world average oil consumption - gasoline portion would thus be 90 gallons of gasoline.

At 30 mpg - this is 2,700 miles = 7.4 miles/day.
At 50 mpg, this is 4,500 miles = 12.3 miles/day.

Present average US driving per car = 41 miles/day.

How many miles do you drive in a year?

Wars, epidemics, famine... am I nuts thinking that someone is going to consider it politically expedient to eliminate a good portion of the "have-nots" so the "haves" can continue "life as usual" for a few more decades?

globaleconomicollaps
09-30-12, 04:29 PM
Wars, epidemics, famine... am I nuts thinking that someone is going to consider it politically expedient to eliminate a good portion of the "have-nots" so the "haves" can continue "life as usual" for a few more decades?

Hummm.... Or "someone" might choose to eliminate the "haves" first.

shiny!
09-30-12, 09:08 PM
Hummm.... Or "someone" might choose to eliminate the "haves" first.

Your kind of thinking is why I always lose at chess. ;-)

necron99
10-01-12, 02:33 AM
I'd like to thank everyone who has posted for your replies. Thanks for bringing interesting perspectives to my admittedly amateur analysis.

Nevertheless, in defense of my original post:

The problem with the curve fits vs. energy is that it is curve fitting. You can apply similar curve fits of economic growth vs. population growth, electricity growth, food growth, etc etc and get similar correlation.

I would argue that it is logical to analyze economics based on energy inputs as well as labor and capital, because most modern products use a lot of energy in their manufacture (and never forget transportation, which burns gigantic amounts of energy shipping everything all over the world these days). Back in Adam Smith's day, you couldn't say that, it was much more true that products were made using human labor and capital only, an transportation energy costs were typically negligible (horses and sail power!) And so that's why classical/neo-classical economics tends to ignore energy input. Today everything revolves around energy and I don't think economic theory has kept up. Some economic sectors use electricity but others don't, others use fossil fuels or other fuels, so when you argue that I'd get the same result from graphing electricity, all you are doing is making an incomplete subset of my case for me. Same goes for population growth, more or less -- if you're accurately modeling labor then that should include population growth inside your model. I think it's logical to try to account for energy as an economic input -- and then the minute you do, you also have to start worrying about EROI and related issues.

I appreciate you citing the historic model of the "whale oil industry" but I'm not sure it negates my point. I agree with you that as prices rise, wasteful uses of cheap energy will disappear, but I question whether the energy can be replaced at a fast enough rate to keep up the broad, nationwide economic growth that our modern finance system depends upon. Back when the whole country ran on whale oil, it may have been true that the whale oil industry kept growing for awhile after passing "peak cheap whale oil". As we've already seen e.g. with the California Energy Crisis of 2001, you can make more money off of scarcity and selling to the rich than you can by providing cheap reliable service to the masses. Hey, that's great for the energy industry. But I have to ask whether the economy as a whole, not just the whale oil industry, kept growing during that period. Seems to me that the period between "peak cheap whale oil", around the turn of the 20th Century, and the widespread introduction of petroleum, was another one of those periods of huge income disparity and widespread suffering, as the lower classes were left to eke out their living by hardscrabble mostly outside the formal economy. As my analysis says, take away the energy from the equation and labor alone can't maintain the lifestyle. We may see those conditions return, not right now, not next month, but from a certain year in the near/medium future until a substitute for fossil fuels is found.

And then when you look at the substitutes for fossil fuels, you may be in for a rude awakening. Coal to liquids is probably the closest thing we have to a substitute for petroleum which is actually ready to go, because the technology is known. And that lets us keep a lot of our infrastructure. But it's terribly expensive, which is why it didn't help the Nazis win the war after we took their oil sources away. Too expensive to scale up even if your life depends on it. And then the minute you start planning on coal replacing petroleum oil, you quickly find out that the widely cited figures that "we have hundreds of years of coal left to us" assumes only the present rate of consumption. Once you mine additional coal to replace petroleum, maintain existing coal uses, and then apply population growth on top of both of those, suddenly you find estimates that we only have a few decades of coal left.
New York Times (http://www.nytimes.com/gwire/2010/09/29/29greenwire-study-worlds-peak-coal-moment-has-arrived-70121.html?pagewanted=all), National Geographic (http://news.nationalgeographic.com/news/2010/09/100908-energy-peak-coal/)
(Incidentally you also find the same thing about nuclear power. We have hundreds of years of Uranium left to us, but only at present rates of consumption. If we magically switch all our transportation over to electric cars powered by nukes overnight, then equally suddenly we've only got a handful of decades of known uranium reserves.)

The thing about forecasting doom is that your forecasts will be wrong time and time and time again, until one day they inevitably become right. Cornucopia doesn't last forever on this earth... or to phrase it from the opposite perspective, what did the farmer say when his cow died? "Gee, she's never done that before!"

;-)

charliebrown
10-01-12, 08:45 AM
I think that there may be break throughs in both energy production, better nuclear, geothermal etc. I think biotechnology could produce some leaps in productivity/growth too. If you look around at U.S. economy there is so much waste, because of cheap energy. These inefficiencies will be wrung out of the system as energy prices rise. If we can wait a week for most household dry goods to be shipped to us instead of firing up the family truckster and driving to the big box store think about the energy savings. Where we live and where we work may be highly reduced too, either by relocation or tele comuting, satellite offices etc. Wireless makes me very productive on public transportation. Mana from heaven is over, but it it not the end of the modern era either.

wayiwalk
10-01-12, 11:33 AM
Hummm.... Or "someone" might choose to eliminate the "haves" first.

I was thinking it would be great if we could actually prosecute the fraudsters and their ilk and put them in some of these private prisons, then we'd solve 2 problems at once.

c1ue
10-01-12, 04:49 PM
I do not personally drive, so it would be impossible for me to say how much oil I consume with regards to food and such. Still, the amount of oil I consume for driving is 0.

I assume you still move around though. Even if you travel via bus, plane, or boat rather than car, oil is still consumed. The goods you buy travel via truck. The plastic in bags, plumbing, insulators on electronics, etc etc come from oil. and so on and so forth.

Equally, as I've noted before, you're a young single guy (I believe). The means by which you get around aren't so attractive for families with kids, seniors, those who have to travel to customers (vocations like plumbers, electricians, etc), and so forth.


I would argue that it is logical to analyze economics based on energy inputs as well as labor and capital, because most modern products use a lot of energy in their manufacture (and never forget transportation, which burns gigantic amounts of energy shipping everything all over the world these days). Back in Adam Smith's day, you couldn't say that, it was much more true that products were made using human labor and capital only, an transportation energy costs were typically negligible (horses and sail power!) And so that's why classical/neo-classical economics tends to ignore energy input. Today everything revolves around energy and I don't think economic theory has kept up. Some economic sectors use electricity but others don't, others use fossil fuels or other fuels, so when you argue that I'd get the same result from graphing electricity, all you are doing is making an incomplete subset of my case for me. Same goes for population growth, more or less -- if you're accurately modeling labor then that should include population growth inside your model. I think it's logical to try to account for energy as an economic input -- and then the minute you do, you also have to start worrying about EROI and related issues.

You are somehow not equating human and animal labor as energy. Food is merely one form of energy - as the ethanol conversion shows.

Equally so it is a mistaken assumption to think that somehow manufacturing in the past didn't involve energy - I suggest you look at the Peak Cheap Peat example.

Be that as it may, the assumption that energy is the basis of everything is wrong because it discounts the impact of technology and innovation.

The reality is that the amount of energy used to make most industrial products is far less than it used to be. The processes by which 1 kilogram of steel is made today consume far less energy than the equivalent 20 years ago or 100 years ago. This difference is innovation.

Thus the massive amounts of energy you cite today are not a function of the efficiency of the processes, but rather the volume of the products.

The volume of products are a function of affordability and prosperity - yet prosperity itself is not a measurable indicator. Was the massive 'prosperity' of the 2003-2007 real estate bubble in the US real? clearly not.

I'd also point out that energy consumption isn't entirely, or even mostly household product or even private durable goods. The United States expended enormous amounts of energy to build the interstate highway system; this system requires much energy to maintain but much less than the original construction. The same can be said for bridges, dams, and other major forms of infrastructure, and also apply to things like building out telephone/cellular systems, electrical grids, sewage/water, and so forth.

China's massive energy expenditure at present is as much because of their build out of the above as much as it is because of overproduction of apartment buildings.


I agree with you that as prices rise, wasteful uses of cheap energy will disappear, but I question whether the energy can be replaced at a fast enough rate to keep up the broad, nationwide economic growth that our modern finance system depends upon.

Our finance system has zero basis on energy. Energy does have a relationship to the P/C (i.e. production/consumption) economy, but iTulip among others have long noted the divergence between FIRE growth and P/C growth.

Equally I'd disagree with the notion that FIRE growth is in any way related to economic growth. The United States has not been significantly economically growing for well over a decade, but FIRE is doing just fine, thank you.


And then when you look at the substitutes for fossil fuels, you may be in for a rude awakening. Coal to liquids is probably the closest thing we have to a substitute for petroleum which is actually ready to go, because the technology is known. And that lets us keep a lot of our infrastructure. But it's terribly expensive, which is why it didn't help the Nazis win the war after we took their oil sources away. Too expensive to scale up even if your life depends on it. And then the minute you start planning on coal replacing petroleum oil, you quickly find out that the widely cited figures that "we have hundreds of years of coal left to us" assumes only the present rate of consumption. Once you mine additional coal to replace petroleum, maintain existing coal uses, and then apply population growth on top of both of those, suddenly you find estimates that we only have a few decades of coal left.

I've posted a number of articles before on CTL - the fact is that CTL is nominally competitive at $60/barrel oil price. However, the cost of CTL plants is in the order of a coal fired electricity plant: $500M. The fact is that there isn't a strong incentive for capitalists to build such plants until it is absolutely certain that the investment will be profitable. I do think another 5 to 10 years of $80+ oil will do the trick, much less oil at $150 or $200.

Thus scalability isn't nearly as much of an issue as you make out. The CTL plants can be built where the coal is, and pipelines can be built to take the CTL outputs elsewhere even if the existing coal transport infrastructure is not used. No new technology must be invented. No exploration/drilling deep sea or deserts. No foreign adventures. etc etc.

Would the output be cheap and allow the FY2000 oil lifestyle to resume, much less the FY1970 oil lifestyle? no

But that's a far cry from not being a viable economic alternative, especially if we're looking at $150/$200 or more oil.

Note that the above doesn't take into account any actual national program to build out CTL infrastructure. If even 1/10th of the resources that went into solar or wind were devoted to CTL, they'd be all over the place.

As for Germany in World War II: let's not forget that Germany was being bombed. This makes it quite challenging to build up an alternative liquid fuel ecosystem. Despite being cut off from oil, the accounts of German bombers, ships, tanks and so forth running out of fuel are quite few.

Some info on German CTL: http://www.netl.doe.gov/technologies/coalpower/gasification/gasifipedia/1-introduction/1-2-2_history-liquid-fuels.html


The thing about forecasting doom is that your forecasts will be wrong time and time and time again, until one day they inevitably become right. Cornucopia doesn't last forever on this earth... or to phrase it from the opposite perspective, what did the farmer say when his cow died? "Gee, she's never done that before!"

I agree, forecasting doom is very difficult - if for no other reason than nobody really wants it.

It is, however, incumbent to look at realistic scenarios rather than linear extrapolations.

My original point was also that the 'energy consumption' progression you note was almost entirely over a period where energy was cheap. From the advent of the oil age to the 1970s, energy was dirt cheap - so it isn't at all surprising to me that this wasn't taken advantage of.

Even the 'oil shock' of the 1970s wasn't an existential threat; it was simply the sudden onset of 'cheap' oil suddenly becoming 'less cheap'.

Put another way - energy costs for the US despite profligate American usage is quite far down the list in overall spending.

It would seem housing cost is the far bigger issue!

Lastly population. I'm a lot more sanguine about this than most.

In my view, when we get to the point of too many people, that problem resolves itself. I am adamantly opposed to any person, group, organization, or whatever which proposes to 'solve' the population problem because every single one of these has turned out to be just using this as an excuse to crack down on 'unacceptables', to gain influence/power/money for themselves, or some equally repugnant objective.