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  • the end of cheap energy and the exit from normal - gregor

    Paper vs Real: Exit From Normal, Ecological Economics, and Probabilistic Regimes in One Chart

    gregor

    A 20 year chart of the US 30 Year Treasury Bond vs. a broad commodity index is the occassion to make several macroeconomic observations. The comparison reveals how the purchasing power of the long-dated US Treasury Bond has fared against a basket of commodities over the period. Tracking the ability of the US Treasury bond, denominated in US Dollars, to maintain its viability as a capital storage unit is not arcane. Rather, it is central. All institutions and individuals eventually use financial assets to purchase energy, natural resources, and labor.



    1. Prior to the years 2000-2002 the Western economic system is still in expansion, funded by cheap fossil fuels. During such a regime, paper assets are priced to reflect the belief in their future purchasing power against natural resources, energy, and labor. This is no mistake. The balance of global population, resource availability, and technological innovation guides savings towards the stability of paper assets. It’s a benevolent, virtuous cycle.

    2. The end of cheap energy after 2002 marks the end of economic growth in real terms. The balance of global population, resource availability, and innovation enters transition. Paper assets lose stability and begin their decline against natural resources as technological innovation runs into the harder limit of energy availability. (Liebig).

    3. Having built up a surplus of paper assets (both liabilities and claims) over a 25 year period, the economic system succumbs to its own lack of industrial growth. (Soddy). Paper assets become highly unstable as they are now deprived of cheap energy. In probabilistic terms the economic systems exits Normal. (Gauss). A new era of volatility in prices ensues as competing units of account come into play. The relative predictability of the future, also made possible by cheap energy, declines. A new probabilistic regime unfolds. (Pareto).

    It’s highly unlikely that long-dated paper assets will ever regain their purchasing power against natural resources, because—while human innovation and technology will surely continue—the energy limit is only surmountable in small, incremental terms. Indeed, most of the revolutionary technology of the past 250 years has neither operated outside of cheap energy nor created cheap energy. Instead, our technological era leveraged cheap energy. The proper stance for resource depletionists therefore is not to dismiss the human capacity for innovation. It is undeniable that technological advances will continue apace. However, the advances made possible once humans started extracting fossil fuels, while likely to be repeated in humanistic terms, will not be repeated in industrial terms. Fossil fuels are not creatable. Their unique density make possible a whole range of laborious, constructive activities at a speed and scale that is not replicable.

    The recognition that paper assets derive(d) their worth from future industrial growth will unfold very slowly. Human society, intellectually, continues to operate in the Normal probabilistic regime. Accordingly, the economic system is trying to move forward on the belief that cheap energy, in real terms without losses from externalities, will return. Indeed, modern economic theory, the operation of governments, and risk models are all predicated on the restoration of available cheap energy.

    My suggestion: increase your optimism that human ingenuity will help to reorganize society around a new, scarce energy era. But, decrease your optimism significantly that a return to Normal, in energy terms or probabilistic terms, is in the offing.

    http://gregor.us/economics/paper-vs-...-in-one-chart/

  • #2
    Re: the end of cheap energy and the exit from normal - gregor

    isn't this the idea behind the postcatastrophe economy? dollar cartel falls apart as cheap oil era ends... usa leverages its entrepreneurial technological advantage? teci replaces fire?

    Comment


    • #3
      Re: the end of cheap energy and the exit from normal - gregor

      "...During such a regime, paper assets are priced to reflect the belief in their future purchasing power against natural resources, energy, and labor."

      Very interesting read. It says that wealth is created through the interplay of natural resources (that is very clear), energy (where we encounter the peak cheap oil factor) and labor. This last factor has interested me and some thoughts have arisen.

      Surely a factor influencing labor must be global or societary physical health. I wonder what is happening to our per capita health (so to speak) as a society? Surely it must be decreasing, since, for example, people are living longer with chronic illnesses, not to speak about those who live without producing any wealth for society (a higher percentage of older people). I suppose that a hundred years ago living people would be healthier than today's citizens. The expectancy of living at birth was lower for sure, but the actual level of health that the living people possessed then could be higher than now.

      Have we reached per capita peak health in our western societies? Will this be a factor towards decreased wealth creation in the West?

      I understand that there is problem with the definition of the term per capita health. For economic purposes, it could be understood as the quantity of personal energy dedicated to the creation of wealth.

      Of course, I could be mistaken and per capita health could be increasing. What do I know.

      Comment


      • #4
        Re: the end of cheap energy and the exit from normal - gregor

        some thoughts flowing from gregor's piece:

        1. isn't asia just recapitulating the growth of, first, britain and then america? china's growth doesn't seem that inhibited by more expensive energy.


        growth has shifted to em's - that same point was made by dalio, among others. the developed world is mired in debt and slow growth, while the emerging world consists of countries which are global creditors with high growth. but china et al can't recapitulate britain's and america's economic development, because the earlier cases occurred in a context of ever-cheaper, ever-denser energy as the world moved from coal during britain's ascendancy to petroleum during america's. the rising cost and limited supply of dense, portable energy has got to re-shape china's development going forward. though i must add that i'm at a loss to think out the implications of what i just wrote.

        2. financialization seems to have accompanied progressively lower energy prices.


        there has been a coincidence of financialization and declining energy prices. but don't declining energy prices go back to the early 19th century? i don't know enough about these things, but i have that theory, at least. yes, oil bumped up during the '70s, but in the great scheme of things, wasn't that just noise? it's like the 1987 stock market crash being hardly visible in an up to date multi-decade chart of the dji. i suppose we'd have to normalize to real dollars to get a better sense, but [i suspect] coal was more expensive in 1820 than 1880. and finance played a huge role in the machinations of the american robber barons of the 1880's[?]- jay gould et al. then, of course, there was jp morgan who had a hand in things in the early 20th century. and although financialization really took off in the last couple of decades, i'd date the beginning of parabolic growth to roughly 1980. jimmy carter actually pushed through some early legislation [the details of which now escape me] in 1976. carter surely presided over the beginnings of deregulation - i remember alfred kahn [he who famously said that since he wasn't allowed to use the word "inflation," would refer to a certain economic process as "banana"] oversaw the deregulation of the airlines industry, and thus established the system which led [pretty quickly] to airline overgrowth and then so many airline bankruptcies. then came the reagan years of [more] deregulation, bush i, then clinton with secty of the treasury rubin and still more deregulation. so i think the growth of industrial society and a complex, increasingly globalized economy, carried with it the growth of financialization- i.e. increasing concentrations of wealth captured the political system and bent it to wealth's own ends. the progressively lower cost of energy propelled the economic growth, while increasing complexity established more and more niches for financialization. anyway, that's the theory that comes to mind.

        3. why can't cheap natural gas substitute, albeit imperfectly, to take up all the slack capacity in the u.s. economy?


        i think there's a mismatch resulting from what the austrian's label malinvestment. in brief, cheap natural gas can't bring back the housing industry. i think the austrian's have a pretty good case about the nature of bubbles: while the keynesians focus on a hangover cure, the autrians focus on the desirability of abstaining in the first place. one feature of financialization was not just the capture of the political system, it was also- thereby- the capture of the monetary authorities.

        the mortgage interest deduction has long led to an outsize investment in housing in the u.s. compared to other developed countries. [after all, home ownership has long been part of "the american dream."] and i think housing is better viewed as a consumer durable than a capital investment. the housing bubble was just one sector of the generalized credit bubble, but globally the most prominant. so how does cheap natural gas ameliorate the rubble of that disaster?

        further, what capital investment there was to be made by american companies was made abroad. cheap natural gas doesn't compensate for the differences in labor costs. and then, if demand shrinks, which factories will be shut down? the old ones in the u.s. [or other developed country] or the new one in an emerging market with cheap labor and little regulation?

        i guess as i write this, i think that gregor was pointing to only part of the story. one part is, yes, more expensive energy. but another part is global labor arbitrage. and another part is global variation in debt and savings levels.

        so the oecd is really in trouble, since it's at the wrong end of all those changes and imbalances. and the developing world can compensate for expensive energy with cheap labor and lax regulation, at least for a while.

        Comment


        • #5
          Re: the end of cheap energy and the exit from normal - gregor

          I think gregor is making a huge mistake equating the end of cheap liquid fossil fuels with the end of cheap energy. They are VERY different things and their likelihoods of happening are drastically different in my mind. The end of cheap liquid hydrocarbons is probably here. In my mind at least, it is very possible that fixed energy sources become cheaper over time. Any conversation of the type gregor is attempting needs to address these two types of energy in individually, otherwise the conclusions are empty. That is unless you steadfastly believe ALL energy is going to be more expensive, but you should state that up front to better clarify your position, and then you need to gives reasons why you feel that way. A proper assessment of the ramifications of energy supply going forward and its implications on the world economy demand the conversation be structured into liquid and fixed energy sources.

          Comment


          • #6
            Re: the end of cheap energy and the exit from normal - gregor

            Originally posted by Jay View Post
            I think gregor is making a huge mistake equating the end of cheap liquid fossil fuels with the end of cheap energy. They are VERY different things and their likelihoods of happening are drastically different in my mind. The end of cheap liquid hydrocarbons is probably here. In my mind at least, it is very possible that fixed energy sources become cheaper over time.

            Any conversation of the type gregor is attempting needs to address these two types of energy in individually, otherwise the conclusions are empty. That is unless you steadfastly believe ALL energy is going to be more expensive, but you should state that up front to better clarify your position, and then you need to gives reasons why you feel that way. A proper assessment of the ramifications of energy supply going forward and its implications on the world economy demand the conversation be structured into liquid and fixed energy sources.
            This is a key point that is frequently missed. The most flexible and least rigid part of our transportation energy infrastructure with respect to cost of change is the vehicles themselves, and the most rigid and least flexible part is the transportation network. Thus the former will change much more rapidly while the latter changes slowly. Fossil fuels used for transportation will be extended through technological innovation that reduces consumption as prices rise, while using the existing network infrastructure. That includes an expansion in the use of buses, the cheapest form of human transportation per passenger mile and a favorite of third world countries.

            In my book I talk about all liquid fuels as batteries, with petroleum having the unique characteristics of being pre-charged by nature over hundreds of millions of years, and also a of higher energy density by volume than hydrogen or other liquids, and it can be piped around at a wide variety of temperatures, unlike any other. You can't pipe liquid hydrogen over long distances. All of the limitations of substitutes for oil add up to higher costs. I first wrote about this here in 2006.

            My thesis is that the credit-based money system is on a collision course with the Peak Cheap Oil Cycle. The US-centric system has been coming apart for other reasons anyway, because the US economy is no longer a strong enough center to hold the system together, but the Peak Cheap Oil Cycle will accelerate the dissolution by forcing countries to abandon the dollar to avoid a domestic inflationary crisis. This is depicted in abstract visual terms in this video.



            Fixed energy costs are also likely to rise as new fixed capacity is added to charge man-made batteries, such as liquid hydrogen -- using nuclear plants, mostly -- as nature's pre-charged liquid batteries are used up.

            I am quite sure of all of this, but a big question remains: rate of change.

            We are using up the liquid fossil fuels at a rate 1 million times faster than the batteries were originally charged on a global scale and under ideal conditions: very hot with intense ultra-violet spectrum due to limited atmospheric filtering and a high carbon dioxide content to the air.

            We can never replace the pre-charged batteries as quickly we've used them up. The question is how quickly they deplete. If they deplete at 3% per year and we can only add 1% new capacity per year, we will cut consumption 2% per year either by innovation that increases efficiency or by rising prices that cause a reduction in goods and passenger miles. It comes down to relative rates of change and transportation system in-elasticities.

            Comment


            • #7
              Re: the end of cheap energy and the exit from normal - gregor

              Originally posted by EJ View Post
              Fixed energy costs are also likely to rise as new fixed capacity is added to charge man-made batteries, such as liquid hydrogen -- using nuclear plants, mostly -- as nature's pre-charged liquid batteries are used up.
              I'm still holding out hope that fixed energy sources will see breakthroughs in the near future. Maybe I'm a bit idealistic, but the promise of thorium and other nuclear technologies intrigues me. I don't think Western Civ, and the economy's need for an expanding energy source and expanding growth, goes down without a fight. It's met big challenges before.

              I agree that the transportation network is in for a remarkable change though, many of those buses will be run on natural gas.

              Comment


              • #8
                Re: the end of cheap energy and the exit from normal - gregor

                Originally posted by Jay View Post
                I'm still holding out hope that fixed energy sources will see breakthroughs in the near future. Maybe I'm a bit idealistic, but the promise of thorium and other nuclear technologies intrigues me. I don't think Western Civ, and the economy's need for an expanding energy source and expanding growth, goes down without a fight. It's met big challenges before.

                I agree that the transportation network is in for a remarkable change though, many of those buses will be run on natural gas.
                Since we're stuck with few million miles of paved roads, I've started to look at paving technology companies as a possible investment area. I suspect that the industry has not attracted the best and the brightest, so there considerable efficiencies remain to be gained as re-paving costs escalate.

                It's hard for me to speak theoretically about energy technology companies because I've gotten up close and personal to several when assisting the due diligence effort for VC clients, and additionally looked into two companies that approached me for a CEO role. Most of the improvements are incremental, not revolutionary. In any case, our immediate problem is not technological but political. The technology needed to double average vehicle fuel efficiency already exists, but fuel is too cheap to force widespread adoption in the US.

                Also, I have a dear old friend who founded and runs a cold fusion company. And he's not crazy, far from it. He and his team have been at it for five years or so. Some day when he's ready maybe I can talk him into talking to the iTulip community. The recent breakthrough in Italy so far appears to be legit.

                I temper my optimism with the historical fact that breakthrough technologies have tended to come about via the mother of invention: necessity. The necessity in this case will be a widespread energy crisis and all of the social and political disruption that such an event implies. The breakthroughs will come but if the depletion is rapid then in a crucible of desperate need, much as the output of the Manhattan Project did.

                In the mean time, I'm focused on natural gas. I will interview my friend Art Berman for iTulip over the next few weeks.

                Comment


                • #9
                  Re: the end of cheap energy and the exit from normal - gregor

                  Originally posted by Jay View Post
                  I think gregor is making a huge mistake equating the end of cheap liquid fossil fuels with the end of cheap energy. They are VERY different things and their likelihoods of happening are drastically different in my mind. The end of cheap liquid hydrocarbons is probably here. In my mind at least, it is very possible that fixed energy sources become cheaper over time. Any conversation of the type gregor is attempting needs to address these two types of energy in individually, otherwise the conclusions are empty. That is unless you steadfastly believe ALL energy is going to be more expensive, but you should state that up front to better clarify your position, and then you need to gives reasons why you feel that way. A proper assessment of the ramifications of energy supply going forward and its implications on the world economy demand the conversation be structured into liquid and fixed energy sources.
                  gregor has noted that the fastest growing source of energy in the last several years has been................coal.

                  Comment


                  • #10
                    Re: the end of cheap energy and the exit from normal - gregor

                    Originally posted by jk View Post
                    gregor has noted that the fastest growing source of energy in the last several years has been................coal.
                    Worldwide, mostly China, he is correct. But coal use has been declining in the US. According to SourceWatch, in 2004 coal's share of electricity production fell below 50% for the first time since 1979. In 2009, that share had dropped to 44.6%.

                    When I gave the keynote at the APPA conference in Phoenix in March, I was told that the trend in US plants for the last decade is to convert from coal to natural gas. The idea that nat gas may not be as abundant in the US as the investment banks are saying is a source of great concern for them. I didn't want to tell them they'd made a mistake to convert, but that in my opinion is the case. Coal use will increase to compensate for rapidly depleting nat gas.

                    That said, no new coal plants have been approved and built in the US for over 20 years, but within five years we will see more built. This is why you don't see me using the word "green" here on this site or in my book. Environmental concerns go out the window when diesel hits $6 in the US.

                    Comment


                    • #11
                      Re: the end of cheap energy and the exit from normal - gregor

                      Originally posted by EJ View Post
                      Since we're stuck with few million miles of paved roads, I've started to look at paving technology companies as a possible investment area. I suspect that the industry has not attracted the best and the brightest, so there considerable efficiencies remain to be gained as re-paving costs escalate.

                      It's hard for me to speak theoretically about energy technology companies because I've gotten up close and personal to several when assisting the due diligence effort for VC clients, and additionally looked into two companies that approached me for a CEO role. Most of the improvements are incremental, not revolutionary. In any case, our immediate problem is not technological but political. The technology needed to double average vehicle fuel efficiency already exists, but fuel is too cheap to force widespread adoption in the US.

                      Also, I have a dear old friend who founded and runs a cold fusion company. And he's not crazy, far from it. He and his team have been at it for five years or so. Some day when he's ready maybe I can talk him into talking to the iTulip community. The recent breakthrough in Italy so far appears to be legit.

                      I temper my optimism with the historical fact that breakthrough technologies have tended to come about via the mother of invention: necessity. The necessity in this case will be a widespread energy crisis and all of the social and political disruption that such an event implies. The breakthroughs will come but if the depletion is rapid then in a crucible of desperate need, much as the output of the Manhattan Project did.

                      In the mean time, I'm focused on natural gas. I will interview my friend Art Berman for iTulip over the next few weeks.
                      Have you looked at concrete vs. asphalt paving systems? I wonder what the road surface of the future will be... even if refined gasoline and kerosene costs go through the roof, asphalt may trail in price gains as heavier oils from tar sands and poorer deposits become become more prevalent. Those oils will have a larger percentage of heavy fractions and, hence, more asphalt from the distiller.

                      Liquid fuel and fixed energy efficiency measures (i.e. limiting vampire devices in homes), and other conservation measures, are obviously the low hanging fruit. I actually believe that the US was "allowed" from a policy standpoint to be incredibly wasteful and careless in its energy use, especially with liquid fuels. This seemingly insane policy actually makes some sense if you think it through. It allows peak cheap oil to rear its head a bit earlier than it otherwise would if conservation measures were aggressively implemented. That early unveiling of peak oil production ends up providing a temporal buffer for the transition towards new liquid fuels or equivalents. If you conserve your butt off then get hit with decreasing production, you end up with rapidly escalating prices and little time to figure out what new technology you want to go with, where the capital and political will is going to come from to pay for it and force it through congress, and then the time to impliment it on a grand scale. You might have civil unrest by then...
                      ...you might get unrest anyway, but now thanks to a disgusting display of rampant energy consumption the bar is set low to enact important stabilizing, time delaying, conservation measures.

                      I know those ideas aren't everyone's cup of tea.

                      If your friend works out feasible, energy positive, controllable fusion, that could be the end of a possible gold standard....there is a lot of gold in the oceans which could be liberated with enough cheap energy.

                      Comment


                      • #12
                        Re: the end of cheap energy and the exit from normal - gregor

                        Originally posted by jk View Post
                        gregor has noted that the fastest growing source of energy in the last several years has been................coal.
                        He should note that the transition we are facing is one of liquid not fixed fuels.

                        Comment


                        • #13
                          Re: the end of cheap energy and the exit from normal - gregor

                          I temper my optimism with the historical fact that breakthrough technologies have tended to come about via the mother of invention: necessity. The necessity in this case will be a widespread energy crisis and all of the social and political disruption that such an event implies. The breakthroughs will come but if the depletion is rapid then in a crucible of desperate need, much as the output of the Manhattan Project did.
                          I know that you are a great believer in the US entrepreneurial spirit but to my mind the need for a solution is far is greater in Asia and consequently where a breakthrough is more likely to come. The US is not facing the dire need that Asia is facing. The US has more reserves of oil than China and a 1/4 of the population. The US has plenty of "spare capacity" in that it could just adapt to using the same amount per capita that is used in Europe for example. US people will get used to to smaller cars and using the bus before they resort to civil unrest in my opinion.
                          The oil equivalent of the Manhattan Project will have to occur in the East as they will chuck all the human (not inconsequential) and monetery (also not inconsequential) capital they can at the problem or face a real disaster not just the inconvenience of using public transport or a car with a 1.3 litre engine.

                          Comment


                          • #14
                            Re: the end of cheap energy and the exit from normal - gregor

                            Originally posted by llanlad2 View Post
                            The US is not facing the dire need that Asia is facing. The US has more reserves of oil than China and a 1/4 of the population. The US has plenty of "spare capacity" in that it could just adapt to using the same amount per capita that is used in Europe for example. US people will get used to to smaller cars and using the bus before they resort to civil unrest in my opinion.

                            China is building super high density cities and is going the electric mass transportation way, and as such will not use as much oil as the US.

                            Comment


                            • #15
                              Re: the end of cheap energy and the exit from normal - gregor

                              Originally posted by touchring View Post
                              China is building super high density cities and is going the electric mass transportation way, and as such will not use as much oil as the US.
                              I understand that. I agree that no country will ever reach the per capita usage of oil that the US has had again.

                              But China's demand has not diminished year on year it has just been dampened by the steps they have taken. Oil demand has increased dramatically in recent years and they will NEED more or face a crisis.

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