Gail Tverberg, Our Finite World
Gail Tverberg, Our Finite World

Resource limits are invisible, so most people don’t realize that we could possibly be approaching them. Indeed, my analysis indicates resource limits are really financial limits, and in fact, we seem to be approaching those limits right now.

Many analysts discussing resource limits are referring to a very different concern to that which I am talking about. A number of observers from the “peak oil” community say what we should worry about is a decline in world oil supply.

In my view, the danger is quite different: The real danger is financial collapse, coming much earlier than a decline in oil supply. The financial collapse is related to Energy Return on Energy Invested (EROEI), a ratio that is already too low. More precisely, the issue is the loss of cheap fossil fuel energy to subsidize the rest of society.

If an energy source, such as oil back when the cost was $20 or $30 a barrel, can produce a large amount of energy in the form it is needed with low inputs, it is likely to be a very profitable endeavor.
Governments can tax it heavily with severance taxes, royalties, rental for drilling rights, and other fees that are not necessarily called taxes. In many oil-exporting countries, this oil-based income provides a large share of government revenues. The availability of cheap energy also allows inexpensive roads, bridges, pipelines, and schools to be built.

As we move to energy that requires more expensive inputs for extraction (such as the current $90+ a barrel oil), these benefits are lost. The cost of key infrastructure such as roads, bridges, and pipelines escalates. It is this loss of a subsidy from cheap fossil fuels that is significant part of what moves us toward financial collapse.

Renewable energy generally does not solve this profound challenge. In fact, it can exacerbate the problem because the cost of its inputs tends to be high and “front-ended,” leading to a need for subsidies.
What is really needed is a way to replace lost tax revenue, and a way to bring down the high cost of new bridges and roads–that is a way to get back to the cost structure we had when oil could be extracted cheaply.

What History Says about Prior Collapses

Until fossil fuels came into widespread use, civilizations regularly grew until they reached limits of some sort, and then collapsed. Peter Turchin and Surgey Nefedov in the book Secular Cycles take an analytical approach to reviewing how these cycles played out, based on financial and other detailed records of eight economies over the past 2500 years.

The pattern found in Secular Cycles looks disturbingly like the pattern that the world has been experiencing since the widespread use of fossil fuels began about 1800: A civilization starts its existence when a new resource becomes available, for example by deforesting land to be used for agriculture (or in our case, finding ways fossil fuels could be used). A civilization experiences Growth for 100+ years as the population is able to grow with the new resource available to it.

Eventually the civilization reaches a Stagflation period. This happens when society at large starts reaching limits. Population is much higher, the size of the governing class is much larger, and feedbacks like erosion and soil depletion start to play a role. In my view, the Stagflation period began for the United States around 1970, when US oil production began to fall.

Turchin and Nefedov found that during the Stagflation period, population growth slows and wages stop rising. Wage disparity increases and debt grows. The cost of food and other resources becomes more variable and begins to spike. The level of required taxes grows as the number of government administrators grows and as armies increase in size.

Eventually, after 50 or 60 years, a Crisis Phase begins, when it is no longer possible to raise taxes enough to cover all of the governmental costs. In this period, average wages drop in real terms and to such a low level that nutrition declines, leading to epidemics and a higher death rate.

The people often revolt, which invariably leads to government collapses. Wars for resources are sometimes fought. The Crisis Phase lasts a variable length of time, typically 20 to 50 years, with the length of time seeming to be shorter in the more recent cycles analyzed. There is considerable die-off from illness and warfare in the Crisis Phase.

Where we are now

It appears that the United States, most of Europe, and Japan are now close to the point where they will enter the Crisis Phase of a similar cycle. Oil production is higher, but it is higher because oil prices are higher.

With the higher prices, it makes sense to use more expensive techniques for extracting oil, such as hydraulic fracturing. We thus use more energy (and dollars) to produce the same amount of oil. This is precisely the opposite of increased productivity. I have referred to the situation as an Investment Sinkhole problem.

When we were still far from reaching resource limits, efficiency improvements could more than make up for the loss of efficiency that comes from the Investment Sinkhole effect. But as we get closer to limits, the situation is reversed. When the Investment Sinkhole problem starts to predominate, financial models suddenly don’t work very well.

Central banks react by cutting interest rates, in an attempt to stimulate economic growth. They also try to stimulate the economy by Quantitative Easing. This temporary fix becomes a bridge to nowhere. The world economy becomes highly dependent on low interest rates, but these cannot continue indefinitely. So we now have a major problem looming.

Gail Tverberg is trained as an actuary. For the last eight years, she has been researching issues related to energy and the economy. She writes at Our Finite World,

Resource Limits May Lead to Financial Collapse
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