$44 TRILLION in Deficits by 2024? Minus 15% Growth Per Annum? The Hidden Energy Degradation Factor

In one of the more disturbing articles in The Financial Times ('West's Debt Explosion Is Real Story Behind Fed's  QE Dance' ), Gillian Tett ties the addiction to quantitative easing by the Federal Reserve to ongoing credit and debt imbalance. As she puts it:

" Faced with the choice of curbing the addiction or providing more of the QE drug the FED chose the latter..... One way to interpret this week’s dance is that policy makers are propping up a system which is at best peculiar and at worst, unstable......Western economies have become hooked on ever expanding debt."

 

 

She adds that:  “Total credit keeps rising, as the productivity of money is falling and an over-leveraged system too prone to booms and busts”.   She then cites Lord Turner who sees the same dangers, and "wants a radical overhaul of the models economists use and for policy makers to deliberately reduce credit."
 

Gillian Tett's piece is admirable, as are Lord Turner's prescriptions, but it is clear neither really grasps what is at the root of expanding debt which is projected to metastasize across the globe multifold times in the next ten years. What is the hidden basis? To sum up as succinctly as possible, it is the decreasing energy return on energy invested (EROEI) of fuel sources. In other words, our energy-dependent civilization is becoming ever more impoverished as the efficiency of the energy to run it diminishes over time.

 

 

Essentially, a civilization which had become addicted to energy delivering 20 to 30 or even 40 times as much energy as it cost to extract, now faces a future with energy return 5 to 8  times less. This spells monetary-economic disaster because at the end of the day it is energy which  determines wealth of nations- money is only a medium to represent it.

 

 

One of the most scarifying revelations I've seen in the past year was cited in Richard Heinberg's new book, Snake Oil: How Fracking's False Promise Imperils Our Future', on p.115. This is from a report issues by a London -based brokerage firm Tullett Prebon whose customers are mostly investment banks. In a Strategy Insight report, author Tom Morgan wrote:

 

 

"Our calculated EROEIs both for 1990 (40:1) and for 2010 (17:1) are reasonably close to the numbers cited for those years by Andrew Lees. For 2020, our projected EROEI of 11.5 to 1 is not as catastrophic as 5: 1 but would nevertheless mean that the share of GDP absorbed by energy costs would have escalated to 9.6% from about 6.7% today. Our projections further suggest energy costs would absorb as much as 15% of GDP (at an EROEI of 7.7 to 1)  by 2030."

 

 

Morgan's report goes on to conclude that the dismal diminishing energy returns means that the economy we "have known for more than two centuries" will "cease to become viable at some point".

 

 

Cease to become viable? Energy costs absorbing as much as 15% of GDP by 2030? What does this mean? It means our present energy-intensive civilization with its HDTVs, Nooks, Ipads, Smart phones, F35 bombers, Dreamliner jets,  drones and SUVs will cease to function. To try an analogy, think of a gluttonous guy of 300 lbs, suddenly dropped on to 'Survivor Island' and forced to eat rice, a few crabs and coconuts for the rest of his life as opposed to just 39 days. Think he'd have the energy to do anything?  Think he'd survive? Guess again. His body - starving of protein  (the equivalent of high EROEI energy)-  would begin to consume itself.  This gluttonous guy is our current energy gluttonous civilization which foolishly believes it has so much energy on hand it can afford to waste major portions on unprovoked wars of choice, and stupid energy investments - such as the F35 bomber which tab is now up to nearly $500m each (and the U.S. plans to build 2, 400 of them)

 

 

Nor is the oil shale -fracking option the way out. As Heinberg observes, while it may cost less to extract a cubic foot of natural gas or a gallon of oil shale today, it will cost much more in just five years and even more in ten - such that one would have to spend as much or more to get the energy as the benefit it delivers. Heinberg summons a point that most of the snake oil salesman humping fracking won't tell you, that it costs energy to get energy. And if you are a nation that resorts to employing 15 to 1 EROEI energy to extract  5 to 1 EROEI  oil shale energy.....well, can we say 'stupid'?

As Heinberg puts it (p. 116):

"No evidence suggests that the technology of fracking has actually raised the EROEI for natural gas production. It temporarily lowered prices but only by glutting the market."


Heinberg's book is essentially a tour-de-force exposing the false promise of fracking with hard statistics and basic energy principles. Readers who wish to see the detailed arguments and facts would be well served by reading it. Especially the chapter in which he notes that while the EROEI of oil and gas are declining, the EROEI for wind and solar photovoltaic are increasing. For this reason, Heinberg advocates much more investment attention to the latter, and not pinning our future energy hopes to the myth of "100 years of natural gas".


He observes, for example(p. 110), that "a study of the EROEI for electrical heating of methane hydrate deposits between 1000 and 1500 meters deep yielded ratios from 2:1 up to 5:1, depending on the source of the electricity"


Regarding the much ballyhooed "oil shale" or kerogen, Heinberg is blunt (ibid.):

"Kerogen is not oil. It is better thought of as an oil precursor that was insufficiently cooked by geologic processes. If we want to turn it into oil, we have to finish the process nature started: that involves heating the kerogen to a high temperature for a long time. And that in turn takes energy- lots of it, whether supplied by hydroelectricity, nuclear power plants, natural gas, or the kerogen itself. Therefore the EROEI in processing oil shale is bound to be pitifully low. According to the best study to date, by Cutler Cleveland and Peter O'Connor, the EROEI for oil shale production would be about 2:1. That tells us that oil from kerogen will be far more expensive than regular crude oil."

We now examine the issue in more detail.

At the heart of the preceding considerations is the net energy eqn. (cf. Physics Today, Weisz, July 2004, p. 51): 

Q (net) = Q (PR) – [Q (op) + E/T]

 In effect, for break-even oil one would find Q(net) = 0    This is the phase at which it costs as much energy to extract the oil (or natural gas) as the energy extracted provides. Thus, there is no net gain in energy given the quantity that must be used to obtain it. For the last 700 billion barrels, of hard to obtain oil (such as oil shale, or tar sands, or deep sea sources):

Q(net) = negative quantity = -Q. 

Since the rate of energy production, Q (PR),  must be debited by the energy consumed for its operation Q(op), and the energy E invested during its “lifetime” T.  Thus its Q(PR) will be small in relation to the bracketed quantity. Thus, the problem in a nutshell is not “running out of oil’ but running out of cheap, accessible oil.  Bottom line, we need not run out of the stuff before the world economy runs into problems of untold, unspeakable proportions.

Heinberg forecasts we will see the initial effects in terms of "an ongoing maintenance crisis" in which we will enter a race to keep basic services  (water, electricity) available  "as energy and capital contract in a self -reinforcing loop". So look for power blackouts, and not just in the summers, as well as water shutoffs, not to mention ever more frequent water mains bursting, bridges collapsing and highways crumbling - even if massive storms (such as struck Colorado) don't strike each year. (But with ramping up climate change we know they likely will)

Obviously, each such feedback cycle will create and reinforce more debt, even if we are bright enough not to engage in stupid wars - wasting more high EROEI energy - or debt ceiling face offs.

For people that have a hard time fathoming a $44 trillion deficit in 11 years, let's put it in temporal perspective.  In the last 13 years the deficit has essentially doubled from $8.3 trillion to $16.7 trillion and this was in an environment with (still) high EROEI energy sources - which we largely wasted on unprovoked wars, and building new weapons such as drones and now F 35s. Thus, it is a no brainer that the deficit can easily double in another 13 years. Now add to that the Tullet Prebon Strategy Insight  report  of an approximately 30%  projected increase in energy costs (as proportion of GDP)  and you easily reach $44 trillion in just 11 years, and that's assuming no more stupid wars or massive storms wreaking havoc on our already crumbling infrastructure.

Here's the connection: lowered EROEI translates to increased debt - nationwide as well as for (most) individuals, since it will cost more and more to obtain the same services, products one currently depends on, in the future. Raise the per barrel oil prices by even 15%  - say from $100 to $115, and watch the impact on food prices, not to mention gas, or electricity. Eventually, as Strategy Insight   notes, the economics becomes "non-viable" and that means the only way people can access the food or services is to go into debt, i.e. using credit cards or other means. This is what Gillian Tett was getting at but she didn't interject the energy factor, which is the hidden,  dirty little secret behind the Fed's quantitative easing.  Sure, there's a credit problem, and certainly millions are attempting to compensate by leveraging debt and expanded credit. But at root it's an energy degradation problem: as the energy to run our society becomes ever more expensive, so do all the devices and services that energy helps produce. Lower the EROEI of that energy to a threshold far below that to which the production process (and society at large) has become accustomed, and you toss a major spanner into the works. A "spanner" treacherous enough to take the society down, or at least degrade to the point it can't provide the basic necessities of life and services for most of its citizens.

Fed QE or not,  unless we either downscale our societies in the West - to match the forthcoming drop in EROEI for our energy sources- or find new high EROEI sources, we are going to be screwed-  of that there is no doubt. That means whopping deficits in our future  that will make today's pols' heads explode. It also means cumulative negative growth, since there simply won't be the capital to drive it - it will all have to go into energy development, extraction, searches and trying to keep the crumbling water mains, bridges and highways from total  inaccessibility.