Friday, March 29, 2013

Are We Doomed?

On this most solemn Crucifixion day, let me share some sombre stats with you :

 Let me put that in writing :

Gas up 168% in ten years
Electricity 97%
Property 66%
Water 63%
Council tax / rates 59%
Petrol 59%
Food 39%
Rents 28%
Consumer durables -5%
Average income up 38%
CPI inflation up 27%.

I don't know what it tells you, but it tells me that the ONS measures of inflation, as far as the poor are concerned, are woefully inadequate. There's no doubt that 24" monitors (made in the Far East) are a fraction of their 2001 price - but how many of those do you buy a year, compared with the number of trips to the garage or supermarket you make?

With pensioners' savings bringing near-zero incomes, and benefits being restricted to 1% increases for the next three years, in tandem with more talk of energy price rises, people will freeze to death with costs like these.  

The graph is from Tim Morgan's The Perfect Storm (pdf). He's head of research at the broker Tullett Prebon, and his thesis is that

a) barring a nuclear miracle* (fusion or thorium), the era of cheap energy is over
b) the end of cheap energy = end of growth
c) the West is particularly poorly situated to deal with this because

d) we've outsourced most of our production to the Far East
e) but we've continued our high consumption, which has left us

f) massively indebted, both at the personal and State level - debt which can only be repaid by heroic and unattainable future growth assumptions. In other words, we're doomed.

I'm particularly taken  with Dr Morgan's work because his short term forecasting record is pretty good. In one of this earlier Strategy Reports, Thinking The Unthinkable, he said the government's deficit reduction strategy was doomed to fail :

"We believe that the British economy simply is not capable of growing at anything like the rates which are predicted by the OBR and are critical to the government’s deficit reduction calculus."

His arguments were based on the idea that previous growth had mainly been the result of private borrowing and public spending, both of which had braked sharply, if not gone into reverse. The sectors of the economy which had provided most recent growth were precisely those which the crisis had hit hardest. Another sobering graph :

To be fair, this may well have been the story of 1986-2007, or even from 1979. Doing things - up, producing things (except houses, schools, PFI hospitals and office blocks) - down.

I digress. The point is, he was right in his prediction, and his explanation of why Osborne's targets wouldn't be hit was persuasive. So I was naturally receptive to his gloom and doom.

Trouble is, I'm an Eeyore, a sucker for predictions of Armageddon. Laban was a Green before the word was invented, back in the days of Paul Ehrlich's Population Bomb and the Club of Rome's Limits To Growth. (I still believe in their basic theses - though Ehrlich failed to predict the Green Revolution which prevented mass starvation, so his forecasts of hundreds of millions of famine deaths in the 70s and 80s happily failed to materialise - and he looked ridiculous. But .. "the trees do not grow up to the sky".)

So I'm a long term believer in doom and gloom, but we have to live in the present, in the long run we're all dead etc. What's exercising Tim Morgan is not that we'll run out of energy, but that it won't be cheap any more, because of something called EROEI - Energy Returned On Energy Invested.

Eighty years back you could drill in Arabia and for every barrel's worth of energy used to make, transport and power the equipment and the oil produced, you'd get a hundred barrels back - EROEI was 100-1. Forward to the North Sea now, and Dr Morgan believes the ratio may be as low as 5-1 - that the cost of five new barrels of oil is burning an existing one. Lower still for the tar sands of Canada and shale gas (although at that point I have to ask - why is shale gas so cheap in the States? Are the producers losing money on it?).

Now Tim Worstall thinks that EROEI is "nonsense", but I must say I don't find his argument as presented in Forbes very persuasive :

"while the math and physics of ERoEI is just fine, indisputable even, it’s just not a very useful conceit except in certain very limited situations. Basically, what is being said is that as oil gets deeper, more difficult to pump up, perhaps with tar sands we’ve got to use more energy to purify the stuff, then at some point we hit a boundary, a system boundary. We’ll be using more energy to get the oil out than we’ll get energy from the oil we get out."

Dr Morgan just says that energy's going to be very expensive, and that world economic growth has almost exactly paralleled increased energy use. Increased EROEIs will, he says mean that an ever greater proportion of world energy use will be devoted to ... energy extraction, with a consequent decrease in the amount devoted to other activities, like driving to Swansea or turning on the electric fire. 

"It takes 1,000 tonnes of water to grow a tonne of wheat. That water must be fresh water. Producing fresh water requires huge amounts of energy. The Sun does this very nicely for us, evaporating it from the oceans and sending it back down as rain again. Now, think of the energy that is required to evaporate 1,000 tonnes of water…..that’s 1 million kilos at 419 kJ per kilo. 419 million kJ. There’s around 3,000 calories in a kg of wheat. So our tonne of wheat provides us with 3 million calories. 3 million kcal (nutritional calories that is) is 12560400 kJ. A little over 12 million kJ. So, in producing that staff of life, those grains which keep the entire world turning, we use 35 times as much energy as an input as we get as an output. And we’re quite happy with this. We don’t think it odd at all. And we most certainly don’t say that it’s unsustainable because it doesn’t pass the ERoEI calculation.

The reason we’re not worried about it is because we’ve got vast amounts of energy coming to us as sunlight. Huge, massive, great big gobs of it. And we’re entirely happy to use it copiously, waste huge amounts of it, because there is so much. We want that energy in a form that can be used by our bodies and we’re just delighted to waste 97% of the energy in order to get a bit in the form we can use.

ERoEI just isn’t a binding constraint on our system, not at any human scale."

Tim's just describing the Agricultural Revolution of 6,000 years or so ago. But we no longer just want "energy in a form that can be used by our bodies" (and even that energy is now dependent on large secondary fossil fuel inputs - via the fertiliser, the tractor, the harvester, the grain dryer, the bakery, the supermarket). We want lumpy, if not liquid, energy - energy we can cart around as fuel for our cars and aircraft, energy to create electricity to power everything from tablet computers to ski lifts, energy to warm our homes - transportable energy. Apart from nuclear and (in some parts of the world) hydro electricity, our main sources are fossil fuels - a finite resource, that once was cheap to extract, but no longer. The low-hanging energy fruit has gone.

* of course the thorium cavalry may gallop over the hill, but we still can't go on increasing energy use indefinitely. How would we get rid of all the extra heat? I guess the fate of the Martian atmosphere is ever in my mind.       


Anonymous said...

I think, regarding energy, a lot of people are relying on the assumption that man's seemingly infinite capacity for creativity will solve the problem one way or another.

I'm not very well read in any of this, but I'm not sure if cheap energy is gone forever. It probably will never be as cheap as it was, say, four or five decades ago. The problem is that the UK hasn't really had a comprehensive energy strategy ever, so we're now playing catch-up with reality, which inevitably costs. The problem from a confidence point of view, I think, is that countries like France and Germany have set out clear ambitions, plans and targets for their future energy. We seemingly are indecisive, which will only lead to increase costs in the future.

Anonymous said...

Good to hear from you, Sam. If you have time I'd recommend reading the whole thing - there's a lot more in it than my six-line summary.

He thinks the last 30 years have been an example of popular delusion in that we've been told that we can produce less, borrow more and consume more, and we've all said "OK, if you say so" rather than "Whaaat?".

Our last balance of payments surplus was in 1983, aided by North Sea oil. That's 30 years of trade deficits!

Back in 1970 one poor set of trade figures before the polls was enough to lose a General Election.

The damage to the UK energy industry was done in 1998, when Blair agreed to stop all new nuclear build. A generation of nuclear engineers have retired in the last 15 years, and no new generation's been recruited. So only the French State (EDF) can build our new ones.

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Anonymous said...

Good to talk, Laban (assuming Anonymous is you). Good to have had time away from the blogosphere, though. Don't worry, my education that you started has continued: I've got my own copy of The Abolition of Britain now!

Time is in short supply, I'm afraid. I'll get round to it eventually I'm sure.

I think part of the problem is too much emphasis, or at least misinterpretation of, comparative advantage. At some point the economists and/or politicians seem to have said that ours is financial management. However, the idea of comparative advantage has its roots in a time when the industrial revolution had only just started going in Britain, let alone anywhere else. The idea that the likes of Smith and Ricardo would have imagined large European states building their economies on what is essentially debt management is folly.

When I studied economics at A-level, we talked a lot about the UK current account deficit, and how it was unsustainable to continue to rely on a capital account surplus for the balance of payments. But it didn't seem anyone had any real idea about how to fix it. Or at least, there were no ideas the teachers thought we'd understand.

From my youthful point of view, I get the impression that no one seems to have had a clue what they were doing for the last sixty years, perhaps even longer. No strategy, no vision, just clinging to a Victorian model of an industrial economy, before junking it at great human cost, and replacing it with a debt-fueled illusion of growth. Frustrating, really, especially when you look at the quite remarkable industrial model in Germany.

Anonymous said...

There are two reasons why energy in the U.K is far more expensive than is necessary are :

1)Governments taxing it at source to pay for useless and parasitic public-sector expenditure, in order to get themselves re-elected.

2) The greenies.

If the British electorate continue to put up with both of the above, they will have to take the consequences.

Ryan said...

Roof over head? Check
Plenty of food? Check

Conclusion: No genuine problems for UK economy. As long as we don't import any more PEOPLE that is. Best to see the economy in real hard terms before judging the veracity of the latest doomsayers predictions. This nation has been around a long time - much longer than refined oil.

Looking around I would say our biggest objective for UK society should be replacing the huge number of crumbling buildings all around us. This would involve digging up clay, baking it, and then stacking the blocks of baked clay on top of each other. I think even we could do that.

But if you really want to deal with the "peak oil" projections of the doomsayers, they were telling us all that North Sea oil would dry up in 1990. Then in 2000, Then again in 2010. (The Russians kept telling us it would NEVER dry up but for some strange reason we don't believe them, despite their scientists being proved right again and again). The reason most of our oil comes from Saudi Arabia is because it is so dirt cheap nobody else can compete with it! Thge Russians have pointed out that for Saudi Arabia to have provided 60% of the world's oil since 1930 it would have had to have been sitting on an ocean of the stuff when it started. It isn't economically viable to open new fields which is why the Russians can't make any real money out of it. The price of oil is set by what the Saudis think the market can take - not what it costs to produce. Actually producing Saudi oil is more or less free.

Fact is the price is going up like crazy but I happen to blame the tax-man. It isn't quite so expensive in the US....

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