The economy at the cliff-edge – our new report
Regular readers will know that I’ve been working on a major report looking at the economic outlook in the context of surplus energy, globalisation and the fall-out from the thirty-year ‘credit super-cycle’. Entitled Perfect Storm – energy, finance and the end of growth, this report is now complete, and will be published in January.
The report shows how four critical trends have combined to create a “perfect storm” which may signal the end of more than two centuries of economic expansion.
By far the most important of these trends is the unwinding of the energy dynamic which alone makes growth possible. Ultimately, the economy is not a monetary system but an energy one, for which the key driver is the relationship between energy extracted and the energy consumed in the extraction process. Known as the energy return on energy invested (EROEI), this ratio is nearing a “cliff edge” beyond which surplus energy becomes insufficient for the economy as we know it to function.
Our report argues that, having declined from 40:1 in 1990 to barely 17:1 today, this ratio is set to pass the critical 10:1 point in the coming ten years. The ratio has already fallen far enough to render overall growth a virtual impossibility, which helps explain why there has still been no strong economic recovery. To those familiar with the energy basis of the economy, the process of deterioration has become apparent over the last decade in a string of key markers such as energy price spikes, food shortages, escalating debt and deteriorating growth. Inflation, we argue, comes next.
Three factors have combined to worsen the outlook, particularly for the Western developed countries. First, the relationship between the financial and the “real” (energy) economies has become drastically over-stretched through a three-decades-long borrowing binge which created the biggest bubble in economic history.
Second, the West has allowed globalisation to drive an ever-widening gulf between growing consumption and diminishing production, a gulf which has been filled by escalating debt. To cap it all, the data on which policymakers, investors and the general public rely has been subjected to a process of incremental distortion which has exaggerated growth, inflation and output whilst disguising the true levels of debt and unemployment.
This report has taken a long time to complete, but I hope you’ll find it worthwhile.
I am so looking forward to this. Are you heading towards the notion of a steady state economy becoming unavoidable? http://steadystate.org/
Barry: Many thanks. By putting the focus on just four issues, the report is able to go into quite a lot of detail on each.
I’m not sure that a steady-state economy can ever exist – just as “nature abhors a vacuum”, economics seems to abhor stability, which perhaps is stasis. But there’s a huge difference between change on the up-slope and change on the down, of course.
Tim
This is a brilliant summary – I look forward to the report
DaveS: Thank you very much. This has been a big project (and it’s a big report) – I’m excited about it, and really hope it will be a useful contribution to the debate. I also hope it reaches the largest possible number of participants. Blog feedback has been a great help since we aired energy and globalisation issues.
Look forward to the report ; I enjoy the clear style and the reasoned content. One wonders why the governing bureaucrats do not undertake this type of research and thinking? [don't want to rock the boat or alarm the passengers ?] Peter
The best is worth waiting for, so do not stress about it. keep up the good work. May be you or Mr Smith could go on CNBC and share your wisdom with Cutmore and Sedgewick as guest host for an hour of unmissable morning TV.
I do agree with Peter Marcham above.
Stephen
Dear Dr Morgan
Like Barry and others I look forward to reading this. An interesting angle to come at and one which is often discussed emotionally rather than on a reasoned basis (peak oil, etc has been hijacked so often in the past 5+ years). I don’t know whether you will reference the Coalition’s “energy policy” (misnommer) but I hope so. Beyond physical security it is my view that energy security is the second most important role of Government – ours have woefully mismanaged the situation over many years, as with so many other things.
Given that you see inflation down the road I would love to know your views on the removal of the Inflation target for the BoE.
Peter, Stephen, Debra: Thanks. This project has been fascinating as well as extensive, since each answer that I’ve found tends to pose at least two more questions. I have accumulated a lot of material which is not included in the report, and that may bode well for the book.
I don’t know whether governments are aware of this kind of analysis or not. On the one hand, you would think that someone, somewhere is employed to look at this kind of thing. On the other, the idea of the economy as an energy rather than a monetary construct is an almost heretical notion to many.
The probable removal of the inflation target, Debra, is worrying, but does not surprise me at all. In the report, I list the markers to be anticipated as EROEI declines. All of them are evident already, with the single exception of inflation…..
Anyway, the report will be published in January, and in the meantime I would like to wish you all a happy 2013.
Hi Tim, I look forwards to this one with particular interest. It sounds very challenging.
Hi Tim, really looking forward to this report, should contain all the things our Lords and Masters should be worrying about. I guess the West will have a double shock, as with a constrained supply we will be competing with Asia, South America and increasingly Africa for the limited supply. In addition the export land model, where countries supplying the oil use an ever greater proportion of the supply they produce will also have a feedback effect pushing prices ever higher.
Dear Dr Morgan, I have been following your various reports and articles for some time now, as well as tracking the thoughts and comments of Terry Smith. I’m very much looking forward to your ‘Perfect Storm’ report and wll read it with interest. When I comment elsewhere I quite often make direct references and links to your other reports, not least the Project Armageddon series. Keep up the good work. I fear that the British political class and much of the mainstream media live in an alter-universe these days. The economy-energy-environment paradigm (per Chris Martenson’s Crash Course) is an extremely important model for understanding what’s happening all around us these days.
Regards
Moraymint
Thank you Dr Tim, a most interesting post.
I presume you’ve looked at fracking, & am wondering if you looked at pond scum & Thorium Fusion energy which I have read is being developed?
I am a regular reader of Terry’s excellent blog, & will now look forward to yours.
Regards
JD.
Tim,
I note that a global war – between dictatorship and democracy, dictators and democrats – does not figure as part of your context. Why not?
Hello Tim,
Thanks for your interesting and thoughtful analysis. I just read the energy section of your report.
I wonder if you could you help me understand how inflation adjusted oil prices declined between – for example 1945 and 1970 – when presumably EROEI was also in decline? Should we not expect declining EROEI ratios to result in rising (inflation adjusted) oil-prices?
Thanks.