Perfect Storm – Energy, Finance & the End of Growth
Notes on a 2013 research paper written by perma- and uber-bear Dr Tim Morgan
Welcome to 2024! My last blog post prior to the New Year discussed my letter to the editors of Reaction Life, and picked up on Anthony Peters’ excellent(ly scathing) piece on how the wheels are (or should be!) coming off the COP bandwagon. Peters references Dr Tim Morgan’s tour de force Perfect Storm, written in 2013 when he was Head of Research at Tullett Prebon.
I pulled together some notes after reading Morgan’s paper in detail, and put them out as a tweet thread on X/itter a few days ago, a platform that seems even more rigidly controlled than ever before (please feel free to click/like/share there to counteract help free it from the shackles). The latest way of hobbling those that think freely is to slap ‘Do Not Amplify’ tags on you such that engagements sink without trace. Additionally, there is a veritable ‘bot army’ promising salacious (but presumably entirely fake) offerings – it seems fairly obvious that these are being used to mark out those that are straying from the establishment line. Robert Kogon has described this in more detail.
If nothing else, this is a reminder to focus on substack, which will hopefully be a bit more resilient to meddling by the censorship industrial complex. So, without further ado, here is a review of ‘Perfect Storm’ by Dr Tim Morgan, which can also be found on his blog. I have attempted to use quotation marks or italics when quoting, but essentially this thread is attempting to summarise Dr Morgan’s seminal piece. I have interjected my own thoughts and comments where appropriate.
The economy as we know it is facing a lethal confluence of four critical factors – the fall-out from the biggest debt bubble in history; a disastrous experiment with globalisation; the massaging of data to the point where economic trends are obscured; and, most important of all, the approach of an energy-returns cliff-edge.
Ultimately, the economy is – and always has been – a surplus energy equation, governed by the laws of thermodynamics, not those of the market.
The relentless shortening of media, social and political horizons has resulted in the establishment of self-destructive economic patterns which now threaten to undermine economic viability.
The financial crisis, which began in 2008 and has since segued into the deepest and most protracted economic slump for at least eighty years, did not result entirely from a short period of malfeasance by a tiny minority, comforting though this illusion may be.
Rather, what began in 2008 was the denouement of a broadly-based process which had lasted for thirty years, and is described here as “the great credit super-cycle”.
Morgan lists four key trends:
Trend 1 – The Madness of Crowds. Morgan reminds us of Charles Mackay (1814-89), who identified (in his 1841 work Extraordinary Popular Delusions and the Madness of Crowds) a common thread of individual and collective idiocy running through such follies of the past as alchemy, witchhunts, prophecies, fortune-telling, magnetizers, phrenology, poisoning, the admiration of thieves, duels, the imputation of mystic powers to relics, haunted houses, crusades – and financial bubbles.
I’ve also written about collective delusion – the extraordinary tale of the Japanese expats in Brazil (Kachigumi vs Makegumi) is – incredibly – no fantasy. But there are more prosaic examples of this phenomenon, such as the Seattle windshield pitting epidemic.
Trend 2 – The Globalisation Disaster. “Talk of Western economies modernising themselves by moving from production into services contained far more waffle than logic – Western consumers sold each other ever greater numbers of hair-cuts, ever greater quantities of fast food and ever more zero-sum financial services whilst depending more and more on imported goods and, critically, on the debts used to buy them. Corporate executives prospered, as did the gateholders of the debt economy, whilst the vast majority saw their real wages decline and their indebtedness spiral.”
Trend 3 – An Exercise in Self-Delusion.
Paraphrasing: “house prices have gone up again – haven’t I done well?”. No – real inflation is making you poorer. And how, precisely, are your children’s children going to pay off the official debts racked by today’s governments?
Trend 4 – The Growth Dynamo Winds Down. One of the problems with economics is that its practitioners preach a concentration on money, whereas money is the language rather than the substance of the real economy.
Ultimately, the economy is – and always has been – a surplus energy equation, governed by the laws of thermodynamics, not those of the market. Society and the economy began when agriculture created an energy surplus which, though tiny by later standards, liberated part of the population to engage in non-subsistence activities.
A vastly larger liberation of surplus energy occurred with the discovery of the heat engine, meaning that the energy delivered by human labour could be leveraged massively by exogenous sources of energy such as coal, oil and natural gas.
Of the energy – a term coterminous with ‘work’ – consumed in Western societies, well over 99% comes from exogenous sources, and probably less than 0.7% from human effort. Energy does far more than provide us with transport and warmth.
In modern societies, manufacturing, services, minerals, food and even water are functions of the availability of energy. The critical equation here is not the absolute quantity of energy available but, rather, the difference between energy extracted and energy consumed in the extraction process.
This is measured by the mathematical equation EROEI (energy return on energy invested). For much of the period since the Industrial Revolution, EROEIs have been extremely high.
The real causes of the [historic or impending?] economic crash are the cultural norms of a society that has come to believe that immediate material gratification, fuelled if necessary by debt, can ever be a sustainable way of life.
What can be done? The magic bullet, of course, would be the discovery of a new source of energy which can reverse the winding-down of the critical energy returns equation. Some pin their faith in nuclear fusion*.
* a field close to my heart due to previous involvement.
Then Dr Morgan makes (in my view) the one blunder of his opus:
Solutions such as biofuels and shales [i.e. fracking] are rendered non-workable by their intrinsically-low EROEIs.
The perils of being a perma-bear! He got this one wrong in the short term… but of course he is right that shale deposits are finite (if larger than previously thought), and that biofuels are – at the very least – no panacea.
He continues with a hilarious vignette:
To expect technology to provide an answer would be equivalent to locking the finest scientific minds in a bankvault, providing them with enormous computing power and vast amounts of money, and expecting them to create a ham sandwich.
In the absence of such a breakthrough, really promising energy sources (such as concentrated solar power [CPV]) need to be pursued together, above all, with social, political and cultural adaptation to “life after growth”.
Personal aside: his point about CPV is apposite. I helped a modular CPV company find funding in the noughties. Much vaunted, CPV (and also that company!) died a death, with cheap & dirty first generation solar panels – a useless grift – now carpeting farmland across the country.
Dr Morgan then reminds us that “this time it is different” in part 2: the implosion of the credit super-cycle:
In his Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay ranked the South Sea Company and other bubbles with alchemy, witch-hunts and fortune-telling as instances of collective insanity. Whilst other such foibles have tended to retreat in the face of science, financial credulity remains alive and well, which means that we need to know how and why these instances of collective insanity seem to be hard-wired into human financial behaviour.
Another example is the Japanese asset boom in the 1980s:
Many commentators, abroad as well as at home, used the ‘fool’s guideline’ of extrapolation to contend that Japan would, in the foreseeable future, oust America as the world’s biggest economy.
As an aside: the “fool’s guideline of extrapolation” was deployed to devastating effect in the great Coronapanic debacle of 2020-2021… Robert Peston celebrating case growth as being only “mildly exponential” being one of the lowlights of that sorry episode.
A further important point about bubbles is that they can inflate apparent prosperity, but the post-burst effects include the destruction of value and the impairment of economic output for an extended period.
In reality, though, the bursting of a bubble does not destroy capital, but simply exposes the extent to which value has already been destroyed by rash investment.
As to why this time it is different (and not in a good way), Dr Morgan notes:
A mass psychological change which has elevated the importance of immediate consumption whilst weakening perceptions both of risks and of longer-term consequences;
Institutional weaknesses which have undermined regulatory oversight whilst simultaneously facilitating the provision of excessive credit through the creation of high-risk instruments.
Mispricing of risk, compounded by false appreciation of economic prospects and by the distortion of essential data.
A political, business and consumer mind-set which elevates the importance of the immediate whilst under-emphasising the longer term.
A distortion of the capitalist model which has created a widening chasm between ‘capitalism in principle’ and ‘capitalism in practice’.
All these are extremely pertinent. Consider the way authorities call the sale of state assets “foreign investment” rather than “selling off the family silver”. Private ownership can be good, but not if it is a means to bleed a country dry by siphoning profit offshore.
Morgan makes a key observation:
The Western response to diminishing production was to expand service industries, but there has to be significant doubt about how much real value is created by doing each other’s washing, eating more fast food or having more frequent manicure sessions.
All this boils down to the ‘killer equation’ expounded in part five of Perfect Storm: the decaying growth dynamic:
This section is a must-understand exposition of the fact that the economy is a surplus energy equation, not a monetary one.
Economics is really about the art of combining tangible components (such as labour and natural resources) to meet needs. Ultimately, money is a convenient way of tokenising this process. The process itself, on the other hand, is an energy equation.
Aside: consider the bitcoiner bros’ cutting / derogatory term for real world labour: “mining fiat currency”…
Further aside: discuss.
But back the text:
It needs to be appreciated from the outset that all forms of energy – including food and work as well as such ‘obvious’ types of energy as oil, natural gas, coal and renewables – are dimensions of the same thing. We term this vital concept the commonality of energy.
The exercise of putting one gallon of fuel into a car, driving it until the fuel runs out and paying someone to push it back to the start-point also illustrates the huge difference between the price of energy and its value in terms of work done.
2024 aside: particularly relevant given the “bunch of dead robots” complaint from in the recent chilly weather.
A gallon of fuel costing [c.] $3.50 generates work equivalent to between $5,460 and $7,380 of human labour. One could come to a similarly leveraged calculation of the energy cost-to-price mismatch by measuring the cost of employing workers pedalling dynamo-connected exercise bicycles to generate the energy used by electrical appliances in the typical Western home, and then comparing the result with the average electricity bill.
The development of society and of the economy is, in reality, a story of how mankind overcame the limitations imposed by the energy equation. In the pre-agrarian, hunter-gatherer era (which lasted for at least 40,000 years), there was an approximate energy balance, in that the energy which each person derived from his food was roughly equivalent to the energy that he or she expended in finding or catching that food. Put simply, there was no energy surplus, and consequently no society. Each person had to be self-sufficient, or perish.
There were then two breakthroughs: agriculture and the heat engine, the latter harnessed by the industrial revolution, without which a Malthusian dystopia might well have come to pass.
(Just for the record, I’m an optimist at heart and very much an anti-Malthusian…).
It is important to consider the subservient role of money in this dynamic. Though economists, policymakers, investors and the general public customarily think in terms of money, this conventional thinking is profoundly mistaken because, ultimately, the economy is a physical rather than a financial construct. Rather than being in any sense fundamental, money serves to tokenise output into a convenient form. After all, the world economy has survived the demise of an estimated 3,800 different paper currencies.
The roles of money can be defined as a medium of exchange, a unit of account and a store of value. The development of money paralleled the emergence of agriculture, the role of money being to tokenise the output of the economy into a convenient form.
The terms ‘labour’ and ‘energy’ are coterminous through the commonality of energy, so anything which could be purchased with money was the product of energy, past, present or future.
All goods and services on which money can be spent are the products of energy inputs either past, present or future. The appreciation of the true nature of money as a tokenisation of energy also enables us to put debt into its proper context.
Fundamentally, debt can be defined as ‘a claim on future money’. However, since we have seen that money is a tokenisation of energy, it becomes apparent that debt really amounts to ‘a claim on future energy’.
Our ability, or otherwise, to meet existing debt commitments depends upon whether the real (energy) economy of the future will be big enough to make this possible.
This absolutely essential piece of Dr Morgan’s work precedes a discussion about peak oil (the Hubbertian school) vs that of the cornucopian sceptics (there’s enough oil and pricing changes will mean it would still be cost-effective to pump it).
Which then brings us on to EROEI (Energy Returns on Energy Invested) – an absolutely essential concept.
This is the ‘killer equation’ where the viability of the economy is concerned.
Put very simply, there is no point whatsoever in producing 100 barrels of oil (or its equivalent in other forms of energy) if 100 barrels (or more) are consumed in the extraction process.
It is a surplus energy dynamic, driven by the difference between energy extracted and energy consumed in the extraction process. The maths is fairly simple. If the EROEI is 50:1, this means that 50 units are extracted for each unit invested in the extraction process.
At an EROEI of 100:1, the picture is overwhelmingly one of ‘profit’, in a profit-to-cost percentage ratio of 99:1. The percentage ratio remains very strong (98:2) at 50:1, and is still robust (96:4) at 25:1. Below an EROEI of about 15:1, however, the ‘profit’ element falls off a cliff.
Oil discoveries in the 1930s offered EROEIs well in excess of 100:1, whereas this ratio had declined to about 30:1 by the 1970s, and few discoveries today offer an EROEI of much better than 10:1.
Much the same applies to other fossil fuels such as coal and natural gas. Where coal is concerned, fuel quality has deteriorated just as costs have risen. Almost all of the world’s original reserves of anthracite (the best coal in terms of energy content per tonne) have already been exhausted, pushing miners into ever greater reliance on bituminous and even sub-bituminous coals, the latter offering barely half the energy content per tonne of bituminous coal.
Another aside: this brings to mind the ‘hirnverbrannt’ Teutonic Energiewende decision to switch completely functioning nuclear power stations only to have to restart lignite mining; to add insult to injury, this also required an onshore wind power station to be dismantled.
Newer energy sources display a similarly disturbing trend. At first glance, the claimed EROEIs for onshore wind power look pretty reasonable at perhaps 17:1. However, the returns claimed for wind seem to make some pretty heroic assumptions about the longevity of generating plant and, in any case, wind turbines produce electricity, not the highly-concentrated transport fuels upon which the economy depends.
And then the wind doesn’t blow, and storage is costly and inefficient. Backup plants aren’t free. David Turver is doing some excellent work documenting the EROEI failures of ‘alternative’ (let’s not call them renewable) energy sources on his substack page, Eigen Values.
Other energy sources look even worse in EROEI terms. Biofuel EROEIs seldom exceed 3:1, and some are negative. Overall, there is an unmistakable trend towards lower energy returns on energy invested, with EROEIs falling within the fossil fuels slate just as society is turning … to renewables.
The critical question (though it is one to which scandalously little official attention has been devoted) has to be that of where the world is in terms of the overall EROEI, and where this critical equation may be heading:
The conclusion is unfortunate for lovers of creature comforts:
the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend.
EROEI decline is the way to create a small fortune out of a large one. It is the road from wealth to poverty. If EROEI falls materially, our consumerist way of life is over.
There are two really nasty stings in the tail of a declining EROEI. First, net energy availability may fall below the amount required for essential purposes including healthcare, government and law. It is hardly too much to say that a declining EROEI could bomb societies back into the pre-industrial age.
Indeed, a decrease in net energy below subsistence levels is an implicit consequence of EROEI decline beyond a certain point – one which is difficult to estimate, but is likely to occur within the next decade – which means that this is when the nastiest results of all start happening.
Second, of course, a decline in net energy availability could (indeed, almost certainly will) result in conflict driven by competition for access to diminishing surplus energy resources.
And in a cut-throat race to secure those resources, the Occident (the West) might find that the Orient is not afraid to resort to below-the-belt tactics.
Dr Morgan concludes his 2013 piece by wondering how we will know when the decline sets in. He sets out five obvious markers, four of which (energy price escalation, agricultural stress, energy sprawl and economic stagnation) were in evidence back then.
We can now add the fifth – inflation – to complete the full set of warning flags, suggesting that the energy-surplus economy is in a parlous state.
This has been a long-ish summary, amounting to the best part of 3,000 words. But the message is clear. The direction of travel dictated by rushed push to decarbonise our economy will result in the most brutal of deindustrialisation, pauperisation and destruction of living standards.
This is made all the more galling given that there is no hint of any sort of man-made, human emission-induced ‘climate emergency’, certainly not one that is linked to runaway / tipping point ‘global warming’, ‘climate change’ or even ‘global boiling’.
That the authorities persist with the decarbonisation madness – promoted by globalist propaganda outfits despite being riven with illogicality and pseudoscientific waffle – tells a sorry tale of a failed state apparatus that has become deeply corrupted.
So what to do? Some of this I have discussed in previous posts on this substack, e.g. here, and I will write more on this topic in future.
But don’t sit idly by while your children’s future – and that of your children’s children – is squandered.
Join the fight to stop the rot.
What an interesting article!
Where is the fight taking place?
Very interesting article Alex - I'd never considered a link between money and energy in quite such a direct way before.
For me the solution has to be in going nuclear - but the whole field has been held back by the 'green' panic on this. What, I wonder, might we have by now if nuclear R&D had not been somewhat relegated? And I'm just talking about fission here. There is some research - but not, I think, as much as there should have been.