In my view, there are three ways a growing economy can be sustained:
- With a growing supply of cheap-to-produce energy products, matched to the economy’s energy needs.
- With growing debt and other indirect promises of future goods and services, such as rising asset prices.
- With growing complexity, such as greater mechanization of processes and supply lines that extend around the world.
All three of these approaches are reaching limits. The empty shelves some of us have been seeing recently are testimony to the fact that complexity is reaching a limit. And the growth in debt looks increasingly like a bubble that can easily be popped, perhaps by rising interest rates.
In my view, the first item listed is critical at this time: Is the supply of cheap-to-produce energy products growing fast enough to keep the world economy operating and the debt bubble inflated? My analysis suggests that it is not. There are two parts to this problem:
[a] The cost of producing fossil fuels and delivering them to where they are needed is rising rapidly because of the effects of depletion. This higher cost cannot be passed on to customers, without causing recession. Politicians will act to keep prices low for the benefit of consumers. Ultimately, these low prices will lead to falling production because of inadequate reinvestment to offset depletion.
[b] Non-fossil fuel energy products are not living up to the expectations of their developers. They are not available when they are needed, where they are needed, at a low enough cost for customers. Electricity prices don’t rise high enough to cover their true cost of production. Subsidies for wind and solar tend to drive nuclear electricity out of business, leaving an electricity situation that is worse, rather than better. Rolling blackouts can be expected to become an increasing problem.
In this post, I will explore the energy-related issues that are contributing to the recessionary trends that the world economy is facing, starting later in 2022.
[1] World oil supplies are unlikely to rise very rapidly in 2022 because of depletion and inadequate reinvestment. Even if oil prices rise higher in the first part of 2022, this action cannot offset years of underinvestment.
The IEA, in its Oil Market Report, December 2021, forecasts a 6.4-million-barrel increase in world oil production in 2022 over 2021. Indications through September of 2021 strongly suggest that there was only a small rebound (about 1 million bpd) in the world’s oil production in 2021 compared to 2020. In my view, the IEA’s view that liquids production will increase by a huge 6.4 million barrels a day between 2021 and 2022 defies common sense.
