The biophysical story behind ‘secular stagnation’

This has resulted in a declining EROI ratio, with the EROI for oil & gas estimated to have fallen from about 35:1 in 2000 to about 17:1 today – and dropping. This declining EROI is, in turn, reflected in the rising costs associated for extracting energy. For example, whereas in the 1990s oil and gas exploration and discovery costs were rising at 0.9% per year, between 2000-2014 they rose by an average of 10.9% per year – a tenfold increase! What this effectively means is that the economy has to plough far more resources into the extractive sector, which leaves less remaining to fund the activities of the wider economy, let alone high growth rates. This not only helps to explain today's low-growth and stagnant real wages, but also the fact that what little GDP growth there is, is increasingly based on debt driven asset and financial bubbles (that will someday burst!), rather than real economic activity.

At this point, it may be asked, what about the current low oil price? Surely this is a sign of excess oil supply, rather than a lack of it? This is correct; the addition of (mainly) unconventional oil from Canada and the U.S has flooded the world market, outstripping demand and leading to the price collapse. But, as analysts such as Gail Tversberg have argued, this can be interpreted as a consequence of a fundamentally sick global economy, worn out under the weight of 14 years of almost continuously high oil prices and ever growing debt – the upshot being that investors and consumers simply could no longer afford the higher price. And while the current low oil price gives consumers a reprieve, it is a nightmare for oil producers who are rendered increasingly unprofitable and are rapidly accumulating unsustainable debts. Indeed as Tim Clarke argue, the current oil price is likely to be "lower than just the breakeven price of all but a small proportion of global oil reserves." Hence the current predicament of the global economy: oil prices that are too high cripple economic growth, but too low that they cripple oil producers.

Whatever one makes of these historical arguments, what seem undisputable is that increasingly deteriorating biophysical conditions will negatively impact on the economy in the near future. In terms of gross energy, the fundamental fact is that fossil fuels are finite resources and will all inevitably peak and decline. The situation for oil is especially critical. A recent HSBC report found that 83% of conventional oil fields are already post there peak in production, and that oil discoveries are at record lows. No wonder, notwithstanding the current oil 'glut', many predict a return to tight oil supply in the next few years, triggering a spike in the oil price and a recession of the debt-ridden global economy. But whatever the case, the global economy will in coming years be increasingly dependent on lower EROI unconventional fossil fuels, as well as even higher cost renewable energy, and all the problems that implies for growth.

Perhaps more importantly, the depletion of energy is only one aspect of the wider biophysical crisis, the impacts of which will certainly intensify in coming decades, including climate change, water stress, soil degradation and chemical build up. And meanwhile, as Nafeez Ahmed points out, "4.3 billion people - nearly two-thirds of the global population - live on less than $5 a day", suggesting further development from the poor majority will intensify the above pressures in all directions. A new book by Ahmed argues that these biophysical realities are already today crucial to understanding the growing turmoil and conflict in the Middle East, with a strong likelihood of spreading to other regions, including the affluent West in coming decades.

So irrespective of whether growth slows or stops soon, rich countries like Australia would be wise to get off that track anyway – better to do so by design rather than disaster.