Predicting the 'Super GFC': two very different views

It would be nice if someone in Canberra was thinking about these problems. Our banks are better placed than most but that will not save us when the global crunch comes.

Life after Growth (Tim Morgan)

Tim Morgan is a Brit with decades of experience in the London finance world. He has built up a reputation for pessimistic predictions.

The central thesis of this book is that the real economy is based on energy availability and cost. The end of cheap energy means the end of growth, or, as he actually argues, the end of the economy as we know it. He goes beyond the 'peak oil' view to a more complex concept of 'surplus energy'. This refers to the amount of energy left after subtracting the energy expended to extract the new energy.

Hunter-gatherer society expended roughly as much energy in getting food as it got from that food. There was very little surplus. Agriculture enabled surplus energy to be produced, making civilisation possible. The industrial revolution was based on the capture of heat energy from burning wood and coal, which created a big surplus. For the last century or so we have leapt ahead by using the amazingly huge surplus energy derived from oil and gas.

The key problem we now face is not that energy sources are going to suddenly disappear but that the surplus energy after extraction is already declining rapidly and will certainly decline faster in coming years.

Morgan's measure is EROEI, or energy return on energy invested. He states that the oil fields discovered in the 1930s had EROEIs of 100:1. This wonderful number has dropped as we move to smaller fields that are much harder to extract from, such as undersea basins. He claims the global EROEI has dropped from 37:1 in 1990 to 15:1 in 2010 and worse is to come.

The killer point is that the decline is not linear. It compounds, meaning it will soon become very difficult to extract a significant surplus amount of energy.

Morgan dismisses the great hope of recent years, shale gas and oil, with the claim that its average EROEI is 5:1 or less, mainly due to the complexity of the process and the very high depletion rate of wells. Wind power he gives a ratio of 17:1, though it could go lower depending on the actual life span of windmills as opposed to the projections. Biofuels he writes off entirely with an EROEI of around 2:1. Hydrogen he claims is a very inefficient system of storing energy rather than creating it. Nuclear is better but can't be scaled up sufficiently to make a huge difference. He believes large scale solar has potential.

As the production of energy becomes more energy intensive it becomes much more expensive. But Morgan insists that the impact is far wider that the simple cost issue. Abundant energy has enabled our consumerist lifestyle and the end of abundant energy will mean the end of consumerism. Also, when energy was cheap workers could become relatively expensive. With energy expensive and workers in abundance, wages will drop.

As evidence of the impact of growing energy costs Morgan lists the inflation adjusted prices of various commodities between 2000 and 2012. Coal rose 183%, crude oil 174%, copper 223%, rice 110% and wheat 102%.

Beyond his view of energy as the fundamental base of the economy Morgan has some related points to make.

He distinguishes between the real economy and the monetary economy, describing money as a claim on the real economy, and debt as a claim on future money. Because energy is the basis of the economy, money comes to represent energy. Over recent decades the financial world in western nations has parted ways with the real economy and created massive debts in the expectation that future economic growth (based on a continuation of abundant energy) will enable repayment.