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Seeing happy faces in the clouds

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The third decade of the twenty-first century could turn out to be fantastic after all.  Emerging from the ashes and insanity of 2020, we are now set for a new age of peace and prosperity.  Who says so?  The Guardian’s energy correspondent, Jillian Ambrose:

“The global economy could be on the brink of a new commodity ‘supercycle’ as governments prepare to use a green industrial revolution to kickstart growth following the coronavirus pandemic.

“The price of commodities, such as energy and metals, have reached record highs in recent weeks despite the ongoing spread of Covid-19 and are expected to climb further as countries embark on plans for a green economic recovery.

“Market experts, including US bank Goldman Sachs, believe the boom could echo the last ‘supercycle’ in the early 2000s led by the sharp growth of emerging BRIC economies (Brazil, Russia, India and China).”

This interpretation of events owes more to the human tendency to find patterns where none exist – such as seeing faces in the clouds – than to a reasoned analysis of our current predicament.  The rise of the BRIC economies was not part of a series of supercycles, waxing and waning like a heartbeat across industrial time.  Rather, they were a last spurt of industrial growth by the few developing economies which could still expand in the face of a rising energy cost of energy.  One reason for this was that each had access to some of the planet’s final reserves of accessible fossil fuels – oil in the case of Brazil and Russia; coal in China and India.  The other reason was that each was sufficiently under-developed compared to the western states, so that the energy surplus was able to maintain the governmental superstructure.

Not that you are allowed to say so when your income comes from the neoliberal establishment media.  Previously an energy editor at the Telegraph, Ambrose has written at length about the accelerating “energy death spiral” that expensive non-renewable renewable energy-harvesting technologies (NRREHTs) have helped to generate.  In short, as the price of electricity increases, those at the bottom of the income ladder disconnect themselves while those at the top invest in NRREHTs – mainly solar – to lower their outgoings.  The result is that the ever rising price of electricity falls onto a shrinking middle which cannot maintain its level of consumption.  Individual energy supply companies become unprofitable and this spreads to the energy suppliers until, ultimately, the electricity system as a whole goes bust.

Guardian readers though, need their daily dose of hopium to see them through the otherwise gloomy drudgery of life in a collapsing post-Brexit pandemic Britain.  This is why they regularly treat us to headlines about “Britain running on renewables” while overlooking regular periods when the UK’s vast arrays of wind turbines are barely moving and we are forced to turn to decimated American forests, the remaining handful of coal plants and a massive volume of gas to prevent us from shivering in the dark; as was the case during the cold snap just last week:

This is not just newspaper bias; it is existential.  Like Herr Schwab at the World Economic Forum, Guardian editors are strong “believers” – as if physics can be overcome with faith – in renewable energy as the power source behind the promised “Great Reset” and fabled “fourth industrial revolution.”  And so renewable energy has to be “getting cheaper” (referring to the seldom-met bid price in auctions to deliver energy to the grid) even though energy prices for most consumers continue to increase; flattening the prosperity of ordinary households and businesses and removing demand from the economy.

In a bygone age, the increase in commodity prices would indeed, signal the onset of a new round of economic growth.  That was before futures trading allowed speculators to gamble on what they thought the economy was going to look like six months or a year from now.  It was this form of trading that caused the price of oil to apparently go negative in the spring of 2020 – oil which had been pre-purchased long before SARS-CoV-2 was a thing, turned up just at the point where the western economies had been shut down.  Not only had oil consumption plummeted, but most of the storage facilities – including the oil tanker fleet – were full to the brim.  And so, financial speculators found themselves holding a massive volume of oil that they could neither sell nor store; and needed to get rid of it at any price.

In a similar but opposite vein, commodity prices are high today because speculators are aware that there has been a large degree of capital destruction as a consequence of the ongoing pandemic lockdowns and restrictions.  This includes the shutting down of mines and the scrapping of mining equipment around the world; but especially in underdeveloped countries that depend upon mineral extraction to pay their debts.  At the same time there is believed to be massive pent-up demand in the economy because households and businesses have put off spending until the pandemic is over.  The gamble here is not that the world is poised for some new cycle of prosperity, but that when the economy opens up once more – something made more likely by the roll out of the vaccines – demand for commodities will far outstrip global supply.  Those smart enough to buy futures cheap will make a vast profit when the shortages bite.

It is in this misreading of the price signal that we find a profound difference between those who regard the economy as a financial structure and those who understand it as an energy system.  The former – including almost all mainstream bankers, economists and business journalists – see absolutely no problem with capital destruction because, once financial investment picks up, there will always be sufficient resources to meet our needs.  So long as the price is high enough, someone will be motivated to extract and refine the fuels and minerals needed to create our next industrial revolution.  From an energy perspective in contrast, rising commodity prices during the deepest slump since the great frost of 1709 points to a far less welcome future.

Throughout the industrial age, the growing energy available to the economy from the growth of fossil fuel extraction allowed a general rise in wages alongside profits.  Occasional recessions aside, the greatest industrial conflicts concerned the allocation of the relative shares of the benefits of energy between workers and capitalists.  This was especially pronounced in the oil age which took hold in the USA at the end of the First World War and spread to the wider world in the aftermath of the Second World War.  The magic two decades 1953-1973 which saw more manufacturing and trade than the preceding 150 years – the so-called “post-war boom” – in particular came to be seen by economists as “normal,” even though we have spent nearly half a century trying and failing to recreate it.

The end of that boom period has been blamed on everything from greedy investors and over-powerful trades unions to unfair competition from emerging Asian states.  The  reality though, was that oil extraction had ceased growing exponentially, the cheapest US oil fields had peaked, and energy per capita had begun to fall as the energy cost of energy began to increase in the early 1970s.  Much was made in that benighted decade of the Marxist concept of a “crisis of over-production” resulting from workers being paid less than the value of the goods and services they collectively create; and thus being incapable of buying them back.  But Marx had been only partially correct about workers being paid less than the value they generate.  It is true that human – and animal – labour is a weak source of value; but the true generator of wealth in the industrial age was the massive stored energy locked up in fossil fuels.  A single barrel of oil, for example, provides the equivalent of 11 years of human labour power – which would cost more than £250,000 at today’s average wage – and yet we pay only the cost of extracting and refining it.  It is from this gap between the cost of energy and the value of the work it does for us that all profit and wages are realised.

It is for this reason that the crash in per capita energy consumption is devastating.  What it means in the real world is that fewer and fewer people are able to engage in discretionary consumption as time goes on.  Indeed, for a growing section of the western precariat it is no longer possible to afford even basics such as an adequate diet or access to heat and light.  This is a problem precisely because Marx was wrong – it is not production that drives the economy, it is consumption.  And as more and more of the energy generated in the economy has to go toward essentials like food and shelter – and, indeed, increasingly expensive energy production – so there is less and less energy available to the much larger non-essential areas of the economy… more accurately, a “crisis of under-consumption.”

This is a paradox to financially-minded economists, but makes absolute sense to the energy-minded.  The former believes in infinite substitutability.  If we run short of a commodity, the price will increase and so more expensive deposits will be extracted.  And if we run out entirely, we will simply turn to some alternative resource to meet our needs.  From an energy point of view though, there comes a point at which the energy cost of extracting a resource becomes too great to make it worthwhile.  This is not just the energy cost of getting the resource out of the ground, but also the various overheads that have to be met.  For example, third world countries and oil states not only have to maintain profits for the extraction companies, they must bring in enough taxable income to maintain the government and the public infrastructure – including debt servicing – of the entire nation.

There comes a point then, where extraction is no longer worth it even if it is technically possible and might still be profitable to an extraction company.  And so commodity prices have to rise.  But there also comes a point when the per capita energy consumption of the population falls sufficiently that further price increases merely dampen demand.  This is most obvious with the rising oil prices in the wake of the 2008 crash.  The assumption at the time was that oil prices would have risen above $200 per barrel by 2020; whereas just prior to the pandemic the actual price was around $40.  The reason is partially explained by Frank Shostak from the Mises Institute:

“If the price of oil goes up and if people continue to use the same amount of oil as before then this means that people are now forced to allocate more money for oil. If people’s money stock remains unchanged then this means that less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come off.

“Note that the overall money spent on goods does not change. Only the composition of spending has altered here, with more on oil and less on other goods. Hence, the average price of goods or money per unit of good remains unchanged.”

In reality, the money stock is no more than a claim on future energy.  And since for most humans future energy is falling, the situation is far worse than Shostak puts it.  All of the other goods which people are no longer spending on require oil in their manufacture and delivery.  And so, when people stop buying them they lower demand for oil forcing the price of oil to fall back.  Energy companies and oil state governments may desire high prices but our collective purchasing power cannot sustain them.

In an EU presentation on the potential resource shortages within the EU’s planned transition to renewable energy, Simon Michaux from the Finnish Geological Survey produced this oil price chart:

What this shows is the end of the oil age – not in the optimistic “Great Reset” way that Herr Schwab and the editors of the Guardian imagine it; but because even before the pandemic we were rushing toward the point at which any oil price was going to be too low for producers but too high for consumers.

The pandemic has of course, accelerated the process.  Whereas prior to 2020 we might have had another decade in which to rescue what we could of industrial civilisation through what I have referred to as a “brown new deal,” the economic vandalism of the past year means that industrial civilisation will be reduced to consuming itself by 2025.  The combination of business closures and mass unemployment which is only beginning, and will be eclipsed when the various support packages are ended, is likely to remove so much demand from the discretionary sectors of the western economies to bring about a crash even larger than 2008.  As David Robinson’s somewhat cryptic piece in The Banker implies:

“’Although the support measures are themselves credit positive, they are outweighed by the larger credit-negative effects of a third lockdown across the UK that will challenge bank asset quality as business revenue and cash flow is squeezed anew after a tough 2020,’ wrote Maxwell Price, an analyst at Moody’s in a report published on January 6.

“’The additional lockdown measures will add negative pressure to banks’ profitability, given likely effects on new loan origination, reduced fee income and additional provisioning for expected credit losses, all exacerbated by the low interest rate environment,’ he said.”

To translate: the negative impact of the lockdowns and restrictions are greater than the various stimulus and support packages.  As a result, business and household debt-defaults are going to be big enough to collapse individual banks; which are unable to raise their profitability because of a lack of credit-worthy borrowers.  Rather like the shell game, we can only sit back and wait to see which failing bank will be the one which brings down the entire banking and financial system.

Beyond that, it is anyone’s guess what will remain once the energy and the money has run out… but it isn’t going to be pretty!

As you made it to the end…

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