Kyotomotors is back! Check in Wednesdays for commentary on the age of abundance, climate change
and the dawning of the post-carbon eventuality...

Friday, August 14, 2015

Promises, Promises… and (dis-)Ability?

[or Money and Energy]

As noted in my previous post, Science has long defined energy as “the ability to do useful work”. Defining money, on the other hand is not necessarily as easily agreed upon, so what follows in this overdue entry at Kyotomotors, risks being over-simplified, if not contentious. But simplicity is actually my objective here. I aim to paint the backdrop of contemporary political and economic theatre with a very broad brush. To do so, I have settled on the definition of money as “the promise to do work.”

With these two definitions, it’s the notion of work that allows us to understand the link between money and energy. What follows, I believe, is a better understanding as to why the headlines these days have so much to do with debt, default, and financial crises. The explanation has everything to do with energy, which, in a global industrial civilisation, translates as having to do with petroleum and other fossil fuels. And this, in turn, explains why I have chosen this topic to begin with. It just so happens that the health of our economy is an energy issue, which means that the Kyotomotors alternatives for daily transport represent one of the more sane responses not just to the spectre of global warming, but also to the difficulties associated with widespread economic contraction, which is here to stay, if you hadn’t noticed…

Again, simplicity is my stated goal, so I’m not going to go into protracted detail about theories surrounding money as debt and industrial capitalism’s capacity to diversify and nurture specialization, which in turn begets ever more complex systems that are woven into the entire system. There’s a lot of interesting material on these subjects, and I encourage my readers to explore them [try Gail Tverberg here & here for starters]. For the purposes of this discussion, I want to simply step back and confirm the observation that the law of diminishing returns, which states that after a tipping point of sorts, for every new layer of complexity, the costs of  maintaining complexity outweigh the benefits. This is the basic dynamic in what William Catton observed in Overshoot [or, try a more legible version] – the period in which business as usual overinvests in everything unsustainable because there’s no negative feedback to shut down the system.

Only one other technical matter need be touched on here, and that’s the question of peak oil.  I have gone on at length about the phenomenon, and how easily misunderstood and misrepresented the facts are. But I am by no means the authority on the subject. Instead, I urge you to read the Hirsch Report – drafted for the benefit of the Pentagon. And for some perspective on the matter, try Rob Hopkins, David Hughes, Richard Heinberg as well as Colin Campbell -- all worth reading if you want to get into it. In short, peak oil is the point at which the world can no longer count on ever increasing supplies of petroleum. The peak of conventional crude is said to have already taken place in 2005-2006. We are now in the period of making up the shortfall with much more difficult (expensive) oil. Tar sands, deep-water and fracked oil are the poster-children of this phase. These sources are more expensive because they require enormous amounts of energy to get a diminished energy return at the end of the day.

The most important aspect of all this, for the purposes of my thesis here, is that as a society, we are faced with a diminishing ability to do work, when measured in simple units of energy. And it’s our inability to make good on promises that affect the economic, and financial realms.

I know this is where the cacophony of protest comes in. But before you throw up your arms and shout something about technology and efficiency, just have a look at two basic truths that have become features of industrial society from the get-go: The first is White’s Law, which states that the complexity of a system is directly proportional to the amount of energy that flows through that system. The second is Jevons Paradox, which states that increases in the efficiency of the use of an energy source results in net increase in the use of that energy.

While you chew on that, please allow me to proceed, if I may…

Another key element in the current energy situation right now is price volatility. Unpredictability is the order of the day, which is largely due to the complexity, and the uneven nature of the resource, by which I mean high-cost sources are trying to compete with still low-cost sources in places like Saudi Arabia. So while the fracking and tar-sands operations have been impressive in terms of sheer volume, the intense costs of doing business puts much of the capital on ice whenever the price of a barrel of oil takes a nose-dive…

So, if the supply of energy is slowly shifting from expansion to contraction, what does that mean for the money side of the equation? What I am suggesting – and I’m by no means the first one to make this connection – the financial crises and general economic downturn has everything to do with a diminished ability to do work. After all, every promise to do work (returning to my initial definition) has to be backed with the eventual ability to do work. To make matters worse, our ability to make promises has not diminished in step with the energy supply, which is why we hear so much about un-payable debt these days.

All money is borrowed into existence, and necessarily backed by industrial society’s ability to do work. Growing debt can be theoretically tolerated in the face of an expanding energy supply, since increases in energy can fulfill the promises made. Indeed, the history of industrial development is a testament to the interdependence of capital and energy, when viewed as two aspects of the work that goes into our collective accomplishments (and failures). But if on the one hand, the supply of petroleum (and other fossil fuels) is ruled by the earth’s very nature, and is non-renewable, on the other hand, debt (money) is a social construct and can theoretically be created out of thin air, with no apparent limit whatsoever.

Just as nearly every kid is likely to dream up the invention of a perpetual motion machine as a solution to energy woes, most kids respond to the problem of running out of money by suggesting a simple trip to the bank, or better still, to the printing press. Sadly, that has been the solution that the grown-ups at the helm of industrial finance have been resorting to for a number of years now. With the absence of a real-life perpetual motion machine, however, this child’s play is as dangerous as playing in traffic. That’s because debts eventually have to be settled, and if there is no ability to make good on a promise, well then things just get messy.

Things get particularly messy when the creation of debt goes into overdrive as a solution to the contraction of the economy, that rears it head at every turn. But the existence of more cash does nothing to expand the amount of petroleum at our disposal, despite all the theorising to the contrary. For example, Stephen Harper’s dream (and lie) is that the Athabasca tar-sands represents a promising ability to make up the shortfall in energy.  But it has proved to be anything but a resilient industry, and is choking on a crisis of capital formation. He has had his kick at the can, and the experiment is a failure.

But I pity his successor, who will inherit a minefield of a political/economic landscape. And since all would-be successors are allergic to the notion of contraction as the new normal, most purported solutions will be certain to make economic matters worse still.

Only once the contraction of energy supply is acknowledged, and the truly new economic landscape before us is perceived for what it is, can we advance with both an energy policy and the fiscal wherewithal to deal with the reality of the 21st century.