Freitag, 4. Mai 2012

Demystifying the miracle of the market

The zealots of economy will argue that everything that has been said in this blog is ridiculous nonsense because, if a commodity gets rare and its price increases, due to the laws of supply and demand, the amazing force of innovation will take care of the problem by itself.

What if growth stops and capitalism doesn't
So let’s take a look at that assumption. What will happen if oil gets scarce and its price is rising from a market perspective? We will not even consider the developments described in the posts before and assume capitalism will survive the end of growth. We still know though that 95 % of the goods that we produce are not only dependent on energy but directly dependent of oil as a resource.

Furthermore there is no resource that can be exploited without the aid of energy and/or oil, therefore all resources and all products and services prices will rise (in relation to their dependency on oil). So not only oil will get scarce but everything will. As a result GNP will drop, as obvious (for anybody but economists) if a key ingredient of your production process gets scarce, and if you can’t compensate it with anything else, you will not be able to produce as much or can’t produce at all. If a producer can’t produce, he will have to close shop so invariably unemployment will rise.

As this will happen throughout all industries, the GNP will decrease, while prices go up. What does it mean when everything gets more expensive? Surely many people will not be able to consume as much as they did before, if they were already stretched thin (as many are), they will get desperate and angry. To be able to afford their costs of living they will demand higher wages or some help from society. Social unrest, strikes and a class struggle will ensue.

So we will have at our hand high inflation and lower production, lower surpluses, more unemployment, a class struggle and much lower GNP. I will call that a global recession. In this situation of a global recession the magical hand of the markets will have to be mighty indeed to save capitalism, but let’s assume it does.

To solve the problems of oil scarcity we will not only need one invention, but thousands, innovations like how to make rubber cheaply without oil, how to produce naphta (resource for 80 % of all chemical products) without oil, how to grow corn without chemical fertilizer, how to fuel trucks without diesel etc.

Most of the time, we will find, that the solution is a problem in itself. Of course we could substitute fossil fuels with bio fuels, but we need fossil fuels to grow and transport agricultural products, and, we will need to eat something too. If you do the math, you will find we will not even have the area of agricultural land to grow enough of it, so this is not an option. Similar problems will arise with other strategies (atomic energy, fission, etc).

Also, when trying to save this market that solves anything, we will not only have to invent fast enough to match current oil production but keep up with an exponentially rising demand. Meaning, that with a steady growth of demand of 3.5%, to fuel growth of GNP we will have to have produced MORE substitutes of fossil fuels in 20 years than the total amount of ALL fossil fuels we have used up in history minus the amount of oil that we could still produce (that will be down to 50 % at that time with a estimated 3,5% drop in production).

So in the end this arithmetic comes down to roughly 75% of total world oil resources that we have exploited in all our history (approximately 1000 billion barrels) replaced by  750.000.000.000 Barrel of Oil equivalent that we will have to have produced at the end of a time span of 20 Years.

During that time, coal, gas and many other resources will probably also reach their peak, especially if we try to substitute oil with them (i.e. coal), leading to further decrease of production, GNP and more work for the invisible hand to come up with more substitutes for things we have taken for granted for a hundred years now.

An arithmetic example

Let us use some arithmetic again on this. One Liter of crude contains about 37.000.000 J. One Barrel is a little less than 160 liters so it contains an energy equivalent of roughly 5.920 * 1012 J. We Multiply that by 750 * 109 bl from above and get final Energy equivalent of 4.4 * 1024 Joule or 1,23 * 1018 KWh that we need to have produced in 20 Years.

As a physicist I would opt for creating a sustainable cycle of energy production and would probably vote for synthetic fuels created by using sustainably produced electricity (wind gas, solar fuel etc.).

Let us say we will be very successful in creating a process for producing an oil substitute (i.e. solar fuel) with an efficiency of 50% (which would be very good indeed) so we would need electricity in an amount of estimated 2.5 * 1018 KWh to produce enough to meet our demands in crude oil substitution alone. (Note: btw. this process needs catalysts made from rare metals today that we are running out of very quickly, i.e.  Copper and Platinum).

2010 we were producing 5000 GW or 4.38 * 1013 KWh per year in electricity worldwide (REN21 renewable worldwide status report 2011). 67.6% of this electricity was produced with fossil fuels, 13% with nuclear energy and the rest 19.4% renewable with only 3.3 not coming from hydropower (which is not to be growing anymore as we ran out of rivers to use).

Keeping up this energy output (which would be hard) would bring us non closer to our goal than 57000 years to produce the power we would need to have produced in 20 years to substitute oil.

Note that a huge amount of electricity produced is produced by using fossil fuels (67.6%), so we need to replace these facilities with new ones based on our innovation. If we would like to do so by using non hydro renewable energy and meet the growing demands, we would need to aim for a steady growth of renewable energy by approximately 100% per year for a cumulated output of more than 2.5 * 1018 KWh in 20 years, to have at the end an output that is a million times higher than today.

Year100'% growth renewable energy production / KWh
Sum 3,04E+18

Right now we manage 20% growth, which is not too bad but will hardly be enough. A steady growth fof 20% would bring us to a renewable energy production of 9.24*1013 KWh per Year which is only 1/16000 of what we need! It would be more than twice of all electricity that we produce today. It will be enough to keep up with our electricity demands, but surely will not be enough to substitute oil.

 100% seems not so utopian altogether though (if one does not understand the arithmetic of exponential growth). Surely this is doable? (this would of course apply to other forms of energy production, i.e. nuclear energy, with the added problems of exponentialy increasing waste).

In Germany there were already an astounding number of 367000 people employed in the renewable energy industry. If we would have this industry grow by 100% per year in 20 years we would need 200 billion employees in renewable energy business in Germany alone! I am not sure I would want to live here anymore and the efforts in reproduction might be more than I could handle. But maybe by being more efficient this number would not apply?

We invested 211 Billion $ into renewable energy in 2010. Growing by a 100% every year would bring this number up to 100 000 000 000 000 000 $ in 20 years. 0.1 billion billion $. As an investor I would start buying stocks now!

When growth stops we need growth to grow but it stopped?

One thing should be obvious though, whatever this substitute may be that the magic hand of the market conjured up out of thin air, we will need to have the production capacities to deliver huge amounts of it in a very, very short time span, and we do not have them at all right now. I can’t even imagine how many facilities for solar fuel we will need to build, how many wind parks and solar cells. As seen above, we will need a million times more renewable energy plants than we have today. Obviously this will cause a lot of work, things to be produced, workers to be paid etc. It will be the greatest effort that mankind ever undertook, meaning it will require growth!

Remember where we started out, that we need energy and oil to have growth but we don’t have them? But the hand of the market will solve this problem? Recursion is another concept (like arithmetic) that economists do not seem to be able to grasp, and therefore choose to ignore.

We could have thought about preparing for peak oil and started this endeavor when we still had a steady growth of oil production. Not that there has not been a horde of scientists (even economists like Kenneth Boulding) that have pointed out the problem from early on, but what would have been the virtues that could have achieved this endeavor?

They would have been foresight, modesty, common sense, solidarity, caring about future generations, respect for our nature and the willingness to accept losses to further the common good, virtues capitalism is desperately lacking because they would have severely gotten in the way of making money, and that, to capitalism, is unacceptable.

In the end it turns out, real innovation is not so much of a trait of capitalism at all.

Fitting Quote by George Monbiot (Guardian)
"We have used our unprecedented freedoms – secured at such cost by our forebears – not to agitate for justice, for redistribution, for the defence of our common interests, but to pursue the dopamine hits triggered by the purchase of products we do not need.

The world's most inventive minds are deployed not to improve the lot of humankind but to devise ever more effective means of stimulation, to counteract the diminishing satisfactions of consumption. The mutual dependencies of consumer capitalism ensure that we all unwittingly conspire in the trashing of what may be the only living planet."


  1. Excellent analysis!
    Not much hope left.
    Is there really no chance?
    Reading the following news keeps me going on:

  2. Wht do you mean, "no hope left"?

    There are lots of chances imo and it is a very hopeful perspective that capitalism cannot last and has come to its end now.

    There is no hope for endless growth, but there never was, so thats no loss.

    I would not trust my hopes on J. Rifkin (or any othe billionare) though.

    Also, the misuse of the word revolution in this article is typical for our media, even those that are non mainstream. We will know the meaning of revolution in not to distant a future.

    Your comment is maybe a misconception about this blog. I am writing this because I believew it is true (also, I am a little vain and would like to say "see I was right" to anyone still believing things can go on like today forever).