Peering Behind the Thick Veil of Paper Money

The red curve in Figure 4, page 19, shows the evolution of US GDP/head in barrels of oil (Boev). US wealth per head peaked in 1970 just as US oil production peaked. By then the USA were already living well above their means in energy terms, using far more energy than they could afford and the major financial crisis that took place at the time was in fact unavoidable. After Nixon’s de facto abrupt devaluation and the two ensuing oil shocks, by 1980, US wealth considered in energy terms was down to early 1900s levels. It is also important to note in this respect that the combined global oil and gas supplies per head of global population peaked in 1979, just at the time of the second oil shock, and have never recovered since.

The US Case

Figure 4 – US GDP/Head in energy terms

US wealth per head recovered partly during the 1980s and 1990s thanks to the oil glut of that period and the US’s ability to leverage the fact that its oil imports were financed through its own currency (that is, relative to oil and gold, the US$ was progressively devaluing). However, as global oil production began to level off in the late 1990s, as it approached the rough production plateau that has been prevailing for conventional oil since about 2000, from 1998 onwards US wealth generation crashed again. With the EROIs for oil and gas passing below 20:1 around 2005 the fall became irretrievable.

Compared with the above evolution, the global financial and debt crisis that has been unfolding since 2008 is but an epiphenomenon of the long-term energy crisis that had been in fact unfolding since 1970 – hidden and largely unseen behind a morass of financial exchanges largely disconnected from thermodynamic reality.

Figure 4 shows that the US GDP/Head expressed in grams of fine Gold follows the same pattern as that of the GDP/Head expressed in oil. However, the contrast with the GDP/Head expressed in so-called “constant dollars” of 2009 (green curve) is striking. Paper money sails through major thermodynamic changes without showing any significant disturbances up until 2008 when reality begins to catch up with it. In this specific sense the present EROI trends are truly apocalyptic, in the etymological sense of the word (apo-, un, kaluptein, cover – to uncover what was hidden) as well as in the vernacular sense if the EROI trends are not rapidly reversed to sustainable levels.

The Japanese Case

Figure 5 – Japan’s GDP/Head in energy terms

As shown in Figure 5, Japan experienced a similar overall pattern although the severe crash it experienced during the 1970s and early 80s was from a much lesser height than in the US (1,160 Boev/head in Japan versus 2,900 Boev/head in the US).

Thanks to the global oil glut and the country’s terms of trade concerning technology exports, Japan’s wealth per head nearly reached that of the US around the late 1990s. For the very same reasons as in the US it crashed after 1998 and has never recovered. Short of a drastic change of technological course, Japan is now in terminal EROI decline.

The contrast between GDP/Head expressed in energy terms and in “constant” currency, here in thousands Yen from the year 2000, is as striking as what we have observed in the USA. Paper money hides what is actually happening in the real world. The average wealth in Japan is now down to the same level as in the early 1960s Japan and at the same level as presently in the USA.

The Chinese Case

Figure 6 shows that although China’s growth began to take off much later than in Japan, essentially fuelled by the relatively low-cost oil glut during the 1980s and 90s, its tangible wealth per head peaked nonetheless in 1998, rebounded after the crash of the early 2000s, only to be caught by declining EROIs after 2009. It too had been living substantially above its energy means from the 1990s onwards.

China is now falling into the same energy trap as all the other countries rich or poor. Once more, GDP/Head in “constant” currency, here thousands 2005 Yuans, shows absolutely nothing. In this matter, however, as illustrated in Figure 7, it is also important to keep in mind the relativities of energy flows through each country. The US and Japan are of similar sizes in terms of actual wealth per head (around 500 Boev/head) and so are the older European industrialised countries, while China is clearly dwarfed (at some 50 Boev/head) – and so are most of the other emergent countries.

Figure 6 - China's GDP/Head in energy terms Figure 7 - Relativity of wealth in energy terms

In paper currency terms, China is now recognised as the second economic power in the world after the US. However, in terms of real power, that is, in the thermodynamic sense, so-called “emergents” are not really emerging. Although, from the outset of the post-colonial era onward, they progressively acquired a major role in the globalised industrial world, they nonetheless arrived too late on the energy scene and remain far from having the sheer power to address the energy and ecological challenges of our times. It is most unlikely that with the current energy technology mix any will ever grow to reach US, Japanese or EU levels.

The French Case

Figure 8 – The French Case

Let’s now consider the case of a smaller, older industrialised country, France, that is considered as being the 5th global economic power. Figure 8 contrasts the evolution of French GDP/head expressed in current Euros (green curve) and in Boev (red curve). It illustrates how energy events since 1970 have been determining. It took about a century of hard efforts to reach the late 1990s peak and only about 15 years to destroy what had been accomplished. The present level is back to what it was at the outset of the 20th century (about 360 Boev/head). The asymmetry between growth and decline is striking. As demonstrated by Prof. Ugo Bardi, this is a key feature of thermodynamic declines. [1]

Like the other three previous cases, Figure 8 shows clearly the gap between thermodynamic reality and the illusion of a GDP/head expressed in a fiat currency. In 2013 this gap was in the order of 1,600 Boev/head. In Euro terms (green curve) everything was apparently fine until 2007 while has numerous French people had sensed it in the struggle of their daily lives, the decline began in the late 1990s. The red curve corroborates the lived experience of most French people: things are getting worse and worse…

The gap between the two evaluations measures the effect of the total debt, that is, the combined debt of the State, regional and local governments, businesses and households. Or, expressed in other words, this “big split” means that since the late 1990s and like all other countries, France lives massively on energy credit, way above its actual means. In the absence of rapidly accessing sustainable energy resources with EROIs well above 30:1, and thus in the absence of intellectual property (IP) enabling to reach such EROI values, France will never be able to repay this energy debt what ever the tax, incentives or other financial quantitative easing put into play.

Expressed yet in another fashion, this gap is the gap between thermodynamic reality and the consumption society fantasy that has been forcibly inculcated to a whole society since the 1960s – a fantasy that many marketers presented as the continuation of the “three glorious decades” era (from the end of WWII to the early 1970s). A long time ago already, in 1990, Jean Baudrillard had ironically enquired: “what to do after the orgy” after all this orgiastic “freeing” of all possible “energies” at the heart of consumerism. [2] On a more sober tone, Figure 8 reveals that for a long time already, France has lost the thermodynamic means of those lifestyles French people of all walks in life want to preserve at all cost, however non equalitarian they may be. In spite of the fact that any exit from the prolonged crisis France is experiencing is feasible without facing this relatively simple reality, one is hard pressed to find a single decision-maker in industry or politics having manifested some consciousness of it, even remotely.

The Australian Case

Figure 9 – The Australian case

The Australian case presented in Figure 9 shows that the thermodynamic decline applies even to young industrialised countries whose wealth is essentially built on mining a wide array of mineral resources that are in global demand. As in the case of the USA, Australia’s wealth creation capacity plummeted in the 1970s only to recover partly during the 1980s and early 1990s and to fall again in the late 1990s. It is now back to early 1900 levels, just like all the other industrialised countries.

The Global Situation

Figure 10 – Global GDP pattern

Figure 10 shows that the phenomenon is indeed global. With a correlation coefficient of 0.852 for the red trend curve, the thermodynamic decline of the industrialised world trend looks ominous. The time-series of GDP/head for the USA, Japan, China, France, Australia and the whole world, highlight rather vividly the fundamental role of energy supplies in wealth creation processes – not oil, gas, coal or “renewables” per se, but the energy they convey and that we all rely on. They show that for both older industrialised countries and industrialising ones, short of decisive innovation, future prospects have become rather sombre. With this in mind we can now examine further the underpinnings of the First Energy Challenge, that is, the links between declining EROIs and oil depletion.

[1] Bardi, Ugo, 2011, The Seneca effect: why decline is faster than growth, http://cassandralegacy.blogspot.fr.

[2] Baudrillard, J., 1990, La Transparence du Mal, Essai sur les Phénomènes Extrêmes [The transparency of evil, essay on extreme phenomena], Galilée, Paris.

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