It's Thermodynamics!
The fact that EROIs are now in the process of passing below 10:1 has fundamental economic and financial consequences that run very deep. The real status of energy can no longer be ignored. It is no longer viable to ignore that the thermodynamics of dissipative systems operating far from equilibrium rule over any form of economics. This very fact, and the related EROI constraints, invalidate the whole of contemporary economics. It reveal its status as a perpetual motion machine fantasy: economics, and with it the whole of finance, ignore the unique irreplaceable status of energy and the fundamental principles of thermodynamics.
EROI trends also means that to dispel the financial fog we have been living in over the last decade we must go further than the Boev approximation that we have used in earlier postings (Energy: the fundamental driver of wealth creation). From now on what is known in thermodynamics as net free energy (very roughly, in lay terms, energy supplies less the total energy cost of supplying energy to end users) must realistically be considered as the only ultimate and legitimate, tangible basis to establish a sustainable and viable standard of value for any currency. This matter has become all the more important and inescapable in light of the prevailing global debt issues.
Since President Nixon dropped the gold exchange standard on August 15 1971, the total global debt has grown irrepressibly to now amount to over three times the size of the gross world product (combining central, regional and local government debt with business and household debt). With all key EROIs well below 20:1, the industrialised world no longer has the thermodynamic power to repay that volume of debt over any time period. It has been living on credit for far too long. Furthermore, it is now plagued with a monetary and quasi-monetary mass in the order of US$600 to US$700 trillion that is no longer convertible in any tangible standard of wealth, be it gold or energy.[1] This means that the present global financial and economic crisis is fundamentally one of insolvency against net available energy.
Or put in another way, the present global financial and economic crisis on the one hand and the combined EROI and related ecological crises on the other hand are but two sides of the same coin, however, the latter is determining. There is absolutely no hope of emerging from the former without first addressing EROI matters.
The above thus means that on “Planet Finance”, that is, the space of economic activity where since 1971 those US$600 to US$700 trillions have been created without any significant real wealth backing, the current EROI trends also signal the unavoidable demise of the present global monetary and financial systems, most likely over a fairly short span of time. This is the background for the Third Energy Challenge that we outlined in earlier postings.
In order to stress further how precarious the global monetary system has become and for the avoidance of doubt, let’s revisit once more what ensued when President Nixon “closed the gold window” by ending the convertibility between the US dollars and gold and established the US$ as the main reserve currency. As we noted earlier, the entire global monetary and financial order became a debt-grounded fiat system. From then on, the value of any currency became entirely predicated on the assumptions and beliefs of countless decision-makers that, notwithstanding the odd transient recessions, tomorrow’s economies would be at least as good as in the past and hopefully better thanks to “growth” (so that the ever more complex systems of debt could always be kept “up in the air” never to be pinned on any fixed tangible anchor). Presently, with EROIs now far too low, such a viable future has vanished – with no future, no stable monetary system and no viable finance system remain possible. Eventually stakeholders’ confidence that the system they have believed in blindly until now has a future is bound to collapse.
It is, of course, not possible to anticipate the exact sequence or timing of events through which the demise is most likely to occur. What we do know is that the system is bound to collapse, most probably rather abruptly. This is another example of the growing number of avalanche-like dangers inherent in the Four Challenges (otherwise known as Self Organising Criticalities, SOCs, as we have seen in the context of the Arctic situation). Still, given the extent of the global debt, present EROI trends, if they are not reversed in very short order thanks to radical technology innovation, stand to make the financial and debt crisis that has unfolded from 2007 onwards look like a tame dress rehearsal. EROI, the “energy wild cat”, has surreptitiously sneaked into the coop and begun rampaging among the “finance pigeons”.
[1] Total global household wealth is estimated to have been around US$223 trillion in 2012 (Keating, Giles, O’Sullivan, Michael, Shorrocks, Anthony, Davies, James B., Lluberas, Rodrigo, Koutsoukis, Antonios, 2012, Global Wealth Report, Crédit Suisse AG.). The total debt-based financial mass is thus more than three times bigger than household wealth (real estate assets plus financial assets, less debt), the latter being the ultimate basis for any debt repayment. 84.3% of global wealth is held by 10% of the global population. We will come back to this matter towards the end of this Briefing.
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