Is the end of the world nigh?
Almost, according to Tim Morgan, former head of global research at Tullett Prebon. In a new book called Life After Growth, he argues that anyone expecting the global economy to bounce back from the crisis that began in 2008 radically underestimates its seriousness and misunderstands its nature. Morgan's core idea is that while economics is fixated on money, what really makes the world go round is energy. Think of two parallel economies: the "financial" economy of money and credit, and the "real" economy of energy resources, labour, goods and services. Under this model, money has no intrinsic worth, says Morgan: any value it possesses derives solely from its "tokenising" role as a "claim" on the output of the real economy today. Similarly, debt is a claim on the real economy of tomorrow.
So why is that a problem?
It's not as long as the global economy does not create financial claims that exceed the capabilities of the real economy. These capabilities are essentially a function of "surplus energy". To understand what this means, think of the world before agriculture, where everyone was struggling for a subsistence living. In this situation, there is "no energy surplus, and consequently no society and no economy". It was the development of farming that created the first energy surplus, because it liberated a proportion of the population to undertake other tasks. But it was the invention of the heat engine and the subsequent discovery of the vast energy resources contained in fossil fuels that ushered in "an era of unprecedented growth and material prosperity". In other words, real economic growth is driven by energy and man's capacity to exploit it.
Is there any historical evidence to support this?
Work by economic historian Professor Robert Allen, an expert in the industrial revolution, suggests a link between energy and industrialisation. Allen has compared the cost of energy in various European and world cities in the early 18th century. He found that Newcastle was an outlier, with lower energy costs than London or Amsterdam and massively lower than Paris or Beijing. This mean that in the north of England, turning cheap coal into work (via steam engines) was highly profitable. The result was an industrial revolution and rising living standards. By contrast, in China it made sense to employ hordes of people on low wages what Allen calls an "industrious revolution" with falling living standards. In this way, cheap energy shaped modern world history.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
What's the worry now?
Today, the world economy is made up of complex societies all built on easy access to cheap energy. But the world's remaining energy sources are becoming more expensive to exploit. The critical measure here is Energy Return on Energy Invested (EROEI) the amount of usable energy acquired from a resource compared to the amount of energy required to extract it. A falling EROEI is associated with the failure of civilisations, according to anthropologist and historian Joseph Tainter, author of The Collapse of Complex Societies. Worryingly, our key energy, oil, is now characterised by rapidly falling EROEI.
How fast is it falling?
When Saudi Arabia first extracted oil from its deserts, the returns were in excess of 100:1. For new oil projects, Morgan calculates that typical EROEIs have fallen from 30:1 to 10:1 today. For global energy overall, the EROEI has fallen from 37:1 in 1990 to less than 14:1 now. Looked at the other way round, that means that the energy cost "levy" on the economy has jumped from 2.6% to 6.8% today and can be expected to rise to 9% by the end of the decade. The result is rising energy prices, which are having far-reaching effects on the economic system.
What could the consequences be?
Expensive energy doesn't just affect fuel costs, it permeates the whole economy. This is why prosperity is falling even as growth appears to be recovering from the effects of the crisis, says Morgan. Ten years ago an average salary in Britain would have bought you 1,076 barrels of oil; today it would buy you 328 barrels, a fall of more than two-thirds.
You might not want to buy barrels of oil, but "that's what we are doing whenever we purchase, not just petrol, electricity and gas, but water, food, anything made from plastic or metal, or any physical item at all".If EROEI falls too far, our consumerist way of life is over. "It is hardly too much to say that a declining EROEI could bomb societies back into a pre-industrial age."
Optimists argue that rising energy prices are both the problem and the solution, since they will push us to become more energy efficient and find new sources of supply.
Take natural gas. Ten years ago supply was tight and prices were high, but that drove a surge in exploration and in improved technology to tap deep offshore deposits. The result was large finds in the Atlantic, the Indian Ocean and the Mediterranean. Meanwhile, shale gas and oil promise to revolutionise US energy supply and many other countries are preparing to exploit their own shale resources.
For pessimists such as Morgan, that's scant consolation. Shale oil has an EROEI of just 5:1, even lower than most renewables at about 7:1. However, energy sources such as nuclear (around 50:1 for some technologies) might offer a way out.
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
December 2023 NS&I Premium Bond winners - check now to see what you’ve won
If you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
By Vaishali Varu Published
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published