For perfectly understandable reasons, public and media reactions to the surge in energy prices have concentrated almost exclusively on rises in the cost of domestic gas and electricity, and of filling up the family car with petrol or diesel.This, though, is to miss more than half the point, because the even bigger consequence of the energy supply squeeze is what it means for industry. It’s simply impossible to run a business without using energy.
The supply of food is just one example. Just as farmers need fuel to plant and harvest crops, suppliers of fertilisers and other agricultural inputs need energy to extract, process and deliver raw materials, and energy is needed, too, for the manufacture, servicing and maintenance of farming equipment. Food manufacturers need energy for processing and transport, and the supply chain from producers and distributors to retailers relies on it for everything from trucks to refrigeration.
Don’t be surprised, then, when rising energy costs show up in the weekly grocery bill.
Food supply, of course, is just one instance of the way in which rises in energy costs ripple throughout the material economy of goods and services. The reality is that nothing that has any economic utility (value) at all can be produced without the use of energy.
This is why some of us have long insisted that, ultimately, the entire economy is an energy system, not a financial one. From this perspective, the critical trend is the relentless rise in ECoEs, meaning the Energy Costs of Energy itself.
Energy can’t be delivered without an infrastructure that includes oil and gas wells, pipelines, refineries, gas processing plants, power stations, solar panels, wind turbines and the distribution grid. No part of this infrastructure can be made, maintained or replaced without using both energy itself and resources which are themselves products of the use of energy.
As energy – and everything made or supplied using it – rises in cost, so does the general level of prices. This effect is most pronounced at the level of essentials, because the supply of most necessities is energy-intensive. As well as food and fuel, this includes the supply of water, necessary travel and transport, and the building and maintenance of roads, offices and homes.
Logic dictates that, within any given level of income, increases in the cost of necessities reduce how much people have left to spend on those discretionary goods and services that they might want, but do not actually need. These discretionaries are a large part of the economy, and their own operating costs are by no means immune to the broader inflationary trend. Travel and hospitality are just two of the more obvious examples of sectors exposed to a ‘pincer effect’ that kicks in when costs are rising at the same time as customers are getting poorer.
The reality is that there are strict limits to what any government can do to mitigate the effects of surges in the cost of energy. Even so, the knee-jerk resort to borrowing as the cure for all ills is depressing. The government seems to think that the surge in the price of energy is some kind of temporary event which can be relied upon to correct itself over time, but the resource situation gives little ground for such confidence.
It might be worth reminding ministers that energy-driven increases in the cost of raw materials also apply to steel, concrete, plastics, copper, lithium, cobalt and everything else required for the expansion and maintenance of the supply of wind and solar power. Just as the case for developing renewable energy sources (REs) becomes more compelling, so the cost of implementing RE expansion plans keeps rising.
Tackling rising inflation requires increases in interest rates, even though measures implemented so far have done nothing to reduce the deeply negative real cost of money. The Bank of England might raise policy rates to 1 per cent or so by the end of 2022 but, by then, inflation could easily be 7 per cent, or higher, meaning that the real (ex-inflation) cost of debt could be -6 per cent.
This is a frightening metric for any ‘capitalist’ economy whose primary predicate is a positive real return on capital.
Hitherto, there’s been a tendency to view rises in the theoretical value of assets as a reassuring offset to the escalating levels of debt and other financial promises. Attaching an impressive aggregate value to the national housing stock is all very well, but ignores the point that the only people to whom the entirety of that housing stock could ever be sold are the same people to whom it already belongs.
With the cost of money rising, and disposable incomes under relentless pressure, it would make sense for everyone interested in property to think through the implications for affordability. As this deteriorates, don’t be too surprised if the false comfort that so many derive from setting inflated property prices against escalating debt starts to drain away.
Dr. Morgan is quite right regarding how essential Energy is to a modern economy.
The price of energy production is of course logically connected to the available energy or Surplus Energy available for productive purposes within the real economy. This tautology is though only part of the story.
Before reaching the same conclusion that the inevitable age of surplus energy has arrived the Nature of the Debt-based model used in the creation of the money used as the measure of and currency for exchange in modern political economy must first be accounted for. A sensible explanation of the main contributory causes of the present difficulties faced by the Global economy particularly in the Post Fordist developed economies is assisted with a judicious application of Occam’s razor..
Dr Morgan says that “before the coronavirus crisis, Britain had been borrowing more than £4 for each £1 of “growth” whilst this is broadly correct the allocation of the debt, largely to the FInancialised sector for speculation on non-productive purposes such as Share buybacks, and purchases of existing assets and not for production actually make Professor Richard Werner’s work of the dis-aggregated theory of credit a much more significant cause of the low growth delivered by each additional unit of debt. and not the energy cost of Energy, Ecoe is a theory whose time has not come and may still not ever arrive.
The problems in Political Economy as they stand presently and the question of future Political Economy based upon future unknown Energy realities are I think helpfully separated which is something Prof. David MacKay is very successful with, in his presentation of the question see the excellent online book, Sustainable energy without hot air.
The Problems are only weakly related with respect to future solutions and breaking the process into 3 parts is useful rather than lumping them all together. It is clear that the existing Form of Market economy and political economy is not able to solve the problem at stage 3 ( I.E Post 2050 post-Oil Economy)
Stage 1 requires a reform of the existing paradigm which involves facing up to the broken debt-based money system. Pension provision, the sovereign debt crisis and Public debt crisis are all addressable and will see improvements even within the deteriorating Cost of energy inputs as a share of output. We could call this stage lets fix what we know is not working.
Stage 2 covers the Post Financialised ( Big Bang Experiment) period to the oil running out in 2050.
This requires a much more long-term investment horizon and complicating the energy mix by overstating the ”Climate Change question** seems to be counterproductive, again I like the way Prof David Mackay dealt with the question including stating the necessities of **Clean Coal and Nuclear”. In this stage, we will be implementing ideas previously barred due to the denial inherent in clinging to a failing system.
Stage 3 Post 2050, This part is much easier than Stage 2 and stage 1, in my opinion, the myth-busting and levelling out inherent in solving the political problems at stage 1 and the challenge to vested interests in stage 2 are by far and away the largest obstacles to getting down to Brass tacks in my opinion.
To Quote Quine, I have in mind his differences of degree and not kind in a way,
this from Two dogmas of empiricism.
´´As an empiricist I continue to think of the conceptual scheme of science as a tool, ultimately, for predicting future experience in the light of past experience. Physical objects are conceptually imported into the situation as convenient intermediaries — not by defnition in terms of experience, but simply as irreducible posits18b comparable, epistemologically, to the gods of Homer. Let me interject that for my part I do, qua lay physicist, believe in physical objects and not in Homer’s gods; and I consider it a scientifc error to believe otherwise.´´
Is the present “Collapse” Managed, Engineered, or an inevitability of Elitist Hubris?
I would argue its a combination of Premature transition management engineering, What’s known as the “Great Reset”
Presently though Central Bank Digital Currencies a new Going Direct solution to the misdiagnosed Banking collapse of the September 2019 New York repo rate spike is being implemented.
“The BlackRock plan calls for blurring the lines between government fiscal policy and central bank monetary policy – exactly what the U.S. Treasury and the Federal Reserve are doing today in the United States. BlackRock has now been hired by the Federal Reserve, the Bank of Canada, and Sweden’s central bank, Riksbank, to implement key features of the plan. Three of the authors of the BlackRock plan previously worked as central bankers in the U.S., Canada and Switzerland, respectively.”
Douthwaite can usefully be consulted in how the monetary system can sensibly be modified or recalibrated to avoid the credit misallocation inherent in the modern monetary regime his short book,The Ecology of Money (Schumacher Briefing, 4) https://az.1lib.to/book/896040/105bf6
Chapter 4: One Country, Four Currencies
“Now we’ve surveyed the various types of the money system, we come to the exciting bit – specifying
the integrated multi-currency system of the future. We have seen that three groups (commercial
institutions, governments and users) can create money. Very little can be said in favour of
allowing the commercial creation of money to continue. Instead, money should be created by
non-profit-seeking organisations representing the people using it. In the case of a democratic
country, this would obviously include a national or regional government working on behalf of its
people.
At least four types of money are needed. One is an international currency, playing the role taken
by gold before the collapse of the gold exchange standard. The second is a national or regional
(sub-national) currency that would relate to the international currency in some way. Thirdly, we
would need a plethora of currencies which, like LETS, the WIR and the commodity-based
currencies, could be created at will by their users to mobilise resources left untapped by national
or regional systems. Many of these user currencies would confine their activities to particular
geographic areas, but some would link non-spatially-based communities of interest. And fourth,
as our current money’s store of value function can so easily conflict with its use as a means of
exchange, special currencies are needed for people wishing to see their savings hold their value
while still keeping them in a fairly liquid form.”
Douthwaite’s briefing has a foreword by Bernard Leitaer.
“Do I agree with all the ideas that are presented here? Even Douthwaite admits that he doesn’t
“expect everyone to agree with the conclusions he has reached”. For instance, although I agree
with him on the importance of linking monetary issues to energy sustainability, I question the
viability of the means he proposes. (Why not include his “Energy-Backed Currency Units”
(ebcu) as part of a basket of commodities and services backing the currency – rather than being
the exclusive backing of currency?”
Leitaers TERRA is easily sourced online.
SEEDS sady has rushed to put the ECOE cart before the usury horse. in Short Seeds is a metric whose day has not and may not come particularly if one follows the science and technology of energy, materials and production.