March 9th, 2011 by Richard Heinberg
Richard Heinberg gave the following presentation to a packed audience at ecobuild on 1 March 2011.
The premise of my new book, The End of Growth, which will be out in July 2011, is that world economic growth as we know it is hitting up against essential limits.
I am going to argue that the economic crisis that started in 2008 is more significant even than we have been told. To understand it I think we have to look at more than just the financial aspects of the crisis.
We have to go back to the very beginning of our existence as a species. We used renewable resources and especially renewable energy resources for 99.9 percent of our history as a species. We used sunlight indirectly as it was gathered by plants and we ate the plants or burned the plants and then we altered our environment by exerting muscle power.
All that changed a couple of hundred years ago with the industrial revolution. We essentially won the energy lottery. We found ways to use sources of energy that had been created through natural processes – processes we didn’t have to invest any effort in whatsoever, it was all done for us over tens of millions of years – the gradual production of oil, coal and natural gas.
In the USA economy in 1850 roughly 85 percent of all the work being done was being done by muscle power – about 65 percent of that by the muscles of animals – horses, oxen, mules etc., another 18 percent by human muscle power. Of course in 1850 much of that was slave labour. By the 1960s muscle power doesn’t even show up on the graph anymore. That is because the power of fossil fuels to do work is so extraordinary.
May be you have had the experience of running out of petrol in your car and having to push your car off to the side of the road. Pushing it even three or four metres is a lot of work. Now imagine pushing your car thirty miles – that’s equivalent to six to eight weeks of hard muscle powered labour and we get that from a single gallon of gasoline for which we Americans are paying only £3.50 right now. Well, you cannot get work that cheap anywhere. So of course we have mechanised every process of production and transportation that we possibly could over the past one hundred years or so. Mechanisation has yielded extraordinary economic benefits. So over the course of world history we see actually very little change in economic activity right up to the nineteenth and twentieth century.
We see the beginnings of what we have come to call economic growth – growth in GDP, growth in Gross Domestic Product. We can see the same growth in urbanisation over the last couple of hundred years as well, the number of motor vehicles, telephones, McDonald’s restaurants.
Of course the most important growth has been in human population, which has recently reached 7 billion. It certainly couldn’t have done before if we hadn’t had the available resources, the food, the energy to support those people. As all this was happening over the course of the last couple of centuries, we were developing economics – a set of theories and institutions that explained growth and that hypothesised that growth could continue forever.
We embedded the expectation of growth in our financial institutions. We even changed the very basis of our monetary systems. Up until a few decades ago money was gold or silver. Over the course of the past few decades we have de-materialised money. Money has become based upon debt. Money is loaned into existence. Of course those loans come with the expectation of payments of interest. It is a kind of pyramid scheme. It works as long as the total amount of debt is growing, which in turn works as long as the economy itself is growing. In effect, tomorrow’s growth is being used as collateral for today’s debt.
Again, all this is fine as long as the economy continues to grow.
Back in the early 1970s a book was published called “The limits to Growth” which is a very famous book. It was the best selling environmental book of all time. The book essentially reports upon efforts by scientists to use computers, which were of course very primitive at that time, to model what would happen in the interactions between population growth, growth in consumption rates, and depletion of raw materials.
The consequence of this study was that world economic activity would reach a peak sometime in the first half of the twenty-first century and begin to decline. Of course this was a very disturbing outcome and “The Limits to Growth” authors were pilloried in the financial press, and many people mistakenly believe that “The Limits to Growth” study was discredited. In fact what happened was that certain numbers were taken out of context and used as hard predictions. If we look back at the modeling that was done in the early 1970s it has been extraordinarily accurate. We’re right on course.
Now it is clear that having depleted our economy on depleting fossil fuels – we know that as fossil fuels deplete we will use less of them, and they will deplete because these are non-renewable resources. The only question is how many other things are going to follow that downward ramp on the other side of the curve.
It is extremely important to understand the financial aspects of the current crisis. In the USA starting in the 1970s manufacturing began going away. The US began importing more and more manufactured goods from overseas – from Japan and then China. At the same time real wages in the USA began declining, very gradually, not to a great degree, even as productivity was increasing, wages were stagnating yet economic growth was still required. So how could that economic growth continue in the face of declining manufacturing and declining wages. Well, through increasing debt and Americans obliged by taking on much more household debt over the course of the next several decades, which of course meant there was increasing requirement for increasing payments on that debt which reduced the amount of money that people actually had to spend. The whole economy was becoming financialised. Debt was growing in every sector – the household sector, the corporate sector. Government debt was increasing. The largest area of increase was in the financial sector itself and we see this increasing right up until 2008 where we see an inflection point in the graph but government debt continues to grow but the other categories decline quite dramatically.
We had the biggest financial bubble in all of world history riding upon USA house prices. It was a housing bubble. Those house prices were being supported by sub-prime and no-doc loans and that money was then being collateralized in mortgage-backed securities, which were then being used for the foundation for tens, and even hundreds of trillions of dollars in derivatives.
In 2007 the price of houses in the USA started to decline and whole inverted pyramid of debt began to creak and shake and come apart at the seams. Foreclosure rates skyrocketed and over the course of just a few months something like $50 trillion vanished from the world’s economy.
What does this actually mean? At the same time all this capital was vanishing so was jobs and we had the worst period of job losses since the Great Depression in the USA and the recovery in terms of job growth has been very, very slow. If people are losing their jobs they have much less money to spend and they are much less likely to want to take out loans or to be allowed to take out loans so that means that the money supply cannot grow. Remember that all money is loaned into existence so if people are out of work they are not spending and they are not borrowing, and that keeps the economy from growing. Meanwhile the bailouts and stimulus packages have been absolutely extraordinary in scope and that’s some kind of measure of just how serious this occasion has been. The bailout package dwarfs the New Deal, the Korean War, the Persian Gulf War and so on – the bailout package dwarfs all those put together. The stimulus payments account for all the recent growth. Subtract what the US government and the Federal Reserve have done over the last couple of years and there’s been virtually no economic growth.
We would assume that once that is all sorted out. Once people start saving money and get back into the housing market and can start taking out more loans and start spending more the economy will get back on its normal track of growth.
However, I would like to suggest there are factors external to the financial economy, which will not enable that to happen.
The role of energy is pivotal in all of this. Without energy nothing happens. Energy is not a category of the economy. Energy is the economy. And oil in particular has a central place in the economy because it is the basis of virtually all transportation. So take away oil and global trade essentially ceases. Oil, as we all know, is a non-renewable resource so when do we have to start worrying about oil depletion?
We all think of the USA today as the world’s largest oil importing nation but we tend to forget that in the early part of the twentieth century the USA was the world’s foremost oil exporting nation. In a typical year in the early twentieth century half or more of the world’s oil was coming from places like Southern California, Pennsylvania, Ohio, Oklahoma and so on. USA oil production did peak and begin to decline in the year 1970. Discoveries of oil peaked around 1930. You have to find oil before you can extract it or produce it. The same thing is happening in other nations around the world. The UK saw its peak oil production from the North Sea in 1999 and the nation is once again a new oil importer. This has happened also to Indonesia. It was where Dutch Royal Shell got its start. It was a significant prize in World War Two. The Japanese with a growing industrial economy had no indigenous fuel resources so having access to the Dutch East Indies was key to Japan’s industrial growth and the USA managed to choke off that supply of fuel and ended the war that way (along with a couple of atomic bombs).
Now, on the whole we’re seeing the same thing happen for the world. Global oil discoveries reached their peak in 1964. Yes, we are still finding oil in places like Algeria, Angola and Brazil and so on but those new discoveries have to make up for declining production in Great Britain, the USA, Indonesia and Mexico etc so we’re at a point now even with rapidly rising oil prices world oil production has been stagnant since 2005.
In the early twentieth century we went for the oil that was the low hanging fruit – the easiest to find and the cheapest to produce. Today we’re going after oil in the most difficult places and we’re producing oil that is much lower quality. We’re making oil out of stuff like bitumen in Alberta, Canada. We’ve gone through the low hanging fruit. What we’re finding today is the high hanging fruit and that’s creating an oil price trap where the price needed for the development of future oil production capacity is $70 and above. If the price of oil goes below $70 as it did at the end of 2008 as a result of demand destruction then oil companies start pulling back from investment in future production capacity and that means we have more supply problems later on. Meanwhile if the price of oil goes much above $100 per barrel then we are going to have problems with the economy as we have seen repeatedly since the early 1970s. Every time we have had an oil price shock we have had a recession as a result. This effectively is putting a cap on economic growth. If the economy begins growing again the price of oil goes up and when the price of oil goes up that chokes off the recovery.
Peak oil means we’re going to see fundamental changes in our way of life. Peak oil may mean peak food. Why? Because we have created an industrial food system that uses oil and other fossil fuels in enormous quantities. Typically a Calorie of food energy delivered to the plate requires something like seven Calories of fossil fuel energy. As a result we are starting to see almost lockstep correlation between oil prices and food prices. We saw in 2008 the oil price spike and in 2008 we also saw food riots erupting in about one hundred countries around the world. This year we’re seeing food prices shooting up again and food prices by many accounts are playing a role in some of the unrest and revolutions that we’re seeing in the Middle East.
Clearly we will need to identify and bring on alternative sources of energy. That means we are going to have to evaluate those alternatives before we invest enormous amounts of capital. This is a huge project. It is going to take trillions of dollars and decades of work to replace fossil fuels.
One of the important criteria for evaluating energy sources is the energy return on the energy invested. It takes energy to drill oil wells. It takes energy to build solar panels and wind turbines. How much energy does it take to do that verses how much energy we get at the end of the day? It turns out historically that fossil fuels have had a very high return on energy invested.
As Energy Return on Energy Invested declines that means more and more of the total resources of society have to be invested in energy production and less and less energy is available to support all the other kind of things that we want to do.
The other sources of energy that we are going to be counting on generally have much lower levels of energy return on net energy. Some of them are relatively good. Wind for example up in the range of 18 to 1. Quite acceptable but then there are other criteria that we have to take into account. Is that energy source something we can count on all the time? Or is it variable as wind and solar are? What is the size of the resource? What is the ease of use? Oil for example is extremely convenient. We can transport it through hoses and tanks. Imagine if you had to run your car on firewood? Not very convenient. The environmental impact? All energy sources have an environmental impact. There are environmental impacts from building solar panels for example. Is it renewable? Is it scalable?
Once you take all these criteria and more – I have simplified – what is the outcome?
The Post Carbon Institute did a study 18 months ago titled “Searching for a miracle.” We looked at 18 different energy sources and evaluated them by ten criteria. Our conclusion was that there is no credible scenario in which alternative energy sources can fully make up for fossil fuels as the latter go into decline. That is a controversial conclusion. There have been many other studies that have said that we can easily make up for fossil fuels with alternative energy sources. What we found is that those other studies failed to take into account one or more of these important criteria.
It is not only fossil fuels that are depleting. We are also seeing other materials that are becoming more scarce and expensive with time. And disturbingly, some of those other materials are the very materials we need for building renewable energy technologies. Things like rare earth elements, which are used to make the magnets in wind turbines or indium or gallium which are used to make some of the sophisticated coatings in new photovoltaic panels.
We are also drawing down on natural capital – the other species of the world are going extinct at extraordinary rates. We depend on these other species to provide ecosystem services like pollination of our food plants. Much of the destruction of other species is happening because the climate is changing. We’re performing this enormous experiment with the Earth’s atmosphere and no one knows exactly how that is going to turn out.
When I put forward the thesis that world economic growth is virtually at its end. Naturally all sorts of objections come to mind. Well, what about China? China is still growing rapidly. Well I would refer you to an article that my my colleague David Fridley and I wrote in Nature last November 18 which talks about China’s relationship with coal. Coal is 70 percent of China’s total energy, 80 percent of its electricity. China is using three billion tonnes of coal per year. Three times as much as the USA. China is now beginning to import coal. The entire world coal export trade is only about 630 million tonnes per year. Cut to the chase. No one knows where the coal is going to come for China to continue growing its economy and while China is rapidly developing alternative sources of energy including nuclear and wind and solar and so on, the reality is that China will not be able to develop these energy sources fast enough to continue growth as soon as it stops being able to grow its coal consumption and this is probably likely to happen within this decade.
What about energy efficiency? Absolutely! We need more energy efficiency. A very good thing. Will energy efficiency by itself be able to make the economy keep growing? I don’t think so. Or substitution. We need to be investing in finding substitutes for fossil fuels and increasing energy efficiency through innovation.
All the things we have been relying on for the last 100 years to create economic growth have ridden on top of increasing energy supplies almost entirely from fossil fuels. Many of these will be important for a process of adaptation to a world in which we have less energy and more expensive energy – especially efficiency and substitution and innovation. Some of these things aren’t going to be able to help us very much in the future like globalisation. Globalisation enabled economic growth through increased trade over the last couple of decades but globalisation has only been possible with cheap transport fuel so as transport fuel gets more expensive we should actually expect less from globalisation.
I would suggest that we are in effect facing a kind of wall. And that wall is of a financial nature. Now we have obviously enormous problems stretching out over the next several decades – climate change, depletion of resources… but before we even get to those problems we have to face the fact that we have created an economy that only works when its growing.
A financial system that only works when its growing. If in fact we have reached the end of economic growth as we have known it then we are likely to see a collapse of the financial structures that enable our society to work and that is the wall that I am talking about.
We have to get past that wall in order for us to be able to begin to deal with the other environmental and energy problems.
When growth ceases, growth based economies enter survival crisis mode and that is where we are today. Don’t take my word for it. Here is Steve Ballmer, the Chairman of Microsoft Corporation – he said “we are in the midst of a once in a lifetime set of economic conditions, the perspective I would bring is not one of recession, rather the economy is resetting to a lower level of business and consumer spending.” So this is what we have to look forward to. It’s not a pretty picture so what to do?
I would suggest the first thing we have to do is get past the wall. And that means reforming our monetary system and our financial system and this is absolutely urgent. We need to effectively to reinvent money. As long as money is loaned into existence then our financial system is destined to crash until the economy can grow and if the economy cannot grow there’s no way out.
So we need to create non-debt based currencies. This certainly can be done. It is just that so little attention has gone into this direction. We can create money that for example is a form of direct credit clearing. The books of Thomas Greco write of this in exquisite detail. The unit of account could be anything. It could be gold or silver or kilowatt hours. It doesn’t really matter as long as what we are actually doing is direct clearing of credit accounts rather than the creation of debt-based currencies. And these new currencies could be nested systems so we have local currencies as well as national and international currencies. And of course there already are thousands of local currencies in use around the world and these are typically direct credit clearing systems so it is not as though we have to invent something that has never existed before but we do have to get away from the currencies that we are currently relying on.
In order to get around the wall we are going to have to do something like paying down the existing debt using non-debt based money. In other words we may have to go through a period of inflation in order to get around the wall. Or we may have to somehow just lop a decimal place off everyone’s accounts. After all this overhang of debt that we have created in the world – unsupportable, unsustainable debt essentially consists of claims. All of those debts are claims on resources and labour and if the resources simply do not exist then we have to adjust the claims so that they respect the resources and one way to do that would be to lop a decimal place off.
Once we do something like that – once we get beyond the wall then we have a lot of other things to take care of.
We are going to have a sustainability revolution and it will be driven by crisis because we have put it off too long. We need to reform economics itself. We have economic theories that have been put in place other the past couple of hundred years of cheap fossil fuel energy that don’t make sense anymore. We have economic theories that say that the environment is a subset of the economy when the reverse is true. We have economic theories that say growth can go on forever, which is simply irrational. We have to have economics in which renewable resources are harvested at less than the rate of natural replenishment and non-renewable resources are all recycled and the rate of use is declining. The industrial wastes have to be food for natural systems or industrial systems. The essential elements of ecological economics have been discussed for about three decades now. If you want to know more read the books of Herman Daly.
We need economic indicators that make sense. As long as we are striving for increasing GDP from here on we will be striving for an outcome that is effectively impossible, but if we are measuring factors like health, education, human happiness we can actually grow our experience of life in those areas without increasing the rate of consumption of natural resources.
We need to plan for an economy with less energy. We also need to rethink our food systems, transport systems, make much more efficient buildings….. The problem of course is that we have known how to do these things for sometime but the political structures that we have created respond to these outdated economic theories I was talking about earlier and so over the short term there is very little likelihood that these good ideas are going to be taken up. It is essential however that we continue to proliferate these good ideas and that we find ways to implement them where ever and however we can.
It is true that only a crisis is going to force our society to change in a fundamental way but here’s the good news – we have a crisis.
Now, if we are not really ready for this crisis that means that we are going to have to deal with some fallout during the process of change and adaptation. We need to develop resilience – the ability to absorb shocks and continue to function. One of the best formulas for doing that that I have seen is the Transition Town movement, which got its start right here in the UK, which is a bottom-up community organising model. Rather than waiting for government to solve these problems, which unfortunately will be too long a wait we need to find ways to implement solutions as we can from the community level on a volunteer basis. And one of the great things about the Transition Town model is that it starts from the premise that life can be better without fossil fuels if we emphasing things that aren’t peaking – things that we actually can have more of then I think we can make this transition – this inevitable transition – a much more enjoyable process.
We can make this transition, this inevitable transition, a much more enjoyable process. It is hard to overstate the scale and the importance of this transition but I am going to try and do so. Let me try to put it in context.
We have had four previous transitions in all of our history as a human species
The adoption of fire probably several million years ago. Three, four, five million years ago.
The development of language several tens of thousands of years ago. We don’t know exactly when the process of the development of language began but it’s probably the most significant factor in making us human.
The development of agriculture only ten thousand years ago and how that changed us in profound ways. And then the industrial revolution of just two hundred years ago, which enabled our population to increase from fewer than a billion to seven billion today.
I would suggest the sustainability revolution – the transition away from fossil fuels to whatever comes next is going to be every bit as important as those four previous great transitions in our history as a species.
We are in the midst of a crisis but we need to remember that crisis is opportunity. It is the biggest opportunity of our lifetimes.
We should imagine life after growth because we probably are seeing the end of growth unfolding in the world around us right now but what if we imagine that life after growth and the world without fossil fuels in the best possible case. What could the world look like under those circumstances in the best case scenario? And now imagine a path from here to there and let’s build it together. Thank you very much.