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Credit deflation and the reflation cycle to come (part 2)


spunko

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DurhamBorn

@Cattle Prod the MSM and market are asleep on energy.They just crow the accepted narrative of everything electric blah blah.Hydrogen is the future for a large part of energy.The UK is very well placed and there is a good chance we become one of the fastest growing economies in the west,or even the fastest.Shell and BP are asleep at the wheel a bit though.SSE and Drax are prime takeover targets and one of them should of pounced.BP might be more looking to Europe though.The key to hydrogen is that it will go blue,then blue and green,then green.Owning power stations,wind farms etc is going to be crucial in a decade.

The prize for the UK is cheaper energy compared to competitors.The boom times have a good chance of returning to our industrial heartlands.Teesside next for a similar project i expect.

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I've got thick skin. Just logged on to my HL account and see that Chesapeake is now simply listed as 'n/a' :S

And I bought £1,000, not £750.:CryBaby:  Little snapshot below (I've included the share that shall not be named for extra amusement)

On the flip side, I'm now up 150%+ on several silver miners. If we can all hold on, the next few years is going to be an epic roller coaster.

 

853133282_ScreenShot2020-07-01at12_36_41.png.f008b2cbebcd3736552af381a17fee9c.png

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jamtomorrow
44 minutes ago, DurhamBorn said:

@Cattle Prod the MSM and market are asleep on energy.They just crow the accepted narrative of everything electric blah blah.Hydrogen is the future for a large part of energy.The UK is very well placed and there is a good chance we become one of the fastest growing economies in the west,or even the fastest.Shell and BP are asleep at the wheel a bit though.SSE and Drax are prime takeover targets and one of them should of pounced.BP might be more looking to Europe though.The key to hydrogen is that it will go blue,then blue and green,then green.Owning power stations,wind farms etc is going to be crucial in a decade.

The prize for the UK is cheaper energy compared to competitors.The boom times have a good chance of returning to our industrial heartlands.Teesside next for a similar project i expect.

DB, I'm not seeing the competitiveness angle in this - seems like this just replaces a more competitive energy source (NG) with a less competitive one (hydrogen). Why is that a good thing?

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DurhamBorn
2 minutes ago, jamtomorrow said:

DB, I'm not seeing the competitiveness angle in this - seems like this just replaces a more competitive energy source (NG) with a less competitive one (hydrogen). Why is that a good thing?

Because when oil is $200 a barrel as it will be by the end of the cycle green hydrogen is going to look very cheap.Most countries will be behind the curve on it.

Notice i said it will go blue,blue/green,green,when we are at green,most countries will be at blue or blue/green.

Leads and lags are crucial.Massive re-industrialisation coming back to the UK.Its already started and is in full motion.

Equinor wants to go blue hydrogen for obvious reason,they have lots of gas,and gas will be heavily used at first,later though the key is from the free energy at night from wind farms.They will use that to create hydrogen and then burn it when demand goes up.Thats why Drax bought the pumped storage place in Scotland.Massive battery.

The market never understands lags as a whole.

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jamtomorrow
7 minutes ago, DurhamBorn said:

Because when oil is $200 a barrel as it will be by the end of the cycle green hydrogen is going to look very cheap.Most countries will be behind the curve on it.

Notice i said it will go blue,blue/green,green,when we are at green,most countries will be at blue or blue/green.

Leads and lags are crucial.Massive re-industrialisation coming back to the UK.Its already started and is in full motion.

Equinor wants to go blue hydrogen for obvious reason,they have lots of gas,and gas will be heavily used at first,later though the key is from the free energy at night from wind farms.They will use that to create hydrogen and then burn it when demand goes up.Thats why Drax bought the pumped storage place in Scotland.Massive battery.

The market never understands lags as a whole.

Thanks for the informative reply.

I like this plan. As you know, I have my doubts about how much employment will come in off the back of this but as a nation we don't have any choices at all if we fail to re-industrialize.

If I had one wish, it would be for a serious decent nuclear programme to be added to the recipe - that would make for quite the mix, in terms of energy security and competitiveness 

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DurhamBorn
1 minute ago, jamtomorrow said:

Thanks for the informative reply.

I like this plan. As you know, I have my doubts about how much employment will come in off the back of this but as a nation we don't have any choices at all if we fail to re-industrialize.

If I had one wish, it would be for a serious decent nuclear programme to be added to the recipe - that would make for quite the mix, in terms of energy security and competitiveness 

We might end up with a lot less jobs but a lot more better paid ones.The last cycle was masked by tax credits and housing benefits etc.

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2 hours ago, Cattle Prod said:

H2H Saltend will be part of the Zero Carbon Humber alliance’s application for public co-funding in the second phase of the Industrial Strategy Challenge Fund, which launched on 23 June 2020.

I noticed the date here of this new fund which is where the government money will come from.  The second phase was only set up last week according to this article so hot off the press yet nowhere have I seen mention of this exciting new industry in the MSN and how we could be world leaders although BBC news had a very short item about hydrogen as the new fuel last night.

 I'm surprised they haven't got Boris plugging this instead of, or as well as refurbishing schools.  This must be where the major new infrastructure funding will go. 

Maybe he's hoping that by keeping it quiet it won't give the Chinese new ideas:D

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2 minutes ago, janch said:

Maybe he's hoping that by keeping it quiet it won't give the Chinese new ideas:D

The thought of them dabbling with hydrogen is hilarious, Chinese daily life seems to be hazardous enough as it is

 

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FYI, here is a link to all the double tax treaties with the UK, I think!

https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt2140pp

So for example, Norway (Equinor?):

"Dividends paid by companies resident in Norway and beneficially owned by a resident of the UK are exempt from tax in Norway where the beneficial owner is:

  • A company which owns, directly or indirectly, 10% or more of the capital in the paying company;
  • A pension scheme; or
  • The United Kingdom Government (including the Bank of England and institutions wholly or partly owned by the United Kingdom Government)

Dividends beneficially owned by persons other than those listed above are taxable in Norway at a rate not exceeding 15%.

The reduction in domestic rates is not given where the dividends are effectively connected with (see INTM153110 eighth sub-paragraph) a business carried on by the United Kingdom resident recipient through a permanent establishment in Norway".

Good mental gymnastics to keep us older types compos mentis (warning, the above is an easy one)!

Question is whether the reduced tax rate is applied at source or do you have to reclaim and how (e.g. via a Norwegian tax authority website in this case)?

The Norwegian web page:

https://www.skatteetaten.no/en/person/taxes/get-the-taxes-right/shares-and-securities/about-shares-and-securities/refund-of-withholding-tax-on-dividends/

But take a look at what's required!

Suppose we could have a whip round and buy 10% (Eur46bn) of Equinor to get the exemption!  Maybe @DurhamBorn is close?

Happy reading!

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sancho panza

 

https://www.marketwatch.com/story/heres-what-history-tells-us-happens-after-the-sp-500s-best-quarters-of-all-time-as-strategist-says-its-set-to-repeat-2020-07-01?mod=newsviewer_click

The S&P 500’s second-quarter gain of 20% makes it the fourth-best quarter since 1950, Lerner said in a note. Following the top 10 best quarters since 1950, the index has climbed every time in the next quarter with an average 8% jump. On three occasions — in 1970, 1998 and 2009 — the strong quarter was also preceded by a double-digit percentage fall, as it was this time around.

 

The index was higher one year later following nine out of the 10 best quarters, with the exception of the 1987 stock market crash, SunTrust’s study found.

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Jumping around a bit, I was looking at the Dutch double tax treaty which states:

"Dividends are taxable in the source state at a rate of 15% if they are payable by a property investment vehicle, such as a United Kingdom Real Estate Investment Trust.

Dividends are exempt from tax in the source state where the beneficial owner of the dividends is a company which controls at least 10 per cent of the company paying the dividend (unless this company is a property investment vehicle) or is a pension scheme or charity.

In respect of all other recipients, the source state taxation is at a rate of 10 per cent.

The reduced rates provided by the treaty are not given if the dividend is effectively connected (see INTM153110 fifth sub-paragraph) with a permanent establishment which the United Kingdom resident recipient has in the Netherlands".

And defines separately a pension scheme as:

"..the term “a pension scheme” means any plan, scheme, fund, trust or other arrangement established in a Contracting State which is: (i)generally exempt from income taxation in that State; and (ii)operated principally to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements".

So no tax due on dividends into SIPPs?

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51 minutes ago, Harley said:

 

So no tax due on dividends into SIPPs?

In theory, that is correct. However, as SIPPs are separate legal entities (the money in a SIPP is not part of your estate), then it is down to the SIPP provider to claim the WHT back (not you). Not all SIPP providers can be bothered (too much effort / paperwork). However, HL and AJ Bell do.

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9 minutes ago, janch said:

Here is the BBC's take on hydrogen:

https://www.bbc.co.uk/news/science-environment-53238512

This is interesting:

The website Euractiv reported that it plans to publish a hydrogen strategy soon. A leaked draft floated the idea of making the Euro the currency for international hydrogen trades, as the US Dollar is for oil.

Hmm.........

Now that is interesting and something I hadn't thought of.  Who else was it I was chatting to about the Freegold/Euro comments? Petrodollar demise by the back door? Fascinating geopolitics potential. 

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1 hour ago, janch said:

The website Euractiv reported that it plans to publish a hydrogen strategy soon. A leaked draft floated the idea of making the Euro the currency for international hydrogen trades, as the US Dollar is for oil.

Getting very Downfall like, i'm looking forward to the video of the Eurocrats in their Brussels bunker pushing Euro bank notes around as they desperately try to find any way to keep the common currency alive.

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2 hours ago, sancho panza said:

The S&P 500’s second-quarter gain of 20% makes it the fourth-best quarter since 1950, Lerner said in a note.

This makes me want to sell everything immediately, lol

Realistically though this kind of divorcing of the stock market from reality is why I found this thread in the first place.

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12 hours ago, DurhamBorn said:

Because when oil is $200 a barrel as it will be by the end of the cycle green hydrogen is going to look very cheap.Most countries will be behind the curve on it.

Notice i said it will go blue,blue/green,green,when we are at green,most countries will be at blue or blue/green.

Leads and lags are crucial.Massive re-industrialisation coming back to the UK.Its already started and is in full motion.

Equinor wants to go blue hydrogen for obvious reason,they have lots of gas,and gas will be heavily used at first,later though the key is from the free energy at night from wind farms.They will use that to create hydrogen and then burn it when demand goes up.Thats why Drax bought the pumped storage place in Scotland.Massive battery.

The market never understands lags as a whole.

DB, your early insights into the coming hydrogen economy has been most instructive, at least for me. Investing in the oil co's was maybe a no-brainer, at least in terms of investment return I do hope it turns out that way! But i wonder, in terms of the UKs future industrialisation programme, are there other disruptive trends that we should also begin thinking about in a similar way, in regard to investment choices? The telecoms sector immediately comes to mind, in terms of future home working/shopping/education/entertainment. But are there other sectors, or is it more about selecting decomplex assets, like potash, copper and silver, in which case are there other decomplex assets that will do well?                                                                                                                                                                                                On a kind of related note DB, it looks like 1M+ Chinese (assuming many will go to Canada, etc) will be coming to settle here over the next few years. Assuming they will be bringing skills and maybe even wealth, so unlike previous migrants they will not be a net drain on the country, do you think such a huge influx of 'professional/technical' workers will have a particular - maybe even uniquely beneficial - effect on this country? For example I hear that one of those 'Free Ports' much mooted by the government could become a 'new Hong Kong'. It sounds far fetched, but I think this would be one way to easily spend billions on infrastructure and crucially spend it very quickly.                                                                                                                                                                                                                     ...If however, I were to be cynical, I might be tempted to think that this big easy spending opportunity was the major rational for granting this immigration. I also admit that  it does also chime with my view that the state will begin seeking more and more intrusion into the economy and into our lives generally. And for example 'health scares' such as the Corona virus and 'humanitarian projects' such as emergency immigration, it seems to me, provide ideal cover for our leaders to enact all kinds of troubling laws without receiving too much objection. On the other hand I also understand how difficult it will for government to steer a path and to 'control' citizens in a democracy when difficult and unpopular decisions have to be made. Interesting times!

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jamtomorrow

Talk about "something for everyone" ... ta-da, "nuclear hydrogen" (although this one looks more like nuclear lobby kite-flying at this stage): https://www.rechargenews.com/transition/wind-alone-too-risky-uk-needs-nuclear-hydrogen-to-hit-2050-net-zero-goal-study/2-1-828038

That's two different "H2H" now, Hull and Heysham. Where next?

Wind alone too risky – UK needs nuclear hydrogen to hit 2050 net-zero goal: study

Nation may need up to 50GW of nuclear with next-gen technologies allied to H2 output, claims government-backed Energy Systems Catapult

 18 June 2020 5:50 GMT UPDATED 18 June 2020 13:23 GMT
 

The UK can’t rely on wind power alone and needs large-scale next-generation nuclear capacity linked to hydrogen production to be sure of hitting its 2050 net-zero emissions target, claimed a government-backed research group.

Achieving net-zero without nuclear is “possible but risky”, according to a new study from the UK's Energy Systems Catapult (ESC).

Britain could need up to 50GW of additional nuclear capacity by mid-century to be certain of decarbonising sectors such as transport and heating, reckons the report Nuclear for Net Zero, which examines the technology's potential role in meeting the nation's legally-binding 2050 target, against the background of a doubling of power consumption by then.

“While wind, in particular offshore wind, now looks the key technology for decarbonising power in the coming decades, trying to meet net zero without any new nuclear would put the target at risk unnecessarily and potentially make the shift to a low carbon economy more expensive,” claimed the ESC, which is part-funded by state agency Innovate UK but operates as an independent entity.

Its scenarios include allying advanced ‘Gen IV’ high-temperature nuclear plants with hydrogen production, which the study’s authors said may open new possibilities for cheaper, more efficient production of zero-carbon H2, either by providing power for electrolysis or through thermo-chemical processes that don’t need electricity at all.

“Compared with other routes of supply to expand the hydrogen economy, such as more steam methane reformation capacity with CCS (requiring more land-based offsetting via increased forestation or biomass) or more low temperature electrolysis energised by additional renewables, advanced nuclear has the potential for greater energy density, lower costs, and much reduced land take,” said the report.

Recharge reported earlier this year how EDF is looking at linking nuclear power with hydrogen production at its UK fleet.

The ESC also sees a big role for nuclear in future widespread district heating deployments and sees multiple applications for carbon capture and storage (CCS) in the UK's energy transition.

The study admits that nuclear will have to reduce its costs if it is going to play an effective role in the UK’s energy transition, but the ESC reckons that will happen with scale – and claimed a commitment to another 10GW of new nuclear beyond EDF's under-construction 3.2GW Hinkley Point project would be a “low regrets” option.

That’s certain to be a hugely controversial view given the uproar around Hinkley Point, whose ballooning costs and 35-year, £92.50/MWh ($116/MWh) (at 2012 prices) power deal with the UK government is regularly compared to the roughly £40/MWh offshore wind is now selling its electricity for from multi-gigawatt projects that match nuclear for scale.

Renewables advocates claim offshore and onshore projects, allied with fast-emerging storage technologies, smart networks and green hydrogen produced using wind power, are up to the job of decarbonising the UK economy without the help of nuclear, with all its safety and waste baggage.

But the nuclear sector reckons its large-scale projects can tackle the baseload and intermittency dilemmas faced by wind and solar, with emerging technologies such as the small modular reactors under development by Rolls-Royce claiming they are on track to get power costs into renewables territory.

“Nuclear doesn’t need to be expensive if we take the right approach,” claimed ESC nuclear practice manager Mike Middleton.

“Provided that costs reduce in line with the analysis we have reported, the deployment decision regarding new large nuclear is not whether to start, but when to stop.”

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DurhamBorn
7 hours ago, JMD said:

DB, your early insights into the coming hydrogen economy has been most instructive, at least for me. Investing in the oil co's was maybe a no-brainer, at least in terms of investment return I do hope it turns out that way! But i wonder, in terms of the UKs future industrialisation programme, are there other disruptive trends that we should also begin thinking about in a similar way, in regard to investment choices? The telecoms sector immediately comes to mind, in terms of future home working/shopping/education/entertainment. But are there other sectors, or is it more about selecting decomplex assets, like potash, copper and silver, in which case are there other decomplex assets that will do well?                                                                                                                                                                                                On a kind of related note DB, it looks like 1M+ Chinese (assuming many will go to Canada, etc) will be coming to settle here over the next few years. Assuming they will be bringing skills and maybe even wealth, so unlike previous migrants they will not be a net drain on the country, do you think such a huge influx of 'professional/technical' workers will have a particular - maybe even uniquely beneficial - effect on this country? For example I hear that one of those 'Free Ports' much mooted by the government could become a 'new Hong Kong'. It sounds far fetched, but I think this would be one way to easily spend billions on infrastructure and crucially spend it very quickly.                                                                                                                                                                                                                     ...If however, I were to be cynical, I might be tempted to think that this big easy spending opportunity was the major rational for granting this immigration. I also admit that  it does also chime with my view that the state will begin seeking more and more intrusion into the economy and into our lives generally. And for example 'health scares' such as the Corona virus and 'humanitarian projects' such as emergency immigration, it seems to me, provide ideal cover for our leaders to enact all kinds of troubling laws without receiving too much objection. On the other hand I also understand how difficult it will for government to steer a path and to 'control' citizens in a democracy when difficult and unpopular decisions have to be made. Interesting times!

No brainer letting the Hong Kong people in.Fantastic people and once the government in China falls,or is reformed,then a lot of those people will be going back and running the country giving the UK fantastic connections.Free ports are very likely and i think Teessport is prime candidate for that and Liverpool.

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sancho panza
1 hour ago, DurhamBorn said:

No brainer letting the Hong Kong people in.Fantastic people and once the government in China falls,or is reformed,then a lot of those people will be going back and running the country giving the UK fantastic connections.Free ports are very likely and i think Teessport is prime candidate for that and Liverpool.

The benefits could be myriad.hard working,ingenious,possibly wealthy with good connections............they should be able to support a couple of million people on tax credits:ph34r:

I think we won't be the only ones with this idea though,can see Canada,Oz,NZ opening up too.

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sancho panza

I don't think we've had this posted up before but I was rereading it yesterday after CP's explanation on shale and offer it up for those like me that sometiems struggle with the level of detail/knowledge from CP,DB,JT,Transistor Man etc

Highlights are mine.Interestingly,he argues that energy is often seen by economists as a function of the economy but posits that actually you should see the economy as a function of energy.Of particualr note,there's a chart near the bottom where the cost of energy crosses the prosperity line (as it comes down)-interestingly chimes in timewise with DB's late 20's(Figure 8).He also argues that renewables are a function of fossil fuel energy and will never be cheap enough not to reduce prosperity.

A long post this one.But well worht the time if you need to understand the issues pertaining to energy more fully.

Anotehr interesting consideration is how he plots the time of optimum cheap energy around the end of WW2 which also tied in with a demogrpahic dividend as the boomer generation was born-hattip paul Hodges.

https://surplusenergyeconomics.wordpress.com/2020/06/19/175-the-surplus-energy-economy/

AN INTRODUCTION

In response to the previous article, it was suggested that it would be helpful if we had a comprehensive statement, a sort of Surplus Energy Economics 101, for new readers. This makes a great deal of sense, particularly given how many people have joined the SEE readership since the last time the thesis was set out in this way. The plan is that the article which follows will be made available as a downloadable PDF in the near future.

The aim here is to encompass two themes in a single article. The first is the basic logic informing the Surplus Energy Economics approach. This builds on the long-established principle that the economy should be understood as an energy system, not a financial one.

The second is an evaluation of where we are today on the evolution of the economy as energy interpretation explains it. This makes extensive use of the Surplus Energy Economics Data System (SEEDS), which models the economy as an energy system.

PART ONE: PRINCIPLE

The best way to start is with the “trilogy of the blindingly obvious”. No-one new to the subject can go far wrong if they bear in mind these three principles.

1.1. The economy is energy

The first principle is that all forms of economic output – literally all of the goods and services which comprise the ‘real’ economy – are products of energy.

Nothing of any economic value or utility can be supplied without using energy. Energy can be defined as ‘a capacity for work’ and, historically, everything that we wanted or needed was produced using the labour (work) of humans and animals, plus some early application of the power of wind and water. That changed from the late 1700s, when we learned how to deploy the vast reserves of energy contained in fossil fuel (FF) deposits of coal, oil and natural gas.

There is an abundantly clear correlation between escalating use of energy and the massive increases in population numbers, and their economic means of support, since the late eighteenth century (see fig. 1).

It should be noted that other natural resources (such as foods and minerals) are energy products, too, since we can’t grow wheat, for example, or extract and process copper, without using energy to do so.

Fig. 1

175-1 Population & energy

1.2. Of cost and surplus

Second, whenever we access energy for our use, some of that energy is always consumed in the access process. We can’t drill an oil well, construct a refinery, build a gas pipeline, manufacture a wind turbine or a solar panel, or install a power distribution grid, without using energy, and neither can we operate or maintain them without it. The energy that is consumed in the supply of energy therefore comprises both a capital (investment) and an operating component.

This principle is central to the established concept of the Energy Return on Energy Invested (EROI or EROEI), in which the consumed, cost or invested component is stated as a ratio. In Surplus Energy Economics (SEE), the cost element is known as the Energy Cost of Energy or ECoE, and is stated as a percentage.

Understood in this way, any given quantity of energy divides into parts. One of these is the cost element, known here as ECoE. The other – whatever remains – is surplus energy. This surplus drives all economic activity other than the supply of energy itself. This makes surplus energy coterminous with prosperity.

We can, of course, use this surplus wisely or foolishly, and we can share it out fairly or inequitably. But what we can not do is to “de-couple” economic output from energy or, to be more specific about it, from surplus energy.

1.3. Money – only a claim

The third part of the “blindingly obvious” trilogy is that money acts only as a ‘claim’ on the output of the real (energy) economy. Money has no intrinsic worth, and has value only in terms of the things for which it can be exchanged. No amount of money – be it currency, gold or any other token – would be of any use whatsoever to somebody stranded in the desert, or cast adrift in a lifeboat.

PART TWO – APPLICATION

This, then, is how the economy works – we access energy (’losing’ some of it as a ‘cost’ in the process); we use what remains (the surplus) to produce goods and services; and we exchange these with each other using money.

Where, though, are we now, on the evolution of ‘surplus energy, prosperity and money’?

2.1. The short version

If you want a succinct answer to this question, it is that ECoE (the Energy Cost of Energy) is rising, relentlessly and exponentially. The exponential rate of increase in ECoE means that this cannot be cancelled out by linear increases in the aggregate amount of total or gross (pre-ECoE) energy that we can access. The resultant squeeze on surplus energy has been compounded by increasing numbers of people seeking to share the prosperity that this surplus provides.

As a result, prior growth in prosperity per person has gone into reverse. People have been getting poorer in most Western advanced economies (AEs) since the early 2000s. With the same fate now starting to overtake emerging market (EM) countries too, global prosperity has turned down. One way of describing this process is “de-growth”.

In recent times, we’ve tried to use financial gimmickry – credit and monetary adventurism – to counter this adverse trend. Since money acts simply as a claim on economic output generated by energy, this is wholly futile, and can be likened to “trying to fix an ailing house-plant with a spanner”. We’ve been piling up financial excess claims on prosperity at a rate that guarantees a crisis in the financial system. This crisis must take the form of value destruction, which may happen through ‘hard’ defaults, ‘soft’ inflationary destruction of the value of money, or some combination of both.

2.2. The ECoE process

The Energy Cost of Energy (ECoE) at any given time is a product of four factors or ‘drivers’. Each of these evolves gradually, so ECoEs need to be understood and applied as trends.

The first of these is geographic reach, and the second is economies of scale. Both of them push ECoEs downwards, and both can best be illustrated by reference to the petroleum industry.

Starting from its origins in the Pennsylvania of the 1850s, the oil industry spread across the globe in search of new, larger, lower-cost sources of production. At the same time, growth in the size of operations reduced unit costs by spreading the fixed costs of operations across a larger amount of oil produced, processed and delivered. Accordingly, the ECoE of petroleum supply fell steadily through the contributions of reach and scale.

The third ‘driver’, which pushes ECoEs upwards rather than downwards, is depletion. Quite logically, the most profitable (lowest cost) sources of any resource are accessed first, leaving less profitable (costlier) alternatives for later. As this process unfolds, ‘later’ arrives, with low-cost resources exhausted, and replaced by successively higher-cost alternatives. This is why depletion drives ECoEs upwards.

The four ECoE-determining factors – reach, scale, depletion and technology – can be put together in an illustrative parabola (fig. 2). In the early part of the sequence, ECoEs fall through the combined effects of reach and scale. As these drivers are exhausted, depletion takes over, forcing ECoEs back up again.

Fig. 2

175-2 Parabola 2

Technology helps to accelerate downwards trends in ECoEs in the early part of the parabola, and then acts to mitigate increases on the upswing. It’s extremely important that we don’t get the role and potential of technology out of context. Technological potential is always limited by the ‘envelope’ of the physical characteristics of the resource.

For example, advances in fracking techniques have reduced the costs of extracting shale oil to levels lower than the cost of producing that same resource at an earlier time. What this has not done is to turn shales into the economic equivalent of large, conventional oil fields in the sands of Arabia – technology, then, cannot overcome the differences in physical characteristics between these resources.

2.3. The irresistible rise in ECoEs        

As we’ve seen, the ECoEs of FFs have progressed along a historic parabola, and are now rising relentlessly. This trajectory is illustrated in fig. 3.

It must be stressed that the earlier part of the chart, shown as a dotted line, is simply illustrative – we don’t have enough data to know what ECoEs were in 1800, for example, or in 1900. We do, though, know enough about historical events, and about the processes involved, to have a pretty good general idea about where ECoEs were in earlier times. Evidence strongly suggests that a low-point – an ‘ECoE nadir’ – was reached in the two decades or so after 1945. This makes it wholly unsurprising – and not remotely coincidental – that this was a ‘golden age’ of growing prosperity.

Fig. 3

175-3 Long run ECoE NEW

Looking at this historically, it’s noteworthy how two factors, not one, favoured the development of the Industrial Economy through a very extended period. Just as ECoEs were falling (thanks to reach, scale and technology), so the total supply of FF energy was increasing as well. This meant that we enjoyed a ‘virtuous circle’ in which the supply of surplus (ex-ECoE) energy was rising more rapidly than the total (‘gross’) availability of energy.

The situation today, though, is that the reverse applies, with a ‘vicious circle’ rather than a virtuous one. Just as trend ECoEs are rising relentlessly, so our ability to carry on increasing the gross supply of energy is being undermined, not just by the depletion of resources but also by the way in which rising ECoEs are undercutting the economics of the energy industries themselves.

To remain viable, these industries need to sell energy at prices which are both (a) above costs of supply, and (b) affordable to the consumer. The situation now is that, whilst costs are rising, increases in ECoE are also undermining affordability, by impairing the prosperity of the consumer.

In the period immediately preceding the coronavirus crisis, the consensus assumption was that total supply of energy was going to carry on rising at rates not dissimilar to those of the recent past.

Three authoritative suppliers of forecasts agreed that, by 2040, consumption of oil would be 10-12% greater than it was in 2018, that the use of gas would have grown by 30-32%, and that even the use of coal would not have decreased. Along with this would go an increase of about 75% in global vehicle numbers, and of about 90% in passenger aviation.

To those of us who understand the energy economy and the trends in ECoEs, these were never realistic projections.

2.4. Renewables – imperative, but not an economic ‘fix’

As the ECoEs of FFs continue to rise, and as concern increases over the threat to the environment posed by emissions, many believe that a “transition” to renewable energy (RE) sources will transform the situation.

We should be in no doubt that, on economic as well as environmental grounds, transition to REs is imperative. Continued reliance on FF energy might or might not wreck the environment, but would definitely wreck the economy, as the ECoEs of oil, gas and coal continue their relentless increases.

There are, though, two reasons for doubting the ability of REs to underpin economic prosperity by driving overall ECoEs back down the parabola.

The first of these is that RE remains essentially derivative of FF energy. We cannot (yet, anyway), build a wind turbine using only wind power, or a solar panel using solar energy alone. For the foreseeable future, the development of RE capacity will remain reliant on inputs whose availability depends on the use of energy sourced from FFs.

This limits the potential for further reductions in the ECoEs of energy sources such as wind and solar power, tying these ECoEs to the (rising) energy costs of fossil fuels. This is why, as shown in fig. 4, it’s unrealistic to assume that the ECoEs of REs will fall indefinitely, the likelihood being that the linkage will limit further declines in RE ECoEs, and could start to push them back upwards.

This linkage is reflected in the truly gigantic costs (which have been put at between $95 and $110 trillion) of transitioning from an FF to an RE economy. It doesn’t help, of course, that we’re reluctant to accept that the structure of an economy powered by RE electricity must differ from one powered by FFs. In the transport sector, for example, the portability of oil has favoured cars, but trams would make far more sense in an economy powered by electricity.

Fig. 4

175-4 Segment ECoE

The second limiting factor for a transition of the industrial economy to REs is that their ECoEs may never be low enough.

SEEDS modelling indicates that prosperity turns down at ECoEs of between 3.5% and 5.0% in the advanced economies, and between 8% and 10% in the less-complex EM countries (see fig. 8 at the end of this report). The likelihood is that the ECoEs of renewables may fall no further than 8% (at best, with 10% more probable). This would certainly make REs competitive with FFs (on a straight ‘ECoE to ECoE’ comparison), but it wouldn’t be low enough to stem, still less to reverse, the decline in prosperity that is already taking place.

This leads us naturally to the subject of prosperity, but it’s necessary, first, to look at how financial manipulation (‘adventurism’) has simultaneously (a) failed to shore up “growth”, (b) obscured what’s really happening to the economy, and (c) created enormous systemic risk.

2.5. GDP – a victim of distortion

As we’ve seen, money acts simply as a claim on the goods and services produced by the energy economy. Unfortunately, though, the energy basis of all economic activity has never gained recognition at the level of official decision-making, which instead continues to adhere to, and act upon, the belief that economics is ‘the study of money’, and that energy is ‘just another input’.

Accordingly – and heavily influenced by the contemporary fashion for deregulation – the authorities responded to the onset of deceleration in the 1990s by labelling it “secular stagnation”, and trying to ‘fix’ it using monetary policies.

In the period preceding the 2008 global financial crisis (GFC), the emphasis was on ‘credit adventurism’, which involved making debt ever cheaper, and ever easier to obtain. The result was that, though the economy appeared robust, what was really happening was that apparent activity was being inflated by increases in credit. At the same time, world debt grew far more rapidly than reported GDP (see fig. 5), whilst risk not only increased, but became ever more diffuse and opaque.

When these trends triggered the GFC, the authorities set their faces against any kind of “reset”, opting instead to enact various forms of ‘monetary adventurism’. This hasn’t worked either, which is why the world entered the coronavirus crisis with (a) the financial system dangerously over-extended, and (b) no available policies, than those which have already failed so spectacularly.

From a surplus energy perspective, the critical point here is that borrowing has far exceeded “growth” through a twenty-year period in which average annual “growth” (of 3.5%) has been made possible by rates of borrowing which have averaged 9.5% of GDP (see the right-hand chart).

Fig. 5

175-5 World Fig. 2

This in turn means that a large proportion (more than half) of this “growth” has been cosmetic. This goes far beyond the simple ‘spending of borrowed money’, important though that has been. Monetary manipulation drives asset prices upwards, boosting the incomes of all of the many activities which are tied to assets. It also enables governments to provide services that, on an ex-borrowing basis, they could not afford to fund.

Even those people who haven’t piled on extra personal debt almost invariably have customers, or an employer, who has, whilst governments, by definition, borrow on behalf of all citizens.

The situation now is that, if debt was held at current levels (that is, it ceased to increase), global “growth” would slump, from a pre-crisis 3.5% to barely 1.0%.

If we tried to reduce debt to prior levels, much of the intervening “growth” would be reversed.

This leaves us with the third option of continuing to increase our debts, enabling incremental credit to keep flowing into the economy.

Unfortunately, this process creates a tension between liabilities and incomes which must result in one of two things happening. Either borrowers default on debts which they can no longer afford to service (let alone repay), or the authorities have to push so much new liquidity into the system that the value of currencies collapses in an inflationary spiral which constitutes ‘soft’ default.

Along the way, the collapse in returns on invested capital has played a major role in creating enormous gaps in pension provision, a situation that has rightly been dubbed a Global Pension Timebomb.

2.6. The economy – coming clean

What matters here is that financial manipulation, whilst it cannot (by definition) change the trajectory of energy-determined prosperity, can disguise the situation by manufacturing “growth” and “activity” through the creation of debt and other financial ‘claims’ that forward economic output will not be able to honour. (These are known as “excess claims” in SEEDS terminology, and are useful in the measurement of financial sustainability).

This gives us the choice of either (a) waiting for an enforced reset through a financial collapse, or (b) endeavouring to work out what is really happening to the economy behind the illusionary data presented, generally in good faith, to decision-makers, analysts and the public.

The latter course involves the calculation of underlying or ‘clean’ output by adjusting for the GDP distortion induced by credit and monetary adventurism. On this basis, we can identify clean growth, which averaged only 1.7% (rather than the reported 3.5%) between 1999 and 2019 (see fig. 6).

This provides a measure of underlying output (C-GDP) which, essentially, is what GDP would fall back to if we tried to deleverage the balance sheet back to prior levels of debt and other liabilities. Because debt is included in the right-hand chart in fig. 6,  both sides of the distortionary linkage are readily apparent.

Fig. 6

175-6 World Fig. 3

2.7. The prosperity dimension

With C-GDP established, the deduction of trend ECoE enables us to measure prosperity, whether nationally, regional and globally, either as an aggregate or in per capita terms. Prosperity data is illustrated in fig. 7, in which all charts are calibrated in constant value international dollars, converted from other currencies using the PPP (purchasing power parity) convention.

The left-hand and centre charts show a situation that will, by now, be familiar, with reported GDP deviating ever further from the underlying situation (C-GDP), whilst debt escalates, and rising ECoEs drive a widening wedge between C-GDP and prosperity. When, as in the centre chart, we calibrate debt, not against (increasingly meaningless) GDP, but against prosperity, we see how financial exposure, with its growing component of excess claims, has become totally out of control. This situation would look even more acute, of course, if either aggregate financial assets (a measure of exposure), and/or gaps in pension provision, were also depicted.

Rising asset prices provide no useful offset at all, because these are purely notional valuations – they cannot be monetised, because the only people to whom these assets in their entirety could ever be sold are the same people to whom they already belong.

The right-hand chart shows one aspect of the challenge facing governments, as the ability to raise taxes is squeezed by deteriorating prosperity. This presents governments with the choice between curbing their expenditures, or creating hardship (and provoking anger) by worsening the squeeze on discretionary (“left in your pocket”) prosperity.

Fig. 7

175-7 world prosperity debt tax

We can and do, of course, take this analysis a great deal further. SEEDS data and interpretation is used to spell out the implications of de-growth; the extraordinary stresses facing every sector from the corporate and the financial to the realms of politics and government; and the insights that can be gained by applying the SEE understanding to our environmental challenge.

It is hoped, though, that this resumé summarises the logic, methods and conclusions of the Surplus Energy Economics approach in a comprehensive but convenient form. As a final reminder of how energy economics (and ECoE in particular) connect with prosperity, fig. 8 shows the relationships between the two, identifying the levels of ECoE at which prosperity per capita has turned down in the United States and worldwide and was, pre-coronavirus, poised to turn down in China.

Essentially, once trend ECoEs rise above a certain point, the average person starts getting poorer – a trend which no amount of financial tinkering can alter.

Fig. 8

175-8 ECoE prosperity 2

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