[R-G] [BillTottenWeblog] The Thermodynamic Economy

[Bill Totten]

by John Michael Greer

The Archdruid Report (June 24 2009)

Druid perspectives on nature, culture, and the future of industrial society


The last twelve months or so of economic chaos has taught those of us in
the peak oil community some useful lessons. Perhaps the most valuable of
these lessons is extent to which conventional economic ideas have failed
to make sense of the way that the twilight of fossil fuels is working out
in practice.

Not too long ago, it bears remembering, most people on all sides of the
peak oil debate - believers, skeptics, and everyone in between - assumed
that the law of supply and demand would necessarily define the world's
response to the end of cheap oil. As existing reserves depleted, nearly
everyone agreed, the intersection of decreasing supply and rising demand
would drive prices up. Common or garden variety cornucopians insisted that
this would lead to more drilling, more secondary extraction, and other
measures that would produce more oil and bring the price back down;
techno-cornucopians insisted that this would lead to the discovery of new
energy resources, which would produce more energy and bring the price back
down; green cornucopians insisted that this would finally make renewable
energy cost-effective, and at least keep the price from rising further;
and pessimists argued that none of these things would happen, and the
price of oil would rise steadily on up into the stratosphere.

None of them were right. Instead, as the world crossed the bumpy plateau
surrounding its 2005 production peak, oil prices moved up and down in
waves of increasing violence, culminating in a drastic price spike driven
in part by speculative greed, and followed by an equally drastic crash
driven in part by speculative panic. The shockwaves from that spike and
crash were not solely responsible for the economic power dive that
followed - most of a decade of hopelessly misguided fiscal policy,
criminal negligence in the banking and business sectors, and a popular
psychology of entitlement extreme even by the standards of past
speculative disasters, all had their own parts to play - but even a
financial world less shaky than the house of cards that imploded last year
would have had a hard time dealing with the body blow inflicted on it by
the oil spike and its aftermath.

The rubble from that collapse is still bouncing, even as politicians and
pundits insist that the worst is over and a recovery will follow shortly.
(This is not exactly comforting; the politicians and pundits of an earlier
day said exactly the same thing during the "sucker's rally" of 1930, when
stock markets and other economic indicators regained much of the ground
lost in 1929 before plunging catastrophically in the years that followed.)
One thing that's already become clear amid the dust and rubble, though, is
that models of the future that assumed a steady upward rise in prices
don't apply to the much more complex reality of spike and crash that is
shaping our energy future.

Somewhere in the midwest, perhaps, where a half-completed ethanol plant
whose parent company has gone bankrupt is being sold for scrap, and oil
leases bought for high prices last June sit unused because the current
price of oil won't justify their development, the dream of a smooth
market-driven transition to a different energy system is rolling across a
field with the tumbleweeds. Meanwhile the price of oil is continuing its
stubborn refusal to obey the laws of supply and demand. Demand has
dropped, as consumers and businesses caught in the economic downdraft cut
costs, and stockpiles are ample, but the price of oil has doubled since
its post-spike low, following a slow, ragged, but unmistakable upward
trend.

What makes this all the more fascinating is that oil has shown the same
habit of standing economic rules on their heads before. Back in the 1970s,
one of the great challenges facing the economics profession was the riddle
of stagflation. According to one of the most widely accepted rules of
macroeconomics, inflation and deflation - which can be defined precisely
as expansion and contraction, respectively, of the money supply - form two
ends of a continuum of economic behavior. Rising prices, rising wages, and
increased economic activity leading to overproduction are all signs of
inflation, while flat or declining prices and wages and diminished
economic activity leading to recession are all signs of deflation. In the
wake of the Seventies oil shocks, though, the industrial world found
itself in the theoretically impossible situation of an inflationary
recession: prices were rising, but wages struggled to keep pace, and
economic activity declined sharply.

That was stagflation. For more than a decade, economists tried to make
sense of the riddle it posed, before finally giving up with a certain
amount of relief in the Reagan years, and deciding that it was an anomaly
that had gone away and so didn't matter any more. To many of the
economists who tried to make sense of stagflation, it was clear enough
that the oil crises had had something to do with it, but this in itself
posed its own awkward questions. The economics of commodity prices had
been studied exhaustively since the time of Adam Smith, but the behavior
of the world economy in the face of rising oil prices violated everything
economists thought they knew.

Only a few economists at the time, and even fewer since then, realized
that these perplexities pointed to weaknesses in the most basic
assumptions of economics itself. E F Schumacher was one of these. He
pointed out that for a modern industrial society, energy resources are not
simply one set of commodities among many others. They are the
ur-commodities, the fundamental resources that make economic activity
possible at all, and the rules that govern the behavior of other
commodities cannot be applied to energy resources in a simplistic fashion.
Commented Schumacher in Small is Beautiful (1973):

"I have already alluded to the energy problem in some of the other
chapters. It is impossible to get away from it. It is impossible to
overemphasize its centrality [...] As long as there is enough primary
energy - at tolerable prices - there is no reason to believe that
bottlenecks in any other primary materials cannot be either broken or
circumvented. On the other hand, a shortage of primary energy would mean
that the demand for most other primary products would be so curtailed that
a question of shortage with regard to them would be unlikely to
arise." (page 123)

If Schumacher is right - and events certainly seem to be pointing that way
- at least one of the basic flaws of contemporary economic thought comes
into sight. The attempt to make sense of energy resources as ordinary
commodities misses the crucial point that energy follows laws of its
own	 that are distinct from the rules governing economic
activities. Trying to predict the economics of energy without paying
attention to the laws governing energy on its own terms - the laws of
thermodynamics - yields high-grade nonsense.

Look at the way that rules governing the availability of other resources
go haywire when applied to energy. When North America's deposits of
high-grade iron ore were exhausted, for example, the iron industry
switched over to progressively lower grades of ore; these contain less
iron per ton than the high-grade ores but are much more abundant, and
improved technology for extracting the iron makes up the difference. In
theory, at least, the supply of iron ore can never run out, since industry
can simply keep on retooling to use ever more abundant supplies of ever
lower-grade ores, right down to iron salts dissolved in the sea.

Try to do the same thing with energy, by contrast, and two awkward facts
emerge. First, the only reason the iron industry can use progressively
lower grades of ore is by using increasingly large amounts of energy per
ton of iron produced, and the same rule applies across the board; the
lower the concentration of the resource in its natural form, the more
energy has to be used to extract it and turn it into useful forms. Second,
when you try to apply this principle to energy, you very quickly reach the
point at which the energy needed to extract and process the resource is
greater than the energy you get out the other end. Once this point
arrives, the resource is no longer useful in energy terms; you might as
well try to support yourself by buying $1 bills for $2 each.

This difficulty can be generalized: where energy is concerned,
concentration counts for much more than quantity. That's a function of the
second law of thermodynamics: energy in a whole system always moves from
high concentrations to low. Within the system, you can get energy moving
against the flow of entropy, but only at the cost of reducing a larger
amount or higher concentration of energy to waste heat. That's how fossil
fuels came into existence in the first place; the vast majority of
hundreds of millions of years of energy from sunlight falling on
prehistoric plants were degraded to waste heat and radiated into outer
space, and in the process a very small fraction of that sunlight was
concentrated in the form of carbon compounds and buried underground.

The same rule of concentration explains a great many things that current
economic ideas miss. Consider the claims made every few years that we can
power the world off some relatively low-grade energy source. Latent heat
stored in the waters of the world's oceans, for example, could
theoretically provide enough power for the world's economy to keep it
running for some preposterously long period of time, and any number of
inventions have tried to tap that energy. They've all failed, because it
takes more energy to concentrate that heat to a useful temperature than
you get back from the process. The same is true a fortiriori of "zero
point energy", the energy potential that according to current physics
exists in the fabric of spacetime itself. It doesn't matter in the least
that there's an infinite amount of it, or something close to that; it's at
the lowest possible level of concentration, and thus utterly useless as a
power source for human society.

The same limits apply, if less strictly, to many of today's renewable
energy sources. Solar energy, for example, is very abundant, but it's also
very diffuse. As with any other energy resource, you can concentrate some
of it, but only by letting a larger quantity of it turn into waste heat.
It's quite common to hear the claim that because solar energy's so
abundant, our society can easily power itself by the sun, but this shows a
failure to grasp thermodynamic reality. Today's industrial societies
require very highly concentrated energy sources; our transportation
networks, our power grids, and most of the other ways we use energy, all
work by degrading very high concentrations of energy all at once into
waste heat, and without those highly concentrated resources, those things
won't work at all.

Now of course there are plenty of productive things that can be done with
more diffuse energy sources. Once again, solar energy provides a good
example. Passive solar heating for buildings is a mature and highly
successful technology; so is solar hot water heating; so are a good many
other specialized uses, such as using solar ovens for cooking, water
purification, and the like. All these can contribute mightily to the
satisfaction of human needs and wants, but they presuppose very different
social and economic arrangements than the centralized energy economy of
power plants, refineries, pipelines and power grids we have today. As
concentrated energy from fossil fuels becomes scarce, in other words, and
more diffuse energy from the sun and other renewable sources has to take
up the slack, many of the ground rules shaping today's economic decisions
will no longer apply.

What this implies, in turn, is that economics does not exist in a vacuum.
The ground rules just mentioned took shape, after all, in an age where
economic processes were dominated - one might even say "distorted" - by
our species' temporary access to extravagant supplies of cheap and highly
concentrated fossil fuel energy. The new ground rules of economics that
will take shape in the twilight of the age of cheap energy, in turn, will
be shaped by the fact that energy is once again scarce, costly, and
diffuse. More generally, it's necessary once again to pay attention to the
myriad ways that human economic systems are rooted in the wider processes
of the natural world - a theme that will be central to next week's post.

_____

John Michael Greer has been active in the alternative spirituality
movement for more than 25 years, and is the author of a dozen books,
including The Druidry Handbook (2006) and The Long Descent (2008). He
lives in Ashland, Oregon.

http://thearchdruidreport.blogspot.com/2009/06/thermodynamic-economy.html


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