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  • Writer's pictureSol J

When value disappears without a trace - understanding the "Energy Seneca"

Energy efficiency underpins all value in an economy - we explore some examples

We can all see evidence of energy in motion, but how many of us think about it when it is stationary? There is energy embodied in everything in our world, whether it is naturally occurring or man-made. Intuitively we know it, but to properly understand how an energy crisis leads to societal collapse we need to apply it to some practical examples.

"There can be economy only where there is efficiency" - Benjamin Disraeli

Imagine you are going to buy a car for personal transport purposes, just to get yourself from A to B. You're not particularly fussed about appearance, colour or size, model or anything else about the car and all other things being equal, the only real consideration is price. You're considering two cars below, a small economical coupe and a large gas guzzling saloon:

When fuel is extremely cheap, you would probably be largely indifferent to which one to choose. But imagine now there's a sharp upturn in fuel prices, what happens to your decision making criteria? Obviously the larger car is now less desirable and you would probably pivot towards the smaller car. Most of us have made a decision like this based on an economic rationale at some point in our life. Now we are going to expand on this theme to demonstrate that the value of everything relies on available net energy. Most importantly, we will show that energy has a multiplying effect that affects the value of assets not just in the present, but also the past and future value as well.

In our example, we can see that as the price of fuel rises and the desirability of the bigger car reduces, its market price will fall. As the price of fuel continues to go up there will eventually come a point where the big car is no longer practical for anyone to use and it will essentially become worthless as a car - in economic terms this is known as a "stranded asset" and it is now only worth its scrap value. Although the vehicle has retained the value of the basic materials, all the built-in value that derived from its usefulness as a vehicle has evaporated. This value is the historical energy input that went into making the car and included every part of the process, the minerals, the human labour, a portion of the plant construction costs, etc.

When we buy a car we are really buying the energy that goes into making the car, with the expectation that we will receive it back over the car's lifetime as energy saved in walking. The energy we put into the car allows us to unlock further energy from fuel to replace human energy. But if fuel for the car becomes too expensive and the efficiency of owning the car is lost, so is the future value of the money we spent on it.

Now what happens as fuel prices go up even further? Initially, there will be an increase in the price of the smaller car as the same group of buyers will be competing for the remaining smaller cars in the market. As the price of fuel continues to rise eventually our small car will suffer the same fate as the larger car - when the cost of fuel outweighs the benefits of owning the car, demand will dry up and the car will become worthless. The entire car market has collapsed. Regardless of the purchase price of the two cars, any value multiplied by zero is zero, so their original value multiplied by zero efficiency equals... zero.

This is what is happening in the world economy and it has been happening for some time. Energy is not a once off cost, it is an ongoing requirement in the maintenance of any object that has utility. Infrastructure maintenance, upgrades, expansions and general use require continuous inputs of energy and materials with their associated energy costs. If energy efficiency drops and net energy is reduced they will begin to decay.

Areas of the former Soviet Union, Detroit and other previously thriving economic zones owe their decline to a reduction in available energy due to passing a peak in system efficiency. In fact, Detroit owes its decline to the loss of its automotive industry, precisely because it was built on the back of high consumption vehicles. When the efficiency of the global oil supply chain passed its peak, demand for those cars disappeared and the whole Detroit economy went with it.

When a system or asset is in decline due to a failing energy supply chain, before it finally becomes a stranded asset, increased energy must be supplied to the system to keep it going until it must be abandoned altogether. In the case of our car example above, someone who already owns the large car will have to work extra hours or forego some other consumer item to cover the additional costs of running the car. The poorer, or those who have to drive further to work will be hit the earliest and the hardest. When they can no longer afford the fuel, they will sell the car at a loss and walk to work instead. Their labour and time in walking to work is now where their energy must be spent to acquire net energy in their lives. Their physical labour has replaced the energy they obtained from fuel. And the historical energy they put in as work to pay for the car has been lost.

Eventually even those who bought the more economical car will be in the same situation. Despite the fuel economy of the car, the energy cost of the fuel can no longer be justified by their income and eventually it is a better use of their time and money to get rid of the car and just walk to work. We end up with a decline in productive capacity, a shift to a labour based economy with reduced prosperity and useless infrastructure that cannot even be salvaged without incurring unaffordable costs. All the historical, present and future value has vanished from the whole system.

If we use this situation as a microcosm for the whole economy, it becomes clear that even to maintain a fixed standard of living requires continuous energy input to maintain and replace assets. All infrastructure has a fixed service life and must be replaced, but even in a maintenance economy if the cost of energy is rising due to increasing energy scarcity then eventually the economy will fail, commencing with the most inefficient points in the economy and hitting the poor first. It is the lower income earners in the heavily industrialised nation states that will be hit by inequity in the early stages of thermodynamic economy collapse.

This describes the effects we are seeing around the world now - social inequity leading to political tension and civil unrest. Inflation is the economist's compensatory mechanism for a heavy decline in energy efficiency, built on a fossil fuel backbone that now has very low net Energy Return On Investment (EROI). The more industrialised a nation is, the more energy it requires for sustenance and just like the bigger car in our example, it becomes valueless earlier than the smaller car. Declining EROI is the Great Levelling Event for affluent industrialised economies and must be the primary focus for sustainability.

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