The Powers of Fossil Fuels, an Update with Data per 2017

This post is an update and small expansion of The Powers of Fossil Fuels spanning more than two centuries of the history of the world’s energy, primarily fossil fuels (FF), consumption.

• Between 2002 and 2017 world energy consumption grew with about 39%, world Gross Domestic Product (GDP) by 130% and world total debts by more than 160% (market value and expressed in US dollars).
• The narrative of the growth story of the world economy (GDP) appears as a rule to leave out two participants:
  1. DEBT and the accelerating debt growth since the 1980’s, more notably since the start of this millennium and how this unprecedented growth in total world debt helped pull forward ENERGY demand.
     Post the Global Financial Crisis (GFC in 2008/2009) the continuity of economic growth became facilitated by concerted policies by the world’s major central banks by their low interest policies and Quantitative Easings (QE).
     Lower interest rates allowed room for more DEBT on most balance sheets and growth in total DEBT is important for continued economic growth.
  2. ENERGY (and primarily FFs) consumption and its strong growth facilitated by the rapid growth in DEBT.
• Simplistic explained is GDP a monetary measure of the annual volume of transactions.
  These transactions involve the exchange of products and services which require some input of ENERGY and in recent years growing amounts of DEBT allowed for this to happen.
  This illustrates that money/currency is a claim on ENERGY.
  The orderly retirement of the growing DEBT is a claim on future ENERGY.
• This post also takes a brief look at the recent years’ growth in solar and wind (renewables, RE) and how their growth measured up against FFs since 1990 and Year over Year (YoY) changes for FF and RE since 2000.

In the early 1800s biomasses (primarily wood) were humans’ primary source for exogenous energy. Coal was gradually introduced into the energy mixture after the successful development and deployment of the steam engine which gave birth to the Industrial Revolution. Coal is a nonrenewable, abundant and a denser energy source than wood.

The growing use of biomasses had led to deforestation in those areas serving energy intensive industries like mining and metals.

The steam engine and its use of abundant coal as an energy source made it possible to rapidly expand the industrial production, create economic growth and thus the Industrial Revolution was made possible by fossil fuels.

With the most recent discoveries and introduction of fossil oil and natural gas there appeared to be several abundant sources of volumetric dense energy that could entertain exponential debt fueled economic growth.

Fossil fuels represent natures’ legacy stock of dense energy (ancient sunlight) that during some decades has been subject to an accelerated depletion.

Several reports in the media may now leave the impression that we are at the threshold for a smooth transition from FFs to RE (solar and wind).

How does this measure up against hard data for RE (solar and wind) versus FFs?

Renewable energy is in a thermodynamic sense a misnomer.
A more precise description would be rebuildable energy harvesters and converters.

World energy consumption from solar and wind was about 2,4% of world total in 2017.

There is no doubt that renewable energy will have a role in our future, but the extent of its role is subject to much (heated) debate. For those that closely have followed my posts (here at Fractional Flow) will have found that I focus on some recurrent themes; oil (FF) prices/costs, growth in world total debt levels, interest rates, consumers’ affordability, fossil fuel companies’ financial health, central banks’ policies (most important the Federal Reserve Bank [FRB]), fiscal policies and some more.

By carefully studying the recent years growth in installations and consumption of RE (solar and wind) one can observe that their growth coincided as the world’s total debt grew strongly as interest rates were lowered and kept low (to allow for growth in total debt) and some governments allowed for competitive advantages for RE.

Despite all the technological improvements for RE that has brought their costs down (and further improvements are likely to follow), RE are, like FFs, also at the mercy of consumers’ affordability; that is the consumers’ ability to continue to access more and cheap credit/debt.

The chart shows that after the collapse of the oil and natural gas prices in 2014 (refer also figure 5) there was some substitution of natural gas for coal.

By comparing the growth between FFs and RE, it demonstrates how dependent our economies, our wealth and well beings are upon FFs. Looking at the growth in total FFs versus RE consumption since 1990 we should now ask ourselves if we truly are prepared to wean ourselves completely of FFs and transition into a life based on an energy budget made up from only RE (refer also figure 1).

In 2017 about 19% of the world’s total energy consumption came from biomasses, hydroelectric, solar, wind and other renewables.

The accelerated growth in fossil fuel and renewable consumption (as of 2002) happened as the world, led by China and the US, accelerated its growth in debt, refer also figures 6 and 7.

Debt allows for energy consumption to be pulled forward in time and (temporarily) pay for costlier energy.

With the global financial crisis (GFC) FF consumption declined in 2009. It came back with a vengeance in 2010 as primarily China and later the US embarked on an unprecedented growth in credit/debt, refer also figures 6 and 7.

Following the oil price collapse in 2014 prices for all FF’s came down (refer also figure 5) as did the YoY growth in FF consumption.

The higher YoY growth in FF consumption since 2016 was likely encouraged from lasting, lowered FF prices. However, growth in FFs was pronounced lower than in the previous years (exception being 2009).

During 2016 and 2017, and in absolute terms, FF consumption has grown faster than RE.

RE continued to grow much helped by lower system prices and low interest policies.

With the oil price collapse the US dollar strengthened versus several currencies like Euro and British Pounds which offset some of the price declines for FFs for several net importers of energy.

Is Energy Widely Recognized For Its Role In The GDP Growth Story?

 The speech “Growing, Fast and Slow” given by the Chief Economist of Bank of England (BoE) in 2015 mentions the steam engine and the Internal Combustion Engine (ICE) as participants for economic growth and energy is only found in the term “cognitive energy” on page 12, and this is not in relation to physical energy.

In the story of economic growth (GDP) from BoE the strong growth in debt has also not been mentioned.

Is Growth In The World’s Total Debt Widely Recognized For Its Role In The GDP Growth Story?

Figure 6 is from this article.

Note from figure 1 that world GDP had a high in 2014 which declined noticeably in 2015 and this happened with significantly lower energy prices. The lowered wholesale energy prices does not fully account for this GDP reduction.

 For the period 2002 – 2012 world energy consumption grew about 3 150 MTOE/a, while world total debt grew by about $120 Trillion. There can be no doubt that this growth in debt made possible the growth in energy consumption and provided some ease in a period with higher energy prices.

The collapse in energy prices from 2014 to 2015 provided some tailwinds to the world economy in 2015.

In 2016 and 2017 it took the addition of $4 – $5 of credit/debt to create $1 of additional GDP for the 43 economies (now represented in the BIS data) that made up more than 90% of the world’s GDP.

The oil price (Brent) increased from $44/bo in 2016 to $54/bo in 2017.

Statistics from BIS Credit to the non-financial sector.

In recent years credit/debt growth in China and USA was the main drivers of world economic growth and allowed for growth in energy consumption and helped negate higher prices. At some point in time the balance sheets for these economies will reach their limits for credit/debt.

The chart illustrates that China’s considerable increase in credit/debt creation from 2009 (when China surpassed US as the world’s biggest credit creator) made a major contribution to bring the global GDP growth back on its trajectory post the Global Financial Crisis (GFC) in 2008/2009.
China and its total credit creation in 2017 likely contributed its fair part in lifting the oil price about $10/bo from 2016 to 2017 as the oil market was on its way to rebalance, following the agreed supply cuts by OPEC and some cooperating nations and implemented as from the start of 2017.

How much room there is now left on the world’s balance sheet for further credit/debt expansion is anyone’s guesses.
Lower interest rates, expands the balance sheet and higher interest rates shrinks it.

At some point in time and for whatever reasons or combinations thereof there will be no more room on the global balance sheet.

 

What then?

And how will that affect energy consumption and prices?

 

FRACTIONAL FLOW by Rune Likvern