The HSBC report’s specific forecasts of global oil supply and demand, which may or may not turn out to be accurate, are part of a wider story of global net energy decline.

A new scientific research paper authored by a team of European government scientists, published on Cornell University’s Arxiv website in October 2016, warns that the global economy has entered a new era of slow and declining growth. This is because the value of energy that can be produced from the world’s fossil fuel resource base is declining inexorably.

The paper – currently under review with an academic journal – was authored by Francesco Meneguzzo, Rosaria Ciriminna, Lorenzo Albanese, Mario Pagliaro, who collectively conduct research on climate change, energy, physics and materials science at the Italian National Research Council (CNR) — Italy’s premier government agency for scientific research.

According to HSBC, oil prices are likely to rise and stabilize for some time around the $75 per barrel mark due to the longer term decline in production relative to persistent demand. But the Italian scientists find that this is still too high to avoid destabilizing recessionary effects on the economy.

The Italian study offers a new model combining “the competing dynamics of population and economic growth with oil supply and price,” with a view to evaluate the near-term consequences for global economic growth.

Data from the past 40 years shows that during economic recessions, the oil price tops $60 per barrel, but during economic growth remains below $40 a barrel. This means that prices above $60 will inevitably induce recession.

Therefore, the scientists conclude that to avoid recession, “the oil price should not exceed a threshold located somewhat between $40/b [per barrel] and $50/b, or possibly even lower.”

More broadly, the scientists show that there is a direct correlation between global population growth, economic growth and total energy consumption. As the latter has steadily increased, it has literally fueled the growth of global wealth.

But even so, the paper finds that the world is experiencing:

“…declining average EROIs [Energy Return on Investment] for all fossil fuels; with the EROI of oil having likely halved in the short course of the first 15 years of the 21st century.”

EROI is the total value of energy a resource can generate, calculated by comparing the quantity of energy extracted, to the quantity of energy put in to enable the extraction.

This means that overall, despite total liquids production increasing, as the energy value it generates is declining, the overall costs of extraction are simultaneously increasing.

This is acting as an increasing geophysical brake on global economic growth. And it means the more the economy remains dependent on fossil fuels, the more the economy is tied to the recessionary impact of global net energy decline:

“The chance of future economic growth matching the current trajectory of the human population is inextricably bound to the wide and growing availability of highly concentrated energy sources enjoying broad applicability to energy end uses.”

The problem is that since the 1980s, the share of oil in the global energy mix has declined. To make up for this, economic growth has increasingly had to rely on clever financial instruments based on debt: in effect, the world is borrowing from the future to sustain our present consumption levels.

In an interview, lead author Dr. Francesco Meneguzzo explained:

“Global conventional oil peaked around the year 2005. All the following supply increase was due to unconventional oil exploitation and, since 2009, basically to US shale (tight) oil, which in turn peaked around March, 2015.



What looks like to be even more important, anyway, is the fact that global oil supply has failed to keep the pace with the increase in total energy consumption, which ‘natural’ growth requires to be approximately proportional to population increase, leading to the decline of the oil share in the energy mix. While governments have struggled to fuel their economies with ever increasing energy supply, other sources have steadily replaced oil in the energy mix, such as coal in China. Yet, no other conventional source has proved to be a valuable substitute for oil, hence the need for debt in order to replace the vanishing oil share.”

On a business as usual trajectory, then, the economy can quite literally never recover — unless it transitions to a truly viable new energy source which can substitute for oil.

“In order to avoid the [oil] price affordable by the global economy falling below the extraction cost, debt piling (borrowing from the future) becomes a necessity, yet it is a mere trick to gain some time while hoping for something positive to happen,” said Meneguzzo. “The reality is that debt, basically as a substitute for oil, does not work to produce real wealth, as apparent for example from the decline of the industry value added as a percentage of GDP.”

Where will this end up?

“Recently, debt has started shrinking, basically because it has failed to generate real wealth. Assuming no meaningful (and fast) transition to renewable energy, the economic growth can only deteriorate further and further.”

Basically, this means, Meneguzzo adds, “delocalizing manufacturing to economies using local, cheaper and dirtier energy sources (such as coal in China) as well as lower wages, further shrinking domestic aggregate demand and fueling a downward spiral of deflation and/or debt.”

Is there a way out? Not within the current trajectory: “Unless that debt is immediately used to exploit renewable sources on a massive scale, along with ‘accessories’ such as storage making them as qualified as oil, social and political derangements, even before an economic crash, look to be unavoidable.”

Crisis convergence

Seen in this broader scientific context, the HSBC global oil supply report provides quite stunning confirmation that for the most part, global oil production is already in post-peak. That much is incontrovertible, and derived from industry-validated data.

HSBC believes that after 2018, this is going to manifest in not simply a global supply shock, but a world in which cheap, high quality fossil fuels is increasingly hard to find.

We don’t need to accept this forecast dogmatically — the post-peak oil market, which HSBC confirms now exists, may function differently than what anyone can easily forecast.

But if HSBC’s forecast is accurate, here’s what it might mean. One possible scenario is that by 2018 or shortly thereafter, the world will face a similar convergence of global crises that occurred a decade earlier.

In this scenario, oil price hikes would have a recessionary affect that destabilizes the global debt bubble, which for some years has been higher than pre-2008 crash levels, now at a record $152 trillion.

In 2008, oil price shocks played a key role in creating pre-crisis economic conditions for consumers in which rising living costs helped trigger debt-defaults in housing markets, which rapidly spiraled out of control.

In or shortly after 2018, economic and energy crisis convergence would drive global food prices up, re-generating the contours of the triple crunch we saw ravage the world from 2008 to 2011, the debilitating impacts of which we have yet to recover from.

2018 is likely to be crunch year for another reason. 1 January 2018 is the date when a host of new regulations are set to come in force, which will “constrain lending ability and prompt banks to only advance money to the best borrowers, which could accelerate bankruptcies worldwide,” according to Bloomberg. Other rules to come in play will require banks to stop using their own international risk assessment measures for derivatives trading.

Ironically, the introduction of similar well-intentioned regulation in January 2008 (through Basel II) laid the groundwork to rupture the global financial architecture, making it vulnerable to that year’s banking collapse.

In fact, two years earlier in July 2006, Dr David Martin, an expert on global finance, presciently forecast that Basel II would interact with the debt bubble to convert a collapse of the housing bubble into a global financial conflagration.

Just a month after that prescient warning, I was told by a former senior Pentagon official with wide-ranging high-level access to the US military, intelligence and financial establishment that a global banking collapse was imminent, and would likely occur in 2008.

My source insisted that the event was bound up with the peak of global conventional oil production about two years earlier (which according to the UK’s former chief government scientist Sir David King did indeed occur around 2005, even though unconventional oil and gas production has offset the conventional decline so far).

Having first outlined my warning of a 2008 global banking collapse in August 2006, I re-articulated the warning in November 2007, citing Dr. Martin’s forecast and my own wider systems analysis at a lecture at Imperial College, London. In that lecture, I specifically predicted that a housing-triggered banking crisis would be sparked in the context of the new era of expensive fossil fuels.

I called it then, and I’m calling it now.

Some time after January 2018, we are seeing the probability of a new crisis convergence in global energy, economic and food systems, similar to what occurred in 2008.

In the end, I might be wrong. The crash might not happen in exactly 2018. It might happen later. Or it might be triggered by something else, something unexpected, that the model outlined here doesn’t capture.

The point of a forecast is not to be right — but to imagine a potential scenario based on the data available that one can reasonably prepare for; and to adjust the model accordingly in light of new data.

Whether or not a crash takes place in precisely the way suggested here, what’s clear from the new research is that the economy is hugely vulnerable to a financial crisis for reasons that conventional economists don’t talk about — reasons relating to the energy system on which the economy is fundamentally dependent.

Today, we are all supposed to quietly believe that the economy is in ‘recovery’, when in fact it is merely transitioning through a fundamental global systemic phase-shift in which the unsustainability of prevailing industrial structures are being increasingly laid bare.

The truth is that the cycles of protracted economic crisis are symptomatic of a deeper global systemic process.

One way we can brace ourselves for the next crash is to recognise it broadly for what it is: a symptom of global system failure, and therefore of the inevitable transition to a post-carbon, post-capitalist future.

The future we are stepping into simply doesn’t work the way we are accustomed to.

The old, industrial era rules for the dying age of energy and technological super-abundance must be re-written for a new era beyond fossil fuels, beyond endless growth at any environmental cost, beyond debt-driven finance.

This year, we can prepare for the post-2018 resurgence of crisis convergence by planting seeds — however small — for that future in our own lives, and with those around us, from our families, to our communities and wider societies.