[ This is the most brilliant and succinct paper I’ve ever seen that explains the interdependencies of our economic, energy, infrastructure, food, and other systems. It is so well-written that you ought to read the entire paper, my summary can’t do it justice. I’ve put most of the paper at the end of this post. There are 3 parts to this post: first my summary of Korowicz’s paper Tipping Point Near-Term Systemic Implications of a Peak in Global Oil Production, second Ashvin at TheAutomaticEarth, and finally much of the actual paper

A decline in energy flows will reduce global economic production; reduced global production will undermine our ability to produce, trade, and use energy; which will further decrease economic production.

Credit forms the basis of our monetary system, and is the unifying embedded structure of the global economy. In a growing economy debt and interest can be repaid, in a declining economy not even the principal can be paid back. In other words, reduced energy flows cannot maintain the economic production to service debt. Real debt outstanding in the world is not repayable, new credit will almost vanish.

Our localized needs and welfare have become ever-more dependent upon hyper-integrated globalized supply-chains. One pillar of their system-wide functioning is monetary confidence and bank intermediation. Money in our economies is backed by debt and holds no intrinsic value; deflation and hyper-inflation risks will make monetary stability impossible to maintain. In addition, the banking system as a whole must become insolvent as their assets (loans) cannot be realized, they are also at risk from failing infrastructure.

A failure of this pillar will collapse world trade. Our ‘local’ globalized economies will fracture for there is virtually nothing produced in developed countries that can be considered truly indigenous . The more complex the systems and inputs we rely upon, the more globalized they are, and the more we are at risk from a complete systemic collapse.

. The more complex the systems and inputs we rely upon, the more globalized they are, and the more we are at risk from a complete systemic collapse. Another pillar is the operation of critical infrastructure (IT-telecoms/ electricity generation/ financial system/ transport/ water & sewage) which has become increasingly co-dependent where a systemic failure in one may cause cascading failure in the others. This infrastructure depends upon continual re-supply; embodies short lifetime components; complex highly resource intensive and specialized supply-chains; and large economies of scale. They also depend upon the operation of the monetary and financial system. These dependencies are likely to induce rapid growth in the risk of systemic failure.

The high dependence of food on fossil fuel inputs, the delocalization of food sourcing, and lean just-in-time inventories could lead to quickly evolving food insecurity risks even in the most developed countries . At issue is not just food production, but the ability to link surpluses to deficits, collapsed purchasing power, and the ability to monetize transactions.

. At issue is not just food production, but the ability to link surpluses to deficits, collapsed purchasing power, and the ability to monetize transactions. Peak oil is likely to force peak energy in general . The ability to bring on new energy production and maintain existing energy infrastructure is likely to be severely compromised. We may see massive demand and supply collapses with limited ability to re-boot.

. The ability to bring on new energy production and maintain existing energy infrastructure is likely to be severely compromised. We may see massive demand and supply collapses with limited ability to re-boot. The above mechanisms are non-linear, mutually re-enforcing, and not exclusive.

We argue that one of the principal initial drivers of the collapse process will be growing visible action about peak oil. It is expected that investors will attempt to extract themselves from “virtual assets‟ such as bond, equities, and cash and convert them into “real‟ assets before the system collapses. But the nominal value of virtual assets vastly exceeds the real assets likely to be available. Confirmation of the peak oil idea (by official action), fear, and market decline will drive a positive feedback in financial markets.

A major collapse in greenhouse gas is expected, though it may be impossible to quantitatively model. This may reduce the risks of severe climate change impacts. However the relative ability to cope with the impacts of climate change will be much reduced as we will be much poorer with much lower resilience.

This will evolve as a systemic crisis; as the integrated infrastructure of our civilization breaks down. It will give rise to a multi-front predicament that will swamp governments‟ ability to manage. It is likely to lead to widespread disorientation, anxiety, severe welfare risks, and possible social breakdown. The report argues that a managed “de-growth‟ is impossible .

It is likely to lead to widespread disorientation, anxiety, severe welfare risks, and possible social breakdown. . We are at the cusp of rapid and severely disruptive changes . From now on the risk of entering a collapse must be considered significant and rising. The challenge is not about how we introduce energy infrastructure to maintain the viability of the systems we depend upon, rather it is how we deal with the consequences of not having the energy and other resources to maintain those same systems. Appeals towards localism, transition initiatives, organic food and renewable energy production, however laudable and necessary, are totally out of scale to what is approaching.

. From now on the risk of entering a collapse must be considered significant and rising. The transition from few market participants accepting the idea, and large-scale acceptance can be very rapid, though the onset of the fast transition can be difficult to predict. In other words: growing government, corporate, and public acceptance of peak oil, will initiate a fear-driven conversion of a mountain of paper virtual assets into a mole-hill of resilient real assets which will help precipitate an irretrievable collapse of the financial and economic system. Such a transition can be expected to be fear-driven and mutually re-enforcing. This is part of the reflexivity of markets, in George Soros’s phrase; or an example of a positive feedback, in the language of dynamical systems. In this context we can understand reported pressure placed upon the International Energy Agency by the United States to overstate future production in its World Energy Outlook 2009.

What seems more likely is that the risk of soverign defaults will rise, as will growing volatility in the currency markets, and growing stress in government finances. Growing credit constraints, declining productivity and further stress on public finances in many developed countries will hamper our ability to invest in renewable energy and other mitigating measures. Energy companies will find it harder to finance new production and maintain existing infrastructure as costs rise, prices and exchange rates remain volatile, and credit is expensive. Meanwhile discussion and actions regarding peak oil are likely to move participants along the cuve of the final frenzy, which may begin to drive up the price of certain land and other real assets, and constrict credit further.The end-point will be a collapse in bond and equity values. This is a result of various re-enforcing processes, including loss of confidence in debt repayment, monetary confidence, supply-chain disruption, evolving dis-economies of scale, and massive potential losses in discretionary consumption.The end result for market participants would be a rush to extract virtual assets (money, bonds, shares, derivative instruments) to convert them into productive, non-discretionary assets (resilient energy assets, land, farm tools, gold). However, there is a vast imbalance in their respective size. In all total paper assets are probably valued at over $300Tr, supported on a Gross World Product of about $55Tr, which itself must collapse.This means that there is a very small conversion window and that only a tiny fraction of investors will get out of virtual assets, to secure the small amount of real resilient assets.

Korowicz doesn’t see how much can be done at this point (see his conclusion for his main conclusions though):

Myth 1: we can dance on a pin. We are close to, and may have passed the peak of global oil production, we are in denial with no preparation, we have little time, torturous decision making structures, multiple competing interests, and live in a hyper-complex environment. We are locked into many welfare supporting structures. We are about to be hit by a full spectrum systemic crisis (in food security, mass unemployment, monetary system, global financial system, health, education, industry, security, public works, IT and communications…..). As this is far beyond what any government or civil society has ever anticipated and planned for, how can we be ready for it in the next year, maybe two?

Myth 2: Missing the Train. Once collapse begins we will lose the tools and infrastructure we would need to manage the collapse.

Myth 3: Potency. We may look at our complex civilization and say If we did this, and if we did this, we surely can do almost anything! However we did not do this intentionally, with a plan that was executed, it is a self-organized system. The complexity is beyond our comprehension or ability to manage.

Myth 4: Control. Governments do not control their own economies, neither does civil society. The corporate or financial sectors do not control the economies within which they operate. That they can destroy the economy should not be taken as evidence that they can control it (this author cannot drive a car, though he is quite confident he could crash one).

Myth 5: Lock-in. We are trapped in the current system. It has locked us into hyper-complex economic and social processes that are increasing our vulnerability, but which we are unable to alter without risking a collapse in those same welfare supporting structures. For example, our current just-in-time food system and agricultural practices are hugely risky. As the current economic crisis tightens we are driving further efficiencies and economies of scale, particularly in food production, as deflation drives costs down. This helps maintain social peace, and supports debt servicing, which supports our battered banks, whose health must be preserved, or the bond market might not show up to a government auction. Which all makes it very hard to do major surgery on our food production. There are countless examples of lock-in.

Myth 6: Uncertainty and Dynamical Chaos. Collapse breaks up the familiar stability of the processes we take for granted, and which provide the frameworks to make judgements about the consequences of actions. The release of stored energy within the complexity of the global economy by collapse, will make the prediction required for large scale control impossible to maintain.

Myth 7: Competing interests. Nationally and internationally we all hold different assets and liabilities (some carry deficits, some carry surpluses, some oil, some land, some have armies, and some think it.s all a conspiracy). From a game theoretic view, there is no stable solution that would give a fair distribution of risks and reward for everyone. Initiating a managed withdrawal, and instituting a new one, irrespective of complexity, would probably trigger a stampede. Financial Feedback We saw that one of our positive feedback processes was driven by market recognition of the problem. The more we do to prepare the more we confirm the hypothesis, which itself drives the collapse.

Myth 8: Stop Consuming/ Green Consuming. If we consume less of the trivial, we may reduce energy flows, but this will lead to rising unemployment and reduced discretionary income. We have also noted that the trivial cross-subsidizes the critical. So as the critical begins to decay, it will hamper our ability to manage the transition. We could mandate the redeployment of workers into new „green. businesses (an upfront cost-where are the credit lines?), with limited ramp-up rates. This would of course cost more energy, just as energy supplies are declining.

Myth 9: Monetary Magic. It is relatively easy to conceive and introduce a local non-debt based money system. It is quite another to unweave the current system from the operational fabric, while keeping the operational fabric viable continuously so that people can be fed, employment maintained, the trade system operational etc.; never mind doing it in a way that lets creditors, debtors, pension funds, and petro-dollars find a happy accommodation.

Alice Friedemann www.energyskeptic.com author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

[ashvin at theautomaticearth discusses some of the ideas in Korowicz’s discussion of systemic failure and interdependencies]

July 29, 2012 Ashvin on “How Will We Handle Our Losses?”

If you are like me, then you can’t help but stop and wonder how you would react in Job’s situation, or how the people around you would react. It is an especially important consideration in times like these, when those who have accumulated great wealth and status and comforts can easily be reduced to nothing in short order; when everything they take for granted, including their loved ones, can be taken away from them. Who among us would have the resolve of Job, never once lifting our hands in violence against others or ourselves, or losing Faith in a higher power?

The sad truth is that the world will be filled with Jobs over the next few decades – people who never knew the pain of severe, systematic loss before, but are quickly plunged into exactly those circumstances. There are certainly many people who are already starting to find themselves in such dreadful scenarios, but the numbers will only grow larger and “closer to home” over time. The threat of financial loss will be unprecedented, as will the threat of physical loss from natural disasters, human violence and disease (all things Job experienced).

Evidence of these converging crises is all around us, from the escalating financial/banking stress across the world to the sociopolitical unrest in the Eurozone, Middle East and Far East, to the rapid rates of air/water pollution, soil erosion, radiation poisoning, etc., to the droughts, famines and severe weather events, to the geopolitical uncertainty in the ME, and much, much more. These things are happening right now, and while there may be some positive developments occurring in the opposite direction, they are few and far between.

The global financial crisis by itself has the potential to produce devastating consequences across all spheres of modern life in our highly inter-connected, inter-dependent world. Our global systems have been designed to take crises that may initially effect only one specific area and magnify its impact and generalize the resulting losses throughout the entire world. That fact was illustrated nicely by the latest report from David Korowicz entitled, Trade-Off: Financial system supply-chain cross contagion (a study in global systemic collapse).

Overview

This study considers the relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalized economy. It outlines how contagion in the financial system could set off semi-autonomous contagion in supply-chains globally, even where buyers and sellers are linked by solvency, sound money and bank intermediation. The cross-contagion between the financial system and trade/production networks is mutually reinforcing.

It is argued that in order to understand systemic risk in the globalized economy, account must be taken of how growing complexity (interconnectedness, interdependence and the speed of processes), the de-localization of production and concentration within key pillars of the globalized economy have magnified global vulnerability and opened up the possibility of a rapid and large-scale collapse. ‘Collapse’ in this sense means the irreversible loss of socio-economic complexity which fundamentally transforms the nature of the economy. These crucial issues have not been recognized by policy-makers nor are they reflected in economic thinking or modelling.

As the globalized economy has become more complex and ever faster (for example, Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalized massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centering on some of the most complex and trade central parts of the globalized economy.

The argument that a large-scale and globalized financial-banking-monetary crisis is likely arises from two sources. Firstly, from the outcome and management of credit over-expansion and global imbalances and the growing stresses in the Eurozone and global banking system. Secondly, from the manifest risk that we are at a peak in global oil production, and that affordable, real-time production will begin to decline in the next few years. In the latter case, the credit backing of fractional reserve banks, monetary systems and financial assets are fundamentally incompatible with energy constraints. It is argued that in the coming years there are multiple routes to a large-scale breakdown in the global financial system, comprising systemic banking collapses, monetary system failure, credit and financial asset vaporization. This breakdown, however and whenever it comes, is likely to be fast and disorderly and could overwhelm society’s ability to respond.

We consider one scenario to give a practical dimension to understanding supply-chain contagion- a break-up of the Euro and an intertwined systemic banking crisis. Simple argument and modelling will point to the likelihood of a food security crisis within days in the directly affected countries and an initially exponential spread of production failures across the world beginning within a week. This will reinforce and spread financial system contagion. It is also argued that the longer the crisis goes on, the greater the likelihood of its irreversibility. This could be in as little as three weeks.

This study draws upon simple ideas drawn from ecology, systems dynamics, and the study of complex networks to frame the discussion of the globalized economy. Real-life events such as United Kingdom fuel blockades (2000) and the Japanese Tsunami (2011) are used to shed light on modern trade vulnerability.

I have altered and cut out some of what follows (as I do in nearly all of my posts)

David Korowicz. 15 Mar 2010. Tipping Point Near-Term Systemic Implications of a Peak in Global Oil Production. Feasta & The Risk/Resilience Network.

Tipping Point

Near-Term Systemic Implications of a Peak in Global Oil Production

Summary

The credit crisis exemplifies society’s difficulties in the timely management of risks outside our experience or immediate concerns, even when such risks are well signposted. We have passed or are close to passing the peak of global oil production. Our civilization is structurally unstable to an energy withdrawal. There is a high probability that our integrated and globalized civilization is on the cusp of a fast and near-term collapse.

As individuals and as a social species we put up huge psychological defenses to protect the status quo. We’ve heard this doom prophesied for decades, all is still well! What about technology? Rising energy prices will bring more oil! We need a Green New Deal! We still have time! We’re busy with a financial crisis! This is depressing! If this were important, everybody would be talking about it! Yet the evidence for such a scenario is as close to cast iron as any upon which policy is built: Oil production must peak; there is a growing probability that it has or will soon peak; energy flows and a functioning economy are by necessity highly correlated; our basic local needs have become dependent upon a hyper-complex, integrated, tightly-coupled global fabric of exchange; our primary infrastructure is dependent upon the operation of this fabric and global economies of scale; credit is the integral part of the fabric of our monetary, economic and trade systems; a credit market must collapse in a contracting economy, and so on.

We are living within dynamic processes. It matters little what technologies are in the pipeline, the potential of wind power in some choice location, or that the European Commission has a target; if a severe economic and structural collapse occurs before their enactment, then they may never be enacted.

Our primary question is what happens if there is a net decrease in energy flow through our civilization? For it is absolutely dependent upon increasing flows of concentrated energy to evolve and grow, and to form and maintain its complex structures. The rules governing energy and its transformation, the laws of thermodynamics, are the inviolate framework through which all things happen- the evolution of the universe, the direction of time, life on earth, human development, the evolution of civilization, and economic processes. This point is not rhetorical, access to increasing flows of concentrated energy, which can be transformed into work and dispersed energy, is the foundation upon which our civilization stands. Yet we are at a point where these flows are, with high probability, about to begin decreasing. We should intuit that an energy withdrawal should have major systemic implications, for without energy flows nothing happens.

The key to understanding the implications of peak oil is to see it not just directly through its effect on transport, petrochemicals, or food say, but its systemic effects. A globalizing, integrated and co-dependent economy has evolved with particular dynamics and embedded structures that have made our basic welfare dependent upon delocalized ‘local’ economies. It has locked us into hyper-complex economic and social processes that are increasing our vulnerability, but which we are unable to alter without risking a collapse in those same welfare supporting structures. And without increasing energy flows, those embedded structures, which include our expectations, institutions and infrastructure that evolved and adapted in the expectation of further economic growth cannot be maintained.

In order to address these questions, the following paper considers the nature and evolution of this complex integrated globalised civilisation from which energy is being withdrawn. Some broad issues in thermodynamics, the energy-economy relationship, peak oil, and the limits of mitigation are reviewed. It is argued that assumptions about future oil production as held by some peak oil aware commentators are misleading. We draw on some concepts in systems dynamics and critical transitions to frame our discussion.

The economics of peak oil are explicated using three indicative models: linear decline; oscillating decline; and systemic collapse. While these models are not to be considered as mutually exclusive, a case is made that our civilisation is close to a critical transition, or collapse. A series of integrated collapse mechanisms are described and are argued to be necessary. The principal driving mechanisms are re-enforcing (positive) feedbacks:

1) A decline in energy flows will reduce global economic production; reduced global production will undermine our ability to produce, trade, and use energy; which will further decrease economic production.

2) Credit forms the basis of our monetary system, and is the unifying embedded structure of the global economy. In a growing economy debt and interest can be repaid, in a declining economy not even the principal can be paid back. In other words, reduced energy flows cannot maintain the economic production to service debt. Real debt outstanding in the world is not repayable, new credit will almost vanish.

3) Our localized needs and welfare have become ever-more dependent upon hyper-integrated globalised supply-chains. One pillar of their system-wide functioning is monetary confidence and bank intermediation. Money in our economies is backed by debt and holds no intrinsic value; deflation and hyper-inflation risks will make monetary stability impossible to maintain. In addition, the banking system as a whole must become insolvent as their assets (loans) cannot be realised, they are also at risk from failing infrastructure.

4) A failure of this pillar will collapse world trade. Our ‘local’ globalised economies will fracture for there is virtually nothing produced in developed countries that can be considered truly indigenous. The more complex the systems and inputs we rely upon, the more globalised they are, and the more we are at risk from a complete systemic collapse.

5) Another pillar is the operation of critical infrastructure (IT-telecoms/ electricity generation/ financial system/ transport/ water & sewage) which has become increasingly co-dependent where a systemic failure in one may cause cascading failure in the others. This infrastructure depends upon continual re-supply; embodies short lifetime components; complex highly resource intensive and specialized supply-chains; and large economies of scale. They also depend upon the operation of the monetary and financial system. These dependencies are likely to induce rapid growth in the risk of systemic failure.

6) The high dependence of food on fossil fuel inputs, the delocalisation of food sourcing, and lean just-in-time inventories could lead to quickly evolving food insecurity risks even in the most developed countries. At issue is not just food production, but the ability to link surpluses to deficits, collapsed purchasing power, and the ability to monetize transactions.

7) Peak oil is likely to force peak energy in general. The ability to bring on new energy production and maintain existing energy infrastructure is likely to be severely compromised. We may see massive demand and supply collapses with limited ability to re-boot.

8) The above mechanisms are non-linear, mutually re-enforcing, and not exclusive.

9) We argue that one of the principal initial drivers of the collapse process will be growing visible action about peak oil. It is expected that investors will attempt to extract themselves from ‘virtual assets’ such as bond, equities, and cash and convert them into „real. assets before the system collapses. But the nominal value of virtual assets vastly exceeds the real assets likely to be available. Confirmation of the peak oil idea (by official action), fear, and market decline will drive a positive feedback in financial markets.

10) We outline the implications for climate change. A major collapse in greenhouse gas is expected, though may be impossible to quantitatively model. This may reduce the risks of severe climate change impacts. However the relative ability to cope with the impacts of climate change will be much reduced as we will be much poorer with much lower resilience.

This will evolve as a systemic crisis; as the integrated infrastructure of our civilisation breaks down. It will give rise to a multi-front predicament that will swamp governments. ability to manage. It is likely to lead to widespread disorientation, anxiety, severe welfare risks, and possible social breakdown. The report argues that a managed .de-growth. is impossible.

We are at the cusp of rapid and severely disruptive changes. From now on the risk of entering a collapse must be considered significant and rising. The challenge is not about how we introduce energy infrastructure to maintain the viability of the systems we depend upon, rather it is how we deal with the consequences of not having the energy and other resources to maintain those same systems. Appeals towards localism, transition initiatives, organic food and renewable energy production, however laudable and necessary, are totally out of scale to what is approaching.

There is no solution, though there are some paths that are better and wiser than others. This is a societal issue, there is no .other. to blame, but the responsibility belongs to us all. What we require is rapid emergency planning coupled with a plan for longer-term adaptation.

1. Introduction

The current financial crisis is contained within a framing narrative, most particularly that the crisis will end and global economic growth will return to its upward trend. Economists may argue about the extent and depth of the recession, but not on its inevitable passing. That is, economic growth is the natural order of things provided bad policy or recklessness do not derail it. Indeed throughout society our assumption of continued growth is implicit within our pensions, government finances, economic and monetary structures, climate and energy policy, research and development, expectations about the Smart Economy, the Health service, a Green New Deal, globalisation, and in the range of expectation we have about the rise of China, our own futures and those of our children. Through the experience of 200 years of globalising economic growth, we have come to embody its processes in how we live and understand the world.

The assumption of future growth implies the energy and material flows to support it are available. As individuals, energy in the form of food allows us to live. Our civilisation, and the economy which supports it, require flows of energy to function. The crucial difference is that once humans reach maturity their energy intake stabilizes, however our evolved economic structures are adaptive only to growing. And because economic growth is exponential, each year’s growth of say 3% is bigger than the previous year’s 3% growth. So even as energy use in the global economy may have become somewhat more efficient, it continues to rise.

There is growing concern, as expressed by Macquarie Bank, Goldman Sachs, consultants McKinsey, the International Energy Agency and the Saudi Oil minister Ali Naimi amongst others, that as the global economy begins to recover we will experience another rise in oil prices which will choke off further growth or in the words of Ali Naimi, constrained or declining oil production will “take the wheels of an already derailed global economy” 1,2. These warnings chime with a recent survey report by the UK Energy Research Council (UKERC) which warned of a “significant risk” of a peak and subsequent decline in global oil production before 20203. A growing number of analysts have been arguing that we have already passed the peak and that continuous declines are imminent4. Former head of exploration & production at Saudi Aramco, Sadad al-Huseini has said that we have already reached maximum sustainable production 5. What are important are flows of oil, not the promises of fields or other substitutes yet to be developed; no more than the promise of water a thousand miles away is relevant to a man dying of thirst. While we will focus here on oil, we are probably close to peak natural gas, and peak energy in general 6,7. Though as we shall see, peak oil is likely to force a peak on other concentrated energy carriers.

If peak oil is imminent or medium-term, we have neither the time nor the resources to substitute for oil, or invest in conservation and efficiency, a point re-iterated in the UKERC report. It is not merely that the net energy, material and financial resources we need to adapt will be in shorter supply, or that we are replacing high quality energy sources with lower quality ones. Nor is it that the productive base for deploying alternative energy infrastructure is small with limited ramp-up rates, or that it competes with food. Nor even that as the global credit crisis continues with further risks ahead, ramping up financing will remain difficult while many countries struggle with ballooning deficits and pressing immediate concerns. But, once the effects of decline become apparent, we will lose much of what we might call the operational fabric of our civilization. The operational fabric comprises the given conditions at any time that support system wide functionality. This includes functioning markets, financing, monetary stability, operational supply-chains, transport, digital infrastructure, command & control, health service, institutions of trust, and sociopolitical stability. It is what we casually assume does and will exist, and which provides the structural foundation for any project we wish to develop. For example, near future degradation and collapse of the operational fabric may mean that we already have in place a significant fraction of the renewable energy infrastructure which will ever be in place globally.

It may at first seem counter-intuitive, how could a potential small yearly decline in energy flows through the global economy, which integrates our global civilization, lead to a major collapse? Especially as we tend to assume that as a society we are resilient, adaptive, and innovative, especially in times of crisis. To understand this we need to understand our growing globalizing economy has evolved a very particular and unique structural form which we and our institutions participate in, but cannot control. And this structural form is adaptive to economic growth. If an energy constraint means it cannot grow, it does not just get smaller, it starts to break up. What is more, we can pinpoint directly some of the major mechanism of collapse dynamics and some of the associated timing issues. The challenge is to see our civilization outside the cultural narratives that grew out of and affirm its inevitability.

Peak oil is expected to be the first ecological constraint to impact significantly on the advanced infrastructure of the globalised economy. However it is only one part of an increasingly integrated web of constraints on fresh water, bio-diversity loss, soil and fertility loss, key mineral shortages, and climate change. In such a context it makes little sense to compartmentalize our focus as we see through the UN Framework Convention on Climate Change processes, for example. The interwoven nature of our predicament is clear, for example, in the green revolution of the 1960s which supposedly „solved. the increasing pressure on food production from a growing population. Technology was marshaled to put food production onto a fossil fuel platform, which allowed further population overshoot and thus a more general growth in resource and sink demands. The result is that even more people are more vulnerable as their increased welfare demands are dependent upon a less diverse and more fragile resource base. As limits tighten, we are responding to stress on one key resource (say reducing greenhouse gas emissions or fuel constraints with biofuels) by displacing stresses on other key resources that are themselves already under strain (food, water). This demonstrates how little adaptive capacity we have left.

For at least four decades laws have been passed, targets set out, treaties signed, technologies developed, and the public cajoled to limit our collective demand on an array of major human ecosystem services and resources. Yet despite this, growing damage and unsustainable resource use has consistently far outweighed our limited successes. The hopeful optimism that continues to drive these processes has begun to resemble a ritualized maintenance of collective denial.

We are attempting to solve these problems within systems that are themselves driving the problem. Furthermore, we are effectively trapped or locked into these systems. We are embedded within economic and social systems whose operation we require for our immediate welfare. But those systems are too interconnected and too complex to comprehend, control and manage in any systemic way that would allow a controlled contraction while still maintaining our welfare. There is no possible path to sustainability or planned de-growth.

The argument we are making in this paper is that an energy withdrawal is likely to initiate a series of processes that will lead to a major collapse in our civilisation. When we talk of systemic collapse, we are referring to major abrupt changes that cause many integrated and co-dependent systems to re-enforce each-others failure. In our context, we see it as a relatively sudden loss of complexity, and a jump to a new stable state.

The idea of collapse is not new, indeed its mythic spectre has probably always been a feature of civilisations 8. In 1972, the famous Limits to Growth argued that economic growth could not continue indefinitely in a world of finite resources and limited sink capacity for our waste. It deployed simple scenarios and early examples of systems modeling to argue that a continuation of business-as-usual would lead to a limit to global economic growth, and thereafter a long slow decline9. Later, authors were more explicit about collapse. They cited ecological constraints as a cause, but also the interaction between the structural, functional, institutional, and behavioral conditions of society. Among the most important studies are Overshoot by William Catton, and The Collapse of Complex Societies by Joseph Tainter 10,11. In recent years the genre has caught the attention of the reading public with the works of Jared Diamond, Richard Heinberg and others 12,13,14,15,16. The web-based ‘think-tank’, The Oil Drum has often had lively and informed debates on these issues. 17

To the public and to the media, anyone who proclaims “the end of the world is nigh” is likely to be seen as deluded or quite mad (that is not what is being claimed here). The dominant social narrative soon re-asserts itself with re-assuring nods towards our collective genius, technology, the shibboleths of our time, or the minor history of our collective wisdom. The intuitive retort that there must be „a solution., or facile expressions of the need for „hope. represent a failure to understand the imminent material reality of our own predicament.

This report outlines why we may be close to a global systemic collapse in our economy, and by extension, our civilisation. It is written as an overview accessible to non-specialists. Where arguments and debates do not alter the principal conclusions, they are alluded to but not picked over. We have deliberately not written a “what to do” section, so that readers can concentrate on thinking about the nature of our predicament. All too often there is a rush to ‘solutions’ before the context is understood, with the result that the proposed solutions are totally mal-adaptive to the most likely scenarios.

2. Energy & Stability in the Global Economy

2.1 Energy and Economic Growth

All evolving systems, life, economies, and civilisations require flows of energy through them to maintain their structure and to allow growth. We see this not just in our ability to run cars, and keep lights and machines running, it is embodied in the things we use such as food, water, and mobile phone components. If we do not maintain flows of energy (directly or by maintenance and replacement) through systems we depend upon, they decay.

The self-organisation and biodiversity of life on earth is maintained by the flows of low entropy solar energy that irradiate our planet as it is transformed into high entropy heat radiating into space. Likewise our complex civilisation has formed from the transformation of the living bio-sphere and the fossil reserves of ancient solar energy into useful work, and the entropy of waste heat energy, greenhouse gasses, and pollution that are the necessary consequences of the fact that no process is perfectly efficient.

The first law of thermodynamics tells us that energy cannot be created or destroyed. But energy can be transformed. The second law of thermodynamics tells us that all processes are winding down from a more concentrated and organised state to a more disorganised one, or from low to higher entropy. We see this when our cup of hot coffee cools to the room’s ambient temperature, and when humans and their artifacts decay to dust. The second law defines the direction in which processes happen. In transforming energy from a low entropy to a higher entropy state, work can be done, but this process is never 100% efficient. Some heat will always be wasted and be unavailable for work. This work is what has built and maintains life on earth and our civilisation. Exergy is the name given to the maximum amount of work that can be done by a system, which is a function of the energy concentration gradient between the source and its environment. In the process of transforming energy, entropy increases and exergy decreases.

So how is it that an island of locally concentrated and complex low entropy civilization can form out of the universal tendency to disorder? The answer is by supplying more and more concentrated energy flows in to keep the local system further and further away from the disorder to which it tends. The evolution and emergence of complex structures maximizes the production of entropy in the universe (local system plus everywhere else) as a whole. Clearly if growing and maintaining complexity costs energy, then energy supply is the master platform upon which all forms of complexity depends 18.

The correlation between energy use and economic and social change should therefore come as no surprise. The major transitions in the evolution of human civilisation, from hunter-gatherers, through the agricultural, industrial, the green revolution to the information age have been predicated on revolutions in the quality and quantity of energy sources used.

We can see this through an example. According to the 1911 Census of England & Wales, the three largest occupational groups were domestic service, agriculture, and coal mining. By 2008, the three largest groups were sales personnel, middle managers, and teachers19. What we can first notice is one hundred years ago much of the work done in the economy was direct human labour. And much of that labour was associated directly with harnessing energy in the form of food or fossil fuels. Today, the largest groups have little to do with production, but are more focused upon the management of complexity directly; or indirectly through providing the knowledge base required of people living in a world of more specialised and diverse occupational roles.

What evolved in the intervening hundred years was that human effort in direct energy production was replaced by fossil fuels. The contribution of fossil fuels to the economy can be expressed as being energetically equivalent to a huge slave supplement to our economy. The energy content of a barrel of oil is equivalent to twelve years of adult labour at forty hours a week. Even at $100 /bl, oil is remarkably cheap compared with human labour. As fossil fuel use increased, human labour in agriculture and energy extraction fell, as did the real price of food and fuel. These price falls freed up discretionary income, making people richer. And the freed up workers could provide the more sophisticated skills required to build the discretionary consumer production which rested itself upon fossil fuels inputs, other resources, and innovation.

In energy terms a number of things happened. Firstly, we were accessing highly concentrated energy stores in growing quantities. Secondly, fossil fuels required little energy to extract and process. That is, the net energy remaining after the energy cost of obtaining the energy was very high. Thirdly, the fuels used were high quality, especially oil, which was concentrated and easy to transport at room temperature; or the fuels could be converted to provide very versatile electricity. Finally, our dependencies co-evolved with fossil fuel growth, so our road networks, supply-chains, settlement patterns and consumer behavior, for example, became adaptive to particular energy vectors and the assumption of their future availability.

The growth and complexity of our civilisation, of which growing Gross World Product (GWP) is a primary economic indicator, is fundamentally a thermodynamic system. As such our economies are subject to fundamental laws. Such fundamental relationships are distinct from the culturally and economically contingent observations found say, within economic discourse.

In neo-classical models of economic growth, energy is not considered a factor of production. It is assumed that energy is non-essential and will always substitute with capital. This assumption has been challenged by researchers who recognize that the laws of physics must apply to the economy, and that substitution cannot continue indefinitely in a finite world. Such studies support a very close energy-growth relationship. They see rising energy flows as a necessary condition for economic growth, which they have demonstrated historically and in theory (20,21,22). It has been noted that there has been some decoupling of GWP from total primary energy supply since 1979 but much of this perceived de-coupling is removed when energy quality is accounted for (23).

It is sometimes suggested that energy intensity (energy/unit GDP) is stabilising, or declining a little in advanced economies, a sign to some that local de-coupling can occur. This confuses what are local effects with the functioning of an increasingly integrated global economy. Advanced knowledge and service economies may not do as much of the energy intensive raw materials production and manufacturing as before; but their economies are dependent upon the use of such energy intensive products manufactured elsewhere, and the prosperity of the manufacturers.

2.2 Recent Short-term Energy-Economy Correlation

The current financial crisis was initiated by a bubble in the credit markets, driven by cheap money, financial innovation, and the perennial desire of people to make money while the going was good. This much is true, but it is not a sufficient explanation. Since 2005 global oil production has been essentially flat. Even as oil prices rose, production remained stagnant. Jeff Rubin, former chief economist of CIBC notes that four of the five last recessions followed an oil price spike. When oil was at $135 per barrel, the US was spending the equivalent of $1Trillion per annum for oil, which is equivalent to 15% of US take-home pay for all taxpayers, nor does this percentage account for indirect rises associated with food (highly fossil-fuel dependent, and competitive with bio-fuels), and natural gas (price correlated). This hit discretionary consumption and put pressure on peoples. ability to service their loans. The second element was that higher oil prices meant more money flowed out of the hands of those who spent what they had into the hands of savers in rich oil producing countries. Even if those savings were re-cycled through Wall Street, they leaked out of general consumption.

Work by James Hamilton also demonstrates the recent economic impacts of oil price rises (24). He shows that the recent oil price spike was ‘indisputably a contributing factor’ to the current recession. He argues that the rise in oil prices should properly be seen as a combination of flat oil production and pent-up demand, demand inelasticity, all magnified by speculation in the futures markets.

To summarise, the close relationship between economic growth and energy flows that we would expect from the laws of thermodynamics are confirmed in long run macro-economic correlations, and in the relationship between energy price spikes and recessions.

2.3 Peak Oil

Oil contributes to about 40% of global energy production, but over 90% of all transport fuel. It provided the physical linkages of good and people across the globalized economy. Peak oil is the point in time when global oil production has reached a maximum and thereafter it enters a period of terminal decline.

The phenomena of peaking, be it in oil, natural gas, minerals, or even fishing is an expression of the following dynamics. With a finite resource such as oil, we find in general that which is easiest to exploit is used first. As demand for oil increases, and knowledge and technology associated with exploration and exploitation progresses, production can be ramped up. New and cheap oil encourages new oil-based products, markets, and revenues, which in turn provide revenue for investments in production. For a while this is a self-re-enforcing process. Countervailing this trend is that the energetic, material and financial cost of finding and exploiting new production starts to rise. This is because as time goes on new fields become more costly to discover and exploit as they are found in smaller deposits, in deeper water, in more technically demanding geological conditions, and require more advanced processing.

Oil production from individual wells peak, and then decline. So must production from fields, countries, and the globe. Two-thirds of oil producing countries have already passed their local peak. For example, the United States peaked in 1970, and the United Kingdom in 1999 and decline has continued in both cases. It should be noted that both countries contain the worlds. best universities, most dynamic financial markets, most technologically able exploration and production companies, and stable pro-business political environments. Nevertheless, in neither case has decline been halted.

As large old fields producing cheap oil decline, more and more effort must be made to maintain production with the discovery and production from smaller and more expensive fields. In financial terms, adding each new barrel of production (the marginal barrel) becomes more expensive. Sadad al-Huseini said in 2007 that the technical floor (the basic cost of producing oil) was about $70 per barrel on the margin, and that this would rise by $12 per annum (assuming demand was maintained by economic growth) (25). This rapid escalation in the marginal cost of producing oil is recent. In early 2002, the marginal barrel was $20.

It is sometimes argued that there are huge potential oil reserves in the Canadian tar sands, for example. The question is then at what rate can oil be made available from it, what is the net energy return, and can society afford the cost of extraction. And if less energy from oil were to make us very much poorer we could afford even less. Eventually, production would become unviable as economics could no longer afford the marginal cost of a barrel. In a similar vein, our seas contain huge reserves of gold but it is so dispersed that the energetic and financial cost of refining it would far outweigh any benefits (Irish territorial waters contain about 30 tons).

The question, where it has been considered, is around the timing of a production peak and the decline rate. A variety of assessment methodologies and secretive data ensure there is room for debate. Nor should we assume that cultural assumptions and the stakes involved play no part in estimates. We outline a general risk assessment framework for dealing with diverse estimates in the appendix. Projected decline rate estimates range from 2-3% per annum27. This gross rate is made up from the decline in old large fields, and the increase in production from new smaller fields, enhanced oil recovery, and new non-conventional production brought on stream. Clearly there are assumptions in this figure, about the future ability to bring on new production and to maintain existing production, and about the ability of society to pay for it. We shall come back to this issue in section 2.5.

2.4 Energy, Net Energy, & Society

It requires energy to get energy. Energy Return on Investment (EROI) is the ratio of useful energy obtained from a source relative to the direct and indirect energy used to obtain it. Net Energy is the energy you have left after the energy „cost. of production. If EROI is less than one, it is a sink. However human society could not have evolved had it relied upon energy sources with very low EROI. Our ancestors living in the simplest tribal societies required a large enough surplus to reproduce, look after children, keep warm, and fight off predators. Modern hunter-gatherers, such as the !Kung of the Kalahari desert, have been estimated to live off an EROI of 10:128. Energy surplus is a combination of the energy density available and EROI. So that hunter-gatherers may have had a high EROI, but if they lived in an area with a low prey animal density, then their surplus energy might be relatively low. Early agricultural civilisation probably had a much lower EROI than hunter-gatherers, but they could increase the area density of the energy they harvested through use of intensive cultivation and irrigation. In doing so, they had the surplus energy available to support non-agriculturally productive people to engage in building, administration, soldiering, and simple manufacturing. Major energy revolutions initiated overall energy surpluses that could support the greater and greater complexity of the rest of society.

The modern age was built upon increasingly high energy surpluses. However, as we find oil in more and more difficult deposits, have to use lower energy content coal, or have to build longer gas pipelines over more difficult terrain, EROI is dropping. Calculating EROI is difficult, however it has been estimated that the EROI of US oil has fallen from 100:1 in the 1930’s, to 30:1 in the in 1970, and to between 11:1-18:1 today, and that the EROI for global oil and gas production is 18:1 (29). These values represent an average, however marginal oil production will be even lower, Oil Shale has an EROI of 1.5-4:1 for example. Of course the energy input for oil production comes not just from coal itself, but from other fossil fuels also. The interdependence of fuels (see also sec. 6..6) complicates analysis, but it also propagates declining EROI across individual fuels.

The importance of declining EROI

Let us assume that the energy supply to civilization is constant, but EROI is decreasing. The total supply is divided between the percentage used to produce energy, and the percentage left over which runs society, and produces the goods and services used. For EROI above 10:1, over 90% of the energy is left to run society. As EROI drops, the ratio begins to change very fast, especially after about 3:1. As conventional oil declines we will use more unconventional oils from biofuels, tar sands etc. For example (assuming no interdependence), 100 Joules of conventional oil with an EROI of 11:1, costs 9 J to produce, leaving 91 J to run the rest of society. If we replaced it with 100 J of bio-ethanol, with an EROI of 4:1, production would require 25 J and society would only get 75 J.

So we see we are facing the problem not just of declining production, but also lowering of EROI, with the net result of an even faster decline in energy surplus to society.

2.5 The Decline Curve Assumption

Models are often used in discussing and informing about peak oil. And with them an assumption has become ingrained in popular and academic writing on the subject. This assumption is that the production modeled on the downward slope of curve is what will be available to the global economy. Under such assumptions people might conclude that we still have approximately as much oil available for use as we have used heretofore, but it will gradually become scarcer, declining at say 2% per annum.

We might add 2 important modifications to this. First, in acknowledging that the energetic cost of finding oil in smaller and more inaccessible fields is rising (a lowering EROI), the net energy available to society will fall at a faster rate than the actual production curve (EGross). Second, the countries with the biggest growth rates of oil use are oil producers who will have preferential access to their own falling reserves [see the Export Land Model]. This is because they earn large foreign reserves from oil sales supporting consumption, have subsidized local energy prices, and are increasingly reliant on the use of very energy intensive desalination to deal with evolving water constraints.

This means that oil available on the global market will fall faster than the decline in global production.

The modeled assumptions for the declining production, even accounting for declining net energy and producer consumption assumes a stable economy and infrastructure. In most of the modeling, the production curve is derived from proven reserves or proven plus probable. Proven reserves imply current price and technology; proven plus probable reserves make assumptions about the growth in technology and increasing wealth (that might allow us to pay higher prices more comfortably). This means that at a minimum, the future production curve assumes current technology and prices.

That is, even as oil production falls, societies can still afford to deploy the technical resources to extract and refine oil, society can afford the price of bringing on new fields, and the financing and price stability is available for investment. It assumes there is no strong feedback between declining production-the economy-and oil production.

However the decline curve assumption is likely to be deeply misleading: declines in oil production undermine the ability of society to produce, trade, and use oil (and other energy carriers) in a re-enforcing feedback loop. Energy flows through the economy are likely to be unpredictable, erratic, and prone to sudden and severe collapse. The implication is that much of the oil (and other energy carriers) that are assumed to be available to the global economy will remain in the ground as the real purchasing power, energy infrastructure, economic and financial systems will not be available to extract and use it.

2.6 The Energy Gap

In this section we will assume the decline curve assumption. The aim here is to indicate how realistic is the hope that we might fill the gap that will open up between declining oil production and the oil required for growth with alternative energy and efficiency measures.

We are expecting a gap to open up between the oil production required to keep the global economy growing, which has averaged about 1.6% per year over the preceding decades, and the net energy available after the energy costs of extraction has been removed from gross production. We will mention here some of the reasons why we cannot fill this gap under current conditions (31,32). In later chapters an even more important set of reasons why this gap cannot be filled is discussed,

The actual energy gap is the sum of the gross production drop plus the growth addition (which the IEA estimated it might be 1.2% a year) plus the energy cost of extraction. Decline rates when quoted tend to refer to the gross production, let us conservatively say 2% a year. We will assume that cost of energy extraction is zero. So we could by way of example imagine the energy gap growing at 3.2% a year. Total liquid fuels production is 86 million b/d (of which 73mb/d is crude, 7.94 mb/d is Natural Gas Liquids, and the rest comprises extra heavy oil, Canadian oil sands, deep-water oil and biofuels) (33) so the gap is 2.75 million b/d.

How easily could we fill this gap, so that the economy keeps growing? As first glance we might substitute bio-ethanol and bio-diesel as our transport fleet would need little modification. In addition, we already have an established agricultural infrastructure in place. Current biofuel production is 1.45 mb/d. However the energy content of a barrel of biofuels is much less than the energy content of a barrel of oil which it is replacing, so in energy terms current biofuel production is about 1 mb/d. To produce at this level has taken years of growth and subsidies, we would need to expand the industry by 275% in the first year alone, when even at the industries height it had a maximum growth rate of less than 30%. We have not considered that we are replacing high EROI oil with low EROI biofuels, but one result would be that as oil and other energy prices rose, biofuels price would rise even faster because it embodies so much fossil fuel energy in its production. So clearly there is an issue of scale, timing and energy return. [my note: not to mention the fact that there aren’t enough plants on earth to make a dent, the EROEI is probably NEGATIVE, and the ecological destruction is worse than coal].

Another major constraint against substituting oil with biofuels is its effects upon food production. Biofuels compete with the land, water, and energy used to produce food. We can get a sense of what such a drop might mean by considering that the Food and Agricultural Organisation (FAO) food price index rose 140% between Feb 2002- Feb2008, with both the World Bank34 and Goldman Sachs35 attributing the main part of that rise to biofuels. The so-called “Tortilla Riots”. in Mexico and a coup in Haiti in 2007 were two of the more dramatic outcomes. Expanding biofuel production when global food production is already under stress will drive not just hunger and instability in poorer countries, but entrench economic instability in rich ones.

The future according to some will be electrification of transport. If we are not going to eat into our already at risk current electricity production capacity, or build back-up power for intermittent renewables, we might try running electric cars from wind turbines. Again we come to the issue of scale and ramp-up. Global installed wind capacity at the end of 2009 was 157 GW, and near record increase of 31% on the year before (36). If we assume 30% capacity, this is in energy terms less than 25% of the 2.75 mb/d gap. Nor have we accounted for the tiny number of electric cars produced, their limited ramp-up rates, and fears over the lithium supplies (peak Li) required for batteries. Nor have we suggested what economic forces might drive this massive development when the world is in recession, the cars expensive, and the auto makers are in crisis.

Coal-to-liquids(CTL) technology has been available in some form for over fifty years, and there is still plenty of coal available. Here we emphasise again that it is not enough to establish that a substitution is hypothetically possible. We need to know the rate at which coal production and particularly the CTL production infrastructure can be ramped up relative to the oil production decline. In addition we need to know how affordable the liquids are, and it.s EROI. Currently, there is only a trickle of CTL produced globally. It is well known that we could use far less energy yet receive the same benefit if we were more efficient. Some measures cost us nothing and bring a direct benefit, turning off unused appliances for example. However, for many other measures there are upfront costs with longer-term payback. This ranges from low cost low-energy lightbulbs, to insulation, to expensive combined heat and power plants. All of these require energy and resources, and an ability of customers to pay the upfront costs or obtain credit. When we (as individuals or governments) are poorer with less access to credit, as in the current recession or one caused by high energy prices, there is less money to pay for such things and our investment decisions tend to become more short-term. In such a manner we can be locked into low efficiency living.

If we were to enact such efficiency measures there is a high likelyhood that the energy use would be transferred elsewhere in the economy, this is the well-known rebound effect37. That is, the money I save from efficiency measures is spent on goods and services elsewhere in the economy, leading to a further demand on energy. However, the rebound effect is limited when there are actual constraints on accessing more energy elsewhere in the economy.

If there is so much easily accessible fat in our energy usage, one might expect very high energy prices to preferentially drive it out. This might be partially true, but the impact is highly asymmetric. We can look at this through the perspective of the energy price rises in 2007/8. For a rich but energy inefficient person or business where direct energy expenditure was a small part of their costs life could continue as before. For a poor person or company where energy was already a high part of costs it was considerably more difficult. Among those who were most hit were important highly optomised industries such as haulage and fishing. There were also wide-spread warnings about fuel poverty.

3. The Dynamics of Complex Civilization

3.1 Civilization, the Economy, & Complexity

This paper is concerned with humanity’s impact on its environmental resource base, and the effect the resource base has on human we lfare. What mediates between these is our complex civilization 38.

The idea of civilization has inspired intellectuals and propagandists for millenia, and it is not particularly helpful to enter the debate here. We shall define it broadly, and in a way that serves our purposes in the current context. Civilization is firstly a system , a singular object that connects all its constituent elements together. The constituents are people, institutions, companies, and the products and services of human artifice. The connections are people, supply-chains and transport networks, telecommunications and information networks, financial and monetary systems, culture and forms of language. It has dimensions of space, in the momentary transmission of goods, images, money, an d people across the globe. And it has dimensions of time as stored in libraries, education and institutional knowledge, the patterns of fields and city streets, ideas of who we are and why we do as we do. It also places, through its history and evolved str uctures, constraints on its future evolution.

Our particular globalized civilisation is one that has grown to connect almost every person on the planet. One is in some way part of it if you have heard of Barak Obama, seen a moving image, used money, or ha ve or desire something made in a factory. There are very few people on the planet who are unconnected, most are more or less integrated. We can also look at this as our level of system dependency . Imagine if suddenly across the globe; all the advanced infrastructure of civilization–banking, IT, communications systems, and supply-chains suddenly stopped working. For developed countries relying upon just-in-time delivery of food, digital money; and complex information systems, starvation and social breakdown could evolve rapidly. In developing countries the situation would not be much better. Only for the most remote tribes on the planet it would make little or no difference. Occasionally we get a glimpse of the issue as during the fuel depot blockades in the UK in 2000, when supermarkets emptied and the Home Secretary Jack Straw accused the blockaders of “threatening the lives of others and trying to put the whole of our economy and society at risk” 39. More recently, the collapse of Lehman Brothers helped preci pitate a brief freeze in the financing of world trade as banks became afraid of perceived counter-party risks to Letters of Credit 40. The more we become part of the system the more we share its benefits and the more system dependent we become.

It is a cliché, though true, to say that civilization has become more complex. We can understand complexity as involving the number of connections between people and institutions; the intensity of hierarchical networks, the number of products available, the extent and number of the supply-chain functions required to produce these products; the number of specialized occupations; the amount of effort that is required to manage and operate systems; the amount of information available, and the energy flows through the syst em. Here is a vivid description of one aspect of complexity by Eric Beinhocker who compares the number of distinct culturally produced artifacts produced by the Yanomamo tribe on the Orinoco River, and modern New Yorkers. The Yanomamo have a few hundred, t he New Yorkers have in the order of tens of billions, and this wealth is a measure of complexity:

”To summarize 2.5 million years of economic history in brief: for a very, very long time not much happened; then all of a sudden all hell broke loose. It took 99.4% of economic history to reach the wealth levels of the Yanomamo, 0.59% to double that level by 1750, and then just 0.01% for global wealth to reach the level of the modern world” 41.

Or we can look at it from the point of view of the supply-chains that are required to transform raw materials into products and services that criss-cross the globe. It is said that a modern car manufacturer has about 15,000 inputs to the manufacturing process. If each of those components was made by a supplier who put together on average 1500 components (10%), and each of those was put together by a supplier who put together 150 components, that makes over 3 billion interactions — and we have not included staff, plant, production lines, IT and financial systems. Nor are we at the end of the story here. For the car manufacturer would not exist were there not customers who could afford to buy a new car, which depends upon their economic outputs which are themselves dependent upon vast complex supply chains, and so on. Nor could these vast networks of exchange exist without transport, finance, and communications networks. And those networks would not be economically viable unless they were benefiting from the economies of scale shared with many other products and services. In this way we can start to see how intimately connected we are with one another across the planet, and why we see the global economy as a singular system.

The remarkable thing about such a complex economy is that it works. Each day I buy bread. The person who sold me that bread need not know from whom the wheat was bought, who manufactured the mixer, or who provided export credit insurance for the bulk wheat shipment. The person who delivered the bread to the shop did not need to know who refined his diesel , who invented the polymer for his gasket, or if I personally have money to pay for bread. The steel company did not know that a small manufacturer of bread mixers would use its product, nor cared where its investment came from. The process required to sim ply give me tasty and affordable bread, required, depending on the system boundaries, millions, even hundreds of millions of people acting in a coherent manner.

Yet in all this there was no organizer. The complexity of understanding, designing, and managing such a system is far beyond human and computer assisted abilities. We say such systems are self-organized, just like the formation of birds in flight, and the patterns of walkers down a city street. Self-organization can be a feature of all complex adaptive systems, as opposed to ‘just’ complex systems such as a watch. Birds do not agree together that arrow shapes make good sense aerodynamically, and then work out who flies where. Each bird simply adapts to its local environment and path of least effo rt, with some innate sense of hierarchy for the lead bird, and what emerges is a macro-structure without intentional design (readers will notice the same non-teleological explanations within evolutionary biology).

Our globalized civilization has evolved and operates as a complex adaptive system. From each person, company or institution, with common and distinctive histories, playing their own part in their own niche, and interacting together through cultural and structural channels, the global system emerges.

What ties our globalized civilization together is the global economy. It is to our civilization what blood and the central nervous system is to our body. The economy allows the exchange of goods and services across the globe. And the more system dependent we are, the more we rely upon the global economy.

If one side of the global economy is goods and services, the other side is money. Money has no intrinsic value, it is a piece of paper or charged capacitors in an integrated circuit. It represents no t wealth, but a claim on wealth (money is not the house or food we can buy with it). Across the globe we exchange something intrinsically valuable for something intrinsically useless. This only works if we all play the game, governments mandate legal tender, and monetary stability and trust is maintained. The hyper-inflation in Weimar Germany and in today’s Zimbabwe shows what happens when trust is lost.

One of the great virtues of the global economy is that factories may fail and links in a supply chain c an break down, but the economy can quickly adapt to fulfilling that need elsewhere or finding a substitute. This is a measure of the adaptive capacity within the globalized economy, and is a natural feature of such a de-localized and networked complex adaptive system. But it is true only within a certain context. There are common platforms or hub infrastructure that maintain the operation of the global economy and the operational fabric, without which they would collapse. Principal among them are the the monetary and financial system, accessible energy flows, and the integrated infrastructures of information technology, electricity generation, and transport.

We can make an analogy here with another complex adaptive system, the human body. Hub infrastructure for the human body would include blood circulation (heart), the signalling and information (central nervous system), and the respiratory system. If any of these fail, we die. However our body can self-repair cuts and light trauma, and can survive quit e major local damage (limb loss). If the local damage is significant enough (or death by a thousand cuts), the body can fail. So collapse (death) can result from hub failure or significant general system damage. We tend to find that final collapse is drive n by the interactions of these elements (death caused by heart or respiratory failure caused by trauma).

This current integrated complexity was not always so. We have adapted so well to its changes, and its changes have been in general so stable, that we are often oblivious to its ties. Imagine if all the integrated circuits introduced within the last 10 or even five years should stop working. Financial systems, the grid, and supply-chains would fail. Our just-in-time food systems would soon leave the cup board bare, and our inability to carry out financial transactions would ensure it remained so, real starvation could appear in the most advanced (system dependent) economies. The question poses itself, how can something introduced only in the last five or ten years cause such chaos if removed, afterall we were fine just ten years ago? Even just consider the consequences of losing the mobile phone network. Our most basic functioning has become, almost by stealth, more and more entwined with rapid turnover te chnologies, the complex supply-chains that carry our needs and labours across the planet, and the financial and monetary systems that hold them all together.

3.2 The Evolution of the Global Economy

For most people living before the late medieval period, sustenance and welfare depended upon one’s own efforts and those of one’s close community. In such a context, abundant harvests could co-exist with nearby famine 42 . From a general welfare point of view there was a production and a distribution problem.

The central problem of distribution was firstly that money was a small part of the local economy, as most communities were largely self-sufficient. Secondly, there were very rudimentary transport links, and actual communication between towns may have been in frequent and haphazard. This meant that there was neither a proper signaling mechanism to indicate shortages, a tradeable store of value, nor a trade and transport system to facilitate the resource redistribution. Rural villages could find themselves vulnerable to harvest failure (from flooding say), which was the bedrock asset of community welfare, and therefore they had to bear all the risk locally. The risk could be partially managed by storage and storage technology, but the ability to store for a rainy day also meant that there needed to be surplus production. But investing in increasing production tends to require surpluses, traded inputs and knowledge from elsewhere.

One of the great advantages of a growing interconnectedness between regions, and more trade with money was that localized risks could be shared over the whole network of regions. Surpluses could be sold to where prices were highest in the network, and the money received in return would hold its value better than the stored grain prone to rot or rodents. Distributing surpluses across the network was also the most efficient use of resources. What economists now call comparative advantage meant that more specialized roles could be performed in the network than in a similar number of isolated regions or towns with greater efficiency. This meant new products and services could be developed, especially ones that relied on diverse sub-components. This promoted further efficiency, increased wealth, surpluses, capital and a growing knowledge and tech nical base. Now increased investment in future wealth could be more ambitious in building the size of the network (through assimilation, integration and conquest) and its levels of integration (bridges, markets, and guilds).

There are push-pull drivers of growth; in human behavior; in population growth; in the need to maintain existing infrastructure and wealth against entropic decay; in the need to employ those displaced by technology; in the response to new problems arising; and in the need to service debt that forms the basis of our economic system. The process of economic growth and complexity has been self-reinforcing. The growth in the size of the networks of exchange, the level of complexity, the economic efficiencies all provide a basis for further growth. Growing complexity provides the basis for developing even more complex integration. In aggregate, as the operational fabric evolves in complexity it provides the basis to build more complex solutions.

We are problem solvers, arising from our basic needs, status anxiety, and our responses to the new challenges a dynamic environment presents. That could be simple such as getting a bus or making bread; or it could be complex, putting in a renewable energy infrastructure say. We tend to exploit t he easiest and least costly solutions first. We pick the lowest hanging fruit, or the easiest extractable oil first. As problems are solved new ones tend to require more complex solutions. Our ability to solve problems is limited by the range of possible solutions available to us, the solution space . The extent of the solution space is limited by knowledge and culture; the operational fabric at a time; and the available energetic, material, and economic resources available to us. It is also shaped by the interactions with the myriad other interacting agents such as people and institutions, and because all may be increasingly complex, they may reinforce growing complexity as they co-evolve together.

As new technologies and business models (solutions or sets of solutions) emerge they co-adapt and co-evolve with what is already present. Their adoption and spread through wider networks will be dependent upon the efficiencies they provide in terms of lower costs and new market opportunities. One of the principal ways of gaining overall efficiency is by letting individual parts of the system share the costs of transactions by sharing common platforms (information networks, supply chains, financial systems), and integrating more. Thus there is a reinforcing trend of benefits for those who build the platform and the users of the platform, which grows as the number of users grow. In time the scale of the system becomes a barrier to a diversity of alternative systems as the upfront cost and the embedded economies of scale become a greater barrier to new entrants, this being truer for more complex hub infrastructure. Here we are not necessarily associating lack of system diversity with corporate monopolies. There is quite vigorous competition between mobile phone service providers-but they share common platforms and co-integrate with electricity networks and the monetary system, for example.

This however can lay the basis for systemic vulnerability. That is, if our IT platform failed so too would our financial, knowledge and energy systems. Conversely if our financial system collapsed, it would not take long for our IT and supply-chains to collapse. The UK based Institute of Civil Engineers acknowledges that the complex relationships between co-dependent critical infrastructure is not understood 43. Our operational systems are not isolated from the wider economy either. Because of the expense of infrastructure and the continual need for replacement of components, a large number of economically connected people and economies of scale are necessary to provide their operational viability. What has helped make such systems viable is that they are being cross-subsidized throughout the whole economy. The resource required to build and maintain critical complex infrastructure demands that we buy games consoles, send superfluous text messages, and watch YouTube.

The growth of civilization has costs, and as it grows, costs rise. The biggest driver of environmental destruction is the growth process itself. Rising soil and aquifer depletion, collapsed fisheries, deforestation, greenhouse gas emissions, and polluted groundwater are just some of the consequences of the requirement for continuous flows for the maintenance and growth in GDP. There are also the costs of complexity itself. As systems become more complex there are growing costs associated with managing and operating the systems and the investment in educating people who will work in more specialized roles.

Joseph Tainter has argued that declining marginal returns on growing complexity provide the context in which previous civilizations have collapsed 44 . The benefits of rising complexity are finally outweighed by the rising costs. But problems still arise, and a society no longer can respond to those problems in the traditional way-increasingly complex solutions. It becomes locked into established processes and infrastructures but is less able to recover from shocks or adapt to change, it loses resilience.

3.3 Evolution of Science & Technology

The assumption that science and technology will automatically respond to meet the challenges we face has become an article of faith. It is related to our conceptions of ‘progress’, and its power and potential may be asserted with authority by anyone. In discussions of sustainability, science and technology is often invoked as the deus ex machina destined to fill the looming gaps between our demands and the earth’s ability to supply them. In this sense it may act as a collective charm wielded to chase away the anxiety induced by glimpses of our civilisation’s precariousness. The following section attempts to locate science and technology within the evolutionary and material conditions of our economy. We also wish to illuminate a little more why high technology infrastructure is vulnerable.

Science & Technology Suffer from Declining Marginal Returns

In 1897 J.J. Thompson discovered the electron, then the cutting edge of physics, all on a laboratory bench. The understanding of this particle laid the foundation for the digital infrastructu re upon which much of the world relies. Today it requires a 27km underground tunne l, 1,600 27 ton superconducting magnets cooled to less than 2 degrees above absolute zero, and the direct involvement of over 10,000 scientists and engineers to find (possibl y) today’s cutting-edge particle, the Higgs boson. In the 1920?s Alexander Fleming discovered penicillin, with a huge benefit to human welfare, for a cost of about €20,000. Today it costs hundreds of millions to develop minor variations on existing drugs that do little for human welfare.

Science and technology are an exercise in problem solving. As generalized knowledge is established early on in the history of a discipline, the work that remains to be done becomes increasingly specialized. The problems become more difficult to solve, are more costly, and progress in smaller increments. Increasing investments in research yield declining marginal return 45 . We see this in the growing size of research groups, levels of specialization, and the knowledge burden 46.

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The conclusion is that further research and development is likely to be more resource intensive, yet on average give smaller returns to society. For a society trying to undergo an energy transformation, this means that more and more of possibly declinin g energy available to society must be devoted to research and development, but with less likelihood of significant breakthroughs.

The Most Advanced Technology is the Most Resource Intensive

Because new technologies tend to be solutions to more complex problems, are built using high technology components, and have relied upon the continually upgrading operational fabric; they tend to be more resource intensive. We can see this in the evolution of key manufacturing processes over the last century where one analysis shows a six order of magnitude increase in the energy and resource intensiveness per unit mass of processed materials. This was driven by the desire for smaller and more precise devices and products 47. A 2 gram 32 MB DRAM chip would now be considered archaic, but it required 1700g of resources to fabricate, one expects that contemporary Very Large Scale Integration (VLSI) chips require vastly more resources 48. While popular focus tends to be on the direct energy used by final goods, it is the embodied energy and material resources that is staggering 49.

Yet the high-tech products we use (computers say), require the networks, telecoms infrastructure, software, and the computer use of others to realize their value. Which in turn depends upon an even vaster infrastructure. So in a way, asking about the resource requirements of your computer is akin to asking about the resource requirements for your finger, it make sense only if you assume the rest of the body is well resourced.

Finally, we note for completeness that rising energetic and material costs from growing complexity (more specifically energy flows per unit mass) is just what we would expect from thermodynamic principal s.

The Most Advanced Technology Has the Most Complex Supply-Chain Dependencies

The more complex a product and production process the more tightly integrated it is into the global economy. There are far more direct and indirect links in the supply-chains upon which they are dependent. Its production process is also dependent upon the inputs of more specialized suppliers with fewer substitutes. Let us consider the integrated circuit as our standard-barer of technological complexity. Intel, who supply 90% of the processors in personal computers relies upon high-tech research-led co mpanies providing sophisticated optical and metrology systems, control electronics, and a vast array of specialty chemicals. Those companies rely upon further sophisticated inputs with few substitutes. High-tech is less geographically mobile, relies upon very specialised staff and institutional knowledge, and generally will have a very large sunk cost in the operations and plant. Thus we can say that the more technologically advanced a process the greater risk it faces from supply-chain breakdown, just like the old rhyme

For want of a nail the shoe was lost.

For want of a shoe the horse was lost.

For want of a horse the rider was lost.

For want of a rider the battle was lost.

For want of a battle the kingdom was lost.

And all for the want of a horseshoe nail.

Because of the complexity of chip manufacture no company has the knowledge to build an integrated circuit (IC) ‘from the ground up’, that is, by starting with th e raw elemenents to build all the production and operation systems, and process inputs. Many companies have co-adapted and co-evolved together, so that the knowledge of fabrication and the tools of fabrication, and the tools of those tools is really an IC-ecosystem knowledge, which itself is co-dependent on the global economy.

4. Collapse Dynamics 4.1

The Dynamical State of Globalized Civilization

The period since the end of the last ice age provided the large-scale stability in which human civilization emerged. Climatic stability provided the opportunity for diverse human settlements to „bed? down over generations. This formed the basis upon which knowledge, cultures, institutions, and infrastructures could build complexity and capability over generations without, by-and-large having it shattered by extreme drought or flooding outside their capacity to adapt.

Within this macro-climatic stability, is the medium-term stability that we referred to above, the period of globalizing economic growth over the last century and a half. We tend to see the growth of this economy in terms of change. We can observe it through increasing energy and resource flows, population, material wealth, and as a general proxy, GWP. We could view this from another angle. We could say that the globalizing growth economy for the last 150 years has been remarkably stable. It could have grown linearly by any percentage rate, declined exponentially, oscillated periodically, or swung chaotically, for example, what we see is a tendency to compound growth of a few percent per annum. And at this growth rate the system could evolve, unsurprisingly, at a rate we could adapt to.

This does not mean that there is not unpredictable fluctuations in the economy. However, the fluctuations are around a small additional percentage on the previous years gross output. Angus Maddison has estimated that GWP grew 0.32% pe r annum between 1500 and 1820; 0.94%(1820-1870); 2.12% (1870-1913); 1.82% (1913-1950); 4.9% (1950-1973); 3.17% (1973-2003), and 2.25% (1820-2003) 50 . Even through 2 world wars and the Great Depression in the most economically developed countries (1913-1950) growth remained positive and in a relatively narrow band. Of course small differences in aggregate exponential growth can have major effects over time, but here we are concentrating upon the stability issue only.

Governments and populations are highly sensitive to even minor negative changes in growth. The constraints felt by governments and society in general from only a very small change in GDP growth should emphasize to us that our systems have adapted to this narrow range of stability, and the impact of moving outside it can provoke major stresses.

4.2 Tipping Points in Complex Systems

Despite the diversity of complex systems, from markets to ecosystems to crowd behavior-there are remarkable similarities. For most of the time such systems are stable. However, many complex systems have critical thresholds, called tipping points, when the system shifts abruptly from one state to another. This has been studied in many systems including market crashes, abrupt climate change, fisheries collapse, and asthma at tacks. Despite the complexity and number of parameters within such systems, the meta-state of the system may often be dependent on just one or two key state variables 51.

Recent research has indicated that as systems approach a tipping point they begin to share common behavioral features, irrespective of the particular type of system 52. This unity between the dynamics of disparate systems gives us a formalism through which to describe the dynamical state of globalized civilization, via its proxy measure of GWP, and its major state variable, energy flow.

We are particularly interested in the class of transitions called catastrophic bifurcations where once the tipping point has been passed, a series of positive feedbacks drive the system to a contrasting state . Such ideas have become popularized in discussions of climate change. For example, as the climate warms it drives up emissions of methane from the arctic tundra, which drives further climate change, which leads to further exponential growth in emissions. This could trigger other tipping points such as a die-off in the amazon, itself driving further emissions. Such positive feedbacks could mean that whatever humanity does would no longer matter as its impact would be swamped by the acceleration of much large r scale processes.

5. Three Peak Energy-Economy Models

5.1 Introduction

While discussions of peak oil have begun to enter the policy arena, and while it is generally acknowledged that it would have a major effect upon the economy, the discussion is often fragmented and lacking in a broad system synthesis. In general, discussion tends to focus on the direct uses of oil, and sometimes its effect on a countrys balance of payments. Where economic impact studies of peak oil have been done, they are based upon the direct decline curve assumption such as the 4see model by Arup for the UK Peak Oil Task Force Report 54. Nel and Cooper have used the decline curve assumption and accounted for EROI and peak coal and gas to look at the economic implications 55. The latter authors show a smooth decline in GDP but acknowledge that their modelling assumptions include that the financial markets must remain functional, State legitimacy remains intact; and international law prevails.

In most cases there is an intuitive assumption or mental model of what the effects of peaking oil production will mean economically and socially. In order to clarify our discussion, and introduce some working concepts, we will look at three models. These should not be considered in isolation. In a very broad and general fashion we might consider that the linear decline model is valid for small energy constraints that have a very small effect on the overall magnitude of real GWP and level of complexity. This merges into a oscillating decline phase which cause larger perturbations in GWP/Complexity level.

Finally, tipping points are crossed that rapidly cause a severe collapse in GWP/Complexity. Finally, we note that what we are trying to do is clarify peak energy-civilization dynamics and identify the major structural drivers in the process. The real world is more unknowable than can ever be engaged with here.

5.2 Linear Decline

Intuitively we tend to assume that most phenomena respond proportionately to some causation. This is mostly true. A change in price proportionately changes demand; an increase in population proportionately increases food demand; and increase in cars leads to a proportional increase in emissions.

Most commonly, there are two associated assumptions relating to the energy-economy relationship post-peak. The first is the Decline Curve Assumption. Thus oil production is withdrawn from the economy at between 2 and 3% p.a. The second element is that there is an approximately linear relationship between the oil production decline and economic decline. The combination of these assumptions is that the global economy declines in the form of the slope of the downward projection curve.

Thus we see oil price rises as oil becomes scarcer. Less energy constrains economic activity. Bit by bit we become poorer, there is less and less discretionary consumption. The rising prices force more localized production and consumption, and there is growing de-globalization. Jobs lost in the areas serving today’s discretionary needs are over time deployed in food and agriculture, and producing with more direct human effort and skill many of the essentials of life. In such a case a longish period of adaptation is assumed in which gradually declining oil production and resulting oil price increases cause recession, hardship and cause some shocks, but also initiate a major move into renewable energy, efficiency investments, and societal adaptation. New energy production that was once too expensive becomes viable. The general operability of familiar systems and institutions is assumed, or they change slowly.

Even were the linear decline model valid, it would be difficult to adapt. Consider a country’s budget in energy terms, with some amount for health, business operations, agriculture, operations, education say; and investment. As the total energy available declined, less and less energy would be available in each sector. Because we discount the future (we favor short-term benefits), and the discount rate rises in economic stress, the ability to maintain investment in renewable energy would become increasingly difficult. In essence, it would be a choice between keeping some functionality in a crumbling health service, and stalling rising employment a little; or accepting job losses and a health crisis in return for a small energy return per annum in the future.

5.3 Oscillating Decline

In this model, constrained or declining oil production leads to an escalation in oil (plus other energy and food) prices. But economies cannot pay this price for a number of reasons. Firstly, it adds to energy and food price inflation, which are the most non-discretionary purchases. This means discretionary spending declines, from which follows job losses, business closures, and reduced purchasing power. The decline in economic activity leads to a fall in energy demand and a fall in its price. Secondly, for a country that is a net importer of energy, the money sent abroad to pay for energy is lost to the economy unless we export goods of equivalent value. This will drive deflation, cut production, and reduce energy demand and prices. Thirdly, it would increase the trade deficits of a country already struggling with growing indebtedness, and add to the cost of new debt and debt servicing.

Falling and volatile energy prices mean new production is harder to bring on stream, while the marginal cost of new energy rises and credit financing becomes more difficult. It would also mean that the cost of maintaining existing energy infrastructure (gas pipelines, refineries etc) would be higher, so laying the foundations for further reductions in production capability.

In such an energy constrained environment, one would also expect a rise in geopolitical risks to supply. This could be bilateral arrangements between countries to secure oil (or food), so reducing oil on the open market. It would also increase in the inherent vulnerability to highly asymmetric price/supply shocks from state/non-state military action, extreme weather events, or othe