Too many promises; too few future physical goods

Posted on December 4, 2025 by Gail Tverberg

Summary:

  • Today’s financial system allows many promises of future goods and services. These include debts, pensions, and even prices of shares of stock.
  • However, the quantity of actual physical goods and services that can be produced appears likely to be shrinking in future years because of resource depletion.
  • This mismatch means that many/most of these promises likely cannot be paid as promised. The economy will somehow change to match what is actually available. We should not be surprised if, one way or another, we receive much less than has supposedly been promised. Even if a high currency amount is provided, it likely will not buy very much. Or a new government may be in power, with virtually no promises of benefits.
  • Today’s economic system requires both increasing energy supplies and increasing debt to function properly. We are now encountering limits with respect to both world energy supplies and US government debt. The parts of the world economy that are most affected by limits will likely begin to contract soon.
  • We don’t know precisely how this contraction will take place, but we can examine a list of countries whose GDP has already been contracting to see how they are faring.
  • Perhaps we need to be relying more on our families and/or on “villages” made up of extended relatives or friends for our long-term support, rather than on government programs.

Introduction

The world is filled with financial promises, including loans, pensions, and even the market value of stocks. So far, the system seems to be working, but in a finite world, it is hard to believe that the system will work indefinitely. Governments can create money simply by adding more promises, but they cannot create goods and services in a similar fashion.

We know that actual physical materials are needed to make the goods and services that people depend upon. Energy supplies are particularly important in making goods and services because, according to the laws of physics, energy is required to produce physical goods and services. Forecasts that support current financial promises ignore the fact that we live in a finite world. Eventually, we will run short of easy-to-extract essential materials, including fossil fuels, uranium, lithium, and copper. Economic growth will need to be replaced by economic contraction.

In this post, I will try to explain the situation in more detail, together with some charts showing what is going wrong now, such as Figure 1. In some ways, we already seem to be reaching limits to growth.

Graph showing world growth in energy consumption per capita from 1968 to 2024, illustrating fluctuating trends with a downward trend line indicating potential scarcity.
Figure 1. Per capita energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute, with trend line and note.

[1] At first, added debt is helpful to an economy.

In some sense, added debt pulls an economy forward.

Illustration of a bicycle with labeled parts representing economic systems: human rider symbolizes primary energy provider, steering system represents profitability and laws, braking system denotes interest rates, front wheel signifies the debt system, gearing system indicates energy efficiency, and rear wheel shows where energy operates.
Figure 2. The author’s view of the analogy of a speeding upright bicycle and a speeding economy.

As long as there are plenty of inexpensively available resources and not too much interest to pay, added debt seems to make sense. It pulls the economy forward, in the direction that those resources are to be used. It “feels good” to the recipients of the goods and services made possible by the debt. People like the homes and cars that added debt makes possible.

Ordinary citizens have clear limits on their credit card debt. The limits on government promises seem to be hidden until they are actually reached.

As long as an economy is growing, that growth seems to hide many problems. Carmen Reinhart and Kenneth Rogoff are two well-known US economists. In a 2008 working paper (p.15) examining 800 years of government debt defaults, they remarked, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.” Without “hugely successful economic growth,” it is impossible to keep adding debt and repaying it with interest. The growth allows debt to be paid back with interest. It allows the fiction that an economy will continue to grow, and this growth will provide the margin needed to repay the debt with interest.

While the world economy has been an amazingly successful growth story since the industrial revolution, we now seem to be running short of the inexpensively available fossil fuels that have made economic growth so far possible. With this change, the economy is likely to start a major shift from economic growth to economic contraction.

We don’t know exactly how this shift from economic growth to economic contraction will take place, but we can hypothesize that the economies that have recently been growing fastest might be farthest from contraction, and the economies that are already struggling with low growth might be the ones most likely to slip into contraction. The countries slipping into contraction can be expected to have special difficulty repaying debt with interest and meeting other financial promises. Some governments may even collapse, perhaps in the way the government of the Soviet Union collapsed in 1991.

[2] Not too surprisingly, given the physics connection stated in the introduction, total world GDP and world energy consumption are highly correlated.

A scatter plot showing the relationship between world energy consumption (measured in Exajoules) and global GDP (in trillions of 2015 US dollars), with a trend line indicating a strong correlation (R² = 0.9757).
Figure 3. Energy based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP in constant 2015 US$ is as published by the World Bank.

In fact, the growth rate of energy consumption and the growth rate of GDP are also correlated, as can be seen from the similar patterns on Figure 4.

A line graph showing the correlation between world growth in energy consumption and growth in inflation-adjusted GDP from 1968 to 2024, with energy consumption represented in blue and GDP growth in orange.
Figure 4. Three-year average growth rates are used for stability. Energy growth rates are based on energy data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP growth rates are based on GDP in constant 2015 US$ as published by the World Bank.

A scatter diagram of the X-Y data used in Figure 4 gives the result shown in Figure 5:

Scatter plot illustrating the relationship between world energy growth and GDP growth, showing a positive correlation with data points scattered around a trendline.

Figure 5. Three-year average growth rates are used for stability. Energy growth rates are based on energy data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP growth rates are based on GDP in constant 2015 US$ as published by the World Bank.

[3] A major issue is the fact that the growth rate of world energy consumption is trending downward.

Line graph showing world growth in energy consumption over the years, with a trend line indicating a general decline in growth rates.
Figure 6. Energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute.

Figure 6 shows a big upward bump starting not long after the year 2000, driven by the addition of China’s inexpensive coal resources to the global energy supply. The low-cost portion of China’s coal resources is now mostly depleted. In addition, we don’t seem to have any other energy sources that will be available in large quantity in the near future. We have been adding wind and solar, but their impact has been small. Their impact is reflected in the total energy increases shown in Figure 6, and in the other charts above.

[4] Even worse, the rate of growth of world energy consumption per capita is trending downward. In fact, if the trend line were extended to 2025, it would seem to indicate contraction in per capita energy supplies.

Line graph depicting world growth in energy consumption per capita from 1968 to 2024, showing fluctuations in growth rates with a downward trend line indicating a predicted shortage of energy.
Figure 7. Per capita energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute with trend line and note by Gail Tverberg. (Same as Figure 1.)

We know that it takes energy to make physical goods. Even services require some level of physical goods and energy, such as a building to perform these services, electricity to operate tools, and the materials needed to make any tools, such as computers or scissors.

On Figure 7, note that the trend line is dropping below 0% in 2024, and even farther below 0% in 2025. This means that a smaller energy supply is available, relative to the population. If less energy supply is available, fewer physical goods relative to the population are likely to be available, as well. No one announces this, but we see the impact in many ways. For example, we discover that our daily newspaper is no longer being delivered. Or we discover that the products we see in stores are becoming increasingly flimsy. Meanwhile, young people are becoming less able to afford cars, homes, and almost everything else.

Furthermore, with limited total energy supply, international fighting about physical goods becomes more of a problem. The place we see this first is with respect to minerals. With limited energy supply and ores that are increasingly less concentrated, it is becoming difficult to extract enough materials such as uranium, rare earths, and platinum to meet the needs of all countries. Prices may temporarily spike, but they do not rise high enough, for long enough, to allow production to rise to the overall needed level.

[5] Falling interest rates push the economy along; rising interest rates act like putting brakes on the economy.

Graph showing the 3-Month Treasury Bill Secondary Market Rate and Market Yield on U.S. Treasury Securities over time, with historical peaks and recessions indicated.
Figure 8. Interest rates on 10-year Treasuries (red) and on 3-month Treasuries (blue), based on data of the Federal Reserve of St. Louis.

Interest rates play a far greater role in the economy, and in economic growth, than many people would expect. Falling interest rates between 1981 and 2022 greatly supported the economy (Figure 8). Since 2022, higher interest rates have acted like a headwind to the economy. This is a concern when it comes to the possibility that the economy is heading into economic contraction because of an inadequate supply of low-cost energy.

Another piece of the picture is the effect of the “yen carry trade.” It allows international investors to borrow money at low rates in Japan, and invest this money in the United States and other countries at higher rates. The yen carry trade has been supporting international borrowing, but it now seems to be at the edge of unwinding because Japanese interest rates are now higher. With this change, it is more difficult to borrow yen at a low rate and invest the proceeds elsewhere at a higher rate. The unwinding of the yen carry trade could push US interest rates up, regardless of what the Federal Reserve tries to do.

[6] Interest payments on US government debt are already getting to be a problem.

US government debt is now close to $38 trillion, and total interest payments have recently risen because interest rates are no longer near zero. Total payments now exceed $1 trillion per year.

Line graph showing federal government current expenditures on interest payments in billions of dollars from 1950 to 2025, illustrating a significant increase since 2020.
Figure 9. US federal government interest payments through June 30, 2025.

The US Congressional Budget Office (CBO) is now concerned about the high level of interest payments. When interest rates were very low in the 2008 to 2020 period (Figure 8), it was possible to add debt without substantially raising the amount of interest to be paid. But now, with higher interest rates and the debt balance increasing, interest payments have become very high, to the point where they even exceed defense spending. It becomes difficult to raise taxes enough to cover both interest outlays and other funding shortfalls.

Graph illustrating the total deficit, net interest outlays, and primary deficit in the US from 1975 to projected values in 2035, showing the percentage of GDP.
Figure 10. Chart by CBO showing annual deficit in two pieces–(a) the amount simply from spending more than available income, and (b) interest on outstanding debt. Source.

I talk more about some of these issues in post called “Energy limits are forcing the economy to contract.” Clearly, if the US economy is being forced to contract, it is very difficult for it to be a hugely successful growth story.

[7] Which countries of the world seem likely to be most resilient against energy limits?

If we believe Reinhart and Rogoff, the countries that would be most resistant to collapse would be the countries that have been growing most rapidly, in recent years. Figure 11 shows a listing of the most rapidly growing countries during the 2019 – 2024 period, based on World Bank GDP data.

Table listing the fastest growing countries in the world from 2019 to 2024, categorized by region.
Figure 11. Listing based on World Bank GDP data (in 2015 US$) for the years 2019 to 2024. The average growth rate of these countries was 4.9% per year or higher.

The only country on Figure 11 that is an “Advanced Economy” (member of the OECD) is Ireland. Ireland is known for its pharmaceutical exports and for its unusually low taxes on corporations. Many companies choose to domicile in Ireland to take advantage of the country’s low tax rates.

All the other countries are, in some sense, “less advanced economies.” Wages are likely lower, giving them an edge in extracting resources and in manufacturing, and then selling the goods to more advanced countries. Some of these countries may have been given loans by the IMF or China to help them develop their resources.

China and India are both known for their coal use; historically, coal has been an inexpensive energy product, allowing countries to make goods inexpensively, for export. The only country listed whose growing GDP is based on oil extraction seems to be Guyana in South America. Its oil extraction started very recently.

Table displaying the slowest growing countries in the world from 2019 to 2024, categorized into shrinking economies and slowly growing economies.
Figure 12. Listing based on World Bank GDP data (in 2015 US$) for the years 2019 to 2024. Average growth rates were strictly less than 0% for shrinking economies, and between 0% and 0.5% (inclusive) for slowly growing economies.

On Figure 12, the list of shrinking economies reads like a list of sad situations that we have read about in the news, way too many times. Many of the countries have recently been in wars or similar situations. None of the countries are Advanced Economies. A few of the countries (Iraq, Libya, Trinidad and Tobago, South Sudan, Venezuela) are oil producing countries.

With respect to the list of slowly growing countries, shown on the right side of Figure 12:

  • Austria, Czechia, Estonia, Finland, Germany, and Japan are all Advanced Economies with inadequate energy supplies of their own.
  • Puerto Rico is an island territory that has recently had debt problems.
  • Thailand is, in some sense, a dropout from the rapidly growing nations of Southeast Asia. My impression when I visited Thailand earlier this year was that a great deal of overbuilding had taken place. Excuses for more debt had mostly stopped.
  • Argentina is an oil-producing country with difficulties.
  • China tightened its grip on Hong Kong in 2019, leading to much slower economic growth. Presumably, there were underlying issues that caused this tightened grip.
  • South Africa has both coal supply problems and inadequate water supplies.

[8] What lies ahead?

I think that we are already in a world of “not enough to go around,” because resource limits are leading to an inadequate supply of finished goods and services for the world economy as a whole. Some countries are already being squeezed out, particularly the countries listed as having “shrinking GDP” in Figure 12. I expect that, over time, an increasing number of countries will be added to the shrinking GDP list. The outcomes may be as bad as seem to be happening to the economies that are shrinking today.

History shows that governments of shrinking countries tend to be overturned by their citizens, or they may collapse on their own. If collapse happens in either of these ways, governmental promises of pensions, and of guarantees on bank accounts, are likely to disappear. Even if the current governments can be maintained, countries will be forced to cut back greatly on the programs they are providing. Pensions may be cut, or they may be inflated away by hyperinflation.

Some governments today talk about possibly introducing Central Bank Digital Currencies (CBDCs). If these currencies are implemented, I would expect that they will be used to ration the increasingly limited supplies of goods and services that are available among their populations.

I do not expect that there will be a formal World War III. Instead, I think the United States is already in a cold war against practically every other country because there cannot be enough goods and services to go around. The US can’t go into a formal war against China because it provides parts of the supply chains for many essential goods the US uses today. Even Europe is a competitor for essential goods. For example, the less oil Europe uses, the more oil will be available for other countries.

While new technologies such as artificial intelligence and energy recovery may eventually alleviate our energy problems, it is unlikely that such approaches will solve our problem in the near term. As a result, governments are likely to be less able to keep their promises. Historically, families or “villages” of extended kin have provided safety nets, rather than government programs. Perhaps now is a good time to be thinking about how we can move in this direction, as well.

Posted in Financial Implications, Planning for the Future | Tagged , , , | 691 Comments

A lack of very cheap oil is leading to debt problems

Posted on October 31, 2025 by Gail Tverberg

Economists, actuaries, and others tend to make forecasts as if whatever current situation exists will continue indefinitely or will perhaps improve a bit. No one wants to consider the possibility that things will somehow change for the worse. Politicians want to get re-elected. University presidents want their students to believe that their degrees will be truly useful in the future. Absolutely no one wants to hear unfavorable predictions.

The issue I see is that many promises were made during the period between the end of World War II and 1973, when oil prices were very low, and most people assumed that oil supply could grow endlessly. No one stopped to think that this was a temporary situation that likely could not be repeated. If things didn’t work out as planned, debt bubbles could bring down the economy. This was a heading I used in my talk at the recent Minnesota Degrowth Summit:

Text slide discussing economic assumptions about oil supply and debt impact, featuring a blue background with white and light blue text.
Figure 1. Text: Our economy has been built as if a growing supply of $20 oil (EROI of 50 – 100) would continue! Simply add more debt if this isn’t true.

In this post, I will provide a few highlights from my recent talk. I also provide a link to a PDF of my Degrowth Summit talk and a link to a Vimeo recording of the summit, which includes a transcript. To access the transcript and an outline of the timings of the various talks, scroll down on the front page of the recording. Joseph Tainter spoke first; there was a recorded section showing clips by other speakers that only online viewers saw, and I spoke last (starting at about 1:55 on the video).

– – – – – – – – – – – – – – – – – –

Between 1920 and 1970, US oil supply grew rapidly. The early oil was easy to extract and close to customers wanting to purchase it. There had been warnings from physicists (including, most notably, M. King Hubbert) that this could not go on indefinitely, but most people assumed that any obstacles were far in the future.

Graph showing U.S. field production of crude oil from 1920 to 2020, highlighting the peak in 1970; a visual representation of changes in oil extraction complexities over time.
Figure 2

Of course, there were other countries producing oil besides the US at that time, so it was possible to purchase imported oil. The US still had some oil it could produce, but it tended to require more complex operations. For example, some of the oil was in Alaska. Bringing this oil to market required working in a cold climate, laying a long pipeline, and using ships to transport the oil to locations with refineries.

Low oil prices were very beneficial to the economy, for as long as they lasted.

Line graph showing the average annual inflation-adjusted oil price from 1948 to 2025, highlighting low oil prices pre-1970, where the price was around $20 per barrel.
Figure 3

We don’t appreciate how important low-cost food is to our personal finances. If food purchases amounts to, say, 50% of available income, necessities such as clothing and housing would take nearly all our income. There would be little left over for optional items. On the other hand, if purchases of food require only 5% to 10% of available pay, there would much more likely be money left over for discretionary purchases, such as buying a vehicle or paying for school tuition for a child.

Oil and other energy products are like food for the economy. During the period when oil prices were very low, there was sufficient margin for purchasing all kinds of “extras,” such as the items listed in Figure 4 below.

A list of historical developments in the United States from 1948 to 1973, highlighting social and economic advancements made possible by low oil prices.
Figure 4

In the low-priced oil era, small businesses were sufficient for many types of operations. There was little need for a deep organizational hierarchy, or for advanced energy-saving versions of manufactured devices. Most goods used in the US were made in the US.

Slide from a presentation discussing the low-priced oil era, highlighting key points about the US economy, including low wage disparity, healthcare costs, affordability of homes, and the economic impact of low-cost oil.
Figure 5

Once the economy started to need more complexity, things began to change.

Slide displaying key points about government spending needs, wage disparity, social changes, healthcare costs, and aging population.
Figure 6

The economy needs a strong middle class to maintain the buying power needed to purchase goods such as vehicles, motorcycles, and new homes, to keep the price of oil up. If the middle class starts to disappear, or if young people start earning less than their parents did at the same age (adjusted for inflation), then it becomes difficult to keep the prices of oil and other energy products up. Prices must be both high enough for producers and low enough for consumers.

Graph displaying average annual inflation-adjusted Brent oil prices from 1948 to 2025, highlighting low prices before 1970 and the impact of wage disparity on affordability.
Figure 7

Recessions took place when oil prices rose. Governments found that they needed to bail out their economies with more debt when oil prices rose. Since 2008, the ratio of US debt to GDP has skyrocketed. Quite a bit of the added debt has been to pay for programs for poor people and the elderly.

Line graph showing the ratio of US federal debt to GDP from 1970 to 2020, indicating significant increase after 1980 and especially after 2008.
Figure 8. Chart by the Federal Reserve Bank of St. Louis, showing the ratio of US public debt to GDP. The ratios would have been even higher if internal debt, such as debt owed to pay for Social Security benefits, were included.

The current level of debt of the US government is widely viewed as being too high. One analysis suggests that if the ratio of government debt to GDP exceeds 90%, economic growth is inhibited. The US debt to GDP ratio is now 120% on the basis shown, which is well above the 90% threshold. One concern is that interest payments on debt already exceed the amount the US spends on defense each year. Taxes need to rise, simply to pay the interest on the debt.

Growing debt, particularly during the Stagflation Stage, is one of the issues mentioned by researchers into so-called secular cycles, which are long-term cycles that take centuries to complete. In the book Secular Cycles by Peter Turchin and Sergey Nefedov, a group of people somehow obtain possession of an area of land (often by cutting down trees or winning a war) that allows the population of the group to temporarily surge. When the population reaches the carrying capacity of the area, population growth greatly slows in a period referred to as Stagflation. Wage and wealth disparity become more of a problem, as does debt.

Eventually, according to Turchin and Nefedof’s study examining eight societies, populations tended to collapse over long periods, ranging from 20 to 50 years. Such cycles are closely related to the periods of growth and collapse analyzed in Prof. Joseph Tainter’s book, “The Collapse of Complex Societies.”

Graph illustrating economic cycles, specifically the Secular Cycle, showing population growth, stagnation, crisis, and intercyclic phases over time.
Figure 9. This chart is my chart, using information from the book Secular Cycles. The extent of the decline of the in population during the Crisis Period is quite variable.

The time ahead looks worrying, if my analysis is correct.

A presentation slide discussing the Secular Cycles Diagram and its implications for today's economy, highlighting the expected duration of Stagflation and potential upcoming Crisis Years.
Figure 10
Slide displaying conclusions regarding economic predictions and concerns, with bullet points about potential parallels to the Great Depression, job market issues, commodity pricing, debt bubbles, and rising conflict levels.
Figure 11
Slide displaying the conclusion of a presentation, summarizing economic cycles, and emphasizing investment in health, tools, skills, and relationships.
Figure 12

A few comments for my regular readers:

  1. My presentation included 51 slides. Look at the PDF to see the full presentation.
  2. Even though I didn’t mention it, having a rapidly growing energy supply at a very high EROI would not be sufficient to forestall collapse indefinitely. Other issues would emerge. Population would rise higher, and pollution would be more of a problem. Eventually, the system would still reach a limit and tend to collapse.
  3. I only included EROI because I thought a few people would already be aware of the concept. I didn’t define it or talk about it.
  4. My analysis seems to suggest that extenders of fossil fuels, such as wind, solar, and nuclear, need to have very high EROIs. But even with high EROIs, they are unlikely to be helpful for very long because the system would still tend to reach its limits.
Posted in Financial Implications, Introductory Post, PDFs Available | Tagged , , , , | 1,521 Comments

What has gone wrong with the economy? Can it be fixed?

Posted on October 6, 2025 by Gail Tverberg

We are at a time when there seems to be far more conflict than in the past. At least part of the problem is that slowing growth in the world economy is making it more difficult to repay debt with interest, especially for governments. A related issue is that government promises for pensions and healthcare costs are becoming more difficult to pay. Donald Trump is trying to make numerous changes that are distasteful both to other countries and to many people living within the US. What is going wrong with the economy?

In my view, major cracks are developing in the economy because we are heading toward a collapse scenario of the type that Dr. Joseph Tainter talks about in his book, “The Collapse of Complex Societies.” No one has told the general population about the potential problem, partly because they don’t fully understand the issues themselves, and partly because the underlying causes are too frightening to discuss with the public. At the root of these collapse-related issues is a physics issue, which is only gradually being fully understood.

In this post, I try to describe some of the issues involved. I don’t believe that the situation is hopeless. At the end, I discuss where we are now, relative to historical patterns, and some reasons to be optimistic about the future.

[1] Economies need to “dissipate” energy on a regular basis, just as humans need to eat food on a regular basis.

In physics terms, economies and all plants and animals are dissipative structures. So are tornadoes, hurricanes, and ecosystems of all kinds. All these structures have finite lifetimes. They all need to “dissipate” energy to continue performing their expected functions. Humans require a variety of foods to digest; economies require energy types that match their built infrastructure. The amount of energy required by an economy tends to rise with its human population.

Figure 1 shows that since 2008, world energy supply growth has only barely been keeping up with world population growth. Physics tells us that energy dissipation is required to create any part of GDP, so energy consumption that rises with population growth should not be surprising.

Graph depicting World Energy Consumption Per Capita from 1965 to 2022, highlighting significant periods such as rapid growth from 1965 to 1973, challenges from 1973 to 2001, and the debt bubble from 2008 to 2024.
Figure 1. World energy consumption per capita from 1965 through 2024, based on data of the 2025 Statistical Review of World Energy, published by the Energy Institute, with fitted trend lines.

The dips in per capita energy consumption in the latest period correspond to major recessions in 2008 and 2020. Rapid growth in per capita energy consumption seems to take place when growth in some low-priced fuel temporarily becomes available.

[2] Low energy prices are at least as important to the economy as low food prices are to individual households. Low energy prices seem to allow investments that pay back well.

If a family spends 10% of its income on food, the family has lots of money left over for non-essentials, such as a vehicle, trips to movies, and even a foreign vacation. If a family spends 50% of its income on food (or even worse, 75%), any little “bump in the road” can cause a crisis. There is little money available to spend on housing or a vehicle.

Figure 2 shows that oil prices were under $20 per barrel (adjusted to today’s price level) in the 1948-1972 period. This corresponds quite closely with the rapid-growth early period shown on Figure 1.

Graph showing the average annual inflation-adjusted oil price per barrel from 1948 to 2024, highlighting low prices before 1970.
Figure 2. Inflation-Adjusted Brent Oil equivalent oil prices, based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute, for values through 2024. Data for 2025 based on EIA information.

The economy was able to add many types of helpful “complexity” during this early period because of the growing supply of cheap oil. It could add interstate highways and many miles of pipelines. Inventions included television, air conditioning, early computers, and contraceptive pills. Many families were able to buy a vehicle for the first time. Women started to work outside the home in much greater numbers.

Many of these early types of complexity paid back well. For example, interstate highways made travel faster. Early computers could handle many bookkeeping chores. Contraceptive pills made it possible for women to plan their families. Without so many children, working outside the home was more of a possibility for women.

[3] Many indirect changes took place between 1948 and 1970 that would be harder to maintain if oil supplies stopped growing as rapidly and as inexpensively as they did during this early period.

If we look back, we know that in the 1600s and 1700s, people worked pretty much all their lives. It was the growth in energy supplies in the 1800s and 1900s that allowed governments to expand their services. They could promise to provide pensions and health care benefits. The rapid growth in oil supplies in the 1948 to 1970 period allowed even more expansion of government benefits, as well as other changes.

Line graph showing U.S. field production of crude oil from 1920 to 2022, illustrating peaks and trends in production levels.
Figure 3, Chart of US crude oil production by the EIA.

US Medicare was added in 1965, providing healthcare benefits to the elderly and disabled. Schools were integrated, promising better education for Black children. After actuarial models started to suggest that pensions could pay out a great deal in pension benefits, businesses started to award pensions to workers, in addition to Social Security.

Social standards started changing, too. Dating couples didn’t have to worry about the woman accidentally getting pregnant, at least in theory. No fault divorce became available. Government programs became available to provide funds to single or divorced parents with children.

Of course, if wages of young people started to stagnate, or if there were too many divorces of low-wage people, this whole approach wouldn’t work as well. It would be harder to tax wages enough to pay for the many benefits for the elderly, the disabled, and those with low incomes.

[4] Governments facing the problem of high-cost oil did exactly what families with suddenly high-cost food would do, if they had unlimited credit cards. They ran up increasing amounts of debt, to pay for all the promised programs.

We know with our own finances that if we are spending too much on food, we can temporarily work around this problem by maxing out our credit cards and adding more debt in other ways. I believe that the world economy has been doing something similar for a long time.

The push toward added debt has become much greater since 2008 (Figure 1), but the general trend toward increased debt started back in the early 1980s, about the time Ronald Reagan and Margaret Thatcher began their terms. Businesses decided that they needed to use what they now called “leverage” to obtain higher profits.

The debt that economies added was a kind of complexity. If the debt was invested in factories or industry that paid back well, everything went well.

But not all the uses of debt went into approaches that paid back well. For example, paying doctors to give high-priced treatments to elderly people who were certain to die within a few months did not provide much benefit to the economy, apart from the money the physician and the rest of the health care system obtained to spend on other goods and services.

Another way the growing debt was used was to invest in international trade. Companies found that they could outsource many kinds of manufacturing processes to low-wage countries in Southeast Asia, leading to cost savings relative to paying for high-priced US labor. (Human labor is a type of energy used by the economy.) In these Southeast Asian countries, coal was used for many processes, making the energy part of manufacturing costs cheaper, too.

The US and other Advanced Economies (defined as members of the Organization for Economic Development (OECD)) seemed to benefit because goods made in Southeast Asia were cheaper than what Advanced Economies could make for themselves. Two major issues arose, however:

a. Wages for the less-skilled workers in the US tended to stagnate or fall.

Line graph showing the comparison of US worker pay and productivity growth from 1948 to 2023, indicating a significant divergence after the peak in oil production around 1970.
Figure 4. Based on data of the Economic Policy Institute.

One reason for stagnating pay was because of wage competition with low-wage countries. As a result, the middle class has tended to disappear. Wage disparity has become a problem.

b. Advanced Economies tended to lose the ability to make many essential goods and services for themselves. If a shortage of inputs were to occur in the future, they would be at a disadvantage.

[5] Now the consequences of too many governmental promises are becoming clear.

Advanced Economies around the world are finding their debt levels ballooning. Much of their higher expenditures are on programs citizens expect to continue forever.

A pie chart illustrating the breakdown of the 2024 US Federal Government Spending, highlighting categories like Interest on Debt, Social Security, Medicare, Defense, Discretionary Non-Defense Spending, and Other Mandatory Programs.
Figure 5. Based on data of the Congressional Budget Office.

US leaders can see that practically the only way that they can fix this situation is by cutting back on many programs the public depends on. If a leader like Trump has a lot of power, he can also try to get a larger share of the world’s output by imposing tariffs on the output of other countries. Neither of these approaches will be popular with very many people. If nothing else, there will be conflict over who gets cut out if cuts are necessary.

Other Advanced Nations face similar problems.

[6] Leaders have not told the public about the likelihood of a shortfall of energy supplies and the difficulties this would cause.

Physicists have been warning that a shortfall in fossil fuel supplies was likely to occur since the 1950s. More recent models, such as the modeling represented in the 1972 book, The Limits to Growth, gave a similar picture.

Part of the confusion has been that economists have given an optimistic view of what is ahead. Their (oversimplified) models indicate that in the case of a shortfall, prices will rise. With these high prices, a huge amount of difficult-to-extract fossil fuels would shortly become available, or substitutes would be found.

In my opinion, the model of economists is incorrect. With the middle class shrinking, there is not enough “demand” to keep the price of any commodity up for very long. Instead, prices tend to bounce up and down. This can be seen for oil on Figure 2. Pricing represents a two-way tug-of-war: Prices need to be high enough for the producers to make a profit, but end products (including food grown and transported using oil) must be inexpensive enough for consumers to afford.

With one story being told by the physicists and another by the economists, competing belief systems arose:

  • One saying that there would be a major shortage of fossil fuels, particularly oil, starting in the first half of the 21st century because the only fossil fuels we can extract are the fairly accessible fossil fuels. There are constraints caused by geology that seem to be difficult to work around, arising from limitations caused by physics.
  • The other saying that any such problems lie far in the future. We should be able to develop new techniques quickly. Otherwise, any shortfall should cause prices to rise high enough to pay for more expensive techniques, or to find substitutes.

Both sides could see a need to limit consumption, one side because we appeared not to have enough, and the other because, if we really could extract as much fossil fuels as they considered possible, models suggested that there would be a climate problem.

To try to satisfy both sides, politicians decided to push the “save the world from CO2 emissions” narrative. This approach had an added benefit: Businesses wanting to import low-priced goods and services, made in China and other low-cost countries, very much favored it. The limitation on CO2 emissions of the 1997 Kyoto Protocol was simply a local limitation on emissions, not a limitation on CO2 on imported goods.

[7] The Kyoto Protocol, as implemented, has had the opposite effect from the hoped-for reduction in world CO2 from fossil fuels.

What has happened with the 1997 Kyoto Protocol is precisely what businesses, looking to sell low-cost goods made in Southeast Asia, wanted. Manufacturing and other types of industry have tended to move out of the Advanced Economies, and into lower-cost countries.

A graph illustrating world energy consumption from 1965 to 2022, showing trends for advanced economies and others, with a significant increase noted after China joined the World Trade Organization in December 2001.
Figure 6. Energy consumption separately for OECD and non-OECD countries, based upon data of the 2025 Statistical Review of World Energy, published by the Energy Institute.

Total world CO2 emissions have risen, rather than fallen.

Line graph showing CO2 emissions from fossil fuels from 1965 to 2022, highlighting world emissions in blue, advanced economies in orange, and other than advanced economies in green, with key events marked in 1997 and 2001.
Figure 7. CO2 amounts related to the burning of fossil fuels, based upon data of the 2025 Statistical Review of World Energy, published by the Energy Institute.

[8] The supposed transition to wind turbines and solar panels is not going well.

Wind turbines and solar panels, the way that they are now being added to the overall electric grid, are having far less benefit than most people had hoped. Of course, their benefit is only with respect to electricity production. Farming, transportation of many kinds, and other industries use a great deal of oil and coal, in addition to grid electricity.

Figure 8 shows a breakdown of world energy consumption by type. Electricity from wind turbines and solar panels makes up only the tiny reddish portion at the top. It represents only 3% of the total energy consumption.

A chart displaying world energy consumption by type from 1965 to 2024, showing fossil fuels accounting for 87% of consumption, while wind and solar contribute 3%.
Figure 8. Breakdown of world energy consumption by type, based upon data of the 2025 Statistical Review of World Energy, published by the Energy Institute. “Other” includes ethanol, wood chips, sawdust burned for electricity, geothermal, and other miscellaneous types.

We usually hear about wind and solar electricity as a percentage of electricity production. This is a higher percentage, which averages close to 15%.

Bar graph showing the 2024 share of electricity production from wind and solar energy by different regions including World, Australia, EU, China, US, Japan, India, Africa, Mid-East, and Russia.
Figure 9. Wind and solar electricity share of electricity production, based upon data of the 2025 Statistical Review of World Energy, published by the Energy Institute.

The areas with the highest percentage of wind and solar electricity generation are already experiencing blackouts because differences from grid electricity have not sufficiently been compensated for. For example, Spain experienced a 10-hour blackout on April 28, 2025, because of low “inertia.” Inertia usually comes from the rotating turbines used in the production of electricity using coal, natural gas, nuclear, or hydroelectric.

Bar graph showing the share of total energy consumption from wind and solar for various regions in 2024, including World, Australia, EU, China, US, Japan, India, Africa, and Mid-East Russia.
Figure 10. Wind and solar electricity share of total energy consumption, based upon data of the 2025 Statistical Review of World Energy, published by the Energy Institute.

Figure 10 shows that in 2024, wind and solar electricity amounted to between 5% and 6% of energy consumption in Australia and the EU. Their high level of usage helped to bring the world average up to a little under 3% of total energy.

[9] There are important things about ecosystems in general and our economy in particular that we are not told about.

I don’t think that educators and politicians are generally aware of the following issues relating to ecosystems and our economy:

a. Ecosystems are built to be resilient. As dissipative structures, ecosystems and economies are “self-organizing structures” powered by energy, just as the human body is. We need not fret that we are responsible for species extinction. Ecosystems, like plants and animals, have short lifetimes. A replacement ecosystem will quickly develop if adequate resources (such as sunlight and water) are available. Furthermore, the waste (or pollution) of one species helps provide the nutrition for other species; CO2 provided by burning fuel helps plants grow. Over the long history of life on earth, 99.9999% of plant and animal species have died out and been replaced by other species.

b. Ecosystems and economies also tend to heal themselves, just as human wounds tend to heal themselves. If a fire, or a type of beetle, destroys an ecosystem, replacement plants and accompanying animals will soon find a way to populate the area. If a major government fails, or banks fail, somehow workarounds will be found to take their place. Human systems need order; if governments fail, religious systems that provide order may become more important.

c. Humans, unlike other animals, have a built-in need for supplemental energy, such as firewood, or fossil fuel energy. Over one million years ago, pre-humans figured out how to cook part of their food. Because of this cooked food, their jaws and digestive apparatus could shrink in size. The improved food supply allowed their brains to improve in complexity. Also, cooked food greatly reduced the time required for chewing, allowing more time for toolmaking and crafts. Heat is also important for killing pathogens in water.

d. Humans are smarter than other animals, allowing the population of humans to grow, while the population of many other species tends to fall. This issue continues today:

A graph displaying world population growth divided between 'Advanced Economies' and 'Other than Advanced Economies' from 1965 to 2022, showing a significant increasing trend in both categories.
Figure 11. World population, divided between OECD countries and non-OECD Countries, based upon data of the 2025 Statistical Review of World Energy, published by the Energy Institute.

The large rise in the population of the less advanced economies contributes to the huge number of immigrants wanting new homes in higher income countries. The book, Too Smart for our Own Good by Craig Dilworth, discusses this issue further.

e. It is ultimately the rising population issue discussed in (d) that leads to the typical overshoot and collapse situation. The issue is that available resources do not rise fast enough (in the area, or with the technology available) to provide enough physical goods and services for the population. If a new approach can be developed, or a neighboring area with additional resources can be conquered, population can start to grow again. Figure 12 represents my attempt to show the shape of a typical secular cycle (also called overshoot and collapse cycle) based on Turchin and Nefedov’s research regarding collapses of agricultural economies.

Graph depicting the shape of a typical "Secular Cycle," showing the timeline of potential societal collapse over 300 years, including stages of growth, stagnation, crisis, and intercycle phases.
Figure 12. Chart by author based on information provided in Turchin and Nefedov’s book, Secular Cycles. The extent of the population decline in the Crisis Period varies from greatly among secular cycles. The decline shown likely overstates the typical case.

f. Outgrowing our resource base is not a phenomenon that began with fossil fuels. In 2020, I wrote a post explaining how Humans Left Sustainability Behind as Hunter-Gatherers. In 1796, when world population was about one billion, Robert Thomas Malthus wrote about population growing faster than food production. This was before fossil fuels were widely used. Now, about 230 years later, population has risen to eight billion, thanks to the availability of fossil fuels. We need major innovations, or additional energy resource types, if we want to work around obstacles now.

[10] We seem to be reaching the end of the Stagflation Period in Figure 12. We are likely starting along the long downslope of the Crisis Period.

In my opinion, the Stagflation Period began when US oil production peaked, in 1970. The estimated length of the Stagflation Period is 50 to 60 years. The 1970 peak is now 55 years behind us, so the timing is just as expected.

The Crisis period is next, listed as lasting perhaps 20 to 50 years. This is the period when governments and financial systems fail. What we think of as national boundaries can be expected to change, while countries themselves will generally become smaller. With less energy per capita, the quantity of government services provided can be expected to fall. Government organizations can be expected to become smaller and simpler. It is unlikely that democracies can continue; authoritarian rulers with a support staff are more likely. Plagues may cause the overall population to fall.

We don’t know if the pattern shown on Figure 12 is the correct model for modern times, but we should not be surprised if things do change in this direction. Governments may fail, and, in fact, the replacement governments may fail repeatedly.

I believe that uranium production is also constrained by prices that never go high enough, for long enough, to increase supply.

To pull us out of this predicament, new energy supplies will need to be developed, or old ones dramatically improved. At the same time, the system will need to reorganize in such a way to use these new, improved energy supplies. I would expect that in the new system, the general trend will once again be toward more complexity. New customs and new variations on religions may also develop.

It is theoretically possible that AI could help us find solutions quickly, so we never go deeply into the Crisis Period.

If much of the world economy does temporarily head downward because of limited fossil fuel supplies, some researchers might continue to work on solutions. Other people may temporarily need to focus on growing enough food, close to where it is needed, and finding sufficient fuel sources to at least cook much of this food. Nice things we are used to, such as home heating and repaving of roads by governments, are likely to be cut back greatly.

[11] Hope for the future.

We know that there are many ideas that are being worked on now that might be helpful for the future. They just aren’t ready to be scaled up, yet.

At the same time, some energy types we have today might work better if used in a different way. For example, solar panels seem to provide intermittent electricity for a long period, with relatively little maintenance. If they can be made to work where intermittent electricity is sufficient, and their use directed specifically to those locations, perhaps this might be a better use for them than putting them on the grid. Solar panels are made with fossil fuels, but they do act to stretch the electricity from those fuels.

Another possibility for hope comes through greater efficiency in using fossil fuels. History suggests that if we can figure out how to use fossil fuels more efficiently, the price of fossil fuels can rise higher. With a higher (inflation-adjusted) price, more oil and other fossil fuels can perhaps be extracted.

One thing that strikes me is the fact that economies are put together in an amazingly organized manner, with humans seeming to be put in charge of them. Everything I can see seems to suggest that there is a Higher Power, which some might call God, that is behind everything that happens. People talk about economies being self-organizing. However, in a way, it is as if a Higher Power is helping organize things for us. It appears to me that creation is an ongoing process, not something that stopped 13.8 billion years ago or 6,000 years ago.

Seeing how ecosystems heal themselves, and how humans have made it through many secular cycles so far, gives me hope for the future.

Posted in Energy policy, Financial Implications, oil shortages | Tagged , , , | 1,621 Comments

Sierra Club talk that may be of interest

Posted on September 13, 2025 by Gail Tverberg

One of the chapters of the Sierra Club of Minnesota has asked Joseph Tainter and me to give Keynote speeches on October 25 at what is being billed as Minnesota’s First DeGrowth Summit. On site space is pretty limited, but free viewing will be available by internet.

If you want to attend in person, you should probably sign up soon.

This is the notice that the organizers have said that I can share:

Minnesota’s First DeGrowth Summit – October 25, 2025

The DeGrowth Summit, hosted by the Sierra Club North Star Chapter’s DeGrowth Team, will bring together organizers, artists, gardeners, educators, and community members to share skills, spark collaborations, and celebrate the many ways we’re resisting extractive economies and creating thriving local futures.

There are 3 ways to participate in the event: The in-person event is held in Minneapolis, MN where there will be presentations by two keynote speakers, Gail Tverberg and Joseph Tainter. In addition it will bring together organizers, artists, gardeners, educators, and community members to share skills, spark collaborations, and celebrate the many ways we’re resisting extractive economies and creating thriving local futures. Expect food, drop-in spaces, workshops, and a vibrant marketplace of ideas—from climate justice to co-ops, repair culture to Indigenous sovereignty. This event is free and you can register at: www.tinyurl.com/degrowthsummit


The second option is a “Watch Party” in Rochester, MN. Here we will gather at the Squash Blossom Farm for lunch and watch the live stream together. After the live stream is done, Gail will be arriving from Minneapolis to have a “Fireside Chat” with the group followed by a bonfire and wiener roast. The cost is $25 which covers the expense of lunch, dinner and the event space. Space is limited to 50 so sign up soon at: 

Rochester DeGrowth Summit Watch Party


The final way to participate is to view the live stream online. The live stream will include the keynote presentations and two other presentations TBD. You can register for this at www.tinyurl.com/degrowthsummit . At the bottom of the registration make sure to check the box for virtual and a link will be sent to you prior to the event.

Some additional information:

The Minneapolis Event is at New City Center, 3104 16th Ave S, Minneapolis, MN 55407

The Watch Party at Squash Blossom Farm is at 7499 60th Ave NW, Oronoco, MN 55960

This is the graphic shown in early web material.

A colorful flyer for Minnesota's First Degrowth Summit, featuring text that highlights the date, time, and location of the event, along with design elements like stars, trees, and a snail. The flyer promotes workshops, mutual aid, and economic justice while indicating the event is kid-friendly and free, with a QR code linking to additional information.

I expect to put up a “regular” post in the next few days.

Posted in Planning for the Future | 1,694 Comments

Why oil prices don’t rise to consistently high levels

Posted on August 19, 2025 by Gail Tverberg

The supply and demand model of economists suggests that oil prices might rise to consistently high levels, but this has not happened yet:

Line graph showing average annual Brent oil prices in 2024 US dollars from 1965 to 2022
Figure 1. Average annual Brent equivalent inflation-adjusted crude oil prices, based on data of the 2025 Statistical Review of World Energy, published by the Energy Institute. The last year shown is 2024.

In my view, the economists’ model of supply and demand is overly simple; its usefulness is limited to understanding short-term shifts in oil prices. The supply and demand model of economists does not consider the interconnected nature of the world economy. Every part of GDP requires energy consumption of some type. The price issue is basically a physics issue because the world economy operates under the laws of physics.

In this post, I will try to explain what really happens when oil supply is constrained.

[1] Overview: Why Oil Prices Don’t Permanently Rise; What Happens Instead

My analysis indicates that there are three ways that long-term crude oil prices are held down:

(a) Growing wage and wealth disparities act to reduce the “demand” for oil. As wage and wealth disparities widen, the economy heads in the direction of a shrinking middle class. With the shrinking of the middle class, it becomes impossible to bid up oil prices because there are too few people who can afford their own private cars, long distance travel, and other luxury uses of oil. Strangely enough, this dynamic is a major source of sluggish growth in oil demand.

(b) Politicians work to prevent inflation. Oil is extensively used in food production and transport. If crude oil prices rise, food prices also tend to rise, making citizens unhappy. In fact, inflation in general is likely to rise, as it did in the 1970s. Politicians will use any method available to keep crude oil prices down because they don’t want to be voted out of office.

(c) In very oil deficient locations, such as California and Western Europe, politicians use high taxes to raise the prices of oil products, such as gasoline and diesel. These high prices don’t get back to the producers of crude oil because they are used directly where they are collected, or they act to subsidize renewables. My analysis suggests that indirectly this approach will tend to reduce world crude oil demand and prices. Thus, these high taxes will help prevent inflation, especially outside the areas with the high taxes on oil products.

Instead of oil prices rising to a high level, I expect that the methods used to try to work around oil limits will lead to fragility in many parts of the economic system. The financial system and international trade are particularly at risk. Ultimately, collapse over a period of years seems likely.

Underlying this analysis is the fact that, in physics terms, the world economy is a dissipative structure. For more information on this subject, see my post, The Physics of Energy and the Economy.

[2] Demand for oil is something that tends not to be well understood. To achieve growing demand, an expanding middle class of workers is very helpful.

Growing demand for oil doesn’t just come from more babies being born each year. Somehow, the population needs to buy this oil. People cannot simply drive up to a gasoline station and honk their horns and “demand” more oil. They need to be able to afford to drive a car and purchase the fuel it uses.

As another example, switching from a diet which reserves meat products for special holidays to one that uses meat products more extensively tends to require more oil consumption. For this type of demand to rise, there needs to be a growing middle class of workers who can afford a diet with more meat in it.

These are just two examples of how a growing middle class will tend to increase the demand for oil products. Giving $1 billion more to a billionaire does not have the same impact on oil demand. For one thing, a billionaire cannot eat much more than three meals a day. Also, the number of vehicles they can drive are limited. They will spend their extra $1 billion on purchases such as shares of stock or consultations with advisors on tax avoidance strategies.

[3] In the US, there was a growing middle class between World War II and 1970, but more recently, increasing wage and wealth disparities have become problems.

There are several ways of seeing how the distribution of income has changed.

Line graph showing U.S. income shares for the top 1% and top 0.1% of households from 1913 to 2013, highlighting significant increases in the top 1% and fluctuations in the top 0.1%.
Figure 2. U. S. Income Shares of Top 1% and Top 0.1%, Wikipedia exhibit by Piketty and Saez.

Figure 2 shows an analysis of how income (including capital gains) has been split between the very rich and everyone else. What we don’t see in Figure 2 is the fact that total income (calculated in this way) has tended to rise in all these periods.

Back in the 1920s (known as “the roaring 20s”), income was split very unevenly. There was a substantial share of very wealthy individuals. This gradually changed, with ordinary workers getting more of the total growing output of the economy. The share of the economy that the top earners obtained hit a low in the early 1970s. Thus, there were more funds available to the middle class than in more recent years.

Another way of seeing the problem of fewer funds going to ordinary wage earners is by analyzing wages and salary payments as a share of US GDP.

Line graph depicting the percentage of wages and salaries as a share of US GDP from 1944 to 2024, showing a downward trend.
Figure 3. Wages and salaries as share of US GDP, based on data of the US Bureau of Economic Analysis.

Figure 3 shows that wages and salaries as a percentage of GDP held up well between 1944 and 1970, but they have been falling since that time.

Furthermore, we all can see increasing evidence that young people are not doing as well financially as their parents did at the same age. They are not as likely to be able to afford to buy a home at a young age. They often have more college debt to repay. They are less able to buy a vehicle than their parents. They are struggling to find jobs that pay well enough to cover all their expenses. All these issues tend to hold down oil demand.

Since 1981, falling interest rates (shown in Figure 6, below) have allowed growing wage disparities to be transformed into growing wealth disparities. This has happened because long-term interest rates have fallen over most of this period. With lower interest rates, the monthly cost of asset ownership has fallen, making these assets more affordable. High-income individuals have disproportionately been able to benefit from the rising prices of assets (such as homes and shares of stock), because with higher disposable incomes, they are more able to afford such purchases. As a result, since 1981, wealth disparity has tended to increase as wage disparity has increased.

[4] Governments talk about the growing productivity of workers. In theory, this growing productivity should act to raise the wages of workers. This would maintain the buying power of the middle class.

Line graph showing the trend in average productivity growth in the US from 1948 to 2023, highlighting quarterly growth with varying colored lines to indicate specific time periods.
Figure 4. Productivity growth by quarter, relative to productivity in the similar quarter one year earlier, based on data of the Bureau of Labor Statistics, as recorded by the Federal Reserve of St. Louis in its data base. The last quarter shown ends June 30, 2025.

Figure 4 shows that productivity growth was significantly higher in the period between 1948 and 1970 than in subsequent years. Figure 2 shows that before 1970, at least part of the productivity growth acted to raise the incomes of workers. More recently, productivity growth has been lower. With this lower productivity growth, Figure 2 shows that wage-earners are especially being squeezed out of productivity gains. It appears that most of the growth attributable to productivity gains is now going to other parts of the economy, such as the very rich, the financial sector, and the governmental services sector.

The changes the world has seen since 1970 are in the direction of greater complexity. Adding complexity tends to lead to growing wage and wealth disparities. Figure 4 seems to indicate that with added complexity, productivity per worker still seems to rise, but not as much as when the economic system grew primarily due to growing fossil fuel usage leveraging the productivity of workers.

Figure 4 shows data through June 30, 2025. Note that productivity in the latest period is lower than in earlier periods, even with the early usage of Artificial Intelligence. This is a worrying situation.

[5] The second major issue holding oil prices down is the fact that if crude oil prices rise, food prices also tend to rise. In fact, overall inflation tends to escalate.

Oil is extensively used in food production. Diesel is used to operate nearly all large farm machinery. Vehicles used to transport food from fields to stores use some form of oil, often diesel. Transport vehicles for food often provide refrigeration, as well. International transport, by jet or by boat also uses oil. Companies making hybrid seeds use oil products in their processes and distribution.

Furthermore, even apart from burning oil products, the chemical qualities of petroleum are used at many points in food production. The production of nitrogen fertilizer often uses natural gas. Herbicides and insecticides are made with petroleum products.

Because of these considerations, if oil prices rise, the cost of producing food and transporting it to its destination will rise. In fact, the cost of transporting all goods will rise. These dynamics will tend to lead to inflation throughout the system. When oil prices first spiked in the 1970s, inflation was very much of an issue, both for food and for goods in general. No one wants a repetition of a highly inflationary scenario.

Politicians will be voted out of office if a repetition of the oil price spikes of the 1970s takes place. As a result, politicians have an incentive to hold oil prices down.

[6] Oil prices that are either too high for the consumer or too low for the producer will bring the economy down.

We just noted in Section [6] that oil consumers do not want the price of oil to be too high. There are multiple reasons why oil producers don’t want oil prices to be too low, either.

A basic issue is that the cost of oil production tends to rise over time because the easiest to extract oil is produced first. This dynamic leads to a need for higher prices over time, whether or not such higher prices actually occur. If prices are chronically too low, oil producers will quit.

A second issue is the fact that many oil exporting countries depend heavily on the tax revenue that can be collected from exported oil. OPEC countries often have large populations with very low incomes. Oil prices need to be high enough to provide food subsidies for an ever-growing population of poor citizens in these countries, or the leaders will be overthrown.

Graph depicting OPEC fiscal break-even prices for various member countries, showing the relationship between cumulative petroleum production and the fiscal break-even price in USD per barrel.
Figure 5. OPEC Fiscal Breakeven prices from 2014, published by APICORP.

Figure 5 shows required breakeven prices for oil producers in the year 2014, considering their need for tax revenue to support their populations, in addition to the direct costs of production. The current Brent Oil price is only about $66 per barrel. If the breakeven price remains at the level shown in 2014, this price is too low for every country listed except Qatar and Kuwait.

No oil exporting country will point out these price problems directly, but they will tend to cut off oil production to try to get oil prices up. In the recent past, this has been the strategy.

OPEC can also try a very different strategy, trying to get rid of competition by temporarily dumping stored-up oil onto the market, to lower oil prices to try to harm the financial results of its export competition. This seems to be OPEC’s current strategy. OPEC knows that US shale producers are now near the edge of cutting back greatly because depletion is raising their costs and reducing output. OPEC hopes that by obtaining lower prices (such as the $66 per barrel current price), it can push US shale producers out more quickly. As a result, OPEC hopes that oil prices will rebound and help them out with their price needs.

I have had telephone discussions with a former Saudi Aramco insider. He claimed that OPEC’s spare capacity is largely a myth, made possible by huge storage capacity for already pumped oil. It is also well known that OPEC’s (unaudited) oil reserves appear to be vastly overstated. These myths make the OPEC nations appear more powerful than they really are. OECD nations, with a desire for a happily ever after ending to our current oil problems, have eagerly accepted both myths.

To extract substantially more oil, the types of oil that are currently too expensive to extract (such as very heavy oil and tight oil located under metropolitan areas) would likely need to be developed. To do this, crude oil prices would likely need to rise to a much higher level, such as $200 or $300 per barrel, and stay there. Such a high price would lead to stratospherically higher food prices. It is hard to imagine such a steep rise in oil prices happening.

[7] The third major issue is that politicians in very oil deficient areas have been raising oil prices for consumers through carbon taxes, other taxes, and regulations.

Strangely enough, in places where the lack of oil supply is extreme, politicians follow an approach that seems to be aimed at reducing what little oil supply still exists. In this approach, politicians charge high taxes (“carbon” and other types) on oil products purchased by consumers, such as gasoline and diesel. They also implement stringent regulations that raise the cost of producing end products from crude oil. California and many countries in Western Europe seem to be following this approach.

With this approach, taxes and regulations of many kinds raise oil prices paid by customers, forcing the customer to economize. Some of the money raised by these taxes may go to help subsidize renewables, but virtually none of the additional revenue from consumers can be expected to go back to the companies producing the oil.

I would expect these high local oil prices will slightly reduce the world price of crude oil because of the reduced demand from areas using this approach (such as California and Western Europe). Demand will be reduced because oil prices will become unaffordably high for consumers in these areas. These areas are deficient in oil supply, so there will be much less impact on world oil supply.

Refineries in China and India will be happy to take advantage of the lower crude oil prices this approach would seem to provide, so much of the immediately reduced oil consumption in California and Western Europe will go to benefit other parts of the world. But the lower oil world oil prices will also act to inhibit future world oil extraction because the development of new oil fields will tend to be restricted by the lower world oil prices.

The lower crude oil prices will be beneficial in keeping world food price inflation and general inflation down worldwide. Some oil may be left in place, in case better extraction techniques are available later, especially in the areas with these high taxes. With less oil supply available, the economies of California and Western Europe will tend to fail more quickly than otherwise.

Unfortunately, so far, these intentionally higher oil prices for consumers seem to be mostly dead ends; they encourage substitutes, but today’s substitutes don’t work well enough to support modern agriculture and long-distance transportation.

[8] Politicians at times have reduced oil demand, and thus oil prices, by raising interest rates.

One way to reduce oil prices has been to push the economy into recession by raising interest rates. When interest rates rise, purchasing power for new cars, and for goods using oil in general, tends to fall. Recession seems to happen, with a lag, as shown on Figure 6. Recessions on this figure are noted with gray bars.

Line graph depicting the 3-Month Treasury Bill Secondary Market Rate and the Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity over time, highlighting trends and fluctuations since the 1940s.
Figure 6. 3-month and 10-year secondary market Treasury interest rates, based on data of Federal Reserve System of St. Louis. The last month shown is July 2025.

Increasing interest rates has led to several recessions, including the Great Recession of 2007-2009. A comparison with Figure 1 shows that oil prices have generally fallen during recessions.

[9] The climate change narrative is another way of attempting to reduce oil demand, and thus crude oil prices.

The wealthy nations of the world have been spreading the narrative that our most serious problem is climate change. In this narrative, we can help prevent climate change by reducing our fossil fuel usage. This narrative makes trying to work around a fossil fuel shortage a virtue, rather than something that needs to be done to prevent calamity from happening. However, when we examine CO2 emissions (Figure 7), they show that world CO2 emissions from fossil fuels have not fallen because of the climate change narrative.

Graph showing the world CO2 emissions from fossil fuels from 1965 to 2022, with data for advanced economies, other than advanced economies, and total world emissions.
Figure 7. World CO2 emissions from fossil fuels based on data of the 2025 Statistical Review of World Energy, published by the Energy Institute. Advanced Economies are members of the Organization for Economic Development (OECD). The latest year shown is 2024.

Instead, what has happened is that manufacturing has increasingly moved to the less advanced economies of the world. There is a noticeable bump in CO2 emissions starting in 2002, as more coal-based manufacturing spread to China after it joined the World Trade Organization in very late 2001.

The climate change narrative has made it possible to “sell” the need to move away from fossil fuels in a less frightening way than by telling the public that oil and other fossil fuels are running out. However, it hasn’t fixed either the CO2 issue or the declining supply of fossil fuels issue, particularly oil.

[10] The danger is that the world economy is growing increasingly fragile because of long-term changes related to added complexity.

Shifting manufacturing overseas only works as long as there is plenty of inexpensive oil to allow long-distance supply lines around the world. Diesel oil and jet fuel are particularly needed. The US extracts a considerable amount of oil, but it tends to be very “light” oil. It is deficient in the long-chain hydrocarbons that are needed for diesel and jet fuel. In fact, the world’s supply of diesel fuel seems to be constrained.

Line graph depicting world per capita diesel supply since 1980, showing fluctuations and a struggle to maintain levels above 100% of the 1980 baseline from 2008 onwards.
Figure 8. World per capita diesel supply, based on data of the 2025 Statistical Review of World Energy, published by the Energy Institute.

Without enough diesel, there is a need to move manufacturing closer to the end users. But what I have called the Advanced Nations (members of the OECD, including the US, most countries in Europe, and Australia) have, to a significant extent, moved their manufacturing to lower-wage countries. Fossil fuel supplies in countries that have moved their manufacturing offshore tend to be depleted. Trying to move manufacturing back home seems likely to be problematic.

The world economy is now built on a huge amount of debt. All this debt needs to be repaid with interest. But if manufacturing is significantly constrained, there is likely to be a problem repaying this debt, except perhaps in currencies that buy little in the way of physical goods.

When oil supply is stretched, we don’t recognize the symptoms. One symptom is refinery closures in some oil importing areas, such as in California and Britain. This will make future oil supply less available. Other symptoms seem to be higher tariffs (to motivate increased manufacturing near home) and increasing hostility among countries.

[11] Both history and physics suggest that “overshoot and collapse over a period of years” is the outcome we should expect.

Pretty much every historical economy has eventually run into difficulties because its population grew too high for available resources. Often, available resources have been depleted, as well. Now, the world economy seems to be headed in this same direction.

The outcome is usually some form of collapse. Sometimes individual economies lose wars with other stronger economies. Sometimes, wage disparities become such huge problems that the poorer citizens become vulnerable to epidemics. At other times, unhappy citizens overthrow their governments. Or, if the option is available, citizens might vote the current political elite out of power.

Such collapses do not happen overnight; they are years in the making. Poorer people start dying off more quickly, even before the economy as a whole collapses. Conflict levels become greater. Debt levels grow. Researchers Turchin and Nefedov tell us that food prices bounce up and down. There is no evidence that they rise to a permanently high level to enable more food to be grown.

Anthropologist Joseph Tainter, in the Collapse of Complex Societies, tells us that there are diminishing returns to added complexity. While economies can temporarily work around overshoot problems with greater complexity, added complexity cannot permanently prevent collapse.

[12] We need to beware of “overly simple” models.

The models of economists and of scientists tend to be very simple. They do not consider the complex, interconnected nature of the world economy. In fact, the laws of physics are important in understanding how the world economy operates. Energy in some form (fossil fuel energy, human energy, or energy from the sun) is needed for every component of GDP. If the energy supply somehow becomes restricted, or is very costly to produce, this becomes a huge problem.

As I see it, the supply and demand model of economists is primarily useful in predicting what will happen in the very short term. It doesn’t have enough parts to it to tell us much more.

For any commodity, including oil, storage capacity tends to be very low relative to the amount used each year. Because of this, commodity prices tend to react strongly to any fluctuation in presently available supply, or projected supply in the future. The supply and demand model of economists primarily predicts these short-term outcomes.

For the longer term, we need to look to history and to models that consider the laws of physics. These models seem to suggest that collapse will take place over a period of years, as the more vulnerable parts of the system break off and disappear. Unfortunately, we cannot expect long-term high prices to solve our oil problem.

Posted in Energy policy, Financial Implications | Tagged , , | 1,589 Comments