Jan 212017
 January 21, 2017  Posted by at 4:59 pm Finance Tagged with: , , , , , , , ,

Workmen next to the screws of the RMS Titanic at Belfast shipyard, 1911


The people at Conflicts Forum, which is directed by former British diplomat and MI6 ‘ranking figure’ Alastair Crooke, sent me an unpublished article by Alastair and asked if the Automatic Earth would publish it. Since I like his work and I (re-)published two of his articles last year already, ‘End of Growth’ Sparks Wide Discontent in October 2016 and Obstacles to Trump’s ‘Growth’ Plans in November 2016, I’m happy to.

His arguments here are very close to much of what the Automatic Earth has been advocating for years, both when it comes to our financial crisis and to our energy crisis. Our Primers section is full of articles on these issues written through the years. It’s a good thing other people pick up too on topics like EROEI, and understand you can’t run our modern, complex society on ‘net energy’ as low as what we get from any of our ‘new’ energy sources. It’s just not going to happen.

Here’s Alastair:



Alastair Crooke: We have an economic crisis – centred on the persistent elusiveness of real growth, rather than just monetised debt masquerading as ‘growth’ – and a political crisis, in which even ‘Davos man’, it seems, according to their own World Economic Forum polls,is anxious; losing his faith in ‘the system’ itself, and casting around for an explanation for what is occurring, or what exactly to do about it. Klaus Schwab, the founder of the WEF at Davos remarked  before this year’s session, “People have become very emotionalized, this silent fear of what the new world will bring, we have populists here and we want to listen …”.

Dmitry Orlov, a Russian who was taken by his parents to the US at an early age, but who has returned regularly to his birthplace, draws on the Russian experience for his book, The Five Stages of Collapse. Orlov suggests that we not just entering a transient moment of multiple political discontents, but rather that we are already in the early stages of something rather more profound. From his perspective that fuses his American experience with that of post Cold War Russia, he argues, that the five stages would tend to play out in sequence based on the breaching of particular boundaries of consensual faith and trust that groups of human beings vest in the institutions and systems they depend on for daily life. These boundaries run from the least personal (e.g. trust in banks and governments) to the most personal (faith in your local community, neighbours, and kin). It would be hard to avoid the thought – so evident at Davos – that even the elites now accept that Orlov’s first boundary has been breached.

But what is it? What is the deeper economic root to this malaise? The general thrust of Davos was that it was prosperity spread too unfairly that is at the core of the problem. Of course, causality is seldom unitary, or so simple. And no one answer suffices. In earlier Commentaries, I have suggested that global growth is so maddeningly elusive for the elites because the debt-driven ‘growth’ model (if it deserves the name ‘growth’) simply is not working.  Not only is monetary expansion not working, it is actually aggravating the situation: Printing money simply has diluted down the stock of general purchasing power – through the creation of additional new, ‘empty’ money – with the latter being intermediated (i.e. whisked away) into the financial sector, to pump up asset values.

It is time to put away the Keynesian presumed ‘wealth effect’ of high asset prices. It belonged to an earlier era. In fact, high asset prices do trickle down. It is just that they trickle down into into higher cost of living expenditures (through return on capital dictates) for the majority of the population. A population which has seen no increase in their real incomes since 2005 – but which has witnessed higher rents, higher transport costs, higher education costs, higher medical costs; in short, higher prices for everything that has a capital overhead component. QE is eating into peoples’ discretionary income by inflating asset balloons, and is thus depressing growth – not raising it. And zero, and negative interest rates, may be keeping the huge avalanche overhang of debt on ‘life support’, but it is eviscerating savings income, and will do the same to pensions, unless concluded sharpish.

But beyond the spent force of monetary policy, we have noted that developed economies face separate, but equally formidable ‘headwinds’, of a (non-policy and secular) nature, impeding growth – from aging populations in China and the OECD, the winding down of China’s industrial revolution,  and from technical innovation turning job-destructive, rather than job creative as a whole. Connected with this is shrinking world trade.

But why is the economy failing to generate prosperity as in earlier decades?  Is it mainly down to Greenspan and Bernanke’s monetary excesses?  Certainly, the latter has contributed to our contemporary stagnation, but perhaps if we look a little deeper, we might find an additional explanation. As I noted in a Comment of 6 January 2017, the golden era of US economic expansion was the ‘50s and ‘60s – but that era had begun to unravel somewhat, already, with the economic turbulence of the 70s. However, it was not so much Reagan’s fiscal or monetary policies that rescued a deteriorating situation in that earlier moment, but rather, it was plain old good fortune. The last giant oil fields with greater than 30-to-one, ‘energy-return’ on ‘energy-cost’ of exploitation, came on line in the 1980s: Alaska’s North Slope, Britain and Norway’s North Sea fields, and Siberia. Those events allowed the USA and the West generally to extend their growth another twenty years.

And, as that bounty tapered down around the year 2000, the system wobbled again, “and the viziers of the Fed ramped up their magical operations, led by the Grand Vizier (or “Maestro”) Alan Greenspan.”  Some other key things happened though, at this point: firstly the cost of crude, which had been remarkably stable, in real terms, over many years, suddenly started its inexorable real-terms ascent.  And from 2001, in the wake of the dot.com ‘bust’, government and other debt began to soar in a sharp trajectory upwards (now reaching $20 trillion). Also, around this time the US abandoned the gold standard, and the petro-dollar was born.


Source: Get It. Got It. Good, by Grant Williams


Well, the Hill’s Group, who are seasoned US oil industry engineers, led by B.W. Hill, tell us – following their last two years, or so, of research – that for purely thermodynamic reasons net energy delivered to the globalised industrial world (GIW) per barrel, by the oil industry (the IOCs) is rapidly trending to zero. Note that we are talking energy-cost of exploration, extraction and transport for the energy-return at final destination. We are not speaking of dollar costs, and we are speaking in aggregate. So why should this be important at all; and what has this to do with spiraling debt creation by the western Central Banks from around 2001?

The importance? Though we sometimes forget it, for we now are so habituated to it, is that energy is the economy.  All of modernity, from industrial output and transportation, to how we live, derives from energy – and oil remains a key element to it.  What we (the globalized industrial world) experienced in that golden era until the 70s, was economic growth fueled by an unprecedented 321% increase in net energy/head.  The peak of 18GJ/head in around 1973 was actually of the order of some 40GJ/head for those who actually has access to oil at the time, which is to say, the industrialised fraction of the global population. The Hill’s Group research  can be summarized visually as below (recall that these are costs expressed in energy, rather than dollars):


Source: https://cassandralegacy.blogspot.it/2016/07/some-reflections-on-twilight-of-oil-age.html 


But as Steve St Angelo in the SRSrocco Reports states, the important thing to understand from these energy return on energy cost ratios or EROI, is that a minimum ratio value for a modern society is 20:1 (i.e. the net energy surplus available for GDP growth should be twenty times its cost of extraction). For citizens of an advanced society to enjoy a prosperous living, the EROI of energy needs to be much higher, closer to the 30:1 ratio. Well, if we look at the chart below, the U.S. oil and gas industry EROI fell below 30:1 some 46 years ago (after 1970):


Source: https://srsroccoreport.com/the-coming-breakdown-of-u-s-global-markets-explained-what-most-analysts-missed/ 


“You will notice two important trends in the chart above. When the U.S. EROI ratio was higher than 30:1, prior to 1970, U.S. public debt did not increase all that much.  However, this changed after 1970, as the EROI continued to decline, public debt increased in an exponential fashion”. (St Angelo).

In short, the question begged by the Hill’s Group research is whether the reason for the explosion of government debt since 1970 is that central bankers (unconsciously), were trying to compensate for the lack of GDP stimulus deriving from the earlier net energy surplus.  In effect, they switched from flagging energy-driven growth, to the new debt-driven growth model.

From a peak net surplus of around 40 GJ  (in 1973), by 2012, the IOCs were beginning to consume more energy per barrel, in their own processes (from oil exploration to transport fuel deliveries at the petrol stations), than that which the barrel would deliver net to the globalized industrial world, in aggregate.  We are now down below 4GJ per head, and dropping fast. (The Hill’s Group)

Is this analysis by the Hill’s Group too reductionist in attributing so much of the era of earlier western material prosperity to the big discoveries of ‘cheap’ oil, and the subsequent elusiveness of growth to the decline in net energy per barrel available for GDP growth?  Are we in deep trouble now that the IOCs use more energy in their own processes, than they are able to deliver net to industrialised world? Maybe so. It is a controversial view, but we can see – in plain dollar terms – some tangible evidence fo rthe Hill’s Groups’ assertions:  


Source: https://srsroccoreport.com/wp-content/uploads/2016/08/Top-3-U.S.-Oil-Companies-Free-Cash-Flow-Minus-Dividends.png 

(The top three U.S. oil companies, ExxonMobil, Chevron andConocoPhillips: Cash from operations less Capex and dividends)


Briefly, what does this all mean? Well, the business model for the big three US IOCs does not look that great: Energy costs of course, are financial costs, too.  In 2016, according to Yahoo Finance, the U.S. Energy Sector paid 86% of their operating income just to service the interest on the debt (i.e. to pay for those extraction costs). We have not run out of oil. This is not what the Hill’s Group is saying. Quite the reverse. What they are saying is the surplus energy (at a ratio of now less than 10:1) that derives from the oil that we have been using (after the energy-costs expended in retrieving it) – is now at a point that it can barely support our energy-driven ‘modernity’.  Implicit in this analysis, is that our era of plenty was a one time, once off, event.

They are also saying that this implies that as modernity enters on a more severe energy ‘diet’, less surplus calories for their dollars – barely enough to keep the growth engine idling – then global demand for oil will decline, and the price will fall (quite the opposite of mainstream analysis which sees demand for oil growing. It is a vicious circle. If Hills are correct, a key balance has tipped. We may soon be spending more energy on getting the energy that is required to keep the cogs and wheels of modernity turning, than that same energy delivers in terms of calorie-equivalence.  There is not much that either Mr Trump or the Europeans can do about this – other than seize the entire Persian Gulf.  Transiting to renewables now, is perhaps too little, too late.

And America and Europe, no longer have the balance sheet ‘room’, for much further fiscal or monetary stimulus; and, in any event, the efficacy of such measures as drivers of ‘real economy’ growth, is open to question. It may mitigate the problem, but not solve it. No, the headwinds of net energy per barrel trending to zero, plus the other ‘secular’ dynamics mentioned above (demography, China slowing and technology turning job-destructive), form a formidable impediment – and therefore a huge political time bomb.

Back to Davos, and the question of ‘what to do’. Jamie Dimon, the CEO of  JPMorgan Chase, warned  that Europe needs to address disagreements spurring the rise of nationalist leaders. Dimon said he hoped European Union leaders would examine what caused the U.K. to vote to leave and then make changes. That hasn’t happened, and if nationalist politicians including France’s Marine Le Pen rise to power in elections across the region, “the euro zone may not survive”. “The bottom line is the region must become more competitive, Dimon said, which in simple economic terms means accept even lower wages. It also means major political overhauls: “I say this out of respect for the European people, but they’re going to have to change,” he said. “They may be forced by politics, they may be forced by new leadership.”

A race to the bottom in pay levels?  Italy should undercut Romanian salaries?  Maybe Chinese pay scales, too? This is politically naïve, and the globalist Establishment has only itself to blame for their conviction that there are no real options – save to divert more of the diminished prosperity towards the middle classes (Christine Lagarde), and to impose further austerity (Dimon). As we have tried to show, the era of prosperity for all, began to waver in the 70s in America, and started its more serious stall from 2001 onwards. The Establishment approach to this faltering of growth has been to kick the can down the road: ‘extend and pretend’ – monetised debt, zero, or negative, interest rates and the unceasing refrain that ‘recovery’ is around the corner.

It is precisely their ‘kicking the can’ of inflated asset values, reaching into every corner of life, hiking the cost of living, that has contributed to making Europe the leveraged, ‘high cost’, uncompetitive environment, that it now is.  There is no practical way for Italians, for example, to compete with ‘low cost’ East Europe, or  Asia, through a devaluation of the internal Italian price level without provoking major political push-back.  This is the price of ‘extend and pretend’.

It has been claimed at Davos that the much derided ‘populists’ provide no real solutions. But, crucially, they do offer, firstly, the hope for ‘regime change’ – and, who knows, enough Europeans may be willing to take a punt on leaving the Euro, and accepting the consequences, whatever they may be. Would they be worse off? No one really knows. But at least the ‘populists’ can claim, secondly, that such a dramatic act would serve to escape from the suffocation of the status quo. ‘Davos man’ and woman disdain this particular appeal of ‘the populists’ at their peril.



Alastair Crooke is a former British diplomat who was a senior figure in British intelligence and in European Union diplomacy. He is the founder and director of the Conflicts Forum, which advocates for engagement between political Islam and the West.



Home Forums What is this ‘Crisis’ of Modernity?

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    Workmen next to the screws of the RMS Titanic at Belfast shipyard, 1911   The people at Conflicts Forum, which is directed by former British dipl
    [See the full post at: What is this ‘Crisis’ of Modernity?]


    As far as my limited competences extend, I agree fully with this analysis (and most everything I have read on this site).

    What I fear is seeing so much work being forgotten and not turned into something practical.

    Maybe the best – or only – thing we can do with such information is to see how to relate it to our immediate experience, where we can really do something, however small. And of course each of us has different, equally worthy, experiences.

    My experience is a very small but significant area – Florence’s Oltrarno district, which has been holding out in a way for 2000 years, and where we have managed to set up a network of resistance to the countless destructive forces that rain upon the area, simply by defending and self-managing a garden area behind the Carmine church where the Renaissance was born.

    This garden allows us to bring generations together and to unite new and “traditional” residents of the area and slowly build back a community, thanks for example to a self-managed football school which has ignited enthusiasm among children and parents, or by creating a free violin school, or monitoring pollution in the district.

    Websites like yours give us an enormous opportunity for understanding what the underlying problems of our times are; and many other websites provide fascinating insights into possible alternatives (I am thinking of the interesting output of some New Urbanists or of those who are involved in permaculture or other extra-urban choices).

    But the big question for us is, what kind of alternative, in times of global collapse, can we build in a highly urban context, in densely populated “historic centres” of European cities, with a very mixed population and very little nature? Survivalists can tell us beautiful things about remote mountains, architects can design new districts, but how can we build communities that can survive here?


    Future Growth is possible for only a fraction of the population.
    1. Give less to many and so that a few will get more.
    2. Reduce the number of people so that there will be more for the remainder.

    Generational wealth transfer is not growth.


    Do you believe that 500,000 women can organize and that the news media did not know about it.
    Nobody told me that there was going to be a world wide demonstration.



    I think the best we can hope for is a descent long enough to make the inevitable decline in population manageable. By manageable I mean allowing for the preservation in society of a humane culture.

    I no longer make the effort to warn people of what is ahead. I reason, “Why unsettle their proud enjoyment of their remaining time on their Titanic deck chair?” Politicians are unwilling to be Cassandras as well.

    The masses still fanatically believe our over-arching societal myth: that human progress will always continue unabated. Perhaps politicians intrinsically know that to abruptly shatter such a myth is to invite unmanageable population decline and loss of humane culture.

    Joe Clarkson

    The overarching paradigm in Crooke’s analysis of our predicament is correct, but I am dubious about the Hills group computation of the energy loss side of their EROI computation. It is certainly true that the EROI of the marginal barrel produced has been dropping, but much of the oil used by the global economy comes from legacy fields for which the EROI is virtually unchanged since decades ago when they were first tapped.

    However, like rust, depletion never sleeps. Non-renewable fossil fuels underpin the global market economy, particularly in the transportation sector, where oil powers virtually all freight transport. As the EROI of oil declines, so will the ability to extract resources and transport finished products. Energy from oil will eventually decline faster than we can extract it. If we are not at that point now, we will be soon.

    So, growth is stalling and will soon turn to de-growth. If politics is in turmoil now, just think what it will be like when economic recession/depression becomes a continuous fact of economic life. Eventually people will realize that growth will never come back, the last vestiges of confidence in the economy will vaporize and we will experience the mother of all financial crises, followed shortly thereafter by economic collapse.

    Crooke is aware of this impending disaster, but then segues into a bizarre conclusion that populism offers the “hope” of “regime change”. The status quo may be clueless and hidebound, but its real problem is that it is suffocating under the implacable force of thermodynamic limits. No amount of populism or regime change can alter that constraint. Populism, whether from Sanders, Trump, or anyone else, is therefore a false hope, if only for the simple reason that when it comes to avoiding the limits to growth, there is no hope.

    V. Arnold

    Genuine human progress would be to recognize our wrong headed behavior; and to then proceed to change that behavior.
    Instead, we think re-arranging the deck chairs on the Titanic is actionable change.
    We are stubborn to our own detriment…


    Is there a country that one can immigrate to so as to not witness the collapse and that the country’s policies are resilient enough to have contingency plans should things go sideways and keep modern society going?

    V. Arnold

    @ sinabl10

    S.E. Asia might fit the bill. Still largely agrarian, very inexpensive (outside tourist areas), and access to excellent medical facilities. The cuisine is exquisite.
    Burma (Myanmar), Cambodia, Lao, and Vietnam have fairly high numbers of English speakers. Thailand, having never been colonized, not so much.
    The downside is culture; 180° from the west; culture shock is almost guaranteed. I was largely unaffected; I think because I found the culture and language fascinating, along with the ancient ruins and history.
    Good luck…

    Dr. Diablo

    This is how it was all set up before any of the present players were born. Field A: depleting access to easy oil fields. Field B: compounding interest in a debt-system.

    Will there be any place to go? No, but each area has their own advantages. America still has enormous, almost indescribable open land. But Europe has the old patterns carved into the infrastructure of Florence, with centralized, walkable cities, railways, enduring architecture, and much of the surrounding open land preserved. If that seems too slender a thread, read on French market gardening in the 1890s. A truly enormous, unimaginable amount of food was grown within the city limits and horse-reach around. It had to be. That technology was set aside, but it still exists in pockets and on paper. We don’t have to go back, but we certainly will have to go forward in a different way. Strip mining the capital assets to paper over the EROI losses will only work so long.

    And the worst is the lying, which makes people disoriented and unprepared for what could be just a deep cultural change to a pattern that gives us meaning and we all like better.

    tony smyth

    Thank you for posting this. Its a brilliant article.


    For Dr Diablo

    ” If that seems too slender a thread, read on French market gardening in the 1890s. ”

    Thanks, I shall be looking into that!


    Thank you Raul for posting Alistair’s piece and there are some fine comments here, particularly Joe Clarkson’s views. I am well familiar with the Hills group work and have been posting on my energy blog my own exegesis and analysis as I struggle to understand if their work is valid. I continue to parse out their graphs and equations and assumptions behind their Etp model laid out in their 65 page monograph and I have been mystified how little coverage that monograph has received in the media and the net besides an excellent report from Ugo Bardi on his casandraleagacy blog and the recent lectures by Dr Alister Hamilton in Edinburgh. No doubt most of the reason is the engineering and math complexity of their work and the interested reader needs sound grounding in thermodynamics and more than passing fluency in college math. I would urge everyone to read it particular the jarring conclusion that oil extraction, processing and distribution may be consuming all of the oil’s energy by as early as 2030, in effect consuming its tail. This surplus of exergy, not energy has made industrial civilization possible and as oil depletes so will wealth and obviously growth. The legacy fields are depleting at 5-8%/yr and the smaller fields twice that and new annual discoveries are less that 10% of world consumption and have been for decades. The average new field was 24 mbbl in 2015(source:HSBC sept 2016). It is definitely time to tend our gardens.


    I would like to direct readers to Gwynne Dyer’s recent article about the Davos meeting. Particularly his suggestion that automation/AI have been the greater cause behind the decline in employment in western countries not global trade. Instead of giving a long winded account of why I say the following I will just say it. Human culture more so in western countries is being replaced by machines. The natural world is being replaced by machines and humans. The implications of this go far beyond what I consider to be this simplistic article which is mainly talking about the end of growth one of the many stories humans have agreed on to use as a world view of who humans are, what the meaning is for human life and where we are going as a species. I feel anger when I read articles such as this which goes on about growth. My God don’t we get it human beings can’t keep taking from the natural world and treat it as a sewer indefinitely. Our positivistic humanism, our hubris, our Faith in technology is so divorced from what is actually happening to the biosphere as to be a form of insanity. The stories we live by are dying. The planet our home, is dying The elite don’t quite get that , given how immersed they are in maintaining power and control, but they do understand that the masses are dangerous to them, to their power and wealth. They are building a sanctuary in the alps and in other places in the world. I saw an Earthship on an island off the coast of Vancouver Island owned by a very wealthy family. The wealthy and powerful whether globalist or nationalist are preparing. THEY WANT TO SURVIVE. THEY WANT US TO SERVE THEM AS LONG AS POSSIBLE AND THEN GOOD RIDDANCE. THEY SEE THEMSELVES AS THE ELITE, THE FORERUNNERS OF A NEW WORLD ORDER. They are scared but we should be even more. Because we are going to be hammered by so many things which they can ameliorate or control and we can’t. Humanity and especially the masses need new stories to live by. Where do they come from? We can’t solve these problems with the old stories. So where does humanity find them?

    Joe Clarkson

    danielm said,

    The wealthy and powerful whether globalist or nationalist are preparing.

    If only! The wealthy could prepare more properly than more ordinary folk because they have the money to buy land. But true preparation means far more than a lavish bunker, it requires creating a complete, virtually stand alone system of food production and allocation.

    Dr Diablo mentioned the market gardens around Paris, but they were found around all cities all over the world. They were the last vestige of pre-industrial agriculture, which supported people in various forms for millennia.

    If rich folk wanted to get serious about prepping, they could purchase large tracts of agricultural land, populate it with peasant farmers and craft-center villages and then live off the income of dues from their tenants, paid entirely in the form of food, firewood and labor.

    Rich people could reestablish pre-industrial agriculture in conjuction with one of the social structures that system requires. They could, for example, once again become feudal lords. That is certainly one logical option for surviving the end of fossil fuels, far better than most people could manage without support from government (as if that would ever happen).

    I seriously hope to see reports in the press of billionaires purchasing whole counties, removing all modern infrastructure except roads and a few village structures and then populating the land with large numbers of agrarian peasants on small-holdings of a few hectares each. That kind of realistic response would be wonderful and keep many alive who would otherwise perish, but I’m not holding my breath.

    V. Arnold

    Joe Clarkson

    Yep, always get a chuckle when I see pictures of the luxurious bunkers of the stupid rich.
    When they come out, as is inevitable, they’ll be killed by things they could never imagine.
    Fools planning and greedy minds incapable of thinking…

    John Day
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