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The hidden cost of energy that?s making you poorer

Cover of  by Tim Morgan

The economy is growing (just!), technology is enhancing and enriching lives (supposedly!) and, thanks to the central planners? best efforts, there?s money sloshing about too. So why are so many people feeling poorer than ever?

Many can?t afford to save for retirement, buy a home, or in some cases, even pay the fuel bills. The number of people in employment grows, but the economy struggles to inch forward. Things simply don?t stack up.

Ex-City analyst Tim Morgan reckons he?s got the answer to this conundrum; a conundrum that?s vexing economists the world over.

And it?s rather neat. Economists only ever consider the economic system in terms of money. But the economy is an energy system ? not a monetary one. Get your head around that, and everything else falls into place.

If this theory?s right, it explodes current economic thinking and will lead to dire consequences for those that don?t understand what we?re living through. It all comes down to the cost of energy.

There are two options here: either higher energy production costs will continue to erode our living standards, or human ingenuity will find a way through.

Oil is ten times costlier now

Having read a summary of Morgan?s forthcoming book, Life After Growth (to be published mid-November), I reckon he?s on to something. In fact, over the years here at The Right Side, we?ve covered the major facets of Morgan?s argument.

Modern life is all about energy. Money doesn?t make the world go round, energy does. The industrial revolution, the agricultural revolution ? even the latest micro-technological revolution; they all depend on energy. In short, fossil fuels have created the modern economy as we know it.

Forget about money (try telling that to an economist!). Money is an artificial construct, and fundamentally has no value. The only value money can ever give is the ability to convert it to something ?real? in the real economy. Money is a claim on future production ? but it is not future production.

The only thing is, the number of monetary claims always goes up. In the past, fuel, coupled with technology, drove production gains. These gains allowed the monetary claims to be met by ?real? production.

The problem now facing Western society is that the real cost of extracting fuel has begun to outpace technological production gains. So has the West, in City parlance, gone ex-growth?

As I?ve mentioned in the past, the cost of extracting oil is going through the roof. If we forget about money, and consider the cost of extracting a barrel of oil in terms of barrels of oil, then you?ll find a rather worrying dynamic unfolding.

In the good old days, we would produce 100 barrels by investing energy equivalent to one barrel of oil in extraction. During the post-war period, cheap fuel drove a golden age of economic growth. But as always, the curve tends to plateau ? and eventually turns down.

According to Morgan, the rot started to set in during the ?70s. At the beginning of that decade, we were only getting 30 barrels from our one barrel investment. Today, it?s barely ten barrels. If you are considering the global economy in terms of energy ? and not money, then this has massive ramifications.

How does fracking fit into all this? In America, this process of blasting underground rocks with water and chemicals to release gas has sent energy prices tumbling. It?s the kind of breakthrough in human ingenuity that could be the answer to our energy troubles. Do you buy that?

You may know that along with my Fleet Street Letter colleagues, I?m bullish on fracking. So I actually think it?s really important to have an informed debate, and I?d love to hear your views below.

Fracking is highly controversial, so even though I?m sure it?s a fantastic investment theme, I think it?s important to have all the facts laid out properly before you jump on board. More on that another time.

Anyway, whatever your views on fracking, one thing?s for sure: with the real cost of fuel outpacing human ingenuity, we need to see huge change.

We need an economic miracle

Put simply, the problem is that the cost of creating ?stuff? is going up. But, as Morgan puts it, ?in blithe ignorance of this increasing levy, we have continued to grow the claims value of the financial system on the assumption of perpetual growth?.

The fundamental problem we?ve got is that there simply isn?t enough production wealth to make good on the financial wealth that?s been promised. Welfare promises, pension promises, healthcare promises ? you name it, it?s all on the never-never.


In order to make good on these promises, we?re going to need a technological revolution every bit as effective as the industrial revolution was. Well, either that, or a renewable energy revolution.

Of course, neither of these two things are impossible. When required, human ingenuity has always come up with the goods.

Some say the central planners are banking on a miracle. They continue to print financial claims, hoping that at some point their economic messiah will come. Well, let?s hope our saviour arrives soon.

But our society is hooked on fossil fuels more than ever. And while that?s the case, the inevitable erosion of the value of financial claims looks set to continue.

Let?s let Tim Morgan have the final word: ?The essential point is that the economy is not a monetary system governed by the theoretical laws of economics, but an energy dynamic determined by the all too real laws of thermodynamics. Once we understand this, the squeeze on household prosperity becomes far less of a mystery.?

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