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Energy’s Impact on Society - Part 1

A complete version of the Bundeswehr (German Army) study is now available. Amazingly, they seem to be interpreting things in quite interesting ways. In many ways it looks spookily familiar – first in their reference to a bifurcating chaotic system, and second in their comment that “All other subsystems have developed hand in hand with the economic system. A disintegration can therefore not be analysed based on today’s system. A completely new system state would materialise.”Excerpts from the Bundeswehr study:

The phenomenon of tipping points in complex systems has been known for a long time and is referred to as “bifurcation” in mathematics. Tipping points are characterised by the fact that when they are reached, a system no longer responds to changes proportionally, but chaotically. Currently, reference is made to potential “tipping processes” most notably in the field of climate research. At such a point, a minor change to one parameter – in the case of the climate, a change in temperature – would have a drastic effect on an ecosystem. At first glance, it seems obvious that a phase of slowly declining oil production quantities would lead to an equally slowly declining economic output. Peak oil would bring about a decline in global prosperity for a certain length of time, during which efforts could be made to develop technological solutions to replace oil. Economies, however, move within a narrow band of relative stability. Within this band, economic fluctuations and other shocks are possible, but the functional principles remain unchanged and provide for new equilibriums within the system. Outside this band, however, this system responds chaotically as well. From the perspective of economics, at least one border of the band can be identified: an economic tipping point exists where, for example as a result of peak oil, the global economy shrinks for an undeterminable period. In this case a chain reaction that would destabilise the global economic system and cause a clear shift in the analytical framework for all other security consequences would be imaginable. The course of this potential scenario could be as follows:[Short Term]1. Peak oil would occur and it would not be possible, at least in the foreseeable future, to entirely compensate for the decline in the production of conventional oil with unconventional oil or other energy and raw material sources. The expression “foreseeable” is very important in this context. Ultimately, it leads to a loss of confidence in markets. n the short term, the global economy would respond proportionally to the decline in oil supply.

1.  Increasing oil prices would reduce consumption and economic output. This would lead to recessions.
2.  The increase in transportation costs would cause the prices of all traded goods to rise (155). Trade volumes would decrease. For some actors, this would only mean losing sources of income, whereas others would no longer be able to afford essential food products.
3.  National budgets would be under extreme pressure. Expenditure for securing food supplies (increasing food import costs) or social spending (increasing unemployment rate) would compete with the necessary investments in oil substitutes and green tech.

Revenues would decrease considerably as a result of recession and necessary tax reductions.[Medium Term]In the medium term, the global economic system and all market-oriented economies would collapse.

1. Economic entities would realise the prolonged contraction and would have to act on the assumption that the global economy would continue to shrink for a long time (156).
2.  Tipping point: In an economy shrinking over an indefinite period, savings would not be invested because companies would not be making any profit (157). For an indefinite period, companies would no longer be in a position to pay borrowing costs or to distribute profits to investors. The banking system, stock exchanges and financial markets could collapse altogether (158)
3. Financial markets are the backbone of global economy and an integral component of modern societies. All other subsystems have developed hand in hand with the economic system. A disintegration can therefore not be analysed based on today’s system. A completely new system state would materialise.

Nevertheless, for illustration purposes here is an outline of some theoretically plausible consequences:

• Banks left with no commercial basis. Banks would not be able to pay interest on deposits as they would not be able to find creditworthy companies, institutions or individuals. As a result, they would lose the basis for their business.
• Loss of confidence in currencies. Belief in the value-preserving function of money would dwindle. This would initially result in hyperinflation and black markets, followed by a barter economy at the local level.
• Collapse of value chains. The division of labour and its processes are based on the possibility of trade in intermediate products. It would be extremely difficult to conclude the necessary transactions lacking a monetary system.
• Collapse of unpegged currency systems. If currencies lose their value in their country of origin, they can no longer be exchanged for foreign currencies. International value-added chains would collapse as well.

Mass unemployment. Modern societies are organised on a division-of labour basis and have become increasingly differentiated in the course of their histories. Many professions are solely concerned with managing this high level of complexity and no longer have anything to do with the immediate production of consumer goods. The reduction in the complexity of economies that is implied here would result in a dramatic increase in unemployment in all modern societies.

• National bankruptcies. In the situation described, state revenues would evaporate. (New) debt options would be very limited, and the next step would be national bankruptcies.
• Collapse of critical infrastructures. Neither material nor financial resources would suffice to maintain existing infrastructures. Infrastructure interdependences, both internal and external with regard to other subsystems, would worsen the situation.
• Famines. Ultimately, production and distribution of food in sufficient quantities would become challenging.

The report runs to 112 pages, a link to it is available from the Energy Bulletin review here.

By. David Clarke

David is the editor of the energy blog Alderic

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