The constricted growth leads to rising defaults on loans and to less international trade that would support the servicing of external debt. It would raise interest rates as the future economic outlook became more precarious. There would be a tendency to save against the increased risks of unemployment. The general effect would be deflationary as money supply dropped in relation to available goods and services. This would add to what are already huge deflationary pressures arising from the deleveraging of the hyper-credit expansion of the last two decades. The rising cost of debt servicing, on top of food and energy price rises, would further squeeze consumption. The oscillating decline model assumes such stresses are not great enough to cause a terminal systemic global banking failure or a major monetary collapse.
The decline in economic activity leads to a fall in purchasing power and a decline in all forms of energy demand and a fall in its price. Falling or volatile energy prices mean new production is less likely to be brought on stream. New energy investments in oil, renewable energy, natural gas or nuclear power, for example, become less competitive not just because energy prices are lower but also because existing energy infrastructure and supply has an overhang of spare capacity. Energy companies’ reduced revenue and the bad credit conditions further constrain their ability to invest in new production.20 The reduced revenue also means that the fixed costs of maintaining existing energy infrastructure (gas pipelines, the electric grid, refineries etc.) is a greater burden as a percentage of declining revenue.
If production falls significantly, companies lose the economies of scale they have been getting from their infrastructure. For example, once the revenue from natural gas sales becomes less than the fixed operating costs of production platforms and pipelines, then continuing to deliver gas becomes no longer viable. That means that loss of economies of scale can lead to an abrupt supply collapse and the withdrawal of supply, leading to a further reduction in production capability, and thus in economic production. This is yet another positive feedback loop.
These same conditions also constrain energy adaptation. For example, customers would find it more difficult to buy electric cars or invest in insulation, and governments to subsidize them. It would also be more difficult for the car manufacturers to ramp-up production and gain economies of scale (in addition to dealing with tight lithium supplies). In general, the tighter the economic and social constraints on an economy, the more likely it is that resources will be deployed to deal with current concerns rather than being invested in something that brings a future benefit. This expresses the generally observed increase in the social discount rate in times of growing stress.
In such an energy-constrained environment, one would also expect a rise in geopolitical risks. Bilateral arrangements between countries to secure oil and food would reduce the amount on the open market. It would also increase the inherent vulnerability to highly asymmetric price/supply shocks from state/non-state military action, extreme weather, or other “black swan” events.
When oil prices rise above the marginal cost of production and delivery, but can still be afforded despite the economy’s decreased purchasing power, the energy for growth becomes available again. Of course local and national differences (in, for example, the degree of dependence on energy imports or the export of key production such as food) affect how regions fared in the recession and their general ability to pick up again. Even so, growth begins again, focusing maybe on more “sustainable” production and consumption.
However, the return of growth will not raise the purchasing power of the economy to its previous level because oil production will be limited by resource depletion; the lack of investment in production; the entropic decay of infrastructure and productive capacity; and the lower purchasing power which will reduce the price that the economy can afford to pay for its oil. The recovery will be cut short as rising oil, food and energy prices produce another recession.
The sequence of events in the oscillating decline model is therefore as follows: economic activity increases — energy prices rise — a recession occurs — energy prices fall — economic activity picks up again but to a lower bound set by declining oil production. As a result, the economy oscillates to a lower and lower level of activity.
There are good grounds for believing that this process has already begun. At least one authority links the record oil prices in 2007 to the pricking of the credit bubble.21
Collapse Dynamics
The oscillating decline model does not account properly for some of the embedded structures of the global economy which, while relatively obvious, have been obscured by the fact that they were adaptive in a growing economy. If oil production declines, and we cannot fill the gap between the energy required for growth and what can be produced, as we saw in the oscillating decline model, this limits the availability of other types of energy, then the global economy must continue to contract. In short, humanity is at, or has exceeded, the limits to growth.
Embedded structures that fail to contract in an orderly manner will break down. The structures that will break down include the monetary and financial system, critical infrastructure, global economies of scale, and food production. As argued earlier, these structures are deeply interdependent. As a result, they will reinforce each other’s collapse. Their collapse undermines the whole operational fabric and the functioning of the global economy and all it supports.
It has been argued so far that our civilization is a single, complex adaptive system. Complex adaptive systems, and the sub-systems of which they are comprised, are a feature of open thermodynamic systems. And while they show great diversity, from markets to ecosystems to crowd behavior, their dynamic properties have common features. For most of the time complex adaptive systems are stable, but many of them have critical thresholds called tipping points, when the system shifts abruptly from one state to another. Tipping points have been studied in many systems including market crashes, abrupt climate change, fisheries collapse and asthma attacks. Despite the complexity and number of parameters within such systems, the meta-state of the system may often be dependent on just one or two key state variables.22
Recent research has indicated that as systems approach a tipping point they begin to share common behavioral features, irrespective of the particular type of system.23 This unity between the dynamics of disparate systems gives us a formalism through which to describe the dynamic state of globalized civilization, via its proxy measure of Gross World Product (GWP) and its major state variable, energy flow.
Catastrophic bifurcation is the name given to a type of transition where once the tipping point has been passed, a series of positive feedbacks drives the system to a contrasting state. For example, as the climate warms, it increases methane emissions from the Arctic tundra, which drives further climate change, which leads to a further growth in emissions. This could trigger other tipping points such as a forest die-off in the Amazon Basin, itself driving further emissions. These positive feedbacks could mean that whatever humanity does would no longer matter as its impact would be swamped by the acceleration of much larger-scale processes.
Figure 2 shows how the system state responds to a change in conditions. The state of a system could represent the size of a fish population, or the level of biodiversity in a forest, while the conditions could represent nutrient loading or temperature (both effectively energy vectors). The continuous line represents a stable equilibrium; the dotted line an unstable one. In a stable equilibrium, the state of the system can be maintained once the condition is maintained. In figures A and B we see two different responses of a stable system under changing conditions. In the first, a given change in conditions has a proportional effect on the system state; in the latter, the state is highly sensitive to a change in conditions. In C and D the system is said to be close to a catastrophic bifurcation. In both of these cases there is an unstable region, where there is a range of system states that cannot be maintained. If a system state is in an unstable regime, it is dynamically driven to another available stable state. If one is close to a tipping point at a catastrophic bifurcation the slightest change in the condition can cause a collapse to a new state as in C, or a small perturbation can drive the system over the boundary as in D.
Small Changes Can Produce a Big Response