A Renewable Energy Future Will Collapse the Financial System
Energy is the economy. That’s a radical concept because most people think that the economy runs on money. It doesn’t.
What is energy? It is the potential or capacity to do work. The economy runs on work. That’s why energy is the economy. That’s simple.
What is money? That’s a little more complex.
“Money is not the value for which goods are exchanged, but the value by which they are exchanged.”John Law
In other words, money has no inherent value. Economists often attempt to change the subject by pointing out that money is at least a medium of exchange, a store of value or a unit of account. The same, however, could be said for cigarettes that were used as money in Communist Romania in the 1980s.
“Society runs on energy and materials, but most people think it runs on money…[Money] is created as debt subject to mathematical laws of compound interest…Money eventually gets spent on a good or service which will contain embodied energy. Money is a claim on energy yet its creation is not tethered to energy availability or cost.”N. J. Hagens
In the end, money–as paper, coins, gold or cigarettes–is just a financial claim on energy, a marker, a unit of account. For example, I may contract someone to do work for me—to build a fence or to move some heavy equipment—and we agree on a payment amount. I pay him dollars for his physical work (joules). He may then use those dollars to buy food (joules), gasoline for his car (joules) or contract someone else’s labor to do some work for him (joules). Money is the medium of exchange but the value exchanged is energy.
Another key point is that money is created as debt. That’s not what I learned in school when my class visited the mint in Washington, D.C. Money is, in fact, created from nothing.
“Money is not a physical thing…Banks and governments can create “Money from Nothing.” Banks create money when new loans exceed loan repayments; Governments create money when their spending exceeds taxation…
“Neither the government nor the banks needs a stock of anything—gold, flowers, chairs, or anything else—before they create money. What they do need are people with whom they can have a financial relationship: taxpayers for the government, borrowers for the banks.”Steve Keen
If money is created from nothing and it is nothing but debt, then what is debt? Debt is a lien on energy.
It is critical that we understand this.
A barrel of crude oil contains the energy equivalent of about four-and-a-half years of human work (Figure 1). In 2022, the world used 85 billion barrels of oil equivalent from coal, natural gas and oil. At four-and-a-half years of work per barrel, that means that society has 383 billion fossil energy slaves working for us all the time.
Let that sink in. That’s magic. That boost in productivity is what created the modern world. Technology and ingenuity were important but played a secondary role to fossil fuels.
We can easily determine how much energy is contained in a barrel of oil. We burn it and measure the heating value as its energy is released.
It’s not so easy to measure the energy contained in renewable sources. One their wonders is that we don’t have to burn anything to produce electricity. Electric power comes directly from a solar panel or a wind turbine. But this makes it hard to compare with fossil energy. There is no barrel of sunlight or wind that we can burn or analyze.
The best way to compare renewable and fossil energy is through power density. Power is the rate at which work can be done and is measured in watts. Power density is the amount of work that can be harnessed from a given area—how many watts we can get per square meter?
Natural gas power density is the electric power produced per square meter of the generating plant. A 25-megawatt mobile gas turbine can occupy as little as 140 m2. Solar power density is the power available per square meter of a solar panel, and wind power density is the power available per square meter of swept area of a turbine.
Figure 2 shows that solar, geothermal, and wind power densities are a fraction of those for natural gas, nuclear, oil and coal. The power density of natural gas is about eighty times greater than solar and two hundred times more than wind.
This is not a criticism of renewable energy. It is a measurable fact that electric power generated from wind and solar farms is far less efficient than from fossil fuel and nuclear power plants.
Once the lower productivity of renewable energy is recognized by financial markets, the amount of available credit will radically contract. Debt is a lien on a future energy supply that cannot possibly generate the same returns as the present mostly-fossil energy supply.
“If we are ever to honor our current debts, the amount of energy required will be immense. If the energy is not available, at cheap prices, those debts will never be repaid.N. J. Hagens
Our entire system of currency, finance and banking is predicated on the future productivity of energy. For the last 200 years, fossil fuels have been the source of that future.
Most of the world’s leaders and the public accept that we are in the early stage of an energy transition away from fossil fuels to renewable energy. Few of them understand what that means for our financial system because renewable energy—for all of its progress and benefits—cannot replace our 383 billion fossil energy slaves.
Money creation is nothing but debt. Debt is an IOU on future energy. If future energy can’t provide the same returns as present energy, money supply and credit will radically contract. A future based on renewable energy will collapse the money supply and the financial system.
Let that sink in.
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