bookcoverThis short book by Tim Watkins is sub titled “An Introduction to Energy-Based Economics”. Perhaps it is worth noting that this is not the same as being an introduction to energy economics and many of the topics in the book would seem a strange choice of topics for an energy economics textbook – the theory of money, for example, or a chapter to explain the economic history of the last few centuries and decades. But if it does seem strange to any readers then they have misunderstand the purpose of the book. This is to show that one cannot understand economics without understanding energy because the economy is embedded and embodied in the material world and

“energy is the beginning of everything in the economy. Before workers can provide labour, they must be fed. Less obviously, before raw materials can be consumed in a factory they must be harvested, mined or refined and then transported to the factory. That takes energy at every stage of the process.” (p 23)

It follows that to understand economic history too one must take energy into account. This includes the Voyages of Discovery in which European explorers discovered the Americas – and why it was that Europeans had an advantage over the Chinese whose ships were probably superior at that time. They were closer to the Americas across the Atlantic than the Chinese were across the Pacific, given prevailing winds and oceans gyres. This is an energy economics explanation for the pre-fossil fuel era of sea transport. That’s not all..

“The impact of this Atlantic trade cannot be overstated. On the negative side of the equation, an additional energy source was added to the wind and tides which powered the ships of the period. Human labour in its most basic and brutal form – slavery – – became the means by which the price of raw materials brought back from the Americas was kept to a minimum”. (p 50)

What was brought back to Europe from the colonies in the Americas and from Asia around the Cape of Good Hope changed the diets and drinks of Europeans….. and of their livestock. For example coffee sharpened up people’s thinking by replacing the previous morning drink of weak beer. The sugar plantations in the Caribbean and South America provided Europeans with an expanding new energy source for their bodies while new crops from the Americas like potatoes energised people, and turnips from middle to east Asia fed livestock over winter.

Watkins pursues the story through the coal powered machines of the early industrial revolution through to the oil technologies brought in during and after World War One, particularly in the USA. There followed the massive exponential growth of oil and fossil fuel use associated with the post- World War Two boom that faltered in the 1970s and 1980s. This was followed in Britain by the North Sea Oil boom which was the real explanation of the success at the time of the deregulation of the financial markets in the City of London – not Thatcher’s monetary policies. Now that the oil from the North Sea is largely exhausted, so too are the future prospects for the economy of Britain.

This ability of fossil fuel to provide an immense amount of physical work when used to power a variety of equipment, devices and machines provides the key to understanding productivity increases. Some increases in productivity could be obtained by increasing the efficiency with which various energy sources are used but

“the energy density of a fuel sets a hard boundary with what we can do with it. The average density of charcoal, for example, is about 4,300 kcalories per kilogramme. In practice of course we would only get a fraction of that as useful – “exergy” – work. The rest would be lost as waste heat. We might improve our technology. For example, a charcoal oven might be better insulated to prevent heat escaping and we might add bellows to pump more oxygen into the reaction. But like it or not if we want more energy from each unit of fuel, we need to switch fuels. Coal, at around 6,000 kcals per Kg, would provide us with a lot more energy. So much so indeed that it might allow us to convert water into steam to power machinery. Oil, at around 10,000 kcal per Kg, gives an even bigger bang for our buck. Indeed because it is liquid, it is easier to store, making it much better as a transport fuel.” (p 39)

Here then lies the secret of exchange value. Clearly Watkins has been influenced by Karl Marx. He critiques the use by Marx of the Labour theory of value….

“It isn’t that labour – including intellectual labour – is not an essential component in the creation of value. After all, value is an anthropocentric concept. Rather it is that labour is but one form of value, and not a particularly strong one. Indeed, the key thing that makes labour a source of value is largely hidden to the observer and entirely excluded from economics textbooks: energy….compared to machines powered by fossil fuels, human and animal labour power is weak. To match the energy provided by a single barrel of oil a horse would have to work for roughly a year – eight hours per day, five days per week – and a human would have to work for roughly eleven years.” (p 22-23)

Since he rejects the Marxian theory of value Watkins needs another theory to explain the distribution of income – which for Karl Marx was explained by a theory of “surplus value”. In fact the Watkins theory of surplus value is very similar to the theory of Karl Marx.

“The way in which we exploit energy is in precisely the way Marx believed we exploited labour. We pay only the price of obtaining useful energy for work rather than the monetary equivalent of the value that it generates” (p 29)

How the surplus value is distributed is another matter. To explain this Watkins uses a concept called “wealth pumps”.

To understand wealth pumps in the modern world we need to understand money and banking because bankers have been getting a growing proportion. What is not generally understood, is that when you get a banking licence you actually have the power to create money. Whoever has the ability to create money has the first call on its purchasing power and bankers use this ability to make loans.

Money itself is not wealth. It is a claim on wealth and for money to hold its purchasing power the claims must not grow more than real wealth does – and that requires the use of energy in the production process. Money can be spent into the economy without inflation if there are spare resources – in particular energy and unemployed people who are able to work – to take up the slack and produce more wealth to match the increase in money. However, if unemployed resources are not there then there will be a decline in the purchasing power of money.

The finance system is one of a number of arrangements that Watkins calls “wealth pumps” – mechanisms to transfer wealth from the poor to the rich.

Another wealth pump that he describes operates internationally through the mechanism of reserve currencies, particularly the dollar. Because the US dollar is the currency that oil is priced in and the currency of payment for oil, the citizens of other countries hold the dollar, or US Treasury Bills, as a store of value. These dollars are earned when foreigners sell goods to Americans and as long as the dollars are not spent on American products but held as a store of value the US is able to import more than it exports. Here is an unequal relationship that has been going on for decades, a wealth pump enabling the Americans, among other things, to pay for their military bases abroad.

Mainstream economists have noticed or understood little of this. They do not understand what should be the two most important topics in their subject – money and energy. The misunderstandings about money go back a long way – at least as far as Adam Smith who invented a fairy tale to explain the origins of money as being the result of the difficulties with barter in local economies. Actually local economies in distant history did not need barter any more than families do today. Small communities had a running sense of the favours that they did for each other and if they needed to keep accounts at all they could use tally sticks, knotted string or other rudimentary records.

However mutual aid and reciprocal favours would not work for temporary passers by. Merchants or troops who travelled from place to place would not be around long enough to work with an arrangement based on mutual favours. If you wanted to buy from merchants you needed money and as regards soldiers you paid them with money too because they collected taxes for the monarch.

So far so clear…but there are some problems. The story is one where the immense productive power of a developed economy is explained by the use of fossil fuels – but fossil fuels deplete and as they do they are becoming more expensive to extract – which means that the surplus value generated by burning fossil fuels eventually declines as a greater proportion of the energy has to be used in the extraction, refinement and delivery process. Secondly, burning fossil fuels has brought immense wealth for some but has also devastated the environment by causing climate change and other toxic effects on people and the biosphere. Watkins writes about the first issue at length – depletion – but the second issue, climate change, a lot less.

This book has virtually nothing to say about the economics of climate change – even though Watkins is by no means a climate denier and clearly thinks something needs to be done about it. However he does not devote a specific section to climate change which, considering the fact that most people probably believe that it is driving policy on renewables and energy efficiency, is surprising.

In my email box is a message from Nottingham City Council which is actually about energy policy – except it is framed as climate policy. Throughout his book Tim Watkins writes about energy issues but I fear not enough people will read his book. Most people are probably blissfully unaware that there is an energy issue different from the climate issue. Thus when I was considering getting involved in XR it drove me nuts to find yet another generation of activists unaware of everything that had been before and unaware of the implications of fossil fuel depletion.

Such are the joys of old age. My impression is that if most people are aware of anything it is probably rising energy prices and they appear to think of these as going up because of profiteering. Or maybe some remembered “peak oil” vaguely but that went out of the news what seems like a long time ago. This was followed by the next generation getting upset, rightly, by “fracking”. However from my involvement in the anti-fracking movement I did not notice many people seeing the connection of “fracking” to the previous concern about “peak oil”. Now the current concern is again climate but my impressions is that for most people this is an issue in a different silo from “energy policy” related to energy depletion. Only ancient people like me…and Tim Watkins remember it.

This takes me back to a few years ago when there were many who thought that peak oil and the energy descent afterwards, as well as more generally “peak coal” “peak gas” and “peak everything”, was going to answer the worries about climate change. The worry instead was that peak oil and energy descent would undermine growth and without growth the banking and finance sector would become unstable leading to a generalised paralysis. This was hardly a cheerful view of the future but it was not one in which climate change was the main problem.

Then along came developments in fracking so that shale oil and shale gas started to be produced in quantity and it looked as if peak oil was postponed for a considerable time. Quantitative easing kept banks and zombie companies alive and also meant that, with many investors “desperate for yield”, many of the money men were prepared to risk lending to fracking companies. However, while these companies produced lots of oil and gas from rapidly depleting wells they made little money.

For a few years it has felt as if the economic crisis was on hold if you did not count the grinding poverty and insecurity imposed by austerity policies on the poor and the growing “precariat”. The rich continued to get richer and the poor poorer – but since the rich own this economic show it remained on the road. That said, it was always in the predictions of some experts that oil peak would not be like a sharp pointed pinnacle but a temporary plateau which would give way eventually to relentless production decline.

Well here we are. The denouement arrived….But has the extra 10 to 12 years of belching out greenhouse gases now put us in territory where we are now at, or over, a climate tipping point?

There is nothing that says that oil descent must helpfully prevent us getting to the really dangerous climate tipping points. In some respects it would be good if difficult geological conditions raising the costs of further oil extraction did us a favour by curbing fossil energy use – something government policy makers under the thumb of the oil lobby and fearing electorates have not had the strength of will to achieve. I confess I have hoped this because I have lost faith in the ability of the policy process to achieve climate mitigation.

But hope is not science. We can have a climate crisis AND at the same time, a depletion crisis with fossil fuel production slipping relentlessly downwards – but after a climate tipping point. The climate tipping point, crashing over us with a time lag, may already have been crossed. We can get the worst of all worlds.

Tim Watkins doesn’t explore this idea. If I were writing a book on energy based economics I would want to at least try to clarify this because my reading of the state of climate science is that it is regarded as alarmist to think of runaway climate change as inevitable (perhaps, for example, because of releases of methane from a melting Arctic) but there is still a chance that it could happen. In any case, the frequency and severity of climate disasters are already rising and a cause for serious concern.

What all this means is that I think to get an attentive reading, Tim needs to trace the connections between climate change and fossil fuel depletion rather more and what each mean for each other. But he doesn’t do this. You will not find in this book anything like targets for rates of decarbonisation or a date by which he believes that the global economy must be zero carbon. I don’t think he believes that we need to focus on this right now. But it is the kind of framing that most other people are concerned about.

In the meantime he is focused on getting through the next 20 to thirty years because there is a crisis brewing in the energy system quite apart from climate change – both in electric power generation and in arrangements for the supply of fossil fuels, particularly diesel, the chief derivative of a barrel of oil when it comes to powering heavy vehicles and equipment.

For the next twenty years there will be an issue of what is to be done with the remaining fossil fuels. It is naive to imagine that their use can be abandoned just like that – for example, you cannot build and install renewable energy equipment currently without fossil fuels. They may generate more energy than it takes to manufacture and install solar panels and wind turbines but that is not the point. Until the production and installation process of renewables is entirely powered by electricity, which is a long way in the future, burning fossil fuels will be needed to produce them. That will not be straightforward if many oil companies go bankrupt. Nor will it be straightforward since the minerals needed for renewable energy systems like lithium, cobalt and nickel are also in short supply. It is not just oil, gas and coal that have been depleted – so too are the minerals needed for batteries, for wind turbines and solar panels.

So Watkins is keen to dispel naive simplifications. He wants it admitted that some fossil fuels must be used for now – and maybe future technologies of nuclear power – and he wants us to focus on problems in the transition. He wants us to look at problems that are not getting proper attention. When he calls for a “brown new deal” he is not in any way denying climate science, he is trying to respond to the impracticality of naive activism, that wants renewable energy systems without recognising that they must be created with fossil fuels and these are not only climate damaging but will be increasingly in short supply. Nor is his brown new deal the same as a “black new deal” – which is the anti- environmental indifference of the mainstream policy makers like Trump who would like to take all restraints off the use of remaining fossil fuels “to get growth going again” on a business as usual trajectory.

In conclusion… why don’t lions chase mice? Because the expenditure of energy in doing so would not be repaid in the energy they got from eating them in the unlikely event that they caught them. It’s not worth it. That’s energy based economics for you…