Contribution of Oil and Natural Gas Industry to US economy (2007)
Source: PwC report for American Petroleum Institute, Sept 2009
PwC concluded that the sector accounted for 7.5% of total US GDP, compared to the 1.5% shown in official GDP statistics. But even the PwC estimate still uses the same flawed data for overall GDP measurement. In other words, the total GDP figure from which they calculate the sector’s 7.5% contribution still includes the supposed 54% for the financial and government sectors, plus another 25% or so for all other services that, as I’ve already pointed out, are merely recycling past industrial wealth. If we remove these from the picture, we find that the US oil and gas industry makes up 37% of the real economy.
This failure by economists and politicians to appreciate the inadequacy of GDP figures seems quite pervasive. For example, the data for mineral extraction that form the basis of my first chart, and which set me off on this investigation, come from a 2011 United Nations report called Decoupling Natural Resource Use from Economic Growth. In this report, the authors state:
‘These data indicate that globally, natural resource use during the 20th century rose at about twice the rate of population, but at a lower pace than the world economy. Thus resource decoupling has taken place “spontaneously” rather than as a result of policy intention. This occurred while resource prices were declining, or at least stagnating. Further research is needed on this relationship between “spontaneous” relative decoupling and declining resource prices.’
In other words, the authors fail to understand why the economy apparently grew faster than the rate of natural resource use would suggest it should have done. They obviously didn’t make the connection to the growth in debt, yet I would suggest that the connection is quite clear. Because spending on credit requires no industrial activity, it uses no natural resources; the debt is created by leveraging the accumulated wealth of past industry. Or, to put it another way, new money is created from past activity. This is not to say that it doesn’t result in any use of natural resources – some of this new money is bound to be spent on industrial goods, and therefore will boost industrial production, and consequently the use of raw materials. But my point is simply that the credit is created from nothing, as distinct from money that has been earned by real work.
Although some of this artificial wealth will be spent on real goods, a lot more of it goes into services and inflated asset prices, particularly housing. Although construction uses resources, the inflation of house prices does not; a house of a certain size requires the same resources, however much it sells for. Yet inflated selling prices result in a general feeling of rising wealth and raise GDP figures by boosting economic activity, especially in the financial and real-estate sectors.
If we look again at that chart of GDP and mineral extraction, this time adjusting the baseline slightly so that both graphs start at the same point (Figure 15), we see even more clearly the link between natural resources and economic growth. The link begins to break some time around 1971, when the dollar, and subsequently all money, broke away from the gold standard.3 Adjusting the baseline might seem like cheating, but all we are doing here is comparing growth rates. The scales are not the same, but that doesn’t matter: there is a strong correlation between the growth of resource use and the growth of the economy, as one might expect. The only surprising thing, as the UN researchers found, is that GDP apparently starts to grow without resources, and I have explained this as being the debt bubble. [I also show here the relatively small gains from increased material recycling, reduction in waste and fuel-efficiency improvements.]
At the start of this chapter I calculated the size of the bubble at $200 trillion, a figure I considered too high to be believable. However, if we add up the GDP figures for each year going back to 1900 (in constant 2010 dollars), we get a total of around $1,760 trillion. This means that the total wealth ever produced, up to the year 2013, according to GDP figures (in today’s money), is around $1,800 trillion (the figures become relatively insignificant before 1900). Now I’ve already shown that GDP figures are a gross over-exaggeration of true wealth production, because they keep recycling wealth that was created in previous years, and therefore this figure of $1,800 trillion will also be grossly exaggerated. But it does at least explain how we might get that $200-trillion figure as the measure of the debt bubble. In GDP terms, $200 trillion of credit-fuelled growth starts to look quite plausible, as long as we remember the key point that it doesn’t represent real wealth.
Figure 15
If we compare my figure of $1,800 trillion for total accumulated GDP with the earlier figure we had for total private wealth in the world – around $240 trillion in 2013, according to Credit Suisse data – we might begin to understand the relationship between output in terms of GDP, and the amount of actual wealth in dollar terms that ends up accumulating in banks. But in reality, the situation must be more complicated than this. Some wealth must get lost along the way – assets such as property crumble with time – and also private household wealth doesn’t represent all the wealth in the world. What about state-owned wealth? Obviously, I must investigate this matter further. I return to this theme in Chapter 8, but first I must answer another question I think this chapter raises.
So what’s wrong with old wealth?
Because the service sector has expanded to become the dominant force in the economy, based on the recycling of past industrial wealth, the ratio of productive to non-productive GDP has been falling in recent years. I can show this in Figure 16 simply by plotting a line corresponding to the proportion of total global GDP that has come from real industry (in other words, from the primary and secondary sectors of the economy).
One might suppose that wealth accumulated from past industry would be just as good as that created from current industry, but this is rarely the case, primarily because this accumulated wealth tends to end up in banks and other financial institutions as private investment. Unless investment goes towards the development of the real economy (ie, non-financial business) – and most of it doesn’t these days, because there’s far more old wealth held in funds than is required for productive investment – then it doesn’t create jobs. All it creates is debt.
Figure 16
This process of debt creation is at the heart of the world’s economic problems. Not only is it linked to the reduction in real jobs and the resulting impoverishment and inequality in society, debt creation is also harmful in less obvious ways. Because so much economic activity is now based on the spending of credit rather than on genuine wealth that’s already been ‘earned’, it is effectively borrowed from future earnings. There are two negative aspects to this borrowing from the future.
First, even if a debt-fuelled economy sees an increase in genuine production due to the spending of this borrowed money, this production itself is also borrowed from the future, because production is bound to decline as debts are repaid; consumers will have less money to spend in the future.
Second, the debt-fuelled boosting of asset prices gives a false sense of increasing wealth. This new ‘wealth’ has no basis in reality because it is based purely on the increase in credit, and this in turn must have consequences for the value of money, because the value of anything follows a simple formula:
