will collapse along with the level of production within a country, making it even more difficult to import energy or materials to increase production. As I explained earlier, modern economies produce almost nothing indigenously, as supply-chain breakdowns causing key production inputs to become unavailable become increasing likely. This will cause further production problems and make it likely that countries will remain trapped at a very low level of economic activity.
Moreover, because our supply-chains are so complex and globalized, local failures in monetary stability, lack of input or a failing operational fabric would propagate through supply-chain links and other national operational fabrics. In this way, localized failures quickly become globalized.
Food
Global food producers are already straining to meet rising demand against the stresses of soil degradation, water shortages, over-fishing and the burgeoning effects of climate change.27 It is estimated that between seven and ten calories of fossil-fuel energy go into every one calorie of food energy we consume. It has been estimated that without nitrogen fertilizer, produced from natural gas, no more than 48% of today’s population could be fed at the inadequate 1900 level.28 No country is self-sufficient in food production today.
The fragility of the global food production system will be exposed by a decline in oil and other energy production. It is not just the more direct energy inputs, such as diesel, that would be affected, but fertilizers, pesticides, seeds, and spares for machinery and transport. The failing operational fabric may mean there is no electricity for refrigeration, for example.
It should be clear even from the above overview that a major financial collapse would not just cut actual food production, but could result in food left rotting in the fields, an inability to link surplus production with those in need, a lack of purchasing power and an inability to enact monetized food transactions.
Our critical reliance upon complex just-in-time supply-chain networks means there is little buffering to protect us from supply shocks. In the event of a shock, unless precautions are taken, it is likely that hunger could spread rapidly. Even in a country that could be food independent or a net exporter, it may take years to put new systems in place. In the interim, the risks are severe.
The Primacy of the Necessary and Reverse Economies of Scale
We mentioned that more and more of people’s declining income will go on the most non-discretionary purchases, in particular food and energy. What does this mean for developed economies where most energy and a fair amount of food is imported, and which together employ only a few percent of a population? It means not only mass unemployment, but also a tiny amount of purchasing power chasing the declining availability of the necessities we depend upon. A similar position would exist in other countries. Imports and exports would drop rapidly. The unemployed, schooled and adapted to specialized and largely service roles in the globalized economy, would be quite at a loss for a considerable period.
In addition we would face reverse economies of scale. As the size, integration and complexity of the global economy has grown, our local well-being has become more and more dependent upon global economies of scale. Economies of scale work at every level — not just in the good you buy, but in all the components that went into making it, and so on. Similarly, all the hub infrastructures depend on globalized economies of scale. The lower unit prices have led to greater sales volumes and have also freed up discretionary income to be spent on other goods and services. Thus our purchasing power too is dependent upon economies of scale. The evolution of our economies and economic infrastructure has been predicated upon increasing economies of scale.
If the scaling-up process goes into reverse, reduced purchasing power, and the constriction in non-discretionary consumption, causes purchases to fall and unemployment to rise. Fewer goods and services are sold, which reduces economies of scale, which causes prices to rise, causing further falls in sales. The problem is particularly acute for very complex products and services with limited substitutability, and ones that have high operational costs.
For example, as fewer users can afford to replace mobile phones or computers, or use them less, the cost of the personal hardware and maintaining the network rises per user. Rising costs mean less discretionary use and so on. This is a serious matter for the operators because common IT platforms require a large number of users to keep costs per user low. In effect, the most discretionary use (say, Facebook, texting and Playstation) keeps down the cost for more important uses such as business operations, banking, the electricity grid and the emergency services. Remove the discretionary uses and the cost for businesses and critical services begins to escalate. Furthermore, large hub infrastructure has a fixed cost of operation and maintenance. Once income falls below the operating cost, the system will be switched off unless supported from outside. As government income is likely to fall greatly, this may not be possible.
Critical Infrastructure
We are deeply dependent on the grid, IT and communications, transport, water and sewage, and banking infrastructure. In general, these are amongst the most technologically complex and expensive products in our civilization. Their scale and capacity is determined by current and projected growth in economies, meaning they have high fixed costs. They are viable because there is purchasing power, economies of scale, open supply-chains and general monetary stability over the world. They both comprise and are dependent upon the operational fabric.
Because of their complexity and scale (implying high levels of entropic decay), this infrastructure requires continuous inputs for maintenance and repair. These inputs are often very complex, have limited lifetimes and require specialized components that depend upon very diverse and extensive supply-chains. For the various reasons discussed, substitutes and sub-components for missing inputs may not exist, causing critical infrastructure to break down. Or, the infrastructure provider or component suppliers may not be able to afford inputs due to loss of purchasing power in economies, loss of economies of scale or monetary collapse.
The tight coupling between different infrastructures magnifies the risk of a cascading failure in our critical infrastructure and thus a complete systemic failure in the operational fabric upon which our welfare depends. At the very least, a failing infrastructure feeds back into reduced economic activity and energy use, further undermining the ability to keep the infrastructure maintained.
Financial System Dynamics
Our knowledge and response to expectations of the future, shape that future. One area that is most sensitive to this is financial markets.
Money only has value because it can be exchanged for a real asset such as food, clothing or a train journey. As long as we share the confidence in monetary stability, we can save, trade and invest. It is a virtual asset, as it represents only a claim on something physically useful.29 For most of us, bonds and equities are effectively virtual, as very few shareholders have any meaningful access to underlying physical assets; they are mediated by money. However, the current valuation of virtual assets towers over real productive assets on which their value is supposed to be based. A bond is valuable because we expect to be paid back with interest some years hence; paying 20 times earnings for shares in a company is a measure of confidence in the future growth of that company. Conversely, if a productive asset cannot be made to produce because of energy and resource constraints and the failing operational fabric, it loses its value. This implies that virtual wealth, including pension funds, insurance collateral and debt, will become worth much less than at present, or effectively evaporate.*
The widespread acknowledgment by market participants (and governments) that peak oil is upon us, coupled with an understanding of its consequences, is likely to crash the global financial system. Initially, just a few market participants will begin to question their faith in the overall stability and continued growth of the system and thus the likely value of their virtual assets. However, the transition
