The End of Post-Industrial Nations

There can be only one… then none?

A one million feet view. Photo by NASA on Unsplash

According to prevailing economic theory we live, in the West at least, in a “post-industrial”, knowledge-based, high income economy where industrial output matters very little. Watching financial metrics alone, one could easily agree with that: GDP per capita just keeps on rising, despite polluting low value-added businesses (metallurgy, raw material extraction and processing etc.) being moved into “developing” nations. While the recent ‘rare earth’ craze — and the realization that without certain raw materials and components high-tech post-industrial products can no longer be made — has thrown some sand into the gears of this theory, so far it has failed to shake the West’s entrenched belief in financial capitalism. However, and as usual, the rabbit hole goes much deeper than what the absence of a few magnets and special components might indicate.

This week my interview with Nandita and Alan from Population Balance went live on YouTube. Be sure to check out their website, too, for show notes, links and updates.

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

Blindspots everywhere

In their recent study PricewaterhouseCoopers shed some light on the role of commodities in growth — stating that ‘Minerals will catalyse value creation in the new domains of growth.’ And what minerals have they placed on the top of the chart? Neodymium? Silicon? Nah, good old coal, iron and copper. You see, while the availability of small magnets can and do disturb supply chains, the vast majority of industrial materials still come from “low value-add”, polluting businesses. In other words: the coal and iron age has never ended. Just take a look for yourself:

Source: PwC analysis

The world, in both of its Eastern and Western hemispheres, is still built and moved by these old materials. And we haven’t even mentioned the master resource — sorely missing from the PwC chart above — crude oil… Without these material and energy inputs even the most advanced economy of the world would cease to function in a matter of weeks or at best months, depending on their stock levels. Controlling the flow of these key inputs thus always was and always will be of strategic importance — at least as long as industrial civilization lasts. And while neoliberal economic theory suggests that these raw materials could always be imported at low cost from somewhere else, that presupposes that people “somewhere else” will always agree to sell them at a low enough price. The question thus poses itself: if these materials are so crucial then why are they so cheap? You see, as Nate Hagens pointed out so vividly, there is a fundamental mismatch between the cost, the real value and of course the price of these commodities. Put more bluntly:

price does not equal value and has very little to do with cost.

Let’s take crude oil for example. Without this substance we would not be able to move our cars, trucks, dumpers, cranes, combined harvesters, excavators, ships, locomotives, planes etc. — nor produce essential lubricants, paint, plastic, asphalt and a thousand other products. Yet, at the time of this writing, one barrel (42 gallons) of crude sells for a mere $63, while providing society with 1.7 megawatt-hours of energy — equivalent to four and a half years of human labor. It’s more than just a question of equivalency, though. Due to its incredible energy density, portability and versatility oil can easily power container ships the size of a skyscraper, while no amount of people could peddle such a boat across the Pacific ocean, let alone launch a SpaceX rocket into space (1). Should the flow of oil stop for just a month, the entire world economy would grind to a screeching halt, and societies would collapse soon thereafter. (This is why even a moderate depletion scenario calculating with a modest 4–5% production loss a year is a very big deal.) In this sense, oil is priceless.

The real value of commodities

The entire world economy was built on the price of energy and raw materials being ultra-low compared to the value they provide to society. Every economic activity, from making a car to legal and financial services involves the burning of vast quantities of energy and consuming enormous amounts of minerals and food. What we call value-added activity is, in fact, owed largely to the vast difference between the value of commodities and the price we pay for those. Just think of the yawning gap between the price of a barrel of oil ($63) and the price of the 4.5 years of physical labor (worth $225,000) it replaces. Almost every cent we earn in society is financed from that gap.

Let’s take legal services for example. That surely doesn’t take much oil to provide right? Still, how do lawyers earn so much by burning so little? They must be super-productive, at least economically speaking, right? Well, no. Imagine for a moment that you are a partner at a law-firm in America. You drive to work, burning a few gallons of fuel every day and think: well, that’s about it. But then you arrive at a building built mostly from steel and glass — taking enormous amounts of coal, diesel fuel, natural gas, iron ore, silica-sand, plastics, copper etc. to build. Still remember the chart I shared above? (I guess I don’t have to emphasize the fact that should your company be headquartered in a plywood shack at the edge of town no one would take you seriously.)

Later that day you decide to organize a business lunch with an important client in a fancy restaurant, where the food — grown and harvested by diesel guzzling tractors and combined harvesters — was delivered on trucks and prepared by burning natural gas and using kilowatts of electricity. Not your business, right? Well, next time organize that lunch on a bench in the park, eating home made sandwiches. I’m sure, your client would be thrilled! In the evening, after a productive day, you drive by a supermarket and decide to do some shopping. Again, the food there wasn’t produced by farmers pulling their plows with oxen, nor that beef patty was kept cool by ladies with fans… Instead, gallons of diesel fuel and untold amounts of natural gas was burned in every step of their production and transportation. (Just close your eyes and replace that meat-stand with the tanks of fuel it took to produce and deliver those products to the store.)

In the evening you arrive home and park your car in front of the garage… I guess I don’t have to repeat at this point how that house and vehicle was made and from what. Sure, you could be living in a homeless encampment built from the refuse of this techno-industrial society, but that’s highly unlikely. At the end of the day, you, as a partner at a law firm, have just consumed a ton of fossil fuels and hundreds of pounds of raw materials — mostly made “somewhere else”. How is your activity less material and energy intensive than smelting iron or making glass in a low value added factory then? I bet you know the answer…

Law firms, banks and a gazillion other materially non-productive economic entities are in fact free-riders on this system built entirely on the availability of cheap fossil fuels and minerals. These businesses represent an enormous “high value added” overhead on top of a crumbling base of loads of “low value added” work. This so called “low value added work,” such as that of a steel worker, is just terribly under-payed work, compared to the real value provided to the economy. Should corporations compensate these workers more fairly, or pay a higher price for these inputs, though, the whole inverted pyramid of value would come crumbling down — and therefore its unlikely to happen.

So while the gap between the price of a barrel of oil and the price of 4.5 years of physical labor seems to be huge, almost every single economic activity on this planet draws its profits from this immense difference. Since we still need oil, natural gas and other essential inputs to almost every single economic activity, any substantial price increase sends waves across the economy, ruining businesses and greatly reducing the purchasing power of money. The chart, depicting commodity price indices below tells it all: after the stability of the 1990’s prices started to rise steadily leading up to the 2008 financial crisis. It is a roller coaster ride ever since with the commodity price index climbing higher and higher, pushing Western economies into stagnation, then (since 2020) into decline.

Source: Index Mundi

The cost issue

The third and final element in this picture, after understanding the gap between price and value, is the cost of extraction. In the early to middle 20th century, returns on oil and gas investment, mines, factories and infrastructure (such as dams) were enormous. Thanks to the abundant, high quality, easy-to-get resources — such as crude oil found in Texas, or copper from the Bringham Canyon mine — the economy could experience explosive growth. The relatively low investment costs needed to access these vast treasure troves of resources meant that a lot less money was needed to be paid for extracting them, leaving enormous profits in the pockets of mining and oil companies, even as the economy enjoyed low commodity prices. This also meant that very little energy and raw materials had to be reinvested into their continued production, leaving more materials and energy to build infrastructure and products from. A win-win, right?

As years passed by, though, and as these once prodigious sites became slowly depleted, new modes of resource production had to be found. Fracking shale formations to find more hydrocarbons or opening mines in less favorable locations, on the other hand, meant a much higher energy and material investment for a lot lower return — in other words: higher costs for the entire society. (And we haven’t even mentioned the environmental harm caused by these operations and the use of these resources, conveniently called externalities.) The resulting cost increases began to erode the profitability of the extraction business, though. Since the economy have a limited tolerance towards price increases (due to its need for a large enough gap between prices paid and value provided by these commodities), mining and drilling companies have increasingly came under pressure. As the Pwc report found, their EBITs are falling even as they would need more money than ever to open new mines and drill more wells to keep up with the depletion of their more productive assets. The following image courtesy of BHP, one of the world’s largest mining companies, tells us so:

Major copper discoveries show a downward trend: both in size and resource depth. Source: Visual Capitalist

Opening new ever deeper mines, or having to remove an ever larger rock overburden increases costs disproportionally. Again, not only in monetary but also in energy and material terms. And if this increased investment yields less and less copper per mine (as indicated by the size of the circles on the chart above) this means that we are facing an exponential increase in material and energy investment needed per ton of metal retrieved. Not a winning combination, if you ask me… Resource depletion is thus not a purely geological phenomenon — even though it’s clearly driven by it — but a complex interplay between price, value and cost. And while extractive businesses are constantly trying to reduce their costs, they are ultimately waging a losing battle. Throwing more technology at the “problem” does not solve it either. Newer methods add complexity and usually come with an increased energy demand. In a world, where energy from fossil fuels have started to become increasingly limited, another “solution” had to be found to this predicament.

The geopolitical context

The ever increasing energy and material cost of resource extraction has slowly begun to cannibalize the rest of the economy. As more and more diesel, electricity, and natural gas got re-invested into mining and drilling, less and less energy and metals were left for the rest of the economy to build houses, factories, products and infrastructure from. The economy, as a result, began to adapt by sending the most energy and resource hungry parts of it abroad where labor costs, environmental standards and energy was cheaper… Up to a point where essentially everything was produced elsewhere, leaving post-industrial nations totally dependent on imports. The original idea behind this policy was that “third world” nations would never develop an industry of their own, never reach an income level where internal consumption becomes a factor, never demand higher wages, clean air and water for their workers, and of course never run out of stuff. In other words: the assumption behind offshoring was that the “third world” would never manage to shake off their colonial status.

As the global south slowly began to decolonize itself by looking for alternatives to Western financial systems designed around their exploitation, and as global energy and raw material extraction approached planetary limits, the post-industrial, high value added model of the West began to crumble. Emerging economies have realized that once the basic industries are secured — providing these nations with the iron, coal, copper etc. needed for their development — they can start training the engineers and scientists of their own, turning these resources into bridges, railways, dams, factories and the like. The industrialization of many global south countries have naturally created a competition for resources between these rapidly developing and the already developed nations. (Unfortunately, meanwhile the size of this planets natural reserves didn’t grow in line with the ambitions of its inhabitants.) So far the global race for energy and raw materials was held back by IMF and World Bank policies demanding wages to be suppressed and austerity measures introduced in targeted nations, and thereby preventing competing markets from being built up. With the weakening of the dollar’s status and the development of an alternative system (BRICS) the picture has started to change substantially.

Europe’s sanctioning of Russian energy has acted as a release valve, though. Thanks to the deeply depleted status of the continent’s own fossil fuel and mineral resources, many companies left the EU in search for cheaper energy inputs after the 2022 price shock, lowering competition for resources on the long run by de-industrializing the economic bloc and creating a permanent cost-of-living crisis in what used to be one of the world’s wealthiest regions. The EU’s plummeting energy demand in the wake of natural gas, diesel and coal price hikes has thus not only prevented a global squeeze on energy but also ensured that the problem of high prices for the rest of the world will be avoided for some time to come. (As for the EU: falling wholesale energy prices invited a substantial increase in taxes on energy, keeping prices high for businesses no matter what.) Germany, as a result, is forecast to experience a 0.3% recession in 2025, but adjusting for state spending, the real decline could be closer to 4-5%:

Daily surveys confirm the same message: Germany is being deindustrialized, losing hundreds of thousands of core-sector jobs. The social security deficits already emerging are just the beginning. Yet both politics and business refuse to conduct an honest diagnosis. […] Large corporations can adjust or relocate production to sidestep regulation, but small and medium-sized enterprises – the Mittelstand – are being crushed.

German per capita energy consumption has fallen by 24% in the past ten years (with a 10% drop in single year between 2022 and 2023). Chemical and metallurgical businesses have fled the country in droves, leaving Germany with an ever weaker industrial base. As Thomas Kolbe writes:

The worn-out German economy will not breathe new life into an equally exhausted state through some unexpected economic miracle. If current trends continue – and all signs suggest they will – German public debt will surpass the 100%-of-GDP mark within the next decade.

A debt-to-GDP ratio exceeding 100% indicates that the total government debt is larger than the country’s annual economic output. And since we are talking about an economy which is shrinking 4–5% a year without government spending (i.e. without taking on even more debt) this also means that these loans can no longer be repaid, just re-financed. Skyrocketing debt levels, with ever higher interests paid on them, act as an additional drag on economic growth, funneling money away from productive investments and towards paying an ever higher interest to investors. In addition to that, large government borrowing tends to absorb capital that might otherwise finance private sector investment, further exacerbating Germany’s (and other highly indebted nations’) economic woes.

American tariffs, intentionally or not, pushed the brake pedal even deeper, further slowing down not just the European but the entire world economy. As part of his tariff policy US secretary of the treasury Scott Bessent outlined a new strategy, treating allied nations’ wealth as an American “sovereign wealth fund” (his words). In this scheme European, Korean and Japanese companies are encouraged to make investments, building American factories and reshoring industries at their own cost in exchange for some tariff relief.

“We have agreements in place where the Japanese, the Koreans, and to some extent the Europeans will invest in companies and industries that we direct — largely at the President’s discretion,” Bessent said. “Other countries, in essence, are providing us with a sovereign wealth fund.”

What American economic policy experts failed to realize is that you cannot profitably re-industrialize a nation which has already depleted its natural resources below the point of offshoring, whose people no longer want to work in factories (or have the skills needed to do so), whose average citizens are buying groceries on credit and whose economy is kept alive by borrowing more money the US taxpayer could ever repay. You see, de-industrialization happens for a multitude of reasons and cannot be reversed by making “clever” policy decisions.

What Bessent’s “sovereign wealth fund” can, and in fact most likely will achieve, is an acceleration of Europe’s de-industrialization, reducing global demand for energy and resources even further (and thereby keeping energy prices at a manageable level). Since Europe is the world’s largest importer of oil, this makes a lot of sense: if we cannot squeeze more juice out of this planet, we might as well start reducing consumption… Elsewhere, of course. The price of oil, as a result, has plummeted and stayed at a price level not seen since 2018 (2). As the rest of the world accelerates its transition towards a multi-polar system and away from western financial institutions and currencies, though, the pressure of resource scarcity building up under the lid can only be expected to grow again.

Until next time,

B

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

Notes:

(1) The same goes to renewables and batteries: their energy density, power-to-weight ratio, availability etc. are orders of magnitude worse than that of petroleum products. This is why there are no solar powered passenger flights from New York to London, or mines and agricultural businesses powered and operated by renewables alone. Wind and solar was never designed to act like a replacement to fossil fuels. These alternative sources of electricity — together with nuclear — are just a better, more efficient way of burning fossil fuels by turning them into energy harnessing devices, instead of converting them into heat in a power plant.

(2) The price of steel pipe and other drilling equipment (not to mention the cost of energy needed to drill and maintain those wells) has exploded ever since oil prices were this low (in 2018). Meanwhile the best spots have been already used up, leaving drilling companies with ever lower quality, ever faster depleting wells. So while oil markets might seem to be oversupplied at the moment, causing prices to fall, the cost of drilling has silently caught up with the selling price, making oil too cheap for producers to keep drilling and pumping at this rate.