No Escape from Fantasy Land

Europe’s industrial plan: zero emissions, zero pollution, zero workers. Photo by Peter Herrmann on Unsplash

The European leadership class, together with a still considerable majority of its constituents, has been living far too long in fantasy land, and recent election results in Germany show that the awakening is still yet to arrive... The continent continues on its path, sleepwalking into a major economic disaster. Skyrocketing gas and electricity prices, together with desperate measures to manage price fluctuations caused by “renewables”, on the other hand, might pull out the last vital building blocks of the EU’s industrial ecosystem, leading to an economic crisis not seen in a century. Europe has unwillingly became a classic case study of systemic collapse, which we now have the “privilege” to study from the inside as it happens in slow motion.

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Dire straits

The prompt for this essay arrived from a recent report released by the Centre for International Energy Policy (CIEP) highlighting the many issues besetting the continent. Quote: “The EU has adopted an institutionalised short-term view on the economy and a belief that its soft and regulatory powers can be used to discipline the rest of the world into following its route to climate neutrality.” The paper also explains how the EU is exposed to the upcoming US-China battle, and “how the avenues to prevent EU industry from becoming collateral damage in this conflict may be limited”. The US and the EU have both become structurally dependent on Chinese supply lines, and as the author contends “it will take time to diversify these”. The biggest problem of the EU economy, though, as the report correctly identifies, is the continent’s structurally higher energy prices.

Natural gas, indispensable for many industrial applications (both as a feedstock and as a source of heat) plays a crucial role in the EU’s struggles. Despite all the hand-waving how its just a bridge fuel, it is still the most efficient way of generating electricity, to which solar panels and wind turbines offer no true alternative. The price rally ensuing in the wake of the sanctions war with Russia has thus not only made electricity generation very expensive, but has also raised the production costs of chemicals, fertilizer, paper, steel, aluminum, copper, glass, food and much more.

Here we must make a quick detour. While economic pundits tend to blame the war for Europe’s energy crisis, it was sanctions, lawsuits, asset confiscations, denial of payments and abrupt withdrawal of permits initiated by EU countries — together with a series of “mysterious” pipeline explosions — which have caused the crisis at hand. Just for context: before the economic war began Germany used to import 50% of its coal, 55% of its natural gas, and 31% of its crude oil from Russia, representing 33% of the country’s total energy consumption. This sudden loss of energy has urged many companies to shut off production and to move their energy intensive operations elsewhere. Despite the resulting demand destruction over the past three years, and notwithstanding the hand-waving how pipeline gas was replaced by LNG [sic], gas storage levels have fallen deep below average this year; indicating another supply shock (1) and signalling the onset of yet another round of deindustrialization and divestment. There is a catch, though. As the report’s author succinctly put it:

“Once disinvestments start, the solid looking Jenga tower will weaken and instigate other disinvestments, causing industrial ecosystems to unravel and collapse. This ‘Jengafication’ can cause irreversible deindustrialization and a diminishing ability to realise the industrial energy transition, security of supply and strategic autonomy.”

Explained in plain English this means that below a certain level of industrial activity economic decline becomes not only permanent, but self-sustained (2). So much for restarting the European economy, or re-arming the continent by ramping up weapons manufacturing. (Shells, tanks, guns, rockets, fighter jets and the like literally take tons of steel, aluminum and high explosives to make. Materials, which, on the other hand, require an energy intensive industry to produce.)

Value chain links of energy intensive industries. Allow critical parts of it to wither away at your own peril. Source

Industrial Ecology meets politics

The key concept to understand here is how industries indeed behave like ecosystems. According to the scientific field of Industrial Ecology (IE) the global material economy can be modeled as a network of industrial processes that extract resources from the Earth and transform those resources into products and services (3). Various relationships among key players exhibit the same emergent, self-organizing features which can be observed in biology. Seen through these lens, material flows, energy, resources or manufacturing plants cannot be analyzed on their own, but only as a part of a complex self-adaptive system. Thus thinking that the market can solve anything — be it a sudden choke-off of gas supplies or replacing coal with wind and solar — is not only delusional but also very dangerous. The issue is that no one from the current crop of elites seem to be able to really comprehend the complexity of a continent wide block’s economy, let alone understand the secondary or tertiary effects of political decisions.

The past three years, however, ought to have been enough to teach politicians and their constituents that one cannot wage a war of attrition on its biggest supplier of cheap energy and hope to win the contest. In a similar vein, it ought to become clear that replacing stable flows of fossil fuels with intermittent electricity from “renewables” is not a path to economic success either. The resulting wild fluctuations of electricity availability has prompted Germany’s grid operator to intervene several thousand times a year to prevent blackouts from occurring, and caused wild swings in electricity prices, reaching 900 Euros per megawatt hours during peak hours.

Now drastic measures are on the table to curb demand on dark, windless days. The Federal Network Agency asked the 400 most demanding industrial consumers to adopt their production schedules to the availability of wind and solar. Needless to say, this proposal would ruin the economic viability of these remaining businesses, as the workforce would have to sit idle in many cases. Not to mention the fact that electric furnaces and other energy intensive machinery can only be run economically on a 24/7 basis. (During their heat up phase, which can take hours, these machines cannot produce anything yet still consume a lot; both in terms of work time and energy).

Yet the folly continues, even as America decided to put forward its own demands: 5% of GDP contributed to military spending, more LNG bought (at a much higher price than pipeline gas from Russia), and now 25% tariffs on imports from the EU. Added on top of all this is the coming “decoupling” from China, ringing the death knell to the EU economy. One cannot help but wonder how could the European elite not see where this process was going? The world is now caught up in a game of musical chairs, where supposed allies are pulling the rug from underneath each other. Maybe Paul Newman had it right:

“If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.”

The situation is much like with a real ecosystem, which found itself bereft of key inputs. Companies, much like living organisms, are driven by a constant flow of material and energy to them. Remove a key component and deficiencies occur. Yes, adaption happens over time, but if stresses mount the ecosystem begins to show signs of distress: species disappear and biodiversity falls. Remove enough components and keystone species (on which many other species depend) start to wither away… Until all of a sudden the entire ecosystem goes through a massive phase shift, such as a forest fire clearing an entire area and turning it into a shrubby grassland — permanently. It’s important to note here that not all the building blocks have to be removed in order to usher in collapse: it’s more than enough to remove the ones with the most connections.

And while many believe catastrophes like this happen without forewarning, the collapse of an ecosystem is always preceded by years of severe distress. Europe’s economy is exactly in such a situation. On the surface it looks to be working, but the fundamentals are completely broken. Fossil energy, driving the entire economy so far has become scarce and very expensive. Wind and solar both failed to provide a reliable replacement for a number of technical reasons from intermittency to their high material intensity and ultra low energy density. Many energy-intense raw material processing facilities have been closed as a result, and with a further round of deindustrialization in the offing, many more might cease to operate soon. One can only wonder which will be the last brick to fall before the entire edifice begins to crumble?

The EU’s economic success hinged on three key factors. Cheap Russian fossil fuels to power its energy-intense industrial sectors, imports of labor intensive semi-finished products from China, and the export of finished goods to South and Eastern Europe (as well as back to China). This dynamic could have made the EU a natural ally to BRICS countries, something which is completely unimaginable in today’s political environment. With the German election results in, and with a former investment company executive elected as chancellor the die seems to be cast. If that looks like a dire predicament, perhaps good ol’ Paul Newman’s second law might light things up a little:

“Just when things look darkest, they go black.”

Postscript

While these issues might seem to be unique to Europe, and its tempting to believe that those old suckers have become the victims of their own folly, I have to remind everyone that the grand Poker game will not end after Europe is out. Taking the concept of industrial ecology to its logical conclusion reveals that our technology — based entirely on finite reserves of fossil fuels and rapidly depleting mineral deposits — is by definition unsustainable, and thus impossible to save. The global industrial ecosystem as a consequence will continue collapsing even as Europe no longer consumes as much as it used to. A study released in 2023 and signed by the most prominent ecologists of our time pinpointed the prime root cause behind the failure of industrial technology:

“current interventions are largely physical, resource intensive, slow-moving and focused on addressing the symptoms of ecological overshoot (such as climate change) rather than the distal cause (maladaptive behaviours)”.

Given these circumstances Industrial Ecology can only serve as a framework to understand (as opposed to act as a guide on how to prevent) the collapse of the global industrial economy. Unfortunately, too much of the “sustainability” discussion is still centered around CO2 emissions, reducing a complex issue into a stupid debate over fossil fuels vs solar panels. This narrow view misses the bigger picture, though: just like the industrial economy, the entire biosphere is coming apart at the seams. It’s all one freakishly complex interconnected system.

We are not only waging wars on each other but on Nature itself.

One research document from 2002 found “that human demand may well have exceeded the biosphere’s regenerative capacity since the 1980s. According to this preliminary and exploratory assessment, humanity’s load corresponded to 70% of the capacity of the global biosphere in 1961, and grew to 120% in 1999.” That is: we are now living up an accumulated natural wealth much faster than it regenerates. This is why forests, fisheries, ground water reserves and fertile top soil keep disappearing no matter what technology we use to get them. (Not to mention the rapid depletion of all the cheap and easy-to-get mineral deposits and oil, which took millions of years to form.) This process will inevitably lead to scarcities, then strife and ultimately war if our leaders have their way. Failing to recognize what’s going on and sticking to a fantasy land version of reality, however, will only usher in destruction far faster and far more drastically than it otherwise needed to happen.

Until next time,

B

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Notes:

(1) For a brief moment in February natural gas became more expensive than crude oil on a megawatt basis. (Translated to a barrel of oil equivalent, that meant $100 a barrel prices.) If that’s not an indication of a major gas supply crisis, nothing is.

(2) For those who need more data behind the long demise of the German economy, I highly recommend reading the essay written by economist Marco Flaccadoro, from the Bank of Italy (via Naked Capitalism). As I indicated in my earlier essay about peak steel: Europe has already embarked on its decline decades ago, yet the fall as a direct consequence to the sanctions war is nothing short of extraordinary.

Production in energy-intensive sectors (2019Q4=100). Source: Eurostat and Marco Flaccadoro’s calculations.

(3) The idea was first floated by Robert Frosch and Nicholas E. Gallopoulos back in 1989. In their Scientific American article (titled: Strategies for Manufacturing) they pondered “why would not our industrial system behave like an ecosystem, where the wastes of a species may be resource to another species? Why would not the outputs of an industry be the inputs of another, thus reducing use of raw materials, pollution, and saving on waste treatment?” — Indeed, why not? And so a new research area of environmental economics was born. And what began as the study of material and energy flows through specific industrial systems, has rapidly evolved into a scientific field of its own with specific research contents and methods. Or as Brad Allenby defined Industrial Ecology: “a systems-based, multidisciplinary discourse that seeks to understand emergent behavior of complex integrated human/natural systems”.