Economic Models Are Overlooking a Looming Diesel Crisis
We are witnessing the initial stages of deglobalization: nations are increasingly at odds with each other, and political parties are becoming more disparate. Trump's demands, both domestically and internationally, are causing concern for many. However, there is a deeper issue that most people are overlooking.
A worldwide shortage of diesel and jet fuel is forcing international trade to enter a new downward phase, as depicted in Figure 1. While international trade grew as a percentage of GDP between the 1960s and 2008, it has since plateaued. The current diesel and jet fuel shortages are causing this percentage to decline to a lower level.
In this article, I will delve into the situation further. One key conclusion: conflicts arise from the necessity to reorganize the global economy to utilize less long-distance international trade.
Background:
The global economy is a dissipative structure, governed by the laws of physics. Economies behave differently from what most researchers assume because they are dissipative structures, operating under the laws of physics. Researchers often model only small parts of economies, leading to misleading or incorrect conclusions.
Dissipative structures, such as plants, animals, ecosystems, and hurricanes, can temporarily grow to avoid a 'dead' state. They require 'dissipating' energy in adequate amounts to maintain this growth. For instance, the human body is a dissipative structure that needs food to stay healthy, and hurricanes dissipate heat from warm water bodies.
If an ecosystem lacks sufficient energy, it adapts to the available resources. Similarly, without adequate diesel and jet fuel, our economy will undergo a transition akin to a human diet or an ecosystem shift when resources change.
Academic Researchers' Misinterpretations:
Researchers in academic settings often make unwarranted simplifications in their models. They assume all energy is equivalent, and substitution is easy and quick. Models suggest that inadequate energy supply leads to rising prices, which the economic system can handle indefinitely.
However, the real world doesn't function this way. Substitution is not as straightforward as models suggest. Ecosystems rely on a mix of resources and predators. If a top predator is eliminated, the system changes. The global economy will face similar disruptions if international transport systems encounter issues.
The Role of Diesel and Jet Fuel:
Diesel and jet fuel are crucial for international transport, meeting specific criteria:
- High energy density
- Easy storage
- Compatibility with existing infrastructure (with potential changes)
- Low cost and minimal capital investment in infrastructure
These fuels have been the primary choice for international travel and transport. 'Bunker fuel,' while heavier and more polluting, is discouraged due to environmental concerns.
Other Essential Uses of Diesel:
Diesel is vital for various applications, including:
- Food production and local transport
- Agricultural equipment operation
- Heavy semi-trucks for local goods delivery
- Infrastructure construction and maintenance (roads, bridges, pipelines, commercial buildings, factories, electricity transmission lines, and power plant structures)
The significance of diesel in the economy is often overlooked due to its behind-the-scenes nature.
Challenges in Raising Diesel Prices:
Raising diesel prices is challenging due to its impact on food prices and public sentiment. High food prices are unpopular, and even low diesel supply doesn't necessarily lead to price increases, as voters may elect new politicians. Oil prices fluctuate, as shown in Figure 2, affecting financial markets.
Heavy Oil Extraction Issues:
Heavy oil extraction is problematic due to:
- Difficulty in shipping and refining
- Higher costs and impurities that cannot be easily passed on to consumers
- Low profitability for oil companies, leading to low tax revenue and unrest in countries with heavy oil reserves but limited other industries.
Misinterpretation of Oil Data:
A naive view of oil data from agencies doesn't reveal the world's oil problem. Most data shows the sum of various oil types, which seems to be rising. However, when considering oil supply per capita and the mix of products, the situation becomes clearer.
Diesel Supply Growth and Trade:
The pattern of diesel supply growth provides insights into the issues with world trade. The World Trade Organization and the Kyoto Protocol indirectly encouraged world trade by promoting manufacturing and mining in other countries.
Between 1995 and 2008, per-capita world diesel consumption increased, corresponding with the flattening of international trade. The restriction in supply starting around 2008 aligns with this trend.
Contributing Factors to Diesel Supply Decline:
Several factors contributed to the drop in per-capita diesel supply since 2008:
- (a) More heavy oil available for refining into diesel and jet fuel before 2008
- (b) Expensive hydrocracking technique for transforming long hydrocarbon molecules
- (c) Price differentials discouraging heavy oil field development
- (d) Depletion of easily accessible oil, leading to higher extraction costs and potential high-cost food
- (e) Political issues related to low profitability and tax revenue from heavy oil extraction.
Radical Change in the World Order:
The global economic order is on the brink of significant change to adapt to the changing availability of diesel and jet fuel.
This situation resembles a game of musical chairs, where players must regroup as chairs are removed. Similarly, economies must adapt to inadequate diesel and jet fuel supply by allowing some businesses and governments to fail and rearranging supply lines.
Future Outlook:
The self-organizing global economy is likely to find a solution, possibly through innovations. However, in the near term, higher levels of conflict due to resource shortages are expected. Trump's policies, despite their strangeness, may make sense in light of these global issues.
