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How much, whom to, and why
does the civilization overpay for oil?

4. Quantifying inefficiency of an economy where energy is a market commodity

The civilization cannot exist without energy consumption. Therefore, the demand for energy is saturated irrespective of its market price, which, as discussed above, is kept at its maximum possible value. Energy consumers, i.e. the entire world economy, pay for energy with a certain share of the globally produced goods and services. As discussed in the previous section, these expenditures constitute about 10% of the annual gross domestic product. That this magnitude does not change consistently with time, Fig. 1, indicates that is already close to the stability threshold of the modern world economy.

U.S. GDP vs energy payments

Fig. 1. Annual energy expenditures, energy consumption and GDP increment in U.S.A. in 1970-2004. Mean energy expenditures are 7% GDP. During the energy crisis of the 1980s, the twofold rise of energy expenditures resulted in economic instability when annual GDP increment dropped to the lowest negative values recorded during the entire period. When the energy expenditures returned to mean values, annual GDP increment and economics as a whole stabilized. This indicates that current energy expenditures (7% GDP in U.S.A., ~10% GDP on a global scale) represent the permissible threshold, beyond which economics starts to disintegrate. Data taken from the U.S. Energy Information Agency (http://www.eia.doe.gov/emeu/aer/txt/ptb0105.html), 1 btu (British Thermal Unit) = 1055 J.

Occupation within the energy production sector constitutes but tenths of per cent of the working population of Earth, Table 1. This means that, whatever luxuriant their living standards can be, people in this sector are unable to utilize the 10% of the globally produced goods and services paid to them in return for the energy they produce, Fig. 2. Therefore, these 10% of world's production must either be discarded as garbage and thus cause a 10% inflation rate, or used to support some population capable of their utilization. The size of this population supported at the existing mean living standard of the civilization (accounting also for maintenance of the elderly and the young) is of the order of the same ten per cent of global population, Fig. 2. This population, supported by the energy sector, does not necessarily have to participate in any meaningful activities stabilizing the civilization, for example they do not have to take part in industrial production. For this reason it is natural to call such population "vacant". We emphasize that maintenance of a vacant population is not an optional choice of the energy sector, but the only opportunity to somehow utilize the enormous energy payments.

Structure of financial flows in modern economics

Fig. 2. Schematic representation of modern world economy with energy treated as a free market commodity. It is assumed for simplicity that the market price of energy is one hundred times higher than its cost price. So 0.1% population working in the energy production sector is paid 10% global GDP. This money is spent to support vacant population, which does not necessarily participate in the maintenance of civilization stability.

One can therefore envisage world economy as consisting of three sectors, which here can be, for the sake of definitiveness, referred to as the industrial sector (where all goods and services sustaining the current level of civilization development are produced), the energy production sector, and the energy-sponsored sector (vacant population supported by the energy production sector), Fig. 2. The financial mechanism of supporting the vacant population is as follows. Owners of energy production receive money after they sell energy in the free market. This money is then given to the vacant population so that they can buy in the same free market goods and services up to ten per cent of global production, which will otherwise remain unclaimed. Vacant population can be provided with a salary equal to the mean salary of the working population within the industrial sector.

Human being is genetically programmed to be active and cannot escape activity. Therefore, the vacant population is necessarily involved in some activities. These paid activities can take arbitrary forms, including various types of Sisyphean toil. Guided by wishes of the sponsors, these activities can be directed towards practically any goal, like creation of wonders of the world similar to Egyptian pyramids, organization of massive religious gatherings and sports competitions, implementation of political changes, as well as towards undermining the foundations of the society via, e.g., terrorism. These activities can also be directed towards stimulation of birth rate increase up to the female biological capacity and maximization of population growth rate. However, an overly high population numbers of vacant population, in particular, in excess of 10% of worlds' working population, will make their living standards drop below the global average. All paid activities of the vacant population are counted in the gross domestic product of the civilization, with the total contribution of the order of the same 10%, Fig. 2.

Social structure of the vacant population can be very diverse and complex. Vacant population can represent the majority of population in a particular country, or it can form several social or professional layers within a country where the majority of population is occupied within the industrial sector. Even a single individual can simultaneously represent both working and vacant population, e.g. working population who receive interest on the profit of companies drilling oil in their region. Importantly, to persist within the industrial sector, any activity must be economically competitive. Within the energy-sponsored sector the situation is fundamentally different — any activity must be in the first place liked by the sponsor, not necessarily economically competitive. Co-existence of these two types of activities within a society mixes up the societal values, misguides the economically active population and, as a result, slows down economic growth and reduces living standards.

Prolonged existence in the state of vacancy of an entire population supported by the energy sector is equivalent to exclusion from active participation in the scientific and technological progress of the civilization. It results in decline of educational standards, disappearance of qualified specialists and general social degradation.

Vacant population is to be affected most when the cheap energy sources are exhausted. When the cost price of energy reaches up its current market price, the producers of energy will be unable to support a vacant population. The third, energy-supported, sector of economy vanishes, Fig. 3. Occupation in the energy production sector will have to rise from the current tenths of per cent to 10% of the working population. This is formally equivalent to vacant population getting engaged in energy production. Although the magnitude of GDP will formally fall by 10% with disappearance of paid arbitrary activities of the vacant population, neither the level of employment, nor living standards in the industrial sector will change. With energy cost price rising even further beyond current market prices, the share of people working in the energy production sector will have to rise as well. In the result, occupation in the industrial sector will start to fall making the scientific and technological level of the civilization, as well as the living standards of the population, decline.

What happens when cheap energy is exhausted and energy cost price rises up to its modern market price

Fig. 3. Schematic representation of world economy based on expensive energy sources. It is assumed that all cheap energy sources are exhausted. Energy has a high cost price coinciding with its modern market price considered in Fig. 2. Maintenance of vacant population is no longer affordable, cf. Fig. 2. Effectively, vacant population moves to energy sector.

In modern economy cheap energy resources still abound. If one abandoned considering energy as a free market commodity and energy were sold it at cost price worldwide, there would be no need to support vacant population and no need to produce the additional 10% of global goods and services for this purpose, Fig. 4. This would open a possibility of globally reducing working hours by ten per cent. This could be done, for example, by diminishing the five-day working week by half a day or reducing the retirement age by four years (given an average forty years working lifetime), all this without affecting the current living standards.

What could be done while cheap energy still abounds if energy market price is reduced to its cost price

Fig. 4. Schematic representation of world economy based on cheap energy sources, which are legally excluded from the list of market commodities and are sold at cost price. Market price of energy is reduced down to its current cost price (cf. Fig. 3 where, conversely, cost price of energy is raised up to current market price). Effectively, vacant population moves to the industrial sector. In the result, there appears a green share of global GDP of the order of 10%, which can be used for solution of environmental problems without reducing modern living standards.

To summarize, consideration of energy as a free market commodity makes the majority of working population of Earth spend ten per cent of their working time to support a vacant population, whose activities are not necessarily contributing to the stability of the civilization and are not necessarily economically competitive.

To cite this document:

Makarieva A.M., Gorshkov V.G., Li B.-L. (2010) Comprehending ecological and economic sustainability: Comparative analysis of stability principles in the biosphere and free market economy. Annals of the New York Academy of Sciences, 1195, E1-E18. Abstract. pdf doi:10.1111/j.1749-6632.2009.05400.x, first published as PNPI Preprint No. 2763.