Oil as Money and the Decline of Energy Earnings

The Oil Drum has posted a must read essay today by Chris Cook, formerly of the International Petroleum Exchange.  Cook suggests that the only real money is in fact energy. And, that the world should eventually migrate to a monetary system based on that reality.

Whether one agrees, disagrees, or simply needs more time to digest such an idea, let’s contemplate the 10 Year chart of the Dow Jones Industrial Average in terms of the price of Oil.

indu-in-oil-terms-620

There are myriad observations to make here. I don’t wish to be either too simplistic or reductionist. However, one simply has to wonder that that the decline in Net Energy globally is what ails the global economy. The Dow was at its highest when oil was cheap near the turn of the millennium. The Dow, expressed as a cash equivalent, was buying 600-700 bbls in that period. Now the Dow is buying about 150 bbls of oil.

If we can free our minds for a moment of how many bbls of oil the world produces, and the current dollar level of the Dow, and think more about Net Energy, then certain insights can unfold over the above chart. It’s good to think generally here, and thematically. So here goes: we know that the Energy Return on Energy Invested–the EROEI–of nearly all energy resources is in decline, globally. In other words, it used to take only a single barrel’s worth of energy to extract a hundred barrel’s of oil. My Twitter pal @alexismadrigal is currently reading Dan Yergin’s The Prize, and is finding some juicy examples of the high rates of return found, in the early days of oil. But now, in this century, we find that the EROEI for Oil, Natural Gas and Coal is now in steep decline. While complex, the answer is obvious: it takes alot more energy to drill for deepwater oil, to vibrate rock to release Natural Gas, and to extract Coal from old mines where the easy coal was sucked dry 100 years ago. The global EROEI of oil has descended to an average now of 12 to 1.

In the last 10 years, global EROEI has gone into steeper decline.

And that’s what the DOW chart may be expressing. Again, there are myriad other factors in play that have produced the chart you see above. But the primacy of energy is without question a major influence here. Industrial companies need to extract profits from their activity that is over and above their energy costs. If their business-wide costs are infused with energy–from the food their employees need to eat to the heating and cooling of buildings–then their earnings, and their earning quality is going to decline. While that concept will be obvious to all, now add in the notion that the quality of energy earnings is also in decline.

If energy costs to an economy are rising in nominal terms, and the quality of energy earnings (EROEI) is now also in steep decline, then we would want to look for signs that the aggregate profits of the entire economy are in decline. And the above chart of the DOW may be an expression of this phenomenon.

–Gregor

Updating: Monday 06 April at 11:45am NY Time: Chris Cook, author of the above referenced article, has made helpful remarks in the comments section this morning and correctly pointed out that, in my intro to this post–which was intended as a more generalized on-ramp to the subject as a whole–I potentially confine Mr. Cook’s idea into a more prescriptive corner that is too narrow. Chris Cook is not saying that energy is the only real money. Rather, in Mr. Cook’s own words, he is saying, and I quote from his posted remarks…. I’m not quite saying that energy is the only real money. I’m saying firstly that energy is a good common standard for exchange, and secondly that energy-based currency could be a useful global reserve currency alternative to the dollar. ie it could be a good common currency, but certainly not a single currency.

I encourage readers to read Mr. Cook’s comments to this post. And, to read the commentary thread to his original post at The Oil Drum which has filled up now quite nicely.  –Gregor

  • http://www.jeffreymclarty.com/jm McLarty

    Playing devil's advocate,

    A currency can't be finite AND consumable, nor should a currency cost something to store and carry. Unless you want pieces of paper to say, “ONE OIL NOTE: This certificate can be redeemed for one barrel”, but then, what do you pay the people storing oil? And, that doesn't solve the fact that those slips would need to be destroyed when a barrel is consumed.

    The discussion says nothing about the advances in technology and economies of scale the world has benefitted from.

    What if we denominated the DOW in the price of solar energy?

    Price of oil is in $ / watt. Price of a square inch of solar panel is in $ / watt. One has gone up, the other has gone down. The chart above would look drastically different, if I could only find the data.

  • http://www.jeffreymclarty.com/jm McLarty

    Playing devil's advocate,

    A currency can't be finite AND consumable, nor should a currency cost something to store and carry. Unless you want pieces of paper to say, “ONE OIL NOTE: This certificate can be redeemed for one barrel”, but then, what do you pay the people storing oil? And, that doesn't solve the fact that those slips would need to be destroyed when a barrel is consumed.

    The discussion says nothing about the advances in technology and economies of scale the world has benefitted from.

    What if we denominated the DOW in the price of solar energy?

    Price of oil is in $ / watt. Price of a square inch of solar panel is in $ / watt. One has gone up, the other has gone down. The chart above would look drastically different, if I could only find the data.

  • http://www.jeffreymclarty.com/jm McLarty

    Playing devil's advocate,

    A currency can't be finite AND consumable, nor should a currency cost something to store and carry. Unless you want pieces of paper to say, “ONE OIL NOTE: This certificate can be redeemed for one barrel”, but then, what do you pay the people storing oil? And, that doesn't solve the fact that those slips would need to be destroyed when a barrel is consumed.

    The discussion says nothing about the advances in technology and economies of scale the world has benefitted from.

    What if we denominated the DOW in the price of solar energy?

    Price of oil is in $ / watt. Price of a square inch of solar panel is in $ / watt. One has gone up, the other has gone down. The chart above would look drastically different, if I could only find the data.

  • http://www.jeffreymclarty.com/jm McLarty

    In terms of the EROEI, I just thought about a chicken and egg situation:

    Imagine 10 years from now, building a community of 20,000 professionals supporting a new nuclear power plant in a remote area, near a lake. Could it become too costly, to actually build the new homes, the infrastructure, to build the plant itself? I mean, as a community. If the plant can only generate X capacity per employee, then that X capacity needs to generate value to justify educating that person and supporting their living.

    I'm getting a bit philisophical here…going to stop thinking so hard, for now.

  • http://www.jeffreymclarty.com/jm McLarty

    In terms of the EROEI, I just thought about a chicken and egg situation:

    Imagine 10 years from now, building a community of 20,000 professionals supporting a new nuclear power plant in a remote area, near a lake. Could it become too costly, to actually build the new homes, the infrastructure, to build the plant itself? I mean, as a community. If the plant can only generate X capacity per employee, then that X capacity needs to generate value to justify educating that person and supporting their living.

    I'm getting a bit philisophical here…going to stop thinking so hard, for now.

  • http://www.jeffreymclarty.com/jm McLarty

    In terms of the EROEI, I just thought about a chicken and egg situation:

    Imagine 10 years from now, building a community of 20,000 professionals supporting a new nuclear power plant in a remote area, near a lake. Could it become too costly, to actually build the new homes, the infrastructure, to build the plant itself? I mean, as a community. If the plant can only generate X capacity per employee, then that X capacity needs to generate value to justify educating that person and supporting their living.

    I'm getting a bit philisophical here…going to stop thinking so hard, for now.

  • http://www.jeffreymclarty.com/jm McLarty

    ahh…but I suppose if energy is valuable enough to warrant the plant, then the employee should always be able to live off the marginal value the watts they help produce actually creates.

  • http://www.jeffreymclarty.com/jm McLarty

    ahh…but I suppose if energy is valuable enough to warrant the plant, then the employee should always be able to live off the marginal value the watts they help produce actually creates.

  • http://www.jeffreymclarty.com/jm McLarty

    ahh…but I suppose if energy is valuable enough to warrant the plant, then the employee should always be able to live off the marginal value the watts they help produce actually creates.

  • Chris Cook

    Hi Gregor

    Just in case you miss my response at Seeking Alpha…

    I'm not quite saying that energy is the only real money. I'm saying firstly that energy is a good common standard for exchange, and secondly that energy-based currency could be a useful global reserve currency alternative to the dollar.

    ie it could be a good common currency, but certainly not a single currency.

    Energy is only one basis for currency – the others IMHO are:

    (a) land/location – which backs over two thirds of money ever created, as mortgage-backed loans; and

    (b) knowledge/ intellectual capital – which backs most Equity, and a great deal of unsecured credit, if you think about it

    I actually see land/l ocation as potentially the most important backing for currencies with purely domestic redeemability (international acceptability is another issue).

    Land basis for currency is not a new idea : John Law came up with it in 1705, but rather ruined the implementation in France in 1719 with the Mississippi Bubble (and thereby leading – some say -to the Louisiana Purchase).

    I set out here

    http://www.slideshare.net/ChrisJCook/equity-sha

    in Dublin, how unitisation of property/land value could be a solution for the Credit Crunch.

    Also this went down well at top level in Iran

    http://www.slideshare.net/ChrisJCook/petro-clea

  • Chris Cook

    Hi Gregor

    Just in case you miss my response at Seeking Alpha…

    I'm not quite saying that energy is the only real money. I'm saying firstly that energy is a good common standard for exchange, and secondly that energy-based currency could be a useful global reserve currency alternative to the dollar.

    ie it could be a good common currency, but certainly not a single currency.

    Energy is only one basis for currency – the others IMHO are:

    (a) land/location – which backs over two thirds of money ever created, as mortgage-backed loans; and

    (b) knowledge/ intellectual capital – which backs most Equity, and a great deal of unsecured credit, if you think about it

    I actually see land/l ocation as potentially the most important backing for currencies with purely domestic redeemability (international acceptability is another issue).

    Land basis for currency is not a new idea : John Law came up with it in 1705, but rather ruined the implementation in France in 1719 with the Mississippi Bubble (and thereby leading – some say -to the Louisiana Purchase).

    I set out here

    http://www.slideshare.net/ChrisJCook/equity-sha

    in Dublin, how unitisation of property/land value could be a solution for the Credit Crunch.

    Also this went down well at top level in Iran

    http://www.slideshare.net/ChrisJCook/petro-clea

  • Chris Cook

    Hi Gregor

    Just in case you miss my response at Seeking Alpha…

    I'm not quite saying that energy is the only real money. I'm saying firstly that energy is a good common standard for exchange, and secondly that energy-based currency could be a useful global reserve currency alternative to the dollar.

    ie it could be a good common currency, but certainly not a single currency.

    Energy is only one basis for currency – the others IMHO are:

    (a) land/location – which backs over two thirds of money ever created, as mortgage-backed loans; and

    (b) knowledge/ intellectual capital – which backs most Equity, and a great deal of unsecured credit, if you think about it

    I actually see land/l ocation as potentially the most important backing for currencies with purely domestic redeemability (international acceptability is another issue).

    Land basis for currency is not a new idea : John Law came up with it in 1705, but rather ruined the implementation in France in 1719 with the Mississippi Bubble (and thereby leading – some say -to the Louisiana Purchase).

    I set out here

    http://www.slideshare.net/ChrisJCook/equity-sha

    in Dublin, how unitisation of property/land value could be a solution for the Credit Crunch.

    Also this went down well at top level in Iran

    http://www.slideshare.net/ChrisJCook/petro-clea

  • gregor.us

    Thanks Chris. I really enjoyed your article and I can see how my introduction in this post–which was intended as a more generalized on-ramp to the subject as a whole–appears to confine your idea into a more prescriptive corner. Sorry about that. You are right. My characterization was too narrow. I will update the post. It is likely that my overly-sympathetic stance towards your idea led me to punch it up a notch in my intro.

    More broadly, I am intrigued by the strong emotions evidenced in the responses to your piece on TOD. This partially confirms my view that money is very emotional and is bound up with national identity and personal indentity. By proposing a unit of energy, your article appears to have touched upon these feelings. Of course, as I said, I am favorable to your idea.

    Best,

    G

  • gregor.us

    Thanks Chris. I really enjoyed your article and I can see how my introduction in this post–which was intended as a more generalized on-ramp to the subject as a whole–appears to confine your idea into a more prescriptive corner. Sorry about that. You are right. My characterization was too narrow. I will update the post. It is likely that my overly-sympathetic stance towards your idea led me to punch it up a notch in my intro.

    More broadly, I am intrigued by the strong emotions evidenced in the responses to your piece on TOD. This partially confirms my view that money is very emotional and is bound up with national identity and personal indentity. By proposing a unit of energy, your article appears to have touched upon these feelings. Of course, as I said, I am favorable to your idea.

    Best,

    G

  • gregor.us

    Thanks Chris. I really enjoyed your article and I can see how my introduction in this post–which was intended as a more generalized on-ramp to the subject as a whole–appears to confine your idea into a more prescriptive corner. Sorry about that. You are right. My characterization was too narrow. I will update the post. It is likely that my overly-sympathetic stance towards your idea led me to punch it up a notch in my intro.

    More broadly, I am intrigued by the strong emotions evidenced in the responses to your piece on TOD. This partially confirms my view that money is very emotional and is bound up with national identity and personal indentity. By proposing a unit of energy, your article appears to have touched upon these feelings. Of course, as I said, I am favorable to your idea.

    Best,

    G

  • steve

    What does “the Dutch Disease” refer to?

    Always great content Gregor!

    Steve

  • steve

    What does “the Dutch Disease” refer to?

    Always great content Gregor!

    Steve

  • steve

    What does “the Dutch Disease” refer to?

    Always great content Gregor!

    Steve

  • gregor.us

    I am tempted to agree with those who think energy is already a strong component of currency. But if that's the case, then mis-pricing is rampant. I gather one motive for an energy unit is to dampen gross mis-pricing. But as you correctly point out, energy is constantly being consumed. So the underlying quantity of energy behind an energy unit currency is changing.

    Different currenices represent different quantities of capital. The USD has largely been backed by human capital since WW2. The capital created by innovation and value discovery and capture. I think we've run inot trouble, in this regard, now. Our most recent “innovations” were uh….not so valuable.

    I still think Gold and Silver work pretty well as money. I know this seems primitive.

    I'll venture we see Carbon Credits as a global unit of exchange, before we see an energy unit. Just guessing.

    G

  • gregor.us

    I am tempted to agree with those who think energy is already a strong component of currency. But if that's the case, then mis-pricing is rampant. I gather one motive for an energy unit is to dampen gross mis-pricing. But as you correctly point out, energy is constantly being consumed. So the underlying quantity of energy behind an energy unit currency is changing.

    Different currenices represent different quantities of capital. The USD has largely been backed by human capital since WW2. The capital created by innovation and value discovery and capture. I think we've run inot trouble, in this regard, now. Our most recent “innovations” were uh….not so valuable.

    I still think Gold and Silver work pretty well as money. I know this seems primitive.

    I'll venture we see Carbon Credits as a global unit of exchange, before we see an energy unit. Just guessing.

    G

  • gregor.us

    I am tempted to agree with those who think energy is already a strong component of currency. But if that's the case, then mis-pricing is rampant. I gather one motive for an energy unit is to dampen gross mis-pricing. But as you correctly point out, energy is constantly being consumed. So the underlying quantity of energy behind an energy unit currency is changing.

    Different currenices represent different quantities of capital. The USD has largely been backed by human capital since WW2. The capital created by innovation and value discovery and capture. I think we've run inot trouble, in this regard, now. Our most recent “innovations” were uh….not so valuable.

    I still think Gold and Silver work pretty well as money. I know this seems primitive.

    I'll venture we see Carbon Credits as a global unit of exchange, before we see an energy unit. Just guessing.

    G

  • http://www.rohrintl.com MacroMeister

    As always, a fascinating perspective and interesting extension of Cook’s ideas.

    I must admit to being in a bit over my head in the primary discussion, yet can not help but comment on the extended implications of the long term DJIA/Oil chart. It speak volumes about how overdone US equities were at the Dot.Com Bubble ‘financial engineering’ high versus the real world. And the degree to which the entire recovery from the 2002-2003 lows was not a ‘real’ new high at all into 2007 (more of that nasty 'engineering' again instead) is such an elegant summary of what really transpired.

    The implication from here in light of all the government and central bank largesse would seem to rest with whether last month was ‘the’ low or just ‘a’ low in equities. As much as it might be too much of a ‘micro’ technical analytic view, the recent increments on the chart certainly put the modest euphoria over the current equity market rally into perspective, and reinforce your perspective on the primacy of the ex-energy profit picture.

    Based upon the recent highs stalling into 218(+/-), any slippage from current levels looks pretty weak, with the recent recovery consisting of some very ugly bearish candles. That is thoroughly consistent with DJIA likely ranging only so far above 8,000 prior to a full correction back toward 7,000, and the highest recent volume occurring on lower Closes. The technical challenges to the DJIA moving much higher without a subsequent sizable correction are certainly daunting; a picture is worth a thousand words: http://bit.ly/126to.

    Thanks Gregor; yet again making the big pic meaningful for the current trend evolution.

  • http://www.rohrintl.com MacroMeister

    As always, a fascinating perspective and interesting extension of Cook’s ideas.

    I must admit to being in a bit over my head in the primary discussion, yet can not help but comment on the extended implications of the long term DJIA/Oil chart. It speak volumes about how overdone US equities were at the Dot.Com Bubble ‘financial engineering’ high versus the real world. And the degree to which the entire recovery from the 2002-2003 lows was not a ‘real’ new high at all into 2007 (more of that nasty 'engineering' again instead) is such an elegant summary of what really transpired.

    The implication from here in light of all the government and central bank largesse would seem to rest with whether last month was ‘the’ low or just ‘a’ low in equities. As much as it might be too much of a ‘micro’ technical analytic view, the recent increments on the chart certainly put the modest euphoria over the current equity market rally into perspective, and reinforce your views on the primacy of the ex-energy profit picture.

    Based upon the recent highs stalling into 218(+/-), any slippage from current levels looks pretty weak, with the recent recovery consisting of some very ugly bearish candles. That is thoroughly consistent with DJIA likely ranging only so far above 8,000 prior to a full correction back toward 7,000, and the highest recent volume occurring on lower Closes. The technical challenges to the DJIA moving much higher without a subsequent sizable correction are certainly daunting; a picture is worth a thousand words: http://bit.ly/126to.

    Thanks Gregor; yet again making the big pic meaningful for the current trend evolution.

  • http://www.rohrintl.com MacroMeister

    As always, a fascinating perspective and interesting extension of Cook’s ideas.

    I must admit to being in a bit over my head in the primary discussion, yet can not help but comment on the extended implications of the long term DJIA/Oil chart. It speak volumes about how overdone US equities were at the Dot.Com Bubble ‘financial engineering’ high versus the real world. And the degree to which the entire recovery from the 2002-2003 lows was not a ‘real’ new high at all into 2007 (more of that nasty 'engineering' again instead) is such an elegant summary of what really transpired.

    The implication from here in light of all the government and central bank largesse would seem to rest with whether last month was ‘the’ low or just ‘a’ low in equities. As much as it might be too much of a ‘micro’ technical analytic view, the recent increments on the chart certainly put the modest euphoria over the current equity market rally into perspective, and reinforce your views on the primacy of the ex-energy profit picture.

    Based upon the recent highs stalling into 218(+/-), any slippage from current levels looks pretty weak, with the recent recovery consisting of some very ugly bearish candles. That is thoroughly consistent with DJIA likely ranging only so far above 8,000 prior to a full correction back toward 7,000, and the highest recent volume occurring on lower Closes. The technical challenges to the DJIA moving much higher without a subsequent sizable correction are certainly daunting; a picture is worth a thousand words: http://bit.ly/126to.

    Thanks Gregor; yet again making the big pic meaningful for the current trend evolution.

  • http://caiti-online.blogspot.com/ Transcanada

    http://www.chrismartenson.com/crashcourse/chapt

    Expanding on the EROEI idea, this video talks about Net Energy and the Energy Cliff about 4:30 into the clip.

  • http://caiti-online.blogspot.com/ Transcanada

    http://www.chrismartenson.com/crashcourse/chapt

    Expanding on the EROEI idea, this video talks about Net Energy and the Energy Cliff about 4:30 into the clip.

  • http://caiti-online.blogspot.com/ Transcanada

    http://www.chrismartenson.com/crashcourse/chapt

    Expanding on the EROEI idea, this video talks about Net Energy and the Energy Cliff about 4:30 into the clip.

  • Bob Inget

    For six years, on line, I've attempted to articulate the same argument.
    The closest I've come is pointing out how US currency is in fact, backed by rich, sustainable, energy resources. Our physical location makes hydro, solar, wave, bio, wind energy available if we exploit it.

    One overly simple example. Two years ago, I traded paper (dollars) for a
    gang of grid inter-tied solar panels. Our farm electric bill, in a very low cost environment, (Pacific NW hydro) ran a steady $100.-/+ a month for decades. Now, we pay $6.50 per month tax. (electric heat, walk-in coolers, 3 freezers, solar hot water, electric water pumps)
    Today, We have (roughly) an additional $95. dollars per month inflation protected dollars to spend on more Lindsay Lohan paraphernalia.
    Currency, of a sort.
    Our 'location' fetches a higher dollar amount. (affordability) Plus, with storage we could be grid free.
    In a sense, we bought sixty (food free) slaves, with an 30 year expected lifespan. Apart from a bit of dusting and evaporative cooling every summer, PVs' are maintenance free.

    Book writin is like that. Copied once, pixels do the remaindered labor.

    Currently I invest, almost exclusively, in CANADIAN, dividend paying, energy stocks. So, I pay attention.
    Because Canada's smaller overall economy, her currency is directly tied to the price of energy. An additional argument, easily proven, for energy backed lucre.

  • Gator8386

    Nice piece Gregor, I'm seeing it all over the place.

  • Gator8386

    Nice piece Gregor, I'm seeing it all over the place.

  • Gator8386

    Nice piece Gregor, I'm seeing it all over the place.

  • ragnarock

    Gregor,
    When you talk about money and energy, it seems to me that you have to define terms. The statement that “the only real money is energy” isn't clear. Either the statement is a truism (something along the lines of: “no energy, no money.”) Or your statement is wrong. Money and energy are, in fact, very different things.

    The standard textbook definition of money is useful and accurate – to wit: money is a human invention that serves three purposes: store of value, numeraire, medium of exchange.

    1) Store of value. In this context think of money as an inter-temporal loan made with yourself. (E.g.: I have enough food today, therefore I will not exchange this barrel of oil now in my possession for food. Rather, I will exchange this barrel of oil for money, then next week, when out of food, I will have money to use to buy some).

    2) Numeraire. A way to make comparisons. (E.g., the price of cornmeal is $1.00 a pound; the price of wheat flour is $1.50 a pound. Money makes possible a comparison between the two, and leads to a decision about which to buy, based on personal preferences.)

    3) Medium of exchange. This is by far the most important of the three. It makes exchange possible between people who lack the double coincidence of wants. (You supply oil analysis and want food. How many farmers want the oil analysis that you supply? Probably not many. Money makes it possible for you and a farmer to coordinate yourselves, and be mutually useful.)

    Coordination is not trivial. A medium of exchange – i.e., money – makes possible coordination between people who are widely dispersed, who have access to different types and levels of knowledge and information, who want different things, and who pursue different goals.

    With respect to numeraires, you can use anything you want to define the unit of money – e.g., one dollar can perfectly well be defined to equal X BTUs of energy. Many people have talked about commodity standards for money. The discussion of this topic would be one that is basically about which commodity would make the best standard. (I personally favor an ounce of gold as the numeraire for many reasons, not the least of which it that gold has served this function for thousands of years.)

    But I don’t sense that you are interested in arguments about commodity standards per se. It seems to me that you are saying something like this: energy is important, therefore a BTU of energy should be the numeraire. The unstated portion of your argument would then be something like this: if a BTU of energy becomes the numeraire, people in general might come to understand the importance of energy, and be willing to accept painful strategies needed to deal with the looming problem of oil scarcity.

    To say this another way, my sense of the matter is that your argument about money and energy is “propaganda” or “marketing”—- words used to move people to action. This is not meant as a putdown. Words used to move people to action are essential. But also essential is clarity. Are your words descriptive (about “the way things are”), normative, (abut “the way things ought to be”) or are you engaged in exhortation (“words used to move people from the way things are to the way things ought to be”)?

  • ragnarock

    Gregor,
    When you talk about money and energy, it seems to me that you have to define terms. The statement that “the only real money is energy” isn't clear. Either the statement is a truism (something along the lines of: “no energy, no money.”) Or your statement is wrong. Money and energy are, in fact, very different things.

    The standard textbook definition of money is useful and accurate – to wit: money is a human invention that serves three purposes: store of value, numeraire, medium of exchange.

    1) Store of value. In this context think of money as an inter-temporal loan made with yourself. (E.g.: I have enough food today, therefore I will not exchange this barrel of oil now in my possession for food. Rather, I will exchange this barrel of oil for money, then next week, when out of food, I will have money to use to buy some).

    2) Numeraire. A way to make comparisons. (E.g., the price of cornmeal is $1.00 a pound; the price of wheat flour is $1.50 a pound. Money makes possible a comparison between the two, and leads to a decision about which to buy, based on personal preferences.)

    3) Medium of exchange. This is by far the most important of the three. It makes exchange possible between people who lack the double coincidence of wants. (You supply oil analysis and want food. How many farmers want the oil analysis that you supply? Probably not many. Money makes it possible for you and a farmer to coordinate yourselves, and be mutually useful.)

    Coordination is not trivial. A medium of exchange – i.e., money – makes possible coordination between people who are widely dispersed, who have access to different types and levels of knowledge and information, who want different things, and who pursue different goals.

    With respect to numeraires, you can use anything you want to define the unit of money – e.g., one dollar can perfectly well be defined to equal X BTUs of energy. Many people have talked about commodity standards for money. The discussion of this topic would be one that is basically about which commodity would make the best standard. (I personally favor an ounce of gold as the numeraire for many reasons, not the least of which it that gold has served this function for thousands of years.)

    But I don’t sense that you are interested in arguments about commodity standards per se. It seems to me that you are saying something like this: energy is important, therefore a BTU of energy should be the numeraire. The unstated portion of your argument would then be something like this: if a BTU of energy becomes the numeraire, people in general might come to understand the importance of energy, and be willing to accept painful strategies needed to deal with the looming problem of oil scarcity.

    To say this another way, my sense of the matter is that your argument about money and energy is “propaganda” or “marketing”—- words used to move people to action. This is not meant as a putdown. Words used to move people to action are essential. But also essential is clarity. Are your words descriptive (about “the way things are”), normative, (abut “the way things ought to be”) or are you engaged in exhortation (“words used to move people from the way things are to the way things ought to be”)?

  • ragnarock

    Gregor,
    When you talk about money and energy, it seems to me that you have to define terms. The statement that “the only real money is energy” isn't clear. Either the statement is a truism (something along the lines of: “no energy, no money.”) Or your statement is wrong. Money and energy are, in fact, very different things.

    The standard textbook definition of money is useful and accurate – to wit: money is a human invention that serves three purposes: store of value, numeraire, medium of exchange.

    1) Store of value. In this context think of money as an inter-temporal loan made with yourself. (E.g.: I have enough food today, therefore I will not exchange this barrel of oil now in my possession for food. Rather, I will exchange this barrel of oil for money, then next week, when out of food, I will have money to use to buy some).

    2) Numeraire. A way to make comparisons. (E.g., the price of cornmeal is $1.00 a pound; the price of wheat flour is $1.50 a pound. Money makes possible a comparison between the two, and leads to a decision about which to buy, based on personal preferences.)

    3) Medium of exchange. This is by far the most important of the three. It makes exchange possible between people who lack the double coincidence of wants. (You supply oil analysis and want food. How many farmers want the oil analysis that you supply? Probably not many. Money makes it possible for you and a farmer to coordinate yourselves, and be mutually useful.)

    Coordination is not trivial. A medium of exchange – i.e., money – makes possible coordination between people who are widely dispersed, who have access to different types and levels of knowledge and information, who want different things, and who pursue different goals.

    With respect to numeraires, you can use anything you want to define the unit of money – e.g., one dollar can perfectly well be defined to equal X BTUs of energy. Many people have talked about commodity standards for money. The discussion of this topic would be one that is basically about which commodity would make the best standard. (I personally favor an ounce of gold as the numeraire for many reasons, not the least of which it that gold has served this function for thousands of years.)

    But I don’t sense that you are interested in arguments about commodity standards per se. It seems to me that you are saying something like this: energy is important, therefore a BTU of energy should be the numeraire. The unstated portion of your argument would then be something like this: if a BTU of energy becomes the numeraire, people in general might come to understand the importance of energy, and be willing to accept painful strategies needed to deal with the looming problem of oil scarcity.

    To say this another way, my sense of the matter is that your argument about money and energy is “propaganda” or “marketing”—- words used to move people to action. This is not meant as a putdown. Words used to move people to action are essential. But also essential is clarity. Are your words descriptive (about “the way things are”), normative, (abut “the way things ought to be”) or are you engaged in exhortation (“words used to move people from the way things are to the way things ought to be”)?

  • gregor.us

    Hi. Thanks for the full remarks.

    In a way, I have perhaps mixed two issues into the same post–that may have been more helpfully explained in separate posts.

    I really use Chris Cook's idea of energy as a numeraire (thankyou) as a jumping off point to talk about the challenge of earning capital profits in an economy where, in the background, the net profit of energy is likely in decline.

    I really don't embrace the idea of using energy as money in this post. That said, I am open to the idea–though I suspect the world clumsily finds a way to accord value to energy producing nations and the currencies of those nations anyway.

    As I try to explain in the most, I am only touching lightly what is a huge and complex issue. Even Chris Cook came on board to explain that he was not saying energy was the only money.

    My truer interest lies in the issue of Net Energy. And I, like others, am still very much at the probing and learning stage of that question.

    Best,

    G

  • gregor.us

    Hi. Thanks for the full remarks.

    In a way, I have perhaps mixed two issues into the same post–that may have been more helpfully explained in separate posts.

    I really use Chris Cook's idea of energy as a numeraire (thankyou) as a jumping off point to talk about the challenge of earning capital profits in an economy where, in the background, the net profit of energy is likely in decline.

    I really don't embrace the idea of using energy as money in this post. That said, I am open to the idea–though I suspect the world clumsily finds a way to accord value to energy producing nations and the currencies of those nations anyway.

    As I try to explain in the most, I am only touching lightly what is a huge and complex issue. Even Chris Cook came on board to explain that he was not saying energy was the only money.

    My truer interest lies in the issue of Net Energy. And I, like others, am still very much at the probing and learning stage of that question.

    Best,

    G

  • gregor.us

    Hi. Thanks for the full remarks.

    In a way, I have perhaps mixed two issues into the same post–that may have been more helpfully explained in separate posts.

    I really use Chris Cook's idea of energy as a numeraire (thankyou) as a jumping off point to talk about the challenge of earning capital profits in an economy where, in the background, the net profit of energy is likely in decline.

    I really don't embrace the idea of using energy as money in this post. That said, I am open to the idea–though I suspect the world clumsily finds a way to accord value to energy producing nations and the currencies of those nations anyway.

    As I try to explain in the most, I am only touching lightly what is a huge and complex issue. Even Chris Cook came on board to explain that he was not saying energy was the only money.

    My truer interest lies in the issue of Net Energy. And I, like others, am still very much at the probing and learning stage of that question.

    Best,

    G

  • gregor.us

    Hi. Thanks for the full remarks.

    In a way, I have perhaps mixed two issues into the same post–that may have been more helpfully explained in separate posts.

    I really use Chris Cook's idea of energy as a numeraire (thankyou) as a jumping off point to talk about the challenge of earning capital profits in an economy where, in the background, the net profit of energy is likely in decline.

    I really don't embrace the idea of using energy as money in this post. That said, I am open to the idea–though I suspect the world clumsily finds a way to accord value to energy producing nations and the currencies of those nations anyway.

    As I try to explain in the most, I am only touching lightly what is a huge and complex issue. Even Chris Cook came on board to explain that he was not saying energy was the only money.

    My truer interest lies in the issue of Net Energy. And I, like others, am still very much at the probing and learning stage of that question.

    Best,

    G

  • gregor.us

    Hi. Thanks for the full remarks.

    In a way, I have perhaps mixed two issues into the same post–that may have been more helpfully explained in separate posts.

    I really use Chris Cook's idea of energy as a numeraire (thankyou) as a jumping off point to talk about the challenge of earning capital profits in an economy where, in the background, the net profit of energy is likely in decline.

    I really don't embrace the idea of using energy as money in this post. That said, I am open to the idea–though I suspect the world clumsily finds a way to accord value to energy producing nations and the currencies of those nations anyway.

    As I try to explain in the most, I am only touching lightly what is a huge and complex issue. Even Chris Cook came on board to explain that he was not saying energy was the only money.

    My truer interest lies in the issue of Net Energy. And I, like others, am still very much at the probing and learning stage of that question.

    Best,

    G