Top Economist: Hormuz Blockade Lead Us To Once in a Lifetime Energy Crisis

0:00 The US president has ordered his navy to blockade of the Strait of Hormuz.

0:06 But we're putting on a complete blockade

0:08 and we're not going to let Iran make money.

0:10 Iran will not be able to sell oil and that would be very effective.

0:15 That's what we're losing right now and people are focusing upon

0:19 [music] the price of this, but the really important

0:20 point is the role of energy in production.

0:23 What if economic [music] growth isn't what drives the world, but energy?

0:26 Steve Keen, who predicted the 2008 crash, exposes the reality.

0:30 As energy rises, [music] economies expand and when it falls,

0:34 the system begins to break.

0:35 This blockade of Iranian oil exports [music]

0:38 will only worsen the global energy crisis.

0:41 If we don't have energy,

0:42 we can't produce goods [music] and services and the link is incredibly tight.

0:47 This is looking a change in energy and change

0:50 in gross world products over the last 40 years.

0:53 What you've got here is the annual percentage

0:56 change in gross world product and the annual

0:58 percentage change in gross energy consumption and they're

1:01 virtually locked step and they're the same magnitude.

1:04 So when energy goes up, GDP goes up.

1:06 energy goes down, GDP goes down.

1:08 They're losing uh 20% of the world's liquefied natural gas,

1:13 a substantial proportion of its oil as well,

1:15 we could see a 5 or 10% fall in energy,

1:18 we will certainly see a 5 or 10% fall in global world gross world products.

1:23 One of the points I made talking to Steven is

1:25 the absolutely critical role that energy plays in our capacity

1:30 to produce output.

1:31 This is something which when you look at the data,

1:32 it screams at you that if you don't have if energy, you don't have GDP either.

1:37 This is data going back to the 1970s,

1:40 so it's 50 years worth of data of both gross world product,

1:43 that's the total of all measures of gross

1:45 domestic product added together and the black line

1:48 is energy consumption and the energy is measured

1:51 in terms of millions of tons of oil equivalent,

1:53 so it puts together all sorts of energy and just measured it in terms

1:57 of the same equivalent amount of million tons of oil and then over here

2:01 we have all the outputs of different

2:03 nations added together and measured in terms

2:05 of 2015 United States dollars and you can see how tight the link is.

2:11 They're both increasing at much the same rate

2:14 and when you look at the correlation between the two, it's extremely high,

2:18 but that is partly spurious because they're both increasing and that alone

2:22 causes series to be get a a strong correlation coefficient.

2:26 So for example, you could show the number

2:28 of pigs on the planet and the number of airplane

2:32 flights and you get a strong correlation between

2:34 the two when of course one doesn't affect the other,

2:37 but there's a critical role for energy here and this is

2:40 something which conventional economic theory completely gets wrong and that is

2:45 that you cannot produce anything without energy and yet the models

2:49 of production that conventional economists leave customarily leave energy out.

2:54 So they have a model of production,

2:55 they call the Cobb-Douglas production function and what it

2:58 has is output is produced by a combination of technology

3:02 multiplied by labor multiplied by capital where the labor

3:07 and capital are both raised to a a power.

3:10 It's like labor squared, labor cubed, that sort of thing,

3:12 but the power is represents the proportion of GDP

3:17 that goes to each of those factors of production.

3:20 So workers get about 70% of GDP,

3:23 so the exponent for them is 0.7 and capitalists get about 30%,

3:27 so the exponent for them is 0.3

3:29 and they completely ignore energy in that picture.

3:32 Now, when economists do occasionally decide well,

3:35 maybe we should take a look at energy as well,

3:38 what they do is they tack on energy as a third

3:41 what they call factor of production and they do the same thing.

3:44 They multiply labor by capital by energy and the exponent

3:49 that they raise energy to represents the share of energy in GDP.

3:53 That's about 4% or 5% of total GDP is goes to the energy sector.

4:00 So the exponent there is 0.04 or 0.05 and when economists talk

4:05 about this, they actually say that because the exponent is so small,

4:10 energy is not a major constraint on the economy.

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4:30 So this is a paper by a German economist written a few years

4:34 ago at the start of the the Ukraine war and they were saying,

4:39 what's going to be the impact of losing

4:41 excess energy from Russia on the German economy?

4:44 So they used their basic form of analysis and they said,

4:48 what if we assume there's a 10% fall in availability of energy?

4:52 What does neoclassical theory tell us is going to happen to GDP?

4:57 And this is the punchline down here.

4:59 So their production function says you have output is

5:02 equal to energy raised to one power times all

5:05 other factors raised to one minus that power

5:07 and the power they use the value they give for alpha

5:10 is 0.04 because that's saying that energy firms make

5:15 up about 4% of Germany's GDP and they then say

5:19 that therefore a drop in energy of 10% so

5:23 they say it's a reasonable estimate reduces production by 0.4%.

5:28 Absolutely trivial.

5:29 So their prediction was losing Russian energy wouldn't

5:32 have any big impact upon the German economy.

5:35 I noticed they say here,

5:36 this shows that production is quite insensitive to energy as expected.

5:41 Now, this is a classic case where economists have their prior beliefs and they

5:46 don't go and check the data to see whether those prior beliefs are maintained.

5:51 They simply stick with the prior belief

5:52 and say energy doesn't have much impact upon GDP.

5:56 But when you take a look at those shots that I showed Steven in the cording,

6:00 there's a one-for-one link between energy and gross world product.

6:03 So what I've got here is a chart of energy being graphed as the the black

6:08 line here measured on the left-hand scale

6:10 in terms of millions of tons of oil equivalent,

6:13 so they add together all the various sources of energy and measure

6:16 them in terms of tons of oil and then on the right-hand side,

6:20 this is gross world product.

6:21 So you add up the GDP of all the countries in the world

6:24 and this is gross world product and you

6:26 can see how they're basically parallel lines.

6:29 So that alone is a reason to say

6:32 the theory that the neoclassicals have is wrong.

6:34 But when you look in change in energy and change in GDP,

6:38 they're basically one-for-one.

6:40 You have over here, you have in 2007 during the global financial crisis,

6:45 GDP fell by about 3% and energy consumption fell by the same amount.

6:51 COVID, it's almost identical.

6:53 Massive negative to gross world product,

6:56 massive negative to energy consumption as well.

6:58 So it's a one-for-one relationship,

7:00 whereas they're saying it's a 1 for 0.04 relationship.

7:04 Now you'd think they'd check the data and say,

7:06 oh we've got it wrong, we must change our model,

7:09 but if they do it, the they lose their explanation for how income is shared.

7:14 So one of the reasons that neoclassical economists

7:17 like this model called the Cobb-Douglas production function is

7:21 that it argues that what people workers get paid

7:24 is equal to what they call their marginal product.

7:26 So workers get paid for the contribution they make to production.

7:30 Capitalists do the same.

7:32 And if you have to acknowledge

7:33 that the relationship is nothing like what they say,

7:36 you simply can't have the exponents they use, then their theory falls apart.

7:41 So rather than looking at the data and saying,

7:43 oh we've got to change our theory,

7:44 they don't look at the data and they continue pumping out their own theory.

7:49 And I want to illustrate just by another

7:51 comparison here with a little Ravel model

7:54 of the difference between the modeling approach that neoclassicals

7:58 use and the modeling approach that I use,

8:00 which is common to what's called the post-Keynesian school of economic thought.

8:04 So what post-Keynesians use is called

8:07 the Leontief production function and basically that says

8:11 that the resource you have the least of is the one that constrains your output.

8:16 So I've got it argued here that capital

8:19 they've got a capital output ratio of one,

8:22 a labor to output ratio of one and energy to output ratio of one,

8:26 but you then get the minimum of what what gets produced

8:30 in terms of GDP is the minimum of any one of those three.

8:34 So if any one of them falls, you get less output.

8:37 What we're going through critically here is less energy.

8:39 Now the neoclassical one says that labor gets a 25% share,

8:44 sorry, capital gets a 25% share,

8:46 labor gets a 70% share and the remainder goes to the energy sector,

8:51 which is a a 5% percent share here.

8:54 And then if you then say what happens according to both models,

8:58 what happens if the availability of energy falls?

9:01 Uh and you can compare the impact.

9:03 So if I now run this model and I reduce the amount of energy available,

9:09 then you can see a huge drop for the post-Keynesian model,

9:13 the Keen estimate as I'm saying here,

9:15 very trivial change for the neoclassical model.

9:19 Keep on going to where there's a 10% fall in total availability of energy,

9:24 which is what we probably face from the impact

9:27 of the war in Iran on energy supplies

9:29 for the planet and the post-Keynesian model sells tells

9:32 you 10% fall in energy, 10% fall in GDP.

9:36 The neoclassical model tells you 10% fall in energy, 0.5% fall in GDP.

9:43 So there's no problem.

9:44 They they didn't even see a problem was coming.

9:46 Now the only way you get a serious decline in output out

9:49 of the neoclassical model if all three have to fall in availability.

9:53 So if I reduce capital uh down from uh 100% down to 90% as you

9:59 can see uh the production falls much

10:03 more substantially according to the neo-neo-classical model.

10:06 It has no effect on the Leontief

10:08 model because you're already constrained by energy.

10:10 It doesn't matter that now that you're also constrained by by capital.

10:14 The one that really has an impact on the neo-classical theory is reducing labor.

10:18 So, if I say the labor is down by 10% then you get a very

10:21 serious fall and finally when I have all

10:25 three of the inputs according to the neo-classical

10:27 theory reduced by the same amount then you get the scale of downturn that I

10:32 said is going to come out of just

10:33 losing energy availability in the very first instance.

10:37 And now the trouble is our politicians are

10:40 being advised by people who believe this model.

10:42 They believe that you can substitute labor for capital.

10:46 So, the reason no particular damage is done

10:48 using the neo-classical model is that they effectively assume

10:53 by saying you multiply the inputs together they're saying

10:56 you can substitute capital for labor and labor for energy.

10:59 So, as energy starts to decline you're effectively getting more and more more

11:03 work out of labor and capital and therefore the decline is not severe.

11:07 But with the post-Keynesian argument if you're constrained

11:10 in any one of those your total output falls.

11:13 They're not you're not multi- you don't multiply

11:14 them together you take the minimum as what

11:17 you actually can use to produce because you can have a factory all the workers

11:22 you need all the machines you need but you've only got 90% of the energy

11:26 going into those machines you're going to get

11:28 90% of the output at the other side.

11:31 So, the perspective of economics that I come

11:33 from the post-Keynesian school capable of an understanding

11:36 energy properly and talks about a one-for-one fall

11:40 in GDP if there's a fall in energy.

11:43 So, neo-classicals aren't going to be

11:44 particularly worried about this cross because

11:46 they think you can substitute labor for energy and energy for for capital.

11:52 You can't.

11:53 So, again you run into physical constraints out

11:55 of this decline in energy coming out of the Straits

11:59 of Hormuz and that's why I wanted to focus

12:02 upon the importance of energy in that discussion with Steven.