The relationship between money and energy

The relationship between money
and energy
Richard Douthwaite
Feasta, Foundation for the Economics of Sustainability
If there was no energy, nothing could be
supplied in exchange for money.
Energy therefore gives money its value
Gold was, in fact, an energy-based currency.
Whether it still is is another matter. Over the
past four decades, the median yearly ratio
between an ounce of spot gold and a barrel of
oil has been 13.4 barrels. The ratio's most
extreme years were 1988, when the multiple
averaged 29.4, and 2005, when it bottomed at
8.9 barrels.
Last Thursday, May 5th, the ratio was
If you put more money into circulation than is
warranted by energy production, the price of
the energy will rise to restore the relationship
between energy and the things that money
can buy.
Essentially, then, energy is the real money,
something we monetary theorists need to
keep in mind
How Ireland's oil import bill grew 2000-2009
"In Europe we are facing this financial crisis.
The amount of increase in the oil import bill in
Europe is equal to government budget deficit
of Greece plus Portugal put together.
"If the economic recovery starts to happen we
can see difficulty in [...] two three years' time.
This in turn may mean strangling economic
recovery efforts because higher oil prices
means putting pressure on the trade balance
and through that economic recovery efforts
can be well strangled.”
Fatih Birol, the IEA's chief economist, in an Australian radio interview
on April 23rd 2011
How fossil fuel output is predicted to fall
What does a rapidly-declining energy supply
mean for the money supply?
1. The supply of money has to fall if it is to maintain its
value. The alternative is an inflation.
2. No-one will wish to borrow as their incomes will be
shrinking. As a result, the debt-based money-creation
system will break down. New non-debt ways of injecting
money into the economy will have to be found.
3. Having the state inject all the new money into an
economy would concentrate a lot of power into the
government's hands. We need a more broadly-based
method. Money should be created by, or on behalf of, its
users. This could be in proportion to the trade each is
doing as is done in Feasta's Liquidity Network proposal .
What does a rapidly-declining energy supply
mean for the money supply?
4. As a supply of energy will be easy to convert into a
supply of money, energy producers will become the money
creators. They will be, directly or indirectly, the new
banks, with, quite literally, the power to decide what gets
5. It therefore matters where the energy is created, and by
6. Communities should attempt to meet all their energy
needs from their own resources as, otherwise, they will
find that an increasing proportion of everything they
produce has to be used to buy in their energy
requirements. The local energy supply can be the basis of
as local currency and a local bank.
What does a rapidly-declining energy supply
mean for the money supply?
7. If people won't borrow, new ways of financing need to
be found. These are likely to be based on a share of total
income rather than a share of the profits.
8. Asset values will fall to preserve their relationship with
9. When the implications of oil peak are thought through,
paper assets- claims on other people's incomes - will be
dumped. This could collapse the global banking system.