Ad Hoc Commentary – fears of China overtaking the West is largely exaggerated

Demographics and energy flows impose fundamental limits to the business cycle. Human intellect and energy conversion is always necessary to accomplish economic activity. Even though favorable demographics and abundance of energy does not guarantee economic growth, they are both important ingredients.

Today, there are many who fear that China will overtake the West. Somehow the fear had found its way even to the White House, and is used as an excuse for the trade wars. However, if anything, both demographics and energy flows does not seem to favor China in the coming decades. China’s aging population had been discussed at length by many pundits. In all likelihood, China will never be able to overcome the demographic drag in the coming decades.

On the energy front, it is important to note that access to the most efficient energy is key to achieve economic dominance. The British had dominance in solid hydrocarbons (coal), and they were largely replaced by the Americans with their dominance in liquid hydrocarbons (crude) and later gaseous hydrocarbons (natural gas).

If you take a long term view of the market, you realize that we move in cycles. Vaclav Smil wrote a book Energy and Civilization in 2017, and in it he tried to connect the dots between the business cycle and energy (in Box 7.4). Yours truly noted that Mr Smil’s expansion waves lasted 26 years each, separated by 29 years between waves:
1787 – 1814: 27 years of stationary steam engines (coal)
1843 – 1869: 26 years of mobile steam engines (coal)
1898 – 1924: 26 years of steam turbines and internal combustion engines (crude)

Taking the liberty of extending the expansion waves by the same frequency, we have:
1953 – 1979: 26 years of gas turbines (natural gas)
2008 – 2034: 26 years of nuclear (nuclear) or wind+solar (sunshine)

The years 2008 to 2034 seems to suggest that we would need to find new source of energy flows. Unfortunately, wind and solar doesn’t seem to hold much promise if you believe, like yours truly does, in declining solar activity for the next two solar cycles, i.e. solar cycle 25 and 26. Physicists like Robert Laughlin to David MacKay had written on the big picture of energy. Taking out the hot air, and partisan politics, it dawns onto yours truly that nuclear energy is probably the only solution powerful enough to power our exponentially growing world GDP into 2034.

So, this brings us to the question: will China overtake the West by 2034? Yours truly believes that it is only possible if China gains mastery over nuclear power. And even if China gained predominant mastery over nuclear power in the next 17 years (a big IF), being the financial capital of the world is not preordained. In fact, if neither China nor America gain mastery over blue oceans of new nuclear energy, the financial capital of the world would likely move to the leader of the current red ocean of hydrocarbons. Increasingly, when America’s shale gas revolution runs out possibly in the middle of the next decade, and America’s best friend Saudi Arabia fields start to decline precipitously, the masters of the red ocean of hydrocarbons is going to be Russia and its friends – Venezuela, Iran and so on. Perhaps the solar eclipse of 2017 and 2024 which crosses at Carbondale, IL is signalling the beginning of the end of the golden age of the carbon economy.

Good luck in the markets.