Ed Ellingson's Blog


5. The Economic Engine Driven by Fossil Fuels

The fundamental benefit of the fossil fuel economy is the incredible energy in fossil fuels.  Think of a rather common car with 4 passengers and luggage, being driven in comfort for 20 or more miles on a gallon of gasoline.  How much human labor, or animal labor, would it take to accomplish that?  Just using some standard values for human output and gasoline engine efficiency, the general number is that a gallon of gasoline is the equivalent of three weeks work for an individual!  This is phenomenal, when you think that gasoline is selling for less than $3 a gallon and the minimum wage is over $5 an hour.  An electric bill of $75 for a month represents the potential work output of about 19 people working 10-hour days.

A thorough evaluation is a little more complicated than this.  Consider shelling corn.  An individual can shell corn by hand with just a bucket as a tool, but a more modern approach would be to use a hand-crank single-ear sheller (these can be purchased for about $200 today) plus a bucket.

Hand Corn Sheller

The literature says “up to” 10 bushels per hour, but  I suspect (having done this, but years ago) that 5 bushels per hour would be a more realistic rate, sustainable for a whole day.  Contrast this with an engine-driven sheller.  This might be something that you’d have to pay $20,000 to buy, but properly supplied with fuel and ear corn, it could likely shell 1000 bu. in about an hour, and burn about a gallon of gas.  Thus a gallon of gasoline is equivalent to about 200 hours of human labor, for this task.

If you want to get some exact numbers, you’ll have to run some exact tests.  The point is, the energy in oil is phenomenal in what it can do to ease the human/animal burden, but it does take a substantial up-front investment in the engine and machine in order to reap the rewards, and, of course, it requires fuel.

This large up-front investment is now a staple of modern business, and it’s recognized that any business goes through phases of initial investment, beginning sales, reaching a break-even point, making a profit, and achieving a return on the investment.  This has always been the case, of course, but it probably didn’t seem worthwhile to rigorously analyze an up-front investment that consisted mostly of hand tools.  My dad claimed that he started farming (share-cropping really) during the Great Depression with a $50 loan from his mother; he hardly needed a financial analyst to help determine the break-even point and the return on investment.

Economic life in the era of fossil fuels is characterized by this investment process.  It takes money to buy an engine and a machine, but it can pay off phenomenally.

Typical Business Investment & Growth

The trick is to make that equipment work hard, which leads to specialization, and economies of scale.  My great-uncle George Higgins bought a steam engine and threshing machine in the early 1900’s; the family story was that this paid for itself in 2 years, essentially a 50% return on investment.  Farmers were OK giving up part of their production to Uncle George because the machine did a better job and saved a lot of human and animal labor.  He started threshing in August when the first fields were ready, but continued through most of the winter, threshing grain that had been stored in barns.  He had to keep the machine working in order to make this great return on investment.

This profitability had a huge impact.  Uncle George could finance his brothers to buy threshing rigs or other powered equipment, or make other investments.  He could afford to buy a car, and build a fancy new house.  Now multiply this by thousands of people, then hundreds of thousands, doing the same thing.  Make the investment in some sort of labor-saving machine, either making it or using it, and you stood to make fantastic profits.  They almost always had to borrow money to do this, but they could pay it back

handily. 

In fact, that became part of the system; borrow money from the banks to get started, buy this fancy equipment, pay it off, make some more money, invest it to make more, borrow more, and also spend some on yourself.  In doing these things you support and expand the manufacturing base that builds the equipment, and the service industry that provides the skilled carpenters and jewelers that provide the other comforts.

This process was extremely disruptive to the people who were no longer needed, but fortunately, workers were needed in the cities at these big manufacturing centers where they worked to make the steam engines, threshing machines, corn shellers, sawmills, cars, and thousands of other items that people needed and wanted.  For all the pain and disruption they went through, life could still be pretty good living in the city and working a factory job.

Consider the oil and fossil fuels as creating an economic engine, similar to the way hot humid air and cool dry air can create a weather system, a thunderhead, or even a tornado.  Weather systems can meet pretty benignly, resulting in just some rain.  But if the conditions are just right, the cool air gets warmed and rises, and the warmer air drops it’s moisture as it cools, and it also tends to rise.  The rising air column tends to draw in the surface air at the bottom, so it perpetuates and even expands, the system.

The economic engine works in a similar fashion.

The Economic Engine

The engineer in Milwaukee that develops a good working steam engine and the factory to produce it can sell the engines at a substantial profit.  The profits make him want to expand, to make more engines and profits, but also allow him to have a better income, so he can become a consumer, and dine out, buy oranges from Florida, and household furnishings from New York.  Businesses expand to provide those products, and they also make money.  They need to hire workers, and the prevailing wages move up.  The workers have a little extra to buy things; the process keeps expanding and growing.

The economic engine is also driven by the economies of scale, and indeed they fit together like a hand in glove.  The great brewers of Milwaukee could scale up their local operations and make beer for a national market; they didn’t need any new technologies, although electric motor and pumps were certainly helpful, they just needed the good transportation system to distribute the beer.   The had to scale up production by using large tanks, and they improved the process by using temperature monitoring equipment and control systems so they had excellent quality control.  They could take advantage of electric motors and pumps, elevators, conveyors, and control systems to reduce human labor, but fundamentally the production was unchanged.  What changed was marketing; now distribution, product branding, advertising, establishing new sales territory were all a part of the business.

The economies of scale are such that mass production always wins out.  These big breweries could sell at a lower price than any of the small local breweries and still make a nice profit.  Besides being able to sell for less, they made enough money that they could make donations to political candidates, hire lobbyists and lawyers, and affect the way laws were made and enforced so as to favor their business.

Large grocery stores can sell at a lower price than little neighborhood stores.  They buy in bigger quantities, so can buy for less.  They have high turnover, so have fresher produce and less loss.   A bigger ship can haul goods at a lower unit cost than a small ship.  A bigger tractor can plow more efficiently than a small.

Farmers like George Higgins could buy a steam engine and thresher and displace ordinary farm laborers with fossil fuel power, and also improve his income so that he could go on to invest more and also have a higher standard of living.  Other people saw this happening and decided to do likewise, so purchased tractors and plows, cultivators, seeder, and a host of other implements.  An engine and a sawmill would compete with the water mill (that’s limited in power to only the available water supply) and win out as a better way to saw timber.  The farm workers no longer needed on the farm found out that there’s plenty of jobs in the city, working to make steam engines, or threshers, or cars, or any of a hundred different things, and the pay is actually much better than they ever could have hoped for as a farm laborer.  Some people do better than others, of course, but it’s like everyone gets lifted by this rising tide created by cheap energy.  Profits increase, the prevailing wages increase, expectations rise, people have more money and buy “things” that they need and want, and money to invest.  They want to invest in the things that have the greatest return, so in effect they support the entrepreneurs who have some great ideas to convert yet another labor-intensive task into one that’s done by some kind of machine, and powered by some form of fossil fuel.

Ayn Rand in “Atlas Shrugged” posited that the term and concept of “making money” was uniquely American, and I think this explains the phenomenon.  A blacksmith in North Detour, IL could develop a steel plow in his shop utilizing an old saw blade, and go on to become a manufacturing giant (John Deere, Deere & Co.).  It seemed that anyone could be a success and “make money”.  It wasn’t a matter of inheriting wealth, or confiscating land or resources, but creating a money-making business, of developing an idea into a valuable product and getting sales and income and establishing a profitable business operation.  This paradigm was an almost uniquely American concept for a long time, leading America to have a thriving middle class, an expanding upper class, and be called the “land of opportunity” because we allowed private ownership of property, and had laws that prevented/delayed the wealthy aristocratic class from confiscating property, and so allowed this to happen here.  Eventually this “system” spread to other countries, but for a time this was uniquely American.

People generally understood that the economic engine was driven by fossil fuels, and that they were finite, but after this economic engine was set in motion, it was virtually impossible to stop.  There were occasional concerns that we would run low on oil, but then followed by some new oil discovery that negated the fears.  How could this be stopped anyway?  After the engine was established, then anything that might slow it down was almost by definition “anti-American”,  something that would rob people of their American birthright and mire them in poverty!  The engine kept running.


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