We are used to expecting that more investment will yield more output, but in the real world, things don’t always work out that way.

In Figure 1, we see that for several groupings, the increase (or decrease) in oil consumption tends to correlate with the increase (or decrease) in GDP. The usual pattern is that GDP growth is a little greater than oil consumption growth. This happens because of changes of various sorts: (a) Increasing substitution of other energy sources for oil, (b) Increased efficiency in using oil, and (c) A changing GDP mix away from producing goods, and toward producing services, leading to a proportionately lower need for oil and other energy products.

The situation is strikingly different for Saudi Arabia, however. A huge increase in oil consumption (Figure 1), and in fact in total energy consumption (Figure 2, below), does not seem to result in a corresponding rise in GDP.

At least part of problem is that Saudi Arabia is reaching limits of various types. One of them is inadequate water for a rising population. Adding desalination plants adds huge costs and huge energy usage, but does not increase the standards of living of citizens. Instead, adding desalination plants simply allows the country to pump less water from its depleting aquifers.

To some extent, the same situation occurs in oil and gas fields. Expensive investment is required, but it is doubtful that there is an increase in capacity that is proportional to its cost. To a significant extent, new investment simply offsets a decline in production elsewhere, so maintains the status quo. It is expensive, but adds little to what gets measured as GDP.

The world outside of Saudi Arabia is now running into an investment sinkhole issue as well. This takes several forms: water limits that require deeper wells or desalination plants; oil and gas limits that require more expensive forms of extraction; and pollution limits requiring expensive adjustments to automobiles or to power plants.

These higher investment costs lead to higher end product costs of goods using these resources. These higher costs eventually transfer to other products that most of us consider essential: food because it uses much oil in growing and transport; electricity because it is associated with pollution controls; and metals for basic manufacturing, because they also use oil in extraction and transport.

Ultimately, these investment sinkholes seem likely to cause huge problems. In some sense, they mean the economy is becoming less efficient, rather than more efficient. From an investment point of view, they can expect to crowd out other types of investment. From a consumer’s point of view, they lead to a rising cost of essential products that can be expected to squeeze out other purchases.

It looks to me as though 2012 is likely to be a truly awful financial year, with several crises converging:

1. Either very high oil prices or recession,
2. The US governmental debt limit crisis,
3. The Euro crisis,
4. The Chinese debt problem,
5. Debt deleveraging in the US and elsewhere,
6. Further MENA (Middle East/North Africa) political problems, and
7. Conflict between need for greater resources and pollution issues.

It seems to me that we may be reaching “Limits to Growth,” as foretold in the book by the same name in 1972. The book modeled the consequences of a rapidly growing world population and finite resource supplies. A wide range of scenarios was tested, but the result in nearly all scenarios was overshoot and collapse, with the timing of collapse typically being in the 2010 to 2075 time period.

The authors of Limits to Growth did not model the full interactions of the system. One element omitted was how debt would impact the system. Another item omitted was how prices for oil and other resources would affect the system.

If a person follows through the expected effects of high oil prices and debt, the financial system would appear to be the most vulnerable part of the system. The financial system would also appear to be what telegraphs problems from one part of the system to another. Unless a solution is found, failure of the financial system could ultimately bring down the whole system.

This is a guest post by Tom Murphy. Tom is an associate professor of physics at the University of California, San Diego. This article is Part 2 of a two-part assessment of the implications of continued growth. Part 1 appeared here. Both articles first appeared at Do The Math.

As we saw in the previous post, the U.S. has expanded its use of energy at a typical rate of 2.9% per year since 1650. We learned that continuation of this energy growth rate in any form of technology leads to a thermal reckoning in just a few hundred years (not the tepid global warming, but boiling skin!). What does this say about the long-term prospects for economic growth, if anything?

The figure above shows the rate of global economic growth over the last century, as reconstructed by J. Bradford DeLong. Initially, the economy grew at a rate consistent with that of energy growth. Since 1950, the economy has outpaced energy, growing at a 5% annual rate. This might be taken as great news: we do not necessarily require physical growth to maintain growth in the economy. But we need to understand the sources of the additional growth before we can be confident that this condition will survive the long haul. After all, fifty years does not imply everlasting permanence.

This is a guest post from Dolores García, an independent researcher based in Brighton, UK.

Recently Jorgen Randers (best known for being one of the co-authors of The Limits to Growth, 1972) asked me to do some modelling work on the World3-Energy model, an updated version of the classic World3 computer model that was used in The Limits to Growth that includes a much larger amount of information about energy. He’d like to use it for the next book that he intends to publish sometime in 2012.

I have published on The Oil Drum before the details of World3-Energy (a dynamic systems model), can be found in:

A New World Model Including Energy and Climate Change Data

And a few answers to reader’s questions can be found here:

New World Model – EROEI issues

Part of the work I’m doing for Jorgen Randers is comparing the results of World3-Energy with IEA’s results. I thought the readers of The Oil Drum would be interested in this.