Energy#2: The Economy and Oil (The Long Decline)

After taking a break for the last couple of months, I think it’s high-time I get back into my World-Changing Wednesday series. Each Wednesday I plan to share my thoughts on an issue which I think will have a huge impact on how we live our lives in the years to come.

For some background reading start here:

Last year I discussed Peak Oil, which is simply the term used to indicate the point in time when World Oil Production reaches its peak and starts its ineviteble decline. It’s not the end of oil, simply a point in time when oil supplies are unlikely to keep up with demand, hence the end of the era of cheap oil.

In my post on The Issue of Human Population Growth I demonstrated that the Earth’s carrying capacity has increased through the use of fossil fuels (including oil) and that without continued injections of cheap energy, the current human population is not sustainable.

And in my post called The Debt Trap (Our Economic System is not Sustainable) I illustrated how and why debt levels have grown exponentially for the last half century and how the perpetual growth of our monetary system is not possible in a world of finite resources.

Once you understand those concepts, let’s go a bit further.

We are living in a time of exponential growth in population, in debt and in oil consumption. We can also make a very strong case that both population and our monetary system are utterly dependent on the continued expansion of oil energy. In a finite world, this becomes problematic.

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What will happen when oil production begins to decline. What will happen to our exponential, debt-based money system during this period? Is it even possible for it to work in a world without constant growth?

There are plenty of smart people out there who think that the financial instability we are now experiencing is due at least in part to the early stages of this process.

Oil and the Economy

Oil is essential to the economy because it’s required for food production, transportation and the manufacturing of almost every commonly used item in our industrialised society. Because of our absolute reliance on the availability of cheap energy, it’s easy to see how a lack of oil might have an adverse impact on the economy.

Dave Murphy of The Oil Drum shows that when the price of oil goes much above $80 or $85 per barrel in inflation adjusted terms, the economy tends to go into recession. As oil prices once again approach this critical range it will be interesting to see whether it’s enough to tip the economy into what some pundits are calling a ‘double-dip recession’.

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This observation becomes particularly relevant when we consider that much of the oil that remains is what we call “difficult oil”, meaning that it is expensive to extract. If producing oil at more than $80-85 per barrel has been enough to throw the economy into recessions in the past, then surely a future of much high energy prices will result in a massive predicament if we wanted to continue to run the economy as we now know it.

Another way to look at the link between oil and the economy is in the following figure from Dave Cohen of ASPO-USA.  This figure shows that growth in global GDP seems to be highly correlated with growth in global oil consumption. This means that if oil production actually starts declining permanently, the world economy as we know it is likely to begin declining permanently as well.

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Operating the current monetary system in a world of declining energy

Operating in a world of declining energy is an utterly new prospect for every single political and financial institution. Our current monetary system relies on the very basic assumption that ‘the future will be exponentially bigger than the present’. What if this assumption is incorrect? What are we to expect in the future from a monetary system so reliant on continued growth when this growth becomes impossible?

What we know

  • Surplus energy has been responsible for all the growth and complexity in our industrialised society.
  • Availability of surplus energy is shrinking.
  • The age of cheap oil is all but over.
  • Oil costs will begin to consume an ever-greater proportion of our total budget.

Here are the Risks

  • There is the risk that our exponential money system will cease to operate in a world of declining energy surplus. It might simply not be suited to the task.
  • There is the risk that our society will be forced to become less complex.
  • There is the risk that even as oil winds down, the momentum of the money system will create conditions ripe for much economic hardship.

Some Predictions

  • The status quo economy will be preserved at all costs. Politicians will hide the truth, economic statistics will become even fuzzier, and central banks will continue to throw more and more money at a system that, at its core, is out of tune with reality.
  • Economic pain (hyperinflation, dollar-devaluation or collapse) will result. With western governments stimulating economies all over the world we can reasonably conclude that the future will be filled with ever more dollars. At the same time, declining surplus energy will assure that there are fewer goods floating around. Together, these spell inflation.
  • A logical conclusion from the previous two predictions is that standards of living will decline. (note: even as ones standard of living declines, one’s quality of life can go up!)

While I’m not suggesting these scenarios are going to happen this year or next, I do think these issues are likely to play out over the next couple of decades. On a larger scale, we need to come up with an economic system which is more in tune with the limitations of Earth’s resources and which does away with the need for constant growth. However on a personal level, we now have the time and opportunity  to adapt to a future of less. If done in a deliberate, voluntary manner we can embrace a lifestyle of less ‘stuff’ which is filled with a more meaningful, joyful experiences. We must not fall into the trap of squandering precious time and remaining energy in a desperate, certainly foolish, and possibly, an ultimately unpleasant bid to preserve the status quo.

Learn more:

Exponential Money in a Finite World by Chris Martenson

Photo by: bitzcelt

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2 comments

  1. Thanks. I love your World-Changing wednesday series. I love that you finished this one off on a positive note and I totally agree “even as ones standard of living declines, one’s quality of life can go up”. I’m looking forward to a future that is fll of so much more than ‘stuff’.

  2. Thanks for you World-Changing Wednesday posts. They are wonderfully clear and deal with really important issues. I particularly appreciate the way you link these major issues – so much of the commentary (and government policy) takes a blinkered, single issue view of the world. Please keep it up.

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