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Thoughts on Economy

Live to Love

Thoughts on Economy

Party Over for the
Industrial Growth Economy 

by Richard Heinberg

oil desaster

The End of Cheap Abundant Oil
The “party” was humanity’s one-time-only opportunity to fuel economic growth and technological innovation with a bounty of cheap, abundant energy from fossil fuels. The harvesting of oil, coal, and natural gas has inevitably proceeded on a best-first or low-hanging fruit basis. While the Earth still possesses a wealth of unexploited energy resources, the cheapest and easiest-accessed of those resources have by now already been used. All of these fuels are in the process of becoming more expensive, and the various energy alternatives are limited in one way or another in their ability to replace hydrocarbons. That means we are currently seeing the end of economic growth as we have known it. The impacts for transportation, globalization, and world food supplies will be serious indeed.

A Fundamental Turning Point
After over a decade spent in trying to alert policy makers and the general public about this issue, I have concluded that only a small minority have any idea what is in store. The “dance” is indeed coming to an end, but it appears to most that the problem is purely a financial one, and that once the global economic crisis is sorted out, we will all be able to get back to business as usual. I do not believe that is an option. We have reached a fundamental turning point, foreseen in the Limits to Growth study of 1972. For a while, world leaders may be able to redistribute wealth in various ways—most likely from the poor to the rich—in order to make it appear that the global economy is continuing to grow. I suspect that this will work only for a very few years at most. At some point soon, it will become clear that economies are contracting. And then most people will look for someone to blame. No doubt politicians will oblige by trotting out various scapegoats.

Victims of Their Own PR
Strangely enough, most of the “elites” are victims of their own public relations efforts. They have promoted the careers of economists who told them what they wanted to hear—that economic growth is the normal and inevitable state of affairs, and that there are no real limits to growth. Certainly there are analysts in the CIA and the military who understand where this is all heading, but—if the ex-analysts I’ve talked to are typical of their colleagues—they have learned that reports about resource constraints are not welcome, unless they are framed in terms of the contest for geopolitical leverage

The Reserves Mystery
Oil “reserves” consist of estimates of the amount of oil that geologists believe can be economically extracted from oilfields that have been discovered, drilled, and mapped. Unfortunately, reserves reporting is not a transparent affair in many countries that have state-controlled oil industries. There is strong evidence to suggest that OPEC nations have systematically and substantially over-estimated their reserves for over two decades.

In 2009, the International Energy Agency (IEA) took a first cautious step in the direction of realism when it published, in its annual World Energy Outlook, an assessment of rates of production decline from the world’s old, giant oilfields, which yield the bulk of the world’s crude oil. On average, there is a net production decline of 4.5% per year from existing fields, which means that the world has to develop a Saudi Arabia’s worth of new production capacity every five years or so, just to maintain existing total production volumes. That is an enormous feat, especially given the fact that oil discovery rates have been falling since the early 1960s. New oilfields are sill being found, of course, but typically they are very expensive to locate and exploit, when compared to the oilfields that were being discovered only a decade or two ago.

world´s liquid fuel supply
The above figure, presented at  Meeting the World's Demand for Liquid Fuels - A Roundtable Discussion (EIA Conference, Washington DC, 2009) indicates the peak of global oil production will occur in 1-2 years time. Chris Nelder comments: "The EIA has no idea how production can increase after 2012. They expect global oil supply to decline by about 2% per year - from 87 million barrels per day (mbpd) in 2011 to 80 mbpd by 2015 - while demand rises to 90 mbpd. Within 5 years, then, there will be a 10 mbpd gap between supply and demand—roughly a Saudi Arabia's worth of oil production."

Energy Prices & Economic Crisis
The reason it’s bad for both an energy crisis and a financial crisis to occur together is that each makes the other harder to address. Without adequate credit and investment capital, how will we build renewable energy infrastructure to replace our current fossil-fuel-dependent transport and electricity systems? And without cheap energy, how can we dig ourselves out of a financial crisis?

Both are indeed happening now, and this should be no surprise given the inherent linkages between energy prices and the health of the economy. Will we see global violence as a result? Of course I hope the answer is “no,” but the likelihood of war would be substantially reduced if the general public had a better idea of why their standard of living is eroding. Since politicians don’t really understand what is happening, I suppose they can be somewhat excused for not telling their constituents. But that means, once again, that the most likely response will be a hunt for scapegoats.

Recession, Monetary System & Debt-based Growth
Michael Ruppert has described the relationship between these elements as follows: 

1. The current global economic paradigm -- governed by fractional reserve banking, fiat currency, and compound interest (debt-based growth) -- is inherently and by definition a pyramid scheme. Money is useless without energy. One cannot eat a dollar bill or crumble it up and throw it in his gas tank. Each of the trillions of dollars created out of thin air since the fall of 2008 is a commitment to expend energy that cannot and will not ever be there. 
2. There can be no "recovery", no return to growth (which is what the economic paradigm demands) without energy.

If the world is to return to stability, an entirely new economic system, based on a new and different form of money, will be required. The world still has willing workers and consumers, and enormous productive capacity in the forms of factories, soils, and recyclable materials. But without a functioning monetary system, there will be no means of connecting production with consumption. Our current money system requires constant growth so as to enable repayment of the interest on the debts that created the money to begin with, so it cannot function well in the context of general resource scarcity and economic contraction. If we ask how does a new monetary system need to look vis-à-vis Peak Oil, there are many possibilities for alternatives, including tradable energy vouchers.

How can we cope with this knowledge?
It’s distressing, but one learns to cope. As we age, we are forced to cope with the knowledge of our own mortality. Our relatives and friends start dying. It’s depressing, but we go on. What would be really depressing would be to have knowledge about imminent global crises but to have no way of influencing the situation. In fact, there is a great deal that still can be done to lessen impacts on humanity and the natural world, and as we engage in that kind of activity it tends to help us psychologically.

We must reduce the scale of the human project—our population and our consumption rates (the latter especially in the industrialized nations). That means redesigning our economic and food systems, re-localizing and down-sizing them, until they can be maintained with renewable resources harvested at sustainable rates.

I don’t see major war as an “exit strategy”; if it happens, it will likely be simply a failure of politics—an expression of the inability of leaders to solve the worsening problems that are confronting them.

Every crisis is an opportunity, and we will be presented with the greatest array of opportunities in history. Survival will require us to evolve quickly, and to change our thinking, our habits, and our expectations. If we do these things, it is just possible that the society that emerges in the process will be far more stable, interesting, and beautiful than the one we see around us today.

Richard Heinberg, Senior Fellow in Residence at the Post Carbon Institute, is the author of 9 books including The Party's Over, Powerdown and Peak Everything. His monthly MuseLetter, essays and articles are widely appreciated for their wry, unflinching approach, facts and realism, Since 2002, he has given over 300 lectures on the subject of Peak Oil to a wide variety of audiences worldwide. The above article was edited from an interview by V.L. Schall.


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