Peak Oil = The End of Economics?

[Petrodollar Warfare]

I've been pondering a somewhat philisophical issue of late, spured by something the Astronomer Royal for the UK (Sir Martin Rees) said about the post-Peak Oil period and the death of economics. Here's a partial exert from my book....(w/ Dr Hubbert and Sir Rees...)

An interesting phenomenon that will likely be ushered in by Peak Oil is the clashing of the Theory of Economics with the Laws of Physics. If the global community experiences a net decrease in overall available energy levels after Peak Oil, which seems likely to occur within a few years, this would theoretically imply a decreased and potentially negative “growth rate.” The current theorems of economics do not allow for such a phenomenon. Secondly, if oil is a required component in the industrialized economies for economic activity, when net energy decreases, does that imply a net decrease in the overall money supply must also follow? The following profound reflections are from a seminar given by Dr. Hubbert at MIT in 1981:

“The world’s present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin .

The first of these two systems has been responsible for the spectacular rise, principally during the last two centuries, of the present industrial system and is essential for its continuance. The second, an inheritance from the pre-scientific past, operates by rules of its own, having little in common with those of the matter-energy system. Nevertheless, the monetary system, by a loose coupling, exercises a general control over the matter-energy system upon which it is superimposed.

Despite their inherent incompatibilities, these two systems, during the last two centuries have had one fundamental characteristic in common, namely exponential growth, which has made a reasonably stable coexistence possible. But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over . The monetary system has no such constraints; it must continue to grow… crisis in the evolution of human society. It’s unique to both human and geologic history. It has never happened before and it can’t possibly happen again. You can only use oil once.”

*****

The late Dr. Hubbert is suggesting in the above passage that it will soon become problematic for the money supply itself to increase beyond the peaking of oil when one takes into account that access to cheap energy has become a necessary precondition for economic growth in our industrialized system. For the past 100 years, the abundance of hydrocarbons has driven the industrialized economies of the developed nations, and more recently, the global economy. This is the basis of the global Financial System.

Unfortunately, no substitutes providing equal energy output per weight or volume have been discovered, and according to the experts this is unlikely to happen before Peak Oil arrives. Dr. Hubbert's philosophical observation proffers that the finite availability of matter-energy could, or perhaps does, place an immutable constraint on the growth of the monetary system itself. Perhaps these rather profound reflections are part of the reason why the majority of economists refuse to provide much if any commentary on the issue of global Peak Oil, other than to say the “market will find substitutes” as the price of oil goes up.

Nonetheless, Sir Martin Rees, the Astronomer Royal of the United Kingdom, has also pondered the implications of Peak Oil as regards economics, and implied that governments may fear the current “Financial System” will cease to work after Peak Oil.

(exert from "Our Final Century")

“The Second Half of the Oil Age now dawns. It is characterized by the decline of oil production and all that depends on it, including most significantly the Financial System. In logic, the onset of oil decline undermines the very foundations of the economic system, which may accordingly collapse long before oil runs out or becomes in serious short supply.”

“…The recognition of the End of Economics will likely have a greater impact than the actual gradual physical decline of oil itself. The enormity of the issue explains why Governments cannot bring themselves to plan or prepare. It may even prompt some to indulge in resource wars to evade the situation for as long as possible or at least until after the next election.”

**********

Without doubt, the author is not aware of any economic models reflecting this discontinuity between the matter-energy and current economic theorem, but it would seem that new models based more on Energy Return on Energy Invested (EROEI) will ultimately have to transcend the current financial system. However, the issue remains, how will the current global financial system react to Peak Oil?

Hopefully Sr. Rees dire prediction proves unwarranted, but I have doubts regarding his concerns about governments indulging in “resource wars” over this issue. A resource war is well underway in Iraq....

Any comments on my deep question for today....


(Below is my earlier post about global oil production being "flat out" right now..)
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x10247

[Massacure]

1. Peak oil will hit about 2010 -- it's not too late for nuclear + hydrogen

If a Manhatten or Apollo style project is launched. The new nuclear reactors are much safer than the ones desgined 30 or 40 years ago.

We may hit a depression when it hits, but we can probably still stumble along.

[el_gato]

2. Nukes won't solve the problem

You can't run an 18 wheeler on nukes and you can't run one on batteries either.

[BlueEyedSon]

7. I suppose that's why he mentioned Hydrogen, which is an energy

storage medium.

[el_gato]

8. Your right

[Petrodollar Warfare]

3. I hope your right, but me too thinks "Cheap oil is dead"

..but my question was really about what will happen to economic theory in the post-peak era..

...but as an aside, I might mention that 95% of transportation runs on hydrocarbons, which is the glue of the global economy, and I do not expect anyone to be driving a nuclear powered vehicle or truck anytime this decade. Here's another article that is starting to say the same thing as Petroleum review last week.

******

The death of cheap crude
By Adam Porter in France

Wednesday 04 August 2004,

http://english.aljazeera.net/NR/exeres/416F7BA6-90FC-48E6-8F4C-CA30FDD6EB39.htm

Ali Bakhtiari, head of strategic planning at the Iranian National Oil Company (NIOC), dismisses the media chat, as just that.

"Cheap oil is dead. You are never going to see oil priced at $25 a barrel again. These high prices, yes, they are exacerbated by Yukos, Iraq and so on, but more importantly they are a sign that we have major structural problems with supply.


"They are a sign that there is now no spare capacity for the fluctuations of the markets."


...Dr Colin Campbell is former executive vice president of oil company Total. He is one of the leading industry figures who have long stated that oil prices are set to rocket, as production fails to meet soaring demand.

"Because of the way the market works, what was previously a minor strike in Nigeria or a commercial row in Russia is now a straw that will break the camel's back.

"Once you are producing flat-out, there is nothing you can do about disruptions. Once a slight imbalance occurs, then traders, who are there to make money, will price oil accordingly."

[BlueEyedSon]

5. Nukes are expensive (proportional with safety)

and the fuel is finite, just like fossil fuels.

So we stumble along til....?

Assuming an orderly winding down of the cheap energy/predictable economic growth, one model might be life the way it was 200 years ago.

Unfortunately the winding down will not be orderly and the resource wars will continue - Iraq being the first biggie (although failed) of this century. The unspoken resource war is the one between the richest few thousand families of the US and the rest of us. They are acquiring as much wealth and power they can before the economic meltdown (which will lead to a civil breakdown). Assume a more totalitarian state and more private security contractors.

[el_gato]

4. Jay Hanson over at Dieoff.org wrote about this extensively

but I haven't been over to that website in a while.

Economic theory is based on the idea of perpetual growth.

[BlueEyedSon]

11. Just as History is written by the Victors

Economic theory is written by the beneficiaries of economics' random fortunes.

[el_gato]

6. As far as I'm concerned peak oil will be a good thing for the world

It's gonna be a rough ride at first but we cannot continue to grow
at the rate we have over the past 100 years.

Idigenous peoples who have managed to retain their lifestyles
will be the best suited to deal with this change. It will
be our highly complex society that crumbles in the face of
ever shrinking oil supplies.

[Speck Tater]

9. The ones who will feel the least impact

are the ones who are off the grid, such as undeveloped nations, solar/wind self-sufficiency folks and pockets of "voluntary simplicity" folks like the Amish, "smallholders" and the "back-to-the-earthers".

"He who knows that enough is enough will always have enough." --Lao Tse

[BlueEyedSon]

10. BS... the ones who will feel the least impact will be the uber-wealthy

living on passive income, they will just have to spend more for their energy (gasoline, airfare, electric, etc.)

[Speck Tater]

12. Until the source of their "wealth" dries up.

I'm talking long run impact here. In the long run, the wealthy will be the most vulnerable to forced lifestyle changes because they don't know how to function in the real world, only in the make-believe world of "finance".

[BlueEyedSon]

13. There will always be repositories of wealth and seats of power

and the rich will be there before you or I.

Will they liquidate to cash? Gold? Real estate (and charge all of us rent)?

When there is only enough oil for 1% of the population to have an "American" lifestyle, who do you think that's going to be?

[fedsron2us]

14. Hubbert's views on this subject are interesting.

In his later years he seems to have spent quite a bit of time pondering the relationship between energy and money in the economy.

I actually think that the money and energy economies are related.

The power of the USA is in many ways dependent upon the status of the US dollar as a reserve currency. This pre-eminence was itself built upon the fact that America was for many years the world's greatest oil producer. It was the foundation of allied success in two World Wars and was the basis of Lord Curzons famous quote about 'floating to victory on a sea of oil'. Even after the USA passed its own production peak in the 1970's the fact that all world oil markets were denominated in dollars helped to maintain the status quo. It meant that most of the profits from the trade had to be recycled back through the US financial system. This prevented any immediate financial implosion when the US became a net importer of oil. It also helped America to maintain its massive military machine. Unfortunately, now that oil supplies are tightening and Asia is rapidly becoming a major energy consumer then this cozy situation may not continue. At the moment nations such as China are happy to help to prop up the dollar by buying American securities. However, as the price of oil rises they may decide that this money is better spent buying the scarce resources needed to support their economies. They may even decide to trade in a currency other than the dollar. When that day comes a major financial crisis will occur that will probably result in a world wide economic depression.

[HarveyBriggs]

15. Only the oil barons have anything to fear.

125 years ago there was no such thing as big oil. There was no General Motors, yet the industrial revolution was well into its second century.

Water powered the first portion of that revolution, then steam and coal, and later oil proved most productive and efficient.

If the monetary supply reflects our ability to produce goods and services, and oil supplies the energy to drive that production, then it is easy to confuse the relationship of oil to the monetary supply. What is lost in the confusion is the key factor of how efficiently we convert that energy supply into goods and services.

Remember, too, that oil is not the only contributor to increased productivity. Instead of oil, it was silicon that fueled the growth in productivity in the 90s. Innovations in personal computing caused incredible changes in how people worked, and what they did for work. As killer apps were developed, processor speeds increased, and communications became more efficient, productivity increased at phenominal levels and so did the money supply. And when we came to the limits of the technology, and to our ability to make good use of the improvements in technology, then the bubble burst.

But, back to oil and the efficient use of the energy it provides to drive our economic engines.

To look at how we will react to dwindling supplies, we can look no further than 30-40 years ago when OPEC gave us a good opportunity to observe how we adjust from the inefficient consumption of oil to more efficient usage once supply is limited. That in turn allowed us to observe the stepped nature of the price elasticity of oil. First we modified our behaviors, then we modified the machines that consumed the energy. Our current inefficiencies -- particularly in the leisure section of the economy -- demonstrate we have a lot to work with before oil costs profoundly affect long-term productivity of goods and services.

Let's also note that many models predicting an early depletion of oil after Peak Oil Production is reached, do so based on current usage patterns and don't accurately affect the lessons of the 70s. When economic conditions demand, we will drive less, and then later we will purchase more fuel efficient vehicles, take the bus more, and insulate our homes better.

(For those who would point to the dismal economy of the 70s, would do well to remember that Stagflation was not caused by OPEC alone; it had help from a Texan who thought he could trade body bags for votes, and later a Republican who thought he could pay for that dirty little war with the U.S. Treasury's printing presses. Today we have a Republican from Texas doing both at once.)

As oil continues to dwindle and prices rise, the choices we find unpalatable now will become more viable. Coal is dirty, but it's there. And for a price it can be cleaned. Nuclear power may seem deadly to you, but tell that to the widow of a coal miner, or the orphans of a military Mom and Dad who died for oil in some far flung land. How many people have died in Iraq now? How many people died at Chernobyl?

Too, there is yet no financial motivation to truly exploit the energy of the sun and the wind. But one day there will be those incentives.

We have plenty of energy alternatives. And you know who taught me that? Former OPEC ministers, who left the mideast to teach economics in the USA back in the 70s. "You Americans worry too much. And you use too much oil."

Sure, there will be temporary disruptions as oil supplies dwindle, and they won't be pleasant; but we will have energy to drive increases in productivity. And we will certainly have the incentive to improve efficiencies. In reaching those efficiencies, we may shift the direction in the flow of the money supply away from oil production, but we will also shift it away from putting it in our gasoline-powered vehicles that take us to spend more of it at the local burger hut, where in turn most of the money supply ends up in the hands of cardiologists who clean the junk that our crappy oil-fueled lifestyles have left in our arteries and our hearts.

Last time I checked, the Amish weren't worried about M-1.

The only fuel we need to worry about limiting the growth of money is the fuel we put in our bellies.

Harvey Briggs

[aneerkoinos]

16. Very plausible

What will the eco-shift from -nomical ("laws"; dogmatic principles) to -logical("dialectics"; interaction between humanity and nature is process) mean?

It means the end of Liberal market economy (Capitalism hard or soft and with it the paradigm of individualism), so no wonder the PTB are scared shitless and in complete state of denial.

I vision three main types of society in the post peak oil world (PPOW):
1) Ecosocialism (collectivist, democratic, equalitarian, inclusive, pacifistic, globalistic);
2) Ecofascism (collectivist, autoritive, elitistic, exclusive, militaristic, tribalistic)
3) Failed state, Mad Max society, remnants of individualism (survivalist ideology) and liberal market-economy.

Reality will of course be a mess, lot of variation and mixing. And energy resources are not evenly distributed, a more comprehensive classification would look at these types also from the point of view of having abundant local energy resources or scarce local energy resources, adding up to six basic society types.

Some self-criticism of my model: these are naturally projections of past and present on the future, and there is allways the possibility of unimaginable.

[BlueEyedSon]

17. Peak Oil = The End of Democracy

Discuss.

[aneerkoinos]

19. No

See my post above. My argument is that the so called liberal democracy, which is based on individualism, free market economy, consumerism and capitalistic ownership of means of production, cannot survive extended period of negative growth, because the social inequality that it produces makes democracy unsustainable.

Demodratic socialism surviving in the PPOW is at least theoretically possible if it can guarantee everybody's basic needs through collective responsibility, meaning by necessity some form of collective ownership of at least essential means of production, making inclusive political project possible. I'm less convinced about the survival chances of representative democracy beacause of the inherent problem of corruption, but representation is not the only form of socialism and there are participatory models that I can think of that would function better, but they require well developed society with high level of education.

I don't find it hard to imagine that countries like Sweden could pull a stunt like this, even peacefully with revolution through legal means.

[whistle]

18. I'm no engineer, but what if nuclear power was generated in...

...reactors 1 or 2 miles underground? Would that allow for the containment of possible failures and meltdown accidents by simply burying the reactors and moving to another site? I know the costs would staggering, but the main complaint against nuclear and rightly so, is safety and long term exposure to the contamination of nuclear accidents. Just wondered if engineers have thoughtfully explored this.

[Zynx]

22. Way too difficult and costly

Underground construction and operation of massive facilities should be left in movies like Resident Evil.

You also need large amounts of water to cool the thing, and a mechanism for getting the power out of there. This complicates the process significantly.

There's no need to make modern, Western nuclear plant design any safer or more elaborate.

[rapier]

20. notes

The end of economics is too apocalyptic. The end of life as we know it isn't.

When I say the end of life as we know it I mean the end of CHEAP energy will have profound effects upon consumption of ALL things. That includes quite importantly food. The thermodynamic equation for modern food production is silly. Far more energy is used to produce food, in calories, than made available in the food produced. The cost of virtually everything will rise. It doesn't take a PhD in econ to know that our economic system based upon excess consumption of STUFF will change profoundly.

All that said nobody knows the shape of the production curve going forward. Let's say peak world production is here now. If it can plateau at this level for a long time, let's say a decade or two, not an unreasonable proposition considering higher prices will bring out all the marginal supplies, the effects I hint at above will take place gradually. A constant drain on the traditional economic system, but not Armageddon.

The neocon dream can be seen as an overt plan to take control of Middle East oil so as to gain a competitive leg up on the rest of the world in the peak and decline phase so as to enhance our economic power. While the stupid among the conservatives and the neocons might actually believe all the various crap about bringing democracy and 'free markets' to the world I find it difficult to believe that the Rumsfeld's and Cheney's of the world harbor any such illusions.


The "money supply" connection is, well, just sort of bizarre. The "money supply" is the product of the banking system, including the Central Banks, and the credit system. (Those used to be one and the same but no longer. Banks play a poor second fiddle in the credit system now) While the end of ever rising consumption trend of the last couple of hundred years or so in the face of higher prices for most everything, and stagnant wages will certainly cause huge craters in the credit and financial systems that doesn't mean money will disappear. Maybe I am being to literal minded about this end of 'money supply" and "economics" as what I speak of is certainly a profound change but not an end.

It IS almost impossible to separate the economic/financial system from cheap energy. Just as it is impossible to separate cheap energy from almost EVERYTHING we take for granted. Every little nook and cranny or our lives and culture is dependent to a greater or lesser extent on cheap energy.

In any case I'll say again, peak doesn't mean the end of supply. The downward path of production might go on slowly for a few years or many decades. Change will be profound. Hopefully, but doubtfully an economic and ethical system can evolve which capitalizes people much more, instead of stuff.

[aneerkoinos]

21. End of what?

Good post.

"The "money supply" connection is, well, just sort of bizarre. The "money supply" is the product of the banking system, including the Central Banks, and the credit system. (Those used to be one and the same but no longer. Banks play a poor second fiddle in the credit system now) While the end of ever rising consumption trend of the last couple of hundred years or so in the face of higher prices for most everything, and stagnant wages will certainly cause huge craters in the credit and financial systems that doesn't mean money will disappear. Maybe I am being to literal minded about this end of 'money supply" and "economics" as what I speak of is certainly a profound change but not an end."

Some sort of abstract means of exchange has been around awhile, and I don't think that is going to change, so you are right that this should not be taken too literally. 'Economics' in this context I understand to be the ruling social paradigm, and the end of it's relatively easy prediction because of it's too narrow scope, and it needs to be replaced with more general theory that takes into account at least physical restrictions and hopefully also other observable "real-life" causalities. I suggest that 'Ecologics' is the next emerging paradigm.

End of money should mean the end of fiat system, to say the least, it is hard to imagine how the black gold backed fiat currecy system could survive the crunch of 'reality bites back', when more and more fiat stuff is backed by less and less black gold.

[dumpster_baby]

23. many european countries use nuclear for much of their electrical power

In fact, I think that some of them will be on almost ALL nuclear. How come no one ever mentions that?

Maybe it has something to do with the fact that American is run by and for the corporations? Maybe America was scared off of nuclear deliberately? So that the oil companies could make bigger profits? And maybe that had something to do with why keynesianism was discarded in favor or neoliberal policies, with the excuse that oil price surges made it impossible to predict economic factors?

And as a former nuclear reactor operator, I can tell you that nuclear power can be done far better than it has been in this country, if we would think for ourselves and not let Corporate power scare us into their pens....