We're at the end of economic growth as we know it. Not everyone has realized this yet, but it has arrived nevertheless.
In past weeks I discussed why this is the case - a combination of hitting a variety of hard geological and ecological limits. Particularly, we have reached or are near (depending on how you calculate it) the peak of oil production and alternative energy cannot substitute for oil in an effective or timely fashion.
The consequences of hitting these limits are huge. As I remember someone saying - this is one of those rare topics where the more you learn about it, the worse the news gets. I'm going to talk about those pieces of bad news, but mainly my goal is discuss what we do about it - what's an intelligent response to the predicament we face? It'll take many weeks and many diaries to fully flesh this out, so I'll only begin to explore our responses in this diary, and it's going to be a learning experience for me as well.
How does oil impact our economy?
As the foundation of oil upon which we've built our industrial system crumbles, we will face direct economic impacts. Hirsch, whose 2005 study for the Department of Energy on the peaking of world oil production is still the gold standard, conducted further studies to try to understand how oil connects to GDP. He concluded that there's a 1-to-1 relationship: for every 1% oil production declines, world GDP declines 1%.
How much does he expect world oil production to decline? Here's what he says:
Best Case Scenario: Maximum world oil production is followed by a period of relatively flat production (a plateau) before the onset of a decline rate of 2–5% per year.
The trend break happened in 2005, when global oil production stopped increasing. We've been on a plateau of sorts since then. While the graph above is technically about oil, it maps directly to the economy.
This indicates that in the best case scenario we should expect a yearly 2-5% decline in world GDP. As a point of reference, the Great Recession that we just experienced caused a US GDP drop of 4.1%. That is, we'll be having the Great Recession nearly yearly.
As I mentioned two weeks ago, it's unlikely that this will result in a constant, smooth decline. Instead, it seems likely we'll go through a number of stair-steps.
The economy on the down escalator
It's difficult to forecast with any certainty what we're going to go through. The best way I've come to think of it is as having an oil ceiling:
In the past, say in the 1990s, when the economy grew, it grew no faster than oil production was increasing, so there was plenty of spare oil and the price didn't go up. When it did grow faster than oil production, the economy bumped against that rising oil ceiling, choking off growth, contributing to a recession (during which oil use declined). Once the economic recovery began, we started using more oil, but in the meantime oil production had continued going up, so there was plenty of room for the economy to not only make up for lost GDP due to the recession, but to grow to an all-new high point.
Now that oil production is flat and soon to be declining, what happens? We hit our head on the oil ceiling, a recession ensues, and as we begin to recover, we quickly find ourselves hitting our heads on the oil ceiling because production is declining. This has two consequences:
- After a recession, the recovery that ensues will only be a partial recovery - that is, the economy won't recover to a better state than it was in before the recession
- Recessions are likely to be more frequent (maybe on the order of every 3-5 years)
Even very data-oriented conventional looks at the economy are starting to realize this, even if they haven't discussed the root cause:
My biggest concern is that jobs and real household income will not even make it back to their pre-great-recession levels before the next one hits.
There are a lot of other consequences to this that I'll try to write about in future diaries. (For example: what happens when the financial derivatives bubble eventually pops again and governments are unwilling or unable to bail the banks out? What happens when countries try to start crash programs to make biofuels to substitute for oil?)
Where do we go from here?
This situation is bad. There's no easier way to say it. But it isn't the end of the world, just the end of a fairly temporary lifestyle that we've had in the industrialized world since the middle of the 20th century.
There are many specific responses, but the most important one, to quote Dmitry Orlov (whose writings on this are very interesting, though a bit dire):
If you're going to fall out of a window, it's better to be on the ground floor.
This holds true for whole economies as it does for individuals. One of the best responses to peak oil is for us to collectively decrease our oil consumption by faster than the rate of decline in production, so we never hit our heads on the ceiling and can have a managed descent.
Another way of looking at it is that if you decrease your personal expenses at greater than the rate of oil depletion - say a minimum of 6% per year - then you'll be ahead of the curve.
The topics that we need to explore for this new paradigm are varied but all important: transportation, finance, food, shelter, work, leisure, community, etc. In future weeks I plan on writing more on each.
Until next time...