By David L. Brown
As we reported here Sunday, the so-called Hubbert Peak of world oil production has very likely been passed and we are entering into a new era of declining supply. That in itself might not seem so bad — except that demand for oil is projected to continue upward on a runaway trajectory. That is definitely a problem, and to fully understand why let’s review a little Economics 101.
A basic assumption of economic theory is that supply and demand interact to affect prices in an inverse way. To an economist, the two are linked together like the opposite ends of a see-saw. Either high supply or low demand can result in lower prices. Conversely, low supply or high demand can result in higher prices. Here is a simple graph that illustrates that phenomenon:
To glimpse the situation vis a vis petroleum in the world today, look at the left side of the graph. There you will see that when supply is relatively low, relative demand pushes prices higher.
Think three dollar gasoline here, or if you want to be more realistic about what lies ahead as the demand for oil further outstrips supply, think six or even ten dollar gasoline. No, that is not an exaggeration by any means. In parts of the UK consumers are already paying around eight U.S. dollars per American gallon for petrol.
Economists believe that the law of supply and demand will always affect both factors in the equation and that the system is self-balancing. In other words, when supply is limited, high prices will soon stimulate production to drive prices down — and if that is not possible, consumers will turn to alternatives, thus reducing demand.
So, for example, when the price of sirloin steak becomes too expensive for their budgets, people will buy more round steak; when round steak rises in price they may turn to chicken; and so forth. (Inexplicably, economists speak in terms of such things as “widgets” to make their points, but real-world examples such as steak and chicken seem more reasonable to me.) In summary, economists believe that consumers will always have an “out” when supply is insufficient and prices rise, a kind of automatic pressure valve. They can turn to something cheaper, or do without.
But here is where we reach a sticking point and economic theory departs from reality. To support this relationship between supply and demand, it is a given in economics that there is always an alternative for any product or commodity. For every widget, there is a gadget, a whizzbang, or a gizmo. In other words, consumers will respond to high prices merely by turning to other products or commodities. In the past that has generally been true — in a world where many resources existed for the choosing.
We no longer live in such a world.
What happens when there is no feasible alternative at hand? Let us suppose, to carry my example a bit further, that only sirloin steak is available — no round steak, no hamburger, no chicken, not even dog food — and that meat of some kind is essential to human existence. What then? Obviously, we would have to pay the higher prices or do without. If there is a fundamentally insufficient supply of a necessary product, there is no price high enough to cause the supply to increase. If there is also no alternative, doing without is the only choice for those who are unable to pay the price. Neither result is acceptable or even sustainable.
This scenario illustrates the situation we face with petroleum. The entire world economy is built upon the presumed availability of cheap and plentiful oil. For about a century the supply of black gold has been able to keep up with demand (barely), and increasing amounts of the stuff have been put to use in any number of ways. Oil is not just for burning in your car or heating your house. It also is the feedstock for the petrochemical industry, is a key necessity for modern agriculture, keeps trucks on the road, fuels power plants, drives tens of thousands of ships and airplanes that facilitate international trade, and in general makes our modern world run.
Imagine (and it would not be difficult) that an individual has invested a large sum of money in a house that requires fuel oil to heat. Imagine further that this person lives in a cold climate such as is found in much of North America. Assume further that that person has purchased a large and uneconomical SUV in order to deal with winter snow and ice. And that to buy affordable housing the person has chosen a home many miles from his or her place of employment, requiring a daily commute of one to two hours. What will it mean to this person when they are forced to bid against the wealthiest consumers for the oil and gasoline they need to maintain their lifestyle? The word is disaster.
So what does economic theory have to tell us about a supply and demand mechanism in which a third factor is introduced, i.e. demand is fixed and growing, supply has peaked and is beginning to fall – and there are no practical alternatives?
The hard truth is this: In the world economy as we have created it, there is no quick or easy alternative to petroleum. In fact, there is no alternative at all for many applications of the substance. There is no practical pressure valve, at least in the immediate term. If oil supplies continue to decline as expected, prices will remain high, perhaps astronomically so, unless and until the entire world economy can be completely transformed to free itself of the need for petroleum. Until that time, only the wealthiest will be able to afford to continue to be heavy consumers of products that rely upon petroleum, such as gasoline, heating oil, and yes, even food. That is the situation facing humanity in the near future.
It is true that with the passage of time the transition to alternatives that economists expect will eventually take place, but certainly not anytime soon and not without great suffering and traumatic events. It took us a century or more to build our dependence upon petroleum, and it could take nearly as long or perhaps even longer to work our way back out of this blind alley in which we find ourselves. In effect we are going to have to throw away much of what we and our ancestors have built and start over again, on a planet whose resources have been greatly diminished and that is groaning under the weight of massive over-population.
Frankly, the Earth cannot support the advanced standard of living that has become the goal of every human being, as represented by America with its consumerism and love of oil. The economist Thorstein Veblen described “conspicuous consumption,” the flagrant demonstration of wealth. He wrote at the end of the 19th century when only a small rich minority (think “robber barons”) suffered from this affliction. The vast majority of our forebears in that era struggled just to keep a roof over their heads and food on the table.
Today, it could be argued, a large proportion of Americans, perhaps even a majority, are engaged in conspicuous consumption. It may not be on the scale of the Golden Age of the robber barons, but nonetheless we see it every day as we pass huge gas-guzzling cars, trucks and SUVs costing $50K or more and carrying only one person; drive by sprawling “MacMansion” tract houses where “families” of two or perhaps three live in faux palaces containing thousands of square feet; or stroll the Arabian Nights environment of a vast mega-mall observing crowds of intent shoppers.
That is the reality of our economy, and its lure has spread around the globe as people in places like India, China, Indonesia, and even sub-Saharan Africa dream of living the American lifestyle.
They will never have that chance, because we are reaching the end of the road for petroleum based economic growth. In the near future, once again it will be only the very rich who can afford to engage in conspicuous consumption — and they had better be careful if they do, because resentment will run deep and violence is likely to follow. It is easy to imagine that the wealthy will be forced to keep a low profile. In fact, there are already signs of that in many areas of the world where gated communities protect the rich from the great unwashed. As the world economy suffers through the coming oil crisis it will become increasingly dangerous to exhibit fantastic wealth.
What we will see in the future will be quite different, an era of what might be called involuntary inconspicuous consumption – at all levels of the social hierarchy.
This vision of a very different future, as plummeting oil supplies meet head-on with voracious existing demand, is a gloomy one indeed. This economic event might be described by comparison with the paradox of an irresistible force that meets an immovable object. The key to solving that paradox is to understand that there are no such things as irresistible forces or immovable objects.
And, no Virginia, there is no Santa Claus to bring us an unending supply of oil so that we can continue to expand our unsustainable oil-based world economy. Neither will it be within the ability of the Tooth Fairy to suddenly present us with affordable and equally efficient alternatives to the oil infrastructure that supports the affairs of all humankind today.
The new economic landscape of enforced “inconspicuous consumption” will come as a great shock and surprise to most people, and it will usher in a period of instability that could quite likely be the most disastrous era in human history. The truth is that wars are already being fought over oil, land, and other resources, and now that the Oil Peak may have been reached or is approaching soon, those conflicts are sure to spread and become even more violent.
A very unpleasant truth is that without a ready supply of oil the Earth is incapable of supporting the numbers of humans already living. Like it or not, population growth can neither continue nor be sustained and human numbers will decline before the forces of humanity and nature, including disease, starvation, war, and even weather as climate changes become more severe. Welcome to your future. It’s a nightmare.
Economics is known as “the dismal science,” and perhaps now we can see why. Future historians might even take that cue and name the period that lies immediately ahead “The Dismal Age”. Let’s hope it is not something far worse.