Stuck on the Cycle of Energy Supply & Demand

By David L. Brown

gas-prices-arm-leg1Oil prices are climbing once again, accompanied by gloating predictions by oil ministers of $250 per barrel prices in the not far off future. What are we to make of this? Well, as I have written before, it is a direct result of the simple fact that the Oil Peak has been reached. Cheap oil is a thing of the past, and there is no way out of the box.

The idea that the world economy can once again resume long-term expansion is beyond possibility. Declining supplies of oil, a basic resource that underlies all industrial and agricultural activity, have placed a ceiling on growth. Unfortunately, growth is the basic tenet of our economic models. Without it, well, economists don’t know what to do.

Although little recognized, it was due to the advent of Peak Oil about two years ago that petroleum prices spiraled out of control last year. And it was that fiscal shock that caused our economic systems to stumble, even to shatter. Food prices soared, leading to hoarding on national scales. Industries shuddered to a halt. Tourism is in terminal shock. Airlines are preparing to mothball thousands of planes. International trade has collapsed and shipping is in crisis. The effect on financial institutions was unprecedented, causing nations to mortgage their futures for decades to come to bail out the banking systems.

All too much of economic theory is based on smoke and mirrors, but the law of supply and demand is a truly hard and fast rule, ranking right up there with the force of gravity and the certainty  of a sunrise at the start of every day.

Oil prices declined, giving economies a breather—but not because supply increased. It did not. Rather, it is demand that fell out of  bed. Now, cheaper oil has caused economies to begin to show signs of life once more. Demand is rising again, but supply is not. We are witnessing a rock and hard place scenario.

Even as demand begins to grow, evidence continues to mount that world oil reserves are declining and production is dropping. Most of the oil that was easy to find and produce has already been used, leaving only more remote, difficult reserves which by definition will always be more expensive to develop and deliver. To compound the problem, uncertainties in the petroleum markets have put a stranglehold on exploration and development, so supplies will continue to falter at an even faster rate.

What will happen? Well, we cannot expect a return to the boom times that extended for more than a half century after the end of World War Two. Those years of expansion and “progress” were fueled by abundant and cheap oil, something that is gone and will never come again.

Since oil production can no longer increase, the discipline of supply and demand will continue to hold like a solid brick wall, a wall into which any upward trend of demand will crash head-on. We have entered a period of up-and-down cycles. Whenever prices drop sufficiently to reignite demand, prices will be pushed back up. When they reach unacceptable levels, demand will drop once again causing a new down cycle. We experienced the first phase of this yo-yo pattern last year and the world economy barely survived the shock. Now that pump prices are once again approaching the three dollar range, we can soon expect to witness a new cycle of economic trouble.

The limits on oil supplies acts like a brake that will repeatedly slow the world economy whenever it starts to heat up. As long as our industrial and agricultural models are dependent upon oil, we will be caught in this cycle of stifled growth. Each time economies begin to grow, they will hit that brick wall and drop back into recession, or worse.

There is no easy answer to this. If only petroleum could be quickly and painlessly replaced as the linchpin of world economic activity, we could pass into a new era of growth and prosperity. But it just isn’t true that such a feat can be achieved, at least not any time soon, and not in our present economic systems. Yes, some headway can be made toward increasing total energy supply by phasing in alternatives such as solar, nuclear and wind power—but as oil supplies continue to decline it will be difficult or impossible to keep ahead of the demand curve unless the world’s economies remain in recession or depression.

Since we cannot solve the problem by increasing supply, demand will necessarily decline as surely as winter follows autumn. The harsh economic law brooks no exceptions. There will always be oil to be had, but only for those willing and able to pay the price, one way or the other. The rich will bid up the price of oil, food and other resources to the detriment of the poor, and that is the tragic tale of economic reality in the post-Peak Oil era.

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