Economic and environmental consequences of expensive oil

What are the causes and consequences of expensive oil? The first question is posed in this article, and answered surprisingly well by a neoclassical economist. He understands the relationship between the price of oil and economic growth, and he hints at constrained supply while also expressing irrational exuberance about continued economic growth. As an economist, I suppose he just can’t help himself on the latter issue, nor can he help turning a blind eye to the many environmental costs of economic growth.

Here in the homeland, we peaked in 1970 and we extract relatively little oil on land or at sea. BP’s 100-million-barrel reservoir off the coast of Alaska — er, rather, on a BP-constructed island, and therefore not offshore at all — will meet U.S. demand for less than a week. Meanwhile, long-time swing supplier Saudi Arabia is turning off the tap. So much for satiating our infinite desires with limitless oil from the Middle East. Even the International Energy Agency forecasts demand in excess of world supply.

As world oil supply has fallen, the price has exceeded $80 per barrel twice in recent history. Both events were followed shortly thereafter by sovereign-debt crises in several countries. We’ll likely cross the $80 threshold again soon, even as the industrial economy continues to nosedive. Considering the debt-related economic pain in Europe despite throwing money at the issue (i.e., papering over the economic mess), Keynesian economics makes no sense at all. The printing press hasn’t been sufficient in the U.S., either, and it’s the one-size-fits-all solution of the Obama/Bernanke team. This is the typical government approach: If it ain’t broke, fix it until it is.

I’m not suggesting the debt-based approach hasn’t been broken for a long time. But every attempt to “fix” the industrial economy represents a boondoggle atop a boondoggle, with every one destined for failure at a faster rate than the prior one. Helicopter Ben has created half the U.S. money in history within the last four years even as the money supply continues to crash. On one hand, states want more federal stimulus (i.e., keep the presses running) as the head into a second-half economic tsunami with no clue how to deal with it. On the other hand, pressure is building to stop or slow the printing presses, but it’s already too late: We cannot possibly pay off the current U.S. debt, so — from the perspective of Bernanke and Obama — there’s no point in slowing the presses now, despite ludicrous, vacuous threats from various factions of the tea party. Meanwhile, the sheeple are growing frustrated as they wonder where the jobs went and why the industrial economy remains in the abattoir. Nobody in a position of influence has the guts to tell them about energy decline and its economic consequences; even if anybody with the ear of the people were talking about it, the hyper-indulgent sheeple wouldn’t have the guts to listen, much less act on the knowledge.

Hyperinflation might be on the way, despite the crash in cash. At the very least, the near future will bring increased volatility and a host of economic woes.

The water is boiling around us and, like frogs, we’re failing to notice. Unlike frogs, we have the ability to see what’s going on, and how it’s killing us, but we prefer the culture of make believe over reality. So we pretend we’re immersed in an imperial spa. Fever? What fever? I just need another drink. Apparently the cancer of industrial culture removes cognitive capacity before it kills the host.

Continuing to pretend won’t help the dire situation on the housing front. As it turns out, housing and energy definitely are not too big to fail. Despite out best efforts to ignore reality, echoes of the Great Depression abound. As housing prices continue to decline, Americans lose the ability to use their homes as ATMs. As oil prices continue to increase, aftershocks continue to rumble through the system, with more quakes on the way.

And it’s not just housing and oil. The collapse in commercial real estate is fully under way, banks are withholding information from the federal government because they dare not open their books in the light of day, another credit crunch lies right out the corner because nothing about the financial system has changed since the last crisis of confidence, and bond vigilantes are coming to America and therefore to the world’s reserve currency.

Plenty of people here in the empire think there are alternatives to oil, thus failing to distinguish derivatives from alternatives. These derivatives will never pay their way, of course, much less serve as anything resembling a comprehensive substitute to crude oil. And without abundant liquid fuels, we cannot grow the industrial economy.

Other folks believe hydropower will keep the lights on in their neighborhood, without working through the consequences of capitulation of the stock markets. Why would the engineers and technicians keep showing up to run the electrical plant if they aren’t getting paid, either because all the banks fail or their employer’s stock is worthless?

Too little, too late, Bill Gates is urging us to spend billions on an energy revolution. But he’s not spending his billions on it, probably because he knows the fossil-fuel party is over.

As a result of running out of inexpensive oil on the way to passing the world oil peak in 2005, we witnessed an oil shock in 2008 that nearly brought the industrial economy screeching to a halt. Chief Executive Officer of insurance giant Lloyds warns of another price spike headed our way, and I cannot imagine the industrial machine of planetary death surviving oil priced at the expected $200 per barrel.

Source: EIA Annual Energy Outlook 2009
Source: EIA Annual Energy Outlook 2009

But I’m an optimist, as I’ve pointed out before. I think we can terminate the industrial economy before we move the assault from the Gulf on our southern border to the wholesale destruction of interior lands on our northern border even as it becomes increasingly clear the tar sands will not meet expectations. The events in the Gulf of Mexico illustrate an important point: As my detractors have been saying for years, we really are awash in a sea of oil. Are you happy now?

The disaster in the Gulf provides a perfect opportunity for the dead hand of Ronald Reagan to rise in the form of judicial activism. This pattern is blatantly apparent in the Supreme Court and all lower courts and is consistent with the notion that the right-wing thought police have taken over this country.

In support of my omnipresent optimism, historian Niall Ferguson has added his voice to the large and growing chorus predicting the collapse of U.S. empire by the end of 2012. If we cease to kill the industrial economy, it will continue to kill the living planet and all of us who depend upon it. Either way — with imperial collapse or reduction of Earth to a lifeless pile of rubble — we can stop worrying about power politics. As should be evident to any reader by now, I prefer a robustly living planet over a dying or dead one. As should be equally apparent to any sentient being, I don’t have much company on this particular point.

The economic endgame is rearing its head. The stock markets are headed down — way down — with a monster shock headed their way. One plausible scenario has collapse of the bond market following collapse of the stock markets. But at Dow zero, you’ll be a lot more worried about feeding your children than the rate of return on your bonds.

Meanwhile, out in the dying murdered Gulf of Mexico, BP has claimed success. Calls for a boycott will fade away and clueless Americans will continue to display an inordinate capacity for cognitive dissonance as they continue to demand abundant cheap oil even while throwing the occasional tantrum at Exxon-Mobile BP corporations providing our drug of choice. You might go so far as to call this yet another example of American psychosis.

Will human life be wiped out by events in the Gulf of Mexico? In a word, no. We’re taking quite an impressive toll on the entire planet, but destroying our entire species with only the tools we’ve developed during the last two centuries will take more than a few years, our vaunted technological prowess notwithstanding. The Titanic of ecological overshoot has crashed into the iceberg of limited oil, leading to a painfully slow descent of the industrial economy. The descent is painful because it allows us to keep the current game going, re-arranging the deck chairs as we head straight for a rapid decline in the human population in the wake of a devastated Earth.

There is a better way. We know what it is. It’s time to give up our childish dreams and act like responsible adults. Is that too much to ask?

Comments 17

  • “Is that too much to ask?”

    Clearly it is, Guy. As we discussed previously, our educational system is churning out little robots who have been spoon-fed whatever the System wants them to hear. Even at the University level no one is truly encouraged to think outside the tidy little box. It’s a shell game, and most people are hiding under one of the shells. Until people learn to THINK outside of their self-centered, comfortable (for the moment) skins, you will continue to have little company in your crusade to save the living planet. I’m sorry I am not more optimistic on this point.

  • …”the typical government approach: If it ain’t broke, fix it until it is.”

    I thought the government approach was: If it ain’t broke, first break it, then “create jobs” and throw money at it to create the illusion of fixing it.

  • I’m confused about inflation/deflation issues.

    I agree that if the Fed were the only source of money, running the printing presses as they have would pave the road to hyperinflation.

    But most money is created by bank lending, no? I believe the deflationist’s argument is that much of this money has been destroyed, simply erased, causing deflation.

    I suspect the truth is somewhere in the middle, with alternating cycles of deflation and inflation making a mess of things no matter how you try to plan!

    We’re certainly caught in the current deflation, and could use a strong partner who wants to work toward self-sustainability:

  • An interrelated and highly relevant aspect of this situation is the utter failure of democracy to ensure equity in the distribution of wealth and living standards. Democracy has been thwarted in many ways, including a failure of government/media/eduction to adequately inform the public about the nature and the reality of energy issues. A fully informed democracy would allow good choices to be made as to how to proceed in a changing world. But the situation has been completely different, with information controlled by corporate media, corporate public relations, and bought and paid for corporate-influenced government at all levels. The public is experiencing life as “collatoral damage” and once consumption is no longer manageable as a means to corporate wealth, the consumers are discarded as chaff.

    But reality sometimes emerges and intervenes, as Barack Obama is about to find out. A good article on the pending fall of Barack Obama is at counterpunch today at:

    Stan Moore

  • Jan, it’s a bit of a long talk, but Stoneleigh at The Automatic Earth has given a good, cogent account of her view of immidiate deflation (already in process), followed some time later by hyper-inflation.

    Guy, regarding the response of “clueless” Americans to the GOM: I swear the residents of the area sound like victims of spousal abuse with regard to their responses to the perpetrators. “I know, I’m bruised and have a number of broken bones, but he didn’t mean to hurt me. And ever since I’ve been in the hospital he’s shown such concern and has been so attentive. And he makes us a good living. So I hope he doesn’t pull up and move off to someone else, or leave the country; we couldn’t pay the bills if he took up with someone else. No, I’d really rather not press charges; I’m not one of those kinds of people. I think of myself as pro-husband. You know, all we need is to put this behind us and pick up where we left off. I don’t want to be negative; we’ve got to ‘stay on the sunny side'”

    Lord have mercy, it’s sick and so, so sad.

  • Wendy, I think your description of the typical government approach is better than mine.

    Stan Moore, thanks for the link to the article about Obama’s fall. It’s good.

    John L. Stanley, thanks for mentioning Stoneleigh’s talk. It’s here. And your description of residents of the Gulf is superb.

  • Well, Wendy, I must say that I agree: in Europe it’s the same thing. But it’s not neccessary having a massive movement. Industrial civilization is doomed, there’s nothing to do. Considering how things are evolving, the only thing you need is a bunch of people with the neccessary skills, and then you can make it. Or at least you have a reasonable chance…

    Most people is unable to think by themselves, it’s true. Even in the (so called) 3rd World, most people only think about living the way western population live: that’s why they abandon their lives in their contries and come to ours (by the way, following the routes of the capital that western countries drain from them). The mythology of the smart poor boy died 20 years ago, along with the most precious and well developed ideologic systems. They will keep buying their cans of artificial happiness until the last minute… if they do not want to listen, it’s OK: Gaia is ruthless to those who do not think of the consequences of their actions.

  • Back to Stone Age:

    Check out story in today’s Wall Street Journal,July 17-18,2010 titled “Roads to Ruin:Towns Rip Up The Pavment”.They are tearing
    up the paved asphalt roads–grinding it up– and laying it down
    as gravel.Cheaper than repairing and maintaining the paved road.

    Looks like a first step to the post-industrial era.

    Double D

  • new book worth checking out:

    This genomics study of human history shows that civilization itself, particularly from the advent of agriculture, resulted in human efforts to control and manipulate nature with profound unhealthy consequences that show up in the chromosomes of our species around the world.

    Yes, the industrial age and the availability of cheap petroleum energy catalyzed and exponentially expanded the damage we have done to ourselve snd our planet, but the roots began earlier. And the evidence is pretty straightforward and damning…

    Stan Moore

  • The mainstream economy was set up through 16th to 19th centuries to extract wealth (in the form of loot, minerals, foodstuffs and tradeable products etc.) from remote locations to centres of population, primarily western Europe. And, of course, to transfer wealth upwards, from those with very little to those with far too much. From the 1800s onwards it became increasingly geared to extracting energy from fossil fuels. The establishment and growth of large urban centres throughout the world meant that the process of converting natural resources into waste could be sped up almost exponentially.

    The modern mainstream economy is now essentially a mechanism for converting coal, oil and natural gas into waste. Any process that contributes to the conversion of coal, oil and natural gas into waste is therefore deemed ‘good’….. tourism being the epitome of a ‘good’ activity, since it consumes large amounts of energy, whilst producing next to nothing.

    For the past decade I have noticed that whenever a region or nation is suffering economic stagnation or decline, tousism is invariably offered by mainstream economists and politicians are the magic bullet that will bring about a transformation: suddenly, with very little effort, everyone will become wealthy. I liken it to the cargo cult of the Pacific Islands in the late 1940s …. just build an airstrip (and perhasp pray to the Sky God) and wait for the silver birds to arrive, delivering all kind of goodies. A few months ago the Italian minister of torusim went as far as declaring that ‘tourism was a human right’, and the clowns in EU agreed. So we will all spend time and money we don’t have elsewhere, while people from other countries will come to our place and spend time and money they don’t have.

    To anyone with any knowledge of energy and human evolution, pronouncements about the potential for growth in tourism are completely absurd. However, it seems that the bulk of the populations of western nations, i.e. most of Europe, the US, Canada, Autralia, NZ etc. are so ignorant of energy and of human evolution they see nothing wrong with tourism, or inefficient homes, or gorging themselves to death on industrially produced food and alcohol.

    Since politicans are primarily concerned with re-election, they will continue to tell the people what the people want to hear, whilst serving the corporate agenda of converting coal and oil into waste as quickly as possible, and transfering wealth upwards. As I’ve said before:”They just keep doing it till they can’t.” It is, after all, the perfect set up: a general populace that doesn’t want to know the truth, governed by controllers who don’t want them to know the truth.

    As for oil rising in price, I certainly got it wrong. Commencing around Throughout 2003 I fully expected oil to keep rising, and for fuel to double and redouble in price … not appreciating the demand destruction factor. It seems that the world economy cannot function with high (above $100) oil prices -well not until the value of money has eroded to the point that $100 is worth only $80 of present value.

    On the other hand, there is plenty of evidence that oil exploration and so-called development (I prefer to call it looting) cannot proceed unless oil prices do rise substantially. Catch-22.

    I see this thing playing out via severe demand destruction. There is an awful lot of oil being squandered at the moment, and there are plenty of organisations and activities that can (and will) go down the drain over the coming two or three years, leaving a lot of people adrift.

    So, I believe unemployment will turn out to be the straw that breaks the camel’s back.

    What is rather amusing for me at the moment is the preposterous planning for ‘bigger than ever’ Olympic Games in 2012, 2016, 2020: a sure indication the world at large is completely insane.

  • Guy:

    I spent a couple of hours Saturday morning reading through all of your web references for this post. They are terrifying and convincing. Then I began to wonder what the world would look like if 300 million Americans gave up childish dreams and began acting like responsible adults. I have a powerful imagination, but I couldn’t get anywhere with that one.

    Your great and inspiring object lesson is the mud hut and your life there, and it’s effective because your level of authenticity has given the lie to so much of what we consider to be authentic. But it’s not going to cause the end of the collective psychosis.

    I suppose the mud hut will retain some power for some people until there’s a McPhersonland at Disney World. When they measure you so they can get the giant electro-mechanical action figure right, and commit themselves to building a 10/1 giant model of the original Mud Hut, you may consider yourself commodified and co-opted and part of the general insanity, no matter your best intentions.

    I bring this up half-seriously because I grew up with the Vietnam War, and watched on TV the Reagan Revolution, Granada, Iran-contra, the first Gulf War, and the Clinton/Bush/Obama triumvir, and spent much of my life saying This Cannot Last. Now, even without a TV, I think that industrial civilization is what Terry Gilliam portrayed it as in his movie Brazil: a giant robot Samurai, boundlessly energetic, lethal to every living thing it touches, and ultimately hollow and soulless. But the thing won’t die–maybe that’s because it wasn’t alive in the first place. God only knows what its energy source is or if it will ever stop, even when it runs out of habitable planet.

    It’s entirely appropriate to bring tourism into this discussion, because it’s an arm of the giant robot. One of its methods is to destroy any consciousness of loss. Walker Percy’s brilliant essay, “The Loss of the Creature” details this process. Dean MacCannell’s The Tourist (1999 ed.) gives a deeper look into the matter, especially with his introduction and epilogue.

  • Thanks for reading all those links, John Rember. You make me think it’s worth reading and distilling them. Also, I appreciate the bits you’ve added to my own reading list.

    The future does seem terrifying, which is probably why so few people are willing to take a hard look at it. One of the reasons I left the academic life was the collective psychosis, which had poured into the ivory tower on the high tide of corporate funds, thereby preventing discussion of serious issues.

    I am not trying to scare anybody: Rather, I am attempting to warn people about the approaching storm, and inspire them to prepare for an ambiguous future. On the other hand, I find solace in two arenas as we launch into uncharted waters:

    1. First and foremost, non-human species and non-industrial humans are bound to benefit from the relief from oppression sure to occur as the industrial age reaches its terminus. Our own species might even make it through the global-change bottleneck if we reduce fossil-fuel consumption by 80% or so within the next few years. I can only hope the last image I glimpse will contain sufficient wild nature to bring a smile to my face as I return to the abyss.

    2. I have been warning people for many years about the two primary consequences of our fossil-fuel addiction, global climate change and energy decline. I’m certainly not the first person, the most rational person, or the most convincing person warning warning people: At this point, somebody would have to be ignorant, apathetic, or both to believe they will avoid economic collapse within the next few years. I’ve employed rhetoric, models, and a list of practical skills, as have many others. I know nothing more I can do. And yet I see little evidence of societal change and even less evidence of individual actions.

    I am saddened by the substantial human suffering and deaths certain to occur in the years ahead, but there is little more I can do to relieve the suffering or reduce the loss of life. From the perspective of former friendships and my so-called career, I already threw myself on the grenade.

    This long-winded response leads, finally, to a question for all readers who’ve made it this far: Now what? What shall we do in the time we have left? Shall we prepare and, if so, how?

  • “Now what? What shall we do in the time we have left? Shall we prepare and, if so, how?”

    Band together with others, grow your own food, produce your own energy.

    Unless you’re under 40 and plan to breed your labour force, the first point is vital: we have to re-form the tribe in order to get by. Do you think Social Security will be there when you’re no longer able to work in the field all day? How about Medicare?

    Those of us with grey hair better start making ourselves invaluable to the next generation.

  • Well, the best way to make it is becoming a feudal landlord with a militia under your command and a willing priest who keep the poor peasants in ignorance.

    That was a joke, but unfortunately there will be many violent landlords after the collapse.

  • “The future does seem terrifying, which is probably why so few people are willing to take a hard look at it. One of the reasons I left the academic life was the collective psychosis, which had poured into the ivory tower on the high tide of corporate funds, thereby preventing discussion of serious issues.”

    Indeed, our collective psychosis is reaching unimaginable scope. This week, The Washington Post, hardly a publication that challenges the status quo, is running a series entitled Top Secret America. See at:

    Read it for the gory details, but just as a preview:

    -850,000 employed in government intelligence related work within 1271 government organizations and 1931 private companies

    Friends, we live in a police state that serves the interests of a small plutocracy. Its scope would make the Third Reich green with envy. When push comes to shove and times get tough, our police state will reveal itself in its full glory. Overt fascism is the government’s response to collapse. It will insure its interests are protected first and at any cost. Forget Mad Max. It’s Orwell who got it right.

  • Indeed, Orwell was right. 1984 is probably the best reflexion about the nature of power I’ve seen in my whole life. Rigth now it’s Orwell, plus Aldous Huxley, plus Ray Bradbury… it seems that any single distopic view of the XXIth century was more or less right. Writers smell troubles even before scientists…

    No doubt about the power of plutocracy, no doubt about the real power of corporations and the essential impotence of executive power, and also: no doubt about the tonelades of lies that people accept as “evident truths”. This world, as it is, is designed for hard-working, non-thinking, obedient citizens. Every day I feel more and more disgusted with the primitive and greedy behaviour of most people.

    To be fair, the live in constant fear. You look for a job? Maybe I don’t find it. You lost your job? Maybe I’ll never find another one. You have a job? I’m worried about losing it. Fear, fear and insecurity, plus the inmature way of thinking of most people. It’s not their fault, if you think carefully: it was just a matter of suggestion, undertaken for many decades by the most greedy and ruthless elites ever seen.

    Up to a point in which most people consider a consumist life as a divine right. Madness…

    But I’m not pretty sure about Mad Max and its label of “Sci-Fi”. In fact, considering how serious the situation of the environmental balance is… it’s very likely that Mad Max become an optimistic view. Possibly our future is going to be even worse. After the collapse of so many civilizations and the awful consequences for most people it has, it would be foolish underestimating the impact of the collapse of industrial civilization.

    How many unnecessary deaths, how much exploitation, how much pain, how many extincted species, how many generations of human doomed to misery… just to give to every mental retard on this planet a car to drive?

    I hope there is intelligent life in other planets. Because on Earth it does not exist.