The End of Cheap Oil

I subscribe to National Geographic. Generally I just flip through the magazine and let my eyes linger on their lush pictures. But occasionally I actually read an article. Their recent article The End of Cheap Oil got my attention. The author makes a convincing case that oil is going to get increasingly more expensive over time simply because of supply and demand. The world’s proven oil reserves are well known. It is unlikely we will discover any huge new oil reserves. If we do then with the world’s thirst for petroleum increasing every year any new reserves won’t last for long.

China, India and Indonesia are emerging as major industrial powers. They are greatly adding to demand for the world’s oil supply. Their demands will only increase. The increase in demand of course also leads to more incentive to find new sources of oil. While we are unlikely to find too many new sources of oil, we’ll find more expensive ways of extracting oil. The net effect will be the same: the era of cheap oil will end.

We may have already seen the beginning of the end when oil prices rose this spring to above $40 a barrel. They have since gone under $40 a barrel and then moved over $40 a barrel again. Certainly a major oil producer like Saudi Arabia can flood the market with oil and reduce the short-term cost of oil. But such tricks won’t last forever. Increasingly oil-exporting countries will have little reason to increase supply since it only cuts into their own revenues.

The United States is a very prosperous country. If oil becomes more expensive we are in a good position to simply pay the higher prices. This will be to the detriment of emerging economies like China. (China may decide it must have oil and invade countries like Indonesia to ensure a steady supply.) The effect worldwide could be very severe inflation. That in turn can cause recessions, depressions or more likely the bugaboo from the 1970s: stagflation. Stagflation is slowing growth in the economy accompanied by a general rise in prices.

Arguably we may already be experiencing stagflation. Currently our GDP is down from its somewhat feverish levels a couple quarters ago while prices have risen steadily. (Actually wages haven’t kept up with increased prices this year, which means that the average wage earner in America is effectively losing money.) Those of us who lived through the 1970s oil shock remember what stagflation was like: 18% interest rates, up to 14 percent annual inflation, an anemically growing economy and wages always lagging a few percentage points behind inflation. All this and gas lines too. It was not a fun time.

Most of us don’t really understand how our economy is tied up around oil. I think we understand that it takes oil to create the gasoline used to power our cars. But we don’t think much beyond that. We don’t understand the huge inflationary effect of a rise in oil prices. And yet gasoline powers the trucks that deliver our food. It delivers the fertilizers so farmers can grow crops in the volumes needed. It runs our tractors. It powers our airplanes. We don’t have coal-burning trains anymore: locomotives require lots of oil too to move freight. Plastics, packaging, many drugs, even a lot of our clothes are made from petroleum products. Petroleum is pervasive and it is everywhere. Our economies are totally geared around its plentiful access, ready availability and reasonable price.

This is why the end of cheap oil is so very scary: we have nothing with which to replace oil. Just think of the impact on the airline business alone. If a barrel of oil reached $150, would we have a commercial airline industry? Would we fly from coast to coast if it cost us $1500 each way? What would be the ripple effect to our economy? How many people would be unemployed if our commercial airline industry shrunk to 20 percent of its current size?

Clearly we have other sources of energy available, including coal (which produces most of our electricity) nuclear and hydroelectric. But as my friend Frank Pierce has pointed out, oil has some compelling advantages because it is so very portable. An airplane cannot be tethered to the ground to an electric cord. There are no alternatives for extracting so much energy in such a convenient and portable liquid form. Similarly, although hybrid cars offer some relief from an oil shock, eventually cars may become too expensive to drive.

Hopefully the end of the oil age will be a gradual process. But it appears to be coming nonetheless and we are not prepared. In fact except for a few in the know most people have no idea that a persistent long-term oil shock is in the horizon of our lifetime. Currently there is hardly any research into petroleum equivalents. (This looks interesting, but it is unlikely we could find enough biomass to satisfy our insatiable thirst for petroleum.) And our appetite for oil seems boundless. It doesn’t seem like any person alive prefers to live in a third world country. They’d much rather live in industrial economies. Millions cross borders annually just to eke out a slightly better lifestyle in a more developed country. Yet the only model we have for a modern economy is oil based.

Those of us living in modern economies would have no idea of how to survive in an agrarian economy. Indeed we really can’t. There are too many of us to feed now. We absolutely depend on oil to run our tractors and till our fields and fatten our cattle so that we can support 300 million plus people just here in the United States. Without it we can predict mass starvation, brutality, anarchy, perhaps war.

If we had enlightened leadership we would be have a well-funded Manhattan-like project. Its goals would be not just to reduce our dependence on foreign oil, but also to find ways to have an oil-less economy. And yet as always we seem to be clueless. The Republicans think that finding oil in the Arctic National Wildlife Refuge is part of the solution. If so it is a tiny part and buys us perhaps a few years of relief from the coming oil shock. Even if we had a huge oil field under the Arctic National Wildlife Refuge we’d still be importing most of our oil. We simply cannot sustain our economy with our own oil.

Hopefully the oil shock will be a tempered shock. Hopefully prices will rise slowly enough to avoid huge rounds of inflation. But there are no guarantees and it would be foolish to prepare for this rosiest of scenarios.

This National Geographic article makes me wonder what sort of retirement I will have, or if I could afford to retire at all. Will the coming oil shock reduce the value of my pension by 50 percent or more? Will I at age 70 be homeless somewhere because I cannot afford to keep a roof over my head?

I wish we had real leadership in Washington. Even the Democrats seem to have only a dim idea of this very likely future. It seems everyone in government is ill informed or living in denial. I wish I could shake them up. Research money spent now to develop ways to sustain a petroleum-less economy might well mean the survival of our nation in the 21st century. Petroleum equivalent tools and products that become available when this oil shock happens could make for some very rich inventors.

Maybe that’s what I need to do: become the Thomas Edison of the petroleum-less age. Like everyone else I don’t want this oil shock to happen in my lifetime. I like the way my life is ordered right now. I want to maintain this lifestyle until the day I die. But increasingly I see this freight train headed right toward us. I wish while there is still time that we were smart enough to prepare for this inevitable era.

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