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Economic growth a dream with dwindling oil supply

By Roger Diamond

I hear and read everywhere that what we all “need” is economic growth, but nobody seems to be talking about how this can be done. Let’s make jobs, let’s stimulate industry, and so on, but not much proper thinking into the roots of what comprises economic activity. The simple fact of the matter is that all economic activity relies on energy.

As pointed out in a previous post, most of the energy we use (indirectly) to power our economy is natural — the sunlight that powers the weather, grows plants and gives us light and warmth. However, over the last few hundred years, humans have been tapping into fossil fuels to provide energy for an amazing array of other activities, like smelting ore, transport, lighting and food processing.

The problem with fossil fuels, from an economic perspective, is that they are finite. And the amazing thing is that nobody will refute this. Yet, when you suggest that oil may be peaking in production, then people get nervous and start making grunting sounds, and when you finally suggest that this means our global economy must shrink, the grunting gets louder and they insert random phrases like “alternative technology” and “service economy”.

Regarding alternative technology, sure, there will be electricity from renewables and … well, that’s just it, there are not a lot of alternatives that are sustainable. But moreover, as pointed out in a previous post, nuclear and coal are no substitute for oil in terms of their ease and variety of uses — unless you have a hundred Sasols springing up around the globe, to convert coal to liquid fuels and chemical feedstocks. Regarding the service economy, indeed, not all sectors of the economy are as energy hungry as airlines or mining, but ultimately even an artist or author uses energy in their work and daily lives.

And so it follows that with less energy, there will likely be less economic activity. There are clever ways to minimise this effect, but with the current lack of creative thinking by economists, bankers and politicians, there is little chance to shift our economy into one that supplies higher social benefit (jobs, quality of life, etc) at lower energy consumption. Ways to do this are to localise economies (reverse globalisation), internalise environmental costs (pay for water use, for pollution, for land value), “de-technologise” (use manual labour and methods more), and others.

Ultimately though, in a world of dwindling oil supply, all the stops will have to be pulled out to achieve even a steady state of economic activity, never mind a growing one. So your challenge is to try and change your life to use less energy but still produce equal social benefit for your family and those around you.

Author

  • POP believes that the problem posed by the imminent peaking of global oil production is something warranting serious attention. The group is made up of a small yet diverse group that brings together theoretical skills on geology, economics and strategy, with practical application of alternative lifestyle choices. POP is dedicated to raising awareness of "peak oil", its likely impacts on South African society and the possible solutions to living in an energy reduced future. The contributors are all members of ASPO-SA

17 Comments

  1. john Bond john Bond 19 June 2009

    Maybe you just want to save face and do a bit of research on oil and fossil fuel before posting a blog like this.

    There is still 12 to 18 months crude “above ground”, mainly in old tankers but also in grain silos and a variety of other storage vessels. The bottleneck and hence the price determiner is the refining process (vertical integration is the problem). The World bank said in September last year that oil would stabilise at about US$80 but no one believed them because the price was US$140 AND CLIMBING… Let’s see if they’re right…

    The price we pay for fuel in South Africa has a limited relationship to the price of crude. About 40% of the price is paid to the government as excise, tax, support for the corrupt Road Accident fund and some other scams. We then have to cross-subsidise Transnet through the Petronet Levy.

    Our energy needs for the next 150 years can be met from coal. Petrol from coal becomes economic provided crude remains above US$90. (these figures are probably out of date). The large capital investment needs price stability.

    In 1957, during the Egyptian inspired oil crisis, they said we’d reached peak production, again in the 1973 oil crisis, again in 1985 and I hear them say it again now. We’re pumping 10 times as much as we did in 1973. Who got the sums wrong? Have they got them right yet?

  2. Rory Short Rory Short 19 June 2009

    I agree the reality is that fossil fuels are finite, just like the earth itself. Thus the two prudent things to do are to (a) continuously strive to minmise our energy consumption and (b) to switch to renewable sources of energy as fast as we are able to. The sun being the major source of ‘renewable’ energy as it has a few billion years still to run. The other compelling reason we need to switch away from fossil fuels is that their combustion results in green house gases which are causing global warming.

  3. Benzol Benzol 19 June 2009

    @Roger: “The simple fact of the matter is that all economic activity relies on energy.”
    As this seems the basis for your conclusion, I strongly disagree. Economic activity existed long before fossil fuels were developed into useful sources and long before apparatus using this form of energy were developed.
    Wood, wind, sun and gravity of water were the main suppliers plus a variety of human and animal resources. The Dutch windmills are ingenious pieces of multi purpose technology using wind as a basic source converted for different purposes.

    The basic drivers of economic activity are “supply and demand”. The Romans never demanded a TV set, so nobody did make an effort in making one.
    The capital investment required in industrialised economic activities called for “economy of scale” principles. This -in a nutshell- called for “creating demand” by cutting the life cycle of a product through delivering minimum acceptable quality (early replacement, throw away society), upgrading the technology features of the product for more productive use or introducing a fashion statement (status) in the product line.
    The increased demand for energy is largely the result of the artificially increased demand for non basic needs (a new car every two years?), extreme waste of produced goods by will full destruction on a large scale (wars, conflicts, SA strikes) and the demand for “instant satisfaction” by consumers, all of which destroys “value” at a large scale.

    There are many well thought through proposals around, but big business does not support them and politicians do

  4. Benzol Benzol 19 June 2009

    Cont’d: (1) Another issue is the demand for economic growth. If society would do nothing to grow an economy, it will automatically grow by the sheer increase of numbers of people in an economically active population. The growth of the world population will automatically lead to economic growth in the demand and supply of basic necessities. We should not need growth stimulating packages.
    (2) The economic growth demanded by business under cover of “creating jobs” is aimed at more value for shareholders, higher share prices and better bonuses. Many politicians (the guys who approve those stimulating packages) are often direct or indirect beneficiaries of the artificially induced economic growth. The “job creation” promise often does not happen or is not sustained beyond the duration of the support programme.
    (3) Energy distribution control as proposed by Eskom: Eskom’s proposal to subsidise the poor by charging the rich more does not make economic sense. Defining the group would introduce another population classification in SA (“rich” vs “poor”). The rich already use more “energy” than the poor do; they are better customers than the poor in terms of “billings per month”. If the rich en masse would respond by “going on strike”, the purpose of the exercise would be defeated. In any case, the energy use of the 10% rich does not make a national impact. The proposal can be considered as political and not contributing to the economic problem of scarcity of energy resources.

  5. Lara Johnstone Lara Johnstone 19 June 2009

    John,

    Our petrol needs can not be met for the next 150 years from coal, at hte current use. Sure if 95% of us convert to donkeys, hten we can get enough petrol from coal, for the 5%.. but your caculations are not accurate.

    Coal is peaking too soon.. coal is getting more expensive, in energy terms and less in energy quality. The energy return on energy invested (EROEI) is going down and down and down….

    It doesn’t matter if hteir is still 20 billion cubic meters of coal underground somewhere in south africa, if to get one cubic meter of coal above ground, requires one cubic meter of coals energy!

    People do not understand Energy REturn on Energy Invested.. EROEI for oil used to be 1 barrel energy could bring up 100 barrels of oil, now it is down to variations of 1: 5 to 1:10… depending on where it is, and how much water they pump into the wells, etc…

    18 July 2006: PeakOilRSA Briefing Paper: Who knew what about Peak Oil, When, in the South African Goverment?

  6. Mark Kerruish Mark Kerruish 19 June 2009

    Mr Bond, what does “finite” mean to you? Personally, I see it as two bell curves superimposed, up and down – disregarding geopolitical shocks. Production peaks, price bottoms. Production starts to fall, as it must with an over-utilised finite commodity, price rises. Consequences?

    Temporary geopolitical situations causing price fluctuations have no bearing on the thesis of this blogger. Mr Diamond is right.

  7. Jon Jon 20 June 2009

    There are still vast supplies of oil under the ground — far, far more than mankind has ever used in the past century or two. But these oil supplies are not as easy to draw to the surface as the stuff we’ve been using so far. The marginal costs are rising as we find oil wells under the sea or at hitherto unplumbed depths in rock strata of unimagined complexity.

    So, the oil is there. It’s just that getting it out is getting too expensive for our budgets to bear, forcing us to explore alternative energy resources as they become cost-effective.

    “Peak Oil” is pretty much overblown humbug, really.

  8. Lyndall Beddy Lyndall Beddy 20 June 2009

    The electric car and biofuels were around 100 years ago.

    The oil companies bought the patents and supressed them.

    My father-in- law had a garage (which he OWNED – unlike nowdays) where he could sell ANY fuel he liked (unlike nowdays).

    Which included Union Spirits (for Union of SA) a bi -product of the sugar business.

    It was suppressed – by government? Oil companies? Sasol? All of them?

  9. Ralph Ralph 20 June 2009

    Jon obviously doesn’t “get” EROEI.

  10. Perry Curling-Hope Perry Curling-Hope 21 June 2009

    Benzol,
    You appear to be laboring under several misapprehensions.

    You ‘strongly disagree’ with the assertion that “all economic activity relies on energy” because “Economic activity existed long before fossil fuels were developed[..]??

    Such economic activity still relied on energy, which was solar energy and the biomass and movements of air and water which it produced.
    This has been the case for almost all of human history.
    This limit on available energy constrained the level of economic activity which could be sustained, which in turn constrained human population.
    Population remainder relatively stable for millennia, expanding only as more land (and the solar energy which fell on it) could be turned to human purpose.

    It was the advent of fossil energy which triggered an explosive growth in economic activity, into which the population then expanded.
    Human population growth cannot create energy or increased economic output, an increase in energy consumption is required to increase economic output, since the product of an economy is dependent upon energy.

    You are correct in saying “The increased demand for energy is largely the result of the […]increased demand for non basic needs”, but who says this demand is ‘artificial’?
    Who is to say, by implication that any demand beyond that which fulfills ‘basic needs’ is unnecessary?

    Not most of humanity!
    A better life for all, which involves uplifting the poor, is going to require a much higher average per capita energy consumption.
    Sharing more ‘fairly’, even if it were viable, just won’t cut it!

  11. john Bond john Bond 22 June 2009

    Lara

    What did those 80 odd illegal gold miners die from? A coal gas explosion! Coal in a gold mine? Yes, most Freestate gold mines have to shaft through huge (and deep) layers of coal to get to the gold reef. This coal is still too deep to be mined economically. We have other coal reserves. The prehistoric inland sea that deposited the gold also created the ancient forests which produced coal. There are coal deposits round that ancient sea that we have not discovered yet.

    We have HUGE reserves of coal. We don’t know how huge but very conservative estimates are 150 years of ALL our energy needs. A problem with coal power is that it is dirty but this is rapidly becomming cleaner.

    Mark Kerruish

    What the heck does finite mean to you? Everything in this universe is finite. Some things, though finite, will meet all humanity’s future needs. Later, we will develop alternatives but it’s foolish to shackle human development just because some green luddite thinks it’s a good idea, we have people to feed and poverty to overcome. Don’t stop improving the lot of humanity because some spoiled green terrorist holds a toy gun to our heads.

    Fashionable yet fictitious fiends cause our focus to fade. Let us rather use our science to enhance humanity and all that is important to us humans. Let’s make this world a better place for all humanity, not just the rich.

  12. john Bond john Bond 22 June 2009

    Humanity’s greatest failure in this millennium has been our scattered approach. We banned lead in petrol and CFCs in packaging and fridges yet millions still starve from lack of food and die from dirty drinking water. We got lost somewhere…

    Tom Peters’ “In search of Excellence” showed us the way, we just didn’t listen. He found that VERY successful organisations operated differently to the “also ran’s” and the failures. They study their environment and focus on what is TRULY important. They focus, for example on their people and put good business practices in place to develop and grow staff. They support their suppliers, helping them innovate rather than trying to screw them. They listen to their customers rather that maximising short-term profits. Managers introduce Balanced Scorecard to measure their performance in a variety of areas. Interestingly, those that use this technique show much better long-term profitability than those that just focus on the fashion of the week, whether that was profitability last week and right sizing this one.

    Notice how each goal uses words like grow, develop or innovate rather than stop, restrict and police.

    So how do we manage our world. Stop using DDT, BAN IT. That commandment cost a mere 50 million lives. We now find out that the research on DDT was a hoax. America’s symbol, the Eagle wasn’t dying from DDT. The sad irony for me is that the iconic American Eagle was more important than 20 million people…

  13. The Creator The Creator 22 June 2009

    Thing about Peak Oil is, if we had the infrastructure, at the cost of pumping out huge amounts of greenhouse gases, we could make oil from coal. Unfortunately, we don’t. If we had coal-burning locomotives we could run our railways on coal. Unfortunately, we don’t. If we had coal-fired power plants we could generate electricity with coal. Unfortunately, we don’t.

    All this would require a mammoth infrastructural project across the globe, which nobody is prepared to pay for — and the end product would be environmental cataclysm.

  14. Nick Nick 24 July 2009

    @ John

    Very wise and valid points but ultimately off the mark. You need to do a lot more research. “our energy needs for the next 150 years can be met with coal…” Are you referring to the whole world, electricity and fuel [for cars]. By energy needs do you include food? If so [if there are no current limits]…and you have the next 5 years to ruminate on this…try to find an explanation why the global economy has tanked, and why prices of virtually everything is rising and will continue to rise.

  15. Nick Nick 24 July 2009

    @ Benzol

    Some quite stupid statements I’m afraid:
    The basic drivers of economic activity are “supply and demand”. Yes, these are drivers. How do you think supply comes to exist? How do you produce anything to supply? How do you grow a grain of rice, make a toothbrush, build a car?
    If you have no energy to do supply something you can’t supply it.
    And what are our demands based on? To some extent on consuming energy [driving and eating] but also on pure consumption. Jeepers if you think economics is about supply and demand and energy isn’t a factor you really are dumb. Do you think goods and services are sucked out of peoples thumbs, that you can get something for nothing? This is an example where a little bit of knowledge makes for a lot of ignorance.

    Roger – nice article.

  16. john Bond john Bond 24 July 2009

    Three quick points
    1. I’ve charted coal and oil for 20 years. It doesn’t follow the normal economic model. Coal is coming down in relative cost (corrected for inflation).

    2. Food supply is increasing and the cost of food is not responding as a “scarce resource” should!

    3. Show me a valid scientific study outlining global warming, not a Gore public relations site but one with solid evidence. This should include the well-documented warm period 1320 to 1450 AD that disrupts current Global Warming theory.
    – Alternatively
    Show me a model that illustrates how the carbon, dust and water changes the temperature as it passes through the various levels. How does moisture affect temperature and does cloud cover ultimately warm or cool our planet?
    – Is it global warming, or global cooling.

    In economics, we may have confused “scarcity” with “human’s perception of scarcity”. There is increasing evidence that nothing is as finite as we think. It is possible that most resources to satisfy human needs are not really finite at all, we just perceive them to be.

    This flies in the face of most current social thinking but remember it when, in 20 years you are still filling your car with petrol and you are eating your genetically modified pizza.

    What I do know is the future isn’t what it used to be, it’s much more exciting!!!

    And of my many many sins, no one can EVER accuse me of not doing my homework!!!

  17. john Bond john Bond 24 July 2009

    @Nick

    Prices continue to fall. But they’re falling faster than even economists understand.

    Take the humble loaf of brown bread, in 1969 a loaf was 16% of a black workers daily wage but now it is just 6.7%. A 2009 loaf costs just 41% what a 1969 loaf cost, right? Wrong!. The modern load has vitamins added. It goes stale more slowly and it tastes far better. The better loaf costs half what the worse one did.

    Do the same for cars. We compare a compact car with aircon, ABS brakes and sometimes even airbags with something that didn’t even have seat-belts and was half as fuel efficient. We then say cars have become 20% cheaper. We are comparing apples with lemons (in 1969, a poor quality car was called a lemon)

    How’s this for “a giant leap for mankind” – the amazing lunar module had less processing power than an entry level cell phone of 2009. The 46 Kbyte memory cost US$ 4 million while a complete cell phone costs less than US$ 135.00, AND the cell phone uses a minute fraction of the silicon, so small it’s difficult to compare the two… but 1 Kbyte, doesn’t this stay the same over time. No – retention, access time and power needed to write or read have all improved.

    Imagine flying to the moon on your cellphone.

    Welcome to the funfair of life, It’s a glorious moving target. The rollercoaster is amazing!!!

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