Oil, Economy and Preparing for the Change Ahead

(This post first appeared in the Transition TC google group. It is reposted here by permission of the author.)

Discussions about peak oil have become very quiet with falling oil prices. However, it is falling oil prices that will cause the peak in global oil production. This is a really good time to use the current surplus to prepare for a future of greater oil scarcity.

Peak Oil is often thought to mean running out of oil: images of gas station lines where no one can get gasoline; stories about gasoline shortages, etc. The documentary "The End of Suburbia" used these images and the image of an empty gas tank gauge. We all know what happens to a car with an empty gas tank: it stops moving!

But that is not how peak oil will work. Peak oil is not about running out of oil. It is about running out of cheap oil, cheap enough to grow an economy. In the past, oil was cheap enough that a growing number of people could afford to own cars and drive to work from the suburbs. Both parents and children could afford to drive. (Or both USA drivers and Chinese drivers could afford oil).

The last 10 years since the peak of conventional oil have show that what we will see is the cost of oil rising to a level where the economy cannot afford to grow both oil production and oil demand. If parents want to keep driving, children cannot afford to drive (college students without jobs); for USA drivers to keep driving, Greek drivers must give up driving (via the collapsing Greek economy).

Peak oil will inflict its damage indirectly, through unemployment and falling wages, instead of through gasoline shortages. Richard Heinberg has often discussed the Goldilocks price of oil -- a price that is "just right;" that is, low enough to encourage economic growth, but high enough to pay for drilling for more oil from more difficult sources, like fracking and tar sands oil.

But what has happened is that the cost of producing oil has risen above the Goldilocks zone. Fracked oil and tar sands oil costs more to produce than people can afford to pay and still have some money left over to grow the world economy.

It used to be that oil companies could make a profit when oil was $25 per barrel. And the world economy grew at those oil prices. Today oil producers need $60 to $100 dollars per barrel to make a profit. That is too high a cost for the economy to grow. So now what happens is this: If prices fall back to $40 to $50 dollars a barrel, then oil companies cut back investing in drilling for more oil, which eventually cuts oil production and forces prices back up. But if prices rise above that, then the economy declines and oil prices are forced back down.

We know the consumer side of the world economy is shrinking. We know this because prices are falling for more than oil, they are falling for steel, for copper, and many other industrial goods. (Our Twin Cities economy is not shrinking, so those falling prices feel pretty nice to us, but our economy will eventually turn down with the rest of the world.)

We also know the producer side of the world economy is now shrinking. Energy companies are going bankrupt in record numbers. State budgets based on oil are deep in the red (North Dakota, Texas, Alaska, Oklahoma). Whole producing nations are sliding into chaos (Venezuela, Brazil, Syria, Egypt, Nigeria, Libya, Iraq). And this will soon lead to a drop in oil production.

The positive side of this chaos is that the world is starting to slowly turn away from fossil fuels. The negative side is that because the change is happening so slowly, some economic downturn is going to be impossible to avoid and that economic downturn will bring more unemployment and falling wages.

It is likely we will see some oil and natural gas price spikes, but it is really the falling wages that will do the damage (maybe via lost jobs or wage cuts, or maybe because investments will do poorly and retirement funds will decline).

Thinking of the Change Ahead

This is a really good time to use the current surplus to prepare for a future time of greater scarcity. This may include:

  • Developing several sources of income, or grouping up to get several incomes per household.

  • Building skills for cooking with less expensive and seasonal foods.

  • Purchasing clothes to stay warm with little heat.

  • Connecting with friends who will let you stay with them if you cannot afford rent or a mortgage.

  • Or building/buying a tiny house or camper where you could stay if housing becomes unaffordable.

These are all good things to talk about and plan for now so you have identified a security net in the next few years.

And step out in gratitude for the blessings we do have today.

This information is provided for educational purposes only and should not be taken as investment advice.


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