With the collapse of the financial markets and now the wider economy, the price of oil has declined dramatically, from its high near $150 bbl. to just below $60 bbl. yesterday. The massive losses on Wall Street, the shocks to the financial system, the worrying rise of unemployment, the ongoing decline of housing prices, all have combined to depress the price of oil, as the future looks to be one of economic contraction and even deflation. As the world works less, builds less, travels less, and consumes less, the decline in the price of oil seems to be the only bright light in a dismal landscape, relieving the pinch on the wallet that we all felt at the pump only a few months ago.
However, a presentation yesterday by Nobuo Tanaka, Executive Director of the IEA (Internation Energy Agency), paints a different and more worrisome picture. He compares our situation to one of driving a car, and suggests that we drive best when we keep our eyes further ahead where dangers may lie, permitting us to avoid them with foresight and advance warning. With such a longer term perspective in view, he warned his listeners that we continue to face a future of energy constraint, particularly when we consider the ongoing and dramatic decline rates of the world's largest oil fields. While our eyes have been focused on demand - which is softening in the expectation of an economic slowdown - the more important side of the story is production, which - he argues - is one of ongoing and inevitable decline. In spite of the current evidence of softening oil prices, he emphatically stated "the low price energy age is over..."
It's difficult to see now - if I may extend Tanaka's analogy, we're like a driver trying to swerve out of the way of obstacles in our immediate path, and so our eyes are neither further down the road nor on our rearview mirror - but there is a deep connection between our current financial crisis and the reality of peak oil, a connection that is now obscured by our sole focus on the economic downturn and the decline of the price of oil.
Peak oil will manifest itself not as the continuous rise of oil prices, but as a series of ongoing cycles and crises in which declining supplies - and higher prices - will create enormous economic stresses that will in turn lead to economic downturns as economic activity is no longer sustainable. Inflation will follow deflation and so on, leading one to observe perhaps not that the "low price energy era is over" so much as the era of price stability is over. Currently we are told that the current crisis arose due to the declining prices in the housing markets, but deeply related - perhaps even underlying - that decline were the rising prices of oil, the unsustainability of far-flung housing, the tanking of the American automobile industry (that had tied its fate to the prospect of low gas prices), and above all, the replacement of an American manufacturing economy (built on home-grown resources) with a service industry (relying on foreign resources and a global market and financial system designed to ensure their flow into America). Our giant financial Ponzi scheme began to be erected in those years following the American encounter with peak oil and the realization that, in the future, energy would be produced largely by foreign regimes. A vast monetary system was erected to ensure certain American advantages - particularly the pricing of oil in dollars - allowing us to begin a long-term process of off-shoring not only labor, but debt as well, as the world's appetite for oil was manifested as an appetite for dollars and the dollar-denominated instruments that allowed America to run up scandalous levels of debt that would have been impermissible to another nation. Our debt-based economic system was deeply and impenetrably linked to our own declining supplies of oil and the world's rising supplies; and when the world ran up against the upper limits of retrievable oil, the entire system began to unravel. The collapse of the financial markets really began with the encounter with worldwide peak oil.
The particularly nefarious part of this cycle is that it shows how the self-regulating market will actually be unable to redress these calamitous successions of commodity-based inflation and economically-distressed deflation. During the past year the high price of oil has sent a strong price signal for energy innovation as well as conservation; one could not pick up the newspaper without reading some call or plan for development of alternative energy and new fantastical behaviors such as "hyper-miling." Countless new projects were springing from paper to construction site, and massive investment was flowing into alternative energy development. With the economic collapse, many of those projects have been shelved, and those price signals have all but evaporated. Private funding for energy projects has stalled, and public funding is increasingly strained as it has been re-directed toward shoring up the basic economy. Investors are again confirmed in their view that investments in alternative energy are too risky, since - without a floor on the price of oil - there can be assurance that the development of energies that seem reasonable profitable with oil over $100 bbl. can be rendered a fool's bet nearly overnight.
When we work our way through this current economic crisis - as we will, if slowly and painfully - we will emerge on the other side again suddenly cognizant of declining rates of oil production and with the realization that we have again lost several years during which we should have - but were unable to - been planning for an alternative future. We will emerge with less oil being produced, and prices that will again skyrocket, likely reaching levels that will make previous highs look cheap. We will again curse the oil companies and the oil speculators (what ever happened to our animus against them? We only dislike speculators when they are making, and not losing, money), failing to understand that it is our own appetites and short-term thinking that is to blame. We will lurch again toward another economic calamity, with commodity-based inflation again creating unbearable economic stresses again leading to an economic downturn. This cycle will ensure that we are incapable of a long-term and sustained effort to develop alternative fuels and alternative habits, but will manifest itself assuredly in our confusion over our apparent lack of power and control over a world over which we were assured mastery. The market will self-regulate, but we will discover - perhaps too late - that its self-regulation is not necessarily to the advantage of human societies.
My small contribution: perhaps a first step is to cease using analogies involving automobiles. That may help us in achieving a truer and more fundamental form of long-term thinking...
UPDATE: Sharon Astyk takes the analysis a step further - noting that our current proposals to ramp up a massive green economy represents more of the same. Her conclusion:
"We can restrain ourselves, emphasize radical shifts in consumption, while also gradually and carefully using our remaining energy resources to build out renewables that can bootstrap us to a sustainable economy - and a sustainable culture.
"Or we can do what we’re doing - borrow like there’s no tomorrow, ignore the reality that tomorrow does always come, and ignore the vast elephant taking up all the space and air in our room, instead of talking about consumption."