Saturday, October 20, 2007

Peak Economy

Robert Hirsch was the lead author of a Department of Energy report commonly called "The Hirsch Report," otherwise known as "Peaking of World Oil Production: Impacts, Mitigation, and Risk Management." Published in 2005, it is a frank public and scientific acknowledgment of imminent worldwide peak of oil production, and is the most significant single piece of evidence that the U.S. government is aware of "Peak Oil." Hirsch's report was one of the first "mainstream" acknowledgments of the phenomenon of peak oil, one that has begun to be more widely publicized by more of the mainstream press, even if the vast majority of Americans still are wholly unaware of a drastically different future.

Recently Robert Hirsch gave an interview at the annual meeting of the Association for the Study of Peak Oil, which met a short while ago in Houston, Texas. His words should be heard and pondered: while he is not an alarmist, his account is deeply sobering. First, answering a question about the impact of peak oil on the economy, he answers that peak oil will result in "peak economy," with the likelihood of annual economic decline between 2-5%. The impact of an ongoing negative growth economy in a society that is premised upon ongoing and permanent growth will be catastrophic. Everything we assume about the future would change. Few jobs, few bank loans, difficulty providing goods and services (including food), shrinking numbers of college educations, the evaporation of our national wealth, declining levels of research and innovation across the board, no retirement accounts, the decline of the middle class and devastation of the lower classes, etc.

In answer to a question whether "peak oil" will occur as a gradual plateau or a sudden and drastic decline, Hirsch points to the high likelihood of increased resource nationalism (a phenomenon we are already witnessing around the world). He notes that private oil companies no longer control petroleum resources; national companies do. As awareness of peak oil spreads, there will first be a further spike in oil prices and a growing inclination of resource-rich nations to hold their remaining oil in reserve for domestic production and in expectation of further rises in price. This response will, of course, only accelerate and deepen the crisis.

Hirsch foresees the likelihood of gas rationing as a reactive answer to our current inability to begin cutting back our consumption. Nature will exact her price, whether we are willing to pay for it significantly now or drastically in the near future. Our techno-optimists tell us that technology will come to the rescue. The nice thing about holding this position is that no one has to act responsibly or like an adult. It was once the case that adults acted with prudence, awaiting not the best case scenario but preparing for the possibility of a worse. Our liberals and conservatives alike tell us that technology will save us, but mark my words, when TSHTF they will be the first to blame someone else: the Saudis, the Iranians, the Russians, Hugo Chavez, you name it. Our impressive military will be called upon to secure our vital national interest, wherever it might happen to be buried. And at that point no one will be able to suggest that perhaps we have ourselves to blame, because we did nothing when intelligent but obtuse people knew what was coming at the end of our wild ride down Sunset Boulevard.
You can access the podcast here. It could be the most important thing you do today.


Anonymous said...

Thx for posting this, very interesting. Points of disagreement:

Few jobs

Actually, there should be more jobs when fossil fuels start peaking hard - labor will have to replace some engine power. Farms, for example, will become more people-oriented and less machine focused, composting instead of fertilizer will make a comeback, etc. These are all labor intensive, and encourage small farms. However, jobs of course will pay less and we will all be less wealthy (that might be what you are saying). But it's certainly not doomsday, and we won't be "poor" by any definition. We have coal and nuke, and can easily conserve about 1/3 of our energy use with no loss of wealth just by using smarter (oil is just so cheap we don't bother right now).

difficulty providing goods and services (including food)

Well, not really, they will just be more expensive. Like taking a pay cut, we will just tighten the belt. Sound like a positive move for the wealthiest people in the history of the world.

shrinking numbers of college educations

Thank goodness here. University has long been a total waste of money, and home school/testing for results will start to replace this colossal waste of money.

declining levels of research and innovation across the board

Not so much. Smart people are the real source of ideas and innovation, not energy. Sure, cutting into our wealth will slow it, but only somewhat. This IS more of an issue due to "peak people," though. Population drop in research-heavy nations doesn't bode well for the future of research. We've had "peak people" in these cultures for some time now, and for the whole world it hits around 2050 according to UN. Birth control in countries that have history of innovating (and have high-IQ averages) is a much greater threat to future research than peak oil (Japan/Korea TFR=1.3, China TFR=1.7 , Europe TFR=1.4, US TFR=2.0).

no retirement accounts

Come on, we won't be that poor! Those accounts will just pay less. And it sounds like a good idea to me, get the grandparents to help out back home instead of golfing in Florida.

decline of the middle class and devastation of the lower classes, etc.

Don't see this either. There
should be more middle class, less upper class, and both would be less wealthy. Wealth in the sense of "class" is relative. Middle class just defines how the wealth is distributed. And when everyone starts getting squeezed, look for the voters to redistribute wealth via taxes. The New Deal and all that. Remember, labor should make a comeback under peak oil.

In summary, the only issue I have with this post is the assumption that oil just "peaks" and everyone keels over overnight. No way. The hump of the peak is long, and conservation kicks in as the price elevates. Give me $500/bbl oil and I'll show you a hullva lot of conservation and energy innovation. No, it's most likely a long, slow, non-alarmist road, people migrating back to city-centers, smaller homes, less consumption...IOW, a better life :-).

But hey, that makes for a boring blog post. I've been meaning to read this report for awhile, so thx again.

Oengus said...

There's another angle for looking at this. The passing of "peak oil" could ultimately send the GOP the way of the Whig Party—that is, on a one way trip to Oblivion.

I think Mr. M_David has some good points. As he says above: "And when everyone starts getting squeezed, look for the voters to redistribute wealth via taxes. The New Deal and all that. Remember, labor should make a comeback under peak oil."

Well, to me, that doesn't sound like a big resurgence for the Republican Party. If anything the GOP is glued to the idea of ever-increasing tax breaks for the wealthiest members of society to help make sure that they stay that way (i.e., The Good Old Laffer Curve Economic Voodoo). But as things get tighter for us grimy plebeians—as we come down to having to decide between spending our money on gas to get to work or spending it on food for the kids—we may no longer find the standard Republican boilerplate arguments quite as convincing as they used to be.

Black Sea said...

I wish I could be so optimistic.

Perhaps, in 50 years, our economic activity and standard of living will look more like those of the year 1900 than of the year 2000. However, in 1900 the US population was 75 million and the global population 1.65 billion. In 2050 we're going to have to feed and support a whole lot more people - a global population of 9 billion - while tapping a dwindling and increasingly expensive pool of fossil fuels. And these fossil fuels aren't just used for transportation, but are, for example, used in fertilizers as well. I suspect that we will squeeze everything out of nuclear that we can, more due to lack of alternatives than anything else.

On top of all this, there will be unimagininable dislocations as people accustomed to and trained for office work and a suburban way of life find these environments, for economic reasons, increasingly closed to them.

It's hard to anticipate what this sort of profound shift in human expectations will do to our society. In ways that most of us aren't fully aware of, we're conditioned to expect improvement, or at the very least stability, in so many areas of our lives. A shrinking pie is going to be very difficult for most Americans to swallow.

On the other hand, I'm known for my pessimism (I've been expecting the modern world to come crashing down around me since I was in elementary school), so I'll hope for the best.

Anonymous said...

BTW, I think your link to the audio interview is busted.

After finding it and listening, I think Hirsh is a smart guy who makes the same mistake most economists do: looking at it from a single direction. Hirsh looks at PO from a production/political angle, while economists look only from a resource/technology angle. Methinks one needs both views to get the whole truth.

For example: to believe that the techno-optimists tell us that technology will come to the rescue comes from "irresponsiblity" is a little rough. It more likely comes from humility to history. It's a mighty bold fellow who claims economic growth will contract for any sustained period. It has never happened in the history of humanity. Since the first tools were built by primates millions of years ago, the historical record shows a relentless, never-ending growth. From man's first toolset, we then see better and better tools invented, then new technologies like the wheel, and so on and on. Knowledge, and our standard of living, has grown except for minor blips for more than a million years based on archaeology and recorded history.

So it's very reasonable to assume people/governments/companies (once they start suffering energy shortages) will begin to work like the devil to find replacements. Need is the mother of all invention. Think about it - we currently have biotechnology, computers, potential conservation technologies, increasing material science, and even possible energy replacements like fusion. Heck, many information technologies alone can make transportation less and less important as well. IOW, the stone age didn't end for lack of stones, and the oil age will end with a myriad of adjustments rather than by running out of oil. And these adjustments don’t necessarily mean a lower GDP in the long run (violating all of human history). Watch for something new.


One really educational part of the Hirsch audio for me (that I foolishly never thought of yet) is his guess that oil producers will start holding back their reserves once peak oil becomes clear to them. This is a really good point, and if this does happen, we will get a “fake oil shortage” really, really fast. The natural "long process" of peak oil will not be long, rather, it will be man-made and thus sudden and scary. It would be like a super-OPEC from the '70s, and producers could benefit by doing it - they could double the price, half the production, and make the same cash and keep more of their precious oil. It's scary, and if Saudi starts getting too far past peak, this will most certainly happen.

But it this would be good for the long term - force us to get serious about change and change the culture overnight - painful short term, better long term prospects once we start learning to live with more expensive energy.

Anonymous said...

As awareness of peak oil spreads, there will first be a further spike in oil prices and a growing inclination of resource-rich nations to hold their remaining oil in reserve for domestic production and in expectation of further rises in price. This response will, of course, only accelerate and deepen the crisis.

Any thoughts on the likelihood that those resources being...reallocated? I wouldn't be terribly surprised, for instance, if China made a grab for Siberia. And frankly, Mexico would be completely incapable of retaining it's oilfields in the Gulf if we ever decided we needed them more.