We’ve been getting a little refresher recently on what an economic contraction feels like. Canadian figures show that our GDP increase dropped from 2.7% in 2007 to .5% in 2008. The US economy contracted by 5.9% and Japan felt a staggering 12.7%. We can expect further contraction in 2009 based on job losses and declining consumer confidence.
The optimist in me believes that the economy will recover as the toxic loans and derivative products are spun out. In 2010, confidence could return and people may open their wallets for purchases. But is there a perfect storm waiting for us after that?
Nassim Nicholas Taleb describes black swan events in his book entitled naturally “The Black Swan”. World War I or the September 11 attack, are examples of how unexpected events can dramatically change human history. Taleb suggests that a black swan is a complete surprise but afterwards is ‘explained’ by hindsight. Wouldn’t it be nice to predict a perfect storm / black swan event and hopefully divert the course of history.
Fact 1 – The population of the world is increasing at slightly over 1% per year or roughly 80 million new inhabitants crowding onto the planet every year. These people all want the good life with a car and other typical consumer items. Greater population with level or declining oil production means 1% more competition for that oil each year.
Fact 2 – The president of Total Oil, Christophe de Margerie recently predicted that world oil supply will peak at 89 million barrels per day, a rather astounding admission from an industry source. A significant number of analysts think that production has either peaked or will in the next few years. At the very least, everyone agrees that the era of cheap oil is over, with new offshore developments costing between $60 to $80 dollars a barrel. Although $40 oil helps our present economic woes, the low price forces cuts in oil discovery and development budgets and also renewable energy projects.
Over the last few years production capacity has flattened out at roughly 86 million barrels / day so his views seems closer to reality than most oil company leaders are willing to publicly admit. The International Energy Agency now predicts a production peak 10 years earlier in 2020. Expect further adjustments to their prognostications are reality shakes their irrational exuberance.
So why does world oil production matter anyway? Very simply, oil equals economic growth. Without oil, there is no economy. We can print all of the dollars we want, but they won’t power a car or a backhoe, or a ship to deliver goods around the world, unless oil is available and at a reasonable price. Declining oil means economic contraction with higher oil prices – the worst of all possible worlds.
A possible black swan starts after an economic recovery in 2010 when oil demand recovers and supply tightens. By 2011 a rapid price spike similar to 2008 occurs. The economy weakens again and the oil price slips briefly. Supply, weakened by under-investment and natural depletion, no longer meets demand. This cycle of spikes and economic slippage proves fatal for our economy. Our growth economy changes to a continual decline economy. Further stimulus programs are out of the question as no willing lenders such as China can be found. Our 2009 stimulus funds were spent on frivolous issues like four lane highways.
As with any sad story, there is a happier version where the wise leader directs and encourages a transition to a sustainable localized resilient community. Significant investment is made in localized food production and manufacture of goods. Conservation of energy in homes and business is made a priority, and shifts off-oil to other renewable supply is promoted.
Is it already too late to save our society? The list of missed opportunities is endless. The Lower Churchill hydro project would take six years. Photovoltaic cells won’t be ready for prime time economically for several years. The present rate of retrofitting our existing homes could take 50 years. We don’t even insist on an energy code for new buildings.
England now requires that all homes being sold have an energy performance certificate and by 2016 all new homes must be zero carbon.
In the courtroom drama “A few good men”, the lawyer Tom Cruise interrogates the Colonel, played by Jack Nicholson shouting, “I want the truth.” Jack responds “You can’t handle the truth.”
Are we ready to understand a truth that globalization without adequate oil is almost impossible? Unless we’re ready with sailing ships, nuclear powered or coal burning ships. Approaching is the perfect storm of population growth, energy decline and economic fragility, but our leaders won’t tell us the truth or help us get ready. Perpetual economic growth requires increased supply of oil. That party is over.
Could we adapt prior to a “declining oil / permanently contracting economy” black swan and avoid the end of our modern society? Maybe. Try renewable energy and extreme conservation. If spent wisely, stimulus funds or routine capital expenditures could begin that transition. At the moment, only Barack Obama “gets it” to the extent of spending billions on rail transit. For Canadian politicians like Stephen (energy superpower) Harper, it’s just business as usual. Energy leadership in New Brunswick is equally unimaginative and bleak.