Racing Against Time: Peak Oil = Peak Economy

This post is a contribution to Honda’s “Racing Against Time” thought leadership series.  Chris Martenson was selected to provide a unique perspective on how we should approach the discussion of oil as a finite energy source.   During the first week of October 2010, five individuals provide their own thoughts on the subject. These independent contributors were not compensated for their participation and as such their views are their own and do not necessarily reflect those of Honda.  Details and links to what others are saying about “Racing Against Time” can be found at www.facebook.com/Honda.

Peak Oil will result in 'peak economy.'  Once it arrives, nothing will work quite the same way again.

Let me explain.

The concept of “Peak Oil” is simple enough:  Oil is a finite resource.  Someday, no matter how hard we try, we will hit a maximum rate of production.  From that time on, we will see less and less oil coming up out of the ground.  What Peak Oil refers to, then, is not "running out" of oil, but the fact that we are going to hit peak production sooner or later.  All of the data suggests that "sooner" is a better candidate than "later."

By itself, the concept of having to get by on just a little bit less oil each year seems to be manageable enough.  Perhaps we can develop more hybrid/electric cars, wind/solar farms, and other technologies that can help us use energy more efficiently.  I will applaud these technologies as they become more widely available, but basic math indicates that they cannot possibly bridge the energy gap being left by retreating oil supplies fast enough.  So then what?

My particular concern, and the focus of my writing and speaking, is the role of energy in creating and supporting the economy upon which we all depend.  The short version of the story is this:  Our economy utterly depends on oil to function.  And for the first time ever, oil production is declining.  We are now racing against time.

Money & Growth

To explain why this is so important, we should begin with an understanding of how our monetary system operates.  Stay with me here; I’ll keep this quick.  The critical fact is this:  All money is loaned into existence.  All of it.  Everywhere.  Every last dollar (or yen or euro or…).  No matter what color your money is, or what colorful pictures it has on it, in order to belong to the international community, the story is the same.  Your banking system must create money and debt at the same time.  Whatever we might think of such a system, it is what we have, and understanding its design will help us assess how the future may unfold.

All you really need to know about debt-based money is this:  It demands growth.

With constant economic growth, our money system is relatively happy; without growth, it becomes utterly despondent.  Think of your own finances.  The more your income grows, the easier it is to meet your debt payments and afford the things that give you joy in life.  If your income takes a hit, you still need to make your debt payments, and if those are too large, it’s ramen noodles for dinner.

Without constant economic growth, preferably in the range of 3% or better, the debts of countries like the US begin to default, new loans are withheld (limiting future growth), the entire financial system suffers enormously (even threatening to collapse), and gobs of wealth are destroyed.  Sound unlikely?  It shouldn’t, as this is what most financial professionals call “2009."

That was the year in which global economic growth slipped by a mere -2%, yet that was sufficient to make it feel as though the economic cart had lost a wheel, toppled into a ditch, and exploded in flames, before the ditch itself was lost over a cliff in a landslide of mud and debris.  Okay, perhaps I exaggerate slightly, but the point that I’m trying to make is this:  Had the world economy grown by 2% instead, it could have avoided suffering through a systemic banking crisis and would not have had to spend tens of trillions of dollars propping up a shaky edifice of 'too much debt.'

That’s the difference between growth and shrinkage in our world economy.  Night and day.  Life and death.  If this strikes you as a rather fragile and unsustainable way to construct an economy, then you are not alone.  After all, how can anything grow forever?

The key takeaway here is this:  Our economy must grow in order to function.

Oil & the Economy

Very few people grasp just how much our economy really depends on the "master resource," energy.  Of all sources of energy, the undisputed king is petroleum.  Besides making a lot of very useful things from oil – plastics, fertilizers, pharmaceuticals, and so forth – oil supplies nearly all of the energy that moves things around (95% of it, to be exact).  Try to imagine our current globalized economy, with its long supply chains (3,000 miles for salads and 30,000 for computers), functioning without oil.

So our economy must grow.  To keep thing working smoothly, we need to grow or build and sell more salads and computers each year - which means, unequivocally, that we need more oil.  Every single country that wants to enjoy a better standard of living requires oil.  And although China and India are grabbing the headlines, oil consumption is rising in nearly every country.  This everyone can see.  But what few really understand is the severe risk that our growth-based economy cannot grow without increasing oil supplies, and, most critically, that our financial system itself may simply cease to function well (or at all) without that growth.  That is why Peak Oil is such a threat to our standard of living.

For more on these concepts, I recommend watching chapter 17b Energy Budgeting and 17c Energy and the Economy from my free, on-line tutorial The Crash Course, in which I spend more time developing this line of thinking.  Right now, let's move on in agreement that economic growth requires expanding oil supplies.

Time

Peak Oil used to be derided as crackpot theory constrained to a few retired and marginalized geologists.  But not anymore.  Recently, numerous institutions and government bodies have disturbingly concluded that Peak Oil, or at least the outstripping of supply by demand, may occur as early as 2012, and possibly as late as 2020, but with an emerging consensus of around 2014-2015.  No matter which estimate we believe, they are naught but the blink of an eye given the enormous changes (and investments!) that we will have to undertake if we want to smooth out the transition process.

We are truly racing against time.

In every technological solution seeking to offer the promise that we can just continue to grow as we have in the past without making any changes to our lifestyles or expectations, I find a chasm between the hopes and dreams of the proponents and the realities of the time that it would take to build these solutions, the scale of the projects involved, and the costs associated with them. Time, scale and cost; these are very real issues that must be addressed if a proposed solution seeks to be credible.

For example, I frequently meet people who have pinned their hopes on electric cars.  While I have high hopes, too, I note that there are far too few electric cars on the roads today to offer any meaningful contribution to our transport needs should Peak Oil arrive in only 3-5 years' time.  Even if we were to build 50,000,000 electric cars per year starting right now, it would be ten years before half the cars in the world had been replaced.  And this does not even factor in the implied massive upgrades to the electrical grid and power stations, or the lithium needed for car batteries.

The Future & What You Can Do

Make no mistake; given the above, there is another energy shock in our future.  It will be larger, longer-lasting, and more profound than the last one.  I see no way of avoiding it at this point.

The sooner we, our companies, and our countries begin the process of adapting to a world of less (and vastly more expensive) oil, the better.  It’s not a matter of conservation for its own sake; it’s a matter of conserving because it is the prudent thing to do.  Taking steps now will allow us to mitigate the risks that we face and take a gentler path to the future than we otherwise would.  And the more time we save, the more time we give ourselves to make mistakes and seek intelligent solutions.

I have created a guide to help you get started on your way to preparing for a life of increasing energy scarcity.  It has been developed specifically to address the question most people ask after learning about the Peak Oil threat: “What Should I Do?”  There is also a wealth of information and advice in the community forums at ChrisMartenson.com.  Whether or not you use these particular resources, I urge you to begin taking action to develop your personal resiliency.  We still have time – let's make good use of it.

And as unlikely as it may sound, there are many things to be grateful for in this story. Our first opportunity is to begin to better appreciate what we have.  I am grateful for the lifestyle that I enjoy right now, for airplane travel, 24/7 electricity, the Internet.  All of these are fantastic luxuries unimaginable by even my own grandmother as a child.  Who knows what my own grandchildren (yet unborn) will experience?

We have the opportunity here to reexamine the way in which we live our lives, to consider the types of work that we will do and how we will value that work, and to potentially fashion lives that have a ‘lower’ standard of living (as measured in excess 'stuff') but a far higher quality of life.  My own life is living proof that this is indeed possible.

The most important asset you have is time.  Use it wisely.

Chris Martenson runs a financially-oriented website and subscription newsletter service that analyzes macro trends in the economy, energy, and the environment, located at http://www.chrismartenson.com. His organization provides exclusive consulting services for a limited number of companies and private individuals. A more detailed version of his views are contained within the enormously popular and free on-line video series called The Crash Course, found at http://www.chrismartenson.com/crashcourse.

Note to my readers:  I was very impressed with the video produced by Honda to introduce this "Racing Against Time" series.  You can find it here: http://dreams.honda.com/#/video_ra  (if you 'skip to the main feature' you'll get there slightly quicker).  I am extremely impressed by how they have combined corporate philosophy, strengths, and vision into a powerful stream of words and images, and I have not recently seen better.  My wife almost cried; I gave a fist pump.  Kudos to everyone involved for striking such an exceptional balance between vision and urgency.