Saturday, February 14, 2009

Part 4: Economy vs. Reality

Economies are expected to grow on an annual basis. Economic growth is required because the world’s population continues to increase and every new person needs food, housing, transportation, health care, education, transportation, entertainment, consumer goods and an occupation. Lack of economic growth results in unemployment, disease, poverty and despair. At least this is what the economists and politicians tell us. For now, let’s assume that it’s true.

We have already seen how energy consumption is directly correlated with economic growth. This relationship exists because manufacturing, agriculture, transportation, resource extraction and even service industries all consume energy for their operation. If the amount of energy consumed for a given product - let’s take a new house for example - is constant, then increasing the number of houses constructed in a given year by 10% will increase the associated energy expenditure by the same percentage.

Let’s summarize:
Economies need to grow. Economic growth is powered through increasing energy consumption. In our industrialized societies, continually increasing energy consumption requires an virtually unlimited supply of fossil fuels.

What happens to economic growth when the available fossil fuel supply can no longer meet the increasing demands?

This same question was asked in graphical form by the people at Their attached graph shows the historic increase in world-wide oil consumption from 1983 to 2005. Several forecasts are provided for daily oil production rates from 2005 to 2030. The first projection, shown in purple, reflects the view of the US International Energy Administration. They based this forecast on a known relationship between economic growth and oil consumption. Economists had predicted that the world economy will continue to grow in a linear fashion. Oil consumption must therefore increase in the same linear manner. If oil consumption increases then oil production rates will inevitably increase at the same rate to meet the demand. Nothing difficult about this - Except.....

The other forecasts of predicted oil production rates were created by a thorough analysis of geology, reserve estimates and known rates of production decline in various basins. While there is some variation in the assumptions and some uncertainty in the data, it is clear that these three independent forecasts predict that oil production will peak somewhere between 2005 and 2011. Once peak production is achieved, production rates will decline.

What does this mean for economic growth?

Current economic projections for the year 2015 will require daily oil production rates of 100 million barrels of oil per day. Realistic forecasts estimate that actual production rates will be somewhere between 65 and 80 million barrels/day. These production rates are significantly lower than the 85 million barrels produced in 2005.

How can the world-wide economy - at least as measured with current metrics - possibly continue to grow?

I suspect that our choices look like this:

a) We will see a massive reduction in food supply, employment, housing, and manufacturing.
b) We will get a lot more efficient in the way we use energy to power our standard of living.
c) All of the above.

One thing is for sure. The status quo is not an option.

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