November 17, 2009
By Charles Cresson Wood
Most articles appearing in business newspapers and magazines implicitly assume that economic growth will continue in the years ahead. This assumption is widely held by economists, but is based on a fundamental misconception about limited resources. This doctrine holds that the free market (whatever that is, because we do not have a truly free market anywhere in the world today) will find a way to resolve all problems, and will then efficiently allocate goods and services. This flawed doctrine assumes that resources are perfectly substitutable for one another. For example, if we run short on petroleum, then we’ll simply use coal-to-liquids instead.
As a technology risk management consultant who has for decades specialized in the ways that the market does not adequately resolve significant technical problems — such as personal privacy — I offer a few data points. Many people are already intuitively getting that the old-fashioned “growth forever” viewpoint is unsustainable. The new reality is grounded in the numbers not from economists and politicians, but from geologists, engineers, and scientists.
The pace of economic growth that we experienced over the last few decades will markedly slow and later decline because the production of 50 important non-renewable resources has already peaked in the US, and is now in decline. These resources include bauxite, copper, iron ore, tin, zinc, magnesium, phosphate rock, and potassium. They also critically include petroleum. Future economic growth is dependent on the abundant and relatively inexpensive energy to which we have been accustomed. According to the US Energy Information Administration, worldwide conventional petroleum production hit a plateau, around 74 million barrels per day, and has not markedly increased since 2005. Note that the price ran up to $147/barrel in July 2008. In spite of this much higher price, producers were unable to bring more oil to market. This contradicts a mantra of classical economists, who insist more petroleum will be brought to market if the price increases.
Yes, tar sands, oil shale, and other types of unconventional oil are ramping up their production, but the supply provided thereby will not be able to adequately compensate for the markedly declining supplies of petroleum. There are several reasons for this — most important is the fact that future oil production will be at a very much higher cost than production has been in the past. Thus the cost to produce one barrel of oil via tar sands, is much higher than it has been to produce one barrel via traditional drilled oil wells. Shell reports the energy required to produce one barrel of oil from tar sands requires one third of what is returned thereby. In other words, 1 Btu invested returns about 3 Btus in oil. Meanwhile, for each 1 Btu invested, many traditional oil wells are now returning 10 Btus. But even this is way down from the conventional oil equation in which 1 Btu invested got 100 Btus in return, a situation common half a century ago. So in the future there will be a natural tax on each barrel produced and this tax will increase over time. At some point, even though great volumes of oil may still remain in the ground, it just won’t make economic sense to extract that oil.
The rapid expansion of modern industrial economies has been enabled by relatively inexpensive energy, most notably petroleum. China isn’t striking a bunch of long-term deals with worldwide oil producers without reason. Petroleum now provides about 50% of America’s energy, so increasing scarcity and increasing prices are going to have a giant economy-wide impact. For example, the globalization trend will soon yield to a localization trend, in large part because transportation will be so much more expensive.
Meanwhile most business models don’t take these changing realities into consideration. The airline industry looks like it will be an early casualty of this trend. Air travel in the years ahead will be reserved, for the most part, for the very wealthy, the politicians and the military. Likewise, air freight will become increasingly expensive, and many current air freight shipments will instead go by boat and rail (the latter two having markedly lower costs per mile). It is no wonder that Warren Buffet has invested so much money to buy Burlington Northern Railroad! He seems to appreciate the trends and some of their implications. But does your business? It’s time for all business people to seriously question whether the business model their organization uses is viable in light of this new energy supply reality.
Charles Cresson Wood is a technology risk management consultant with Post-Petroleum Transportation in Mendocino, California. He is the author of “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.” He specializes in the strategic planning, risk assessment, and contingency planning related to both peak oil and climate change.