Physical things, like water, sometimes display startling and abrupt shifts in form. Apply heat to a pot of water. The water will get steadily hotter until it reaches the boiling point, and then something dramatic happens; the temperature stops rising and the water steadily turns to vapor, and disappears into the air. Something equally dramatic happens when water freezes. Subject to cold enough temperatures, water’s temperature steadily decreases, until it reaches the freezing point. Then there is no further temperature drop until the water freezes. At that point the water, now effectively transformed into the mineral, ice, continues to get colder. These sorts of shifts, or phase changes, are well known to physical scientists, but beyond the professional experience and training of most economists and social scientists.
But there probably are phase changes in economic and social systems, and it looks like we’re in the middle of one now. The growth of cheap, concentrated energy in the form of petroleum that has underpinned economic growth for generations is gone. The continued failure of mainstream economists and politicians to grapple with understanding this is becoming unconscionable.
Take a look at this chart, from an article that just came out (Murray, James and David King, 2012, Oil’s tipping point has passed, Nature, 481, 433-435). Oil economics changed markedly around 2004-2005 from elastic to inelastic supply. It seems highly unlikely that this change can be attributed to anything other than production of crude oil hitting a ceiling at about the same time. The idea that instead this marked change is due to some sort of political attitude shift that suddently occurred during that short period seems far-fetched.
The abrupt shift in behavior of the oil market looks a lot like a phase change. This shift tells us that things are different now. Things are so different that all bets are off as to the future behavior of the price of oil and the systems that have been built on the ready availability of inexpensive and steadily increasing quantities of it. It seems inevitable that the vast array of systems of the industrial world that depend on this fuel, including, especially, transportation, will go through a phase change of their own, with consequences that are perhaps nearly impossible to predict. To continue the analogy with water; if you’ve spent your whole life understanding how water behaves, you may have a hard time understanding steam.
Those in a position to help decide the future of economic and social systems have to understand that the old order has changed if they are to be able to have a chance of preventing all hell breaking loose. It seems certain that the economy cannot continue to increase its production of traditional goods and services, and the jobs that rely on these, now that the supply of cheap oil is no longer increasing. It also seems certain that we won’t be able to “grow our way out” of this recession/depression and that we’ll have to start actively looking at how a non-growing, steady state economy will function and how to get there.
Mike, this is a fascinating although disturbing post. I'm hesitant to draw conclusions on long-term trends from short-term data, but the preponderance of predictions of "the end of cheap oil" combined with the consistent data from 2005-present (the current spike in prices being particularly relevant) makes me a believer. In particular, I see the emergence of China and India as major consumers of fossil fuels creating a long-term upward pressure on demand & prices at a time when demand and prices have been high enough for long enough that there can't and won't be an increase in supply to match the increase in demand.
ReplyDeleteThanks for your very thoughtful insights! -Glen
Thanks for the kind words Glen. It seems likely that we're seeing some "demand destruction" already in the U.S., as some just can't afford to drive as much, for example, as gas approaches $4/gallon. In India and China, however, demand is still increasing even in the face of more expensive oil. This is probably at least in part because they are more efficient in their use of oil. (For example, they aren't burdened with a SUV-heavy fleet of motor vehicles.)
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