The Less-Oil Economy

The Less-Oil Economy

March 4, 2007

A “mysterious seller” kept a lit on the gold market, so we will have a bit longer to wait before we see what the next market phase brings there. Stock markets had quite a selloff, however, and I suspect they are far from done.

In the meantime, there was an unusually informative post at that seems to have defined the bell-ringing of Peak Oil. It appears that Saudi production is headed downward from here, with production down about 8% Jan 06-Jan 07 even with the apparent addition of about 300,000 b/d from the Haradh III additions and an explosion in active rigs from about 18 in 2004 to 53 recently. The underlying decline rate (minus the Haradh additions) appears to be an alarming 14%! This could be explained as the natural curve seen after use of horizontal multilateral drilling, as whole swathes water out at once.

Most people seem to think of an economy as a sort of huge machine, and the biggest machine they typically have any experience with is their car. It is obvious that the car doesnπt run without oil, and less oil means that it runs proportionally less. Thus, less oil on a worldwide basis must mean the world economic machine must also run less, or something like that right?

Actually, economies run on human effort. They are expressions of cooperative human activity. In the past, most people were farmers and thus most people thought of the economy as something like a farm. Those with the most land and natural resources were the wealthiest. Then, industrial manufacturing became more prevalent and countries like Japan showed that you really didn’t need to have any natural resources at all to have a powerful economy. Today most people think of factories when they think of the economy, although manufacturing is less important these days than it was, just as agriculture is less important. Just as people discovered that you don’t need land to have an economy, they may soon discover that you donπt need all that much oil, either.

The purpose of an economy is to provide the things that we use. The end product is consumer goods, although there are many employed in various stages in between. If you want to understand an economy, you can just look at a typical household’s expenditures. The typical US family spends most of their money on their house and house-related expenditures such as utilities, maintenance, renovation, etc; autos, medical expenses, and education.

The purpose of the US economy today is basically to construct and maintain Suburbia. Suburbia is the physical manifestation of the economy, just as the body is the physical manifestation of the person.

Suburbia consumes lots of natural resources, including land, metals, wood, and so forth, and certainly a lot of fossil fuels. This has been OK because such things (as we saw in our recent commodities prices graphs) have been cheap. We may note, however, that an urban dweller consumes much less resources. There aren’t a lot of urban dwellers in the US due to the predominance of the automobile suburb, but it is not too uncommon in Europe, Asia and the rest of the developed world. We will use a typical Manhattanite as an example, since Americans have a clearer image of a Manhattanite than a Parisian or someone living in Seoul, although the following applies just as well to them.

These urban environments tend to be expensive, and often people flee to the burbs somewhat reluctantly as they find the burbs are cheaper. The urban environments are not expensive because they consume more natural resources. They do not. Their expense is due to other things, which we may generalize as “non-resource value.” These “values” are typically expressed in monetary costs, rather than real aesthetic worth, which produces funny outcomes. Two hundred years ago, everyone was a deer hunter, and probably enjoyed it. Today, you can spend $3,000 on a week of deer hunting, which previously had been so ubiquitous that nobody thought that it could even have a price.

I suppose my point here is that an economy can produce more “non-resource value” even as constraints limit the amount of resources consumed. The best restaurants serve just as much food, on a caloric basis, as the fast-food joints, the difference being the “non-resource value” provided by the chef. The chef provides this value not by burning petroleum but by honing and expressing his skills as a chef. It can be argued that if there were more “capital investment” in the form of chef training then there would be more “economic output” in the form of delicious food, which commands a higher monetary price and thus causes measured GDP to increase.

An environment of less natural resource consumption, through the rationing system of higher prices (the same system in place now), would probably be an economy of more “non-resource-value” and less “resource value.” It could be an economy that’s less about suburban consumption, and more about expressions of value that don’t require natural resource inputs. An opera singer is just as much a part of GDP as a construction worker.

A typical economist probably doesn’t think these things through very well, but they have a sense that they exist, which is why they say “the market will find a way.”

It may well be that higher prices for natural resources could mean more measured GDP even at lower outputs. The oil companies’ revenues have been going up even as oil produced as been going down. “But that’s just an illusion; certainly if the amount of oil produced goes down thenäyouπve got less right?” Hard to say. In late-19th century Egypt, there wasn’t much in the way of wood or fossil fuels, but there were mummies everywhere. The British built a railroad where the trains burned mummies — yes, the things now in museums — as fuel. Thousands of them. Today we look at such behavior as unimaginably destructive and wasteful. When we are past “peak copper” in the way that Egypt is now far past “peak mummies”, we may look at today’s use of materials in much the same way. I think we could run what amounts to a modern industrial economy with perhaps 10% of the copper used today, and recycling could provide most of that. It would look different that the economy of today, just as the trains in Egypt today look different than the old mummy-burners, but we may enjoy the same benefit as copper provides today — electric lighting, refrigerators, computers and so forth. To take one example, an LED desk light that uses three watts provides much the same benefit as a 100 watt incandescent bulb. Because it uses 1/30th the electricity, the copper wire that supplies that power can be 1/30th the cross-sectional area and serve the same purpose. So there’s a 97% reduction with hardly any thinking at all.

And you probably thought a 90% reduction was going to be hard.

If, for example, copper was 100x the cost it is today, or roughly the cost of silver, people would think that wiring a house with 12ga silver is totally insane, like burning mummies for fuel. They would use very thin silver wires and LED lamps, and they wouldnπt think anything of it. This is not “conserving copper,” itπs just not using copper, in the same way that nobody is “conserving silver” or “conserving mummies” because they donπt use it. Not using a wide range of natural resources may just not be that big of a deal. When the Manhattanite commutes from his Upper East Side apartment to Midtown, about two miles on the subway, he does not think he is “conserving petroleum.” He’s just not using it.

The economy of today can’t be sustained with, say, 20% less oil, but there could be “economic growth” with less natural resource inputs. By “growth” we mean, more generally speaking, positive evolution, not tons of steel produced. “Positive evolution” for the last two centuries has had an oil-burning theme, but in the future it may not. (I personally am looking forward to more good restaurants and fewer fast-food joints.)

This is a fairly optimistic sort of view. Population itself may pose an insurmountable problem at some future point — this “future point” likely being reached in this century. It appears that the Earth can comfortably carry about a billion people. The increase in population since then has been fueled, at some level, by natural resource consumption. Let’s be generous, and consider that two billion could be sustained, since we are all so gosh-darned smart these days. However, the Earth is quite a bit worse off than it was at the start of industrialization, so one could argue that not even a billion could be sustained.

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We might have had some funny virus problems on this site last week. It does not appear to have come from my computer, so maybe there was some sort of external attack? Plenty of mean-ass people out there these days.

Lastly, hereπs one final commodities chart, which was left over from last week.

The Less-Oil Economy