Bill Clinton’s campaign used this catchy phrase, among others, to defeat President George H. W. Bush in the 1992 presidential election. Bush had the misfortune of being president at the beginning of a recession, and Clinton’s campaign didn’t let him, or American voters, forget it; Clinton convinced enough Americans that he could turn things around where Bush had failed to depose the incumbent President. It’s no accident that presidential hopeful Mitt Romney talks at length about his recession-busting strategies as he campaigns against incumbent President Barack Obama. I trust the upcoming 2012 election and its aftermath will be abundantly entertaining.
On that note, let’s take a closer look at our recession. Figure 1 illustrates how, from 1950 to 2007, inflation adjusted per capita Gross Domestic Product (GDP) in the United States generally increased. GDP is an estimate of national income, and dividing it by population to get per capita GDP yields a reasonable estimate of the average American’s personal income. Throughout 2008, though, US per capita GDP went into a tailspin. Although per capita GDP rebounded since 2009, we have yet to surpass the ‘peak’ seen in the final quarter of 2007. I’m of the opinion we never will.
I could go on at length about outsourcing manufacturing jobs, greedy businessmen and corrupt politicians, but these are all red herrings, distractions from an underlying cause. That underlying cause is energy depletion. The purpose of this essay is to clarify the link between energy depletion and economic performance, and to back up my claim that we may never see US per capita GDP rise to the level it reached before the most recent recession. This essay is not all doom and gloom, however; it will end with a discussion that puts our energy and economic conundrum into a broader perspective that will hopefully empower and motivate readers.
GDP is a measure of the dollar value of all goods and services bought and sold within a defined region. These goods and services don’t materialize out of thin air, they’re made by someone, often using machines. The machines we use to manufacture products require fuel, such as diesel or electricity, and require energy to build and maintain. Human labor requires food, which, in our modern industrial agriculture, requires fuel to grow. Fuels also don’t materialize out of thin air, they’re made from energy resources such as oil, natural gas and coal, and these energy resources are the real foundation of our economy. Without energy resources we have no fuel, and without fuel man and machine sit idle and can’t produce the goods and services that, when sold, are recorded as GDP. GDP is built on the transformation of energy resources into fuels and the use of those fuels.
Figure 2 illustrates the most important energy resources in the United States: oil, natural gas and coal. Oil is refined to make transport fuels like gasoline, diesel and jet fuel, and some of oil’s refined fuels are used for space heating and electricity generation. Natural gas is refined for use in space heating applications, and is also important as a fuel for the electricity sector. Coal is primarily used to generate electricity. Oil and natural gas are also used as feedstock by the chemical industry, although those uses are not energy-related. Transport fuels’ importance in our global, mobility-dependent economy drives oil’s dominance in our energy mix, as we can’t refine usable transport fuels from other energy resources at a reasonable cost.
Since energy resources power our economy, their prices have powerful economic influence. Figure 3 shows how most major recessions in recent US history are correlated to periods when energy prices, and therefore consumers’ energy expenditures, increased. When consumers’ spending on energy remains constant or declines, the economy chugs along fine, but when energy prices increase and force people’s energy expenditures upwards, other areas of spending fall (or consumers take on debt that must be repaid with future spending). When non-energy spending falls, businesses outside of the energy sector see lower revenues, and eventually must lay off workers to balance their bottom lines. If people start losing their jobs, public confidence falters, people tighten their spending habits to brace for the worst, banks stop lending, and the economy slides into a recession. Sound familiar?
I began this essay by noting the now famous “It’s the economy, stupid!” phrase from former President Clinton’s campaign. This phrase served him well because the US was gripped by a recession that emerged on the tails of a modest oil price spike in the early 1990s. In the previous section I expressed my doubts that inflation-adjusted per capita GDP will ever reach 2007 levels again. As economic growth resumed in late 2009 after being in a tailspin for over a year, oil prices also began rising and by the end of 2011 had surpassed $100 per barrel. As oil prices rose, fuel prices followed suit as have consumers’ energy spending, and now we’re at the cusp of another downturn driven by another period of rising energy expenditures.
Hundreds of millions of years ago, when the Earth’s climate was much warmer than it is today, small aquatic plants and animals proliferated in warm, shallow lakes and seas. When they died, they sank to the bottom and were buried in sediments. If these sediments lacked oxygen – which was likely as decomposition easily depletes oxygen in shallow, warm waters – they failed to decompose and accumulated, making the sediments unusually rich in organic material. As these organic-rich sediments were buried deeper and deeper beneath the Earth’s surface, heat and pressure ‘cooked’ them into what we recognize today as oil. These microscopic critters were fueled by sunlight, either directly or indirectly, so oil is nothing more than a vast stockpile of ancient sunlight stored in the Earth’s subsurface. Natural gas shares similar origins to those of oil, and coal began as wetland plants that weren’t buried as deep. Oil, natural gas and coal are still forming within the Earth’s crust today, but the rate at which we’re extracting them far exceeds their rate of formation. For all practical purposes, they are finite resources.
When scientists realized that the fossil fuels oil, natural gas and coal were finite, they naturally began pondering what these resources’ extraction profiles will look like over time. The earliest article focusing on fossil fuel depletion I’ve so far found was published in 1925, but the science of fossil fuel depletion is most commonly associated with geophysicist M. King Hubbert who, in 1949, postulated that fossil fuel extraction rates would follow a bell-shaped curve as illustrated in Figure 4. According to this model, fossil fuel energy resources will enjoy a growth stage during which their extraction rate rises, delivering more and more energy to the economy they support. Following this growth phase a peaking phase occurs, typified by the emergence of constraints that hinder further supply expansion. Eventually the decline phase begins and extraction rates fall to zero as recoverable resources are exhausted.
The bell-shaped curve shown at left in Figure 4 is a stylized model of a region’s extraction curve. Many researchers have attempted to use this model to predict impending global oil peaks by estimating a region’s recoverable oil resources (the area beneath the curve) and assuming that the peak will occur when half of these resources are extracted. Historical statistics (including those from the United States) demonstrate that extraction curves are rarely symmetric, suggesting that using such a simplistic model may lead to erroneous predictions. Nonetheless, the United States’ oil extraction profile typifies the growth, peak and decline phases of the cycle, and many other countries – including Mexico, the United Kingdom, Norway, Australia and many others – show the same pattern.
The potential for global or regional peaks in coal and natural gas has not received widespread attention, but the potential for a peak in global oil supply has. Multiple government reports over the past decade acknowledge that a peak in global oil supply will have enormous economic and political implications. Being able to identify a peak is therefore of paramount importance, and one valuable tool we have at our disposal is the supply curve. A supply curve for a given good or service shows the level of production that can be expected over a range of prices. The underlying assumption is that a number of producers can deliver the same product, and their costs of production vary. When prices are low, only producers who can make money at that lower price will deliver their product, so the total supply is lower. When the price rises, more producers can make money so production, and thus supply, rises. For a product that’s not suffering from any constraints in its production supply chain, the supply curve depicts a roughly linear response of supply to prices like the graph presented in the upper left of Figure 5.
When oil markets are in the resource’s growth phase and aren’t facing constraints, oil behaves much like any good or service delivered by producers and as prices increase extraction rates rise to deliver more supply. When the peaking phase of the oil extraction cycle arrives, something changes. Constraints prevent producers from increasing the quantity of oil supplied, even when prices rise. In this situation, oil’s supply curve looks like the lower left graph in Figure 5, roughly linear near the origin but approaching vertical at the level of supply where constraints create a ceiling. If oil prices fall suppliers can and will curtail supply, but rising prices won’t drive supply up through its ceiling. The graph at right in Figure 5 shows oil’s supply curve based on actual monthly supply and price data. The curve is clearly more similar to the constrained supply curve than a normal, linear one.
Why can’t firms just produce more? The answer to this question is complex and starts with production costs. The cost of production for the average barrel of oil is increasing. Decades ago when the first oil well was drilled, the resource was readily accessible from shallow wells dug on land. It was easy to get oil. Now to retrieve a barrel of oil we need sophisticated technology to drill wells miles below the surface and often beneath miles of ocean, along with massive drilling platforms, toxic hydraulic fracturing fluids, and myriad other costly technologies. Decades ago the cost of producing the easy oil was just a few dollars per barrel, even when adjusted for inflation. Today the costs of adding new extraction capacity are much higher, often surpassing $60 per barrel and sometimes even $100. If prices don’t remain high, oil firms have little incentive to extract expensive oil. When the cost of production is so high that the high oil prices needed to justify extracting the oil drive personal energy expenditures too high and instigate a recession (think back to Figure 3), you have an economic recipe for peak oil. Recessions always reduce demand for oil and other energy resources, prices fall with demand, and prices never remain high enough long enough to convince oil companies to make the needed investments in new, more costly capacity to keep global supply growing. For purely economic reasons oil supply reaches a peak, and as old fields are exhausted and extraction capacity isn’t replaced due to the high expense of developing potential resources, supply falls.
When talk of oil supply constraints arises, discussion predictably drifts to other sources of energy. In the news today, at least within the United States, the most common oil alternative mentioned is natural gas. It wasn’t too long ago that analysts were concerned about natural gas depletion and were predicting a North American supply peak. Figure 6 shows that up until 2005, US gas production had been on a plateau for decades and seemed poised to decline. Natural gas price spikes were starting to emerge as well, much like they have since 2005 for oil.
North American natural gas production was rescued by the highly controversial practice known as hydraulic fracturing, which involves injecting a mix of toxic, caustic chemicals into gas or oil wells under very high pressure to fracture rock that was otherwise not porous enough for the resources to seep through. Once the rock is fractured, the gas can be extracted from the well. The process of hydraulic fracturing, often called ‘fracking’, is banned in many countries and was recently banned in my home state of Vermont. Given that groundwater contamination, unusual seismic activity and a host of other concerns are linked to the practice, it’s not clear how long hydraulic fracturing will remain legal in enough regions to deliver continued gas supply growth. The natural gas industry's adoption of hydraulic fracturing speaks to how desperate they and governments are to maintain supplies and moderate prices; if there were more benign methods to bring new supplies to market, firms would be using them and governments wouldn’t have to turn their heads from citizens’ complaints of contaminated groundwater, air pollution around the gas wells and unusual seismic events. In the same way that oil producers are forced to seek out less accessible deposits to bolster supplies, gas producers are forced to use progressively more debilitating extraction practices to do the same. In the absence of hydraulic facturing, US natural gas supplies would be falling rather than rising, and prices would be decidedly more volatile.
What about coal? For decades political figures have touted coal as the road to American energy independence. Recoverable coal resources are certainly vast, but coal may be nearer its decline phase than many suspect, at least in North America. The left graph in Figure 7 shows that, despite rising prices, coal production has not increased since about 2000. Productivity at US mines is also falling, as shown in Figure 7’s right graph, a complete trend reversal after decades of increase due to mechanization. Is this because mining companies have exhausted their most accessible reserves and remaining reserves are less efficient to mine?
Even more interesting is the fact that this productivity decline has emerged despite rising coal prices, when mining companies have every reason to increase production and productivity. A supply curve would be a valuable addition to this investigation, but unfortunately the way coal statistics are compiled by the US Energy Information Administration monthly data are not available over a broad enough timespan to present a useful graph. We’re left to wonder whether we face not only global peak oil, but perhaps also peak coal in the United States.
What about other energy resources? The most well developed alternative energy source aside from fossil fuels is currently nuclear power. Reactor technology has moved forwards in leaps and bounds since the first wave of US reactors was built decades ago, but the accident at Fukushima, Japan in March 2011 raises huge questions about the technology’s ability to withstand unexpected events. Several countries, including Germany and Japan, that previously embraced nuclear energy are backing off investments in new plants, and it has been decades since a new plant made it through the permitting process and construction in the United States. The bigger issue, in my view, is how to deal with the radioactive waste generated by nuclear fission, as no acceptable, long-term storage facility has been designed and constructed anywhere in the world. Beyond issues of safety, nuclear power plants provide only electricity and restructuring our current transportation infrastructure to run solely on electricity would require massive investments.
What about renewable energy? Renewables primarily include hydroelectricity, biomass, wind turbines and solar photovoltaics. I will make the bold but easily defended statement that we cannot replace the energy we derive from oil or fossil fuels more generally with energy from renewable sources. The magnitude of our energy-dependence on fossil fuels simply prohibits it. It’s not that I’m against renewables, but rather that I support realistic expectations. To bring renewables to the table without a healthy dose of realism is a recipe for investment disaster.
Let’s start with the United States’ most well-developed renewable energy resource, hydroelectricity. Although hydroelectric potential throughout the United States is vast, economically developed potential is largely tapped so little growth in this arena is expected. In fact, in some regions of the United States dams are being targeted for removal due to their many negative impacts, and if this happens on a large scale the total hydroelectric capacity in the United States will fall. Beyond this, dams, like nuclear plants, only provide electricity while fossil fuels provide a broader mix of fuels. Hydroelectricity will certainly play an important role in the United States’ energy mix, but we can’t expect it to substitute for declines in the supply of fossil fuels to any meaningful degree.
Biomass, including wood, herbaceous plant material and agricultural residues, is another alternative often heralded as a substitute for fossil fuels. Unlike hydroelectricity and nuclear power, biomass can deliver a wide range of liquid, solid and gaseous fuels for space heating, electricity generation and liquid transport fuels. Unfortunately the potential for sustainable biomass use in the United States – and in most developed countries – is far less then current fossil fuel use. Biomass currently delivers roughly 4 percent of the US’ primary energy, and while this figure could be increased by a factor of 3 or 4 if resources are well managed this still requires total primary energy demand be reduced radically. Biomass also has relatively low energy density compared to fossil fuels and is costly to transport over long distances, relegating it primarily to local markets. I’m not opposed to using biomass energy resources, but we need to be realistic about their potentials to make good decisions.
In theory, solar photovoltaics and wind turbines could provide all of the United States’ electricity and all of its energy more generally. The issue here isn’t generation potential, it’s cost, key resources such as rare earth elements needed in manufacture, and the fact that they deliver intermittent electricity that must be stored. Storage technologies are poorly developed at the present time, and to switch our infrastructure over to run totally on electricity rather than a mix of electricity and solid, liquid and gaseous fuels would require a magnificent investment. Again, I’m not against development of solar photovoltaics (and other solar energy technologies) or wind, but I see no realistic scenario in which these technologies can substitute for declining supplies of fossil fuels.
I don’t want to create the fear that supplies of fossil energy resources will suddenly vanish. We won’t suddenly run out of oil, natural gas or coal anytime soon. We’ll be using these resources for decades to come. I do suspect, however, that supplies of these resources will face constraints, and these constraints will factor into price volatility that will challenge our economic productivity. The current recession may not – and probably won’t – end.
Adjusting to this reality is the challenge of the 21st century. Increasing our renewable energy capacity is a small component of this adjustment, as renewables, because of their cost and availability, cannot substitute for fossil fuels given our current energy demands. We need to get used to the idea that high and volatile energy prices are the new normal, and that the strategically wise decision to buffer ourselves from this price volatility is to use less energy. Much less.
It’s the economy, stupid! No doubt this phrase features prominently in the campaign strategies of President Barack Obama and presidential hopeful Mitt Romney. They’ll both attempt to convince the American public they have The Plan that will end the recession and bring prosperity back to this great country. The idea they carry is that something’s broken in the economy, and if they could isolate and fix that something, business as usual would resume. Sorry gentlemen, not going to happen. The economy isn’t broken. It’s working exactly like it was designed to given the constraints we built into it. It’s not the economy, stupid. In fact, if we really dig down it’s not even the energy, stupid. It’s the worldview, stupid!
Above I outlined my vision of why energy prices are so volatile, why we can’t seem to shake the current recession. While fossil fuel depletion is the cause of our economic woes, we need to realize it’s only a proximal cause, a cause one layer beneath the surface. We can try to remedy energy scarcity if we want, but this will result in wasted resources because energy scarcity is really a symptom of something deeper. Our limited resources are best put to use dealing with the ultimate cause of our malaise: our worldview.
About 10,000 years ago groups of Homo sapiens began leaving behind their nomadic roots to rely on agriculture as a means of subsistence. Agricultural methods of the time increased the amount of storable calories they could derive from an acre of land, but at a cost: soil degradation and erosion. Although we read all about the improvements ‘organic’ agriculture has to offer, the reality is that today’s agricultural practices aren’t much better than those used thousands of years ago. Millions of tons of topsoil are lost due to erosion every year because of our agricultural practices, whether conventional or organic, and we’re rapidly depleting soil carbon and mineral stores. Thousands of years ago our ancestors used agriculture to turn the Fertile Crescent into a desert, and we’re replicating this on a grand scale.
I bring up agricultural practices not so much to malign them as a subsistence strategy, but rather to use them to exemplify an element held sacred in the worldview of many in the developed world and an increasing number in the developing world: the willingness to exhaust and degrade vital resources to create short-term abundance at the cost of long-term resilience. This aspect of our worldview drives modern affluence, and it also drives the emergence of the economic instability I discussed earlier. Think about it: if our economy is faltering because of energy scarcity and energy scarcity is emerging because costs of energy production are exceeding levels at which are economy can function normally, then the underlying problem is our willingness to exhaust key energy resources to the point that all we have left are the energy resources that are too expensive.
We made a decision during the early days of the fossil fuel era: we were going to get rich quick on Earth’s vast stores of ancient sunlight, and we didn’t invest a dime figuring out what to do when the cheap energy that delivered that affluence became scarce. This tendency shows itself in our strategies for meeting our need for food through agriculture, our strategies for meeting a variety of needs using finite stocks of fossil fuels, in our willingness to meet various needs at the cost of air, water and soil pollution, and even our willingness to sacrifice community in favor of commodifying relationships as ‘services’ to be bought and sold. We are a society whose worldview entails that it’s not only acceptable but inevitable to sacrifice future resilience in return for present-day affluence. Why do we accept this?
In some traditional societies, children, often in their early teen years, go through a rite of passage that marks their transition to adulthood. During these rites the child effectively dies as an individual, and their childish worldview – which focuses on demanding that their immediate wants and needs are met with little care about the consequences – is extinguished. Through their rite of passage the child is reborn as an adult with the more mature worldview needed to serve vital roles in their community. In most developed countries children never have an opportunity to do this anymore, and I can’t help but wonder if our tendency to hold onto childhood worldviews of abundance without consequences is part of what drives our political and economic decision making in adulthood. Are we overdue for a rite of passage, as individuals and as a society?
Rites of passage generally include multiple stages: preparation, severance, threshold, return and reintegration. If we accept that emerging scarcities – of energy, soil, clean air, fresh water, healthy food – are here to trigger a reevaluation of our worldview analogous to a rite of passage, then perhaps we can find value in a deeper exploration of these stages. Preparation involves taking stock of the resources we have at our disposal, which may translate to tabulating financial, land-based and community resources. Severance involves articulating our current energy and economic worldviews and opening ourselves up to leaving them behind, putting everything on the table. When we reach the threshold it’s time to ask ourselves hard questions about what’s practical and what’s not, what delivers resilience and what doesn’t, which lifestyle choices can help us regenerate our world and which can’t, and what path forward is worth committing to. Our return will involve designing and implementing a new version of ‘civilization’ that accounts for the answers we found while muddling through our threshold, and reintegration involves settling into this ‘Civilization 2.0’ while creating traditions and stories to prevent future generations from repeating our missteps.
The decision to embark on this rite of passage won’t be an easy one. Most people in the developed world have no interest in changing anything about their lives or their worldviews, and are often oblivious that anything’s amiss to begin with. They’re not remotely interested in asking the hard questions that might shed light on a path forward. Even those of us who are open to a rite of passage struggle to take that first step. We’re scared. I’m scared. But we can’t allow this fear to rule our lives, to constrain our futures. A rite of passage isn’t supposed to be easy, it’s supposed to introduce us to our edges and the void that lies beyond. I can’t pretend to know precisely what each of these stages of our impending rite of passage will look like and how people in different regions will muddle through, but I trust it’ll be powerful, enlightening and, at the very least, interesting. Perhaps more interesting than we’d prefer. But then we live in interesting times, so go figure.
In many essays it’s common for the concluding section to summarize answers. I’ve offered some answers in this article, but to comparatively small questions. I posed the question of why we can’t seem to escape our current economic recession, and tied this to the emergence of supply limits in fossil fuels and the impacts that resulting price volatility have on our economic productivity. This pointed to another question: what’s causing the supply limits? Here I offered the extraction cycle with its growth, peak and decline phases as an explanation for supply limits, and evidence suggesting that the peaking phases for fossil fuels appear to be creeping up on us. This led to yet another question: What can we do about energy scarcity? To this I suggest the path of least resistance: use less energy, much less energy.
I don’t want to end this essay with answers, though. I introduced the idea that the emergence of energy limits can be thought of as part of a global rite of passage, one that forces us to investigate the many tenets of our worldview that don’t jibe with reality, in particular our tendency to pursue short-term affluence at the expense of long-term resilience. In the spirit of this rite, I’ll end with some questions. They aren’t easy ones, but then if we’re serious about building a new worldview, one that will serve us better than the one we have now, they can’t be.
First, how must our values and goals change so that falling per capita energy consumption and falling personal income don’t equate to falling quality of life?
What does it mean for citizens of a developed country to live within their means in the 21st century?
And last but not least, what will it take for these questions and others like them to become part of our national discourse?
That’s enough questions for now. You’ve got work to do. We’ve all got work to do...
Thanks to Jon Dowds for helpful editorial suggestions, and Lori Barg for offering additional resources on hydropower in the United States. I also thank a number of anonymous commenters for offering constructive criticism.
About the author
Eric Garza received his PhD from the University of Vermont in 2011, and consults in the energy, agriculture and food sectors as well as teaches courses in environmental pollution, energy systems and food systems. He manages the Path2Resilience.com website. For permission to reprint this essay, contact the author at Eric (at) Path2Resilience (dot) com.