Peak Oil = Urban Ruin

by George Orwel

"Our economy depends so much on fossil fuel that a lack of oil without
any alternative fuel sources would lead to total chaos."

I have often been reminded of a Chinese saying that basically
translates into something like this: Long is not forever. In other
words, everything comes to an end; it doesn't matter how long it
takes. I've been covering the oil industry for a long time and I often
talk with many economists about the status of the market. They are a
very optimistic lot. That's good because they deal with issues of
wealth creation, except that when they let unreasonable optimism color
their thinking in such a sway that their only concern is the
short-term financial benefit, they run the risk of losing their
credibility.

I say that because something new is happening in the modern world. For
a long time, we've been used to classical economics championed by the
likes of Milton Friedman. But there is a new breed of what one might
call renegade economists whose focus is not based merely on
competition alone, but also on community good. These economists, just
like scientists, are now debating the consequences of a world with
reduced petroleum supplies. They are asking, "Why can't we start
preparing for the time when we probably won't have it?" Like
geologists who are now calling our attention to an oil peak, these
skeptics think the oil industry is taking itself for a ride by being
overly optimistic that natural resources will stay abundant. Very
soon, we shall see a shift in mainstream economic thinking from
unbridled, red-hot free markets to something grayish.

Which brings us to the debate about peak oil. Let's just assume that
world oil production peaks in about 15 years. What will that mean to
us, in concrete terms? It won't mean we'll run out of oil right away.
It only means that net oil availability will decline at an annual rate
of about 2 percent thereafter, and we should expect that supply will
be down by 20 percent by about 2035, when world population will be
doubled, along with fuel consumption. This is still speculative and
things might turn out differently, including development of new
technologies that would make life a little easier, but it's going to a
huge problem. It's safe to say that the general progression of events
points to a scary future.

In the last two years we have already seen a preview of this movie, in
the form of oil supply not being able to keep up with demand. The
result has been high fuel prices and a dent in the economy and in
consumer confidence. It's important to remember that current high fuel
costs aren't bad compared to what we should expect in the future. It
will be a crisis when supply is so drastically reduced that it won't
matter whether you have the money to pay for the fuel. As anyone
knows, when money loses meaning because there's nothing you can buy
with it, what you are left with is primordial existence.

It's going to be tough to deal with the impact on transportation,
health, agriculture, and other development issues. In the event of a
general power outage, think of what would become of our metropolitan
subways, our hospitals, our farms, our offices, and our houses. Our
economy depends so much on fossil fuel that a lack of oil without any
alternative fuel sources would lead not only to a virtual crash of the
economy but to total chaos. As James Howard Kunstler points out in his
book, "The Long Emergency: Surviving the Converging Catastrophes of
the Twenty-First Century," the U.S. economy has gradually evolved from
the use of solar energy to the artificial patterns of living
subsidized by cheap fossil fuel.

I'm typically an optimist and my view is that living off oil may not
be as artificial as Kunstler puts it, but I have to appreciate his
central point. He says that we depend on computers for work, for
learning, and for shopping. That we are used to microwaving our food
and using gas to cook is not in doubt. The systems we have developed
in the West, he argues -- systems that are supposed to improve
efficiency -- can't survive without some kind of energy, mostly fossil
fuel energy.

Others have also noted that the financial boom of the early to
mid-1920s was spurred by oil. The economy was propelled by automobiles
as well as by the first great wave of suburban expansion. Both
generated enormous business activity in other sectors, from real
estate to manufacturing. Some 8 percent of American households had
electricity in 1907, and that number jumped to 35 percent by 1920. Car
production rose from 45,000 units in 1907 to 3.5 million in 1923. Most
important, the United States met its own oil needs from domestic
production. The fact that oil was cheaply available here in the United
States saved us a ton of money, which we invested in Wall Street.

But that oil boom also meant trouble for the farm economy, which got
neglected as we moved toward industrialization during the mid-20th
century, with exports of manufacturing goods to Europe just as the
Second World War got under way. U.S. farms, which had done well by
exporting grains to Europe during the First World War, began to hurt
in the 1930s as mechanization led to an oversupply of farm products
such as grains. Grain prices crashed, and the financial depression of
the early 1930s gave way to farm depression later in that decade. The
system we had depended on collapsed during the Great Depression. Some
think the current scarcity of energy sources could push our economy
toward a similar situation.

Up until now, we haven't started thinking of what we can do to keep
these systems running in the event that we run out of fossil fuels. In
Kunstler's view, the reason we haven't invested in alternative fuels
is simple: we have left the decision to neoclassical economists who
don't think a crisis is looming. The result, he says, is that our
economy will stop growing at some point in the near future. In the
past two years, high energy costs have cut growth by a small
percentage, lowered consumer confidence, and impacted earnings of both
the auto makers and airlines. When the U.S. economy takes a major hit,
we are likely to feel it -- not only in our pocketbooks, but also in
the social structures we have built -- because of the potential
collapse of services.

Change isn't going to happen overnight. The automobile industry is one
of the most energy-intensive modes of transportation ever created. Car
ownership in the United States, at 217 million, is the highest in the
world. Because of urban sprawl in the south and west, in places such
as California and Arizona, we have a social dependency on car
transportation. The highway system, which was built in the 1950s, has
only encouraged this urge to drive in a huge car alone. Millions of
gallons of gasoline are being used in the process. In the decades
ahead, there may be no need to build more highways because there won't
be many cars to use them. We might be well advised to start moving
toward a mass transit system even in cities that currently don't have
one. The reason is simple: the need to conserve fuel is becoming
greater by the year.

A study several years ago by Randall G. Holcombe of Auburn University
in Alabama shows that the automobile industry would sustain by far the
most significant damage in the event of an oil shock, due to either an
embargo by producers or other supply shortages. Also, a large part of
the economic damage is from a decline in the demand for output rather
than as a direct consequence of reduced petroleum supplies. Holcombe
considers this significant for two related policy reasons. First, it
implies that even if policy makers could replace all of the embargoed
oil, major economic disruptions could still result from an embargo or
just from limited supply. Secondly, policies designed to minimize
demand disruptions can achieve significant benefits at low cost, and
should have a high priority in policy matters pertaining to embargoes.
That's a powerful argument for early planning.

The above article is excerpted from Black Gold, copyright (c) 2006 by
George Orwel. Published by Wiley; June 2006.

[George Orwel is an oil analyst and senior writer for both the Oil
Daily and Petroleum Intelligence Weekly. He has appeared on CNN, BBC
and NPR, and written for the L.A. Times and the Christian Science
Monitor, among other publications.]