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Page added on October 20, 2011

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Peak Oil and the Great Recession

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Jim Hamilton, an economist at UC San Diego who has done extensive work on the economics of oil spikes, has just published a summary of the current state of oil macroeconomics called“Oil Prices, Exhaustible Resources, and Economic Growth.” His conclusion: “The historical record surely dictates that we take seriously the possibility that the world could soon reach a point from which a continuous decline in the annual flow rate of production could not be avoided.”

Translation: peak oil might not be far away, and we should take it pretty seriously. And Hamilton’s research suggests strongly that when peak oil does arrive, it’s not going to be pretty:

Coping with a final peak in world oil production could look pretty similar to what we observed as the economy adapted to the production plateau encountered over 2005-2009. That experience appeared to have much in common with previous historical episodes that resulted from temporary geopolitical conflict, being associated with significant declines in employment and output. If the future decades look like the last 5 years, we are in for a rough time.

Most economists view the economic growth of the last century and a half as being fueled by ongoing technological progress. Without question, that progress has been most impressive. But there may also have been an important component of luck in terms of finding and exploiting a resource that was extremely valuable and useful but ultimately finite and exhaustible. It is not clear how easy it will be to adapt to the end of that era of good fortune.

“Pretty similar” to 2005-09 means a big spike in oil prices that causes a big recession. The chart on the right shows what he means. The green line shows expected economic growth. The dashed line shows the Great Recession. And the red line? That’s his estimate of the effect of the huge spike in oil prices in 2007-08. If Hamilton is right, then the oil spike is responsible for about two-thirds of the Great Recession all by itself. The housing and credit bubbles are only responsible for a fairly small piece of it.

But even if Hamilton is wrong about the precise trajectory of the 2008 meltdown, the evidence is now clear that oil spikes have a very significant effect on the economy. And as the production of oil starts to plateau, oil prices are going to spike a lot. In fact, they’re likely to spike every time the global economy starts to grow. As I said the last time I reported on Hamilton’s work:

If this model is accurate—and if the ceiling on global oil production really is around 90 mbd and can be expanded only slowly—it means that every time the global economy starts to reach even moderate growth rates, demand for oil will quickly bump up against supply constraints, prices will spike, and we’ll be thrown back into recession. Rinse and repeat.

Hamilton’s language is cautious, but this is basically what he’s saying. Oil controls our economic future more than we’d like to believe.

Via Stuart Staniford, who calls Hamilton’s paper “thoroughly researched, superbly argued, and very clearly written.”

Mother Jones



5 Comments on "Peak Oil and the Great Recession"

  1. Kenz300 on Thu, 20th Oct 2011 7:19 pm 

    Every individual, business and country that imports oil needs to develop a plan for greater energy self sufficiency. The effects of higher oil prices and reduced supplies will be felt by all.

  2. sunweb on Thu, 20th Oct 2011 7:51 pm 

    We could go a long way towards having more time if we Stopped NASCAR, stop all the sports events with tens of thousands of people in stadiums and arena countrywide, turned off all the advertising lights around the country, and decommissioned a few hundred military bases worldwide.
    Of course if we did the first two, we could televise the riots over no sports.

  3. Stephen on Fri, 21st Oct 2011 12:29 am 

    Sports would not be my first area of cutting. I would expand railroad tracks to sports stadiums and run daytime games. Also, I would do more local sports leagues for recreation, again that play in the daytime (less use of high power lighting). NASCAR is a good one to stop but I think Football, Soccer, or Basketball could be good post peak-oil pasttimes for people.

  4. Btritt on Fri, 21st Oct 2011 6:25 am 

    The above ideas are nice, but not even a drop in the bucket. Americans don’t even see the waste anymore. They expect it as their ‘right’.

    How do you force Americans (yes force, they will not do it voluntarily. It’s an addiction, after all.) to start conserving? A gradual fuel tax of $1 per gallon per year for the next 5 years would be a start. If it were on home heating oil, it would force them to insulate and turn down the thermostat.

    Eliminating unnecessary lighting levels would also be good, but, only if it was enforced by the same method…higher electric costs. A ramp up to maybe $0.50 per kwh. over a few years time.

    Pain in the pocket book is all that will make Americans pull back from our wasteful habits. We can do it that way or just wait until nature does it for us in the near future and lose everything.

  5. Mike999 on Sat, 22nd Oct 2011 12:53 am 

    – Convert out of home heating oil. Not easy. GeoThermal? Triple Pane Windows, and double your insulation.

    Or, buy a Zero Energy Home Today!

    – Buy an EV.
    Reward innovation in EV’s by buying one.

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