Is Peak Oil Behind Economic Disintegration?

Something is wrong with the economy. No kidding, you might reply, but what is the underlying cause? Is it Peak Oil? Or is capitalism just a system that doesn’t work and is destined to failure? Are we just stuck with inevitable deterioration in living standards for the majority, or is there at least theoretically something we can do about it? Would political decisions help or are we just doomed to watch the disintegration of civilization as the oil runs out?

In an interview a few weeks back with Tom O’Brien of the From Alpha to Omega podcast, KMO asked him about the predictions of Peak Oil collapse and why they seem to have not come to pass the way some people thought they would:

Tom O’Brien: “Think if we lived in Syria or Egypt. We might think [about] things slightly differently. I don’t know about yourself KMO, but when I heard about peak oil first, I was like ‘Holy Jesus, run for the hills!’ You know, it was a very convincing thing. The global system is so complex and there’s so much momentum in certain areas that this shuddering world-wide collapse is probably not the way things are going to happen.” “But if we look at the Middle East where the mass of wealth coming from oil was controlled by certain fairly disreputable families and maybe their surplus is coming under threat; not as big a surplus as there had been before.

You know, we’re starting to see- especially those countries that now have gone past peak like Egypt, and I think Syria, that aren’t getting money from their external sales of oil anymore and the economy is under more pressure, and they have dictatorships—you see those economies really falling into chaos – like Syria total chaos. Now that’s also to do with the politics of the region. But that’s’ essentially the peak oil catastrophe meme- is that all these kind of politics things, they do play out, and they can play out in kind of bad ways.”

“So, I just think that this timescale for these things was – the timescale for this to play out could be eighty years. We might look back after eighty years and if we don’t have renewable energies, [those] don’t fill in the gap, we’ll look back on it and we might never know that it was peak oil but behind that- the pushing force behind this thing might be–there’s a good chance it could be peak oil.”

KMO: “Well, I’ve certainly read a lot of people who attribute the ongoing nature of the financial crisis – the recession that never really seems to end except on Wall Street – they say that this is a result of Peak Oil even through it’s not acknowledged. And I look at other trends like globalization and like automation and factors that lead to technological unemployment, and I can see a stagnant economy just from those things alone, without Peak Oil even being at issue. And it could be, it seems to me, that while conventional crude oil production did peak in back in the middle of the first decade of this century, the total amount of hydrocarbon energy available to us has not peaked, and that peak oil or the effects of peak oil might be something that gets added to our current woes in a few years’ time to really make things uncomfortable for a lot more people that are suffering now.”

Tom O’Brien: “Yeah, I thank there’s undoubtedly been an effect from peak oil because oil is – well, it might be cheaper than it was in a long time now – but oil is dear. Oil used to be like, what was it, $20.00 a barrel? And now it’s, you know, take your pick—it was up around $100.00 a barrel for a long time. And it’s a key component to every business in the world. And so that’s going to definitely have an effect on the rate of profit. It’s going to definitely have an effect on people wanting to cut wages. So it’s definitely had an effect. And also hydrocarbons have increased, the production, but also the amount of stuff that they’ve had to do to get their hands on it has also increased. So I don’t know what that interaction will be.”

“I also think that when we look at the poor performing economy that we have, you know, a lot of that is down to choice. A lot of the governments that control their own currencies like the U.S. and the U.K., could, if they wanted to, stimulate their economies. Barack Obama and Gordon Brown at the time, they both did. They stimulated their economy enough that the whole thing didn’t fall apart. But then they stopped their stimulus. And the reason why they stopped their stimulus is that the capitalist class see it as a way now to attack labor and to attack the social welfare net of the working people. So the reason why the economy’s not doing that well is that the capitalist class is saying, ‘we’re going to seize our chance now, so we can attack these things; so we can change the structure of society underneath, where we won’t have to do as much national health care, or we don’t have to give them as much pay or whatever.”

“So they’re willing to take a hit on the size of the economy growing versus putting the class war back in business. And I think that – you have many different factors here, but Peak Oil is definitely a factor. What percentage of that , say, low growth is a factor of peak oil, you know, it could be a half a percent of GDP, it could be a percent, I don’t know the figures. But I do think that class war is the main determinant. So the austerity that’s being done in, say, Britain, which does not need to be done, economically it doesn’t make sense for it to be done, or in America, they’re political decisions. I think that they’re class-based political decisions that are effecting that dynamic, as well as other dynamics like peak oil.”

After writing about and contemplating these issues for some time, I’ve come to believe that this is correct. I don’t think the major cause of our economic woes is oil prices or a lack of energy resources at this time. However, I think that will contribute to our woes in the future, along with scarcity of things like fresh water exacerbated by climate change. But I think that the problems with out system are not simply a shortage of oil.

The reason this is important is that I read a lot of people who see everything through the lens of peak oil. They are convinced that the oil is running out, period, and so it doesn’t make any sense to talk about the problems with the economy. The oil is running out, they say, we are collapsing, the middle class is doomed, and the idea that this is caused by political decisions as much as anything else is anathema to them. They don’t want to hear any discussion of what we can do to stimulate the economy, reduce unemployment, reduce inequality, or anything like that.

A simple illustration will show why this is closed minded. There are a lot of countries with little to no oil resources where the middle classes are much better off than in the United States. If the middle classes are collapsing because of peak oil, then why didn’t Japan and Germany gut their middle classes the way we did here? If access to cheap oil is the sole determinant of a country’s prosperity,then how do explain things like free education and health care in Germany, or the fact that Japan can build high-speed rail lines and we cannot? Both those countries look a lot better than here, and we can think of many other examples in Europe, Asia, and even Latin America (Costa Rica for example).

Another strike against this is the fact that booms and busts have occurred frequently throughout the history of capitalism, shutting down the economy and tossing millions out of work. The Great Depression is the classic example, and there was certainly plenty of oil back then, including in the United States. The previous depression was renamed the Long Depression, and there are plenty of other examples. There were ten grinding years of slowdown and slump that defied explanation (one as Hansen’s, see below.) In the Great Depression, we wouldn’t hit peak oil domestically for another forty years, or globally for another eighty.

A third strike against this is that the wealthy are continuing to get ever more wealthy. If the ability of the world economy to grow were truly slowing down, we expect the wealthy to at least experience some level of downturn; they certainly did in the depression. Instead their luxury, opulence, arrogance, megalomania and sybaritic excesses just continue to increase without bound in ways that beggar the imagination. How is this possible if oil is truly running out?

Rather than rare occurrences, it seems failures, panics, crashes, slumps, profiteering, unemployment, underutilization and so forth are the rule rather than the exception under capitalism, regardless of the state of oil. So why are we so convinced that oil is the key? I think Tom O’Brien is more amenable to this view because he studies the works of Marx who describes the inherent problems and contradictions within capitalism, so it’s easy to see how the system can break down without any recourse to energy and resource shortages. As I’ve written before, the task of economists is to use “sci-jacking” to rationalize this madcap system based on gambling and usury.

At the same time, we have passed the peak of conventional petroleum resources. Is it possible that the crash of capitalism has actually protected us from peak oil, somewhat? The phrase you hear in this context is “demand destruction,” which means that less oil is being used by consumers and industry because of the slump. But did Peak Oil cause the slump, or are we getting a reprieve from peak oil because of it?

Since they are political propagandists at base, economists cannot accept the importance of oil, nor can they accept Marx’s critique they must come up with alternative theories  to explain the slowdown in capitalist growth observed throughout the world. This is usually couched in the term “market failure.”

One idea getting traction is the concept of  “secular stagnation.” This is a situation where the desire for saving outpaces useful investments due to aging populations, slower workforce growth, lack of new developing countries to invest in and technological slowdown. This idea has been promoted by Larry Summers:

[Alvin Hansen] suggested that the Great Depression might just be the start of a new era of ongoing unemployment and economic stagnation without any natural force towards full employment. This idea was termed the ”secular stagnation” hypothesis. One of the main driving forces of secular stagnation, according to Hansen, was a decline in the population birth rate and an oversupply of savings that was suppressing aggregate demand. Soon after Hansen’s address, the Second World War led to a massive increase in government spending effectively ending any concern of insufficient demand. Moreover, the baby boom following WWII drastically changed the population dynamics in the US, thus effectively erasing the problem of excess savings of an aging population that was of principal importance in his secular stagnation hypothesis.

Recently Hansen’s secular stagnation hypothesis has gained increased attention. One obvious motivation is the Japanese malaise that has by now lasted two decades and has many of the same symptoms as the U.S. Great Depression – namely dwindling population growth, a nominal interest rate at zero, and subpar GDP growth. Another reason for renewed interest is that even if the financial panic of 2008 was contained, growth remains weak in the United States and unemployment high. Most prominently, Lawrence Summers raised the prospect that the crisis of 2008 may have ushered in the beginning of secular stagnation in the United States in much the same way as suggested by Alvin Hansen in 1938. Summers suggests that this episode of low demand may even have started well before 2008 but was masked by the housing bubble before the onset of the crisis of 2008. In Summers’ words, we may have found ourselves in a situation in which the natural rate of interest – the short-term real interest rate consistent with full employment – is permanently negative. And this, according to Summers, has profound implications for the conduct of monetary, fiscal and financial stability policy today.

http://economistsview.typepad.com/economistsview/2014/04/a-model-of-secular-stagnation.html

Somewhat related is the “technological stagnation” hypothesis, proposed by Robert Gordon:

The analysis in my paper links periods of slow and rapid growth to the timing of the three industrial revolutions:

    IR #1 (steam, railroads) from 1750 to 1830;
IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and
IR #3 (computers, the web, mobile phones) from 1960 to present.

It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972.

    The paper explains this history by a simple proposition. The great inventions of IR #2 were just more important than anything that has happened since. The speed of transportation was increased from that of the ‘hoof and sail’ to the Boeing 707. The temperature of a room was wildly variable in the 19th century but by now is a uniform 70 degrees year round. The transition from rural to urban in the US could only happen once. Only once could electricity be invented and create rapid transit, machine tools, consumer appliances, and the entire electricity-dependent set of entertainment devices from the radio to the TV to the internet and its multiple spin-offs such as the iPod, iPhone, and iPad.

    The loss of the impetus of IR #2 inventions makes a big difference in the future of human wellbeing. Figure 5 shows that if the 1948-72 productivity trend had continued, the level of productivity would have been 69% above what would have occurred if the 1972-96 trend had continued. The actual outcome shown in Figure 5 is that the benefits of actual productivity from the IR #3 internet revolution only closed 9% of the 69% gap created by the end of the IR #2 inventions.

    Even if innovation were to continue into the future at the rate of the two decades before 2007, the US faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9% annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative ‘exercise in subtraction’ suggests that future growth in consumption per capita for the bottom 99% of the income distribution could fall below 0.5% per year for an extended period of decades.

http://economistsview.typepad.com/economistsview/2012/09/gordon-is-us-economic-growth-over.html

Put another way, people have a desire to save and a desire to invest. In conventional economics, savings=investments. If there are a lot of investments, the interest rate is high, but if no one is wanting to invest, the interest rate is lowered to “entice” people to invest. Even with interest rates at zero, money is not being invested in useful ways.

Another theory is the “Rise of the Machines” hypothesis. These people point out that as more and more jobs are automated, this will cause slower job growth, and hence have a depressing effect on consumer spending. Robots earn no salary, they do not spend money, they do not need housing, food, education or medical care, etc. As more and more tasks are automated (via algorithms, artificial intelligence, networks, robots, software, DIY kiosks, online storefronts, bots, etc.), people are not earning enough the wages necessary  to purchase the output that the economy is able to produce.  Additionally, automation causes a “bifurcation” of the economy into high-end technical/managerial jobs, and  low-end service/social occupations with nothing in between.

This view was actually also proposed in the the 1930’s by a group calling itself Technocracy Unlimited. The Technocrats have long since been forgotten, but they claimed back then that higher efficiency and technological innovations were putting large numbers people out of work. Farmhands were replaced by combines, and factory output was so high that fewer workers were needed in the factories. Goods were piling up faster than they could be sold, and food was so abundant that producers could not fetch reasonable prices for them and went under. That is, it was a crisis of abundance, not scarcity.

The technocrats argued that the capitalists need to earn a profit led inherently to overproduction and gluts. They proposed production for use, centrally managed by engineers and technicians, rather than putting production in the hands of bankers and financiers, and an economy based on use instead of speculation. (one member of the movement was M. King Hubbert)

This view is rejected by most “conventional” economists, who insist that history always shows that technology creates more jobs in the long run, the capacity for an economy to create salaried positions is essentially unlimited, and to insist otherwise is to subscribe to the “lump of labor” fallacy.

A fourth is inequality. As more and more of society’s income flows into the hands of fewer and fewer people, the majority of workers earn less and less . The decline of unions, outsourcing, insourcing, and the addition of billions of workers to the global economy etc. have exerted a downward pressure on wages. A  consumer economy requires enough consumers with enough money to buy its products. If consumers are living paycheck to paycheck, they cannot spend in sufficient amounts to produce investment opportunities for the glut of savings. This is exacerbated by a shocking rise in the cost of housing and in the U.S. of education and heath care caused by monopoly, crony capitalism, price gouging and rank profiteering. Many people have pointed out that today’s levels of inequality have reached the exact same levels as those immediately before the Great Depression of the 1930’s.

A lot of commentators point to the political doctrine known as Neoliberalism as the core of for this development. Neoliberalism is a set of economic ideas that supposedly concern economic “freedom” but really has to do with shrinking the state, stripping assets from the public sector, and reguatory rollbacks of protections for workers and the environment. It sets up a world without any constraints on the behavior of the wealthy and corporations, and gives an intellectual veneer to what is basically looting by the upper classes.

As Naomi Klein has written, during economic shocks, these “structural adjustment policies” are imposed on various nations – repayment of unpayable debts no matter the social cost, selling off of public assets to private investors, reduced government employment, raiding pensions and forcing longer working hours, dropping trade barriers, financialization of the economy, reduction of public services, rollback of environmental and labor regulations, etc. After 2007-2008 these policies were imposed upon bankers on the people of their own countries in addition to developing nations. “Austerity measures” have pushed countries like Greece into outright collapse, and many other countries to severely restricted economies with entire generations unable to find adequate employment.

This is what O’Brien refers to as “putting the class war back in business.” This has caused a spectacular rise in inequality, poverty and precariousness for citizens all around the globe, while the wealthy and their heirs rake in ever more than they can ever hope to spend. Easy money policies cause inflation in assets like art and real estate, but little of the wealth trickles down to anyone else. Extreme inequality also causes expenditure cascades, raising prices for necessities.

Thus, we do not need peak oil at all to explain economic slowdown and stagnation. But does that mean that is has played no role?

As O’Brien points out, while we don’t need peak oil to explain the current economic failure and stagnation, we cannot discount oil because it is so vital to the functioning of the economy. In an earlier interview, KMO asked a guest whether people were making the claim that things like fracking were proving that peak oil was a myth. This is an odd question, since fracking is actually incontrovertible proof that peak oil is real! There is no way we would be fracking if oil from conventional sources were still abundant. The need to use hydraulic fracturing, to build oil pipelines from Alberta’s tar sands to the Gulf of Mexico, to drill miles under the ocean and in the melting Arctic, all point out that we are in dire straights when it comes to energy.

But, as KMO points out, we have turned to toehr sources of hyrdocarbons – coal, natural gas, kerogen, etc. to meet the demand. Sure, the prices may be all over the board, but they were all over the board throughout the entire history of capitalism. As Carbon Democracy pointed out, the problem with oil traditionally is how to keep it scarce enough to fetch a high enough price, yet this did not by itself tank global economies – these were usually called by a stock market crash, panic or bank run rather than energy prices.

Th major point is, if we just throw up out hands and say, the oil is running out, so it doesn’t make sense to do anything, might as well just get used to the new reality is simplistic and does not really benefit anyone except the people profiting from this mess.

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