POSTED: 3 MAY 2007 - 9:30am HST

Economic growth to end soon - forever

by Michael Lardelli on 3 May 2007 in Australia Online Opinion

Peak Oil is the idea that the world’s oil production will soon reach a peak and then begin to decline. This will have epoch-changing effects on a growing globalised world economy where over 60 per cent of energy demand is met by burning oil and gas, and where 95 per cent of transport is driven by oil.

Over the last couple of years the status of the peak oil idea has been transformed from that of a Chicken Little conspiracy theory to one commanding the public attention of national governments.

The weeks before Easter 2007 were a truly momentous period for the peak oil debate. Highly respected figures in the oil industry, such a energy investment banker Matt Simmons and legendary Texas oilman T.Boone Pickens, abandoned their usually restrained commentary to declare that world oil production was now at its peak and would henceforth fail to meet future demand increases.Ali Samsam Bakhtiari, a retired vice president of the National Iranian Oil Company, reported that two differently formulated computer simulations of world oil production had given very similar predictions - peak oil production in 2007 followed by a decrease of 33 per cent by 2020. As Bakhtiari wrote:

"The similarity of the results obtained by two very different models - the WOCAP and the GBM - should help bring “Peak Oil” modeling to a close, as according to these models the peak of global oil production has now been reached.

Furthermore, the two models’ similar forecast for a global oil supply of 55 mb/d by 2020 can now be considered as being the most accurate and reliable forecast for the future production of the international oil industry.

The implications of this simple statement are staggering and yet unappreciated by the general public.

What Bakhtiari is saying essentially is that, quite soon, world economic growth ends - forever. Of course, there will still be some parts of the world, such as those endowed with exportable amounts of the remaining oil, where sky-high oil prices will bolster foreign earnings and stimulate local economic activity.

However, all “western” nations, (with the exception of Norway and Canada) are net oil importers. For these nations, decreasing energy levels in their economies will mean decreasing economic activity.

This is not to say that the nominal value of stockmarkets will not continue to rise since reserve banks are currently busy increasing the money supply to ensure this. (Australia’s money supply increased by 14 per cent in the past year while its economic growth was only around 4 per cent.) But expensive oil energy will feed through to raise the cost of all food, transport and manufactured goods (including devices for harvesting renewable energy sources) so that each dollar will buy less.

Is there a silver lining to the imminent decline in oil production and the world economy?

A 33 per cent decline in oil use by 2020 will mean 33 per cent less carbon emissions from burning oil. The decline in economic activity will probably mean an overall reduction in the use of other fossil fuels too.

Some might argue that the oil energy gap will be filled by the use of alternatives such as natural gas or coal. While some such substitution will undoubtedly occur, the steeply rising costs of such infrastructure projects will probably limit their implementation (for example see here and here). We will simply have to learn to live with less energy.

So, in 2007 with energy still cheap, we should seize the opportunity to prepare for an eventful ride on the slippery slope of energy decline. Buying a bicycle and growing some vegetables in the backyard would be a good start.

see also:
Island Breath: Bubble Burst
Island Breath: Kauai 2007- 2050
Island Breath: Cuba Survives Peal Oil 7/29/2006
Island Breath: Thru Peak Oil Goggles 4/6/2006