The last century can rightly be called the Age of (Inexpensive or ‘Cheap’) Oil as world oil consumption grew from about 20 million tons per year in 1900 to just under 400 million tons per year in 2005. Since 2005, however, world oil consumption has been nearly constant despite high demand and record high oil prices, which indicates that we simply cannot produce oil any faster. And since oil is not renewable, eventually the production (and therefore the consumption) of oil must decline.
Declining oil production will be an extremely painful reality for the U.S. because not only does the rate of energy use strongly affects national wealth, health and education levels, but the American economy is built on two largely unspoken assumptions about oil: First, we assumed we could have all the oil we wanted, and second, we assumed that oil prices would be relatively low ($20 per barrel) and stable. Neither one of those assumptions is true anymore, and as a result, U.S. society has entered into a painful transition, highlighted by much of the turmoil that we see around us – such as the rise and fall of places like Detroit, the 2008 financial crisis, and the reduced tax base for local and city governments and subsequent reduction in services.
As the oil age winds down even bigger problems will arise: High unemployment will follow a shift away from industrial and occupational hyper-specialization, high and volatile oil prices will wreak havoc on the food system, and national and international trade – particularly in commodities – will be in turmoil as prices and price volatility increase. Since trade has always been a catalyst for wealth creation, the buffeting of trade will likely reduce American and global wealth creation.
Perhaps the most far-reaching and transformative effect of the end of cheap oil, and the end of growth in oil consumption rates, will be a significant and long-lasting brake on economic growth. Increased rates of oil consumption over the last century led to greater economic activity, higher gross domestic product (GDP) levels and bigger tax receipts. Over the past decade, coinciding with the end of cheap oil, growth in real GDP has been very slow in the US and the developed world and thus tax receipts are stagnant or declining. What will happen to our social programs and entitlements that require continuing economic growth? I believe it will be a very painful period for the U.S. and other nations as we revisit and revise our social programs to account for lower economic growth.
If we are to make wise decisions about our future, we must understand and accommodate ourselves to this harsh fact: the age of cheap oil is over, and it will not return.
Do you agree with this analysis of the oil landscape? Please comment.
Read the original version of Dr. Bruce Dale’s editorial, first published in the journal Biofuels, Bioproducts & Biorefining, here: “The times they are a-changin’: the end of cheap oil and how it is changing our world.”