The Oil – Employment Link, Part 1

I am giving another presentation, which I want to share with you as two posts. The first post is my analysis of the problem. The second post is more about the ramifications, and my view of what might be done.

From what I can see, oil consumption and employment are very closely linked. It is this link that seems to be contributing to the unemployment problems we have now in the US.

Going forward, we know that the US is heavily dependent on oil imports. If these drop, either because world oil production is dropping, or because world oil production is close to flat, and the US is being outbid for the oil, then it seems likely that employment in the United States will drop even more.

These are a selection of slides from my presentation:

Most people who have been looking at oil supply problems understand that oil is used for a wide variety of uses, covering all almost all aspects of what we do. Since machines are built for a particular type of energy source (oil, natural gas, coal, uranium, electricity), there is no easy way to shift from one energy source to another. And the raw materials fossil fuels provide cannot be replicated by something like wind.

In the above slide, we can argue which is cause and what is effect–does higher employment enable higher energy consumption, or does higher energy consumption enable employment–or is our system so tightly linked, that the two necessarily go together? If the two are very closely linked, the problem is that the system may “break”, rather than move very far from historical patterns.

During the 2004 to 2006 period, people were able to use their homes as a source of additional cash. They were able to frequently refinance the homes, taking out the higher equity, and using the funds to redecorate, buy new cars, or go on trips. Lax lending standards also allowed people with very low or unstable incomes to buy homes. All of this allowed a large amount of home building to go on. These activities allowed people to have more spendable income than their earnings from jobs would have suggested. I expect that it was this pseudo-income from increased loans that kept oil use high, even without high employment. Now that lending standards are higher, and home prices are lower, lending acts to depress spending, not add to it.

The graph on the above slide shows the total number of non-farm jobs according to the Bureau of Labor Statistics divided by US resident population. One problem with this calculation is that population includes both the elderly and children, so a person wouldn’t expect the percentage employed to be very high. Also, some people will hold two jobs.

When unemployment rates are as high as they are now, many will drop out, or will settle for a part-time or lower paid job, instead of full-time employment.

Many people don’t understand that oil imports have been declining. Even oil imports from Canada have been flat since 2006. Canadian oil imports have been dropping, as has Canadian non-oil sands production. Both of these declines tend to offset increases from oil sands.

Note that the above slide shows total oil consumption, not imports. US and the rest of OECD (the other “developed” countries–the historical oil importers), while China, India, and the oil producers are getting more of the total, and in fact, are increasing their usage in absolute terms.

Saudi Arabia and the rest of OPEC can sound more powerful, if they can make claims about huge reserves and about the ability to increase production, if they choose to. The catch is that neither the reserves nor the ability to raise production has been audited. Past history shows that OPEC pumps a bit more when prices are higher, and less when prices are lower. This would seem to be a reasonable approach for any producer, especially if their costs of production vary from field to field.

World oil supply stopped rising in 2005. We have been experiencing oil-related problems since 2006, when there was no longer enough to go around, and the US (and many other countries) found it necessary to cut back on oil imports. Higher oil prices drove up interest rates, which pricked the housing bubble.

The way that reduced oil supply took place was through higher oil prices, leading to recession. Reduced credit also played a role. All of this looks like inadequate demand for oil, but it is really inadequate demand for high priced oil. If there had been low priced oil available, it is likely that there would have been plenty of demand.

Biefuels are the tiny purple wedge. This is mostly ethanol from corn.

Imports are the big light green section.

We don’t really know how fast future imports will drop, but it seems very likely they will decline. If total world production starts declining, then imports could very well drop at faster than the 7% a year shown. If world oil production stays level or increases a bit, then it is possible that the decline will be less than that shown–but it is pretty certain to still be a decline.

I show US oil production as being flat. In fact, US oil production has been decreasing since 1970, with few exceptions. US oil production showed a small uptick recently, thanks to deepwater drilling and increased Bakken production. But even maintaining this level of production is likely to be very difficult.

This is the indicated drop in non-farm employment, based on the relationships calculated. I am assuming that the ratio of oil consumption to employment continues to drop by 0.5% per year.

I don’t see how our economy can handle such a continued drop in employment. Governments (federal, state, and local) have been trying to “prop up” the economy, through deficit spending, but this can only go on for a limited time period. If employment tends to drop further, the situation will be even worse.

High oil prices cause recession and a cutback in credit, and these reduce demand for all fuels, and for electricity. You can see this in the 2009 drops in fuel use in the above graph for natural gas and coal.

Note that wind is only the tiny green line near the top. Wind produces intermittent electricity, which is not at all equivalent to oil. But even if it were, the quantity is still very low. (I am using EIA’s way of combining fuels of different types. Other approaches might treat wind more favorably, but its contribution would still be very small.)

This graph shows my guesstimate of traditional, non-farm employment. The timing is quite uncertain. Home gardening and crafts would not be counted in these amounts. I will talk more about this slide, and other slides, in a later post.

Our Finite World