Connecting the Dots: Energy and the Economy

As oil and gas reserves are depleted, the effects will be more than just $3 per gallon gasoline — or even $20 per gallon gasoline. The effects will ripple through the world economy, raising all prices and inflating all currencies.

Remember e = mC**2 – that little equation that unlocked the secrets of nuclear energy? Here’s another to keep in mind, whenever you read the news about peak oil, gas prices, inflation or the economy: E = $$$$$$$

http://www.democrats.us/editorial/wise041105.shtml

It’s not physics, but it’s true: money equals energy. Real, liquid wealth represents usable energy. It can be exchanged for fuel, for work, or for something built by the work of humans or fuel-powered machines. Real cost reflects the energy cost of doing something; real value reflects the energy expended to build something.

Nearly all the work done in the world economy — all the manufacturing, construction, and transportation — is done with energy derived from fuel. The actual work done by human muscle power is miniscule by comparison. And, the lion’s share of that fuel comes from oil and natural gas, the primary sources of the world’s wealth.

Up through the 1970’s, while the U.S. economy was mostly self-contained, you could see in national statistics how the purchasing power of the dollar rose and fell with the amount of energy used. You could compute the “energy value” of the dollar each year, and it tracked closely with the Consumer Price Index. Nowadays, with most of our household goods and machinery made overseas, the relationship is not so obvious.

In North America and in Europe, we enjoy living conditions far better than our ancestors. “Technology!”, you may be thinking. But technology is only a set of methods and techniques. What we have done with our technology is to harness the energy stored in the bodies of dead plants and animals over millions of past years, and we use it to do thousands of times more work than we could do ourselves.

The old power company ads used to say you had the equivalent of 20-odd slaves in your household, by having electric power. They were right. It’s no coincidence that slavery was wiped out in the world at the same time that ships, railroads and factory machinery began to be powered by coal.

We live today in a cascade of wealth created by extracting fossil energy. But as these fuels are depleted, we face a future in which energy will have to come from a variety of alternative sources, none of which are nearly as rich as oil or natural gas. We hear rumors of cheap, unlimited energy from this or that source, but nothing can compete in the marketplace with oil or gas.

Our most likely future is one of declining energy supplies and declining wealth. We will see inflation without economic growth, as in the 70’s. Stocks go nowhere, interest rates can’t keep up with inflation, and people scramble for “hard assets” that seem to hold their value. Between bouts of stagflation may come recession or depression.

There’s no solution to this problem, if you define “solution” as continuing to live as we do now. But part of the answer is within ourselves. We know that consumption is not a worthy goal in life; that luxuries beyond our basic needs don’t do us good or bring real happiness. We can tighten our belts and work together as families and communities to weather this long transition, to whatever the future holds.

In the end, the loss of our fossil wealth could be the salvation of life on earth. Over centuries, global warming could level off or even reverse, if there are no fuels being burned to increase the greenhouse gases. If we had had unlimited “free energy”, there’s no telling what we might have done to the earth’s ecosystems.