Ignoring peak oil and scarcity – political myopia?

Oil will one day run out and without a comparable substitute – we can expect a return to 1970s-style oil shocks. And, yet, politicians and economists prefer to ignore the truth

If you are lucky enough to have been born in an industrialised country and old enough to remember the oil crises of the 1970s, it is not difficult to imagine the economic impact of oil scarcity. While most of us in the developed world are too busy to stop and think about it, it only takes a moment’s reflection to realise the extent of our dependence on this remarkable commodity. Only more remarkable than its properties and our dependence on it, is possibly our assumption that we will always have it.

For again, upon only a moment’s reflection we can deduce that it will one day run out and without a comparable substitute – we can expect a return to 1970s-style oil shocks. Yet in the face of the seemingly obvious flies our wilful ignorance on the one hand and possibly more dangerous, a professional body of knowledge that in the main dictates many aspects of public policy – neoclassical economics. A school of thought that defies the laws of physics and believes that infinite growth on a finite planet is both possible and desirable. It has indoctrinated us into the belief that economic growth is the only panacea for all our ills. More insidious, we have actually locked ourselves into an economic paradigm that is only stable while growing – like a spinning top that stumbles when it slows.

Much like our myopia of the role of oil in industrial society, so too our ignorance of how the neoclassical economic school has risen to the extent that it is presented simply as economics. It has smothered out those who question its authenticity or, at least, it had until our recent economic woes. Thankfully, the simple question “did no one see it coming?” – much like the child pointing out the naked emperor, has left the profession feeling rightly embarrassed.

The neoclassical model, which claims to explain economic growth, was developed independently in the 1950s by American economist Robert Merton Solow and Australian economist Trevor Winchester Swan. Solow received the Noble Prize for his efforts in 1987. The model claims that economic growth is determined by only three things: labour, capital, and what is termed “technological progress”. As it turns out, without the endogenous factor of technological progress, normally interpreted as man’s great ingenuity – labour and capital explain only very little of the economic growth since 1900. So, as far as the economists who advise our governments are concerned, the availability of energy is of no consequence to the performance of our economy. And so you should have no reason to be concerned by theories such as peak oil.

The approach to energy demand planning that is currently practised is to prepare a forecast of economic growth based on expectations about growth in labour, capital, and technological progress – and then feed that into the energy demand model. So expectations about economic growth determine how much energy will be needed. Until recently, no consideration was given to whether or not the raw materials – oil, gas, coal – would be there to meet such demand. In fact, the issue of climate change has done far more to force policy makers to consider the sources of the energy they expect to support economic growth than any concern over shortage.

While physicists, and the newly emerging profession of ecological economists, intuitively know that there is no economy without energy – just like the average person – the hegemony of the neoclassical school, nothing more than misguided group-think, has been such that they have all but crowded out what are sometimes called non-orthodox or heterodox economic thinkers. An interesting insight into how this might have happened is revealed in the recent documentary on the financial crisis Inside Job. Thankfully, after many years of labour, academics outside the neoclassical school appear to have made a breakthrough in our understanding of the role of energy in determining economic growth. Specifically, the efficiency with which we convert raw energy – in whatever form – into useful work. By including energy and this conversion factor along with labour and capital in our economic growth model, we can dispense with the large fudge factor of technological progress and explain with remarkable accuracy the economic growth of the past century.

Sadly, if this model is correct and we are at a maximum of oil production – which all the evidence currently suggests we are – then, in the absence of further investment in greater efficiency, we are at a maximum in terms of the size of the global economy. We may well find, although it is likely to be something that can only be seen in the rear view mirror – much like peak oil itself – that the global economy is as big now as it ever will be; based on the available and expected technologies to exploit energy sources.

And if that is the case, then the challenges ahead are threefold. First – we are going to have to figure out to how to share out more fairly the resources of the planet, as we can no longer dismiss the “have nots” on the basis that they will get theirs as the economy grows. Second – we must invest massively in greater efficiency as much, if not more than, we need to invest in alternative sources of energy. Lastly, it is time to fix our global financial system – to address the two preceding challenges. Needless to mention, if you think getting people to wake up to the reality of peak oil is a challenge, good luck convincing the powers that be that we need root and branch reform of our banking system. The gap between what’s obvious to most and what gets done in the interest of the few never ceases to amaze.

Public Service Europe