What we can first notice is 100 years ago much of the work done in the economy was direct human labor. And much of that labor was associated directly with harnessing energy in the form of food or fossil fuels. Today, the largest groups have little to do with production, but are more focused upon the management of complexity directly, or indirectly through providing the knowledge base required by people living in a world of more specialized and diverse occupational roles.
What evolved in the intervening century was that human effort in direct energy production was replaced by fossil fuels. The energy content of a barrel of oil is equivalent to 12 years of adult labor at 40 hours a week. Even at $100 a barrel, oil is remarkably cheap compared with human labor! As fossil-fuel use increased, human effort in agriculture and energy extraction fell, as did the real price of food and fuel. These price falls freed up discretionary income, making people richer. And the freed-up workers could provide the more sophisticated skills required to build the complex modern economy which itself rested upon fossil-fuel inputs, other resources and innovation.
In energy terms a number of things happened. Firstly, we were accessing large, highly concentrated energy stores in growing quantities. Secondly, fossil fuels required little energy to extract and process; that is, the net energy remaining after the energy cost of obtaining the energy was very high. Thirdly, the fuels used were high quality, especially oil, which was concentrated and easy to transport at room temperature; or the fuels could be converted to provide very versatile electricity. Finally, our dependencies co-evolved with fossil-fuel growth, so our road networks, supply-chains, settlement patterns and consumer behavior, for example, became adaptive to particular energy vectors and the assumption of their future availability.
The growth and complexity of our civilization, of which the growing GWP is a primary economic indicator, is by necessity a thermodynamic system and thus subject to fundamental laws.
In neoclassical models of economic growth, energy is not considered a factor of production. It is assumed that energy is non-essential and will always substitute with capital. This assumption has been challenged by researchers who recognize that the laws of physics must apply to the economy and that substitution cannot continue indefinitely in a finite world. Such studies support a very close energy-growth relationship. They see rising energy flows as a necessary condition for economic growth, which they have demonstrated historically and in theory.11,12,13 It has been noted that there has been some decoupling of GWP from total primary energy supply since 1979 but much of this perceived decoupling is removed when higher energy quality is allowed for.14
It is sometimes suggested that energy intensity (energy/unit GDP) is stabilizing, or declining a little in advanced economies, a sign to some that local decoupling can occur. This confuses what are local effects with the functioning of an increasingly integrated global economy. Advanced knowledge and service economies do not do as much of the energy-intensive raw materials production and manufacturing as before, but their economies are dependent upon the use of energy-intensive products manufactured elsewhere, and the prosperity of the manufacturers to whom they sell their services.
Peak Oil
The phenomenon of peaking — be it in oil, natural gas, minerals or even fishing — is an expression of the following dynamics. With a finite resource such as oil, we find in general that which is easiest to exploit is used first. As demand for oil increases, and knowledge and technology associated with exploration and exploitation progress, production can be ramped up. New and cheap oil encourages new oil-based products, markets and revenues, which in turn provide revenue for investments in production. For a while this is a self-reinforcing process but eventually the reinforcement is weakened because the energy, material and financial costs of finding and exploiting new production start to rise. These costs rise because, as time goes on, new fields become more costly to discover and exploit as they are found in smaller deposits, in deeper water and in more technically demanding geological conditions. In some cases, such as tar sands, the oil requires very advanced processing and high energy and water expenditures to be rendered useful. This process is another example of declining marginal returns.
The production from an individual well will peak and decline. Production from an entire oil field, a country and the whole world will rise and fall. Two-thirds of oil-producing countries have already passed their individual peaks. For example, the United States peaked in 1970 and the United Kingdom in 1999. The decline has continued in both cases. It should be noted that both countries are home to the world’s best universities, most dynamic financial markets, most technologically able exploration and production companies, and stable, pro-business political environments. Nevertheless, in neither case has decline been halted.
As large old fields producing cheap oil decline, more and more effort must be made to maintain production with the discovery and production from smaller and more expensive fields. In financial terms, adding each new barrel of production (the marginal barrel) becomes more expensive. Sadad al-Huseini said in 2007 that the technical floor (the basic cost of producing oil) was about $70 per barrel on the margin, and that this would rise by $12 per annum (assuming demand was maintained by economic growth).15 This rapid escalation in the marginal cost of producing oil is recent. In early 2002, the marginal cost of a barrel was $20.
It is sometimes argued that there is a huge amount of oil in deposits such as the Canadian tar sands. The questions this claim raises are “When will it be on-stream?”, “At what rate can oil be made available?”, “What is the net energy return?” and “Can society afford the cost of extraction?” If less available net energy from oil were to make us very much poorer, we could afford to pay even less. Eventually, production would no longer be viable as economies could no longer afford the marginal cost of a barrel. In a similar vein, our seas contain huge reserves of gold but it is so dispersed that the energetic and financial cost of refining it would far outweigh any benefits (Irish territorial waters contain about 30 tonnes).
Some Misconceptions Regarding Peak Oil
The Decline Curve Assumption
The now familiar image of a modeled global oil production curve showing a decline in production of 2–3% per annum (EGross), has led commentators to assume that this is what will be available in future to the global economy. Intuitively this might seem an almost manageable constraint. The assumption on which this curve is based, the decline curve assumption, is incorrect for three reasons. Firstly, it does not account for the increasing energy cost of extracting oil; the net energy (ENet) available to society will decline at a faster rate than the modeled decline.
Secondly, oil exporters, for the moment at least, are growing consumers of oil, and will favor domestic consumption over exports. This will reduce the volume of internationally traded oil.
The third reason lies at the heart of why we must take a whole-systems approach to peak oil. The decline curve assumption assumes there is no strong feedback between declining production, the economy, and oil production. The modeled assumptions for the declining production, even accounting for declining net energy and producer consumption, assume a stable economy and infrastructure. In most of the modeling, the production curve (EGross) is derived from “proven reserves” or “proven plus probable” ones. “Proven” reserves imply we can afford to pay current real prices and deploy existing technology, while “proven plus probable” reserves are estimated on the basis of assumptions about the growth in technology and the idea that increasing wealth might allow us to pay higher prices more comfortably. In other words, at a minimum, the future production curve assumes that current technology and real prices would allow new oil to be brought on-stream to counter some of the effects of declining established production, without which the so-called natural decline rate could be greater than 7% per annum.16
Energy Supply Too Small to Permit Economic Growth
