This article was prompted by Gail Tverberg’s important essay, “Affordability, Not Scarcity, Is the Real Energy Crisis”, published on Our Finite World. Her original article, including its charts and detailed historical analysis, should be read at the link.
The conventional picture of an energy crisis is one of physical shortage. Oil wells begin to run dry, petrol prices soar and queues form outside filling stations. Governments respond by searching for new supplies or subsidising alternatives.
Tverberg presents a more complicated and much more disturbing possibility. The immediate problem may not be that the world has no oil, gas or coal left. It may be that the economy can no longer afford to extract and use them at the prices producers require.
Energy can therefore become unaffordable in two different ways.
If its price rises sufficiently to cover the increasing cost of extraction, transport and processing, households and businesses cannot afford to buy enough of it. Demand falls and the economy contracts.
If its price falls to what consumers can afford, producers may be unable to justify investment in new mines, wells, pipelines, refineries and power stations. Production then becomes financially unviable.
There may be plenty of energy remaining underground, yet no price at which the whole system works satisfactorily.
Energy and economic growth
The industrial economy did not develop independently of energy. It was created by the growing availability of relatively cheap coal, oil and gas.
Cheap energy allowed mechanised farming, mass manufacturing and long-distance transport. It supported the growth of large cities and international supply chains. It enabled rising wages, expanding consumer markets and the construction of millions of homes. Credit could expand because lenders expected future economic growth to make debts repayable.
Tverberg connects periods of rapidly growing energy consumption with rising living standards. She also identifies troubled periods when energy consumption grew slowly or contracted. These periods were associated with financial crises, political instability, wars and the failure of governments.
This does not mean that energy alone explains every historical event. It does suggest that political and financial systems become much harder to sustain when the energy available to support each person is no longer increasing.
Our present arrangements were built during an age of expansion. They depend upon continuing expansion. Governments, pension systems, banks, property markets and businesses all make promises based upon the assumption that tomorrow’s economy will be larger than today’s.
If the economy is shrinking instead, many of those promises cannot be honoured.
Why low prices are not necessarily good news
We are accustomed to regarding falling oil prices as beneficial. They reduce the cost of transport, heating and production.
In a weakening economy, however, a low oil price may be evidence that households and businesses lack purchasing power. People travel less, buy fewer cars, postpone buying homes and reduce discretionary spending. Factories produce less and freight movements decline.
Falling demand then pushes energy prices below the level needed by producers. Investment is cancelled. Older fields continue to decline and new supplies are not developed quickly enough.
The apparent abundance may therefore be misleading. Oil is available, but only because fewer people can afford to use it. Meanwhile, the productive system required to maintain future supplies is deteriorating.
This explains why scarcity and affordability cannot be separated from the wider economy. A barrel of oil has no economic value unless someone can afford to buy the products made from it. Equally, an oilfield cannot continue operating unless its income covers the cost of machinery, skilled labour, finance and replacement infrastructure.
The debt problem
Debt has allowed governments and households to postpone recognition of the affordability crisis.
Borrowing creates additional spending power in the present. It can support house prices, consumer spending, public services and business investment even when underlying prosperity is weakening. But borrowing is a claim upon future production.
If future production does not grow, the debt becomes harder to service. Governments borrow more to cover existing commitments. Businesses refinance loans that cannot realistically be repaid. Households devote a rising proportion of their income to mortgages, rent, energy and food.
Eventually, borrowing ceases to disguise contraction and begins to intensify it. Banks become cautious. Investment falls. Property prices weaken. Unemployment increases and tax receipts decline.
The financial economy may continue to report growth for a time, particularly when inflation is included. The material economy can nevertheless be shrinking underneath it.
The implications for the future
The future may not be characterised by one dramatic moment when energy suddenly runs out. It is more likely to consist of repeated losses of affordability.
People will give up discretionary purchases first. New cars, holidays, restaurant meals, entertainment and non-essential household improvements will become less frequent. Businesses dependent upon these purchases will contract.
Housebuilding will suffer because the combined cost of land, materials, energy, labour, finance and regulation exceeds what buyers can afford. Existing property prices may also weaken as mortgages become harder to obtain and household incomes come under pressure.
Governments will face the same difficulty. The cost of maintaining roads, hospitals, schools, defence, pensions and public administration will rise while the tax base becomes less dependable. Borrowing may postpone reductions, but it cannot permanently replace the productive economy from which public revenue ultimately comes.
Large projects will become particularly vulnerable. High-speed railways, data centres, complex renewable-energy systems and major urban developments require huge quantities of energy, materials, finance and specialist labour. A government may announce them, but completion and continued maintenance are separate questions.
Global supply chains will also become less reliable. Higher shipping, insurance and financing costs must be absorbed somewhere. Consumers may be unable to pay more, while producers and farmers cannot indefinitely accept less.
The result is likely to be declining variety as well as declining quantity. Goods that depend upon complicated international supply systems may disappear long before the basic materials from which they are made become physically exhausted.
The localist response
Tverberg describes the economy as a self-organising system. When one form of economic organisation becomes unworkable, people do not simply stop living. They find different ways of meeting their needs.
This is where localism becomes important.
Localism is not a government scheme for reproducing the present economy on a smaller scale. It is the natural reorganisation of economic life around what remains necessary, affordable and locally possible.
Food production, repair, care, basic building, water management, woodland work and small-scale energy provision will become relatively more important. Discretionary employment will decline, releasing people who will need to find useful work closer to where they live.
Localities with fertile land, water, practical skills, workshops and strong social relationships may be more prosperous in real terms than places which retain high financial incomes but depend completely upon distant supplies.
Prosperity will have to be understood differently. It may consist less of the number of new products purchased and more of secure food, maintained homes, dependable neighbours and access to essential services.
National government will remain necessary for activities such as defence, telecommunications, specialist medicine, intercity rail and the maintenance of a common legal and monetary framework. But it may no longer possess the resources to organise every aspect of life from the centre.
More responsibility will fall upon localities, families, small businesses and informal networks. This will not necessarily happen because government deliberately chooses localism. It will happen because centralised systems become too expensive and unreliable.
Preparing for a different economy
The importance of Tverberg’s argument is that it moves the discussion beyond the simple question of how much energy remains.
The decisive question is how much useful energy society can afford after meeting the costs of obtaining it. If those costs rise while household purchasing power falls, the industrial economy can contract even though substantial physical resources remain.
Governments will continue to describe each difficulty as temporary. They will promise renewed growth through borrowing, technology or investment. Some innovations will undoubtedly help. But technology cannot remove its own dependence upon energy, materials, infrastructure and paying customers.
The sensible response is not to attempt to predict an exact date for collapse. It is to make households and localities less dependent upon systems whose affordability is deteriorating.
The future may contain less energy, less mobility and fewer material choices. It need not contain less human purpose. As the growth economy loses its ability to provide, people will begin to rebuild economic life around necessity, proximity and sufficiency.
Localism will not prevent the shrinking economy. It is how we may learn to live within it.
