The more I learn about energy, and peak oil in particular, the more concerned I get. So, in the spirit of the season, I thought I would share some of it with you. I’ll get to some concrete things we need to start doing now to mitigate as much as we can the impact of falling oil supplies in the coming years. But before I do that I think a post or two on peak oil itself and its impacts would be a good idea. And, before that, a post on why energy is so important.
So, what is the economy? Basically, it is the conversion of naturally-occurring raw materials into forms we find more useful (and the provision of services, most of which use equipment created from raw materials). All of this wealth creation (conventional economic measures place no value on nature) requires work, in the scientific sense (the transfer of energy from one system to another), to be done. It requires energy turn raw materials into more ‘valuable’ goods. In essence, the economy is the use of energy, whether that energy be supplied by humans, animals, or, mostly these days, from fossil fuels.
Neoclassical economics doesn’t really understand the ramifications of this all that well (neoclassical economics is the economics that we are led to believe is the only economics at school, at university, and in the media). In fact, neoclassical economics doesn’t understand the economy very well at all. Neoclassicism looks at just two types of input, capital and labour, and it assumes (because it lives in a make-believe world) that prices accurately reflect value. So, if 50% of GDP goes to labour and 50% to capital then adding 1% to the labour input would increase the GDP by 0.5%, same with capital, and increases in those inputs should explain all economy growth. Problem is they don’t. Only a fraction of economic growth is explained by increases in capital and labour – the rest, the so-called Sowol Residual, is actually most economic growth and is vaguely attributed to technological progress.
It turns outthat if you look at the percentage increases in energy used (note not just expended but used, so efficiency gains matter too) it matches economic growth almost precisely. That means something very important. We’ve got wealthier (ie converted more raw materials into goods and equipment for services), by using more and more energy, mostly fossil fuels, especially oil (37% of the world’s energy supply comes from oil, 85% from all fossil fuels). To grow our economies we need to use more energy every day and use it more efficiently.
So, what will happen when the day comes that the supply of oil starts to fall? Unless there are dramatic gains in thermodynamic efficiency, less energy means are smaller economy to be divided amongst evermore people. Simple as that. Tomorrow, I’ll write about when that’s going to happen.