Civilization and the Price of Oil

I attended a lecture and workshop by Arizonan Guy McPherson last weekend that hit me like a kick in the head. McPherson, who posts at Nature Bats Last and recently published Walking Away from Empire: a Personal Journey, is on tour in New Zealand. According to McPherson and a growing number of prominent energy and economic analysts (including, among others, George Soros, Max Keiser, Gerald Celente, Paul Craig Roberts and Marc Faber), industrial society will grind to a halt some time before the end of the year. The evidence McPherson presents linking the price of oil to economic activity and declining oil reserves with stagnating production is extremely compelling. Seriously. We’re not talking theoretical any more. He’s got me and several dozen of my friends setting up planning meetings to plot our collective survival without imported oil and food, electricity and water that comes out of the tap.

McPherson’s basic premise is that a spike in the price of oil will spark a second global economic crisis. Only this one will be severe enough to bring global financial transactions and trade – and possibly our energy and telecommunications grids – to a total standstill. In other words, TEOTWAWKI (The End of the World as We Know It). In McPherson’s view, things look so bad on the climate change front that the impending TEOTWAWKI moment is actually incredibly good news. The recent appearance of methane vents (up to one kilometer in diameter) in the thawing Siberian permafrost and the conversion of the Amazon rainforest, owing to severe drought, to a net carbon emitter has caused all the international agencies monitoring carbon levels to drastically revise their predictions. Many are forecasting a six degree centigrade increase in average global temperature by the end of the century – some by 2050. According to McPherson, only the total collapse of industrial civilization can save us.

A Warning from Lloyd’s of London

The data he bases his talk on, all freely available on the Internet, checks out. In fact the scariest document I came across was from the world’s most famous insurance company, Lloyd’s of London. It advises the businesses they insure to begin “scenario-planning exercises” for the oil price spike they expect in the “medium term”

A graph published in the Wall Street Journal in February 2012 seems to have triggered a rash of predictions of a second, catastrophic crash triggered by a spike in the price of oil. The graph shows that every recession since 1973 has been triggered by a steep increase in oil prices. Oil surged to $140 immediately preceding the 2008 global economic crisis.

Other economists have extended the oil spike/recession link back to World War II. Since 1947, according to James Hamilton, every recession but one was linked to a spike in oil prices.

These findings make a lot of sense. Businesses have no choice but to cut their oil use when the price goes up. And because of the direct link between energy use and industrial production, economic activity decreases accordingly. This, by definition, is a recession.

Why Now?

It has become a little tiresome listening to Peak Oil engineers and economists, who have been predicting the imminent collapse of the global economic system for more than a decade. Their forecasts are based on the growing cost of oil extraction (we’ve used up all the sweet stuff that’s easy to get at – sucking it out of tar sands and from deep water wells is far more difficult and costly). They deserve credit for correctly predicting the phenomenal increase in the price of oil. And I totally agree with their argument that all industrial activity and economic activity has always depended on the ready availability of cheap fossil fuel. But total economic and industrial collapse? How can they be so certain?

Until recently the exact timing of the next $140 oil spike (and economic crisis) has been difficult to predict. In a genuine free market, price can be predicted from production/demand curves. Unfortunately the true free market is a kind of unicorn because it has never existed under industrial capitalism. Governments, rather than markets, have always determined the fortunes of multinational corporations, through preferential contracting, tax breaks and direct subsidies.

Nevertheless there is now sufficient industry data to establish that world oil production peaked and plateaued in 2004 – and that demand by energy-hungry nations such as China, India and Brazil will continue to expand by at least 5% per year. One law of classical economics that is totally immune to the effects of corporate welfare is that prices shoot up whenever demand increases faster than production.
Russian economist Dean Fantazzini summarizes most of the available data (which includes arctic, tar sands and deep sea oil production) in an exhaustive study reprinted in the Oil Drum in March 2012. More alarming still, he agrees with Pentagon predictions that world oil production will begin to decline by approximately 4% a year in 2014 or 2015.

Why the Current Price of Oil Has Dropped

According to McPherson (and others), severe austerity measures in Greece, Spain, Portugal, Britain, Ireland and Italy have caused “demand collapse.” This, in turn, has caused the oil price per barrel to decrease by 25% over the last three months. There was a similar price drop when the current recession first started in October 2008. However it didn’t take long for industrial production to resume in India, China and other emerging economies. Before long oil prices were back over $100.

As many Americans have noted, the price of gasoline has remained high despite the drop in oil prices. This seems to relate to an anticipated drop in Iranian oil production, triggered by onset of Eurozone oil sanctions. Bloomberg‘s predicts this will create sufficient excess demand to push the price back to $114 per barrel in the 3rd quarter of 2012.

What Obama Could Do (But Probably Won’t)

Because the high price of gasoline is a major campaign issue, we can expect the President to release most, if not all, of America’s strategic oil reserves to flood the market, reducing excess demand and price. Unfortunately the strategic reserves are a drop in the ocean, compared to the hundreds of millions of barrels of Iranian oil lost to the world market.

A far better option for quickly reducing excess demand would be to withdraw all American military and security personal from Iraq and Afghanistan. The Pentagon is the world’s largest consumer of oil (117 million barrels in 2011), and US personnel in the Middle East swallow up 75% of it. Sadly a decision to end the Middle East occupation seems highly unlikely. Obama seems committed to the misguided strategy of using military force to establish US control over dwindling Middle East reserves. Given the vast amount of oil consumed in the process – to run military vehicles and naval vessels, heat bases, etc – you have to wonder if there’s still enough under the sand to make up for the vast amount the Pentagon has incinerated.

Other possible options are to suppress the price by implementing price controls (like Nixon) or to suppress demand through rationing (like Roosevelt during World War II). Obama’s gross mismanagement of the economic crisis thus far, suggests he is unlikely to opt for bold initiatives that might alienate his corporate supporters in the fossil fuel.

We Are the Solution

Even for a long time sustainability activists like myself and my friends, it’s mind boggling to think that six months from now there might be no more petrol at the pump, no food on the grocery shelves and, possibly, no electricity or running water. I can see why this stuff triggers denial in so many people. The hardest part is the uncertainty. It leaves a person hovering over the decision whether to totally abandon life as usual to prepare for the coming catastrophe. For those of us lucky enough to have jobs, it means deciding whether to quit them to begin growing food and devising ways to collect water, cook and keep warm without relying on the grid or money that becomes valueless when there’s nothing to buy with it. If people leave their jobs and the economy doesn’t collapse on schedule, it could have devastating short and long term implications for them and their families.

I guess the answer, for now, is continuing to work at jobs where we can, while simultaneously collaborating with friends and neighbors to make our communities self-sufficient in providing for our basic needs. I can’t see any other alternative. We have all known for some time that the end of cheap fossil fuel was at hand. Here in New Plymouth, we have known for several years that food security is our most pressing survival issue. We were just missing key bits of information – the exact price of oil that was likely to shut down industrial society and exactly how long it would take to get there.

Several New Plymouth neighborhoods have already begun laying out plans to put parks and council reserves into food production. Using John Jaevon’s How to Grow More Vegetables (which tells you exactly what and how much you need to grow) as a guide, we are putting our major focus on staples (mainly grains and potatoes), high protein foods (lentils, dried beans and corn) and seed crops. After so many years of living isolated, individual lives, we are all approaching this new adventure in civic engagement with excitement and anticipation. From everything I read, this is a typical response when people join Transition Towns, Via Compesina and similar groups dedicated to economic and political relocalization. At last we are taking definitive steps to throw over our shallow corporate-dominated lives in favor of healthy, resilient communities. It feels fantastic.

Dr. Bramhall is a retired American psychiatrist and political refugee in New Zealand. She has published a free, downloadable non-fiction ebook 21st Century Revolution. Her first book The Most Revolutionary Act: Memoir of an American Refugee describes the circumstances that led her to leave the US in 2002. Email her at: stuartbramhall@yahoo.co.nz. Read other articles by Stuart Jeanne, or visit Stuart Jeanne's website.