Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here’s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Economic growth: a zero sum game

By Cameron Leckie - posted Thursday, 25 November 2010


Understandably growth, growth and more growth is the mantra of politicians, economists and media commentators the world round. However, what if future growth is just not possible? The recently released World Energy Outlook (WEO) from the International Energy Agency (IEA) did not go so far as to say that future growth is no longer possible, but it does suggest that at the global level future economic growth is now a zero sum game. In short, China and India’s gain is the OECD’s loss.

From the WEO 2010 Executive summary (p. 6):

All of the net growth [in oil demand] comes from non-OECD countries, almost half from China alone … . Demand in the OECD falls by over 6mb/d.

Advertisement

So what is the big deal? If you are an economist, this is not a problem, because increased efficiency in the use of oil will allow growth to continue while demand falls - problem solved. In the real world however, this is the least probable outcome. A more likely result is that a six million barrel a day (mb/d) decline in OECD oil demand will result in a corresponding drop in OECD GDP. Let’s explore why this will be the case.

First some background. It wasn’t so many years ago that the IEA scoffed at the idea of peak oil. The IEA simply predicted a rate of future economic growth and calculated the volume of oil required to meet this growth, resulting in widely optimistic projections such as oil production of 116 mb/d a day in 2030 according to the 2007 WEO. An interesting trend has however occurred over the last few years. Each year the WEO has become more pessimistic in its view of future oil production, this year being the most pessimistic yet with production in 2035 being only 99 mb/d and crude oil production having already peaked. Even this subdued forecast is likely to be optimistic. One of the IEAs mandates is economic development; it is therefore rather difficult for the IEA to suggest there is insufficient oil to allow growth to continue. The IEA has got around this little problem by suggesting that the oil intensity of the OECD economies will improve significantly over coming decades, as shown in Figure 1:

Figure 1: Projected oil intensity in the 450 scenario

There is no doubt that improvements in the oil intensity (defined as the quantity of oil consumed per unit of GDP, the lower the better) can be made, but the difficulty of this challenge should not be under estimated, particularly given current circumstances. Many OECD nations have ageing populations, are heavily in debt, virtually all are dependent on oil imports with some notable exceptions (Norway and Mexico) and have in many instances outsourced much of their manufacturing industries to developing nations.

Take the United States for example. Drowning under government and private debt, with “real” under and unemployment at about 22 per cent, with nearly a quarter of mortgage holders “underwater” and consumers paying down debts, the result is reduced oil consumption due to fewer people transiting to work, fewer goods being exchanged and fewer holidays being taken (see Figure 2).

Advertisement

Reducing the oil intensity of an economy will require significant capital investment, something that in the weakened economic state of many OECD nations is unlikely. Reducing oil intensity is also subject to diminishing returns, each increment of improvement in oil intensity will become increasingly expensive and difficult to achieve. In this context, significantly reducing the oil intensity of the economy would be a monumental achievement.

Perhaps history can provide an example of a more likely future scenario; the 2007-2008 oil price spike being such an example.

Increasing demand combined with flat oil production from 2005 onwards led to the oil price reaching US$147 a barrel in July 2008. At this price, oil (among other factors) induced a recession. The recession resulted in falling demand (demand destruction, see Figure 2) and hence a collapse in oil prices. It also led to significant cuts in oil/gas/renewable energy investments (future supply destruction). This cycle is likely to repeat itself in the years ahead with each cycle increasing in intensity as demand destruction leads to future supply destruction. For this reason, many of the actions that could potentially assist in reducing the oil intensity of the economy, such as electric vehicles, are likely to be subject to the law of receding horizons.

  1. Pages:
  2. Page 1
  3. 2
  4. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

63 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Cameron Leckie has a Bachelor Science and a Graduate Diploma in Education. Employment experience includes a range of management positions both in Australia and overseas in the telecommunications industry. He is a member of the Australian Association for the Study of Peak Oil and Gas (ASPO Australia). Since finding out about peak oil in 2005, he has written extensively on the topic and in particular, its impact on the aviation industry.

Other articles by this Author

All articles by Cameron Leckie

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 63 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Deals from Sponsor
Flipit.com Australia
20% extra off on everything when you use this Moss Bros promo code
Grab 30% off full price items with this J. Crew promo code
Photobook Australia voucher code: Get 56% off on all products
Reid Cycles discount code: Get 10% off sitewide
Use this Facial Co. exclusive coupon code to get 5% off sitewide
Advertisement

About Us Search Discuss Feedback Legals Privacy