Peak oil, economic growth and the big lie

In the commentary on Peak Oil recently published in the leading scientific journal Nature, James Murray (the founding director of the University of Washington's Program on Climate Change) and David King (the Director of the Smith School of Enterprise and the Environment, University of Oxford) made the following statement,

Historically, there has been a tight link between oil production and global economic growth. If oil production can't grow, the implication is that the economy can't grow either. This is such a frightening prospect that many have simply avoided considering it.

Why do we find the idea of the end of economic growth so frightening? The reason is what I call, ‘The Big Lie’.

The ‘Big Lie’ of our economic system is that anyone can get rich. Most of the world’s population will not see wealth in their lifetimes, either because of the circumstances of their birth, or because they chose the wrong career path, did not work or study hard enough or did not think it so important to pursue personal monetary gain.

However we all take comfort from the idea that it might be possible to improve our lot or even that, if we make the right choices, we could become rich. Most of us believe that anyone can become wealthy if they truly work hard enough for it. But in a world where finite resources are passing their peak extraction rates this is no longer true: if it ever was.

The great majority of people in our society do not understand economics. Judging by economists’ ability to predict the behaviour of the economy, most of them do not understand economics either. Yet, most people believe they understand the idea of economic growth, or at least the “growth” part. The end of growth does not sound positive.

We intrinsically understand that the end of economic growth means our material situation will not improve: or that to improve it we must do so at someone else’s expense. The already wealthy fear that those poorer than themselves will demand a more equitable distribution of resources. If nations understood that resources are finite (and not endlessly substitutable as economic theory insists) then they would want to conserve those resources (their wealth) instead of exploiting them as rapidly as possible. Credit markets would collapse since the only way to earn interest on debt in a finite world is to secure possession of someone else’s resources rather than milking it from an expanding economy.

A world where people no longer believe the economy will grow is one where the world’s poor majority cannot hold out for a brighter future. They know that the only way their lives will get better is if they equalise the distribution of wealth themselves. Wealthier people need the poor to believe things can get better (or that their poverty is their own fault) to protect their wealth from seizure.

Energy is the central facilitating resource that makes our economy possible. For an economy to expand it requires an increased rate of energy use. But the world’s net energy production already appears to have plateaued. Conventional crude oil production has been flat since 2005. The current hubris about the small uptick in U.S. oil production from shale will eventually be exposed as economists’ hype and ideas that oil production from Canada’s tar sands can be massively expanded are unrealistic.

Increased oil use in China and India has been at the expense of the USA and Europe. The amount of oil available on the world export market has been in decline since 2006 as production plateaus or falls in exporting nations and those nations use more of their own oil production to service their economies and growing populations. 

Nuclear energy is in decline and the fraction of the world’s energy supplied by renewable sources is still small and will not be able to grow fast enough to substitute for declining fossil fuels. The net energy the U.S. derives from coal production peaked in 1990. China has grown its economy primarily on the back of increased coal use but the world’s coal production also appears to be approaching a peak. Since the rate of world energy production appears to be peaking and the energy costs of energy production are constantly rising we are almost certainly beyond peak net energy production.

If world energy production has plateaued then world economic growth must have ended. However, while the U.S. and Europe have staggering debts to pay, we are still hearing stories of economic growth in many Western nations. How can this be?

It cannot. It is so important to maintain the ‘Big Lie’ that governments lie to us about economic growth (and, to be fair, we want to be lied to). This is done by, among other things, manipulating inflation figures by frequently changing the formula by which inflation is calculated and by excluding the cost of fuel (energy) and food (human fuel). If, instead, we keep the inflation formula constant so that it can be compared over time then economic growth statistics look very different. For example, the Shadow Government Statistics (SGS) website shows that the U.S. economy is not, in fact, growing but has been contracting continuously since 2005:

And, in Australia, why should cost-of-living expenses be blamed for the near-eradication from the Queensland parliament of the governing Labor Party at the recent election if our economy and wages are growing? What is the real Australian rate of inflation that the “battlers” must cope with?

How bad will things have to get before we admit to ourselves that the ‘Big Lie’ is, in fact, just that? With the wealthy in charge of our media and our politicians unable to win votes unless they promise us a brighter future I suspect that most of us will never stop believing it. It is human to be irrational and hope nowadays is compulsory. Admitting that the ‘Big Lie’ is a lie also means admitting that too many hard truths are true. The truth that the world is finite is too hard for most of us to understand let alone to bear.