The Oil – Employment Link, Part 1

I am giving another presentation, which I want to share with you as two posts. The first post is my analysis of the problem. The second post is more about the ramifications, and my view of what might be done.

From what I can see, oil consumption and employment are very closely linked. It is this link that seems to be contributing to the unemployment problems we have now in the US.

Going forward, we know that the US is heavily dependent on oil imports. If these drop, either because world oil production is dropping, or because world oil production is close to flat, and the US is being outbid for the oil, then it seems likely that employment in the United States will drop even more.

These are a selection of slides from my presentation:

Slide 4

Slide 5

Most people who have been looking at oil supply problems understand that oil is used for a wide variety of uses, covering all almost all aspects of what we do. Since machines are built for a particular type of energy source (oil, natural gas, coal, uranium, electricity), there is no easy way to shift from one energy source to another. And the raw materials fossil fuels provide cannot be replicated by something like wind.

Slide 6

In the above slide, we can argue which is cause and what is effect–does higher employment enable higher energy consumption, or does higher energy consumption enable employment–or is our system so tightly linked, that the two necessarily go together? If the two are very closely linked, the problem is that the system may “break”, rather than move very far from historical patterns.

During the 2004 to 2006 period, people were able to use their homes as a source of additional cash. They were able to frequently refinance the homes, taking out the higher equity, and using the funds to redecorate, buy new cars, or go on trips. Lax lending standards also allowed people with very low or unstable incomes to buy homes. All of this allowed a large amount of home building to go on. These activities allowed people to have more spendable income than their earnings from jobs would have suggested. I expect that it was this pseudo-income from increased loans that kept oil use high, even without high employment. Now that lending standards are higher, and home prices are lower, lending acts to depress spending, not add to it.

Slide 7

The graph on the above slide shows the total number of non-farm jobs according to the Bureau of Labor Statistics divided by US resident population. One problem with this calculation is that population includes both the elderly and children, so a person wouldn’t expect the percentage employed to be very high. Also, some people will hold two jobs.

When unemployment rates are as high as they are now, many will drop out, or will settle for a part-time or lower paid job, instead of full-time employment.

Slide 8

Many people don’t understand that oil imports have been declining. Even oil imports from Canada have been flat since 2006. Canadian oil imports have been dropping, as has Canadian non-oil sands production. Both of these declines tend to offset increases from oil sands.

Slide 9

Note that the above slide shows total oil consumption, not imports. US and the rest of OECD (the other “developed” countries–the historical oil importers), while China, India, and the oil producers are getting more of the total, and in fact, are increasing their usage in absolute terms.

Slide 10

Saudi Arabia and the rest of OPEC can sound more powerful, if they can make claims about huge reserves and about the ability to increase production, if they choose to. The catch is that neither the reserves nor the ability to raise production has been audited. Past history shows that OPEC pumps a bit more when prices are higher, and less when prices are lower. This would seem to be a reasonable approach for any producer, especially if their costs of production vary from field to field.

Slide 11

World oil supply stopped rising in 2005. We have been experiencing oil-related problems since 2006, when there was no longer enough to go around, and the US (and many other countries) found it necessary to cut back on oil imports. Higher oil prices drove up interest rates, which pricked the housing bubble.

The way that reduced oil supply took place was through higher oil prices, leading to recession. Reduced credit also played a role. All of this looks like inadequate demand for oil, but it is really inadequate demand for high priced oil. If there had been low priced oil available, it is likely that there would have been plenty of demand.

Slide 13

Biefuels are the tiny purple wedge. This is mostly ethanol from corn.

Imports are the big light green section.

Slide 14

We don’t really know how fast future imports will drop, but it seems very likely they will decline. If total world production starts declining, then imports could very well drop at faster than the 7% a year shown. If world oil production stays level or increases a bit, then it is possible that the decline will be less than that shown–but it is pretty certain to still be a decline.

I show US oil production as being flat. In fact, US oil production has been decreasing since 1970, with few exceptions. US oil production showed a small uptick recently, thanks to deepwater drilling and increased Bakken production. But even maintaining this level of production is likely to be very difficult.

Slide 15

This is the indicated drop in non-farm employment, based on the relationships calculated. I am assuming that the ratio of oil consumption to employment continues to drop by 0.5% per year.

Slide 16

I don’t see how our economy can handle such a continued drop in employment. Governments (federal, state, and local) have been trying to “prop up” the economy, through deficit spending, but this can only go on for a limited time period. If employment tends to drop further, the situation will be even worse.

Slide 17

High oil prices cause recession and a cutback in credit, and these reduce demand for all fuels, and for electricity. You can see this in the 2009 drops in fuel use in the above graph for natural gas and coal.

Note that wind is only the tiny green line near the top. Wind produces intermittent electricity, which is not at all equivalent to oil. But even if it were, the quantity is still very low. (I am using EIA’s way of combining fuels of different types. Other approaches might treat wind more favorably, but its contribution would still be very small.)

Slide 18

This graph shows my guesstimate of traditional, non-farm employment. The timing is quite uncertain. Home gardening and crafts would not be counted in these amounts. I will talk more about this slide, and other slides, in a later post.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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40 Responses to The Oil – Employment Link, Part 1

  1. Kenneth says:

    Well I like the last slide of major events in a sort of fatalistic self reassurance. It has a time scale (although not concrete) what what to expect when. I would like to see more timeline projections and yes I am aware that all future predictions mere guesses, but some are better than others. Thanks Gail and keep up the good work. I look forward to your next post.

  2. Jb says:

    Dear Gail,

    I’m a fan that’s followed you over here from TOD. Thank you very much for posting this presentation; I wish I could see it presented in person.

    IMO, this “Cheap Oil = Jobs” connection is the key to everything. Without cheap oil, it’s impossible for the middle class to pay off it’s debts. If we can’t pay our mortgages, municipalities can’t collect property taxes to keep schools open, pay police officers, and keep the water/sewage plant running. According to M. Whitney, the states are already in serious trouble. Yet there is no political will to address the issue ahead of a breakdown.

    Are we about to see millions of desperate (and likely angry) Americans begging for basic needs? I think we are pretty far down this road already. The first adjustment to the ‘new equilibrium’ is going to be very ugly. Maybe it’s a failure of my imagination, but I just can’t see this going on for much longer. I expect to wake up one morning and see the President holding an emergency press conference announcing the ‘temporary’ closing of banks, rationing of gas, and the freezing of SS payments. The vast majority of people I talk to have absolutely no idea what’s going on. I wish I knew what to do.

    • I agree with you mostly. I don’t expect to see gas rationing, though, because it takes a lot of planning to do. Instead, I would expect to see outages in parts of the country farthest from refineries.

      • Jen says:

        Rationing would indeed be challenging to implement on a short timescale, but it would not surprise me to see the government (in a pinch) require refiners to prioritize the refining of diesel over gasoline (and most everything else), thereby prioritizing the fuel needed by trains, trucks and heavy equipment – thus attempting to keep supply lines functioning, food on shelves, electricity on, etc.
        Looking forward to part II – thanks…

        • The catch is that voters drive cars, so I wonder if it wouldn’t be the reverse–prioritize gasoline over diesel. Of course, ethanol keeps the amount of gasoline needed down a bit. But I don’t think voters are smart enough to realize that we really need the diesel.

          There is actually is an allocation scheme for gasoline that was devised quite a while ago. Nate Hagens had a post on The Oil Drum a while ago. I would have to check for the details. It seems like it was based on number of cars (probably not greater than number of drivers). Everyone would get the same allocation, whether they lived in a nursing home, or were a high school student, and regardless of whether they live in Hawaii or Wyoming. People could then sell their extra allocations. I don’t have time to look for the link now.

        • Jb says:

          Thank you both for your responses. I tend agree with your logic, however, I also wouldn’t be surprised if the government created a modern version of the Office of Price Administration (WW2) should war break out (cyber or otherwise) under the Dept. of Homeland Security. The Office of Homeland Security was created just weeks after 9/11. Fear is a powerful motivator and if gasoline were to suddenly dry up at the local gas station, Americans in their SUVs will demand immediate action.

        • Jen says:

          I will look up the article – thanks :)
          I do appreciate (both) your points about voters/SUV drivers demanding their gasoline, but I would like to point out that voter mandates are routinely ignored – not to say they would be on this point, rioting might actually happen if the tanks run dry! But I would expect the greatest pushback would come from the refiners, who would be forced into a position of selling something (diesel) perhaps less profitable than selling gasoline to desperate drivers. But… what is the value getting to work if the power is off? or driving to an empty grocery? I think that the simple fact of food>getting-the-kids-to-soccer-practice or electricity>how-much-profit-can-we-make-this-quarter will assert itself when push comes to shove. I could be wrong, though – a system that “breaks”, perhaps suddenly, would be darn tricky to anticipate accurately.
          best – j

  3. Don Millman says:

    Gail,
    A very good article! I’ve been harping on the link between decreasing oil production and increasing unemployment in the U.S. for five years on theoildrum.com

    Note that most of the unemployment caused by declining U.S. oil imports will be so- called “cyclical” unemployment, namely, the kind that results from zero growth, or negative growth in real GDP. However, structural unemployment will also result as a result of declining per capita use of oil in the U.S. For example, many jobs will be eliminated in the tourism industry–one of the largest “industries” in the U.S.

    I think there will be a ferocious struggle to keep Business As Usual as long as possible–and even longer than that! For example, as imports of oil to the U.S. decline, I expect a rapid and dirty ramp up of Coal to Liquids. I also think deficit spending will be greatly expanded along with accelerated quantitative easing by the Fed. In other words, I expect a return to rapid or fairly rapid inflation over the next few years; I think policy makers recognize the threat of debt defaults and will move to much greater inflation in an attempt to avoid as many of these defaults as possible. However, fiscal and monetary policy ultimately will be impotent to deal with the decreasing employment caused by global decreases in oil production.

    • Kenneth says:

      I am not sure that coal production would be able to keep up with an increasing liquid fuel demand on it fro an extended period of time.

      • Don Millman says:

        CTL is not a long-term answer to Peak Oil. However, I expect irresistable political pressures to do something about unemployment increasing due to declining oil imports into the U.S. A short-term (ten to fifteen years) surge in CTL could very well extend BAU for ten years or more. The CTL plants would be built in the coal fields so as not to have to transport coal any significant distance for the production of liquids.

        Note that in the nineteen thirties the Germans rapidly scaled up CTL: It can be done with sufficient governmental support. I also expect federal government money (from increased deficits) to finance most of a CTL ramp up. In other words, the building up of that industry will be done with newly printed money as ever more aggressive quantitative easing finances federal deficits in the two to three trillion dollar range.

        • There is quite a long ramp up period on CTL, especially if one has to put in infrastructure to support it, so I expect that it would take 5 years to start getting any material amount. Think about the Hirsch report from 2005.

        • Arthur Robey says:

          The German experience was that they had lots of planes and lots of pilots. But they could not spare the oil to train these young men properly, so that their casualty rate was high.
          (Isn’t war jolly good fun?
          Damn those responsible.)

          Where was I?
          Oh yes.
          The Germans are technically competent, but even in their hour of extreme need, Coal to Liquid was inadequate for the task.
          I would not bet the farm on CTL.

        • Don Millman says:

          Arthur,

          In regard to your comment below, of course the Germans did not have enough CTL during the last year and a half of the war: The U.S. Eighth Airforce was aiming its Norden bombsights on the CTL plants. Depriving Germany of oil was one of the main goals of U.S. daylight strategic bombing. What the Germans did prove was that CTL can be ramped up quickly.

  4. DW says:

    Gail,

    Good article btw. Since you mention the housing bubble in your article, what is your take (if any) on the Federal Reserve’s involvement in the spurt of spending due to its cutting of the Federal Funds Rate? Is it safe to say that central banks have contributed to malinvestment into oil, among other consumables?

  5. Bicycle Dave says:

    The financial press is all abuzz with happy news. Oh, maybe some higher commodity prices but nothing to worry about.

    CNBC:”Asset rebalancing by commodity indexes and mounting signs of a well-rooted economic recovery are expected to keep a tide of money flowing into commodities this week, pushing prices to new highs. Copper started the new year with a record high and oil scaled a two-year peak after U.S. factory and housing data on Monday pointed to better recovery in the No. 1 economy, alleviating concerns investors had lately about growth in China and Europe.”

    Interesting that higher oil prices are just part of a “better recovery”.

    And then we have Jim Cramer with his super happy predictions for 2011.

    http://www.cnbc.com/id/40885040

    The disconnect between folks like us and the US financial world is quite striking. There really is no middle ground here – one group must be terribly wrong.

  6. step back says:

    Gail,

    I hate to be a killjoy, but the causality assumption made in Graph #1 up top is ridiculous.

    Why don’t you also plot out USA population and world population on the same graph?

    Obviously as we have “growth” in population we will likely have growth in number of “jobs” and also in consumption of the crude stuff.

    There is too much group think here on the idea that Peak Oil is the cause and forcing factor for every effect seen in the Universe. That is too simple a model of how the world is put together. There were “jobs” long before there was oil.

    • Did you read what I read regarding causality? (It is actually two slides down in the discussion.)

      In the above slide, we can argue which is cause and what is effect–does higher employment enable higher energy consumption, or does higher energy consumption enable employment–or is our system so tightly linked, that the two necessarily go together? If the two are very closely linked, the problem is that the system may “break,” rather than move very far from historical patterns.

      My concern is that our current system is stable only within a fairly small range. Someone can try to tweak it “up” with more debt. And that will work for a bit, until debt defaults start. People can try to tweak it “down” a bit, by asking people to conserve electricity, and use CFLs. But what is really happening is a big change, and the big change translates to a lot of people losing their jobs. This is not easy for the system to handle, especially because we have so much debt.

      • step back says:

        the big change translates to a lot of people losing their jobs

        The thing we call a “job” is often merely a socio-political designation.
        Someone in power (TPTB) designates another person as “deserving” to share in the booty that flows through the 1st person’s fingers and he calls this arbitrary designation a “job”.

        I won’t go into the black hole of “jobs” performed in the religion or politics arenas. But consider for a moment the so-called “job” performed by a blackjack dealer at a Las Vegas casino. What form of productivity does this person provide to society such that he/she should deserve to partake in the production output of society? The blackjack dealer is merely an almost mindless cog in a law-of-large-numbers machine that is designed to vacuum clean the pockets of those who do not have a good comprehension of the law-of-large-numbers. However, if you have a well placed cousin in Vegas, he can designate you as deserving to have this “job”.

        So when we talk about loss of “jobs”, it is an almost meaningless exercise. What we are really talking about is a decrease in the number of people who will be designated by TPTB as deserving to share in the booty.

        Certainly the total amount of booty will shrink as the availability of cheap oil decreases. But number of “jobs” is still a socio-political designation independent of crude oil. There were jobs before there was oil.

        • In our current system, most of the money gets distributed to individuals through “jobs”. It is the fact that the people have jobs that allows them to buy things–and that may be a big part of the relationship with oil. If people don’t have jobs, then with our current system there is a real problem distributing needed goods to them (except through government handouts).

  7. Doug W. says:

    It seems declining jobs becomes a negative self-feeding loop since so much of our economic activity is based on consumer spending. People who lose their jobs will spend less, and the general public seeing others lose their jobs would spend less. This would lead to more job losses. To a certain extent an economy based on consumer spending rather than basic needs is a giant “make work” project anyway.

    Things may not be as grim as it would appear. Not only is there an underground economy ie “off the books”, but an “invisible economy”. The latter is most common in rural areas and constitutes a direct return on labor such a gardening and home food production, or fuelwood projection.

  8. Fred Magyar says:

    Hi Gail, while I have occasionally disagreed with you in the past over how alternatives such as wind and solar should be viewed in the context of the big picture. I’ve argued that they must be viewed through a very different prism than the one that currently constitutes the BAU paradigm, in any case those are but mere quibbles.

    There is very little that you say here that I could disagree with. Basically you are just confirming that BAU is pretty much kaput.

    All the more reason for using our dwindling resources to shore up local community centered, food and energy production, wherever possible. It’s high time to man the lifeboats and hope some of them actually float…

    Cheers!

  9. Joe Clarkson says:

    Regarding your chart showing a decline in non-farm employment to about 3% of the population: The best thing that could happen is that all the previously non-farm workers become productive farmers, but I fail to see a realistic program that could make that happen.

    Would corporate farms be confiscated to provide small land holdings for emigrants from the cities? Would the unemployed be given hoes and told to work alongside the tractors still tilling the corporate fields? Would farming be collectivized?

    But, how do an army of unemployed urban/suburbanites leave their homes and start life anew in the country? Where would they live? Perhaps they could be rapidly trained to become farmers, but the capital required to successfully move most of the urban population to the country would be impossibly huge. It will be even harder for them than it was for the victims of Mao’s Cultural Revolution who were forced out of the cities and on to farms so that they could assume solidarity with the peasants.

    I see them staying put and gradually becoming more and more destitute. Rationing fuel will mean rationing food too. Eventually the food will become too little for everyone…….

    • I think a big concern is that there may not be enough food for people in cities. If there is a population reduction, they would seem to be disproportionately at risk.

      The question about what to do about getting farmland back to people is one of the issues I raise in part 2.

      • Jb says:

        And not only farmland, but golf courses, city parks and state parks as well. I can envision lakes near urban areas crowded with boats full of people fishing. They will pull out everything they catch leaving the stock depleted. State forests will be full of hunters, many of whom will be firing a rifle for the first time at anything that moves.

  10. Doug W. says:

    Joe – Food is actually one of the things I am most optimistic about. During WWII, the Victory Garden movement and community garden effort was a grass roots movement that was supplying over 50% of the food grown in the country by 1943. While fewer people have those skills today, learning to garden, etc is not beyond the person of average intelligence and health. Hollowed out urban areas such as the large number of vacant lots in Detroit could be turned into urban garden sites. I don’t want to romanticize any of this or make it sound easy, but we are a resourceful people.

    • Kenneth says:

      I am in agreement with the home gardening suplementing your food. If one has a backyard, you can plant vegetables. Where I live, Coastal Alabama, you can have one year round. City dwellers are at a distinct disadvantage. I am currently composting leaves in two areas of my backyard and want to expand it some. So many people send their leaves off to the dump with trash collection, when they make a very rich organic material – great for gardening.

      • Joe Clarkson says:

        Victory Gardens were reputed to have generated about 40% of the nation’s produce, not total food calories. Victory gardeners were not raising beef in backyard herds or harvesting wheat with backyard combines.

        If memory serves, it takes about 0.07 hectare (7,500 sq ft) to provide the subsistence needs of a single person, assuming expert gardening and a vegan diet. At 2.4 persons per suburban household, this would require almost 1/2 acre of productive garden, which is far bigger than most suburban lots, including house and driveway (a 100’x100′ lot is less than 1/4 acre). Of course, those folks living in apartments and condos have no arable land of their own. I sincerely doubt that vacant lots and derelict industrial sites will provide much per capita land for them to garden.

        In any case, it seems to me that it will be far easier to bring country-grown food to people in cities, even if by horse-drawn cart, than relocate most urbanites to the country. Unfortunately, it will be very difficult indeed to round up the requisite number of horses and carts.

  11. DownToTheLastCookie says:

    It’s a 3000 miles drive from CA. to NY. At 70 mph an 80,000 tractor trailer gets 5.5 mpg and it take the driver 42.8 hours driving time. At 55 mph the tractor trailers get 7 mpg and it takes the driver 54.5 hours.

    It seems to me that if we get off the BAU (B.S.) and apply a little human matter between our ears, we can trade labor for fossil fuel with very little decrease in our standard of living.

    Now, there are half a million class 8 trucks on the road doing 150.000 miles a year. Do the math. What this country needs is leadership not war (for oil), but the GOP put a fork in Jimmy Carter 30 years ago. Now you want to tell me that less oil means fewer jobs. I’m not drinking that Kool-Aid. The real reason for the unemployment in this country is the trade defecit and the shipping of 30 million manufacturing jobs out of the country over the last 30 years. Now high school grads have nothing to look forward to but flipping hamburgers, it wasn’t that way 30 years ago when we bought our own goods. But then again how could we have $500 42” inch flat screens and/or computers without foreign slave labor?

    Oh, Gail I know I don’t post very often but this just got to me. I always enjoy your material and looking forward to part two. You’re doing a great JOB. Really, you write wonderful articles.

    Thanks

  12. Arthur Robey says:

    It seems to me that you should be part of a much bigger team, Gail.

    Something along the lines of the “Limits to Growth” group.
    Surely, the people who have enough money to hire the best and brightest on this Planet will have had the Idea of modeling our situation.
    They do it for climate-why not economics?

    OK. Sorry. I forgot.
    That would expose Economists for the Necromancers and Astrologers that they are.

    Still, if they want to be considered scientists they have to be exposed to the harsh light of reality.

  13. Pingback: The Oil Employment Link – Part 2 – Looking at more detail underlying History Chanel’s “Prophets of Doom” story | Our Finite World

  14. Min Barberio says:

    Can I just say what a relief to find someone who decently knows what they’re talking about on the internet. You always know how to bring an issue to light and make it credible. More people need to read this and understand this side of the story. I cant believe youre not more popular because you definitely have the gift.

  15. Sandwichman says:

    Gail,

    I saw your comment over at Juliet Schor’s blog and followed your link.

    What you are saying above about the statistical correlation between oil consumption and jobs is also inherent in the Jevons Paradox, as he stipulated in The Coal Question. I get the impression that discussion of the Paradox is almost entirely second hand and most people don’t go back and look at the source. They should. What they would find is that Jevons explicitly linked the paradox of energy efficiency to classical arguments about how machines “create more jobs than they destroy.”

    At Ecological Headstand, I’ve written about the explicit link in Jevons’s book between the paradox of efficiency and the ubiquitous “technology creates more jobs than it destroys” mantra. I would welcome your comment on the issues I raise there.

  16. Pingback: Oil Limits Overview and Links to Some Posts | Our Finite World

  17. I believe your RSS feed does no functional cause it just gives me a web page of strange characters, would the error be on my end?

    • I think you are probably right about the RSS feed. I know way back in 2007 when I started the blog, I had that problem. I tried to follow the directions. Perhaps I need to check with their technical support. Thanks for letting me know.

    • Check and see if the RSS feed is working now. I am not sure I really did anything to fix it, but it looks OK to me.

      I sent a message to tech support.

  18. bleach says:

    Uneducated question: I know you are using wordpress for this blog, but have you tried any other platforms. I am trying to decide for my blog? and I ask because I like yours.

    • I have had a WordPress blog since 2007, but changed the “Theme” recently, and this seems to be a big improvement. My new theme is called Twenty Ten. It seems to be WordPress’ new theme for 2010. One of the features I looked for was “Nested Comments”. I also looked for the flexibility for putting tabs across the top and various things in the sidebar. I have been very happy with it, and the cost of the whole setup is close to $0. The major drawback that I have run across is that commenters don’t seem to be able to post images, although they can post links to images. I have heard that that is true for Blogger as well.

      The only other blogging software I am familiar with is Drupal, which is what The Oil Drum and Energy Bulletin are on. This is more flexible, but you need a programmer to make changes, and it seems like you are always working around “bugs” in the program. For example, on The Oil Drum, uploading images is a pain, because they often “hang up”, and you lose everything since your last “save”.

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