Oil and the Economy: Why it is important to figure out approximately where we are headed

There seems to be a lot of conflict among folks attempting to make plans for the future. I think the basic cause is different views regarding where we are headed, and how fast changes may take place.

The most popular view among the general public, including research scientists, is that growth will continue practically indefinitely. Let’s call this Scenario A. This forecast by Price Waterhouse Coopers might be typical of what one would expect:

Expected base case GDP and population growth to 2050 from Price Waterhouse Coopers report

Figure 1. Expected base case GDP and population growth to 2050 from Price Waterhouse Coopers report

These growth rates don’t look all that high when presented on an annual basis, but they really add up over time. At an annual growth rate of 7.6%, India’s GDP in 2050 can be expected to be 27 times its real GDP in 2005. At an annual growth rate of 0.8% per year, by 2050, India’s population can be expected to 43% higher than in 2005.

A second scenario, which I call Scenario B, is one that is held by quite a number of people who have been studying oil and gas depletion models. It is focused on an expectation that oil and gas production in the future will follow a pattern such as this one prepared by Colin Campbell, taken from the April 2009 ASPO-Ireland Newsletter.

Colin Campbell forecast of future oil and natural gas extraction, made in April 2009

Figure 2. Forecast by Colin Campbell of future oil and gas production, made in April 2009

Note that in this scenario oil production starts dropping off about now by about 2% a year. Natural gas production doesn’t drop off as quickly. Substitutes, such as ethanol and coal aren’t shown on the chart, but many think they will help cushion the decline. With this view, the big concern is adapting to having a little less oil and gas each year.

A third scenario, which I call Scenario C is a very rapid drop off in fossil fuels of all types, such as might happen if a financial crash, or a major disruption of international trade, suddenly affected world economies. This is a graph I made for an Oil Drum post in 2009:

One theoretically possible outcome with respect to future oil supply, if a financial crash or some other disruption should seriously disrupt our current way of making markets work.

Figure 3. One theoretically possible outcome with respect to future oil supply, if a financial crash or some other disruption should seriously disrupt our current way of making markets work.

Under this scenario, the big concern is that the exponential growth we see in many things–real GDP, bank deposits, world population–will suddenly (or perhaps over a period of, say, 20 years) come to an end, and may in fact lead to collapse. As Kenneth Boulding was quoted in saying in yesterday’s post, “Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

We are depending on fossil fuels to maintain and increase our food supply. It is doubtful that with a much smaller fossil food supply, the world will be able to continue to support a population of 6.9 billion people.

The Connection between Oil Supply and World GDP

One other thing that it is helpful to understand is the apparent connection between oil use and GDP.

Graphic by Robert Hirsch showing the relationship between world GDP growth and oil production growth.

Figure 4. Graphic by Robert Hirsch showing the relationship between world GDP growth and oil production growth.

This graphic indicates that for the historical period shown, a rise in the world oil consumption of a given percentage seems to be associated with an increase in World GDP that is about 2.5 times as large. No doubt, increases in the supply of other fossil fuels play a role in this GDP growth as well.

We are not really certain precisely how the relationship between GDP and oil consumption will work on the way down. At least part of the growth in GDP is from oil substituting for manual labor. If we start moving the other direction–toward more manual labor–will that bring GDP down more quickly, since manual labor does not produce a very large quantity of goods and services, in comparison to oil? Efficiency gains and substitution of natural gas and coal may work to keep GDP from dropping as quickly, but these require investment–for example, building electric cars to replace gas-powered ones.

Looking at the three scenarios

Scenario A – Economic and Population Growth continues almost indefinitely

This is the scenario that underlies the pronouncements in the press. Even most mainstream scientists seem to believe this view of the future.

With this view, oil, natural gas, and coal use continue to rise, practically indefinitely, and forecasts of CO2 levels are very high. Climate change is a major concern, as is getting countries to voluntarily cut back on their fossil fuel use. The expectation is that economic growth will continue forever (although perhaps at a bit lower rate) even if major cutbacks in fossil fuel use are made.

One detail that is sometimes raised by those in the peak oil community is that it is not entirely clear where all the fossil fuels assumed in the climate change models will come from, since climate models seem to assume more fossil fuels (oil, natural gas, and coal) than are available.

Comparison of Fossil Fuel assumptions used in climate models of 2008 IEA World Energy Outlook with Luis de Sousa and Euan Mearns' view of the amount of fossil fuels actually available.

Figure 5. Comparison of Fossil Fuel assumptions used in climate models of 2008 IEA World Energy Outlook with Luis de Sousa and Euan Mearns' view of the amount of fossil fuels actually available.

Figure 5 is from this Oil Drum post by Luis de Sousa. This difference will not be an issue to many people, because of concern for being near a climate change “tipping point,” but it does give rise to differing viewpoints on how urgent it is to cut back.

The other detail that “peak oilers” raise is that oil production seems likely to decline on its own. While there is still a need to limit coal use, and perhaps natural gas use, a large share of the oil problem perhaps will naturally take care of itself. If there is a way to ease the transition away from oil, for example through tax structure, that perhaps makes sense, but the reason for the move away from oil may be as much because the oil won’t be there, as it is for climate change reasons.

Scenario B – Oil and natural gas production estimates based on depletion analyses govern the likely future

With this view of the future, future oil price and technology changes are viewed as likely to have relatively small impacts. Oil and natural gas production are expected to progress in accordance with models which take into account the tendency of oil supply from oil fields to decline. Typically, the models assume that much of this natural decline is offset by infill drilling, development of new (usually smaller) fields, and very slow development of unconventional oil.

With this view of the future, the issue is to try to hold up GDP (or some other measure of prosperity) by substituting materials for material that are expected to be in short supply, such as oil–for example, building electric cars, to replace gasoline powered vehicles. The type of decline in GDP that perhaps might be expected is perhaps something like this:

Scenario B - Two possible options for future real GDP

Figure 6. Scenario B - Two possible options for future real GDP (Selected by author).

Some with this view have focused on adding wind and solar to the electric grid, to increase electric capacity for electric vehicles and for general “growth” in the use of electricity. Some who are not concerned about climate change issues may also suggest an increased role for coal in electricity generation, or even coal-to-liquids, as a substitute for oil.

Most of the transition-type plans one sees for the future seem to follow the belief that the future will follow Scenario B. The plan is often to substitute approaches which use a little less oil for current approaches, which use more oil. Or the plan may try to substitute electricity for oil, or reduce electricity use.

Gardens or small farms will often have diesel operated equipment, and may be irrigated, perhaps using a solar pump. Electric fences may be used. Improved public transportation, such as long distance trains, may be part of the plan. Because the expectation is that the economic situation is not deteriorating too quickly, climate change is often a major consideration, because of its connection with coal usage.

Scenario C – Crash scenario, because the “system” does not hold together in some way.

The assumption in Scenario B, above, is that depletion will govern the amount of future oil and gas extracted. This implies that oil and gas companies will continue to do infill drilling, and will continue to drill in new fields they are developing. It also assumes that systems will work together pretty much as they do today–our electric system will keep operating; our governments will keep operating, and the markets (based on supply and demand) will continue to operate.

But it can be argued that the depletion models really set an upper bound for oil and gas production (assuming no new major innovations in extraction technology, and assuming prices remain high enough to encourage drilling at the level assumed in the depletion models). The question is whether our systems can in fact work together as well as we hope. If not, there could be a major disruption–perhaps not as soon as suggested by Figure 3 above, but it could be quite soon–certainly within the next 20 years.

One of the big concerns is whether the financial system will be able to continue to function as it does today, since it needs growth to maintain its current method of operation. Without growth, huge debt defaults seem likely, and growth is tied in with oil supply. Of course, even if the financial system does fail, there is the possibility that new system could be devised. Also, as long as the means of production remain, it is possible that other systems may be able to continue operating, even if, say, the banks fail.

The problem is that we have many vulnerabilities, and we may not even understand all of them. Our “just in time” delivery system is one. Another is our international trade system. Almost every high-tech product requires raw materials from around the world, so disruption in this system could be a major issue. If electrical companies go bankrupt, or are unable to pay their employees because of financial disruptions, this could lead to widespread electrical outages.

For a person who is concerned about these types of issues, the way to plan for the future becomes more problematic. One of the issues is just keeping the current system together as long as possible. Making major changes–and this could be as simple as adding a lot of wind and solar to our current electrical grid–could be the type of change that brings the system down.

Faced with possible immediate problems, climate change may move down the priority list for some. If a Scenario C type of situation should occur, it would likely pull down natural gas and coal production, in addition to oil production. Food and water supplies could easily be affected. One might expect population to decline–if not immediately, over a period of years.

It seems to me that one of the types of mitigations we would want to consider in planning for Scenario C  is restoring technology of the type we had prior to the industrial revolution. At that time, there were wind turbines made with local materials that were used to power some factories. We also made use of canal boats for transportation of goods. Ropes and knots were also used to a significantly greater extent than they are used today.

Steps would also need to be taken to develop food production capabilities without using fossil fuels, and also for pumping or otherwise gathering water. Food storage would be another major area of concern.

If Scenario C is really an issue, one almost feels powerless. What politician would ever consider such an extreme scenario? But even if a Scenario B evolves toward a Scenario C because things start falling apart after many years, one would still need plans for local food and water production that do not depend on fossil fuels.

I should add that I do not see any way that wind and solar PV are, on their own, self-sustaining. To me, they can only be produced with fossil fuels. They will stop working not long after fossil fuel support ceases to be available. For example, suppose you have a solar PV panel. If it is part of a grid connected system, it will stop functioning when the grid stops. If it is separate, it will be useful only as long as the appliance to which it is connected still works. If we lose the ability to make new computers and light bulbs, the solar panel will have much less use.

Blending Scenarios

Most people would say that we really don’t know for certain which scenario is ahead. As a result, we perhaps need to look at both Scenarios B and C, weighted as we think appropriate, in terms of what types of planning we will do.

There are no doubt some variations I left out. If one sees financial markets as being able to mitigate Scenario B, perhaps this might lead to higher oil and gas prices, and more fossil fuel production. In this case, the result may be something between Scenario A and Scenario B.  The reason I tend to discount this possibility is because high fossil fuel prices tend to cause recession, and bring oil and gas prices back down again. At this point we don’t have good substitutes (on any reasonable scale) for oil, gas, and coal, either. The substitute that comes closest is ethanol, and it is in competition with resources needed for food.

It is important that we think through which scenario(s) are most likely, and how this affects where we choose to place our priorities. While it would be nice to be able to do every type of mitigation, some may not be helpful, and may even be counter-productive. We also don’t have resources to do everything, so we need to make choices.

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 financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
This entry was posted in Introductory Post, Oil and Its Future, Planning for the Future and tagged . Bookmark the permalink.

28 Responses to Oil and the Economy: Why it is important to figure out approximately where we are headed

  1. Todd says:

    I posted this link on TOD the other day: “The Imminent Collapse of Industrial Society” by Peter Goodchild http://www.countercurrents.org/goodchild090510.htm He reviews a number of issues (14 IIRC) and it is a long read. I think his title says it all. There are a number of big and small nits that can be picked but I still consider it a must read.

    I consider myself a realist although I’m typically seen as a doomer. My position is that BAU is simply dead meat and the only issues are how rapidly “collapse” comes and the form it will take. Yes, we can go back to earlier technologies and skill-sets but how many people actually have expertise. Further, one reason there were apprentice programs was to learn the “tricks of the trade.” For example, I have books on emergency surgery and hospital dentistry but no one in their right mind would want me to touch them. My point in this is that information, per se, isn’t useful without proper training. Or, at the very least will be used inefficiently.

    It is going to be a hard row.


    • Todd,

      The whole topic of collapse is a difficult one. The Oil Drum would like to stay away from collape because it is upsetting to readers. Because of this issue, neither Peter Goodchild’s post or this post of mine is likely to appear on The Oil Drum.

      I am afraid you are right, about the path ahead being a difficult one.

      • Todd says:

        Hi Gail,

        Well, there are a number of pages devoted to energy…but that’s not what I want to discuss.

        Perhaps it comes from my years in the chemical industry in a variety of positions including plant manager. Safety is always a critical issue. I’ve seen one plant disaster that killed 15 people to single individuals who died from doing something “wrong.” I was part of a two person team that investigated single events.

        Our approach to safety was always to start considering a worst case and how it could be avoided. In other words, what stupid thing(s) could a worker do that would lead to harm and how could we prevent that. Obviously, we could not foresee the future, yet, we had to make realistic assumptions of what might occur.

        The same thing is true of society. We cannot see how things will play out…but we can make realistic assumptions so that there are “error bars”/probabilities to allow us to make reasonable decisions. I know from my own experience that it is impossible to cover every base preparing. However, it provides me with the knowledge that this is indeed the case. No rosy glasses.

        In the case of society as a whole, we can easily see obvious areas of concern ranging from peak energy to the financial system. From my perspective it is unfortunate that the approach is usually from a top down perspective (things are going down hill but it’s not “that” bad) rather than bottom up perspective (things have gone to heck, now how do we get back?).

        Well, I’ve overstayed and I’ll let it go at this unless you want to get into it deeper.


    • Fred Magyar says:


      For example, I have books on emergency surgery and hospital dentistry but no one in their right mind would want me to touch them. My point in this is that information, per se, isn’t useful without proper training. Or, at the very least will be used inefficiently.

      Perhaps you could raise a few pigs and practice on them while living high on the hog… If nothing else you’ll have some bacon and ham with which to pay a more qualified surgeon or dental practitioner other than your self >;^)

      Good Luck! I too firmly believe that BAU is already deader than a doornail.

  2. Joe Clarkson says:

    The important thing to remember is that “collapse” happens to individuals and families even without industrial civilization shutting down. If the world economy enters a state of continuous gradual decline in GDP of 2% per year (1/2 of a modest oil decline rate), then there will be increasing numbers of “surplus” workers, most of whom will be living in cities and having no way to support themselves without a job.

    As the jobless rate continually rises, how long will it be before the remaining workers cannot support them via the various forms of welfare? How will a rapidly declining base of workers support the elderly and retired? At what level of unemployment; 20%, 30%, 40%?

    If the increase in unemployment generally tracks the decline in GDP, it will not take many years before unemployment rates reach Depression levels, without the Depression era “benefit” that many of the unemployed were already in rural areas and could scrape by on their own, albeit with much difficulty and suffering.

  3. majorian says:

    The period of 1977-1982(price peak in 1979) should is what a combined economic crash and oil shock should look like and we are well below that transition with GDP inflation adjusted and the GDP tracks with energy. Even during the Great Depression
    the paralysis of the Hoover administration and governments around the world(the real cause of collapse) supressed growth for a short amount of time.


    It would be very dumb for the US to cut the social safety net which strongly stimulates economic activity and even with 40% unemployment such programs (food, housing and unemployment benefits)would tend to smooth out the worst aspects of economic collapse. However, the emergency of the idiot Tea Party does raise the specter that the US could ‘choose’ collective suicide.

    “Civilizations die from suicide, not by murder.” –Arnold Toynbee

    First, the world only gets 37% of its energy from oil so a 60%? reduction in world oil production wouldn’t reduce world GDP by close to 60%. In the US 60% of oil goes to personal transportation so higher efficency cars, carpooling and mass transit would
    would take up a lot of the slack.
    Outside of the US a depression would hit exporters hard as it did the US in the 1930s.

    In short, I’d say you are too negative in the short run and too focused on energy alone as being the main driver here.

  4. QTC says:

    Did anybody notice that Europe is collapsing economically even though it is arguably the most energy efficient regional economy in the world? Did anybody notice that the U.S. is collapsing economically even though it is the largest energy hog in the world, with some of the worst efficiency ratings? Did anybody notice that ENERGY EFFICIENCY DOESN’T MAKE A DIFFERENCE in terms of economic sustainability?

    • You would almost think energy efficiency is negatively correlated with economic stability. If a country is operating using close to the minimum amount of energy required for its standard of living, it would seem as if it has no place to cut back, if energy supplies suddenly become tighter.

      “Growth” in many of the EU countries hasn’t been all that good either–no doubt related to the high price of oil–and this has contributed to their financial problems.

      • QTC says:

        And I almost forgot that Japan, THE most energy efficient economy in the world (arguably) has been in a state of economic decline for the past 20 years and it appears the decline is becoming permanent.

        Yet energy gluttons, such as the US, are also in decline, and again paradoxically, other energy gluttons DNsWO (developing nations with oil) are growing rapidly.

        The real knife’s edge for economic survival seems to be whether a country is a net producer/exporter or a net consumer/importer of oil, not its energy efficiency.

        As you said, efficiency is what you are driven to when you have no other options and your “energy margin” [like ‘profit margin’] is getting thinner every year.

        Furthermore, DNsWO are growing from a third world state to the level of say, Brazil, so there’s plenty of headroom for growth up the income scale.

        This suggests that there is a possibility that capitalism has a “ceiling” beyond which it cannot grow. Beyond that, all that’s left is for the ultra-rich to cannibalize the lower 3/4 of the economy, since they cannot get richer otherwise.

  5. Kenneth says:

    Peak Oil has been a a major concern of mine since 2006. I have no confidence in the IEA’s 2010 WEO report – where unconventional oil makes up for the decline of conventional sources. Their prediction that oil will only cost $113 a barrel in 2035 (2009 dollars) is absurd. We hit $147 a barrel in 2008, athough the market collapsed, but we are back and flirting with $90 a barrel now. I can’t imagine the amount of infrastructure required to process tar sands and shale oil at levels needed with a 5% crude oil decline rate.

    So here is the question.
    I read (and have read other articles by you) the three scenarios of our energy/ economic future. What is your gut feeling on our future?

    As a lay person, although not uneducated, a blend of B & C seems likely and if you were to be narrowed down to a date – when?

    These are some dates I found.
    IEA – 2006 – no problem until 2035
    JOE – 2012-2015 shortages
    DOE – Glenn Sweetnam – 2011-2015 shortages
    ASPO – 2012
    German Military – 2010 – although not severe until 15 years later
    Charles Maxwell , oil investor- 2017-2018 although plateaued by 2015
    Shell’s chief executive – 2015
    Barclays and Bank of America – 2013-2014 shortages

    Thanks for all the hard work done to educate us.

  6. an391 says:

    “You would almost think energy efficiency is negatively correlated with economic stability. If a country is operating using close to the minimum amount of energy required for its standard of living, it would seem as if it has no place to cut back, if energy supplies suddenly become tighter.”

    No the above is false: if a country A has the same GDP per capita as country B, but higher energy efficiency, and A and B are both 100% net importer, in all cases it is better positioned than B on an oil price rise (all else being equal). (doing 20% less miles with a better mpg car still makes you spend less on oil (at the country level) than 20% less miles with a higher mpg car)
    And as to the case of the US compared to Europe, one should not forget that the US is still the third oil producer worldwide !
    In any case the best mitigation peak oil policy for the US right now would for sure be to increase its -completely at the bottom amongst OECD countries- gas tax level.
    But that of course will most probably not happen.

  7. RobM says:

    I used to worry about B and C until I read the recent papers of Tim Garrett:

    Now I’m mostly depressed because I see no personal mitigation strategy for my family that will work. I’ll probably proceed with plans to purchase a small farm but the joy and hope is gone.

    Garrett’s findings are profound on many levels. They imply a hostile climate by the time my children are my age and an unlivable climate for their children, NO MATTER what we do, including a C scenario crash.

    His findings are also very enlightening around the effect and value of energy efficiency.

    I’m a long time admirer of your work Gail. I hope you find the time to read Garrett’s work and perhaps write an article on it.

    • Climate is an issue, and it is worrying that, for example, trees I plant now may not be right for the climate 20 or 40 years from now.

      But I don’t think climate is any more overwhelming an issue than the other issues we are facing. There were people living on the earth, even during the last ice age. They just moved to more hospitable areas. Our problem now is that there are so many people in the world that it is hard to move some people without displacing others. Also, we are very much tied to living where we are, and doing what we do.

      There is considerable evidence that the climate fluctuated a fair amount in the past, certainly within a given geographical area. I expect this is part of what helped keep world population down. Somehow people lived with the situation–perhaps focusing more on the present, and less on long-range expectations for the future. I thought this post, called Life after the Crash: Lessons from Kenya had some helpful observations.

      • RobM says:

        Thanks. I used to share your view. Please try to find time to read James Hansen’s Storms of My Grandchildren. It might change your perspective.

        • I think world population may be down quite a bit for a lot of reasons by the time the storms hit, so you may not have grandchildren living through the storms. I know that is not a very comforting thought, though.

          We have all been brought up with the idea that the climate has a fixed way of behaving. But if we look back, we are between ice ages, and based on past gaps between ice ages, we would be about due for another ice age. So even if we get our CO2 problems fixed, we may still have to contend with changing climate.

          Perhaps it is partly our belief system that needs readjustment. We may have to live more in the here and now, rather than having expectations for 50 or 100 years from now (or even 10 years from now). We have been brought up to believe that we have control over everything, even nature, but I am not sure that that really is the case.

  8. Doug W. says:

    Interesting discussion. What lies ahead may be difficult, but I am not sure that it is worth dwelling on to the point that we give up hope or are paralyzed. The fact is no one really knows. We need to make our best personal guess, then use today to prepare the best we can.

  9. wotfigo says:

    Gaily. I followed your posts avidly on TOD. I feel your views contributed significantly to their hard data on depletion. I will follow your posts here now. I am glad The Energy Bulletin will be posting your links.
    Keep up your great work. It is appreciated by many PO aware people. Thank you.

  10. JVP says:

    It would seem to be it scenario C is already happening in some areas(developing countries with depleted resources such as Yemen, Somalia), while others are beginning scenario B.( developed but resources importing countries like the EU and the USA)

Comments are closed.