Headed for a lower standard of living?

The amount of oil that is extracted from the ground each year has been close to flat since 2005, regardless of what has happened to price. Since world population has been growing, this means less and less is available for each person. We use oil in many important ways, including growing food, manufacturing and transporting goods, and in some parts of the world, heating homes. There is a clear tie of oil with standard of living. If we have less oil, the tendency is for people’s standard of living to drop.

Figure 1. OPEC and Non-OPEC Oil Production, Compared to Oil Price. (Production is Crude and Condensate from EIA.)

The “natural” approach for fixing this problem is recession and debt defaults. With limited oil supply, oil prices rise. As oil prices rise, the higher prices leave less funding for everything else, because oil is important for many necessities–food and commuting expenses particularly. A person who pays more for food and commuting expenses will cut back on discretionary spending. This leads to layoffs in market segments affected by cutbacks in discretionary spending–especially construction of new homes, building of cars, restaurant spending, and donations to charitable organizations. Those laid off tend to default on loans. Others default as well, especially those who were living “at the edge,” before oil prices rose.

The government tries to fix the problem by “stimulus,” and temporarily “fixes” the situation. This temporarily hides the situation in the governmental sector. What happens, though, is that the government finds itself with increasing debt levels because of its stimulus efforts, and inadequate taxes, because so many have been laid off work, and are not contributing to the tax base.

All of this leads to governmental debt problems, including the United States’ problems with debt limits, and the problems many European countries are having with debt.

How does all of this get fixed? Basically, what the natural system does is push us towards a lower standard of living. This is very uncomfortable. If we need to spend more on food and required energy supplies (as for commuting), we have less to spend on other things. People who are unemployed end up moving in with friends or relatives with jobs. Young adults live with their parents longer. Most of us cut back on discretionary spending.

There are a few ways we can theoretically solve our problem:

1. All of the world could cut back on their standard of living, and reduce their demand for oil products this way. It is hard to see this happening voluntarily. If oil supply should actually decline in the future, multiple cuts in standard of living will be needed.

2. Some parts of the world could cut back on their standard of living, and let the rest of the world live better. Government leaders may push for this, but it is hard to see the population of countries voluntarily accepting this result.

3. Cut back on some parts of the economy that are not critical, so as to try to save the standard of living with respect to the rest of the economy. One that comes to mind is military spending. Another that is often targeted is personal auto use, but if more efficient cars are sold, this change phases in slowly, so is not very effective in the short term. If only few countries cut back, the result is similar to (2) above, however, with the slightly lower oil prices because of the cutbacks benefitting those who choose not to cut back.

4. Ramp up alternative energy supplies to try to offset the shortfall. This approach has been most successful in China and India, where coal supplies have been ramped up greatly, but with negative environmental consequences. When alternative forms of energy are expensive (most energy sources that need subsidies), it is doubtful that the economy benefits at all–the result is just more recession and debt defaults.

Figure 2. World coal consumption by area, based on BP data.

5. Drill for more oil in the US. This doesn’t do very much, very quickly, unfortunately, because of long lead times, and because the most promising areas have already been drilled.

6. Start fighting with each other over the resources that are available, so that declining standard of living is less of an issue for the “winner.” Wars are likely to use up a lot of resources, and don’t really solve the underlying problem.

7. Encourage limited family sizes (one child per family (?)), so that resources will stretch better in the future. It is hard to get agreement on this, however, and the change is very slow to have an effect on total population.

* * *

It is hard to see that any of these approaches will lead to very satisfactory outcomes, in short enough time frames. Ultimately, we are all likely to find ourselves with lower standards of living. This is something governments find it very difficult to talk about and plan for. Perhaps if we could start facing up to the real issues we are dealing with, it would be easier to find mitigations for our problems.

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.
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66 Responses to Headed for a lower standard of living?

  1. Andras says:

    Really good article Gail! Thanx!
    I’m wondering how Americans could live without personal auto usage. You know, I’m from Hungary, where, similarly to Western Europe, the alternative transportation type gets more and more popular. We have significant improvement in # of biker (not only for sport purposes). Some W. europian countries gives tax allowance if someone use thier bike instead of car to get to work.
    As oil production has been flat for a while but that is spread among more and more customers therefore average US or European customer consumes less and less. This is easy if spare time activity (travel) is concerned, BUT if erevy day activity then it gets interesting.
    What I see (maybe I”m wrong), Europeans are preparing slowly. How people in US are preparing for it? I heard something about that less and less SUV are sold – so you drive smaller cars. I do not think this is enough.

    • Ed Pell says:

      I would say the biggest effort is population migration from cold northern states to warm southern states.

    • I think the big response in the US to date is laying people off from work, so a particular segment of the population is less able to buy products and services made with oil. This is not really satisfactory.

      I also think young people are paying disproportionately, by not being able to find good-paying jobs. Without funds, they cannot buy goods and services made with oil.

  2. Keith says:

    Hi Gail,

    It’s rather ironic I think that someone who works as an actuary has through your contributions in these posts contributed to me concluding that contributing to a pension (I’m in my early 40’s) is probably a waste of money and that better uses could be put to those funds.

    • I personally would not contribute more than the minimum amount to a pension plan, especially if you are in your 40s.

      It seems like you would be better off putting your money into land and tools, if you can do gardening/farming. There is too much risk that that far away, your plan will not be there to do much of anything–but maybe it will pay out, at a reduced rate from what you hoped. So there is perhaps some point in putting some in, especially if you are near retirement, and aren’t looking 20, 30 or 40 years into the future.

    • Owen says:

      There is considerable merit to that conclusion.

      Saving for retirement is a phrase poured into the media by mutual fund companies primarily, starting in the 1960s. Every dollar you place with them is about 1.2 pennies per year they keep as annual expense ratio. This is true of all vehicles: bond funds, stock funds and even money market funds. The fund takes its slice from you, and uses a bit of their slice to advertise the need to save for retirement.

      Some reasons why you might not want to:

      1) The die off coming. Soon. This should inform every thought you have, every discussion you participate in, every calculation you perform, and every political choice you make.

      2) Inflation outstripping returns. Bonds have outperformed stocks over the past decade.

      3) Risks of retirement account confiscation in an asset (as opposed to income) tax scenario.

  3. Texasjune says:

    A friend recommended your blog – and I’m happy he did! Will subscribe.

  4. Ian says:

    Keith,

    Gail has a very interesting blog and those of us in the United States should pay heed to her warnings of what our society could look like in the future. However, she is a Casualty actuary (like myself), as opposed to a Pension actuary. To not save money because it may be worthless in 20 years would not be wise. The US will not enter the Stone Age overnight.

    • It is hard to know how to deal with planning for old age. We don’t have good ways of saving, other than having stocks and bonds of companies and governments, and related securities.

      There is land and gold and other tangible investment–but this has risks too. Someone (or a government) can take it away from you, or taxes may rise too high to keep it.

      So we end up making choices. I do have quite a bit of my savings in traditional “safe” investments, but my level of confidence that this will work for the long term is not very high. Maybe it is OK for the short term–we do need to think about that as well.

      • schoff says:

        An old Jewish woman, who had too many bad experiences in the 20th century, told me once, they can’t take away what you know (your knowledge or expertise).

        I’m reading a prophetic book from 1953 by Robert Nisbet “The Quest For Community” (Columbia and Berkeley Sociologist) discussing what was going to happen in the Statism of the US as we depend more and more on a central federal government instead of the historic local organizations that Americans had, before they fully embraced the fully autonomous individual of modernity.

        One could create another Axiom: “They can’t take away your relationships.” (Assuming you have them). It is a good thing to be in relationship with people in various communities from family onwards.

        Comparable writings might be Bonhoeffer’s “Living Together” (more theological), to “Bowling Alone” (more sociological).

        Drilling down to a practicality, I’m not super mechanical, but a decent gardener, and a budding farmer. My friend from school and church keeps my combine going and I keep him in grain and veggies.

      • Les D. says:

        The best plan for old age is to live as far as possible in a way which will allow you to work all your life. Your work in extreme old age may be as simple as watching children as they play, but you will still be working, and getting paid (though maybe not in money).

        I cannot think of a single ten year period of my adult life when the risked, post-inflation, after-tax return on any readily available investment is positive. At present, for example, “safe” investments might return 3%, but that is about what can be expected in the way of inflation, and there is a serious risk of inflation being higher. Yet you can be sure taxes will be payable on any dollar income, regardless of inflation.

        Land — of the agricultural kind — makes a lot of sense as an investment in theory. But in addition to taxes you have maintenance costs for things like fences and any buildings on the land.

        • schoff says:

          Given the tool reference, possibly Gail, means a “bit” of land as in 10 acres of self sufficiency per John Seymour in “Complete Book of Self Sufficiency”. John has a 1,5, and 10 acre plan, beautifully illustrated in the book. Pick the right place in the US with a small house and a small outbuilding and your taxes might not be huge, a couple of years ago I was looking at $40,000 houses in the dakotas on 1/2 acre lots with annual taxes of $300 total. Add some PV and some solar heating and it might be a sustainable pleasant life for some.

          As for fencing. I put in 3 miles of wood fencing around my farm, and there is some maintenance but I’d say it is a couple of hours per year, and around $30/yr to mend it. The costs are more up front then ongoing for $.

  5. Rebecca says:

    Don’t all these Federal budget negotiations have a lot to do with deciding who will have their standard of living decline first?

    • Rebecca,

      The Federal Budget negotiations do indeed have quite a bit to decide who will have their standard of living decline first.

      I think the problem is that while maybe we can get through this set of negotiations, the underlying problem will be there and getting worse. Ultimately, I don’t see a way of getting the negotiations to work.

  6. Shunyata says:

    Gail is reminding us of several things:

    Increasing population, increasing global development and decreasing resource quality are reducing the availability of goods and services.

    Our monetary system generally acts to increase the amount of money available. Initially this action stimulates greater availability of goods and services. In the end this action only stimulates inflation, effectively reducing availability of goods and services.

    Money is only useful to the extent that it can be converted into goods and services. In the absence of goods and services accumulated savings has no practical value. When making investment decisions, a wise investor will consider the purchasing power of money today vs. what savings can buy tomorrow.

    • Shunyata,

      I agree. We have been taught something different–that money is a store of value in itself. That is only true if the amount of goods and services available is increasing, and the amount of money in circulation is not rising too much.

  7. Robert says:

    Gail,
    With the shortage of oil and other resources coming down the road, What is your opinion about the current U.S. immigration policies? It seems to me that importing and artificially growing our population is a terribly unwise thing to be doing.

    • A Real Black Person says:

      I think you mean that Illegal immigration is unwise. Remember,only a small portion of society benefits from illegal immigration. The elite believe that cheap (voluntary slave-labor) immigrant labor is another source of wealth that acts as a damper on wage inflation. Slavery was common in just about every advanced civilization, and was common in the West until slaves were replaced with fossil fuels. In energy accounting, fossil fuels are sometimess referred to as “energy slaves” as a reference to what they have replaced. Cheap labor still has its place, since there is work that machines cannot due but pay too little and are too precarious for the local workforce. As fossil fuels disappear, the act of importing cheap desperate labor to support the crumbling remains of America’s elite, will look attractive as they may seek to retain a lifestyle similar to what they had before, even if it’s at everyone else’s expense. This solution will be temporal because as resources dwindle, this arrangement will become increasingly unstable.

  8. Gary Peters says:

    A nice article, Gail. As one who started teaching and writing about population in 1971, I can assure you and readers that nothing we can do will curb population growth in the short run unless something catastrohic occurs. It is not that we have not been warned about the planet’s inability to sustain population growth, it is that we, especially economists, have ignored those warnings and created instead an economic system that is addicted to growth.

    As a geographer, I’ve never had problems accepting that Earth is finite. I’ve always been suspicious of those, especially economists, who argued otherwise. More and more evidence suggests that our economic system has hit a wall, perhaps many walls. As you and many of your readers know, before the era of cheap fossil fuels began our population struggled to grow slowly to around one billion. It is not unthinkable that a sustained population decline lies ahead, though to what lower level and for what reasons none of us can say right now.

    • Bicycle Dave says:

      Hi Gary,

      we, …., have ignored those warnings

      I submit that the word “ignored” does not adequately convey the underlying cause of our collective inaction. When people ignore something there is usually a reason. I can point to corporate and political machinations and disinformation campaigns, but again we need to ask why people are so willing to be manipulated in self destructive ways? My opinion is not shared by Gail nor most other people – perhaps I’m the child that blurts out that the “Emperor is wearing nothing at all” – perhaps some think I’m dead wrong and will pay for all eternity (not going to happen).

      For a variety of evolutionary reasons, we have come to the point where the great majority of Earth’s people have been indoctrinated to hold an anachronistic belief that there is a supernatural dimension to our existence and, in most cases, some type of continued personal existence after we die. Billions of humans worship, pray and engage in behaviors they believe will enhance the deal they will get in their afterlife – behaviors that have not been helpful in understanding our current predicament. All of this is predicated/justified on the concept of “faith” – which, by definition, does not require any rigorous pursuit of “truth”. And, this is the fundamental problem: the collective human species is not able to effectively deal with the concepts of “true” and “false” (also what can’t currently be known). We can therefore be manipulated by any Shaman that promises some type of reward or comfort. Although supporters of religion suggest that “good deeds”, mental comfort, and noble values emanate from these belief systems – these arguments pale in the face of the suffering that will surely come from “ignoring” our predicament and failing to take rational steps to mitigate the ultimate consequences of the “limits to growth”.

      I’ve heard all the arguments about the limits of rationality, “science is just another religion”, “people need religion” and “who are you to question the existence of god”, and all the other nonsense used to perpetuate myths that should have been discarded a couple hundred years ago. None of these arguments are going to help reverse the insanity of our over breeding and destruction of the planet’s ability to support billions of humans for generations to come.

      What are needed are more voices demanding separation of church and state and a promotion of a new cultural worldview. A worldview that is not human centric but rather an appreciation that humans are only one part of the biosphere – no better or worse than any other living creature. A worldview that understands that the only “afterlife” we have is just like every other species on the planet – it is what we pass on in our DNA and the condition of the environment we leave behind. We need to stop thinking about the “deal” we get from personal salvation and start thinking about future generations of our species and all the other species we depend upon. The movie “Avatar” may be a simple Hollywood fantasy, but I think the Na’vi have a better moral code than we do. There is good reason to envision a more joyful and ennobling lifestyle if we embrace this new kind of “spirituality” (non-supernatural) compared to the self-centered stuff of personal salvation, reincarnation, etc. There actually are some movements in this direction – but, admittedly very small at this time.

      Of course, the above will mostly be categorized as a “rant” against religion – but the stakes could not be higher and perhaps we should be thinking about the underlying causes for our “ignoring” the obvious condition of the Emperor.

      • schoff says:

        This causal link seems Deism/Theism and ignorance of Peak Oil / “Doing the Right Thing”
        might require a little more logical development, energy exploitation of course parallels the enlightenment. At the policy/wonk level I think i’ve met few deist/theist, they almost all
        appeared to be atheist/agnostic, in fact the last meeting I was at in Cern (other than me) there were no theists in the room, from DOE to OECD, UN, etc.. In fact in my slight earlier days dealing with Goldman, UBS, Ibankers I don’t remember meeting any theists there either.

        I simply don’t see the elites, or the people capable of writing the $1B+ checks describable in this manner. Having spent considerable amounts of time in Scandinavia they certainly appear to be post-God, and the PEW Trust data would support that, yet Norway is a worse per capita consumer of energy than the US.

        [I have to do this]

        Perhaps what is happening is all about one of those seven deadly sins? Greed, Lust, Gluttony and cultures that support them (or even celebrate them). What I find interesting especially in the Hebrew Scriptures are the (negative) narratives of the various individuals, they seem timeless, they are just like my neighbors, just like me! So maybe Solomon was right, there really isn’t anything new under the sun.

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  10. sunweb says:

    Bicycle Dave – I agree totally and add that the “mine is bigger than yours” “the wholier than thou” the Us against them is one of our major concerns. A natural response of a herding animal, it has lead us down the paths of violence, ethnic cleansing (consider missionaries), genocide (again consider missionaries as well as other violence), blue laws and gender abuse.

    As an expression of life, as a representative animal and as ourselves, we are exactly how we would end up. We are not dysfunctional, as some would have it. We did not take a wrong turn in the past, ten thousand years ago at the agricultural revolution. We are not a cancer on the earth and we are not disconnected from our environment.

    There are several natural factors that have aimed us at this particular moment in human history, where population pushes against resource availability, where as a social animal we stand against each other, where we are immersed in an environment of our own creative making and where our brilliance threatens us.
    From: http://sunweber.blogspot.com/2011/05/we-are-here.html

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