How High Oil Prices Lead to Recession

There is ample evidence that spikes in oil prices leads to recession, at least in the US, which is an oil-importing nation. James Hamilton has shown that 10 out of the last 11 US recessions were associated with oil price spikes. How does this happen? An analogy can perhaps help explain the situation. This analogy also sheds light on a number of related economic mysteries:

  1. How can oil have a far greater impact on the world economy than its share of the world GDP would suggest? After all,  BP’s World Energy Outlook to 2030 shows the world cost of oil is only a little over 4% of world GDP.
  2. How can high oil prices continue to act as a “drag” on the economy, long after the initial spike is past?
  3. Why isn’t a service economy insulated from the problems of high oil prices? After all, its energy use is relatively low.

The Oil Analogy

An oil product, such as jet fuel, is in some ways analogous to a specialized employee, with skills different from what human employees have. Let’s think of an airline. It has human employees–pilots, copilots, flight attendants, baggage workers, mechanics, and airport check-in personnel. None of these human employees can actually provide the energy to make the jet fly, however. It takes jet fuel to do that.

What happens if the price of jet fuel triples? Jet fuel is now more that than triple the price (near $3.00 gallon) it was in the late 1990s (under $1.00 gallon, at today’s prices).

Figure 1. Jet fuel price in December 2012 $. Jet fuel price per gallon is Spot Gulf Coast price from EIA; price adjustment based on CPI-Urban, from US Bureau of Labor Statistics.

Figure 1. Jet fuel price in December 2012 $. Jet fuel price per gallon is Spot Gulf Coast price from EIA; price adjustment based on CPI-Urban, from US Bureau of Labor Statistics.

The high cost of jet fuel is analogous to the jet fuel employees’ union demanding triple the wages they were paid previously. So what is the airline to do? With very high aviation fuel prices, many tourists who might buy airline tickets will be “priced out” of the market for long distance travel. The airline can sell some airline tickets at higher prices, but not as many.

One thing airlines can do is to cut the number of flights, taking the least fuel-efficient planes out of service and reducing flights on routes with the most unfilled seats. According to a recent Wall Street Journal article, airlines spend 34% of revenue on fuel. With such a high fuel cost, even with these changes, airline ticket prices will remain high. But perhaps with fewer flights, the airline can make a profit.

If an airline cuts its number of flight, this leads to an “across the board” cut in the goods and services the airline buys. The airline will use less jet fuel (and thus use fewer “jet fuel employees”). If it is able to retire quite a few fuel-inefficient jets, “jet fuel employees” will be cut to a greater extent than human employees. It will use fewer human workers, at all levels: pilots, copilots, flight attendants, and ground workers of all types. The airline will reduce its electricity usage because it needs fewer gates in airports for its operations. The airline will also need less gasoline because it will operate fewer baggage-transport vehicles and other ground vehicles.

In many ways, the airline is simply shrinking in size to reflect reduced demand for its high-priced services. When this happens in multiple industries, the result looks very much like recession. I described this situation earlier in a post called How is an oil shortage like a missing cup of flour?. In that post, I said that if oil supplies are short, the situation is not too different from a baker who does not have enough flour to make a full batch of cookies. If he still wants to make cookies, he needs to make a smaller batch, and so needs to cut back on all of the other ingredients as well.

Other Changes an Airline Can Make to Fix Profitability

Apart from cutting back on the number of flights and retiring inefficient jets in the process, there are other things an airline can do to offset the higher “wages” demanded by the jet fuel employees union. One is to reduce the wages of human workers. For example, wages and pension plans of pilots can be cut back, or hours lengthened.  Wages of other workers can be frozen or cut back.

Another approach is a merger with another airline, so that “redundant” employees can be eliminated, and flights can perhaps be cut back further. Of course, these layoffs and cutbacks in wages will add to recessionary impacts, because these workers will have less discretionary income.

A third approach to restoring profitability is to automate some of the functions previously handled by human employees. In this case, electricity is used to substitute for human workers. We can think of this automation as substituting new “electrical employees” (analogous to the “jet fuel employees”) for human employees. Relative to the amount of physical work (pushing buttons, moving luggage, etc.) humans can do, humans are far higher paid than either “oil employees” or “electricity employees”. If we assume that the energy of humans is similar to that used by a 100 watt light bulb, at $20,000 a year, humans are paid roughly 1,500 times as much as “oil employees” and 3,500 times as much as “electricity” employees, to do equivalent physical work. So if automation is an option, it almost always saves money.

A fourth way an airline can reduce costs is by purchasing lighter, more fuel-efficient jets. Making a transition of this type takes a long time. Boeing’s Dreamliner 787 is an attempt in this direction, with a 20% fuel savings anticipated. Boeing has over 800 jets of this type on order, but the 50 already in use have been grounded until battery problems are resolved. Quite a few changes have been made in the new jet, so there is a possibility of additional problems also needing to be ironed out, before production ramps up as planned.

Another Example: Asphalt

Asphalt is another product whose consumption has dropped in recent years.

Figure 2. Trends in US Fuel Consumption by Type, with 1994 = 1.0, based on EIA data.

Figure 2. Trends in US Fuel Consumption by Type, with 1994 = 1.0, based on EIA data.

The amount of asphalt produced in 2012 was only about 70% as much as was produced in 1994. The reason for the shortfall in asphalt is partly because at current high oil prices, refineries can make more profit by selling high-valued products like gasoline, diesel, and jet fuel than they can make by selling asphalt. A recent EIA article titled, Hydrocracking is an important source of diesel and jet fuel, makes the statement, “A refinery’s ability to upgrade low-value products into high-value products and convert high-sulfur material to low-sulfur material with a secondary unit like a hydrocracker plays a key role in determining its economic fate.”

State budgets are tight for a variety of reasons, including inadequate gasoline taxes to cover the cost of maintaining roads. While part of the need for asphalt can be obtained from recycling, many  governments are finding that today’s asphalt costs are so high that concrete roads would be cheaper in the long runMany states have found it necessary to go back to gravel on some of the smaller roads, because of the high cost of paving today. State and local budgets are likely to be stretched even farther if the US government solves its budget woes by sending programs back to the states, and lets the states work out the funding.

What happens when a state decides move some roads from asphalt back to gravel? For one thing,  jobs lost in the road paving business. Also, the new gravel roads have an uneven surface, providing more rolling resistance, so automobile and truck mileage is poorer. In addition, roads tend to degrade more quickly, keeping long-term maintenance costs high. If budgets are tight and roads are not maintained, there is a chance gravel roads will become unusable.

If local governments continue to use asphalt for paving (or switch to concrete, which has even higher initial costs, but lasts longer), they find a need to cut back on other types of services they provide, if they are to avoid a tax increase. This leads to services such as library hours being cut. Cutting back on services reduces both wages and energy costs (lighting and heating/cooling costs). The effect is not all that different from what happens in the airline industry: cuts are made that affect both wages and energy usage of many types. Employee wages seem to be especially affected because changes in employee hours can be made more easily than, say, closing a building or running fewer school buses.

The More General Problem

It is not just airlines and users of asphalt that cut back because of high oil prices. The story plays out in different ways in many industries. Clearly any restaurant is at risk if high oil prices cause consumers to cut back on discretionary purchases, because reducing the frequency of eating out is an easy way of reducing discretionary expenditures. If restaurants have fewer customers, some restaurants will close and are not replaced. This is the restaurant industry’s  way of “making a smaller batch”. The result is fewer jobs, less oil use, and less use of resources in general.

Another type of discretionary purchase that gets cut when oil prices are high is the purchase of a new car. A recent article by the New York Times says that the recovery of auto sales since the recent recession has been very slow, with charts for several countries. Reduced car sales is yet another example of making a “smaller batch.” The result is fewer jobs, less use of oil, and less use of many other types of resources.

A similar story can be told about new home sales. These dropped in the recent recession, and have been slow to recover. The drop-off is frequently attributed to the housing bubble bursting, but rising oil prices played an important role as well. When oil prices increased in the 2004-2005 period, the Federal Reserve raised interest rates, trying to cut oil prices. Instead, the higher interest rates together with lower discretionary income from high oil prices led to lower housing prices, starting in 2006. (See my article from the journal Energy, here or here.)

The Economic Implications of High Oil Prices

Our economy is all about “adding value”. But where does this value added come from? To a significant extent, this value comes from adding external energy of some sort. It is really the “energy employees” I mentioned earlier that add this value. Human workers are needed as well, but with automation, the number of human workers required tends to decline.

The ability of external energy to add value is what causes the link between  GDP, energy consumption, and oil consumption. Oil plays a special role, because it is easily transported, and can be used in many situation where electricity or some other form of energy (such as human energy, wind energy, or natural gas) would not work.

If we look at a graph of changes GDP compared to changes in world oil and energy usage, (Figure 3, below), we see that all three tend to rise and fall together. In fact, changes in oil and energy usage appear to slightly precede GDP changes. This is the pattern we would expect, if economics are causing a “smaller batch” to be made when oil prices are high.

Figure 3. World growth in energy use, oil use, and GDP (three year averages). Oil and energy use based on BP's 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.

Figure 3. World growth in energy use, oil use, and GDP (three-year averages). Oil and energy use based on BP’s 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.

Part of this change may simply reflect a transfer of energy use from less efficient industries (ones using more high-priced oil in their fuel mix) to more efficient industries (ones using less high-priced oil in their fuel mix). If could also reflect a shift in oil and energy distribution to more less efficient countries (ones using more high-priced oil in their fuel mix) to more efficient countries (ones using less high-priced oil in their fuel mix). For example, Greece (which specializes in vacation tourism, and which uses much oil in its energy mix) would be expected to be an oil/energy loser (Figure 4, below).

Figure 4. Greece's growth in energy use, oil use, and GDP (three year averages). Oil and energy use based on BP's 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.

Figure 4. Greece’s growth in energy use, oil use, and GDP (three-year averages). Oil and energy use based on BP’s 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.

China (which uses much coal in its energy mix and thus keeps costs low, and specializes in inexpensive manufacturing) would be expected to be an oil/energy gainer (Figure 5, below). See my posts, Energy Leveraging: An Explanation for China’s Success and the World’s Unemployment and Why Coal Consumption Keeps Rising, for discussion of this issue.

Figure 5. China's growth in energy use, oil use, and GDP (three year averages). Oil and energy use based on BP's 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.

Figure 5. China’s growth in energy use, oil use, and GDP (three-year averages). Oil and energy use based on BP’s 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.

High prices work together with a number of other factors (including increased automation and increased competition from countries with lower wages) to force wages of humans down, and to reduce the number with jobs. The proportion of US citizens with jobs started declining about the year 2000 and accelerated with the recent recession:

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census.  2012 is partial year estimate.

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate.

If we look at the ratio of wages (broadly defined, including proprietors’ income and taxes paid on behalf of employees by employers, but not including transfer payments, such as Social Security payments and Unemployment Insurance) to GDP in Figure 7, below,  we see that the ratio of wages to GDP has been dropping since 2000–another indication that human wages are not keeping up with the rest of the economy.

Figure 7. Wage Base (defined as sum of "Wage and Salary Disbursements" plus "Employer Contributions for Social Insurance" plus "Proprietors' Income" from Table 2.1. Personal Income and its Distribution)  as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

Figure 7. Wage Base (defined as the sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

If “Energy Employees” Are Really Doing Most of the Work

If it is really the “energy employees” doing most of the work, then the models used by many economists today are not really correct, and some of the standard beliefs based on these model aren’t right either. For example:

1. The idea that the value of oil or other energy to the economy is proportional to its price doesn’t hold. This can be seen from the examples provided. In fact, if oil or another needed energy product is removed, very close to no work gets done. Humans can provide a little energy, but compared to the energy of oil or electricity, our efforts are puny, and very high-priced. Without external energy, humans’ efforts are limited to tasks like digging with a stick in the ground, or making baskets with reeds that they have gathered.

2. One type of energy doesn’t necessarily substitute easily for another type of energy. Just as one type of employee (mechanic, airline pilot, or flight attendant) can’t necessarily be substituted for another, one type of energy cannot necessarily be substituted for another. Dreamliner’s battery problems illustrate that even trying to substitute a little more electrical energy for oil energy can provide a technological challenge.

3. Somewhat surprisingly, high oil prices remain a drag on the economy permanently, because the high wages of the “oil employees” remain. Output isn’t any higher with these higher wages, so there is not a proportional benefit to society from these higher oil wages. More human workers may be hired in the oil extraction process (often in another country). But even if more workers are hired in the same country, their output does not replace the entirely different kind of output that is provided by the (now-unaffordable to many) high-priced oil.

Another factor in the slow uptake of high oil prices is the fact that governments can temporarily hide some of the effects of high-priced oil through unemployment benefits and stimulus programs. This temporary cover-up cannot continue for long, though, because governments (such as the US and other oil importers) soon run into problems with high deficits (as is happening now). When governments raise taxes or reduce benefits to solve their financial problems, the deferred high-priced oil problems return, showing that the problem never really left.

4. An economy which is mostly services, is not insulated from the problem of high oil prices. Both the airline and asphalt examples illustrate how high oil costs can circulate through the economy and disrupt discretionary spending, even in the US.  (Also see Ten Reasons Why High Oil Prices are a Problem.)

Services tend to be the “fluff” of society because for the most part, because we could live without them, at least temporarily. For now, we have a temporary respite from oil-price impacts because of high deficit spending by governments. If governments are forced to balance their budgets, cutbacks seem likely in many areas of services, including medicine for the elderly, higher education, and government-sponsored research programs. If cutbacks occur in areas such as these, we can expect that GDP will shrink faster than savings in oil and energy use–a reversal of what has happened in the past, and a reversal of what many economists have come to expect in the future.

Also, contrary to popular belief, we cannot increase the economy very much by simply selling services that do not require energy to one another. It really takes “energy employees” to play their role as well. Without external energy, we can dig in each others’ back yards with sticks, but this activity doesn’t add much to the economy. We need “energy employees” playing their role as well, if we are to have computers, and metal scissors, and the many other tools we expect, even in a service economy.

85 thoughts on “How High Oil Prices Lead to Recession

  1. Are you familiar with the concept of a keystone commodity? I can’t remember where I read it but I’ll summarize below.

    Some commodities can be labeled Keystone commodities simply because everything relies upon them. Fresh water and oil are the most obvious.

    As you noted above, increased use of fossil fuel employees, despite their increasing wages, reduces the need for human employees.

    The blogger was trying to find a way to calculate how much each industry had levered fossil fuels. Wish I had more details. 🙂

    • I’ve heard about keystone species, and I suppose that keystone commodities would be parallel. According to Wikipedia,

      A keystone species is a species that has a disproportionately large effect on its environment relative to its abundance. Such species play a critical role in maintaining the structure of an ecological community, affecting many other organisms in an ecosystem and helping to determine the types and numbers of various other species in the community.

      The role that a keystone species plays in its ecosystem is analogous to the role of a keystone in an arch. While the keystone is under the least pressure of any of the stones in an arch, the arch still collapses without it. Similarly, an ecosystem may experience a dramatic shift if a keystone species is removed, even though that species was a small part of the ecosystem by measures of biomass or productivity. It has become a very popular concept in conservation biology.

      That is a good point–oil is a good example of a commodity that plays a disproportionate role in the whole system. If we take away most of our ability to transport goods and people, we are in deep trouble. Even if our loss is only the loss of asphalt, and this leads to rapidly declining road conditions (because governments can’t afford the big up-front cost of concrete), this could be a big problem as well.

        • I think you are right that Liebig’s Law of the Minimum is involved with keystone resources.

          Thanks! I have read some of Manicore’s work before, but I need to read the parts I have missed. They are very good!

  2. Yet another nice summary Gail, thanks a lot for that.
    And it would be nice to be able to formalize a bit more about the first question “How can oil have a far greater impact on the world economy than its share of the world GDP would suggest? After all, BP’s World Energy Outlook to 2030 shows the world cost of oil is only a little over 4% of world GDP.” as indeed, the general “economics mindset” keep on looking at these 4% and say “what are you talking about”, more or less.
    Somehow one senses that energy acts as a kind of “leverage” to the whole economy, and anyway no energy would mean no economy.
    Maybe a usable approach is the equation proposed Jean-Marc Jancovici, which is done on the same principle as the “kaya equation” but without talking about CO2 :
    Saying :
    Jobs = Jobs
    So :
    Jobs = (jobs/gdp)*gdp
    (the number of jobs is equal to the number of jobs per unit of GDP times the GDP)
    So :
    Jobs = Jobs/gdp * gdp/energy * energy
    (gdp is replaced by gdp per unit of energy, times energy)
    Explained below (but in French) :

    Another point would be also to say that the part of GDP dedicated to energy is not well accounted for, for instance one could say that a big part of the defense budget is in fact related to “energy security” so in fact energy supply…

    • Note :
      gdp/energy, in fact refers to energy efficiency (unit of gdp produced per unit of energy consumed).
      In the end what this means (quite straightforward) is that in order for jobs to increase without increasing energy supply, either energy efficiency has to increase, or the number of jobs per gdp unit (salaries decrease)

    • THanks for your ideas! Also, thanks for pointing out Manicore’s article. Google Translate does a somewhat acceptable job on the article.

      Manicore has located some data bases that I have not used myself. I will need to study them–perhaps contact him about some of the sources if I can’t find them on the Internet. I have often used only US data because I know where to find it.

      I looked at the US number of jobs/GDP, and compensation per job in the US, and came up with somewhat similar results to what Manicore did. See this post: The Close Tie Between Energy Consumption, Employment, and Recession.

      With respect to GDP / Energy, the issue I have increasingly become aware of is that for the US (and quite a bit of OECD), is that while this ratio has been declining, the decline is in no way sustainable. What is happening is that the US (and I expect most of the rest of OECD) is increasingly not producing the goods it needs to continue to operate, because of the decline in industrialization. In the case of the US, the cost of the increasing amount of imported goods is being paid for by debt. The growing debt is not sustainable. The cost of the imported embedded energy is not considered in the ratio GDP/Energy, so it gives a misleading impression of the amount of energy needed to sustain our way of living.

      THis is a graph I had hoped to include in the current post, but decided I was already trying to cover a lot of subjects. It shows how little US industrialization has grown, compared to the commercial and residential sectors.

      Trend in US electricity consumption by sector

      When I looked at natural gas and oil usage by the industrial sector, I found that they had also decreased since 1994– oil by 7.9% and natural gas by 8.5%. This growing divergence does not seem to be sustainable because of the debt issue mentioned above.

      • “is that while this ratio has been declining, the decline is in no way sustainable. What is “happening is that the US (and I expect most of the rest of OECD) is increasingly not producing the goods it needs to continue to operate, because of the decline in industrialization. In the case of the US, the cost of the increasing amount of imported goods is being paid for by debt. The growing debt is not sustainable. The cost of the imported embedded energy is not considered in the ratio GDP/Energy, so it gives a misleading impression of the amount of energy needed to sustain our way of living. ”

        Yes this for sure is a key point, and it skews a lot the ability to derive the evolution of energy efficiency in a realistic way from simple GDP and energy consumption figures for a country (in the article the evolution of energy efficiency is also presented for the world, so this problem should not arise in that case, but not sure if it is very reliable).

        However this debt aspect might also be mixed up with production having moved towards products with higher added value and increased efficiency, when residential has probably seen its energy efficiency in fact decrease : bigger houses, bigger cars; eventhough in the pure “economics” gdp/energy sense, I’m not sure what an efficient house or commercial building is : one sold for a lot and built using little energy at capex time ?

        But for sure the increasing debt aspect is the thing that is not well captured in the equation, especially when considered for a country.

        • I have remarked that on a world-wide basis, Energy Consumption per unit of GDP stopped decreasing about shortly before 2000 (about the time the Kyoto protocol was signed). This are links to a couple of related articles:

          Is it really possible to decouple GDP growth from Energy Growth

          Thoughts on why energy use and CO2 emissions are rising as fast of GDP.

          Also, I wrote an article, Climate Change: THe Standard Fixes don’t Work. This is an image from that post:

          World carbon dioxide emissions with line fitted to 1987-1997 emissions

          THe straight line is fitted to the years before the Kyoto protocol was signed. Emissions/GPP ratios continued to look good for most individual countries, but not in total.

          • Of course you can decouple GDP from energy. Financial institutions trade phantasy assets back and forth “producing” a lot of GDP. But that doesn’t help the real world very much.

          • Thanks for the links, about “Consumption per unit of GDP stopped decreasing about shortly before 2000 (about the time the Kyoto protocol was signed).” hope this is related to China boom (and coal boom in particular, which also shows an acceleration around that time) and not to the Kyoto protocol!
            Although the Kyoto protocol being CO2 oriented and not energy/resource constraints oriented, clearly things like CCS could lead to both less CO2 emissions and more energy and resources consumption (and so a decrease in energy efficiency).
            Simple volume based taxes “on fossile energy content” would be much better than these cap and trade stuff, clearly aiming at reducing CO2 and resource consumption through efficiency.

            • We can hope it was mostly the China addition to the World Trade Organization that caused the problems, but the Kyoto protocol put China on notice that quite a few other countries would not be using as much coal (leaving the import market open to China). If Kyoto Protocol tended to discouraged heavy industry in OECD nations, that would be a plus for China, especially if there were no taxes on imports.

              I agree that taxes would be better than cap and trade, but they have to include high taxes on imported goods from parts of the world that use coal for manufacturing, if they are to keep world coal use down.

    • Inflation means that a person’s salary doesn’t go as far, for goods and services. The person will need to cut back in discretionary expenditures–exactly the scenario I described. The economy shrinks back, and oil prices go down. Oil demand increases again, prices rise again, (rinse and repeat). So I’m not sure we are saying anything different.

      At some point, things get bad enough, and the government must lay out huge amounts of funds to try to offset unemployment and provide stimulus. Then the problems get moved over to the government financial sector. THat is where we are now. For my long-range view of where we are headed, see my post, 2013: Beginning of Long Term Recession?

      • Gail, your article says the U.S. government has “financial problems,” because as you say, “Their tax revenue is lower, because of layoffs in discretionary sectors. Their expenditures are higher.”

        This wrongly assumes the federal government is like you and me — that it can run short of dollars to pay its bills. It cannot. If all federal taxes fell to $0 or rose to $100 trillion, neither event would affect the ability of the federal government to pay its bills — not even by $1.

        The federal government cannot have financial problems. It only can have economic ignorance problems.

        The federal government became Monetarily Sovereign on August 15, 1971. You and I (and the states, counties, cities and the euro nations) are monetarily non-sovereign). To understand economics, it is necessary to understand the difference.

        If you wish to learn, go to:

        Rodger Malcolm Mitchell

          • Gail, you said, “The US government cannot manufacture resources where none exist.”
            To which resources are you referring? Which resources is the US government unable to obtain?

            You said, “It can print dollar bills that have nothing behind them, to temporarily pay its bills . . .”

            Behind dollars is full faith and credit, the same thing that always has been behind dollars. What else do you think is behind dollars?

            I’m disappointed that you have not taken the trouble to look at the reference I sent you, because it is clear you do not understand the difference between Monetary Sovereignty and monetary non-sovereignty. You seem to think the federal deficit is a burden on the federal government, just as a personal deficit is a burden on a person.

            False. The federal deficit is not a burden, but is an economic necessity. Why not take just 15 minutes and learn a bit about Monetary Sovereignty. It will open up a whole new world for you.

            Rodger Malcolm Mitchell

            • There are several different parts of the problem. One is that governments are not permanent. The Soviet Union was a “Superpower” for many years, but collapsed in 1991. A few years earlier, no one would have ever guessed the situation. Part of the reason for the US concern about debt is because its debt level is now over 100% of GDP–a danger level. It is also running $1 trillion deficits pretty much every year, with no end in sight. If a person looks through history, collapses of governments are common.

              Another issue is that we really are running into limits on physical things. Oil is clearly one of them, and because of limits on oil, there are limits on things we make from oil.

              Asphalt is one thing we make from oil. US consumption is down to 70% of 1994 levels. We ether have to pave more roads in concrete, or turn more roads back to gravel. The decision seems to be to turns roads back to gravel in some parts of the country, and may be more so as we go along. Gravel roads will mean a reduction in mileage for vehicles.

              Other oil products are running into limits as well. The amount of gasoline that we as a country can buy depends on the wages that our workers are earning. If they are earning high enough wages, they can afford to buy gasoline for their vehicles, and farmers can afford fuel for their machinery. One problem we are running into is that wages are not rising the way they should be. Part of this is that there are more unemployed people (and discouraged workers) who cannot afford cars, and part of this is that competition with China and India is keeping wages down. Government printing of money is not doing much to get wages back in the hands of wage earners (except that because of deficit spending, taxes are not high enough to cover expenses, so after-tax wages are higher than they “should be”). But this really can’t continue without ramifications.

            • Gail, you said, “Part of the reason for the US concern about debt is because its debt level is now over 100% of GDP–a danger level. It is also running $1 trillion deficits pretty much every year, with no end in sight. If a person looks through history, collapses of governments are common.”

              Why exactly is a debt level in excess of GDP a “danger level”? Federal so-called “debt” is nothing more than the net deposits in T-security accounts at the Federal Reserve Bank, made in the past 30 years. GDP is the one year total of production. Classic apples/oranges, meaningless comparison.

              You also said, ” . . . because of deficit spending, taxes are not high enough to cover expenses . . . ” If I read this right, you think federal taxes pay for federal spending, which of course is not true, or we wouldn’t have deficits.

              Gail, you really should try to understand Monetary Sovereignty. Your comments reflect popular misconceptions about our economy, and you are spreading misinformation. Go to and read any of the 900+ posts.

              Rodger Malcolm Mitchell

        • OK, they can print all they want. But then why does any government even bother? Why are all the national oil companies of the oil exporting countries selling their most valuable asset flat out, if they could just print the money? Russia certainly could. Why are politicians fighting over tax increases, instead of simply handing out money to calm down the people? Is it an old-fashioned custom to look for real revenues? Or is it maybe a little more complex, with bond markets, interest rates and currencies?
          Actually, the US and Japan are not really pretending anymore, and started open asset purchases all over. Neither history nor pure logic can give one example where this worked. It brings about the end of the currency, inflation, chaos.

        • Sounds good at first sight, and explains why Japan is still standing.
          OK let’s make a really nice case, no extremes, no inflation, no negative social impacts, no trade imbalances. You stop taxing and give all citizens a monthly pension of 10.000 $ for the rest of their life. Print the money, or take it back from the 1% if you prefer. You will finally get back GDP growth. The domestic economy booms, people (who still want to work) have jobs, consumer and corporate credit flows, businesses expand. When there is a threat of recession, pensions are increased to 20.000 $, 50.000 $… After some decades you have a consumer paradise, wonderful innovations in technology and healthcare, no crime, no drugs, no pollution…

          But then, that’s why we are on this blog, the world IS finite. Resources would become scarce very soon. Competition between people and countries would come back. You couldn’t even rise the pensions fast enough, there would still be a mad run on real things. We are just too many, and information is just too readily available in realtime. Finally, you would still get hyperinflation of the currency, social and economic collapse.
          The 1% know that. They want the high life for themselves and not for everyone, because they know the planet can’t sustain it. In this way, they extend peak oil and peak climate better than any conservation and renewable laws. I read that the richest 100 people could end global poverty tomorrow. OK, and the day after we have peak everything.

          • Got it.

            We dare not make a better life for ourselves and our children, because sometime in the future (we don’t know when), things might (maybe, possibly) be so good that we will run out of resources (we don’t know which). So it is better just to suffer along with what we have and let the rich control us.

            Too bad our ancestors didn’t think that way or we wouldn’t have these darn machines to do our work, and these darn medicines to help us live longer. And really, who needs books?

            Ah, for the good old days of misery and ignorance.

          • Mitchell, it seems you have found some comfort of an explanation in the “monetary world”, while Gail and many others here live in the physical world. The blog title clearly state this. Lets assume that the world is indeed finite, that at one point oil becomes scarce and energy consuming to get out of ground. That mining phosphorous also becomes more difficult due to rising energy costs into getting the fuel for mining it. The same effort it has on gasoline prices, food prices, personal economy, etc. I think Gail does a wonderful blog about explaining the symptoms we see of failure in the system and that resource shortcomings is the natural base cause for all of this.

            Its so easy to fall into the trap of economies and money being independent of energy and real physical assets, as we have seen many big banks go under after making all kinds of fake value products out of nothing, just like the government can print more dollars to “solve a monetary problem”. In the end, this is all playing with monopoly money and figuring out what kind of paper they can conjure up to represent a dwindling amount of real physical assets (both due to entropy and rising population and consumption).

            And there is the whole problem, the real physical limits of the world is showing the truth of the matter. If financial institutions are unable to grasp this yet (40 years after Limits to Growth was published btw), then I am really amazed at the incredible mis-education and delusion that has been going on in the past 40 years since I was born. Once you see past that foggy mirror, its all clear that the leaders of the financial world is basically trying to “keep up appearances” a little while longer rather than deal with the actual problems at hand. Acknowledging that this is what Gail is trying hard to explain in thousand different ways, and with supporting evidence, is a good first step towards accepting the worlds resources is indeed finite.

          • Ah the famous “Mathus” card. 🙂

            As Gail and many others have commented elsewhere, the main reason for Malthus’s “wrong” predictions was that he was unaware of the coming big energy boom civilization would have from the discovery of fossil fuels. If you rewind the time back to his time and make a note at what population was then and what average energy consumption was expected back then, you will see that “do we live well” question is basically based on the notion of all this cheap and abundant energy is what makes us “live well”. That’s the whole point now isn’t it? Its not going to be like this in the future as we are indeed running out of resources this time (and was also doing back then given the technology and energy available).

            So you probably assume we will just invent a new endless energy machine and while we are at it the “invert entropy” machine as well? As Chris Martenson say, technology is not an energy source – its an energy sink.

            If you open your eyes a bit and see what human being have done to the planet since we discovered oil, how can you think that this can continue another 100 years, even if we have a new super energy source? Take a look at population growth? Topsoil depletion (actually mining)? Water depletion? Deforestation? Phosphorus mining? (any mineral actually). CO2 emissions? Sea acidification? Average global temperature? And the sideffects of this like droughts and floods, less water storage as ice in the mountains (catastrophe for China).

            Some regard our great cities today a glorious testament to our fantastic civilization, but its really just an incredible sink for fossil fuel, just like Rome was a sink for the fruits of it’s slavery, conquest and maintenance cost. Our “good lives” are today defined by these “fossil fuel slaves” we surround ourselves with, and we don’t seem to care much about the side effects the mining and burning of these resources does, as it generally cant be observed in your own back yard.

            Do you really believe we live outside the physical constraints of this world as long as we have enough technology? (I wont mention money as that is really just an abstract entity in all of this, although indirectly its about having enough money to make new technology).

            • ” . . . he was unaware of the coming big energy boom . . .”

              And of what are you unaware? Your preference seems to be: “Poverty now, rather than maybe, possibly, perhaps poverty at some unknown time in the future.”

              Just saying resources are not infinite does not prove why we should institute worldwide poverty, today. A big meteor absolutely will hit the earth one day. What’s your suggestion?

          • Unlike a meteor wiping out life on this planet, we can control whats currently in the process of wiping out life on the planet. Finding a better way to manage our resources is one of them. Currently we are squandering it on luxury for a select few.

            Worldwide poverty you say? Who has given you rights to live a better life than the ones that do live in poverty? Was it your god given right? Is it written in the constitution? Does your country have more rights to the resources of this planet than other countries? USA couldn’t have sustained this “good life” without cheap oil from Saudi Arabia. With all the talk of democracy and all that, its really odd that you accept that the country feeding you the “blood” to your good life comes from such a corrupt system. Talk about double standards.

            No one here is really talking about going back to poverty either. If you have a chocolate box you have the option to:

            A: Eat all of them at once
            B: Spread them out over time so that it can be enjoyed by future generations

            Atm I feel we are seriously only executing option A. Often when confronted with this many people take a defensive position and talk about “thinking positive” and “ke sera sera – whatever will be will be – the future is not our to see…” – talk about sticking your head in the sand. I have no timescale for things to happen in the future, but just like global warming, the Greenland ice wont melt tomorrow, but it surely will if we keep up this pace. This fact really tells us that change is good to prevent problems tomorrow. The same way scaling down the economy and conserving is perhaps a better way of going about our business figuring out what “this new life” is?

            The other option is surely a path to collapse and complete destruction. Rather poor than dead I say.

  3. I would like to approach the issue from the opposite side of the coin–the household economy and personal happiness side. I will ask the question:
    Does oil enabled transport add greatly to the potential for a happy life?

    My answer will be, ‘Not very much’.

    Please note that I simply won’t address the issue of repaying money debts which were incurred during that delusional time when exponential growth was expected to make all of us rich. Nor will I address the issue of what to do with a Federal Reserve which keeps printing money to inflate the price of assets which takes them out of the price range of all except the favored few. Nor will I address the issue that privatization of virtually everything makes it difficult for poor people to function and thus requires government suppression of the dissent.

    Toby Hemenway has an interesting lecture about the Battle of the Little Big Horn (aka, Custer’s Last Stand).

    If you watch the first minutes of the talk, you will hear Toby reflect on what was at stake at the Little Big Horn. It was the last stand of the ‘freest people in the world’ against the forces of regimentation. Freedom won the battle but lost the war.

    The Freedom Fighters at Little Big Horn did not use significant amounts of fossil fuels. They did have some guns which they had acquired from people who were much more regimented and worked in factories powered by falling water and coal, mostly. But they still relied heavily on bows and arrows. When they traveled, they walked or rode horses. Typically, they might transport everything they owned across the prairie on a travois pulled by a horse while they walked along side. If the regimentation represented by Custer is so attractive, why did these Free People rebel?

    Can we recover that freedom in today’s world? (Toby will, I suppose, talk about that during his session at Kripalu in Massachusetts)

    I don’t know what he will say. I am pretty sure he won’t advise us to follow the herds of buffalo across the barbed-wire desecrated grasslands of Montana. But perhaps he and the participants will have some good ideas about the recovery of freedom in a world of unprecedented regimentation. GDP is a good measure of regimentation. Debt is probably an even better measure. Earnings of financial institutions may be the best measure of all:

    Just examine the first graph, if you don’t want to read the whole thing.

    Over the past half-decade, I have looked pretty closely at my own life and oil. I am of the age when people begin to try to figure out how it all went wrong somewhere. I can tell you that it never got better than being 16 years old on a blanket with a Midwestern girl in an alfalfa field looking at the stars and partaking of other amusements. (The New Deal had conveniently planted rows of trees everywhere, so finding a secluded field was easy.)

    One of the things that strikes me about young people today is how Unfree they are. Yes, they have a lot of gadgets. But if two 16 year olds are found on a blanket in an alfalfa field, they are more likely to be shot than for the adults to smile knowingly and reminisce about their own discoveries in buggies or sleighs.

    So what has oil done for us? It has laid the stage for the completion of Custer’s program of regimentation. Can Society figure a way out of the regimentation? I don’t see much movement in that direction. Can individuals escape? Some are beginning to…maybe Toby will have a productive discussion with the people at Kripalu.

    Don Stewart

  4. To understand the COMPOUNDING NATURE of rising input costs, you have to look at the different types of global supply chains. The “spider web” type isn’t so much affected from the point of view of the central company, because input costs increase only two times: once in the periphery, and once in the center itself (cost management in the periphery is another matter, and will effect prices in the very long run also). The big car companies work like that. But many supply chains are of the “pipeline” type, in which one product is turned over many times, with value added in each unit. Often physical transport is involved. These supply chains are very common in the downstream part, and at the end you have painting, packaging, labeling, marketing etc. Everyone has to pass on his increased costs to the next unit, and you get compounding input costs (and possibly disruptions of the supply chain). It makes the end product much more expensive than you would think by just looking at the single unit.
    And in an environment of rising costs, the business model tends to look for profits not on an absolute, but rather on a percentage basis (to give an extreme example, it’s not the same if you make 10$ profit on 100$ input costs, or if you make 10$ on 1000$ input costs; it’s much riskier). That increases price pressure even more.

  5. Buona sera Mrs. Gail , la seguo da mesi dall’ Italia che come ben saprà e’ nei guai fino al collo , sono felice di aver conosciuto il suo blog ; lei è una persona molto brillante, e la ringrazio per la sua opera di informazione, continui così .

  6. «Energy» and «Work» are views from two sides of the Wonderland mirror. I suppose the easiest way to distinguish them is that the former is expendable while the latter is spent. I find it amusing that when the Mechanics concept long known as «Conservation of Energy» was first proposed by Helmholtz, he referred to it as «Conservation of Force»!
    Terms in Mechanics do not necessarily carry the same meaning as they do in everyday speech. This fact can lead to considerable confusion; consider how some scoundrels take advantage of this, saying: “Evolution is only a «theory».” (I love a pun as much as anybody does, but for humor…)

    Nevertheless, the parallels between «Work» as in Work=Force∙Distance, and in human «Labor», are astounding! An older friend of mine, who was not only the first in his sharecropper family to go to high school but also to college, obtained both BSME and MSEM. At his graduation with the first, his grandmother told him, tears of pride running down her face, “Now you will never have to work, never.” In one sense she was quite correct.

    At about the same time (1860’s) that Helholtz expressed one view of Work, Ilya Repin expressed another view (1870’s), from a third side of the Wonderland mirror:
    This is a discomforting view of a future on the far side of a «facile fuel» consumption peak, even though it dates from the early upslope of said peak. By the right margin of the painting, there is a dim representation of a smoke-spewing steamboat, indicating relief from the dehumanizing drudgery of human beings as dray animals. However, absent «facile fuel», there is only one potential form of relief illustrated. In the far left margin, renewable energy is represented by the barge heading downstream, moved by both the river’s flow and by the tailwind… neither of which, going in the opposite direction, can ease the burden of the burlaki in the foreground.

    Of course, there are more possibilities, hinted at by the blond youth in the middle of the burlaki: he, unlike the rest (particularly the used-up chap at the far right), at least is thinking. We have no guarantee that we can think our way out of the predicament. “Which of you by taking thought can add one cubit unto his stature?” (Matthew 6:27.) One obvious truth in plain view before us is that we cannot grow our way out. The «facile fuel» peak, whether imposed by climate considerations or resource depletion, is a situation to be dealt with. It is not a problem to be solved.

    • As quite a few have said, we have a predicament, not a problem. If there were a solution, we would have come across it long ago.

      By the way, when I was in China, traveling on the Yangtze River, I heard that the men who have historically pulled boats on rivers there (through the tight areas-not the whole way) didn’t wear clothing. This saved them getting wet. So I think that there have been men around the world doing something not too different, for a long time. Human labor is a form of renewable energy.

Comments are closed.