Evidence that Oil Limits are Leading to Declining Economic Growth

The usual assumption that economists, financial planners, and actuaries make is that future real GDP growth can be expected to be fairly similar to the average past growth rate for some historical time period. This assumption can take a number of forms–how much a portfolio can be expected to yield in a future period, or how high real (that is, net of inflation considerations) interest rates can be expected to be in the future, or what percentage of GDP the government of a country can safely borrow.

But what if this assumption is wrong, and expected growth in real GDP is really declining over time? Then pension funding estimates will prove to be too low, amounts financial planners are telling their clients that invested funds can expect to build to will be too high, and estimates of the amounts that governments of countries can safely borrow will be too high. Other statements may be off as well–such as how much it will cost to mitigate climate change, as a percentage of GDP–since these estimates too depend on GDP growth assumptions.

If we graph historical data, there is significant evidence that growth rates in real GDP are gradually decreasing.  In Europe and the United States, expected GDP growth rates appear to be trending toward expected contraction, rather than growth.  This could be evidence of Limits to Growth, of the type described in the 1972 book by that name, by Meadows et al.

Figure 1. World Real GDP, with fitted exponential trend lines for selected time periods. World Real GDP from USDA Economic Research Service. Fitted periods are 1969-1973, 1975-1979, 1983-1990, 1993-2007, and 2007-2011.

Trend lines in Figure 1 were fitted to time periods based on oil supply growth patterns (described later in this post), because limited oil supply seems to be one critical factor in real GDP growth. It is important to note that over time, each fitted trend line shows less growth. For example, the earliest fitted period shows average growth of 4.7% per year, and the most recent fitted period shows 1.3% average growth.

In this post we will examine evidence regarding declining economic growth and discuss additional reasons why such a long-term decline in real GDP might be expected. Continue reading

Planning for Higher Food and Energy Prices, and their Wider Impacts

Over the years, we have become accustomed to a rising standard of living. One of things that has helped this happen is a gradually declining ratio of food costs to total personal expenditures. Energy costs have not followed as clear a trend, but are higher again now, and seem likely to be higher in the future as well.

Figure 1. Food (excluding restaurant food) and fuel as percentage of personal income, based on Bureau of Economic Analysis data, Table 2.5.5

As long as the sum of food and energy costs were declining, an increasingly larger percentage left over after covering “the basics” could be used for other purchases. This no doubt contributed to a rising standard of living, because a larger share of income could be used for education, and for recreation, and for new homes. The greater share of income that was available to spend on new homes no doubt contributed to the long-term rise in home prices.

Now, it looks like this long-term trend of lower food and energy prices in relationship to personal expenditures is turning around because of higher oil prices and higher food prices (and, as will be discussed below the fold, lower employment figures). Higher food prices are partly the result of higher oil prices, since oil is used in the production and transport of food. Other contributing factors include more land use for biofuels, rising meat expectations from “emerging market countries,” and weather “issues.”

How do we plan for this new situation, in which food and energy seem likely to again be rising in relationship to incomes, and as a result, living standards quite likely declining? The following are a few of my thoughts:

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The Oil – Employment Link, Part 1

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

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

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

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