Monday, February 20, 2012

Economic Growth 'R' Us

Economic growth is the paradigm that runs our society. We take it as a given that economic growth must happen; there is a clear relationship between growth in GDP and employment rates. Economists and policy makers try hard to squeeze as much growth as possible out of the system to ensure full employment; this is what is taught at universities. On the other hand, there is no curriculum on "steady-state" economics, a model which is definitely NOT mainstream and about which the majority of governements and policy makers know nothing. Our growth-based model has historical roots in the industrial revolution, and is clearly based on the premise of limitless resource inputs.

Because our economy is set up for growth, when it stalls, unemployment creeps up, and it becomes hard to pay back loans. So, you get defaults, and banks become less eager to loan. It becomes harder for businesses to borrow money for large capital projects. If growth stalls for a prolonged period, the economy starts to unwind: massive defaults, large-scale unemployment, financial crisis. And, of course, popular unrest (does this sound familiar?). Our only "living" examples of no-or-low-growth societies are poor (Africa), or have essentially no rule of law (Iraq, Afghanistan), or are state-controlled (Cuba). Not very positive examples. In other words, collectively, we have no idea how to deal with a situation where the economy is not growing.

Now, economic growth requires growth in energy consumption. There is no evidence that decoupling growth from energy consumption is possible. One might imagine more of a "service" economy and less of a "resource" economy, but you cannot (even theoretically) completely decouple growth from consumption of physical resources like water, air, food, and - the key - fuel, or energy. In our society, in fact, a lot of energy is required even to supply water and food. Certainly, our economy here in Canada is based heavily on resource extraction, which is fuel-intensive.

From a purely "physics" perspective, exponential growth in energy use is by its very definition unsustainable. Run the numbers, even at a "modest" growth of 3%, and you'll quickly (within a century or two) hit ridiculous, galaxy-sized, requirements on energy. This is basic math, folks.

So at some point, we must hit an energy supply limit. When this happens, growth will stall, because cheap energy is what is driving economic growth. What happens to an economy when it hits such limits? Evidence from the past would indicate that it collapses, unless it's able to change its ways and adapt

Are we at this point yet?

There is quite a bit of evidence that we, as a society, are hitting some physical limits. The most urgent one is, in fact, energy: cheap oil. Since 2005, there has been no increase in the amount of oil the world produces; we appear to be plateauing at about 90Mbpd ("million barrels per day"). No matter what the price! This is a checkable fact, and governments are aware of this.

Here's a nice summary, from which I extract this quote:

"[...] concerned analysts usually point to two basic facts. First, each year, the world’s mature conventional fields produce about four million barrels a day less oil than the previous year, a gap that has to be filled just to keep global output constant. In only five years, that gap grows to 20 million barrels a day of production – equivalent to twice Saudi Arabia’s output, which is mammoth. Second, the world’s cheap and easy-to-get oil is disappearing fast. So, on average, each additional barrel requires more work, more complex technology, more environmental risk to get and refine than the last."

The Alberta Tar Sands, the horizontal drilling, those Brazilian deep-sea finds, don't even make a dent in the world's increasing demand. These finds are in the 2-5 Mbpd range - a mere 10-20% of what is required just to keep us with 0% growth, let alone allow the 3% economic growth Canada seems to require, or the 8% growth that China's expecting to maintain. These finds simply cushion the decline by replacing cheap oil with expensive stuff, and make the drop in supply more gradual...but a decline it is. And since we are replacing cheap oil with expensive stuff, the price of our major energy source will not come down. (well, it will once the high prices induce a major recession which kills the economy, thereby reducing oil demand, but killing the economy is what we're trying to prevent, right?)

And you know what? "Green energy" is not going to save our butts on this one. Biofuels, which are a plug 'n' play replacement for oil, unfortunately very clearly fall into the "cushion" category, with very low volumes and a high price.

In fact, most green energy is electricity, which can't run our daily commutes, our fleets of tractor-trailer trucks, our sawmills, our cement plants, our mining, tar sands, and natural gas extraction, or our manufacturing, today, and won't be able to tomorrow either, without massive retooling.

So...I must say I find this alarming. All the evidence points to the fact that cheap and easy oil is on the way out, which will have pretty direct - by this I mean fast - economic consequences - and we have no plan "B", no cheap source of fuel waiting in the wings ready to take over.

While we still have the money, we need to start preparing for a low-oil future.

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