Will the End of Oil Mean the End of Growth?

It’ll be nice when this recession is over and the economy starts chugging along again. When GDP resumes its ordained upward trajectory. When we finally get back to growth. After all, the economy should always be growing, right?

Well, maybe not. As you probably heard, the world’s population raced past the 7-billion mark sometime in the last few weeks. Meanwhile, we’re running out of water, rare earth metals, and oil. With resources dwindling and population booming, can the global economy sustain endless growth?

In the early 1970s a team of young scientists at MIT set out to answer that question. They created a mathematical model of the entire world, focusing on the relationships between five variables: population, industrialization, pollution, food production, and natural resources. Their model allowed them to simulate how those five variables would change over time as the population grew. The projections were grim: Sometime in the 21st century, they concluded, humanity would outstrip the Earth’s capacity to support more economic growth, resulting in a precipitous decline in food production, industry, and ultimately population.

Their findings appeared in a 1972 book called The Limits to Growth. The book was a commercial success, thanks in part to the 1973 oil crisis, which made resource scarcity a palpable reality. But mainstream economists dismissed the idea that limited natural resources could limit growth. The standard view was that technological innovation and market forces would find a way around any apparent resource shortage.

But here’s the scary thing: The Limits model has been pretty reliable so far. In 2009, two systems ecologists, Charles A.S. Hall and John W. Day, Jr., revisited [PDF] The Limits to Growth, comparing its projected values for things like population, available oil and copper, and industrial output per capita, to actual 2008 data. In their paper, Hall and Day acknowledge problems with the Limits model, but in the end conclude that, “its predictions have not been invalidated and in fact seem quite on target.”

So when will we hit the limit of economic growth? We may have already. According to the International Energy Agency’s latest World Energy Outlook report, released on Wednesday, global oil production peaked in 2006 at about 70 million barrels per day. Oil turns out to be pretty important for our economy. As Hall and Day write, “There are virtually no extant forms of transportation, beyond shoe leather and bicycles, that are not based on oil, and even our shoes are now often made of oil. Food production is very energy intensive, clothes and furniture and most pharmaceuticals are made from and with petroleum, and most jobs would cease to exist without petroleum.”

The standard view among economists is that economic growth doesn’t depend on any given resource. A stagnant or declining oil supply won’t be a problem, because, through technological innovation and market forces, the economy will unshackle itself from oil and go right on growing. But that process might be long and painful. We can’t switch to other forms of energy overnight. Even if we had workable cold fusion tomorrow, we’d still have a fleet of cars, trucks and tractors built to use oil.

Gail Tverberg, an actuary and energy analyst, thinks this oil shortage is going to keep us mired in recession for a long time to come. In a recent post at The Oil Drum, she explains how:

…when prices of oil and food rise, consumers (except for those making more money because of higher oil and food prices) tend to cut back on discretionary spending. This cut-back in spending leads to lay-offs and recession in discretionary segments of the economy. Some laid-off workers default on their debts, and businesses scale back their plans for expansion, because of the “bad economy."

If economic growth really depends on increasing oil supply, what most politicians and economists are still calling a recession might be the new long-term reality.

We should take that possibility seriously. Sure, innovation might engineer us a lifeboat. But it’s irresponsible to bank on that belief. As Jared Diamond has pointed out, societies do sometimes collapse and resource limits are sometimes to blame.

Clearly, a prolonged period without economic growth would be rough. How rough exactly, we don’t know. We may have to adjust to new standards of living that are much more austere. Buy fewer things. Travel less. Or we might be in for something more Mad Maxian.

But a prolonged period of low or zero growth might also present us with an opportunity to design a more sustainable and equitable world. If we acknowledge that the pie isn’t getting any bigger, questions of how it’s divided become more pressing. Maybe politicians will start taking income equality seriously. A guy can dream.

And if they don’t? Tverberg, who thinks we could face 20 or 25 percent unemployment in the next decade, mentioned the possibility of revolution. Occupy Wall Street doesn’t seem to have a growth problem right now.