High oil prices & the end of growth

Brent crude oil is currently trading on the market at about $109 per barrel.  According to Jeff Rubin in The Big Flatline, this price marks an effective block to future growth in the First World countries of North America, Western Europe and Japan.  "Growth," in the sense that Mr. Rubin (a Canadian and formerly chief economist with a large Toronto-based investment bank, but now once again a sojourner among mankind) is using the term refers to expansion of gross domestic product, GDP, that catch-all term that adds up the movement of money in payment for goods and services within an economy. 

It takes a while to develop an intuitive sense for why the price of oil means so much in terms of economic growth, but I have read much the same thing, from different angles in the writings of such deep thinkers as Richard Heinberg (The End of Growth), Gail Tverberg (in her excellent Our Finite World blog) and, of course, the take-no-prisoners, Russian enfant terrible, Dmitry Orlov.  Essentially, an economy runs on energy.  An economy has to be powered: it doesn't just happen. 

In the West and Japan, petroleum has served as the basic energy source since the development of the internal combustion engine.  Virtually all transportation in the United States (which uses about 19 million barrels of oil a day, 20% of the world's total production) is based on oil, by car, plane and ship. Agriculture, pharmaceuticals and the military are all heavily petroleum-dependent (the U.S. military, as an organization, is the single largest user of petroleum in the world).  Thus, the high cost of petroleum finds its way into the final price of just about everything we buy, or think about buying.

The idea is related to, but is not the same thing as, Peak Oil.  It is not that the world is running out of oil at the present moment; it's more that the low-hanging fruit has been picked, the easily accessible "Spindletop" kind of gusher that simply requires drilling down into dry earth and waiting for Black Gold to come fountaining up in a Beverly Hillbillies-type jubilee.  Now it's more like using a fleet of icebreakers to make one's way out into the Arctic towing a giant drill rig, then in the blackness of unending night and freezing temperatures drilling down for miles through a frozen sea bed into ancient rock formations.  Or digging up huge amounts of tar sands in the wilderness of northern Alberta so that bitumen oil can be squeezed out through a complicated and expensive process. 

We do all this because oil is marvelous stuff.  It's a liquid at room temperature and thus easily piped and shipped, it's energy-dense (it has twice the power per volume of natural gas), and it used to be very plentiful and easy to get to.  Especially in the United States, it used to also be reasonably cheap. These days, however, you may be like me and have become "gasoline price conscious."  In the good old days, when gasoline cost so little that you could fill your tank for twenty bucks, it probably did not affect your conscious decision-making all that much.  When it gets to the point where it costs fifty bucks to fill your tank, and you need a tank of gas per week to get to your job in the urban center which used to seem conveniently close to your suburban home, one's perspective begins to change.

This is the essence of the problem the United States now faces.  We are a "consumer economy" which relies on a kind of assumed "surplus" to keep all of our "discretionary" businesses going: the restaurants and bars, the tanning salons, the yoga and Pilates studios, the party planners, all of the "consultants," the plastic surgeons, all of those take-it-or-leave it lines of work which begin to disappear when the surplus goes away.  The "surplus" gets spent on running your car and heating your house, and paying the increased costs for food which must be fertilized, harvested and hauled to market using the same high-priced oil.

Politicians and mainstream economists do not like discussing things in this way (that is, in a realistic manner).  The Keynesians, such as the Grand Poo-Bah of economics at the New York Times, Paul Krugman, justify deficit spending by the government in anticipation of renewed growth (as a "kick-start" to the economy, as it gains "traction"); thus, so the reasoning goes, the current deficits (and the interest thereon) will be manageable in the future because growth will again provide a fiscal surplus through increased government revenues.  However: suppose this entire theory is wrong?  Suppose we are mired in economic stagnation and future growth sufficient to handle the increased debt service is not in the cards?

The political establishment wants even less to do with such an outlook.  It's vaguely "un-American." What are we, Danish or something? 

There's a lot more food for thought in Mr. Rubin's book, such as the international "zero sum" aspects of the oil market and the contours of a "post-growth" economy.  I'll write about those matters soon.