Building a world of
resilient communities.



Demand destruction: who gets destroyed?

Economists who comment on the possible effects of world peak oil production love to ridicule those who make statements such as "demand at some point will exceed supply." Strictly speaking, those economists are right that supply and demand are always in balance. The variable that changes to make it so is price.

So an economist who accepts the possibility of an oil peak may still believe that the marketplace will allow us to make a relatively smooth transition to a new energy economy as the price encourages the development of alternatives to oil and as demand is destroyed. The latter phrase is often glossed over. But demand destruction is at the core of misconceptions by economists about the likely course of events leading up to and following an oil peak.

A smooth transition away from oil mediated entirely by market prices essentially assumes two things: 1) a very gradual decline in oil supplies after the peak and 2) a recognition in the market price that the peak is coming long before it arrives.

Both assumptions are called into question by Robert Hirsch's study of oil depletion curves in various countries across the globe. Hirsch's study indicates that any world peak is likely to have a sharp crest followed by a swift decline in oil production--anywhere from 3 percent to 13 percent per year if the historical record can be relied upon. Hirsch also notes that "in all cases, it was not obvious that production was about to peak a year prior to the event." This would help explain why the second assumption listed above is likely to turn out to be wrong as well. Market participants are unlikely to see the peak coming. This means that prices will only start to signal that alternatives are needed for oil long after it is too late to prevent tremendous disruptions.

Douglas Reynolds gives a more detailed explanation of how energy and other mineral markets misinterpret price signals as indicative of future supplies. When finite mineral resources are involved, the market typically creates "the appearance of decreasing scarcity," something I've commented on previously in Faith-based economics II: The case of oil's sudden scarcity.

The final argument on which the smooth transition idea rests brings us back to demand destruction. An economist will properly point out that people will stop using oil for some applications and will turn to alternatives where they are available. All that is true enough. But it is worth asking what they mean by "applications." In reality, it is the poor who will stop using oil for "some applications," both in industrialized countries and across the world. If alternatives are not available or are just as expensive, they will simply have to forgo the benefits of those "applications." That will help keep a lid on oil prices, but it won't solve the problem: too little oil for all the activities that power and feed 6 billion people.

With a sudden decline in oil availability it is almost certain that agriculture, which is heavily dependent on oil and oil derivatives, will be less productive; that many marginal factories will close in short order; that tremendous financial turmoil will occur in world markets; that many people will have to do with less heat or without heat at all; that skyrocketing prices for transportation will prevent commodities including food from freely circulating around the world, and so on. In short, there would be no smooth transition.

The heightened price of oil would certainly encourage conservation--i.e., demand destruction--but that conservation might come in the form of terrible hardship for millions and perhaps billions of people and possibly death for many. That would give a rather gruesome connotation to the notion of demand destruction. High prices would also encourage the development of alternative energy sources, but that's assuming that world society does not become so disoriented and chaotic that such efforts cannot actually be effected.

If one assumes that the oil peak is far off and that technology will allow us to make a smooth transition to the next energy economy (and solve other related problems that threaten to annihilate us such as global warming), then there is no need to worry about the effects of sudden demand destruction in the oil markets. But, if the peak arrives soon, say, within the next 10 to 15 years, then no bloodless abstraction such as "demand destruction" will be able to obscure the fact the it is people who are going to get destroyed, and lots of them.

What do you think? Leave a comment below.

Sign up for regular Resilience bulletins direct to your email.

Take action!  

Find out more about Community Resilience. See our COMMUNITIES page
Start your own projects. See our RESOURCES page.
Help build resilience. DONATE NOW.


This is a community site and the discussion is moderated. The rules in brief: no personal abuse and no climate denial. Complete Guidelines.

The Great Deceleration

The 'Great Acceleration' of economic activity in the past 60 years has led …

New Zine Highlights the Solidarity Economy in St. Louis

It's hard to convey what the sharing movement is about without describing …

The Climate Crisis and Economic Policy Choices

A major issue in climate economics is whether it is possible to halt the …

Patterns of Commoning: Can Commoners Become Self-Aware of Their Collective Potential?

As the idea of patterns of commoning suggests, commons are not objects, but …

The Centre-Left’s Narrative on Climate Change has Convinced No One

The election of Donald Trump reflects the unraveling of the centre-left …

Money for Everybody

The Netherlands will kick off the year 2017 by launching an experiment with …

Portugal Announces World’s First Nationwide Participatory Budgeting Project

Participatory budgeting is becoming increasingly popular, with more than …