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Economics: avoiding the Y2K fallacy

The end of the age of cheap fossil fuels heralds a total revolution in economic affairs worldwide. For the last three hundred years, the key to prosperity has been the replacement of human skill with mechanical energy. The steam-powered factories of 18th century England heralded an economic order in which technological progress and soaring rates of fossil fuel extraction went hand in hand, and success went to those who pushed mechanization into new economic sectors – replacing sails with steam, farm horses with tractors, local theaters with movies and TV, folk culture with mass-produced pop culture, and so on.

Hubbert’s peak marks the limit of this process. Mechanization depends on massive infusions of cheap energy, and that combination of abundant energy at low cost is exactly what won’t be available in the future. If the last three hundred years funneled wealth to those who could exploit fossil fuels to the fullest and build centralized, technologically driven economic structures, the next three hundred years will see exactly the opposite; success will go to those who get ahead of depletion curves by reducing their reliance on fossil fuels further than others, and relying instead on human skills and sustainable, low-intensity energy inputs.

These changes won’t take place overnight, though. Hubbert’s peak occurs when approximately half the world’s accessible petroleum has been pumped out, and so the slope down from it will more than likely parallel the slope up to it. This means that in 2030, for example, the world will be producing about as much oil as it produced in 1980, and very significant amounts of coal, natural gas, hydroelectricity, and other energy sources will also be available. All that energy will still be available to power factories, fuel transportation, and fill other economic roles. It will be more expensive, less reliable, and spread more unevenly among a larger world population, but it will still be there.

Thus the survivalist fantasy that peaking oil production will lead to sudden collapse can’t be justified. What we face instead, as I’ve argued elsewhere, is a long period of economic contraction and technological decline. There will be plenty of bumps and potholes on the long road down, to be sure. Systems failures like the one that accompanied Hurricane Katrina last year, and reduced large portions of coastal Louisiana and Mississippi to a Third World level from which they show no signs of recovering, are likely to be regular occurrences. Still – and this has to be grasped in order to make any sense at all out of the future – systems failures don’t automatically spiral out into total collapse.

This point has been notably lacking in many discussions of the economic impact of peak oil. It’s commonly argued, for example, that the financial shock imposed by rising energy costs will cause the entire global economy to come apart at the seams, leaving people unable to get food and other necessities and turning them into the marauding hordes of the standard survivalist fantasy. This is a classic example of what I call the Y2K fallacy, and revisiting the Y2K fiasco will cast some light on where current speculations about peak oil have run off the rails.

In the late 1990s, as my readers will doubtless remember, computer experts began to warn that many older computer systems had no way to process year-numbers beginning with a 2 rather than a 1, and could crash when the calendar rolled over from 1999 to 2000. Early surveys of the problem showed that a very large number of systems could be affected, especially in banking, telecommunications, and government. By the beginning of 1998 or so, it was clear that a major mess was in the making unless something was done.

This real and serious problem, though, quickly got blown out of proportion by the apocalypse lobby – the sizeable number of people for whom faith in the imminent collapse of civilization is an emotional necessity. By 1999, survivalist visions of social collapse and mass death via Y2K spilled out of this subculture and percolated through American society. I knew many people who confidently expected the end of civilization as we know it on New Years Eve of 1999, and waited all night in their basements for the blackouts, systems failures, and rampaging mobs that never came.

Some pundits have used these failed predictions to argue that the whole Y2K crisis wasn’t real in the first place, but this misstates the whole lesson of the experience. The threat was real; the apocalypse lobby simply missed the four most important words in the prediction – “unless something was done.” Faced with a credible threat, a hard deadline, and a clear course of action, people responded predictably by doing something about the situation. Sales of Y2K-compliant computers and software soared off the charts, and software jockeys made money hand over fist reprogramming old machines. Some of us used simpler fixes; I simply reset the calendar on my old and non-compliant computer to December 31, 1949, and went through the rollover to January 1, 1950 with no trouble at all.

The fallacy that bedeviled the Y2K survivalists was the belief that government, business, and ordinary people, faced with an immiment threat and obvious responses to it, will sit on their hands and do nothing until catastrophe overwhelms them. This same odd belief can be found all through discussions of peak oil. As oil plateaus and then declines, energy prices will rise sharply; that’s the threat. The obvious response, which succeeded brilliantly in the 1970s, is to reduce energy use through conservation. This factor is already helping to drive swings in energy prices, as demand for petroleum and natural gas fails to meet speculators’ expectations.

The collision between declining fossil fuel production and increasing demand, in fact, is far more likely to cause drastic swings in the price of energy than the sort of sustained rise imagined by some peak oil theorists. As energy prices rise, speculators dive into the market, driving up prices further than actual shortfalls in production capacity would justify. Many energy consumers respond by cutting back on their energy use by means of lifestyle changes and conservation technologies, while others are simply priced out of the market. The result is that demand drops, stockpiles rise, and prices start to slide. The speculators dive out of the market, driving down prices further than actual declines in demand would justify, and the cycle begins again. The resulting whipsaw movements in the price of energy can cause plenty of economic damage all by themselves, but there again it’s possible to respond to volatility constructively – for example, by stockpiling fuel when it’s cheap and drawing down those stockpiles when prices spike.

The same logic needs to be applied to other aspects of our economic situation. The United States today, as many people have pointed out, is a spendthrift debtor nation, borrowing more than $2 billion a day from overseas to pay for imports that far exceed its exports and a standard of living that can’t be supported by its anemic manufacturing and resource-extraction base. These factors are unsustainable, and major shifts in the world economic order are inevitable as the resulting imbalances work themselves out. Those who claim that the result will inevitably be social collapse and a Road Warrior future, though, haven’t been paying attention to world economic affairs. Over the last fifty years or so, quite a few nations have borrowed and spent their way into fiscal crisis. Some responded with austerity and periods of recession; some inflated their currencies, went into hyperinflation, and came back out of it; some repudiated their foreign debts and weathered the international reaction; others simply muddled through. All of them survived the crisis and rebuilt afterwards, and so will the United States.

Most people nowadays, it has to be said, underestimate the resiliency of the modern nation-state. A US government faced with a severe economic crisis has plenty of options. It can respond to a market crash by flooding the economy with essentially free credit, as Japan did after the 1990 stock debacle. It can respond to currency collapse by abandoning its old currency and issuing a new one with solid backing, as Germany did in the 1920s to end its bout of hyperinflation. It can manipulate markets, nationalize industries, enact wage and price controls, levy punitive tariffs and embargoes, subsidize basic necessities for the population, and impose rationing of fuel and food. If necessary, it can declare martial law and use the military and National Guard to restore civil order. All of these things have taken place in many other countries in the last half century or so, when governments have faced the possibility of chaos. Any or all of them could readily happen here – and for that matter, some already have.

There are still very rough times ahead, to be sure. After a quarter century of reckless borrowing and waste fueled by absurdly extravagant use of the world’s finite energy resources, America is likely to face a period of contraction as bad as the Great Depression, and an economic breakdown on the scale of the one that engulfed Russia after the collapse of the Soviet Union is far from impossible. Still, the United States still existed after the Depression, Russia still exists today, and millions of people came through each of these economic crises with their lives, families, homes, and livelihoods intact.

Thus we can expect the next few decades to see a great deal of economic volatility and wrenching change, and quite probably some very hard times for many people. Energy costs will be impossible to predict as prices spike and crash, trending slowly but very unevenly upwards, and economic sectors dependent on stable access to energy will face a very rough road indeed. On average, those people and industries that require more energy will do worse than those that can make do with less, and those professions that meet actual needs will do much better than those devoted to the mass production of the unnecessary. Two weeks from now, I’ll make some suggestions about how individuals can prepare to deal with the new economic world of the deindustrializing future. Before that, though, it’s necessary to take a second look at the economy and draw some rarely noticed distinctions between the real economy of goods and services and the fictive economy that currently dominates the way goods and services are produced, distributed and sold.

Editorial Notes: Part Three of a nine-part series.

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