Contemporary discourse concerning the potentially enormous problem of dealing with peak oil overlooks the “own demand” of substitution. It takes a lot of oil to substitute for oil. A closer look reveals that the structural gyration of historical proportions associated with the process is up to its chin in the stuff.

Oil flowing into the economy splits into two branches: The first is called “current production” and the second (a relatively new one) is earmarked “for the substitution process.” The substitution branch also splits into two: energy (e.g., wind, solar radiation, etc.) and material (renewable agricultural products and abundant nonrenewable materials). These two sub-branches are locked into a system of “internal” (“intra-substitution branch”) demand. The entire enterprise of eliminating global subjugation to King Petroleum will be successful if increased flows of energy and materials from the substitution sector into the current use sector overcompensate for the reduced flows of oil into it.

As of now, the replacement of oil is not gaining ground. The implication is worse than mere stagnation. The U.S. Department of Energy (DOE) warns of severe negative economic fallouts unless a crash program of mitigating the effects of the peak is undertaken 20 years before it occurs. A little familiarity with peak predictions (clustering between 2010 and 2020, skewed toward the lower limit of the range) shows that the world has already missed its cue. DOE predictions also show that, despite the beating of drums, the ratio of renewable sources in the world supply of energy will barely change between now and 2030. It will remain close to, but below 10 percent. In its savage appetite for untrammeled economic growth, the world blindly ingurgitates energy resources; dependence on oil is on the rise. From a distant future perspective, our civilization may well appear demented. It accelerates even after being told that the paved road ahead will soon end, to be followed by an unknown and dangerous terrain. Any way we look at it, global energy policies (if the brew of divergent and conflicting national and transnational corporate aspirations qualifies for the concept) clearly fall short of any “peak oil minus 20 years” crash program.

The spontaneous, market-force generated growth of the substitution sector — a small patch of a green island in the Black Ocean — is far from being assured. Current upward ticks in oil prices (the long shadow of the approaching peak), to be followed by peak- and post-peak real shortage-driven secular price increases could curtail the élan of the world economy. The stagnant business atmosphere would then engulf the substitution sector. If, as a result of some unforeseen combination of tax/subsidy policies, public pressure, moral suasion, and technological breakthroughs, the substitution sector spreads, that phenomenon itself could slow the world economy.

Green limits constrain and redirect market exuberance. If they were to dominate the world economy, they would slow and stop the present drive toward global industrialization. Senior industrialized country government officials and mainstream economists never get tired of repeating that “we” live in a post-industrial, cybernetic, service economy that has a reduced and declining dependence on oil and raw materials. The global picture shows that “we” need the oil- and raw material-ingurgitating industrial products of the developing world. The growing billions who suffer from a deficit of material welfare want to industrialize in the coming decades — no matter what. (The supply of postmodern moments in economics these days far exceeds the demand for them.)

The following transpires from a recent report of the International Energy Agency (IEA): A cumulative investment in energy-supply infrastructure of over $20 trillion in real terms over 2005-2030 would be needed to satisfy the growing global demand for energy. It is highly dubious that all this investment will actually occur. Capital formation in the oil and gas sector in real (inflation-adjusted terms) has been stagnating since 2000.

This remarkable phenomenon gives us an ominous hint about the limitations of the market (“as is”). Current oil prices should have already prompted massive flows of investment capital into the energy sector. Are we witnessing the emergence of a never before seen failure of the market’s famed anticipatory prowess? Is this problem simply too big to be solved by unflinching insistence on “hands-off, dirty price-spoiler” neoclassical micro-mentality? If considerably higher prices of oil are needed to coax out the required investments (even under the current financial conditions of a “global savings glut”) then the cause will never produce the desired effect the way encrusted folk economics ensures us it always must and must always. Further increases in the price of oil (even as a 3-year moving average) would dislocate the world economy. Then who would provide the record capital investment needed to safeguard future economic progress?

It is not difficult to see that the broadly defined substitution process can be successful (i.e., demand for and supply of oil declines as the demand for and supply of substitutes increase) if, and only if, the substitution branch becomes an autonomous and expanding center through the infusion of creative energy and will. The cycle of dependency must be broken within the substitution branch. For example, increased output in solar energy will have to depend increasingly on the use of materials made of natural and synthetic fibers and the production of these fibers would have to entail increasing amounts of solar energy. But this self-reinforcement is an act of creation, not a spontaneous development.

Significant substitution away from oil through business as usual (i.e., “just leave it to the market”) is no slam-dunk. It is more will-o-wisp. Placing all our hopes in an undirected, random, natural selection-like evolution of economic activities to develop the oil-substituting green sector must eventually give way to a belief in human creativity; in the possibility of remaking the world in the image of a new logos, a yet to be discovered rationality.

The global society (it is time to discover it!) faces a “no-exit” situation. Solution concepts that involve a novel mix of private and public initiatives are needed now if the world is serious about reducing oil dependency. Otherwise, they will be needed later when coming generations face the consequences of nibbling at the edges of the oil problem now. The historical experience of institutional and behavioral inertia would make a gambler bet on this second outcome.

What the world needs now is good luck. Lots of.

Peter Pogany
Economist and author of “Rethinking the World”