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Geometric progressions: What you *will* learn from an oil shock

The phrase "oil shock" is being thrown around a lot in the national news, and events in Tripoli at the moment seem to be reinforcing the idea that we're facing an extended period of instability, and possibly a new cycle of oil price increases and the stress on personal and public economies that accompany rising prices.

Is this a given? No, but there are similarities here to prior experience. The most important point is that while everyone notes that Libyan oil is less than 2% of world consumption, that supply constraints don't have to be significant, or even present in order to cause a crisis. Think about the last few oil shocks. In 2008, oil prices spiked to $147 barrrel during a period of no significant supply constraints - instead, rising Chinese demand and a growing economy banged up against Saudi inability (they call it unwillingness, but let's be honest, when was the last time anyone was getting record prices for their product ad said "hey, we don't really want to make that much money.") to increase production, but there was no major supply constraint at all.

The 1970s oil shocks did come with actual supply constraints - but comparatively small ones, a matter of 5% in total reduced availability for the 1973 crisis and less still for the second cycle of oil shocks. Those enough old enough have at least vague memories of car seats and gas lines, but it is worth reminding yourself that even though objectively there was more than 5% waste in the system, a very small oil shock had very big economic and social ripples. To give a more extreme example, the state of Cuba's "special period" was brought about by no more than a 20% supply disruption - not the 50% often stated.

Which is important - objectively speaking, a society should be able to cut 5% of its oil use no problem, right? Any of us can see how it could happen. Even 20% isn't that challenging, right? There's plenty of wiggle room in the system - plenty of cuts in air travel, driving, heating, and other uses of oil that could be made. Any one of us, engaged in an intellectual exercise, could come up with compelling ways to minimize the effects, right?

So why doesn't it work that way? Why, for example, when you have a usefully totalitarian leadership like Cuba, can't you just order people to conserve in the most optimal ways? Why would the average Cuban lose 20lbs? Why were the 70s oil shocks an ongoing economic crisis? Why was 5% so hard to endure? And more importantly, why is a small percentage of oil going offline going to teach us a lot about how vulnerable we are? Libya's less than 2% of world oil, combined with Algeria's 2.5%...well, we're getting close to the 1970s.

What we have learned from past oil shocks (which few people outside the peak oil community have chosen to recognize) is pretty clear and simple - that the effect of oil on the economy, on individual lives, on the world as a whole is dramatically greater than can be expected by a direct arithmetical progression - that is, the effect of oil on whole systems is something like a geometric progression, increasing in complexity and impact well beyond what one would intuitively expect.

What we've also learned is that what seems obvious isn't - that is, wise strategies for management don't always emerge without good advance planning. Thus the gas lines (which were at least part a symptom of poorly planned government responses), the recipes for fried grapefruit peel, etc... Even with good advance planning, shocks would be felt, but they can manifestly be made worse by inadequate response.

Remember, too, that the oil shocks of the 1970s caused an early shock when oil price rose to the stunning heights of the contemporary equivalent of $75 barrel, and began in a period of economic growth. Consider the way the impact is likely to affect us now, either in the beginnings of a recovery (maybe) or still in a shaky soft spot of a recession (depending on your preferential narrative) with stable oil prices above $80 barrel.

What will we learn from another oil shock? In the long term, maybe nothing - that's probably the net of what we learned from the 1970s oil shocks, and in a matter of 2-3 years, people seemed to forget even about the 2007-2008 oil and food price shock. In the short term, we're going to learn a lot about ourselves - we'll see that we can actually use a lot less energy (energy consumption drops during economic and energy crises) and we'll also see that we have a tough time distributing those shifts in ways that aren't economically difficult and personally destructive to a lot of people.

What do you think? Leave a comment below.

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