The profit criterion, which may be considered the international economy’s organizational basis, guarantees that the depletion of oil reserves proceeds along a rising marginal cost curve.

When the easiest accessible, smallest resource-bundle-demanding find is exhausted, the operational locus moves to the next smallest, which is still higher than the previous one, and so on until the absolute maximum is reached. This happens when input costs become so high that, if they would move only one Planck-length higher, the buyers of oil (the world at large) could no longer afford it. That is the “economic peak” in theory.

How and when it will be reached in practice, provided we are not there already, no one knows. Nor is it possible to determine if the mere threat of the “economic peak” would not make the growth of oil output stop long before the “physical peak” (breakeven between energy gained from an additional barrel of oil and energy in all forms sacrificed to access it) is attained.

A problem like no other

Historical experience and statistical theory suggest that the predictive potential of the Hubbert model (exponential rise, peak and terminal decline) varies according to the area occupied by the reserve and the time that remains until half of the world’s confirmed and economically accessible oil wealth is used up. The smaller the space, the more accurate the prediction; the closer the generally perceived midpoint in aggregate depletion, the less robust (i.e., the more assumption-driven, hence more dispersed) assessments become.

This “space-time” dependency is readily understandable. Data are the most complete and accurate and the experience in estimation is the richest for wells and fields. The exact opposite is true for the planet. And the more oil is believed to be available (i.e., the farther the era of grave concerns), the easier it is to find perfect substitutes for the peaked source of supply, the less problematic the winding down process of “exhaust and abandon,” the more symmetric (“Gaussian”) the descent will be.

“Hubbert” worked best for wells and fields in the fifties. It gained deserved notoriety by being right on the money about U.S. output reaching vertex four decades ago, and proved to be of great practical significance in forecasting drain-down profiles for a variety of non-oil material resources in different parts of the world. But the model has become much too “noisy” now when applied to the global ceiling in oil output.

The area examined is at its maximum and the time left to the midpoint is stochastically at its minimum, i.e., it converges fast to zero.

But next to impossible as it may seem to pinpoint the peak now, it will be there in retrospect along an appropriate macrohistoric timescale because the proposition has no compelling alternatives.

Flat absurdity, sinusoidal silliness

Fast forward to 2110. There are only two ways the lucky analyst poring over oil figures (not data on “liquids,” which tend to confuse the peak issue by lumping the crude with other items) at her green-energy-lit desk would conclude that “it takes fuzzy logic to call that a peak.” Either annual average output remained on a flat plateau for decades or the plateau undulated for the same period with such regularity that it traced out a sine curve whose maximum points happened to lie on a straight line paralleling the horizontal (time) axis.

Both of these scenarios are sterile because they ignore that unidirectional (irreversible) and chaotic (nonlinear) developments must accompany the metabolization and ousting of a nonrenewable, yet admittedly crucial, natural resource.

The flat plateau postulate tacitly presumes that the discovery of new reserves compensates for emptying known ones; technological development keeps costs of access and exploitation from rising to prohibitive levels; and the introduction of substitutes occur in such prefect combination as to preempt any fluctuation in worldwide demand for an extended period. Believing in this scenario is like buying a lottery ticket and taking out a huge loan with the intent to repay it from the winnings.

“Perfect undulation” differs from the flat demand mirage by the implicit assumption of an automatic self-coordination among all “below ground” and “above ground” factors of production and consumption. Here the loan secured by the power ball ticket is cautiously lower because there is evidence of undulation.

The economic setback, which ensued in the wake of rising oil (energy) prices in late 2007, reduced both demand and supply. Oil and energy prices fell until stimulative fiscal and monetary policies rekindled growth, prompting a new increase in consumption (demand and supply).

The currently experienced cyclicality may indeed be equated with undulation. But how can it be regular?

The probability is near zero that the joint dynamic of population growth and economic expansion, sputtering as it may be through periods of stall and recovery, and the financial crisis, which is inseparable from the world’s encounter with the growth-constraining exhaustion of low-cost barrels, would make the evolution of global oil output time-symmetric.

The long-observed fact that reduction in unemployment lags behind general recovery leads to the inference that impoverishment and income differentiation within and among nations is likely to be one of the unidirectional processes accompanying the foreseen undulation in oil production (hence, in the world economy). That is, by the time employment reaches its pre-recession level, a new, prohibitive oil-price triggered recession would slow job creation and bring new layoffs.

Statistics corroborates this hypothesis. Worldwide unemployment gradually declined following the 2001-2002 recession, from 6.3 percent in 2003 to 5.7 percent in 2007 before the new downturn pushed it up again to 6.6 percent in 2009 (IMF data). The International Labor Organization (ILO) forecasts the number of jobless persons to range between 219 and 241 million this year — the highest on record. And, to paraphrase Bertolt Brecht, the bitch that bore triple-digit oil prices is in heat again.

The quack oracle of “peak on demand”

Some analysts claim that the phasing out of oil dependence is going to be a relatively unruffled process because it is natural moderation and decline in demand rather than the insufficiency of affordable supplies that will direct and regulate it. Demand in the developed world has already peaked, the reasoning goes, and the rest of the world will follow suit in due time.

Based on projections showing flat oil consumption in the OECD area during the next 20 years, the theory’s proponents argue that the trauma of the past decade has revealed that once an economy reaches a certain level of development, it can substitute away from oil through innovative programs and radical policies.

The idea stinks of advocacy.

While it is in the best interest of petroleum producers and exporters to convince the public that “supply peak” is sheer nonsense, the opposite happens to be true: Partial equilibrium amidst an aggravating, dynamic general disequilibrium is plainly impossible.

Since oil is both fungible and critical, the consequences of an evermore expensive barrel do not recognize national borders.

No area can isolate itself from countervailing megatrends in the rest of the world.

A secular rise in the world price of oil is bound to affect OECD countries directly because the restraint in consumption is not all that dramatic. DOE/EIA reference case shows only a relatively minor decline in OECD’s reliance on “liquids,” from 38 percent in 2010 to 36 percent in 2030. What’s more, EU dependence on oil imports is on the rise, in Japan it remains nearly 100 percent, and although it should embark on a downward trend in the United States, it is still expected to be high enough (ca. 40 percent in 2030) to retain the national economy’s vulnerability to price hikes and/or supply disruptions.

Indirect effects are equally unavoidable. A climb in oil prices as the marginal cost of production rises will negatively affect every single net oil-importing nation. It will increase production costs across the board and weaken the ability to pay for imports in general, thereby endangering the stability of those economies (regardless of OECD membership) where structural trade surplus is an important (positive) component of the GDP.

Many independent analysts consider the need-based forecasts of oil consumption in 2030 unattainable. Anemic investment in the sector, relative to what would be required to support projected levels of demand, is an early indication that a physical constraint to global growth, called “cheap oil,” is already binding. Ambitious national economic targets, conceived with the historically conditioned belief in the abundance of inexpensive energy, could easily get lost in a dense new network of pernicious unknowns.

Supply, not demand, will dominate the endgame.

The world economy pushes toward a boundless increase in material welfare, propelled by private profit-maximizing incentives. These ends and means have proved to be in perfect harmony as long as the absolute (physical) limits to economic expansion were appropriately distant. But now, when they are near (the Earth is full and getting fuller with each passing day) and it has become necessary either to thump down the growth gung-ho or find substitutes for the actually binding resource (“cheap oil”), the system is in a failing mode.

The means (market-guided decentralized decision making) turn out to be incapable of adapting so as to accomplish either alternative without endangering income and employment, that is, social peace.

Growth is essential for the survival of private business and substitution away from nonrenewable resources is growth-hampering in the long, and self-disabling in the short run.

Concerning the long view, a renewable-resource-based world economy is smaller than the one that can — at least for a while — exponentially finish off once-in-a-geological-time gifts of nature. The future will say a very harsh “nay” to the cornucopian myth of endlessly growing material abundance.

Regarding the immediate perspective, our socioeconomic organization’s unconditional reflexes effectively prohibit the release of resources required for the structural transformation of the resource base.

This phenomenon unfolds before our eyes. When the price of oil is relatively low, substitution for it is all but forgotten, as if economic agents suffered from transient amnesia. And when it is high, the cost of substitution goes up, and this circumstance, in conjunction with the curtailment of aggregate demand, discourages the flow of capital into the grand project of real sustainability.

Comprehensive and persistent government action would help, of course, but the system resists that with every ideological, institutional, and legal inch of its body politic, with every cell of its cultural matrix.

The conclusion is that constraints on the supply of oil rather than consciously restricted demand will usher in the end of the age of petroleum. The most likely scenario is a secular increase in the price of oil by sequential shifts in demand being met by less and less adequate and ever slower responses from the “supply side.” Physical and economic factors jointly contribute to this sluggishness. As the marginal cost of extracting oil rises, so does the opportunity cost of “extraction now.”

Since reaching a maximum in the rate of output is unavoidable, and lingering at that level for several years is unlikely in the extreme (it would require the coincidence of too many conditions to be regarded realistic), a peak in worldwide oil production remains the sole intrinsically plausible alternative.

Most analysts share this view. Opposing arguments in service of oil producing nations’ strategic propaganda are so threadbare that they border on the droll: The Arabian camel asking a crowd of onlookers with sublime nonchalance, “What hump?”

The conundrum arises from the ex ante unpredictable peakedness of the peak (kurtosis) and the temporal landscape in which it will find permanent home ex post.

A lengthy, multigenerational progression away from the disaster-bound practice of scavenging on peleobiological remnants in support of exponential economic growth will play the decisive role in imparting and conserving the depletion leg’s negative slope. Net exporting nations shifting supplies from foreign to domestic users will contribute to it, since the implied curtailment of oil trade will reinforce permanent, post-oil characteristic transformations in net importing countries.

Among the factors counteracting the descent (e.g., discovery of new, relatively “low marginal cost” reserves, technological development, revitalized demand associated with economic recovery), setbacks in substitution, exactly because of the high real price of oil, stand apart.

Oil dependence penetrates all forms of extrasomatic energy. Harnessing even the most sustainable sources — movements of air, water, and geologically endowed flows of heat — requires oil. Contrary to conventional economic calculus, when the barrel is high, the development of inexhaustible energy sources suffers.

Indeed, a widening discrepancy between reality and expectations bids fair to be the malheur of our epoch.