Commentary: What no candidate is saying about energy and the economy

November 5, 2012

This election is being framed as a choice between two different approaches to return to robust economic growth. But what if both sides are missing a critical underlying factor in our economic troubles? What if tools of the past no longer fit the economy of the future? Economic growth, as we have known it, is being constrained by an unprecedented slowing of growth in world oil supply. America’s path to future prosperity needs to recognize and confront this new energy reality, and adapt our economy to run on a lot less oil.

World crude oil production has been on a century-long rising trend—from less than one million barrels per day (mbd) in 1900 to nearly 75 mbd today. There have been aberrations along the way, such as a large fall in production during the Great Depression, but the upward trend has persisted—until recently. Since 2005, global oil production has been essentially flat. There have been plateaus before, but what is different this time is that real oil prices—i.e. adjusted for inflation—have roughly tripled within the span of a decade, yet relatively little additional production has been brought forth.

For most of the 20th century, oil prices in 2009 dollars were less than $35 per barrel. During the 25-year economic boom following World War II, they stayed reliably below $20. Real prices shot up to the $50 mark in the early 1970’s following the Arab oil embargo and reached $100 shortly thereafter with the Iranian hostage crisis. Excepting those oil shocks, average real prices remained remarkably low.

But something appears to have fundamentally changed over the past decade. Since 2000, aside from a spike and crash in 2008 and 2009, U.S. oil prices have climbed steadily and are now holding in the $80-$100 per barrel range, approximately three times their historic average, despite a worldwide economic slowdown. We have essentially been in a long, slow, but equally damaging oil shock for several years, only this one is not associated with any acute geopolitical event.

Various forces are contributing to rising oil prices, but an unavoidable key factor is the increasing cost and energy required to produce each new barrel of oil. From an energy and economic standpoint, the return on energy invested for new petroleum sources—such as tight oil in North Dakota, Canadian tar sands, or deepwater offshore oil — is much lower than for conventional oilfields of the past, as research at the State University of New York at Syracuse has shown.

What does this mean for the economy? In essence, oil is delivering substantially less energy “profit” or surplus wealth to society than it used to. Higher prices also mean more American dollars flowing to oil-exporting countries, less money for households and businesses to invest or spend on other goods and services, and rising prices for oil-dependent products (a long list). It all adds up to a major drag on economic growth.

There is another important new wrinkle in the story of the petroleum age. Before 2000, we didn’t care much about other countries. The United States essentially laid first claim to the world’s oil exports. No longer. Oil consumption in developing countries, especially China, has exploded over the past decade. At the same time, oil-exporting countries are using more oil domestically. The result: oil exports available on the global market have been declining by an estimated 0.7 percent per year since 2005, according to analysis by Texas geologist Jeffrey Brown, and competition for those declining oil exports has increased, pushing prices further upward.

Rather than grasp and face this new reality, many candidates are instead harping about “energy independence.” Not only is U.S. oil production unlikely to meet current consumption (ignore the hype, check the numbers for yourself), more domestic production will not address oil’s increasing burden on the economy. Canada, for example, produces much more oil than it consumes; however, adjusting for taxes, our northern neighbors pay about the same at the pump as we do.

 No matter who sits in the White House or controls Congress, America cannot drill its way out of our oil predicament, and more importantly, we cannot just “grow” our way to prosperity without addressing this new energy reality and charting a new course toward a low-oil economy.

Charles A. Hall is the ESF Foundation professor at the State University of New York at Syracuse and co-author of “Energy and the Wealth of Nations.” Jan Lars Mueller is the executive director of the Association for the Study of Peak Oil & Gas USA, a non-profit, non-partisan research and education group in Washington DC.

Charles Hall

A systems ecologist with a focus on energy, Charles A. S. Hall is ESF College Foundation distinguished Professor at the State University of New York in the College of Environmental Science & Forestry (ESF). He has held positions at the Brookhaven Laboratory, Cornell University, and other institutions, and is the author of more than 250 publication.

Tags: 2012 presidential election, Energy, energy depletion, high oil prices