If we know anything about what makes our economy tick we know this: Feed it cheap oil and it runs like a charm. But keep it rationed to expensive fuel, and growth stops dead.
Every major global recession in the past four decades has oil’s fingerprints all over it. For all of our efforts to wean ourselves off the fuel, oil remains the world economy’s most important source of energy (and, as a transit fuel, almost its only source of energy).
In the past, oil prices spiked to growth-killing levels when key producers shut off supply. Today we see these prices with the spigot wide open.
If you are wondering why, just look at where the fuel supply is coming from. Consider the Alberta oil sands, for example.
The oil sands’ real nemesis isn’t the so-called “eco-terrorists” that worry governments, but the shape of the cost curves that have plagued expanded production.
Why do you think Calgary-based Nexen Inc. is so eager to sell to China National Offshore Oil Corp.? While state-owned CNOOC thinks it is buying a strategic reserve, what it is really buying are huge cost overruns and production delays.
What’s true of Nexen’s bitumen resource is true for the Orinoco heavy oil belt in Venezuela, shale oil, or deepwater oil. The world will never run out of oil, but as we increasingly depend on these unconventional sources for our fuel supply, we are rapidly running out of the oil our economies can afford to burn.
The very prices that bring these fuels out of the ground stop our economy in its tracks. No amount of government pump priming or printing money is going to suddenly make that fuel more affordable and bring back growth.
By the metrics of my profession, oil’s collar on growth will leave us all poorer. Almost every measurement of economic welfare is tied to growth. But as every day brings new evidence of how our economic activity is distorting our environment and climate as never before, surely the measure of our well-being is more than simply the sum of what we consume.
As economies gear down, we may just find that a smaller human footprint, be it carbon or otherwise, may be just what our world really needs.