Of course the world will never run out of oil in the literal sense. There are some 170 billion barrels of the stuff trapped in the Alberta tar sands, and over 500 billion barrels more in the Orinoco tar sands in Venezuela. And if we suck them dry, there are billions more barrels of oil in shale, just as there is natural gas.

But what the global economy has already run out of is the oil it can afford to burn. Depletion isn’t just a geological concept; it’s also an economic one. From a purely geological standpoint, you can always boost production—or at least offset depletion—by accessing increasingly costly and environmentally problematic sources of new supply (such as the tar sands). But as we saw from the recent recession, the global economy can’t afford to run on the prices needed to pull that oil out.

For some people, the fact that oil prices fell to around $40 per barrel during the depths of the recession was proof enough that it had no business being in triple-digit range in the first place. But what those folks forget is that world oil demand fell during the recession for the first time since 1983. Peak oil is not a problem if the economy it’s supposed to power is shrinking—it’s only a problem if we actually want our economies to grow.

The first thing you notice about an economic recovery, even an anemic one, is that the world economy starts consuming more oil. The next thing you notice is that the price of oil starts heading up.

We all might have liked the pump prices that came with $40-per-barrel oil during the recession, but we shouldn’t expect much to be flowing out of the gas pumps at that price. Even deep-water oil, like at BP’s ruptured Macondo well in the Gulf of Mexico, doesn’t work at that price, to say nothing of mining bitumen in Alberta and processing it into synthetic crude.

If you doubt that, just look at what happened in the Alberta tar patch when world oil prices plunged during the recession. Some $50 billion of planned investment was cancelled literally overnight.

No, the world’s not running out of oil. It’s just running out of the oil we can afford to burn.

President Obama won’t lift the moratorium on deep-water drilling until the Macondo gusher is, at minimum, fully capped. But whether he lifts it after that may not matter. BP has already lost over 40 per cent of its market capitalization. If Chapter 11 bankruptcy protection is the ultimate sanctuary from the staggering economic and environmental costs the firm will face, how eager will other oil companies be to follow in its deep-water footsteps?

As the days of rupture flow by, not only is the area no longer the answer to tomorrow’s oil demand, but before too long it may not even produce the 1.6 million barrels per day that it currently does. Without accessing even deeper fields, like BP’s Tiber field, almost six miles below the ocean, the rapid depletion rates of offshore wells on the much shallower continental shelf spell declining production for the Gulf region and for the United States as a whole.

Hopefully Canadian tar sands aren’t Plan B. If they are, someone should tell Governor Schwarzenegger and the growing list of other US politicians who claim that fuel is too dirty to burn. The real problem isn’t that it’s too dirty—at least not for the vast majority of American drivers, who would be happy to burn it—but rather that it’s too expensive. That’s why BP and the rest of the oil industry were drilling in deep water in the first place.

In the end, Plan B isn’t more tar sands production from Canada or Venezuela, or more deep-water production from Brazil or Africa. Whatever comes from those sources will barely cover depletion, and what’s left over will be gobbled up by the exploding oil appetites of the BRIC economies.

Plan B can only be less oil consumption. Whether Americans realize it or not, they are already on that path. The disaster in the Gulf is just putting that reality into sharper focus. Last year there were four million fewer vehicles on the road in the United States than there were the year before. In the next decade, there will be 40 to 50 million fewer cars than today. In the process, an economy that once consumed over 20 million barrels of oil per day will find a way to run on 15 million barrels or even less.

Peak supply defines peak demand. That, in a nutshell, is Plan B.

In terms of environmental degradation and economic cost, it’s already become much more. The real legacy of Three Mile Island wasn’t what happened back in 1979, though, but rather what happened, or more precisely didn’t happen, over the course of the next forty years in America. Literally overnight, the near-meltdown of the reactor core changed public acceptance of nuclear power plants. No company in the US has built a new one since.

Deepwater Horizon was not a producing well, nor will it likely ever be one. Hemorrhaging anywhere from 5,000 to 25,000 barrels of oil every day, the spill is already approaching the size of the discharge from the Exxon Valdez. What’s worse, BP has no way to shut it off, short of drilling a relief well to divert the pressure, which will take three months. At 25,000 barrels a day, three months means a cumulative discharge of 2.25 million barrels of oil, or 94.5 million gallons (one barrel equals 42 US gallons), or roughly eight Exxon Valdez spills. Even at 5,000 barrels a day, that’s almost 20 million gallons of oil. And to top it all off, by the time a relief well can be drilled, we’ll be smack in the middle of hurricane season.

The scene of hurricane-force winds raining oil on New Orleans and the rest of America’s Gulf Coast will no doubt make for an apocalyptic image of the end of the age of oil. Unfortunately, our dependence on the stuff will survive this catastrophe, even if the fisheries in the Gulf of Mexico and the marsh ecosystems of the Mississippi Delta won’t. But what might also not survive is deep-water drilling: no firm’s shareholders will be willing to accept the consequences that BP will soon have to face.

President Obama has already suspended his recent decision to open up new offshore areas for oil development, and he’s declared a moratorium on new drilling. You can imagine what the regulatory environment will be like after three months of the spill, just as you can imagine what those satellite photos of the Gulf of Mexico will look like.

But what you might not imagine are the implications for world oil supply. Conventional oil supply has not grown since 2005. Without a steady stream of oil from fields below the ocean floor, not only can’t world oil production grow, it can’t even stand still, since we rely on oil from new deep-water fields to replace the bulk of the four million barrels per day of global production we lose every year to depletion (out of a total of roughly 86 million barrels per day).

If the Deepwater Horizon disaster is the offshore energy industry’s Three Mile Island, then not only has world oil production already peaked, but it will also very soon start to shrink.

So if you think oil prices are high today, you ain’t seen nothing yet.

Most forms of unconventional oil and gas (including, by the way, shale gas) are invariably very hard on the environment. Although tar sands production draws most of the world’s criticism, we are quickly discovering that deep-water wells and the pressure surges they engender run the risk of wreaking even greater ecological and environmental devastation.

And the deeper that technology allows us to drill miles below the ocean floor, the greater the risk that we will see more and more of these disasters. If this week has shown us the pressure surge of wells a mile below the ocean floor, what are the prospects of our standing up to those we’ll encounter in newly discovered Gulf of Mexico fields like BP’s Tiber one, six miles below the ocean floor?

Of course, devastating leaks haven’t been the only thing to thwart America’s efforts to boost its oil production in the Gulf. Five years ago, Hurricane Katrina and the other Category 3 to 5 storms that hit the region devastated its oil industry. Instead of doubling production levels, as once confidently forecast by the US Department of Energy, production got hammered. In fact, it’s only very recently returned to pre-Katrina levels, only now to face an entirely different setback.

Why is this so potentially devastating to America’s oil future? The Gulf of Mexico was the only area of the country where there was any reasonable hope of expanding domestic supply. Production in the lower 48 states peaked in the early 1970s, as predicted by the American geophysicist King Hubbert back in 1956. And despite the enthusiasm of the “drill, baby, drill” lobby to do more in Alaska, that state’s oil production has been depleting even faster than in the rest of the country. As a result, a country that once produced ten million barrels a day is now barely able to produce half that amount.

If you’re wondering why we’re risking catastrophic environmental consequences by drilling wells miles below the ocean floor, the answer is simple enough. It’s the same answer to the question of why we’re pouring billions of dollars into the tar sands.

It’s all that’s left.

Exactly why oil traders and speculators think the data has anything to do with the state of world oil demand is beyond me. I suppose, like Pavlov’s dog, they’re only doing what they’re trained to do. But their training comes from a world that no longer exists.

While the US oil inventories data pertains to the largest oil-consuming nation on the planet, it is no more indicative of world demand than US oil production numbers are indicative of world supply. Both are in terminal and irreversible decline.

It certainly wasn’t US fuel demand that took oil prices over $100 in the first place, and it won’t be US fuel demand that will push them back into that range anytime soon. US oil consumption is almost 3 million barrels per day short of its pre-recession peak.

But the fact of the matter is that US oil consumption will never regain its pre-recession peak, just as US motor vehicle sales will never again see the levels that prevailed before the recession. Ditto for oil consumption in Canada, Western Europe, Japan, or, for that matter, anywhere in the OECD economies.

Back in the 1990s, that kind of demand contraction in the OECD would have foretold a big decline in oil prices, since those countries accounted for almost three quarters of global oil demand. Today, they account for barely half, and tomorrow they will account for even less.

Just as the developing world has long surpassed the developed world in terms of coal consumption, the same is about to happen with respect to oil. Between explosive growth in oil-thirsty economies like China and India, and OPEC’s voracious appetite for its own fuel, OECD fuel markets are becoming increasingly marginal. That’s why Saudi Aramco is far more interested in securing long-term supply contracts with rapidly expanding domestic oil markets in countries such as China and India than in supplying shrinking oil markets like those in the US.

In a world where affordable oil supply will soon peak, if it hasn’t already done so, global oil consumption quickly becomes a zero-sum game. As China moves from consuming 8 million barrels a day to 10 million barrels, and OPEC ramps up its own daily consumption from 10.5 million to 12 million barrels, somehow, somewhere else in the world, there must be a corresponding decline in oil consumption. That somewhere else just happens to be the US market and the oil markets of the other OECD economies.

So instead of thinking that a decline in US oil consumption means a build-up in global oil inventories, just think of it as freeing up another barrel to be guzzled in China or the Middle East.