By Karl North | May 20, 2011
The energy descent from peak oil production imposes decades of contraction in the global economy. An orderly contraction, particularly in the US, is not likely for a number of reasons. This is a summary of the case for a disorderly descent, garnered from many sources, a couple of which are listed at the end of the essay.
One reason has to do with the nature of the oil extraction and processing industry. According to industry experts, once existing oil wells are shut down, the costs of restarting production are high. The same is true for refinery shut-downs. Also, refineries cannot be economically run at less than capacity. Finally, oil exploration is an increasingly costly and lengthy process. These supply chain problems magnify oil price volatility as it interacts with global economic contraction, thereby punctuating economic behavior with ever deeper stall-outs.
Other reasons derive from the nature of modern industrial society and its world-economic system. First, debt-based economies cannot shrink slowly. Because of the need for an economy to grow to pay interest on debt, when growth is no longer possible credit tends to dry up, the investment needed to merely maintain an economy in operation begins to fail, and the economy experiences periods of paralysis as critical pieces break down. As one analyst put it, capitalism is not designed to run backwards.
Perhaps the most important risk is to the number of supply chain functions required to keep modern economies operational. As infrastructures are not maintained, the just-in-time inventory typical of modern economies is disrupted, with ripple effects throughout the system. Gas lines at filling stations prevent a suburbanized labor force from getting to work. Grocery shelves lie empty for extended periods. Deeply off-shored economies like the US suffer most from supply chain disruptions, and have no rapid recourse to re-industrialization.
Ultimately, cultural conditioning may be the strongest disorder-generating influence. The widespread denial that the pattern of civilization of at least the past two centuries is unsustainable leads to political paralysis, as eminent writers and powerful interests continue to argue for unlimited growth, and the general public, having lost most skills of self-sufficiency, sees no hope in alternatives to its current lifestyle.
No one can predict exactly how a disorderly descent will unfold. One reason is our inability to foresee historical contingencies like natural disasters, and resource wars and other social upheavals, which could accelerate change in societies that are already at a tipping point. Second, assuming the importance of the factors previously described, we still can’t predict exactly how they will interact. But we can develop a dynamic structural model of the interdependency of those and other important variables, a causal structure that captures important feedback effects, and thereby provides insights into likely scenarios. Here is my model of that feedback structure, gleaned from the now prodigious literature on the collapse of modern society that has begun to occur. As you can see, it suggests the likelihood of cascading effects, or falling dominoes as it were, provoked by the new era of permanent decline in global oil production (Readers who seek help in reading the causal loop diagrams in this essay are directed to my introduction to systems thinking).
As many students of the energy descent have pointed out, the effect of Economic Shrinkage, the first domino to fall, is to cause demand destruction, which makes oil temporarily cheaper, and grants a brief pause in the economic decline. So the early shocks in the energy descent may not cause a full cascade into Credit Collapse and eventually Monetary Collapse. However, initial economic shrinkage increasingly hampers alternative energy production and infrastructure maintenance, which in turn accelerate economic decline. Because all the feedbacks in this model are reinforcing (R) loops that accelerate change, a cascade, once started could trigger deep steps in the stairway of collapse.
Because the dynamics of oil production itself and its price/scarcity are central to understanding the socio-economic consequences of the energy descent, it is important to model the feedback structures that govern those. The attempt below is separated into two models to facilitate analysis, one containing negative, balancing feedbacks (B) that slow or counteract the expected rise in the price/scarcity of oil, and the other hopefully capturing the main positive feedbacks (R) that could accelerate oil scarcity.
Geopolitical Feedback Structure of Declining Oil Production: Feedback Effects on Short to Medium Term Oil Prices After Peak Oil
What follows is a brief analysis of how global trends in key variables are liable to create a ‘disorderly oil market’ as the oil era ends. It is intended to complement the explanation of feedback provided in the graphic models.
The era of cheap oil saw the emergence of complex and ultimately fragile social and economic structures. During this time for example, the spatial distance between material and labor resources, production facilities and markets could expand with few obstacles. As this distance economy becomes increasingly costly and eventually unaffordable, perhaps the strongest feedback effect exerting short term downward pressure on oil prices is the specter of a widespread economic depression triggered by a chain reaction of non-performing mortgage and other debt leading to bank and insurance industry collapse, etc. This is the wild card that I represented separately in the first diagram, Systemic Failure Feedback Structure, because its tipping point is much harder to estimate – when it might kick in and possibly overwhelm the other feedbacks.
By contrast, a number of the negative and positive feedback effects on the global oil economy, which I described and diagrammed above, can be expected to occur in the short to medium term. However, the oil price ‘disorder’ that these feedbacks will generate only puts off the arrival in the longer term of a lower energy civilization (here assumed to be inevitable), with the catastrophic changes that implies. In the relatively short run these changes could include severe suffering, particularly for non-peasant populations heavily dependent on the distance economy of the industrialized world and addicted to its material comforts. However, in the longer run the change to a low energy civilization also holds the potential to include major benefits: a return to a more sustainable pattern of resource use, healthier, happier lifestyles as people are released from the propaganda grip of the consumer economy, and liberation from wage slavery and the constant damage to quality of life from distant decision makers as the power of monopoly capital over the decisions that affect our lives goes into decline.
Here is how the negative feedbacks work:
A shrinking buyer market
This is the ‘isolated islands of prosperity amid demand destruction’ scenario: more and more of the global majority is priced out of the market for all products affected by rising oil price. This is happening already to many populations of the global south. But a shrinking buyer market eventually puts downward pressure on oil price, at least for a while, as in the feedback loop B1. Depending on the comparative strength of this feedback loop, it will manifest as either a brake or temporary reversal of the generally upward trend in the global oil price.
Alternative Energy and Energy Conservation Adoptions
Existing technology can rapidly reduce fossil fuel use, notably in transport and heating, particularly in the US, where such changes will be most affordable, at least in the short term. For example, an expected response in the automotive market to rising motor fuel costs will be an eventual rise in fuel efficiency. When the average US car gets 40 mpg it will more than halve the current U.S. need for automotive fuel and depress oil prices significantly for a while, as in feedback loop B2. More than the shrinking buyer market, this feedback loop involves significant delays (marked as // in the diagram), as consumers react slowly to rising prices in the affected oil products. If delays are too long, however, both consumers and producers become caught in a poverty trap that closes off the window of opportunity to adopt energy conservation technologies. The way this works is that rising oil prices render unaffordable the technologies, whose production still depends on fossil fuel use.
The momentum of economic growth in the global capitalist economy
Analysis of the political economy of capitalism has long demonstrated that its characteristic structure and decision rules generate an historically typical behavior: a drive for unlimited growth, provoked in turn by the need to accumulate capital to compete in a global economy shaped by unrestrained use of private capital. In the era after peak oil, this drive will manifest itself where opportunity offers, e.g., in emerging economies with access to masses of cheap labor, like China and India, and to a lesser extent everywhere that lucrative investment opportunity emerges. In the short to medium term this includes such fuel use as caused by a continuing trend toward exurbanization in developed economies. Eventually rising oil price will put an end to unlimited growth, which will then depress oil price, as in feedback loop B3. But due to delays in stemming the growth drive, the loop will be weak in the short term. In that period the momentum of the growth habit of capitalism will act to push oil prices higher.
The positive feedbacks illustrated in the second diagram complicate the picture even more, and would require extended analysis that is beyond the scope of this essay. As the diagram shows, they are numerous and interlocking, and therefore have the potential to cause rapid rises in oil price and/or scarcity. Some of the effects are already happening. The recent Russian decision to halt oil exports could be an example of energy mercantilism R2 or perhaps the need for domestic use of domestic oil production R3. The decision of Iraq to sell its oil for Euros not dollars is an example of mercantilism R2 that allegedly provoked the second Gulf war. That conflict with its sabotage and other damage to Iraqi oil production is an example of R4.
The timing and time span of the feedback effects described above is impossible to predict due to the complexity of their interaction (that is, which loops become dominant when) and to the likelihood of unpredictable triggering events such as the likely global economic depression. Thus the disorderliness of oil prices in the short and possibly medium term (20 year time horizon), and the damping effects of the feedbacks on oil price rise at times during the period, are the only safe predictions possible from this analysis. At the same time all three of these dynamic models suggest probable future scenarios that we would do well to take seriously.
 Korowicz, David. 2010. Tipping Point: Near-Term Implications of a Peak in Global Oil Production. Feasta Foundation. March 2010.
 Catton, William R., Jr. 1994. “The Problem of Denial” http://www.mnforsustain.org/catton_problem_of_denial.htm