Monday, August 20, 2012

Borrowing the future: the economics of peak oil

The root of the economic crisis is that people borrow money.

Which, in and of itself, is not that big of a deal. Borrowing money is something that happens just about every minute, and the invention of a system for borrowing money was a big boost for the development of just about any economic sector you can imagine.

In general, the borrowing of money makes it possible to do things. The most notable of these things is the making of more money - which we might unironically call a good investment. More common for the average person, however, is the purchase of large, expensive items, such as houses and cars and such. These are not made to make money, but rather to take funds from the future in order to get something now.

The "future" part is when you pay back the loan. Plus interest.

This arrangement in and of itself is not a cause for crisis. One may object to the principle of interest on religious grounds, but by and large this works. As long as people do that backpaying.

Things become problematic when a significant number of people can't pay back. Which, of course, is what the economic crisis is all about - people not paying back on loans. It is no stretch of any imagination to say that an unpayable loan is a crisis for just about anyone, but one personal crisis does not constitute an economic crisis as we refer to it. Rather, it is the sheer numbers of these people that makes the personal political.

As the numbers of defaultees increased, there was less money to go around. Both for the people why didn't have any of it left to pay that ever present loan, and for the banks who suddenly found itself having lent positively huge amounts of money to a boatload of people who couldn't pay them back. Which is a problem if your business plan is to make money out of people paying interest on past loans. The money just isn't there anymore, and without money - no new loans.

Which means that those people taking loans in order to make money won't be able to do so. Which, in turn, is what the economic crisis is all about. As long as people can use personal debt in order to spur personal profit, economic growth happens. When people can't do that, it doesn't. Which leads to just about all kinds of trouble in a debt-based economy where just about everyone has a mortgage to pay. New investments aren't made, less money is made and even more people default on their loans.

Vicious cycle indeed.

I want you to remember three things out of the above:

1) people borrowing in order to make more money
2) people doing it in order to consume
3) the system that makes this possible

The title mentions peak oil, yet we've only talked loans so far. What gives?

Well, here's the deal. We're facing just about the same problem with our oil supply. It's no secret that there's a finite amount of oil in the world - every well that is pumped dry is one less available in the future. Every barrel of oil we use now is one less to use later.

This works, in part, due to the fact that we use some of the oil to find and extract new oil. As long as this is going on, the rest of us, who use it to move around, grow food, make plastics and on the whole consume it in various ways - can continue to do just that. The supply of new oil is ensured by the supply of current oil, and as long as this reinvestment of oil goes on thing can continue as usual.

In a sense, we borrow from the future in order to make things happen now.

Remember that 123 up above?

What we have going on is 1) people using oil in order to get new oil, 2) people using oil in everyday life and 3) a whole set of economically interdependent pieces that make sure that 1 and 2 can do what they do.

As the supply of oil gets lower and lower, it also means that it gets harder to get to. As the easy wells dries up, one needs to start looking at those well harder to get to. Those at the bottom of the sea or far away in the permafrost. Which translates into a lower ratio of oil returned to oil invested. The harder it is to get the oil out, the more oil you have to use in order to get it out. Which means that things get that much more expensive, and thus we the people have to pay the higher gas price.

It is possible that the hardest wells only get you enough gas to get the drillers back to civilization afterwards. But long before that becomes an issue, things will have become so expensive that most people really can't afford it any more.

And so we have our economic crisis repeat itself. Loaning from the future only works if there is a future there to repay it. If there for some reason is no future left - well, that won't bode well for anyone. Especially not those who are dependent on the future in order to make things happen now.

Which would be us.

Just to make things worse, there are very few things in our society that does not require oil in some direct or indirect way. So as oil becomes ever more expensive, everything else becomes that much more expensive as well. Combine this with what we said about everyone having a mortgage to watch over them - well.

Maybe it is time to borrow from tomorrow and build a better future out of that. There is after all no future in the present.

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