Economic growth: a zero sum game

Figure 2: US oil consumption. A case of demand destruction

Of course oil is a fungible globally traded commodity. At least currently! This situation is changing for two major reasons. The first is that the continuing growth in oil consumption by oil exporting nations, when combined with actual or projected declines in production of these nations will see the pool of oil available for importers decline.

Jeffery Brown, the co-originator of the Export Land Model (PDF 3.28MB) suggests that by 2015, based on current trends, for every three barrels of net oil imports non-Chindia countries purchased in 2005, these countries will have to make do with two barrels by 2015; a situation that will only continue to deteriorate.

The other factor is that some nations don’t play by the free market game. China in particular has and is continuing to be aggressive in its securing of oil supplies (as well as other resources such as natural gas, rare earths, minerals and farmland) to meet its future needs from countries around the world. The net result is that those oil importing countries who continue to believe in the free market will be fighting amongst one another to secure a continually decreasing and ever more expensive pool of oil.

Unfortunately there is good reason to believe that the IEAs scenarios are actually quite optimistic. These reasons include:

• Expecting Saudi Arabia to increase its oil production by 5 mb/d from current levels, even though King Abdullah has said that exploration will be stopped to save the oil for future generations.
   
• We currently consume far more oil than we discover each year. A 30-year trend that is unlikely to reverse.
   
• Considering unconventional oil and natural gas liquids (NGLs) as an equivalent to crude oil without factoring in the reduced Energy Return on Investment of unconventional oil or the lower energy content of NGLs.

To summarise, using the IEAs scenario for future oil production, a scenario that is likely to be overly optimistic, the best that we can hope for is that future economic growth at the global level is a zero sum game. Obviously the implications arising from this are significant. How does Australia ensure that it is on the winning side of this equation? Here are a few ideas:

• Use less oil. Transforming our transportation system from one where the car and truck dominate to one where rail and public transport dominate is a logical risk mitigation strategy.
   
• Natural gas as a transition fuel. Australia has large natural gas reserves whilst our oil production is already in decline, a trend expected to continue, and insufficient to meet current or forecast demand. A major program aimed at transitioning portions of our vehicle fleet to natural gas would provide a buffer as the availability of oil imports becomes increasingly problematic.
   
• Food for oil. Relying on the free market to secure future oil imports, when other nations aren’t playing the free market game is fraught with danger. Long term oil supply contracts with major oil exporters, potentially in exchange for food or other resources would increase Australia’s security of supply.
   
• The reversal of globalisation. The current level of globalisation has been achieved due to the low cost of transporting goods around the world. However in a world of triple digit oil prices, distance equals money. As the comparative advantage provided by low cost labour nations erodes, this provides an opportunity for manufacturing in Australia.
   
• Fractional reserve banking and fiat currencies. Our current financial system requires continual economic growth to sustain it. The economy either grows or implodes. There are other options however, such as the steady state economy proposed by former World Bank economist Herman Daly. Moving away from fractional reserve banking and fiat currencies will be vital in avoiding systemic financial crises in the future.

Reading between the lines of the IEAs latest World Energy Outlook suggests that whether we like it or not, the rules of the game are changing. The conventionally accepted economic wisdom, which was derived in an era where energy was cheap and seemingly inexhaustible, is becoming less and less relevant to our current and future situation. Successful countries will be those that understand that the game has changed and adapt accordingly.

It is time for reform, not the minor tinkering that constitutes reform in current political debate, but fundamental change. Business as usual can’t and won’t remain an option for much longer.