Degrowth, expensive oil, and the new economics of energy

Samuel Alexander [University of Melbourne, Australia]

Copyright: Samuel Alexander, 2012

See (PDF): http://www.paecon.net/PAEReview/issue61/Alexander2_61.pdf

Preparing for life after growth

Building upon the ‘limits to growth’ perspective (Meadows et al, 2004), and drawing upon the work of various energy analysts (Ayers and Warr, 2009; Murphy and Hall, 2011a-b), this paper is based on the view that, in order to grow, industrial economies require a cheap and abundant supply of energy, especially oil. When the costs of oil increase significantly, this adds extra costs to transport, mechanised labour, plastics, and industrial food production, among many other things, and this pricing dynamic sucks discretionary expenditure and investment away from the rest of the economy, causing debt defaults, economic stagnation, recessions, or even longer-term depressions. That seems to be what we are seeing around the world today, with the risk of worse things to come (Tverberg, 2012a). Since crude oil production has been on an undulating plateau since 2005 while demand has increased (Hirsch et al, 2010), this has put huge upward pressure on the price of oil, and several commentators have drawn the conclusion that these high oil prices signify the end (Heinberg, 2011; Rubin, 2012) or at least the twilight (Alexander, 2011a; 2012a) of economic growth globally. If this is true, we are living at the dawn of a new age, and should be bracing for impact.

Some new research, reviewed below, has come to light that seems to confirm this essential message. Expensive oil, in other words, does appear to be suffocating the debt-ridden, global economy, just as it is trying to recover (Hamilton, 2011; Tverberg, 2012b). Unfortunately, mainstream economists, including those in government, seem oblivious to the close relationship between energy, debt, and economy, and this means they are unable to see that expensive oil is one of the primary underlying causes of today’s economic problems. Consequently, they craft their intended solutions (e.g. stimulus packages, quantitative easing, low interest rates to encourage borrowing, etc) based on flawed, growth-based thinking, not recognising that the new economics of energy means that the growth model, which assumes cheap energy inputs, is now dangerously out-dated. When growth-based economies do not grow, household, firms, and nations struggle to repay their debts, and quickly things begin to unravel in undesirable ways.

Furthermore, even many of the most progressive ‘ecological economists’ fail to appreciate the important relationships between energy, debt, and economic growth. For several decades advocates of a ‘steady state’ economy (e.g. Daly, 1996) have been arguing persuasively that we need to move beyond the growth model, for various social and environmental reasons (Victor, 2008; Jackson, 2009). But very few seem to realise that interest-bearing loans are incompatible with a steady-state economy due to the fact that repaying debts plus interest implies growth (Sorrell, 2010; Trainer, 2011). Put simply, it implies growth because more money has to be paid back than was initially lent or invested, requiring an overall expansion of the economy if debts are to be repaid. Many ecological economists are against growth, without being against interest-bearing loans, and it is not clear that this is a coherent position. It is a tension that certainly deserves more critical consideration.

Similarly, ecological economists who argue for decarbonising the economy do not seem to realise quite how revolutionary this proposal is – which is not to say the proposal is misconceived (Hansen et al, 2008), only that its economic implications may be misunderstood. If the global economy managed to wean itself of fossil fuels over the next few decades in response to climate change, then a ‘steady state’ economy would be impossible, if a steady state is meant to imply maintaining anything like existing levels of affluence. It would be impossible because fossil fuels currently make up around 80% of global energy supply (IEA, 2010a: 6), and nothing like existing production could be maintained when we are talking about that level of energy reduction. Without fossil fuels, the world just would not have the energy supply to maintain a steady state of economic output; the economy would have to contract significantly. This is not a consequence many ecological economists seem to understand or dare to acknowledge.

While I accept that the world must transition to renewable energy sources without delay, evidence suggests that such sources will never be able to replace (fully or affordably) the energy contained in fossil fuels, especially oil (Trainer, 2012a; 2010a). Renewable sources are also fossil fuel dependent themselves, a point often and easily forgotten. Therefore, if we are serious about tackling climate change and getting off fossil fuels, we should be preparing ourselves for a world with perhaps half as much energy consumption, and this implies embracing, not a steady state economy, but some ‘degrowth’ process of planned economic contraction (Alexander, 2012b; 2011b). As the world’s population grows to nine or ten billion in coming decades, this reasoning is only going to get more challenging, because sustainable energy consumption on a per capita basis will decline even further. It is worth noting that even if there were no energy supply problems, the fact that the existing economy already greatly exceeds the sustainable carrying capacity of the planet (Global Footprint Network, 2012) means that significant overall economic contraction of some form would still be required (Alexander, 2012b; Clarke and Lawn, 2010; Latouche, 2009).

Needless to say, the powers that be are not willing even to entertain this ‘degrowth’ diagnosis or its radical implications, for it implies establishing fundamentally new economic systems that operate on much lower energy inputs. Empire, we can be sure, will not contemplate self-annihilation; it will struggle for existence all the way down. In much the same vein, consumerist cultures are very unlikely to accept any proposal to voluntarily reduce levels of consumption. Overcoming or dealing with these forms of resistance is the near impossible task that lies before those of us who seek a radically alternative, post-carbon economy (Trainer, 2010b; Heinberg and Leach, 2010; Alexander, 2011c).