JTRoberts recently made an important and insightful observation which I paraphrase and elaborate here.

Oil is a non-renewable resource that we extract from the earth. Oil companies are motivated by profit so they start with low-cost reservoirs and as those deplete they move to increasingly higher cost sources like water injection, offshore, tar sands, and fracking.

All economic activity depends on energy, as the laws of thermodynamics explain, and as the near perfect correlation between wealth and energy consumption confirms.

Oil is the keystone energy because oil is required to extract or capture all other forms of energy including food, coal, natural gas, wood, solar, wind, nuclear, and hydroelectric energy.

The cost of oil can be viewed as a tax on economic activity. Our economy is configured to operate profitably on about $20 per barrel oil. We have already captured most feasible energy efficiency gains making it difficult for our economy to operate profitably on oil over $20.

Thus, as the cost of extraction due to depletion of low-cost reserves pushes the price of oil above $20, the difference must be made up with debt.

At today’s $70 oil, which we burn about 96 million barrels per day, that works out to 96 * 365 * ($70-$20) = $1.8 trillion, which as predicted, is about the rate that global debt is increasing.

If you believe we have many years of oil left, then you must also believe that debt can continue to increase much faster than our income for many years without consequence on the value of money.

Money has value because we have confidence that the debt which creates our money will be repaid with interest, which can only occur when the economy grows, which can only occur when the quantity of energy we burn grows, which due to continually increasing extraction costs, can only occur when debt grows faster than the economy, which at some point will erode our confidence, which will reduce the value of money, which will reduce the amount of energy we can afford to burn, which will reduce economic activity, which will further erode our confidence in the value of money.

Do you see our energy and climate predicament?

Do you see why our leaders deny we have a problem?

Do you see why the longer we deny the problem the worse the outcome will be?

Additional Thoughts (30-Jul-2018)

Most people do not think we have an imminent oil problem because they’ve read in the news that there is 50 years or more of unconventional oil left to extract. While probably true, this fact is misleading.

What does it mean to say oil is depleted?

Depleted does not mean that all the oil is gone. Depleted means that all the oil we can afford to extract and purchase is gone. Big difference.

To be a little more precise, depleted is the point at which the cost to extract oil exceeds the price that our economy can pay and still grow.

Today we are paying the price and achieving a little growth, but it is taking a lot of debt at a very low interest rate to do so, and each year it takes more debt.

The ability of our global debt-backed fractional reserve monetary system to function (i.e. not collapse), and the high standard of living we enjoy, and the high capital things we invest in like modern infrastructure and technology, all fundamentally depend on economic growth. If growth stops our system will collapse, and our monetary system will have to be replaced with a different design, such as an asset-backed full reserve system, which will mean much lower standards of living, and much less availability of many things we currently take for granted.

I wrote an essay on economic growth which I recommend you read because many people think they know why we want economic growth but in fact don’t know the main and much more important reason.

So what evidence exists that oil is getting close to being depleted?