What’s the driving force of the economy? That is, what is it that gives value to our money? Yes, the value of money is based on agreements such as international money exchanges through FOREX desks, but what’s the underlying force giving value to money? Let me suggest that it is oil and other fossil fuels.
In our current societal structure – oil and other fossil fuels are what drive the machines that cause the economic activities that create profits for corporations, taxes for governments, and wages for the workers. Money wouldn’t have value if it wasn’t the token of economic activities that are enabled by fossil fuels.
Fossil fuels are a leveraging of energy to extract more energy from fossilized hydrocarbons. The energy expenditure to extract raw fossil fuels is repaid with an immensely larger quantity of energy, thanks to the very high fossilized hydrocarbon energy density. The phrase is: Energy Return On Investment (EROI)
Well — that’s true for traditional fossilized hydrocarbon sources. For example the old oil fields where you metaphorically stick a straw in the ground out comes a bubbling crude – oil that is, black gold, Texas tea. You find a gusher and it doesn’t matter if you’re a hillbilly from the sticks, you get your mansion in Beverly Hills. Or, so went the hype.
But, that myth is slowly becoming false.
The process is called Peak Oil, and it also applies to natural gas, or coal, or any other extractively consumed resource. Copper has become expensive, for a similar reason.
Namely, as “we” consume a resource it is the easiest-to-extract sources that are tapped first. In the Oil Age that was the big oil fields in Texas, the Persian Gulf, and some other places. But as oil is pumped out of an oil field, there comes a tipping point where it becomes hard to extract that oil. “Hard” as in it takes more work to extract the same amount of oil — “work” meaning energy. The tar sands, the deepwater drilling, the fracking, all that is very energy intensive. The ratio of energy gained to energy expended starts to shrink. Further, as this plays out over all the oil fields in a region or around the world you can build a statistical model that looks like a mountain.
Until 2006 or so the worlds oil companies were climbing the slope of oil production, increasing the production rate to meet demand every year. But around 2006 they were no longer able to continue increasing production, from normal oil fields, using normal oil production technologies. That point is the peak of oil production.
Since then, to keep increasing total oil production the oil companies have had to turn to ever more difficult, energy intensive, methods like deepwater drilling and fracking.
A similar story has occurred in the natural gas industry. In 2005 the pundits were saying natural gas was doomed to declining production. But now thanks to fracking the U.S. is so much awash in natural gas that liquified natural gas (LNG) export terminals are being built, and the government wants to use LNG from fracked fields as a political tool to undermine Russia’s dominance over the natural gas market in Europe.
But that these companies are turning to expensive energy intensive technologies like fracking is a symptom of resource depletion. Further the ratio of energy gained to energy expended is shrinking.
It’s that ratio – the energy gained from extracting fossil fuels – that drives the engine of the economy. The investment to extract fossil fuels isn’t giving the same payoff we enjoyed a few years ago.
Hence, can we expect more economic problems as fossil fuels become ever more difficult to extract and more expensive? Is it a coincidence that we’ve had nonstop global economic trouble since 2006?
But wait, you’re saying, in early 2015 as I write this, the price of gasoline has fallen to the lowest point in many years. Doesn’t that prove me wrong?
The current price of gasoline in early 2015 is due to OPEC price manipulation in an effort to destroy the companies that are fracking. OPEC is flooding the market with oil causing the price to fall, just like a price war between feuding gasoline station owners. At these low prices the companies depending on fracking can’t compete, and are folding up shop. I’m confident that by 2016-7 OPEC will change its tune and oil prices will go back up. Further, the facts of oil extraction I laid out above dictate that over the long term the price for fossil fuel resources is only going up. There may be short term price manipulations, as is going on now, but it’s the long term trend that dictates our future.
Our future is that fossil fuels will become scarce and expensive.
And therefore the economy will become worthless unless the economy unhooks itself from fossil fuel dependency.
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