Beyond Economics

The End of Growth and Time for a New Era

Tag Archives: peak oil

The Price of Oil and Beyond


Sunset on the Age of Oil

The American Dream of suburbia and the post-WWII global economy were built on cheap oil. Although the price of oil is down by over 40-50% from the $100 level of recent years, they are still higher than during the formative post-war period or even that of the 90s ($10-$30).

Oil and gas are now in a lose/lose situation. When prices are high for a sustained period, it will spur production (supply) but put a drag on world economic growth (demand), leading to a surplus and then a price collapse. When prices are low for a sustained period, while not helpful for alternatives, oil and gas companies will suffer more and production will eventually be cut back while demand rises, leading prices to go back up. Over time, technology improvements in extraction and production will be more than offset by rapid depletion rates. The low-hanging fruit has been picked.

Meanwhile, the economics of solar and wind will continually improve and are now close to competitive, even without subsidies.

Nominal and Inflation Adjusted (Real) Price of Crude Oil, EIA, BLS, EIA, BLS

A Brief History of Oil Prices

Convential Oil

When oil was easy

  • The industrial economy of the 20th century is built on cheap and easy oil
  • The birth of OPEC and its actions in the mid to late seventies cause a spike in the price of oil, leading to inflation, down-sizing of cars, and talk of alternative energy
  • OPEC realizes that they would be better off in the long run with a growing world economy addicted to cheap oil
  • At the start of the 21st Century, globalization has really kicked in, China is growing at 10+% and the price of oil starts a steady march upward as rapidly rising demand leads the depleting supply of conventional oil
  • Rising oil prices and a U.S. housing and credit crisis infects the world economy, crashing economic demand and oil prices
  • As the economy recovers, economic demand and high oil prices return
  • Saudi Arabia, as the swing producer in OPEC, stabilizes prices at around $100/barrel by increasing or decreasing production as needed
  • On the Supply Side, with consistently high oil prices at or above $80-100/barrel, unconventional sources are developed and come online (deep water, American shale from fracking, Canadian tar sands, and soon, Arctic)
  • On the Demand Side, with consistently high oil prices, world economic growth is slowed and there are incentives to economize with higher gas mileage cars and other energy efficiencies (demand destruction)
  • The result: with supply up and demand down (slowed), oil prices weaken and then crash, fueled by speculation on the down side.
  • This time, Saudi Arabia decides not to intervene in hopes of putting unconventional sources, primarily U.S. shale, out of business by driving prices below the cost of production (also hurting Iran and Russia as a bonus).
  • Venezuela’s economy is virtually destroyed as the country had become too dependent on oil export revenues and failed to maintain their oil industry infrastructure under Chavez.
  • Saudi Arabia’s plan is not entirely successful. Shale production does back off some at lower prices, but much production continues as producers need the cash flow.
  • After losing market share long enough, OPEC, led by Saudi Arabia, finally agrees in November 2016 to make some production cuts in order to bring oil prices up from the $40s to the $50s.
  • For now, US sale production is operating somewhat as a swing producer, able to shut down and start up drilling relatively quickly in response to prices.
  • For the time being, it appears that prices will stabilize in the $50-60 range.
  • When oil prices were lower and US gasoline hovered just above $2.00/gallon, Americans returned to buying larger SUVs and pick-up trucks. With prices now settling slightly higher at closer to $2.50/gallon, we shall see if this enthusiasm continues.


Why Oil Prices May Be Volatile

“The best cure for low prices is low prices. The best cure for high prices is high prices.”

Here is the key to it all:


  • On the supply side, low oil prices will disincentivize further development of North American shale (from fracking) and then deep water and tar sands
  • On the demand side, low oil prices are already sending Americans back to pick-up trucks and SUVs and providing a stimulus to the economy
  • Eventually (6 months to 2 years), supply will be down, demand will be up, and prices will rise again
  • When prices rise again, production (supply) will increase but economic growth (demand) will slow and the vicious cycle will repeat
  • Meanwhile, economic and geopolitical wildcards could come into play at any time for better or worse
  • Financial speculation can drive prices up and down quickly and excessively but fundamentals will eventually prevail to some extent since oil storage can serve as a buffer but is not unlimited

Why Unconventional Oil is So Costly

Much of the low-hanging fruit (cheap oil) has been picked.

Deep Water

1 mile down to the sea floor, 2 miles further down to the oil seam. When something goes wrong… relief_well_diagram

Fracking for Shale Oil and Gas

See my full post on fracking for more on the environmental and economic costs. Fracking -Diagram-2

Canadian Tar Sands

Imagine the energy, water, and expense of steaming oil out of this. Tar-Sands-1

Think these unconventional sources will continue to be produced with low oil prices? Think again. Low oil prices will wreck havoc on the debt-laden unconventional oil producers and oil service providers. This could be the next financial crisis and is already leading to whispers that there may be a need for bailouts.

For Further Exploration


The Future of Economics and Society as We Know It

Richard Heinberg delivers a clear and powerful message on the urgent need for the world to begin the transition to a sustainable future. He takes a big picture perspective on the interconnectedness of economics, energy, the environment, and society.

We are, and will be, seeing a cavalcade of environmental and economic disasters, not obviously related to one another, that will stymie economic growth in more and more ways.

Each will be typically treated as a special case, a problem to be solved so that we can get “back to normal”.

In September 2008, the global financial system nearly collapsed. The reasons for this sudden, gripping crisis apparently had to do with housing bubbles, lack of proper regulation of the banking industry, and the over-use of bizarre financial products that almost nobody understood. However, the oil price spike had played a critical (if largely overlooked) role in initiating the economic meltdown.

The end of growth is a very big deal indeed. It means the end of an era, and of our current ways of organizing economies, politics, and daily life. Without growth, we will have to virtually reinvent human life on Earth.

Interview of Nate Higgins on

So I’m not necessarily calling for a stock-market crash in the next decade, but I am calling for within the decade we probably won’t have a stock market. That’s a scary thing to contemplate, but this entire system is based on more every year, and we’ve extended the system by a decade or more by little bells and whistles and allowing people to buy houses with no money down and the repeal of Glass-Steagall.

And since 2008, the crash in private and household credit has been made up by government stepping in and providing 11% of our GDP just from deficit spending. And that bullet has now been spent. So the whole thing starts to unravel once they’ve spent all the bullets they have. And I don’t know that it really matters, really; stocks go down 10% or 50% or 100%, we have to restructure the way that we think about society.

Competing for nominal, digital wealth is going to go away as the main cultural objective. 

This is a fascinating, in-depth discussion of our economic, environmental, and societal predicament. If you have the time, this really ties it all together. Until recently, Nate Higgins was lead editor of The Oil Drum, one of the most popular and highly-respected websites for the analysis and discussion and global energy supplies, and the future implications of the energy decline that we are facing. He holds a Master’s Degree in Finance from the University of Chicago and recently completed his PhD in Natural Resources at the University of Vermont. Previously, he was President of Sanctuary Asset Management and a Vice-President at the investment firm Solomon Brothers and Lehman Brothers.

Nate Higgins Web Site

Additional Resources on Peak Oil

Post Carbon Institute
Founded in 2003, Post Carbon Institute is leading the transition to a more resilient, equitable, and sustainable world.

The Oil Drum
The Oil Drum seeks to facilitate civil, evidence-based discussions about energy and its impacts on the future of humanity, as well as serve as a leading online knowledge-base for energy-related topics.