Monday, September 27, 2010

Sustained Economic Growth: Our Favorite Oxymoron

I'll begin by admitting that I know quite little about the topic of oil production. Most of my knowledge comes from a short talk I heard a few weeks ago by Sally Odland.

Odland's talk made me realize something which I think is both obvious, and profound. This realization stems from two basic observations.

The first is that there is a causal relationship between energy consumption and GDP. These two quantities are inexorably linked. Just take a close look at the following graph, which plots U.S. energy usage and GDP:

There's a lot going on here, but I think there are three important observations.
(1) Both energy consumption and real GDP have risen, more or less linearly, over the course of the last 150 years.

(2) The growth in energy consumption has come, almost entirely, from increased use of fossil fuels.

(3) Amidst this growth, there are various dips in economic activity, recessions and the like. If you look closely you'll notice that dips and bumps in the GDP curve are mirrored by dips and bumps in overall energy production.

In other words, fossil fuel consumption and GDP move in tandem. In fact, one could say they are almost the same thing.

Here's the problem:
Growth in oil production, which has largely come from the Middle East over the last 20 years, appears to be plateauing. Now people will argue about how much oil still remains in reserves. But Odland makes the point that OPEC doesn't actually offer any proof for a large number of its claimed reserves, many of which which appeared out of thin air during the 1980's

Regardless of the reserve quantity, everyone agrees that the production and consumption of fossil fuels cannot increase forever. And a simple examination of the above graph shows that we have reached, or are close to reaching, the maximum amount of daily production.

These are the two facts that I have just illustrated:
(1) fossil fuel consumption is GDP
(2) fossil fuel production has, or is close to plateauing.

With these two key ideas in mind, it strikes me as absurd that economists continue to talk about things like sustained economic growth. This concept is simply an oxymoron.

What is sustained growth? It is an exponential increase. It is in fact, the definition of a cancer - something that continues to grow unchecked. In other words, our stated economic goals are a continued growth of consumption and production. We don't have to be a cancerous growth upon the earth's surface, but our current economic philosophy dictates that we be exactly that.

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