Decks growth

10. Higher oil prices reflect a need to focus a disproportionate share of investment and resource use inside the oil sector. This makes it increasingly difficult to maintain growth within the oil sector, and acts to reduce growth rates outside the oil sector.

There is a close tie between energy consumption and economic activity because nearly all economic activity requires the use of some type of energy besides human labor.  Oil is the single largest source of energy, and the most expensive. When we look at GDP growth for the world, it is closely aligned with growth in oil consumption and growth in energy consumption in general. In fact, changes in oil and energy growth seem to precede GDP growth, as might be expected if oil and energy use are a cause of world economic growth.

Figure 5. Growth in World GDP, energy consumption, and oil consumption. GDP growth is based on . Oil consumption and energy consumption growth are based on BP’s 2012 Statistical Review of World Energy.

The current situation of needing increasing amounts of resources to extract oil is sometimes referred to as one of declining  (EROEI). Multiple problems are associated with declining EROEI, when cost levels are already high:

(a) It becomes increasingly difficult to keep scaling up oil industry investment because of limits on debt availability, when heavy investment is made up front, and returns are many years away. As an example, Petrobas in Brazil is running into this limit.  are reaching debt limits as well.

(b) Greater use of oil within the industry leaves less for other sectors of the economy. Oil production has not been rising very quickly in recent years (Figure 6 below), so even a small increase by the industry can reduce net availability of oil to society.  Some of this additional oil use is difficult to avoid. For example, if oil is located in a remote area, employees frequently need to live at great distance from the site and commute using oil-based means of transport.

Figure 6. World crude oil production (including condensate) based primarily on US Energy Information Administration data, with trend lines fitted by the author.

(c) Declining EROEI puts pressure on other limited resources as well. For example, there can be water limits, when fracking is used, leading to conflicts with other use, such as agricultural use of water. Pollution  as well.

(d) High oil investment cost can be expected to slow down new investment, and keep oil supply from rising as fast world demand rises. To the extent that oil is necessary for economic growth, this slowdown will tend to constrain growth in other economic sectors.