The Bumpy Ride: What Peak Oil Means for You and Your Business

By Dr. Matthew Heun
April 8, 2010

Much has been made in recent years about global warming and CO2 emissions, especially the effects that climate change will have on the poor worldwide. But, I believe that CO2 is not the whole story. In fact, I think that CO2 issues will become secondary to economic issues in the near term.

It is useful to review the present situation with oil. Worldwide oil production rates have been essentially flat for four years (indicating that “peak oil” is nearly upon us), despite increasing demand and record high prices that should have encouraged additional output if additional production capacity had been available. Soon, oil production will begin declining, if it hasn’t already. (The world record for oil production rate occurred in 2008.) When the economy recovers, oil demand will be ascendant, especially in China, India, and other developing countries, at precisely the same time that oil production will be declining due to resource limitations. What happens then is anybody’s guess, because we’ve never encountered those circumstances before.

Or have we? 1973 comes to mind. The Arab oil embargo produced essentially the same situation: oil-producing countries restrained production rates while oil demand (which is rather inelastic) declined only slightly. South Africa’s recent history also comes to mind. In late 2007 and early 2008, coal shortages and steadily increasing electricity demand led to rolling blackouts, which wrecked havoc on their economy. Estimates indicate 1.4 percent of GDP was lost in the carnage.

So, we’ve seen energy resource shortages before, and they aren’t pretty. Energy constrained economies tend to contract, but not slowly and steadily. Rather, they shrink in fits and starts. Recession is followed by recovery and rising energy demand that bounces against the ever-lowering energy supply constraint, which causes a deeper recession which is followed by a shallower recovery.

Matthew Heun working with students on a wind turbine in 2007.

At present there is far too little substitutability for fossil fuels. And, developing full-scale substitutes (whether they be wind, solar, hydro, nuclear, or biofuels) takes both time and resources. The states that start planning now will protect themselves against the negative economic effects of fossil fuel shortfalls and will be better equipped to provide for their people in the future. But, volatile boom-bust economic cycles do not provide the best economic conditions for tackling a grand challenge like energy. Planning ahead means building renewable energy capacity now; this requires (a) political fortitude to create the right policies to incentivize renewable energy industries and (b) economic investments that are hard to come by in a recession.

Although I am convinced by the science that human-induced global climate change is real, I am less concerned now than a few years ago that CO2 is the biggest environmental threat that we face. The way that energy interacts with our economic system is the real area of concern.

Economic shocks from reliance on fossil fuels whose supply rate cannot meet energy demands is an issue that will affect the world’s poor far sooner and far more dramatically than increasing CO2 concentrations. Ultimately, we need to find a way to feed, clothe and house even more people than we do now on a smaller and decreasing fossil fuel budget. The sooner we figure it out (by reducing energy demand and by developing and rolling out large-scale substitutes), the better.

The present challenging economic environment should be seen as an opportunity for forward-looking states to lead the world in technology development, to create local jobs, and to gain access to capital that would otherwise flow in unsustainable directions. The question before our government and business leaders is whether we can turn energy resource constraints into an opportunity for investments in innovation and new value chains that can provide fossil fuel substitutes. If such a transition is to happen, the readers of Corp! are likely to play a big role in it. My fear is that even recent events will not provide a loud enough wake-up call for the transition to occur.

It will be a bumpy ride down the back side of peak oil, and economic volatility is sure to be part of the picture. Are you and your business ready to seize the opportunities that are sure to come?

Dr. Matthew Heun is a professor of Mechanical Engineering at Calvin College. Before coming to Calvin Dr. Heun worked at NASA. He can be reached at [email protected].