The fossil fuel age is not over, but the age of cheap energy is. As we turn to Arctic oil, tar sands and fracking, the world is increasingly reliant on much more expensive sources of energy. And that, say many commentators, has put the economy onto something of a rollercoaster. I’ve seen it explained several times, but Rob Hopkins and Asher Miller’s recent paper put it rather well and included this illustration, which I thought I’d highlight quickly.
Essentially what happens is this.
- Rising demand pushes up the price of oil.
- As prices rise they become a drag on the economy. Consumers tighten their belts, and energy demand falls.
- Falling demand for energy pushes the price back down again. At the new lower price, investments in new energy production are now no longer economic. Investments are pulled.
- The fall in investment creates a shortage and prices begin rising again.
We may be on this cycle already, as companies pile into expensive sources of energy like tar sands when the price is high, only to make a loss as the energy price falls. With oil supplies tight and investment needing a long lead in time, this kind of volatility looks likely to continue. And with the economy so dependent on cheap energy, we could find ourselves on a cycle of recession and recovery too.
That’s the briefest of introductions, but for more, see the paper above, the Industry Taskforce on Peak Oil and Energy Security, or Jeremy Leggett’s book The Energy of Nations. It’s worth investigating a little further. If the theory is correct, this could be an important dynamic in the economy over the next few years, and it’s virtually unrecognized in government at the moment.