Economic recovery, oil price, and carbon

Earlier this week there were two signals that the oil price is threatening to return to dangerous levels as economic growth begins to pick up. On Monday, the FT reported that forward oil prices are now $20 higher than two years ago, even though spot prices are much lower. And on Tuesday, the Guardian reported allegations by a whistleblower at the International Energy Agency in Paris that the agency has been underplaying the rate of oilfield decline, while overplaying the chance of finding new oil – suggesting that the peaking of global oil production is much closer than they previously maintained.

This news is exactly what would be expected if the world actually is entering the zone of the global oil production peak.

Nevertheless, even if we knew the supply situation accurately, the peak itself could not be predicted at a fixed moment in the future. Depending on whether economic growth is higher or lower, the peak is effectively smeared out over a longer period of time or concentrated closer. Peak oil and oil-intensive economic growth are locked in a see-saw relationship.

This means the approaching peak may well trigger a dynamic process that can already be seen underlying the events of 2007–2008. The sequence would go like this. The onset of the peak initially constrains economic growth by shocking the system into recession through oil price rises. For a while, recession makes the oil problem recede as prices fall.

Then, when the world economy begins to pick up, growing consumption runs head-on into limited oil availability again, pushing prices back up and stalling the recovery. Repeated episodes of this stop-start pattern would force the economy lower each time, following the downslope of global oil production. That is, if the economy is not derailed entirely by the second or third jolt.

If the world economy and energy consumption contract in this way, so will carbon dioxide emissions, to the point where there will not be enough carbon going into the atmosphere to achieve anywhere close to business-as-usual carbon dioxide emission projections.

This would not make current efforts to achieve a low-carbon economy redundant. Ultimately, the savings involved may have their real payoff in helping the world adapt to a progressive decline in oil production. So in this scenario, low carbon technologies and practices still promise to be a source of lasting economic security, even if for different reasons than we currently suppose.