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Jan 2010
Turning the Corner on Growth
Marc Fader/Solutions
New York City, viewed northward from the Tribeca neighborhood.

Everyone agrees: our economy is sick. The inescapable symptoms include declines in consumer spending and consumer confidence, together with a contraction of international trade and available credit. Add a collapse in real estate values and carnage in the automotive and airline industries, and the picture looks grim indeed.

But why are both the U.S. economy and the larger global economy ailing? Among the mainstream media, world leaders, and America’s economists-in-chief (Treasury Secretary Geithner and Federal Reserve Chairman Bernanke), there is near-unanimity of opinion: these recent troubles are primarily due to a combination of bad real estate loans and poor regulation of financial derivatives.

This is the conventional diagnosis. If it is correct, then the treatment for our economic malady would logically include heavy doses of bailout money for beleaguered financial institutions, mortgage lenders, and car companies, better regulation of derivatives and futures markets, and stimulus programs to jumpstart consumer spending.

But what if this diagnosis is fundamentally flawed? The metaphor needs no belaboring; we all know that tragedy can result from a doctor’s misreading of symptoms, mistaking one disease for another.

A case can be made that dire events having to do with the real estate market, the derivatives markets, and the auto and airline industries are themselves mere symptoms of an even deeper, systemic dysfunction that spells the end of economic growth as we have known it.

For several years, a swelling subculture of commentators has been forecasting a financial crash, basing this prognosis on the assessment that global oil production was about to peak. The reasoning went like this: continual increases in population and consumption cannot continue forever on a finite planet. This is an axiomatic observation with which anyone familiar with the mathematics of compounded arithmetic growth must agree, even if they hedge their agreement with vague references to “substitutability” and “demographic transitions.”

This axiomatic limit to growth means that the rapid expansion in both population and per-capita consumption of resources that has occurred over the past century or two must cease at some particular time. But when is this likely to occur?

Energy is the ultimate enabler of growth (again, this is axiomatic: physics and biology both tell us that without energy nothing happens). Industrial expansion throughout the past two centuries has in every instance been based on increased energy consumption. More specifically, industrialism has been inextricably tied to the availability and consumption of cheap energy from coal and oil (and more recently, natural gas). However, fossil fuels are by their very nature depleting, non-renewable resources. Further, burning these fuels releases climate-changing carbon dioxide into the atmosphere, setting up conditions for droughts, famines, and the drowning of coastal cities. None of these events is compatible with continued, easy economic growth.

Thus, either climate catastrophe or the eventual inability to continue increasing supplies of cheap fossil energy will likely lead to a cessation of economic growth, unless alternative energy sources and efficiency of energy use can be deployed rapidly and to a sufficient degree.

Of the three conventional fossil fuels, oil is arguably the most economically vital, since it supplies nearly all transport energy. Further, it is the fuel that is likely to encounter supply problems soonest because global petroleum discoveries have been declining for decades, and most oil producing countries are already seeing production declines.

During the period from 2005 to mid-2008, demand for oil was growing, especially in China (which went from being self-sufficient in oil in 1995 to being the world’s second-foremost importer after the U.S. by 2006). But the global supply of oil was essentially stagnant: from month to month, production figures for crude oil bounced around within a fairly narrow band between 72 and 75 million barrels per day. As prices rose, production figures barely budged in response. There was every indication that all oil producers were pumping flat-out: even the Saudis appeared to be rushing to capitalize on the price bonanza.

Today, oil prices are only half what they were in July 2008. Why has the economy not quickly recovered? Clearly, peak oil is not the only cause of the current economic crisis. Enormous bubbles in the real estate and finance sectors constituted accidents waiting to happen, and the implosion of those bubbles has created a serious credit crisis (as well as solvency and looming currency crises) that will take several years to resolve, even if energy supplies are not a problem.

Perspective_Heinberg_2_web.jpg
Noel Kerns

But now the potential for renewed high oil prices acts as a ceiling for economic recovery. Whenever the economy does appear to show renewed signs of life (as has happened in May-July this year, with stock values rebounding and the general pace of economic contraction slowing somewhat), oil prices will take off again as oil speculators anticipate a recovery of demand. Indeed, oil prices rebounded from $30 in January to nearly $70 in early August, provoking widespread concern that high-energy prices could nip recovery in the bud.

The problem extends beyond oil and other fossil fuels, and even beyond climate change: the world’s fresh water resources are strained to the point that billions of people may soon find themselves with only precarious access to water for drinking and irrigation. Biodiversity is declining rapidly. We are losing 24 billion tons of topsoil each year to erosion. And many economically significant minerals—from antimony to zinc—are depleting quickly, requiring the mining of ever lower-grade ores in ever more remote locations. Thus the peak oil crisis is really just the leading edge of a broader Peak Everything dilemma.

In essence, humanity faces an entirely predictable peril: our population has been growing dramatically for the past 200 years (expanding from under one billion to nearly seven billion), while our per-capita consumption of resources has also grown. For a species, this is virtually the definition of biological success. And yet all of this has taken place in the context of a finite planet with fixed stores of non-renewable resources (fossil fuels and minerals), a limited ability to regenerate renewable resources (forests, fish, fresh water, and topsoil), and a limited ability to absorb industrial waste products, including carbon dioxide. If we step back and look at the industrial period from a broad historical perspective that is informed by an appreciation of ecological limits, it is hard to avoid the conclusion that we are today living at the end of a relatively brief pulse—a 200-year rapid expansionary phase enabled by a temporary energy subsidy (in the form of cheap fossil fuels) that will inevitably be followed by an even more rapid and dramatic contraction as those fuels deplete.

The winding down of this historic growth-contraction pulse doesn’t necessarily mean the end of the world, but it does mean the end of a certain kind of economy. One way or another, humanity must return to a more normal pattern of existence characterized by reliance on immediate solar income (via crops, wind, or the direct conversion of sunlight to electricity) rather than stored ancient sunlight.

This is not to say that the remainder of the 21st century must consist of a collapse of industrialism, a die-off of most of the human population, and a return by the survivors to a way of life identical to that of 16th century peasants or indigenous hunter-gatherers. It is possible instead to imagine various acceptable and even inviting ways in which humanity could adapt to ecological limits while further developing cultural richness, scientific understanding, and quality of life (more on this below).

But however it is negotiated, the transition will spell an end to economic growth in the conventional sense. And that transition appears to have begun.

If the physical scientists who warn about limits to growth are right, confronting the global economic meltdown implies far more than merely getting the banks and mortgage lenders back on their feet. Indeed, we face a fundamental change in our economy as significant as the advent of the industrial revolution. We are at a historic inflection point—the ending of decades of expansion and the beginning of an inevitable period of contraction that will continue until humanity is once again living within the limits of Earth’s regenerative systems.

A case can be made that after all this is done, the end result will be a more satisfying way of life for the vast majority of citizens—offering more of a sense of community, more intergenerational solidarity, more of a connection with the natural world, more satisfying work, and a healthier environment. Indeed, it is essential at a challenging time like this to emphasize solutions and benefits rather than dwelling only on the enormity of the crisis confronting us. But those in charge need to understand that looking on the bright side doesn’t mean promising what can’t be delivered—such as a return to the days of growth and thoughtless consumption.

We have entered a new economic era in which the former “rules” no longer apply. Low interest rates and government spending no longer translate to incentives for borrowing and job production. Cheap energy won’t appear just because there is demand for it. Substitutes for essential resources will in most cases not be found. Over all, the economy will continue to shrink in fits and starts until it can be maintained by the energy and material resources that Earth can supply on an ongoing basis.

Is it too late to begin a managed transition to a post-fossil fuel society? Perhaps. But we will not know unless we try. And if we are to make that effort, we must begin by acknowledging one simple, stark reality: growth as we have known it can no longer be our goal.

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