Peak Energy Is Most Fundamentally an Economic Issue - Literature review Example

Peak Energy is most fundamentally an Economic Issue Peak energy refers to a peak in the rate of energy production. Specifically, this concept denotes a time when the global rate of extraction of energy resources reaches the maximum, after which a terminal decline in the rate of production follows (Mórrígan Tariel, 2010). The fact that non-renewable energy resources have formed the pillar of growth of economies means that a constraint in those resources will not just reduce the size of an economy but it is likely to break up. In short, the existing growth of economies of nations as well as the world economy has evolved with particular dynamics and support from various inputs with energy resources playing the biggest part. As a result, we are locked up in hyper-complex economic processes that are increasing our vulnerability, but which we cannot be able to alter without adversely affecting the growth of our economies (Korowicz David, 2010). Consequently, we are likely to witness a decline or eventual collapse of our economies owing to the aforementioned problem. This paper suggests that peak energy is most fundamentally an economic issue. To understand this better, it will be prudent to give a brief background of “peak energy” concept. In order to address this issue adequately, this paper highlights the impact of peak energy on the economies of nations. The concept of peak energy as applied to the rate of energy production is derived from the Hubbert Curve, which has been applied to the nation’s domestic production rate in the past (McPherson Guy, 2010). The concept of Hubert Linearization is applied in predicting the amount of a non-renewable resource that is recoverable. This model assumes that it is possible to describe the “annual production trajectory of a non-renewable resource” logistically (McPherson Guy, 2010). According to this model, the annual production of a non-renewable resource is prone to grow at an increasing rate. But the production slows down at a certain point called the point of inflection. The peak in annual production is reached at a point in time when about half of the original amount of a resource has been depleted. This is followed by a decline in annual production at an increasing rate which eventually becomes rampant as the resource comes close to depletion (Abelard, 2003). The Hubert Linearization Model clearly reflects the trend with the production of non-renewable energy resources. A good example for this position is oil, whose rate of oil extraction has been growing constantly every year from the last century. Currently, approximately 85 million barrels of oil are extracted from the natural reserves every day (Adam Grubb, 2011). When about a half of the original resource is used up, it is very likely that a terminal decline in oil production begins, which leads to a “peak”. According to Adam Grubb (2011), peak oil is often reached oil after companies have extracted oil that is easy to reach from those natural reserves. Usually, the oil that is pumped first from natural reserves on land and near the surface is easy to refine since it has a low content of sulphur. Remarkably, the oil that remains is usually far from the land surface, far from markets, in lesser quantities, in smaller fields and contains higher sulphur content. Consequently, extraction, refining and transportation of such oil require much more energy and money. Furthermore, McPherson Guy (2010) explains that all oil fields reach a point whereby “it takes a barrel of oil to extract a barrel of oil, then further extraction is pointless, no matter what the price of oil is.” At that point, the oil fields are no longer viable energetically and more so economically. A peak in energy is likely to limit economic growth of nations in the world. This can well be illustrated using the economy of China. According to Dr. Minqi Li (2010), China is ranked as the world’s second largest economy after the United States and constitutes approximately 12 percent of the whole world’s gross domestic product (GDP). Also, China’s economic growth has been the fastest in the world. In fact, economists have projected that the country’s economy is likely to overtake that of the United States by the year 2015 if the current trend continues. But as Dr. Minqi Li (2010) argues, the high rate of economic growth of China is highly dependent on energy. Currently, China is ranked as the second largest consumer of primary energy (excluding traditional sources of energy such as cow dung, firewood and others) after the United States. In fact, it accounts for 18 percent of the world’s consumption of primary energy. It is argued that China is likely to become the world’s largest energy consumer if the recent trend does not decline. In 2008 alone, the total primary consumption for China was 1,917 million metric tons equivalent of oil. Coal accounted for 73 percent of the Chinese energy consumption. Between 2000 and 2008, the average annual rate of coal production grew by 10 percent. In 2008 the country accounted for 41% of world total coal production or 2,780 million metric tons. In 2007, the Ministry of Land and Natural Resources of China estimated that the country’s coal reserve was approximately 190 billion tonnes (Minqi Li, 2010). By then, it had been estimated that coal production in China would peak in 2029 and the peak production level was estimated at 3.8 billion metric tons. But there has been acceleration in the rate of coal production in China, which has triggered a change in that view. Owing to the current levels of production and consumption, China’s official coal reserve, Tao and Li now estimates that the peak for coal production is likely to be reached in 2015. Consequently, coal production in China is likely to slow down in the near future. From an ecological perspective, it is clear that the current trend of China’s consumption of energy is not sustainable given that coal is the major source of energy in that country. According to Minqi Li (2010), it is estimated that China’s energy consumption is likely to reach the peak around 2040 and decline during the rest of the century. From an economic perspective, energy efficiency can be defined as the ratio of a country’s GDP to energy consumption (Minqi Li, 2010). A study conducted by Lightfoot and Green in 2001 showed that the average physical energy efficiency of the world’s economy was about 20 percent. China’s energy efficiency in 2008 was 3,800 dollars per metric tonne of equivalent oil. This represents 62 percent of the world’s average. With the current trend, it is estimated that China’s energy efficiency will catch up with that of the world and eventually approach the long-term potential of the world energy. By multiplying the projected energy efficiency with the projected primary energy consumption, it is possible to estimate China’s future GDP. Statistics project that China’s economic growth will start declining after 2010 owing to a rampant decline in coal production which is the major input that drives the economy. As well, the overall economy of China will decelerate enormously after around 2050 and for the rest of the century. According to Engdahl F William (2004), it may be very difficult to bring a new energy resource that would maintain the current energy infrastructure such as oil infrastructure. As such, it is very likely that we are going to observe a massive collapse of the existing demand and supply and inabilities to reboot. Currently, production of food especially in the developed nations highly depends on inputs from fossil fuels. This means that a decline in those inputs will most likely cause food insecurity risks even among the most developed nations in the world. The issue is that such a situation will result into collapsed purchasing power, a reduced ability to monetize transactions and eventually budget deficits among nations. Another point is that oil production is closely tied to prices of many other commodities. As noted earlier, a decline in global energy resources production will result into a decline in production of most commodities that use those energy commodities as inputs. The worst will happen to nations whose basis of monetary system is based on credit. For a growing economy, it is possible to pay the principle amount of debt as well as the interest. But for a declining economy, it would be difficult to pay even the principle amount of outstanding debt. In such a situation, it is likely that new credits will varnish for the affected nations. From this perspective, it is possible that a peak in energy production would lead a collapse in economies. Certainly, a collapse in economies of nations will have a great adverse impact on the world trade (Abelard, 2003). Currently, there is virtually nothing that is produced in our “local” globalised economies especially in the developed countries that can be regarded to be truly indigenous. Many of the developed nations depend on imported energy resources as production inputs which form the pillar of their economic growth. Consequently, they face the risk of systemic failure of their economies, which will definitely result into a collapse of the world economy. As mentioned earlier, energy is ranked first as the facilitator or the force behind economic prosperity. Cheap energy results into high prosperity while expensive energy leads to low economic prosperity. Peak energy is associated with high prices of the energy resources and low demand. As Chris Pearson (2007) explains, when energy becomes too expensive, growth of economies of the affected nations is slowed down, leading to a decline in economic prosperity. According to Planck Foundation (2010), this is the reason behind the credit crunch that was observed all over the world in 2008, which was caused by too expensive energy resources. Due to peak energy, economies faced peak credit, peak production, peaks in resources, peak transport and eventually peak globalisation. It was thus demonstrated that the existing economic prosperity is far from being sustainable. Perhaps what needs to be learnt is the fact that energy is scarce. Energy is a commodity that is used as an ingredient any time, everywhere, in large quantities and for every action. It becomes quite strange to find out that the existing energy system is largely based on finite resources while the gap between growth in the level of consumption and the discoveries of new reserves is widening every year. Similarly, the new discoveries are often harder to explore and contain low quality resources which make exploration of oil more expensive and end cheap oil refining. A good example of this is China. According to the Planck Foundation (2010), China is currently the largest car producer as well as the largest consumer of cars in the world. All these cars consume oil constantly. As mentioned earlier, China is the largest consumer of coal. These resources are likely to become the most expensive sources of energy if the current consumption trend continues. As the Planck Foundation (2010) points out, “when you operate an energy system fully based on finite resources, peak energy is inevitable.” In short, given that a decline in growth of consumption of energy is not expected in the near future, the reality is that energy will become scarcer in future. This is going to happen quite rapidly due to the increased demand and the fact that resources that are easy to refine are explored and extracted first. Such a scenario is exactly similar to the case of coal production and consumption in China. The worst part is the fact that many nations do not seem to wake up to this reality and learn to protect their economies. There is need to conduct independent thinking and research along this line. Otherwise, it is very likely that we are going to face very high prices of energy resources and we shall have nothing to do but to witness irreversible economic decline. Another point is that energy brings about income for the energy surplus nations such as Iran and Saudi Arabia. However, the fact that energy is income ought not to be looked at only from historical perspective as existing historical data fail to disclose vital information such as the increasing cost of exploration, higher costs of refining, huge increase in demand and the reduced net energy exploration ratios. According to the Planck Foundation (2010), the average costs of energy production have increased from 1 barrel per 73 barrels in 1971 to about 1 barrel per 9 barrels in 2009. This puts it very clear that there is need to make future projections from the available historical data. It is quite evident that if that trend continues, the cost of exploration of energy resources will overrun the returns. At that point, it will be economically pointless to produce these energy resources. This means that energy business is certainly going to stop owing to the reduced returns. Consequently, is likely that overall supply of energy will decline with time while demand continues to rise. This will cause a market mechanism surplus. On top of that, the existing connection between the local market price and the global market price will be lost. Some nations will not be in a position to buy as much energy as they require. Eventually, such nations will be faced with inflation and rampant economic stagnation (Jackson Davis, 2007). Jackson Davis (2007) argues that peak in energy production has already passed but we are living in a jail of past reality which is bad for the existing energy investments as there are no longer available references for a new and totally different reality. Davis equates this with calculating expensively produced vegetables during off-season when it is in cheap market prices. This means that cheap, high quality and abundant fossil fuels are behind us. It therefore requires a strong and developed energy market in future that will support energy transition. Davis (2007) further notes that it is due to peak energy that there has been a decline in trust in the guarantees offered by many nations especially the developed countries. There was a time when developed nations issued guarantees and market demand for treasury bonds was high. Remarkably, it is no longer the case and the market demand for western treasury bonds is on the decline. This is more so because many western nations are burdened with debts, they have lost their production economy and are unable to realize their dreams of superiority of their economies. This has been witnessed by the Greek treasury crisis which was fought globally with huge amounts of guarantees. The reason for this is that the existing economic prosperity is slowly becoming unsustainable owing to the reduction in supply and increase in demand of the prime mover of economies. Viewed from another perspective, a peak in energy production leading to an increase in prices of non-renewable energy resources may not be very bad for an economy as pointed out earlier. For example, if production of oil and gas reaches a peak, resulting into high prices for these commodities, this can have a positive impact of making other sources of energy more economically attractive (Aleklett and Campbell, not dated, p. 2). However, certain physical factors are likely to limit the expansion of such energy resources. Even when combined, it may be impossible to get the quantity, and quality of energy that is gathered from the most used resources as oil. In fact, it would be more expensive and sometimes impossible to substitute oil energy for other sources of energy for driving engines such as those used for air travel (Michael Giberson, 2010). Deriving from the above points, it can be ascertained that planning to operate a fuel system that is based on non-renewable resources is not a very wise idea from an economist’s perspective, (Abelard, 2003). The declining discoveries, increased costs and low quality of energy resources as the peak in energy production reaches poses a challenge to the current breed of leadership to enhance a transition from the current heavy reliance of fossil energy towards a fuel free energy. In other words, it is time that nations consider to start relying more on renewable energy resources and reduce the great reliance on renewable resources in order to save their economies from the adverse impacts of peak energy. There is need for an urgent vision and this cannot be produced while running. It will require a massive action of change to the current non-sustainable energy system of energy to a system in which economic prosperity can be sustained. As the Planck Foundation (2010) explains, “harvesting affordable renewable energy is just as a result of research + technology + finance + business.” All that is needed is to move away from the barrier of addiction to the reality of the past. It is always a difficult task to enhance change until a point of traction is reached, after which the change approaches a downhill. A huge change always has economics as its engine. It only requires a start engine and the rest will be driven by economics. In conclusion, peak energy refers to a time when the global rate of energy resources extraction reaches the maximum, after which a terminal decline in the rate of production follows. As discussed in this paper, if the current trend of energy production and consumption is maintained, it is likely that we are going to break our economies with expensive fossil energy. Additionally, fossil fuels have built the economic prosperity of many nations and whole world’s economy, but it will also be the cause of decline if we decide to just keep it. Remarkably, the relationship between energy and economy is very direct. As well, it is very clear that energy availability drives economic growth and leads to prosperity while at the same time it leads to decline in economic prosperity. Peak energy which is associated with a decrease in supply and an increase in demand of energy will lead to an increase in prices of the energy resources. Since many nations use non-renewable sources of energy for production, it is very likely that peak energy will result into a decline in production of many other commodities. Consequently, there will be a rampant decline in the economic performance of the affected nations and even imminent collapse. It is therefore clear that the concept of “peak energy” largely affects “economics” at personal, societal and at global levels. Hence, it can be deduced that peak energy is fundamentally an economic issue. 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