Beyond Oil is published by Univ. Press Colorado 303-530-5337
PROLOGUE TO THE THIRD EDITION
Nearly ten years have passed since the last observations were made on which the conceptual and quantitative models in Beyond Oil are based. Much has happened during this period. Oil prices collapsed in 1986 and have fluctuated between $10 and $30 per barrel since. A telethon was held to rescue the most productive farmers in the world. The U.S. economy had the longest continuous economic expansion since the end of World War II. Nevertheless, for all of the changes that are implied by these events, we are proud to republish Beyond Oil in the same form as it first appeared in January 1986. We feel comfortable doing so because the basic premises on which the conceptual and theoretical models are based remain intact.
Beyond Oil concludes that the U.S. cannot increase its per capita material standard of living and its population ad infinitum. The belief that it can do so is a myth that arose from a century of economic success. Yes, the United States has increased its material wealth tremendously. But this wealth was created by the United States depleting its high-quality deposits of nonrenewable resources and degrading high-quality renewable resources. Yes, the technologies by which humans convert natural resources to economic wealth have changed at an amazing rate. But the strategy by which these technologies increased output remained the same: by using energy to increase the work that could be done by muscle power alone. Furthermore, our economic success has allowed us to ignore an underlying truth. The relation among resources, energy use, and economic activity is stronger than economists or politicians are willing to admit. Taken together, dependence on a depleting resource base implies that either the population or per capita-material standard of living must stabilize, or both.
The fragility of our economic success comes as a surprise to most people. After all, there were no news stories regarding resource depletion or a strong relation among resources, energy use, and economic activity. Just like the frog that doesn't jump out of the cup as the water in which it sits is brought slowly to a boil, the average U.S. citizen cannot notice the resource depletion that is associated with each dollar of GNP generated. Every day, U.S. oil supplies dwindle with each rise and fall of the horsehead (the moving part of an oil well), and soil resources erode with each tractor pass. This slow, steady, and quiet depletion of natural resources is one of the main foci of our analysis.
There was no need to modify the text of Beyond Oil greatly because the depletion of natural resources has continued unabated since the book was first published. The behavior of the U.S. oil industry illustrates this ongoing depletion: the depletion of domestic oil resources appears in all stages of exploration and production. In Chapter 2 we describe research that indicates that the amount of oil discovered or added to proved reserves declined steadily between 1946 and 1978 (Figure 2-14). This conclusion now is strengthened by ten years of additional data and research. An analysis by Cleveland and Kaufmann (1991) indicates that the amount of oil discovered per foot of well drilled has declined exponentially from 1925 through 1988 without interruption (Figure P-1a). Oil prices and rates of drilling hide this decline at times, but these factors cannot alter the geological fact that the United States has discovered most of the fields from which it will produce economically significant quantities of oil. Similarly, an analysis by Cleveland and Pendleton (in press) finds that additions to proved reserves, which include revisions and extensions in addition to discoveries, declined exponentially from 1946 through 1988 (Figure P-1b). Again, drilling rates and other factors may hide this exponential decline at times, but these factors cannot alter the geological fact that the United States has drilled up most of its domestic oil supply.
The exponential decline in the rate at which the U.S. oil industry discovers oil and adds it to proved reserves sets the stage for the decline in U.S. oil production, which is described in Chapters 2 and 4. In these chapters we use Hubbert curves to explain the historical changes and to forecast rates of production for oil and natural gas, both domestically and worldwide (Figures 2-12; 2-13; 2-17). We use this technique because M.K. Hubbert was able to forecast the peak and general pattern for U.S. production more accurately than other analysts. The success of these curves is remarkable because a quick review of history indicates that movements in U.S. oil prices and production defy standard economic theory.
Real oil prices declined slightly between 1947 and 1970, but production of oil nearly doubled. Real oil prices doubled between 1970 and 1986, but production declined 20 percent.
Further research explains the ability of the Hubbert curves to account for the contradictory movements between prices and production. Kaufmann (1991) extends the method used by Hubbert to include the effect of prices and political decisions by the Texas Railroad Commission. His analysis finds that changes in resource quality are responsible for the general pattern of production (Figure P-2). The oil industry was able to double production between 1947 and 1970 because the costs of production declined faster than the real price of oil. On the other hand, production declined between 1970 and 1985 because the cost of production rose faster than the real price of oil. Since 1986 production has declined sharply, but prices alone do not explain this drop. Production dropped sharply because the decline in price reinforced the negative effect of resource depletion. If prices do not recover soon -- and there is little reason to expect that they will -- the United States may import between two-thirds and three-quarters of its oil use by 2010 (Kaufmann 1988).
Oil is not the only resource that the United States is depleting. In Chapters 5 and 6 we describe how domestic agricultural practices degrade the agricultural resource base on which the United States depends for food and foreign exchange. In Chapter 6 we hypothesize that U.S. agriculture was ending a period of intensification, in which output grew in conjunction with inputs, and was entering a period of saturation, in which output grew less rapidly than inputs. The end of one era and the beginning of another was based on a comparison of energy use and gross farm product per acre between 1940 and 1979. Ten more years of data and research reinforce our claim that the United States has entered a period of saturation. Cleveland (in press) extends the data in Figure 5-7 to include yearly observations from 1910 through 1988. The extension of the data shows that saturation slows the rate at which increased use of energy is able to increase output (Figure P-3). These results indicate that the agricultural strategies that increased U.S. food supplies in the past cannot continue forever.
The declining quality of oil, agriculture, and other resources would pose little threat to the U .S. way of life if the relation between energy use and economic activity were weak, as claimed by most economists and politicians. But the relation between energy use and economic activity is stronger than most believe, and quantifying the strength of this relation is another foci of Beyond Oil. In Chapter 3 we describe three factors that determine the amount of output produced per unit of energy: the types of fuels used; the amount of energy consumed in the household sector; and the real price of energy. Quantitative analysis of these factors indicates that they account for 97 percent of the total variation in the amount of output produced per unit of energy in the United States between 1929 and 1983 (Figures P-3 to P-8).
The quantitative analysis of the amount of output produced per unit of energy is one of the most controversial aspects of Beyond Oil . When the book was first published, many analysts claimed that we underestimated the importance of energy conservation and technical change. Moreover, some claimed that the statistical results were spurious because the United States had access to an inexpensive supply of energy during much of the 1929-1983 period. They argued that the large increase in energy prices would loosen the relation between economic activity and energy use. Given sufficient time and incentive to adjust to higher prices, the pattern of U.S. energy use would resemble that of Europe and Japan.
Anticipating these charges, we explain clearly and strongly how assumptions built into the neoclassical economic model systematically underestimated the strength of the relation between economic activity and energy use. Furthermore, ten years of more data and research confirm our original claims. An analysis by Kaufmann (in review) finds that the same factors determine the amount of output produced per unit of energy in the other "big five" nations: France, Germany, Japan, and the United Kingdom. He finds that the amount of output produced per unit of energy in these nations can be accounted for by the same factors described in Chapter 3 (Figure P-4). The similarity of results is strong evidence that there are limits on the degree to which economic activity can grow without a corresponding increase in energy use. The combination of resource depletion and a strong link between economic activity and energy use leads to the final conclusions of Beyond Oil, that the United States cannot continue to expand its per capita standard of living and its population. These limits are illustrated by a model of the U.S. economy in Chapter 4 and a model of U.S. agriculture in Chapter 6. The model of the U.S. economy forecasted that per capita GNP would rise through 2005, albeit at a rate slower than the postwar expansion, and decline slowly thereafter (Figure 4-7). Similarly, the model of U.S. agriculture forecasted that total crop production would rise through 2025, albeit at a rate slower than the USDA target (Figure 6-20). Although none of the models forecasted apocalyptic collapse, many claimed that the forecasts were too pessimistic because growth was slower than conventional wisdom. Data from the last ten years, however, indicate that the forecasts were not too pessimistic. Per capita GNP rose steadily during the last ten years but at a rate slower than the rapid postwar expansion (Figure P-5).
But even this economic growth probably overstates the increase in per capita standard of living. As described in Chapter 4, per capita GNP is a poor measure of the material standard of living.
Other indicators show that the U.S. material standard of living has stagnated or declined during the last ten years. The decline is most obvious when we examine the amount of output produced by each worker. The real GDP per worker has risen only slightly in the last fifteen years (Figure P6a).
Similarly, the real hourly wage has declined steadily through the 1980s (Figure P6b). The danger of a decline in output per worker is described in Chapter 7. In a section titled High Productivity Versus Full Employment, we describe how the United States would face a trade-off between employing a small number of workers in highly productive, high-paying jobs, or employing a large number of workers in relatively low-productivity, low-paying jobs. Data from the last decade indicate that the United States has chosen the latter path.
The combination of resource depletion and a tight link between economic activity and energy use already has ended a century of rising per capita standards of living, population, and leisure time. The pinch is real, and many of the social changes that have swept through the United States over the past fifteen years are associated with the new "limits to growth." The slow growth in labor productivity and wages have "convinced" husbands that it is socially acceptable for women to abandon their traditional role as housewives and to return en masse to the workplace. Similarly, the new limits on growth strained the willingness of taxpayers to foot the bill for the government services. Not willing to pay for them or do without them, voters elected Ronald Reagan and George Bush to maintain services, cut taxes, and balance the budget. Because such promises are impossible under the new limits to growth, the real U.S. government debt has skyrocketed (Figure P-7). Yet, even these social changes have failed to alleviate the new limits to growth. After rising steadily in the 1950s and 1960s, real family income stagnated in the late 1970s and 1980s (Figure P-8). In summary, the stagnation and eventual decline in the U.S. standard of living that is described in Beyond Oil is not pessimism, it is here.
Robert Kaufmann June 1991
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