Fossil fuels were produced very slowly by natural biological, geological and chemical processes over millions of years and only a finite amount of these fuels existed at the dawn of our present industrial civilisation that has now evolved to depend upon them. The energy from ancient sunlight was stored in the hydrocarbon chain molecules synthesised by ancient vegetation. Combustion of those fuels releases this energy.

What is Peak Oil?

Fossil fuels are nature’s Energy Savings Bank, and the exponential curve of oil consumption from 1900 until the oil crises of the 1970’s shows that we have been depleting these savings as quickly as we could. Peak oil is a theory first put forward by Shell geologist M. King Hubbert, that used to be ridiculed by establishments but which has been proven correct time and again by real cases. Nowadays Peak Oil is taken very seriously (see, for example, a list of links to scientific peer-reviewed articles here; reports from concerned establishment institutions here, here (PDF), here and here; and the appearance of “peakist” language in the latest official report of the IEA here and here, which is astounding, given the IEA’s culture of rose-tinting oil numbers for years to please the Americans).

Simplified, the Peak Oil theory states that the rate of oil extraction must eventually peak and start declining irrespective of any Herculean efforts put in to avert such a decline. Most serious students of peak oil place the timeframe for the peak somewhere between 2005 – 2013. The peak is only visible in the rear view mirror, however, so it might be a while until we know conclusively when the peak will occur. Based on historic production, the world is currently on what some have called a “peak plateau”, meaning that daily production volumes have been stagnant for the last five years now. This is despite a steady increase in the average price since 2005.

World Crude Oil Production has been on an undulating plateau since 2005

How much did fossil fuels contribute to modern life?

Human beings, like all living organisms, need energy to survive. This energy comes from the Sun, stored into what we call “food” by photosynthesis. The energy released inside our bodies when we metabolise our food can be conserved by additional use of energy to condition our surroundings (think of the first cavemen staying warm by burning the first fires inside caves, or of the invention of clothes). Since humanity discovered and started using these fossil fuel resources to augment its energy budget, it is as if every one of us has acquired a dozen or more slaves (“energy slaves”) who are available 365 days and nights to add to the energy services we receive out of consuming our food, net of the energy we spend in producing it. Put another way, before the invention of agriculture, each of the three million hunter-gatherer humans walking the Earth was the energy-using counterpart of a common dolphin (Delphinus delphis), whereas each of today’s 232 million Americans matches the energy use of a sperm whale (Physeter macrocephalus).

In other words, freed from the energy-intensive toil of hunting, gathering and farming which could only produce a small energy surplus per human being, the burning of fossil fuels led humanity into the proverbial Garden of Eden. Only that, heedless of the allegorical biblical warning, we didn’t just take a single apple, we have (and are) taking everything we can lay our hands on that nature had saved over millions of years. The result from the colossal energy surplus per capita caused by this rapid drawdown of saved ancient sunlight was the accumulation of capital and the production of a huge volume of goods and services, which taken together are tantamount to the incredible progress that we see all around us. Our fathers and mothers were born in an era when most homes did not even have electricity and private cars were rare luxuries. The complexity, specialization and almost everything we call modern about our current global civilization is here thanks to the dozen energy slaves each of us owns: nature’s rapidly depleting savings bank of fossil fuels.

What happens to our complexity and specialisation when we no longer have enough daily fossil fuel extraction to meet current daily demand?

As predicted by the 1972 “Limits to Growth” study, our “recent” and “temporary” (relative to time spans longer than a single lifetime) reliance on our dozen of energy slaves per capita has led humanity into overshoot. Overshoot is the condition of a species that has expanded beyond the sustainable carrying capacity of its habitat, thus setting itself up for inevitable future collapse of its population and standard of living. A simple illustration of overshoot followed by catastrophic collapse is a yeast colony feasting in a barrel of grape juice, with the population growing exponentially until the alcohol content reaches 14% which is too toxic for the yeast to survive. That yeast colony is in overshoot from day one, given the finite volume of grape juice compared to population growth rate and alcohol production rate. The fate of future collapse is sealed from the moment overshoot starts, even though judgment day is often deferred. A respected author on the subject of overshoot, who wrote a highly recommended book of the same name in 1980 which is still highly relevant, is William R. Catton, Jr.

Obviously, if even a few of the energy slaves are taken away, the personal energy surplus and therefore the individual standard of living must decline. But will the decline be gradual and survivable, or catastrophic? The answer to that question hinges on what we were doing with the fossil fuels while they were still abundant. Did humanity use them to create a massive capital base consisting of renewable energy production systems? Or did we use them to build Hummers, vacation homes, private jets, aircraft carriers and golf courses?

Tackling the same question from another angle of finance and economics, the very real productivity gains that were made possible by fossil fuels combined with humans’ natural tendency to healthy optimism, have given rise to both an abundance of resources for consumption and investment, and to a widespread conviction that exponential growth is eternal, inexorable and a one-way street – even though this is mathematically impossible as long as we remain on a single, finite planet. In turn, this expectation of inexorable growth has led society to evolve out-of-control debt-based financing, because in an ever-expanding pie, there is always plenty of room to pay back both the ever-expanding principal and the ever-expanding interest. However, as the production of oil appears to have reached a “peak plateau” since 2005, more and more resources must be diverted to pay for the cost of imported oil (and of all imports in general, since oil is used for everything). Peak oil analysts have even put forward analyses naming peak oil as the proximate trigger of the global financial crisis here, here and here, a theory that is at least consistent with the observation that a few exporting nations are amassing trillions and billions in surpluses while most import-oriented economies lose steam and stumble towards deflation.

Beyond this immediate monetary link, another interesting question is: what would happen to debt as an institution, if the hardships caused by Peak Oil eventually undermine the currently prevalent and implicit faith in infinite growth? The answer is that, in the absence of the growth which creates the new money to pay back principal and interest and maintain the average standard of living, debt can only do one thing: shrink to a fraction of its present day volume. At the end of the first decade of the 21st century, we are working through the aftermath of a credit super cycle that began after the Second World War, where debt is shrinking as a result of the internal dynamics of human economies. By the time the generational “credit supercycle” rolls around and primes itself for a new expansion of debt, will the world be willing and able to take on new, additional net debt? Or will Peak Oil have dealt a mortal blow to the belief that growth is eternal?