The study of how human culture interacts with economic events and conditions. Culture, in this sense, includes everything we are: our political systems, religious beliefs, ethnic character, economic psychology, mores, traditions, history, customs, arts, sciences, and education. These all play a role in how we chose to organize the production of goods and services, the values we place on labor and opportunity, how we make purchase and investment decisions, and how we utilize the resources of this earth. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. In the aggregate, these drive the data that is used to measure how our economy is behaving - markets, raw materials, production, finished goods, revenues, costs, profits, inventory, employment, housing, income, savings, stocks, bonds - and so on.
Cultural Economists must have a strong sense of the cultural matrix within which economic phenomena occur. However irrational they may appear, values and traditions are non-the-less relevant to economic analysis. Political and religious allegiance influence purchase decisions. Fear and greed are economic motivators. Attitudes about education, individual rights, the accumulation of wealth and the importance of private property drive the adoption of economic systems and political institutions. Collectivist, dictatorial and democratic solutions compete for political power that will determine how labor, capital and material resources are allocated and managed. Culture defines the collective manifestations of who and what we are, including our religious beliefs, political systems, customs, values, intellectual acumen and creative endeavors.
Economic research frequently yields inadequate conclusions based on irrelevant or obsolete data that has been interpreted using algorithms of questionable relevance. In other words - we play with the numbers. It's a great academic exercise. Then we project our conclusions into the future on the basic assumption that future reality will be an extension of past reality.
Sometimes it actually works. We can usually make reasonable estimates of near term demand and consumption, Gross Domestic Product (GDP), inflation, employment and so on. We have a reasonable probability of success if we are making a specific forecast for event driven data that will occur within the next three to six months. It helps our accuracy if future events within the forecast period are well understood and relatively static. In other words – our economic environment will not be altered by any surprises such as weather disasters or unanticipated political events.
Unfortunately, the longer the forecast period, the higher the margin of error. Cultural change is a given. Our economic environment is always evolving in reaction to current events. If we only use historical data as the basis of our economic analysis, then forecasts that extend out beyond a year or two will be something of a crap shoot.
Why? Because the future is NEVER an exact duplicate of the past.
Many years ago I developed a model of world oil production and consumption. The left hand columns of my Excel spread sheet show annual production in each producer region. Right hand columns show annual consumption for each consumer region. The middle columns show how the balance between production and consumption. There are columns for Other Liquids and Refinery Gain; Oil Surplus or Deficit; Oil in Storage and Transit; and the price of oil per barrel. The Surplus or Deficit column shows if production exceeds or trails consumption. There are also columns to record or estimate the corresponding price of USA: gasoline, GDP, Inflation, Unemployment, and efficiency of consumption.
The first step was to establish how much oil we have on this planet: proven, probable, and possible. According to what I have read, when we humans started to consume oil in the late 1800s, there were 6.9 trillion barrels available on our planet. By the end of 2020, we will have consumed about 1.6 trillion barrels.
Since this is primarily an economic analysis, we are concerned how much of the product produced from the remaining 5.3 trillion barrels can be distributed and sold at a price the consumer can afford to pay. That can be defined as accessible oil reserves:
"Accessible reserves are those reserves of oil that can actually be found, produced, transported, refined, and distributed without material disruption at a price the consumer can afford to pay."
Most of the oil we humans produce is used for mobile applications (vehicles, ships, planes and trains) and agricultural applications (pumps, tractors, trucks, soil and plant amendments). Thus far, relatively cheap oil has helped to fuel rapid economic growth and the rise of modern industrial economies. Cheap oil and its hydrocarbon counterpart - cheap natural gas - have supported an ever expanding increase in world food production. Taken together, increased mobility and increased food production have enabled a corresponding increase in world population.
But as we consume oil products, supply chain challenges will inevitably increase the cost of the oil from which they are made. Conventional oil production, which is characterized by wells drilled on dry land, has already peaked. New production is often from expensive under water wells; from wells located in hostile physical environments; wells in regions where production is hampered by government interference; well production hampered by a lack of low cost transportation from field to refinery; and wells drilled in low yield formations. Some of the world’s largest oil reserves are buried in sands and shales that must be mined in order to recover the oil.
For the moment, the oil prices are low because oil recovery by fracking has made ample oil available to the world market. However, many of the oil producers who have participated in fracking activity are not profitable on an on-going basis. The price of oil produced by fracking operations must inevitably increase in order to cover driller capital and operating costs.
I have a separate model which I use to analyze world oil reserves (proven, probable and possible) on a nation by nation basis and by the type of reserves that are available in each nation, it would appear the world has ~ 2.12 trillion barrels of oil and liquids (40 percent of our remaining oil legacy) that can be defined as accessible. It would appear roughly 1.43 trillion barrels (27 percent) will be sufficiently expensive to make them useful only for manufacturing, public ground transportation, freight, and a very limited number of vehicles.
Considering typical recovery rates, reservoir development challenges, and political obstacles, approximately 1.75 trillion barrels of oil (33 percent) will not be found, will not be developed, or left in the ground after a recovery operation.
Thus we have to conclude our production of accessible oil is limited by several restrictions. Oil is not an unlimited energy resource.
Our endowment of future production includes 2.12 Tbl of accessible oil and 1.43 Tbl of oil that is too expensive to use for consumer mobile applications or for the production of food. Excluding refinery gains, we humans are on a course to produce roughly 33% of those 3.55 trillion barrels of oil and oil liquids by 2050. By then, the consumption of oil will have begun to decline because many vehicle owners and farmers, particularly in poorer nations, will be unable to afford the price of gasoline or diesel fuel. The production of agricultural products using oil based amendments and oil fuels will be in decline. Even though oil consumption will be declining, by 2080 we will have consumed 60 % of our remaining oil endowment. Increasing prices will have sharply curtailed the use of oil for agricultural applications.
The remaining 1.43 trillion barrels of oil and liquids will primarily be used for vehicles driven by wealthy people, government agencies, mass transportation, moving freight, making manufactured products, and military operations.
How realistic is this assessment? We have already experienced a temporary shortage of accessible oil. Higher oil prices and a corresponding rise in natural gas prices (a major source of fertilizer) caused a temporary food shortage crisis in the period 2002 – 2015. There were food riots and famine in several geographic regions. (Note 1.)
In addition, it is worth noting no climate change model should ever assume oil will still be accessible in 2080. That simply is not going to happen. By then higher prices and asymmetrical availability will have forced a massive decline in consumption.
Are we running out of oil?
No. We will never run out of oil. There will still be plenty of oil in the ground when the last human turns off the lights.
So what’s the problem?
We will burn through existing proven reserves in less than 19 years. We are burning through our proven reserves faster than we are finding new proven reserves. Oil supply chain and exploration costs are accelerating. Between now and 2050, it is likely we will begin to experience a decline in consumption because we have burned through 33 % of our remaining accessible oil. And that is the problem. For an ever increasing number of consumers, oil is likely to be too expensive to use as a source of energy for gasoline, diesel, jet, propane and heating oil fuels.
What do we need to do?
We humans need to be looking for low cost mobile and heating energy solutions to power our future. We need to find a realistic, cheap, and readily available source of mobile fuels by 2050, or humanity is going to be in deep trouble. The best solution is to find an alternative that conforms to the laws of physics and the high density energy requirements of mobile applications. The worst possible thing we could do is believe the problem of mobile fuels can be solved with wind mills and solar panels (which – of course – are not mobile). Vehicles that run on electricity are not a solution unless we also find a way to produce massive quantities of cheap electricity. Remember: electricity is not a source of energy. Electricity is a (rather inefficient) carrier of energy.
What are the consequences of doing nothing?
Think depression, famine, social disintegration, and military conflict as nations scramble to secure remaining reserves. In my opinion, the Chinese government already recognizes the implications of this scenario.
How good is this data?
Estimates are always dangerous. But the narrative is in the ball park. Anyone can argue with the numbers, but not the primary points.
Note1. Food data is from the U. N. Food and Agriculture Organization. Oil and natural gas data is from BP, IEA, and EIA. The U.N. data and narration for this period should be particularly alarming.