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Living Better In 'The Finite World'

By Craig A. Severance

03 January, 2011

A lot of things we use every day are about to get much less affordable.

That's the bottom line impact for the average family looking ahead at this next decade. This next ten years will be the time when serious world resource shortages begin to take hold, especially the expected Peak of world oil production.

Will we be able to grow jobs if we have no money left after filling our gas tanks? Who will be hurt the most? Will our entire civilization experience a catastrophic Collapse when world oil and other critical supplies begin to decline?

Most importantly -- is there still hope we can actually live better?

The World is Not Just Us. Though Americans are still hurting, prices of essential supplies and fuels (deemed Commodities by traders) are now rising because of greater world demand.

World population is increasing, and people almost everywhere now live on a lot less than we do here. Exploding economies such as China and India have been growing at rates over 8% per year.

They need to use more, just to meet their basic needs. No problem with that, except for this fact: there isn't "more".

The Finite World. We don't have the whole Universe to supply our needs. We live on this little round ball called the Earth, and it is finite. You can make your way around it in just a few hours in a space shuttle.

This little globe has been a really great kitchen cupboard to explore, but it seems we've just about opened all the drawers to all the pantries. Yet, more company keeps arriving and sitting down at the dinner table.

Graphs and charts (see links) can tell the story of depleting key minerals and especially the limits to production of our Master Resource, crude oil.

Common sense tells the story just as well. We don't live in an abstract world of infinite x and y axes. We live in a real, physical, world where there is only so much -- of anything.

Something Has to Give (and it is). With more people clamoring to use the same resources, the Law of Supply & Demand is kicking in. Prices for basic resources -- oil, metals, grains, cotton -- are all rising, much faster than many people expected just a few months ago. Just this week, predictions were circulating of $5 per gallon gasoline soon in the U.S.

Data Source: Dec. 31, 2010 Current Interactive Charts

An Economist's Finite World. Nobel winning economist Paul Krugman posted a tantalizing New York Times column this week entitled The Finite World. I say "tantalizing" because Krugman came very close to challenging the economic profession's central dogma -- the assumption of endless and infinite economic growth -- but in the end he backed away.

As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.

And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. True, alternative sources, like oil from Canada’s tar sands, have continued to grow. But these alternative sources come at relatively high cost, both monetary and environmental ....

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone Mad Max style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

Krugman then deflected from examining the full implications of The Finite World, and redirected to his main purpose.

It turns out the main point of Krugman's article was to argue that current increases in commodity prices "have no bearing, one way or another, on U.S. monetary policy." Krugman has been a promoter of economic stimulus, and was merely using this piece to defend against attacks that rising world commodity prices are a sign the world is devaluing the U.S. dollar.

The Great Precipice. Like a car careening in the dark, inches away from an unseen chasm, Krugman came right to the edge seemingly unknowing of the breach he almost vaulted.

If he had continued pondering the implications of The Finite World, he would have seen that economic growth may drop off a cliff when the economy's basic fuels and supplies become too scarce. How can you make and deliver more and more products, unless you have a ready supply of more raw materials and fuels?

Economy Killers. Our trial leap into this void occurred in 2008, when oil prices last soared, and world economic growth collapsed. Steven Kopits, manager with energy business consultancy Douglas-Westwood, has noted the close correlation between past recessions and spikes in oil prices with the economy going into recession when oil expenditures exceeded 4% of GDP (about $80/barrel in today's prices).

Family Budgets Can Only Go So Far. Suddenly paying a lot more for basic items like gas to get to work, and food at the grocery store, left an already struggling middle class with no room for buying extras. When prices for essentials got too high, many could not even pay their mortgages.

The collapse of the credit markets and the Great Recession ensued in very close order behind the spike in oil prices. After the economy was crippled, demand then fell and prices returned to lower levels.

This "yo-yo" of prices for raw materials and fuels first spiking upwards, killing the economy, then falling again is the classic pattern we can expect to see as resource limits are reached. If you cannot grow without bumping up against physical resource limits, economic growth (i.e. jobs, sales, tax revenues) will periodically be strangled.

The Void. The Finite World so clearly described by Krugman means there is a limit to the supply of basic resources. Whenever we reach a point where finite supply cannot keep up with demand, our desires will meet The Void of empty and depleting storehouses. Rationing consumption, to match the amounts actually physically available, is usually accomplished by hiking prices.

Broken Circles. Won't this money just come back around? Economists argue that money is seldom at rest and the money we must pay in higher prices may come back to us. However, the extra money we pay doesn't always work its way back into our own economy. About two thirds of U.S. oil purchases are from other countries, who have no obligation to buy from us. When oil prices rise, Iran will benefit but we will suffer.

Up in Smoke. As resources become more physically difficult to extract, such as the need to drill miles under the ocean to obtain new oil, we must burn more oil to obtain each new barrel of oil. Similarly, the tar sands hailed by many as the supposed salvation of near term oil supply require burning major quantities of natural gas to cook the gooey tar out of the sands. These extra expenditures, for low energy returns on energy invested, will not be returned to us --- they have literally gone up in smoke.

Not Mad Max, But a Regressive Catastrophe. Some who contemplate Peak Oil and other resource limits often spin a picture of a world of rolling power outages and the cutoff of basic services. A societal Collapse is envisaged, where we will all be left freezing in our homes with no water supply or central power. These visions of Doom make great novels, but may be too simplistic.

As a former utility commission staffer, I have known utility managers and I can tell you this idea of utilities shutting down simply won't happen any time soon. The number one priority in the culture of utilities here is to "keep the lights on" -- for those who can pay their power bills.

For those who cannot pay their power bills, however, the Collapse will be real. In many parts of the country, electric utilities are already installing prepaid power meters which -- like prepaid cell phones -- shut off power automatically when the customer payment runs out.

The "rolling blackouts" and cutoffs of basic services will happen -- they are already happening -- but their impact is targeted to those individual families least able to afford the rising costs.

Similarly, when gas hits $5 a gallon, it will be regular families who will run out of gas before their next paycheck. The Mercedes of the oil lobbyists, however, will continue to roll.

Destruction of Middle Class. Instead of a general Collapse of civilization, the prices of food, fuel and supplies are just going to get a lot more expensive, and the middle class will be strained to breaking.

A major erosion of the middle class and growth of the Working Poor has already occurred. Michael Snyder of the Economic Collapse blog has an excellent article detailing the latest results of the Working Poor Families Project, in his article here.

The Working Poor study challenges our TV-sitcom conception of ourselves as a prosperous nation. Currently 30 percent of working families in the U.S. are considered to be "low income". Over 42 million Americans are on food stamps, and one of six are enrolled in at least one anti-poverty government program.

In a "free trade" global economy, economic forces will work in the direction of a global standard of living and a global wage for any work that does not have to be performed locally. That means Americans are on a long ride downward. Snyder concludes:

If you are a member of the working poor I wish I had better news for you. Things are not going to be getting better, and unfortunately millions more Americans will probably be joining you.

The Economic Challenge of Our Time. Learning to cope with the impending limits of The Finite World is the most important economic challenge of the 21st Century. Yet, few main line economists have even acknowledged it. Dr. Krugman is a brilliant economist, who also cares deeply about economic equity, and environmental and resource issues. Public awareness could be raised if he and other economists chose to work seriously on this problem.

Actually developing a workable model for an economy that prospers human welfare under conditions of depleting physical resources, would be worthy of another Nobel Prize.

The answers, however, are likely to come not from Wall Street or the ivory towers of academia, but from those who are already learning to live better..

Living Better in The Finite World. We cannot live without hope. While we may have to learn to live with fewer physical resources from central sources, this is not the same as living a poor life. We can instead learn to live better.

It is better to live in a warm house that uses less fuel because it is well sealed against air leaks.

It is better to eat sumptuous produce from your own garden than to buy tasteless products shipped from thousands of miles away.

It is better to live in smaller houses with less stress, than to slave forever to pay for 3,000 sq. ft. "debtors' prisons".

It is better to live close enough to work to walk or bike and feel healthier for it.

Economists might call all these "better" attributes newly developed economic resources.

We can call them joy.

Have a Happy New Decade.

Article originally published at www.EnergyEconomyOnline.com