Chapter 6 The Petroleum Age and Economics



From the "stone age" to the "space age" -- they used to happen one at a time. Right now, we seem to be going through several "ages" all at once. 

Some folks call this the "jet age," thanks to all those black-nosed, bent-wing, silver-bellied kerosene-suckers in the sky. Whatever happened to the "train age"? 

Others might still say we're living in the "atomic age." If the term is falling into disuse, it's probably because people don't enjoy being reminded of the hazards associated with this once-promising technology. 

From time to time you hear references to the "television age" or the "computer age." So. there are plenty of ages to choose from. 

The "petroleum age" deserves special consideration. It's coming to an end. Not surprising. though. Nobody said it would last forever. 

Anybody for the "bicycle age?"


You can buy between seven and fourteen barrels of crude oil for an ounce of gold. 

Fluctuations have stayed in that range since the middle sixties. The prices of gold and petroleum are both trending generally upward, as the value of the currencies you buy them with are trending downward. But gold and petroleum don't maintain perfect synchrony. 

Many economists look at the relative price data and see confirmation of the conventional wisdom that predatory petroleum pricing is a cause of inflation. Others glimpse movements in gold prices occasionally happening earlier than changes in petroleum prices and conclude that the high price of oil is an effect of inflation. It seems doubtful that both are correct. 

Each interpretation may result from post hoc ergo propter hoc fallacy. Expressed colloquially: "Event B follows event A, therefore B was caused by A." Ambiguities in the time relationships between the As and the Bs permit opposite conclusions by economists. The real cause of both A and B may be C, something else entirely. 

Economists and others need to be reminded of a cardinal principle of science; a correlation between two observed events is a necessary -- but not sufficient -- condition to establish a causal relationship. It is always incumbent upon the framer of an hypothesis to supply the unifying account, that chain of closely-reasoned, proximate arguments that connect the events together -- or to a common cause. 

A plausible starting point for the case at hand, is the fact that both commodities, petroleum and gold, are in their separate ways destined to be used up. the former through combustion, the latter from being hoarded unusably away. 

Meanwhile, you can buy two or three mighty fine bicycles for an ounce of gold.


There was a war going on. Not a moral equivalent, not a police action -- one of those big, good wars we used to declare. And then win. To help us do that, we had efficiency experts. Any idea where they all went? 

Efficiency experts used to be found in defense plants with clip-boards and stop-watches measuring things and writing reports on productivity and such. While Rosie the Riveter was riveting some efficiency experts stood around and counted the rivets. That may be how efficiency experts got a reputation for not seeming to do anything. During that war. God was somebody's co-pilot, but not one efficiency expert made tail gunner -- or even made tail guns, from all appearances. They made percentages. 

"Efficiency experts are expected to talk percentages," must have been the advice of a few zealots in their ranks. "How else can improvements be measured and wars won?" 

Though their numerical machinations may have given some efficiency experts a bad name, there are still plenty of them around. Only their titles are new. Some of them, no doubt, are still doing time-and-motion studies, but now they call themselves industrial engineers. Others broke into the "O.R. Game" -- that's operations research -- and today many are known as management consultants. 

Their modern-day counterparts did well for themselves. You'll find them in the management of our corporations, in our legislative bodies -- even among our presidents and prime ministers. 

Efficiency experts nowadays make promises to the effect that there will never be a need to change the way we live -- our life style. Americans won't ever have to give up driving around in fossil-thirsty vehicles, for example. 

"All we have to do is get rid of waste," you'll hear them say. "Our energy needs can be more than satisfied from known supplies." 

You should be alert for overly optimistic projections for what "efficiency" gains can achieve. As we approach the end of the petroleum age, it may be the unhappy duty of bicyclists to disabuse people of some myths. Out of the current crop of efficiency experts, few seem to understand the principles. 

Here's a crash course you can give them. 

To become a real expert in the efficiency field, you must first understand something about a "process." All your life. you've been surrounded by processes -- feeding, learning, working, cooking, transporting. Any process involves putting something in: materials, time, effort -- and always energy. Any process also involves getting something out -- products, knowledge, entertainment, noise. 

Not all of what one gets out of a process is desired. Processes also put out waste. The idea, of course, is to minimize waste. In other words, your job is to maximize what you want to get out of a process for a given amount of resources put in. That's efficiency. But you're not an expert yet. 

Efficiency is commonly expressed as a percent. Thus, if one says that a process is 75% efficient, that means one will get about 75 units of desired output for every 100 units of input, there being some 25 units given off as waste. 

You'll notice right away that a process having an efficiency greater than 100% is impossible. There must always be some waste. The second law of thermodynamics even goes so far as to set rigid upper limits on efficiency, usually far short of 100%. 

For any given process, there's only so far that efficiency improvements can go. Beyond that, you're talking about entirely different processes. 

Bicycles in place of automobiles -- as absurd and unsettling as that may seem.


Many of our decision-makers and their constituencies grew up with television. We might well find important clues for understanding some of the observed mentalities that surround us by reviewing those early influences.

To what extent did "Have Gun, Will Travel" influence our decisions in Southeast Asia?
Are past devotees of "0zzie and Harriet" now responsible for the prime rate?
Does anyone suspect that "Father Knows Best" helped shape today's nuclear weapons policy?

Shows featuring a talking horse or a flying nun did little to foster informed skepticism. Others are likely to have created unrealistic expectations.
Take for example the "Beverly Hillbillies." You may recall that the opening of each week's episode contained a musical reprise of how a certain backwoods family came to become overnight millionaires. The patriarch of the family, according to the song, was out hunting 'possum, fired his rifle and missed. Where the buckshot struck the ground, "out flowed bubbling crude."
Off went the whole television audience to rejoin the transplanted, nouveau riche family in their palatial Beverly Hills home for that week's comedic variant of culture shock.
Right after a word from our sponsor.
How many people today harbor a fantasy of some huge reserve of oil lying around just beneath the surface waiting for an accidental puncture? According to this Beverly Hillbillies mentality, gasoline should be plentiful and cheap. Why, if it weren't for the villainous oil companies and their greedy stockholders, we could all go on driving big cars indefinitely.
Whatever became of "I Dream of Genie?"


Full Price

No process can be 100% efficient. You don't have to be an efficiency expert to know that. There must always be some waste. 

What happens, though, when you take a waste product from one process into another where it gets converted into something useful? Doesn't that make the second process about 100% efficient? In a way it does. 

There are many examples. The heater in your car uses waste heat from your engine to warm the passenger compartment. It takes nary an inch-per-gallon from your mileage. You can't beat that for energy efficiency. Not so with your air conditioner. 

The electrical appliances in your home all give off waste heat: lightbulb and toaster, dishwasher and hair dryer, television and refrigerator. In winter, that waste heat helps warm the house, thus reducing the thermal load on your central heating system. Those appliances, loosely speaking, are 100% energy efficient. Not so in summer, when each increases the thermal load on your air conditioning system. 

There is a catch in the economics. A hair dryer is a pretty expensive way to heat your home. A kilowatt-hour costs more than its equivalent in stuff that burns. (Electrical energy is, by the way, "superior" to heat energy, according to the hierarchy imposed by the second law of thermodynamics.) So apparently you can have energy efficiency in a process that is economically inefficient. 

You can also have the opposite; an economically efficient process that is energy inefficient. Energy policy in the U.S. has traditionally made this a common occurrence. Simply stated, the policy from the beginning has said, "keep energy cheap." Price controls on energy, as intended, do stimulate economic development, but by disregarding the law of supply and demand -- not to mention the second law of thermodynamics -- price controls also create artificial economic efficiency and foster energy inefficiency. 

We have yet to pay the full price for our energy. Particularly fossil energy. When we get around to doing so, you can bet we'll search out the most energy efficient processes we can find. 

Even if it means bicycling.


Petroleum has been called the Noble Substance. Considering its many uses, there's probably no more valuable resource on earth. 

We have treated petroleum as an income resource instead of what it really is, a capital resource. 

For example, when Americans urge the petroleum industry to "produce" more, what we're actually saying is let's invade capital faster -- a policy which from the beginning had a predictable outcome. It's troubling to see economists, industrialists, and statesmen ignore this most obvious fundament of the future. 

Any meaningful caution has long ago been displaced by mindless expectations for technological salvation. 

Meanwhile, the global quest for a direct replacement for the Noble Substance has turned up nothing. Except for the bicycle, all of the identified "alternatives" so far have serious economic drawbacks or seemingly insurmountable environmental defects. 

Bicyclists might take the lead in finding hope for the future based on voluntary adaptation to realities, not on wishful thinking.


A gallon guzzled back in the '60s was the same as a gallon guzzled in the '70s. Only we didn't give it much thought. 

A gallon saved in the '80s is the same as a gallon saved in the '90s. Give that some thought next time you pass a bicyclist. 



How many naugs did they kill to cover that car seat? 

That's no longer a joke. Everybody knows that naugahyde is a petroleum product. 

Using petroleum for a synthetic fabric does seem more enduring than burning it up in an engine. It's still a non-replenishable natural resource, however. An even better idea is to use animal skins. 

The issue is manageability. 

Mankind can manage the perpetual availability of any animal on earth: the cow, the caribou, the gray whale, the baby seal. Whether we will -- by establishing and enforcing international policies to do so -- is a question. But we can. 

Not so with petroleum. It is not "manageable." Nothing we can do will guarantee an unending supply. 

The naug is not an endangered species. It is doomed.

One-Way Street

Economics, we're told, is a science. 

As such, it can reasonably be expected to invoke canons of evidence and proposition -- rather than opinion. Yet, there are those who say that if you take ten economists and lay them end-to-end, they'd all point in different directions. Detractors scoff at the lack of precision in economics, calling it the "one-digit science." 

Whether these criticisms are fair or not, when it comes to dealing with non-replenishable natural resources, economic theory encounters some withering limitations. 

Economics has to do with the production, distribution, and consumption of things. Studying its theories and projections gives one a sense of, well, flowing -- the flowing of raw materials, goods, services, capital, wealth. There are cycles -- plenty of backing and filling, like waves on the beach. And you find economic tides, too. 

Measurements tend to be represented as incremental and decremental changes. Productivity went up by such-and-such; housing-starts by so-and-so; cost-of-living by umpty-ump. Sometimes the base figures quietly lose their meaning, except for the purpose of comparing corresponding figures for different times and places, different industries and political regimes. Does anybody really know what to do with an absolute value of "gross national product per capita" other than to subtract it from, or divide it by, another one? 

Energy is a unique commodity. 

Energy is essential for everything else -- for the mining, growing, harvesting, processing -- and even the recycling of any other commodity. You need a ton of coal to make a ton of steel -- whether from scrap or from ore. Energy itself cannot be recycled. 

Energy is on a one-way street -- toward outer space. 

In all its forms, energy originated in the sun a long time ago, or in the formation of the earth, even a longer time ago. Living things, including people, harness and then release energy from various sources. 

The most desirable energy is that highly-concentrated, geological stuff we call fossils -- the very best being petroleum. Once mined and combusted, fossils are gone forever, their last remnants of heat simply radiated away "toward unimagined voids beyond the sky." 

While fossil-derived energy flows through our various economic systems, it gets treated by conventional economic theory like any other gradually changing variable. Instead, on the scale of history, fossil energy is an utterly transient thing. 

So, how can economics assign an absolute geological value to an irreplaceable, essential commodity -- that's running out?


"Did you ever feel a stone in your shoe?"

"Uh huh."
"Did you ever walk around for awhile with a stone in your shoe and get kind-a used to it?"
"Yeah. So?"
"Did you ever walk around for awhile with a stone in your shoe, get use to it, and take it out?"
"For sure."
"Did you ever walk around for awhile with a stone in your shoe, get used to it, take it out, and then miss it for the rest of the day?"
"Where are we going with this?"
"Funny, isn't it, how we adapt to life's irritations: a snoring mate, a sticking drawer, a rattling kickstand, a smelly car?"
"Yep, funny."
"Did you ever walk around for awhile with a stone in your shoe, get used to it, take it out, miss it, and later feel a stone -- in your other shoe?"

Economic theory models the world as a network of entities transacting with one another. In each transaction, you have goods or services flowing in one direction and money flowing in the opposite direction. One kind of goods is energy. 

Actually, all kinds of goods are energies, directly or indirectly. The same is true for all kinds of services. 

Raw materials, from aluminum to zinc, cannot be mined or refined; work-in-process cannot be shaped, assembled, or packaged; finished products cannot be distributed -- without the expenditure of energy. Farms and feedlots, dairies and hatcheries all need energy to operate. So do hospitals, schools, banks, cafeterias, or wherever people expend human effort for other people. Even supplying energy needs a supply of energy. 

So energy might be considered the "universal transactant," a ubiquitous counter-currency embodied within all other things, swimming against the world's monetary streams.

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