For most of human history work meant manual labour, often difficult, dangerous and wearing. With the rise of machines and cheap energy to fuel them, forward-looking thinkers began to speculate about a future age of leisure, where people freed from toil would cultivate philosophy and the arts and other higher pursuits. We know how that turned out, of course. We’re busier than ever, leisure time is shrinking, and the highly paid elite – bankers, doctors, lawyers and so on are working even harder than everybody else. In short, another famously wrong prediction.

Except, if you look closer, those utopian dreamers weren’t actually that far off the mark. Physical labour really is pretty much done. Almost all of the heavy lifting it is now done by machines. We even have devices like the Segway, designed to replace walking – the ur-activity which marked us off from our chimp-like ancestors all those millenia ago. For more and more people work means interacting with customers or sitting in an office. But then, anyone who ventures out in any major city during “business hours” will find the streets, sidewalks, shops and cafes packed. People are sightseeing, strolling around, window shopping, snacking, slurping on lattes while surfing on their Netbooks. Who’s working?

Well, ok. Not everybody is out lollygagging; there is a noticeable weekday afternoon surge down Bay St in the direction of the GO trains, starting at around 3:45 pm. But then again, what are these employees actually doing? A nice little piece in the Post today by Rudyard Griffiths of the Dominion Institute makes the point. About 30,000 municipal workers are on strike in Toronto, and the city has not exactly been brought to its knees. In fact, apart from only a very slight increase in the amount of trash on the sidewalks an out-of-towner probably wouldn’t notice anything amiss at all. Griffiths states that economists who research this kind of thing believe that about a quarter of all government workers are actually “pseudo-workers”, who show up for the paycheque but do little or no meaningful work. (Of course, it isn’t hard to imagine that this estimate might be on the low side).

But the numbers in corporate bureaucracies are likely to be sizeable also. Then there are jobs which are completely unnecessary – like tax law and accounting, which produce nothing of net social benefit and would cease to exist if governments rationalized the tax code. Or the “work” being done in the justice system, where it takes 5 times as long to get a homicide conviction as it did 50 years ago, with no noticeable improvement in accuracy. The education system meanwhile churns out half-educated high school “graduates;” what is the productivity of a teacher whose students leave school as functional illiterates? Many of the better grads go on to fill up the institutes of higher employment-avoidance, er, sorry, higher learning and acquire degrees which they never apply. If the economic value of extra degrees in unnecessary subjects is nil, then so is the productivity of the professors who produce this surplus. Add in the economic value of Wall Street, now believed by many to be close to zero (as are ancillary activities like financial regulation and risk management). And all the non-work being performed in subsidized industries all around the world, producing products nobody wants – at least in the sense of being willing to pay for them.

The reality is that the number of people really needed to produce the goods and services we consume is not that great. Take away the young, the old, students, pseudo-workers, the semi-productive, people in useless jobs or doing busywork, the “officially unemployed” (really just the tip of the iceberg of the non-producing sector) – and there’s not a lot left to make up the numbers of the truly productive. The problem is that to acknowledge this by action – i.e. canning the unproductive and terminating their useless activities – could have a major negative impact on demand. The leisure society envisioned by yesterday’s dreamers had one major flaw: how to distribute the wealth. We have solved this by creating a system of fake work on a large scale, under a variety of pretexts, to soak up what would otherwise be massive unemployment. A Keynesian Ponzi scheme that continues to run and run.

Why Your World is About to Get a Whole Lot Smaller

Ex-CIBC economist Jeff Rubin makes the case for peak oil and its implications in his latest book, Why Your World is About to Get a Whole Lot Smaller.

While the history of warnings of terminal depletion is almost as long as the history of oil production itself, it seems that this time the Chicken Littles really are coming home to roost. The bare facts are not encouraging. As oil wells are depleted pressure drops off and what remains becomes more and more expensive to extract. Most wells still have about half their oil left at the point at which they become uneconomic. Over time the US, the world’s largest single consumer of oil, has gone from being largely self-sufficient to heavily dependent on imports. In 1970 it was guzzling about 15 million barrels per day (mbd), but produced about 10. Now it needs 19 and produces only 5. In the UK, North Sea oil production peaked in 1999 and was down 43% from that peak by 2007. The UK is now a net importer of oil, as is Indonesia, formerly but no longer a member of OPEC. Mexico has slipped from being the number two supplier to the US to number three; its exports declined by 20% in 2007 alone and barring new discoveries are expected to skid downwards by 80% over the next five years, by which time the country will have ceased to be a significant exporter. The massive Ghawar field in Saudi Arabia, discovered in 1948 and still the world’s most productive single field, is now reputedly dependent on pumped-in seawater to maintain pressure. Overall, exports from OPEC barely grew over the first half of this decade and are expected to decline. This has been balanced mainly by Russian exports, up 60% since 2000. But Russian production did not grow in 2008 and is expected to remain flat over the next few years. With global total output at around 80 mbd, current production is declining at a rate of 4 mbd per year. So over the next 5 years the world will need to add 20 mbd just to meet current demand.

And that new oil is getting harder to find and produce. In one of the earliest wells, Spindletop in Texas, discovered in 1901, oil was struck at just 1,100 feet below ground. The recently discovered offshore Tupi field in Brazil, by contrast, sits under 2,000 feet of sea water, 10,000 feet of rock and 6,600 feet of salt. The Thunder Horse platform in the Gulf of Mexico is 120 miles off the Louisiana coast, a mile above the seabed, with the oil 3 miles below that. It was knocked over by Hurricane Dennis in 2005. Cumulative hurricane damage resulted in Gulf of Mexico production in 2008 being 20% less than in 2005. Globally, offshore fields now represent the single largest source of new supply; but because of wider pipes, they deplete about twice as fast as wells on land. In the Kashagan field in Kazakhstan the levels of hydrogen sulfide force workers to carry gas masks against the danger of asphyxiation. Other new developments are in hostile environments like Alaska or Siberia, or politically chaotic locales like Nigeria where 20 to 40 per cent of productive capacity at any given time is off-line because of attacks on pipelines or rigs. Alternatively, oil production in places like Iran or Venezuela is in the hands of nationalized companies whose limited technical abilities make it harder to add new capacity. In brief, the old conventional oil – from large accessible onshore fields in politically stable countries – is running out. Replacement oil – technically, politically and geographically ever more problematic and available in ever-decreasing quantities, demonstrates by its very nature that we are moving from the era of cheap abundance to that of expensive scarcity.

In terms of problematic oil a special mention needs to be made of Canada’s oil sands. The reserves are thought to hold about 165 billion barrels, or about 2,000 days of current global consumption. The exact nature of this horrifying gunk represents unequivocal evidence of how desperate the world is getting in its search for fuel. Every barrel’s worth of oil is mired in two tons of sand. The stuff near the surface can be mined by giant steam shovels which each gulp 4,250 gallons of diesel per day. This conventional sand mining has a terrible return on energy, requiring one British thermal unit (Btu) of energy for every three produced. A conventional oil well in the Middle East, by contrast, has an energy return of 100 to 1. The stuff (i.e. bitumen) which is too deep to dig out has to be extracted by applying steam at 1,000 degrees to make it hot enough to flow. And it isn’t as good as conventional oil: bitumen contains less hydrogen, so refining it into gasoline essentially requires the addition of hydrogen, making it more expensive in terms of both energy and dollars than conventional refining. The production of one barrel of synthetic oil requires the consumption of 1,400 cubic feet of natural gas, pollutes 250 gallons of fresh water and emits 220 pounds of carbon dioxide. Admittedly, some of these problems could be ameliorated: carbon sequestration could be implemented and nuclear power might eventually substitute for the natural gas used to create steam. But these fixes might take years or even decades to put into place and would drive up costs even more. It is all an awfully long way from just sticking a pipe in the ground.

But if the supply side is depressing, the demand side isn’t any cheerier. Rubin dispenses with a couple popular misconceptions, in particular that the heart of the problem is that the residents of the developed world just need to get out of their SUVs. The reality is that OECD oil consumption is price-sensitive and stagnant. In the developing world it is neither and this is where the future of demand lies. Regional consumption is as follows: US 19 mbd, OPEC + Mexico + Russia 13; Western Europe 12; China 7.5. So the developed part of these regions outconsumes the rest by only about 3 to 2. The growing populations and demand for cars in the developing world will run ahead of stagnant OECD levels. And while free-market economies impose the realities of supply and demand on Western consumers, their counterparts in producing countries do not face the same restrictions. Gas may have hit $4 a gallon in the US, but in Venezuela it is only 25 cents and just 50 cents in Saudi Arabia and Iran. While the Iranian government seems to be willing to take a hard line against cosmopolitan pro-democracy demonstrators in Tehran it quickly learned the folly of trying to ration gas in 2007 when it backed down in the face of riots. Estimates are that half the world’s population receives some form of oil price subsidy, affecting a quarter of global production. As the price of oil rises, of course, the producers become wealthier and are therefore better able to consume or subsidize even more. And even if production goes up, it may all be soaked up by increased local demand, so that exports remain flat. Because of an absence of alternative power sources in the Middle East, for instance, oil is actually a major source of electric power. Saudi Arabia is planning to triple electricity production by 2020. At the same time it is running out of water, as it is draining its aquifers. The future water supply will come from desalination, an energy-intensive process powered by oil. All this increased demand will be met by greater oil consumption, putting more pressure on global prices.

Another misconception which Rubin skewers is that conservation will help us out of this mess. This sounds sensible, but actual experience has been paradoxical. The developed world has already made great strides in energy efficiency. In the US home heating and cooling are 30% more efficient than in the 1970s. Fuel consumption per mile flown is down by 40% since 1975. And energy consumption per dollar of US GDP is down by almost 50% since then. The problem with all this is that as energy costs for a given activity go down, consumers simply respond by consuming more. So we have more air conditioners, drive bigger vehicles and fly more. Under stable energy prices, which the world enjoyed until relatively recently, conservation is offset by greater consumption. Under a regime of continually rising prices (the likely future), conservation simply delays the final resolution of the supply problem.

The only remaining option is substitution. Unfortunately there is currently no effective replacement for gas and diesel, which are essentially the world’s only transportation fuels. Ethanol is a charade, representing nothing but a transfer of wealth from taxpayers to agribusiness; the only thing it really fuels is food price inflation. The problem with switching the car fleet to electricity is that electricity is an energy carrier, not an energy source. Putting the US fleet on batteries would require an enormous new power source. Wind and solar are too weak, nuclear is a logistical and political nightmare and coal presents the unpleasant alternatives of massive carbon emissions or expensive carbon capture.

With the first half of the book laying out the problem, the second half considers the implications. According to Rubin pricey oil is going to punch a hole in global trade, on account of increased shipping costs. The fuel surcharge on a standard 40-foot container shipped from China to the US was $455 in January 2007 and $1,055 a year later. Extra shipping costs are economically equivalent to a tariff on imports. The rise in the price of oil from 2004 to 2008 offset the reduction in global tariffs over the last 3 decades. So the trade liberalization of the era of globalization, driven by tariff reduction, is now going to be neutralized by higher transport costs. The consequence, supposedly, will be at least a partial reversal of globalization, with factories returning to the US from China as the offshore wage advantage is wiped out by transport costs; America’s trade deficit will vanish as the nation reverts to the self-sufficiency of the 1950s.

The other problem with fossil fuel is of course carbon emissions. The pattern is the same here as with oil consumption: slow growth in the developed world, rapid growth everywhere else. The developing world may eventually surpass the developed world in oil consumption; in coal consumption it is already far ahead. Rubin recommends a carbon tax, to be imposed on domestic producers and on imports alike. This will, supposedly, be a win-win solution for the developed world. Because of its far superior productivity per unit of carbon emitted it has a huge competitive advantage over the low-wage regions. The carbon tax/tariff will cut emissions at home but at the same time encourage the return of long-lost overseas manufacturing. How the developed world will react to this proposal is not discussed.

Overall, the best part of the book is the first few chapters, which provide a concise summary of the oil supply-demand problem. This is peak oil in a nutshell, and a good introduction to the issue for people who haven’t read much about it. But much of the rest of the book misses the target. The chapter on shipping costs and the purported demise of the globalized economy is short and sketchy. It doesn’t emphasize sufficiently that the higher marginal cost of transport will fall mainly on low-value goods. A container of stuffed toys headed for the dollar store will suffer a much heavier tariff in relative terms than a container of memory chips. And as a counterexample, the yen went up 40% against the US dollar in the 1970s – that is, there was an effective 40% tariff on Japanese goods. But Japan continued to export. To the extent that production does shift back to North America for certain goods it is more likely to move to Mexico or to new, robot factories. The old jobs are not coming back.

More broadly, Rubin seems unreasonably sanguine about the demise of cheap energy. In some ways he seems to view it as little more than opening the door to a smaller but more liveable world of walkable urban neighbourhoods, bicycles and farmer’s markets. But the implications of peak oil are anything but comforting. The price spikes of the last couple years, with oil riding from $40 to $140 and back are likely to be repeated, only with even higher highs. The effect on the world economy will be chaotic. Reduced consumption doesn’t mean making do with less, turning down the air con, taking our vacations at home and so on. It threatens a deflationary spiral. As car makers and airlines, say, lay off workers they cut their own consumption, which affects all the businesses they buy from, resulting in lower profits and yet more layoffs. Add in higher transport costs and depressed international trade. While some American unions might welcome higher-priced Chinese goods, most low-income Walmart shoppers will not. The standard of living of America’s bottom quartile has been both undercut and propped up by globalization; expensive oil may raise prices for this group without increasing employment. While Rubin does have a point in observing that peak oil will do more to reduce US carbon emissions than a hundred Kyoto treaties, his suggestion of slapping a carbon tariff on Chinese imports seems plain batty. This is not the way to deal with a rising major power, which already holds a couple trillion dollars of US bonds.

Overall, the book has a slapdash feel, as though the author was in a rush to add to his list of publications. One suspects that it was quickly glued together from a bunch of CIBC research reports. Among the minor annoyances: the fact of global depletion progressing at a rate of 4 mbd per year is mentioned at least 5 times; Senator Phil Gramm is misnamed Gram; the figures for projected oil demand to desalinate water in Saudi Arabia in Chapter 2 are nonsensical. Chapter 1 is all about supply, and Chapter 2 about demand; except that at the end of Chapter 2 Rubin suddenly goes back to discussing supply again. The Middle East is characterized as “the highest per capita users of electricity in the world.” Apart from the syntax, this is presumably applies only to parts of the Middle East, like Kuwait or Dubai; it is hard to imagine that Egypt or Iraq are world leaders in the consumption of anything. In addition, Rubin skirts the really big picture, namely that oil depletion is just a part of a broader resource squeeze caused by the master driver of population growth. Well, it’s good to be outspoken, but one doesn’t want to go too far.

Bottom line: this is a decent quick summary of peak oil; the end of globalization is sketchy and speculative. Jeff Rubin could have written a much better book. As an economist perhaps he calculated that working out his arguments more thoroughly wasn’t worth the extra time and effort. On the other hand the topic isn’t going away and there won’t be any shortage of books about peak oil; readers may want to wait for the next one.