The Archdruid Report - Archive

Part One: The World Outside the Market

As the current pullback in oil prices continues – one of the benchmark grades dropped to a little over $120 a barrel yesterday, though it jumped back up $4 in early trading today – peak oil skeptics have seized the opportunity to insist that there’s nothing wrong with the petroleum market that a few more trillion-dollar giveaways to the oil industry wouldn’t fix. One interesting lesson worth drawing from the current barrage of punditry is that most of people who reject the concept of peak oil don’t actually seem to know what the phrase means.

A case in point is a recent opinion piece that denounced peak oil as “sheer nonsense,” on the grounds that the world still has some forty years of oil left at today’s rate of production. The author of this piece somehow managed not to notice that the peak oil theory focuses on precisely the point he took for granted, the sustainability of today’s rate of production. The world may well have the equivalent of forty years’ worth of current annual petroleum production left in its reserves, but if the amount it can produce each year plateaus and then begins to shrink due to geological limits, a global economy founded on ever-expanding energy supplies is in trouble. That’s the essence of the peak oil position, and waving around claims about the absolute size of global reserves doesn’t address it at all.

Still, it’s not surprising that so many people are finding such ingenious ways just now to avoid understanding the implications of peak oil. As worldwide oil production remains stuck in its current plateau – a plateau that increasingly has had to be propped up by massive production of high-cost biofuels and tar-sand products – some of the most basic presuppositions of the modern world are turning out to be well past their pull dates. Once production begins to slip down the far side of the world’s Hubbert curve, that process is likely to accelerate, and much of what counts as conventional wisdom today will end up sitting in history’s dumpster next to phlogiston and the divine right of kings.

One example with sweeping implications unfolds from a particular mismatch between current economic theories and the practical realities of the age of peak oil. Perhaps the best way to introduce this example is to invite my readers to put on their walking shoes, pick up their canvas shopping bags, and join me in one of yesterday’s errands.

In the southern Oregon town where I live, Tuesday is the day of the weekly grower’s market, and so yesterday, as we do nearly every Tuesday between March and November, my wife Sara and I walked the 3/4 of a mile or so to the National Guard armory parking lot where local growers and ranchers sell their produce. Among our purchases was a flat of fresh raspberries, and this afternoon we’ll be turning those into home-canned raspberry jam for the year to come.

Now it’s unquestionably true that we could just buy an equivalent volume of commercially manufactured raspberry jam and eat that instead. Still, these two ways of putting by a supply of raspberry jam are by no means equal. Set aside for a moment the higher quality of homemade jam, which (in this case, at least) is made of fresher ingredients and prepared in small batches; one of the most important differences between the two processes is that the homemade jam represents a much more efficient use of fossil fuels.

The grower who produced the raspberries used organic methods, which saved the petroleum and natural gas that would otherwise have had to go into pesticides and fertilizers. While she used a pickup to bring her crop to the market, the ten miles or so she drove compares favorably to the thousands of miles agricultural products are routinely shipped in their journey from farm to factory, warehouse, and supermarket, and even if we owned a car and drove to and from the market, the extra mile and a half of gas wouldn’t shift the balance much.

Turning berries into jam and canning the result probably takes about an equal amount of energy per pint of jam whether it’s done in a home kitchen or a huge factory, though it’s a lot easier to provide the energy via a solar cooker or other renewable source on a small scale. Even without that, though, the homemade jam takes a small fraction of the energy to go from raspberry canes to our pantry than commercial jam requires. One measure of these energy economies is that, including all expenses, our homemade jam costs us only about two-thirds as much as the same volume of commercial jam.

Compare the homemade jam with its commercial equivalent from the viewpoint of conventional economic measures, though, and the balance swings the other way. In terms of its impact on the gross domestic product – generally considered the broadest measure of national prosperity – our homemade jam is practically an economic disaster. The very modest price of raspberries, sugar, pectin, and new lids for our much-recycled canning jars is the only contribution it makes to the economy. By contrast, making, shipping, storing, and selling the commercial jam requires, directly and indirectly, the expenditure of a very large amount of money, all of which counts mightily toward a higher gross domestic product.

Consider the economics from the perspective of the participants in the creation of the homemade jam, though, and things take on a very different shape. Even aside from the other reasons Sara and I might want homemade jam, we have a potent economic motive; by making the jam ourselves we get a superior product at a lower price. The raspberry grower, in turn, benefits handsomely from the same decision; the price she gets for her berries when sold directly to the consumer is several times the price she can get from wholesalers. According to conventional economics, the end result of individuals freely pursuing their own interest in a market should be the maximization of prosperity – and yet if prosperity is measured by the gross domestic product, our free pursuit of our own interest decreases our contribution to national prosperity.

What is happening here, of course, reflects one of the largest of the blind spots of contemporary economics: the assumption that market transactions mediated by money are the only significant form of economic activity. Our household jam-making activities drop off the economic radar screen the moment we finish paying for the raw materials. Value is being produced – the same jam offered for sale at next week’s market would bring substantially more than the cost of the raw materials – but it’s being produced outside the market economy, and therefore has no official existence in an economy measured entirely by market metrics.

What makes this particularly relevant in the twilight of the age of cheap oil is that the world’s industrial nations, and above all the United States, have spent most of the last century transferring as much as possible of the household economy into the market sphere. In making our own jam, among other things, Sara and I belong to a minority of American households. Glance back a hundred years, by contrast, and nearly every family in the country outside the very rich and the very poor had an active household economy that produced a large fraction of the total goods and services they consumed. Many factors contributed to this dramatic shift, but one of the most significant is the availability of cheap abundant energy.

Most of the economies of scale that make mass production of processed foods economically viable, after all, are economies only because the cost of transportation is low enough to permit them. As recently as the first half of the 20th century, most consumer products in the US were produced locally for regional markets, in large part because transportation costs were still high enough to make national distribution a costly proposition. (Those brands that did find a nationwide niche, such as Coca-Cola(tm), did it by franchising out manufacturing and bottling to local firms.) It took the birth of a new transportation network of diesel-powered trucks using a massive new interstate highway network to create today’s national distribution chains, and cheap petroleum provided the foundation on which the whole system arose.

The twilight of cheap oil, in turn, bids fair to throw this process of economic centralization into reverse. As transportation costs rise to become a major part of the cost of consumer products, the economies to be gained by local production will sooner or later outweigh the economies of scale that shape the current system, opening economic niches for small and midsized firms nimble enough to move with the currents of economic change. Equally, though, the financial advantages of the household economy will become overwhelming. In a world of scarce oil, anything that can decrease the amount of fossil fuel energy that has to go into an product will pay off handsomely, and if the transition to scarcity involves widespread impoverishment – as seems most likely just now – the choice faced by many households throughout the industrial world may well come down to doing things themselves or doing without.

At the same time, it’s crucial to recognize that the forces holding the current economic order in place reach beyond the realm of simple economic calculations into murkier areas of culture and collective psychology. For those who have access to fruit growers – and with the growth of farmers markets across the US and elsewhere, this has become a tolerably large fraction of the population – making one’s own jam, and a great many other food products, is already a paying proposition; so are many other activities that once formed part of the household economy, and very likely will do so again; yet these activities remain the hobbies of a minority of today’s Americans, and most of their neighbors turn to the market economy to get inferior products at higher prices instead. The forces motivating this sort of economic irrationality will be the focus of next week’s post.