Wednesday, March 25, 2015

The Fallacy that Oil Prices Can Rise Arbitrarily High

You are repeating the original fallacy that oil prices can rise arbitrarily high. Civilization would indeed not be endangered if this were true. Critical infrastructure would remain intact and the rich could still get whatever they want. But this is precisely what will not work.

The price of oil is set by the global market. When ordinary consumers are unable to keep up demand at the price needed to supply oil, prices will go down and oil producers will go bankrupt, which is starting to happen already. The rich are powerless to stop this process because there are too few of them and they don't have enough money. By the time only the rich could still theoretically afford oil, there will not be enough critical infrastructure left to have a functioning oil industry at all. It takes a civilization to have an oil industry, and oil needs to supply enough net energy to power this civilization. From a thermodynamic perspective, it is physically impossible to keep extracting oil when you have to invest more energy in its production than you can get out of it (unless another energy source could make up the deficit, in which case oil could still be extracted at an energy loss and used for liquid fuels and feedstock, but we have no such option). Due to the diminishing returns resulting from depletion, we already get too little net energy out of oil to keep the system running for much longer. Physics trumps economics and there is nothing you can do about it. Saying "prices are relative" will not negate the second law of thermodynamics.

It is even worse, because we also rely on the oil industry to provide employment and to fund governments and pensions and all sorts of financial derivatives. Low oil prices will likely lead to so such a chaos that it could bring down the entire system long before it becomes physically impossible to extract more oil. The financial system is the operating system of the economy and just as essential as the hardware, so a financial crisis could bring down the entire system all by itself. All it takes is loss of confidence that debts can be repaid, resulting in a credit crunch and broken supply lines.

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