The throughput chain comprises several “links”, different processes that follow one another but do not all necessarily take place at the same rate. The processes commonly are: the extraction or controlling of wealth; its rendering or structuring into saleable goods and services; the sale of those goods and services; and their subsequent degradation into waste matter from which wealth may be renewed.
Crude oil provides one illustration of fluctuations in the relative rates of the throughput “links”. Sometimes oil is being pumped out of the ground faster than it is being refined into a range of fuels and chemicals, sometimes more slowly. Sometimes the refinement process is faster than the sale and consumption processes. At other times refinement lags behind sale and consumption, or sale may be faster than consumption, or vice versa.
The relation between the various rates is an important determinant of prices. This relation is thus a determinant of the rates of sale and consumption. Changes in these affect the rates of the previous links in the throughput chain. This in turn affects again the rates of sale and consumption. A change in the rate of any of the links, which are all interdependent variables, does not just effect a simple alteration in the others. It is more in the nature of a disturbance which knocks the entire chain into an agitation that can settle into a new dynamic equilibrium.
During the 1980’s and ’90’s, many people thought that the “oil crisis” of the 1970’s had been put behind us. In the 1970’s there was supposed to be a world shortage of fossil oil; prices had to go up; we had to consume less, get smaller cars, get the bus, get on our bikes. During the 1980’s and ’90’s it seemed that OPEC were under pressure, “production” (i.e., extraction) of oil had to be cut to prop up prices, there was a glut of oil on the world market.
The reality is that over the decades, there have been no sudden dramatic changes in the world oil situation. Fossil oil is still a limited resource; its rate of consumption has risen steadily over the decades; it is still being depleted by being consumed at a rate much faster than its renewal rate; it is still being consumed faster than could be permitted by any known renewable replacement resource and it has been depleted considerably in the last thirty years – in fact the oil situation in the 1980’s and ’90’s was worse, not better, than in the 1970’s.
In the 1980’s and ’90’s the illusion of a great improvement in oil supplies was created by changes in the relationships among different links in the throughput chain.
In the 1960’s and 1970’s, consumption of fossil oil was straining to get ahead of the rate of extraction and refinement of oil. This, combined with low prices and profligate consumption, made it easy for nations with large oil resources within their borders to gang together, restrict their extraction rates, and boost prices. This took place from 1973 onwards.
The reaction to this altered the relations in the throughput chain. Prices and taxes for oil products increased. Economies slowed their rate of increase in throughput (currently called their “economic growth” rate). People went for smaller cars or took public transport to work, and there was a boom in the use of bicycles. Oil for heating was replaced to a great extent by better insulation, solar heating, gas, electricity; oil previously burnt to generate electricity was replaced more and more by coal, nuclear fission, natural gas, hydroelectricity, geothermals and so on.
While this was going on, countries with oil reserves untapped or not being extracted as fast as they possibly could be, borrowed huge sums of money to extract oil faster, build more refining capacity, and pay for all sorts of things that they wanted to have immediately in the expectation that oil revenues would pay off the debt in the future.
The result of all this has been that oil could in the 1980’s be extracted and refined at a considerably faster rate than that at which the market was able to consume it. So the first link in the throughput chain, extraction, was too big for the subsequent consumption link – quite the reverse of the situation in the 1960’s and ’70’s described earlier. Extraction and refinement were put under stress by a rate of consumption lower than they could allow. This did not change the facts of the world’s oil situation, but it changed the direction of the pressure on the prices of oil and oil products – downward pressure replaced the previous upward pressure. This change in the direction of pressure on prices was really the only change that had occurred, but it served to create an illusion that the world oil supply situation itself had dramatically changed.
Conversely, a resource can be renewable, plentiful in supply, and being consumed at a rate comfortably below its renewal rate. But mismatching between the links in the throughput chain of this resource can create the illusion of shortage by putting upward pressure on prices.
To sum up, the throughput of resources takes place through several stages. Mismatches in the potential rates of these different stages have large effects on the price of the resource and of goods made from it. But these effects are artifacts of human behaviour and market forces and may have little to do with the depletion rate, renewal rate, quantity of the resource, or how much danger to the economy is threatened by its rate of consumption at the time.
The continued excessive and unnecessary consumption of oil posed, if anything, a greater economic threat during the 1980’s and ’90’s than during the 1970’s despite the more benign price environment. It could have been expected that once oil-producing countries had either paid off or defaulted on their debts and abandoned enough industrial plant and grand economic schemes to adjust to a lower rate of extraction, then since oil consumption continued to rise, another ‘price shock’ would happen later with analogous consequences to those of the 1970’s. This has happened in the early years of this century.
A new factor in the current situation is the interest in global warming. I say the interest in it, because the warming itself has been an issue since humanity started large-scale consumption of fossil fuels. It was mentioned at least fifty years ago. Nothing has been done about it and it is too late now – it has a momentum of its own. All the effort, investment and talk being directed to trying to stop and reverse it would be better directed towards coping as best we can with the consequences.
Posts in this Series
- Review of 1988 edition of Economics for a Round Earth
- Ends and Means
- Evolution Not Revolution
- Notes on Evolution Not Revolution
- Concepts and Terms – What is ‘wealth’?
- The Throughput Chain
- The Derivatives of Wealth
- Global Inequalities in Wealth
- Economic Growth Redefined
- Misconceptions in Practice
- Borrowing to Invest to Get Rich
- Environment versus Economic Progress
- Digression: Pollution Red Herrings
- Digression: Depletion and Inflation
- Value Inflation – the Trigger, not the Bullet
- Living Standard and Quality of Life
- Digression: Resource Consumption, Jobs, and Hands Off
- When the Boom comes
- The Effect of People’s Expectations
- Hard Work – Virtue or Vice?
- Who needs the Snail Darter?
- More Dollars for Conservation?
- Non-renewable Resources – Leave Them in the Ground?
- Digression: Fast Breeder Nuclear Fission Reactors
- Minerals in National Parks – Leave Them in the Ground?
- Population and Wealth
- Left, Right and The Environment
- Digression: “So Long As We Profit, Costs Elsewhere Aren’t Our Problem”?
- Limits to Growth?
- Solar Energy – a Special Case
- The Solar-Powered Car
- Money Supply, Throughput and Inflation
- Real and Money Wages: Living Standards
- Digression: Caution about “Increases” and “Decreases”
- The Idea of Proportionate Flows Applied to Wages: the Great Depression
- Deficit Financing
- The Optimum Proportionate Flow Condition
- Digression: Thrift versus Spendthrift
- Digression: the Private Motor Car – a Basic Necessity?
- The Idea of Proportionate Flows Applied to Wages – the Stagflation of the 1970’s and 80’s
- Excessive Wages Can Cost Jobs
- Fight Unemployment or Inflation First?
- Digression: Work and Jobs
- Other “Job Creation” Schemes
- Visual and Noise Pollution
- Digression: Renewal and Recycling of Resources; Wages and Jobs
- Ratio Distortion and Consumption
- Aggregate Demand – Components and Internal Ratio
- The Slave Economy
- Employment and the Steady State
- Consumer-Led Recovery
- Interest Rates and Ratio Distortion
- Demographic Trends and Living Standards
- Digression: Bad Economics Good for Conservation?
- Coping with Aging Populations
- Stabilising the Human Population
- Costs – What Really Costs Us and What Doesn’t?
- Digression: Other Comments on Statements in UN Report
- Discussion of Costs Resumed
- Budget Balancing Methods – Cost or Gain?
- Digression: Government Expenditure – Government Employees
- Expenditure on Weapons