The Decline of Per Capita Wealth

Yesterday was a momentous day.  According to the State of World Population 2011, published by the United Nations Population Fund, it was the day world population topped 7 billion people.  We find this to be momentous not just for the sheer size of the population, but, more importantly, for the rate at which it is increasing.

For example, at the time of Christ’s death the world’s population was around 300 million. Slowly, over the next 1800 years, the planet added 700 million more people…hitting 1 billion when John Adams was President of the United States…and causing quite a shock to the intellectuals of the day.

The world’s burgeoning population produced visions of apocalypse for English economist, Robert Thomas Malthus.  Between 1798 and 1826, he scribbled six editions of his famous treatise, An Essay on the Principle of Population, in which he predicted a massive collapse brought about by population increasing faster than the supply of food.

Of course, Malthus was dead wrong.  Just 127 years later, in 1927, world population hit 2 billion.  Then, 32 years later, in 1959, the 3 billion mark was reached.  Fifteen years later, in 1974, the population topped four billion.  Thirteen years after that, in 1987, five billion was surpassed.  Twelve years later, in 1999, world population logged six billion.  And now…seven billion.

As you can see, since about the beginning of the Industrial Revolution, population growth has dramatically risen.  Over this time, per capita income has dramatically risen too.  What does this tell us?

The Conventional Crude Oil Production Peak

For one, it tells us that population growth and economic growth are dependent on energy. We didn’t take the time to conduct a study, but using a little conjecture, we surmise that there’s a connection between world population and economic growth, and increases in world energy production.

The world economy has developed and expanded over the last 200 years based on a paradigm of cheap and available energy – namely oil.  In particular, continuous increases in oil production have helped push up economic growth.  So what would happen to the economy if oil production no longer increases?

Look around.  What you see may be an initial glimpse at an economy sputtering in fumes…

According to a January 2007 International Energy Agency (IEA) report, world oil supply (which includes biofuels, non-crude sources of petroleum, use of strategic oil reserves, in addition to crude production) averaged 85.24 million barrels per day in 2006, an increase of 0.76 million barrels per day from 2005.  This increase was a little more than half the average yearly gain in global supply of 1.2 million barrels per day from 1987 to 2005.

Unfortunately, as the experience of the last several years has shown, future increases in world oil supply may cost a whole lot more.  The 2010 IEA World Energy Outlook stated that conventional crude oil production peaked in 2006.  In other words, going forward, world oil supply increases must be obtained through unconventional oil production like tar sands or deep water drilling.

The Decline of Per Capita Wealth

The problem with unconventional oil production is that it’s not cheap.  What this means is the economy must adjust to more expensive energy costs.  So far the adjustment has been rough going.

At the turn of the new millennium a barrel of crude oil cost roughly $24.  In 2006, the year conventional crude oil production peaked, the price of oil averaged $58 per barrel.  Then, in July of 2008, just before the financial system blew apart, crude oil topped $145 per barrel.

After bottoming around $37 per barrel in early 2009, crude oil prices climbed back to over $100 in the second quarter of 2011.  Its price currently sits at over $90 per barrel.  By comparison, the economy has not kept pace with escalating crude oil prices…

Between 2000 and 2005, U.S. gross domestic product grew from approximately $9.8 trillion to $12.5 trillion – an increase of over 27 percent.  From 2006 through 2010, U.S. GDP grew from $13.3 trillion to 14.5 trillion – an increase of just 9 percent.

Noticeably, in an environment of elevated crude oil prices, the economy has sagged like an old Cal bungalow rooftop.  We don’t know if this represents a true correlation or if it’s plain old coincidence.  What is clear is that the days of cheap available oil are over while demand, driven by population growth, continues to rise.  What this means is per capita oil production has gone into irreversible declining.  Perhaps, per capita wealth will follow.

Sincerely,

MN Gordon
for Economic Prism

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