Crude Oil Production and Economic Growth

There is no great dispute over the fact that crude oil production and economic growth are interrelated.

However, awareness of this fact and its consequences are not well accepted in public. The two graphs above (Source) illustrate exactly this correlation from the early 70's up until today. The dire consequences when world crude oil production declines are the main concern of peak oilers today. Most people underestimate the effect on global economic growth and the consequences of a shrinking economy called depression or economic collapse. What it means for people is job loss, financial hardship, in many cases loss of housing, unacceptable increase of crime, ... In other words, third world conditions.

Whereas recession is a mild economic slowdown for about 2 years, a depression is a severe decline in economic activity. Economic conditions in a depression are characterized by falling prices, reduced purchasing power, an excess of supply over demand, rising unemployment, accumulating inventories, deflation, plant contraction, public fear and caution, and a general decrease in business activity. (compare reference on anwers.com.) Interestingly, in a depression prices are falling and supply outstrips demand. How would a depression scenario triggered by peak oil look like? Why would supply suddenly be higher than demand after crude oil shortages make economic growth harder and harder?

While recessions are part of a normal business cycle, depressions occur when the economy does not recover from a recession. When demand does not pick up anymore after a recession because infrastructure and market mechanisms were damaged too much by the declining economy, supply does not reach the consumer anymore and the business system is not functional anymore. This scenario did happen during the Great Depression in the 1930's. A similar scenario might happen when crude oil supply will strangle economic growth and damage existing economic mechanisms like transportation systems, trading platforms or communication systems.

The only way to prevent this economic meltdown is to invest in alternative energy supply systems and market systems which are independent from crude oil supply.