Recently, this blog has been exploring the social impacts of climate change, arguing that rising temperatures will lead to rising political tensions, with the likelihood that war, chaos and genocide will result. Since much of this social disarray will be caused by climate impacts on the world economy, I wanted to spend some time examining the various areas of the economy that are expected to be impacted.

It should be emphasized that when we consider the effects of climate change, the overall economic outlook is very, very grim. In fact, the very basis of our current industrial economy will be tested, not only because of climate change, but also because the global economy has been consuming resources in unsustainable ways for decades and we are fast approaching a day of reckoning. This is true with oil, food and water especially.

Optimists like Thomas L. Friedman are betting that international agreements on climate change and/or market forces will actually lead to economic growth in the Green Tech sector, spurring a remarkable century of high profits, innovation and sustainable growth. But according to Nicholas Stern of the London School of Economics, growth itself is problematic. Stern’s view is that rich nations, at the very least, will have to tamp down on economic growth by 2030 if we are to keep the planet safe for human civilization. But even if we do not do this on our own, the physical limits of our planet may do it for us.

So, while the 20th Century might have been characterized by the likes of Neil Armstrong and Charles Lindbergh, the 21st Century will likely be one more accommodating to the ideas of Thomas Robert Malthus. This simple fact will be at the root of the historic economic contraction that will remake and resize the economy over the course of the 21st Century. And as the economy shrinks, so will human population.

Over the coming weeks, I will explore the specific problems facing the economy in an age of a warming planet with posts on:

• Water
• Agriculture
• The Insurance Industry
• And finally, the Financial Markets and Trade

This week, though, I will examine one of the key economic trends that, while not related to climate change, will underlie the economic story of the 21st Century: The end of cheap oil.

Off to a Poor Start: The 21st Century Oil Shock

While oil supply is not related to climate change directly, it is nonetheless going to dominate the headlines and play a negative role in economic activity for the next few decades.

Oil is a finite resource and by definition, shortages are inevitable. In the parlance of the oil industry, Peak Oil is a moment when the productivity of an individual oil well reaches its maximum, after which productivity drops exponentially. Over time, the term has also been applied to national oil resources and even to global supply. For example, the United States reached Peak Oil in the late 1960s. But unlike regional or national peaks, global Peak Oil will mean that productivity will fall planet-wide and cause an unavoidable and constant rise in the price of oil.

Debate has raged over the timing of global Peak Oil, but most agree that it has either already occurred or will occur within the next 10-15 years. Whatever the case, by 2100, the world will likely have passed Peak Oil and the consequences will be part of the historical record.

What consequences? Firstly, because oil plays such a central role in the economy, higher oil prices will naturally slow economic growth as more and more corporate profit and household income must go toward paying higher fuel bills. But oil prices will also affect most other goods, since everything from food to plastics requires oil in their production and transport.

Some like James Howard Kunstler have written that Peak Oil, will usher in a new era of austerity and force an unprecedented economic and demographic shift as suburbs crash, cities starve, energy-intensive industries go extinct and international trade becomes untenable. In short, after Peak Oil, the whole world order will change forever.

It will take decades to switch from oil to some other energy source, if we can at all. If we choose wisely and opt for sustainable energy sources, the World Bank, puts the net cost of this conversion to around 2% of global GDP by 2050, which is just less the loss of GDP experienced from 2007 to 2008 in the economic crisis, but spread out over decades. If we choose unwisely, and turn to coal and natural gas, or war for the few remaining oil fields in the Middle East, we will only subject ourselves to even greater costs.

As with climate change, addressing Peak Oil sooner rather than later will mitigate the costs to the economy. But as we are only making small steps in this direction, it is unlikely much of the economy will be prepared for the spike in prices that will ensue when Peak Oil is reached, if it has not already been reached. Indeed, at least one economic analyst, Jeff Rubin, Chief Economist at CIBC World Markets, has blamed the current economic crisis, not on a real estate bubble, but on Peak Oil.

Whatever the case, our dwindling supply of oil will cost us one way or another. But there are other threats that we must add to the list of economic problems the human race will face this century which are largely driven by climate change.

The next one I will examine will be that other liquid gold: Water. Stay tuned.