Four ways energy can derail the economy

On the train last night I was reading the opening chapter of Jeremy Leggett’s new book The Energy of Nations: Risk blindness and the road to renaissance. It’s about energy related systemic risks that could destabilise the global economy. Since I wrote about the link between the oil price and the economy last week, I thought it was worth sharing some similar connections.

The book covers four large risks to the global economy:

Oil depletion – Global demand for oil continues to rise, but supplies are tighter than ever and new production is increasingly expensive. At some point, global production will peak, and the price of oil will skyrocket as the number of buyers increasingly exceeds supply. We’re already beginning to feel the effects of the loss of cheap energy from the global economy.

Climate change – Since CO2 emissions from fossil fuel use are the biggest driver of climate change, climate-induced economic woes have energy as the root cause. And there are several ways that a destabilising climate could wreck the economy. It could drive up the price of food, or erode investment by diverting resources into adaptation. For some countries, insurance losses is going to be the big one – more on that here.

Carbon assets – Energy companies are valued according to the reserves of fossil fuels that they hold, as I’ve explored before. Those reserves cannot be used if we are to avoid serious climate change. Action to prevent climate change, or the threat of it, risks creating billions of dollars of stranded assets and an economic crisis in the process.

Shale gas – While shale oil and gas has made a big impact on the US market, Leggett detects the danger of a shale bubble. We’ve already seen land speculation, oversupply and downgraded reserves in the US, but it’s still seen as a positive story. Inspired by the promise of cheap oil and gas, other countries could throw resources at shale at the expense of other energy sources, only to be disappointed.

Quite how likely these risks are to develop into actual crises is a matter of debate. The global economy might not be troubled by any of them, or it could strike them all at once for all we know. But there’s no excuse for not examining them and managing the risk. For more detail, you’ll have to wait for the book, or see jeremyleggett.net for his ongoing commentary on energy matters. As a renewable energy entrepreneur, environmentalist and former oil geologist, he’s definitely a voice worth listening to.