Figure 2. Two views of future growth
The problem is that when limited oil supply is rationed by high oil prices, economic growth slows down, and eventually decreases (Figure 2). When this happens, it becomes much less advantageous to borrow from the future, because the future is no longer better than today. If an economic contraction occurs for very long, the whole debt system can be expected to undergo a major “unwind”.
Logic says the result would be fairly cataclysmic. We recently started seeing the beginning of this unwind with the financial crisis of 2008-2009. We are seeing more of the potential unwind with the problems in Greece and the rest of Europe, and with the US government reaching limits on borrowed debt. Exactly how this will play out is uncertain, but debt defaults in Europe could spread to banks worldwide, in one scenario.
With much less credit available, demand for extracted energy products would fall, because with less debt, people can afford to purchase fewer products that use energy, such as new cars. Prices of oil and oil substitutes will fall, making oil extraction unprofitable in locations where extraction costs are high. The result is not likely to be a slow decline, of the type attributed to M. King Hubbert. Instead, a much more precipitous decline can be expected (Figure 3).