Despite the recent closure of the Strait of Hormuz, oil prices have barely moved. The strait typically handles roughly 20% of global petroleum liquids consumption, according to the US Energy Information Administration, making the muted price reaction all the more striking. Many analysts expected a sustained spike, but the latest increase has been modest by historical standards. Adjusted for inflation, past price spikes would appear even more pronounced than they do today.

This is not a new phenomenon. Energy demand data stretching back to 1820 shows that periods of low affordability have consistently coincided with financial crashes, wars, and political collapses. The world may now be entering another such phase.

High Demand vs. Low Demand

High energy demand corresponds with periods when a growing share of the population can afford automobiles and the fuel they require. Annual new car sales rise. Young adults, earning more in real terms than their parents did at the same age, readily purchase homes. Developing nations industrialize with relative ease, lifting living standards. The 1950s, 1960s, and 1970s exemplified this pattern of robust oil demand growth.

Today's landscape contrasts sharply. Large numbers of young adults, even those with advanced degrees, cannot find well-paying employment. Many cannot afford vacations or new vehicles. Record numbers continue living with their parents after completing their education. Global car sales peaked in 2017, an indirect but telling indicator of declining household purchasing power. The shift toward electric vehicles further dampens oil demand, and the International Energy Agency has separately projected that global oil demand could plateau before 2030 under current policy settings.

Home construction tells a similar story. The US Census Bureau reports that new home sales reached a record 1,283,000 in 2005. By 2025, that figure had fallen to 678,000—roughly 53% of the peak. The decline in new home building reflects widespread financial strain, particularly among younger would-be buyers.

Income trends reinforce this picture. A study based on IRS data, published in Forbes and analyzed by economist Emmanuel Saez, found that between 1948 and 1970, US incomes rose faster than inflation. From 1968 to 1983, both the top 10% and the bottom 90% saw incomes keep pace with inflation. However, between 1983 and 2012, the top 10% received dramatically larger gains than the bottom 90%. When the vast majority of workers struggle financially, commodity producers face persistent difficulty maintaining the prices they need. Even the wealthiest individuals consume only so much food and fuel—the prosperity of the bottom 90% is essential for sustaining commodity demand.

Lessons from Energy Consumption Patterns Since 1820

An analysis of world economic behavior from 1820 to 2017—recently updated—reveals that the global economy performed well during periods of high energy consumption growth. Conversely, low energy consumption growth correlated with financial crashes, wars, and government collapses.

The methodology combined two datasets: older decennial energy data from Vaclav Smil's Energy Transitions: History, Requirements and Prospects (Appendix) and more frequent recent data from BP's Statistical Review of World Energy, which has been published by the Energy Institute since 2023. Average annual growth rates were computed for each 10-year period.

The 1961–1970 decade, for example, exhibited an exceptionally high annual growth rate in energy consumption. This coincided with the opening of much of the US interstate highway system and extensive pipeline construction.

By decomposing total energy growth into population growth (blue bars) and the residual available for raising living standards (red bars), the analysis revealed two periods where the residual was negative: the period ending 1860 and the period ending 2000.

Periods of High Living-Standard Growth

High growth in energy supplies and high oil prices have historically moved together. The 1973–1981 period featured elevated oil prices, including the oil embargo that disrupted supplies to major industrial economies. China's rapid growth following its 2001 accession to the World Trade Organization produced another oil price spike, driven largely by China's enormous increase in coal production between 2002 and 2011.

China and the rest of the world saw another coal production increase beginning in 2022, when coal prices temporarily surged—possibly connected indirectly to the conflict in Ukraine. Coal prices have since declined, resulting in flat global coal production growth since 2023 and a plateau in China's coal output. Meanwhile, OPEC+ has repeatedly cut production targets across 2023 and 2024 to support prices, yet the muted price response suggests demand-side weakness is offsetting supply restraint.

Troubled Periods

The analysis identifies three periods of severe living-standards contraction:

The First Troubled Period began with the Panic of 1857, which some historians consider a contributing cause of the US Civil War. The crisis stemmed from over-expansion of the US economy and the subsequent collapse of the debt bubble that had financed it. Financial distress affected both the North and the South.

A key factor was the declining profitability of slave labor in the South, where enslaved people constituted the primary energy source for plantation operations. Soil depletion from years of cotton and tobacco cultivation compounded the problem. Slaves had been purchased with debt that could not be repaid unless plantation income was sufficient. Poor harvests were not offset by proportionally higher prices, creating financial strain for plantation owners.

Evidence of broader impoverishment includes declining army recruit heights, suggesting deteriorating nutrition. Improved sanitation and continued immigration may have contributed to overpopulation, pressuring wages and farm incomes. When the Confederacy lost the war, the Confederate Dollar became worthless—adding another layer of financial catastrophe.

The Second Troubled Period (1920–1940) encompassed the Great Depression and World War II, and arguably World War I as well. Commodity prices of all kinds fell to extremely low levels. Tariffs were imposed in the 1920s. These problems appear to have coincided with Peak Coal—the point at which prices could not rise enough to cover extraction costs from narrower, deeper seams. World War I began around the time of Peak Coal in the UK; World War II coincided with Peak Hard Coal in Germany.

As extraction costs rose but sale prices failed to follow, coal miners' wages were squeezed. Strikes and lockouts proliferated, and military service became an increasingly attractive alternative. The period also included the Weimar Republic hyperinflation (1921–1923), the Holocaust (1933–1945), the redrawing of national borders, and the disappearance of entire states—leaving holders of dissolved nations' currencies without recourse.

The Third Troubled Period (1990–2000) was marked by the collapse of the Soviet Union's central government, which left its 15 republics as independent states. Cuba, North Korea, and several Eastern European countries were indirectly affected. Fuel demand fell sharply across the affected nations, and factories closed in many regions, including Ukraine.

The demand pullback from the Soviet collapse helped keep oil prices low during 1991–2001. Oil prices had already been depressed by the interest rate spike of 1980–1981. These persistently low prices, in turn, undermined the Soviet Union's ability to invest in new oil fields—a dynamic that likely contributed to its collapse. The Japanese real estate bubble also burst during this period, followed by the 1997 Asian Financial Crisis.

The Economy as a Self-Organizing System

From a physics standpoint, all economies are dissipative structures—similar to ecosystems, living organisms, and hurricanes. These systems tend to grow during their lifespans and, within limits, exhibit self-healing properties. A cut heals; a hurricane weakened over land can regain strength over warm water.

Dissipative structures depend on adequate energy supplies of the right types. For humans, that energy is food; for economies, it is the combination of energy sources matched to existing infrastructure. All dissipative structures have finite lifetimes—ecosystems end in fires, humans live roughly 80 to 100 years, and economies can collapse through war or debt-driven government failure.

Economists describe this stability through the concept of the Invisible Hand; complexity researchers call it "self-organization." When a forest burns or a climate shifts, regrowth follows. When a business or government fails, replacements emerge. Over the long term, the economy may reorganize itself into a more complex, energy-efficient form.

Near-Term Outlook

Several converging pressures warrant attention:

Middle East disruptions and other conflicts are raising long-distance shipping costs for both food and oil. Because consumer affordability remains constrained, these higher transportation costs must be absorbed primarily through reduced net prices for oil producers and farmers rather than passed through to consumers.

The additional oil consumed by longer shipping routes reduces the supply available for other uses—agricultural machinery, jet fuel, and industrial production—potentially pushing the broader economy toward contraction. If recession takes hold, oil price declines similar to those of 2008 and 2020 are possible, but a prolonged downturn would likely prevent rapid price recovery.

Home and farm prices may fall globally. Data from Realtor.com shows that median US asking prices for homes through June 2026 have been barely holding steady. Farm incomes are under pressure as well. If real estate values decline, the debt bubble supporting them could collapse.

Multiple debt bubbles appear vulnerable, including debt tied to artificial intelligence investment and commercial real estate sustained by "extend and pretend" lending. The Institute of International Finance has reported that global debt reached record levels exceeding $300 trillion in recent years, amplifying the systemic stakes of any widespread repricing. Collapsing debt bubbles tend to destabilize banks, reduce lending, and trigger layoffs—all pointing toward a significant recession with diminished consumer purchasing power.

Government collapses similar to the Soviet Union's dissolution are also possible. Such events can substantially reduce global energy consumption, including oil demand, with relatively limited violence.

Long-Term Resilience

Despite these risks, economies possess self-healing properties. Troubled periods can persist for years, but historical evidence suggests eventual recovery. If governments fail under debt burdens, successor governments—likely leaner, with fewer employees and reduced services—are expected to emerge. Some businesses will continue operating even if new currencies must be created. New enterprises will form, some utilizing recycled materials from failed predecessors.

According to the Maximum Power Principle, organizations tend to develop methods to exploit available resources. Over the long term, the economy may reorganize into a more complex, energy-efficient structure. If efficiency improves sufficiently, a higher energy price could become affordable. Such a transition, however, may take many years—if it is possible at all.

By Gail Tverberg via Our Finite World