Off the keyboard of Gail Tverberg
Published on Our Finite World on April 21, 2013
Discuss this article at the Energy Table inside the Diner
We have all heard the story about oil supply supposedly rising and falling for geological reasons. But what if the story is a little different from this–oil production rises and falls for economic reasons? If this is the issue, it doesn’t really matter how much oil is in the ground. What matters is if economic conditions are “right” for continued and rising extraction. I have shown in previous posts that oil prices that are too high are a problem for oil importers while oil prices that are too low are a problem for oil exporters. As a result, oil prices need to be in a Goldilocks zone, or we have serious problems, of one sort or another.
As long as the price of oil keeps rising, there is at least some chance the amount of oil extracted each year will keep rising, because more oil resources will become economic to extract. The real problem arises when oil price falls back from a price level it has held, as it has done recently, and as it did back in July 2008. Then there is a real chance that investment will become non-economic, and because of this, oil production will fall.
Oil prices play multiple roles:
- High oil prices encourage extraction from more difficult locations, because the higher cost covers the additional extraction costs.
- High oil prices allow exporters to have adequate money to pacify their populations, even if their oil exports have been declining, as they have been for many exporters.
- High oil prices allow funds for investment in new oil fields, as old ones deplete.
- High oil prices tend to put oil importing countries into recession, because it raises the costs of goods and services produced, without raising the salaries of the workers. In fact, there is evidence that high oil prices lower wages (both directly and through lower workforce participation).
- High oil prices make countries that use large amounts of oil less competitive with countries that use less fuel in general, and less oil in particular.
When oil prices decline, it is evidence that Items 4 and 5 above are outweighing Items 1, 2, and 3. This tips the scale in the direction of a fall in oil production.
Debt also affects oil prices. As long as investors have faith that businesses can make money, despite high oil prices, they will continue to borrow to expand their businesses. This additional debt helps drive up demand for goods and services of all kinds, including oil, so oil prices rise. Also, if consumers are able to borrow increasing amounts of money, this also drives up demand for goods that use oil, such as cars. But once the debt bubble bursts, it is easy for oil prices fall very far, very fast, as they did in 2008.
If we look at the 2008 situation, oil limits were very much behind the overall problem, even though most people do not recognize this connection. It was the fact that oil limits eventually led to credit limits that caused the system (including oil prices) to crash as it did. High oil prices led to debt defaults and bank write offs, and eventually led to a huge credit contraction in economies of the developed world. This credit contraction affected not just oil demand, but demand for other energy products as well.
The problems of the 2008 period were never really solved: the lack of growth in world oil supply remains, and this lack of growth in world oil supply continues to hold back world economic growth, particularly in developed countries. We recently have not been feeling the effects as much, because with deficit spending, the problems have largely moved from the private sector to the government sector.
The situation remains a tinderbox, however. The financial situation is propped up by ultra-low interest rates, continued government deficit spending, and Quantitative Easing. In a finite world, debt growth cannot continue indefinitely. But if debt growth permanently stops, and switches to contraction, we would end up in an even worse financial mess than in 2008. In fact, such a change would very likely to would lead to a contraction of “Limits to Growth” proportions.
In this post, I will explain some of these issues further.
The Rise and Fall of Oil Prices in 2008
If we look at world oil production and price between January 1998 and July 2008 on an X-Y graph, we see that as long as oil demand stayed below 71 million barrels a day, oil price stayed low (Figure 3, below). But once demand started to push above that level, oil price started to rise rapidly, with little increase in production. It was as if a brick wall on oil supply had been hit. No matter how much the oil price rose, virtually no more production was available.
If we look at an X-Y graph of the non-OPEC portion of oil supply, we see that the situation was even worse for the non-OPEC portion (Figure 4, below). The amount of oil that could be produced at a given price had actually begun to fall back. While in 2003 and 2004, non-OPEC had been able to produce 42 million barrels a day for only $30 barrel, by 2008, non-OPEC could not reach 42 million barrels a day, no matter how high the price. It looked as though non-OPEC had hit “peak oil” production. Geological limits appeared to have the upper hand.
Fortunately, during this period OPEC was able to raise its production somewhat, in response to higher prices, as illustrated in Figure 5, below. Between July 2007 and July 2008, it was able to raise oil production by 2.1 million barrels a day, in response to a $56 dollar a barrel increase in price in a one-year time-period. (The small increase in response to a huge price rise suggests that OPEC’s spare capacity was not nearly as great as claimed, however.)
What brought about the collapse in oil prices in July 2008? I believe it was ultimately a financial limit that was reached that eventually worked its way to the credit markets. Once the credit markets were affected, individuals and businesses were not able to borrow as much, and it was this lack of credit that cut back demand for many types of products, including oil.
The way this cutback in credit came about was as follows: Oil prices had been rising for a very long time–since about 2003, affecting the inflation rate in food and fuel prices. The Federal Reserve Open Market Committee tried (unsuccessfully) to get oil prices down by raising target interest rates. I describe this in an article published in the journal Energy called, “Oil Supply Limits and the Continuing Financial Crisis,” available here or here. The combination of high oil prices and higher interest rates led to falling housing prices starting in 2006 (big oops for the Federal Reserve), and debt defaults, particularly among the most vulnerable (those with sub-price mortgages). As early as 2007, large banks had large debt write-offs, lowering their appetite for more debt of questionable quality. Total US household mortgage debt reached its maximum point on June 30, 2008, and began to fall the following quarter.
By July 2008, the financial problems of consumers in response to high oil prices and falling housing prices had transferred to other credit markets as well. Revolving credit outstanding (mostly credit card debt), hit a maximum in July 2008, and has not recovered (Figure 7 below). (July 2008 is exactly the same month as oil prices began to fall!) Non-revolving credit, such as auto loans, hit a maximum in the same month.
Credit issues kept getting worse. The Federal takeover of Fannie Mae and Freddie Mac took place in September 2008, as did the bankruptcy of Lehman Brothers. By late 2008, cutbacks in credit had spread to businesses including all sectors of the energy industry. I wrote an article on December 1, 2008, documenting that credit issues led to lower prices not only for oil, but for coal, natural gas, nuclear, and renewables as well.
The reason why a cutback in credit availability is a problem is because it is very difficult to buy a new car or home, or to finance a new business operation, if credit isn’t available. In fact, the amount a business or family can spend depends on the sum of their income during a period, plus the amount of additional debt they take on during that period. If the amount of debt outstanding is going down, then, for example, old credit card debt is being paid down faster than new credit card is being added, and the amount currently spent is lower.
The Federal Government tried to fix the situation by running larger deficits (Figure 8), starting the very next quarter after oil prices hit a peak and started declining.
Oil prices rose again starting in 2009 as demand outside the US, Europe, and Japan continued to grow. By 2011, high oil prices were back. The economies of US, Europe and Japan did not bounce back to the kind of economic growth most expected, because at high oil prices, their products were not competitive in a world marketplace that relied on an energy mix that was slanted more toward coal (which is cheaper), and also offered lower wages.
In 2013, world oil supply is still constrained.
It is easy to get the idea from news reports that everything is rosy, but the story presented to us is painted to look much better than it really is. Production from existing sites is constantly depleting. In order to replace declining production, huge investment must be made in new productive capacity. It is as if oil producers must keep running, just to stay in place.
Cash flow has historically financed much investment. Now we read, Energy Industry Struggling to Generate Free Cash Flow.
Many naive people believe Saudi Arabia’s stories about their “productive capacity” of 12.5 million barrels a day, but their maximum crude and condensate production in recent years has been only been 10,040,000, according to the EIA. Their recent production has been only a little over 9 million barrels a day in recent months, according to OPEC Monthly Oil Market Report.
Iraq is supposed to be the great hope for future oil production, yet it increasingly seems to be stumbling toward civil war.
Russia is now the largest oil producer in the world, with a little over 10.0 million barrels a day of crude and condensate production. According to a Russian analyst,”Gas condensate production is the real driver behind the [recent] growth. Crude oil output is falling and organic growth currently is impossible.”
Admittedly, tight oil production has ramped up quickly. But it is an expensive technology, that requires a high oil price, and lots upfront investment. There is evidence that such oil is concentrated in “sweet spots” and these get tapped out quickly. In North Dakota, the earliest area for US tight oil extraction, rig count is down from 203 at the beginning of June, 2012, to 176 at April 19, 2013, according to Baker Hughes. Lynn Helms, Director of the North Dakota Department of Mineral Services gave this explanation, “Rapidly escalating costs have consumed capital spending budgets faster than many companies anticipated and uncertainty surrounding future federal policies on hydraulic fracturing is impacting capital investment decisions.” Meanwhile, North Dakota oil production has recently been flat–perhaps because of weather; perhaps because of other issues as well.
The ramp-up in US crude oil production amounted to 812,000 barrels a day in 2012–very small in comparison to world crude oil needs. World oil production, shown in Figures 1 and 2, is barely affected. In a world with 7 billion people, most of whom would like vehicles, the amount of oil supply being added is tiny.
In 2013, the financial problems of the United States, the Euro-zone, and Japan haven’t gone away.
Current high oil prices make the big oil-importing countries less competitive. It is hard to compete with countries with lower average fuel costs, thanks a mix that it much heavier on coal, and lighter on oil. A graph of oil consumption shows that oil is increasingly going to the Rest of the World, rather than the US, EU, and Japan (Figure 10).
The countries that see little growth in oil consumption are the same ones struggling with low economic growth. Low economic growth makes debt very difficult to repay. Governments are tempted to add more debt, to try to fix their problems.
Tackling government debt problems in 2013 tends to bring recession back.
The big problem when oil prices rise is that workers’ discretionary income is squeezed, because their wages don’t rise at the same time. This problem can somewhat be offset by deficit spending of governments for programs to help the unemployed, and for stimulus.
Once taxes are raised, or benefits are cut, the old problem of lower discretionary income for workers reappears. Thus, the recession that governments so cleverly found a way around previously, re-emerges.
In 2005, there was a very sharp impact to oil prices when high oil prices indirectly affected the credit system. This time, a big issue is rising government taxes and lower benefits. These are staggered in their implementation, so the effect feeds in more slowly. Greece and Spain started their cut-backs early. The US raised Social Security taxes by 2% of wages, as of January 1, 2013. Later it added sequester cuts. All of these effects feed in slowly, and add up.
With respect to debt, in 2013 we are rapidly approaching the time when this time truly is different.
There has been a great deal in the press about a mistake Rienhart and Rogoff recently made in their book, This Time Is Different. I think Rienhart and Rogoff, as well as economists in general, have missed an issue that is much more basic: In a finite world, debt, like anything else, cannot keep growing. The economy (whether economists realize it or not) depends on physical resources, and these are in limited supply. One piece of evidence with respect to the limited supply of oil is the fact that the cost of its extraction keeps rising. This means that fewer resources are available to be used for making other goods and services.
I show in my paper, Oil Supply Limits and the Continuing Financial Crisis, that lower economic growth rates make debt harder to repay. Reinhart and Rogoff seem to confirm this relationship works in practice. In their NBER paper, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” they make the observation, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”(They did not seem to understand why, though!)
The 2007-2009 recession partially brought the level of debt down, outside the government sector. Government debt has been ramping up rapidly because tax revenues are down and benefits are up (Figure 8).
Government debt helps take the place of “missing” debt from other sectors (at least in theory). Now government debt is above acceptable levels. US debt is around 100% of GDP, and growing each quarter.
Without rapid economic growth, only a small portion of the debt that remains can be repaid. If increases in taxes/cutback in benefits leave more without work, a new round of debt defaults can be expected. Student loans are particularly at risk. Business loans maybe a problem as well, especially in discretionary industries. Government debt is likely to be a problem, especially for states and municipalities. Banks may again have financial problems, especially if they have exposure to debt from other countries, or student loans.
I am not certain what will happen to the huge amount of US government debt, if Quantitative Easing ever stops. The same might be said of the debt of all of the other countries doing quantitative easing. Who will buy the debt? And at what interest rate? If the interest rate rises, there will be a huge problem, because suddenly loans of all types will have higher interest rates. Governments will need higher taxes yet, to pay their debts. It will be hard to sell cars with higher interest rates on debt. Home prices will likely drop, because fewer people can afford to buy homes with higher interest rates.
I showed in Reaching Debt Limits what a big difference increases in household debt can make to per capita income (Figure 12).
If debt starts long-term contraction, we will truly have a mess on our hands. Businesses will have a hard time investing. Individuals will have a hard time buying big-ticket items, like cars, furniture, and houses. Demand for all types of goods and services will fall. I showed in my post Why Malthus Got His Forecast Wrong that increasing debt was what allowed rapid growth in fossil fuel use. If debt stops growing and starts shrinking, we will get to see the reverse of this phenomenon.
What is Ahead?
Lower oil prices indicate that demand is declining. (The cost of extraction is not lower!) Lower oil demand seems to be related to poorer earnings reports for the first quarter of 2013, which in turn is at least partly related to the increase in US Social Security taxes withheld, starting January 1, 2013. Nothing will necessarily happen quickly, but by next quarter’s earnings reports, some of the “sequester” cuts will be added to the cuts. Businesses with poor earnings are likely to lay off workers, and those workers will file for unemployment benefits. Gradually, we will see increasing evidence of recession.
It is not clear that this time will necessarily lead to the “all time” switch to long-term debt contraction, but it will bring us one step closer, at least in US, and probably in Europe and Japan as well. Oil supply may not drop very much, very quickly. If we are lucky, demand will bounce back and bring prices back up, as in 2009-2010. But with all of the debt problems around the world, it is possible that a contagion will begin, and defaults in one country will spread to other countries. This is what is truly frightening.
Off the keyboard of RE
Published on the Doomstead Diner on April 23, 2013
Discuss this article at the Energy Table inside the Diner
Of all the charts and graphs which can be pulled up off the net to demonstrate that the Peak Oil corner has been turned, none do it more effectively than the Total FSoA Gasoline Sales History chart published by the EIA at the top of this article.
Retail Gasoline sales to J6P essentially fell off a cliff beginning in 2005, actually well before the collapse of Bear Stearns and Lehman Brothers and the implosion of the Subprime Mortgage Market, all today seen as watershed moments in the ongoing collapse of Industrial Civilization. Today in 2013, retail gasoline sales are 50%, HALF what they were at the Peak of Happy Motoring in 2005. That is roughly 8 years of time, an average rate of decline of around 6% per year. Assuming no other trend line changes, retail gasoline demand in 2021 would hit ZERO. This all while total population size (if you believe the stats) continues to INCREASE, which can only mean a lower per capita usage of energy through this period.
It may not take that long of course if the Dollar crashes, or it might take longer if some sort of “plateau” effect takes place as portions of the world economy are triaged off the Oil Jones, but there is no evidence to support the idea said demand will ever Rebound, or that if it did rebound that Gasoline could be produced in sufficient quantity at cheap enough price to supply that demand.
Oil production at all the main “Legacy” fields such as the North Slope here in Alaska is in decline, with the persistent Myth promulgated in the MSM that Horizontal Drilling and Fracking will produce enough to replace the lost production from the conventional Oil fields. If that were really true, the Oil companies would have been ramping up this production to keep the demand up and keep the game going, but the fact of the matter is that said companies are shutting down Refineries here and in Europe because the demand isn’t there to justify their existence. The only reason they can still show a “profit” is because the price is so high, and the few people with money/credit left are Bankrupting themselves to keep buying it. Eventually there won’t be enough of them left either to keep 1/2 the number of refineries open, at which point it shrinks again to 1/4. Then 1/8 etc until finally there isn’t enough tax revenue coming in to keep maintaining the roads and bridges, and Open Gas Stations can only be found in a few small Ringfenced local economies. No more Happy Motoring for ANYBODY after that, drive a few miles outside a Major Metro there will be no Open Gas Station around to fill up your Jag or Maserati, even if you are a Filthy Rich Pigman.
The other Myth promulgated is that besides Fracking producing enough liquid fuels to replace the lost production from fields like the North Slope and Ghanwar, Happy Motoring will transition off the ICE and move to EVs, battery powered vehicles running on Electricity. The problems with that idea are abundant, overall the battery technology is itself very dependent on fossil fuels for extraction and refinement of the Rare Earth Metals used in the more durable rechargeables, and the Electric Grid as it stands is decaying and having major issues with Demand Destruction as well. As more McMansions get abandoned because the ex-Suburbanites can’t pay the Mortgage, the revenue stream to the Local Power Company drops off the map. They keep cutting back on Staff, maintenance is deferred, breakdowns and blackouts become more common. What do you DO if you have driven your EV to the next county over to visit Granma and her Lights are OUT, so you can’t charge up the Prius to drive back home? Are you going to wait for the Solar PV Panel on the Roof of said Prius to recharge the batteries? Maybe with REALLY sunny days in a Week or Two the PV panels could generate enough electricity to get you halfway home.
It’s pretty obvious why there is so much Demand Destruction in Gasoline consumption now here in the FSoA, one only has to look at the UE figures and the size of the Employed workforce to see the reason for it. Although the BLS persistently massages the UE figures by dropping people off the stats, the actual number of working age people gainfully employed continues to drop, all while the total population continues to increase. Although we do use copious amounts of gasoline to drive around willy-nilly for no good reason, in REALITY the major use of the automobile is to get J6P to and fro his workplace in the Morning and Evening Rush Hour. The Billions of Gallons of Gas wasted by J6P sitting in Rush Hour Traffic Jams for the last 50 years here in the FSoA is impossible to calculate, but those gallons were a HUGE portion of the demand for Gasoline in the Car based economy developed here in the post-WWII era. Fewer people employed means fewer people driving to work, less gas consumed. Old Retired Boomers & Silents don’t usually consume that much gas, besides a few who cruise their Bugout Machines around the country to visit Grandkids. They mostly sit home these days and get into arguments on Internet Message Boards and Blogs like the Doomstead Diner. LOL. Consumptive still of Electricity, but it doesn’t use much Gas.
The effect is of course synergistic, since so much of the economy is based on people driving around willy-nilly, as fewer people do this, more jobs are lost. Now it’s not just Retired Silents hanging out at home getting into arguments on the Internet, UE GenXers and even Millenials are doing it too! Nobody has REASON to leave the house, they don’t have JOBS to go to! The only reason to leave is to go to Walmart to pick up Food for the Week, or even MONTH if you really wanna conserve on Gas usage. In most cases also, people are not SOOOO far from their local Walmart they can’t ride a bike pulling a trailer to pick up Groceries using their JPMC SNAP cards either. That crew represents near 50M people in the FSoA now, close to 15% of the whole population NOT using any gasoline at all!
Right beneath everyone’s NOSE, the effects of Peak Oil have been ongoing in earnest since 2005. Really of course they began long before that in the late 60s and 70s, evidenced by the Political Turmoil in those years as well as the Oil Embargos by OPEC, not to mention the closing of the Gold Window by Nixon in 1971 and the ever increasing Debt load taken on in the intervening years to mask the effects, at least here in the FSoA.
Now however since the problem has gone GLOBAL rather than LOCAL, the old tricks of Masking resource depletion with Debt Issuance is no longer working too well. There are no “Credit Worthy” customers anywhere on the whole GLOBE left now, and there are no SOLVENT Banks or Sovereigns left who can lend to anybody either! Anybody who thinks the Chinese or Germans are really solvent needs a wake up call, neither of them are. They just have positive account balances measured in debt other Insolvent countries “owe” them. Will the FSoA EVER pay back the $2T in USTs held by the Chinese? With WHAT? They don’t even need J6P as SLAVES, they got 1.3B of their own Slaves to Feed & Clothe here.
So inexorably and in rather RAPID time here we see the economic system collapsing in tandem with the Energy extraction and Distribuition system, which really TOOK OFF in the late 1800s with the development of the Railroads and then Standard Oil under the aegis of John D. Rockefeller. EVERYTHING in the Industrial Economy since that time was based on a seemingly ENDLESS supply of Cheap Energy in 1880, but what in fact was a quite LIMITED supply which enabled a huge Population EXPLOSION of Homo Sapiens, which just ended up CONSUMING said energy all that much faster. I remember reading as a 2nd Grader in Brasil out of a textbook that we had a “500 Year” supply of Oil, which perhaps we did at the population size and per capita consumption of the era, but the Exponential Function took care of that problem in 50 years. It is plain OBVIOUS as a Pimple on your Nose that we are running short on the Cheap Energy necessary to run the Industrial Lifestyle. Every last economy tied to this system is in some stage of Collapse now, barely 8 years since Gasoline demand started to Crater here in the FSoA. All due respect to John Michael Greer, that is NOT a “Slow Catabolic Collapse”, it is a fucking HEAD ON COLLISION with REALITY.
What can you DO about this problem? It is not going away here, and Goobermint cannot really solve the problem, at least on a Global Basis they can’t. Locally it may be solved for a while by the Big Ass Military stealing resources from some places to keep Happy Motoring going here in the FSoA for another day, week, month or year, but that strategy gets ever less effective all the time as the Costs for running such Wars grow ever Greater, while the resources captured are ever less productive. When the War Machine cannot feed ITSELF, it collapses on the Grand Scale and this is still a bit down the line, though perhaps not as far as some people believe.
The best you can do is to find others who understand these problems and who see the Writing on the Wall, and plan together with them a new Life in the Post Industrial Economy, such as it may evolve here in the future. Here on the Diner, this is what we DO on a daily basis as we hash out TEOTWAWKI. Such discussions formed the Genesis of our SUN Project, for Sustaining Universal Needs, and we invite all others to join with us as we plan for a BETTER TOMORROW. Only through Cooperation and Selflessness can anyone make it through the shitstorm coming down the pipe here. NOBODY will survive going it alone, not even up here in the Bush of Alaska, not in the Yukon Territory either. Such strategies only might preserve your life for a bit, they won’t resolve the problem of making the society of Homo Sapiens compatible with the rest of Life on Earth. It is up to us to remake ourselves to be in harmony with the Spaceship Earth, and to do this TOGETHER. That is what it MEANS to be a DINER ON SPACESHIP EARTH.
THIS IS ALL WE HAVE. WE MAKE IT WORK, OR WE GO THE WAY OF THE DINOSAUR.
Off the keyboard of Jason Heppenstall
Published on 22 Billion Energy Slaves on April 13, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Thatcher: The Oily Lady
There has been an awful lot of debate raging since former British prime minister Margaret Thatcher died last week. And like many debates that raise the emotional tempo this one is crystalizing nicely into two competing camps, namely the camp that says she ‘saved’ the UK from decline and the camp that says she left it a scorched moral wasteland where only the greedy and the bigoted flourish.
Off the keyboard of Gail Tverberg
Published on Our Finite World on April 11, 2013
Discuss this article at the Energy Table inside the Diner
We in the United States, the Euro-zone, and Japan are already past peak oil demand. Oil demand has to do with how much oil we can afford. Many of the developed nations are not able to outbid the developing nations when it comes to the world’s limited oil supply. A chart of oil consumption shows that oil consumption peaked for the combination of the United States, EU-27, and Japan in 2005 (Figure 1).
We can see an even more pronounced version of this pattern if we look at the oil consumption of the five countries known as the PIIGS in Europe: Portugal, Italy, Ireland, Greece, and Spain. All of these countries have had serious declines in oil consumption in recent years, as high oil prices have impeded their economies.
Oil consumption for the PIIGS in total hit its highest level in 2004, before the decline began. Peak oil consumption by country varied a bit: Portugal, 2002; Italy, declining since 1995; Ireland, peak in 2007; Spain, peak in 2007; Greece, peak in 2006.
Peak demand is very much related to jobs. Peak oil demand occurs when a country is not competitive in the world market-place, and because of this, loses industry and jobs. One reason this happens is because the country’s energy cost structure is not competitive in the world market-place. With the run-up in oil prices starting about 2003, oil is by far the most expensive of the traditional energy sources we have available today. Countries that use a large percentage of oil in their energy mix can be expected to have a hard time competing, because of oil’s higher cost.
Anything else that is done which raises costs for businesses will also have an impact. This would include “carbon taxes,” if competitors do not have them, and if there is no tariff on imported goods to reflect carbon inputs.
High-cost renewables can also have an adverse impact, regardless of whether the cost is borne by businesses, consumers or the government.
- If the cost is borne by businesses, those businesses must raise their prices to keep the same profit margins, and because of this become less competitive.
- If the cost is borne by consumers, those consumers will cut back on discretionary expenditures, in order to balance their budgets. This is likely to mean a cutback in demand for discretionary goods by local consumers.
- If the government bears the cost, it still must pass the cost back to businesses or consumers, and thus reduce competitiveness because of higher tax costs.
This importance of competitiveness holds, no matter how worthy a given approach is. If costs were “externalized” before, and are now borne by the local system, it makes the local system less competitive. For example, putting in proper pollution controls will make local industry less competitive, if the competition is Chinese industry, acting without such controls.
One issue in competitiveness is wage levels. Wages in turn are related to standards of living. In a global economy, countries with higher wage levels for workers, and higher benefit levels for workers (such as health insurance and pensions) will be at a competitive disadvantage. Countries that use coal as their prime source of energy will be at an advantage, because workers’ wages will tend to “go farther” in heating their homes and buying electricity.
Countries that are warm in the winter will be at a competitive advantage, because homes don’t have to be built as sturdily, and don’t have to be heated in winter. Workers can commute by bicycle even in the coldest weather.
Energy usage (all types combined, not just oil) is far higher in cold countries than it is in warm wet countries. Countries that extract oil also tend to be high users of energy.
The difference in per capita energy usage among the various countries is truly astounding. For example, Bangladesh’s per capita energy consumption is slightly less than 2% of US energy consumption. This difference in energy consumption means that salaries can be much lower, and thus products made in Bangladesh can be much cheaper, than those made in the United States. This is part of our competitiveness problem, even apart from the energy mix problem mentioned earlier.
In my view, globalization brought on many of our current problems. Perhaps globalization could not be avoided, but we should have foreseen the problems. We could have put tariffs in place to make a more level playing field. See my post, Twelve Reasons Why Globalization is a Huge Problem.
Inadequate world oil supply isn’t exactly the problem. The issue is far more that the price of oil extraction is rising. The price of oil extraction is rising for a variety of reasons, an important one being that we extracted the easy to extract oil first, and what is left is more expensive to extract. Another issue is that oil exporters now have large populations that need to be kept fed and clothed, so they don’t revolt. This is a separate issue, that raises costs, even above the direct cost of extraction. There is no reason to believe that these costs will level off or fall, no matter how much oil the US produces using high-priced methods, such as fracking.
When oil prices rise, wages don’t rise at the same time. In fact, in the US there is evidence that wages stagnate when oil prices are high, partly because fewer are employed, and partly because the wages of those employed flatten.
The countries that are most affected by rising oil prices are the countries that use oil to the greatest extent in their mix of energy products. In Figure 3, that would be the PIIGS. The rest of the US, EU-27, and Japan would be next in line.
When oil prices rise, consumers need to balance their budgets. The price of oil products and food rises, so they cut back on discretionary items. Their smaller purchases of discretionary goods and services means that workers in discretionary sectors get laid off.
Businesses find that the price of oil used in manufacturing and shipping their products has risen. If they raise the sales price of the goods to reflect their higher costs, it means that fewer people can afford their products. This too, leads to cutbacks in sales, and layoffs of workers. Sometimes businesses decide to outsource production to a cheaper country, or use more automation, as a way of mitigating the cost increases that higher oil prices add, but automation or outsourcing also tends to reduce US wages.
The net effect of all of these changes is that there are fewer workers with jobs in the countries with high oil usage. This reduces the demand for oil in the high oil usage countries, both from business owners making goods and from the consumers who might use gasoline to drive their cars. This price mechanism is part of what leads to the oil consumption shift we see in Figure 1.
We are dealing with is close to a zero-sum game, when it comes to oil supply. The amount of oil that is extracted from the ground is almost constant (very slightly increasing for the world in total). If prices stayed at the low level they were in the past (say $20 barrel), there would not be enough to go around. Instead, higher prices redistribute oil to countries that can use it manufacture goods at low overall cost. Workers in factories making these goods are then able to afford to buy goods that use oil, such as a motor scooter.
Citigroup recently released a report titled, “Global Oil Demand Growth, – the End is Nigh.” Its subtitle says,
The substitution of natural gas for oil combined with increasing fuel economy means oil demand is approaching a tipping point.
This is out-and-out baloney, for a number of reasons:
1. There are way too many of “them” compared to the number of “us,” for energy efficiency to make even a dent in our problem.
2. When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.
3. Substituting natural gas for oil still leaves cost levels for the US, Europe, and Japan very high, compared to those for the rest of the world, where little energy is used.
4. There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers until they reach a different limit of some sort.
Let’s look at these issues separately.
There are way too many of “them” relative to us, for energy efficiency to even make a dent in our problem.
If we look at world population, this is what we see:
Using a ruler, we could probably make fairly reasonable projections of future population for each of these groups.
If we look at per capita oil consumption for the two groups separately, there is a huge disparity:
Per capita oil consumption for the EU, US, and Japan group peaked in 1973–a very long time ago. In recent years, it has been drifting down fairly rapidly, just to keep up with a slight per capita rise in oil consumption of the Rest of the World. Even with recent changes, per capita oil consumption of the EU, US and Japan group is more than 4.5 times that of the rest of the world.
If cars were made more efficient, more people could afford them. The market for cars is unbelievably huge, compared to today’s market, if costs could be brought down. Furthermore, gasoline accounts for less than half of US oil consumption. Even if efficiency were improved to allow cars to use half as much fuel, it would save a little less than one-fourth of current oil consumption. How far would this oil go in satisfying the needs of 6 billion other people–and growing every year?
When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.
If we look at per capita oil consumption in the US, split between gasoline and other oil products, we see that the big drop in oil consumption came from the drop in other oil products–that is the commercial and industrial part of US oil consumption.
The amount of fuel used for gasoline has stayed in the 10 to 12 barrels a year per capita band, since 1970, in spite of huge improvements in vehicle efficiency.
I recently wrote a post called Why is US Oil Consumption Lower? Better Gasoline Mileage? In it, I looked at the decrease in US oil consumption between 2005 and 2012. I concluded that the majority of the decrease in consumption was due to a drop in commercial use. Only 7% was due to an improvement in miles per gallon for gasoline powered vehicles.
Substituting natural gas for oil still leaves the US (as well as Europe and Japan) very high priced, compared to the rest of the world, that doesn’t use much energy.
Living in the US, Europe or Japan, it is hard to get an idea of the cost structure of the rest of the world. We are so far above the cost structure of the rest of the world that substituting natural gas for oil would do little to fix the situation.
We can also debate how much substitution of natural gas will actually do, and in what timeframe. In the US, natural gas is temporarily very cheap. But it costs more to extract shale gas than the market currently pays, in many areas. Also, a recently University of Texas study showed that Barnett Shale was past peak production, if prices do not rise.
There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers, until they reach a different limit of some sort.
When a country is not competitive, it is not just oil consumption that drops, but consumption of other energy products as well. If we look at the per capita energy consumption of the US, EU-27, and Japan combined, we see that non-oil energy consumption per capita reached its peak in 2004, and is now declining (Figure 10, below). If consumers are too poor to buy oil products, they are also too poor to buy products made with other types of energy.
The Rest of the World followed a very different pattern of energy consumption. Non-oil consumption soared, on a per capita basis. Oil consumption also increased on a per capita basis.
More detailed data shows that the big increase in non-oil consumption was a huge rise in coal consumption, after China was admitted to the World Trade Organization in December 2001.
How does peak oil demand work out in the end?
I would argue that lack of competitiveness in world markets is a limit that the US, EU-27 and Japan are hitting right now, but at slightly different rates. EU-27 now seems to be ahead in the race to the bottom, partly because its combined currency. I wrote a post in March 2012 called Why High Oil Prices Are Now Affecting Europe More Than the US, explaining the situation.
It seems to me, though, that a big piece of the problem with lack of competitiveness gets transferred to the governments of the affected countries. This happens because collection of tax revenue lags, because not enough people are working, and those who are working are earning lower wages. At the same time increased payouts are needed to stimulate the economy, and to provide benefits to the many without jobs.
Governments increase their debt to meet the revenue shortfall. They reduce interest rates to record-low levels, to stimulate the economy. They also use Quantitative Easing, or “printing money” to try to lower long-term interest rates, and to try to make their exports more competitive. Unfortunately, these actions do not solve the basic structural problem of high and rising world oil prices, and the fact that these rising prices make their economies increasingly less competitive in the world marketplace.
One possible way I see of the current situation working out is that the total energy consumption (including all types of energy products, not just oil) of the EU, US and Japan will continue to fall, as high-priced oil continues to erode our competitive position in the world marketplace.
The slope of the decline is based on the type of decline experienced by the Former Soviet Union, in the years immediately following its collapse. This pattern might reflect a combination of different patterns for different countries. Greece and Spain, for example might continue to fall quite quickly. The US might lag the EU in the speed at which problems take place. The likely path seems downward, because any action taken to fix the government gap between income and expense can be expected to have a recessionary impact, and thus have an adverse impact on energy consumption.
The Rest of the World is now growing rapidly, but at some point they will start reaching limits. One of these limits will be lack of an export market. Another will be lack of spare parts, because businesses in the US, Europe and Japan are failing for financial reasons. Some of these limits will relate to pollution and lack of fresh water. The effect of these limits will also be to raise costs. For example, a shortage of water can be worked around through desalination, but this raises costs. Lack of spare parts can be worked around by building a new plant to make the spare part. Pollution problems can be mitigated by pollution controls, but these add costs. These higher costs, when passed on to consumers will also lead to a cutback in demand for discretionary goods, and the same kinds of problems experienced in oil exporting nations. Thus, these countries will also have “Peak Demand” problems, because of rising prices, related to limits they are reaching.
I don’t know exactly how soon the Rest of the World will hit limits, but given the interconnectedness of the world system, it would seem to be within the next few years. Figure 13 shows one estimate of how this may occur.
Here again, individual countries may do better than others. Countries with little connectedness to the world system (for example, countries in central Africa) may have fewer problems than others. Of course, their energy consumption (of the type measured by the EIA or BP) is very low now. They may use cow dung and fallen branches for fuel, but these are not counted in international data.
Figure 14, below, shows the sum of the amounts from Figures 12 and 13. Thus, it gives one estimate of future world energy consumption based on Peak Demand considerations.
If there is a silver lining to all of this, it is that world CO2 emissions are likely to start falling quite rapidly, because of Peak Oil Demand. World CO2 emissions could quite possibly drop below 20% of current levels before 2050. In the scenario I show, energy consumption drops faster than forecasts such as those put out by the Energy Watch Group. Such forecasts do not take into account financial considerations, so are likely overstated.
The downside of Peak Oil Demand is that the world we live in will be very much changed. Population levels will likely drop, indirectly because of serious recession, job loss, and cutbacks in government benefits. The financial system will need to be completely revised, because debt financing will make sense much less often than today. In fact, in a shrinking world economy, money can no longer act as a store of value. There no doubt will be some people who survive and prosper, but their lives will likely be very different from what they are today.
Off the keyboard of Jason Heppenstall
Published on 22 Billion Energy Slaves on April 1, 2013
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- Global liquids (excluding ethanol etc.) plateauing and supply remaining constrained despite growing demand
- Which in turn led to a huge hike in oil prices that has stayed with us
- Thus causing a permanent state of close to zero growth or shrinkage in the major industrialised nations
- And a shortage of food in much of the Middle East, leading to riots and revolutions
- Followed by a desperate scramble for unconventional fossil fuels, such as shale gas, tight oil and deep sea oil
Off the keyboard of Gail Tverberg
Published on Our Finite World on March11,2013
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A friend asked me to put together a presentation on our energy predicament. I am not certain all of the charts in this post will go into it, but I thought others might be interested in a not-so-difficult version of the story of the energy predicament we are reaching.
My friend also asked what characteristics a new fuel would need to have to solve our energy predicament. Because of this, I have included a section at the end on this subject, rather than the traditional, “How do we respond?” section. Given the timing involved, and the combination of limits we are reaching, it is not clear that a fuel suitable for mitigation is really feasible, however.
Energy makes the world go around
Energy literally makes the world turn on its axis and rotate around the sun.
Energy is what allows us to transform a set of raw materials into a finished product.
Energy is also what allows an us to transport goods (or ourselves) from one location to another. Services of any type require energy–for example, energy to light an office building, energy to create a computer, and human energy to make the computer operate. Without energy of many types, we wouldn’t have an economy.
Increased energy use is associated with increasing prosperity.
Energy use and oil use have risen more or less in tandem with GDP increases. Oil is expensive and in short supply, so its increases have tended to be somewhat smaller than total energy increases. This happens because businesses are constantly seeking ways to substitute away from oil use.
China is an example of a country with very high growth in energy use. China’s energy use started growing rapidly immediately after it joined the World Trade Organization in December 2001. China’s energy use is mostly coal.
European countries with bank bailouts show declining oil consumption.
Increased fuel use is also associated with rising population growth.
On Figure 6 above, the fuel use and population growth rise very rapidly, after fossil fuels were added about 1800. In fact, the lines overlay each other, so it is not possible to see both. Adding fossil fuels allowed much better food supply, sanitation, and medical care, all leading to huge population growth.
World population is still growing rapidly, especially outside of the developed countries. The countries with the most population growth (blue) are only now beginning to obtain goods and services that the developed world takes for granted, like better medical services, cars, and electricity for every home. Their fuel use is growing rapidly.
There are huge differences in kinds of energy.
This chart illustrates a few of the kinds of energy available. Each has its particular uses. Businesses will substitute a cheaper source of energy whenever they can. Businesses especially seek ways to substitute away from human energy, since it is the most expensive type. One approach is automation. This substitutes machines (running on electricity or oil) for human labor. Another approach is outsourcing the manufacturing of goods to countries that have lower-cost labor.
One factor that limits fuel switching from oil to electricity is the amount of machinery currently using oil. Robert Hirsch says
Worldwide machinery operating on oil is valued at $50 to $100 trillion (Automobiles, airplanes, tractors, trucks, ships, buses, etc.)
There is also a huge investment in roads, bridges, refineries, and pipelines. Past transitions have taken more than 30 years, because it usually makes economic sense to wait for current machinery to reach the end of its economic life before replacing it.
LIMITS WE ARE REACHING
Unfortunately, we live in a finite world. At some point we start reaching limits.
One limit we are reaching is how many people the world will support, without unduly affecting other species. There are now over 7 billion humans on earth, compared to fewer than 200,000 gorillas and chimpanzees, which are also primates.
The natural order is set up so that each species–including humans–reproduces in far greater numbers than is needed to replace itself. Natural selection chooses which of the many organisms will survive. With the benefit of fossil fuel energy, humans (as well as their cows, pigs, goats, chickens, dogs and cats) have been able to survive in far greater numbers than other species. In fact, paleobiologists tell us that the Sixth Mass Extinction has begun, thanks to humans. At some point, interdependencies are disturbed, and we can expect more population collapses.
Another limit is pollution of many types. This image is of air pollution, but there is also water pollution and CO2 pollution. Even what we think of as renewable energy often poses pollution challenges. For example, battery recycling/disposal can pose pollution challenges. Mining of rare earth minerals, used in electric cars, wind turbines, and many high tech devices is often cited as being very polluting in China.
Another limit is declining soil quality. In the natural order, soil is not disturbed by plowing, and the nutrients animals use are recycled back into the soil, after they use them.
As we disturb this natural order, we find erosion reduces top-soil depth. The amount of organic matter in the soil is reduced, making crops less drought-resistant. Nutrients such as phosphorous and potassium are often depleted, and need to be added as soil amendments, requiring fossil fuel transport. Soils often suffer from salinity related to irrigation. Nitrogen levels also become depleted.
It is possible to mitigate these problems using fossil fuels. However, we discover that our ability to feed 7 billion people becomes increasingly dependent on continued fossil fuel use. If we increase biofuel production, this tends to make the situation worse. Techniques such as regrading of hills to improve rainwater absorption can help the situation, but this too requires energy.
Another limit is imposed by the Second Law of Thermodynamics. Entropy happens. Things fall apart. All of the “stuff” humans have produced (including roads, bridges, pipelines, electricity transmission equipment, cars, and computers) keeps degrading, and eventually needs to be replaced. If we intend to continue to have roads, we need to keep repairing them and building new ones. Using current technology, this requires an increasing amount of fossil fuel energy.
Another limit arises because we extract the cheapest, easiest to extract resources first. (Figure 11) As a result, at some point, the cost of extraction rises, because the cheap resources have already been depleted. Outside observers don’t necessarily notice a difference as the quality of resources drops over time; it always looks as if there is an increasing quantity of reserves available as we move down the resource triangle.
Unfortunately, the apparently increased resources are not really comparable to what was already extracted. The resources lower down in the resource triangle, such as oil and gas that requires “fracking” to extract, require the use of increased energy resources. The speed of extraction is often remarkably slower–light oil flows like milk, while heavy oil can be the consistency of peanut butter. Extracting oil using fracking has been compared to getting oil from the pores of a concrete driveway.
Another example is fresh water. Initially we take it from a local stream, or from a shallow well, where little energy (and cost) is required to obtain it. As this resource depletes, we seek other sources–deeper wells, or water piped from afar, or desalination. All of these approaches use much more energy. If the world’s total energy supply is not growing rapidly, using more energy for water supply is likely to mean less energy is available for other uses. I discuss this issue in Our Investment Sinkhole Problem.
An example of how resource depletion can work is illustrated with US oil supply. US oil production (blue) suddenly began to decline in 1970, despite the oil industry’s best efforts to extract more. By scrambling around quickly, it was possible to add more oil production from Alaska (red), but this soon declined as well.
It wasn’t until oil prices rose in the late 2000s that it made economic sense to use technology which had been developed much earlier to extract tight oil. Tight oil is expensive oil to extract. How much production will rise from current levels depends to a significant extent on how much oil prices are able to increase in the future. The higher that oil prices rise, the greater the recessionary impact that can be expected, but the more oil that can be produced.
World oil supply is now about level, except for the small increase added by US and Canadian oil supply. (Figure 13) One concern with world oil supply as flat as it is, is that at some point, world oil supply will suddenly take a nosedive, just as US oil production did.
Another concern is that the developing world will get the majority of the world oil supply, leaving little for historically large users (Figure 13). US, Europe, and Japan experienced severe recession in the 2007-2009 period, and still are seeing economic headwinds, at the same time that countries that were able to obtain the oil continued to experience economic growth.
I think of our current situation as being like that of a host who gives a party for 10 people. There is enough food to go around, but just barely. The host decides to invite another 50 people to the party. Surprise! Suddenly there is a shortfall. Globalization has its downside!
A third concern is that oil prices will disrupt economies of oil importing nations. Oil prices rose sharply after US oil production dropped in the 1970s. They began rising rapidly again about 2003, as the world became more globalized. In addition, oil resources became increasingly expensive to extract. There is little possibility now that oil prices can decline for long without a drop in oil production.
Oil price spikes lead to recession. Economist James Hamilton has shown that ten out of the most recent 11 US recession were associated with oil price spikes. When oil prices rise, food prices tend to rise at the same time. Consumers cut back on discretionary spending, because fuel for commuting and the price of food are necessities. This cutback in spending leads to layoffs in the discretionary sector and recession.
High oil prices also seem to lead to depressed wages. (Figure 15. Here, I am dividing total wages for all non-government employees or by the total US population, and then taking this average wage, and adjusting if for inflation.) This is the effect we would expect, if the major substitution caused by high oil prices is a loss of human employment. This shift tends to occur because human energy is very expensive, and because wages tend to be a big share of a company’s costs.
Figure 16 shows an illustration of the effect that happens. If oil prices rise, the cost of making goods and transporting them to their destination rises. If the sales prices of goods doesn’t rise, a business’ profits will shrink. (Before and after the oil price rise shown in black box). The company will consider low profits unacceptable.
The company has several ways of fixing its lower profit. Wages tend to be one of the company’s largest costs, so these are a likely target. One approach is automation. This may slightly raise electricity costs, but it will lower wage costs, and raise profits. Another approach is outsourcing production to a low-cost country like China. This will lower wage costs and probably other costs, leading to higher profit for the company.
A third approach is what I call “making a smaller batch.” It involves closing unprofitable offices, or flying fewer jets, so that the quantity produced matches the new lower demand for the product, given the higher required sales’ price, now that the oil price is higher. Any of these approaches reduces the amount of wages paid to US employees.
HOW DOES THIS CONCLUDE?
A person could argue that any of the limits could eventually bring the system down. The pressure on wages is particularly a problem, since a further rise in oil prices would seem likely to lead to more job loss, and further pressure on wages of those who keep their jobs. The large amount of debt outstanding is another issue of concern.
My personal view is that the most likely scenario is that the various limits will work together to produce secondary effects, and it is the secondary effects that are likely to bring society down. These secondary effects are Financial (wealth disparity, debt defaults, inability to collect enough taxes), Political (not enough taxes, uprising by the lower classes, government collapse) and Disease Susceptibility (inadequate food, medicine, and sanitation due to inadequate wages and government cutbacks).
These effects are similar to ones experienced in the past when economies started reaching resource limits, based on the research of Peter Turchin and Sergey Nefedov reported in the book Secular Cycles. In the past, societies seemed to go through about 300 year cycles. The first was Growth, lasting over 100 years. The second was Stagflation, lasting perhaps 50 or 60 years. This third was Crisis, with population decline, lasting up to 50 years (but perhaps a much shorter time). The fourth was Depression/ Intercycle.
If we estimate that today’s complete cycle started in 1800 with the use of coal, and the Stagflation period started about 1970 with the decline in US oil production, then we now seem to be nearing the Crisis stage. Of course, each situation is different. This is the first time we are reaching resource limits on a world-wide basis.
There is considerable evidence that we are already reaching the situation where governments are encountering financial distress of the type shown in Figure 17. With wages being depressing in recent years (Figure 15), it is difficult to collect as much taxes as required. At the same time, expenses are elevated to handle the many issues that arise (such as payments to the unemployed, subsidies for alternative energy, and the higher costs of road repairs due to higher asphalt costs). The big gap between revenue and expense makes it hard to fix our current financial predicament, and increases the likelihood of political problems.
REQUIREMENTS FOR A FUEL TO FIX OUR CURRENT PREDICAMENT
Is it possible to fix our current situation? To really fix the situation, we would need to reproduce the situation we had in the post-World War II period–when energy was cheap, and growing very rapidly. Economists have observed that historically, the cost of energy was very low. Given the importance of energy, its low price was an important feature, not a bug. It is what allowed society to have plenty of energy for growth, at minimal cost.
In order for a new alternative fuel to truly fix our current predicament, it would need the following characteristics:
- Abundant – Available in huge quantities, to meet society’s ever-growing needs.
- Direct match for current oil or electricity – Needed to avoid the huge cost of building new infrastructure. Electricity needs to be non-intermittent, to avoid the cost of mitigating intermittency. We also need an oil substitute. This oil substitute theoretically might be generated using electricity to combine carbon dioxide and water to create a liquid fuel. Such substitution would require time and investment, however.
- Non-polluting – No carbon dioxide or air and water pollution.
- Inexpensive – Ideally no more than $20 or $30 barrel for oil equivalent; 4 cents/kWh electricity. Figure 15 shows wage growth has historically occurred primarily below when oil was below $30 barrel.
- Big energy gain in the process, since it is additional energy that society really needs – This generally goes with low price.
- Uses resources very sparingly, since these are depleting.
- Available now or very soon
- Self-financing – Ideally through boot-strapping–that is, generating its own cash flow for future investment because of very favorable economics.
It is interesting that when M. King Hubbert originally made his forecast of the decline of fossil fuels, he made his forecast as if an alternative fuel would become available in huge quantity, by the time of the decline. His original idea (in 1956) was that the new fuel would be nuclear. By 1976, his view was that the new fuel needed to be some version of solar energy.
What kind of solar energy might this be? Solar panels PV located on the ground are heavy users of resources, because they have a low capacity factor (percentage of the time they are actually collecting sunlight), and because they need to be fairly sturdy, to withstand wind, rain, and hail. Space solar theoretically would be much better, because it is much more sparing in its use of resources–it would have over a 99% capacity factor, and the PV film could be much thinner. Timing for space solar would be a big issue, however, assuming financial issues can be worked out.
Also, even if space solar or some other fuel should provide the fuel characteristics we need, we still need to address the population issue. As long as world population keeps rising, humans are an increasing strain on earth’s resources.
Off the keyboard of Steve from Virginia
Published on Economic Undertow on January 23, 2013
The time frame is less than two years: the world becomes net energy negative. At that point there is no turning the clock back.
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Gregor Macdonald discusses the end of inexpensive crude oil and the so-called production ‘Revolution’ hoopla with Chris Martenson’s (Peak Prosperity).
Gregor makes the point that the increase in crude prices after 1998 took a lot of analysts by surprise. Many predicted a decline to historical levels with drillers simply adding to output from inventory. This is a critical idea that remains in force to this day: that crude production is essentially low-cost, that crude is mis-priced, that manipulation is forcing prices higher, that prices will return to historical levels once manipulators are ‘surgically removed’ from the marketplace.
A fundamental principle of industrial modernity is oil can be wasted because it is cheap, it’s cheap because the only thing it’s good for is waste. The waste process is monetized, it is collateral for loans which ratchet the wasting process further along. After we borrow the first time, we borrow additional amounts in order to waste more as well as to service and roll-over the previous rounds of loans … Both the loans and the waste compound exponentially along with pressure on resources, the entire economy becomes saturated with debts and waste products while resources are exhausted.
What’s there not to like?
Problems emerge when crude oil is depleted and it becomes too costly to waste. If oil isn’t ‘waste-ably cheap’ customers cannot afford it, if the crude is not costly enough there are no returns for the driller. Our economic infrastructure has been built assuming cheap petroleum into the far distant future, our empire of ‘stuff’ is stranded by the high-priced variety … meanwhile, costly, difficult to extract crude is all that remains! Cost is the reef upon which the modern world has run aground: there isn’t enough margin remaining after paying the fuel bill to offer as collateral for new loans or to service debts … the fuel bill has to be very high or there is no more fuel!
A hundred years into the petroleum era and there are no ‘innovative’ scalable economic uses for crude other than to burn it! Despite massive conversion losses, cheap oil provides energy returns sufficient to support current living standards, not-wasting under the current regime doesn’t provide anything. Because of the absence of imagination and a shortage of high-cost/real value uses, the exhaustion of low-cost crude means the end of waste-based modernity: there is no ‘Plan B’.
Figure 1: From TFC Charts, continuous Brent monthly contract (click on for big). The top line represents what customers are able to pay, above that price there are no petroleum sales and price must decline as producers holding petroleum products cut their losses. The bottom line represents the ‘floor’ price that drillers must receive otherwise they cannot afford to bring new crude oil to the marketplace. There are a few things to keep in mind at all times:
– Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.
– The gross amount of incremental credit available is the amount
that the so-called customers are able to service at any time of roll-over credit that the establishment can cajole from lenders including central banks over a period of time. This incremental ‘serviceability’ or productivity of debt is decreasing … due to the negative feedback effects of high crude prices over time. See Charles A. S. Hall: ‘discretionary’ spending declines because more funds are diverted toward obtaining energy and away from the consumption of other goods and debt service, (PDF warning) Even though finance is creating more credit, that added credit is bringing less crude to the marketplace.
– It doesn’t matter how many discretionary dollars the establishment is able to cajole: at all times, the producer’s dollar is the same as the consumer’s dollar! Alternatively, the gallon of diesel fuel used by the driller is the same gallon (identical energy density) burned by the customer.
A change of the customer’s condition will have an adverse effect on the driller. The customer’s leverage or ability to borrow is increased at the expense of the driller’s leverage … and vice-versa … This is because money represents the same ‘energy cost’ to both.
Currency is nothing more than a proxy for the fuel used by the customer … which is the same fuel required by the driller to bring more crude into the marketplace. The driller cannot use one kind of dollar to gain fuel while the customer uses a different kind to waste the fuel.
Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Gregor suggests workers were able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, the productivity of credit is diminished.
There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. It costs more for the driller because he is constrained by geology while the customer is limited only by access to credit itself/wasting infrastructure. The relationship between the sets of borrowers conforms to game theory:
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrow or don’t borrow. Not borrowing by either meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices!
There was no need to allocate between drillers or customers, they could ‘have it all’: by March, 1999 the world was …
The famous cover for the Economist Magazine: it was an ugly cover … it was also incorrect about the future.
From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Figure 3: Post-1998, brutal new game, new mutually-assured-destruction theory!
Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers.
– When drillers borrow alongside customers for diminished return, borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by credit costs.
– The choice is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller must compete for the same credit dollar: one gains at the expense of the other. The customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers:
Figure 4: Bakken output declines by Darwinian: when drillers cannot borrow, local oversupply of crude cannot be sold to meet costs, the drillers retire drilling rigs. Meanwhile, Bakken wells deplete rapidly, there is no way for drillers to ‘catch up’ after they have stopped drilling. If crude is not affordable now it will be less affordable — to both customers and drillers — tomorrow.
A few more things to keep in mind as we descend into the net-energy rat hole:
– Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.
– The inability of drillers to meet costs or to borrow sufficiently is illustrated by Royal Dutch Shell’s pathetic efforts to drill exploratory wells in the Chukchi and Beaufort Seas, (Rolling Stone):
The year closed on a particularly low note when, on New Year’s Eve, the Kulluk – one of two drilling rigs Shell sent to the Arctic – broke free from its tow ship in rough weather and ran agroundon the rocky coast of Stikalidak Island while carrying more than 150,000 gallons of diesel. But even before this mishap, the experiment had already been a severe disappointment to the company. In July, the Kulluk’s sister ship, the Noble Discoverer, slipped its anchorage and narrowly avoided a similar fate. Construction problems and equipment failures delayed drilling; just a day after work finally began in September, the Noble Discoverer had to stop again to make way for an incoming ice floe more than 30 miles long. An oil spill containment dome failed a required safety inspection, “crushed like a beer can” by underwater pressure. The Coast Guard, which is already investigating the Noble Discoverer for criminally inadequate pollution and safety controls, is now launching an investigation of the Kulluk incident. And in further bad news for Shell (and the Arctic), the Environmental Protection Agency announced yesterday that both the Kulluk and the Noble Discoverer repeatedly violated the Clean Air Act during the 2012 season.
The Kulluk is a 30-year old drilling barge that had been mothballed for 20 years before being brought back into service, the Noble Discoverer is 37-year old rust-bucket intended for duty in the relatively placid Gulf of Mexico. Shell’s Arctic effort is an improvised, cost- and corner-cutting jury rig rather than a serious effort, which would cost tens of billions of dollars and require many years of preparation that Shell seems unwilling to invest.
– Pretty much all the oil that has been- recovered since 1858 has been wasted in automobiles and to fight wars. When shortages appear, the contestants for the oil that remains will be militaries and drivers.
– When net energy becomes negative — when the cost to extract oil cannot be met by the customer — there will be physical shortages. These shortages will be permanent: oil that cannot be afforded by customers in the present will not be magically affordable when these customers are poorer in the future. There will be no further rationing by access to credit, reduced amounts of oil will not deliver additional credit.
– Oil producing states tend to be autocratic: look for Norway, Denmark, the US, Canada and Mexico to become single-party states like Saudi Arabia or Iran. Because of autocrats ability to control access to energy, they will gain ascendancy with their populations’ eager consent. What is at stake for Americans and the West is democracy itself: a choice between the right to have a say in our own affairs versus the false-promises of energy-driven ‘prosperity’ offered by autocrats … the choice between driving a car or having a functioning republic.
– Oil shortages will manifest themselves as food shortages: even though there is likely to be plenty of food in general, there will be areas without food due to distribution problems.
– The time frame is less than two years then the world becomes net energy negative. At that point there is no turning the clock back. Not every oil producing region is showing diminished returns, these exceptions are the remaining large conventional fields that offer equal- or greater returns for each energy-dollar invested in them. At current rates of draw, these fields are being depleted rapidly. It is not necessary to note the field or the rate of decline, only to note the price of crude relative to the ability of the customer to meet that price. The time that remains to our current way of doing business is how long it takes for these last conventional fields to decline.
– This in turn is the time remaining to ‘prepare’: to move yourself or your family to a more pleasant place, to become an activist, to find a less petroleum-dependent job, to learn a post-petroleum skill or gain a post-petroleum avocation. When the US becomes net energy negative, the amounts of fuel available will diminish sharply. So to will be the ability of ordinary citizens to access that fuel … this will be so until a new allocation regime is in place, likely to be some form of hard rationing. In the new regime, the only citizens that will be free from the reach of authorities will be those who do not use fossil fuels or petroleum at all.
EDIT: Coal, nuclear, hydro-power, solar and wind, natural gas and other prime movers are dependent upon cheap, plentiful supplies of petroleum to power the necessary ships, trucks, trains and other forms of transportation. When supplies of petroleum diminish (finger cutting across throat gesture).
Off the keyboard of Jason Heppenstall
Published on 22 Billion Energy Slaves on January 8, 2013
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|Houses in Germany with solar roofs. Image from here.|
|A warehouse roof in Germany|
Off the keyboard of Monsta666
Discuss this article at the Environment Table inside the Diner
This article should form the final connection between the Water article written by RE and the Peak Oil Primer written by myself earlier this week. As I like to stress to many people the connection between the vital commodities of food, water and oil are numerous. What is more these commodities cannot be easily substituted and in the case of water and food there are no alternatives if we wish for humans to survive on this planet. A man has got to eat and drink!
The means of acquiring food have changed throughout the ages with much of these changes coming as result of increased pressures from population growth. As we know when man first climbed out of the trees his main means of procuring food came from either gathering food or hunting wild game. While this simple method is the most sustainable and leaves the smallest footprint on the environment this method of food extraction also supports the least people in any given area. As a result of this paradigms limitations it was not long before man’s population had increased to such a degree that he soon began hunting at an unsustainable rate. This excessive hunting resulted in the extinction of numerous species particularly the larger fauna roaming the plains at the time. In effect man had reached the natural carrying capacity of the land following the hunter gather paradigm. As the population continued to rise despite this fact it created social stresses and the number of conflicts between humans increased as there were more disputes over the remaining food resources.
It was around this time that agriculture was developed. This change did not come because agriculture was superior to the hunter-gatherer paradigm as commonly depicted in literature but rather this change came about due to necessity as agriculture could support denser human populations. In other words this move was not a move of inspiration and a sign of man progressing and taking a step towards civilisation rather this was a move of desperation on the part of mankind to support increasing populations. Indeed archaeological evidence supports this assertion for early farmers were not only six inches (15cm) shorter than their hunter gatherer counterparts but they also suffered from a greater range of diseases due to closer contact with more people and animals. Other negative aspects came from the fact that the early farmer’s diet was less varied as his diet consisted of a small range of crops as opposed to the varied diets of his ancestors. This lack of variety in the diet would result in increasing incidents of malnutrition.  To many people of the time these lower standards of living would be seen as a step backwards.
In addition to these negative aspects described above agriculture also placed greater stress on the natural environment as more land was needed to be cleared to grow the said crops thus displacing more animals and even deforestation if forests were cleared to acquire crop land. Once the land is cleared for farming the land itself is put under major stress as every year the farmland is ploughed and replanted resulting in the loss of some topsoil. If enough topsoil is lost then it can mean the land is no longer suitable for growing crops and it will make the area more prone to desertification. The removal of topsoil is also largely irreversible as it can take 500 years to regain one inch of topsoil back. What is more by planting only a small range of crops the habitat contained less diversity and therefore became less resilient to changes in the environment. Moreover this lack of diversity also meant the soils that were used to grow crops would degrade in quality if it was not carefully managed through crop rotation and natural fertilizers such as manure.
The biggest issue that resulted from agriculture however is that it places large demands on water resources in the area as crops need large amounts of water to grow. For example one kilogram of wheat corn requires 880-2200 litres of water while a kilo of corn requires 880 litres.  Seeing as these two crops are one of the most widely grown crops in the US it easy to see how dependant agriculture is on rich water sources. If we consider meats then water demand increases by an order of magnitude so if we wanted to produce a kilo of beef we would need around 10-20,000 litres of water. . This large demand for water was one of the main reasons why many early cities formed around rivers as these regions were most suitable for growing crops.
As populations expanded and the demand for food increased the water demanded also increased since food production is so dependent on water. This continual increase in water demand lead to innovations such as the irrigation which can allow more marginal lands to produce food or allow existing fields to increase yields of crops. Such methods however are not without their disadvantages however as over use of irrigation can lead to reduce water flows to rivers, saline, reduced water tables (a particular concern for deep water aquifers) and water pollution. Another side issue with over intensive farming methods is it can lead to desertification of regions if the farm land is not managed properly. It is said that Mesopotamia (the region encompassing modern day Turkey, Syria and Iraq) used to contain the most fertile lands on the planet but due to over irrigation and exploitation of these lands the region gradually turned into a desert. This loss of land played a significant part in the collapse of civilisations such as Greece, Carthage and the Roman Empire. 
For the most part despite the listed disadvantages the agriculture paradigm did deliver in feeding its population provided the farms were properly managed and were not overexploited. This allowed human population too slowly but steadily rise as more and more land was devoted to growing crops. Innovations in farming equipment, better crop varieties (for example the introduction of potato as a stable crop in the 16th century) and improvements in irrigation allowed incremental increases in yields during this time facilitating further population growth.
The real turning point started around the advent of industrial revolution particularly after 1900 when the rate of population growth began to accelerate in earnest due to improvements in sanitation and medicine that lowered the death rates in various countries. This issue became more acute and noticeable during the world war periods particularly in World War II when not only had the population exceeded two billion by that point but food production was effected by the on-going wars. As a result of these factors rationing took place in many countries and for the first time many nations were no longer self-sufficient in meeting its local food demands. This food insecurity resulted in various governments placing a greater priority in increasing food production to ensure they were no longer dependant on food imports and had to endure the accompanying swings in food price from the world food market.
The main way this food security became assured was by deploying more farm machinery, pesticides, synthetic nitrogen/potassium and phosphate fertilizers as well as improved crop varieties. All these factors lead to huge increases in crop yields and was later called the Green Revolution. Once this development, which began in Mexico in 1943 by Norman Borlaug with the help of the Rockefeller Foundation was discovered the practice was quickly adopted by other nations.  As the name implies the green revolution had a large effect on many countries particularly the developing countries (not Africa however) such as India which during the 1960s was in the brink of mass starvation. Not only did the green revolution make India and other nations self-sufficient and not dependent on food imports it also allowed lower food prices which facilitated not only population growth but enabled greater economic
growth due to reduced living costs.
Like all new technologies these innovations in farming came with their own disadvantages. The chief problem about sustaining the green revolution is the fact that much of the inputs necessary for this form of farming are non-renewable. For example synthetic nitrogen fertilizers come from either natural gas or coal which is not only non-renewable but the processes to make this fertilizer are energy intensive. Meanwhile potassium and phosphorus based fertilizers come from potash and phosphate rock respectively which have to be mined thus they are subject to peak production rates which in the case of phosphate is likely to come around 2030. The pesticides used in farms are derivatives from oil.
The other big issue with the green revolution is the number of environmental issues it imposes on the area. Modern farming practices reduce biodiversity to an even greater degree than traditional farming methods. This is because one of the main ways of achieving the higher yields is to use specially selected breeds that only really thrive under the artificial conditions of inorganic fertilizers and pesticides. As a result the number of viable species used in farms has significantly declined making them less resilient to changes in environment (which is a bigger concern if one considers the impacts of global warming). It should be also noted that these new strains of crop do not perform better than traditional crop varieties if no artificial fertilizers or pesticides are applied. Another problematic aspect of these modern practices comes from the fact that over time fields that use phosphate type fertilizers will gradually sterilise the soil thus making farmers dependant on using only artificial fertilizers to keep growing crops on their fields. Finally these new farming practices have done little to reduce the increased demand for water. As food yields have increased so has water consumption.
There are also large economic implications; first of all such methods are less labour intensive and more capital intensive meaning that not only is less labour needed but the demand for credit will increase as more capital investments become necessary to start a farming operation. Since richer farmers have easier access to credit it means they can gain a bigger competitive advantage to poorer farmers thus increasing existing inequalities which will eventually lead to further consolidation of the farming industry which can further exacerbate the issue of decreased diversity in crop inventories.
Another issue that can extend from this last point is the fact that oil becomes more extensively used as it is needed to fuel the farm machinery and due to the larger fields that can be deployed using modern farming methods the amount of oil consumed is that much greater. If were to include processing and distribution in food in this equation the use of oil is increased further. It is this increased oil dependence that has made food prices strongly correlate with oil prices as oil is used in all stages of food production, processing and distribution.
These factors have meant that while industrialised farming has resulted in increased efficiently in terms of crop yields per acre it has become less efficient in terms of energy consumption. 
What is more like most things the gains made from the green revolution have suffered from diminishing returns for example the period between 1950-1984 global food production increased by 250% yet the increase between 1984 and the present is only 40%. More important however is the fact that for the past 60 years increases in global food production have consistently surpassed population however this trend is unlikely to continue much longer as production increases are barely keeping up with population growth.
Considering how it is expected that the population will reach 9.1 billion by 2050 with food and water demand increasing by 70% and 55% respectively it seems questionable whether these targets can be achieved. These already ambitious targets seem even more daunting if one considers the fact that we are already extracting water at non-sustainable rates. This unsustainable water extraction comes about from the fact that many water tables across the globe are falling and once these water reservoirs are depleted then the source of water can only be extracted by its natural recharge rate. More worrying is the fact that many deep water aquifers are not rechargeable at all from rainfall. These aquifers, sometimes dubbed “fossil water” for the fact they only charge at very slow rates spanning hundreds of years is a serious issue in India, China and perhaps most notably the US which is depleting the Ogallala aquifer; one of the biggest deep aquifers in the world.
Another significant issue is that of peak oil. Seeing as modern agriculture is so heavily dependent on oil a decline in total oil production is very likely to lead in a reduction in total FOOD production which will result first in higher food and eventually shortages. However it is likely the globe will face problems even before peak oil arrives due to fact that as oil production increases stops rising at the same rate as population growth then prices of oil will raise which will eventually lead to higher food prices. Once food prices get high enough the probability of a food riot increases considerably. It should not be forgotten that during the big oil spike in 2008 when oil reached $147 a barrel there was a large number of food riots. When high food prices struck again in 2011 the world witnessed the Arab Springs which was a revolution that started because of mass youth unemployment and high food prices.
Other exacerbating issues in delivering these targets will come from global warming which is likely to lead to more extreme weather patterns that can adversely affect crop yields. The recent drought 2012 in the US is one of the worst droughts in the US for 50 years and has decimated many crops and livestock in the region. Considering that the US is the biggest food exporter in the world (and indirectly water exporter) then it is likely that food prices will be considerably higher in 2013. If these droughts are a sign of things to come then it is very possible that we may actually see a peak in global food production in the coming decade particularly if these changing weather patterns occur simultaneously with declining global oil production AND water production.
 = People Grew Shorter Growing Crops (DiscoverNews)
 = The USGS Water Science School (U.S Geological Survey)
 = Reducing the impact of humanity’s water footprint (WWF)
 = Ecology of desert systems, p.277
 = The Nobel Peace Prize 1970 Norman Borlaug
 = Peak Phosphorus (Wikipedia)
 = Why Our Food is So Dependent on Oil (Energy Bulletin)
 = World population to reach 9.1 billion in 2050 (UN)
 = Global agriculture towards 2050 (Food And Agricultural Organization of the United Nations)
 = Global Water Forum
Off the keyboard of Lucid Dreams
Published on Epiphany Now on June 5, 2012
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Off the keyboard of Monsta666
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Peak Oil is an old topic for long time Doomers, but many Rookies in the Collapse Blogosphere are not that well versed in the ramifications of energy depletion issues. Here, Monsta666 gives a cogent overview of the Peak Oil situation as it stands now-RE
Peak oil is not “running out of oil” as commonly depicted by critics in the mainstream press rather it is the time when total oil production reaches its maximum. After peak oil the total amount of oil production goes into terminal decline. It is really quite simple what peak oil is but people have a habit (not just with oil) of making the definition overly complicated.
A good example of peak oil can be seen in the graph below which shows that US oil production peaked at 9.6mbpd (million barrels per day) in 1970 and since then has gone into decline. There have been two recoveries with the first occurring in the late 1970s to late 1980s. This first recovery came about when the biggest oil field in the US (Prudhoe Bay) came online. There has also been a more recent recovery in production and this new recovery was mainly the result of the shale oil revolution in the late 2000s. None of these recoveries have exceeded the peak of 1970 however. This oil production profile is typical of most countries and perhaps the US is even slightly unusual in this aspect when compared to other countries as most countries do not experience a recovery periods.
Since peak oil is concerned with production rates it is about flow rates. That means it is not about reserve numbers as flow rates cannot be accurately determined by looking at reserve numbers in isolation. This point must be stressed particularly in light of recent years were a disproportionate amount of new oil comes from unconventional sources. As well as providing lower EROEI (Energy Return On Energy Invested) the flow rate from these sources tend to be lower relative to reserve size. This means that huge reserves number can be added but as they have low flow rates then these sources cannot offset the declines of conventional oil which incidentally are expected to decline by about 7% per annum according to the EIA (Energy Information Administration). Thus peak oil will be reached even though total reserves may increase substantially.
It should be noted that the dynamics of a global peak oil production will be quite different to the peak oil of an individual country. This is because unlike a single country, a change in the supply on a global scale will have a profound effect on the global price. An individual country on the other hand has a small influence on the world price (at least for the vast majority of countries). If the world supply of oil becomes constrained the price of oil will rise and this will either create a recession, bring more oil to the market or a combination of both. These factors will likely result in an extended plateau as more oil is brought online to offset declining fields while the high price will reduce demand keeping production from having to get too high. The graph below of world oil production demonstrates the trend described in this paragraph:
This plateau cannot be maintained indefinitely. As time progresses the amount of investment required to maintain production rates rises exponentially which means higher and higher price is required to maintain flow rates. At some point the global economy cannot support the costs required to maintain flow rates and as a result total oil production will decline. If the flow rates decline then the total supply in the market will decrease and if demand remains constant or worse rises, then oil prices must rise in tandem. Now the issue to bear in mind and this is a point that is often forgotten or overlooked even to people aware of peak oil, is the belief that oil prices will rise to infinity. I would say such a scenario is not going to happen, at least not within the foreseeable future..
It should be remembered that the price of oil has a profound effect on the world economy. If the price of a barrel of oil reaches a certain threshold it will send the economies that import oil into a recession. When a country enters a recession the demand for oil will decrease which will result in a price drop. We have seen two examples of this demand destruction in recent years; the first occurred in 2008 when oil reached $147 a barrel before the price fell dramatically due to the onset of the global financial crisis. The second more recent crash happened in March 2012 when oil reached $128 a barrel (Brent oil) and then subsequently fell to $90 a barrel. These high prices contributed to the ensuing recession in the major OECD countries particularly Europe and this demand destruction has been the chief contributor to the recent price decreases. We can therefore say there is a limit on how high oil prices can reach before it results in a recession and prices come down. The correlation between oil prices and recessions is strong with nearly all recessions in the last 50 years coincided with a recent rise in world prices as shown in the graph below:
Another important aspect to remember is when oil prices rise the economies of oil exporting nations grow leading to more internal consumption of its oil resource. In nearly all cases this internal consumption increase exceeds the rise in total production which results in less oil being exported. This rise in internal consumption is even more pronounced in Middle-Eastern countries were the price of oil is heavily subsidised and the culture for efficient use of petroleum is not widespread. Furthermore a significant amount of electrical energy, which is also heavily subsidised in the Middle-East, comes from oil which creates a strong downward pressure on the total amount of oil exported. As less oil is exported the price needed by these exporting countries to balance its books rises.
This issue of balancing the budget becomes even more acute if the exporting country needs to pay large fuel subsidies or/and social programs as these costs will be added on top of the increased investments required to maintain/increase oil production. These elevated costs are further exacerbated if the population is rising rapidly which is often the case in Middle-Eastern countries. If the price of oil were to fall below the break-even price for an extended period of time then the exporting country will reduce supply in an attempt to bolster prices. Thus there is a price floor for oil and since global net exports are decreasing this price floor will slowly rise over time. This decline in global net oil exports is clearly seen in the graph below:
Now with both those facts established we can see that there is a price ceiling which oil prices cannot exceed without creating a recession and there is also a price floor that oil will not stay below for long. Since the price floor will rise over time, there will come a time when the price floor meets the price ceiling and when that time arrives it is likely to create significant problems on the global economy.
This constraint supply and shifting price floors/price ceilings (which will come closer together over time) will also lead to another phenomenon. That is an increase volatility of oil prices. In fact a high volatility of price can be seen as indicator that the amount of spare capacity in the system is low. This increasing price volatility can easily be seen in this graph below:
As a result of this increasing price volatility it will become more difficult for consumers and suppliers of such oil to make long-term business plans which will raise costs indirectly as result as it becomes harder to maintain favourable long-term contracts. However what is more significant is since oil prices are so heavily connected to the state of the economy there is a good chance these bigger fluctuations will lead to greater volatility in growth rates (going from recession to growth and back again).
It should be noted that as stated earlier, there are limits to how high prices can rise and it is likely that coming oil crunch will not manifest itself initially as an oil crisis (with oil lines at the petrol station) but as a financial crisis with large numbers of bank insolvencies and other associated systemic risks that will stem from this initial crisis. It should also be noted that global economy is highly efficient and can produce goods and services at extremely low costs but this high efficiency comes at the price of low resilience. This is because many of the supply chains that supply our economies with goods/services are not only long spanning many countries but also operate on a JIT (Just-In-Time) basis. With the risk of various systemic failures what are the chances these low resilient supply lines can continue to operate in the midst of a financial AND liquid fuel crisis?
This distinction between and an energy crisis and a liquid fuel crisis is an important one because 90% of the energy for global transportation comes from oil. This transportation energy covers the most obvious examples such as cars, trucks, planes etc. but what should also not be forgotten is the machinery (and pesticides) necessary for agriculture and the mining of various metals that is needed for various goods including metals needed for the construction of renewable sources of energy. These sources, at this current time all depend on oil for these products are either transported or extracted using oil or oil itself is a basic input in the production of the said resource. In fact we can easily say that oil is an enabler of other vital resources so when we face an oil shortage it is likely we will also face a shortage in other resources. Again it is likely this scarcity will not initially manifest itself with the resource or good disappearing but merely that the price of the goods rises considerably.
While price rises and the accompanying demand destruction will serve to alleviate the constraint supply of oil for a time eventually higher prices can no longer manage a basic shortage. There will come a time when the price of oil rises creating a recession. However unlike previous cycles the next price rally will not generate a sufficient amount of income to overcome the existing decline rates from old fields. When this time comes not only will global oil production decline but more important, the rate of global oil exports will decline at an even greater rate. This decline will be higher than what developed countries can handle and adjust to so it is likely at that point that real oil shortages will occur.
Once the perception of an oil shortage begins to take hold then it is likely to induce not only higher prices but hoarding of the available resource. This behaviour occurs not only on a consumer level but also on an interstate level as exporting nations will begin hoarding their oil from the importing oil countries. The exporting nations will hoard oil as it will wish to save its remaining resources to itself as it will prioritise the needs of its citizens over the needs of foreign customers. This hoarding behaviour has been seen in the UK in two occasions when there was a perceived shortage of oil, first in 2000 and more recently in 2012 when an oil shortage induced consumers to panic buy and hoard the valued resource thus exacerbating an already difficult situation. It is likely that when a strong perception of shortage is felt then rationing will need to take place to avoid such irrational behaviour. In any case, when thinking about peak oil in its later stages, the physiological component cannot be forgotten as that will play a big part in how this situation unfolds. This last point cannot be understated as it is likely that once the problem of peak oil becomes apparent it is likely that other systems and conduits will be in a severely degraded state. What is more a shortage of oil is likely to compound any existing problems that are occurring.
Recent post from Diner Mark N at the Economics Table inside the Diner, synopsizing the failing Plans of the Elite running the New World Order.
I don’t know if these guys are truly Brain Dead and Stupid or if they are really Smart and just so locked into a paradigm they can’t grasp the truth here. Or if it is as El G suggests, they are Wickedly Brilliant and this is part of the Master plan. I will pick Door Number 2 on this one Monte.
I will take door number one. The elite are brilliant at theft and domination, but they have blind spots. How do you think any of the Rothschild’s would fair if dropped off in the Alaskan wilderness to survive for three weeks with no supplies. I do not believe in there is any satanic tricks or secret powers these guys have and I am sure they would starve like any other soft suburbanite.
I know that the Illuminati had a grand plan, a New World Order if you will. I am quite sure that the whole of the earth was to come under complete corporate domination, selling us EVERY SINGLE good or service we would ever use from the cradle to the grave. With super computers monitoring every single communication sent or received, thought crime immediately punished. We can see they are quite close to Global Governance and currency now.
The world however does not always cooperate as any fallen Emperor could attest. The Illuminati converted their empire to run on fossil fuels with the advent of the Industrial Revolution. The magical energy gains from oil in particular made the New World Order the crowning achievement of all previous empires. As the men of science worked on zero point energy, fusion or whatever new energy was to follow fossil fuels, something went terribly wrong. Human ingenuity failed to conquer the laws of thermodynamics and the laws of nature.
Starting in the late 1960’s technological advancements other than computer science for the most part started to slow. More alarmingly for the Illuminated ones glorious plans, DECAY and ROT started appear in the countries that were under their complete control. It now appears that the engine of the NWO, the global banking system, is FAILING. The very ability to have an industrial civilization will be lost. The ability to feed the global population will be lost. When all these systems fail it will be as if a mighty dam has broken. Unless the Illuminati have magical powers or alien allies they will be scattered by the raging torrents. Just like every single other empire that has fallen so shall this empire fall. The structural support of this empire has been rotting away since peak oil per capita hit in 1979. The foundation is rotten and we will see it fall.
Hiding in plain sight:
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Q: How would you describe the economy?
A: It is a system that allows a select few to borrow immense fortunes. The rest of us … you, me, everyone else … repay the debts.
Q: That’s it?
A: That’s it.
The face of Peak Oil. 
We are in the middle of a crisis that has been ongoing for almost five years now: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?
The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Greece, Ireland, Portugal, in the US … in cities and states pensions everywhere are under attack.
Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying pensioners? Technology is supposed to save us but raiding pensions insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology won’t work, from the people who are in a position to know.
What happens after the retirements are pilfered? Who knows? Nobody has a plan.
The world is shocked to discover a shortage of capital, not for investments but to prop sagging balance sheets. Who could have guessed as capital has been shoveled into the furnaces of ‘development’ for decades? Only economists and bureaucrats believe that we never run out of inputs.
Neil Gough (NY Times)
China’s banks are among the biggest and most profitable financial institutions in the world. But the state-backed banks are also starved for capital after an aggressive lending spree that was encouraged by the government.
Maybe they are profitable and maybe not. “Starved for capital,” suggests not. The operating idea is that capital is money rather than material inputs. These inputs are mispriced so that the money-equations used by industrialists add up to something ‘positive’. Cheating works until it doesn’t any more: substituting debt for unaffordable inputs doesn’t produce anything. Debt isn’t capital and self-delusion isn’t capitalism. Maybe we should call our economic system ‘Delusionism’ and be done with it.
Within the last year, seven of the biggest Chinese banks tapped the markets for 323.8 billion renminbi ($51.4 billion ) in new funds, according to Citigroup estimates. Several financial firms are expected to raise another $17.7 billion in the next few months, with China’s fifth-biggest lender, the Bank of Communications, accounting for $9 billion.Banks around the world have been tapping investors for new funds as they struggle with slumping share prices and waning profits. But Chinese firms have maintained that their profit growth is strong and their balance sheets are solid, raising red flags among some analysts about the banks’ persistent capital needs.
Chinese bankers and business tycoons, each more corrupt than the last: raise that Red Flag high! The Chinese need capital because so many are stealing it and removing themselves overseas.
The problem is that paying out high dividends blows holes in their base capital. Thus, banks need to continue tapping the markets for fresh funds, often diluting minority shareholders by issuing new shares. The finance ministry, the banks’ ultimate controlling shareholder, always buys in, keeping its stakes topped up.
Somebody at the bottom always takes it in the neck. Today, it’s the minority shareholders, tomorrow it will be the senior bondholders or the pensioners or the schoolchildren forced to eat radioactive school lunches. This is part of an ongoing process, not a new feature within delusionism. It was invisible when everyone was busy getting rich: now that the abuses are visible it can only be on account that fewer are getting rich. The endgame heaves into view.
The amount of cash that is churned in the process is staggering. In 2010, China’s five biggest banks (the Big Four plus the Bank of Communications) paid more than 144 billion renminbi in dividends and raised more than 199 billion renminbi on the capital markets, according to GaveKal.“This is the nonsense of it,” says Fraser Howie, a managing director at CLSA Asia-Pacific Markets, who is based in Singapore and is a co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “There’s an awful lot of money just going round and round from one pocket to another, giving the appearance of strength when it’s really not there.”
Fraser Howie cannot see what is under his nose. What else is he missing? How about Peak Oil? The owners of industrial enterprises borrow (steal) their fortunes and oblige the rest of us to repay the loans. The lending-go-round is the reason for industrial economies, their purpose in the first place. “Money just going round and round from one pocket to another,” is the theatrical production that is collateral for the loans. More appearances of strength means more loans — and bigger fortunes — for the owners. The churning of the bank funds is a feature, not a bug: modern finance villainy hiding in plain sight!
The public must accept the process at face value otherwise loans to ‘entrepreneurs’ could not be justified. There would be nobody able to commit to debt-service. As it is, the public has over-bought, the cost of fuel crowds out debt service. The solution is to chop off pensions with a samurai sword.
It’s not just Chinese banks that are starved for capital and it is not just banks. The world is capital constrained.
Europe’s Capital Flight Betrays Currency’s Fragility
The euro area’s financial troubles appear to be flaring up again, as this week’s gyrations in the Spanish bond market show. In reality, they never went away. And judging from the flood of money moving across borders in the region, Europeans are increasingly losing faith that the currency union will hold together at all.
The flows are tough to quantify, but they can be estimated by parsing the balance sheets of euro-area central banks. When money moves from one country to another, the central bank of the receiving sovereign must lend an offsetting amount to its counterpart in the source country — a mechanism that keeps the currency union’s accounts in balance. The Bank of Spain, for example, ends up owing the Bundesbank when Spanish depositors move their euros to German banks. By looking at the changes in such cross-border claims, we can figure out how much money is leaving which euro nation and where it’s going.
Figure 1: Surprisingly, there is still capital in Greece and Ireland remaining to flee. Perhaps the last capital out the door in these countries will please turn out the lights.
This analysis suggests that capital flight is happening on a scale unprecedented in the euro era — mainly from Spain and Italy to Germany, the Netherlands and Luxembourg. In March alone, about 65 billion euros left Spain for other euro- zone countries.The idea that Europe’s current incremental approach has the advantage of saving money is an illusion, and not just because the disintegration of the currency union could trigger a global financial meltdown. As the capital flight figures demonstrate, the stricken nations of the euro area are bleeding private money and becoming increasingly dependent on taxpayers. In all, the debts of struggling banks and sovereigns to official creditors such as the EU, the ECB and national central banks now exceed 2 trillion euros, much of which would be lost if the debtor nations dropped out of the currency union.
What isn’t mentioned is the flight out of euros into other currencies or assets such as US equities. Wait until the euros start flowing out of France. Bloomberg will have to draw a much larger chart.
What have you … done for your car, today? 
Resource nationalism should be giving more billionaires reason to pause. The game has instantly become much more interesting:
Argentine government to pay Repsol ‘zero pesos’ for YPF seizure as Spanish oil company issues legal warning
Fiona Govan (Telegraph, UK)
Spain’s Repsol has threatened legal action against any company that attempts to invest in YPF following its expropriation by Argentina last week as the government expressed determination to “pay nothing at all” in compensation to the Spanish oil company.
The move would discourage external partners from providing the investment YPF needs to exploit vast shale oil deposits discovered within the Latin American country and is the latest attempt by Repsol to fight back against the illegal seizure of its subsidiary.
“We reserve the right to take legal action against any party investing in the YPF and its assets following the unlawful expropriation of the company,” Kristian Rix, a spokesman for Repsol in Madrid, told the Daily Telegraph on Monday.
The Spanish energy company believes billions of dollars are required to develop Argentina’s prospects including at least €25bn a year over the next decade to exploit the Vaca Muerta shale discovery made last year.
Resource colonialism on a foundation of paper promises and graft will prove to be worthless as the distances to overcome are too great and leverage of the colonialists insufficient. The Argentine example is appropriate for the various biofuel plantations landgrabbed in Africa and elsewhere by the Saudis, Chinese and others. When the locals decide the renege on the contracts and expropriate the ‘goods’ there will be nothing the ‘New colonialists’ — and their Blackwater-esque goons — can do about it.
Hiding in plain sight: peak oil.
Nobody mentions that the reason for the Greek economic unraveling and that of the Eurozone is caused by peak oil. The blame is fixed on Greece’s debt exceeding it GDP by a few percentage points. Ditto the other countries under siege around the world.
Figure 2: Chart by Jon Stewart/the Bonddad: Greece borrowed euros hand over fist for ten years to import fuel that increased in price 600% since the beginning of the euro. All the other countries in Europe (except Norway and Denmark) did the same thing. Why did the price increase from $20 per barrel to $120? Because of diminishing supply relative to exploding demand. Meanwhile, Greece earned absolutely nothing from burning/wasting the fuel. Greece also has little in the way of non-fuel output to pay for imports: it’s ‘Uncompetitive’.
The Greeks were conned into believing that they could live like Americans. That they could borrow as do other large debtors at very low cost. That they that sovereign privilege and could roll over their debts as they came due just like other states. They believed they could monetize pyramiding debt the way the Japanese and other large debtors do.
They would have been able to do so if the Eurozone was a country instead of a Ponzi scheme with the euro a sub-prime mortgage, if the industrial economy wasn’t a debtonomy and capitalism a delusion. Greece gulped the Kool Aid and ignored its own absence of real output and the structural deficiencies of the EU. Greece’s lenders did the same thing: once these lenders got cold feet and strangled cash flow the credit Greece depended on was cut off.
No credit and fuel is cut off, the Greek cash flow diminishes further, there is less output in a vicious, self-amplifying cycle. The outcome of peak oil process is Greece, destitute.
It’s also Ireland, Spain, Belgium, France … and Syria. Those who believe that the endgame of peak oil is Mad Max are wrong. The outcome for the unlucky is ten- times worse. The movie warriors did not have armor or heavy artillery and the willingness to turn it loose on civilians.
 Unidentified cinematographer, ‘The Character Humongous from the film, Road Warrior’.
 Unidentified photographer, ‘Syrian armor on the streets of Homs’.
There once was a Doomer from Nantucket
Who ordered Mountain House Foods by the Bucket
He had Gold in his Vault
and he quoted John Gault
But when Peak Oil hit there was no Diesel to Truck It
Posted originally on TBP on 27th April 2011 by Reverse Engineer in Economy
Why is it that Sovereign Nations don’t issue their own non-Debt based money, instead of becoming a part of the massive International Banking system based on debt? This is another one of those very tough questions to answer which I believe has its roots back at the very beginning of International banking in the Medici Era (at least for a Modern Era analysis). The goal here in Part II of this series is to make a plausible hypothesis for why this has not ben a viable solution over these centuries, if not all the millenia of the Money Game.
I will start here with a hypothetical country completely disconnected from the rest of the world. Call it Hawaii before Cook arrived. As the first Polynesian Navigator to guide my Catamaran rigged Canoes to the Big Island, I get great Respect from my People who trusted me to Guide them on the Voyage from the Marquesa Islands, and I am unanimously accepted as King on arrival. All those years studying the Stars and memorizing the Constellations and watching Wave patterns really paid off for me. All of Hawaii is MINE! I am SOVEREIGN!
My first act after being declared King by Acclimation is to take on Anna Paquin and Natalie Portman as Concubines, but AFTER that I have to figure out how to administer my new country and distribute out all the assets BESIDES Anna and Natalie.
So next thing I do is to hand off portions of the land to my best buddies to administer, and then after that I have to create some currency for people to use to trade with. There isn’t much Gold or Silver around, but there are a limited number of Macadamia Nuts. They are a good currency because they are small and portable and store well, and unlike Gold you CAN actually eat Macadamia Nuts. However their value is not in the Calorie Content, but rather in their scarcity relative to everything else being produced in Hawaii. They aren’t a debt based instrument, they are based on production already done. If at some point somebody found a way to grow a shitload of Macadamia Nuts the currency would be debased, but as long as the supply remains relatively limited they are a good currency.
Macadamia Nuts function as a great Currency for us in Hawaii until Cook arrives. At this point our Macadamia Nuts only will buy as much of the cool new Metal Knives the Traders on the Tall Ships will take for them. If we want all the STUFF being produced elsewhere, we have to fork over all our Macadamia Nuts for that stuff. Polynesians of the era actually called all the Stuff the traders brought “Cargo”, for obvious reasons. (read Jared Diamond’s Germs, Guns and Steel) You could substitute Gold for the Macadamia Nuts, it does not matter what the commodity is here, the point is that in order to get access to the production of a more advanced society producing such things as Metal Knives, you have to give up your resources to do so. We actually are pretty fortunate to be using Macadamia Nuts which do have some intrinsic value and not be using Cowrie Shells, because the Traders could pick tons of them up off beaches elsewhere.
As we progress along here, in return for our Macadamia Nuts, Pineaapples and anything else we produce in Hawaii, the traders give us in return their Notes, which we can then use to buy Cargo from them. Since we are now exporting all our Macadamia Nuts we don’t have enough of them to use as currency anymore, so now our Goobermint creates its own Notes which are worth some fraction of the value of the Notes the traders give us in return for our produce. We have now become intrinsically CONNECTED to the Global banking system using Notes as our Currency rather than any other abstract item.
Now, if your country happens to be well gifted with Natural Resources to trade for Cargo, the tendency is to basically live off those resources and not Industrialize. A few people at the top of the Pyramid in Hawaii (my Heirs from Anna and Natalie) do very well, but the rest of the population mainly just gets a few Trinkets like Satellite Dishes to put up on their Grass Huts and otherwise lives dirt poor. Read this virtually every Oil Producing nation in the M.E.
Now, if you want to start Industrializing yourself so you can make your own trinkets and start exporting them, you need LOTS of the Notes the traders use to buy the big machines that make trinkets, and they generally cost so much that even years of Macadamia Nut sales are not enough to by them. However, if you have a large population of people willing to work for peanuts, Banksters with lots of Notes will loan them to you so you can build Trinket Factories. They will disassemble complete factories running in Amerika and ship them over to you so you now are the Trinket builder. You of course have to pay lots of Interest on those factories, so actually getting ahead in this game is pretty difficult, although it is accomplished briefly in some places. Of course Hawaii never had a big enough population to make this kind of thing worthwhile, but places like Japan, Korea and China did. This is why large population centers with few resources have evolved into manufacturing centers. Amazingly simple isn’t it? What seems to be a very complicated problem of trade laws and tariffs is not so complicated once you grasp the underlying forces of labor, resource and capital movement. Its not a lot different or more complicated than Water running Downhill actually. I only came to this epiphany very recently though, but to be sure it explains the general movement of Capital through the Capitalist era. If I had figured this out when I was in my teens instead of chasing pussy, smoking dope and doing blackboard contests in the basement of Havermeyer Hall, I’d probably be richer than Soros by now. Water under the bridge though of course, and I ended up rich enough anyhow here from Grandpa the High Steel Walker turned Bootlegger, for as long as the flotsam and jetsam he accumulated retains some value anyhow. LOL.
To return to the topic at hand, over time here the entire world got captured up into this system of Notes run centrally from a few big Banking Houses and Trading companies like the British East India Company, House of Rothschild, JP Morgan et al. Any Sovereign Nation wishing to participate in the Free Trade of Goods and Services had to have their Money tied into the system, valued at some relatively fixed rate against the major currencies the traders used, which after Bretton Woods was the Dollar. Your money can float some on a day to day basis, but it has to hang within a fairly restricted range to remain functional.
At this point it becomes impossible for you to issue Non-Debt based money and use it for international trade, because as soon as you issue it without debt attached, it devalues. So you also now start issuing Bonds at some rate of Interest in order to increase your currency supply, and if you offer a high enough Interest rate on those Bonds then you get George Soros, Jim Rogers, Bill Gross and the rest of the gang flocking to your doorstep to buy them with their Notes. Of course, you better be damn industrious little Beavers to be able to pay off on the interest on those Bonds.
Over time this Web of Debt in Ellen Brown’s terminology has grown ever larger, like a massive Cancer spreading across the face of the earth. In order to be part of the great global game of trading around the Trinkets and Raw Materials to make the Trinkets, you have to be using a Debt based currency the Illuminati can Invest in through your Bonds. You go into Indentured Servitude to the Bond Holders, which is of course why they are called Bonds to begin with.
The Bond Holders of all worldwide debt are the Top of the Ponzi, and in any crash these are the folks that expect to be paid off FIRST. If you have to sell off your Parks and Bridges, lay off all your Sanitation workers and Teachers whatever, you MUST pay the Bond Holders! If you don’t pay off the Bond Holders, its ARMAGEDDON!!!! The Fabulously Wealthy will be impoverished along with all the Pensioners invested with PIMPCO! So everything possible is done to try to keep paying off on the Bonds, or rolling them over into new Bonds, whatever just do not ADMIT that the production is not there to ever pay off on those Bonds!
Now the question is, WTF did the top of the Ponzi Bondholders actually GET the money to loan to you? At some point, it had to be Borrowed into existence with the Central Bank creating the currency. So if you are close enough connected to the center of this, you can Borrow money at very low interest directly from Da Fed to then go and loan at higher interest to somebody else and collect on the spread between those rates. This is bad enough, but the evolution of Derivatives made it even worse, because lots of Banking Houses could create financial instruments like CDS and CDO without ever actually borrowing money from Da Fed to do it. These instruments represent Trillions if not Quadrillions of Dollars of debt obligations that cannot be paid off unless Da Fed goes ahead on a Printing Spree that would make the current one look like a Sunday Picnic.
Needless to say, I don’t think the Political Will is there to do that kind of printing, it would totally destroy the currency and that is not in the interest of the people who hold all the Bonds. The trick here is to keep the House of Cards standing so these instruments do not trip. However, as the debt problem moves up the line to bigger and bigger Sovereigns (next up, Spain and CA), just the amounts necessary to make them nominally solvent is probably beyond the political will of the Banks, and most certainly against the political will of the populations that are forced into Austerity. So at some point here the Ponzi will collapse.
Jesse over on Café Americain makes the Hypothesis that Da Fed is sufficiently in control of all of this that they can manage a controlled Stagflation, but to me this begs the question of what is going on all around the World all tied to the Dollar as World Reserve Currency. While here in the FSofA we might be able to withstand a Slow Boiled Frog effect of say a 10% yearly Inflation of Prices while Wages Deflate at 10% and not run up into a Rock/Hard Place situation for 5 years, that is not the case for all the impoverished countries around the world where people live on $2/day and 90% of their income goes to just buying enough Rice to make it to tomorrow. As long as Da Fed is “managing” a steady inflation, these folks are going to be quickly (if they are not already there) in a position where they simply cannot afford to buy enough food to eat. If they are in a location where there is no Oil, it’s a Humanitarian Crisis but we don’t send in the Marines. If it is a location where there IS Oil, we clearly DO send in the Marines to try to secure the Oil Fields. We also have to send Food Aid to the faction that will line up with us for the moment, and arm them with AR-15s and RPGs at the very least to try to take back control.
The Financial House of Cards is clearly in a very delicate balance at the moment, and Da Fed has very little maneuvering room between the Hyperinflation/Deflation outcomes. Even small changes in the Interest rate or Money Supply can tip the balance now. That problem is difficult enough by itself to manage, but on top of that you have all these Wars breaking out in marginal countries, and you also have your Natural Disasters like Tsunamis messing up Production out of Japan and Cyclones turning part of Australia into an Inland Sea and now apparently non-stop Tornadoes taking out Airports like Lambert in St Louis.
How many of you noted the story in the Newz that Shillary Clinton was in Japan promoting a “Private/Public” Partnership to help the Japanese rebuild? She was joined by Chamber of Commerce Big Wigs from Nippon and the FSofA, basically BEGGING people not to Abandon Japan. You have to KNOW they are doing this because companies are EVACUATING Tokyo in droves. WTF is going to stay in Tokyo with an Office when they can move it over to Taiwan or Shanghai or Hong Kong or Singapore? The Nip Goobermint is now talking about a “6-9 Month” period to get some control over the reactors. No actual plan here for doing so, but this is the spin. Even if it was only 6-9 months, who would stay there while they figure it out? How long would it take to replace the electrical power generation of those nuke plants? Even a Coal fired plant takes years to build.
The issues Da Fed has to deal with in managing the currency are only a part of the Global issues here, and no matter what they do with the money supply, Da Fed cannot get more Oil flowing out of the M.E., nor can they repair Japanese Reactors and get BAU running in Japan either. They do not seem predisposed to handing out much Free Money to J6P, just enough to feed him and keep him from rioting, and that does not an economy make, at least not the kind of economy we were used to.
The real question is not IF we will slide down Richard Duncan’s curve of per capita available energy, but how fast it will actually occur. Because we are such profligate users of energy here in the FSofA, there is a lot of WASTE in the system that can be cut out before we completely power down, so I am at least hopeful that he is wrong and 2012 will not be the year the Lights Go Out. However I did watch another video of his where he made a good point about Mexico, which is pretty much already a failed state. Their electrical power grid is a joke, held together by duck tape and bailing wire. With their own Oil supply now dwindling, they are not going to be keeping that grid up and functional too much longer. He makes the point that when the lights go out in Mexico Shity, 20M people will start streaming across the border in a Tsunami of refugees. Exactly how we will try to stop that remains to be seen.
To get back to our monetary system, it is far past repair at this point and will have to be replaced by an entirely new one. Our New World Order Globalist Illuminati Masters of course want to run this show, but by no means is it clear they will be able to do so. Over in Finland the True Finn Party has taken power with a No Bailout Policy, and the Euro consortium which is the CENTER of the Globalist movement is coming apart at the seams. If they cannot hold Europe together, how could they hold the whole WORLD together under a single currency regime?
What is much more likely is a breakup Regionally here in the FSofA with first a Command Economy of Rationing and eventually some sort of Local Currencies evolving. Both Food and Fuel will be very scarce, forcing nearly every able bodied person into some aspect of food production and distribution. Regions will probably be governed by former units of the National Guard, the warehouses and silos will be put under guard and a replacement transportation system will develop. I could see 6 guys all on Bicycles hitched to a Wagon pulling grain to silos from the fields, and small Steam Powered Locomotives built from old Boilers utilizing whatever they have available to burn to move the grain around the region on the rail lines. At the other end of the line, more Teamsters on Bicycles pulling the grain into local communities. This until we breed up enough draft animals to pull the wagons.
Is this Extinction Level? No it is not, but it most certainly is Civilization Ending. It doesn’t even take a Thermonuclear War to occur either, all it really takes is for the energy we accessed through the industrial era to become less and less available. Which pretty much everyone here agrees is already occurring. The likelihood of being able to substitute for this lost energy either with Nukes or Renewables in the next 50 years is pretty small. The Energy necessary to build those things is going to disappear faster than we can build enough of them. Its not even clear after Fuk-U-Shima that anyone is going to WANT to build a Nuke, although in some areas I am sure some will be built. Not nearly enough though to substitute for the lost fossil fuel energy we have been accessing.
Accessing Nat Gas reserves and Conservation can and probably will draw this whole thing out some, so I don’t necessarily agree with Richard Duncan that by 2020 we will be Lights Out everywhere. I do think though by 2020 that Poor Nations like Mexico will be Lights Out by that time. It really is remarkable just how FAST almost all the world got Wired up for Electricity, even towns in Afghanistan have it, although likely it is pretty intermittent there. Problem being of course by wiring up EVERYWHERE, we used up the available energy to drive the system that much faster. When we ran out of enough of it here on our own shores to drive our power systems, we had to start importing it from elsewhere, and this should have clued everyone in at the time that the writing was on the wall, but it did not generally do that. Why? Because everyone was sold on the idea that coming down the pipe at some time in the future was a replacement for it created by Human Ingenuity. Fusion Power being the Holy Grail there, and BILLIONS were spent in pursuit of that technology, with the greatest Physicists and Engineers of the last 60 years all engaged in the project in one way or another. We built Super Conducting Super Colliders, and individuals in labs messed with their ideas for Cold Fusion. 60 solid years of research in Nuclear Physics since the Manhattan Project, and NOBODY has been able to make this idea work at positive EROEI.
You have to wrap your mind around the concept that the energy we accessed to run the Civilization of Homo Industrialis is going Extinct, even if some of the people manage to survive that extinction. We had a Century Long Party burning the candle very brightly in the Industrialized Nations, but now that Candle is running out of Wax. We are halfway down the candle, but in the intervening time we bred up 6 times as many people as when the game started, so Per Capita energy available is much less than at the beginning of the game. The fact it is skewed in distribution keeps the FSofA burning brightly right now, but once we cannot maintain sufficient military force to keep the Oil moving in this direction, we will quickly be in the same boat everyone else is in. Our standard of living will approach that of the current 3rd World. This is inevitable now, its just a question of how long it will take to slide down and how the society will adjust to the new reality.
To look at this whole post from a Fourth Turning perspective, how does this Turning differ from the American Revolution, the Civil War, and the Great Depression? In each of those prior Turnings our Society was accessing Greater Wealth and Power. After the American Revolution, we were accessing the vast Wealth of the North American Continent and all its Resources. After the Civil War, we were accessing the thermodynamic energy of Coal and beginning the Industrial Revolution. After the Great Depression and WWII, we were accessing the thermodynamic energy of Oil and growing into the Information Age. What is there left for us now to grow into after THIS Fourth Turning. I put to you that we have nothing left to grow into now, and so we must as a species go into a period of shrinkage that we have not experienced since the Dark Ages and the Black Plaguei. Like the original Dark Ages, I think this period will last near a Millenia, and who we are and how we come out of this at the end is anybody’s guess. We may never come out of it and go the way of the Dinosaur, that remains a possibility, but one I hope does not come to pass.
For those of us who lived through the Age of Oil in the Industrialized Nations, even if you were relatively Poor you got quite a ride. It was however a One Time ride that only a select portion of Humanity got to really enjoy, and it is now passing into History. Those who follow us will curse us for our profligacy, at least for so long as they can remember it, which probably won’t be more than a couple of generations. After that, there will only be the Ruins of what once was, and a Planet gradually healing itself of the scars left by Industrialization. One can only hope that somewhere, somehow, some Tribe will make it through the Zero Point to rebuild a better society with better principles of existence. We did it after Toba went Ballistic 70,000 years ago, we can do it again. It will be a very long time from now before that comes to pass however.
See You on the Other Side
Climate change- and Peak Oil deniers are like turkeys who gather in a corner of the farm convincing each other and the other turkeys that this mysterious circumstance called ‘Thanksgiving’ is a fraud. According to rumors that flare up like wildfires through the community then evaporate just as quickly, when this ‘giving of thanks’ event draws near The Great God stuffs the turkeys in a truck (whatever that is), takes them somewhere then has them all put to death! Turkey corpses are then wrapped in plastic (whatever that is) and shipped to supermarkets (whatever these might be). The rumors are highly disturbing to the turkeys even as some of the more perceptive among them notice that turkeys who leave the community never return.
“Pay no attention,” cry the deniers. “This obviously cannot be so: God is the turkeys’ best friend. Every day he brings more and more delicious food, as much as the turkeys can eat. The more food we eat the more we have available to eat. All this food and much more has been provided by God for as long as us turkeys can remember.”
“Certain as one day follows the next, this incredible bounty will go on forever. We dare not change anything or leave. To do so would have us … living like savages in caves!”
“Where are the old turkeys?” asks a thoughtful, young turkey. Where are they indeed: there are old turkeys and bold turkeys but no old, bold turkeys. Recently the climate denying-gobblers had a chance to see that the turkey-god is a farmer with an ax and a calculating mind. This came in the form of Senate testimony from the insurance industry.
It’s one thing for the pimply-faced teenaged brigade of energy company shills/morons to scorn scientists and for middle-American turkeys to believe them. It’s another thing altogether for the shills to smear the insurance industry. The warming-related disasters are costing the top insurance gangsters real money, these costs ricochet through related real estate and finance rackets:
Climate Change: Insurers Confirm Growing Risks, Costs
Stakeholders from the insurance industry met with members of the U.S. Senate to acknowledge the role global warming plays in extreme weather-related losses, and to issue a call for action.
The politics of global warming have typically involved much debate as to the role climate change plays in growing weather-related risk. Yesterday, however, at a Capital Hill a press conference on the cost of climate change, debate was not on the agenda. Pointing to a year of history-making, $1 billion-plus natural disasters, representatives of Tier 1 insurance companies took a definitive stance with members of the U.S. Senate to confirm that costs to taxpayers and businesses from extreme weather will continue to soar because of climate change.
Representatives from The Reinsurance Association of America, Swiss Re and Willis Re and Ceres, a nonprofit organization that leads a national coalition of investors, environmental organizations and other public interest groups working with companies to address a variety of sustainability challenges, joined Sens. Bernie Sanders (I-Vt.) and Sheldon Whitehouse (D-R.I.) yesterday to discuss the growing financial impact of global warming.
Reality about energy supplies begins to emerge and it’s as ugly for ‘Autoworld’ as Thanksgiving is for turkeys. Peak Oil has blitzed the Greek economy into the dumpster with stunning dispatch, so much so it seems beyond the ability of sensible Greeks to understand what happened to them. Greece isn’t a hedge fund or an over-leveraged investment bank peddling fubar MBS out of a back room but a modern, middle-class nation with a (semi)functioning government and a four-thousand year history: all that except for the history is gone … in a heartbeat. Fall asleep in Greece, wake up in Angola.
During the period of the Asian credit contraction or the Argentina default and crisis Latin America that took place during the late 1990s there were exceptions to malaise. The industrialized economies such as Japan and the US performed well. In 2012, the economy of entire world finds itself stuffed into the back of the truck heading for the freezer.
It really is different this time!
Forget the turkey gobble about ‘Peak oil in 2035′ or ‘energy self-sufficiency’. Without drastic change in attitude, the world is never going to get to 2015 in one piece. From an energy standpoint there is no difference between Germany and Greece … or Japan! Berlin (Tokyo) must sell cars to millions of turkeys or the lights go out. Peak oil drives a stake through the heart of the auto-sexy sales pitch. What happens next? Both Japan and Germany have carefully constructed the model post-modern energy-arbitrage value-added economy: Peak Oil destroys it. What rampages through Greece is getting ready to cum inside quivering Germany, possibly within months.
Ominously, fuel prices are rising to record levels even as the world slips into recession. This is a slowdown in credit expansion, without credit there are few funds available ‘on the sidelines’ to push up crude prices. What this means is that any spare change on the sideline is being burned up for nothing right now.
There are output declines in the UK, outliers in once-booming China, ongoing deflation as well as a new trade deficit in Japan, slowdowns in the countries which have depended on commodities sales to China and India: the EU is collapsing and the US is pincered between the need for more easing to keep debt costs under control and the steadily rising fuel prices amplified by more easing:
Figure 1: here is your Gasbuddy gift, red spreads across the US in the form of plus-four dollar gas prices. What sort of turkey will Gasbuddy bring in the future? Plus-five dollar gas or declining prices and faster declining ability to pay? Best to bet on declining employment and more poverty.
|BRENT CRUDE FUTR (USD/bbl.)||125.520||0.180||0.14%||20:00|
|GAS OIL FUT (ICE) (USD/MT)||1,030.000||1.750||0.17%||20:00|
|HEATING OIL FUTR (USd/gal.)||325.400||1.110||0.34%||20:01|
|NATURAL GAS FUTR (USD/MMBtu)||2.263||-0.006||-0.26%||19:58|
|GASOLINE RBOB FUT (USd/gal.)||333.630||1.330||0.40%||20:01|
|WTI CRUDE FUTURE (USD/bbl.)||106.640||0.300||0.28%||20:00|
Table from Bloomberg has Brent crude at a economy-crushing $125./barrel. The economic infrastructure has been built around an assumed $20./barrel forever. Crude costing more than $40 per barrel or so strands the entire fuel-wasting enterprise, this includes China. Meanwhile, the high fuel prices represent/require massively expanded credit. The reason for the credit in the first place was because there wasn’t enough cheap crude to satisfy all demand starting ten years ago! Credit access became a substitute for fuel and a way to ration it at the same time.
So far the current mini-spike hasn’t been able to push past last April’s high of $128./barrel for Brent. If the $128 level holds it indicates the world is too broke to afford higher prices. Prices pushing above that level indicate the turkeys’ best chances of buying their way past the consequences of their own waste are being hurled into the fire.
Figure 2: this chart is from Jonathan Callahan’s Energy Export Databrowser.Greece does not produce any petroleum energy to speak of: a few thousand barrels per day from offshore fields. It has to import fuel from overseas, mostly from Middle East producers such as Iran. Where does Greece get the hard currency to swap for petroleum overseas?From an energy standpoint Greece is insolvent. It once borrowed — euros — from banks to buy fuel. Now it has to borrow from new banks to pay off the old banks AND to buy the fuel. Greece is on the road to oblivion. It buys less fuel even as it falls further into debt. Without some drastic change Greece will not only default but collapse.Like the other countries, Greece obviously failed to earn enough from using the fuel to pay its energy bill otherwise it would not be insolvent.
Last Summer was really the EU’s last chance to put its energy house in order and get serious about conservation. It is too late when economies are stripped out there are no funds with which to ‘buy’ the saved btu’s. Greece from the ground:
“A harder Default To Come”
“We owed it to our children and grandchildren to rid them of the burden of this debt,” said Greek Finance Minister Evangelos Venizelos about the bond swap that had just whacked private sector investors with a 72% loss. While everyone other than the bondholders was applauding, the drumbeat of Greece’s economic horror show continued in its relentless manner.
In central Athens, a stunning 29.6% of the businesses ceased operations, up from 24.4% in August; in Piraeus 27.3%, a 10-point jump since March. The whole Attica region lost 25.6% of its businesses. “This worsening of the survival index in the commercial sector … shows that resistance is waning,” said Vasilis Korkidis, president of the National Confederation of Hellenic Commerce. “We must continue the battle of daily survival and keep our shops open,” he pleaded—while fourth quarter GDP was being revised down to -7.5% on an annual basis. The Greek economy has shrunk about 20% since 2008.
Unemployment is veering toward disaster. The overall rate of 21% in December, announced Thursday, was horrid enough, but youth unemployment rose to a shocking 51.1%, double the rate before the crisis. A record 1,033,507 people were unemployed, up 41% over prior year. Only 3,899,319 people had jobs—a mere 36.1% of a total population of 10.8 million!
No economy can service a gargantuan—and rapidly growing—mountain of debt when only 36.1% of its people contribute (by comparison, the US employment population ratio is 58.6%, down from 64.7% in 2000). Hence, another bout of red ink. The “cash deficit” at the end of 2011 hit €24.9 billion, 11.5% of GDP, far above the general budget deficit. Government-owned enterprises, such as the public healthcare sector, couldn’t pay their bills. Total owed their suppliers: €5.73 billion.
What a horror show! Richter doesn’t mention that the only way for Greece to escape its straitjacket is to either borrow more and roll over debt or to repudiate it. There is no way for Greece — or Germany — to repay Greece’s finance debts even if 100% of its citizens hold jobs. The debts are simply too enormous.
Greece Undergoes An Energy Cramdown.
Greece’s GDP has declined right along with energy consumption. This is no accident or coincidence. The fairy-tale increase in GDP that everyone loved so much was powered by credit expansion which leaked into fuel bourses. Credit enabled the virtuous cycle of bull markets and ever-rising asset prices. Customers could meet the cost of expensive fuel (and everything else) by taking on more debt. At the same time credit expanded — as it must — so that internal costs of that credit could be managed.
The problem is that expensive fuel is that it returns the same ‘nothing’ by its use as does the cheap stuff! $20 fuel is a bagatelle to waste, it subsidizes the $50,000 automobile and the $500,000 tract house. $125 per barrel crude oil is burning a Jackson Pollock in the fireplace. The mindless waste on a planet-wide scale digs a bottomless pit that economies are unable to climb out of. The automobiles and tract houses cease to be assets but become liabilities instead: ‘Welcome to Greece’.
Here is what the world’s economists ignore: that our Number One Investment for the past two-hundred years has been non-remunerative waste, paid for with an ‘asset’ that mandates its own ceaseless and perpetual increase. The beneficiaries of this waste have been a handful of very special turkeys. Like them, the economists insist that the waste is ‘productive’ and ‘progress’: that the wasting process is so fundamental to our way of life as to defy scrutiny.
Just like the turkey farmer, credit has been our best friend, the ready enabler of all our wants. The Credit God stuffed us with everything our hearts and stomachs desired, even as these became perverse then self-destructive. Waste for its own sake was elevated to a virtue, it became the basis of our economies.
With supply constrained relative to increasing worldwide demand, fuel costs rise until something important breaks, in 2008 it was the securitization industry and shadow banking, now looks to be repos and sovereign credit. The costs of fuel plus the debt needed to bid for it are breaking costs, countries can no longer borrow. Without credit there are vanishing chances of expanding GDP or to roll-over maturing debt … or to import fuel.
Figure 3: Adding insult to injury: gasoline in Greece costs about $8.75 per US gallon, on the way to $50 per US gallon by way of black market profiteering and diminishing fuel supply. In the future, if Greeks want gas they will have to sell their children in order to afford it.
– Europe must borrow in order to obtain fuel even as the continent’s defective borrowing structure breaks down.
– The mercantile states such as Germany have been able to borrow against the accounts of their EU trading partners but now these partners are bankrupt. Unsurprisingly, the German economy is starting to contract.
– Europeans afford high priced fuel by cutting back on car purchases.
– Europe’s liabilities in euros are expanding dramatically along with the euro ‘rescues’ and bank bailouts. Germany has little choice but to exit the euro to escape mounting peripheral liabilities. Defending the euro would be suicide for Germany as would abandoning it: Germany chooses its poison.
– Euro-finance is a Ponzi-scheme, he who exits first escapes with something, the rest hold the bag. UK has exited the euro-concordat already, Spain looks to exit along with the Netherlands, France will exit after Sarkozy is ousted from his presidency. Germany cannot carry the bailout costs these other countries represent. As EU countries exit or default Germany will ditch the euro for the D-mark.
Germany is partially responsible for the multi-trillion euro ECB balance sheet. The collateral held by the ECB for its LTRO is deteriorating: there are margin calls. The central bank’s balance sheet is becoming largely unsecured debt. Germany encounters the First Law of Economics: the cost of managing surpluses becomes greater than the surpluses are worth. Selling all those cars turns out to be more than a dead loss.
Germany has been running persistent current account surpluses with the peripheral states since the introduction of the euro (click on for big).
Figure 4: Europeans have bankrupted themselves with their automobiles. Current accounts don’t lie, the credit imbalances are vendor financing within a fixed exchange rate regime, all for the benefit of German industrial firms. As European managers remain silent about the need to conserve energy, energy conservation as a natural consequence of credit breakdown is scything through the turkeys.
It is astounding that the Europeans would throw Greece into the pit, it is certain that they did not mean to do so, circumstances forced them to it. Too bad nobody is willing to face reality and throw the automobiles into the pit, instead.
Next goes Europe, itself. The Greek default closes the book on Europe in its current form, which is a lost cause. It is the end of the beginning: there is not going to be any ‘recovery’ or way back from the abyss that is now engulfing the continent. Some fragments here and there might save themselves for a little while, then like sparks from a bonfire be swept away by the wind. The crisis must now burn itself out: Europeans, look to yourselves and may your turkey-credit-God have mercy on your souls.