Oil Limits Reduce GDP Growth; Unwinding QE a Problem

We know the world economic pattern we have been used to in years past–world population grows, resource usage grows (including energy resources), and debt increases. The economy grows fast enough that paying an interest rate a little higher than the inflation rate “works”  for both lenders and borrowers. Borrowers are able to handle the required interest rate, because their wages are rising fast enough to buy homes and cars at prevailing interest rates. Unemployment is not too much of a problem because jobs grow with population and resource usage. Governments do fairly well, too, because they can tax the growing wages of the population sufficiently to get enough taxes to pay the benefits they have promised to constituents.

This model “works” fairly well, as long as the economy is growing fast enough–population continues to grow and resource extraction continues to grow as planned. In a finite world, we know that this model cannot work forever. At some point, we can expect to start reaching limits.

What do these limits look like?  I would argue that in the case of resource extraction, these limits look like increasingly high cost of extraction. We need to extract resources from increasingly deep locations, in increasingly out-of-the way places, using increasingly more energy intensive techniques. For a while, improved technology is sufficient to keep costs down, but eventually the cost of extraction begins to rise. Some of the rising cost may even be taxes, because the country where the extraction is located needs higher taxes to keep a growing population properly fed and housed, so they do not rebel and disrupt production.

When the cost of extraction begins to rise, it is as if we are pouring more manpower and more resources of many types (steel, fracking fluid, jet fuel, electricity, diesel fuel) into a deep pit, never to be used again. When we put more resources in, we get the same amount of resource out, or even less than in the past. If we want to continue to increase the amount we extract, we have to further increase the quantity of resources used in extraction. I have referred to this issue as the Investment Sinkhole problem. Obviously, if we put more manpower and other resources into this pit, we have less for other purposes.

A recent example of resources hitting limits is oil. World oil prices started increasing about 2004 (Figure 1). Analysts say that these rising prices are related to rapidly increasing production costs. Oil company presidents say that we extracted the cheap to extract oil first, and most of it is now gone. Recent reports of major oil companies say profits are dropping, despite high oil prices.

Figure 1. World crude oil production and Brent spot oil price, both based on EIA data.

Figure 1. World crude oil production and Brent spot oil price, both based on EIA data.

Oil is an important commodity because it represents about 33% of the world’s energy supply. It is the world’s primary transportation fuel. It is a very important fuel in agriculture, operating farm equipment, transporting fertilizer, running diesel irrigation pumps, making herbicides and pesticides, and transporting goods to market. Therefore, if oil prices rise, food prices are likely to rise well. In fact, since nearly all goods are transported, an oil price rise affects nearly all goods and quite a few services.

There are really two issues when the cost of oil extraction rises:

1. If the sales price of oil rises, to what extent will this increase adversely affect the economic growth oil importing economies? Rising oil prices mean that the salaries of workers do not go as far, so they must cut back on discretionary goods. Profits of companies will also fall, because it is hard to raise prices of goods, without reducing the quantity sold. In my view, the run-up in oil prices since 2004 explains pretty much all of the “Great Recession’s” impact on oil importing economies. See my article Oil Supply Limits and the Continuing Financial Crisis. In the next section, I show evidence that oil price increases have had a very adverse impact on GDP growth of oil importers.

2.  While the cost of oil extraction is expected to continue to rise, can the sales price of oil really increase to match this higher extraction cost? If oil price can’t rise because of affordability issues (low salary growth, low growth in debt, or cutbacks in government transfer payments), then there is likely to be a crisis of a different kind. Oil exporters will find that oil prices are not high enough to cover their costs, and will cut back drilling to what is profitable. In fact, countries that are producing oil mostly for themselves, such as the US, are also likely to see their oil production drop, because prices will not be high enough to justify new investment. In such a situation, both oil importers and oil exporters are much worse off, because most of our systems are dependent on oil, and less oil will be available.

The Federal Reserve now is discussing the possibility of stopping quantitative easing. If this is done, I expect it will have a very adverse economic effect: long-term interest rates will rise and asset prices are likely to fall. If commodity prices fall as well, then we could find ourselves in the scenario outlined in the preceding paragraph, in which oil prices drop lower than the cost of production for many producers.

Relationship between Oil Consumption Growth and GDP Growth

If we look at a history of growth in energy consumption and world economic growth, it is clear that energy growth, and for that matter oil growth, tend to move together.

Figure 2. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

Figure 2. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

In fact, agencies such as the International Energy Agency use projected GDP growth in estimating future demand for energy products, including oil. Energy supplies don’t grow quite as rapidly as GDP, partly because of efficiency gains, and partly because the world economy is becoming more service oriented. In general, new services don’t require as much energy as new manufacturing.

Growth in oil usage would also be expected to mirror GDP growth, but at a slightly lower rate of increase than growth of energy use in general. This is the case because oil is the most expensive of the major energy products. Consequently, there is a strong incentive to switch to cheaper energy products or to increase efficiency.

Effect of High Oil Prices on GDP of Oil Importers

If we look at the data, it is striking how handicapping high oil prices are to oil-importing countries (Figure 3). Consumption by countries that have historically been the biggest importers of oil, (US, EU-27, and Japan) started dropping about same time oil prices were started to rise.

Figure 3. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 3. Oil consumption by part of the world, based on BP’s 2013 Statistical Review of World Energy.

At least part of the reason for this drop is because oil is an expensive energy product. With  the run-up in prices, goods made using oil products became increasingly high cost to make and transport. With these higher costs, goods became less affordable to the country’s own citizens as well as less competitive in the world marketplace.

During the same period, annual growth in inflation adjusted (“real”) GDP for the EU, US, and Japan combined dropped significantly below the rest of the world (Figure 4, below).

Figure 4. Annual percent change in Real GDP by part of the world, based on data of the USDA.

Figure 4. Annual percent change in Real GDP by part of the world, based data of the USDA.

In fact, if we look at groupings of countries as shown in Figures 5 – 7, we can see a dose-related response, with countries deriving the highest percentages of their energy consumption from oil having the poorest economic results.

Figure 5 shows the percentage of energy consumption coming from oil in 2004, for several country groupings. (2004 is about the time that the oil price run-up started.) Figure 5 indicates the PIIGS1 and Japan had the highest percentage of their energy supply from oil, and China had the lowest percentage. The US, the EU-27 minus PIIGS, and India were in between.

Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU - PIIGS means "EU-27 minus PIIGS')

Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU – PIIGS means “EU-27 minus PIIGS’)

We can also look at economic growth for the same groups of countries. The countries with the lowest proportion of oil use, and thus least affected by the run-up in oil costs since 2004, have had the greatest GDP growth in the 2005 to 2011 period. In fact, the GDP growth percentages for the period 2005-2011 (shown in Figure 6 below) follow exactly the reverse pattern shown in Figure 4.

Figure 6. Percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 6. Percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

In Figure 6, part of the high growth in India and China relates to increased globalization. Countries around the world compete on wage and benefit levels as well as on the price of energy. China and India have lower wages than the developed countries, so could increase their share of manufacturing for this reason as well. More liberal treatment of pollution control may also be a factor in their increases.

Not too surprisingly, growth in oil usage follows the pattern of economic growth (Figure 7, below).

Figure 7. Percent consumption growth between 2004 and 2011, based on BP's 2013 Statistical Review of World Energy.

Figure 7. Percent consumption growth between 2004 and 2011, based on BP’s 2013 Statistical Review of World Energy.

It should be noted, too, that for the PIIGS, it is not just one large country with a high percentage of oil consumption in 2004 that is dominating the group result in Figure 5. All of the PIIGS had high oil consumption percentages in 2004: Greece, 62%; Portugal, 61%; Ireland, 61%; Spain, 52%; Italy, 49%. In fact, the country with the worst problems (Greece) had the highest oil consumption percentage in 2004.

I might also mention that economist James Hamilton found that 10 out of 11 United States recessions since World War II were associated with oil price spikes of 25% or more.

What Goes Wrong in the Expected Model, When Oil Prices Remain High?

In the first paragraph of this post, I outlined an expected model of how the world might operate, if economic growth remains high. Slower economic growth would be expected, if resource limits start having an impact on economic growth.

What happens if oil prices remain high? I think the answers is fairly different for businesses, compared to consumers. Businesses can mostly shake off the impact of higher oil prices, by cutting back on the amount produced (and thus cutting the number employed), or by shipping production to a lower cost part of the world (again cutting back the number of US workers employed), but workers don’t have the benefit of making changes of these types. They can drop out of the workforce and apply for government benefits, but this does not really fix their lack of jobs, and the low growth in wages for those who do have jobs.

Because wages of workers are still adversely affected, even years after an oil price rise, and because the cost of goods now reflects the higher price of oil, consumers continue to find that their budgets are stretched. Some can afford to purchase a higher-mileage automobile, but most cannot–their budgets are still stretched, and some have dropped out of the work-force completely. The government can try to cover up this situation with artificially low interest rates for homes and cars, and with higher transfer payments using deficit spending. Unfortunately, the government programs don’t really fix the underlying problem, namely a lower percentage of the population with jobs, and wages of those with jobs not rebounding by much. Because there is no real fix for the underlying problem, the economy doesn’t really bounce back.

Quantitative Easing, and the Unwinding of Quantitative Easing

One way the government hides our current financial problems is with quantitative easing (QE). QE lowers longer-term interest rates, such as those that affect the price of mortgages. QE also lowers the interest rate the government pays on its own debt, helping to government to have closer to a balanced budget. The lower interest rates tend to increase stock market prices, and to raise prices of homes2 and farms, because investors seek investments that provide better yields than the absurdly low rates available on bonds. This doesn’t really fix the underlying problem, either.

The government can also try to induce banks to lend more money out, but if buyers don’t have high-paying jobs, it becomes increasingly difficult to actually get the money available for lending into the hands of potential buyers. Waiting for several years doesn’t really fix the situation either–the accumulated deficit just gets worse, and the bubbles blown by QE become larger. None of this fixes the underlying problem of high oil prices.

If the government tries to back off from QE, we will see longer term interest rates rise. This will make mortgage rates rise, and cut back on the number of buyers of homes. Rising interest rates are likely to bring back the problem of falling home prices, and reduce the number of new homes built. Car sales may also fall, as interest rates on loans for new cars rise.

The suddenly higher interest rates are likely to make the stock market fall, because with higher yields, bonds will become more attractive investments in comparison to stocks. As interest rates rise, the value of bonds can be expected to drop as well, because this is the way bonds are priced–the higher the available interest rate, the lower the resale price of the bond.

The declining values of stocks and bonds, and for that matter, houses, is likely to be a problem for citizens, because they will realize that their savings are worth less. The “wealth effect” will work backwards. People will realize that they are poorer than they were before, and spend less.

The decline in the value of stocks and bonds is likely to be a problem for banks, pension plans, and insurers–and for that matter, any kind of institution holding large amounts of stocks and bonds. The exact impact will depend on the accounting rules for the particular institution. If market value is used for stocks and bonds, institutions holding them will show large capital losses, perhaps putting them below regulatory limits.

Part of the capital losses may be covered up by special accounting rules, such as allowing bonds to be valued at amortized cost rather than market value. But there may still be an adverse impact on capital, possibly putting some institutions below regulatory limits. Also, if an institution needs to sell a bond or stock that is valued on its balance sheet for more than it is really worth, it will incur a loss.

The removal of QE will also mean that the interest rates the government pays on its own debt will rise. This is will push up needed tax rates, putting further pressure on the consumer.

With lower asset values and higher tax rates, debt defaults are likely to become more of a problem again. Banks may cut back in lending as well, especially if their capital ratios fall too low.

The Effect on Oil Prices

With values of most investments dropping lower and tax rates rising, my concern is that the sales price of oil will drop lower, causing a severe cutback in world oil production. This issue is really one of affordability of oil. Economists would call this inadequate “demand” for oil. Of course, people will still need to eat food and need oil for commuting, but this doesn’t come into economists’ definition of demand–demand is only how much people can afford, not what they need.

So we really are in a quandary. If oil prices stay high, recessionary effects can expect to continue for oil importers. In addition, China, India, and other developing countries are increasingly becoming oil importers, so they themselves can increasingly expect to be affected by high oil prices. Furthermore, these same countries find demand for their manufactured goods is reduced because of economic problems of the Eurozone, Japan, and possibly the US.

If oil prices drop, they will be too low for oil companies to make new high-cost investments. A drop in oil production will take place gradually, as existing wells continue to produce, but new ones are not added. The impact of this lower oil production may be quite severe. The collapse of the Former Soviet Union in 1991 seems to have been caused by too low oil prices, as I showed in How Oil Exporters Reach Financial Collapse. I also talked about the low price issue in Low Oil Prices Lead to Economic Peak Oil. All countries are likely to be affected by this drop in production–importers because the lack of availability of oil for import, and exporters because of the lack of revenue from oil exports.

Even if we sail through our current set of problems, we can count on meeting them again in a few years, because the cost of oil extraction can be expected to keep increasing. If oil prices rise again, oil importers are likely to see a large increase in unemployment, and a squeeze on profit margins of businesses. Banks may again fail. Government will face a new round of problems, similar to those in 2008, or even worse, without having fixed their previous set of problems.

Notes:

[1] Acronym for Portugal, Italy, Ireland, Greece, and Spain, the countries in Europe with the most financial problems in the past few years.

[2] Many of the buyers for houses are institutional investors, planning to rent the houses out.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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267 Responses to Oil Limits Reduce GDP Growth; Unwinding QE a Problem

  1. Scott says:

    Thanks Gail, Yes, all eyes on interest rates to see the direction things are heading. Amazing growth in China and India in the last 20 years….

  2. Brian Carpenter says:

    One part of your thesis seems to be coming true. Exxon, She’ll, BP, and Chevron all reported dismal profits yesterday. High production costs and political issues were to blame, we’re told.

  3. RobM says:

    Very nice summary of our predicament, thanks.

    For all the reasons you list I see no possibility that QE will be reduced until inflation increases to an intolerable level. I am interested in what you predict will happen if QE continues.

    • I would need to think about that. There are other limits out there as well. For example, with very low interest rates we have now, pension plans can’t get enough funding. At the same time, interest rates are inching up, causing problems in home sales. Very low, flat interest rates cause problems for banks, who are geared to more stepped up interest rates. At the same time, the problems around the world continue, and the cost of drilling keeps rising. So there is sort of a contest as to which problem sets things off first.

      • Interest rates have to stay low, because you can only pay interest in a growing economy, and our economy is in contraction, or “negative growth” as the newzspeak has it. In reality, they should be paying negative interest on reserves parked at Da Fed.

        We talk quite about the Energy-Money equation in the recent Podcast with Ugo Bardi from the Cassandra’s Legacy Blog. For those who don’t know, he’s the Physical Chemist who built the computer model demonstrating the Seneca Effect in resource depletion issues. Podcast is embedded in an article by Ugo, Peak Shale Oil? What Peak?

        http://www.doomsteaddiner.net/blog/2013/08/03/podcast-peak-shale-oil-what-peak/

        We’ll be discussing this further in 2 more parts with Ugo, and also in an upcoming Podcast with Graham Barnes from the FEASTA website, who writes on currency issues and renewable energy financing.

        Gail, last I checked your Credit and Energy Part 1 had 561 Listens. Kudos, you are second only to Uber-Doomer Secretariat Guy McPherson in listens to an individual Podcast on the Diner. :-)

        Also folks, be sure to listen to my recent Dialogue Destruction podcast. It’s a spoofing of the Censorship that goes on in the Commentary of the Collapse Blogosphere. You should get a chuckle or two. LOL.

        http://www.doomsteaddiner.net/blog/2013/08/04/dialogue-destruction/

        RE

        • Thanks for your update!

          Ugo has some worthwhile things to say in his talk you link to, bringing in the experience with the Fall of the Roman Empire.

          Regarding the Commentary on the Collapse Blogosphere, I would agree each site has its own view, and definitely there is a problem with cutting off discussion on issues that are opposed to what the site is talking about. I think, though, that there also gets to be a problem with people just plain being off topic. If a person is not talking about topics that are at all related to 9/11, it gets just plain annoying to hear yet again, a commenter’s conspiracy theory. For the sake of not cluttering up the comments with things that are just plain off-topic, it is necessary to remove those comments–but probably not banning the commenter.

          By the way, The Oil Drum is still alive until the end of August. It is mostly running “last posts” by staff members during August–at least to the extent that the editors can agree with the last posts. I understand Ugo Bardi is running the last post he wrote for The Oil Drum on his own blog, because some Oil Drum editors disagreed with what he had to say. (It is my view he should be allowed to provide his own view, whether or not other editors or I happen to agree with his view.)

          • “I think, though, that there also gets to be a problem with people just plain being off topic. If a person is not talking about topics that are at all related to 9/11, it gets just plain annoying to hear yet again, a commenter’s conspiracy theory. “- Gail

            This is why I run SMF rather than the linear commentary provided by WP. When commenters go off thread, I can simply split the thread and give them one of their own. I then have the forum divided up into topic areas, so if the tangent topic is Conspiracy, I move it to the Conspiracy board. People uninterested in reading about conspiracy don’t have to visit there. Problem solved, no censorship. :)

            There is no excuse for censoring people on this type of software, and it is similar to the type The Oil Drum was running. Basically Leanan is highly intolerant of viewpoints contrary to her own, and censors a LOT. I know, I dealt with her on Peak Oil. I have an extremely low opinion of her based on my experience on both boards. I think she is in large part responsible for why they did not succeed long term.

            We did talk with Ugo about the demise of TOD, I believe that shows up in Part 3.

            RE

            • There are differences in types of blogs. On Our Finite World, I am operating by myself, and don’t really have the time to set up separate conspiracy threads, for example. On a site that aims to do more, then there is the possibility of multiple discussion simultaneous threads.

              The Oil Drum started out being more liberal with respect to what kinds if articles it would accept, and what kinds of discussion would be permitted. When I was making decisions on what articles to run, I was a great deal more liberal in accepting articles than the current “voting” approach provides. There seem to be a whole lot of people who only want their own view published. The clash of what is “right,” leads to very few articles actually being published.

          • xabier says:

            Gail

            Drumbeat is always interesting and useful, as are many of the comments on the site, but clearly the editorial policy of The Oil Drum has, unfortunately, been rather narrow and repressive: perfectly ridiculous to reject Bardi.

            • To my knowledge, no one has ever met Leanan or knows her real name. She has complete freedom on what she posts, and also on what she decides to censor. Her views on climate are fairly different from those of quite a few staff members, but no one has ever been able to influence her on what she writes or posts. Drumbeat is more or less a take-it-or-leave-it package.

              With respect to the articles posted outside of Drumbeat, voting tends to eliminate a lot of articles that disagree with the opinions of one or more editors. It is hard to find anything worthwhile that everyone agrees with.

          • “There are differences in types of blogs. On Our Finite World, I am operating by myself, and don’t really have the time to set up separate conspiracy threads, for example.”-GT

            Gail, given the amount of time you spent responding in your commentary, the amount of time it takes to move a post from one place to another is miniscule. I do all this part of the board management myself, though I have created other moderators over time.

            It’s just a choice you make if you believe in Free Speech and seek to eliminate Censorship as much as you can. I made that choice, and so could you. We could set you up in precisely the same way you know.

            There are other adantages as well. In the SMF set up, EVERY COMMENT has a UNIQUE URL. This means you can link to specific responses you make in the commentary, bookmark them in favorites just like any website.

            It also means you can catalog commentary by subject area, organize your website for reading by area of interest rather than just chronologically. and maintain discussion on subjects for months, even years. Our Inflation-Deflation debate goes back a year and a half to when I started the Diner and runs 30+ pages in length.

            Anyhow, gimme a holler when you want to upgrade and join me in supporting greater freedom of speech in the Collapse Blogosphere. The Database Cavalry from California will get you up to speed in no time.

            RE

        • Your SPAM filter is pulling my posts again.

          RE

          • I try to check my spam filter pretty often, and release the posts that are caught. The world “conspiracy” will get your post caught for review, because it has been an issue often enough.

  4. dan says:

    Well won’t wages come down for oil workers as more unemployed people will be willing to do a lot more for a lot less thus driving down operating cost for oil companies?..Also if interest rates go up, can’t the pension plans put their money in to bonds or somewhere else to grow at the higher interest or will people lose their faith in the almighty dollar? If they do what does that do to the price of oil. Also isn’t possible that we stay in this slow malaise that we are in now for another 10 years and continue to keep the American people drunk on entertainment so they don’t notice. I know a lot of well educated people with phd’s that think NPR actually knows what they are talking about….even though I tell them they have missed every major news story for the last 15 years.

    • Oil workers are pretty specialized. They need very specific people to operate their high-tech machines. In fact, that is the reason that a lot of outsourcing of drilling is done. Inability to coordinate all of the high level employees is a problem already–see the testimony in the BP Gulf Blowout. I don’t see them taking up much of the slack in unemployment.

      If interest rates go up, pension plans can put new money in at the higher interest rates. (The are counting on 7% t0 10% interest rates.) But all of the old money is at what it is at. And if there is investment in the stock market (this can be 50% or more of a pension fund) the fact that its value falls is a big deal. Starting from a lower base, even if the money is invested at a higher rate, is a problem.

      I am having a hard time thinking that this could continue for another 10 years, but I am constantly amazed at the number of additional tricks the economists can pull out of their hat.

      I don’t listen to NPR either.

      • timl2k11 says:

        I think the “tricks”, the QE, the fudging of the CPI and GDP are all about public psychology. If people knew the real state of things, their behavior would change and there would be a deep recession or even depression which is really exactly what we need, given we are hitting are resource limits. Instead, for whatever reasons, TPTB would like everyone to think it is BAU so instead we are running full speed ahead toward a cliff.
        BTW, what *do* you listen to? :)

        • dan says:

          What do I listen to…well I have my list of blogger sites that I get my information from…Oil Drum, Automatic Earth, Howard Kunstler, and Hardcore History. I sometimes worry that I am so inundated with doomer info that I am not seeing things right or I am missing something, especially when I see so many people acting BAU all the time …Maybe I should be out being a grasshopper having a good time rather than an ant storing food for the storm! But I think things will turn on a dime when they do…and when fear sets in this next time it will be hard to entice people with greed to get them out.

        • People who visit my home comment as to how quiet it is. Basically, I listen to nothing, other than real people talking. I would rather read an article, than listen to a podcast of it. In fact, I very much avoid recordings, if I can. But I do listen to some recordings readers recommend, or at least part of them.

          We don’t have a television, and I generally don’t listen to the radio (except possibly Garrison Keeler on Saturday evening, or sometimes music on the radio if I am driving somewhere.) I don’t listen to music while I work, and I don’t have a device with recorded music on it.

      • xabier says:

        Gail

        ‘…another ten years…’

        Indeed! An interesting time to live: it seems to me that that most people don’t grasp the magnitude of what happened in 2008, while the remainder who do understand are either struggling to keep the balls in the air and the plates spinning, or, like us, perplexed and wondering as to how it can possibly continue………

        • Bill says:

          I live a life that’s as quiet as Gail’s, maybe quieter, but just spent a weekend in Chicago, where I learned that people are still lining up 15 deep to buy things – ok, cheap women’s clothes at shops like 21 Forever, or whatever it was, on Michigan Avenue, and that at least a million of them can spend a weekend wandering Grant Park sending text messages about the Taste of Chicago “food fair” item they have in their mouth. There are still cranes at work building more hospitals on the north side. On the train ride back west, one can see millions of weed-free acres of Roundup’ed corn, wind turbines and alcohol fuel plants. Everything’s absolutely fine.

          • xabier says:

            Bill

            I live in one of the economic and property ‘hotspots’ of England: same observations. It looks very good.

            It’s like Europe, July 1914……

  5. aleklett says:

    Nice work.

  6. timl2k11 says:

    One of the articles you linked to talks about the cost of a marginal barrel of oil. I looked up marginal cost on Wikipedia. Is the “marginal cost of a barrel of oil” or a “marginal barrel of oil” referring to “new” barrels of oil (vs. barrels from oil fields already long in place)? Is that the gist of it?

    • Exactly. “Marginal barrels” are the new barrels of oil. Once you have wells drilled, you can still get quite a bit of oil out cheaply, because you have already made all the investment in finding the right area, getting the rights to the land, and doing the drilling. The new barrels are the problem, because their cost is getting higher and higher.

      The wells that are in place will probably continue to mostly produce oil for a while, even if the price of oil goes down, because companies can earn enough selling the oil to cover their minimal ongoing costs, once wells are in place.

      • St. Roy says:

        Hi Gail:
        I second Kjell A. Of all the peakists and net energy bloggers I follow, your work ranks at the top. New oil versus old? Has anyone looked at the percentage on new versus old in the marketplace in any one period/year? Wouldn’t that ratio be telling in terms of economic contraction, collapse, etc.? The more new oil in the market, the lower the EROI, which as you have said we are already below the point where we can run our current civilization.

        • I am not aware of a source of new oil versus old. There are some expensive proprietary databases that give a lot of detail, but I do not have access to them.

  7. The price or availability of oil has had little to no effect on our economic problems today. Greenspan and his banks ran a housing bubble scam at the same time 25 million factory jobs went to china. There nothing for high school grads but part-time minimum wage. If your going to make it in this country you have to become some kind of professional. Our current congress is holding back our economy by cutting spending, laying off government workers, creating debt ceiling sabotage and not passing a large infrastructure jobs bill(high speed rail for one, water storage, schools, etc.). The Tea party is holding the economy hostage. Energy is not what is holding back the economy today. This is all about the power struggle (money and how it’s spent, money is power) in Washington. Don’t think the banks didn’t know what they where doing either. There are a lot people who walked away with big bucks making that bubble and left a lot of folks broke.

    • I guess everyone has a right to an opinion, no matter how ill-informed. After studying this issue since 2005, I am pretty sure about what I am talking about. This is a link to my article that was published by the journal Energy in January 2012: Oil Supply Limits and the Continuing Financial Crisis. According to Scopus, it has so far been cited by 12 other articles.

      • The biggest problem today with the American economy is the gutting of good paying manufacturing jobs that got sent to China in the second half of the 90′s to 2008 (but the professional do enjoy their cheap big screen TV’s from Chinese rice paddy labor. The next best thing to slavery). The second biggest problem is the rising cost of heath care which from 2002 to 2012 rose faster than the price of oil and is twice the expense to the American consumer than oil based fuels. Just because the price of gasoline is posted on every major intersection in country don’t make it the number one problem. I have yet to meet someone who filed bankruptcies because of the price of gasoline. There might have been a few trucking companies put out of business. But home ownership and medical bills have filled the courts. It’s a lot easier to sell your half ton pickup daily driver for a used Civic than to preform your own heart bypass surgery or deliver a baby. After inflation and efficiency improvements, transportation fuels aren’t any more expense today than 30 years ago. But you might not realize that if you have been only studying the subject since 2005.

        • Lindon says:

          ChiefEngineer, at first read your argument has a tiny ring of logic and common sense to it. But you seem to be in denial. If you look at and study the charts that Gail posted, and the facts those graphs present, you’ll have a very difficult time persuasively arguing that oil availability and price has nothing to do with our current seemingly insurmountable economic problems. Adjusted for inflation or not, the difficulty in providing increasing amounts of petro energy to fuel increased economic growth has everything to do with our economic mess. The rising cost of healthcare, I bet, has a lot more to do with the rising average age of the population which has only been made possible by our petro-fueled economy.

          • Denial would be basing your entire economic philosophy on the fact that using the easiest resource first is the worlds economic problems. Being that has been true from the beginning of time, how did we get to the advance society we have today. “That’s denial”

          • Chief Engineer
            Using the easiest energy source first has brought is to this point of ‘high civilisation’ simply because there have always been more energy sources to exploit. The apparent limit on energy sources was removed by exploitation of fire. That enabled mankind to move out of the tropical zones and set up home everywhere (though not evenly of course)
            This constant exploitation gave rise to the self perpetuating myth of ‘no limits’, and that our advancement has been solely the result of technological acheivement.
            There is now the odd belief that technology will solve the energy crisis.
            We are now at the point where the use of fire has gone full circle and imposed its own limit on us.
            In other words, we started burning tree for firewood, now all the trees have gone.

        • Don Stewart says:

          Dear Chief Engineer
          I agree with you that the health care costs have been rising steadily. They have gone from around 6 percent to 18 percent of the GDP.

          However, when we look at GDP, we have to remember what a peculiar measurement it is. It is essentially the cost of running the economy. Now if you are an economist, and can assume that a perfect market is perfectly allocating resources, then maybe the additional 12 percentage points of GDP is money well spent. If you think that the extra money has been spent because of poor lifestyle choices with the consequence of chronic disease epidemics, coupled with poor practices in the industry, then you see it as a waste…and maybe it should be SUBTRACTED from GDP. But it is undeniable that the health care sector has been one of the outstanding job creation sectors in the economy:
          http://www.huffingtonpost.com/2012/12/07/health-care-jobs_n_2257872.html

          Think of GDP as a component of the measurement of ‘ability to repay debt and to pay taxes’. One can be living very happily on a tropical island with no debts and no taxes and plenty of free stuff to eat and not generating, nor needing, any GDP whatsoever. But put that person in the US where the government demands its pound of flesh and the loans come due every month, and everything changes. Suddenly, ‘jobs’ become the overriding factor. In short, we move from ‘satisfaction with life’ to ‘ability to pay the powerful’. And ‘paying the powerful’ is one of the things that GDP measures. Whatever is left over after one pays the powerful one can spend as one wishes.

          Suppose that we include in ‘the powerful’ those who control oil supply (whether domestic or foreign makes no difference to the ordinary consumer). The money the ‘oil powers’ are able to extract is a direct subtraction from what the ordinary person has left over to spend as he likes.

          As I see it, the effects on a country’s GDP reflect the drain of money out of a country to the ‘oil powers’ who reside in foreign lands. But even if the money is spent for domestic oil, the ordinary consumer still perceives that they have less left over to spend as they like.

          I think that the ordinary consumer is in a real vise between rising taxes, falling entitlements, rising cost of oil and heavily dependent products such as food and also health care and college costs…and their stagnant or falling income. But strictly in terms of GDP, the rising costs are counted as ‘additional GDP’ so long as they are produced domestically and the costs include a sizable component of wages paid. In short, we have to keep clear the distinction between ‘welfare’ and ‘GDP’.

          The recent inclusion of ‘intangibles’ in the GDP is perhaps a good example. Since everyone seems to think that ‘more GDP is good’, the BLS ballyhoos how much ‘intangible growth’ we have experienced. Another way to look at it is that we used to be able to amuse ourselves without all those intangibles we now have to purchase. If one is in debt and depending on writing a hit App to pay the rent, then one will have a different perspective than a Martian observing the peculiar behavior of the humans.

          Don Stewart

          • Hi Don,

            Living on a desert island might make a great two week vacation or TV show, but for myself I will pay my taxes without complaining and live in an advance society. Where others before me have given their lives and hard work for my comfort.

            The right wing favorite Rush this last week has been saying health care is 16% of the American economy. I believe the consumption of oil is about 6% but that might be off a little. There are many factors pushing our medical costs, the American diet, obesity, pollution from fossil fuels, couch potatoes, sitting in front of computers all day, Corporatizing And Profitizing care, and insurance companies removing some or all of personal financial responsibility to name a few. The ACA is the best thing that has happen to most of us in a long time, except for a few of the special interest that are not going to be able to suck us dry as easy. It’s not perfect but it’s a lot better than what we had.

            • Don Stewart says:

              Dear Chief Engineer

              If you are trying to scare me with quotes from Rush Limbaugh, I encourage you to look at what realistic people who are generally regarded as ‘liberals’ are saying. I won’t try to be encyclopedic, just a few tidbits.

              1. Take a look at this lecture by Mark Hyman, MD. Mark calls some of the Clintons ‘my friends’ and spoke at a Clinton Summit.
              http://drhyman.com/blog/2013/08/01/diabesity-and-how-food-is-medicine/

              Hyman thinks we are on the road to bankruptcy with health care, and the cause is industrial food. Without debating whether Hyman is right or wrong, just suppose he is correct. That means a huge chunk of GDP (food production, packaging, distribution, fast food restaurants, plus most of health care) is actually killing us. While it may be killing us, it is providing a huge chunk of the debt financed jobs. Restaurant workers and health care workers have been the mainstays of the ‘recovery’ in jobs.

              2. I was looking at my new issue of Permaculture Activist this afternoon. We have a few articles by Green Party people…’liberals’, I suppose. And we have a review of the book Revolution Wants Banner by David E. Gumpert. Gumpert recounts the struggle by farmers and consumers against the federal and state bureaucracies, and the FDA in particular, over raw milk. ‘Some 9 million Americans drink raw milk regularly today, a number that has burgeoned several fold in the past 8 years. At the same time, food illnesses linked to raw milk continue to fall, running less than 1 percent of all food borne illnesses, between 25 and 200 cases per year nationwide….And in a perfect parody of the national dilemma, loose-lipped Capitol staffers, self-congratulatory at their success in marshalling illicit food flows, tip the FDA off to the source of raw and grassfed dairy products slipping into suburban Maryland from across the Mason-Dixon line.’

              Gumpert says that the revolt against the bureaucrats has not yet found its ‘Rosa Parks Moment’, but that such a moment is approaching. He notes some local sheriffs have threatened to arrest federal enforcers who harass local farmers. I think the public, due to Eric Snowden and gun laws and a myriad of other causes are about to reach what I would call the Network moment, ‘We’re mad as hell and we not going to take this anymore’.

              3. Also from Permaculture Activist, a review of Dmitry Orlov’s Five Stages of Collapse. The reviewer notes approvingly some of Orlov’s concluding advice:

              ‘The best-case scenario is that the old rules are consigned to oblivion quickly and decisively. The public at large will not be the major impediment to making the necessary changes. Rather, it will be the vested interests at every level–the political class, the financial elite, professional associations, property and business owners and last, but not least, the lawyers–who will try to block them at every turn. They will not release their grip on society voluntarily…it is important to keep in mind one vital distinction: is this community going to operate under the old rules or the new rules? The old rules will not work, but the new ones might, depending on what they are.’

              You think that the Affordable Care Act is a great leap forward. There are very serious and well-informed people who think that the old rules, of which the ACA represents thousands of pages of legislation, is a prescription for disaster. You can dismiss them as ‘right wingers’, but that reveals more about you than about them.

              Don Stewart

          • Well Don, I’m just about the last person here to drink the Rush Koolaid. Everyone can have their own opinion, but I don’t think the other side would let him state facts like that without getting their underwear wet. I’m guessing it’s petty close.
            Dr. Hyman is probably right about America’s road to bankruptcy with health care. There are signs that the ACA is slowing the increase in costs but I would say it’s a little to early to be sure. But BAU was really not an option. I say give the ACA a fair chance. Then come back and fix what ever is wrong with it.
            Clearly one of the biggest problems is the American eating habits and how do you fix that without most of the country screaming big government in my life. My first answer would be drilling into young peoples head the importance of proper nutrition and exercise in school. My second answer might be to charge a $3 tax on a McCardioBiPass burger to pay for damage done.
            Anyway, this is the weekend and I’m out of here. Enjoy!

          • Scott says:

            Hi Don and others, Looking at the national debt vs GDP is the thing I am watching. We had a brief time we approached this point just after WWII. But it was healed by all of the soldiers coming home and building homes, a great building and baby boom. The time of the Baby Boomers. Here are several charts I was looking at, but we have to consider that times have changed and we do not have the same situation as we had after WWII.

            http://www.usgovernmentspending.com/federal_debt_chart.html

            http://zfacts.com/p/318.html

            We do not have the impending building boom that we had then, after the World War to build us out and expand, the way we did then with $30 oil after the big wars. We are now left with lots of dry holes in the old producing oil and gas fields in much of the world.

            Our 14 or, 40 trillion dollar debt depending on how you look at it (including the unfunded liabilities which is closer to 40 or more trillion and even more if you add on derivatives).

            I think the main issue is looking at rolling over the debts as interest rates rise. If I owed even one trillion dollars I would be fearful of any fractional rise in interest rates. Heck even my ten thousand dollar car loan hurts if rates rise. Governments may have to print an even larger amount of money than they have in recent years to service such debts as a result of rising rates and falling tax revenues due to the downturn.

            The real unemployment rate is closer to the mid twenty percent because people who gave up looking for work are no longer counted as unemployed.

            I believe this will be an uneven global decline or collapse as we call it.

            In recent years we have seen an uneven collapse, and likely continue worse in some places than others and relatively good in some lucky areas like Wall Street for now.

            So far the newly printed money from QE has mostly gone into Bonds and Stocks VIA large banks that were the recipients of the money.

            I think what is yet to be seen is what happen when these over inflated markets (Bonds and Stocks) Collapse. There will undoubtedly be a monetary response to such a collapse of the stock and bond markets. I just wonder where the money will go then. Gail any thoughts on that, what will be the next attempt to reflate and what bubble will be blown then and which groups will be left out to anguish in poverty?

            So perhaps one more attempt to re-inflate the system, you know that also makes me wonder about inflation as that has also been uneven, we are going to see inflation as a result of such a monetary response to a collapse in the bond markets, the question is where.

            Scott

            • The pumping up of the system after World War II took a lot of inexpensive fossil fuels. It also took ramping up private debt, at the same time that the government paid back its World War II debt. Rebuilding the economies in Europe (with a lot of cheap fossil fuels) helped the system too. Now we don’t have cheap fossil fuel to make this pump-up. And debt is already at a high level.

              I agree that QE has not worked to inflate the system. I really don’t know what besides very low interest rates and QE might be used to inflate the system. It seems like we are running out of options.

            • Scott says:

              Yes, Gail, If QE Fails (which it looks like it is), they really do not have many options left. I think we must prepare ourselves for many waves of emergency programs – which will come our way. Massive government programs, I bet they are making plans now for this already as I write this. Printed money being handed out for specific projects which could eventually bring severe inflation but this may be the blow off phase of our slow escalating emergency.

              I think we will be surprised how long this will go on and perhaps things will muddle along for years to come. But a sudden shock could come at any time given the instability in the world, just over the weekends they closed many US Embassy’s over some unknown threat. It is a scary world out there these days for sure.

              I still see an uneven slow grinding collapse with some doing better than others for a time until perhaps (let’s hope not), but when real emergency rolls into town, then things will suddenly change.

              I am still interested to know how much oil being cut off from USA would launch a crisis here like the 1970′s? It was not much then and I would bet it would not much now?

              Scott

            • I have already been surprised at how long things can go on. It is possible that our financial wizards will find yet another way to keep the balls in the air, although I would find it hard to figure out what it might be. It is possible the collapse will be pretty uneven, with some countries doing better than others.

              The issue with oil supply is mostly not being able to afford it. From that point of view, “cutting off” really isn’t an issue. Also, if prices drop, the US supply will drop as much or more than imports. So if we have “not enough”, it may be not enough of our own oil.

              There are two ways of looking at oil supply–what the actual change is, and what the per capita change is. If population is rising at close to 1% a year and oil supply is flat, the combination means that per capita consumption is dropping by a little less than 1% per year.

              If we look at “bad years” in the past we see the following:

              1973-1974 change: US oil consumption change, -3.8%; per capita change, -4.7%

              2007-2008 change: US oil consumption change, -5.7%; per capita change, -6.6%%

              When the economy was growing rapidly, we see for example,

              1999-2000 change: US oil consumption change, +3.2%; per capita change, +2.0%

              In 2012, the economy was not growing rapidly. Young drivers could not afford new cars. Many were dropping from the workforce.

              2011 -2012 change: US oil consumption change, -2.1%; per capita change, -2.8%

              The amount of difference between the 2011-2012 result and the 2007-2008 result is about (1.00 -.057)/(1.00 – .021) = .963 or -3.7%

              So we are looking at something less than a 4% change to have a result perhaps sort of like the 2007-2008 result. If we want really good growth, we need to add several percentage points compared to the 2011-2012 pattern of oil supply growth. More than a 4% decline in oil supply, relative to the low growth we saw in 2011-2012, is definitely bad news.

            • Scott says:

              Hello Gail and other, It does look like we are on the Plateau of Peak Oil and all we can hope for is that we continue to do okay for awhile it seems. It is hard to time these things, and it is out there looming fearfully, but I am in no hurry for it.

        • I would agree that our healthcare system is a major problem. Its cost is absurd, and has been growing year by year. Health outcomes are terrible. (The terrible outcomes may be related to our poor food, and our lack of exercise, as well.)

          I have been at the edge of the medical system all my life. My father was a doctor. My mother was trained as medical technologist, but did not work outside of the home after I was born. I worked in medical malpractice insurance and in workers compensation insurance, both of which are health related fields. I saw a lot of bad results of health care, and I heard my father’s views of other doctors.

          I do my best to say out of doctors’ offices.

      • “I guess everyone has a right to an opinion, no matter how ill-informed.”

        Hello Gail, after reading your comment. I was wondering if a look in the mirror wouldn’t be fitting. You are welcome to read the a post from a Professor on the subject who supports my statements.

        http://www.huffingtonpost.com/robert-reich/obama-jobs-republicans_b_3703612.html

        ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers “Aftershock” and “The Work of Nations.” His film, “Inequality for All,” will be out in September. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.

        • timl2k11 says:

          I don’t see anything in that article that refutes Gail’s observations.

          • Tim, Gail insinuated that my opinion was ill-informed. The article confirms major parts of my opinion which is different than Gail’s by someone who as a lot more experience and credentials than Gail. Gail has a habit of referring others with different opinions than her own to her own posts she has written with her opinion again. This is a completely professional outside opinion. This outside opinion was to confirm my opinion not refute Gail’s. There is a difference but clearly it does not support Gail’s opinion either. Thanks

            • You say the professor has a “lot more experience,” but the question is “experienced in what”. You also talk about better credentials.

              In a subject that requires understanding from a multidisciplinary point of view, it is very hard for professors to do well. They usually seem to understand exactly one side of the problem–their own chosen discipline. They want their views to be published, so they tend to follow what everyone else has said.

              I started by working in a financial area for well over 30 years, then added several years of learning about the oil and energy situation. I am able to find and use databases myself. Many people consider an FCAS equivalent to a PhD. I have published an article that has been cited 12 times with respect to the energy-financial situation in the well-respected peer-reviewed journal Energy: Oil Supply Limits and the Continuing Financial Crisis. I wrote an article for the casualty actuaries called The Expected Impact of Oil Supply Limits on the Property Casualty Insurance Industry. I have spoken to many groups of professional people, invited both by groups of college professors and by groups of Casualty Actuaries. In fact, I have several such speaking events planned.

        • There are a lot of professors who do not understand the real situation.

          • xabier says:

            Gail

            One of my customers is a rather distinguished Professor of Economics at Cambridge University. Alas, as fine as his letters to the Economist are, he ‘can’t boil an egg’ , as the English have it……. Splendid man, whom I greatly like, in fact, but acquaintance lessens ones deference for academic titles and the conclusions of those who hold them.

            More seriously, academic thought tends to get trapped in ‘schools’, which makes it inflexible and dogmatic. And economics is a highly politicized subject.

            • Academics are under tremendous pressure to publish “N” articles per year, or a total of “M” pages in journals. The only way this can be done is by

              (1) Writing articles that are very closely related to previous articles
              (2) Not deviating much from the assumptions or the conclusions of previous articles
              (3) Not bringing in many ideas from other subject areas
              (4) Collaborating with lots of other professors, so lots of people get credit

              As a result, there is a huge amount published, but it is hard to find much with original thinking.

    • no CE, money isn’t power
      Money becomes power only when used to buy energy, or the results of expending energy.
      If you doubt that, next time your car runs out of gas—stuff the tank with money, don’t bother buying gas.
      Or—next time you feel hungry, try swallowing coins. Deep fried dollar bills are nice too.
      In both instances, money is only usable when you exchange it to buy embodied energy, whether that’s bread, a car or a house.
      The ‘power’ bit has been the grand illusion of all of us.
      The current shift of jobs to low wage economies is symptomatic of the problem, not the problem itself. Manufacturers are denying the inevitable. Jobs went from ‘high energy’ USA to ‘low energy’ China. Now China is burning more energy (better diet, housing, cars etc), so jobs migrate further down the scale from China to an even lower wage economy, which should really be described as a lower-energy economy. They too will want better food and housing, so will become uneconomic, and the jobs/goods will migrate again. (oil powered transport allows that)
      Eventually we run out of ever-lower paid workers and reach a logical conclusion:
      Workers are not paid at all, and work in return for basic subsistence, food and housing. This was declared illegal in the 1860s, but the future might offer a choice between that and something even worse.
      Ridiculous? Stupid?
      Then think again. Already the majority of people with jobs can’t find any (oil supported) excess to set aside for the future. They are having to run faster and faster to stand still. Their (oil restricted) income can’t keep pace with (oil driven) prices. They are losing the battle with energy prices.
      Our entire civilised infrastructure was built on supposedly infinite cheap oil. We are now trying to support it on increasingly expensive oil. It can’t be done. Therefore our ‘economy’ is going to vanish. Without oil, we do not have an economy, which means your money will be worthless.
      But we still need to eat, ie obtain energy in its most basic form (food)
      without money, how dyou suppose we might do that other than by direct labour?
      Depletion of our energy-economy reveals the start of our final downward slide into an era of no-economy as the energy available to world industry slips into steeper and steeper decline.

      • EndMore, I’m still trying to figure out how you fill your gas tank without the “power of money”. Do you have a refinery and deep hole in your back yard ?

        • nope—It’s a difficult concept to explain, the point I was trying to make was that money can only buy you the results of someone else’s efforts.
          Money is only ever a token of work done, or a promise of work to be done.
          When you fill your gas tank with fuel, you have bought the results of someone else’s efforts, namely the people who pumped and refined the oil. They have to make a profit on that transaction, so they can pump more oil for all of us. Their profit lies in the energy factor locked up in the oil–which you release by burning it, and gain benefit by travelling from A to B cheaply.
          That might be to your place of work say, where you have to earn enough to pay for getting there–plus everything else you need to live on. Plus, hopefully savings for old age.
          As oil goes into depletion, then the cost of it will rise, until we reach the point where oil is unavailable at any price. Even if you’re a billionaire, you won’t be able to get fuel for your cars, because refineries work on colossal scales, they can’t function by supplying fuel to the super rich, therefore the wheels will come off everybody’s lifestyle.
          It won’t be that there’s no oil in the ground, there will be plenty, but we will have passed the parity point, where the cost of extraction in energy terms, is greater than the work we get out of the oil.
          No matter how much money you wave at the drillers and refiners, if energy return is less than energy invested, the oil will stay in the ground and our oilparty is over.
          Money will buy you nothing because literally everything we live on is oil based. Hence–no oil…no economy.

      • Christopher Johnson says:

        Well said, End of More. But just a few months late. China’s contraction began almost a year ago and, despite expansive government efforts to hide it, almost all knowledgeable observers see the China Miracle as being pretty well over. The biggest questions are how bad is the damage?, and will this impact the rest of us?.
        The best (most probable) outcomes are 1) China will continue to make and export cheap stuff, but much less, since their wage have already climbed somewhat: Indonesia, Bangladesh, Vietnam, the Philippines, and a few others are much cheaper now. China’s also needs to improve education to avoid the ‘middle income trap’ So despite all the clamor, China probably will not be overtaking the USA within the next few years or maybe even decades.
        China’s slowdown will affect all of us somewhat. Imagine a Billion or so people in an area the size of the USA east of the Mississippi, or Western Europe (remember that place?) It cannot fail to impact its neighbors and the rest of the world. We can only hope that harmful explosions are avoided, but they can never be ruled out.
        China’s pollution, poisoning of its soil and plethora of social and economic problems post huge challenges; One thing the Chinese are doing is buying agricultural land abroad. Please avoid believing any statistics or financial data promulgated by the government!

        Cordially, Chris

        • I worry about all of the debt in China. It seems like there are going to be debt defaults, as China’s growth stalls.

          • Christopher Johnson says:

            Yes ma’am. Ditto with Japan, ditto with California, etc. There was a good story in Bloomberg yesterday: some polling organization asked bunches of Chinese what they wanted to do about about various problems, including debt, and even offered suggestions. The most popular solution was to roll over all the existing debt (local, project, civic, county, provincial) into bonds and the start the squeeze and bargain process all over again. Hope springs eternal. The reason the Chinese government keeps a tight grip on who’s allowed to trade bonds is quite well understood.

            Cheers, Chris

            • Scott says:

              Hi Chris, Yes what else can they do but try to roll over this huge Pig of a Debt, all these trillions… I believe the cost to roll over will skyrocket in the coming years. That will indeed be a problem.

              Scott

  8. timl2k11 says:

    I think it would be great to see a graph of world oil production with all of the production costs, that is the energy needed to get that production, backed out. I suspect we would see a very different graph that shows we are definitely long past “peak”. Additionally the energy required to produce solar and wind energy should be backed out as well, I suspect that would show we’re getting virtually nil net energy from renewables (especially ethanol) as well. I suspect graphs such as I propose would clearly show our energy problems are as bad as the most dire pessimists think they are.

    • I don’t have data on the production costs, and the energy to get the production, unfortunately.

      I think just a big issue is the taxes that governments depend on from oil and gas companies. Even if production costs are lower in some parts of the world, the difference between their lower costs and the world oil price is soaked up by taxes.

      Governments certainly don’t get the taxes from renewables–renewables are takers, rather than givers of tax money.

    • dan says:

      What happens if the Baakan and the Eagle Ford productions fall much faster than the production the optimist said and the U.S has to go out on the open market to purchase oil in greater quantities?….One of the things I don’t think you mention is that if oil price falls then a lot of oil producing countries will have “Arab Springs” producing more supply disruptions…oh vey! soo much to watch it is hard to tell where the break is going to come from…
      Also Gail, I believe you live in Atlanta, is that a really wise place to be? I think future societies will look at that city as one of the most poorly planed cities in the world, well not including Las Vegas and LosAngelous and….Miami….and New York….well never mind.

      • I agree that if oil price drops, there may very well be “Arab Spring” type situations in countries where income drops. Perhaps some will be more like the fall of the Former Soviet Union, and be mostly peaceful.

        I am not sure there is really a good place to live. I have not really gone out of my way to be a survivalist. I have planted a few trees and some garden, but there is no way I could feed myself on it–not to mention my relatives, who would want to be fed too.

  9. ravinathan says:

    Gail writes: “As interest rates drop, the value of bonds can be expected to drop as well,” A small typo; you meant ‘as interest rates rise’. Great article! QE has another temporary beneficial impact on the stock market. As QE fueled interest rates drop, corporations increase debt and buy back stocks, a debt for equity swap. This move increases earnings per share generating the illusion of increasing corporate profits. One can see through the illusion because revenues are often flat or declining and do not match the growth rate of earnings per share. Decreasing interest expense and falling wage costs are not sustainable in the longer term given the zero interest lower bound and reduced consumer demand. Higher leverage increases risk for corporations because interest expense is now a fixed cost burden. This is why the next move for central banks is to somehow generate higher inflation. It eases debt burdens all around for governments, corporations and individuals. Money illusion can be wonderful, if it were not for oil price puncturing the illusion, not to mention the social havoc caused by inflation on poor people everywhere and those on fixed incomes. The resulting scenario would be stagflation, a particularly vicious combination of cost push inflation along with high unemployment.

    • Thanks for pointing out the typo. If a person is not thinking very carefully, it is easy to write the opposite of what you mean.

      Thanks for your point about swapping equity for debt when interest rates are so low. As you say, this makes earnings per share look better, but isn’t sustainable and increases risk.

      With respect to central banks somehow increasing inflation, they haven’t done very well at it so far. QE leads to lots of asset inflation, but if they want real goods purchased, they need to

      (a) Increase wages, particularly of the common worker
      (b) Increase debt levels if potential consumers
      (c) Increase government transfer payments to those without jobs

      Doing these things is a real trick, when the economy is not growing very much.

      • ravinathan says:

        Yes, it does appear that sustained inflation will require a massive infrastructure and jobs program, the fiscal policy solution that Chief Engineer advocated in an earlier response. The congressional deadlock will only dissolve if there is another economic crisis. In that sense QE has been a little too successful at sustaining the mirage. Unfortunately, the fiscal policy response will also speed up the depletion of oil with all the resulting consequences. A temporary reprieve at best. Sigh…

        • Yes, I agree that getting the money actually back to the workers would work. Of course, there would have to be massive deficit spending, and a lot of oil and other fossil fuels would be used.

  10. dashui says:

    Hey I found a new limit!
    The farmers in the Mississippi delta are complaining that local bridge’s weight limits, it’s a swampy place, are being downgraded. This means that it is harder, if not impossible to move their equipment from one field to another, and to transport their products off their farms.

    http://m.deltafarmpress.com/government/funds-deficient-mississippi-roads-bridges-hard-slide-downward

    On the bright side, they are complaining about herbicide resistant pigweed taking over. Actually pigweed has a fantastic nutritional profile, full of omega oils, much better for you than the corn they are planting.

    • That’s interesting. It sounds like bridges are deteriorating, so some of the weight limits on roads are being reduced. I hadn’t thought about that being the way roadway usage limits are reached.

  11. ravinathan says:

    Gail, here is some more research support for the relationship between energy consumption and economic growth. http://unews.utah.edu/news_releases/is-global-warming-unstoppable/

    • ravinathan says:

      I need to mention that the news item is from 2009. I have not seen the original research paper.

    • Thanks for the link. There is definitely a close link between economic activity and energy use. It seems like what Garrett is saying is close to what Robert Ayres and Benjamin Warr said in Accounting for Growth, the Role of Physical Work.

      Garrett is saying that you don’t need to know population. That is sort of true, but the more population you have, the more demand for energy there will be. All of these people need to eat and keep warm. Fewer people will need less.

      I do agree with him that energy efficiency is a dead end, when it comes to using less energy in total for society. Energy efficiency makes it possible for more people to afford a device, so tends to drive up usage.

      • ravinathan says:

        I understand Garrett as saying that global energy consumption proxies for population. Adding the pop variable provides little additional information in his model and by Occam’s razor he could drop it. I am less clear about his use of lambda, the growth in energy consumption and its relation to GDP. Shouldn’t lambda be related to real GDP growth? Isn’t the economic sensitivity today on GDP growth without which the global economy would collapse?

  12. ravinathan says:

    Here is the link to the remarkable paper by Tim Garrett. I regret that I cannot follow all of the math but the intuition is quite clear. I don’t know if you have reviewed this paper Gail, if not it should be well worth your effort and we will all benefit from your comments.
    http://link.springer.com/content/pdf/10.1007%252Fs10584-009-9717-9.pdf

  13. ravinathan says:

    A more recent 2012 follow up paper by Tim Garrett with startling results.
    http://arxiv.org/pdf/1010.0428v3.pdf

    • Dopamine says:

      Born into this world we struggle to avoid a premature return to death’s black hole. The fossil fuels we have entrained into our technological civilizations are an anti-gravity that propels us away from that state of final equilibrium and the grubby, tortured life that surrounds it. We can’t get far enough away, but it always ends the same and regardless of our distance from the core, we eventually spiral inward and are consumed. Of course, all organisms strive at the edge of that abyss but accept their fates without reflection when maladaptation precludes survival. Man, upon reflection, wants to avoid the grubby life and death at all costs for both those well adapted to prevailing conditions and for those whose infirmities guarantee an early recycling. Cancerous cells are like that, wanting to avoid death and limitation even at the expense of the destruction of the system upon which they depend for life.

      Inevitably, as the great majority of mankind reverses course towards the grubby life and the black hole of death, greatly accelerated by the damaging externalities of their technological foray, there will be an overwhelming, limbically derived call for burning all remaining fuels in a vain attempt to maintain us as far from the black hole as possible. And as a geoengineered curtain closes on humanity’s farcical play, those that survive, if any, will once again circle the edge of the evolutionary black hole into which their delusional technological ancestors were swallowed sometime long ago.

      • Scott says:

        Just like JHK says the collapse could be rather sudden and stunning, kind of like Pearl Harbor was…

        • it will be sudden, because it would only take the closure of Saudi oil fields to shut down western industry.
          How?–there is now a dangerous nuclear threat across the middle east. If Israel and Iran start nuking each other, Saudi is in the middle of it all. One nuke on the Gharwar field closes it for good
          They are the key suppliers, and while there are alternative oil sources, none are big enough to replace Saudi, so the cost of oil would probable quadruple because other suppliers would try to exploit world shortage for a short time, in denial that with Saudi gone, the world oilparty would be over.

          • Scott says:

            End, I agree it could be sudden, although the USA gets most of its oil from Canada these days. It would be a world shock if such an event you described, a big war in the middle east perhaps even a nuclear bomb. Sometimes systems want to shut down just out of fear even if there is really no real shortages.

            It may have to do with lines of credit needed for each bill of laden. Just the fear of a problem sometimes can shut down the lines of credit which the system so much needs. No boats leave without payment or a proper line of credit.

            In the 1970′s we had the Iran oil emergency which created terrible shortages, but I do not believe there was really a shortage as severe as they made it, but they were able to double the price as a result of it in a matter of months.

            Fast forward to 2013 and I believe the shortages will be real as head forward. They were going to build a pipeline from Canada to bring bitumen from the tar sands but they shot that down due to environmental reasons. There is the strategic reserve but the military will likely grab that for themselves.

            I met an oil man about 5 years ago and asked him if the USA was running low in oil and he said the whole country was like a pin cushion. But that was right before fracking and I have been reading the fracked wells really have a short life span compared to conventional wells,

            So yes, it will not take much to create an oil-gas shortage emergency.

            Lets hope it all holds together for a time, but these days a black swan can swoop out of the sky at almost any moment.

            Scott

        • Scott
          Getting a lot of oil from Canada won’t help the USA because if the major oil player goes down. the entire world market will go down with it because the price balance will be thrown into chaos.
          It wont be so much the availability of oil, but the cost of it

          • Scott says:

            Hello – End, You make a good point, it is a world market these days and it does not take much to shake up the jittery oil markets, even the perception of a shortage would cause panic like what happened during the Iranian Embargo in the 1970′s. I remember that one well because I worked at a gas station as a teenager then. Hard to believe that Iran could take the whole country to its knees even in the 1970′s as I do not think was more than 10% of our oil coming from Iran then, Gail may have some data on that. So what is the tipping point to crisis, loosing 5, 10 or 15 or percent of your oil supply? I bet even 5 percent could really shake things up.

            I would like to look at a chart to see what percentage of oil and gas we import and from where.

            Thanks,

            Scott

            • What was really the underlying problem back in the 1970s was the decline in US oil production in the years after 1970. The way the problem was described to the public was as the Embargo causing the problem. But if we hadn’t gotten ourselves into a jam in the first place, the embargo couldn’t have made any difference.

              With respect to who we get oil imports from, you can see at this link. (I use “net imports”. If you don’t net out what is sent back to the country it came from (where we just do the processing) you get a different list.) With net import, Canada is first, Saudi Arabia is second, Venezuela is third. I don’t this list is necessarily all that relevant. Even a reduction in our oil production (because the price isn’t high enough) would be a problem. A small reduction is a problem. The small decline in 2008 and 2009 were definitely problems.

            • Scott says:

              Hello, Yes Gail, that was the time that Peak Oil hit the USA in the 1970′s and the big fields of Texas already were peaking out. Perhaps the first sign of peak oil. I just remember all of those signs at gas stations “NO GAS” and the ones that were open had lines 3-4 blocks long then. It was a very disruptive situation, but folks could still get a little gas if they were patient enough and their day with odd or even license plates….

            • Putting in price limits is mostly what causes lines. If the powers that be allowed prices to rise, then some people will be priced out of the market. We also had lines in Atlanta after hurricanes disrupted supply–I think in 2005 and 2008. Then again, it was made clear to gas station owners that they couldn’t raise prices, without huge repercussions.

          • I might also add, US production will drop too. Shale wells decline quickly, so it will tend to decline faster than some other oil.

        • Scott
          The oil crash is now seen to be a rehearsal for what is going to happen in our near future, that’s why I devoted a chapter to it in my book http://tinyurl.com/oa854gt
          back in the 70s it was shrugged off as a nuisance, the costs of oil shot up, but then the suppliers realised they were locked into the same economics asylum as we were, so just pumped more at a higher price while we paid ourselves higher wages (long term debt) to pay for it. Thus the whole thing balanced out and everything went on as before.
          But now of course oil can’t be pumped in any greater volumes because the capacity is no longer there, So wages can’t be ramped up to match higher oil prices.
          problem is, few people can understand that, and riot in protest at politicians who fail to deliver prosperity.
          as you say, it would maybe only take a sudden loss of 5% to tip things over the edge, 10% would guarantee it. Tight now Iraq seems to be heading that way, into a state of anarchy
          world wide unrest is ultimately about a lack of energy to provide jobs and food, as oil declines further, this will get worse.

          • xabier says:

            End of More

            Quite right. But people lack wisdom and understanding of their economic situation, too. The rioting masses in, say, Egypt, are, by and large, ignorant and deluded: they believe that conspiracies and plots have kept them from prosperity. Overpopuplation? What’s that?!

            I say this particularly after talking to the Turkish driver of a customer of mine: such a nice man, he was very much of the opinion that if people in the Mid East are poor, it’s because of Zionist and American plots, and he got very excited about it. Oh dear……

            But this is how the mob have always thought: ‘It would be Paradise, but for Them……’

            Like you, I foresee only violence or repression. As the effects of the energy crisis hit, they simply won’t have the information to understand it: people on blogs like this are the tiniest of minorities.

      • xabier says:

        Dopamine

        ‘Life looks gloomy, no cause for cheer?
        Cheer up my lad, and drink some beer!’

        • Dopamine says:

          Your comment reminds me of a response to my assertion that civilization is a metastatic cancer. The person said I must be “depressed” to have such an idea, as if the emotional centers of my brain had failed to supply an adequately happy take on reality. Very revealing of how the human mind works, such a negative hypothesis could never be true. After working out the details and confirming its validity, my and others assertion that technological man is basically a cancer is quite alarming. Working and functioning in this expanding morass of cancerous growth can leave one dejected. All of the talk about the CO2 levels, what Fed’s going to do, growth rates, oil depletion, the newest technological tool to break into the last resource gradient etc. is like watching a cancer begin to panic as the body it rebelled against goes into terminal decline. Most will believe they’re still “God’s” gift to the universe, or the high point of organic evolution, as they collapse towards their singularity. Humans didn’t choose to become a cancer, they evolved into it and that relative but temporary success is irresistible to them. So here’s a toast to the cancer that ate ecosystem, may their cells penetrate ever fresh tissue on their way to their ultimate reward.

          • It has always seemed to me that the Earth has now recognised mankind as an infection, climate change is the first sneeze, global warming is the fever and heat wind and water forms the remedy that gets rid of us

        • Skye says:

          Very good, Xabier!

    • Thanks. I should read that one too. I see the paper references Ayres and Warr.

  14. John Dunn says:

    Gail :
    You’ve outlined perfectly, the financial dilemma we have been facing since around 2008. Whilst the problems had likely been building for some 4 decades or so, it was 2008(ish), that the balloon finally popped, (pierced no doubt, by the oil price shock of $147/bl ). The full collapse of the economic balloon, ought to have happened there and then, but somehow, the West, managed to get a ‘hose’, connected, and blow in ‘fairytale fiat’, to keep it from total deflation.

    The (Keynesian?), hope was that growth would resume, and do some of the balloon re-inflating, so that the QE ‘fiat pumping hose’, could be withdrawn slowly. That hasn’t worked out, because most economists, still do not get the connection between ‘expensive energy’, and permanently crushed growth.
    Consequentially, that QE hose cannot, now be uncoupled, because the stalled 2008 crash, would simply be re-visited (but with a vengeance.)
    That QE will continue, until :
    1. It destabilises the currency so badly, that mass default, becomes the norm.
    2. Some country, somewhere, comes to a point of saying ‘ Sorry,.. we don’t take US dollars anymore’.

    It will not be pretty.

    • Bill S. says:

      Larry Kudlow on CNBC said Friday that he expects QE to continue for a few more years. I think he is correct, because as soon as they try to reduce it, interest rates will go way up and the stock market down. He isn’t the only person in the financial community I’ve recently heard say that QE will continue a lot longer than most financial people think.
      Interestingly, no people in the financial community on CNBC ever relate the economic mess to high oil prices. They fail to grasp that the increasing oil prices during the last decade is like constantly increasing the tax on nearly everything. And the Wall Street bankers and the 7 figure income corporate elite, don’t realize that most Americans don’t have a lot of discretionary income. They live in a bubble of wealth. Some fellow just wrote a book about it, and the decline of the middle class. Mort Zuckerman said Friday on The McLaughlin Group (PBS) that a very serious economic crisis is coming. He just couldn’t say when.
      And the enormous amount of private and public is another crippling problem. Profits go to interest payments instead of into innovation. Some fellow on CNBC last week said that only a massive debt write off, a debt jubilee, could prevent a coming economic crisis. That won’t happen because too many rich people would lose millions in that process. So Gail is right. This sucker is going down. The only question is how soon. Hopefully, they can prop it up for another 10 years or so, but I will be surprised if it lasts that long.

      • dan says:

        I hear what you are saying…but I have to take CNBC with a big grain of salt! Just read on that website that the reason Chevron is posting lower profits is because oil prices are lower! From where I sit oil prices have been climbing for some time! So many people acting BAU I keep wondering if I am missing something…what would another 10 years get you by the way!? The longer this goes on it seems the worse the outcome…There is so much misinformation out there it is very confusing at times…I watched a frontline documentary on the crash of 1929 and there was a part that the big investors were going around on the stock market floor buying lots of shares trying to get the masses to buy into their enthusiasm—–sounds like Warren Buffet today…and other cheerleaders…

      • I agree mostly with your comments. I think the one thing that people who talk about debt write-offs miss is that a huge share of the debt is held by pension funds, insurance companies, and banks. The people who benefit from this debt are not necessarily the wealthy. Instead, they are the ordinary citizens who have insurance policies, pensions, and bank accounts. Even if it is a person’s employer who has a bank account, that is helpful to the ordinary citizen. So a debt write-off isn’t as easy as it sounds. Pretty much all of the future promises don’t really work out. Debt is the part that links the expected payments of one person to the future promised income of someone else. The rich are promised more than others, but all of us would have a hard time if the whole system doesn’t work.

    • THanks for your vote of confidence in what I am saying, and slightly different way of expressing the situation.

  15. BAU says:

    Thanks for the new article Gail!

    I’m no pro but I sometimes like to make some simple calculations just to get a grasp on what we are spending on oil etc. If 2012 world GDP amounts to about 71.000 billion dollar, and world oil consumption is about 93.000.000 barrels a day, then at 100$ oil we would be pissing about 4.7% of our world GDP in dollar value down the drain just with consumption no? I’d guess that it would be logical to add $600 billion a year in upstream investment to that as well?

    I know it’s probably not correct because an amount of oil is not sold on the open market for this price, but used internally.

    Which percentage of oil IS actually sold on the open market?

    • There is a whole lot of recycling of the oil, because if oil isn’t there, the follow-on products which need oil are not there either. Oil price thus gets embedded in food price and a whole lot other things. It is one of the basic products without which the economy doesn’t run–not having oil is sort of like trying to make a chemical reaction work, without one of the reagents.

      I don’t know the amount of oil sold on the open market. Certainly, some oil is sold at subsidized rates, mostly by countries that are oil exporters.

    • Bill says:

      As Gail points out, you can’t make a $100 bbl assumption, but if you could, it’s a mighty 4.7%. Imagine GGDP with no oil expense, as in, no oil in the mix. Much lower. Got goats?

  16. Charles Justice says:

    Great article Gail. You’ve described trends that would follow increasing oil prices and decreasing prices, but what about increasing oil price volatility. That possibility seems to me more likely because of positive feedbacks you mentioned. Wouldn’t the increased volatility be a strong effect in itself because it would increase risk and create more “creative destruction” of firms and households? Kind of like a wrecking ball that swings back and forth smashing two buildings simultaneously.

    • In fact, what we have had is more volatility. I suppose it depends how bad the reaction to the problems of high price/low price are. We could have more volatility, just as we have in the past, as we head on a generally downward trend.

      So more volatility may also be a problem–like a wrecking ball, as you describe.

  17. Stan says:

    I have been wondering if there are examples of business leaders who believe that collapse might be in the near future. And what type of actions would they be doing presently to protect themselves?

    In http://www.moneynews.com/ there is an article that might be an example.

    “Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of ‘disappointing performance’ in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods.

    In the latest filing for Buffett’s holding company Berkshire Hathaway, Buffett has been drastically reducing his exposure to stocks that depend on consumer purchasing habits [or on their disposable income:Stan]. Berkshire sold roughly 19 million shares of Johnson & Johnson, and reduced his overall stake in “consumer product stocks” by 21%. Berkshire Hathaway also sold its entire stake in California-based computer parts supplier Intel.”

    Here is a tinyurl that points to the article: http://tinyurl.com/economic-pessimism

    While investigating what non-governmental leaders are thinking along the lines of Gail’s writings, I happened across the following web site: http://www.ceres.org. Their goals: “…advance sustainable solutions that will reduce carbon emissions and other pollutants, protect vital natural resources like water supplies, ensure safe and just working conditions for employees and reduce our reliance on fossil fuels while transitioning to a clean energy economy.”

    Of particular interest: “www.ceres.org/investor-network/resolutions” which details “…shareholder resolutions filed by our investor network participants”, many of which address issues that Gail raises here.

    Stan.

    • There are really two parts to the issue: (1) Figuring out that there is a major problem in our future, and (2) Figuring out what to do about it. Even if people have figured out the first part, it does not follow that they have also figured out reasonable things to do about it. There are a lot of people who think that if what we have done in the past doesn’t work, doing what seems to be the opposite might.

      I really don’t think that there is anything we can do that will “save everyone”. There may be things that we can do that will save a smallish percentage of the population (at least for some reasonable number of years), but I don’t claim to be an expert on figuring what they may be.

      I am really doubtful about most of the clean energy economy proposals of getting us anywhere. Anything that raises energy costs contributes to a tendency toward collapse, rather than fixing it. Even if energy types are called clean-energy, the are still add-ons to our fossil fuel economy and don’t work without fossil fuels.

  18. Bill S. says:

    If any of you haven’t seen it, people may want to Google this free, 178 page German research report published in March:
    Fossil and Nuclear Fuels – The Supply Outlook.

    • The report you refer to is put out by the Energy Watch Group, a German group. It is a report that estimates future production based on supply, rather than on price considerations. It is right in the sense that it gives an idea that oil and other fossil fuels can’t continue too long. It is far from perfect though. I think the forecast of the shape of the decline curve it gives is probably misleading. Instead of being symmetric curve, it should extend a little farther past what is now the middle, as price rises, and encourages more supply. It then should drop off more rapidly, when high price cannot continue. Quite likely, all fuels (fossil fuels, nuclear, and fuel to maintain renewables) will decline together. It is possible there will be another iteration of “up and down prices,” as in 2008.

      • timl2k11 says:

        Bingo. I was thinking the same thing when I looked at their new graphs. Their rational for this was “the longer we are on a plateau the more likely a decline is going to immediately ensue”. That is a bit of a dubious statement I think.

  19. Stilgar Wilcox says:

    Gail, you wrote: “The Federal Reserve now is discussing the possibility of stopping quantitative easing. If this is done, I expect it will have a very adverse economic effect: long-term interest rates will rise and asset prices are likely to fall. If commodity prices fall as well, then we could find ourselves in the scenario outlined in the preceding paragraph, in which oil prices drop lower than the cost of production for many producers.”

    This is my concern too, i.e. once QE ends the tether holding the false façade drops and with it stock & commodity prices and in particular oil price drop. A lower oil price at that stage will probably signify the historic point of peak oil, because lower prices as you point out restrict expensive resources profitability to extract. Even if somehow in a post QE, 2nd major step-down (08 being the 1st) the world economy gets going again, it will be on a lower scale and as such I doubt would ever sustain triple digit oil prices again, permanently reduce oil supply.

    As a side note: I think Bernanke will keep QE exactly where it is, (85 billion a month) until a successor takes over and is forced to make a decision as to when to end it, knowing politically whomever ends it will take most of the heat, not him.

    • Stilgar Wilcox,

      I think you are right. If the world economy gets going again, it will be on a lower scale such that it will probably not sustain triple digit oil prices again, permanently reducing oil supply. Also, Bernanke will not make a move, forcing a successor to make a move.

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  22. Adam says:

    A remarkable recent article appeared in The Telegraph (UK):

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10214989/Commodity-supercycle-in-rude-health-despite-shale.html

    Excerpts:

    “The demise of Britain’s The Oil Drum has been seized on as an admission that peak oil is just another Malthusian myth. Yet it is hardly evident that the world is again enjoying abundant sources of cheap energy, metals or indeed food. Commodity prices have held up remarkably well given that we are in a global trade depression.

    It all adds up to a prostrate global economy, yet on Wednesday Brent crude oil was still trading at $106. A new Eos report, ‘Peak Oil and Energy Independence: Myth and Reality’, argues that global crude output has been stuck on a plateau of around 75m barrels per day (bpd) since 2005. ‘Global net oil exports have peaked and are in decline.’

    The output of the big five oil majors has fallen by 26pc over the past nine years, despite a relentless hunt for new fields. The North Sea, the Gulf of Mexico and Alaska are all wasting away. Expenses keep ratcheting up as fields move further out to sea in the Atlantic. Theoretical reserves are meaningless. What matters is the break-even cost.

    Eos said flows from the world’s existing fields are falling at 5pc a year, yet the report was cited by the BBC as evidence that peak oil production is a myth. “Where they got that idea escapes us,” said co-writer Jim Hansen.

    Barclays is defiantly holding to a Brent crude forecast of $184 in 2020, betting that oil shocks will come back to haunt us. The next five years may decide whether Europe spirals into catastrophic decline as the ageing crisis hits. It may already be too late. Consensus has swung too fast from the 2008 oil panic to the energy complacency of 2013. Peak cheap oil remains an incontrovertible fact. To Oil Drum, a fond farewell.”

    • Thanks for the link! Yes indeed, there still is a problem, even if people haven’t acknowledged it. I am not convinced that it is “peak oil” that was originally envisioned (down as fast as it goes up, no effect on economy) that remains an incontrovertible fact. Instead, it is more of a financial problem, which is not the area of expertise of many of the authors of The Oil Drum.

    • Christopher Johnson says:

      That might be very shrewd, perhaps disciplinary, of Barclays. Their message is that if you want $184 oil, you’ll get it; if you want something different, you’ll have to make the conditions right to get that, as well.

  23. Don Stewart says:

    Dear Gail and Others
    You mentioned that your job is to alert us to what is coming–not to chart a course on how to get through the mess. I’d like to suggest a slightly different take on that. Each of us needs to take charge of at least our own personal response. We don’t necessarily have to hold ourselves out to the public as having ‘all the answers’, but I do think it is important to be doing something personally.

    Here is some recent research on the importance of ‘purpose’ in life. Being under stress and being mindlessly entertained both result in similarly unhealthy gene expression. Having a purpose results in health promoting gene expression.

    http://oftwominds.us2.list-manage.com/track/click?u=d7ee5db74404cedc5e4bba858&id=d873fa8b17&e=e58f5fc4ac

    So I would conclude that thinking about the issues and having a plan and working proactively to realize the plan is a very good idea.

    There are, of course, no guarantees in this business. Some people will bury gold under the big oak tree, some will make as many friends as possible, some will start a homestead, some will study thievery. If you are stumped and can’t think of anything that might work, I suggest two (out of thousands) of possibilities. The first is Toby Hemenway’s new initiative in terms of urban permaculture. Toby is the guy who gave a speech at Duke a couple of years ago titled ‘How to Save Humanity, But Not Civilization’. In that speech he stated that he expected a lot of people to die. I don’t know how he may have evolved in his thinking, but you might like to keep an eye on the results of his research in terms of the potential in urban areas. The workshop in Miami will be followed by a new book. The Miami workshop may be videotaped.

    http://permaculturemiami.com/design-course/tobyurbancourse
    Growing Community, Food, and Livelihood in the City – Weekend workshop with Toby Hemenway

    Second, I think that listening to Sara Gottfried, MD talk about how ‘rocking your mission’ in life is in your own hands gets you on the right page in terms of having a purpose..
    Scroll down to Sara’s interview and click play. About an hour.

    http://www.entheos.com/Eating-Psychology/Play

    Don Stewart

    • I think that each of us can have a goal, but “saving ourselves” doesn’t necessarily have to be part of that goal. It may very well be for quite a few people, but I think that some people can legitimately say, “I have other priorities than working night and day to save myself.”

      I personally am not spending the kind of energy I would need to on planning to save myself. If I were to spend all my time on doing that, I would not have time to research what the connection between energy and the economy really is, and explain it to others. I have done a little bit on starting a garden and planting some fruit and nut trees, and a few other things, but I don’t kid myself that I will save myself (much less myself plus my family). I personally don’t think extending my own life is necessarily all that important.

      I suppose my view is colored by the fact that I am not young–but I am younger than you are. But I also have a lot of difficulty with the issue of having a lot of friends and family who are not preparing for the future. If I were to prepare, and they did not, I expect that they would expect me to share with them. There would not possibly be enough food for me to share with them, given the amount I could grow. I don’t have a good way of resolving this issue–perhaps others do.

      • Don Stewart says:

        Gail
        The research, as I understand it, was not very fine grained. Which is to be expected when something new is discovered. Actually, it is a very old philosophical question about the importance or irrelevance of meaning in life.

        For example, so far as I know, no one has really looked at the medical effects of deciding to become a suicide bomber. Suicide bombers have a purpose in life…it may just not be the purpose we, ourselves, would choose. When I say that we all need to make some choices and do some things, I think that deciding to do nothing is probably a valid response. An elderly couple living in Manhattan may just choose resignation. People who are eagerly awaiting the Rapture are doing something very deliberate. And people planting large gardens are also doing something very deliberate. In short, in all these examples the people have made conscious decisions.

        My guess about what the research is telling us is that cognitive dissonance is not healthy. If we think that the world is going to hell in a handbasket, and that we are going to die miserably, but then do nothing (except try to repress the feelings), then I think that we are setting ourselves up for suffering. If, on the other hand, we think that the world is in for a big change, but that we are preparing for it as best we can and helping others to the extent we can, then we will be considerably healthier.

        I began to prepare for big changes around 2006. It’s now 7 years later and I am now 72. I look at ‘taking action’ considerably differently than I did when I was 65. The undeniable evidence of mortality accumulates. If I were a certain kind of religious person, I might think ‘God will just call me a little more quickly’. As it is, I just place a lower value on surviving for another decade than I did when I was 25 or 35 or 65.

        This is probably a muddled explantion of why I think it is important not to feel powerless and stressed and make oneself the prey of disease. If one can be resigned to fate, then I see that as doing something, psychologically. But my guess is that you weren’t resigned when the thoughts of collapse first crossed your mind…so you have done some mental and emotional work. And I certainly wouldn’t try to convince you that you have made the wrong decision. If I were having a chat with a 25 year old, I would be more forceful in expressing my belief that some action is better than none.

        Don Stewart

        • I have taken some actions–enough to see that it would take a whole lot more, to prepare for myself and my family. I suppose, if the downslope is slow enough, it may almost be enough.

          My husband isn’t interested in gardening or farming. In fact, he has never been interested in yard work, and has only a passing interest in peak oil. He has his own interests and work. So I don’t expect that he will be a great help in preparing. I suppose I could get myself upset over this situation, but I learned early on that family is primary. Working as an actuary, I would never have considered taking a job, say, as head of an office in another state, because I put my family first. In fact, most of my life, I worked less than full time, so as to have more time with my family. (This is not the approach to maximize income.)

          There has been a lot of emphasis on the individual in recent years, but not everyone thinks that way. When I was in graduate school, I had a poster that said, “Bloom where you are planted.” I still feel pretty much that way. Where you are planted may not really give you the option of preparing a whole lot.

          • xabier says:

            Gail

            I think there are many families where one partner gets it and wishes to act in some way to prepare, and the other doesn’t and has no wish (or ability) to change the way they live: one just has to go with the flow I suppose. I know many people who would rather die than dig for and plant their own food, and that is their choice: I find it incomprehensible, but there we are…….

            When Germany collapsed in 1945, it was noted that the women saved the families and fed them, by hook or crook, while the husbands, – deprived of their uniforms and military roles, without status, – sank into apathy and drink. One person can pull a whole family through a crisis, or drag it down.

            • My husband is very supportive of what I am doing in many ways–it is just that he personally is not interested in changing what he is doing. For example, he doesn’t object to my running off around the country and world to give my talks, and he likes visiting universities and talking to my friends.

              But it is highly unlikely he will dig in the garden. He will do what he is interested in. He canned two batches of pickles, and is interested in the book on fermentation that I bought. So somehow, it sort of works together, but not on the fast track toward self-sufficiency.

          • Don Stewart says:

            Gail
            I forget who said it, but someone recently said ‘don’t think independence, think interdependence’.

            There is some research on group size and interdependence. The ideal size of a group to formulate a change is around 5 people. Simple village economies consist of several hundred people…some farmers with various specialties, a baker, a cobbler, a blacksmith, etc.

            Most serious people who look at our predicament don’t see a way out through ‘rugged individualism’ or through ‘doing business with people you don’t know’.

            Since, at least in the US, we live in a society which imagines itself to be composed of several hundred million rugged individualists, but which is actually composed of hundreds of millions of people who are utterly dependent on trade using fiat money (debt) with people they don’t know, and with the rules of that trade enforced by a police state…well, you can see the size of the predicament.

            It’s not, I think, irrational for an elderly person to look calmly at the situation and decide that there isn’t much they can do. A condemned man with seven days to execution can make the best of each of the seven days. I think what the research shows is that a condemned man wandering aimlessly through his last seven days or being wracked by stress during his last seven days leads to poor gene expression. On the other hand, if the condemned man can formulate a purpose for his last seven days, he may achieve good gene expression and better health. We all end up dead but some of us contribute a lot more along the way than others do.

            Your contribution…your purpose…may be like a Prophet preaching on street corners (well… in the blogosphere). But unless those who hear you actually do something, I don’t see that the preaching accomplishes anything except possibly to make the situation worse by generating stress and thus poor gene expression. You may, quite sensibly, say that advising people ‘what to do about it’ is not your job. Certainly I couldn’t quarrel with that. Such a conclusion simply has some downstream effects in terms of what I need to do.

            Don Stewart

        • Scott says:

          Well Hang in there Don we need you for a few more years for sure. I am 52 and have lived longer than most of the folks we read in history!

        • xabier says:

          Don

          Resignation in the face of Destiny is, I agree, a very healthy mental attitude, and does not exclude taking decisive action.

          Another option recommended by the interesting writer Robert Twigger on his blog is that of simply laughing in the face of Fate and defying it within: ‘So, I’ve lost my job, my home and my future: is that all Fate can do, come on!’ It’s not so crazy as it might sound.

          Having a rather Iberian dark sense of humour, and a fair share of Spanish stubborn egotism, the latter often works for me. In other words, you don’t kid yourself that all will be well with ‘positive thinking’ ad ignoring the hard facts: you recognise the tragedy of life, and still defy it. The Chechens were apparently never broken in the Russian Gulag system, and I suspect this was their attitude, helped by contempt for non-Muslims.

          Having said that, Franco did indeed break the spirit of the Spanish. But that’s the power of a corrupt surveillance society established for over 40 years….

          Other mental techniques for dealing with stressful dilemmas: some readers might be interested in Napoleon’s technique. Asked how he ran an Empire and fought vast campaigns, he replied that he imagined a large chest of drawers. Each problem or predicament had a corresponding drawer. He would mentally open it, consider, make a decision and act (or not as the case might be,) and then shut it up again in the drawer and not let it disturb his thoughts or spoil his sleep, knowing he had acted on what was within his power and could do no more.

          No need to be an Emperor to deploy this technique. I sometimes use this technique at night before falling asleep: I never lie awake fretting now, which I once did.

          Recalling brave ancestors who overcame dire circumstances can also be a useful technique, and at one point in my life when I was on the verge of losing it all I bucked myself up by thinking of my father breaking stones in a Spanish Army prison (no picnic!) – he had refused to obey orders, no real crime. Now, most of us would fear that sort of thing wouldn’t we? But it didn’t do him any harm. Compared to being a prisoner I was still free, so why worry or give in? We are a stubborn family (I sometimes suspect he used his head to do the breaking…)

          The development of a suitable mental technique is I believe vital, when faced by the immense and perplexing problems discussed here, which have the capacity to leave one feeling totally powerless and vulnerable. This is exacerbated by the atmosphere of lies and propaganda we live in, promulgated by the MSM and governments.

          I have to say, I’m not a meditating kind of person, but I’m sure that can work for many. My personal temperament is more combative and aggressive.

        • Dear Don,
          How very true that “…it is a very old philosophical question about the importance or irrelevance of meaning in life.”

          Long before I became aware of peak oil or climate change, I was a student of life, specifically the meaning of life. Perhaps at the age of 54, I have come back to that pursuit. I began to prepare for ‘big changes” later than you, somewhere around late 2008. The near collapse of our financial system might have had something to do with that. I devoured books on the subjects of peak oil, climate change, economics, politics, history…looking for solutions, believing I could find them. I became determined to prepare, fearing I would run out of time trying to make our family “sustainable”, whatever that may mean in the face of the changes we are likely to encounter.

          I was fortunate that my husband understood and shared my concerns. Without his support we could not have done what we did. But after four years of this my husband finally told me that I needed to stop reading about this subject because it was making me depressed. I think it was after I finished reading “Six Degrees: Our future on a hotter planet” by Mark Lynas. That book really clarified the ramifications of our changing climate. The book is based on current paleoclimate research, and it describes what the earth has been like in the past when our climate was much hotter, and how such changes will affect us today. Having a background in earth science I quickly grasped what the research was showing and my conclusion was that it is already too late for us to stop catastrophic climate change (i.e. reaching six degrees change). That realization more than anything forced me to conclude that our civilization will not survive.

          I realized my husband was right, it was making me depressed. It was like knowing one has a terminal disease, and given little time to live. I think it was reading “The Transition Handbook” by Rob Hopkins that helped me cope with the impending “death” of our civilization. He was the first author I found that connected the five stages of grief with what is happening. I realized that depression was a natural part of the process, but not the end of the path. I couldn’t do much more than I had already done to prepare. I had to accept that we can never really be prepared and just go back to living each day as best I could.

          I think what you and Gail are talking about is acceptance, that stage we reach when we move past the denial, anger, bargaining, and depression. But as you so wisely stated above, the meaning we find in life is very important for our health.

          I haven’t found it difficult to make changes in my lifestyle. I grew up living off the garden, being frugal, cooking and canning, being connected to the natural world. In some ways I feel like “preparing for the collapse” just made me into the person I was meant to be.

          Now, I just try to take each day as it comes, finding meaning in simple things: my garden, reading a good book, lunch with a friend, laughing at my son’s jokes, caring for my animals, reading this blog. Living a simple life, unattached to the ambitions, I am much less stressed than I have ever been in my life. Each day is precious because tomorrow is uncertain. I find that life is so much sweeter when I don’t take it for granted.

          Fondest regards,
          Jody

          • Scott says:

            Well Said Jody, I think most of us feel that way. These changes that are underway in the world are not stoppable by our small group of mortals. I do think things will go along this plateau for awhile. We all have to realize that life itself is not immortal in the physical sense and we would even say that life is a terminal illness, but take it a day at a time and cherish them.

            But I will still hold out as “the weird one in the group” – saying that I still hold out hope that there may be a solution that is not yet known to the public. A clean power source that has not yet been made public and that perhaps would explain some of the complacency that we see out there.

            Scott

          • xabier says:

            Jody

            Well, traditionally, after the Dark Night of the Soul, comes the Vision of the Divine and a form of perfect peace: one has to go through worry and fear, even despair, to arrive there.

            I still can’t quite reconcile myself to the wrecking of the natural world which has taken place over the last two hundred years though: it’s an extraordinary, immensely beautiful -if dangerous – planet, and what have we done to it? The British government is now looking forward to wrecking large tracts of England with fracking and mocking opponents: it makes one weep.

            Your point about getting to be in practice what you really always have been, not just being an anxious ‘prepper’, echoes my sentiments and experience exactly, and I’m sure of many others.

            • Scott says:

              Hello Xabier, that is something the group has not discussed much, whether to Frack or not or whether to drill in the arctic national refuges. I suppose we mostly agree that we are short on oil and I am sure these places will not be untouched by the drilling and fracking coming to many places soon too. Any thoughts out there on that?

      • xabier says:

        Gail

        You raise an interesting point about people expecting you to share.

        I have a customer who is fairly preoccupied with these issues, and although I have never talked about what I am doing, he remarked recently that ‘if anything happens, and it gets nasty, we are coming straight here as you are the sort of person to have made plans.’

        Pretty good intuition on his part: I suppose I just give an impression of being decisive or something, as what I do is very low key – there is no gold and no weapons here, no fierce guard dogs!

        But my thought was: ‘Once here, what would you have to offer?’ Which of course I didn’t say!

        Orlov refers to Russian families expelling useless members when life got really tough, and that included Granny. No one needs a cousin of a cousin who just wants to free-load. No one will want the crippled or sick, the drunk or the malicious…..

        • I am not sure I would be up to expelling the useless family member. In fact, I might be the useless family member, especially if I, say, broke a leg.

          There seem to be so many of the potentially useless family members and friends around that expelling others would come up pretty frequently. If we are gradually losing the embedded energy of the goods that people thought would sustain them into the future–(the water pump no longer works; roads are becoming degraded; soil needs more soil amendments, but it is too hard to carry such amendments from 50 miles away) then a given plot of land will sustain fewer and fewer people, meaning that there will be a continuing need to expel more family members. This does not sound like my idea of the kind of future I would like to live in.

  24. jbsties says:

    Don’t forget Mexico who is currently our third largest supplier of crude oil.

    While our eyes are focused on the Middle East, Mexican production is declining and internal consumption is slowly increasing. They are already a net importer of refined product and their demand for natural gas via pipeline from the US is expected to increase. Jim Hansen quoted a report recently that said Mexico would be a net importer of all products within 5 years.

    Mexico is going to look a lot like Egypt very soon except it will be on our doorstep.

    So which fails first? Production (or price) from the Bakken or exports to the US from Mexico? I can think of only two ways to make up the shortfalls: you either find more oil at a reasonable price out on the international market, or we get it through demand destruction in the economy. The motivation for the invasion of Iraq as a last-ditch effort is suddenly very clear.

    http://www.eia.gov/countries/cab.cfm?fips=MX

    • Scott says:

      Hello, Thank you for that very comprehensive article on Mexico and Energy. That contained a chart I was looking for on the USA and where we get our energy. Looks like Egypt next door!
      http://www.eia.gov/countries/cab.cfm?fips=MX

    • Christopher Johnson says:

      To jbsties:
      Sir: On the contrary, there are huge differences between Mexico and Egypt. Mexico’s GDP/Capita (PPP) is in the realm of $12,000; Egypt’s less than $1,000. Mexico surely has major problems that its goverments have ignored over the years: lack of competition, all-power unions, all-powerful plutocrats, etc. The new government is gaining strong marks from the people and neighbors for taking on those vested interests. None of which means they’ve got an easy ride ahead of them. They don’t. But they do have other energy, including oil, sources that need to be developed. They just go lazy for about 70 years. Now they’re going after shale gas to power industrial growth.
      Egypt, on the other hand, is going to be a continuing problem. We can only hope that it gets solved without too much bloodshed.
      Cordially, Chris

    • We refine a lot of Mexican oil, and send the refined products back to Mexico. This is why I gave a list of countries by “net” oil imports. Mexico’s issue is more one of not having refineries of the right type, than it is of exporting oil to the United States.

      Net imports from Mexico in 2012 were 469,000 barrels per day. That is behind Iraq (474,000 bpd), Russia (477,000 bpd), Venezuela (867,000 bpd), Saudi Arabia (1,358,000) and Canada (2,551,000). So Mexico is sixth, on a net imports basis (although it is in close to a tie with Iraq and Russia).

      On a basis of how much Mexican oil is filling up our refineries, even if the refined products go back to Mexico, we got 1,031,000 bpd in 2012. That made it third on this basis. (So you are right, on the basis some people use for looking at imports.)

      I agree with you too that Mexican imports are falling rapidly, no matter how you measure them. And you are probably right that it could soon be another Egypt on our doorstep, although it does have more agricultural land than Egypt, which may help.

      You can see from my list that we are already using Iraqi oil for imports, plus the other big producers (Russia, Venezuela, and Saudi Arabia). Venezuela is selling at least some oil to China, reducing what it can sell to us in the future. Canada depends on imported oil on its East Coast, at the same time it sells us oil from the western part of the country. If its supplies get cut off, there will be more pressure to use Canadian oil for Canada.

      • Scott says:

        Gail don’t you agree that Canada will be a friend in times of trouble in an oil shortage to the USA?

        • the next oil shortage is going to be the terminal one
          nice folks though the Canadians are, they are going to hold on to the oil and gas they have. Canada is a cold country, they need heat. Ultimately it won’t make any difference of course, but at least they can hang on to their delusion for longer.
          The same applies to Mexico and other countries that are currently oil-rich.
          It’s all too easy to visualise the future in terms of ‘now’ with the USA being able to buy oil with ‘now’ money.
          With oil in terminal decline, money will cease to have any value, hence no purchasing power to buy oil

          • xabier says:

            End of More

            As they say: no friends in politics, only interests…… One hopes that Canada might take some pity on poor old chilly, damp Britain, but those days are long gone I suspect.

          • Scott says:

            Hello End_of_More, It seems that every exporting country we look at is a high population growth country and perhaps fueled by oil money. These exporting countries are using more and more of the oil and gas for themselves each year.

            I do believe oil prices will increase and as they do there is some room to cut back. For example in the Northwest people drive very large SUV’s and Super Duty Trucks. I have a neighbor that drives his really huge truck just to get coffee and paper each morning and then lunch etc.

            I think if the price gas goes up to say like $10 many of these giant vehicles will get parked while people seek out smaller used cars. I just bought a Honda Civic which is about the best I can do as the electric cars are pricey. These big trucks are needed to move things around, but mostly I see them running around empty with only one driver inside. That just goes to show, no one really sees a problem.

            I was looking at your website yesterday and can tell you have some very interesting writings much like Gail.

            I was wondering what timeline you see for the shortages to appear in a way the public will see it?

            Many people I talk to say they are not surprised if gas is going to go up, but few perceive any real shortages.

            Do you think we may first see $10 Gas?

        • I imagine Canada will be as much of a friend as any country. But in time of trouble, countries tend to break up over resource shortages, and even friendly countries will look to their own needs first. A major reason for countries breaking up is the fact that government must be changed to take a whole lot less of a country’s total output. The cheapest form of government is a local dictatorship that provides few services to the population. A poor country really can’t afford the package of benefits that the governments of the US and Canada have promised.

          • Saudi is perhaps the scariest high population country support by oil.
            Pre-oil (1900) they had 1 million people, now they have nearly 30 million. They blatantly buy off their mutinous youth by doling out free everything. When that stops, as it must, the country will join the string of failed states across the middle east. It’s as well to bear in mind that oil rich states are currently holding Egypt together. Without that help it would be even more of a basket case than it is already.
            Saudi princelings point to ‘alternative’ industries that are supposed to provide continued prosperity post-oil. Yet there is a childlike naivety that ignores the reality of those industries needing oil for ongoing support. They simply cannot grow enough food to support themselves, or maintain control over farmland they have bought overseas. As soon as real famine kicks in, that land will be overwhelmed. Food is the ultimate source of energy, no country will let it go to foreign buyers once corrupt rulers are deposed.
            The string of fail mid east states correlate with the USA, (and Europe too) which itself is only held together by supplies of food and energy supporting its population. As they break down the states will fall apart because there will be no means to hold them together. Maybe we in the UK can have our island status back. One can certainly see Alaska breaking away when the means to hold it as a state is no longer there.
            Africa will certainly devolve into tribal wars over mineral resources, (that’s happening already), but it’s important to remember that Africa was carved into its present geography only as recently as 1885

        • Hi Scott

          Thanks for the kind words about my website,
          As to the $10 gas thing, that’s incredibly difficult to get one’s head around. It’s not the actual figure that’s the problem, it seems to me that as fuel prices have risen, everything else has risen in tandem….Up to now.
          But I’ll try to explain my own take on it—other readers here please feel free to shoot me down in flames!
          Basically we use hydrocarbon fuel to produce stuff and do stuff. As long as we have the means to do that we can continue to pay each other for services rendered, no matter what the transaction.
          We call that taking in each other’s washing.
          We pretend that it makes a profit and provides ‘GDP’ and % growth and makes us all rich.
          But of course what our business really is, is pumping oil out of the ground and burning it.
          We build bigger better faster machines to do just that. (think airlines as a simple example)
          If we stop doing that we have no ‘business’ or ‘economy’.
          Now back to the price of gas….it doesn’t matter what figure is on the pumps, as long as we were producing more oil that we could consume in our machines, then whatever price it rose to, could always be counterbalanced by payrises.
          in other words, a payrise was always met out of increased production/sales, which in turn was supported by more oil output. We locked ourselves in a vicious spiral that could only go on rising as long as enough cheap oil was fed into the system to support wages/production/sales. (that explains how gas rose from 10c a gallon (or whatever) to its present price)
          Industrial production during the 20th century was precisely matched by oil production. so wages, gas prices, houses , food and everything else simply leapfrogged each other while economists and politicians pretended it was this or that political dogma that was responsible.
          it worked until 2005. That was the year conventional oil plateaued, and the world economy crashed in 08 as a result. (economic forward momentum stalled because there wasn’t enough oil available to keep the economic pumps primed) folks didn’t have so much spare cash to go on buying stuff.
          Now the expectation of the annual payrise has gone, because there’s no cheap oil to fund it, so we are able to afford less and less gas. If less is sold by the refiners, it gradually becomes less economic to produce—this closes down the shale plays. As gas climbs higher its use will fall, because we have less and less ‘excess’ money to pay for it.
          (the cost of food will use a greater proportion of our income). So to attempt to make oil viable–its price will rise still further, this in turn bumps up the cost of food, making even less available to buy gas.
          And so on.
          As our oil leaves the market place, so will our money-value
          gas will tend to rise towards $10 gallon but at some stage the system must implode because food will become unaffordable as a result. That will bring about violent revolution (food shortages inevitably cause revolutions) and destroy any last vestige of social cohesion. That will wreck the fuel distribution network and finally close the oil era.

          • Scott says:

            Hello, End_of_More, thanks that was helpful we are fortunate to have authors such as you writing on this site. From your website I can see your concerns. It looks like we agree that it is going to be a rather slow process unless there is a sudden trigger (which know one knows when) that could cause financial collapse (which we are in no hurry to see). I expect that gas could easily rise faster than paychecks too. The comments I made on the large trucks earlier – all these empty huge trucks running around just to drive to work. Well it seems to me that could conserve some of the last oil we had left and we could avoid this oil collapse or postpone it for a time more. But folks up here are still buying the big trucks and paying $4 gas because it is a cultural thing up here.

            I have not read your book yet, but I wonder if you believe in my concept of an uneven collapse where some places will still hold together while other regions have decline. Perhaps Africa and places in the far corners of the world, places where when things happen they may not make it onto the evening news show? We are already seeing declines in Egypt, Africa. But if this if the situation declines in parts of Europe it could spread to the USA fast I think.

            They are trapped into a corner with rates, if they allow them to rise, they are in trouble as to roll over all those trillions at higher rates will surely make the country feel more poorer, but the monetary response to print could eventually become inflationary, or stagflation? That is something that we have discussed much here and I still think, that armed with the printing presses they can bring the inflation we fear. We may still receive our retirement checks, but they may buy less and less each month.

            An event such as terrible bond market collapse, stocks and value of US Dollar or other world currencies could be the catalyst for crisis. Something to keep an eye on.

            Kind Regards,

            Scott

          • Randall Smith says:

            When gas prices rose in 2008 employees of the state of Oklahoma hadn’t had a raise in 2 years, It’s been 7 years and still no raises. Salaries of government workers don’t rise, except for the military which is on a COLA.

        • Hi Scott and all pitching in to this discussion.
          On the point of the ‘slow decline’ I think I may have given the wrong impression on that.
          I don’t think it will be.
          I liken it to a piece of elastic—it stretches just so far, then when it snaps it hurts your fingers.
          The pain is exactly in proportion to the amount of stretch.
          Syria is a perfect case in point.
          You have two religious sects who got along reasonably well. Then Syria had a ten year drought, the farmers gave up and moved to the cities and clashed with the people already there, with grievances too numerous to go into here.
          Hence the explosion, using religion and politics as the trigger.
          Same with Egypt. The initial protests were about food and jobs, not politics or god
          Changing governments there wont change anything, but the explosion hit suddenly. With any political explosion, there are always opportunists who try to grab what they can. Godbotherers have always been skilled at that
          Greece exploded for the same reason, it’s gone quiet for the moment because they’ve been able to borrow some more money. When that runs out, it will kick off again.
          Spain has a youth unemployment level of 50%…so suddenly they divert attention to Gibraltar.
          The swathe of southern Europe is fundamentally energy deficient, yet insists that growth in manufacturing ‘stuff’ is the only solution to the problem.
          There is an absolute refusal to accept that too many people are demanding a share of too little fuel.
          As jbsties points out, when Mexico reaches the stage of having to import energy, they won’t have the means to do so. You then have a country on your doorstep even more unstable than it is now. Toss a few other South American countries into that mix and you have a scenario too awful to contemplate,
          The USA can only defend its borders as long as its energy supplies hold out, and social cohesion holds together. in that respect a nation is no different to a medieval castle.
          On the medieval castle line of thinking, it’s as well to remember that one in six is already on food stamps. Despite this deficiency in energy, growth and ‘job creation’ will fix everything. As the USA collapses, just as with the Middle East, factions will try to grab what they can. That is basic human nature. Again, I fear it is the godbothering factions you have to worry about. After all, everything else has been tried, time to let god take charge. (via those chosen to interpret his doctrine of course)
          but for the moment, our political captains are navigating the future by watching the wake of the ship of state, while we the crew are complicit in our self destruction by chopping up the decks and lifeboats to feed the boilers.

          • xabier says:

            End of More

            And, again, looking beyond the Mid East for examples of sudden descent into violence, we could cite the Balkan wars: people of different races and religions living peacefully enough – then a sudden and sharp political crisis leads to mass slaughter and torture, neighbours murdering one another, rape camps, etc.

            Which is why it’s probably a good idea to try to live in a more or less homogenous zone, avoiding the fracture lines of race and religion where possible. One less pretext for violence.

            I see that extreme right-wing ‘religious’ groups in Russia are reported as torturing and killing homosexuals at the moment, and filming it for fun. Yes, there’s a lot of people out there who make one shudder and who may come to the fore in times of crisis, and they may well use religion as their pretext for bestial behaviour.

            Unlike you though, I suspect that non-religious political divisions will still be good enough reason for killing, and new parties may form which we can’t even dream of now. Political hatreds run very, very deep in Spain for instance, having become tribal since the Civil War, and abductions and secret murder have never entirely gone away.

            A lighter (black humour) note: a friend writes from Colombia that you can buy ‘Powder of Hate’, a supposedly hazardous magical substance to do in your enemies, with a nice colour picture of a horned demon on the packet. Imagine: a country where it is worthwhile to make and market such a thing! And some people think S. America will be a refuge in times of collapse………

          • xabier says:

            End of More

            The castle analogy is a good one: with some many on state support (unemployed, pensions) or food stamps as it is, it’s rather like going into a siege situation with 30% of the garrison half-starved to begin with. Our societies are immensely fragile as they stand.

            Another castle instance from my family history: an ancestor of mine was in charge of what was reputedly one of the strongest castles in Spain when he had to face a siege. He put up a good fight, but what let him down, as far as I can tell from the chronicles, was that the repair of the castle had been neglected for decades – something he couldn’t do much about himself, it was too big a problem for the castle governor. So he surrendered. And partly as a result of that, the whole kingdom fell. (Oh, and the king had run away: makes one think of George Bush getting into his plane when the Twin Towers fell).

            The pattern is instructive: decades of slow real decline, whatever the facade might have appeared to be, due in fact to the lack of revenue to maintain the infrastructure, followed by very sudden collapse when faced by a sharp shock – in this case invasion. If action to make repairs had been taken earlier, it might have turned out differently. The materials were available: wood from the forests, stone in the quarries. But action was impossible, because the cash wasn’t available. The wood and stone reserves were useless. The revenue problem undermined a structure which had stood for centuries, and which in theory could have stood against any army, much as Gail warns us about financial complications menacing us now. …..

          • Xabier

            my point about godbothering was that it doesn’t really matter what kind of faith you employ, in a time of crisis you will always find unpleasant people to do ‘gods work’
            A case in point is that the SS had Gott mit Uns stamped on their belt buckle, fascism is just another kind of ‘faith’ in a purpose that promotes a supreme leader while ultimately leading to destruction. Extremes of Christianity and Islam have the same purpose
            the god part is irrelevant, grabbing other peoples resources is what they were all about, with the certainty that they were right.
            The wonderful cathedrals of the middle ages were built by draining the resources of the surrounding country, while the masses were convinced it was god’s will that they should live in hovels.
            Dissent meant execution, so there was the incentive to keep the whole thing rolling in a belief in the ‘leader’

  25. Hello all,
    Interesting article and comments. Lots to chew on. I think one of the biggest problems we have in our society is the lack of understanding of energy. It amazes me how little the average person thinks or understands how much energy they use or where it comes from. Many don’t even understand the basic principles of energy.

    One woman proudly told me that she and her husband have renewable energy because they had “geothermal” installed. I asked her what powered their heat pump and she said “Why the earth’s energy”. I explained that a “geothermal” system still requires something to power it’s compressor, pumps, and fans. Her eyes glazed over and she said “Well I don’t know anything about all that.”

    The level of ignorance is almost frightening! When I give presentations on sustainable living I ask the audience how many people know how much electricity their home uses. Almost no one can answer my question or even have a ball park idea. I’ve given up the hope that our society will be able to make the changes needed in the time that remains before our economic engine seizes up. I agree with the comments that “it won’t be pretty.”

    But I also agree with Don, those who do understand should be doing all that they can to help themselves. Learning how to live well now will make life better even the future isn’t guaranteed. And living well encompasses so many different things.

    Speaking of living well, my first batch of peach butter is bubbling away on the stove. After that will come tomatoes for sauce and cucumbers for pickles. I have two bushels of onions and a hundred cloves of garlic curing in the porch. We are enjoying fresh pesto from our basil and garlic. The sweet corn this year is the best I’ve tasted for many years. This year the garden’s bounty is overwhelming. And when I think of energy I think “Do I have enough energy to can all this?” But no worries, if I get too tired I give a call to friends and they happily come to pick the rest. I never have any difficulty finding people to share the wealth….and they often bring the beer!

    cheers,
    Jody

    • xabier says:

      Jody

      Good to hear from you again. While you are engaged in your positive and sane endeavours, I see that a large number of fools in only their underwear are crowded into a square in New York in order to win the record for the largest number of fools to crowd into a square in their underwear.

      I do not think I am a sour kill-joy in observing that these people will not weather any storm that may be gathering……

      PS When is dinner: I think many of us might like to drop by your place (with beer.)

      • Xabier,
        You would be welcome. There is nothing I enjoy more than sharing good food, wine or beer, and conversation. Many an enjoyable evening has been spent by the fire with friends who love eat, drink, and talk. We’ve not solved the world’s problems, but we feel better being with other kindred spirits. Just let me know when you’re coming and dinner will be waiting!
        Jody

        • xabier says:

          Jody

          The people who think they can solve the world’s problems usually end up chopping off heads or shooting people do they not? I’m with the bon viveurs and beer drinkers!

        • Scott says:

          Gail, Xabier, Jody, Chris, Don and many more of us wish we were closer to sit down and enjoy a meal and a beer and/or some wine together and talk about these subjects.

          • it would almost certainly end in a bar brawl over who was the best/worst doomster
            My global warming is worse than your energy depletion—etc etc

          • Christopher Johnson says:

            Right, and I’ll print us up some pistolos but won’t reveal which ones have pins made of marshmallow. After which I get to snatch Don, based on when the Big C is gonna hit. If it’s next month or later, then I’ll go get him later — he sounds like a picky eater and unless Jody agrees to cook, well, I wouldn’t know quite what to do. Any volunteers? Xabier, I like Spanish food, too.

          • You would all be welcome, although some will be sleeping in tents! I’m sure we would have many interesting conversations and lots of good food. Too bad we don’t live closer together. The problem of internet communication! Don, North Carolina isn’t that far from Indiana. We could meet up in Kentucky and visit Wendel Berry. Scott, I hear Oregon is a nice place to visit! My oldest son lives in Montana.

            EOM, I have two teenage sons who fight all the time, certain they are always right. Men and boys, not much different when it comes to arguing about who’s right. My solution is to make them wash and dry the dishes together. If the fighting continues, cleaning out the pig pen comes next. Arguments usually end before more drastic chores are assigned!

            Second batch of peach butter heading for jars! Looks like my trees may have two or three more bushels of peaches on them. Whew…..

            Cheers,
            Jody

            • Scott says:

              Hello Jody and All, You know we talk about traveling and getting together but those of us that have like the mini farms and all sorts of animals and gardens to tend, we find so hard to get away.
              If you try to become more self sufficient you will find yourself more closely tied to the land and it is hard for me to leave my home and my animals for more than one day at a time.

              Well I guess the internet will have to help us communicate for now it is one freedom we still have but I am sure it is censured too.

              Right now is kind of a busy time here in Oregon and yes it is pretty too. Leaves will be changing soon on all of the Maples but not just yet. But it is busy because of the harvest, our little garden too but also farmers bringing in bails of hay for the winter feeding of livestock. I am a homebody and love being home, sometimes my wife is the one that encourages me to leave the house and go places, we are lucky here we do not have to go far to see the wonderful wilderness.

              All the garden stuff is coming in fast now and I have to learn a few tricks to save some of it, going to dry corn etc. But also plan to attempt pickles this year.

              So I guess my point is forget your traveling if you are a serious homesteader… On second thought I think the world could do with out aircraft except for emergency situations. We need to become more patient and boats and trains would do well for us if we could just slow down.

              Kind regards,

              Scott

    • Timothy says:

      Jody,

      When I first started my gardening experience, I too grew many vegetables. My wife and I have jarred many of them without much thought. But I began to wonder about the energy it took to process, boil, and sterilize all of that food.

      Once I actually took that into account, I realized that there was no way this would be sustainable without massive investment in some sort of renewable energy technology which I refuse to do.

      My plan is to be able to survive with no electricity. I will certainly use it while it is available, but I will continue to develop my system with the assumption that electricity will not be available in the quantity, quality and consistency that it is now.

      Currently we are reliant on the city water and waste, but I am saving to have a well dug with a manual pump as well as reading up on and planning to use humanure.

      But as for food preservation, there is but one ‘sustainable’ method and that is drying. Now we will always have a vegetable garden to add variety and needed vitamins and minerals to our diet, we already save seeds and replant. However, the majority of our sustenance will come from fruit and nut trees. Nuts need next to no processing for storage and fruits are easily dried. The fruit trees require little maintenance and work to preserve the soil. Also we have a perennial vegetable garden that at the moment, includes artichokes, sunchokes and horseradish.

      I built a solar dryer for about 200.00 that works very well. You can check it out here if you are interested. http://futurereferencefarm.blogspot.com/2012/09/the-solar-food-dryer.html

      The crux of my point is that we need to move toward perennials rather than annuals in order to sustainably produce our food in the future.

      Currently on 1/5th (yes, .20) of an acre we have:

      Trees

      Bing Cherry
      Black Tartarian Cherry
      Hazelnut (2)
      Almond
      Cherry plumb
      Plumb (2)
      Arkansas Black Spur Apple
      Macintosh Apple
      Elberta Peach
      Apricot
      Nectarine (2) Ultra Dwarf
      Moonglow Pear Full
      De Anjur Pear (2) Ultra Dwarf

      Berries

      Blackberries
      Raspberries
      Blueberries
      Strawberries

      All of which require very little labor to maintain and no soil disruption. What I am surprisingly excited about is implementing the humanure system as I would feel so much better about my footprint if I wasn’t washing my personal waste ‘away’. Of course we compost all of our organic waste outside of the bathroom already.

      Thanks and have an awesome journey!

      • Timothy says:

        I also forgot to mention that we have a small asparagus bed of about 12 plants as well as several grape vines.

  26. jbsties says:

    Recent history suggests that we cannot tolerate gas prices above $5/g. Therefore, going to $10/g seems unlikely. Steve Ludlum over at Economic Undertow has much to say on the subject: http://www.economic-undertow.com/wp-content/uploads/2013/07/Triangle-of-Doom-070113.png

    • I agree with Steve Ludlum that $10 oil seems unlikely. In fact, unless governments hold down prices, it is not at all clear that there will be lines at gas stations either. People may never know that oil limits are behind our problems.

      • xabier says:

        Gail

        ‘People may never know what is behind our problems.’

        All too true: and governments and the MSM are doing their best to obscure the issues even when people wish to inform themselves.

        The crude propaganda being manufactured and disseminated against ‘Baby Boomers’ is having its effect – ‘the greedy generation who took everything’ is a (poisonous) meme increasingly seen in both pieces by journalists, politicians’ speeches and comments on discussion threads. Energy limits? What are they?!

        This is a procedure – scapegoating a generalized group in society – typical of totalitarian and fascist regimes. It’s a gift to politicians trying to get off the hook themselves and knowing that huge cuts in services and pensions are inevitable, no wonder they are peddling it with enthusiasm.

        If we are trying to discern what the future may hold, it’s already taking shape, and it’s not pleasant or civilized. It is a form of fascism, ‘corporate fascism’ if you will, not that the label matters much.

        Meanwhile, one reads of nothing – in the MSM and government press releases – but ‘growth’ in the jobless (or more accurately, low-skill jobs) ‘recovery’, (‘amazing growth of 0.6%’ !!!!) while governments persist in luring the unsuspecting into more student and mortgage debt, to prop up failing systems, and announcing infrastructure developments of no discernible economic benefit or durability (at least in the UK).

        The era of maniac, fraudulent, short-term fixes.

        The experience of reading the MSM these days leads one to suspect that something has been slipped into one’s morning coffee, provoking hallucinations…… But I want what the politicians are on: it’s clearly more powerful.

        • I agree. And Saudi Arabia slips in its own ridiculous announcements as well, to add to the confusion.

          • xabier says:

            Gail

            The recent Saudi observations on oil demand etc are a hoot: I never thought Wahhabis would make me laugh!

            Combined with every European leader saying that Europe has turned the corner and growth is in sight (next year, always next year), makes them all competitors in a stand-up comedy contest.

        • Chris Johnson says:

          Xabier:
          Strong condemnation, and wholly warranted. We in this country and other places that have not been damaged so severely cannot appreciate the impact of 50% unemployment among 20-30 year olds. And for how many years. Is this not the kind of situation that so frustrates growing portions of the population that eventually a majority emerges that demands radical or totalitarian solutions? Different cause, but effects like in the 30s?
          Is that scenario in the cars for others?
          Is the scapegoating you described not also reflected in the recent name-calling about Gibraltar? Lots of finger-pointing and shouting.
          Am I wrong in thinking the German social-labor-economy solutions are superior? Are the psychosocial properties transferable or is a Teutonic mindset demanded (maybe we could try to define what that means, but not right now). Some of the youth behavior we read about in UK is not particularly encouraging, and certainly other societies are grappling with these issues as well, aren’t they?
          BTW, one of the reasons I focus on the students is that ‘student loans’ is the financial mechanism that first snares people into the “credit society” mindset. Then the car, then the house, then the wife, etc. It’s not merely a question of education, but more of Pavlovian conditioning: the TV says buy this widget on credit and the well-trained viewer says ‘Arf.’ Or maybe I’m way off track? Something sure is!
          Cheers, Chris

          • xabier says:

            Christopher

            A whole society of Pavlov dogs going ‘Arf!’ is pretty much what modern consumerism is about, no question: what a crazy acceleration we’ve seen in this in the last 20 years or so, now that people seem to be plugged to the net in almost permanently.

            I’m not sure that thuggish lower (or upper!) classes in Britain is a new phenomenon, a significant percentage of Britons have always thought breaking things and people is a good laugh (even Churchill did it when young!) It’s why boxing was promoted instead of knife fights, to limit the damage. The London riots two years ago were more about robbery than social protest, or political protest as the Left tried to say – how the Left love the thought of Street Revolution! The British didn’t win a global Empire by accident.

            Gibraltar is just an old tactic of the Right in Spain, Patriotism and Scoundrels as Dr Johnson said….!

            The mass youth unemployment in Greece, Portugal, Spain and Italy (and soon France?)is an extraordinary and alarming social experiment, the results of which – say in a decade – are greatly to be feared. Beethoven’s Ode to Joy, the European Anthem, is most ironic at present.

      • Chris Johnson says:

        Gail:
        Do you know if economists have recently run sensitivity analyses on the incremental effect of oil price rises. One would think off-hand that the earlier experience and then the post-2004 rises might be sufficient to determine that $5.00 might be the highest the US economy could tolerate (note that Europe, Japan and China are already higher, I think). But $8/Gal would probably kill what economic life still flickers, etc. I’m sure there are some pretty sophisticated analytical tools out there for such things. Any thoughts?

        • Economists don’t seem to understand the many ways oil affects the economy. They run sophisticated tests on one tiny piece of the impact, say the amount that rising gasoline prices affect the spending of an average American, and conclude that the impact is too small to make a difference.

          Their sophistication lies with believing everything follows a particular model, and seeing how a change in oil prices changes one little piece of the model. They don’t understand that oil prices could have an impact on employment, and on taxes collected, and on housing prices, and on debt defaults, and on many other things, all at the same time. They have a very hard time seeing the big picture, because they are focusing so intently on one tiny piece of the whole puzzle. It is as if the problem is occurring in 10 dimensions, and they have very sophisticated one-dimentional tools.

  27. 8-7-13 Oil Limits Reduce GDP Growth; Unwinding QE a Problem
    Posted on August 2, 2013

    Thank you Gail for a great, realistic site. As a useful hobby I have been studying some of these issues for ~ 40 years. I am a retired RN with advanced education and a wide experience in my practice. The hobby has reaped rewards in making my contribution to our great project ahead: what I call a people and planet project. Our finite world calls for innovative lifestyles, work, and creative thinking for creative new ways of honoring our finite world. Lifestyle changes have been my focus.
    Marie.

    • Welcome! Hope you keep reading, Marie.

    • Chris Johnson says:

      Hello Marie,
      Does your medical training lend to survival scenarios. Some of us are committed to stay alive and maintain a modicum of civilization, in which medical threads must flow.
      Welcome.
      Chris

  28. Randall Smith says:

    Gail, thank you so much for this blog and The Oil Drum. Finally, someone who knows the limits of cheap oil, the ramifications of expensive to extract oil, and the huge economic, political, and social implications of what that means.
    KEEP UP THE GREAT WORK.

  29. Randall Smith says:

    THE GUESTION of the next 20 years is can we peacefully transition to renewable energy because fossil fuels, especially oil, will be gone soon.

    • I see “renewables” as simply add-ons to the fossil fuel system. If we have a problem with fossil fuels, the electrical system will fail, bringing the usefulness of the renewables down as well.

      There is a possibility that a some electric panels off grid will continue functioning as long as the things they are connected to keep functioning, and as long as the panels keep functioning. This may be helpful to some individuals, but will not save the system as a whole.

  30. Randall Smith says:

    THE QUESTION….sorry

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