Our Oil Problems are Not Over!

If a person reads US newspapers, it is easy to get the impression that all of the world’s oil problems are over. But this is not really the case.

An Overlooked Part of the Problem: High Oil Prices

A major piece of the world’s oil problem is high price. Prices continue to be far above historic levels, now in 2013.

Figure 1. World oil price (Brent equivalent) in 2011$,  based on BP 2013 Statistical Review of World Energy data.

Figure 1. World oil price (Brent equivalent) in 2011$, based on BP 2013 Statistical Review of World Energy data.

High oil prices disrupt economies around the world because when oil prices rise, the wages of the vast majority of workers do not rise to compensate. Workers find that they need to adjust their spending patterns because the higher price of oil leads to higher prices for many things, including the cost of commuting, the cost of food, and the cost of buying goods that have been shipped long distance.

When workers adjust their spending patterns, discretionary spending is cut. This leads to patterns we associate with recession, or perhaps just slow growth. Unemployment rises, and there is less demand for new homes and cars.

Governments are also affected, because many of their costs, such as building roads, are higher. They also have to pay benefits to workers who can’t find jobs, or who can only find only low-paying jobs. Governments find it increasingly difficult to collect enough taxes because of the low wages of workers. Problems with rising deficits and the debt ceiling become the order of the day. Does any of this sound familiar?

One of our biggest issues today is that we don’t have a way of getting oil prices back down again, without a drop in oil extraction. The “easy to extract” oil (and thus the  inexpensive-to-extract oil) was extracted first. There is still a huge amount of oil in the ground. The issue is that we can’t get it out, except at high prices—the same high prices that either (a) cause recession, or if governments can disguise the problem with deficit spending and low interest rates, (b) cause persistently low employment plus slow growth.

The Recent Rise in US Crude Oil Production

It is true that United States oil production is now higher than it has been in the recent past. The rise in production relates primarily to “tight oil”—the kind of oil production that is enabled by very extensive hydraulic fracturing (also called fracking). (Figure 2)

Figure 2. US crude oil production, divided into "tight oil", oil from Alaska, and all other, based on EIA data.

Figure 2. US crude oil production, divided into “tight oil”, oil from Alaska, and all other, based on EIA data.

We are often told that this rise in production is because of the invention of fracking. This is not really true; fracking has been used for decades, but not in the quantity it is used today. Oil production is up because oil prices continue to be high. High oil prices allow producers to use fracking in the quantity it is used today, on sites that without the technique would not be able to produce oil. Even with recent improvements in techniques, fracking remains expensive. Continued extraction of tight oil depends on oil prices remaining high.

There are other things besides high oil price that enable tight oil production. One of these things is plenty of credit, available at low interest rates. Tight oil by its nature requires considerable up front investment. Cash flow tends to be negative as production is ramped up. This means that there is a need for a lot of debt financing, so low rates are helpful. Ultra low interest rates, such as those provided by quantitative easing, also enable equity (stock) financing, because investors are so starved for reasonable returns that they will buy stocks of iffy companies, in the hope of capital gains.

Another thing that enables tight oil extraction in the United States is our law structure. In the United States, property laws permit landowners to share in the profits from oil drilling. In most other countries, profits are split between the company and the government, with nothing for local property owners. Because of the financial incentive, US property owners are often willing to put up with the hassles of hydraulic fracturing. This isn’t necessarily true elsewhere.

The United States also has other advantages that are not available in much of the world: lots of pipelines already in place, many drilling rigs available, a reasonable level of water supply, and population which is not terribly dense, so that fracking can often be done away from populated areas. The spread of technology for doing fracking around the world is far from a slam-dunk, because of the many obstacles to extraction elsewhere. These can at times be overcome with different techniques, but this adds another layer of costs, meaning oil prices need to be higher yet.

The amount by which tight oil production will continue to rise is open to a variety of interpretations. If oil prices drop because of recession, there may be very little additional production.  If credit availability dries up, tight oil production may drop. If everything goes well, US production may rise. If miracles happen, tight oil production may even rise in many areas around the world.

As I have indicated previously, I am concerned about a financial discontinuity in the very near future–a few months to a year or two–a discontinuity that is ultimately related to high oil prices. This financial discontinuity could even be related to the current government shutdown, if it goes on for an extended period. If we are reaching a discontinuity, credit markets may be so disrupted and other changes may be so significant that past projections will be irrelevant.

A Second Overlooked Part of the Problem: Inadequate Rise in World Oil Production

The second major issue we are encountering now, besides high oil price, is an inadequate rise in world oil production. Many people are concerned about a possible unplanned decrease in world oil supply (so-called “peak oil”). While this may happen, worrying about this issue misses an important issue that comes earlier: for a growing world economy, we really need a reasonably large annual increase in oil supply.

Even if we include all kinds of liquids that aren’t quite oil, such as ethanol, natural gas liquids, and coal-to-liquid, the growth of oil supply has tapered off considerably in the last 50 years. (Figure 3).

Figure 3. Growth in world oil supply, with fitted trend lines, based on BP 2013 Statistical Review of World Energy.

Figure 3. Growth in world oil supply, with fitted trend lines, based on BP 2013 Statistical Review of World Energy.

If we fit trend lines to historical oil production, we see that the lines become progressively flatter. To make matters worse, the number of potential customers for this oil has been rising, thanks to globalization. The World Trade Organization was formed in 1995. Adding China to the World Trade Organization in December 2001 particularly ramped up demand for all types of energy products, including oil. As China’s use of oil products soared, it put huge pressure on world oil prices. The combination of flat production and rapidly rising demand led to rapidly rising oil prices between 2003 and 2008 (Figure 4, below.) Oil prices temporarily dropped during the Great Recession, but are now back up above $100 barrel.

Figure 4. World crude oil production and monthly average Brent spot oil price, both based on EIA data.

Figure 4. World crude oil production and monthly average Brent spot oil price, both based on EIA data.

Whether or not recent oil production really is sufficient for a growing world economy is debatable. Certainly in terms of supply equaling demand, there was enough. But in terms of how this supply was divided, it has been very unequal (Figure 5).

Figure 5. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 5. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

The big historical users of oil, that is the United States, the European Union, and Japan, have seen their use of oil drop, while oil use has continued to rise in the rest of the world. The countries that have seen a drop in oil consumption also tend to be the countries that experienced the greatest downturn during the Great Recession. These same countries are now struggling with slow economic growth and little gain in the number of high-paying jobs available.

There is good reason to expect that oil use and economic growth would be highly correlated. This expected correlation comes in two different directions—from the demand side and from the supply side. From the demand side, if businesses are growing, and if workers have jobs that allow them to buy an increasing amount of goods that use oil (such as cars or motorcycles, or new houses), the demand for oil products is likely to be growing as well.

Availability of oil is also important from the supply side—that is making and transporting goods. As mentioned previously, oil is required to transport goods, and it is used in many other places in the economy—such as in growing food, in the construction of buildings, and as a chemical feedstock. Of course, if oil is cheap, it is much better on the supply side than if it is expensive, because if it is expensive, the high price of oil tends to send the required selling price of goods upward, and (oops!) lead to fewer sales, cutbacks in production and recession.

How Financial Limits Tie in With Oil Reserves

There is a common belief that we have plenty if oil, because companies and governments report high oil reserves. For example, using BP’s 2013 Statistical Review of World Energy, the amount of oil that companies seem to think is extractable is (1668.9 billion barrels of oil reserves/ 31.5 billion barrels of oil produced in 2012) = 53 years worth of oil at the 2012 rate of production. If we look at oil resources that are supposedly available, which include oil that may be available with further exploration and development, the amount seems to be higher yet. So it doesn’t look like there could possibly be a problem.

The reason why this belief is false is because the real cut-off is financial, and those making the estimates have no way of figuring out when the financial cut-off will occur. So they assume that we can extract oil that is very likely to stay in the ground indefinitely. One way of illustrating this problem is shown in Figure 6.

Figure 6. Resource triangle, with dotted line indicating uncertain financial cut-off.

Figure 6. Resource triangle, with dotted line indicating uncertain financial cut-off.

Oil resources in the ground can be thought of as being somewhat like the triangle of resources shown. There is a lot of oil that is expensive to extract near the bottom of the triangle, but relatively little that is inexpensive to extract at the top. Oil companies start with the inexpensive to extract oil at the top of the triangle, and gradually work their way down through the triangle.

The least expensive oil is the oil that can be extracted with minimal problems. It is typically located near the surface, onshore, and can be extracted with the simplest equipment. Most of the easy, and thus cheap, to extract oil is now gone.

Now, if we want oil, we are being force to extract the more expensive oil, found lower in the triangle. Such oil may be deep under the sea, or near the North Pole, or may require hydraulic fracturing to extract. Sometimes the higher oil cost relates to indirect expense. For example, governments of oil exporters usually charge high taxes on exported oil. These taxes are used to keep their populations pacified with food subsidies and other benefits, such as desalinated water, so they do not revolt.

At the bottom of the triangle is an invisible financial limit, which I have shown as a dotted line. One way the limit “works” is by inducing recession in countries that obtain a very large percentage of their energy consumption from high-priced oil. Another way the financial limit works is by inducing financial collapse in oil companies. This happens when companies have huge up-front expense before they can recover their costs by selling  oil they have extracted at high oil prices.

As an example of a company hitting such a financial limit, Brazil’s second largest oil company, OGX, is trying to extract oil offshore Brazil, including the presalt area (that is oil beneath a salt layer that is difficult to drill through). OGX recently missed a debt payment because of its inability to obtain sufficient financing to work its way around a long-term negative cash flow situation.  It reports that most of the oil fields it has explored are not economically viable–the cost of extraction would be higher than the price available in the world oil market.

Because the financial limit is invisible, companies and government agencies have no way of excluding the too-expensive-to-extract oil from their estimates. A reasonable case can be made that at $100 barrel, oil price is already adversely affecting the economy. Without quantitative easing and deficit spending, the economy would be in recession from high oil prices now. Thus we are already hitting the financial limit, even though companies can see a huge amount of more oil that is theoretically available to extract. The only minor catches are that (a) consumers need to be able to afford to purchase the high-priced oil, and (b) oil companies need to be able to obtain ever-more cheap financing to extract it.

How Oil Limits Tie in with Energy Returned on Energy Invested (EROI)

Dr. Charles Hall and others have calculated Energy Return on Energy Invested (EROI) for various fuels (Hall and Klitgaard 2012). The basic premise is that the more energy is needed to extract a fuel, the less efficient it is for providing needing desired energy for society. Hall’s research has shown that over time, the EROI for each fuel extracted tends to decline. This is very similar to the rising cost of extraction over time I am showing in Figure 6. The main difference is that I include all relevant costs, including wage costs, taxes, financing costs, and distribution costs, rather than just energy costs associated with extraction.

I have talked about required oil prices already being too high, and thus causing recession. In many ways, this is parallel to saying that the EROI of oil is already too low, and is leading to recessionary problems.

Some people (for example, Garcia 2009, which seems to be used in used in Randers 2012)  would like to use EROI comparisons to determine what might be a suitable substitute for oil. I do not consider this a suitable use for EROI for several reasons:

  • Substitutability away from oil is very poor in the short-term, especially if we are up against a financial limit that will make substitution even more difficult in the future. The use of EROI in this manner assumes that substitution is really possible.
  • EROI does not consider some important variables, including the timing of investment (and thus the need for long-term financing), and governments’ dependence on tax revenue from oil. Even in the US, governments obtain considerable revenue from oil extraction. According to Barry Rogers in the Oil & Gas Journal, in North Dakota, the total “government take” amounts to $33.29 on an average $80 barrel of tight oil.
  • If substitution were to take place, huge transition costs would be incurred, such as  early retirement of the current vehicle fleet, and higher capital costs (and thus more energy expenditure) related to the new vehicles. Simply considering EROI would miss these costs.

Conclusion

When we hit oil limits, we are really up against Liebig’s Law of the Minimum. Applied in this situation, this law would say that if a necessary fuel is missing, the economy will not operate properly. This law originally was used to describe a problem in raising agricultural crops. If a necessary nutrient (such as phosphorous) was not present, it didn’t matter whether excess amounts of other nutrients were added. The plants could not grow properly unless the missing nutrient was available.

With oil, the situation is pretty similar. The economy cannot operate as usual, without an adequate supply of cheap oil (or in EROI terms, high-EROI) oil. All of the talk about substitution for oil is irrelevant, if our problem is a financial problem we are hitting right now, or in the very near future.

In order to have prevented our financial problems, several years ago we would to have needed to put in place a substitute for oil with very little or no transition costs. Ideally, the substitute could have kept transportation costs very cheap—comparable to the cost before the run-up in oil prices starting about 2003.  Ideally, the substitute would also have worked for other oil uses, such as for powering irrigation pumps, for powering agricultural equipment, and as a chemical feedstock for asphalt, for medicines, for herbicides and pesticides. To be truly an oil substitute, the new product would need to be available sufficiently cheaply that it could be taxed heavily, to make up for lost revenue from oil royalties and other taxes.

Now we are faced with what looks like an unsolvable problem. We need a cheap oil substitute, yesterday. The stories we heard saying, “Substitutes will work when the oil price rises high enough,” were a bunch of nonsense. The folks who came up with this idea didn’t realize what a negative impact high oil prices have on the economy. A high-priced substitute for oil is not at all helpful. Neither is one with huge transition costs.

Without a substitute, we need to figure out how to live in a very changed world, one facing financial collapse–a very difficult problem indeed.

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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247 Responses to Our Oil Problems are Not Over!

  1. Scott says:

    Thank you Gail, It looks like the oil price needs to stay right where it is at pretty close to now as any lower price will slow down production especially of tight oil. Higher prices, would mean the economy will slow. A fine line to walk with the oil price. Trapped in a channel of slowly rising prices and cost are not a good economical model using yesterdays models of infinite growth.

    Looks like a time of “less for more” and higher prices ahead for most everything we need.

    Scott

  2. timl2k11 says:

    The problem is about maybe 0.1% of the general public understands any of this, not that it is complicated, in fact you show in your writing just the opposite, it is quite simple. I think the problem is that virtually everyone is part of the problem, everyone depends on fossil fuel for their livelihoods, and they don’t like being implicated. This goes for overpopulation too and why it is so taboo. A surprisingly common and terribly immature refrain I see all across the internet when someone suggests the world is overpopulated is “If that’s what you think? Why don’t you kill yourself”? When people contemplate the possibility that the world is overpopulated, resources are finite, we’ve far exceeded the carrying capacity of the planet, they will at least subconsciously question their contribution, or perhaps consider that the justification of their very existence is being… “undermined”. I think that is why I see so much immaturity and defensiveness when it comes to topics like world population, pollution (especially global warming) and energy security and why, by extension, we are doomed. No one wants to accept even a tiny fraction of responsibility for what is happening on our little planet.

    • Most people don’t understand any of this. Part of the problem is that we have many layers of people who are in denial about our problems: government officials, economists, those who write school books, those who write newspapers (and would like advertising).

      A person might expect that academics would understand some of this, but the academic textbook companies want something they can publish for 20 years, so that they can make money on the books. The academics are under pressure to get grants and to publish lots of paper. The way they can do this is by saying what everyone else says. No one gets a grant to say (for example) that carbon capture and storage is silly, or that we don’t have enough cheap oil.

      A lot of what underlies our problems is instinct–an instinct to take care of ourselves; an instinct to have things as good as others have things (hierarchical behavior); an instinct to have enough children that they can help in our old age. It is hard to deal with that.

      • Danny says:

        Well I just went to see former treasury secretary John Snow talk and his presentation centered around how social security can be fixed and medicare is going to bankrupt the country. There was no mention of peak oil until the very end when he said “I want to end this on a positive note- the shale deposits in this country are so big and they will bring in so much revenue that this country will be in great shape for a long time to come…I kept raising my hand to ask a question but of course never got called on….So either this guy is a real idiot….which is highly likely….or he just doesn’t want to face reality. One thing that he said that really surprised me is that he said the republicans will be blamed for this short term but if we default on are debts Obama will get the blame for that…..scary that they think this is all just a chess game.

        • Social Security is pretty much pay as you go (regardless of what you have heard). So Social Security can be “fixed” by reducing benefits, if there isn’t enough money. At least that is what actuaries believe. There would probably be revolt, if the extent of reduction that is needed were to take place. But at least it is not depending on fictitious prefunding, like most pension plans are.

          Medicare is more or less a full employment for doctors and health care workers system. The costs keep escalating, as the health care system finds more ways to spend money. US life expectancy continues to fall relative to other countries, even with all of the spending. Funding Medicare is a huge problem. I would argue that the system needs to be overhauled, to spend a lot less money. I am also not sure that we should be spending much of our health care dollars on people over 80 years old, or clearly near death. Palliative care has a place in the system.

          And of course, no one understands the nature of our oil problem. They think it is only too much imports.

          • Danny says:

            Thanks Gail I love your articles; they slice right to the point. Maybe it is not your forte but I wonder if you have thought of an article of the psychology of people that makes them unable to see certain realities before them. It almost seems that the more accomplished someone is in this current system the less likely they are to question the system that has wrapped them in such a warm comfortable blanket. I noticed this last night in the “suit yes men ” surrounding John Snow and feeding him softball questions. I am a working class electrician in flannel shirt and they probably thought it was not safe to let me ask a question- even though I do have a degree in Economics. Yes Social Security can be fixed but don’t you need to have an economy to do this? People paying into the system- when the FED has to pull back its spending and the stock market collapse and we fall into depression there will not be the revenue to fund it. The treasury dept will then have to start printing money to pay its obligations. This would then shoot everything into an inflationary spiral…..so what kind of spiral would oil be on?

            • The psychology issue is an interesting question. Perhaps I can write an article about it one of these days. There are no doubt whole different layers of the subject–what people think, mixed with what publishers (books as well as newspapers) are willing to print. Education no doubt plays a role, as does religion. For politicians, growth has huge benefits, so there is a tendency to seek out economists with the “right” views.

          • Andy says:

            @ Danny
            David Cohen writes some interesting articles about the human condition. It comes down to more then just an oil problem though. To me it seems that the human evolutionary trait of denial, optimism and confirmation bias has lead us to this place. As Homer J Simpson said, if stupidity got us into this mess, why can’t stupidity get us out.
            http://www.declineoftheempire.com/2013/07/the-reality-of-the-unconscious.html
            http://www.declineoftheempire.com/2013/07/flatland-a-good-enough-theory-of-human-cognition.html

            • I think the problem is that we have evolved to use external energy–energy from burning wood, or oil or natural gas, or some other source. See my post Humans seem to need external energy. This is what sets us apart from other animals. Our bodies have now evolved to need cooked food, and we have moved to parts of the world where we require fuels of some sort to modify the natural environment.

              Once our population had outgrown what was available from burning biomass (plus a little from wind and water energy), we moved on to fossil fuels. Fossil fuels allowed humans to ramp up our population to even a greater level. But doing this created huge problems–we took over the habitat of other species, we added huge numbers of domestic animals in addition to ourselves. By our very act of living, we messed up the rest of the world.

              We can talk about living more sustainably, but conservation does very little. For one thing, we tend to spend our incomes. So if we conserve in one area, and thus save money, we tend to spend the money in other areas. The spending, wherever we do it, results in energy use, pollution, and disruption of the natural world. Population is growing so rapidly that any savings through efficiency tends to be quickly taken up by more population. So apart from a huge drop in population, it is hard to see a way to fix this problem.

        • Casamurphy says:

          @ Danny

          If you would like to explore the philosophical side of decline, I highly recommend

          http://thearchdruidreport.blogspot.com/

          Mr. Greer over the last dozen or so posts has done a remarkable job of exploring the “cult of progress” as it relates to our predicament.

          • Thanks! JMG makes some good points. I looked at his post about the real cost of the Internet–the fact that it depends on having an electrical grid working–something that people overlook.

        • xabier says:

          Danny

          The electrician in a flannel shirt is probably today’s equivalent of the little boy who pointed out the Emperor’s nudity and folly: so no surprise they didn’t pick you to ask a question…..

  3. Joe Clarkson says:

    One of the big unknowns is how long high oil prices can stay high without causing recession. The US is one of the world’s biggest oil users and one of the most wasteful (European economies have only half the energy intensity of the US). Because of this waste, it is relatively easy to reduce oil consumption in the US with only a modest negative effect on the economy. Every wasted barrel of oil saved helps dampen upward pressure on prices.

    I think that one reason oil prices have been relatively stable for the past few years is that energy waste is being wrung out of the world economy at about the same rate as EROI is declining. Eventually the easy efficiency gains will end, oil prices will rise and instead of mere stagnation we will have full-blown recession. If a financial crisis hasn’t happened sooner for other reasons, continuous world-wide economic recession will certainly do the trick.

    • Kristoffer says:

      I don’t agree that it would be relatively easy to reduce energy consumption in the US to the level of EU.
      The infrastructure in place makes the need for transportation much higher in US.

    • I think that the only reason we are not in recession now is because we are covering up the problem with QE, ultra low interest rates, and deficit spending. We would be sliding back on a balanced budget.

      The US economy was built on a different model than European. It would be horribly expensive (and energy intensive) to try to change it. So I don’t think the issue is really waste. Admittedly the big SUVs could be replaced with smaller vehicles, but even doing this has a cost to it.

      • But I believe Joe Clarkson is right in that there is a small level of “energy optimization” going on now in the US, and in addition to the QEs things have been trudging along. People travelling a bit less and buying more fuel efficient cars. These are easy moves to take for many individuals, but as Joe say, when you have peeled away that first layer of energy waste you are left with the hugely inefficient energy intense structure that its all built upon. When you start cutting into those, you will start the real recession.

        Unfortunately I believe the first real cuts to the government will be in all the research related jobs – no doubt a lot of people working with climate research will be booted by republicans “optimizing economy”. This leads me to think that in the middle of these first stages of decline they are also removing the people who have knowledge about changing the system to something that wont be catastrophic to the ecology of the planet. My only hope is that the public picks up on this and demand certain changes to how the country is run.

        • xabier says:

          Science funding has really collapsed in Spain’s austerity regime. Schools badly hit, too.

          But lots of nice comfortable places for politicians still being funded easily enough……

        • I wish I had as much faith in the academic system as you do.

          Climate change scientists assume way too much CO2 in their models, based on the belief that energy consumption can rise indefinitely. There is a “2.6″ estimate in the 2013 model, which is the “peak oil” estimate, but still is very conservative (that is high) in the estimates of carbon to be burned–it assumes that we will continue to extract these fuels, even on the downslope, when there is not nearly enough to go around. It shows a median temperature rise of 1.5 degrees C, compared to other simulations that go up to 6.0 degrees C.

          The academic system follows where the grants for money are. It assumes that we can continue to add more complexity (and cost). Researchers know that if they publish something similar to what the common belief is, their papers have a good chance of being published. So it reinforces standard thinking.

          IPCC Projections from 2013 report

          • Peak economic oil may cause the current rate of CO2 to decline thereby reducing the risk of CC in the future however there is still 30-40 years of buffered CO2 in system now as well as plenty of coal and gas. The other issue is that being a consensus project for politicians and policy makers the IPCC report has been criticised for being too conservative in its forecasts – the less likely but possible feedbacks being down played.

            The real problem, I think is humans are just living in the moment- when crisis hit Greece people desperately burned street and park trees for fuel. An element of AGW is change in land use – ironically the very wealth from oil allowed us to be environmental protective of forests which will be a resource of fuel that will be quickly plundered. And in the short term any recession in Asia may reduce the amount of aerosols and put warming back on track.

            Projections are at best tools- I think it is highly unlikely that any one will be completely correct. Add the uncertainties of oil production, social unrest, climate disruption happening now [ the speed of Arctic warming is far quicker than projected] and possible food shortages as well as the odd way the economy functions- Oil has tripled in price and the economy seems to function- just.

            Seriously- assuming the next 10 years will likely be just like the last seems the best way to get a decent nights sleep.

            • Peak oil alone won’t solve the global warming problem

              Half of oil burnable in 2000-2050 to keep us within 2 degrees warming has been used up as we hit 400 ppm
              http://crudeoilpeak.info/half-of-oil-burnable-in-2000-2050-to-keep-us-within-2-degrees-warming-has-been-used-up-as-we-hit-400-ppm

            • Scott says:

              Matt, Thank you for that article – http://crudeoilpeak.info/half-of-oil-burnable-in-2000-2050-to-keep-us-within-2-degrees-warming-has-been-used-up-as-we-hit-400-ppm
              The world currently uses about 90 million barrels per day and by the year 2050 we only be producing only about 30 million barrels per day. The problem is simple and it is likely that the population of the world will need more than a 100 million barrels per day and the shortfall looks devastating.

              I think this problem will be well known however long before 2050. We can burn a bunch of coal if we can no longer get enough oil which will make the CO2 worse. Looks like Thorium is the best option for the world to embrace at this point. Supply lines will shorten slowly as costs grow and shortages start to show sometime down the road.

              Perhaps there will be a big move to localize more in the years ahead, People will have fewer choices and no longer will we have as much fresh vegetables and exotic fruits from all over in the dead of winter. It would be an interesting change to see go us through and I do not see it happening voluntarily, especially with the attitudes of many young people these days. Although some young people are awake to the problem.

              Scott

            • I don’t think that we can “burn a bunch of coal if we can no longer get enough of oil”. Instead, high oil prices bring down the financial system, natural gas, oil, and coal more or less simultaneously. The combination also brings down electricity and world population. So even if there is climate change, there will be many fewer people to be bothered by it. The remaining population can simply move somewhere else, where the climate is better.

            • Scott says:

              Hi Gail, Wow only 30 million barrels per day by 2050!!! Do you agree that is the path we are on?

              Scott

            • If banks aren’t operating, it could be a lot sooner than 2050 that oil production goes down to 30 million barrels a day. Companies need a way to pay employees, and to collect money from customers.

            • I expect nearly all of the other half of fossil fuels will stay in the ground, because a trip up of the financial system will tend to bring the whole interlinked system down. For one thing, we can’t make computers or anything else high-tech (an LED light bulb, for example) without our whole interlinked system that allows us to import metals from around the world. Even if we lose little things, like the ability to fly people around in commercial jets, it could have huge impacts. Another potential problem is losing the ability to make computers. This could mean that once the ones in existence wear out, and we cannibalize the others, we lose our ability to make things we need computers for–which is most everything made with today’s manufacturing techniques.

            • I agree about the buffered system being an issue, but presumably the climate scientists put it into their model.

              If oil becomes a problem because of price, I think it could bring down the whole system quite quickly. The expected impact is like severe recession–reducing all fossil fuel uses at once. The economy is so networked, it is hard to substitute, except for simple things like burning trees down.

              I suppose forgetting everything does give a decent night’s sleep. If there is really nothing we can do–and I am afraid that is close to the situation with climate change–maybe that is a solution.

          • I do think that the current 400ppm is already very high for the planet, actually “only” 100ppm over pre industrial times. And remember 100ppm is also the difference between an ice age which is really only -5C lower on average for the whole planet. 400ppm might have a +5C in the pipeline even if we cut all emissions today, unless there is some carbon capture thing going on at the same time. Considering trees are our best way of capturing carbon, in a oil-decline scenario we would no doubt cut down and burn large parts of the worlds forests just to keep some of the machinery running, hence removing the most important carbon sink (besides the ocean). As the planet warms so will oceans ability to absorb CO2 also go down, leaving more in the atmosphere.

            And I haven’t even mentioned the fact that IPCC still does not quantify the amount of methane emissions we might get from thawing of permafrost and methane clathrates at the bottom of the sea. These are the wildcards at play here and they could be a serious problem in the very near future (and no doubt the worry that people in the NTE-camp believes in).

            I am no believer of doomsday scenarios but I do believe that Guy McPherson is onto something when he say that “Only a collapse of the industrial civilization can prevent runaway global warming.” – And the faster it happens the better we have a chance of preventing huge ecological changes to the planet (as if there wasn’t enough damage done already).

            Some research seem to indicate that the aerosols is preventing the full effect of warming to a degree that the actual warming would double if you cleaned it all out. Thats an additional +0.8C that could come rather fast if our current fossil fuel burning is turned off (no doubt this wont happen even in a collapse scenario).

            I know that we cant solve our current energy predicament by renewables alone, but I do believe they can help us as we scale down the world economy and at least give us some degree of vital technology around. Remember that e.g Norwegian steel industry is powered almost exclusively by hydroelectric power. But I believe we have discussed this before – and I am under the belief that it is possible to maintain some system even if it means the majority of the people live in poverty.

          • Tarjei V says:

            Gail says: “I expect nearly all of the other half of fossil fuels will stay in the ground, because a trip up of the financial system will tend to bring the whole interlinked system down”
            I think there is a definite possibility that human technological inventiveness combined with political urgency will somehow introduce a new coal age, even if oil recedes and modern financial systems crumble. As in the thirties, we might see desperate states nationalizing companies and resources, and reverting to semi-fascistic governments. The little oil there is will be rationed, and resources channeled towards rebuilding parts of the infrastructure so that coal can come in and fuel specific parts of the economy. This needn’t happen overnight.
            A hypothetical example. Country C – whose export is mainly natural resources – hits bad times, people go hungry, banks close. A semi-tyrant emerges, as described above. Some other countries in the world still have fairly cheap oil (which they keep to themselves), and function decently, so the export marked is there. Country C have coal fields, coal mines are opened, scarce oil and abundant manpower is channeled (forced) into mining, engineers are rebuilding ships and trains to coal power, the export gets going, currency flows in, further rebuilding ensues. As long as abundant coal is fairly attainable, I think humans will find a way to keep their fossil “energy slaves” even past the oil age. The key here is semi-fascism, nationalization, rationing of the remaining oil resources, in order to facilitate the transition. This, of course, makes for a possible escalation of humanity’s co2 emissions, but when the alternative is starvation and war, no one will care. It is in fact possible to argue that the end of (cheap) oil will make things worse. I don´t know if it’s likely, but I think it’s possible. The coal age didn’t end because we ran out of coal. It will possibly reemerge when we run out of oil.

            • Even if this scenario takes place, I would argue that we still could not make high tech devices, like computers. We would in a few years lose major parts of the system, including widespread electricity distribution, because we need computers to regulated the distribution system (and probably other parts of the system). Without universal electricity distribution, we would soon lose natural gas and oil distribution, because natural gas and oil pipelines are electrically powered. At some point, we will also lose Internet availability, for those who have electricity available. Banks operating in areas without electricity would have huge problems figuring out people’s bank balances. It would be hard to get around all of the problems we would have.

      • Andy says:

        I would also add the increased economic activity generated by fracking for both oil and gas is providing it’s own form of stimulus, as well as ultra low prices for natural gas. I haven’t seen it quantified but I imagine a years worth of fracking operations are a decent percentage of GDP, and directly responsible for a lot of the growth.

  4. Niels Colding says:

    The main difference is that I include all relevant costs, including wage costs, taxes, financing costs, and distribution costs, rather than just energy costs associated with extraction —- and you are doing right so – money = energy, re Nate Hagens!

  5. top hyena says:

    Very cheeky of Liebig to give his name to a “law” that was well known and already stated the obvious:

    For want of a nail the shoe was lost.
    For want of a shoe the horse was lost.
    For want of a horse the rider was lost.
    For want of a rider the message was lost.
    For want of a message the battle was lost.
    For want of a battle the kingdom was lost.
    And all for the want of a horseshoe nail.

    From Wikipedia:

    ‘German: (positively formulated) “Diz ſagent uns die wîſen, ein nagel behalt ein îſen, ein îſen ein ros, ein ros ein man, ein man ein burc, der ſtrîten kan”; The wise tell us that a nail keeps a shoe, a shoe (keeps) a horse, a horse (keeps) a knight (or man), a knight, who can fight, (keeps) a castle (c. 1230, Freidank Bescheidenheit).’

    I see you’re not really interested in giving your name to a law, Gail, and enjoy telling it like it is: ‘The stories we heard saying, “Substitutes will work when the oil price rises high enough,” were a bunch of nonsense.’

    I never realised that nonsense came in bunches. Where’s the supermarket where I can buy me a bargain bunch? In England we have had “nonsense poetry”, of course, but when those high-fallutin’ French invented their own cultural brand of nonsense, they just had to give it the fancy name of “surrealism”. Typical.

    • Maybe “bunch” isn’t the right collective noun. But we certainly have a lot of economic sayings that are based on nothing more than wishful thinking. Others are based on observations while the economy was temporarily expanding rapidly.

      Maybe I need a more elegant way of putting things, and a “Law” can be named after me.

  6. “As I have indicated previously, I am concerned about a financial discontinuity in the very near future–a few months to a year or two–a discontinuity that is ultimately related to high oil prices. This financial discontinuity could even be related to the current government shutdown, if it goes on for an extended period. If we are reaching a discontinuity, credit markets may be so disrupted and other changes may be so significant that past projections will be irrelevant.”-Gail

    Discontinuity is what EVERY mathematical model ignores/discounts. All projections are made based on what occurred before, with the assumption that this will continue on in some smooth fashion, up or down as the case may be.

    So, if you think a discontinuity is on the horizon, you need to make a model which takes into account possible discontinuities. Nobody really does this.

    You are braver than most here, in terms of predicting a discontinuity in the next 6 mo- 2 years, and I happen to agree with you on this. However, QUANTIFYING it, explaining why the discontinuity will come when you think it will and explaining WHY TPTB will not be able to paper it over with more QE etc is quite a difficult challenge overall.

    RE
    http://doomsteaddiner.net

    • Difficult doesn’t stop me from trying. I have “things falling apart” already on my side.

      • It will be interesting to see what “solution” gets cobbled together by Oct 17 for resolving the Debt Ceiling problem. Even more interesting is to contemplate what occurs if the FSoA goes into technical default. I would think some CDS would have to trip on that one.

        RE

  7. Scott says:

    Gail I am a huge fan. At the same time I am not as dire about our current oil situation….Looking at the forward curve of oil, it is going lower, not higher. In 2020 it is trading around 80 dollars a barrel right now. Why would that be? Because high prices cure high prices….Traders aren’t stupid, they wouldn’t give something away at 80 which is going to be 300 in 7 years. Fact is, oil is going to get cheaper over the next few years. I’m not debating 2030-2050 but nothing is imminent right now. Thanks.

    • THe point I am making is that the (cost of extraction) is going up, while (the amount we can afford to pay) is going down. This causes a huge problem. What you are looking at is more closely related to (what we can afford to pay).

      • Scott says:

        Hello Gail, Yes agreed cost to extract going up and cost to buy gas going up and wages not keeping pace, it just will get harder and harder for many.

        I think the wise ones should be downsizing things now like their homes and cars if they are planning to make a purchase. If the inflation comes that we fear – it will be very profound and miserable. People are already screaming with the partial gov. shutdown I can only imagine what they would do if prices suddenly doubled again on food and gas.

        But we could also experience deflation, when few have money or (jobs) go buy cheaper goods.
        However, I think the central bankers are bent upon inflation so we will eventually get a whopper jump in inflation at some point when all of this new printed money finds its way into the world. Now it is mostly sitting in bankers vaults so the big inflation has not happened yet.

        I believe we would be in an actual Depression right now if not for the extreme measures of the Fed and Central banks of the world but it has only made the inevitable worse. It looks like the economy is ready to collapse again and it will be dicey time in the years and months ahead it seems.

        Scott

  8. Pingback: Thursday Morning Links | timiacono.com

  9. Leo Smith says:

    Substitutes WILL come along when the price is high enough BUT there is a time lag involved. And in that tie lag things can get pretty desperate.

    All western nations need to transition to a new energy infrastructure.

    The problem is that its currently the wrong one.

    • Substitutes will come along, if things haven’t fallen apart too badly in the interim. We are very dependent on things like cheap credit right now.

    • Substitutes are unlikely to come along because fossil fuels represent millions of years of Energy Collection time from the Sun. On a real time, pay as you go basis, you don’t get enough usable energy hitting the earth to replace the stockpiled energy in fossil fuels. So much Energy to Waste will be Unavailable at Any Price.

      RE
      http://doomsteaddiner.net

  10. Pingback: Our Oil Problems are Not Over! | Our Finite World « Olduvaiblog: Musings on the coming collapse

  11. yt75 says:

    “But this is not really the case”

    I like Gail’s euphemisms :)

    Otherwise it is indeed quite amazing how the propaganda regarding the “the US new Saudi Arabia” and the like has worked …

    For instance one can read recently in le Monde (from a raw materials “specialist”) something like :
    “The United States, who will soon export their oil again” :
    http://abonnes.lemonde.fr/economie/article/2013/09/14/la-syrie-n-enflamme-pas-le-petrole_3477546_3234.html

    Maybe one should also be reminded that the last figures regarding oil imports and consumption are (BP stats review 2013) :

    Imports :
    U.S. : 8,4 mbd
    China : 5.4
    Europe (BP definition, very large) : 9.5

    Consumption :
    U.S. : 18.5
    China : 10.2
    Europe : 18.5

  12. Yes. High prices are still around. Why is that ignored? In 2008 when the oil went up to $145.00 a barrel the price of a gallon of gas rose up to $4.00 to $4.30 a gallon. In the months following that oil bubble I had read somewhere that the refiners knew that the public couldn’t pay the real price of a gallon of gas corresponding with a barrel of oil so they absorbed some of the costs. I wish I had that article post today to share with others.
    If a gallon of gas today is always just inching around about $4.00 what will happen when oil again goes to $145.00 a barrel? Will the refiners step in again and hold down prices? I doubt it. If a barrel of oil right now is $105.00 and we are currently paying around $3.65 for a gallon of gas shouldn’t the barrel of oil costing $145.00 cost a corresponding price per gallon increase of 38% or in real dollars $5.02!

    Then there is the total obfuscation of the deniers, capitalists and media pundits.
    1. Let’s confuse the issue ALL THE TIME by calling it “running out of oil” as opposed to a worldwide Peak of Oil production. Why don’t we confuse TOTAL WORLDWIDE OIL with the evaporation of cheap easy to get oil? Ignore what the term “Peak Oil” really means.

    2. Let’s make the picture of oil look better by including all carbon liquids and fuels irregardless of their actual non-interchangeability. Also ignore the fact that true oil production has not truly risen much since 2005.

    3. Let’s enlarge the geographical boundary of our oil possession. Let’s not call it American oil. Let’s enlarge it to mean all of North America (United States, Canada, Mexico, etc.) Look people, I just increased our total wealth by assuming that these other countries will always share with us. Also even though we can enlarge our so called immediate geographic oil possession that still has no effect on the total amount of world-wide oil. There is what there is.

    4. Let’s exaggerate the issue of lower oil usage. Demand is down so that proves that we don’t even need as much oil as we used to. That doesn’t take into account that there is a limit to how much oil can actually be economized or efficiently manipulated without effecting the economy. That doesn’t take into account the fact of a worldwide recession or high unemployment in the United States. That doesn’t take into account the fact that the Asian world is just coming on board with ramped up living standards that are oil intensive

    5. Then there is the fact that actually we are doing everything possible in the world right now to extract every single of barrel that we can find. Fracking is just wringing the sponge. Off-shore drilling is just chasing down every blind alley as fast as we can.

    I hate being a realist but I hate self-delusional denial even more. Thanks.

    • yt75 says:

      Nice summary of the current “information twisting techniques” …

      Another one I encountered recently :
      - Total (the French oil IOC) recently published some quaterly results
      - The offcial press communication says something like : Total BOEs(Barrel Of Oil Equivalent) increased this quarter (or year on year forgot) by 2 or 3% (forgot exact figure)
      - Of course this then gets transformed the next days in the average press article in “total oil production increased !’
      - When in fact this increase was mainly due to the north sea gas platform Elgin being put back in production (after a serious accident), and the oil production still decreased.
      - As is the “production”of all IOCs (oil majors) since 2004 :
      http://petrole.blog.lemonde.fr/2013/02/21/total-production-by-the-five-major-oil-producers-has-fallen-by-a-quarter-since-2004/
      (note : above link to M Auzanneau blog, offline right now but should be back shortly)

      • Thanks for the link. Very Good. Very Important.

      • Oil companies have been getting more into gas drilling, so that their “reserve replacement” would look better. It seems like I heard that there is some effort underway to get them to report oil and gas reserves separately. I don’t really remember the details though.

        • Usually oil companies report oil and gas production separately but sometimes they show graphs with boe (barrels oil equivalent)
          http://en.wikipedia.org/wiki/Barrel_of_oil_equivalent
          in which oil and gas are added in energy units and then converted to barrels of oil

          • Danny says:

            I live in Mt and just had our energy company tell us we would be paying 13% more for natural gas and 2% for electricity to heat our homes this winter….What!!!??? I thought we had so much of the stuff we had to flare it offf!!!!!!!!!

            • Scott Walker says:

              Hello,  Well we have been reading that the shale plays may not last very long and most wells deplete in like 5 years, not as good as the old gas wells.  Shale gas looks to be short lived.

              Scott

            • The price is up from last year, but still below the cost of extracting shale gas. (Some gas is a by-product of oil drilling, and can be extracted very cheaply, so the price is high enough to cover its costs.)

              Natural gas is something that does not have much flexibility in quantity. If the quantity is only a few percentage above what is needed, the price will drop dramatically. The quantity is still a little higher than needed. At the new higher price, I expect some utilities will go back to coal, so the price may go drop again. This is very frustrating for those trying to produce natural gas.

  13. Thanks Gail for another great post.

    I found this article by Kurt Cobb that talks more about the energy cost of the “resource pyramid”:
    http://scitizen.com/future-energies/energy-the-achilles-heel-of-the-resource-pyramid_a-14-2760.html

    Whenever reading about “vast new resources” I always encourage people to ask two critical questions:
    1. At what rate?
    2. At what cost?

    The first question can be understood using the simile of a bank account. If you have $1 million in the bank but can only extract $500 per month you will technically be a millionaire on paper, but you will nonetheless find yourself living in relative poverty.

    The second question is actually three questions:
    1. What cost economically?
    2. What cost to the environment?
    3. What cost in energy?

    I occasionally see one of these, sometimes (but far less often) two of these costs discussed in reporting on our energy and resource predicament, but I rarely if ever see a full accounting of all three of these costs. Thank you again for all of your efforts and the clarity of your thought in that regard.

    • Thanks for the link to Kurt Cobb’s article. I think he has more hopes for renewable energy than I do. It doesn’t function on its own–only as a small “extender” to a fossil-fuel based system.

    • Thanks for the link to Kurt Cobb’s article. I think he has more hopes for renewable energy than I do. It doesn’t function on its own–only as a small “extender” to a fossil-fuel based system.

  14. Very nice post Gail, excellent summary.

    “Without a substitute, we need to figure out how to live in a very changed world, one facing financial collapse–a very difficult problem indeed.”

    I don’t believe (and don’t think you do either) that we will find a substitute for oil, certainly not one that will allow us to continue living a lifestyle made possible by cheap, abundant oil. The solution I adopted a long time ago was to change my lifestyle. For most of my life I have practiced the 3 R’s; reduce, reuse, recycle. “Resource conservation and environmental awareness promoting ecological balance through conscious behavior and choices that will lead to savings in materials and energy, which will benefit the environment” (Wikipedia). Now I call it Sustainable Living.

    [The following definition is from Wikipedia]
    Sustainable living is a lifestyle that attempts to reduce an individual’s or society’s use of the Earth’s natural resources and personal resources.[1] Practitioners of sustainable living often attempt to reduce their carbon footprint by altering methods of transportation, energy consumption, and diet.[2] Proponents of sustainable living aim to conduct their lives in ways that are consistent with sustainability, in natural balance and respect of humanity’s symbiotic relationship with the Earth’s natural ecology and cycles.[3] The practice and general philosophy of ecological living is highly interrelated with the overall principles of sustainable development.”

    Yesterday I spent the afternoon in the “education” tent at the farmer’s market. I was asked to be there to answer questions about sustainable living. I prepared a very nice poster showing examples of the things I do (energy conservation, recycling and composting, renewable energy, food production and preservation, and slow cooking). It was a beautiful day to be outside, but I was disappointed because few people showed much interest!

    It seems to me that most people in our society want to continue living with the current system because they don’t know a different way, they are ignorant of the ramifications of our current system, or they prefer to deny any problems exist. And even the well-educated, affluent ones that do understand the issues don’t want to give up coffee at Starbuck’s, their Apple tablet, or having to get work growing food. As long as central banks continue to create money, and the media keep telling people “all is well, don’t worry we have plenty of oil”, no one tries to change. At some point the system will collapse (relatively soon if you’re right Gail), or interest rates will finally be allowed to rise and inflation will destroy the value of our money supply. When that happens people will suddenly and traumatically realize that their job (if they still have one) and their money (if they had paper bills and coinage) won’t buy them what they need to survive. Or in other words, that their lifestyle was not sustainable.

    I had one women stop by and look at my poster. She said “That’s nice! I try to live sustainably. I recycle and I have rain barrels.” God help us!

    Regards,
    Jody

    • There was a saying that people used to use every part of the pig except the squeal. Also “waste not, want not.” Such thinking may come back into fashion. My family members think I am “cheap” by nature.

    • xabier says:

      The Green movement has done a lot of harm leading people to complacently think that if they merely drive an electric vehicle and recycle stuff, they have saved the planet…… Oh, and use a longer-life plastic bag at the supermarket.

      • When it comes to not adversely impacting the planet, the ideal must be living like a rabbit or a fox or a fish that lives in the wild might live. Basically, we need to eat only raw food. We need to live without housing our clothing. We can have no possessions. Otherwise, we adversely impact the planet–we wiped out whole species, back when we were just hunter-gatherers, with less than 1 million total world population.

        When held to the standard of other species resource use, it becomes clear how far “green” initiatives have to go.

        • Gail,
          I think one can take the analogy to far. I can’t imagine anyone wanting to live in a hole, naked, eating only raw food. Humans evolved to use tools. We don’t need to live in holes, unless we want to live in a sod, earthen home.

          It is my impression that too few people ask the question “Where do my resources come from?” We do much harm not knowing where our resources come from, how they are produced, what the consequences are from their production. Look at the pollution in China, a consequence of our need for cheap imports. Are we absolved of our responsibility if we are ignorant of the consequences?

          The best we can do is try live with more awareness, and to make choices in the level of harm we cause.
          Jody

          • The issue is that our use of external energy gives us a huge advantage over all of the other creatures that have to make do with what they get from eating or other metabolic actions. This is how we have come to dominate the whole earth. I wrote a post back in September 2011 describing some of the issues:

            What would humans have to do to really live sustainability with the world’s ecosystems?

            I got a shock when I read about the pattern of species extinctions which is taking place that form a part of what is called the “Sixth Mass Extinction.” It turns out that man’s adverse influence on ecosystems didn’t start a few hundred years ago, when we started using fossil fuels. Instead it started way back, when man was still a hunter-gatherer, and there were fewer than 100,000 people on earth.

            According to Niles Eldridge, in describing the Sixth Extinction:

            • Phase One began when the first modern humans began to disperse to different parts of the world about 100,000 years ago.
            • Phase Two began about 10,000 years ago when humans turned to agriculture.

            Check out the post if you want to learn more.

  15. ravinathan says:

    Gail, very nice summation of our energy predicament. I am not sure if you have seen this 2013 report by Deborah Rogers on shale gas. She writes about Wall Streets pumping up of shale prospects to sell debt and merger transactions. Maybe the discontinuity will coincide with the pricking of the shale bubble. http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf

  16. Vineyard says:

    A friend send me this Washington Post report.
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/03/the-scariest-paragraph-about-the-debt-ceiling-youll-read-today/
    If the dept ceiling isn’t lifted, then there might be a finacial crisis that would be even worse than the crisis of 2008.

  17. Don Stewart says:

    Gail
    I plagiarized these from Albert Bates site. I hadn’t seen them before…Don Stewart

    I was in New York in the 30’s. I had a box seat at the depression. I can assure you it was a very educational experience. We shut the country down because of monetary reasons. We had manpower and abundant raw materials. Yet we shut the country down. We’re doing the same kind of thing now but with a different material outlook. We are not in the position we were in 1929–30 with regard to the future. Then the physical system was ready to roll. This time it’s not. We are in a crisis in the evolution of human society. It’s unique to both human and geologic history. It has never happened before and it can’t possibly happen again. You can only use oil once. You can only use metals once. Soon all the oil is going to be burned and all the metals mined and scattered.

    M. King Hubbert, 1983

    Initially it will be denied. There will be much lying and obfuscation. Then prices will rise and demand will fall. The rich will outbid the poor for available supplies. The system will initially appear to rebalance. The dash for gas will become more frenzied. People will realize nuclear power stations take up to ten years to build. People will also realize wind, waves, solar and other renewables are all pretty marginal and take a lot of energy to construct. There will be a dash for more fuel-efficient vehicles and equipment. The poor will not be able to afford the investment or the fuel. Exploration and exploitation of oil and gas will become completely frenzied. More and more countries will decide to reserve oil and later gas supplies for their own people. Air quality will be ignored as coal production and consumption expand once more. Once the decline really gets under way, liquids production will fall relentlessly by five percent per year. Energy prices will rise remorselessly. Inflation will become endemic. Resource conflicts will break out.

    Colin Campbell, March 2002

    • Those aren’t really cheery quotes you found. Hubbert’s quote sounds closer to the way I see things than Campbell’s.You need the financial system to hold together to get Campbell’s. I suppose if the financial system does hold together, then one could get Campbell’s scenario. Otherwise, the decline could be faster.

  18. Hubbert ” You can only use metals once.” Actually If you can recycle half of a metal after each use, you can essentially use it twice – 1.0 + .5 + .25 + .125 +… = 2.0. Recycle 2/3 and you can use it three times. Unfortunately recycling requires energy.

    • Don Stewart says:

      Dear Robert
      I agree with you that pretty high recycle rates have been achieved for many metals. Yet our appetite for them must be growing.

      A couple of years ago I visited a mining museum at Cartersville, GA, which had mining vehicles on display. They ranged from mule drawn or human powered carts up to the monster vehicles of today. I would guess that the range of load capacity in the vehicles was at least ten thousand to one. There has to be a reason why we are processing so much dirt and rock to get so little metal.

      Don Stewart

    • Right. And it is hard to make the same purity that you had originally. So it works best for low tech products. It is not even clear that a person can make a knife that holds its sharp edge with recycled metals.

      • It isn’t just metal utensils that are getting less functional, but also plastic things are getting more brittle and cheaper. I still have a plastic sieve that fits at the edge of a kettle or bowl to drain off the liquid. It was given to my grandmother 30 years ago as a complimentary gift by the local dairy. It still works great and I expect it will hold up for many decades more. Most plastic utensils I buy now breaks within a year or two. I don’t think it is planned obsolesce. I think it is lower quality feed stocks.

        • xabier says:

          Jody

          Exactly right! The decline in durability of these basic goods is very noticeable right now: Chinese and other Asian manufacturers on extremely tight margins are clearly saving every cent they can. ( So how can we put any faith in their solar panels?)

          I contrast this with our Family Wooden Spoon, which first my grandmother and now my mother have used to stir and beat for – we estimate – some 65 years (some doubt as my mother being a child cannot recall the original purchase).

          Squandering the wealth of our planet home to produce…..shoddy goods.

          • Xabier,
            You are right. I have noticed the quality of goods declining very sharply over the last five years. I am very picky about the things I buy, especially tools. I figure I may not get a chance to buy them much longer. Good quality costs more, but even spending 5 times the price is worth it if something lasts 30 or 50 years! Every spring I see homeowners loading their carts with shoddy garden tools. I wonder if it will even last a season?

            Funny you should mention wooden spoons. When I visited your country I wanted to take something back with me that was made in England. Even in 1987 I had to search very hard to find such things. But I was able to find a very nice wooden spoon made from oak. I found it in a hardware store of all places! I still use it for making bread because it is so strong. Being only 26 years old it’s still young compared to your mothers! I hope whomever she passes that along to appreciates its value.

            I have had good luck finding well made kitchen tools from Germany. I bought a wonderful garlic press that I think will last long enough to pass down to my children. I also have an excellent pasta maker from Italy. The internet is very valuable for finding such things.

  19. Edwin Pell says:

    Bill Clinton will be one mile from my house at the Omega Institute talking about sustainable living. What does Bill Clinton know about sustainable living I wonder. The Omega Institute has a sewage treatment plant that they call a center for sustainable living. Man I love marketing.

  20. Another overlooked problem is peak oil (and global warming) in several key countries with geopolitical implications, e.g. Syria

    Peak oil, climate change and pipeline geopolitics driving Syria conflict

    Faced with dwindling profits from oil exports and a fiscal deficit, the government was forced to slash fuel subsidies in 2008 which at the time consumed 15% of GDP. The price of petrol tripled overnight, fueling pressure on food prices.

    The crunch came in the context of an intensifying and increasingly regular drought cycle linked to climate change Between 2002 and 2008, the country’s total water resources dropped by half through both overuse and waste.

    Once self-sufficient in wheat, Syria has become increasingly dependent on increasingly costly grain imports which rose by 1m tonnes in 2011-12, then rose again by nearly 30% to about 4m in 2012-13. The drought ravaged Syria’s farmlands, led to several crop failures, and drove hundreds of thousands of people from predominantly Sunni rural areas into coastal cities traditionally dominated by the Alawite minority.

    The food price hikes triggered the protests that evolved into armed rebellion, in response to Assad’s indiscriminate violence against demonstrators. The rural town of Daraa hit by five prior years of drought and water scarcity with little relief from the government, was a focal point for the 2011 protests.

    The origins of Syria’s ‘war by proxy’ are therefore unmistakeable – the result of converging climate, oil and debt crises within a politically repressive state, the conflict’s future continues to be at the mercy of rival foreign geopolitical interests in dominating the energy corridors of the Middle East and North Africa.

    http://www.theguardian.com/environment/earth-insight/2013/may/13/1

  21. MrColdWaterOfRealityMan says:

    Gail, unfortunately I think the situation may be somewhat worse than what you’ve described.
    The reason I believe this is because:

    1) Supply chains worldwide are recursively interdependent. Supply chains for computers are dependent on supply chains for electronics which are dependent on supply chains for plastics and mining, which are all dependent on computers…

    2) Supply chains for all of the examples above are dependent on cheap, petroleum-based transportation fuels, for which there is no viable substitute, at least not in the quantities used today.

    3) The recursive interdependency implies that supply chain breaks will be non-linear, cascading, and to some degree unpredictable as more and more supply chains become economically unsustainable due to high fuel costs associated with transportation (e.g. heavy bulk items like coal, metals, machine parts, etc.). Any product whose profit margins are low and whose transportation costs are significant portion of production costs will start becoming either scarce, or prohibitively expensive.

    4) Eventually, higher prices caused by high fuel costs and supply chain degradation start to effect the production of energy itself. In other words, high fuel costs start to become one of the causes of high fuel costs, creating a feedback effect. This may cause some quite rapid price spikes, followed by sudden price drops as the economy can no longer sustain the high prices, followed by more spikes and drops, until the price of hydrocarbon fuels reaches a permanently high plateau.

    • I agree with most of what you have said.

      I am not sure whether prices reach a permanently high plateau, or there start to be feedbacks that affect other systems, like the political system. People have been known to overthrow governments if things get too bad. Or government officials could just give up, figuring that it would be easier to start over than to try to fix Medicare, Social Security and other programs that there is no way that there is funding for.

      • Rich Zeit says:

        Hi, let’s keep in mind a distinction between overthrowing a government and significantly changing within a reasonable time the disparity in wealth among the strata…certainly the wealthy will have resources even to exploit a changing of the guard…

    • timl2k11 says:

      Nice analysis McWorm. I agree that we will see increased volatility, and I especially like your insight on the problems of recursive feedback loops. Not too many people can wrap their heads around recursion (but Gödel got it in a fantastic way).

  22. Don Stewart says:

    Gail
    We have discussed the issue of Keynsian fiscal stimulation and monetary QE. Here are two interesting charts:

    http://www.zerohedge.com/news/2013-10-04/definitive-rich-vs-poor-chart-rich-hold-assets-poor-have-debt

    Oversimplified, the Republicans are in favor of measures which increase financial wealth, which is heavily concentrated among the One Percent. The Democrats are also in favor of increasing financial wealth, but also want to maintain things such as social security payments, which are far more important to the bottom 80 percent. Both Republicans and Democrats are in favor of inflating the value of housing, which is a small percentage of the net worth of the One Percent, but is what the game is all about for the bottom 80 percent. Both Republicans and Democrats view debt repayment as sacrosanct, which hurts the bottom 80 percent and is what the game is all about to the One Percent.

    If we, as a political body, are able to visualize some way out of our predicament, it may help to keep these relationships in mind. My guess is that the One Percent will be the big losers, as corporate equity and bonds decline in value and as debts simply can’t be repaid. Will the Powers That Be permit that to happen? What will they do to prevent it? The bottom 80 percent will have their entitlements reduced, which will not be as much of a shock as what is about to happen to the One Percent. (I admit to a very cloudy crystal ball.)

    The charts and analysis also point out that giving money to the bottom income groups stimulates spending, while giving it to the top groups stimulates financial bubbles. This was part of Keynes analysis during the Great Depression–he just didn’t have the statistics that we have today. But since it may seem, as it did in 1931, that the problem is lack of consumer spending, then more unpayable debts may be created attempting to inflate the incomes, and therefore the expenditures, of the bottom 80 percent.

    Don Stewart

    • Ert says:

      @Don

      You talk about QE – and a most important aspect of QE is that it is only a temporary fix or extension of the whole game.

      Why? QE does not print money – it only provides liquidity for frozen assets like bonds and mortages. With QE holders of those instruments (i.e. papers) can exchange them for cash before the contract runs out. At the end – die FED returns the assets (bonds, etc.) to the issuer or originator – and gets their cash (plus interest payments) back.

      As more “paper” the FED holds – as less is in the market and can generate new liquidity injections.

      Then there is the second aspect: Debt. Only as long the debt is secured – the rich are rich. Since Debt and Money are two sides of the same coin a collapse of the lower 80-90% may also be a problem for the 1% if the bad debt is not hidden or written down. This is also the shell game behind the housing market. The link you used showed that approx 65% of the “net worth” of the lower 20-80% is in the principal residence. If you would collapse that….

      The question for me is: “How long can the current game be extended” – when energy cost more an more and the “near easy to take” resources deplete?

      • Don Stewart says:

        Dear Ert
        The market value of a house is only important to the occupant if they have a mortgage which must be paid, or if they want to monetize the house by selling it. Suppose the Glorious Revolution arrived on our doorstep and all debts were cancelled in a Jubilee Year. Poor people would stop paying their mortgages, and would be better off for that. The wealthy would be much worse off than they perceive themselves to be as assets would simply vanish. Since there would be less money in circulation, the value of the house would also decline. But the real value of the house to poor people is in terms of shelter. That wouldn’t change. Let’s suppose the husband dies and then the wife. The heirs decide to sell the house and get much less cash for it than they thought they would before the Jubilee Year happened. Not a disastrous event.

        Don Stewart

        • Ert says:

          @Don

          You stated the reason I don’t think there will be a “peaceful” debt jubilee: “The wealthy would be much worse off…”.

          You could even tax the people for “win/revenue” of the debt jubilee – in rates scattered over 10-30 years to provide the capital for new infrastructure programs (like in Germany after WWII) – so it would not be a total free lunch…. more like: If we can’t tax the rich, we forgive debt and tax the debtors.

          Somehow I like that last idea :-)

          A problem may be that corporations own a lot of debt – and the rich own the corporations… I do not like to let that uncontrolled gorilla loose! A debt jubilee had to be limited, so that it favors the lower 80-90% and not speculators that are high in debt.

        • That is a good point. Of course, many may choose to move, leaving their homes behind, if conditions are bad.

          • Don Stewart says:

            Gail
            My purpose in calling attention to the wealth and propensity to spend graphs is not to make predictions. Merely to provide part of the framework which is required to make sense of what is going on. The top 400 families in the US have more assets than the bottom 50 percent. If anything threatens the assets of the 400, a rational person will expect a counter-attack. For example, Automatic Earth has recently identified pension funds as one of the last untapped resources. They recount the scandal in Rhode Island as the state Treasurer has looted the resources and turned them into fees for Wall Street.

            There clearly won’t be enough real resources to go around, no matter how much money is printed. So we can expect a lot of maneuvering by the various parties trying to get theirs first. I also wanted to point out that a financial collapse, if segregated from the physical economy, can be much harder on the rich than the poor. The inability (or unwillingness) of the US to segregate the financial collapse of 1929 from the physical economy is what prompted Hubbert’s comment.

            Don Stewart

            • I am not certain that it is possible to segregate a financial collapse from the physical economy. It is possible to inject money into the economy, without it really getting to most of the “regular” participants, as we have discovered. But I don’t think the reverse is true. If the economy takes out the banks, this affects everyone.

            • Don Stewart says:

              Gail
              I certainly don’t claim to be an expert. But here is what I observe:
              1. In 2008, the important thing was to save the bank owners and managers. Several Wall Street ‘outsiders’ have commented that the banks should have been nationalized, their owners equity written off, any debts reduced to a reasonable level as would happen in a bankruptcy proceeding, and then the banks sold to new private investors.
              2. In 1929 the money supply was allowed to drop like a rock (Milton Friedman and Anna Schwartz). Thus, debts became very much harder to pay off and millions of people lost their farms. I assume a lot of small businesses went bankrupt. The government could have looked at the decline in money supply and arbitrarily reduced debts by a similar percentage.

              In both cases, a huge obstacle to taking action is our faith that the ‘free market’ solves all problems and that debts by private individuals are moral obligations (whereas corporate debt is viewed more as gambling).

              In addition, as my reference to the wealth and propensity to consume charts showed, the sociological effects are profound. Assuming some ‘rational response’ rests on the fragile assumption that we have a government which is both rational and fair minded.

              Ray Charles sang a song about ‘cotton is down to a quarter a pound and I’m busted…the sheriff will haul my belongings away’. I have a book written by a ‘Texas oilman’ who lost his job due to the collapse in oil prices…he took up Nature study and sketching. If we hope to have any chance of averting a collapse in the real economy as a result of a financial debacle, then we have to remove our ideological blinders and look realistically at our options. It would have been better if we had never permitted debt bubbles to be blown, but……

              Don Stewart

    • I am not convinced that things work the way you think they do.

      With lots of debt defaults, we quickly lose banks, insurance companies, and pension plans. At some point, the government cannot even pretend to bail them all out. Maybe it can offer people the ability to take a limited amount out of their bank account each week–say $200 week. The concern I have is that businesses will not be able to buy goods from afar without banks. They also will not be able to pay their workers. We hope that they somehow will be able to bribe essential workers (those who run the water, sewer, and electric systems) to stay without pay, but that may take some doing. Also, it would be nice to get some food delivered to cities.

      I expect the loss of government programs will not be far behind the loss of banks, insurance companies, and pension plans. This could mean the loss of Social Security, Medicare, unemployment insurance, food stamps, and other programs that a lot of people will depend on. Perhaps this loss might come in stages–first big cuts, then the government may get overthrown. Loss of police force and teachers may come as well.

      The top 1% will probably still be the top 1% after all of this, but a lot less wealthy as well.(The pensions may still pay a little, and the stocks and bonds may have some value.) But the 1% will likely “pull enough strings” that they have a better chance of surviving than the other 99%.

  23. Edwin Pell says:

    The current thinking about sustainable is equal to efficient. To actually be sustainable we would have to talk about controlling the size of the population. We are all in favor of efficiency. Henry Ford was in favor of efficiency. All the old time time motion study experts of capitalism were in favor of efficiency. It may hold off collapse for an extra ten or twenty years but population will always swamp efficiency, “sustainability”, permaculture, etc..

    • Don Stewart says:

      Dear Edwin
      Before you make sweeping indictments of Permaculture, perhaps you should watch, from beginning to end, Toby Hemenway’s talk at Duke on How to Save Humanity, But Not Civilization.

      Don Stewart

      • timl2k11 says:

        Don, I watched the video. Very informative, but, I think, quite irrelevant on a planet with 7 billion people. How much of a population can permaculture support? I agree agriculture is a disaster, and horticulture is sustainable and permaculture is regenerative, but I don’t see how we get there until we have a massive population die-off. There are too many people (and their “needs”) “in the way”, so to speak, for permaculture. Once we have a great die-off, yes, permaculture, not agriculture, and then horticulture. From that talk, sounds like the implementation of Agriculture was humankind’s Great Mistake (sounds like a good book title).
        In other words, yes do permaculture where possible, but so much land is taken up by agricultural civilization right now it’s not going to have much of an impact.

        • Don Stewart says:

          Dear timl2k11

          At the conclusion of Toby’s talk, he was asked about the prospects for human population when all the fossil fuels are gone. He said ‘perhaps somewhere between 500 million and 2 billion’. David Holmgren recently said that biological agriculture can probably feed 8 or 9 billion people if it is present along with some fossil fuels. When the fossil fuels are gone, he also came up with numbers in about the same ballpark as Toby.

          Most of the fossil energy used in food today is not used on the farm. It is used in transporting and storing and manufacturing and packaging and retailing and storing in fridges and cooking on stoves. Adopting biological agriculture does a lot of very good things in terms of restoring land to fertility and restoring the ecosystem, but it doesn’t do anything, directly, about the functions which are performed after the food leaves the farm.

          In my opinion, there are four productive avenues for food production. One is to garden everywhere–particularly with perishables. Big farms focus on things such as grass pastures and the production of non-perishables. The second avenue is simplifying the distribution system with information networks to directly connect farmers and consumers. The third avenue is to simplify food storage and preparation through the use of things like fermentation. The fourth avenue, as we get to the point where fossil fuels are really scarce, is for people to repopulate the rural landscape to get closer to food.

          I have been watching the Omega Institute proceedings this morning. Majora Carter talked about her initiatives. She remarked that growing food in cities is impractical. ‘It doesn’t create jobs’. She was followed by Michael Reynolds, who builds Earth Ships. Michael is everything Majora is not. Majora is elegant and a MacArthur winner. Michael is dissheveled and builds houses out of junk and the houses are self-contained. There is no external heating or cooling, they grow a lot of food inside them, and they use both gray water and black water to fertilize their gardens.

          Michael has been persecuted by his native New Mexico for his buildings. He joked that local governments ‘understand AK-47s’. He said seriously that ‘Desperation is an arrow that penetrates dogma’. As the current system collapses, so will the opposition of local, state, and federal governments to the doing of eminently sensible things. (I’m not so sure about that…back to the 400 families that control everything).

          The first speaker, Jeremy Rifkin, delivers a complex story but one part of it is that the Second Industrial Revolution is on life support, and all the smart people (except the oil companies and big utilities) understand that. Meanwhile, automation and communications are eliminating jobs. So jobs and the way we do things are both endangered species. Majora Carter harks back to Martin Luther King and ‘impatience to get our share of the wealth’. Reynolds message is that life can be very good if you build yourself an Earth Ship and largely disconnect from the economy. I would say that David Holmgren is in the same camp as Reynolds, relative to ‘largely disconnecting from the economy’.

          Of course, Permaculture is founded in Anarchy, so there is no Apostles’ Creed and the variety of opinions is as wide as their are practioners. I don’t think Reynolds calls himself a Permaculturist, but you can see the similarities.

          Concluding with the population question. Toby thinks the abundance of grains in the diet led to the beginnings of the population explosion. So part of Toby’s solution is to simply get grains out of the diet. He shares that opinion with the Paleo people. David Perlmutter’s book Grain Brain is a multi-faceted attack on grains and sugars. So you see lots of different threads connecting these people.

          Don Stewart

          • Don,
            Thanks for the summary.
            Jody

          • timl2k11 says:

            500 million to 2 billion without fossil fuels and sustainable? I’m just not seeing it. There seems to be a disconnect somewhere in that conclusion. Before widespread agriculture the world population was less than ten million people ( http://web.archive.org/web/20110102201303/http://www.census.gov/ipc/www/worldhis.html ). How does the earth support 10x, let alone 100x that amount of humans sustainably? I’m just not seeing it.

            • Don Stewart says:

              Dear timl2k11

              I haven’t peered into the minds of either Toby or David to see exactly what they are thinking. But lets try to put some perspective on the question. It is a problem similar to that faced by the IPCC. You have to have some different scenarios to look at and make some assumptions.

              Let’s consider Edo Japan with nearly 40 million people in the first half of the 19th century, and using no fossil fuels. If we assume that the world could achieve the same level of output as Edo Japan in, say, 2100, then 2 billion is not out of the question. Japan has very little arable land. Places such as China and the US and Africa have much more. Now think of reasons why the world might not achieve the level of Edo Japan in 2100. One possibility is extreme climate change. Another is nuclear war and its aftermath. Another is soil erosion and the continued loss of fertility. Another is the destruction by roving bands of zombies. Working in favor of 2 billion is the fact that we know a lot more science now than the Edo Japanese knew. Extraordinarily high yields have been achieved without using fossil fuels but with the application of modern science.

              But let’s change the assumptions and see how many ‘free people’ could be sustained by Earth in 2100. For that, I suggest you take a look at Toby Hemenway’s lecture ‘The Last Nomads and the Culture of Fear’. You will find it on his website:
              http://www.patternliteracy.com/‎

              Note his statement that there was absolutely nothing that the Plain Indians wanted from the US government–except to be left alone. They were very free…why submit to slavery? The Edo Japanese were not free: they were tightly yoked to a life of pretty hard work. If one tried to project how many Plains Indians the Earth might support in 2100, then the number would be far lower.

              Don Stewart

        • We exist in the context of our current civilisation through the production of excess.
          When 9 early farmers found they could produce enough (excess) food to support 1 non producer, that was the start of our civilised existence
          That 1 non producer might be a metalworker, priest, soldier or whatever. the exact job is irrelevant.
          But that 9:1 ratio continued until we reversed it with the industrial revolution because we had cheap energy available
          Our problem now is that we expect things to carry on as they have always done, but with expensive energy.
          It can’t be done
          So we must inevitably revert to the pre-industrial population ratios because we do not know how to produce food, even if there was enough land to produce it on.

          • Scott says:

            Hello End of More, I just keep thinking about that number,…. that we will only have 30 million barrells per day by 2050 at a time we will need more than 100 to continue the current growth anomoly and the decline will surely set in before then with looming financial crisis.

            Scott

          • Very well stated and understood. It’s a hard concept to really grasp that we have to constantly be involved with “takedown.” The ratio numbers you present are a clue as to what has happened to mankind. Many people in more elevated careers or positions are the least able to understand or appreciate where our world comes from.

            When my kids were 5 and 6 they thought that money grew on tress.
            When they became young teens they realized the money came from ATM’s.
            Then when they became older teens they started to realize money came from jobs.
            (Oh, so is that where you go everyday, Dad? To your job!)
            Then as they became adults they realized that money came from ‘real’ jobs. Especially full-time jobs and/or well-paying jobs.
            Then as we worked those jobs we realized that ours jobs were dependent upon everyone else going to work. Other people producing things to keep our own production going. Food planted, grown and harvested on a constantly evolving basis. As you stated so well we moved from a 9:1 takedown basis to a 1:9 basis with oil/energy discovery and production.
            If we consider the concept as a can of soup. How many tractors were used to plant and harvest the crops? How much water and fertilizer were used? How many railroads and trucks were used to transport that to the cannery? What other ingredients were used to actually make soup? How was the paper made to label the soup? Again more lumbers and mills were used to create just the label. Then railroads and trucks were used again to transport to the market? Then after all that is done I drive my car to the store, purchase the soup and return home. Was it worth it.
            As economies of scale go and creators of jobs. Yes. But the whole house of cards is built on the easy and profitable access of the takedown utilization of oil. Without it we have nothing. No, maybe not even 9:1. Thanks.

      • jcl64 says:

        Thanks Don for the tip on the lecture by Toby Hemenway. A very intelligent guy with some very good ideas about permaculture. One question remains though that were not mentioned, and that is the inability for 7 billion people to be doing this. Other than that I really agree with him about the deity thing – one has to learn to respect life before you can even consider believing in some all mighty god. So the earth spirituality surely has close links to the Gaia hypothesis by James Lovelock. I have always thought there was something very realistic about Genesis 3:19 – “In the sweat of thy face shalt thou eat bread, till thou return unto the ground; for out of it wast thou taken: for dust thou art, and unto dust shalt thou return.”

        I am not a very religious person, but I do believe in life and its fragility. Humanity has unfortunately placed ourselves in this “gods chosen” kind of thinking frame – elevating ourselves above nature – which again means we are unable to read the signs nature is giving us… or at least are easily fooled into either god saving our skin or a technofix just around the corner.

        • I think we now have a religion of growth, with Ben Bernanke as high priest. Growth of technology fits in. If anyone questions it, they are treated as if they are crazy.

    • I agree population is a big issue. Even big increases in MPG are quickly swamped by population growth.

      The other thing about efficiency is the fact that people tend to spend what they earn. If they save money because of, say, new insulation that allows their heating bills to be lower, they will spend it on something else. Pretty much everything we buy requires energy of some sort to make, so we end up using more of a different kind of energy, and we end up more or less where we started.

      It is possible to reduce people’s expenditures by raising taxes and using the higher taxes to pay down debt. (Not popular with anyone!! No one does this voluntarily.) This will tend to induce recession in the country taking such an approach. What happens on a world basis is more debatable. In the case of oil, which is in limited supply, the price will tend to drop a bit, and the supply will go to other countries not taking such action. The fact that taxes are higher in one country may not reduce world oil usage much at all, if the supply can be maintained. If world oil production drops, that is another issue.

      • Gail,
        We added insulation and a programmable thermostat and used the savings on energy to invest in more things to save energy, such as a wood burning stove. Lower energy bills helped us to afford new windows. And then using those savings we bought new doors….and then solar panels. Now we use the energy savings to pay extra principle on our mortgage, thus paying off our debt faster. Our goal is to have our home paid for and have minimal utility bills so that no matter what happens to the economy we are prepared. If the economy limps along until we retire then it will mean we have lower fixed costs.

        I don’t think Jevons Paradox means as much in a world where resources are diminishing. People should be doing everything they can to reduce energy consumption because soon they will have to whether they want to or not.

  24. Graeme says:

    Gail, have you read this report by David Korowicz?

    http://www.feasta.org/wp-content/uploads/2012/06/Trade-Off1.pdf

    It’s about how systemic collapse of the global economy could occur very rapidly if one or more key “hubs” of the system (such as finance) was shifted outside of its normal parameters. And that would in turn affect all of the other hubs such as energy, and lead to a self sustaining negative feedback loop which would bring the system down very rapidly.

    In essence it’s similar to the sort of argument you are making.

  25. Stilgar Wilcox says:

    Gail you wrote: One of our biggest issues today is that we don’t have a way of getting oil prices back down again, without a drop in oil extraction.

    Once the discontinuity you mention occurs, the price of oil will drop and like you mention in so many words extraction of marginal sources will drop along with reduced exploration. That will probably be the beginning of the permanent descent from peak plateau. Should get really interesting once massive borrowing and (helicopter Ben) printing are off the table.
    I can hardly wait – yikes!

    • Maybe someone else will have concocted a new idea. I am always amazed at how rules are changed, or new ways are found to try to kick the can down the road a little farther.

      But you are right, the situation doesn’t look good.

      • Ert says:

        What I do not understand is that the taxes on Energy products (Oil, Gas, etc.) in the US are not higher. Even in lower income eastern Europe countries, the taxes on gas are considerably higher than in the US.

        A slow but steady tax increase on energy products would promote energy savings and give people and industry time to adapt. An additional benefit would be that real price increases are dampened – when 60% of the price at the pump are taxes.

        Continuing the Oil & Energy game when prices are temporarily destroyed – and no one can afford higher ones will be interesting. You could tax exempt revenues from new energy explorations for a time, even lower the (low) environmental standards in the US and elsewhere…. but you can’t change the universal TANSTAAFL law as defined by R. A. Heinlein.

        • Taxes can be distributed in various ways. Our government taxes oil as it is extracted from the ground, as most governments do.

          We do have some taxes on oil at the pump as well. If the taxes are higher, it decreases use in the US, but does not necessarily reduce world oil usage. Basically, it allows other potential users, like China and India to use it. This rather strange phenomenon applies when production of oil is constrained–production is pretty much as high as it can go, regardless of price.

          Have you read my post, Climate Change: The Standard Fixes Don’t Work?

          • Ert says:

            @Gail

            Thanks for the link – didn’t knew that one since I follow you only from the beginning of 2013. Your insight’s are truly deep and the user comments here are also great – so it requires already a lot my time to follow your new posts.

            I see your point, but think in different directions. We currently see all that affordable energy will be a problem within at least the next 20 years – as we can’t exclude a technological jump/singularity in the future. But every country or society that will become more energy efficient and self reliant will have big competitiv advantages in the future if it can run on less energy and no singularity or other miracle will appear.

            It is clear to me that someone else will take the seat in the plane or burn the liter gas I saved by biking. But that does not count for me – if everyone thought that way, we would never start to think and do differently. At least that is what keeps my hope and motivation up.

            Thanks for all the time and though you put in this great blog and all of your comments!

  26. Just like to thank Gail or yet another timely and clear presentation.

    I’m one of the many people in the world who were pressing the ‘peak oil’ button, gaining much traction and interest… and then…. the agenda virtually evaporated overnight…. the world is awash with new oil everybody was told. In a matter of months the term ‘peak oil’ became liability, an untruth. And so, in no time at all, the peak oil movement foundered on the rocks, its adherents dwindling.

    I think the term ‘peak oil’ itself has become the major liability because it invokes a simplistic, graspable notion of ‘peak’ then ‘decline’ as the resource got gobbled up. Not hard for anyone to imagine that. But it is time to move on.

    It’s taken a while to re-set the compass, for the oil predicament to be spelled out in understandable terms, marrying it to economics and immutable laws of physics and mathematics, and I have to hand it to Gail for communicating the depth of the problem with great clarity. So pleasing to see the debate on our oil problem become alive again, this time with a much better understanding of its true implications for our world.

    This article is one of there best and so timely.

    • Ert says:

      @Chris

      I personally mostly use the term “Peak ‘Cheap’ Oil” – then If price and economy, environment and EROEI would be irrelevant we may be far, far away from a real ‘physical’ peak.

      But I see, that most do not grasp the basic concepts of EROEI and finance and their connections with affordability and economy. And the environment is only relevant if it is before ones own doorstep.

      What many not see is that even the IEA production numbers are only the ‘raw’ output of oil & gas – but not the net value (raw – oil & gas expenditures that make the production possible). So everywhere you may look, the picture is clouded. The semi-informed people I seldom discuss with hanging their (false?) hopes on all those clouded issues – so It is really hard to discuss the core of these issues. And we may all discuss those issues here, because we (at least I) still have the (energy surplus) luxury to do so.

      In that context I always remember these lines from Meadows: “The World Bank director (most recently responsible for the global airline industry) has explained to me, the problem of peak oil is not discussed in his institution, it is simply taboo. Whoever will try to anyway, is fired or transferred. After all, Peak Oil destroys the belief in growth. You would have to change everything.”. Original Austrian source: http://www.format.at/articles/1222/525/329547/da

    • Glad you like my article. I have been saying something like this all along. Needless to say, I don’t necessarily make myself popular with the peak oil crowd, because what I am saying is not the same as others are saying.

      This is an article I wrote back in April 2007 (before the great recession) saying some of the same things. Our World Is Finite: Is this a Problem?

  27. Manuel says:

    In % terms, how much does electricity represent of the total energy used in the US? I mean, you have to use non-electricity sources for transportation and in industry. So I don’t think you can ‘electricize’ the entire US using only renewables. Some types of fuel are not electric.

    It seems impossible to generate electricity entirely from renewables, and much scale it to cover ALL of our energy uses besides electricity.

    Sorry for my English, I am not a native speaker.

    • Manuel says:

      much less possible to scale it to cover***

      Sorry, my mistake.

    • Edwin Pell says:

      Try googling “us energy supply by source” and pick the wikipedia page it includes this graph
      http://upload.wikimedia.org/wikipedia/commons/6/6c/LLNLUSEnergy2011.png

    • tmsr says:

      the short version electric is 40% of total

    • There are actually different ways of converting electricity to be comparable to other fuels. The EIA and BP “gross up” electricity that is made directly from hydroelectric, nuclear, wind, solar PV, or geothermal by figuring how much fossil fuel would have needed to have been burned, to produce that amount of electricity. On that basis, the EIA indicates that 40% of US energy use in 2011 was from electricity.

      Of the electricity generated, fossil fuels generated 69% of electricity in 2012. This is down (a bit) from 71% in 2002. Nuclear is about 19% of the total. (This needs to be replaced–it is reaching the end of its lifetime.) Hydroelectric is about 7% of the total. “Other renewables” (including wind, solar PV, wood, waste, geothermal, etc.) are about 5% of total electricity in 2012.

      Renewables are hard to scale. Hydroelectric is pretty much “built out”. Wood scraps and sawdust are limited. It is possible to burn some waste for electricity. The fact that so much nuclear needs to be replaced with something in the next few years is a problem as well.

  28. ravinathan says:

    It is my opinion that the Jubilee is already ongoing in so many ways. When the Fed took AIG’s off balance sheet assets onto its balance sheet it was a Jubilee for AIG. When thye nationalized Freddie and Fannie, it was a humongous debt forgiveness for these two companies which kept the creditors whole. In turn, the federal govt. enjoys a Jubilee when the Federal Reserve buys its debt. This is what sustains the game.
    To keep things even handed the government proposed writing down individual mortgages of home owners. Some benefited although the impact was not evenly distributed.
    The Federal Reserve’s balance sheet is infinitely elastic. It can grow and it can shrink if the assetsx that it holds, which are essentially debt securities ineed to be written off. We are unlikely to see a Jubilee as in biblical times when all debts were written off periodically. Instead, it will be selectively applied at key pressure points, such as too-big- to-fail banks. I would predict that we will eventually see a jubilee for student debt that already exceeds a trillion dollars and for the mortgage debt of the FHA which are also seeing high default rates. Bernanke has said the the is not worried by the student debt bubble since the debt is mostly owned by the federal government. So we have this potentially infinite loop where the govt absorbs failed private debt and the federal reserve monetizes govt. debt. How convenient!

    • tmsr says:

      So basically Jubilee for the rich.

    • Your comments about debt forgiveness already going on is an interesting perspective.

      One question that arises is, “What happens on the next default cycle?” You mention the student debt. The government is already deeply indebted. Forgiveness of student debt would make it worse (unless it is monetized).

      There are a lot of derivatives outstanding. It would seem like quick interest rate swings could lead to defaults here as well. Quite a bit of AIG’s problems were related to derivatives. We need to go through another round of forgiveness. Aren’t there limits to all of this? Isn’t there a point sometime, when someone says, No more debts?” Doesn’t someone at some point say, “No more bailouts?”

      • Scott says:

        Hello, One would think so, no more bail outs. but the Fed and World Central Banks must keep money flowing or the bills of credit and bills of laden stop running.

        I believe the earlier post you linked to today is true, this will likely end in hyperinflation. But the timeline is uncertain on that, but it seems to be looming. 1-3 years?

        Scott

      • In the meantime, toll-way operators in Australia are kicking the debt can down the motorway:

        Refinancing of the debt portfolio is actively managed and funds are secured early, from diverse sources. The Transurban Group has been successful in sourcing funding during challenging credit markets, with over A$1.549 billion financed in the 12 months ending in June 2013. Debt maturities are spread over time to reduce refinance risk. As at 30 June 2013, the Transurban Group’s senior corporate debt was rated A- (stable) (S&P and Fitch) and Baal (stable) (Moody’s).
        http://news.iguana2.com/transurban/ASX/TCL/395102

        Here are some more details:

        12/2/2013 No debt repayment plan for Sydney’s toll-ways
        http://crudeoilpeak.info/no-debt-repayment-plan-for-sydney%e2%80%99s-toll-ways

        Government spin ensures the next generation of road tunnels is built:

        The financial case for the east-west link hinges on a prediction
        that toll road use will jump over the next 30 years because of rising
        wealth and shrinking petrol and CBD parking price rises.
        http://www.theage.com.au/victoria/secret-case-for-link-revealed-20131001-2ur5r.html

        • Thanks! Our newspapers recently have had a number of stories about a possible second major airport for the Atlanta area. The airport would represent an expansion of an existing airport out on the suburbs. (There are a number of these, that mostly serve private planes and corporate jets.)

          We needs a second airport like a hole in the head. There would be some up-front expense for the people planning the airport, which I am sure would be financed by debt. Delta is fighting it–it would be a way for a local carrier to undercut its fares, for people flying to Atlanta for a convention or vacation.

          Actually, the huge International terminal added recently is a lot bigger boondoggle. It is hard to see that it will ever be used to capacity.

      • ravinathan says:

        The US has the extraordinary privilege of its currency being a store of value outside the country. In my travels, I have often been surprised at how many people have some US dollars stashed away just in case. Estimates are that 60 percent of US currency circulates outside the country. As limits to growth continue to squeeze, it’s the periphery of nations that experience inflation and currency collapse. Paradoxically, this leads to a strengthening in the US dollar as capital flees the periphery seeking a safe haven. Isn’t that ironic? The closed loop of the govt. absorbing bad private debt while having its own debt monetized by the central bank can go on for a long time. Future attractions as the periphery crumbles: Fiscal Policy unleashed in the form of a huge jobs and infrastructure investment program in the US. Student debt forgiven. All of these steps will be lauded by the global financial markets as necessary for global recovery!!
        http://articles.baltimoresun.com/1993-03-14/news/1993073048_1_dollars-central-bank-paper-currency

        • It seems like every time there is a crisis, we hear,”And because of the crisis, the dollar strengthened,” as more money saw a flight to “quality”. Everything headed to the bottom?

          • Scott says:

            Yes, with all countries printing at the same time it is the ugliest house on the block which looses or should I say the dollar is the best ugly house on the block.

            Those Earth ship houses that Don was showing us were interesting, They kind of remind me of the old Adobe’s but better. If you live in an extreme climate they would do better than any of the modern homes in times of collapse as they moderate the temp inside without much need for heat or cooling.

            Unfortunately most of us here believe there will not be the money or perhaps the means to build enough of them except for a lucky few it seems. Especially if supply lines break down or inflation hits and things like windows, building materials food etc are priced out of reach for most.

            We are really watching a spectacle at the White House right now which is a sign of trouble, they finally realized they spent too much and borrowed too much money?

            I think in the hot climates a stone house would be a must without power and air conditioning but few will have them it seems.

            Scott

          • Scott says:

            Hi Gail and everyone, Another subject I have been looking at this week is how the US Gov. still continues to expand expenditures to control far away lands. You know millions to Egypt last month and this one today. I imagine the UK is doing the same?

            Meanwhile we have no money for opening our closed government and parks.

            http://worldnews.nbcnews.com/_news/2013/10/12/20920291-as-us-ups-aid-to-perus-drug-battle-farmers-say-they-will-fight-to-defend-cocaine-source?lite

            Best Regards to all,

            Scott

          • Scott says:

            Hello, This article about living on $5k per year was a top story tonight on MSNBC.

            http://inplainsight.nbcnews.com/_news/2013/10/13/20923154-living-on-5000-a-year-on-purpose-meet-americas-intentional-poor?lite

            I think some of us could do it – especially if on our own, alone, but perhaps my wife would not go along with this type of arrangement and especially kids these days, I do know some families that have home schooled and do not have TV’s etc. but that seems rare these days. It would be good if we could downsize like this, but easier said than done for most.

            Scott

            • Yesterday I fronted a debate on nuclear power at a film showing, and I argued the case for powering down our profligate energy consumption as a prior focus rather than use supply side issue as the primary policy focus. The protagonist speaker said “yes, I would agree, but people just won’t do that!”

              Much though I hate to say it, I think on that score he is correct. Society is going to desperately try to hang on to its comfort zone, and its not just those ruthless corporations, it’s us. We won’t let go easily. Many of my environmental colleagues have a romantic fixation of EVs, choosing to turn a blind eye to the negative climate impact. Whether it be Arctic oil, 5 km deep sub marine oil wells, landscapes plastered with wind turbines, nuclear power plants, garbage burning power plants, bio fuels diverted to keep jet aircraft flying….. almost everything we do points to points to us having to learn the hard way.

              This is not maliciousness or even selfishness on the part of the majority, it is simple denial of the reality that we live in a finite world and are already way, way over the tipping point.

              On the plus side there is a rapidly growing coterie of people who are trying to come to grips with this reality and this movement is snowballing, though in its very early days.

            • Scott says:

              Hello, Yes Change will not come easily, even for me as we get older we get set in our ways and used to the things staying the same which they rarely do.

              Honestly, I am really going to miss some of the things we routinely buy now from around the world. And, in the future, they may be discontinued or too expensive to buy anymore and we will make substitutions and life will not be quite as nice.

              Well at least that is my view a slower collapse unless something big happens like war and that front seems to be calming just a bit. But now war has been replaced with civil unrest in many places around the world which I think will continue to be a problem and kind of a new reality.

              I hope Gail and some others are wrong about the coming sudden collapse as so far I see a slower one unfolding. Let us hope it will hang on for another Generation or so before major shut downs. But I imagine we would be at like 600 PPM on CO2 by then and much hotter. It will likely happen since we have the coal and other stuff to burn through after the light sweet crude is gone.

              Scott

            • Scott says:

              Hello, Oh, by the way…. not a fan of nuclear, but we may have no choice on nuclear power, I still think we do not have anything better than the Thorium Reactors that I have read about that is if they can really be built like I read about, not sure yet on that but I think they could be.

              With those we could at least power up the existing grid without the warming of the CO2. I have said this before and I think we all agree no one is really a fan of nuclear, but what else do we have to make clean power without warming our planet?

              Scott

            • The issue in favour of nuclear power is energy density, being the only prospect for provision of high density energy that could replace the energy density of hydrocarbon energy. If we had to pick the better of two evils, I would now have to rank nuclear as less risky than burning coal. (That’s not to say that its risks are not significant.)

              The limitation of nuclear (and also that of solar and wind etc) is that our fixation on electrical energy does nothing to resolve all of the other multitudinous uses of hydrocarbons, everything from clothing to fertilisers, to flying of aircraft and all those industrial manufacturing and smelting processes that require carbon as their basis.

              Then there is the much more unsolvable problem of money. There’s not enough of it in the world to just close down all that hydrocarbon-burning infrastructure and build a brand new energy system to replace that can underpin industrial society as we know it. Energy transition doesn’t come easy. The world economy is already teetering.

        • Ert says:

          @ravinathan

          Interesting observation! I have recently read a similar post in another forum. The main line was that the periphery collapses first – before the center declines. Comparison where made with Rome and other (collapsed) civilizations and/or kingdoms.

          You can kind of see it in Europe: The periphery already collapses – high unemployment and no way out. But Germany seems currently unaffected (which is in certain aspects not quite true,,, but that is a bigger story).

          You mention the US and the $ domain. That may be true for the whole Americas (north & south) and some Asian and former Soviet regions. If China lets the Yuan float – there will certainly be a bigger shift and a weakening of the $.

          Therefore you may be on to something.

          • Chris Johnson says:

            Let’s see if we have this right:
            If China floats the Yuan the BOC will lose control of the exchange rate. Losing control of the exchange rate will impact Beijing’s manipulation of trade and finance. Current opaque ponzi operations will be exposed and several minor empires may collapse.
            On the other hand, Premier Li Keqiang recently won a major victory against conservative (statist) forces in establishing Shanghai as some sort of (limited??) ‘Special Economic Zone’. The upcoming Party Congress meeting in November should provide more detail about their plans.

          • Ert says:

            @Chris

            I would not go so far as to let the Yuan float. But I would encourage use of “Cash” Yuan as a kind of shaddow currency in the grater asia – like the dollar does it. With the exchange-rate window a Yuan would be, considered from the purchasing power, as good as good as a USD.

          • ravinathan says:

            The massive over investment in Chinese real estate (ghost cities) is a signal that the Chinese savers themselves do not see the yuan as a long term store of value. There are reports that the chinese 1 percent dispatch family overseas and purchase real estate abroad as a form of insurance. In fact, cities like New York and London have become real estate safe havens for the global rich. Dubai has become a similar destination for Middle East money. I really do not see any other currency displacing the US dollar at this time. Some observers have noted that the Federal Reserve, by opening its funding window to international banks, has actually helped prop up the euro. Zero Hedge has posted a number of articles about the mind boggling amounts that foreign banks have borrowed from the Fed using their US banking licenses to tap this source of funds. Money illusion dies hard, and Gail may be right that it will take a bout of global hyperinflation before the Fed stops printing. We seem to be quite far from that contingency given anemic economic growth and prevailing concerns about global deflation.
            Although Gail predicts that financial collapse will come first mitigating the CO2 build up, it may actually be close race. The oceans are rapidly acidifying and the die off is alarming. We may see an arctic free of ice Ina few years with all of its consequences. Climate impacts may end up triggering the economic collapse.

            • There are really two parts to why climate change is less important. (a) If humans are soon to be mostly wiped out by indirect impacts of oil limits, then CO2 limits are not of huge import to humans–something else “took us out” first. The earth will recover fine. Whether or not humans do is a separate issue. (b) The models are not put together with correct CO2 assumptions. If the models work as climate scientist say they do, then climate change is less of an issue than it otherwise would be. This of course does not eliminate other impacts, like ocean acidification, and overfishing.

              This all points to a model which overestimates the effect of climate, and underestimates other limits of a finite world. We have been led to believe that climate change is the #1 problem, when in fact, it probably only deserves equal billing with a number of other problems. Oil limits are one of these, and it threatens to take out most of the human population sooner.

  29. ravinathan says:

    I would like to recommend this 2012 interview with Deborah Rogers on the shale hype. It is not often that I am able to sit through a full length interview but I was impressed with the quality of the questions and the depth of the answers.
    http://m.youtube.com/watch?autoplay=1&v=nxG4CpNSZTQ&desktop_uri=%252Fwatch%253Fv%253DnxG4CpNSZTQ%2526autoplay%253D1

    • Thanks! She points out that after the change in reserve requirements, shale gas reserves no longer had to be audited. In fact, some companies immediately showed much higher numbers. The higher reserves gave the companies more reserves to spread their finding and development costs over.

      She also points out that the foreign companies coming in are interested only in the export market, because that way they can get the price up to a point which is in line with their costs. The oil majors can afford to wait out the time needed to do this.

      She also talks about air pollution issues associated with shale gas drilling.

    • Chris Johnson says:

      To ravinathan and ERT: we ran out of ‘reply’ buttons above for the good discussion of Yuan floating and reserve currencies. I am very appreciative of both of your comments; you clearly knows this field well. And I agree that the USD will probably remain the basic reserve currency until it becomes very bedraggled — much worse than currently.
      One question I would like to ask, however, is whether the Euro or the Yen are playing effective roles for their owners as ‘quasi’? reserve currencies. Does their use convey similar advantages to their owners? If so, it would appear that the Chinese might be tempted to ‘jigger the books’ on this — they already treat balance sheets as ‘fill in the blank’ monthly operations that may or may not accord with actual financial conditions.
      I would be interested in your views.
      Cordially, Chris Johnson

      • Ert says:

        @Chris

        Unfortunately my experience with this field is very, very limited to grasp all he aspects.

        From all available numbers, I see that China is robust. Growth, consumption, energy production, export, etc. pp. Debt levels are low when compared to OECD and the US. Bank have high reserve rations when compared to the US and Europe. Even if there is faulty investment in the housing sector – it is financed quite solid with lots of own capital of private people. And if something goes bust? China has a lot of cash to bail their banks out – much more than the US and EU, which are already out of ammunition. But I see China is heavily affected by the limits to growth… and that will be their end – with all the others.

        The USD is currently the big advantage of the US – but it is only as good as much it is accepted by others. If China alone would start to spend their 2+ Trillion USD reserves to buy up international assets – prices in USD would rise sharply (means: The USD value would decline rapidly). So what’s China gonna do or buy with their 2+ Trillion USD in the future? There are to much aspects for me to consider.

        Regarding your question of EUR and Yen: I earn EUR – for me it is THE currency, as I have to pay taxes and the like in EUR and not in USD. Holding USD for me would be speculation in the value of my purchasing power. The EUR zone is quite big and I can pay in that big zone directly with that currency – without exchange rates and risks. Also the EUR zone produces a lot of goods that are exported, so the EUR has a good external value as some people need EUR to buy stuff from this zone.

        Therefore I see the Yen as much smaller vehicle. The Japanese economy is smaller and we all can’t really price the risk of Fukushima (not that such a think can not any minute happen in the US or Europe). But As I know, the Yen does not play a big role as international currency.

        Hope that you can get something out of my thoughts.

        • Chris Johnson says:

          @ERT

          Thanks for your analysis, which is slightly less scornful than what I would write about the most mendacious denizens of East Asia. But neither they nor the EU nor any other economy can be blamed for wanting to modify the current arrangements. The headlines yesterday talked of China and EU establishing a swap arrangement that doesn’t require USD involvement. That’s probably a pretty smart thing to do in principle, but I would be very concerned about how its is actually used. The EU might want to hire some Sicilian consultants…
          Cheers, Chris

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