Beginning of the End? Oil Companies Cut Back on Spending

Steve Kopits recently gave a presentation explaining our current predicament: the cost of oil extraction has been rising rapidly (10.9% per year) but oil prices have been flat. Major oil companies are finding their profits squeezed, and have recently announced plans to sell off part of their assets in order to have funds to pay their dividends. Such an approach is likely to lead to an eventual drop in oil production. I have talked about similar points previously (here and here), but Kopits adds some additional perspectives which he has given me permission to share with my readers. I encourage readers to watch the original hour-long presentation at Columbia University, if they have the time.

Controversy: Does Oil Extraction Depend on “Supply Growth” or “Demand Growth”?

The first section of the presentation is devoted the connection of GDP Growth to Oil Supply Growth vs Oil Demand Growth. I omit a considerable part of this discussion in this write-up.

Economists and oil companies, when making their projections, nearly always make their projections depend on “Demand Growth”–the amount people and businesses want. This demand growth is seen to be rising indefinitely in the future. It has nothing to do with affordability or with whether the potential consumers actually have jobs to purchase the oil products.

Kopits presents the following list of assumptions of demand constrained forecasting. (IOC’s are “Independent Oil Companies” like Shell and Exxon Mobil, as contrasted with government owned companies that are prevalent among oil exporters.)

Kopits 10 Assumptions of Demand Constrained ForecastingThus, it is the demand constrained view of forecasting that gives rise to the view that OPEC (Organization of Petroleum Exporting Nations) has enormous leverage. The assumption is made that OPEC can add or subtract as much supply as much as it chooses. Kopits provides evidence that in fact the Demand view is no longer applicable today, so this whole story is wrong. 

One piece of evidence that the Demand Model is wrong is the fact that world crude oil (including lease condensate) production has been nearly flat since 2004, in a period when China and other growing Eastern economies have been trying to motorize. In comparison, there was a rise of 2.7% per year, when the West, with a similar population, was trying to motorize.

Kopits 20 Motorization and Oil in Historical Context

Kopits points out that China’s big source of oil supply has been US main street: China bids oil supply away from United States, to satisfy its needs. This is the way that markets have made oil available to China, when world supply is not rising much. It is part of the reason that oil prices have risen.

Another piece of evidence that the Demand Model is wrong relates to the assumption that social tastes have simply changed, leading to a drop in US oil consumption. Kopits shows the following chart, indicating that the major reason that young people don’t have cars is because they don’t have full-time jobs.

Kopits 35 Driving and Employment

Kopits makes a comparison of the role of oil in GDP growth to the role of water in plant growth in the desert. Without oil, there is less GDP growth, just as without water, a desert is starved for the element it needs for plant growth. Lack of oil can considered a binding constraint on GDP growth. (Labor availability might be a constraint, but it wouldn’t be a binding constraint, because there are plenty of unemployed people who might work if demand ramped up.) When more oil is available at a slightly lower price, it is quickly absorbed by markets.

“Supply Growth” is the limiting factor in recent years, because the amount of extraction is rising only slowly due to geological constraints and the number of users has risen to the point that there is a shortage.

Experience of Major Oil Producing Companies

Kopits presents data showing how badly the big, publicly traded oil companies are doing. He looks at two pieces of information:

  • “Capex” – “Capital expenditures” – How much companies are spending on things like exploration, drilling, and making of new offshore oil platforms
  • “Crude oil production” –

A person would normally expect that crude oil production would rise as Capex rises, but Kopits shows that in fact since 2006, Capex has continued to rise, but crude oil production has fallen.

Kopits 40 Oil majors capex and production

The above information is worldwide, not just for the US.  At some point a person might expect companies to start getting frustrated–they are spending more and more, but not getting very far in extracting oil.

Kopits then shows another version of Capex history plus a forecast. (This time the amounts are labeled “Upstream,” so the expenditures are clearly on the exploration and drilling side, rather than related to refineries or pipelines.)

Kopits 41 Upstream Spend continues Strong

The amounts this time are for the industry as a whole, including “NOCs” which are government owned (national) oil companies as well as IOCs (Independent Oil Companies), both large and small. Kopits remarks that the forecasts shown were made only six months ago. When talking about the above slide Koptis says,

People in the industry thought, “Capex has been going up and up. It will continue to do very well. We have been on this trajectory forever, and we are just going to get more and more money out of this.”

Now why is that? The reason is that in a Demand constrained model for those of you who took economics–price equals marginal cost. Right? So if my costs are going up, the price will also go up. Right? That is a Demand constrained model. So if it costs me more to get oil, it is no big deal, the market will recognize that at some point, in a Demand constrained model.

Not in a Supply constrained model! In a Supply constrained model, the price goes up to a price that is very similar to the monopoly price, after which you really can’t raise it, because that marginal consumer would rather do with less than pay more. They will not recognize [pay] your marginal cost. In that model, you get to a price, and after that price, there is significant resistance from the consumer to moving up off of that price. That is the “Supply Constrained Price.” If your costs continue to come up underneath you, the consumer won’t recognize it.

The rapidly growing Capex forecast is implicitly a Demand constrained forecast. It says, sure Capex can go up to a trillion dollars a year. We can spend a trillion dollars a year looking for oil and gas. The global economy will accept that.

I quote this because I am not sure I have explained the situation exactly that way. I perhaps have said that demand had to be connected to what consumers could afford. Wages don’t magically go up by themselves (even though economists think they can).

According to Koptis, the cost of oil extraction has in recent years been rising at 10.9% per year since 1999. (CAGR means “compound annual growth rate”).

Kopits 43 Costs are Rising Fast

Oil prices have been flat at the same time. On the above chart, “E&P Capex per barrel” is pretty much the same type of expenses as shown on the previous two charts. E&P means Exploration and Production.

Kopits explains that the industry needs prices of over $100 barrel.

Kopits 45 Industry needs oil prices over 100

The version of the chart I have up is too small to read the names of individual companies.  If you would like a chart with bigger names, you can download the original presentation.

Historically, oil companies have used a discounted cash flow approach to figure out whether over the long term, pricing for a particular field will be profitable. Unfortunately, this “standard” approach has not been working well recently. Expenses have been escalating too rapidly, and there have been too many new drilling sites producing below expectation. What Kopits shows on the above slide is the prices that companies need on different basis–a “cash flow” basis–so that each year companies have enough money to pay today’s capital expenditures, plus today’s expenses, plus today’s dividends.

The reason for using the cash flow approach is because companies have found themselves coming up short: they find that after they have paid capital expenditures and other expenditures such as taxes, they don’t have enough money left to pay dividends, unless they borrow money or sell off assets. Oil companies need to pay dividends because pension plans and other buyers of oil company stocks expect to receive regular dividends in payment for their equity investment. The dividends are important to pension plans.

In the last bullet point on the slide, Kopits is telling us that on this basis, most US oil companies need a price of $130 barrel or more. I noticed that Brazil’s Petrobas needs  a price of over $150 barrel. (OSX, Brazil’s number two oil company, recently went bankrupt.)

In the slide below, Kopits shows how Shell oil is responding to the poor cash flow situation of the major oil companies, based on recent announcements.

Kopits 46 The Majors Respond

Basically, Shell is cutting back. It no longer is going to tell investors how much it plans to produce in the future. Instead, it will focus on generating cash flow, at least partly by selling off existing programs.

In fact, Kopits reports that all of the major oil companies are reporting divestment programs. Does selling assets really solve the oil companies’ problems? What the oil companies would really like to do is raise their prices, but they can’t do that, because they don’t set prices, the market does–and the prices aren’t high enough. And the oil companies really can’t cut costs. So instead, they sell assets to pay dividends, or perhaps just to get out of the business. But is this sustainable?

Kopits 48 conventional oil production

The above slide shows that conventional oil production peaked in 2005. The top line is total conventional oil  production (calculated as world oil production, less natural gas liquids, and less US shale and other unconventional, and less Canadian oil sands). To get his estimate of “Crude Oil Normal Decline,” Kopits uses the mirror image of the rise in conventional oil production prior to 2005. He also shows a separate item for the rise in oil production from Iraq since 2005. The yellow portion called “crude production forward” is then the top line, less the other two items. It has taken $2.5 trillion to add this new yellow block. Now this strategy has run its course (based on the bad results companies are reporting from recent drilling), so what will oil companies do now?

Kopits 49 -Oil Majors Cut Capital Expenditures

Above, Kopits shows evidence that many companies in recent months have been cutting back budgets. These are big reductions–billions and billions of dollars.

Kopits 50 Majors Capex

On the above chart, Kopits tries to estimate the shape of the downslope in capital expenditures. This chart isn’t for all companies. It excludes the smaller companies, and it excludes the National oil companies, so it is about one-third of the market. The gray horizontal line at the top is the industry consensus back in October. The other lines represent more recent estimates of how Capex is declining. The steepest decline is the forecast based on Hess’s announcement. The next steepest (the dotted gray line) is the forecast based on Shell’s cutback.  The cutback for the part of the market not shown in the chart is likely to be different.

Oil and Economic Growth

Kopits offers his view of how much efficiency can be gained in a given year, in the slide below:

Koptis 54 Oil Efficiency and GDP GrowthIn his view, the maximum sustainable increase in efficiency is 2.5% in non-recessions, but a more normal increase is 1% per year. At current oil supply growth levels, OECD GDP growth is capped at 1% to 2%. The effect of constrained oil supply is reducing OECD GDP growth by 1% to 2%.


Kopits 59 ConclusionsWhile demand constrained models dominate thinking, in fact, a supply constrained model is more appropriate in recent years.

We seem to be short of oil. Whenever there is extra oil on the market, it is quickly soaked up. Oil prices have not collapsed. No one is nervous about a price collapse.

China recently has been putting little price pressure on the market–its demand is recently less high. Kopits thinks China will eventually return to the market, and put price pressure on oil prices. Thus, oil price pressures are likely to return at some point.

Gail’s Observations

An obvious point, which I thought I heard when I listened to the presentation the first time, but didn’t hear the second time is, “Who will buy all of these assets on the market, and at what price?” China would seem to be a likely buyer, if one is to be found. But when several companies want to sell assets at the same time, a person wonders what prices will be available.

The new strategy is, in effect, maintaining dividends by returning part of capital. It is clearly not a very sustainable strategy.

It will take a while for these cut-backs in Capex expenditures to find their way through to oil output, but it could very well start in a year or two. This is disturbing.

What we are seeing now is a cutback in what companies consider “economically extractable oil”–something that isn’t exactly reported by companies. I expect that what is being sold off is mostly not “proven reserves.”

In this talk, it looks like lack of sufficient investment is poised to bring the system down.  That is basically the expected limit under Limits to Growth.

In theory, if an expansion of China’s oil demand does bring oil prices up again, it could in theory encourage an increase in drilling activity. But it is doubtful that economies could withstand the high prices–they are already having problems at current price levels, considering the continued need for Quantitative Easing to keep interest rates low.

A recent news item was titled, G20 Finance Ministers Agree to Lift Global Growth Target. According to that article,

Mr Hockey said reaching the goal would require increasing investment but that it could create “tens of millions of new jobs”.

The cutback in investment by oil companies is working precisely in the wrong direction. If these cutbacks act to cut future oil extraction, it will bring down growth further.

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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548 Responses to Beginning of the End? Oil Companies Cut Back on Spending

  1. Dave Kimble says:

    One point that hasn’t been emphasised is that The Powers That Be know all this stuff perfectly well already. They are not fools, they have access to the best experts and better data than we do. It follows that what you have seen them doing, over the last two decades at least, IS their “solution”.

    Deny Peak Oil, fiddle the statistics, lump Crude and Condensate and Tight Oil together despite the fact they are quite different things, print more money and lend it to banks who leverage it tenfold and lend it out to shale oil developers, pretend the global economy is healthy, pretend that the Saudis are good people – all just kicking the can down the road because THERE IS NO SOLUTION.

    The collapse is on now, but it is only in its early stages yet. While the USD is still respected as the world’s reserve currency, the collapse rate is slow. But when the next financial crash happens (and it could be tomorrow) the entire global house of cards will implode, China too (some say China will implode first, causing the US to implode). Kiev will be played out everywhere, with people demanding more jobs, cheaper fuel, cheaper food – a completely impossible goal.

    • InAlaska says:

      This may be the very reason that China is attempting to create a second reserve currency in the renimbi, perhaps backed by all of the gold they have been importing. If they can get something going of their own to replace the petrodollar, maybe they can extend the shell game for quite a bit longer.

      • Dave Kimble says:

        I agree that that is what they are trying to do, but they have a low-wage, export-based economy, financed by gigantic borrowings from US/Japan/Europe, so the kind of fundamental shift to a high-wage, home-based economy that is needed would be an economic miracle, and would take years to achieve. And that still doesn’t solve the Peak Oil problem.

        • Jan Steinman says:

          In my case, it’s to have a way to take my farm goods to market.

          [cynic]Should be a hit with the organic food crowd.[/cynic]

          • Jan given the nature of the business we’re in, interested to hear more about what solutions you will need to help shift your farm produce to market.

            • Jan Steinman says:

              “what solutions you will need to help shift your farm produce to market”

              It’s pretty simple. Pile it in the van and go. We have four grocers and two open-air markets. Certain products (like cucumbers) I take to the grocers and get a cheque in the mail, and I get almost as much or the same as I would get if I sold direct. Other products are more exotic (like physalis), and are worth spending a whole day farmers marketing: hauling, setting up, selling, tearing down, hauling home.

              We’ve used the Vanagon with our own biodiesel, with a full-sized pickup as backup. But the 48 hp diesel in the Vanagon is grossly underpowered when we load it up with a ton of produce. We have a kilometre of 10% grade a short distance from here. It’s 80 kph road, and people get unhappy when they are stuck behind a walking-speed vehicle, labouring up the hill in second gear. Thus, the electric conversion.

          • Don Stewart says:

            Dear Jan
            If transportation collapses, and you don’t live in an actual desert, I suspect you may have the opposite problem. That is, local people will overwhelm your ability to provide them with food.

            At the present time, 95 percent or so of the food in grocery stores comes from far away. Even if there is a field of lettuce next to someone’s house, the lettuce is trucked to a giant washing and packaging factory. A transportation crisis would severely upset the industrial food system.

            If you look at the old French painting of The Gleaners, or read the story of Ruth in the Bible, you see an alternative. Local people go out to the fields and buy or work for their food. Sepp Holzer in Austria plants a ‘tangled bank’ of plants, some of which are edible, and local people come out and harvest food and pay by the pound (or kilo). Sepp is, according to what I hear, making lots of money based on the taxes he complains about paying.

            When Simon Fairlie did his ‘can Britain feed itself?’ study, he assumed that many people would have to move from the cities to the countryside to get closer to the sources of their food.

            Don Stewart

            • Jan Steinman says:

              I suspect you are right, but it’s all about bridges, isn’t it?

              So until we have interlocking city-country fingers, it’s still more efficient for me to bring a van full of stuff to a population centre than it is to have all those people come to me.

            • Don Stewart says:

              Agreed. Just pointing out that, should you survive long enough, you may well end up as the destination.

              Don Stewart

            • Jan Steinman says:

              We’re already the destination for people who are willing to work to eat. But the government is clamouring for us to pay full Mandatory Employment Related Costs (MERCs) on an imputed minimum wage for them — and to report that minimum wage so that our “volunteers” have to pay taxes on it!

              I guess that can be seen as protecting people from becoming serfs…

              (Luckily, BC is pushing this approach for all forms of volunteer work, which they’ll never get away with. I’m baffled that they now want to tax the volunteer boards and workers of organizations providing the services that a government should be supplying, like homeless housing, mental health and environmental protection!)

            • Don Stewart says:

              When I look objectively at government activities, I see either stupidity or evil, mostly. When Gail looks at government activity, she sees the charitable acts that are holding the country together.

              Perhaps if the government went away, but ‘citizens councils’ were formed to guard against violence, I might find that the government is doing something positive that I am overlooking. But, what I see right now, is that we would be better off without it.

              Don Stewart

            • The government needs to be supported with something. If it doesn’t have oil or gas revenue, it has to go after wages.

            • Jan Steinman says:

              “The government needs to be supported with something. If it doesn’t have oil or gas revenue, it has to go after wages.”

              And eventually, it may go after land. Property taxes are a time-honoured way of confiscating land.

            • It reminds me a little of Amazon deliveries vs. driving to the book store.

      • the ultimate problem with gold is that you can’t eat it.

    • Peter S says:

      “One point that hasn’t been emphasised is that The Powers That Be know all this stuff perfectly well already.”

      I’d like you to give us a citation, reference and some evidence for this. The great thing about this blog, and especially this presentation by Steven Kopits, are the cold hard facts and conclusions drawn by professionals.

      This is not a place for conspiracy theories or fantasies. Perhaps there are conspiracies (every agreement behind closed doors – by politicians or married couples – is by definition a conspiracy) and maybe there aren’t. But talking about hypotheticals is very dangerous, and detracts from what we can know, and the reasonable plans we can make. We have no idea if the “powers that be know this perfectly well”, even if that thought makes you feel more justified. We need to stick to the facts.

      Apart from the conspiracy theory opening, I generally agree with you about the state of the market.

      • The Powers That Be know about Peak Oil, but it is not clear that they understand about the financial implications of Peak Oil. They may not understand the connection to current financial problems.

        At one point, I had a peak oil quotes from Alan Greenspan and from Bill Clinton. I am sure that the Bushes would know about oil limits.

        • Peter S says:

          I agree with that, that there are people in power who know about it, but don’t recognize how it will effect the economy and the world. I hope I’m not being arrogant when I say this, but many of our leaders (these “powers that be”) are incompetent and fools. And they don’t hold the pursestrings (big business), which could be where the real power and influence is. I’m sure that oil has been on many, if not all, administrations’ minds, but I don’t see much of a conspiracy, apart from focussing their military on countries with oil, and supporting friendly regimes in oil producing countries. I would say they’re obviously not so smart if they’re so focussed on making profits on oil, yet risking the entire world monetary system (if the economic system collapses totally, so does the value of their own money) at the same time.

          • Dave Kimble says:

            I can’t accept that TPTB are fools. Yet what they are currently doing about the problem, Plan A, is just kicking the can down the road. What interests me most is what Plan B is likely to be when Plan A fails, for they surely have one.

            I’m afraid I get bogged down in doing analyses of (probably faked) statistics too, because it is at least amenable to mathematical treatment, but pondering about Plan B is no less important just because we will never get a mathematically certain result.

            Plan B almostly certainly involves some wars, because the war machines are getting deadlier all the time (dont be fooled by “proposed cuts” – they will only be cosmetic). And it almost certainly involves a crack-down on personal freedoms – why else the arming of the police with full-on military gear? And by developing the capability to know everything that is going on on the internet, and how to launch/repel cyber-attacks, they are preparing for threats which aren’t apparent right now, but will become obvious when Plan A fails. This much I take for granted.

            Could we all take this much for granted, and then hypothesise rationally about the likely future course of Plan B? It’s too easy to dismiss it all with the “conspiracy theory” label. There are valuable insights to be gained here, if we really look.

            • Chris R says:

              Well if we assume that the TPTB can’t/won’t proactively propose more realistic policies to attempt to mitigate a descent because doing so would go completely against the current power/financial structure. They would also have to justify such policies and given that they are responsible for us being in this mess in the first place that is unlikely to go down well.

              I probably need to add that whereas our collective behaviour has brought us to this point in time I believe that those in power are responsible for perpetuating the system/outlook that controlled such behaviour. I have a science background and started looking into the 2008 crash a couple of years back and found it very hard to come to terms with the fact that the underlying assumptions to the economic theories/models that were being used to manage our economy were obviously insane and that our financial system is completely unstable.

              So the safest approach would appear to be to say things are improving while things steadly contract. Cut back on benefits and services whereever possible so that the more vunerable and less useful members of society (remember you are less useful if you aren’t working) become progressively more stressed and either die off or become homeless. I believe you can no longer ‘vote’ in either case.

              Eventually something more drastic will occur, financial collapse or war and the government will be able to justify more serious measures/controls. Like food/fuel rationing, directed labour, etc.

              Continue this way for a while and I suspect we’ll end up with a substantially reduced population mostly labouring in the fields, controlled by a well-equipped security force with a small elite at the top.

            • Paul says:

              I really don’t think there is anything that anyone can do that can soften the landing.

              I think that the most they can do is to continue QE/ZIRP and other draconian policies to try to delay the catastrophic collapse.

              Does anyone have any suggestions as to what else they could be doing that would not be exercises in futility?

      • garand555 says:

        Well, there are, in fact conspiracies. Operation Northwoods is just one such example. But, to your point that we shouldn’t use hypotheticals as though they were fact is something that should be emphasized. The conspiracy that I listed is one that has dates, names and actions that have been documented. Evidence. My personal experience, though far from conclusive, is that TPTB are suffering from the same normalcy bias as everybody else regarding peak oil.

        • Peter S says:

          I agree there are conspiracies. Any secret deal is a conspiracy, and there must be plenty of them. But yes, we shouldn’t cling to hypotheticals as facts. As soon as we go down that road, we start to become distracted by our own biases and our own personal investments – political, idealogical, religious beliefs etc..

        • Paul says:

          I was in Hong Kong last week and had dinner with two fairly senior bankers from the Squid. While they both indicated they thought a calamity was imminent when I stated the case that the end of cheap oil was the cause neither were buying that – they were unable to explain why they just were dismissing the theory.

          I suppose that relates to Cognitive Dissonance – the are smart guys and they know what the end of cheap oil means — no recovery – no reset – no job – no food – likely death for most. So I suspect they didn’t want to go down that rabbit hole.

          But at the highest levels of these banks I am 100% certain that the big picture is painted for the decision makers. There is NO WAY in hell that they do not know cheap oil has peaked – and there is NO WAY in hell that they do not understand the implications.

          The minions are cogs in the wheel – it does not matter that they know. But when you are making strategic decisions on a global level I don’t think you stick your head in the sand and deny or ignore the facts — you would not be around long if you did that.

          And the facts in this instance are irrefutable – there is no way to argue out of this crisis — the only question that I think comes up at these high level discussions is:

          How can we delay this as long as possible

          • garand555 says:

            You are doing exactly the same thing the bankers you had dinner with were doing. You find it to be incredulous that those at the top do not understand the implications, therefore you do not believe that they don’t understand the implications. There is no rule or law that says that they must understand and acknowledge the implications of peak oil. None. They are still human and still fallible. If they understand the implications, you should show evidence that they are acting in such a way that they do understand those implications. Trying to maintain the status quo is not evidence of such. Maintaining their power is not evidence of such.

            • Paul says:

              Actually I believe what I have said is that those at the very top (not the people I had dinner with – they are only cogs in a big machine) absolutely do know we have passed peak oil and they are fully aware of the implications.

              I believe their reaction to this has been a) to purposely create a housing bubble to try to offset end of growth and b) when that unsustainable strategy failed they quadrupled down on seemingly insane policies printing money and dropping interest rates to 0 pumping up far more and far bigger bubbles.

              Of course they know what the implications of doing nothing are – why else would they implement policies that are clearly suicidal – but which delay the inevitable? These policies are clear demonstration of their awareness of just how dire the situation is…..

              As for preserving the status quo – of course that is what they are attempting to do – and although on one level I find it distasteful, I applaud Bernanke and his crowd for doing that – because a world where bankers pay themselves absurd bonuses on the backs of almost everyone else is something we will look back on fondly when the SHTF.

          • Peter S says:

            Being intelligent is not a prerequisite for getting to the top. They are just like everyone else, can’t or won’t connect the dots in front of them. And remember that the globalized world we live in is extremely specialized. Each professional is only an expert in his tiny field of expertese. Many fewer people today have broad skills and responsibilities. Politicians trust their think tanks and voter bases (and ideology), for examples. In this respect they are no different to average Joe on the street: they have a narrow field of concerns, and think optimism is good. Peak oil and the limits of growth have no solutions – or at least no solutions most people would want to hear.

          • InAlaska says:

            Yes, one must wonder how much the rulers of the Easter Island civilization realized that cutting down the last tree to roll the last stone statue to the coast would be the end of their civilization. Surely they all knew what was coming, but cultural norms and an inability to see beyond the short term led to their collapse just the same. All that is left are silent stones standing mutely as testimony to human fallability.

            • Paul says:

              I wonder if the likes of Bernanke and other leaders who are in the know on this are like those Easter Islanders who were looking at their landscape with a handful of trees remaining and said ‘oh my – what have we done?’

          • dashui says:

            How come you never take us out to dinner?
            I love Dim Sum!

      • Dave Kimble says:

        How about these two Presidential addresses:

        Carter’s “fireside chat” to the nation, 1977

        Tonight I want to have an unpleasant talk with you about a problem
        unprecedented in our history. With the exception of preventing war, this is
        the greatest challenge our country will face during our lifetimes. The
        energy crisis has not yet overwhelmed us, but it will if we do not act

        It is a problem we will not solve in the next few years, and it is likely to
        get progressively worse through the rest of this century. We must not be selfish or timid if we hope to have a decent world for our children and grandchildren.

        We simply must balance our demand for energy with our rapidly shrinking
        resources. By acting now, we can control our future instead of letting the
        future control us.

        Obama’s eerily similar version, 2010
        ” After all, oil is a finite resource. We consume more than 20% of the world’s oil, but have less than 2% of the world’s oil reserves. And that’s part of the reason oil companies are drilling a mile beneath the surface of the ocean – because we’re running out of places to drill on land and in shallow water.

        For decades, we have known the days of cheap and easily accessible oil were numbered. For decades, we have talked and talked about the need to end America’s century-long addiction to fossil fuels. And for decades, we have failed to act with the sense of urgency that this challenge requires. Time and again, the path forward has been blocked – not only by oil industry lobbyists, but also by a lack of political courage and candor.

        The consequences of our inaction are now in plain sight. Countries like China are investing in clean energy jobs and industries that should be here in America. Each day, we send nearly $1 billion of our wealth to foreign countries for their oil. And today, as we look to the Gulf, we see an entire way of life being threatened by a menacing cloud of black crude.

        We cannot consign our children to this future. The tragedy unfolding on our coast is the most painful and powerful reminder yet that the time to embrace a clean energy future is now. Now is the moment for this generation to embark on a national mission to unleash American innovation and seize control of our own destiny.”

        • Peter S says:

          They’re not the same at all. Carter proposed being more efficient, starting by putting on a sweater and driving less. Nobody liked that idea. Using less?? That’s the antithesis of capitalism.

          Obama’s plan is to drill polluting oil at home. Perhaps it’s his only politically feasible option. But it is far far from Carter’s address.

          • Dave Kimble says:

            Don’t bother with the words they said, they are always going to be “I can fix this if you do as I say, and everything will be good again”. Instead, ask yourself why they made statements on it at all. They knew about Peak Oil, that’s the point I was trying to make. They are not fools.

        • I would be more supportive of this if I thought a clean energy future would have any chance of working. We need to use less–that is the only solution I can see.

          • Dave Kimble says:

            You miss my point. Their words are unimportant – just more feel-good Presidential propaganda. But why did they say anything at all, unless they understood that worldwide Peak Oil is going to happen ? They are not fools. The words they say to the public are ridiculous, but they are not fools. They know they have to sound as if they (and not the opposition) have the answers. They cannot say what we say, or else the opposition will say THEY can fix it, and win power.

            Meanwhile watch what they actually DO. More weapons, more militarisation of the police, more spying on dissenters, more assassinations. When Plan A fails, they will have to try Plan B. Plan B seems silly and over the top right now, and people object with quaint ideas like “You are infriging by personal privacy”. But under Plan B, you won’t have the right to personal privacy. Get it?

        • InAlaska says:

          These two speeches are pretty clear evidence that TPTB know and understand what is going on. Things in our world are running on 200 years of momentum and inertia. Its hard to slow and then turn the ship of state.

      • Obama putting country on notice that he will get around legislative inertia by using executive orders…April timeline for getting US to ratify new IMF SDR global currency

    • garand555 says:

      “One point that hasn’t been emphasised is that The Powers That Be know all this stuff perfectly well already.”

      Don’t be so sure. I was discussing peak oil with a friend of mine last night who does a lot of modeling for TPTB. One of the things that he was asked to do back in 2005 was to model security threats in a world with expensive oil. His group was going to use $100/bbl as the point and TPTB raised hell because they did not believe that we would ever see $100/bbl, and said that even $70/bbl was almost unbelievable. 3 years later, it hit $147/bbl. They suffer from the same normalcy bias that everybody else does.

      • Danny says:

        Who are “they”? The German military has a peak oil plan; you don’t think the rest of the world doesn’t know about peak oil? You have to keep the sheeple in line, any public talk of this will get you fired and forced to seek therapy…Look what happen to Kopits after he gave this talk. Maybe that was going to happen anyway. But one has to take everything with a grain of salt…I noticed when Kopits mentioned alternative transportation there was immediate “respectful” condemnation of his thoughts… I don’t think anyone knows how this is all going to play out….Paradigm shifts are in order.

        • garand555 says:

          “I don’t think anyone knows how this is all going to play out….Paradigm shifts are in order.”

          I think this is key. I think we can predict some large broad events, but I do not think that we can predict what comes after those events. We know painful change is coming on a very large scale. We know that modern countries have not been developing alternative systems to industrial oil based agriculture. We know that alternatives for globalized products are not being developed. We know that oil is getting more difficult to extract and is vital to almost everything in our modern economies, and that no alternative has been found or developed.

          We can predict that this will all come to a head without an oil alternative. We can guess how fast things will happen once it does. What comes after is a lot more murky.

          BTW, the “they” in this case was the US government. They were using Lawrence Livermore resources and personnel, so that would be the US DOE.

        • Peter S says:

          You’re right in that we do know the problem (the limits of growth, as Gail puts it), but nobody can know how it’s going to play out. I like Kopit’s opinion about alternative transportation. I don’t agree with it, and I can’t fault Gail’s logic on how she sees a lot of serious problems and changes coming. But I hope I am wrong, and that Kopit is right.

          But I get tired of “conspiracy” talk. It’s becoming my own theory (from experience, and now from studying anthropology in uni) that most conspiracy theories are just a way to avoid harder truths. It’s easy to blame a secret organization: it’s simple, it’s concrete, and you can focus your frustration on a fixed point. It’s the classic “us” vs. “them”.

          But it’s much harder to look inside. It’s not so easy to accept that none of us are innocent, some more and many of us less to blame, but we have all contributed to this situation. And it’s also difficult to accept that many (I would say most, but you may think I’m being too cynical) people are closed-minded and willfully ignorant: you can show them facts, evidence and danger, and they won’t even consider it. People automatically prefer to believe a comfortable lie. The problem is not a conspiracy, it’s just each person (CEO, shareholder, politician, iPhone buyer, anyone etc. involved in this growth system) looking out for themself and short term profits. That’s the scary truth, that we belong to a species that doesn’t even care about its own existence and votes against its own interests.

          • Paul says:

            When the truth becomes too much to bear – or can no longer be ignored – there’ always XANAX.

            Of course that’s why so many people are popping these on a daily basis in the US.

          • xabier says:

            Peter S

            Yes, we are caught up in a complex web: the indirect results of billions of complex interactions weave our doom.

            And like the Prince in the Persian tale, even when we recognise the destructiveness of our habits, we find can’t free ourselves from them.

            I’d love to ditch this poisonous laptop, but I can’t function now in the modern economy without it, etc….. Just a fly in the web.

      • xabier says:


        I’d agree: I learnt that lesson re TPTB when I spent some years reading diplomatic documents – what even the best informed people get wrong or misunderstand is quite eye-opening. They are as apt to live in a world of delusion and wishful-thinking as any other human beings. Even the cynicism and real politik can be based on very mistaken preconceptions. Blind ‘leading’ the blind, etc.

        • Danny says:

          Well I guess you are right about the Blind leading the Blind….I remember watching a Front line special on the collapse of 2008 and Hank Paulson was so scared he was telling his wife to go get cash out of the bank. I also remember Bernanke telling we had “green shoots” in 2009….I have talked with a lot of people about this and more “comfortable” they are the less likely they are to listen…I remember seeing John Snow give a talk at my local university and he mentioned some bumps in the road but to end his talk he had to find something positive so in his laziness started bragging how much oil is in the Baaken and Eagle Ford and how we are going to become a self sufficient nation….I would just like to think that our leaders are a little more intelligent but I guess you don’t make it to leadership by thinking outside of the box and group think is very powerful thing….Danny

        • InAlaska says:

          There is also the powerful urge felt by all people, including TPTB, to conform. Nobody wants to be the first Chicken Little to shout “the sky is falling!” They think to themselves, “maybe it isn’t true…what if I’m wrong…? I don’t want to be the crazy guy in the room who makes an ass of himself.” Its imagine its quite like a bunch of teenagers and nobody wants to be the weird one in the group.

          • Danny says:

            Yes every time I bring this up with people I am vilified as a doomer and crazy person but I can see with BAU how crazy it does seem.

      • Danny says:

        Amazing that in 2005 he had no idea….since this movie was made in 2005 “Syriana” all about peak oil and the battles for it….even discusses what would happen if oil prices fell to a certain level….it seems like the writer new a lot about peak oil……

    • Bullwinkle J Moose says:

      I subscribe to Hanlon’s razor:

      Never attribute to malice that which is adequately explained by stupidity.

      Our politicians are particularly short-sighted when the only goal is to get elected again at any cost. Australia’s Abbott government is trapped by their own stupidity into an action plan* that is counter to any sensible policy.

      Business is slightly better, but often equally short sighted when Shell is borrowing and selling assets to pay dividends to keep the shareholders happy. If this sort of behaviour doesn’t cause a rush for the exits, what will?
      In a repeat of previous episodes, the water has to be coming in the port holes before the masses stampede for the now departed life boats.

      We urgently need an agenda that does ‘more with less’ and then one that does ‘less with much less’.

      * To undo everything that the previous government did

      • Paul says:

        “We urgently need an agenda that does ‘more with less’ and then one that does ‘less with much less’.”

        If you think that through it is not possible.

        Think about this — if people shop less – fly less – eat less meat etc… that will only accelerate the collapse of the world.

        There are many implications but the key one is that if people consume less we end up with deflation – deflation would mean that the price of oil crashes to a point below where it is economically viable to extract oil – it would also mean no additional investment into oil exploration because the ROI is not there.

        No oil means no civilization – means no food because most food is produced using oil and gas inputs. Remove those and mass starvation is guaranteed.

        Sadly we are well past the point of being able do anything meaningful.

        I hate to say it but we might as well just keep on shopping and borrowing and printing – anything that keeps the current paradigm going for as long as possible.

        Because the only other option is more dystopian than anyone’s worst nightmare.

        • I am afraid I have to agree with you.

          • Interguru says:

            This thread is getting too dark to read. ( Not that I disagree, I just prefer keeping my head in the sand )

            • Jan Steinman says:

              Oh, c’mon now! We all know things are going to get bad.

              The antidote to depression is action. If you focus on individual and community coping mechanisms, you don’t have any time to be depressed.

        • Emanuel says:

          What’s sad is that we COULD do something. But it would require coordinate action of most nations in the world. An agreement that the current system is not viable. In the end, it’s the insanity in human nature that is causing all this. We, as a species, are, once again, directly or indirectly choosing to go down the path of madness and collapse. We have failed to prepare ourselves. We are just not civilised enough as a species. Not yet.

          • Paul says:

            What do you suggest we could do to make this a soft landing – or less hard landing?

            • Emanuel says:

              If you’ve seen the Zeitgest films, there are some ideas there. Basically, it’s about a resource-based economy. In other words, common sense. Of course, most people would think it’s science fiction but it’s possible, we have the technology. It’s just that we are not willing to do it because we are not civilised enough, we are prisoners of our tribal thinking. But there’s really no alternative: a resource-based global economy or suffer the consequences.

            • Paul says:

              How do you extract resources without oil and gas inputs? How do you run a iron ore drilling rig – transport the ore – smelt it – refine it – create a product from it?

              The resource based economy is done. Technology is a result of oil and gas inputs – not the other way around. An iphone would not exist without cheap oil and gas.

              So I suppose we will suffer the consequences.

          • The catch is that we need energy to live–perhaps not as much as we are currently using, but some. Also, all species keep expanding their population, to match the energy resources available to them. Humans are no different. Perhaps, quite a while ago, we could have decided to go slower on our growth, so resources would have lasted longer. But now it is too late.

  2. Ikonoclast says:

    As to living styles… I would not want to be in a condo or a high-rise when the power shortages start. Imagine life in a high-rise with no power. There will be no lifts, no air-conditioning, no heating and very possibly no water. Many high-rises are not designed for opening windows so in summer they are unliveable then; too hot.

    But overall, will we see catastrophic collapse or controlled descent? I think the answer depends on where you live. Some nations and regions will see catastrophic collapse. Others will manage controlled descent. Strangely, Russia is well placed to manage a controlled descent. They have a relatively small population, the largest country on earth and plenty of oil and gas left if they keep it to themselves. The Middle East, India, China and Africa look doomed for catastrophic collapse. Europe will decline quickly too. North America (Canada + USA) could manage a controlled descent if they are clever about it. Australia could also manage a controlled descent. I doubt that Central and Sth America will do very well.

    Surprisingly enough, if they keep their own houses in order and manage a controlled descent, I would suggest USA, Canada, Russia and Australia will probably be the best places to be.

  3. Jesper says:

    Great post!

    * +200,000 people per day (1 France per year)
    * Forecasts of + 3-4C temp in 100 years
    * Massive youth unemployment. How can they prop up any retirement system?
    * Severe droughts in US, Brazil, Australia
    * QE drives inequality through the stock market

    “Recovery” is a propaganda term. Clearly marginal consumers are giving up every day, and that makes it very hard to drive up oil prices. “Things we all need have to be cheap”. Therefore fuel price will never be an issue for the top 15% of income earners, and the government has to step in and reduce fuel consumption by law.

    But the long term (100 year) scenario looks very bleak. No oil left. Chaos everywhere. Hunger and misery. I guess a rising population was a good thing as long as we all had jobs. But now… But this was very obvious and the failure to understand the exponential function comes back to haunt us again. Long live Albert A. Bartlett.

  4. Lindon says:

    Right in line with the points that Gail and Steven are making, here is an article posted today entitled “Clouds on the horizon for fracking companies?” It looks like the largest company involved in fracking — Chesapeake — is not doing well. “The fact that they are now planning to sell a large part of their business and that they have earlier sold off parts of their activity indicates that their foremost problem is “cash flow”.”

  5. Stilgar Wilcox says:

    Gail and posters, during the video presentation linked at the beginning of this most recent posting, Kopits shows a graph with a symmetrical peak, saying the only reason the plateau (gray shaded area to right of peak) was extended as far as it was after 2005 is because of 1.2 trillion in major oil company exploration. An unprecedented investment that resulted in minimal gains in production.

    That graph (with the extended gray zone shown after the symmetrical peak) looks very like the (predicted by many) ‘Shark Fin’, going from the front base of the fin to the top. Is it possible that we are that close to the beginning of the descent in oil supply (vertical back side of fin)? I don’t remember which collapse scenario you ascribe to, shark fin, catabolic, or something else, but maybe at some point later it might be a good posting to delve into the different projected descents, with which one seems most plausible and on a graph where you think we are now.

    • timl2k11 says:

      That sort of posting might be too scary. But for my part I think the most probable outcome is what is represented by the ‘Shark Fin’.
      A good analogy is a treadmill. We will keep increasing the speed on the treadmill to keep up current production until we (metaphorically) die of a heart attack.

    • I think we are ultimately following the Limits to Growth descent. All fuels decline simultaneously, because of oil’s influence on the economy.

      • Paul says:

        Gail, can you spot the typo? It happens, just sayin’.

        • Robin Clarke says:

          But Mcmericans have never been able to spell our language correctly. Even their dictionaries are wrong.

        • Fixed it (I think). The latest update to the MacIntosh software makes words out of any group of letters a person types. Sometimes what it thinks you are trying to type is not what you think you are trying to type.

  6. arijitbanik says:

    Reblogged this on Arijit Banik and commented:
    Gail Tverberg always provides a lot to think about in terms of resource depletion and economic growth. She references Steven Kopits’s presentation which can be found here:

  7. Pingback: When Will Peak Oil Actually Arrive? Costs Way Too High and Rising » Peak Oil BarrelPeak Oil Barrel

  8. edpell says:

    From purely a gut feelI agree with Steve’s prediction of $150/barrel in 2020. That is why I hope I am buying an car from Elio with 80mpg.

    • Stilgar Wilcox says:

      Edpell, I remember you from TOD. Anyway, I can see oil supply dropping due to reduced exploration, putting pressure on oil price to rise, however if the economy is too weak to handle higher prices all that will happen is a reduction in demand. In an early post Gail agreed that would probably be the case, but either way, 1) increased price or 2) reduced demand, will lead to economic contraction.

      Personally I don’t thing the economy can handle 150 a barrel. Maybe 120-130 if QE continues, but that’s about it.

      • edpell says:

        As China and India continue to grow in efficient use of oil they can bid up oil. Yes,major chunks of the trilateral economies can not afford $150 they will be pushed out of the global economy. No country is a monolith that survives or dies as a whole. Parts of a country can fall out of the global market place while other parts remain industrialized. At $6 per gallon for gas I expect my wife and I will reduce to one car from two.

      • Bullwinkle The Moose says:

        Yes, even $100 seems to be a strain for the consumer. Steve Kopits described this in some detail in his talk. If anything, the world economies are getting more ragged and less able to afford, even the current prices. First the onto the knees, then a face plant in the mud seems to be the prognosis.

    • dashui says:

      Which color?
      I like the lime green, myself.

    • Jan Steinman says:

      “That is why I hope I am buying an car from Elio with 80mpg.”

      That is why I’m converting a vehicle to electricity.

      That’s a personal, stop-gap measure, I know. I don’t subscribe to the notion that all we have to do is change all our cars to electricity and things will be fine. I’m hedging my bets against not being able to the the vegoil I need for my diesel truck.

      I calculate that, at least in the summer, I can get a couple trips to town each week on my two solar panels.

      • Stilgar Wilcox says:

        “That’s a personal, stop-gap measure, I know. I don’t subscribe to the notion that all we have to do is change all our cars to electricity and things will be fine.”

        I agree and see this a lot. The illusion is energy for vehicles is the big stumbling block leading to collapse, but it’s way too late for conversion to alternate forms of transport in a desperate attempt to save us from the descent from peak. Refined oil is used for barge oil in ships, diesel in trains, tractors and so on. Now if what is meant is trying to have a mode of transport to have mobility after the collapse, well, sure for a while anyway it will help.

  9. Phil Harris says:

    We are seeing a surreal bidding war in the last few days between Scottish Nationalists and the UK Prime Minister concerning Scotland’s North Sea resources. (A referendum for independence is coming up.) The PM promises large capital investment in North Sea if Scotland stays with the Union. Scotland will benefit, he says, from UK government standing behind the investment. Scotland’s present First Minister (devolved Scottish Parliament) disagrees and says investment will be better guaranteed by an independent Scotland. What they both seem to agree on is that there is more oil still out there than has yet to be accessed. Given dropping production rates that seems a surreal assumption. I think the ‘rate of production’ versus ‘reserves’ issue goes to the heart of the matter.

    An important set of interviews frames these problems and supports as I understand it Steve and your positions.

    It seems like we are only just beginning to get used to Peak Oil, but we have not seen the last of Public Relations.

    • Thanks for the update. I expect as resources get tighter, there is going to be more of a tendency of countries to break up.

      • that fits with my favourite bit of drum banging—that nations are held together by the energy they produce

      • Harry says:

        Britain’s North Sea oil and gas industry is facing its “biggest challenge in 50 years” thanks to a combination of rising costs and a sharp drop in the number of new strikes, according to a major report.

        Oil and Gas UK, the official trade body, said exploration activity over the past three years has fallen to its lowest ever levels, with only 15 new wells drilled in 2013.

        Production fell by eight per cent last year, the report, said, although this is an improvement on the 15 per cent annual drops experienced between 2010 and 2012.

        Although the North Sea is currently attracting record investment, the report said the drilling that took place was “often expensive and subject to time and cost overruns.”

        Production is expected to increase this year, with 25 exploration wells planned, but the industry warned this was “too low to recover even a fraction of the potential resources”

        Full article from yesterday’s Telegraph:

        • Thanks! Oil and gas revenues are important to countries as well. When revenues fall, and exports change to imports, countries are especially bad off. I imagine that the big UK increase in wind turbines is to help fix the gas problem, but it is hard to see how it will work. The costs are way too high, and it still needs lots of other energy to balance.

  10. It seems that there is ‘hope’ that China will ‘save’ the market. The information I’ve been reading suggests that China is looking at a harder landing than the States or Europe had after the 2008 financial crisis.
    While many critics of the US Federal Reserve point out the $4+ Trillion in an expanded balance sheet, it would appear that the People’s Bank of China has expanded theirs even more outrageously, by almost 4 times, $15+ Trillion (for a sum of over $25 Trillion) (see this:
    I don’t know if China can save the ‘market’, with their empty cities and highways to nowhere (extensive misallocation of capital). They are already looking at a number of significant financial defaults as their economy contracts (see this: If there was some hope that they could buy assets, perhaps if they continue their money printing along with all the other central banks; but that fiat currency experiment always seems to end badly…

    • A quick follow-up since this was just posted recently on zerohedge ( This post outlines that corporate debt in China has hit record levels and is expected “to accelerate a wave of domestic restructuring and trigger more defaults.”

    • Thanks! When I visited China in 2011, I was astounded at all of the building. Everyone was being sold new condos for the first time. Previously, people had gotten housing “free” as part of their employment. The housing was modest, with a shared outhouse for bathroom facilities. The new buildings are high rises, with “real” bathrooms and electricity. So people are getting mortgages for the first times in their lives, and I imagine electricity bills and water and sewer bills.

      As long as there is more debt and more building, this sort of works. Some people buy condos they don’t need, just because they think the value will be rising. In the big cities, mortgage amounts are very high relative to salaries based on what I heard. If the economy hits any kind of speed bump, and jobs are a problem, or debt comes due on investments that aren’t really working out, there will likely be a problem.

    • InAlaska says:

      The tragic irony of China is that it is ramping up its infrastructure for a civilization that has already ceased to exist on all but paper. By the time China finishes “developing” the game will be over and they will have a built infrastructure they cannot use. The energy embodied in all of the buildings, roads, cement, cars, etc. etc. will be sitting wasted and useless. They are like the new kid on the block who shows up to the party too late.

      • That is a good way of describing the situation.

      • Christian says:

        It makes me remember some anthropologist I’ve read saying XVII th century Emperor had about ten empty towns, replicas of european or asian existing cities; I think Genoa was on the list. Now, they had converted this sport in a gigantic housing bubble, fossil fuels scale. It seems working middle class invest on this thinking on their future, because there is no pension funds and the State doesn’t care of old people.

    • Danny says:

      Well it will probably end with them taking over another country and taking all their resources….and maybe starting WWW3…just like the Germans did.

      • InAlaska says:

        A good bet that you’re right. Probably get another East Asian Co-Prosperity Sphere or something akin to it.

      • Bullwinkle The Moose says:

        No need to take over the country.
        Many, particularly here in Aussiestrailia, have been happily selling it to them one piece at a time. By the time WW3 is primed, they will have got all that is worthwhile and will be sending us their garbage, unless the fragile state of economies gets there first.

        My understanding of the situation in china is not so much home owners buying those condos, but families (and funds?) using the grey banking sector to buy ‘investment’ properties in one of the few non-state-bank and non-share markets available to them. This would explain the near total lack of people in those cities and also give the properties about the same intrinsic value as tulip bulbs.

        The income gap in the Chinese labour market means that, even if these cities were filled with industry, the factory workers are hopelessly priced out of the condo market, so there is no way to ever occupy or rent these properties. When will the penny drop?

        Perhaps it already has: I have read of some strange goings-on in the local property market with offered properties being sold to ethnic Chinese buyers, well above the asking price, aggravating the housing bubble in Australia. It occurs to me that the investment strategy is “anywhere but China and preferably somewhere temperate”.

        Gail; Excellent stories and writing. Awesome effort.


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  12. edpell says:

    Since the “New Scientist” just wrote an article about underground coal gasification (UCG) will this play a roll? Yes, I understand about C02 please do not shoot the messenger. It seems there is 600 years worth on brown coal that can be burned. Yes, leading to levels of CO2 that will frighten everybody.

    • I don’t think so. All of these things need investment. We are running short on funds (and stuff) for investment. It will not be long before borrowing for investments will be very difficult. It is this cut off of credit that will cut off most of (or all of) these things. We need a high-tech civilization for all of these fancy investments. It will be increasingly difficult to keep up such a civilization.

      • marmico says:

        Household net worth relative to GDP (national income) is near all time highs.

        Household debt service is near 35 year lows.

        The U.S. is not short on funds (and stuff) or ability to borrow for investment.

        • garand555 says:

          $56 Trillion in total debt in the US, $100-$200 trillion in unfunded liabilities and over $200 trillion in potential bad financial exposure in our banking system, much of which is exposure by FDIC insured (read: taxpayer backed) deposit taking banks. You really think the US is not short on funds?

          • marmico says:

            You really think the US is not short on funds?

            Yes. Household, nonfinancial business and government debt service costs relative to income (profit) are at multi-generational lows.

            • Jan Steinman says:

              “Household, nonfinancial business and government debt service costs relative to income (profit) are at multi-generational lows.”

              Well, nobody I know feels included in that group!

              You must admit that, assuming for a moment your point is true, it is grossly inequitably distributed? And in the final analysis, what is the difference between inequitable distribution and the vast majority being “short on funds?”

              Or do you advocate seizing assets of the rich?

          • garand555 says:

            “Yes. Household, nonfinancial business and government debt service costs relative to income (profit) are at multi-generational lows.”

            When debt service costs are this low, (lower than inflation, which is *understated* despite the fact that core CPI is used for COL adjustments) it introduces distortions. The interest rates are artificially low, manipulated by the Fed. They cannot EVER go up to historical norms without crashing the system. Never. We are backed into a corner. People who would save are punished. They must either accept diminished purchasing power, or go into high risk investments. Asset price bubbles are also an artifact of cheap money. People aren’t going to buy price inflated houses even with cheap money without NINJA loans, and that stocks and bonds are not overvalued is a load of BS.

            Regarding debt creation, last year, 99% of net consumer debt created was auto loans (about half of which was subprime) and student loans. Student loans are given under the assumption that a person will become educated and get a higher paying job and be able to afford to pay the loan back. A simple look at non performing student loans tells you that people are not getting high quality jobs needed to pay their loans. Your premise that cheap money is the answer is flawed, and you need look no further than student loans to see this.

            That the population employment ratio has dropped (63% in 2006 to 58%-59% post Lehman,) the labor force participation rate has been dropping, and that part time employment for economic reasons is very high is a sign that the unemployment figures that we see are BS. That median household income has dropped from $55,627 in 2007 to $51,017 in 2012 is another clue that people have less discretionary income than they used to. That means less to pay debts back as well. On top of that, the Gini index has been on the rise, meaning that the rich are getting richer and the poor are getting poorer.

            Or you could just look at the numbers I posted above and understand that we are swimming in more debt and liabilities than we can pay. Don’t believe the bank exposure? Well, go to page 13 on the OCC’s quarterly derivatives report: Then ignore the OCC’s notes on total risk should there be a market meltdown because it’s risk assessment assumes that none of the counterparties goes out of business. When Lehman went down, that ignited the 2008-2009 firestorm, including the bailout of AIG (due to derivatives,) TARP and several trillion dollars being printed via QE, and that’s just the US.

            Cheap money only benefits the government and those who have direct access to the Fed’s discount window and QE programs.

        • It is short on wages, with fewer people working as a percentage of the population. Unemployment statistics hide this detail. Prices of assets are being “pumped up” by Quantitative Easing.

          Both of your graphs are of net worth.

          • marmico says:

            Both of your graphs are of net worth.

            No. Do you want me to post a graph on the ratio of household assets to household liabilities? 5:1 seems about right.

            Wages as a percent of the economy in developed economies have been in secular decline for decades. What’s the point?

            Economies get more energy efficient every second of every day. There is not much difference in the growth rates of world GDP between 1995-2004 and 2005-2014 even though there were differences in the volumetric extraction of oil (crude & condensate) in each of the 10 year periods; an increase of 10 mb/d in period 1 and 2.5 mb/d in period 2.

            Prices of assets are being “pumped up” by Quantitative Easing.

            What asset classes? Quantitatively define “pumped up”. For instance, U.S. equities are trading at historically average price-earnings levels.

          • garand555 says:

            Stocks are only at “reasonable” P/E ratios because companies have been going into debt to buy back their stocks and mark-to-unicorn accounting.

          • garand555 says:

            I should also add that companies are cutting input costs left and right, hence the declining labor force participation rate and the rise in part time workers. People with low paying or no jobs do not buy goods, hence the current trends are unsustainable.

    • mikkel says:

      I personally think it will. There is plenty of investment available if neoliberal consumerism stops being the dominant model — just think how many millions of jobs and countless resources are wasted on designing extremely similar gadgets with slightly different shapes.

      With rationing (either direct or through prices, such as imposing a major oil tax) there is plenty to get UCG up. It also directly leads to being able to produce whatever hydrocarbon based product you want. This is why I do not share Gail’s “rosy” opinion that CO2 emissions are unimportant due to peak fossil fuels.

      • marmico says:

        Both of your graphs are of net worth. Yes, indeed. My html error.

        <A HREF=""Household debt service as a percent of disposable personal income. The decline in the debt service ratio has offset the rise in energy goods and services.

        Cheap money only benefits the government and those who have direct access to the Fed’s discount window and QE programs.

        Then explain why the household debt service ratio has declined? Okay, households refinanced higher interest rate obligations.

        People with low paying or no jobs do not buy goods, hence the current trends are unsustainable.

        Wage and salary compensation and proprietor income as a percent of the economy has been in decline since WW11. The wage and salary compensation ratio peaked in the late ’70s.

        Once again. Why is the crude oil futures curve in backwardation if the market is supply constrained?

        • garand555 says:

          I would direct you to the presentation in the article to see that less miles are being driven by people. That means less income for those who rely on tourism, for starters. It also means that, when combined with more fuel efficient vehicles, that gasoline expenditures is not going to have increased very much. There is, however, a limit to fuel efficiency in cars, and the higher gas prices are already having an effect on consumption.

          “Then explain why the household debt service ratio has declined?”

          Except for student loans and auto loans, banks are not lending. That means defaults plus people paying what they can without access to new credit. The debt load has decreased for consumers. However, the median household income has decreased while the income for the top earners has increased. The richest Americans are also certainly included in those statistics, which makes them misleading in a consumer economy. The rich are getting richer and the poor are getting poorer, unless you think that going from 26 million on foodstamps in 2006 to 47 million in 2013 indicates something else. Or, unless you think an ever increasing Gini coefficient indicates something else. My statement about ZIRP and QE (cheap money) still stands.

          This is all in a consumer economy, where it is the masses who must be able to afford to consume in order to drive it forward. The foodstamp, median household income and Gini data say that the masses will not be able to continue. You do realize that there is a difference between median household income and mean household income, right? You do realize that GDP growth is not being driven by the bottom 90%, right?

          The picture you paint does not jive with the unemployment, employment population ratio and labor force participation rate figures that I listed.

          And you seriously don’t understand why the price of something that is going to be more scarce or is going to cost more to produce in a year is in backwardation? The closer the contracts come to becoming due, the more people realize that it is going to cost more to actually produce the product. But go ahead, explain why a physical resource that our entire economy would collapse without and that is supply constrained should be in a contango market. (I’ll give you a hint, if they do go into a contango market, and it is not just minor, it means that supplies are going to be collapsing.) Furthermore, futures markets are not perfect markets. If they were, we would not have terms such as backwardation, contango and arbitrage.

          And you still continue to ignore the total debt numbers, the unfunded liability numbers and the derivatives numbers that I keep on bringing up. Those will not go away. Those will destroy our economy. Ignore them at your own peril.

          • marmico says:

            Who cares that urban American Soccer Dads double up in the Lincoln Navigator to the game, suburban blathering bloggers grow tomatoes in their backyards and exurbans have rooftop solar hot water.

            Why do experts in the oil business with money at risk say that oil prices will be lower next week, next month, next year and in every year through 2022 relative to the spot price? Backwardation is the antithesis of a supply constraint.

            Now when Tverberg commenced her prophetess of doomerism, the oil market was in contango which is the thesis of a supply constraint.

            It’s amazing that mathematically trained persons (actuarial scientists) are so blindingly innumerate to data which is in short supply on this blog.

          • garand555 says:

            Who cares? Our economy is CONSUMER DRIVEN. When consumers can no longer spend to consume, our economy breaks. The top 10% cannot consume enough to make up for everybody else living paycheck to paycheck.

            And the pricing that you are describing is contango, not backwardation. Furthermore, your appeal to the “experts” who have money in the game have been wrong in the past. Think big money is right because it is big money? Look at how wrong they got it in 2008.

            Oil prices will drop until 2022? If so, say goodbye to all of that fracking and all the associated liquid fuels with it.

            You are out of your league here.

        • timl2k11 says:

          I would suggest you introduce yourself to a dictionary. Backwardation is associated with a supply constraint.

  13. edpell says:

    Gail, thanks for the wonderful video reference. Steve, thanks for the detailed analysis, Go Lions!

    Gail, as an actuary where will pension funds invest when energy companies are liquidating, electric companies no longer have primary inputs, communications is dirt cheap (? there is that energy input needed maybe communication goes down too?), food production faces rising input costs, etc… What is a safe solid long term investment for pension or anybody?

    • Paulo says:


      Only half tongue in cheek, here….(as you ask the million dollar question). Where will they invest? Answer: how about something like this

      I like the phrase: “simple products for a simpler life”

      I think Gail’s answer might be something like, “There will be damn few things like pensions around” (which is almost the case, now, isn’t it?) Buy land, tools, knowledge, and help create community. Watch you health. Some will buy weapons, or all of the above.

      regards, Paulo

    • Ed,

      Unfortunately, each year we live on pretty much what is produced (or extracted) that year. All money does is help allocate who get what. There is a some carry over from year to year in the form of buildings and vehicles, but not a whole lot. Things like food and clothing are produced new each year.

      What money does is allocate the production that is available among potential buyers. If there isn’t much to buy, money can’t do anything about the situation.

      As oil production goes down, I except considerably less will be produced by the economy. Gas and coal extraction will probably decline as well. Food production will go down.

      I imagine in not too many years, pension plans will be a thing of the past, except perhaps based on taxes of current production. Social security mostly operates in this manner. Some of what young people earn is used to give money to the elderly and disabled.

      There still might be a transition time when pensions continue to operate. I don’t know what they should invest in. Nothing will do all that well.

      • Danny says:

        Yes but I think you underestimate the role of the government..especially here in the U.S….I don’t think it is going to wimper away….I think they are already working on this..that is why you haveNSA, massweaponpurchaces, and police that look like military commandos. The government will nationalize everything so there will be no need for taxes….

        • garand555 says:

          The government is going to collapse under its own weight. Even with all of their paramilitary gear, the police are going to be no match for the hoards of people who are worried about what they are going to eat. There is something like one firearm for every man, woman and child in this country, and civilian purchases of ammunition have put government purchases to shame. Remember, with no oil, there will be very little food under our current system. Even cops have to eat. Those MRAPs and Bearcats are fuel hogs, and there would be a choice: Food or paramilitary police running around in armored vehicles.

          What it boils down to is that even the government cannot violate the laws of physics, and ever increasing entropy is one of those laws.

  14. Pingback: Beginning of the End? Oil Companies Cut Back on Spending | Our Finite World « Olduvaiblog: Musings on the coming collapse

  15. bob legg says:

    Interesting listening to Kopits presentation and then taking a quick look at the presentations of Howard K. Gruenspecht, Deputy Administrator, Energy Information Administration and Mark Finley, General Manager, Global Energy Markets & U.S. Economics, BP which are both demand side oriented. In particular the last slide from Howard Gruenspecht reads:

    Why long-term projections might/could/will be wrong
    • Different relative fuel prices
    • Faster / slower economic and energy demand growth
    • Changing policies and regulations
    • Changing consumer preferences
    • Faster / slower technology progress
    • Technology breakthroughs

    Spot what’s missing?

    Supply side might be constrained!

  16. sunweb says:

    Is it both demand and supply growth as a description of at least oil (energy source) is not other finite natural resources?

    In the beginning, there is “low hanging fruit” with high EROI and costs that are low and profits high. It starts with low demand but grows encouraged both by the industry itself and the natural inclination of all species to grow into the available energy source in its environment.
    Cars, multiple cars, muscle cars, SUV, trucking, shipping, SSTs, industrial agriculture, and more and more people, infrastructure upon infrastructure. Remember 30 cent gas prices?

    Housing/settlement/suburb patterns, all the goodies to fill the homes, city blocks with buildings filled at the bottom with stores and above with residences that are the size of small rural towns of yesteryear. Honest but useless manufacturing jobs, honest but frivolous service jobs, massive bureaucracies.

    At some cross-over time (2005), the “low hanging fruit” peaks, EROI begins to reduce dramatically, costs grow and profits diminish. Supply becomes the search in the bottom of the barrel for sources with at least a modicum of positive EROI – fracking, tar sands, deep ocean drilling. High costs demand high prices per barrel. High prices per barrel limit demand because of high costs for energy. All this comes with the “unintended consequences of massive environmental damage of the earths support systems for life and threats for life itself.

    And it is a mad scramble to maintain what everyone believes is the norm, should be the norm, has to be the norm because the reality is to tough to wrap our minds around.

    Overshoot with a human face.

    • I am afraid you are right.

      I think of the oil extraction as being a function of both supply and demand. I think of increased demand as being driven primarily by increased wages and by increases in debt. If they aren’t there, is it hard for demand to rise in a country like the US. Of course, adding more Chinese consumers will increase demand.

      If oil supply is high priced, demand (constrained by affordability) will fall. But I don’t use the proper economic jargon.

      • momist says:

        “If oil supply is high priced, demand (constrained by affordability) will fall. But I don’t use the proper economic jargon.”
        Gail, the most valuable feature of your postings is that you can translate the ‘proper economic jargon’ to plain English for the rest of us! You spell it out, and then the comments from others expand and clarify anything that a first reading misses. We’d be less educated without you.

  17. timl2k11 says:

    Thanks for this right up Gail. The presentation you linked to was great, I was surprised an hour had already passed by at the end, packed with information as it was. Kopit presents what I would call an unimpeachableargument that we are supply constrained. He also provides a lot of valuable data for those of us who really want to know what is going on and what to expect in the future, the kind of data that helps one make sense of the world in the fog produced by the MSM, by oil majors themselves, by mainstream economists etc, etc.

    • Steven Kopits says:

      Thank you for the compliment.

      This presentation, as I understand it, is the cutting edge in oil markets macro theory. Best I can tell, it’s the state of the art.

      However, it should not be taken as a criticism of any other organization. I rely very, very heavily on excellent work done around the globe by industry professionals, investment banking analysts, and independent consultants. Just take a look at where I source my charts: Barclays, Goldman, IEA, BP. It is fair to say, however, that there are significant aspects of my analysis which qualify as innovative relative to models used elsewhere today.

      I would also add that I think I make a strong argument for a supply-constrained world. But keep in mind, six months of non-conforming data could scupper all my fine theories. If you’re in the forecasting business–and you take it seriously–you’re always aware that all your models are provisional. It’s the best I can do now, but there’s no guarantee that it’s good enough in the long run.

      • timl2k11 says:

        Thank you for your feedback Steven. It is true you do not have a crystal ball, but what you do is provide a crystal clear picture of where we are today, how we got there, and where we are most likely headed. I don’t really see how any non-conforming data could be forthcoming. The foundation of your theories are based on facts. It’s true that some sort of unforeseen event could lead to a dramatic decrease in demand, or, (highly unlikely) a dramatic increase in the supply of cheap oil, leading to a “phase-switch”, if you will, to a demand-constrained economy, but this seems “baked-in”, or accounted for, in your theory.
        And may I say, after hearing a certain person, whose name I won’t mention, (from IHS CERA) talk, your presentation with it’s clear layout of the facts and the big picture is therapeutic?
        Thanks again.

      • marmico says:

        Why is the current price of WTI crude in backwardation through 2022 if there are supply constraints (“peak oil”)?

        • Our problem now is that the price won’t of oil won’t go up high enough to allow the oil to be extracted.

          We need some combination of higher wages, increased borrowing, and increased number of buyers in the marketplace to get the price up higher, but these have not been working to raise price. At this point, the only way the “developed economies” are in the market for oil is through Quantitative Easing, as it is not working all that well. QE is not a long-term option, so in some sense, the backwardation may reflect the real state of affairs. Steve would argue that at some point, China will be getting back into the market, and oil prices will rise again. But if they rise, the high price will send economies back into recession quickly, so they can’t last, in my view.

          As a practical matter, I understand only the close maturities are used in the vast majority of transitions.

    • I agree. We have Steve Kopits thank for the talk.

  18. GreenHick says:

    Can anyone help me think through what re-nationalization of oil companies might mean here? To this point, they seem to have developed a degree of regulatory capture that permits them to rearrange the deck chairs, direct and indirect subsidies, socializing environmental externalities, climate / carbon debts, film flam tight-oil financing. But if these companies become ever more evidently basket-cases, might (some) governments pull the overt and embedded subsidies, tank the share prices and take them over? It’s very much against the grain at the moment, but might we see crash programs of demand destruction (rationing / energy-efficiency investments / accelerated switches to renewables, however non-sustainable these might eventually prove to be in the long run)? I think it’s plain enough here that market forces cannot give us a managed energy descent. It’s far from certain that we could do this by design even if we had the nerve to try it, but perhaps in an accelerating collapse scenario a few jurisdictions might do so?

    • I don’t see denationalization of oil companies as a solution. It just changes ownership.

      Oil companies historically have directly and indirectly helped the finances of a lot of folks:

      1. Governments have levied huge taxes on oil companies. The “government take” can be as high as 80% or 90%. This is the reason for government ownership of oil exporting companies. All the stuff you hear about subsides is mostly distorted to make renewables look good. One article in Oil and Gas Journal in May 2013 showed that the “government take” associated with an $80 barrel of Bakken oil in North Carolina is $33.29. This is more than oil company Capital Expenditure ($22.60) and Operating Expenditure ($7.50) combined. Part of the Kopits’ presentation that I didn’t include mentioned a push to try to get the “government take” reduced. Obviously, that puts government finances in a worse position. (Some of the government “take” goes for things like fixing North Dakota roads after all of the big trucks wreck them.)

      2. A big reason for the rising “productivity of humans” is a reflection of fossil fuel use. Some of this is equipment operated with oil. Roads would not be possible without oil use. Countries like Brazil with poor roads are terribly handicapped–they cannot get the goods they manufacture to market for a reasonable price. After peak oil, it is doubtful that we can keep up our roads, whether or not we have electric vehicles.

      3. Oil companies have been able to pay big dividends, which is one reason pension plans have been possible. If a government takes over the oil company, and takes away the need to pay dividends, there is still the problem with supporting financially all of the elderly people who depend on these dividends.

      When the cost of extraction is high, it is a real problem, because citizens cannot afford the oil. Changing the ownership doesn’t fix the situation, unless the government can somehow figure out a way to tax others, besides the oil companies. (Some of the “government take” is in the form of fees, rather than taxes. The amount includes local taxes as well.) I show some figures and a map with government take by country in this presentation.

      • GreenHick says:

        Hi Gail,
        Many thanks for the kind reply. I agree that this does not seem like a solution, if by “solution” we mean an arrangement by which things can go on as before. Indeed, given that most of your readers seem prepared to grant that things cannot go on as before, it would be helpful to devote more emphasis to what to do about or do with that. My question was in the context of ways in which we might make the energy / civilizational descent less chaotic than others. The market-driven version seems pretty much locked into catastrophic collapse, but are there there less-catastrophic albeit steep decomplexifications that we might alternatively envision?

        All best.

        • You are on the right track to be looking for things we can do to soften the collapse. I am not sure governments will be able to play a very big role though–they are one of the worst off, and will be faced with trying to stave off their own collapses.

          It may help if resources can be shared as equally as possible–at least that there aren’t a few who are dominating the distribution.

          I think eventually we will need to be using more of a gift economy, where people give away their surpluses. This only works well in a small setting, where everyone knows everyone else, and there are expectations that each one give away any surplus. People will also need to take responsibility for relative’s children who lose their parents, if government is playing a smaller role. But such changes will be big ones.

          • T. G. Neason says:

            In my opinion, there is no way of preventing the imminent economic collapse. We can either strive to maintain business as usual and fall into chaos or manage the decline. I suggest the actions;

            On Wednesday, November 5, 2014, President Obama declares a national emergency and announces that petroleum rationing and increased petroleum taxes will be implemented on January 1, 2015.

            The ratio quota would be 90% of the usage over the preceding six months. The quota would be reduced 5% every six months until consumption reached 50% of the 2014 consumption level.

            The increased taxes would be used to fund the increased federal welfare expenditures that would accompany the economic decline caused by rationing and increased taxes.

            I would also implement confiscatory tax levels on income and wealth above a certain level (level to be determined by analysis). Those taxes would also be used to fund the additional welfare load.

            We have a reasonably well functioning food (SNAP), retirement (SS and disability), and medical (Medicare and Medicaid), housing (Section 8) system in place. They can be expanded to accommodate the greatly increased demand.

            Europe, Japan, Saudi Arabia, etc. would be put on notice that they will now be responsible for their own defense. The recent Defense Department announcement on down sizing is a start but just a start. The funds freed up by military down sizing will be used for other domestic discretionary expenditures.

            I contend that the above is far superior to what will occur if we continue business as usual

            • Jan Steinman says:

              “We have a reasonably well functioning food (SNAP), retirement (SS and disability), and medical (Medicare and Medicaid), housing (Section 8) system in place.”

              Say what?

              I don’t think the present industrial agriculture system will be a “well functioning food… system” in a low-energy world! Where will the tractor fuel, pesticides, and fertilizer come from?

              “There is justifiable concern that the current dependence of the food sector on fossil fuels may limit the sector’s ability to meet global food demands.” — from the UN FAO. I think the US food system is perhaps one of the least secure in the world. Third-world subsistence peasants will have an easier time of it! US soils are depleted and tired, and cannot grow much without fertilizer derived from natgas and petroleum-fueled mining.

              “Well functioning… retirement… system?” What is propping it up? Pensions are almost all in the stock market, and Social Security income has been included in the general budget to make deficits look less bad! Meanwhile, more baby boomers enter the system every day. I’m 58, and I don’t think there will be anything left by the time I reach retirement age. Or they’ll just start bumping the retirement age up every year, so that most people in the demographic bulge will never reach it.

              “Well functioning… medical… system?” The US spends a greater portion of GDP on medicine than any other country — 16% or so, by some measures. Contrast with Germany, Japan, Canada, and many other “socialized medicine” countries that only spend some 7% of GDP. The insurance industry is a big, fat, unnecessary overhead expense that programs like Obamacare merely firmly institutionalize, with government subsidies. Any day now, only the rich will have health care in America!

              “Well functioning… housing… system?” Section 8 does nothing for the person who bought property decades ago, retired to a fixed income, and now find the property’s value has inflated so much that they can no longer afford to pay the property taxes. Besides, where will a bankrupt central government get the funds as Section 8 claims start to increase in step with unemployment — which paradoxically reduces government income?

              I think the only way the US can possibly slide through this crisis without general insurrection is through the use of military force to seize the assets of other countries. Canada comes to mind.

            • Dave Kimble says:

              That recent Defense Department announcement was just a bit of smoke and mirrors posturing. They were given a cap, to which the Pentagon said, “This is what you will get for that money” in the certain knowledge that that wouldn’t get through Congress, and that the cap will have to be increased.

        • Bill Simpson says:

          I bet the government will start creating money out of thin air, not borrowing it from anywhere. That will delay the collapse until the value of the new money is destroyed by hyperinflation. Look for deflation, to be followed by hyperinflation as the government gets desperate and starts to try anything to keep the system from melting down. Don’t be surprised if they start sending checks to all taxpayers, like they did around 2000 with that ‘refund’ they sent out when they saw the economic indicators heading straight down. Some economist on MarketWatch suggested that right after the crash of 2008 as a way to boost demand and get the economy growing again. Billionaires won’t just sit back and watch civilization collapse around them because, as Ukraine just demonstrated, no amount of money can protect you from the mob. You need to stop the mob from forming. So expect some very unconventional ‘fixes’ to be tried in a few years.

          • garand555 says:

            Will *start* printing money out of thin air? They’ve already been doing so via the Federal Reserve, using bankers as straw purchasers of US Treasury debt. That’s what quantitative easing is, at least the part of it that deals with US Treasuries. We have been monetizing the debt despite what the Fed has told us.

          • Danny says:

            Since every country is in the same position with the respect to money printing won’t they at some point have to come together and reprice assets and currencies. I know it seems hard to fathom but if you tell them o.k you can do this or take your chances with the lion in the arena…..I think most if not all will have to capitulate. We can’t be the only ones that see this coming? The PTB have known about this for a long time….that is why we went into Iraq…you could not have a PO crises with that guy in power…he would have been able to build a huge army under the wing of the Soviet Union and China…. Your models and assumptions are based on the “current system” which might not even exist anymore. Danny.

  19. Chris R says:

    I am still getting to grips with the economic and financial aspects so would appreciate if someone could explain what constrains an oil company from simply cutting back or not paying dividends and investing the money in exploration, licenses and production. I assume it would send a very negative signal to the financial markets which would then impact the companies share price and I am guessing their ability to borrow but they can at least divert the revenues that they would have been paying out in dividends. Is the ability to borrow not backed by the assets and production that they control which won’t exactly vanish?

    • Considering institutional pension funds are tied up heavily in the fossil fuel industry and are likely invested for “income” generation over capital growth, trashing dividend payments would not only highlight massive wider problems, they’d also cause a stampede and have politicians scrambling for cover. Easier to keep people quiet by selling assets and continuing dividend payments. Clearly a FUBAR solution.

      They want to buy as much time as they can before the inevitable. I’d be surprised if some of these invested funds hadn’t already written to these guys questioning their long term business plans. Not only do they need to panic about imminent peak oil but also rising impacts of climate change. In short it’s game over and they know it.

      Think of the institutional behemoths tied up in Exxon Mobil, BP, Royal Dutch Shell, Gazprom, Sinopec, CONSOL Energy, American Electric etc.

      • Chris R says:

        Many thanks, so basically just keep the lid on things for as long as possible!

        • Think of everything in these terms from here on in in terms of aggreage fossil fuel production

          Phase 1 – Growth (1800 >> 2006) 200+yrs
          Phase 2 – Plateau (2006 >> 2015-2020) 10-15yrs
          Phase 3 – Decline (2015-2020 >> ??

          We’re months away from entering Phase 3

          No one is beating the laws of physics. They’ll try with creative accounting but when the happy feely recovery articles flow just remember the above.

          What we’re debating is the speed of collapse and its impacts globally.

          • as the usa has dominated global finance for much of the las century, based entirely on colossal hydrocarbon energy reserves tapped from the 1800s onwards, phase 1 ended in 1970, the year USA went from being in oil surplus to oil deficit.
            Few realised the significance of this, so America carried on being the world’s creditor nation, but effectively borrowing money to do so as the oil deficit got larger and larger. they were freewheeling or freeloading on the rest of the world, depending on your point of view.
            that lasted for a while, there were ‘energy shocks’ in the early 70s, but the producers had to accept that they were on the same pendulum as the infidel consumers.
            everybody went back to sleep, so the American dream could carry on, with the promise of infinite oil.
            Come the 90s, and the realisation that oil isn’t infinite, the oil wars began under the tattered banner of liberation. This trashed the oil sources, inevitably.
            And just as inevitably we reached the plateau of 05/06, and we’ve been there ever since, denying the inevitable on a world scale, just as the USA denied it back in 1970.
            Only this time there’s no one to borrow from to get ourselves out of trouble.
            This why the USA is running down its military, without the ongoing guarantee of cheap energy, it’s unaffordable.
            Now we come to the final phase: Saudi is clinging on to its delusion of infinite oil, just as the USA did, but soon it will run dry. Saudi is surrounded by basket case nations, held off by the US presence and oil wealth. America cannot maintain its military, and Saudi is too weak to survive without it. When the USA pulls out, Saudi will collapse and with it the stability of the global oil market—and by definition the global economy.
            Oil will never run out, all it needs is for somebody to step on the supply hose for a while.

    • Oil company stocks and other dividend paying stocks are the backbone of pension plans. Pension plans, and almost everyone else, would dump the stocks, if they no longer could pay out dividends–especially if the reason was that they were running out of good prospects for development.

      If they are running out of good prospects for development, borrowing is going to be less and less of a possibility too. The issue in the recent past is that as oil companies have not been able to estimate the extent to which the challenges of new oil fields can be overcome. They often find that they can get very little oil out, or the cost is much higher than planned. If the reason they are cutting back is because of this problem, lenders are not going to be very excited about the prospect of lending to these companies.

  20. Joe Plateau says:

    Dear Gail,

    Thank you for a beautiful analysis. These data seem to have driven your somewhat alarmist last two pieces, where you proposed that serious oil shortages will bite into our economies within 2 years.

    I think insiders know this, judged by 2 observations: P/E ratios of all major oil companies are way below average, implying that market observers do not believe in any growth in new oil finds.

    Secondly, all major automobile manufacturers are rapidly developing electric and fuel cell driven cars. If we had oil for another 50 years, why would they bother ?

    • Conventional wisdom has moved in the direction of “Peak Oil,” with a morph to electric cars and all kinds of other technology. I agree that you are right–everyone is trying to move in the direction of getting off oil.

      The problem is that conventional wisdom is wrong. We can’t maintain the long supply chains needed for any kind of high technology. Thus, unfortunately, these high tech solutions won’t save us.

      • Steven Kopits says:

        Let me disagree.

        We will get used to whatever energy budget we have. Look at Britain. Productivity has taken a hit, but employment is coming back. We will get used to less oil. And we will find alternatives–I personally think self-driving electric cars will be a huge change in technology and society after 2020.

        But in the short run, Gail is pretty close to right, I think.

        • I think the things that lead me to see things differently are

          (1) The dependence of governments on the surpluses that they get directly and indirectly from cheap energy.

          (2) The dependency of our current system on debt, and in fact, on increasing amounts of debt. The use of increasing amounts of debt “works” in a growing world, but not in a shrinking world.

          (3) The problems our economic system has had to adapting to $100 barrel oil. The financial system is very close to the edge, in spite of Quantitative Easing since 2008. The financial system cannot withstand higher oil prices. In fact, if interest rates go up very much, we are likely to see collapse with $100 barrel oil.

          (4) The experience in previous collapses. The situation in each of these was a situation of diminishing returns leading to increasing disparity of wages. (With less resources per capita, new workers could not get as good-paying jobs.) Governments found that they needed to provide increasing amounts of services–such as armies to conquer other countries with more resources, and programs for the many unemployed. With common workers earning such low wages, it was impossible for governments to raise taxes sufficiently. The downfall came because governments could not raise taxes enough to pay for the increased benefits required. A recent related post is this one.

          No one has ever disproved the original Limits to Growth analysis of 1972. It looks to me as if we are on the path that it suggested–not the common “peak oil with mitigation” story that is widely believed. The limit in the 1972 analysis was inadequate investment capital (in a physical sense), plus some pollution issues.

        • garand555 says:

          Actually, employment is not coming back. If you plot the employment:population ratio against U-3 unemployment, then plot the labor force participation rate against U-3, you will see a very disturbing trend. The employment:population ratio plummeted after the 2008 financial crisis and has remained largely flat, yet U-3 has continually fallen after it peaked at around 10.5% or thereabouts. When you compare U-3 (or U-6 for that matter, U-3 and U-6 are so highly correlated that I doubt U-6 is measuring anything real,) to the labor force participation rate, you will notice that they are going down almost in lock step. The BLS is simply rolling people out of the labor force for its accounting purposes and no longer considering them unemployed. In other words, they’re out of work, but no longer unemployed. Nice, huh?

          • thestarl says:

            Look at what is currently happening in Australia’s manufacturing sector.The last three carmakers (GM,Ford and Toyota)leaving.Alcoa closing their Pt Henry aluminium smelter,SPC Ardmona closing their cannery,Qantas about to lay off over a thousand more workers,the end of the massive mining CAPEX,Major banks still offshoring the list goes on.
            To make matters worse government budget deficits projected to only worsen unless we take the path of austerity which only feeds into this negative feedback loop but get this the Australian property market is at all time highs?
            This ends badly.

            • It sounds like Australia is having problems not too different from quite a bit of the rest of the world. Low commodities prices are part of the problem, as is the inability of workers with stagnant wages to afford high prices.

        • xabier says:


          (Thanks for your post and comments. )

          And yet in Britain the ‘returning’ employment which our idiot politicians refer to is of a very low quality: increasingly, poorly-paid, inadequate for new household formation and the sustaining of a consumer class.

          Even high salary earners are seriously under pressure if they wish to maintain the lifestyle they and retailers, and their creditors, wish to have – and which their parents enjoyed.

          I’d agree that the goalposts move as costs rise: to the extent permitted by the credit available we get used to increases and changes, adapt to new budgets and change our expectations, but on the whole I’m not quite so optimistic.

          Everything now seems to hinge on the credit that can still be extended to almost every class in Britain. ‘Middle class’ and ‘working class’ seem outmoded to me: the rub is ‘Are you in the ‘credit-worthy’ class?’ When one thinks of the old definition of middle class, (not an economist’s definition but that of the middle class itself, a Victorian definition) which is ‘possessing a freehold property and being able to live of income from capital’, one can see how far things have declined……

          I suspect – from anecotal evidence – at the moment that there is a brief phase of an end to patience with caution and austerity, and that people who have access to credit are saying: ‘To hell with it! The sky hasn’t fallen in, we have to live (go on holiday, buy that new car, etc)!’ Husbands fearing divorce if they don’t keep their wives happy, etc….. there are powerful social pressures which lead to consumption which can’t be afforded.

          Seems very fragile indeed, to me at least.

          • thestarl says:

            This casualisation trend seems to be gathering pace so where’s the discretionary income to drive growth.Extend and pretend.Neo feudalism coming in the not to distant future.

          • Calista says:

            Indeed, my poor husband is suffering under my requests for a cistern, masonry heater, metal roof, the list goes on and on… ;)

        • Jan Steinman says:

          “I personally think self-driving electric cars will be a huge change in technology and society after 2020.”

          Steven, where will the capital come from for the vastly increased complexity required of “self-driving electric cars?”

          In many ways, I could see electric vehicles gaining traction. (Pun intended. :-) They were among the very first “horseless carriages,” and I think the tech of the future is going to look more like the past than it will look like the tech of today.

          But it appears to me that the advances in technology necessary for “self-driving electric cars” stands on the shoulders of all of human civilization. They will require a functional financial system, education system, highway infrastructure, semiconductor manufacturing, etc. — all of which are currently dependent on “non-substitutable” petroleum.

          Until the logistics industry converts to electricity, I don’t see “self-driving electric cars” as sustainable. Until then, it’s high-tech manufacturing is totally dependent on diesel-powered truck transportation.

          Imagine a pyramid that is modern civilization. At the bottom is energy. On top of that, we build our various industrial systems — finance, education, food systems, medicine, etc. At the apex of the pyramid is the most modern, highest technology we have, along with the research and development necessary for future technology growth.

          It seems to me that you are arguing that there will be a smaller “base” on our pyramid. Does that not mean that all the things that sit atop that pyramid must necessarily scale back?

          • garand555 says:

            If anything, we would be going back to steam engines, unless somebody figures out how to make a practical Stirling engine. NASA tried back in the 1980s and had vehicles driving around on them, but then stopped the research. I’m not sure why; if it was an engineering practicality problem, a funding problem or a QWERTY problem. No matter what, in the future, if there are engines, I expect they will be external combustion engines because there is much more flexibility in what kind of fuels you can use.

            I don’t see electric cars taking over simply because of storage issues. That would require an enormous amount of batteries, which means a lot of mining, and there is also the issue of charge times vs changing batteries out. If I run out of juice, away from a source of electricity, I NEED to have spare batteries, whereas with gas or diesel, I need a can and a nice person to give me a ride. Perhaps some kind of electric trolley/train system in urban settings would be doable, but that means that we need a supply of electricity.

            • Jan Steinman says:

              “If anything, we would be going back to steam engines…”

              You mean horses, don’t you? :-)

              I think a lot depends on the rate and severity of collapse. It could be that the stock of vehicles on the planet will leave survivors with spare parts for many years. But I don’t see the mining, refining, and machining capabilities for making new engines of any sort being around for very long.

        • timl2k11 says:

          Steven, you seem to be missing an important piece of the puzzle that will limit future possibilities. Meet Simon Michaux.
          (50 minutes and worth every one of them)

        • Steven….having been impressed by your lecture, I am staggered by the naivety of that comment.
          Surely you can’t have fallen into the ‘technology will save us’ trap?
          We have enjoyed 2 centuries of increasing ‘technology’ which has created our modern world, but there isn’t a single aspect of it that doesn’t depend entirely on hydrocarbon fuelled energy for its existence. Energy =Technology, that equation cannot be reversed.
          Can you visualise the complexity of self driving electric cars? A concept so staggering as to defy belief when related to our oncoming energy crunch! A human being is basically a means of converting raw fuel (food) into energy output. We do it at a fantastic level of efficiency. A self driving car would have to replicate that, just where do you imagine that energy replication will come from…solar panels on the car roof? That’s before we get to the onboard computers necessary to do it. Or the complexity of the factory system necessary to make it.
          You point out, quite rightly, that rises in GDP etc coincide exactly with increases in miles travelled, You point to big changes being inevitable, then fantasise about society continuing on wheels so that our motoring habits continue to form the driving momentum of an industrial society —all we have to do is go on making things with wheels on! Unless you fantasise about anti-gravity too and dispense with wheels altogether?
          We all know what happens when you drive around in ever decreasing circles.
          We got into our fine mess by replicating human effort by mechanical means, (via heat) then magnifying it by factors of hundreds and thousands to produce 6bn people too many.
          Only coal oil and gas allowed us that privilege, and for a short time—until those fuel sources run out. We are burning 200m years of stored fuel in 2 centuries…and there are no substitutes. You should add a blindingly obvious point to your next lecture, that you cannot make anything without heat.
          Our society functions by making ‘stuff’, and stuff needs heat to manufacture it. The ‘wealth’ of the last 2 centuries came solely from digging fuel out of the ground and burning it. But we insisted on calling it GDP. But when that stops, the wheels come off our industrial society and those 6bn people will be left with no means of support. They will not survive by taking in each others washing and other modes of fantasy employment.

          • There are a lot of “peak oilers,” Steve included, who think that a decline in oil supply will not be a problem. We just move on to other forms of transportation. I agree with you though, that the issue is maintaining the whole web that allows for today’s technology.

        • John Dunn says:

          @ Steven Kopits
          “We will get used to whatever energy budget we have. Look at Britain. Productivity has taken a hit, but employment is coming back. We will get used to less oil.”
          I and many people I know, here in Britain have ‘voluntarily’, halved our personal travel cars. Yes there are jobs being created, but many are zero hours contracts. i.e. no fixed hours, but waiting for a phone call for a day, or weeks work.
          People are digging into savings for purchases, because there is no interest on savings, and there is a tacit fear that bank savings are not as secure as we had been led to believe 10 years ago.
          A Personal Protection Insurance scandal here in the UK, by many financial services, has paid out compensation to thousands of people who have in the last 2 years found themselves with a ‘windfall’, of £ 5000 on average. ( some are even suggesting that these windfall payouts are part of the reason for the UK recovery ).
          So when you say, we will get used to less oil, I say yes we are, but up to present we are basically eating into the easy ‘fat’.
          It’s the next step down, when the fat has been used, that we need to worry about?

          • Thanks for your on-the-ground view.

          • Jan Steinman says:

            “We will get used to whatever energy budget we have.”

            Ugo Bardi notes that Italy is now getting by on the amount of oil they used in 1967.

            That’s both encouraging and scary. “Encouraging” that a modern industrial country can even survive on an energy budget of nearly 50 years ago. “Scary” in that this has happened so quickly to a modern industrial nation.

            • Paul says:

              Amusingly I saw an article the other day about how Americans are FINALLY becoming more efficient users of energy — utter bs of course — unless you count not having any money to pay for gasoline becoming more energy efficient.

              When energy use does not grow neither does the economy (although QE can mask that for awhile)

  21. Stilgar Wilcox says:

    Gail, I watched the video presentation. Here’s my question: If oil price is not high enough to reward exploration with increased production to satisfy investors, causing a hiatus in exploration (and selling of assets), won’t that lead to reduced supply, which will in turn cause higher prices for oil due to scarcity, and at say 125 a barrel once again provide incentive to drill?

    Or, is it a case of oil sitting in a tight price zone due to an overall weak world economy, so that if oil price does get pressure to rise from reduced supply, all it will do is reduce demand? I’m leaning towards the 2nd scenario, but I’m interested on your view.

    • Since 2005 conventional has been declining by around 6% pa
      Oil skyrocketed to $147 in 2007
      Triggered 2008 financial collapse
      As demand crashed, so did price of Oil to $37pb
      ZIRP & QE went into overdrive financing, well everything! including LTO (unconventional) projects

      Oil then climbed back up from $37pb in 2009 to $102 WTI Crude & $110 Brent in 2014 300% increase < 5 years

      Contrary to the MSM/political recovery bullshit, we know there's sustained demand destruction happening throughout the West as people become poorer and the middle classes are being wiped out, so this sustained demand destruction must be absorbing the shock of rapidly rising prices

      Developing nations still get greater bang for their oil usage so their economies will continue to grow

      Between 2015-2020 LTO increases in production will fail to keep pace with conventional declines that I mentioned at the start. As soon as that rubicon is crossed demand will outstrip supply and prices will rise again triggering the next crisis, terrifying everyone to pieces leading to the next crash in price.

      Basically the SHTF between 2015-2020 as we stare into the abyss and take our first leap into the unkown (right hand side of the Peak Oil curve)

      Just expect to see a lot more civil unrest, war, chaos from 2015 onwards

    • The catch if oil prices go up again is that they sink the economy. In fact, the economies of the developed countries are already pretty much sunk with $100 barrel oil–it is just Quantitative Easing that is hiding the problem. The price can’t go up and stay for any reasonable length of time.

      You are right. If the price does go up, it will very quickly reduce demand. This is what will sink the economy. So we either get reduced supply, and a contraction of the economy because of that, or higher prices leading to reduced consumption, and a contraction of the economy. The fact that there is all the debt outstanding makes the situation worse.

      • Stilgar Wilcox says:

        Thanks for your reply Gail. As I suspected, it doesn’t matter what we do now it will lead to economic contraction.

    • Steven Kopits says:

      That’s a great question.

      We have at least three differentiated influences on supply: rising costs and deteriorating economics for the IOCS, which in principle should reduce supply; rising costs and deteriorating economics for the limited access NOC countries (Mexico, Russia, Argentina, Venezuela, et al), which should lead to increased supply (or at least access); and shales, in which I would normally defer to Art Berman–does anyone really know what its long-term economics and prospects are?

      Reduced supply should lead to increased prices, but probably not sufficiently great to overcome increasing E&P costs. This is an issue amenable to quantitative analysis. I’ll put it into my deck of analyses to be completed.

    • garand555 says:

      Perhaps if wealth and income inequality were not as bad as they are now, $125/bbl would be something that we could handle, but back when things were better, $147/bbl nearly brought the country down. We’re a lot more fragile and an lot fewer people can afford gas at today’s prices. Employment is down to 58.8% of the US population being employed as of Jan, 2014 from 63.4% in December, 2006. Low paying part time, rather than well paying full time jobs are on the rise. In short, there is a lot less discretionary income to go around, unless you are rich. $125/bbl will raise prices on just about everything in our globalized economy, putting a strain on people who are living paycheck to paycheck. The consumer base simply is not there to support $125/bbl for any appreciable amount of time. So, yes, they might start pulling more oil out of the ground for $125/bbl, but when people aren’t buying things because jobs have gone away due to the higher costs, further hurting the consumer base, who are they going to sell that $125/bbl oil to?

      BTW, Mr Kopits, since you are on here, let me say that was a great talk. I love it when people bring hard data to the table. Would you agree that your point regarding supply-constrained forecasting is another way of saying that economists are not including resource scarcity into their models?

  22. Rick Larson says:

    I believe Kopits was optimistic to think equity firms will buy the assets of the oil companies (I assumed not the oil production going forward), but what will any buyer do with these assets as the capex continues to widen and oil production declines? It is a losing proposition.

    • Agreed. What is the time marker when he talks about this? I know I heard it the first time, but when I was listening to sections later, I couldn’t find it.

      • Robin Clarke says:

        The selling and hoped-for buying of assets (by China and Rosneft) are mentioned in the questions session at about the one hour mark. That’s probably why you couldn’t find it in the lecture per se.

      • Robin Clarke says:

        As for what happens to assets not easy to sell, my own locality gives an answer. Birmingham was once “the workshop of the world” and “city of a thousand trades”. But the ubiquitous “Made in England” has now been replaced by “Made in China” and streets that were hives of industry for a century are now deserted. Many of the factories have been converted to residential or leisure use (e.g. The Custard Factory), or more recently to indoor car parks. The remainder just sit empty because few entrepreneurs see UK competing adequately with China where labor/environmental regulations and pay are so much lower.
        Meanwhile the old (1768-72) and new (1826-1838) mainline canals, which were the “motorways” of the beginning of the global transport and industrial revolution, are now just “heritage” gimmicks for leisure boating and supposedly stylish city living (like canals in Venice or Amsterdam)(though also nice off road bikeways). Ironically these canals, which were originally fossil-fuel free (though actually used to carry coal) no longer allow horse-drawn barges but instead have smelly noisy oil-powered chuggers instead – so much for “heritage”!

        • We have lots of empty downtowns across the United States, filled with crafts people have made and other fun little “gift” stores. The major stores have moved to the edge of town, and are now part of huge chains getting goods from China. People need cars to get to them. Factories are mostly gone, moved to China too.

    • Steven Kopits says:

      The buyers for assets have recently been primarily Middle Eastern–Kuwaitis, Qataris and the Emirates. The assets being sold are concrete and specific. They are amenable to valuation and therefore a transaction. That’s not the issue.

      The issue is that the value of an asset to a strategic player should be greater than that to a financial buyer. Thus, Shell’s share in Wheatstone should, in principle, be more valuable to Shell than to, say, KKR. For now, we have quasi strategic buyers from the Middle East. However, if the oil companies decide to continue dumping assets–and I think that’s likely–then the first round buyers may discover that they have overpaid, on the one hand, and that they have a finite appetite for IOC divestments, on the other. If the Chinese or other oil companies don’t step in, then the IOCs will have to sell to financial investors like KKR, TPG and other funds who can move billions at a time. And they will have to sell them for less than the oil companies think they’re worth. Some oil companies are ahead of the game: BP, due to Macondo; Conoco (due to my visit there? maybe a bit); Hess (savaged by Elliott Management); and now, Shell. Expect Chevron and Exxon to wake up to this game late. They’re most likely to be caught out.

  23. Paul says:

    Great article — what I am left wondering is:

    Once investors realize the ROI is no longer there will they rush for the exits unloading Big Oil shares which of course would collapse these companies and the age of industry is effectively over.

    The central bankers and world leaders would have been aware of this issue years ago — I believe that the primary purpose of QE and ZIRP were to ensure that capital was available to flow into continued oil exploration to kick the can — I also believe the non-stop drum pounding by the MSM that fracking would save the world is also part of a coordinated effort to get hot money into that scam…

    If the above are true — is there anything more that can be done to kick this can any further?

    Are there any more creative ways that central bankers can delay this collapse? I hope so – but I doubt it.

    When I read this article I am convinced that we have perhaps months – no more than a year or so — before things unravel.

    And I am also convinced that the unraveling will be like splitting open a golf ball — fast and furious — when the big money moves there is not stopping the stampede.

    The only way I can see this being delayed is if the big money is told that they MUST stay in no matter what the ROI is — because the moment any of them makes a move — the world as we know it – ends.

    • I don’t know if there are any more rabbits that can be pulled out of hats, in the financial world.

      I think that part of what keeps things hidden is each sector’s lack of knowledge of the other’s goings ons, and their effects, and the willingness of people to believe the happy stories they are told.

      The big money investing in oil companies is pension funds. In fact, pension funds are the big investors in practically all kinds of stock and bonds. Ultimately, we know that the value of paper investments has to converge to what they really can buy, in a world with shrinking resource extraction–in other words, not much. But a person would like to delay this day as much as possible. A lot of how this works out depends on how well governments hold together.

      One ironic thing is that Steve Kopits was laid off from Douglas Westwood, not long after he gave his presentation. His office is being closed, for lack of business. I suppose oil company cutbacks hit all areas, including consulting services.

      • garand555 says:

        “I don’t know if there are any more rabbits that can be pulled out of hats, in the financial world.”

        I don’t know if it will actually work, but continue to taper -> crash stock market -> money floods into the “safety” of US Treasuries -> stampede wears off and retirement accounts are seized. Somewhere in there, QE gets ramped back up to save the banks when the shadow banking system begins to unwind again.

        Combine that with massive government subsidies, and that is the last rabbit. It may be a dead and decaying rabbit, however. I’m bracing for food price shocks sometime between this spring and fall, given the low cattle herds and the drought in California, and we all know what food price shocks can lead to. Add to that retirement accounts getting wiped out, and the end may be civil unrest, American style.

        • Maybe your list of additional steps would work. The “safety” of US Treasuries is something it is easy to forget. Maybe you could get a job in Washington DC, fixing the situation.

        • xabier says:


          Sounds like the rabbit my dog was running around with today: a stripped carcase, fairly rotten but it kept him happy for a bit. We live in the age of short-term expedients.

          I suspect we can take some food shocks: they will undoubtedly hit the very,very poorest, but the majority will not be so distressed as to riot.

          Credit is still allowed to them, after all……..

          And in Britain: rain = no riots, you can bet your last dollar on it!

          • the police call rain P C Rain—it does their job for them

          • xabier says:


            The only dangerous time in Britain is a very, very hot and dry August/September, allowing those who might riot or join in to loot, to get tanked up out of doors on beers and cider (from about 8am, as far as I’ve observed…..).

            A substantial rise in assaults and robbery is of course possible as a consequence of economic distress in any season.

            • gepay says:

              there were riots in London and elsewhere in England not all that long ago – 2011 – These were just from what that Russell Brand talked about in his interview saying why he didn’t vote – had to do with his perceptions growing up about how the system only cared for itself.
              In the US it will be far worse as there are magnitudes more guns unless the contrails conspirasists are correct and Americans are as chemically sedated as they are acting now.
              What I have noticed is an economy only grows 1-3 % in good years – add in something like converting to fossil fuels (and a workable national policy – Japan 1965-85 and you can get 5-10% (China recently) for a decade or two. Then things level off and you are back to 1-3 % sustainable. You can have special situations like the US after WW2 with the only fully intact industrial system left functioning so 5% was sustainable til about 1970. Of course the US blew this golden egg on Empire, things like the Vietnam War, and the Cold War. Then the government and/or the financial segments use funny money schemes to ramp it up – the bubble and bust system now being used. The elites are never satisfied with their wealth growing 1-3% a year.

        • Ukraine is a top producer of corn and other grains that thicken the plot.

      • Jan Steinman says:

        “The big money investing in oil companies is pension funds. In fact, pension funds are the big investors in practically all kinds of stock and bonds.”

        So how long before pension funds, caught in the pincer of collapsing returns and baby-boomer retirement demands, start to fail?

        • We have the Pension Benefit Guaranty Corporation to guarantee our pensions up to a certain level–$35,000 a year comes to mind–in the US. Of course, there is virtually no money in the PBGC. It would have to be the US government attempting to guarantee everything.

          We are already starting to see some pensions fail. Detroit has some that are going through the Detroit bankruptcy for example. With the federal government guaranteeing banks as well, and bailing out insurance companies, it seems like everything fails at once.

      • Information, rather than being shared, husbanded and used to improve, is used as a weapon in wars of finance, economic and political power. In the end we are damned by our childish, egotistical regard for the power of information. That is the story that, were there remnants left to tell it, survives the other narratives of gold and oil as the agents of our demise.

    • Dave Kimble says:

      Craig Collins suggests the next stage will be “catabolic capitalism”, see

      Paraphrasing, as companies weaken and go under, predatory investors take advantage of fire sales, restructure to ditch manpower, lower wages, reject responsibility for workers’ retirement funds, etc. Any federal/state/municipal government controlled enterprises/services get privatised and given the same treatment.

      Of course this doesn’t solve the problem, but Capitalism eating itself up theoretically could make things last a bit longer. It ends when the people are so alienated from “the good times” that they rise up in revolt.

    • Robin Clarke says:

      “…they rush for the exits unloading Big Oil shares which of course would collapse these companies…”
      Does that make sense? Surely if the shareholders sell for a lower (or zero) price it’s just the shareholders that are burnt. Isn’t the causality the other way round, that a collapsed business lowers the share price rather than a collapsed share price lowers the company?

      • Dave Kimble says:

        The share price multiplied by the number of shares is the company’s market capitalisation, and that is what is used as collateral to get loans. So if the share price falls, the company cannot get a loan, and indeed their existing loans can get foreclosed.

        Usually capital-rich predators then launch a take-over and restructure, but if the problem is fundamental, like energy shortage, no rescue is possible.

        • Robin Clarke says:

          Thanks for your clear explanation. I guess there is consequently a positive feedback vicious circle, with weak fundamentals causing weak share price and vice versa. Which would tend to “weed out” the weaker from the stronger. A question then becomes of how many shareholders persist in a notion that oil companies are here to stay anyway. Many people are incapable of “paradigm shifts”, let alone if they have their “wise” investments bound up with them.

  24. x236k says:

    Not sure I get it all right… Capex and Crude Oil Production: CAPEX $262 bilion, yearly crude production: 14*365 = 5,1 bilion, therefore $51 per barrel produced..? If so, how is this in line with E&P Capex per Barrel @ $20/barrel?

    • Each of Steve’s exhibits has a slightly different caption for what he is looking at, making it hard to compare one exhibit with another. I should have put exhibit numbers on these to make it easier to identify which is which. I would have to try to work backward myself, to figure out what is happening. Some exhibits include the National Oil Companies –most don’t. Some exhibits include all Independent Oil companies, some include only “Majors”.

    • Steven Kopits says:

      The capex number is from Barclays. I think the trends are more important than the levels for purposes of this discussion. Notwithstanding, this is one of complexities of understanding these sorts of presentations. Often numbers don’t quite mean what you think they do–and that’s something we struggle with as well.

      For a flowing million barrels of capacity, the current capex numbers would be $130-160 bn in the Gulf of Mexico, and around $120 bn for shales (if I’m reading my Pioneer numbers right). For Saudi, it’s probably around $40 bn for a flowing million barrels of capacity.

      By such a measure, we would expect $262 billion to represent perhaps 1.5 mbpd of increased capacity (gross), bearing in mind that much of this spend in on maintenance capex, not new projects. Don’t know if that helps.

      • I imagine that the recent difficulties in the Arctic suggest that the cost per flowing million barrels of capacity is even higher than $160 bn.

      • x236k says:

        It would be extremely interesting to see the project related data. Based on what you say, and assuming 10years production period (therefore depreciation period), it requires per barrel $36- $44 for the Gulf, $33 for shales and $11 just to depreciate the project related CAPEX.

  25. etfideas says:

    Really an eye opening presentation.

    There’s one thing I don’t clearly understand. It mentions Petrobas need $150 per barrel to be profitable. But I’ve checked in Yahoo Finance, and although the stock has been tanking for several years so something must be very wrong, the company is still profitable.

    • There is a difference between “accrual” and “cash” accounting. Financial statements are set up on an accrual basis, which is the normal approach. I’m not sure of the details, but it generally doesn’t charge for all of the expenses–they will benefit future production, so should theoretically should be put against that income, not today’s income. The catch is that that income may never come along. A company that is trying to ramp up production may have huge expenses. In fact, that is pretty much the problem. And the future flow may not materialize as planned. The cash flow method of calculating needed revenue very much hurts companies that are trying to ramp up new production.

      • Jan Steinman says:

        Accountants are like economists — they can give you any answer you want! At least, for a while.

        Accrual accounting bites back eventually, when you have to “write down” expenses meant to accrue against earnings that never happen. That is when the wildcat fracking companies will go bankrupt. (Of course, their principals will be just fine, unlike their shareholders.)

        I think the “when” of sunk-capital-cost write-down has to do with the depreciation rate of the asset. Usually, companies try to accelerate depreciation, to offset current earnings. I don’t know what happens if they choose to instead drag out amortizing sunk capital costs.

        I imagine the SEC has something to say about that. A few minutes of googling didn’t tell me anything. I’ve never been in such a position, and always tried to depreciate sunk capital costs as fast as possible (to minimize taxes), but I can see in this case the incentive to do otherwise.

    • Steven Kopits says:

      The financials of Petrobras are highly influenced by the retail price of gasoline and diesel in Brazil, which is set by the government, and generally at loss-making levels for Petrobras. Thus, the Goldman analysis shouldn’t be over-interpreted for Petrobras as reflecting only upstream realities.

      Petrobras’ pre-salt discoveries are considered among the lowest cost oil for the IOCs, not because they’re particularly easy to produce, but because the reservoirs are exceedingly large, and therefore the unit costs are hoped to be low.

      In any event, Petrobras should not be automatically grouped with, say, Shell or Chevron. The drivers of its financials are quite different and heavily influenced by government policy to the downside, but with truly impressive field potential, on the other.

  26. Jan Steinman says:

    This explains why the majors are not playing with tight oil.

    But the question remains: who is financing tight oil, and how long can that continue?

    I’m guessing wildcatters are driving tight oil with Other People’s Money, paying themselves handsome salaries and bonuses, knowing full well that bankruptcy is in the future, and that the shareholders will be left holding the bag.

    • Wall Street (aka the Fed) is being used to finance tight oil. In the end I expect to see most of the states financial resources being diverted into last ditch desperate attempts at extracting energy at the expense of many other less vital industries.

      When you look back (if you’re still alive) Their efforts will be miniscule when you think of the sheer magnitude of the deflationary forces (Phase 3) we will have experienced.

      Phase 1 – 200 years growth
      Phase 2 – 10-15 years plateau
      Phase 3 – 100 years decline

      Nature will wipe out man’s arrogance.

      • Lizzy says:

        Oh, come. It’s not ‘arrogance’. It’s hoping against hope and it’s ignorance and it’s helplessness. What else to do? We’re not all bad, we’re people. Such stuff as dreams are made on.

        • xabier says:


          I’m with you there: most of us are like the Welsh hill farmer in the poems of R S Thomas ‘living a life he didn’t ask for’ and struggling.

          Living like any other animal, in fact.

          Heedless, maybe, but not arrogant.

          • Lizzy says:

            Yep. Beautifully put, Xabier — I’m going to write that down.

          • Heedless… Have you ever listened to Ben Bernanke at the Fed? It’s as if mankind created the earth and laws of physics. Arrogance is an understatment.

          • Dave Kimble says:

            What Bernanke says publicly and what Bernanke believes are quite different things. Same for all politicians trying to keep the dream alive.

          • p01 says:

            Not arrogant, but extremely intelligent. And intelligence makes stories. Stories are used as bypass mechanisms for energy usage, that no other animal on the planet has.
            So, humans (arrogant or not, irrelevant) use stories to fool themselves with debt that they will all go on the deck of Starship Enterprise (or at least in the living quarters, making bip-bip with the phasers.. Or in the Galactic empire. Or variations.
            Others fool themselves with becoming trees, singing with angels, or having 70-something virgins.
            Frankly, I don’t know which one is the most ridiculous at this point.

            • Jan Steinman says:

              “Others fool themselves with becoming trees…”

              That would be attractive… if all humans became trees!

              But if just one mating pair of humans are left, the trees will not be safe.

          • p01 says:

            BTW, congratulations, Gail!
            You have been linked in the comment section on Slashdot a few days ago (+4 insightful).
            Whoa, you should see the comments on the link! Phasers on stun on all who dared to question the Church of industrialism!

          • thestarl says:

            Australia’s treasurer Joe Hockey has the look and sound lately of a very worried man and its worth remembering that he is married to an investment banker who works for Deutch Bank (leveraged at 65:1).Must be some interesting pillow talk.

        • timl2k11 says:

          But there is still plenty of arrogance.

          • xabier says:


            Well, yes, I do agree there is quite a bit of arrogance around: I think we can say that of many educated people and above all scientists (thinking back to the my fellow students in the hostel in the old days) and of course those crass and puffed-up bankers – but then isn’t it also a kind of heedlessness, ie not being fully tuned in to what this world really is?

            But mankind as a whole arrogant? no, just getting by…. If we are going down to the dark places, we might try to like ourselves just a little!

            Perhaps the word is ‘fantasists’?

            Maybe 1800 to 1970 was ‘The Fantasy Realised’?

          • timl2k11 says:

            “heedless: showing a reckless lack of care or attention”
            “arrogant: having an exaggerated sense of one’s own self importance”
            I don’t think being “merely” heedless is any better than being arrogant. As a scientific minded person, I do not understand your argument that scientists are arrogant. I think having the ability to have knowledge of the world through experience (this is what I think of as “science”) is not at all arrogant. But surely here my bias shows, although I am not a scientist proper, I am science minded, and it seems the scientific method has shown to be a much better way to evaluate reality than religion.
            Some scientists are arrogant, no doubt, but I don’t think their arrogance has anything to do with science.

          • xabier says:


            I’m science-minded too, but I suppose i’m referring to the arrogance of narrow and over-cultivated intellect, which leads to a kind of conceit and arrogance: I often observed this among fellow students – I studied at Cambridge, so there were lots of scientists and mathematicians around.

            But anyway, it’s a side-issue here!

            We are simply, most of us, most of the time, fools, and our collective folly will do us in, I’m quite sure.

    • cassandraclub says:

      Tight oil is financed out of thin air. The investment-capital leaking down from the FED’s QE-programs goes straight to the small oil- and gascompanies operating in tight-oil and shalegas.
      Shareholders no nothing about the physical reality of unconventional oil and gas and believe the Saudi-America stories. It’s a Ponzi-scheme, a carbon-bubble. They will never see a decent return on their investment..But no one really cares, because it was all excess capital handed out by the FED.

    • Paul says:

      I reckon fracking works on this formula:

      > engage a PR firm to create hype that fracking is the next big thing – don’t miss out!
      > print trillions so that there is plenty of capital available — at low rates of interest
      > big chunks of that get scooped up and poured into fracking as institutional investors ride the hype wave
      > retail investors get wind of this ‘great opportunity’ and pour in
      > big oil remains mostly on the sidelines after realizing this is a hype wave — that will crash on the rocks. They confirm this after getting burned dipping a toe or two in the fire
      > this is a massive bubble/ponzi scheme that will shatter into a million pieces at some point

    • There is a combination of investor who are willing to buy shares in these small companies, and a lot of debt. If what Art Berman is saying is right about length of life of wells, and the concentration of oil in sweet spots, there is a lot of creative accounting in the financial statements as well. The companies, with ultra low interest rates and creative accounting, look like they are doing well on an accrual basis. But when Shell bought some of this acreage, they quickly wanted to dispose of it.

      A lot of the reports seem to show profits on a partial basis–total revenue, but only part of the expenses, so things look better than they really are.

  27. Another blistering article Gail.

    Peak Oil (the maximum rate of petroleum extraction is reached) is now set in stone. The projected total global decline in 2015-2020 is looking more and more accurate. The more vulnerable economies are already collapsing from within. M. King Hubbert was close to being right all along. Again Peak Oil has nothing to do with reserves in the ground but everything to do with rates of extraction.

    Overt zero sum politics will rise as weaker states with resources or vital strategic interests get gobbled up. Powerful elite leaders with axes to grind will without question start to destabilize competitors. Ukraine anyone?

    More powerful/organised states will seek ways to bring other competitors down first. The weaker more vulnerable states will start to collapse. We’re seeing it already around the world.

    Western politicians are always talking about win/win but we know they’re covertly fighting for zero sum. Others powerful states are quite comfortable stating their zero sum objectives.

    The US has already announced it will reduce its land based military down to that of pre WW2 levels which is an open signal to those with zero sum aspirations around the world.

    Finally “Food Security” will become a single greatest challenge. We need to produce more food in the next 30 years than we’ve done the last 10,000 and do it sustainably, collaboratively, intensively.

  28. The Goat says:

    Shell has just sold its Geelong refinery 870 fuel stations Australia wide its share in the Wheatstone LNG in Western Australia and has decided to not construct its Arrow energy LNG plant on Curtis island in Queensland.

  29. Paul says:

    BP’s Earnings Decline 25%
    Refining Margins Fall, Income Drops Following Asset Sales

  30. Major oil companies selling assets. Just happening in Australia.

    Geelong refinery sold as Shell’s oil production continues to decline

    Sydney’s Caltex refinery is closing this year. When this was announced, the Caltex chief executive assured that Sydney’s growing demand will be met by fuel imports from Chevron. But their sales are in long term decline.

    Chevron’s oil production, sales decline by 5%

    Now we read:

    Caltex profit bounces back after restructuring costs hit previous year’s result
    Fuel supplier Caltex says there is no issue with Australia’s fuel security, after it announced a massive profit surge and a takeover of a rival fuel transporter…..
    “I think the supply chain into Australia is very strong and this has been proven time and time again during very severe weather events, I think the industry has proven that it’s very resilient,” he said.

    Not so, according to a report commissioned by the NRMA, called Australia 2030: Running on Empty, which says Australia’s fuel security is at significant risk.

    NRMA director Graham Blight says the point of the report is not to scare people, but to point out the facts and get a national discussion happening.

    “Australia’s dependency on imported fuel and oil for transport has grown by more than 30 per cent, from 60 per cent in 2000 to 91 per cent in 2013, and we are approaching 100 per cent dependency on imported transport fuels,” he said.

    However, Mr Segal says this is not a concern.

    The NRMA is Australia’s leading Roads and Motorists’ Association. The report is here:

    Long live the debate….

    • Thanks for the additional Australian information!

      • Steven Kopits says:

        Thanks, Gail, for posting my presentation.

        I respond to some of the commenters below.

        • Ikonoclast says:

          The short story is that Australia now imports about 90.5% of the refined product (gasoline, diesel, avgas etc.) that we use.

          At the same time we produce about 40% of the crude oil we use. This means 60% of the crude we use is sourced elsewhere (Asia and M.E.) refined in Singapore and sent to us as refined product. At the same time, we clearly refine a quarter of our own crude (1/4 of 40%) and send 3/4 of our crude (probably to Singapore) to be refined and sent back. At least, that is what I think from the figures.

          Australians are blissfully ignorant of the dire implications of this situation in a world of constrained oil production. I have tried to raise this issue on Australian economic blogs and garnered 0% interest. So Australians don’t know and don’t care. (A very common national characteristic unfortunately.)

          People might point to Japan’s economic miracle (about 1945 to 1970) and the fact that Japan did well while importing all its oil. That was all fine and dandy in a world of unconstrained oil supply. Matters are very different now. Energy independence will be needed on a national basis as international trade in energy fails. When food and energy (two key necessities) get short, nations will hoard what they need for themselves. World trade will plummet.

          • thestarl says:

            I hear you loud and clear Iconoclast and not only is this of great concern but also our exposure to the dire implications of the Chinese credit bubble.

    • Dave Kimble says:

      NRMA’s figures on Australian dependency on imports is a highly contrived argument, although the overall situation is indeed not good. BREE data for 2013 shows Australian refineries produced 48% of the diesel (distillate) and 80% of petrol (gasoline) sold in Australia. Admittedly a lot of that was from imported crude, but Australia exports 80% of its oil, and that fact is completely ignored by NRMA. Even then, I cannot find where that 91% figure comes from.

      • Ikonoclast says:

        Dave, Australia imports about 90.5% of our refined product use (gasoline, diesel, avgas etc.). That figure is correct.

        However, our refined product use can be imputed to 40% Australian crude and 60% overseas crude. All or much of that overseas crude is refined in Singapore. Also, it seems from our figures that of the 40% of our own crude we refine about 10% ourselves and send the other 30% O/S for refining.

        In a nutshell, we are 40% self-reliant in crude but only about 9.5% self-reliant in refined product. The story gets worse than that. Our oil wells are dwindling rapidly and our use of refined product is increasing rapidly. By 2020 we will only be 20% self-reliant in crude. Our domestic crude oil fractions are light too so they don’t deliver any diesel.

        That BREE data has to be wrong or misread. I have checked two other sources that back up the NRMA data.

    • Bullwinkle J Moose says:

      The senior ministers in the Australian Government have sawdust between their ears.

      It is difficult to see how the G20 is even going to maintain the current growth target, let alone achieve a higher one as suggested by (sloppy) Joe Hockey.

      I am now likening the current situation to the titanic piling on more coal as it heads into the ice field. Very few are looking out the front, most are dancing a merry jig down below and the Australian government has set up on the rear deck where they know they won’t see any icebergs.

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