Reasons for our Energy Predicament – An Overview

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system. 

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and services affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transport food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energy in 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

Figure 1. Average weekly West Texas Intermediate “spot” oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30’s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply 
  3. GDP growth 
  4. Wage growth
  5.  Debt growth 
  6. Growing government programs 

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

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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434 Responses to Reasons for our Energy Predicament – An Overview

  1. mago says:

    bassi prezzi del petrolio comportano per le big oil riduzione di investimenti nelle ricerca ed estrazione, quindi penuria. Alti prezzi contrazione economica, crisi e minore richiesta. Mi sembra non ci sia possibilità di crescita futura. E nemmeno di poter mantenere a lungo il welfare attuale.

    [Translation from Italian by Google: Low oil prices pose to the big reduction of investment in oil exploration and extraction, and shortages. High prices the economic downturn, crisis and reduced demand. It seems to me there is no possibility of future growth. And not to be able to maintain long-welfare today.]

    • Interguru says:

      Google Translation

      low oil prices pose to the big reduction of investment in oil exploration and extraction, and shortages. High prices the economic downturn, crisis and reduced demand. It seems to me there is no possibility of future growth. And not to be able to maintain long-welfare current

  2. x236k says:

    I believe points 2, 3, 5 and 7 are a bit misleading. The drivers behind all of these are capital and EROEI. “Money” as we know it is simply a distribution tool, so then any issue with it can damage our ability to get energy, but can hardly be a root cause of our energy problems.

    • The issue at hand is diminishing returns. Falling EROEI is a measure of diminishing returns.

      I am looking at how diminishing returns affect the economy. Money is more than a distribution tool; it is what allows us to have long supply chains, and to bid up the prices of some goods to high enough levels to get them out using our economy that we have put together for this purpose.

    • Niels Colding says:

      No, if you go to the root of what money is you will see that money is a claim of energy; ,money = energy

      • The view that money is a store of value then only makes sense if money can, over time, continue to be a claim on the same amount of energy. This becomes increasingly difficult in the time of energy limits.

      • I think most agree that money is power. Energy comes before money – because “money” whether paper, gold or services traded, is required to sell the energy. Money is only a liquidity conduit – to allow value to be exchanged between things and services.

  3. Dave Kimble says:

    From this nice clear explanation, it ought to be possible to construct a computer model like “Limits to Growth” (but hopefully simpler, since it’s more focussed) and prove the system must fail. Population must fall to “sustainable levels”, and will overshoot that level at first. Then we will be in a position where living sustainably will look like heaven, instead of the wretched hell it looks like now, from the peak.

    • SourabhJain says:

      Dave,

      I totally agree with you. I think the lack of mathematical models describing our dependence on oil or cheap energy is making it very difficult for many people to grasp limitations to growth. So far, on all the blogs the issues of peak oil, capital, and EROI are discussed qualitatively. Therefore, it becomes easier for people to just discredit or at least disagree with certain facts, as they consider those qualitative argument still just opinions.

      Unless we show through models that system will fail, we cannot expect any action from either people or government.

      ~SJ

      • Harry says:

        Infinite economic growth is not possible on a planet of finite resources. The fact that this ineluctable logic still flies over the heads of the vast majority leaves me with little faith that mathematical models will help. The 10.9% annual increase in the oil majors’ capex costs discussed in Gail’s previous post is clearly not sustainable. The falling profits of BP, Chevron, Shell, Exxon et al are making headlines in the business news. If TPTB haven’t joined up the dots yet I fear they never will.

        • Stilgar Wilcox says:

          “The fact that this ineluctable logic still flies over the heads of the vast majority leaves me with little faith that mathematical models will help.”

          Agree absolutely. People will listen, but the problem is they interpret information through a positive filter relative to themselves. They view their life as only getting better, not worse. If they don’t like information they simply change it. For example when my wife and I see a movie and she doesn’t like the ending, she changes it in her mind and tells me the new ending. She’s a cornucopian (bless her heart), so although I understand peak oil but I’m not allowed to talk about it because it’s too negative. This response pattern I think is the problem, not how information is provided.

          The same situation comes up in AGW discussions, suggesting if we could just present the information better maybe the deniers would understand. No, they get it completely but just filter it to meet their personal needs of a better future for themselves. It’s self-involved, narcissistic, infantile, but a lot of what occurs at the adult level is extremely immature, so it shouldn’t be a behavioral surprise.

          • Harry says:

            The denial mechanisms are powerful indeed. I keep returning to sites like Gail’s in part to remind me of the reality of our predicament. The familiarity of my workaday life always threatens to lull me back into complacency.

          • dashui says:

            On the other hand, Mr. Wilcox, if your wife was more realistic she wouldn’t be your wife, would she? ;)

          • Paul says:

            Not many people can handle the implications – so they grasp at anything – usually the anything is that ‘technology will save us’

            I had this discussion with my brother recently and he was initially staggered when I presented the facts – I could sense that I did break through the cognitive dissonance for a moment – but he regained composure and suggested a solution would be found perhaps at the last minute.

        • Paul says:

          And even when the SHTF they will still disagree that the cause is Peak Cheap Oil (Peak Cheap Resources).

      • @SJ
        “Unless we show through models that system will fail, we cannot expect any action from either people or government. ”

        What you formulate was exactly the argument made 40+ years ago by the club of rome and the “limits to growth” studies.
        Since then, the mathematical models exist, but are ignored or denied anyway.

        • It is very hard for governments to do very much. Cutting back on energy use doesn’t work. Making plans for resettlement might be helpful.

          • Harry says:

            Gail, forgive my nosiness but have your opinions ever been solicited by anyone with the power to shape or influence government policy?

            • Not exactly. I was involved in a “Symposium” at the Naval War Academy back in December 2010. The head of the Academy was interested in Peak Oil, and wanted to know what kind of “war games” the navy should be putting together, to simulate the effects of Peak Oil and various other potential crises coming up. (I remember mentioning over dinner that budget cuts might one kind of result.) There were other experts at the Symposium–one was an expert on loss of fish in the ocean; another was on climate change.

              My recent meeting to Stockholm related to some research related to the UN Rio + 20 conference. The person who invited me was Anders Wijkman, co-president of the Club of Rome. He is a reader of Our Finite World. He is in a position to influence thinking, if not government action.

              We know of course that Robert Hirsch (author of the so called Hirsch Report) did consulting for the US Department of Energy with respect to Peak Oil back in 2005. And I have seen recent presentations that Steve Koptis has done for some government (legislative) groups.

          • Paul says:

            I think the last chance we had to ‘do something’ was prior to the green revolution. When we started growing food using oil and gas we were doomed.

            • xabier says:

              A more significant turning watershed than the Industrial revolution: our economies, and population growth disengaged completely from reality with the Green Revolution.

            • Paul says:

              Yes of course – that was the real beginning of the end.

              I point to the green revolution as the final Rubicon – before that we could have turned back because we could have more or less fed the number of people living on the planet.

              Now we may be facing an extinction event.

            • Bruce The Moose says:

              Even more disturbing than the green revolution itself, is the fact the we need another one now and the map is pointing at unwinding the first.
              I suspect that the industrialisation of farming has done so much damage that this will overshoot to a significantly lower than would have been the case with no green revolution and only good stewardship.

        • Interguru says:

          You cannot model a Black Swan, even one that you see coming. Chaos theory allow us to model the statistical behavior of many chaotic systems, but we cannot model one.

          • Bruce The Moose says:

            Very good point. Dennis Meadows says the same – the first peak event that occurs invalidates the LTG W3 model.
            Our best hope is still some form of modelling, although it may not be terribly accurate, and only provide qualitative guidance. I suspect that many of us already do this at an informal level.

        • Stilgar Wilcox says:

          And if you were a more charming person dashui you wouldn’t be alone, would you?

      • Jim King says:

        While a college student at University of Florida in 1973 I was fortunate to take H. T. Odum’s Systems Ecology course. He and his teachings profoundly influenced my life and work. The concepts of energy flows in ecological (and all other) systems have enabled me to understand amazing things that most folks miss.

        In Odum’s class we used primitive analog computers to model global oil (production, distribution, consumption, and money flows) among many other systems. My class project modeled a catfish pond with some surprising indications regarding the importance of the energy inputs provided by the invertebrates in the system.

        While adjusting the numerical inputs to the oil model changed the timing, it was intuitively clear to us as young, open minded students that global oil production would peak and decline, with direct impacts on money flows, nations’ economies, and people. We could manipulate the timing, but not the end result. Production and consumption declined.

        Forty one years later, I think most people are neither intuitive, nor open minded. Even simple models and results will be denied or ignored, especially if one thinks very much about the implications.

        I think TPTB know the score, but cannot embrace the issues because there are no apparent solutions to the predicament, and knowing the substance of what is coming (especially with timing uncertain) would likely push many people to act in ways that could fulfill the worst of prophecies. I think it is perceived better to let the masses blunder along in relative bliss, while TPTB gather as much of the masses’ wealth in the interim.

        Besides, human population is the elephant in the room, and the harder we hit the wall, the fewer survivors there will likely be, and managing the consequences may be easier with fewer people. I’m glad I was also influenced by Zero Population Growth while in college. It is a relief not to be terrified for the future of my own children, and to know that I didn’t contribute to that problem, although plenty of other folks contributed in my stead. Also, I am glad I’m nearer the end of my life than the beginning.

        Will I be a victim or survivor, a spectator or participant? It does not matter in the long view. But knowing and watching is one of the hardest things I’ve done.

        Thanks Gail for all you’ve done for all of us.

        • edpell says:

          Yes, human population is not one and only root issue.

        • You are welcome. I have visited the campus and have met Betty Odum. I expect TPTB have an inkling of the problem. A government has to save everyone, and not interfere with people’ rights to have more children, so governments are left with little they can do.

        • Paul says:

          100% agree – the fewer people that ‘get it’ the better. If too many buy into this then the hordes will be in looting the grocery stores and all hell break loose.

          • i1 says:

            Thank God for television.

          • Jim King says:

            I work in a courthouse in the US, and the multiple courts have full dockets today. The vehicles in the full parking lot include rolling wrecks, and many have piles of clothes in them, making me think too many folks are living out of their vehicles. (House rents here are generally $600 and up per month, with junky mobile homes in shabby parks starting about $400). The appearance of the people waiting to get through our airport type security this morning was shocking, and the stress apparent in the Wackenhut security people and the attending Sheriff’s deputies was striking. Few things frighten me, but looking at these people and thinking about having to deal with large numbers of them when things go bad is scary. Better they don’t know what is coming?

            I hope they DO have access to television (thanks i1 for making that excellent point). If that pablum goes away, this will be ugly quickly. I keep looking and hoping, but I can see no way this ends well.

            I try not to be a doomer, but I don’t like the reality I see right here today. Anyone who thinks this will be a smooth decline should to go to their local courthouse and observe our less fortunate citizens, and think how many more of them are out there. For many, the collapse has already occurred and as their ranks grow, they will disrupt much of society here, both economically and physically. Those of us who can quibble about numbers and timing have obviously not seen collapse yet. Locally, if you know what to look for, it is slowly and inexorably in progress.

            I’ve done what I can to prepare, but I know it won’t mean much besides making me feel a little better. Too many desperate people will overwhelm it all.

            I agree with Gail (in an earlier post) that we should enjoy what we can while it lasts, and hope for miracles.

            Be happy knowing we’ve seen the best of times.

            • Dano says:

              “Those of us who can quibble about numbers and timing have obviously not seen collapse yet. Locally, if you know what to look for, it is slowly and inexorably in progress.”

              Exactly. It seems that people, some of us even, are expecting a cataclysmic event announcing that the end is here. Something out of the bible perhaps. But it is already in full effect, working its way up from the bottom. The poor get poorer, less educated, and more isolated. They have no way out. Meanwhile politicians spin the same old rhetoric on how to get back to the American Dream, and the markets near record highs. The middle class is supporting the system for now, while they still exist. It will be interesting as the upper class becomes the only group remaining with any income and assets to tax … what then?

              In the end, on some days the sun will still shine. My friends and I discuss the predicament over beers, and becaused we do not have kids, we just pray that we will be dead before SHTF.

            • Food and water would be nice as well.

        • thestarl says:

          You know Jim i first realised something was drastically wrong after the financial meltdown in 2008.I know for a fact how misleading the MSM is and through my own basic abilities, research into the financial system and the interlocking relationship with energy its there for all to see.
          In regards to QE how on earth can one taper a ponzi scheme.The sad part about this is the human suffering and the fact that TPTB couldn’t care less.

      • Paul says:

        I would suggest the governments of the world are fully aware of the situation — and their response has been to unleash torrents of 0 interest cash into the economy to try to offset the end of growth.

        What else do you suggest they do?

        • garand555 says:

          If they are aware, they are not anything that I would want to be associated with. If they were aware and gave a damn, they would actively be working on shortening supply chains for basic necessities rather than taking campaign contributions from large companies who like having a monopoly. Instead, their acts of protecting large industrial agriculture are maintaining long supply chains if not increasing them.

        • xabier says:

          Exactly: they cannot take up, for instance, Don’s sensible plan of home economies and subsistence suburban gardening to buffer people against decline, because to do so would be to admit the growth game is over -which is Game Over.

          So, all the extra credit and fudges while we wait for a global recovery. Oh dear, what’s that? China’s exports down 20% yoy? Let’s just wait a little longer for that recovery shall we. And hum a happy little tune while we do, and…..

    • It may be possible to construct such a computer model, but the big issue is how long the current financial system can hold together. That seems hard to model, except that the distance in the future, from which it has to fail, can’t be all that far away. Estimating the ingenuity of the Federal Reserve is difficult.

      • Interguru says:

        Stein’s Law: ” Things that can’t go on forever eventually stop”
        Two lemmas ( mine — Interguru’s Lemmas )
        1) They go on a lot longer than you think they can.
        2) They stop suddenly without warning. Even those who see it coming have no idea when.

        ( repeated from an earlier discussion)

    • garand555 says:

      “From this nice clear explanation, it ought to be possible to construct a computer model like “Limits to Growth” (but hopefully simpler, since it’s more focussed) and prove the system must fail.”

      If you’re trying to predict the exact failure point, that model would require a lot of assumptions, and many would be unfounded. We can start with the ultimate failure point: EROEI=1. That’s the one that is dictated by physics, not our economy. How close we can get to that, however, depends on our economy. It depends on how much debt there is and how much we can sustain. It depends on income distributions and efficiency. (Note: I include not only the energy in to energy converted to work of a car in efficiency, but also the length of supply chains.) It also depends on how quickly we are able to make adjustments.

      The overall problem is simple: Exponential growth on a finite planet. The specific details, however, are insanely complex.

      If you want people to understand, you’ll have to make them understand exponential growth. That is a daunting task in our “math is hard” society that often fails to understand simple ratios.

      • Interguru says:

        In short. Even if you see a black swan coming, you can’t predict where and how it will land.

        • garand555 says:

          I would take it further than that. Even if you see a flock of black swans coming, you cannot tell which one will land first.

      • I disagree with respect to failure coming when is EROEI=1, or something similar. Failure comes far earlier.

        Because of the way the economy is constructed, “going backward” in net energy at all is a problem. Governments and financial systems fail. In fact, rising population together with diminishing returns in many other areas (metals extraction, fish population, extraction of sand, NPK availability, mitigation of pollution problems) means we need increasing amounts of net energy, just to stay even. Making adjustments is very difficult, when the primary areas needing adjustment are financial systems and governments.

        • garand555 says:

          I simply bring up EROEI=1 as the limit dictated by physics, i.e. it is something that we can merely asymptoticly approach. I do not think that we will ever get there. In fact, I would argue that, given how our current system works, we won’t. As oil resources need to go more and more into extracting oil, that will take a bite out of what gets allocated to things like driving to work or producing food or shipping goods. Even if we did have an economy that could potentially make it to EROEI=1, the closer we got, the less room there would be for mistakes.

  4. Patrick says:

    One might find me overly rushed, but I think that Gail pretty much nailed how diminishing returns of pretty much every resource, and oil in particular, interact with our financial system to bring about the breakdown of our highly complex societies.

    So, from my point of view, the why is understood to such an extent that the expenditure of a lot more thought energy will lead to ever diminishing returns on the knowledge front. The irony inherent in my statement on a blog such as this deserves a chuckle or two, I hope.

    The important remaining question around this topic for me is: how?

    How will the breakdown come about? Will it be fast, slow, or slow in some areas and very fast in others? Will we more trade wars and beggar thy neighbor policies? Will the frictions between major nations remain proxy wars, or are they likely to turn into a direct conflict? How will the inter elite conflicts for resources affect the equation? What are the likely courses taken by the moneyless masses?

    Alas, the answer to these questions is much more open to conjecture since we do have much less available data and it concerns the future, which is prone to crush any man-made prediction with the delight of a toddler trampling a sand castle.

    Nevertheless, I would hope that Gail and the commenting community here would start to pool their considerable brain power and knowledge to chart a couple of scenarios that might help us understand the likely ways in which the development could occur.

    However, charting these scenarios would not be complete stab in the dark. We have a thorough understanding of the nature of our conundrum and how it interacts with our financial system. We also have the works by Tainter, Turchin and Nefedov, and, providing a more historical perspective, Toynbee and Spengler.

    The issue I have with all these books is that they are much better suited at understanding and predicting the breakdown in much less complex societies than the ones we currently live in. The complexities have risen to the power of the nth degree, due to the high levels of global interaction and interdependence on social, financial, agricultural and economical dimensions. In addition, we also have much more devastatingly effective military potential in the play. Other factors also worth mentioning are the unprecedented levels of surveillance and population control available to governments worldwide, the extreme levels of population density on every continent, and the loss of non-industrial farming knowledge, especially in the industrialized countries.

    The task is quite monumental, but my perception is that it would be a more fruitful area to explore rather than devote increasing amounts of energy towards understanding the why just a tiny little bit better.

    • Doug W. says:

      It seems to be things are already unraveling. Perhaps we need to revive the domino theory. The number of countries whose crises can be traced back to energy/debt issues grows every month. At some point some large and important country would fall and that would be the tipping point. Or, perhaps the all powerful market will precipitate a crisis.
      As for the works that offer a historical perspective, THE GREAT FRONTIER by Walter Prescott Webb has worn well over the past few decades. Webb even included a few pages on Hubbert when he wrote in the 1950’s. According to Webb we are winding down on a 500 year boom that started with the Age of Discovery. Europe in 1400 had reached a subsistence balance between land, population, and resources organized through a feudal system. The discovery of the New World and other lands changed all this with more land and resources. Our ideas about the individual and democracy were one result as was the modern corporation as a means of organizing labor and capital to exploit all the new-found resources. And of course the West became far richer. Fossil fuels have extended the time frame and kept the game going. Webb would say that we are finally reaching a subsistence balance again between population, land and resources–this time on a global scale. We would need to swing another earth into our orbit and exploit its resources in order to continue on the path of the last 500 years. Webb’s account makes as much sense as anything else I have read about our current predicament.

      • I think you are right about the domino theory being important. If even a smallish country (Say Greece) fails, it puts pressure on the next bigger tier. As more countries fail, it makes it more likely that the whole system will fail

        • poverty has a nasty habit of creeping up the ladder of prosperity

        • Paul says:

          Agree re: domino theory. What kicks it off is hard to say:

          – war
          – populist gets elected in say Greece – and says ‘we are out of the EU and defaulting on all debt
          – uncontrolled riots resulting in a failed state in a key country

          Or we could have a general loss of CONfidence and QE ZIRP fail to have any further impact. That could topple all the dominoes in one go as the financial system would implode (see Lehman x 1000000)

      • louploup2 says:

        “”According to Webb we are winding down on a 500 year boom that started with the Age of Discovery.” Immanuel Wallerstein’s World Systems Analysis: An Introduction makes a similar argument grounded on neo-marxist anlysis. cf. http://www.amazon.com/World-Systems-Analysis-Introduction-Immanuel-Wallerstein/dp/0822334429

        I see that Wallerstein cites Webb in his work and both are cited in the texts on history of western civ.

    • That is probably a worthwhile suggestion. I was just trying to put the outline together in one place. We can clearly see a couple of different paths–energy exporters and energy importers, and the ways things are falling out.

      I have a hard time understanding precisely how fast the downslope will be, except that it has to be faster than natural depletion rates.

    • B9K9 says:

      Hmm, you want to know ‘how’? Are you sure you can handle the truth? If so, then try this simple experiment – in fact, it’s so easy, it’s considered recreation by a large amount of people:

      Get a backback, load it with enough food for 3-4 days, and oh, be sure to include shelter [tent/sleeping bag]; water [filter/chlorine pills]; and fuel [cooking/purification]. If you’re an expert, you can get this load down to around 20lbs. Ok, once you’re all ready to go, set out attempting to hike around 10 miles per day – extra credit if you’re out West and hiking above 10k feet.

      When you return from your 3-4 day odyssey, have someone take a picture of you. This is what humanity will look like after the easy means of washing cease, combined with the necessity of hard field labor. Next, take a mental inventory of how you feel – are you hungry, thirsty, etc. Now, consider in a return to scarcity, that even if you are exhausted, you will still need to find new sources of food, water & fuel if you want to continue living.

      This short exercise will be a lesson on what drove H Sapiens out of Africa to the far reaches of every continent, why the smart n’ savvy soon got to work inventing a social paradigm that allowed them to avoid the filth and ride on the backs of others, and why a premium was placed on the ability to inflict violence to ensure this kind of economic system.

      The last 200+ years have been the closest thing humans will ever come to experiencing heaven – and it occurred on earth. Only fools fail to recognize that these truly are the “good ‘ole days”.

      • Patrick says:

        Been there, done that. Until early adulthood I have been a member of a boy scout community that prided itself on living with the most basic means of shelter and disdaining many conveniences of modern civilization.

        The stink that came off my gear after week long treks through forests, meadows and mountains was something for the ages. I also have never lost such an amount of weight so quickly ever since. Nice were the days:)

        Thing is that the breakdown will be very different from that experience, since societies will break down, infrastructure will crumble, nations may go to war, sicknesses will abound, and there may be no hot shower waiting for me after an excursion.

        • B9K9 says:

          LOL. There’s nothing like getting in your car, turning the AC on @ full blast, driving back into town, getting a hot shower, slamming some cold beer(s), and scarfing down large, plentiful helpings of food after a trek.

          It’s almost surreal if you allow yourself to contemplate the sheer volume of ‘energy slaves’ required to deliver that kind of experience. Never mind the driving/flying to/from your destination. Absent the luxuries humanity has become accustomed to, the numbers of people who will simply sit down by the side of the road and die will sadly become an everyday experience for future generations.

          The best thing Bernanke did was extend this sucker a few more years. Sure, we screamed and yelled at the time that is was unfair – well, of course it was – but in retrospect, I’m cheering on Yellen to really get the pumps going. There’s not a day that goes by where I don’t have a momentary sense of wonder in knowing that what people take for granted as “just is” is actually coming to an end. But boy, what a ride.

      • Interguru says:

        “H Sapiens out of Africa ”

        Out of Africa we are an invasive species. We left our worst parasites and diseases behind. The mammals in Africa had time to adapt to us and our spears. In the rest of the world they were easy game.

        In Africa we could have never developed a modern civilization. Outside we could and did..

      • Interguru says:

        Two centuries ago every adult lived in constant pain, no dentistry, no anesthesia, no surgery to correct painful conditions, no pain medication. The poorest person in the US had less pain than the King of England did.

        • Bob Valiant says:

          People have lived since the beginning of time experiencing happiness and sadness, laughter and tears, pleasure and pain. I don’t think my grandfather’s life was less meaningful than mine, nor his grandfather’s life less meaningful than his, and neither would have expressed less desire to continue living than I do.

          • Christian says:

            Surely they didn’t. And they had opium as well, better than most we have today

          • Paul says:

            One difference – that generation had enough food.

            We grow most of our food using oil and gas based fertilizers and pesticides.

            Epic starvation is imminent. There is no going back.

            • Christian says:

              You right indeed, starvation seems unavoidable under the current paradigm at least. Countries as Argentina have the time to transition to organic, but it is not the case everywhere.

            • What the organic folks don’t understand is the natural phosphorus cycle and that most organic crops are based on using waste products generated by NPK production. Most scientist see a sustainable global human population of about 1-2 B people using “organic” farming techniques – but without NPK inputs.

            • louploup2 says:

              I disagree. The capacity to grow food is not going to disappear. There will certainly be lots of pain and suffering–and premature death–but there are many places where the net primary productivity will sustain significant populations without petrochemical power and fertilizer. China had a population in the hundreds of millions well before fossil fuel. I agree we are in overshoot for the amount of consumption per capita, and numbers will decrease, but transitions can occur. Look on the bright side: we won’t be emitting as many GHGs any more so AGW might not get as bad as IPCC projections.

            • Paul says:

              Right – America was able to feed many millions of people before the innovation of using oil and gas to grow crops. Likewise China – likewise most of the world.

              But forget about that now — because now that we have poured oil and gas all over the mega farms — if we stop the soil is dead – as in completely and totally unable to support the growth of any crop.

              And it would take 3 years of intensive organic inputs to get it back in shape.

              So no – there is no going back. Sadly.

              And as someone pointed out on these forums recently, only 2% of the world’s ag land is farmed organically – the rest is reliant on oil and gas. That millions of acres of dead soil post SHTF.

              The capacity to grow food is not going to disappear – but we are not going to be able to feed anywhere near 7.2 billion people. I doubt we could feed even a billion – probably not even 100 million.

              Even if everyone tried to plant their backyards it would take months before they’d have any food – that’s assuming they’d be able to get their soil in shape with composting – but even composting takes months to be ready.

              So what will those 7.2 Billion people do when the grocery stores are empty – I very much doubt they’ll be turning soil in their backyards and waiting patiently for the tomatoes to ripen – they’ll probably be killing anything the moves or grow….

              Hate to be negative on this but I see food as the biggest problem we will face — along with the 1000s of cooling ponds holding spent nuclear fuel rods – one other concern is that 7.2 billion people without a source of energy to cook or keep warm will cut down every last tree on the face of the earth.

        • damon says:

          Provided they lived beyond childhood, many people in the 18th and 19th centuries lived as long as those born in the 20th. However, as far as pain and dentistry go, I agree with you.

      • Adrienne Adams says:

        Last night I re-watched Godfrey Reggio’s “Powaqqatsi.” it is much less well known than his first work—Koyaanisqatsi—but for this discussion the second film is much more relevent. We know what’s wrong, no need to convince us, but we need to be reminded of the way humans lived pre-industrialization.

        Powaqqatsi opens with a scene in a silver mine where men carry sacks of wet ore on their backs up out of the pit. The bulk of the film shows heartbreaking and terrifying scenes of the monumental pain and effort humans have had to expend just to stay alive for the 10,000 years of our agricultural existence. This is life truly on the edge: not the kind that we can play at for a few days (with a full belly and extra pounds on our butts) using modern equipment.

        Anyhoo, if you want a powerful reminder of what life will be like post-carbon, take a look at Powaqqatsi.

      • Paul says:

        I am considering turning everything off on our property here in Bali for a weekend as a test run just to get a feel for what we are facing.

        That will also give us a better idea of things we need to add to our preparations.

      • Danny says:

        God, you are soooo dramatic!! You are like the guy on a 20 mile hike that starts complaining about his foot hurting and can’t shut up….Yes it is going to be hard but go out fighting not this constant whining about how bad it is going to be…you don’t know all the answers….

    • I have laid out my version of it in a series of novels (
      World Made By Hand (2008)
      The Witch of Hebron (2010)
      A History of the Future (coming Sept 2014)
      Published by Atlantic Monthly Press

      • Thanks for your reply, Jim. We need some folks who can interpret how the future will look.

      • Stilgar Wilcox says:

        The Long Emergency is a book I read along the path to better understanding peak oil, and highly recommend. Really like your Monday postings as well. Mostly I enjoy them for the way you run the words together, turning writing into an art-form. You are a rare talent.

      • InAlaska says:

        The Long Emergency also opened up my eyes, and now I lend my dog-eared copy out to friends. In fact, I think I never got it back the last time it was borrowed. Thank you for that gift of a book, Mr. Kunstler. Your fiction is also entrancing, but I hope that you weave more climate change into the story: an aspect of the future that is almost certain to be major factor.

      • Paul says:

        3 things lead to my epiphany on the oil issue:

        The Long Emergency (Kuntsler)
        The End of Growth (Heinberg)
        Our Finite World

  5. I expect a currency reform after the crash. Where the debt clock is reset to zero. Then there can be a fresh start, albeit at a much lower consumption level, like after WW2. That lower consumption level will reflect the much higher oil production cost.

    • The fresh start is the issue I have a problem with. Canceling all of the debt will eliminate huge numbers of jobs and bring the prices of commodities way down. Figuring out how to add new debt will be a major conundrum. Governments are likely to be overturned as a result.

      Edit: I should also add, forgiving lots of debt will make banks and insurance companies fail. It will also make pension plans fail. These issues will be extremely difficult to deal with as well.

      • Doug W. says:

        Another factor is the breakdown in trust. People loan others money with an expectation of being repaid. If there is a jubilee or debts are wiped out. Restoring trust would be crucial to any new system, and that may be a hard for the medium term.

        • Interguru says:

          Forgiveness of debt every 50 years, the Jubilee year ( Leviticus 25:10 ), seems like a piece of bronze age nonsense. Our ancestors were smarter than they seem. If you look at economic history every 50 years or so there is an economic crises which results in massive wiping out of debt. If course the problem with the biblical version is that you cannot announce it beforehand.

          • edpell says:

            In the Bible it is a forgiveness of debts every 7 years. Every seven times seven years it is a return of ancestral lands, family lands. Money debt every seven years, land “debt” every 49 years.

        • I agree, especially if the economy is shrinking. If it is shrinking, then there are a lot of business closures and worker layoffs. Even if the person means well, forces beyond his control may limit his ability to repay.

        • garand555 says:

          “Another factor is the breakdown in trust. People loan others money with an expectation of being repaid.”

          Trust is a two way street. If I’m going to borrow, I want to trust that the lender isn’t a giant parasitic entity who is out to cheat me any way it can. There is also the issue of said giant parasitic entities creating the “near money” at the time of the loan creation.

          • xabier says:

            A scandal here in Britain recently when it was shown that a major bank was deliberately forcing business customers into insolvency, in order to seize their under-valued assets and sell them a great profit. Funnily enough, that story has ‘died’…….

      • Ghung says:

        The entire global operating system is in the process of crashing under its own complexity, and, while we’re in unprecedented territory, predicting the general outcome isn’t that hard. Banks, pension plans, current production of commodities, current systems of government, current methods of maintaining infrastructure,,, all are utterly reliant upon things as they are and will be irrevocably changed. The ability to adapt is the quadrillion dollar question. I’m convinced that our ability to adapt, collectively, isn’t as good as we like to think it is; not even close. We haven’t come to terms with our level of overshoot, with the true nature of our situation.

        Those who pre-adapt to coming changes may or may not have an advantage, but at least they are less likely to be surprised. It’s about expectations and making some sort of peace with one’s own future.

        • xabier says:

          The challenge is to move from an over-complex, indeed surreally so, system to one which is, if apparently simpler and ‘basic’ , itself very complex – if it is too function effectively as a form of society.

          Reading about the late neolithic ‘Iceman’ who was found in the Austrian mountains, I realised that his society was in fact technologically sophisticated and quite complex.

          How to make such a transition?

          Peace of mind, and presence of mind, is perhaps all one can really hope to accomplish fully.

      • Danny says:

        Yes but what choice do you have? You can’t continue on this path forever and if banks fail etc…Is that not better than complete out of control collapse and WW3…in a lower tech society there might be more jobs….just not the ones people are used to….Pensions banks, insurance are all leaching the life out of economy anyway….

        • It is hard for me to know how things will work out. Dmitry Orlov writes about life after the fall of the Soviet Union. I get the impression that tearing down buildings and trading things that used to be used for some other purpose gets to be one of the major sources of livelihood. I expect it will be hard to build up much in the way of new jobs, other than trading used goods. Without banks, it would be hard to pay for such goods though, unless a business lets you bring things to trade, or lets you work for a while, to earn what you purchase. The main jobs will have to do with food and water, I expect, because these will be harder to maintain, and will take more workers.

          • InAlaska says:

            Unfortunately, for us, the Russian people entered collapse with far less expectations for the future than we Americans. Dmitry mentioned that lots of things that didn’t work well in Russia before collapse, continued not to work well after collapse. For us, lots of things work well, and we expect them to. Psychologically, most Americans are unprepared and don’t even want to be prepared. It is, somehow, un-American, to accept defeat.

            • garand555 says:

              Russians were already used to standing in line to maybe or maybe not get a loaf of bread, and learned how to cope. Shelves were already empty.

          • Paul says:

            Somalia might be a better benchmark….

    • Paulo says:

      re: “I expect a currency reform after the crash. Where the debt clock is reset to zero.”

      And what happens to those who have lived prudently and have no debt; who have refused the lure of self-indulgent consumption? Is this just another way to steal and redistribute to the connected, be they the 1% or the voting block folks on Govt. programs?

      Paulo

      • Christian says:

        Not exactly right Paulo. People not being personally indebted (as me) are indebted as citizens of a country (US citizens are on top of this). Given the magnitude of the situation, individual stories are to be mostly dismissed and could only be handled on a social basis. Regarding Mushalik’s view, we must not fail to see limited resources extraction will continually drop from now, and no plan forgetting this will work.

      • Ghung says:

        Relax, Paulo. Most of your fungible assets will likely have already been ‘appropriated’ in the “Great Bail-in” as the the PTB try to minimize their losses (for the greater good), prior to any forced debt jubilee. Greer’s essays on voluntary poverty touched on this, using monks as an historical example. Monks didn’t have much worth the trouble of taking (and they made good beer), so were often overlooked or tolerated when TSHTF.

        At least you’ll be more used to living without the debt subsidy that the rest of your society is addicted to. That’s something…. and you won’t be heading to debtor’s prison as debt slavery gets converted to the real thing.

      • InAlaska says:

        When the system collapses, there will be no reward to those of us who have been prudent and debt free. Only the satisfaction of having seen it coming. You should have gone shopping when GW urged you to.

      • garand555 says:

        Paulo, the best answer that I can give you is “Life is not fair. Get a helmet.” The only consolation that I can give you is that, if you are used to living prudently, that, in itself, may be a valuable skill.

    • Roz says:

      And much lower population …. maybe me & mine OR maybe you or yours ?
      Just a caution to us all….

  6. I very much agree that it is the economy which is likely the limiting factor here, perhaps even THE factor that ‘pushes’ us over the ‘collapse cliff’. Not being an economist but reading voraciously both Austrian and Keynesian perspectives the past couple of years, I continue to be surprised by developments, particularly how long the-powers-that-be have been able to kick-the-can-down-the-road and avoid the really big fallout that almost always seems to follow credit crises. With all the money-printing going on by the central banks, it is surprising hyperinflation has not been more widespread; although it does seem to be occurring on the periphery (emerging markets) and is possibly being held in check within the core because of widespread deflation.
    The fact that we are embedded in a centrally-controlled, fiat currency world is what worries me most. It is human hubris at its best to believe that a few people, even with good intentions, can control a dynamic, complex system when feedback is delayed, misinterpreted, and/or ignored (not to mention the corruption and malfeasance that exists in such a system). Perhaps the crash will come when all have taken the red pill and realise that their paper wealth is, in fact, worthless. Then things will get quite interesting…

    • Patrick says:

      Hello,

      The finer intricacies around monetary and financial issues are quite complex. The defining aspect of what money is, is, if you have been following Gail’s blog or Steve’s (economic-undertow) for a bit, quite easily to grasp.

      That is why I find it troubling when people refer to money printing or hyperinflation. Money printing is not what is happening, and I do not think that hyperinflation, such as in Zimbabwe, is going to manifest in the EU, the US, China or Russia.

      Money, whether fiat money or gold, is a promise of payment given physical form. This promise cannot exist without the coming into existence of debt. Debt is almost always tied to some form of valuable asset, be it the working capacity of the debtor, a piece of land, a house, a part of the company issuing shares, etc. Government debt is secured by its ability to enforce and raise taxes. Interest and compound interest just exacerbate the underlying forces and reinforce the need for growth in economies, but do not alter the underlying principle to a significant extent. A critical issue flows forth from these observations: without debt there is no credit or balance. If all debt would be erased, there would be no money left. Sure, one could use some other means as currency, but any other, and I explicitly include precious metals, would function along the same principles.

      Another more obscure issue around money is that it, to the best of my knowledge, came into existence with the advent of agriculture, because only with agriculture did the concept of property evolve. One needed to stake a claim on a piece of land that could produce surplus in a not too distant future against which on could borrow.

      Only with agriculture could states and class distinctions (warrior, farmer, administrator, etc.) emerge. Property can not exist without an executive enforcing the rights to said property against other groups or individuals coveting it and trying to take it into possession. In addition, property also needs laws encoding the boundaries and deeding the rights of using and extracting some value from the property. The laws also dictate the costs or payments that come associated with the defense of the property and the regulations with regards to the rights to use it: taxes.

      Two main deductions flow forth from this view. First, without agriculture there is no need for either state or the notion of property. There is only possession. Without statehood (whether city-state or nation) there is no material wealth and no basis for existence of, for example, corporations. This also explains why corporations cannot flourish in states with a weak executive. They need the strict enforcement of laws.

      Coming back to the notions of money printing and hyperinflation and addressing them based on the notions developed above.

      Money printing: what most people seem unable to accept is that neither the FED, nor any other central bank can just print money. They need collateral, however shady that collateral is. The FED takes de facto worthless collateral at its notional, mark-to-model value and gives in return to the banks bonds and credit of the same value. These, on the other hand, are supported by the full faith and credit of the US Government. While it is a sleight of hand, it is NOT money printing and not infinite, as the FED holds some collateral, however worthless it might be.

      Hyperinflation: Currencies, as we have them now, can only then lead to hyperinflation if they are not supported by some form of collateral, or if the trust in the currency would evaporate. Currencies today are not the Assignats of yesteryear’s France. In fact, as debt is credit is money, the diminishing returns on available resources and energy highly suggest a deflation-only future, with the possibility of hyperinflation in the major currencies only likely just prior before the issuing state collapses. How can there be inflation, if debts are rendered worthless, therefore written off and destroyed, if that causally necessitates the destruction of wealth and assets to an equal measure?

      If you think I’ve got that wrong, then I’d be happy to hear your arguments.

      • timl2k11 says:

        You’ve got it wrong. Central banks can print as much money as they’d like, without collateral. How do you think Japan and the US debase their currency? How does the federal reserve buy US debt as part of “QE3″? It prints money out of thin air! Either digitally or otherwise. The proper definition of money is “a claim on energy”. The proper definition of debt is “a claim on future money (or a claim on a future claim of energy)”. Money can be created without “being loaned into existence” and is all the time 24/7 by central banks.

        • Patrick says:

          Here is a nice wiki quote explaining what QE is:

          “A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base and lowering the yield on those financial assets”

          Incidentally, that is exactly what I described in the earlier post. Equally, as I explained earlier, US debt is backed by the USG’s ability to enforce and raise the payment of taxes.

          There is nothing coming out of “thin air”. Just because Zerohedge and other websites often peddle to their readership by publishing the scribbles of, quite often, woefully misinformed or misinforming authors, doesn’t mean that it shouldn’t be digested with a helpful grain of salt.

          With regards to the definition of money you are using. It really does matter very little what the payment consists of. Money, as we handle it today, is *the promise of payment*.

          And yes, money is created by being loaned into existence. that is the very heart of my argument. But: without loan, no debt, without debt no promise of payment. Ergo, no money.

          • Thanks, Patrick. I’m new to economics (having studied archaeology) but it seems to me the problem is the ‘promise to pay’. Once that ‘trust system’ begins crumbling, I suspect that the SHTF, as some are fond of saying.

          • timl2k11 says:

            “A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base and lowering the yield on those financial assets”
            And what do they buy those assets with? Money created out of thin air. What else would they buy the assets with?

          • timl2k11 says:

            “Money, as we handle it today, is *the promise of payment*.”
            No, money is no promise, if you use it is payment. Money is a claim, not a promise. That is why the Federal Reserve can create as much as wants. Debt is a “promise of payment”. You are really confusing money and debt. Money is not debt. They are two different things. Two types of assets. You also seem to be confusing money with he more general term “asset”.

            • Patrick says:

              I disagree.

              Arguing about claim or promise, are two sides of the same coin. For the debtor it is a promise of payment, and for the creditor it is the claim of said payment.

              The Federal can indeed create as much as it wants, but it can only sell it against (financial) assets or lend it against collateral to banks, which makes it neither infinite nor coming out of “thin air”. And there we are again. Without the creation of debt and the presentation of collateral, no money.

              I do certainly not confuse money and debt. They are the two opposite sides of the same coin, which make them look and feel different if you just happen to look at one side. However, one can not exist without the other. As such, a distinction between the two, with regards to defining what money is, is more semantics than anything else.

              Unfortunately I can’t find the graph anymore that would have made my key point much clearer than a 1000 words. It compared the total amount of global debt with the global amount of wealth. The lines depicting their values, including their growth, was virtually identical.

              For an individual, a company or a militarily weak state, being a debtor or a creditor has significant consequences indeed. But that was not the issue here.

              Also, have a read of BC’s comment below. If you accept my argument of money and debt being the same coin, the process described becomes so much more illuminating.

              As a last point. Maybe I should have been more precise with my phrasing. I should have said financial assets rather than assets although I thought the implicit meaning was clear. I understand that it was not.

            • timl2k11 says:

              I think we are talking past each other, also you did not address some of my other points. Since the closing of the gold window, Federal Reserve Notes are backed by nothing. This is inarguable, unless you just want to make stuff up. Again how is the Fed buying housing loans and US Treasuries? Do you realize they are “monetizing the debt”? That means they are taking it off bank and government balance sheets and giving them money in return. Where does this money come from? It comes from thin air. If you don’t understand that you do not understand how the Fed really operates. Ben Bernanke himself has said the US can never default “because the FED has this thing called a printing press” (his own words).

              “For the debtor it is a promise of payment, and for the creditor it is the claim of said payment.”

              If I have $10,000 US Federal Reserve notes in my hand neither a debtor or creditor need I be. If I take out $10,000 loan from a bank, the Federal Reserve Notes they give me is money not debt. I can take that money and make claims on energy (including labor). My debt is a separate instrument. That instrument is the promise to pay the debt back. If I am gifted $10,000, and I do not deposit the cash at a bank I am neither a creditor nor a debtor. To simplify when I say money I am specifically referring to Federal Reserve Notes. They are backed by nothing. There is nothing preventing the FED from printing as many of these as they want, we can have Zimbabwe style inflation here if the FED prints enough money. Government sells debt, FED buys it with money created out of thin air, rinse and repeat in dramatic fashion and you have hyper-inflation. Whatever debts go bad the fed can again just print money out of thin air and buy the bad debt (just like it has been doing). If pensions are underfunded the Fed can come to the rescue.
              Ever heard of the phrase “Neither a lender nor a borrower be?”

              You also said “Arguing about claim or promise, are two sides of the same coin. For the debtor it is a promise of payment, and for the creditor it is the claim of said payment.”
              Not true. For the creditor it is still a promise. For both the debtor and creditor it is a contract. The debtor “promises to repay”. The creditor owns that promise. The creditor has no claim on anything, only a promise. Once they are repaid, they have a claim, money!
              If I have money I can go get a haircut. I make a claim on that person’s labor with my money. If I have money I can pay for energy, I make a claim on my electric companies energy supply.

              You also said “The Federal can indeed create as much as it wants, but it can only sell it against (financial) assets or lend it against collateral to banks, which makes it neither infinite nor coming out of “thin air”.
              Wrong again. What do you mean “sell it”? The Fed right now is creating money out of thin air and buying treasury notes and housing bonds. This is clearly debt monetization. Where is the selling?
              Are we still talking semantics? Are we talking about different “kinds” of money? I think I’ve made my case pretty clearly.

          • A promise of payment does sound a lot like debt to me.

            Canceling all debt (in effect saying a government won’t make good on its promises, and doesn’t expect others to) and then wanting to start over sounds like a recipe for a problems, especially if the economy is shrinking, and banks are closed, thanks to the previous round of debt defaults.

            • Patrick says:

              True, a debt default would not make a difference with regard to dealing with diminishing returns, but create a major shock for the financial system.

              On the other hand it could stop, or at least slow down, the transfer of wealth and ownership of bound collateral from the increasingly destitute masses to the banks and their owners.

          • Stilgar Wilcox says:

            “And what do they buy those assets with? Money created out of thin air. What else would they buy the assets with?”

            Sorry Patrick, Tim’s got it right. The above sentences explains it perfectly.

          • garand555 says:

            Your argument is semantic. The Fed is using primary dealers as straw purchasers in order to monetize the debt. (Also to keep the banks afloat, but that’s another story.) The ability to raise the payment through taxes is quite obviously insufficient, ergo the partial monetization of the debt. While the Fed is not physically printing physical money, it is creating new “near money,” (i.e. the values on the ledgers are fungible with physical bills, at least until somebody big experiences a run) which is leaking slowly into the economy via deficit spending.

            • Patrick says:

              What you are saying is spot on, but what you are describing is the process of what happens after the money has come into existence. As you are partially saying yourself, that is a whole other kettle of fish.

            • garand555 says:

              The Fed still has to create that money. While I don’t know if it is still going on, the Fed was telegraphing to the primary dealers how much to buy by purchasing notes and bonds of a given maturity period from the dealers right before an auction for treasuries of the same maturity period would take place. Call it what you want, but the net effect is the same as printing money, except that this time, there is a middleman skimming. It is just a lot more obfuscated than it would be if they fired up some physical printing presses and started designing and issuing higher denomination bills.

      • Patrick,

        Thanks! You have a good way of making these points.

        • Scott says:

          Gail, Patrick might be good at making his points, but it does seem to me that he is wrong on one key point: the fed is indeed creating money “out of thin air” to pay for it’s bond purchases (I.e.,QE). Do you agree?

          • I tend to side with Patrick, although I am not sure how important it is. Money and debt are awfully closely related, as I see it. Maybe I am not one for fine distinctions.

            • Christian says:

              You right Gail, it’s a msis anyway

            • Scott says:

              I find it important in this way: I am trying to figure out if there is any limit to what the Fed is doing (limit in terms of how long this can go on, and how high the Fed “balance sheet” can get). If what they are doing is literally “creating money of of thin air” to buy bundles of worthless mortgages at full face value from the god damn banksters, then it seems it can go on for quite a while – maybe forever? However, if it is not just “creaing money out of thin air” (i.e., has some limits), then the limits will eventually be reached (soon?) . I see this as a critical issue/question – maybe my biggest question left unanswered in all my reading and study of what has gone on and what is going on in our financial/political system: How long can the Fed continue to prop up our rotting Zombie of an economy?

            • I don’t think we know for sure how long this can go on. Maybe other commenters know more on this than I do.

              One thing we know is that asset bubbles burst. Bidding up stock market prices and land prices won’t go on forever.

              We also know that there is a fixed amount of treasuries that the Federal Reserve can buy, and a (larger) amount of US mortgage securities that the Federal Reserve can buy. I suppose the Federal Reserve can change the rules to add something else to the mix as well–say student loans, except that the government already underwrites these. I believe.

              At some point, it seems like the dollar being the world’s reserve currency would become an issue as well, with continued QE.

              Even if QE doesn’t stop, the economy could still run into trouble if low oil prices lead to oil companies cutting back on drilling, and because of this, oil production going down. If oil prices spike in response, this could send the economy into recession. Or the economy could go into recession just from the lack of oil, even with QE.

            • timl2k11 says:

              “How long can the Fed continue to prop up our rotting Zombie of an economy?”
              For as long as we maintain the status as the world’s reserve currency. That is the main reason why we don’t see much inflation from all the Fed’s money printing.
              And just a clarification, QE3 is a different animal than normal Fed operations that it would use to control the Fed Funds Rate (which is also how it manages the money supply). QE3 is the outright buying of housing bonds and government bonds with nothing but money printed out of thin air. It can go on forever, but not without consequence. And there is no doubt about this. The only thing the fed has to buy government and housing debt as part of QE3 is money printed out of thin air. I am actually surprised Gail does not understand this aspect. The Fed can print extra “claims on energy” thereby devaluing the currency, as all other central banks do. Gail, can you explain to me how the cash or, say, gold I may have in my pocket has anything to do with debt?

            • You can’t eat gold. There is an implicit promise that you can exchange it for something you actually want–otherwise it would have no value. The cash in your pocket is tied to the promise of the government to back your money. The gold has value, only to the extent that there are things you can actually buy with it. The implicit government guarantee behind the cash helps enable “stuff” being made, so that there is indeed something you can buy with the gold as well as the cash.

            • Scott says:

              Thanks for the replies! (Both Gail and Tim)
              Gail, you are right – the Fed can’t print oil, nor clean water, nor topsoil, nor … One day the jig will be up … and that will be an interesting day …

              Yeah, Tim, I guess that is it: It boils down to how long the US maintains the reserve currency status – there is no vote among the global players (that I know of) on what currency has such a status – instead, one day (soon?) that status will just fall away from the dollar and shift to something else. That will be an interesting day in Washington … and actually all across this once great country. It is all but over … Brace.For.Impact

            • Eduardo Martinez says:

              Well done Patrick. It is too easy to for people to parrot the phrase ‘the FED is printing money out of thin air’. Money is created as debt and also destroyed as debt is repaid. If the rate of creation is greater than destruction you get inflation and you get deflation if it is the other way round. All money created by the FED has to be paid back (or rolled over), in the future. Hence the money is not created out of thin air to remain in circulation for ever, but as a debt to be repaid. How will the government pay it back? Through enforcement of taxes, and if need be, confiscation of financial assets to refinance the government.

      • Jeff says:

        Money is an agreed unit of value between the laborer and beneficiary of the labor. Debt is a claim on future labor.Money is a store of value. Currency is not necessarily money because it tends to lose value over time. Fiat currency obtains its perceived value through the faith and credit of the issuer.You are right that it would difficult for the United States to go the way of Zibabwe although not for lack of trying.We are the the reserve currency of the world, the fact that we have the largest military does put a lot of credibility behind our currency.Oil is one of many multipliers of labor unique in that it is very energy dense and easily transportable.Gold, silver and other precious metals make good forms of money because they store value over time and at least in the case of gold and silver are pretty much universally recognizable and valuable.
        Now here is a though concept, if an issuer of debt can make a claim on future labor to pay off the debt (debt=future labor) doesn’t it follow that their is a medium that would represent past (historical) labor . Gold and silver are representation of that past labor and not just the lucky miner that hit the jack pot but all the others that tried and failed.

      • timl2k11 says:

        Another fundamental you have totally wrong: “Money printing: what most people seem unable to accept is that neither the FED, nor any other central bank can just print money. They need collateral, ”
        Collateral hasn’t been needed since Nixon closed the “gold window”. Why did Nixon close the gold window? Because we had printed way more money than we had gold for. The value of gold immediately quadrupled in terms of US dollars. Money is now backed by nothing. It has whatever value everyone agrees it has. Any central bank can indeed “just print money”, just like Zimbabwe, and if it wasn’t for our reserve currency status, inflation would be much higher.
        You seem to be thinking of the way money worked when we were still in a gold standard. That ended in 1971.

        • Christian says:

          As Gail says it’s not easy to get it all, but I’m with Tim on this. Graeber convincingly structured all his work upon the difference between debt and cash (or money), remarking money put an end to a relationship and both parties are allowed to walk over, although debt just doesn’t and both parties remain linked.

          It is true paper money works as an IOU, referred to the State (but it seems not to be exactly that in the case of the US, where the central bank is a private entity) and that the State economic capacity is ultimately reduced to catch taxes (in our case, where it does not produces goods to sell). Also, as Aristotle noted, even gold has not a value in itself but by convention, so as a last resort everything (money and debt) are just WHAT WE WANT THEM TO BE. They have not an intrinsic nature, but a pragmatic one: they are useful in structuring society, or they are not and then must be changed.

          To be honest, I have a hard time trying to get why, in this specific moment of history, we may need more debt. Two reasons.

          One, humans geographic scope starts reducing because of the fall in transports, or if you wish globalization trend twists in localization trend, and so there is no need to look at more debt to keep relationships more open and thus embrace more (and more distant) people.

          The second, our specific financial organization, banking and thus interest centered, essentially relates debt with growth. And we know very well what is happening with growth right now. This kind of debt has become impossible to repay, and so, as I argued at some other post, has become meaningless. It is not to clear all debts and restart the banking system. It is that one of two things will happen: a) the whole system will break by its own and possibly take us down with it; or b) we can collectively realize this (upon some crash or not) and just forget it and start with another system, with no banks nor interests. A lot of people would go unemployed? They will do anyway, and it is not related to the absence of debt but of cheap oil. The only way to create jobs is people moving to the country and working on land, where they will not need cheap oil. Clear and simple as a sunny day.

          Capitalism and debt will not anymore give us our daily meal. Wich does not mean we have no way to get it.

          • Starting over without banks will means a very much more local economy, where everyone knows everyone else. The amount that will be produced will be much smaller than today.

        • Paul says:

          Zimbabwe did not have thousands of nuclear weapons as ‘collateral’ :)

        • Patrick says:

          The major reason why Nixon closed the gold window is, as I understand it, the curse and the blessing of issuing the global currency:

          De Gaulle insisted on gold payment, just to pester the US, and attracted a lot of imitators.

          The US, as every other issuer of the global currency before, started to get in to trade deficit territory which reduced their gold holdings. The US had the power to force others to accept these changes, so it did.

          Similar to current money, gold also just has the value everyone agrees it has. You can not eat it, burn it (like current money) or use it as a weapon because it is far too soft for it. So what? That may be exactly one of the reasons that it has been adopted as money in the first place.

          • timl2k11 says:

            “The major reason why Nixon closed the gold window is, as I understand it, the curse and the blessing of issuing the global currency:”
            Wrong again. I thought explained this. The only reason Nixon closed the gold window is because the Bretton-Woods agreement made the collateral for the US Dollar gold. A dollar was fixed at 1/35th an ounce of gold. Other countries were than fixed to the US dollar. US dollars could be converted into gold, at $35 an ounce. However the Fed created too much money (more money than we had gold collateral for) to fund are deficit spending for wars and moon landings and the great society, etc. France suspected we were printing too much money and started converting their US dollar reserves into gold. Other countries soon followed. Our gold reserves began to dwindle and Nixon quickly responded. Ever since world currencies have been backed by absolutely nothing.
            There is a very good movie “Federal Reserve: Money for Nothing” that interviews people both inside and outside the Federal Reserve System that gives great insight into how the Fed really operates. But really, all this can also be easily researched.
            Again, I think I have argued my point quite clearly. Are we still arguing semantics? (I did not see the above post before I replied to your other one).

          • Christian says:

            There is another reason to the end of Gold Standard: the US oil production peaked in 1970 and the country needed to import more oil, and so to export dollars and forget about importing more gold. Next, US and king Faisal settled the petrodollar and the new standadrd was completed. As Paul says, if there is a “collateral” it’s US Navy.

            • John Dunn says:

              @ timl2k11 and Christian
              I think tim’s explanation of the break from gold is spot on, but Christian has taken the next (and vital), step by pointing out that as the dollar disconnected from gold, it did not ‘free float’ as some suggest, but instead got pegged to crude oil.
              This pegging to cheap oil (in the 70’s), gave the world license to forward purchase billions of dollars of goods and services not yet made or provided. And it would likely have continued to work for some time to come, had it not been for the shift from cheap to expensive oil. Now we are in a position of having to pay back the global credit card using expensive oil, even though we created that global debt on the assumption of easy and cheap oil.

            • timl2k11 says:

              Very good points!

            • John says:

              Late to the party, have any of you read FOFOA on the petro dollar?

      • Paul says:

        I suppose the Fed’s collateral is a) having a good con-person at the helm and b) at the end of the day being backed by the worlds largest arsenal.

      • timl2k11 says:

        How is gold debt?!

    • That is a good point about the nature of the centrally-controlled fiat currency system.

      The dynamics are hard to understand. For example, forgiving huge amount of debt would make a lot of people much poorer and make banks fail. For that reason, it is hard to see it happening. It would also be very hard to restart the system.

      • BC says:

        Apart from $600-$700 billion the US and foreign primary dealer banks used to write down loans in 2009-10, the remainder of the “money printing” has remained circulating between the Fed’s balance sheet, primary dealers’ cash assets/reserve deposits at the Fed, and the US Treasury. Bank lending has not grown since 2007-08. Accounting for the increase in bank cash assets for the deposit base, money supply less bank cash assets is no higher than in 2007-08, and it has been contracting yoy since summer 2013, not unlike in 2009-10, 1937-42, and three times in Japan since 1998, including recently.

        Moreover, the net interest return extracted by the financial sector today exceeds yoy growth of nominal GDP. That is to say, the nominal valued-added output of the US economy, including price changes, is contracting after the financial industry extracts its take.

        Despite the unprecedented “money printing out of thin air” by the Fed, the result has been a net crediting of banks’ cash assets to shore up banks’ insolvent balance sheets without growth of loans or money supply less bank cash assets.

        Finally, the value of debt-money is the imputed compounding interest “claim” effectively at an infinite term. Thus, debt-money must grow at a minimum rate in the long run to permit sufficient debt-money supply to service the existing debt outstanding and provide funding for economic activity. Since 2007-08, US debt-money supply less bank cash assets has not grown. Therefore, there has been insufficient growth of debt-money supply to permit servicing outstanding debt AND to fund further growth of economic activity after inflation and debt service.

        Not surprisingly, then, US real final sales per capita are no higher today than in 2007-08, and real per-capita bank loans and deposits less bank cash assets are contracting yoy.

        The US since last summer-fall has been experiencing incipient debt-money deflation, whereas few appear to be aware of it. The effects will soon manifest in the form of a plunge in profits, private investment, employment, and growth of wage and salaries in 2014.

        • Thanks for all your observations. Even with ultra-low interest rates, we are still having the problems listed. This does not add to my confidence regarding how long the system can hold together.

          It seems like the financial system’s interest on the debt is another piece of our problem. If the interest rate ever goes up, the situation is completely “game over”.

          • InAlaska says:

            From what I have read and understand, it seems like our first danger will be deflation, not inflation. As the velocity of money slows down, a sure sign of sagging economic activity, there will be less and less goods and services produced. With the Fed printing too much money, we will have a whole bunch of dollars chasing relatively far fewer goods and services. When the debt bubble finally bursts, credit will dry up and then the Fed will truly go crazy printing even more dollars to get it ginned back up again. Then we’ll have Zimbabwesque hyperinflation. Then, I think it will be “game over.” This will happen so fast that it’ll be impossible to see it coming, so when we get deflationary pressures, that will be the signal to hang on tight.

            • I think the issue is mostly deflation. Money is loaned into existence. As these debts fail, there is less money. Our bank accounts may suddenly disappear, or allow us to take out, say $100 a week. People may need to sell their homes to a market with no buyers, because the sellers have no jobs and need to move in with relatives. Ultimately, the government collapses, and the money is worthless–like Confederate dollars.

      • Paul says:

        Agree – very hard to restart the system.

        Just take this one example – all government pension obligations would be discharged. Millions would lose all income.

        How do you restart a system when that happens?

        Keep in mind this would be only one of the toxic consequences that would manifest in a debt jubilee.

        • Christian says:

          Actual system is toxic, and will kill us if we insist living within

        • Danny says:

          It is already happening….why do you think they got rid of basic accounting principles….they have already bought all the toxic mortgages and they have dissipated…as far as how someone will pay there mortgage without a job—-I am shocked at how you don’t get it….who would they pay their mortgage to? If no one can pay their debts the banks will quickly collapse….in some circumstances you talk BAU as paying a bank and then in others you talk about Mad Max themes….funny I don’t remember seeing a Wells Fargo or ATM’s in that movie….

    • Stilgar Wilcox says:

      “With all the money-printing going on by the central banks, it is surprising hyperinflation has not been more widespread; although it does seem to be occurring on the periphery (emerging markets) and is possibly being held in check within the core because of widespread deflation.”

      Good point regarding the periphery – are we next? I wonder how much the accusatory manipulation of gold price has stabilized core currencies? It would seem a requirement upon so much printing.

    • InAlaska says:

      All of our worry about economics may simply be rearranging the chairs on the deck of the Titanic. On the website Nature Bats Last, the climate change summary has many interesting tidbits such as:

      “Writing for the Arctic Methane Emergency Group, John Davies concludes: “The world is probably at the start of a runaway Greenhouse Event which will end most human life on Earth before 2040.” He considers only atmospheric carbon dioxide concentration, not the many self-reinforcing feedback loops described below. Tacking on only one feedback loop, and writing on 28 November 2013 — methane release from the Arctic Ocean — Sam Carana expects up to 20 C warming by 2050.”

      There are very many other equally sobering peer-reviewed articles such as this in the summary that the mainstream media won’t touch. From this perspective, a full scale economic collapse might be the only thing that can save the future of human life on Earth. Cheery.

        • One of the articles the Mr. McPherson cites interested me greatly.

          URL: http://unews.utah.edu/news_releases/is-global-warming-unstoppable/

          Snippet:

          “Garrett says his study’s key finding “is that accumulated economic production over the course of history has been tied to the rate of energy consumption at a global level through a constant factor.”

          That “constant” is 9.7 (plus or minus 0.3) milliwatts per inflation-adjusted 1990 dollar. So if you look at economic and energy production at any specific time in history, “each inflation-adjusted 1990 dollar would be supported by 9.7 milliwatts of primary energy consumption,” Garrett says.”

          • BC says:

            The implication of this metric is profound: At the 9.7 mW/real GDP US$ at the given total global energy (potential exergetic capacity per capita), global real GDP per capita today, and 1600-2000 cal/day for subsistence/existence indefinitely, one can extrapolate a mass die-off of the human ape population of 90% by 2050-80.

            But the accelerating log-linear decline trajectory will begin no later than 2016-20.

            Thus, imagine all of the factors that will coalesce to precipitate the global systemic collapse regime in the next 2-6 years, and we will begin to witness them in numbers that accelerate.

            Egypt, North Africa, Ukraine, Thailand, Venezuela, parts of sub-Saharan Africa, and tensions between Iran and Israel and Japan and China are only the beginning.

      • Paul says:

        If we can kick the can to 2040 I would be so very pleased.

        Somehow I think something will intervene in the meantime to make life a whole lot different.

      • Think of the collapse as good news then. I can’t imagine that anything we do voluntarily, apart from collapse, will make much difference.

        • InAlaska says:

          I think you’re right, Gail. Complete collapse (soon) may be our only salvation. What a world we live in where economic catastrophe is a good thing.

  7. Pingback: Reasons for our Energy Predicament – An Overview | Our Finite World « Olduvaiblog: Musings on the coming collapse

  8. mindweapon says:

    Reblogged this on Mindweapons in Ragnarok and commented:
    TL/DR The economy may not support energy extraction. We may have large oil reserves, but they will mostly stay in the ground because our economies can’t afford the extraction.

  9. The ultimate oil supply problem will be fighting over what’s left.
    Everyone recognises that without oil we die, or revert back to such a pre-industrial condition that life will be nasty brutish and short.
    So people will fight to avoid that, even though they/we know any personal respite can only be short term.
    The unravelling of states we see happening across the world can be pinpointed to energy depletion in one form or another, and fighting over scarce resources eve though the call it politics or religion.
    Essentially we have hunter-gatherer brains trying to function in a modern society that has existed for a few centuries. We evolved to be hunter-gatherers for millions of years before that. Our minds are only attuned to short term planning in terms of resources—we consume what is here and now on the assumption that our actions will provide more tomorrow. We think like that because it has always worked for most of us for most of the time. We can only think short term even though ‘planners’ delude us otherwise.
    Unfortunately we have consumed most of what there is and refuse to believe it because evolution has conditioned us not to.

    • timl2k11 says:

      “The ultimate oil supply problem will be fighting over what’s left.”
      I agree. I see this has been already happening and will only get worse. In Ukraine, they face debt default and the east and west are fighting over whose “influence” Ukraine falls under (buying influence by buying Ukraine’s debt). Iraq was a failed grab for political stability in an oil rich country. There are so many countries dependent on monetary aid, or the free flow of debt in return for energy. What happens when that aid and debt can no longer be sustained? Then there is Egypt, Syria, Argentina, Venezuala, all countries that no longer seen to have enough energy to sustain their economies. Yemen, not enough energy to pacify it’s population.
      Japan will be the biggest dominoe to fall yet. Virtually no energy production and a policy of weakening their currency, making energy imports ever more expensive. “Abenomics” is suicide. It’s like Abe is the kamikaze pilot of Japan’s economy.
      The US with the worlds reserve currency is very “lucky” right now. Everyone seems to want our debt.

      • you should read Tim Morgan’s brilliant piece on ‘abenomics’ in Japan. http://surplusenergyeconomics.wordpress.com/
        but of course the ultimate problem will be fighting over what energy is left, not what oil is left, and it will be the most ‘civilised nations who engage in the fighting, because they have the most to lose.
        We think of resource wars as happening now, but Germany and Japan were doing it 70 years ago to keep their economies afloat. Those nations were among the most cultured and civilised, yet committed atrocities on a colossal scale in order to survive on their terms.
        We might protest that this couldn’t happen again, but since the 30s and 40s it has happened many times. Under different names perhaps, but the willingness to perpetrate evil on fellow human beings is always magnified by the means available, and willing hands are always available to carry it out.
        The USA may be enjoying short term luck, but as energy supply runs out, the same kind of unpleasantness will kick in there too. The nation is already divided by geography, race and religion, peoples who tolerate one another because there is more or less enough to go round.
        When there isn’t enough, the same primeval reflexes will kick off there, the same as in Syria, Ukraine, the Congo or anywhere else currently in meltdown

        • Thanks for the link about Japan. The increase in Sales tax from 5% to 8% on April 1st has always seemed at least somewhat suicidal to me. When paired with Japan’s other problems, things don’t sound good.

          • Politicians, like most people, can only think short term.
            If their policies deliver a year or two of upswing, then they have reasonable chance of leaving office with their heads attached to their shoulders.
            It then becomes somebody else’s problem/fault.

          • xabier says:

            Gail

            Try the levels of, -and increases in – sales taxes in Europe and Britain! Financed to a large degree by credit extended to consumers…..

            I believe Lagarde of the IMF has just said that Spain ought to increase its already very high sales taxes.

            How punishing this is for businesses they do not grasp.

            Of course, a properly telegraphed tax rise can provide a brief jump in consumption of some goods, as people attempt to pre-empt the tax rise, but often followed by a sharp crash – I believe this has happened in Japan.

            • I know that Europe and Britain get a lot of their tax revenue by sales taxes. If Spain increases its tax rate, it likely will send the economy down further. The increase in sales before the new tax goes in is a very brief surge.

        • Christian says:

          Resources wars have milleniums of history, but actual situation doesn’t necessarily will multiplie international wars. The motive of scarcity is set and working, but EROEI reality says adding the cost of war and occupation to low extraction yields makes such a kind of adventures profitable only in a very few cases, such as Iraq. A completely different equation stands for civil wars, whose costs are far less and motifs more diverse: armed conflicts are very much likely to be of this type, and to be more cruel as well. Mixed conflicts, domestic and internationals at the same time, such as Sirya and Ukraine are complex and must be considered upon their particularities. A direct war between nuclear powers is not likely to happen (although not impossible) given this would be very damaging to both contenders.

          • Civil wars tend to be about resources too.
            North v South Sudan–oil
            Syria..Farmers driven off their land because of drought, clashing with town dwellers who follow a different cult
            Central Africa…numerous factions fighting for control of copper, uranium, gold etc
            I can see South American nations dividng into factions over food supplies—Ultimately North America will do the same thing.
            The ultimate rule of warfare is that it cannot extend beyond the means of the army involved in it. The actual scale of warfare is irrelevant.

          • Christian says:

            Reply here to End. Yes “the motif of scarcity is set and working” for domestic fighting as well, mixed with diverse local issues. South American countries are generally well equiped on food, but of course in some time this will not more to be the case if nothing is done about its fossils dependence.

          • I hadn’t stopped to analyze things this way. Thanks for your views.

            Certainly, historically most wars have been local resource wars.

        • Danny says:

          Yes I agree with you there…..Most people in the U.S don’t even know what is going on in the rest of the world. And even the ones that do think they are untouchable. I was talking to someone today and she believed that nothing would happen in her lifetime…she is 38…I am not so sure….the water will be lapping up her soon.

      • InAlaska says:

        Yep, Japan is struggling under a decade of deflationary economics. When they collapse, it’ll be an object lesson in what not to do. Of course, they didn’t really have any choice given their demographics. It will be bad here, when it happens, but not as bad as everywhere else. As you say, we are very lucky. In the end, I think being in the US/Canada will be the least worst place to be.

        • garand555 says:

          Perhaps in Alaska, and parts of flyover territory, but can you imagine what NY, LA, etc… would be like if supply chains broke? Imagine 8 million people all of a sudden cut off from food in NY. Pure hell. Probably not as bad as Japan, but still pure hell.

          • InAlaska says:

            Yes, I can imagine. Not pretty. Once Fukushina starts to get away again, it’ll be even worse over there. Imagine all 400+ nuclear reactors after collapse occurs. It takes a decade of thoughtful planning to decommission a nuke plant. Talk about pure hell….

            • Paul says:

              A thought…..

              Many have commented that the global leaders surely must be aware of what we are facing — yet they are failing to act — their response is not to attempt to cushion the landing rather they ensure the landing will be like slamming a 747 into the ground as hard as possible.

              So why don’t they attempt to subtly introduce policies that allow us to prepare?

              – encourage people to grow food in their backyards
              – encourage people to learn organic farming
              – encourage community spirit
              – encourage some level of survival skills

              Surely this would be the responsible thing to do….

              So why don’t they? Could it be that they have gamed the likely scenarios and they have determined this is an extinction event?

              Could it be that they know that these thousands of nuclear fuel rod pools will ignite and explode and wipe out all life?

              Could it be that they have concluded that the situation is completely futile — run the engine as hard as possible to get a few more miles out of it — before it slams into the rock cut?

              Just a thought….

  10. Daddio7 says:

    The whole world is on the up escalator. Any country that gets off wont slow it down and will only be left behind. Only crushing military regimes like N. Korea can hold its people back. It would be wise to prepare for the Collapse but the moneyed interest want to keep the escalator humming.

    We as individuals can make our own preparations and form small groups to ride out a panic but we will be swept along by whatever happens globally just like Dr. Zhivago.

  11. Ghung says:

    The problem with substitution is that, at comparable price points, it doesn’t actually substitute for anything; it supplements. It’s a Jevons thing. Increasing oil production didn’t stop increasing uses of coal. Any new “substitute” quickly gets sucked into growth if its utility and price is in a comparable range. If it’s higher, it doesn’t get developed until prices can support it (tight oil and fracking as examples). This is why so-called alternatives aren’t alternatives at all. They’re just another drop in an energy bucket that gets emptied as fast as it gets filled. It’s all an economic tug-of-war between costs and economic utility. Such has it always been. Masking it with a complex system of financialization doesn’t change that. Indeed, entropy will take its cut, reducing overall efficiency as complexity increases.

    If it takes more energy to catch a rabbit than you get from eating the rabbit, decline sets in. If it takes more energy to produce the capital to buy the rabbit than you get from eating the rabbit, or more than others can/will pay for the rabbit (after you’ve taken your cut), decline sets in. Eventually the rabbit gets a pass.

    At least rabbits breed like rabbits.

  12. Gail, I follow your commentary with great interest – agreeing with most if not all of what you say, but as a good skeptic – still try to poke holes in your perspectives.

    Regarding oil prices and reserves, I think our assumptions on production prices are so loose as to be ineffective for meaningful projection. You make the assumption that oil companies need $100+/bl to produce, yet as recently as 2008 oil prices fell to nearly $30/bl and production and sales continued without a major fluctuation in production. So, we know that some oil can be sold for about $30+/bl for some period of time and some oil companies apparently can still make money at these price levels. Consequently, I believe that oil companies in general highly inflate their costs of production and that actual production costs vary widely depending on sources and producer efficiency and consequently profit margins also vary.

    We may well see the current cut back in major oil co. production not so much because of the lack of a high enough price, but rather because a lack of profit levels to which they have grown accustomed. There is a difference between this and just insufficient market prices. Major oil companies operate much more like public utilities – not worrying about their costs because they are controlling the market and the prices. When demand decreases as it has in recent years, then they have a much more difficult time setting prices – while competing with much smaller and leaner oil production companies who can operate more efficiently and may have much lower costs – and lower margin expectations.

    I’m not saying that what we observe in oil markets is driven by my perspective above totally, but I think it is one of the factors with varying affects in what we see in the oil markets. Perhaps big oil is just going to set back until the lower cost producers have sold off their cheaper produced oil – before they sell off their reserves at the profits they have come to expect.

    Even if my perspective is correct, it doesn’t change the eventual out come for petroleum depletion, but it does have an impact on the timetable. Fluctuating oil prices also have an affect on alternative energy development – whether by design or accident. Every time oil prices fall for extended periods it pushes developing alternative energy companies over the edge – especially those who naively depend on higher oil energy price forecasts instead of recognizing they have to compete at the lowest recent historical prices to remain viable.

    And a final comment, we really can’t talk about our petroleum economy without also realizing that 95% of our food production comes from petroleum based NPK fertilizers – for which there are currently no replacements at the scales required. A rapid decline in the petroleum industry economies of scale will send global food production into chaos that make our global energy deficits seem trivial.

    • the vast majority of people are convinced that food comes from supermarkets, not oil and gas wells

    • jphsd says:

      Did you consider what the investment profile looks like? Oil dropping to $30 a barrel didn’t stop the existing wells from pumping but it most certainly did influence whether or not new projects would be started. Any drop in production would only become apparent over a longer timescale.

      • Looking at the price chart in article you can see that price and price inflation slope was interrupted over several years. I agree that lower oil prices affect profit motive and that affects exploration and development, and continued lower prices may restructure the oil industry to one having many more smaller and leaner less utility like producers – rather than the current majors and NOCs. My entire point is that is almost impossible to know what the actual cost of oil really is. To automatically assume that it is over $100/bl because OPEC and the majors say so, doesn’t seem credible – to me. OPEC it self bases oil prices not on costs, but on what they think their countries oil resources are worth in the long term and what they think they can force consumers to pay – again no cost basis and the latter reason being dominant – what consumers will pay.

        • OPEC doesn’t set prices, I am afraid. They adjust their production, so that they produce less when prices are low. OPEC doesn’t have the power it claims to have.

          • I think you are arguing semantics. Controlling production does set the price.

            • OPEC has a lot less power to change production than they claim. I noticed that Ron Patterson has a good recent post on OPEC production explaining the situation. http://peakoilbarrel.com/can-depend-call-opec-opec-peaked/

            • The Patterson post is good, but unfortunately it only considers recent past (current) production. For example it ignores Iraq’s vast untapped proven reserves (5th largest in the world – some say could be the largest) because of large areas of unproven reserves and plain unexplored areas. I suspect other ME/OPEC countries are in similar situations of having oil, but for one temporary reason or war or another can’t access and produce it – except maybe Saudi Arabia who seems to have completely peaked. I think the demise of the OPEC cartel and it’s market control is largely wishful – and not without justification vengeful thinking. Global oil prices will be impacted by OPEC decisions for some time to come. If fracking costs and gov. parasitism is as great as you say – then I’m sure the frackers don’t want OPEC to go away – as long as their production quotas support prices.

            • Paul says:

              I don’t buy this premise: “For example it ignores Iraq’s vast untapped proven reserves (5th largest in the world – some say could be the largest) because of large areas of unproven reserves and plain unexplored areas.”

              If there are recoverable reserves in Iraq then they would be recovered. The US spent trillions in an illegal invasion of Iraq killing tens of thousands – which demonstrates their extreme level of commitment to doing what it takes to steal — I mean secure — Iraqi oil.

              One of the first things they did was secure the oil fields and the oil ministry building. The various factions can car bomb the hell out of each other but go near the oil fields and the hellfire missiles and drones will come raining down on them.

              if there were a mother load of oil to be extracted they would extract it. If there were unexplored areas they would not be unexplored for very long. If they have not – then I don’t believe they exist

              This sounds like another MSM propaganda story along the lines of ‘fracking will get the world 100 years of oil’

              I am not aware of any other countries where fear is keeping the Big Oil out. If there is oil — they will get it.

              Look at the middle east – the biggest bee’s nest in the world — the US sets up bases in Saudi – the centre of Islam and they support the House of Saud which is full of whoremasters and coke snorters who mock Islam — which drives the people into a frenzy.

              But can the people do anything about this? Nope – not so long as the US protects the House.

              The US has demonstrated both the willingness and the capability to go into any of these underdeveloped countries and extract oil. I do not buy that there are significant untapped reserves anywhere in the world waiting to be found – but which are left alone because Big Oil fears to tread there.

            • Paul, A little more reading on the subject might broaden your perspective and reduce your fears of MSM propaganda – which begs the question – where do you get yours? Here are some of my propaganda sources:

              http://www.businessinsider.com/biggest-untapped-oil-fields-2012-7?op=1

              http://books.google.com/books?id=Bq-wmEqZ6PMC&pg=PA125&lpg=PA125&dq=Iraq%27s+vast+untapped+oil+reserves&source=bl&ots=ZkrkoghaBW&sig=36Of6iiY-vFr5vR-XN6XrTnfJUg&hl=en&sa=X&ei=qkoZU43nOcLu2gXpkoD4AQ&ved=0CGEQ6AEwBw#v=onepage&q=Iraq%27s%20vast%20untapped%20oil%20reserves&f=false

              http://www.reuters.com/article/2014/03/05/iraq-oil-idUSL6N0M22P120140305

              http://en.wikipedia.org/wiki/Oil_reserves_in_Iraq

              http://www.eia.gov/countries/country-data.cfm?fips=iz

              http://www.reuters.com/article/2014/01/09/us-iraq-anbar-oil-idUSBREA080AI20140109

              http://www.ft.com/cms/s/0/5b24f674-f5e6-11dc-8d3d-000077b07658.html#axzz2vFOusTbt

              http://www.globalpolicy.org/component/content/article/185/40502.html

              and finally to understand that even though we know where resources (not just oil) might be generally in the middle east – we are still finding new ones and are a long way from being able to cost effectively plunder them. Sometime we can discuss why the USGS surveys are misleading and in many cases not worth the paper they are written on regarding the general the availability of global resource reserves – why BTW are generally overstated by the USGS.

              http://www.nytimes.com/2010/06/14/world/asia/14minerals.html?pagewanted=all&_r=0

            • Paul says:

              My view of the New York Times is that is is useful only in that when I read an article there I can generally expect that it is a lie. That allows me to rule out that version of events as I go about my day seeking the truth.

              Whatever oil remains is not being extracted because it is too expensive to be extracted – as I will demonstrate using a number of articles:

              Big oil counts the cost of tapping new discoveries – FT.com

              “One hundred dollars per barrel is becoming the new $20, in our business.” With that pithy analysis, John Watson, chief executive of Chevron, summed up the oil industry’s plight.

              As companies pursue the ever more challenging oil reserves that they need to increase or merely sustain their production, their costs have risen to the point that the most expensive projects, such as deepwater developments or liquefied natural gas plants, need an oil price of at least $100 a barrel to be commercially viable.

              Now a growing number of oil executives are saying that has to change. As discussions at the IHS Cera Week conference in Houston made clear, cost-cutting is back at the top of the industry’s agenda.

              The issue has come to a head after three years in which the price of crude has drifted down, in part because of the extra supply coming on to the market from the US shale oil boom, while costs have continued to rise.

              The result has been a squeeze on margins, declining returns on capital, and underperforming share prices.

              Chevron and ExxonMobil’s shares have both risen 11 per cent in the past three years, and Total’s by 8 per cent, while Royal Dutch Shell’s have fallen 2 per cent. In the same period the S&P 500 index rose more than 40 per cent.

              Futures prices show oil is expected to fall further, with five-year Brent at about $91 a barrel, suggesting that the pressure on oil producers’ profits will intensify.

              Shares in companies such as Schlumberger and Halliburton, which provide services to the big oil groups, have over the past five years comfortably outperformed their customers. Under mounting pressure from their shareholders, oil companies are being forced to act.

              In part, the roots of the industry’s cost problem lie in part in the increasing technical difficulty of the new projects being developed, such as large LNG plants or offshore oilfields in deep water. They demand complex equipment such as drilling rigs, specialised materials such as sophisticated steel pipes, and highly-skilled engineers, all of which are in limited supply.

              As Peter Coleman, chief executive of Woodside Petroleum of Australia, put it when explaining the soaring cost inflation in the country’s LNG projects: “Everybody jumped into the pool at the same time, and we’re all trying to fight for the same floatable toys.”

              Paolo Scaroni, chief executive of Eni of Italy, argues that his rivals’ rising costs also reflect their failure to discover more easily-developed resources. Companies such as Exxon and Shell have been adding production in the oil sands of Canada and US shale, which generally have higher costs per barrel because of the need for techniques such as hydraulic fracturing to extract the resources from the shale, or processing to separate the oil from the sand.

              Exploration is more risky, but offers higher returns, Mr Scaroni says. Because with oil sands and shale the resources are known, “you are sure of everything, but the point is profitability is lower than if you make a discovery”.

              Christophe de Margerie, chief executive of Total, adds another explanation: companies – including his own – have lost sight of the need to control costs. When oil prices are rising, managers are tempted to relax on cost control because their projects will still be profitable.

              “If you have $110 [per barrel], and the budget is at $100, it’s easier. You can say ‘we’ve made it’. But what about the ten dollars? Where are they? Gone with the wind,” he says. “That’s not the way engineers or commercial people should behave.”

              All the large western oil companies have reached similar conclusions. Andrew Mackenzie, chief executive of BHP Billiton, the mining and energy group, suggests the oil companies have reached the same point the miners were at a couple of years ago: facing up to the need to improve productivity in an environment of weaker commodity prices.

              Total, Chevron and Shell have announced cuts in capital spending, and were joined on Wednesday by Exxon. Several companies have been “recycling” projects: delaying them to try to work on improving their economics.

              BP’s Mad Dog phase 2 development in the Gulf of Mexico, Chevron’s Rosebank oilfield in the Atlantic west of Shetland, and Woodside’s Browse LNG project in Western Australia are among the plans being reassessed.

              Mr Coleman told the Houston conference that as originally planned Browse had an estimated budget of $80bn, which was “not a commercially acceptable risk”.

              The prospect of an investment slowdown already appears to be having an impact. David Vaucher, an analyst at IHS, says the firm’s survey of oil and gas production costs shows they levelled off last year, in a sign that the industry is moving into a more sustainable balance.

              Day rates for drilling rigs have started to fall, even for advanced deepwater rigs. The prospect of further falls has helped send shares in Transocean, one of the largest rig operators, down 20 per cent in the past 12 months.

              However, Mr Vaucher observes that costs tend to be easier to raise than to cut.

              At Total, Mr de Margerie still sees a lot of work to be done. He is promising a cost-saving plan throughout the company, a new process for designing projects to build in cost control right from the start, and reshaped relationships with service companies.

              “You need to create a new culture,” he says. “Yes, safety first, yes environment. But also at the same time, yes cost is important. And to achieve a project with lower cost is good.”

              http://www.ft.com/intl/cms/s/0/b7861cc8-a51b-11e3-8988-00144feab7de.html#slide0

            • Paul says:

              FORTUNE — If it wasn’t clear before, it certainly is now: Big Oil has got some big problems.

              In a year in which oil remained near historic highs at around $100 a barrel, ExxonMobil (XOM), the all-around best-in-class energy company, said on Wednesday at its analyst meeting in New York that its return on capital employed (ROCE) for 2013 was 17%. Let me repeat that — 17%. This is bad, people.

              Admittedly, achieving a 17% ROCE is something many companies would kill for — even other energy companies. But this is ExxonMobil. No other energy company is as skilled or as adept at maneuvering the political and economic quagmire that comes with drilling for fossil fuels than Grandpappy Exxon. In the 2000s, ExxonMobil’s ROCE, which is a measure of profitability and efficiency of how capital is employed, was legendary for its strength and power, with 35% considered the internal benchmark. Achieving a level below 30% was considered failure among Exxon’s conservative lot, according to a longtime engineer at the firm.

              But the financial crisis put an end to ExxonMobil’s profit party. Oil and natural gas prices plummeted, and, as one would expect, so did Exxon’s ROCE. It still stayed in the mid-20% range, which, while disappointing, wasn’t the end of the world. But investors cut the company some slack. They thought that once the tumult was over Exxon would again reign supreme.

              MORE: Banks may be lending too much

              And now we have this — 17%. Even amid high oil prices, the company couldn’t even hit 20%? Even more embarrassing, Chevron (CVX), the other big U.S. energy company, is expected to beat Exxon hands down when it comes to ROCE — it has done so every year since 2010.

              This must be very disturbing for Rex Tillerson, ExxonMobil’s chief executive. On Wednesday, Tillerson took action, which he believes will boost Exxon’s legendary profitability — spend less. In a surprise move, Tillerson said that 2014 will see a $4 billion, or about 10%, decrease in ExxonMobil’s ridiculously large $40 billion capital expenditures budget. Spending less capital means that the ratio will go up, provided that profits stay level. That’s probably a good bet considering that it takes years, even decades, for a project to start paying off.

              So is Tillerson making the right move? The markets don’t think so — Exxon’s stock price sank 3% after the announcement, dragging the entire Dow Jones Industrial Index (INDU) down with it. Tillerson must be very confused. He is doing exactly what he thought shareholders and analysts wanted — delivering a higher ROCE.

              But while ROCE is an important metric, it isn’t the only thing investors care about. People who invest in ExxonMobil tend to be conservative value players, more interested in consistent cash flow with long time-horizons than with hitting some financial target. For example, Warren Buffett, the king of value investing, disclosed last November that he had accumulated a nearly 1% stake in ExxonMobil during the second quarter of 2013, equating to some $3.45 billion.

              At the same time he bought Exxon, Buffett slashed his relatively large stake in dimming energy giant ConocoPhillips (COP), which, at the time, was going through a major reorganization. Some investors found his choice strange as ConocoPhillips’ stock was up 27% for the year at that point, while Exxon’s stock was up only 8%. But it plays to the theme of value investing. Exxon’s earnings are stable, with defined long-term earnings potential, while COP’s future had been up in the air. Uncertainty isn’t ideal for value investors, even if it means giving up some of the upside.

              Exxon has made a point to be as consistent as possible with its returns, despite, of course, the volatility in oil prices. When it says it is going to invest $40 billion, investors trust that the company will deliver world-class returns on that money over the next few years.

              That’s why when Tillerson said on Wednesday that he was cutting the CapEx budget, investors ran for the exits. They had projected that Exxon would continue to plough money into new projects and that those projects would yield strong and consistent 20% to 30% returns over time. Sure, it is nice to have that extra $4 billion returned to shareholders, but that’s just this year. Value investors are in it for the long haul and cutting CapEx means that they should expect decreased revenue down the road.

              To be sure, no one is saying that Exxon should invest in unprofitable ventures just to keep busy — too many companies already do that. It was just disappointing for investors to hear that the company doesn’t believe it can deliver a strong enough return to justify its carefully planned CapEx budget.

              Then there is the big fear — did Exxon think a 17% ROCE was a strong enough return to justify last year’s massive capital expenditure outlay? If so, what exactly does Exxon think its future projects will yield if it can so easily slash so much off of it — 15%? Maybe 10%? You can see how this might have caused a bit of a panic.

              finance.fortune.cnn.com/2014/03/06/exxon-performance-spending-cuts-rattle-investors-nerves/

            • Paul says:

              Kashagan fails to live up to promise FT.com

              What happens when geology, politics and corporate bureaucracy collide? The answer is Kashagan, the $50bn oilfield in the Caspian Sea that has been plagued by delays, cost overruns and technical difficulties.

              Discovered in 2000, the world’s most expensive standalone oil project finally started producing oil last year – almost a decade later than had been first envisaged by the seven-member consortium behind the project. The partners include Eni, Royal Dutch Shell and Total.

              But Kashagan, dubbed ‘cash-all-gone’ by industry watchers, is still not producing the hoped for volume of oil. In fact, it is currently sitting idle.

              The latest twist in the project’s history came in October when output was halted after a leak in a pipeline that transports a toxic gas associated with the oil to an onshore processing centre.

              It remains unclear when production will resume. The results of an investigation into what went wrong, together with a new development plan for the field, are due at the end of this month.

              Sauat Mynbayev, chairman of Kazakhstan’s state energy company KazMunaiGas, said this week that the restart of the field would probably happen in the second half of this year. “However, we should speak about it in terms of probability, and not talk about the volume of extraction yet,” he added.

              Analysts believe the field is unlikely to produce more than 100,000 barrels a day when it does come back on stream. To put that figure in perspective Kashagan was expected to produce 180,000 b/d in its initial phase before ramping up to 370,000 barrels a day by the start of 2015. (Once all three phases of the project are completed – at some point over the decade – the field is expected to yield more than 1m b/d).

              “Given the extremely harsh winter, our expectation is for Kashagan to ramp up in the second half of 2014 at the earliest, although there is a growing risk that the field’s start will be pushed back to 2015,” Energy Aspects, a consultancy, wrote in a recent report. “Thus the field is set to disappoint relative to market expectations and will not be a source of growth in our view.”

              The infrastructure at Kashagan is built on artificial islands to avoid damage from ice in waters that freeze for five months a year in temperatures that can drop to minus 30 degrees.

              Adding an extra layer of complication is the make-up of the consortium. No one partner has a big enough stake to take control, which has slowed down the decision making process, say analysts. Politics have also proved challenging with the consortium forced to renegotiate its contract with the Kazakh government several times.

              What return the partners make will depend on the oil price. Analysts say projects in the former Soviet Union sit at the higher end of the cost curve and typically require prices of about $100 a barrel to break even. However, Kashagan is reckoned to be much lower.

              http://www.ft.com/intl/cms/s/0/779905f0-a550-11e3-8070-00144feab7de.html#axzz2vLp4lwZ5

            • Paul says:

              To paraphrase Chomsky – read as many sources as possible – MSM and non MSM – and you might be able to come close to finding truths.

              I spend minimum 12 hours a day in front of a computer – for the most part doing research on a range of topics – particularly those related to geo-political events and energy – because that is where my interests lie.

              Here’s a tip – dump the New York Times – the bastion of liberal propaganda – and have a look at Zero Hedge. That site breaks more stories than the entire MSM combined in a year.

              But then how difficult is that when the competition is comprised of whores who suck the teat of their corporate owners, their cronies, and the politicians who are in bed with them.

            • Paul says:

              http://www.nytimes.com/2010/06/14/world/asia/14minerals.html?pagewanted=all&_r=1&

              I am sure there are a lot of minerals in the mountains of Nepal and Tibet too – and at the bottom of the oceans. I bet there are huge deposits of minerals on the planets and asteroids.

              Just as there is plenty of oil remaining in the ground.

              The problem is that it is EXPENSIVE to extract these resources.

              Here’s the formula re: expensive resources:

              High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.

            • While I agree regarding the “death spiral” – probably not caused by the same limitations as most see herein. I also generally agree that resources are becoming more difficult and costly to produce, but not necessarily accurately reflected in their prices. Because I don’t see unbiased information that suggests that cost and prices are directly linked in things like petroleum, or healthcare, or insurance, and lots of other market manipulated products. I’m always wary of Big Oil’s proven ability, if not modus operandi of manipulating the markets to their profit advantage.

              “Expensive” is a relative term – that mixes both costs and the price that the market will pay. Since 1970 I remember numerous commodities “shortages” of sugar, fertilizer, silver (remember the Hunt bros.), coffee, oil and a number of other commodities including gold and interest rates – where those commodities became very “expensive” – but the production costs and in some cases the availability of those commodities were relatively unchanged, but the public perspective and resulting prices were manipulated by their respective marketers.

              As an aside to market manipulation by corporate interests not unlike Big Oil – the best example I know of where an industry has raped the public while “crying rising costs” is the hurricane disaster/insurance industry. With the spate of hurricanes in 2004-2005 my coastal FL hurricane insurance went from $1000 per year to $7000 per year. If the respective hurricane insurance companies had been putting the appropriate amount of my previous years premiums into the risk pools as they say they do and were legally supposed to, this one in one hundred year event could have been paid for with minimum discomfort to both insurance companies and premium payers. Instead the insurance companies had been diverting risk pool money to profits and dividends and consequently their risk pools were totally inadequate if not near non-existent when the hurricanes finally came. Not unlike the mortgage and credit default bankers a few later – the Justice Dept. quietly ignored and chose not to prosecute these insurance companies. Now, in spite of a below average hurricane frequency since 2005 we continually hear about increased hurricane frequency as part of climate change propaganda. I’m not a climate change denier, but hurricane frequency increase just isn’t part of the support data – as yet. Who benefits from this kind perspective manipulation? The insurance companies and a host of businesses that make money from disaster fear.

              Going back to Big Oil – just the fact that an oil cartel like OPEC exists announces in your face that the oil market not only can be manipulated well above actual costs, but that it actually is manipulated whether by supply/demand control or other manipulations. In the case of oil it may be a combination of more difficult production costs for newer wells and market manipulation. Given the 20-30 year avg. life of oil an gas wells (non-fractured) clearly Big Oil is charging us now for future increases – or just for profit. Big Oil is aware that the majority have finally come to accept the finite nature of natural resources including petroleum deposits. If I were an oil executive I would be foolish not to utilize that perspective to justify and enhance higher prices than I actually needed to increase my profits. If Chris Nelder is correct (http://www.smartplanet.com/blog/the-take/the-energy-transition-tipping-point-is-here/?tag=nl.e660&s_cid=e660&ttag=e660&ftag=TRE4eb29b5) and Big Oil sees the end of petroleum energy and transportation in sight due to replacement by cheaper alternative energies – then logic would say you would try to make every dollar possible before then. We can argue over the details and motives regarding oil price and marketing, but in the end none of us are going to all the data necessary to come to undeniable conclusion.

              In any case, I see our end coming by petroleum industry economics rather than physical petroleum limitations per say, but rather tied to petrochemical economics necessary for the production of non-substitutable commodities – most especially phosphorus. Petroleum energy can and is being substituted and replaced by alternative energies. However, it appears to me that we don’t adequately see petroleum’s economic link to food production. Unless new sources of energy are dramatically cheaper than petroleum has ever been, sourcing ever diluted and increasingly limited essential food production resources like phosphorus will be economically impossible in the next few decades – if not sooner. One my physicist friends whose Ph.d. was in mass transfer says “Nothing is impossible with cheap enough energy.” He means with enough cheap energy current critical resources can be extended indefinitely by affording the economic mining of resources at more dilute levels and or by reversing reactions in commodity resources back to their useable states regardless of the energy necessary to do so – because the energy is so cheap.

              Whether that energy source will arrive in time – if ever – is the real question of our day and on which our species’ future now appears to depend entirely upon. Essentially unless we make a high yield energy production system like fusion happen in the near term, I don’t see a cheap enough energy source necessary to offset the changes in the costs of petrochemicals (with the decline of the petroleum industry) required for processing/producing NPK, or even recycling wastes to meet even a fraction of the current populations food needs. Most people don’t understand that neither potassium or phosphorus ores are not useable out of the ground and have to be chemically processed to forms that are available to plants. The petrochemical industry is the only current at scale source for those chemicals – change its cost structure very much and all bets are off on our species ability to adapt and feed itself as we have for the past 100 years or so. Otherwise, and without NPK It takes years for soil organisms to make phosphorus compounds available – the natural phosphorus cycle and why permaculture and organic production techniques regardless of human labor available can never feed the existing population.

              Again my point is regardless of the FED printing money that has no collateral basis, regardless of debt that mathematically can’t be repaid, regardless of how much available oil is in the ground – we have serious physical limitations effecting our food supply, that unlike other economic factors – limitations that once reached can’t be manipulated or propagandized – that are being ignored regarding planning and abused regarding prioritization and preparation – not unlike the FL hurricane insurance company risk pools pre-2004. It seems to be part of human nature that we are more reactionary than proactive.

            • Paul says:

              If you have a look at the FT article the problem is the price of oil is too LOW – Exxon and Chevron are cutting back on investments because they are unable to make money even with oil over $100.

              Even if the market is 100% manipulated it does not matter – because if these companies and OPEC were to shift the price higher then the market will completely collapse.

              Because the global economy cannot deal with 100 oil let alone 130 or higher.

              To reiterate:

              High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.

              That would lead to oil prices crashing (as happened briefly in 08) and that would lead to even less exploration and extraction reducing the supply and ultimately bankrupting the industry.

            • Paul says:

              Here’s another hopeless piece of rubbish from the NYT – not a word about how for every 1.50 invested in shale 1.00 is returned —- they present this total joke as if this is going to save Japan.

              Give me a break — this is the sort of stuff one would expect in The Enquirer.

              They might as well have ran a headline “Energy Coup for Japan – Former Kamikaze Pilot Flights into Space in Cessna and Tows 5000 Tonne Chunk of Frozen LNG to Tokyo”

              Or better still “Japan Trains Mermaids to Capture Frozen Methane from Ocean and Declares 100 Years of Cheap Energy!”

              An Energy Coup for Japan: ‘Flammable Ice’

              http://www.nytimes.com/2013/03/13/business/global/japan-says-it-is-first-to-tap-methane-hydrate-deposit.html?pagewanted=all

            • What is needed is the existence of credit for buyers of cars, homes, business equipment, and many other things to keep the price of oil up. If credit goes away, the price of oil will drop way down, regardless of what OPEC does. Even Iraq needs a high price for oil, to build all of the infrastructure it needs.

            • Gail and Paul,

              I have read many of the same articles that you have and you are certainly accurately quoting them and interpreting them as they are written. While I respect your opinions, I’m a bit more skeptical of their source articles (MSM or WSJ, or whatever) and their universal potential for manipulation. Remember the media in general has a memory shorter than their shoe strings and most writers wear loafers. Add to poor memory the fact that we now live in the age of “paid content” where it is increasingly hard to know the motivations of what is written and even when accurate, whether that accuracy has been skewed by weighting of opinions, or omission of contradicting data.

              Regarding recent articles on increasing major oil capex, and the claimed need for higher prices for higher production costs – and declining demand:

              I would posit that current major oil company capex reductions are simply an adjustment to reduce immediate future production in the face of decreasing demand and acknowledgement of higher availability of increasingly lower cost alternative energies – same strategy that OPEC uses when prices fall – reduce production. Consequently in the face of lower oil demand and potentially shrinking petroleum energy markets, if you are marketing executives for major oil companies – you start media campaigns about the cost of production being higher, as opposed to your corporations unwillingness to have lower volumes of profits. The question is whether the public really wants to continue to fund the life styles that petroleum company profits have afforded their executive staffs and their dividend receivers. In any case the market will sort this out over time I think.

              New drilling deeper and in more remote locations has undeniably become more expensive over time as shallow deposits have been exhausted. I would counter that new technology has made drilling and oil recovery far more cost efficient. For example, octopus rigs (with eight or more multiple horizontal wells radiating from one central platform – make wells much more cost efficient because it lowers rig costs seven or more times by eliminating new set up costs, leases, time and logistics. Additionally, octopus rigs are much more efficient in getting more of the oil from a specific deposit than single multiple wells and they don’t require as much post-peak production additional manipulations – like pumping in CO2, water, etc. make get more oil from the deposit that a single well could reach. Technological efficiency improvements have gone a long way in improving petroleum development efficiency – and that doesn’t include fracking that gives old wells new life and existing wells more efficient and thorough utilization has yet to be adopted much outside of the US. To paraphrase Shakespeare “The lady (major oil companies) doth protest (cost increases) too much, methinks.” New technology is a serious offset to deeper and more remote wells.

              In spite of recovering from recession, 2010, 2011, 2012, and 2013 were all record or near record profit years for many of the major oil companies – especially Exxon. I can’t see how companies of this scale can post record profits (in the multi-billions) multiple years running and a year later “poor mouth to the media” claiming they are so poor that they are “selling assets to maintain dividends” and expect anyone with more than 12 months of memory to find their supposed financial woes credible, due any sympathy – or immediate justification for higher prices – which I’m sure we will see shortly. There are are at least two obvious and logical conclusions – either major oil companies have no financial/resource projection capability that allows them to invest wisely previous years profits because they are run by incompetent morons (which doesn’t jibe with all those previous profits), or they are in the midst of a major misinformation campaign to justify higher prices to maintain and grow profits on lower demand due to lower oil demand from growing less expensive alternative energy competition.

              http://thinkprogress.org/climate/2013/02/01/1525441/exxon-chevron-2012-profit/

              http://thinkprogress.org/climate/2012/01/31/415242/exxonmobil-made-411-billion-in-2011-but-pays-estimated-176-percent-tax-rate/#

              http://money.cnn.com/2012/07/26/news/companies/exxon-

              profit/http://www.gasbuddy.com/gb_retail_price_chart.aspx

              Regarding Gail’s comment on declining oil demand due to US oil production increases, a lack of credit for cars and homes:

              If you only have a US perspective the effects of decreased credit, and a declining US economy might be true along with US oil production going up – at least in the short term. However, as US auto demand has slumped – Asia’s had grown rapidly. China now is the largest car market in the world. They are forecasted to have three times the car sales as the US market by 2020 in less than six years. China has been and will probably continue to be slow on adopting EVs. So, they represent offset to oil demand in China or Asia’s growing oil demand. So, while US transportation fuel may be down, global demand for oil continues to grow as less develop countries expand their living standard and economies. Oil is a global market in spite of slight differences various source prices like WTI and Brent. Energy is is the true global reserve currency and oil will be continue to be the primary form of transportation energy, albeit declining in fits and starts for a few years more.

              http://www.businessinsider.com/chinese-auto-sales-are-going-to-be-enormous-2013-4

              Again, I would have to side with Chris Nelder and think that long term declines in petroleum production won’t relate to oil production costs and availability as much as competition with other alternative energy form prices, but rather shrinking demand from alternative energies. At the same time I understand that Chris also has an alternative energy bias. In any case, our use of petroleum and other fossil energies will decline and higher supposed oil costs and or marketing campaigns will only hasten the decline of petroleum energy and fuels.

              The decline of petroleum combustion for fuels and energy is good news environmentally. However, if we don’t account for plan the overall petroleum economy-of-scale declines along with the primary (95%) fuel and energy petroleum sectors and resulting higher costs/prices regarding petroleum based petro-chemicals (5.o% of the petroleum industry), but which 95% of world food production is dependent upon, we will have far more serious problems as a species with food shortage related economic, social, political and ultimately military (resource wars) problems than we have from petroleum caused environmental problems. BTW the earliest projected food crises come decades before serious climate change issue begin to affect most of the world. As some one with a 40 year career in biotechnology and food production technology development, I don’t see even minimal consideration of the level of seriousness that petroleum decline and the potential for related food shortages require – not even remotely close to the consideration level needed.

            • Paul says:

              When trying to determine the truth it is effective to look at many sources and use some common sense.

              Fact: BP is selling assets to be able to pay dividends. If they were profitable and lying about it why would they be doing this? If they were profitable then why is there share price negative while the S&P is up 40%? That would be illegal and that would open them up to massive shareholder lawsuits.

              Fact: EXXON and Chevron are cutting capex – you can easily get your hands on financial reports as they are listed companies – so how could they lie about that? That would be illegal and that would open them up to massive shareholder lawsuits.

              Fact: http://www.csmonitor.com/Environment/Energy-Voices/2013/0412/The-decline-of-the-world-s-major-oil-fields

              Common Sense: we know that the easy to extract oil is mostly gone – we know that what is left is without question is going to be more expensive to find and extract – we know that expensive oil nearly ripped down the global economy in 2008.

              Do you think that the elites of the world are going to allow the likes of Rex Tillerson to tear their worlds apart by playing PR games and lying about the situation — and ramping the price of oil up to $147 to line their pockets?

              Not a chance in hell. They would smack him in the head and get him in line without a second thought.

              FACT: THE CHEAP OIL IS GONE – THAT IS WHY WE ARE FRACKING – THAT IS WHY WE ARE PRINTING MONEY – THAT IS WHY WE HAVE INTEREST RATES AT 0 – AND THAT IS WHY AT SOME POINT WE ARE GOING TO COLLAPSE – AND THE AGE OF OIL AND INDUSTRY WILL BE OVER.

            • Paul, Again most of the oil being sold today was drilled and expensed 15-20 years ago and some as much as 30 years ago. What I’m saying is that today’s oil company income has no direct relationship with the cost of the oil currently being sold by the oil company. So, if you look at oil price history charts you see that oil companies have received steadily increases in price since 2000. They still should have another 15 years life of wells drilled when oil was selling for $30-40 in 2000. The should be raking in profits from those less costly wells by your reasoning. And, indeed they have I sent you the refs. of Exxon’s record profits 2010-2013 – a year latter they’re selling assets to pay dividends? Don’t buy it regardless of the “common sense” that oil is getting more expensive. I have heard that my entire life as I watched prices go up and down more than 300%.

              Sure, Exxon is a modern day riches to rags story. I get oil is necessarily becomes more expensive as the resource declines in availability and increases in costs, but profit structures at Exxon’s scale and history don’t change that rapidly with 20-30 year well life and go south in 12 months. If you don’t think books are cooked as part of corporate strategy and self-interests at the highest level – then you are naive. We commonly talk about an entire nation(s) – our nation – cooking their debt books, unemployment records, raiding social security funds, etc. and yet you find it incomprehensible that it might be done at the giant oil corporate level?

              Do you remember a company called Enron? “At the end of 2001, it was revealed that its reported financial condition was sustained substantially by an institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. >>>Enron has since become a well-known example of willful corporate fraud and corruption. <<>>affected the greater business world by causing the dissolution of the Arthur Andersen accounting company<<<." (http://en.wikipedia.org/wiki/Enron). While helpful – Sarbanes–Oxley has been described as a less than perfect solution to stopping major accounting fraud.

              I suggest you review the lists at these links – and note the disproportionate number of oil companies 1. (http://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals). 2. (http://www.therichest.com/business/top-10-corporate-scandals/). Almost, all involved deceptive financial record keeping at some point. My point being sometimes companies get away with it and sometimes if you're really successful – it gets to be a habit before it takes you down. Perhaps I'm just overly cynical, but today almost nothing is as it may seem where large amounts of money are involved, but is rather is more probably the perception that is being bought and sold through today's "media."

            • Paul says:

              “What I’m saying is that today’s oil company income has no direct relationship with the cost of the oil currently being sold by the oil company.”

              It has EVERYTHING to do with the share price of the company.

              This is a forward – not backwards – looking dynamic as in what have you found lately – how much did it cost to find – how much will it cost to extract – and what is the market price for oil.

              Let’s say I was running a fund of 10 billion dollars. I know Exxon has just cut its capex stating that new exploration/extraction will not be profitable with oil at $110. Being a good manager I would know that oil at $110 is killing economic growth – so I am certain that oil will not go much higher than the current price – otherwise we get a recession and the price of oil will crash destroying the share price of Exxon.

              Exxon/Chevron say ‘but we have all these old fields that are profitable at $110 so we’re just going focus on those assets – cut costs – and maintain our 30% margins – and pay some nice dividends – invest your 10B with us!’ (this is actually what they said last week)

              BP says ‘what we are going to do is start to sell assets to generate some cash flow – and pay dividends – invest your 10B with us!’ (this is actually what they have done)

              I’d realize that both companies have just stated that we have reached peak CHEAP oil – that companies have no growth prospects and will at best remain stagnant for some years – then barring a miracle – collapse.

              Because that’s what stagnant public companies do – particularly those in the resource industries – because it is all about growing proven economically extractable reserves.

              The moment that stops – the fat lady warms up.

              Now I might ride the wave of these dogs a little longer because Exxon will no doubt pay solid dividends if they stop drilling dry holes – as will BP if they sell the family jewels.

              But the writing is on the wall – get the stops in place because when the herd runs sniffs this out and realizes there are greener pastures out there – they will do this http://www.youtube.com/watch?v=whixkUJbdO8

            • Paul says:

              I would fully support a policy from the Fed of secretly buying Big Oil shares to keep them from collapsing.

              If the market concludes the growth prospects for companies such as Exxon are limited or non-existent, then we are very quickly toast.

              Anything that delays the inevitable is worth doing. Regardless of how outrageous it seems.

            • timl2k11 says:

              Great link, Gail. And very interesting discussion below that article. Someone gave a link to a panel discussion of some very knowledgeable shale industry insiders about how long they think the shale boom can last. It’s an hour long, but worth it if you want to know the mindet and possible blindspots of those inside the industry.

      • Paul says:

        Once again — oil was at $30 for a very very short period — if it would have stayed there nothing would have been pumped because every barrel extracted would have lost money

    • The thing you have to understand about oil production is that there is a huge amount of investment that going in on the front end–leasing the land, hiring the right experts to decide exactly how and where to drill, and then actually getting the drilling gear in place. Over time, there is often more drilling that needs to be done.

      When oil prices drop to $30, oil companies stop going out and leasing new land. They probably also stop working on some of the next steps, as well. But they have some wells already drilled, that will continue to flow for a while, with essentially no work. The reason why oil production hardly budges when oil price drops is because of the huge inertia of the system. The wells that are already drilled will keep producing oil for a while, unless an active step is taken to stop them.

      Actually, a big part of the costs of oil companies is taxes and other government fees. In most countries, these are variable, with the price of oil. In the US, they tend to be closer to fixed costs. Some of these are state taxes, and some are federal. In the Bakken, the “government take” is higher than the direct costs. According to an article in the oil and gas journal from May 2013, on average, for a barrel of oil from the Bakken that sells for $80 a barrel, Capital Expenditure is $22.60, Operating Expenditure is $7.50, and “government take” is $33.29. These amounts do not reflect dividends to stockholders, which are pretty much required (because pensions buy they stocks, and depend on them to pay dividends). Among oil exporters, the “government take” is often 70% to 90%. Needless to say, oil extraction is a big source of revenue for oil exporters (and even for countries like the US).

      You may have missed my last post, when I was talking about oil companies now having cash flow problems, because prices at $100 barrel are not high enough for all of their expenses. Some companies are selling assets to have enough money to pay dividends–not a good sign.

      • Actually, I did read your last post and several other columns on similar topics – on the recent majors drop in production and retrenchment – including a very good one by Chris Nelder. “The reason why oil production hardly budges when oil price drops is because of the huge inertia of the system.” That’s part of my point.

        I have to admit I didn’t realize the various governments’ bites were quite so large. I need to look into that further. I have interviewed a few independent oil producers and worked a few years for Sunoco a few decades ago – and my reference to their operating like public utilities is not an exaggeration – cost sensitivity wise. You may remember just a few years ago when we were all up in arms over Exxon declaring record profits during a recession – a couple of years running. The majors operate in their own sphere, independents in an entirely different one – with lower cost and perhaps higher risk though that might be debatable. I do appreciate your opinion and information, but I still think much of oil pricing – at least up until very recently has been more about what the market would bear.

        • Paul says:

          Disagree.

          Fracked oil needs roughly USD80 per barrel to turn a profit. And that is increasing as the low hanging fruit gets fracked. The market sets the price in that if the market will not pay at least that then the oil will stay in the ground.

          But that’s not the only thing impacting the price – the fact that Big Oil is drilling many dry holes also means that when they do hit oil they have to sell at a higher price to offset the massive losses on failed exploration.

          I believe in kazakhstan BP has wasted 30B already with nothing to show for it. They have to make that up somehow or they go out of business. So the price of a barrel needs to be even higher.

          I recently posted that for every 1.50 invested into fracked oil returns 1.00. How does something so illogical continue? Not because oil companies are like utilities rather sleazy companies like Chesapeake pay PR firms to float the story about 100 years of oil – QE and ZIRP money that is floating around looking for a good story flows in — and you create a wave. Retail follows. And eventually the whole thing does what a wave often does – it smashes on jagged rocks.

          This is a good summary of the situation http://www.businessweek.com/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power

          • Fracking is significant to US only at this point in time and while it effects US imports has little impact on the costs, price or supply of oil globally. You need to remember that the average life of an oil well is 20-30 years. Most of the oil sold today was drilled 10-15 years ago with those cost structures (before fracking started as well) – but the price of oil is based only on what people are willing to pay for it now and in the immediate future. Point being – there is no direct link between the actual cost of oil production and current market price. Oil companies use current difficulties to help justify market prices, but their profits come from wells drilled decades ago. This cost disconnect can be quite substantial and I’m not sure that it’s either justified or deserved – especially when it isn’t necessarily well invested in new production and technology.

            • A lot of what you and I think of as profit gets absorbed by governments as taxes. They do their best to get as much as possible from the industry. As I pointed out last week, the big companies now have a cash flow problem because they have not been able to bring about new production as planned.

        • Jim King says:

          Gail and Durwood, you are both right about oil production continuing even if it is loss-making due to low price. The bite is long term.

          As long as they think they see light at the end of the tunnel (or hope they will soon), businesses will usually continue to operate at a loss if they can afford to, in order to minimize the magnitude of the total losses. It usually costs less to operate at a loss than to shut down and restart later, for lots of solid reasons, including negative perceptions of the business in financial markets which affect stock prices and debt costs, and rust (and other deterioration) never sleeps at shut down infrastructure.

          Investing in new production and facilities is another matter. The bite of lower prices is longer term rather than short. The time to bring new oil production to market is several years, perhaps a decade or longer for complex, expensive projects. Once delayed, will they ever appear potentially profitable again, or the capex be available? Major price drops that last long enough will show up as less production way down the road, often with little or no apparent effects on production in the short term.

    • newyorker says:

      Maybe we can go back to mining guano and transporting inon sailing ships, like we did pre-haber process.

  13. SlowRider says:

    Although you have said most of it before, you managed to connect the dots again, in a slightly different fashion. It is very convincing how you show the financial situation will be at the center of events. Where else do we read about QE and the debt system propping up commodity prices so that these commodities can even be extracted economically, at all. That seems like a ponzi scheme.

    • In some sense, our whole economy is a like a ponzu scheme. As long as it can keep growing, everything is fine. Let is switch to contraction, and we have a real problem. Economizing doesn’t really help, because it pushes the economy to contraction quicker (assuming it is successful).

      • Gail, I would be very interested in your view of the feasibility of whether a non-growth and shrinking economy is functionally possible. I’ve asked a number of noted economist this question and never got much of an answer. Admittedly we all are so used to thinking in terms of growth.

        • Christian says:

          Economists will not think good of lack of growth, as they will never give us a way out of this situation. Their profession is dead and confined to lie saying it is not.

        • A non-growth society would still require a rising amount of fossil fuels, just because we are reaching diminishing returns–ores are of lower quality, oil is harder to get at, water increasingly requires desalinization, we need to do more and more to fight pollution. The rising amount of fossil fuels, especially oil, is a deal killer.

          If we use a flat or shrinking amount of fossil fuels, the economy will shrink by a big enough amount that we are likely to have huge debt defaults. It will also be impossible to fund current governments, leading quite likely to government collapses. Restarting the economy in such a scenario is doubtful. Long supply lines are based on promises to pay. At some point, businesses will stop believing promises to pay, because there are so many defaults. Local businesses will probably still work, but these will be smaller and use only local resources.

  14. Karl North says:

    Gail,

    Your view that in a declining economy due to the end of cheap oil, solutions to the problems like debt/credit, government funding, currency reform, capital re-allocation, employment are virtually impossible is correct, and has been nicely stated in many of your posts. But your view of limited options depends on an unstated assumption: that these solutions must happen in the present form of political economy. My question is why make that assumption? Admittedly a fundamental shift in the form of political economy is unlikely because power is so concentrated in few hands, but there are precedents – the partial command economy in WWII, for example. And if we do not even consider alternative systems, that makes them even less likely.

    Here is one scenario of an alternative, one that I limit to a rough sketch because there already exists a vast literature on the subject. Because of the interdependency in the system, multiple issues would have to be addressed at the same time. If the government took over the banking and other capital allocation that we call finance/investment, and returned to progressive taxation that recaptured the wealth and income of the rich, government could address multiple issues. It would be possible to simultaneously enact a debt jubilee, re-allocate the diminishing resources of our society in the energy descent to the creation of a transition economy (e.g., relocalize and scale down production including energy), create institutions of interest-free credit, make essential services like health, education and pensions public again, reform the currency, enable transitional employment and alter other institutions and policies to serve the public interest, not private capital. It could be done in a way the provided for a minimum of economic security for all during and after these changes. Partial versions of public control have existed at one time in other economies – the European economies for example – even under capitalism, and still function in partial or tarnished form today. Even in the US the Nebraska State Bank is an institution that is a step in this direction. Many argue that the “long emergency” as it deepens will propel us toward some sort of command economy anyway, so why not explore a version that might serve the whole public?

    The main obstacle to such a scenario in the US today is not technical but cultural. Private control of everything – physical resources, investment, essential services, income and wealth distribution – has been so glorified and public control so demonized that a fundamental shift in the collective consciousness is hard to imagine, and therefore politically difficult. Other cultural obstacles are well known to your readers: widespread denial of the end of cheap resources and addiction to The American Way of Life, to give just two examples. But because otherwise the human species faces a very steep slope down, aren’t alternative systems at least worth considering in your blog?

    • The way I see things, the government is being put in a very bad position now because it has promised far more than it can deliver. If it is going to do different things that it has promised (like relocalization, taking over banking, etc.) , it will need to cut back even farther on the things it has promised, like unemployment insurance, food stamps, Social Security, and Medicare. I am not sure it has the expertise to do the things you mention. If we get into delocalization, there are a whole set of problems associated with compensating existing owners for land, training people, and deciding how to do this so the land isn’t just further wrecked. I am not convinced that anything more could be done than is being done on pumping low interest rate money into the economy either–think of all of the student loans for example.

      So I am not really convinced that there would be something that could be easily done. It is almost better to work outside the government.

      • Christian says:

        Good points Karl. Gail is too kind to go further in revolution. But government can do anything it wants if all politicians agree, or if it has no reservations for using force, or if it convinces the masses this is the way things must go for them to keep living. (Or if the masses convince the government instead.)

        Closing banks or taking them over has no monetary cost, neither a political one if they fail (twice!). Land ownership issues on relocalisation can be properly addressed without a penny, using tax traps on big property for instance (if actual collapse doesn’t left landowners unable to even feed themselves). I think our situation is so extreme, or will be, that it could even be a good instance to one way or another put an end to big property. After all, inheritance has always been the main contradiction in liberal -in the US called conservative- political economy, since it goes against the principles “we are all born equals” and “each individual must seek his destiny by his own means”.

        Furthermore, I’m not sure “a lot and a plot” approach would be the best, given we are used to live in agglomerations and given we urbanites are not skilled on gardening. It would possibly be better to relocate people in small towns whose dwellers share some land and its products, and so will be in better shape to start, sharing skills also. As I see it, the historical moment is so significant –the culmination of humanity- that things can and will change in ways we could never have imagined. And I encourage anthropology reading, as Graeber works, because it’s the only science that really transcends our actual society.

        • garand555 says:

          In order for a government to apply force on the scale you are talking about requires energy. Those MRAPs and Bearcats suck down a lot of fuel, and there are supply chains to worry about in the midst of what would be turmoil. If there is to be a re localization of the economy prior to an economic collapse, it will not come from Washington DC. It will have to come from the locals. That is another way of saying “You think that globalization is a mistake, and that we need to go back to more local economies? What are YOU going to do about it.”

    • Paul says:

      Sounds something like Soviet Russia or Maoist China.

      Re: debt jubilee. Let’s think that through – governments unload all their debt – think of the counterparties involved – companies that are owed on govt contracts would collapse – 100s of millions of jobs gone

      All pension obligations would be dissolved – 100’s of millions of people with no income.

      Our system is simply far too complicated to endure a debt jubilee – you pull out one piece and the whole thing implodes (cancelling all debt pulls out many many pieces)

      Look at what happened when Lehman was let go – the global economy seized up.

      And people talk about a trillion dollar coin or debt jubilee as if that would be the ticket.

      It’s not – and even if it did reset the financial system, it would not overcome the primary issue of the end of cheap oil

      Have a look from p.56 on at what the implications are of removing a single card from the house does http://www.businessweek.com/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power

      • Christian says:

        Paul, it seems you don’t realize the financial way of living has become just untenable, and this under the premises of limits to growth you do say to accept. And this seems to be the case for other people here as well, intellectually understanding this game is over now or in the near future but not willing to really accept it. You talk about “epic starvation”; how does it match with trying to maintain the “house of cards”?

        Soviets and Mao wanted to grow, which is not my case. And I’m worried about how to maintain, and even improve, democracy under a severe twist in society, which you’ll notice if you read all that I write. Btw how much democratic you think your country is? Just an example: in Florida a third of color males can never vote in their whole life because of just being imprisoned once when teens by the racist judicial system standing there. But my concerns are not echoed by those just whining while imagining future “state of exception” and TPTB and governments trying to keep BAU at work at any (social) price. May be you secretly allow TPTB to infringe democracy because you just can’t imagine another kind of society, or you are very well placed in this one and all your fears are in loosing your standing. And it seems some people here don’t get what 50% unemployment of those under 30 means, as in Greece or Spain, and it is obvious they don’t have lost their jobs or incomes.

        Erasing pensions doesn’t mean aged people starving, because the State can subsidize them but under a different (and more equal) paradigm. Do you have your 401k? Do you believe it really exists?

        It is as if you just don’t read what I write. “Debt jubilee a ticket”, “restart the financial system”; go and reread my points.

        If anything, Argentinean experience teach us money and finances are not at all eternal.

  15. MJ says:

    The Petri dish of human cells is just about filled. That’s about the sum of it all, the rest is just drama.

  16. notaneoliberal says:

    Just like to point out that fertilizer is not made from petroleum. Nitrogen is made from natural gas. The p and k are not made from fossil fuels (in terms of feedstock) at all.

    • Natural gas is part of the petroleum product spectrum. While there are other sources fro nitrogen such as methane clahrates, none of these methods are in commercial production now. However, potassium and phosphates use huge amounts of primarily with petroleum fuels and they use large amounts of petro-chemicals from petroleum to process the ores into bio-available fertilizers. So, NPK fertilizers and 95% of global food production is entirely currently dependent on the existing petroleum industry and more importantly – the scales at which it currently operates – less our current food economics change drastically. I worry about this far more than whether we run a debt economy or not.

    • Oil is used to transport P and K. Quite a bit of nitrogen fertilizer is now made in China using coal, rather than natural gas. (Natural gas is used in the US.)

  17. Ikonoclast says:

    There are several dynamics which mandated and enforced a business as usual approach. These prevented us from taking preventative action in the 1970s when it was still possible. These dynamics also prevent us from taking any mitigation action today.

    1. Propensity for natural increase. Given benign or conducive conditions, the population tends to increase, seemingly without limit.

    2. Optimism bias. For most of our evolutionary history, having an optimism bias was a good survival trait and it was positively selected.

    3. The capitalist system. This system was predicated on and dependent upon endless growth, unlimited resources and the ignoring of negative externalities.

    4. Offensive realism. States and empires must seek to become bigger and more economically and militarily powerful than rivals otherwise they are destroyed in conflict. Unilateral de-growth and de-militarisation are open invitations to being conquered and destroyed.

    In a de-growth phase, the nations and empires which shrink and collapse the slowest are the ones which become relatively stronger compared to the others. This is true even though ALL are becoming absolutely weaker. Thus, in the collapse phase, the geostrategic issue will be to collapse slowest. The extra relative strength accrued in this manner will actually allow a bit more resource plundering from weaker regions. Slow collapse might even have as its reward some stasis periods where survival is tolerable for a while.

    Which places are best placed to collapse slowest? To collapse slowest or among the slowest a modern nation must be;

    1. Already a major power or a mid-power with a major power ally.
    2. Not already in ecological overshoot or not too severely in ecological overshoot.

    To cut a long story short, the nations which fit the above bill are Russia, USA/Canada (taken as a resource whole), Brazil and Australia. Russia, Brazil and Australia are not yet in ecological overshoot. Russia has by far the best resources to population ratio. The USA is in some considerable ecological overshoot. Canada is not. Taken as a resource whole USA/Canada may be at the cusp of resource overshoot. USA, using its power, can continue taking resources from elsewhere to cushion its decline.

    Regions/countries like Africa, the Middle East, Indian sub-continent, China, Japan, Europe (sans Russia), S.E. Asia and middle and south America excluding Brazil and maybe Argentine are already in bad ecological overshoot.

    So, the superpowers of the declining world will be Russia and USA/Canada. Australia and Brazil/Argentina might do passably well as tributary resource suppliers to USA/Canada. The only country that could conceivably overthrow this calculation is China via resource plunder of the rest of the world and expansion into Russia and central Asia. However, I think China has too many problems looming to achieve that. Russia’s nuclear deterrence and the USA’s Pacific power also contain China to roughly its current territory where it is badly in overshoot.

    To sum up, you cannot ignore geostrategy and the conflict of modern empires. This dynamic will play a huge role in outcomes. Russia and USA/Canada look relatively well placed. The EU, China and India look badly placed for the geostrategic struggle in the collapse phase. However, there are sets of mistakes which Russia and the USA will have to avoid. Otherwise, they might play into China’s hands. But that is outside the scope of this post.

    • Daddio7 says:

      This is the best explanation to geopolitics I have ever seen. You must have read Niven and Pournelle’s “Mote in God’s eye”.

    • Christian says:

      Good analysis, Ikonoclast, although Argentina is not a resource supplier to the US but to China (food). There are some parts of Latin America overshooted, as you say, but it is not generally the case. Another point: given China’s historic relentlessness to invade and expand, I’m not sure as so many people here do -perhaps projecting their own worldview- Chineese will now go out en masse for plunder. More generally speaking, 1-4 may or may not to be the case, but I’ll let you to discover why and where.

    • InAlaska says:

      I agree with your geopolitical assessment. US/Canada will be the least bad place to be. Once again, the splendid isolation of our two oceans will buffer us. Although Russia will be relatively resource rich, it will be surrounded on all sides by fiercely desperate people and nation states. Nuclear-armed Europe to the west, Nuclear-armed China to the south (with a billion Nuclear-armed Indians and Pakistanis right behind them). That will be a messy place to be trying to eke out a living.

    • Paul says:

      Even had we stopped 50 years ago that would still have meant massive suffering.

      Of course nobody was going to willfully enact policies that ended growth – even now, when people are choking on smog in China and climate change is a massive threat there is not a single serious voice in business or politics suggesting even a re-think.

      Nope – if the Arctic melts that’s awesome – we can get at the oil trapped under the ocean!

      Of course now we have 7.2 billion people so the end of growth (caused by the end of cheap resources) will not only result in massive suffering – it will cause billions of deaths. Thanks to the green revolution that brought us chemical based farming.

    • The Western Hemisphere definitely looks less populated than the Eastern Hemisphere. It is hard to know on the very cold part of the world how much in overshoot they are.

      Russia tends to be cold, as does Canada. The short growing season and need for heating all winter keep the carrying capacity down. India and much of China are relatively warm countries. This gives an advantage we don’t often think about, of more heat from the sun, allowing more crops per year.

      It is hard to know how all of this will work out. Clearly, major cities anywhere will be a problem.

      • Danny says:

        I used to live in the south with no air conditioning and working outside, it wasn’t bad when you got used to it. I can’t imagined people there now living without air conditioning. All that air conditioning has killed the culture- people used to travel at night, sit on porches, take breaks in the heat of the day. Without cheap abundant energy we have to have different rhythms. I now live in MT and even when it is -27 with blizzard people still go about their day…using much more energy….

        • Calista says:

          Fascinating lack of social customs allowing us to adapt to our environment. I wonder when we’ll bring them back? Personally I’m looking forward to the siesta.

          • xabier says:

            The essence of Modernity is the defiance of custom, and hence, eventually, of environment.

            It began with the French Revolution which destroyed customary feudalism, and really took off with oil and gas-based architecture and mobility, which destroyed traditional urban and architectural models.

            Perfect example: the Gulf State Arab, driving in a SUV to a European-style Modernist glass- and- concrete, thin-walled bunker for work, or living in one as his home.

            Actually, a modern Spaniard or Mexican is a better example, as traditional dress has disappeared too.

      • InAlaska says:

        Living in Alaska for the last 22 years, the climate has definitely moderated with warmer shorter winters and warmer longer summers. I can grow green beans now where it never used to be possible. It gets hot now in the summers because we have 24 hours of daylight in June-Aug. and the earth just keeps heating up. No cool evenings on the porch, here. As the southern climate shifts northward, Alaska, Canada, Russia, Northern Europe may be pretty good places to live (for awhile).

  18. Don Stewart says:

    Dear Gail and Others
    A common conclusion from discussions on this website is that everything is going to be horrible. I participated in a Webinar this evening that I believe everyone should pay attention to. It is a discussion between Ruth Buczynski, a psychologist in Connecticut and Kelly McGonigle, a PhD researcher at Stanford. The general subject was stressful situations and how an individual perceives them and reacts to them. Consider the following as bullet points written by an amateur, and most certainly not accurate in detail, but perhaps indicative of broad themes.

    Our brain changes itself much like a muscle. If we want to strengthen a muscle, we must strain it beyond its comfort zone. If we want our brain to handle stress better, we must stress it beyond its comfort zone.

    Stress makes us more social. We make more oxytocin, which is associated with loving and caring. The oxytocin effect is particularly strong in people who are not usually very responsive to oxytocin. So a person who is usually a loner, but who finds themselves in a stressful situation, and reaches out to others, shows the greatest increased response to oxytocin. This is in contrast to the assumption that the usual response is ‘fight or flight’. (It is also consistent with what Janine Benyus said at the Omega Institute seminar last fall.) Affiliation is a core response to stress.

    Cueing the affiliation response to stress makes you healthier. Oxytocin is cardio protective and anti-inflammatory. IF you choose the sociability response, rather than fight or flight. The affiliation response also changes our epigenetics, affecting the neuroplastic parts of the brain.

    Caring for others buffers us from stress. We can choose to train ourselves in compassion. Training in compassion, in Kelly’s lab, results in decreased worries, increased happiness, with no change in stress. (My comment: In short, the stress is real and recognized as such, but the emotional response changes.)

    A lab in Germany trains people off the street in about 6 hours.

    Increased activity in the reward networks in the brain. We no longer collapse in the face of suffering. The training fundamentally alters our tendency to avoid suffering or unpleasantness. The training can be seen as a chain of meditation techniques:
    1. Mindfulness meditation…what is happening right now?
    2. Metta meditation…good wishes for everyone
    3. Compassion…recognizing that bad things are happening and doing what we can

    Kelly is currently involved in laboratory tests with patients with chronic pain and with war veterans with PTSD. Anecdotally, she is getting very good results.

    Pain is a complex mind/body experience. The mind interpretation is more important than the raw sensation.

    Suffering is particularly dependent on the Interior Cingulated Cortex. Patients in frmi machines can pretty quickly learn neurofeedback techniques to control pain. The machines, of course, are expensive. But it seems that ordinary meditation may have a very similar effect on the Interior Cingulated Cortex. So there are available methods for teaching your brain to regulate your brain.

    Finally, Kelly talked about willpower. Decades of studies have convinced most researchers that willpower is a finite resource. If we are using our willpower to resist sugary desserts, we have less to spend on exercising or resisting credit card debt. However, it turns out that the mindset controls the effect of the use of willpower. If we perceive that willpower is limited, it is limited and we don’t have enough to go around. If we perceive that will power is like a muscle, and the more we use it, the more powerful it becomes, then the more we have available.

    Final Advice: Embrace our brain’s bias for avoidance, and move away from avoidance strategies.

    My Coda: I hypothesize that people involved in Transition Towns and solar power and permaculture and such endeavors who are able to look clearly at the challenges, but remain focused on what they can do to ameliorate the situation, in conjunction with others, will be far better off than those who either delude themselves, or those who give up because everything is hopeless, or who try to grab what they can for themselves while the grabbing is good.

    Don Stewart

    • xabier says:

      Don

      Agreed: and I would add that good habits once established and regular, enable us to direct our willpower to other areas, – the habits having settled the struggle.

      I do not have to struggle not to buy crap at the mall, or book a foreign holiday, or buy a new suit, because the thought no longer really occurs to me now and advertising leaves me unmoved. I have evolved a different pattern of life which moves in a different direction.

    • Don,
      Thanks for the large-hearted post.

  19. Timothy says:

    It is ironic that you would mention how the Central Bank & Bonds have been ‘Helpful’ when in reality they have encouraged and brought about at breakneck pace, our unsustainable and currently doomed operating paradigm.

    If by helpful, you mean they hurried us to this point (collapse and sustainable redesign) then I understand. Otherwise, I don’t see their benefit at all.

    • Without external energy sources of any kind, we would be living like the chimps.

      We learned to use external energy very early on–burning biomass over 1 million years ago, so that we could cook our food and keep warm, extending our range. Most of the increase in human brain size came after that point, at the time that our bodies could put more energy into brain development and shrink the size of our guts and teeth.

      Unfortunately, biomass wasn’t enough for our growing population. We needed fossil fuels to keep the party going. Debt (and the long supply chains that debt = financial promises allow) has allowed ramping up fossil fuel use.

      So what happens is that the beneficial effect to humans of allowing the ramping up–allowing us to live in large numbers on the earth–is also what causes our demise.

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  21. I would add that future drought and lack of water to process any form of fossil fuel is also on the list.

  22. Another good discussion, as far as it goes. Gail sets a salutary tone of humility, but so much of our discussion seems devoted to showing once again what we have largely conceded: business as usual is in for a sharp correction; something ranging from catabolic to catastrophic collapse bulks on the horizon. I find myself increasingly inclined to exploring avenues that have plausible prospects for negotiating better than worst-case outcomes. What follows are not offered as solutions but as a suite of elements worthy of further exploration. Most of these fall under the heading of seeking to fail if not gracefully at least non-catastrophically. Undoubtedly most of these will fail at some point, as most things do, but how we fail–together, in solidarity, in pursuit of just outcomes, in working against a Darwinian cull of isolated losers…etc.

    Guaranteed national incomes and satisfaction of basic needs (for as long as we can) to lessen panic at job loss, especially, and to promote solidarity.

    Green corps / peace corps programs aimed at reskilling youth–relocalizing food production, installing (admittedly temporary / transitional) energy alternatives. Heinberg estimates that perhaps 50 million people will need to return to direct food production under largely human powered energy. Not much GDP activity, but sufficient surplus ecological services / gifts to survive on.

    Large-scale nationalizations, investments in energy efficiency, rationing of liquid fossil fuels especially towards essential “secondary” items–as we saw in war time. Not as a solution but as an energy descent alternative to market based responses that Gail makes a good case for leading us off a very steep decline cliff.

    Promoting some degree of localization of currencies.

    Shifting the terrain of incentives–lowering general tax rates, removing payroll taxes, promoting job sharing. moving toward 3-day workweeks–while at the same time eliminating tax deductions for items with negative or unproven social value: corporate advertising, PR, legal costs, lobbying, salaries over some multiple of a minimum wage, political contributions, PACs, polling services. Do it if you like, but don’t expect the public treasury to pay for it.

    Eliminate campaign contributions above, say, 100 and limit these to humans.

    Eliminate corporate personhood, sharply constrain legal protections to senior corporate officers, revoke charters of egregious or repeat offenders.

    Promote worker owned enterprises.

    Nationalize media, and award shares and vouchers to restore ownership of information exchanges as part of the commons.

    Nationalize banks, financial institutions beyond basic post-office level banking.

    &

    &

    &

    • Christian says:

      I like your list. Shares and vouchers for nationalized media, how this? I would confess media nationalization seems to me unavoidable at some point but I doesn’t get a way to maintain them democratic if they are only subject to government’s will. This is a problem we have here right now with national media, which are so much biaised as the private ones.

    • xabier says:

      But one might answer: Human Nature! It is not that pretty! Corporations are corrupt because they are human.

      The ‘youth corps’, for instance, would likely turn into instruments of war and repression, even genocide. In fact, they would be armies.

      Peasants will steal, and kill one another for more land.

      Every power structure is perverted and subverted over time. The Constitution of the Soviet Union and that of the USA made great reading, but…..

      Lets just reflect on the history of youth corps in the 29th century: Franco’s , Hitlers’ the Soviet ones. Not very attractive……..

    • Any strategy needs to be something that is financially feasible. If there is huge job loss, taxing the remaining workers at high levels, so that everyone has a little will mean that no one can pay their car payment or house payment. Banks will fail, and we will have big problems. Job sharing has the same issues. It also raises transportation costs relative to work hours, since workers will still have to get to and from work, but for fewer hours.

      Local currencies will not be our problem. Our problem will be a lack of supply chains, so that every currency that is available will be (by definition) local. The big problem will be that you can’t buy anything with the local currencies, except something made strictly with local materials. In other words, practically nothing.

      I would agree that teaching people skills to farm, and resettling, would be nice goals. I think the teaching of skills would need to come first. There might need to be research on exactly what can be grown where, and what techniques can be used without fossil fuels. Also, how to organize things, so that farmers don’t immediately wreck the soil. But the killer in doing this would be buying up all of the land from existing farmers (or commercial owners of farms). Also, the huge loss of productivity that comes, as we make the shift. While the change might be needed, it is hard to see any politician voting in favor of it.

      I am not optimistic on rationing of fuels being helpful. Prices for oil will be very low, but most people won’t have jobs, so strictly speaking, won’t need oil. Who should get the oil? The businesses that might provide jobs? Police and emergency vehicles? Workers who might get to their jobs? Everyone, including those without jobs? Setting up a system that is even marginally helpful, without knowing what the problems are, is likely not to work.

      • MG says:

        I think there will be no problem with the agricultural land (water will be a worse problem). As the supply chains collapse, there will be a lot of land laying unused. But to use it will be possible only by the individuals, communities, as there will be no one to afford buying the food. The self-production of the food will be the only means of getting the food for the majority of the people. But with the climate change, different crops and techniques will be used.

        Today, what is called the “development help” in the form of the EU subsidies and EU co-financed projects for its new member countries is in fact masking the reality of diminishing returns: the infrastructure in many of the East European countries would already be in a terrible state. Many of the collectivized farms live on subsidies for just keeping the land from being turned into forest. Importing the food is still cheaper. Industry is kept going on by massive incentives.

        The former construction boom in Ireland or Spain, highways in Greece, empty hotels in Slovakia are also the “Potemkin villages” of the EU. The subsidies from the EU are simply used on any projects, although there are no profits to finance the operation costs of such a newly built “Potemkin village”.

        To me all this looks like a theatrical scenery: people try hard to keep their roles, but the world is intrinsically changing in a different direction, namely in the direcion of local and simpler and slowlier lifestyles.

        But it is hard to persuade many, who believe more the reality presented in their smartphones, computers and TVs, that the world is undergoing deep changes. The propaganda of consumer (fosil fuel based) society is very strong. Lives of many people are thus ruined. They try with all their efforts to get something which ceases to exist…

        • Thanks for your observations. We have so many looking only at TV reality, that they don’t realize what is really happening.

          • MG says:

            The problem with agriculture in East Europe is low subsidies and low wages. During the Soviet era collectivized farms from scattered family fields like these:

            http://dtonline.sk/hrinovske-terasovite-polia-su-vo-svete-raritou/

            were created, destroying the the terraced fields, They were trying to grow wheat or maize where only potatoes or rye had been grown before… All with the magical help of oil and fertilizers.

            Imports from heavily subsidized West Europe today helped to make the farm food production in East Europe less competitive:

            http://www.bbc.com/news/world-europe-11216061

            Guess what happens when the oil has even higher price or is less and less accesible? There is no way to save the collectivized farms that were created from such small terraced fields…

            • Thanks for the background and links. I can understand why such a problem would occur.

              We now have truly large machines working in our fields in the US 24/7. I have never seen a terraced field here. It is just up and down. The farmers take down all of the trees, fences, and houses.

            • MG says:

              Yes, the ever larger machines/plants + plains is the way it also works here in Central Europe. The population of mountainous areas (with formerly terraced fields) is already after its peak and going down.

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  24. Patrice of Mtl says:

    If our civilisation is to break down into simpler parts then the future will be determined locally. Every part will have its own story. Quebec, for example, has a good chance of coming through relatively well and might even prosper. A small and close-knitted society with a well defined identity. Lots of hydro-electricity and fresh water. Land getting ever more productive with the rising temperature (short season is main problem right now). The main city high enough to escape the rising waters and well out of the path of the big storm. Add to this an economical fluvial transportation. Things are looking good for Quebec and my home town, Montreal. War and flood of refuges, however, if it ever come to that point, might wreck that rosy scenario.

    • dolph says:

      Yeah I agree Quebec is probably in decent shape but ultimately everything is political, right? Your last sentence is insightful.

      Canada doesn’t make for a natural country anymore than the U.S. does. This is an unfortunate but true reality in North America. The linguistic and cultural split between Ontario and Quebec is huge, to say nothing of the secondary split between eastern and western Canada.

      If Quebec wants to survive and thrive on its own terms, it might be forced into separation, and how do you peacefully accomplish that when the Anglo elite of Ontario want to keep you in the union? It’s the same problem Scotland faces.

    • xabier says:

      Good points.

      But before being too enthusiastic and hopeful about small local cultures and organisations, we should perhaps remember that the societies of medieval Europe, or pre-historic Europe, for instance were small, local and tightly-knit, yet were and always involved in civil wars, and wars with other such groups.

      The history of man is violence and war, it has been the principal definer of the lives of most people rich or poor, part of empires or not. Not that I wish to sound like Hitler, but he did have a point! (His mistake and moral crime of course was to define violence as an ideal to be pursued, rather than an inevitable condition of life .) There is ample evidence of extreme violence in neolithic times and tribal societies.

      Someone from one of the local families here (Eastern England) was filling me in on the local farmers and their quarrels: believe me, if the police and courts were to disappear, blood would probably be spilt! Violent tempers and long, long feuds. ‘Ah, the Websters, now they’ve always been a bit odd!’ etc.

      Reading the local history and court records, it seems that the whole of the Middle Ages here passed with farmers stealing one anothers land and felling trees not on their property, rustling livestock, etc, and constant malicious litigation and menaces, quite a tale. This was not rough Border Country either, where life was always savagely violent and lawless, but cereal-growing lowlands. Things are a bit tamer now, but the future?

      Small can be violent and unjust as much as an empire.

      Where my family live in Spain, a very rural province which was in the 18th century until a few decades ago, two old farmers(85!) killed one another recently, in a fight in a field, in consequence of a feud which had been burning for about 60 years. Everyone who knows real rural life understands this kind of thing. Killing someone while out hunting in an ‘accident’ which just happens to solve a land dispute? Not unusual. Some Russian novels reveal the sheer ugliness of rural peasant life – the madness of the people not just the poverty.

      • Paul says:

        Agree – there will not be provinces or states rather small localized communities – that will likely be at constant war with each other or at least with survivors from the cities who attempt to seize land and the remaining resources.

        I very much doubt it will be like Little House on the Prairie or The Waltons.

    • oh well—if where you live is ok—then all’s well with the world
      secede from Canada now before things get nasty in Toronto

    • Ikonoclast says:

      I spent a month in Quebec recently in mid-Winter. (I am Australian and only speak English.) I really enjoyed Montreal, it is a well planned city for the cold Canadian winters. Good metro underground and undergound shops in the city. People are friendly and would always speak English when they realised I knew no French.

      However, I think Quebec’s future is still best as part of Canada. Your economy will do better working with the rest of Canada. Your own culture is strong. I don’t think you need to be concerned about being swamped by the English speakers.

      Canada has plenty of energy sources and plenty of land. I expect Canada to endure quite well. Your winters are hard but you have the resources to deal with that.

    • I think the big issue for most places will be loss of jobs. It is hard to believe that Quebec and Montreal will be exempt. And the flood of refugees, as you mention, if one part of the world does better than another will be a problem.

      • Ikonoclast says:

        Jobs can be created by wise public policy. In countries like the USA, Canada and Australia, official unemployment rates have run at about 5% to 8% since the Great Recession of 2009. Real unemployment rates are actually about twice that at 10% to 15% once you count hidden unemployment and under-employment. That is a huge waste of manpower and woman power.

        There are always jobs that could be done. Is education perfect in the countries I mentioned? Is public health perfect? Are urban landscapes perfectly maintained and clean? Are there no ecological projects that could be run? If you are paying people to do nothing then you can train them and pay them to do something useful. Australia’s and Canada’s welfare is relatively generous. I am not sure about the USA. Convert that welfare to a wage (for little more overall budget cost) and you have a government worker.

        The rich need to be taxed properly. Raise the taxes on the rich and the corporates and you will have enough government monies for employment creating projects as occurred to end the Great Depression in the USA. Certainly, there is great trouble coming with Limits to Growth. And certainly, developed countries with reasonable remaining resources (USA/Canada, Russia, Australia, Brazil) will have to undergo a controlled energy and resource descent. But I do not agree with giving up. Defeatism will get us nowhere.

        Russia, Australia and Brazil are not yet over their ecological footprint. I am pretty sure that the USA and Canada taken as a whole are only a little over. We can rein in wasteful use of resources, stabilise population and work for a controlled descent in at least those countries. If you want to argue that the rest of the world is done for… well I agree. There is no soft landing for them. The world in the future might support 1 billion. There is no reason that 500 million of them cannot be in North America, Russia and Australasia (Australia & New Zealand). I you live in the one of the survivable locations mentioned above you should be working and arguing like hell to help your nation survive.

        • Paul says:

          One of the reasons why organic farming is unable to compete with industrial farming is that it is far more labour intensive.

          I would suggest that this will completely change when the age of oil ends.

          A job will not be about a salary – rather it will be about being fed. So employing many thousands of people on farms will not be seen as uneconomical (we only see it that way in our current economic paradigm) – it will be seen as a necessity – when the alternative is starvation.

          See Steinbeck’s Grapes of Wrath….

  25. Danny says:

    you are dreaming man!!! What are you going to eat for food? How much food do you think your region imports! It is climate change not global warming. You might have a warm year one year and a very frigid the next…..no one really knows.

  26. Howard says:

    I remember reading somewhere that of all the oil used since 1850, HALF of that we used in the last 22 years. Is this true?

    What about gas, is there any data?

  27. MJ says:

    I was listening to NPR news regarding food, and indeed we do need to grow a lot in the next decade to supply the world’s growing and aging population. Seems the discussion revolved around non-conventional foods, like insects and such. We are going to need to be creative in feeding ourselves it seems. They did not even take into account “peak” fertilizer in the discussion.
    I suppose the discriminating mind of like and dislike taste will fall to the wayside.
    As far as “aging” how old should a person live in such a world?

    • It seems like the issue is remaining productive. It will be difficult for a poor society to support very many non-productive citizens. Productivity can come in a variety of ways. Knowing how things were done in the past might be a useful skill, when Internet days are past.

    • xabier says:

      You can bet the head of the IMF won’t be eating insects.

  28. xabier says:

    Its interesting reading the various tentative schemes for new societies to see how blandly optimistic they are about human nature. History perhaps teaches differently.

    There is also a slightly naive view that all evils stem from Corporatism, and Private Property, and once eliminated the inherent goodness and sociability of humans will triumph. The 20th century disproves this.

    A phrase which always comes up is usually along the lines of ‘ during the transition, a basic but adequate income/sustenance will be provided to all.’ And if that can’t be provided, who kills whom?

    Nice fantasies.

    • Paul says:

      Heart of Darkness: “For Marlow (and Conrad) civilisation is a varnish which wears off as soon as man is cut of from the conditions that created it.”

      No such thing as a noble savage. Let’s not kid ourselves – we laugh at the photos of monkeys dressed up in clothes – we are no different – and far more vicious.

    • Christian says:

      Oh, fantasies are also part of human nature. Of course in many places things will turn really bloody, it’s just there are others where resources do are sufficient and IF people get organized blood can somewhat remain within veins and arteries. Solidarity is not to take for granted, and a lot of people here are proving not to be on that boat, wich doesn’t means others are not willing to row.

      It is not corporations are evil, they did a lot of good things. It’s just they are failing and their time is over.

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