Russia and the Ukraine – The Worrisome Connection to World Oil and Gas Problems

What is behind the Russia/Ukraine problem? It seems to me that what we are seeing is Russia’s attempt to fix a two-part problem:

  1. Some oil and gas exporters, including Russia, are not receiving enough oil and gas revenue to meet their needs. They are not able to collect enough taxes to provide the services they have promised to their citizens, plus allow the amount of reinvestment that is needed to maintain production. Russia is starting to experience economic contraction because of the low revenue situation. This situation very closely related similar problems I have written about  previously. In one post I talked about major independent oil companies not producing enough profit to provide the revenue needed for reinvestment, and because of this, cutting back on new investment. In another, I talked about the problem of too low US natural gas sales prices, relative to the cost of extraction.
  2. Some oil and gas importers, including Ukraine, are not using their imported oil and gas in productive enough ways that they are able to afford to pay the market price for oil and gas. Russia gave Ukraine a lower natural gas price because some of Russia’s pipelines cross Ukraine, and Ukraine must maintain the pipeline. But even with this lower natural gas price, Ukraine is behind on its payments to Russia.

If a person thinks about the situation, it looks a lot like a situation where the world is reaching limits on oil and gas production. The marginal producers (including Russia) are being pushed out, at the same time that the marginal consumers (including Ukraine) are being pushed out.

Russia is trying to fix this situation, as best it can. One part of its approach is to make certain that Ukraine will in fact pay at least the European market price for natural gas. To do this, Russia will make Ukraine prepay for its natural gas; otherwise it will cut off its gas supply. Russia is also looking for new customers who can afford to pay higher prices  for natural gas. In particular, Russia is working on a contract to sell LNG to China, quite possibly reducing the amount of natural gas it has available to sell to Europe. Russia is also signing a $10 billion contract with Iran in which it promises to construct new hydroelectric and thermal energy plants in Iran, in return for oil exports from Iran. This contract will increase the amount of oil Russia has to sell, and will increase the oil available on the world market. Russia’s plan will do an end run around US and European sanctions.

Gradually, or perhaps not so gradually, Russia’s exports are being redirected to those who can afford to pay higher prices. European Union purchases of natural gas imports have declined since 2008, presumably because they are having difficulty affording the current price of gas, so they are being relied on less for future sales.

The Russian approach seems to include building a new axis of power, including Russia, China, Iran and perhaps other countries. This new axis of power may threaten the US dollar’s reserve currency status. With the dollar as reserve currency, the US has been able to buy far more goods from other countries than it sells to others. Putting an end to the US dollar as reserve currency would leave more and oil and gas for other countries. If purchases by the US are cut back, it will leave more oil and gas for other countries. The danger is that prices will drop too low because of the drop in US demand, leading to lower production. It this should happen, everyone might lose out.

I am doubtful that Russia’s approach to fixing its problems will work. But if Russia is “between a rock and a hard place,” I can understand its willingness to try something very different. It now has more power than it has had in the past because of its oil and gas exports, and is willing to use that power.

The US/European approach to this problem is to loan Ukraine $17 billion to pay for past natural gas bills. The hope is that with this loan, Ukraine will be able to make changes that will allow it to afford future natural gas bills. There is also the hope that the United States can step in with large natural gas exports to Europe and Ukraine. In addition, the US and Europe are trying to impose sanctions on Russia.

I find it very difficult to believe that the US/European approach will work. The idea that the United States can start exporting huge amounts of natural gas to Europe in the near future borders on the bizarre. There are many hurdles that would need to be overcome for this to happen. Installing LNG export facilities is among the least of these hurdles.

In fact, the West badly needs both the oil and gas that Russia is producing, so it really is in a very precarious position. If Russia cuts off exports, or if Russia is forced to cut off exports because of financial difficulties, both the US and Europe will suffer. It is clear that Europe will suffer because of its dependence on pipeline exports of oil and gas from Russia. But the US will suffer as well, because the US is tied closely to Europe by financial ties, and by import and export arrangements with Europe.

Furthermore, the US/European approach involves a great deal of new debt, in an attempt to fix an inherent inability of the Ukrainian economy to afford high energy prices. Without a huge transformation, Ukraine will be in even more financial difficulty when it comes time to pay back the new debt–it will need make debt payments at the same time that it needs to pay for more expensive future natural gas. More debt doesn’t necessarily fix the situation; it may make it worse.

The US powers that be do not understand what Russia (and the world) is up against, so the policies they propose are likely to make the situation worse, rather than better.

Background

We live in a world in which some countries use far more energy products than others. One question that the new proposed axis of power raises is whether this disproportionate share of energy use should be allowed to continue to exist.

Figure 1. Per Capita Energy Consumption, based on BP 2013 Statistical Review of World Energy data and EIA population data.

Figure 1. Per Capita Energy Consumption, based on BP 2013 Statistical Review of World Energy data and EIA population data.

The United States, Europe and Japan got to the position of using a disproportionate share of energy resources by way of being first with industrialization. This early industrialization set up a pattern of using energy for “frivolous” things–large, heated homes; private passenger automobiles for individual citizens; businesses that were not necessarily as energy-efficient as they might be. In the early days, imports were limited and cheap. As local supplies became depleted, imports rose. The cost of imported oil and imported gas (except for natural gas in the US) rose as well, making the imported fuel harder to afford. Now the early users–that is, the US, EU, and Japan, are the ones struggling to keep up past consumption levels.

In some ways, Ukraine is not too different from the EU is this respect.  Ukraine also got to the position of using an above average share of energy resources, by being early in its industrialization, during the era of the Soviet Union. Ukraine, prior to the collapse of the Soviet Union, was using as much as energy on a per-capita basis as the US-Europe-Japan group (Figure 2), because of its heavy industry.

Figure 2. Figure similar to Figure 1, but including Ukraine's per capita energy consumption as well.

Figure 2. Figure similar to Figure 1, but including Ukraine’s per capita energy consumption as well.

Once the Soviet Union collapsed, Ukraine had huge difficulties: Exports of oil and gas from Russia (upon which Ukraine’s industry depended) collapsed. Ukraine’s industry had been set up under the Soviet-Era model, and didn’t produce the variety of goods, cheaply, that people outside the Soviet Union expected to buy. Ukraine also didn’t have alternate sources of energy supply, if Russian supplies were cut off, because a major source of energy was pipelines of both oil and gas from Russia.

The Ukrainian economy has struggled for many years. Trying to transform it now to be successful competitor in the world economy is likely to be a difficult task. If Ukraine tries to make goods for the world market, it will find itself in competition with Asian competitors. The Asians are hard to outcompete, in part because their labor costs are low (because it uses workers with little energy use, so they can live on low salaries) and in part because their energy costs are low (often from coal). Safety standards are often low as well, adding to their low-cost structure.

If, instead of making goods for the world market, Ukraine decides to specialize in high-priced services, such as financial, medical, or educational services, it will find that it has a great deal of competition from the EU. It will also find that the EU is having difficulty making the service model work. The service model provides little for export, for one thing.

The Russian Energy Situation 

Russia’s cost of producing oil is among the highest in the world. Mark Lewis, in a presentation at the November 2012 ASP-USA meeting estimated that Russia needed a price of $115.90  a barrel, to cover both its cost of extraction, plus Russian budget needs from taxes. If costs are rising at, say, 10% per year, the current required cost today would be about $134 barrel. Current oil prices are not much over $100 barrel, which is too low.

Russia is the second largest oil exporter in the world (after Saudi Arabia), exporting approximately 7.2 million barrels a day. We in the rest of the world very badly need Russia’s oil exports to continue, to keep up world oil supply. Without this oil, the world economy would suffer badly.

With respect to natural gas, Russia is the single largest exporter in the world (Figure 3, below), exporting more natural gas than all the Middle Eastern countries combined. The cost of producing Russia’s natural gas is likely very high, because Russia is extracting it from more and more difficult locations. Also, Russia is transporting this natural gas greater and greater distances. New pipelines or LNG facilities are necessary to facilitate this transportation, and these are expensive as well.

Figure 3. Natural gas exports by country, with some countries grouped. Exports from the New World are excluded, since they historically have mostly stayed in the New World.

Figure 3. Natural gas exports by country, with some countries grouped. Exports from the New World are excluded, since they historically have mostly stayed in the New World. For example, Canada exports natural gas to the United States by pipeline.

When an oil/natural gas exporter doesn’t get enough revenue, there is a danger of recession, or even collapse. A major part of the problem is that oil and gas exporters depend on tax revenue to fund government services, such as roads, schools, and public health. This tax revenue depends on profitability of the companies selling oil and gas. If prices are not high enough, tax revenue suffers. In fact, the 1991 collapse of the Soviet Union took place after a period of low oil prices made it impossible to justify investment in new more-expensive-to-extract fields. Russia began to recover once oil prices began rising again, making new investment oil investments profitable again.

Ukraine has been a particular problem with respect to natural gas exports for Russia, because it has used a significant share of Russia’s natural gas exports, without paying market price for them (Figure 4). In fact, some of the time, it didn’t even pay the below-market price Ukraine had contracted for, for natural gas exports–the reason for Ukraine’s debt to Russia.

Figure 4. Ukraine natural gas imports as a percentage of Russia's natural gas exports.

Figure 4. Ukraine natural gas imports as a percentage of Russia’s natural gas exports.

Also, with Russia’s total natural gas exports close to flat (see Figure 3), the high exports to Ukraine have limited the amount available to members of the European Union. If Russia bases its economy on the sale of oil and natural gas, it needs a high enough average price, to fund its overall costs.

Ukraine continues to need Russia, because Russia is the source of its oil and gas supplies. The IMF recently approved a $17 billion loan to the Ukraine, to pay off its debt to Russia and for other purposes. The loan is contingent on fiscal reforms, including a 50% increase in natural gas prices, raising taxes and freezing the minimum wage. My expectation is that the Ukrainian situation will spiral downward, with lower and lower energy use (because citizens won’t be able to afford the high cost of energy).

Russia needs the US, because it is having trouble obtaining enough investment capital, because of current low oil prices. It needs to continue relationships with oil companies such as Exxon Mobil, hoping these companies will help provide investment capital. The catch is that they too are having difficulty. Exxon Mobil has reported falling profits for four quarters. The same Exxon article mentions that the company cut capital and exploration costs by 28% as a way of getting income and outgo back into line. So Exxon Mobil is “hurting” as well, for the same reason that Russia is hurting: inadequate oil and gas prices.

To keep income in line with necessary expenditures, Russia has essentially no choice but to insist on higher prices from the country that is a big consumer, but can’t pay its bills–Ukraine. These higher prices are likely to push Ukraine’s economy down further, likely making the IMF loan impossible to repay.

To Which Countries Can Russia’s Natural Gas Be Exported?

The market for Natural Gas imports is somewhat restricted, as shown in Figure 5, below. This chart includes natural gas imports from all sources, including the Middle East and Africa, not just Russia. I have omitted the Americas, because it currently tends to operate as a separate system, with the US, Canada, and Mexico connected by pipelines.

Figure 5. Natural gas imports (excluding new world) by country grouping. FSU is "Former Soviet Union." Based on EIA data. Chart omits Switzerland and other non-EU European natural gas importers.

Figure 5. Natural gas imports (excluding new world) by country grouping. FSU is “Former Soviet Union.” Based on EIA data. Chart omits Switzerland and other non-EU European natural gas importers.

When it comes to finding locations for Russia to export natural gas to, the countries of the European Union are a large share of the natural gas market. (In Figure 5, I have omitted a few small European importers that are not part of the EU, and not part of the FSU, such as Switzerland, but this omission should be small.) Ukraine and other Former Soviet Union countries are gradually being squeezed out, because they cannot afford today’s natural gas prices. Asia is growing in its natural gas use. The prices paid in Asia have tended to be higher than in Europe (Figure 6, below), so it is natural for Russia to look to Asia as a growth area for its natural gas exports.

Russia cannot easily walk away from the countries it currently exports to, because it needs natural gas revenue, and the pipelines are already in place.

Can the United States Actually Help Ukraine with Natural Gas? 

Ukraine’s big problem with natural gas is that it can’t afford to pay market prices for it. This issue is likely to continue to be a huge problem in the future, regardless of which country is planning to export natural gas to it. Greece has had a similar problem, with inability to pay for natural gas imports from Russia. On my view, Ukraine’s inability to afford natural gas is its number one problem. The problem can be temporarily “papered over” with an IMF loan, but unless there are huge structural changes to the economy, the basic problem won’t be fixed.

Let’s suppose that Ukraine actually finds money to pay for imports. Can the US provide the natural gas imports required? Can it also help with European imports? Many people look at the disparity in natural gas prices around the world (Figure 6), and expect that US can provide natural gas to Europe as well .

Figure 6. Comparison of natural gas prices based on World Bank "Pink Sheet" data. Also includes Pink Sheet world oil price on similar basis.

Figure 6. Comparison of natural gas prices based on World Bank “Pink Sheet” data. Also includes Pink Sheet world oil price on similar basis.

If a person looks at the situation closely, it is hard to see that US exports will happen in large enough quantity, in a fast enough time frame, to make any difference. I recently wrote a post pointing out some of the issues, called The Absurdity of US Natural Gas Exports. I point out in that post that the United States is currently a natural gas importer. Our own natural gas in storage reservoirs is at record low levels, and there is concern that we may not be able to refill them in time for next winter. The amount of natural gas required by Europe is huge, if it were to try to replace Russia’s contribution. So we are talking about the need for a very large change for the US to be able to help Europe and the Ukraine.

There is one scenario in which the United States might theoretically be able to help Europe. This scenario would require a lot more than putting LNG export terminals in place. In particular, we would need:

  • Much higher US natural gas prices than are currently the case, in order to make it economic to extract shale gas that seems to be present, but that is not economic to extract at this time. US natural gas prices would likely need to rise to two to three times current levels, perhaps to current European levels.
  • The US economy would need to weather the storm that these higher natural gas prices would cause. Homeowners would find that the cost of heating their homes is much higher, but that their salaries are not any higher. Utilities that use natural gas would find that their sales price of electricity needs to be much higher, affecting both homes and businesses. The US economy would suddenly become much less competitive in the world market place, because of its higher cost structure compared to countries using coal as their primary fuel.
  • In order to extract this higher-priced natural gas, we would need to greatly ramp up the number of shale gas wells drilled, perhaps to 10 times the current number of wells drilled per year. Part of the big increase would take place because of the greater total amount of natural gas required. Part of the increase would take place because we would now be drilling wells with lower productivity–partly because of lower monthly output, and partly because of shorter productive lives. Without adding low-productivity wells such as these, there is no way that production can be ramped up as much as required. (This is the reason that higher natural gas prices are needed.)
  • To drill this huge number of wells, we would need many more drilling rigs. We would need many more engineers. We would need many more trucks hauling water for hydraulic fracturing fluid. In dry areas, we would likely need to transport the water required for fracking much longer distances than in the past. We would need to dispose of much more waste material, causing potentially many more problems with pollution and with earthquakes. We would need communities willing to put up with all of these problems, in order to help other countries in need of natural gas imports.
  • Someone would need to build a huge number of LNG transport ships to carry all of this natural gas. It is not clear whether LNG import terminals would be needed as well–the ones currently in place tend to be underutilized.
  • Many more pipelines would be needed, both in the US from the new wells to the terminals, and in Europe, connecting LNG terminals to the new users. Many of these pipelines will be used for only a short period of time, as wells deplete quickly.
  • The cost of LNG the US will be able to send to Europe will likely be more expensive than current European natural gas prices, when the combination of the higher US natural gas cost, plus LNG transport cost, is considered. If there are new European natural gas imports, say from Israel, the additional high-priced natural gas from the US may not be needed. It is also not clear that Europeans will be able to afford the new expensive natural gas, either. The high-priced gas will tend to make the European economy shrink, because salaries will not rise to match the new higher costs.

Conclusion

The US approach to the Russia /Ukraine situation reflects a serious misunderstanding of the situation. Russia has little choice but to try to raise the price of products it is selling, any way it can. It needs to cut out those who cannot afford its products, including Ukraine. If Europe increasingly cannot afford its products, Russia needs to find customers who can afford them.

There is little chance that the United States is going to be able to help Europe with its natural gas needs in any reasonable timeframe. Our best chance at keeping the global economy “working” for a little longer is to try to keep globalization working as best we can. This will likely require “making nice” to countries we are unhappy with, and putting up with what looks like aggression.

Policymakers like to think that the US has more power than it really does, and like to encourage stories suggesting great power in the press.  Unfortunately, these stories are not true; we need policymakers who understand our real situation.

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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768 Responses to Russia and the Ukraine – The Worrisome Connection to World Oil and Gas Problems

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  2. Lindon says:

    The problems that you describe in this post are insurmountable. More fracking requiring 2 or 3 times the current natural gas price in America along with all the increased infrastructure and pollution is a no-go. Russia would love to start selling more to Asia (China especially) because at the current time they could get a higher price, but how much investment and time will be required to make that a reality? The only way to summarize this entire situation is that we as a fossil-fuel driven technological civilization are at the end of the road. I do not believe that TPTB are unaware of the insolvability of these issues. In fact, there is no doubt but that they are highly aware of these and other related issues and have been for a long time. Now we are entering the end game. I believe that the entire Ukraine crises is being used to provide cover for Russia, NATO and American security/military forces to move and position their assets and troops into place in preparation for a collapse of the global economy that simply can’t be avoided, or for that matter, put off for much longer. A surface reading of Russian, European and American political actors would convince anybody that they don’t understand the situation, as Gail states, but don’t be fooled by what they appear to be doing and what the real intentions behind their actions are. It is winding down to the finish line, the joke that the entire global economy has become is about to deliver its final punch line, and when it does I doubt that many people will be laughing.

    • You may be right. Everywhere we go, we encounter new problems. Every step we take takes energy products and time. Everywhere we look, it looks more like we are approaching the end of the road. The question is only what steps TPTB will take to try to cover up our problems.

      • Lindon says:

        I agree, Gail. As I read your article, I kept waiting for the part where you stated explicitly that we are stuck between a rock and a hard spot. There just aren’t any solutions to the problems that you have elaborated on, and a new-hire in the CIA energy analysis division ought to be able to figure that out.

        Billionaire George Soros gave an extensive interview last year where he talked about the impending financial collapse, and specifically talked about the turmoil and bloodshed that would occur in Europe should that collapse come to pass. There are plenty of ethnic tensions and border rivalries in Europe that have been suppressed for a long time during our post WWII period of economic plenty. In a real collapse situation, Europe is set to explode once again like a powder keg. It makes sense to position troops in and around Europe especially close to hotspots like Ukraine IF you are anticipating a collapse and IF you have the goal of maintaining some kind of order in the post-collapse world. Pure speculation on my part, but it is the only thing that makes sense (to me).

        • palloy says:

          That makes sense to me too. There’s no way that TPTB can be unaware of the problems, given their closeness to the fossil fuel industry, and the laughable forecasts of the IEA, the suppression of the Peak Fossils message, etc. As Gail points out, the idea of the US being able to help the EU out of its problems is laughable – so there must be a massive disinformation campaign going on in the MSM to stop people laughing.

          So what is their Plan B? It’s not going to be that they just give up. They are preparing for war, and for widespread public unrest. That explains the spending on the military that is greater than the next 20 countries (when they are already broke), and the militarisation of the police. It also explains the massive spending on trying to capture everything on the internet – it seems so over the top when Plan A has the appearance of functioning normally, but when we move into Plan B mode it will be essential to know what governments around the world are thinking, and what dissidents are planning.

          Why has the USG pushed so hard against Russia over the Ukraine issue? Putin has been personally demonised (always a bad sign) and the Russian oligarchs targetted with sanctions, but is not the US run by oligarchs too? The result has been that we now have a new Next Great Threat, who we are going to fight in the next war.

          I think the current stand-off will last until the next financial crash (probably starting with a bank that has lent too much to Russia) and then the US will be turned into a war economy, with Austerity, food and fuel rationing, conscription of angry young men into the army, censorship of media and internet, internment of dissidents …

      • Hartley Schultz says:

        Hello Gail,
        Well it is on for young and old here in Australia!. With the federal budget just a few days away, Mr Hockey’s latest efforts are to bring back prosperity and responsible government through fuel tax increases, welfare and public service cuts and of course the new debt ‘temporary levy’. I wonder how temporary that will turn out to be?

        http://www.abc.net.au/news/2014-05-08/budget-debt-tax-not-a-broken-promise-says-treasurer-joe-hockey/5438294

        http://www.abc.net.au/news/2014-05-08/government-poised-to-increase-fuel-excise-tax/5438056
        Kind regards
        Hartley

        • Governments need more tax money at precisely the time when citizens cannot afford to pay the additional taxes. Eventually, inability to collect enough taxes can bring the system down, as I have noted before. My sympathy!

    • The problem is much more one of Peak Credit than Peak Oil, though one clearly impacts on the other.  The credit system gives out well before the Oil does.
      Here’s a snippet from the latest Rant:

      …For many years since around 2000 or so, there has been quite a bit of discussion about the idea of Peak Oil, which many people interpreted as the idea we would RUN OUT of oil to fuel the industrial machine that our society is currently based on. Not just Oil, but the other fossil fuels like Coal and Natural Gas we extract to keep the machine running. The machine is vast and complex, it includes everything from the electrical generating plants that supply electricity to the pumps that pull water up from aquifers to deliver to suburban homes and farms to the sewage systems that remove the waste to the trucks that deliver the goods to the Carz that ship everyone around willy nilly every day from home to school, to work and to the local Fast Food restaurant.
      We’re not running out of this stuff in absolute terms, there is a ton of it still left in the ground. What we are running out of is the easily accesible stuff which for a good while here came a bubblin’ up out of the ground practically for free, like on Jed Clampett’s old farm before he headed for Beverly Hills, upon Cashing Out on the farm to the Rockefellers and Standard Oil…
      For the rest, LISTEN TO THE RANT!
      RE

      • Paul says:

        And we can imagine what $100 oil does to growth…. if 35 does this:

        HIGH PRICED OIL DESTROYS GROWTH
        According to the results of a quantitative exercise carried out by the IEA in collaboration with the OECD Economics Department and with the assistance of the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

      • Dug up a fabulous article from Bloomberg on the NG Fracking Ponzi:

        Shale Drillers Feast on Junk Debt to Stay on Treadmill

        Also, got up the latest Rant on Ukraine

        Ukraine Nazi Deja Vu

        RE

        • Paul says:

          That is a SUPERB find. I’ve passed that along to a friend who is drunk on the fracking fluid (he sends me research reports on how fracking is such an awesome money spinner – I continue to claim it is a massive bubble).

          I suspect one of the key purposes of QE ZIRP is to create conditions where cash flocks to nicely spun stories like the fracking one.

          Trillions of free money + ‘the new Saudi Arabia’ is a great formula.

          I wonder which Think Tank thunk up this strategy to keep the hamster running on the wheel?

          These people are really very creative — hopefully they can keep coming up with more tricks that keep BAU going!

        • The Junk debt issue for shale drillers is definitely a real problem. Unless the prices are a lot higher, cash flow remains negative.

      • Part II of our Podcast with Steve Ludlum of Economic Undertow is now UP on the Diner Blog.

        In this one, we look at various definitions of Peak Oil, and how Credit Constraints will affect the industrial economy.

        http://www.doomsteaddiner.net/blog/2014/05/18/podcast-peak-oil-with-steve-ludlum-from-economic-undertow/

        RE

        • I accidentally put up Part III instead of Part II on the Diner last night. Part II went up correctly on The Burning Platform though.

          Both Parts are now up on the Diner.

          RE

  3. Adriaan Kamp says:

    Dear Gail,
    Excellent piece ! Needs our attention and clear views on what needs doing.
    Thanks for sharing!

  4. Rodster says:

    I’m amazed when bloggers try to theorize that what is happening in Ukraine and the escalation between the US and Russia is nothing more than a co-opted script by the IMF to implement a Global SDR and finally for TPTB to implement a Global Govt.

    They forget that none of that matters because their paradigm is all about more of the same but a power grabb and control of all financial assets on a global scale. They are still working with an infinite growth paradigm in a finite world. And resources are quickly depleting. I read that 60% of China’s water is toxic and not fit for human consumption because of pollution. Our industrial civilization is based on cheap oil and as the author has noted as well as Michael Ruppert, the population spiked/exploded when fossil fuels were introduced during the early 20th century.

    I would like to ask the author for her thoughts on the Zeitgeist Movement? From the little i’ve read it appears it’s a step in the right direction although i’m not sure if it’s too little, too late at this stage of the game.

    If all of the above isn’t depressing enough, Stephen Hawking is warning that man’s pursuit for artificial intelligence may destroy man in the end as computers and robots will be uncontrollable.

    • Robin Clarke says:

      because their paradigm is all about more of the same

      Quite. See my below penned at same time as yours.

    • Stilgar Wilcox says:

      I think the idea of Ai destroying man is similar to the worry in the early days of robots that they would have their own personalities and therefore possibly be violent and destructive. There will be a collapse in the near term so this won’t happen now, but I could see in a far off future once the world rebuilds using a future power supply like fusion or methane hydrates, the top .01% wealthiest would populate the world with robots instead of allowing poor people to procreate in order to have assured control. Robotics in a rebuilt future, will continue to improve and at some point make more monetary sense to have robots do the work because of the elongated hours they can perform without demands. Imagine how easy it would be to be a manager of robots instead of people. One person could manage hundreds without complaints, demands, sick leave, vacations, wages, showing up late or excuses, etc. “Come here, I’m going to show you how to do inventory which will only take you the next 87 straight hours. Your energy pack is being recharged internally so there is no need for a break to recharge anymore, so just keep working until you are done, then transmit the results to this web address and email me its done.”

      • Rodster says:

        Stephen Hawking did not give me the impression it will be far off in the future. Currently Robotic AI is quite advanced in its early stages. Google recently purchased Boston Dynamics. Watch this video and you will watch a robot teaching itself to walk and anticipate movements all thru AI. http://www.youtube.com/watch?v=tFrjrgBV8K0

        One of the founders of Google says we are on the path where Robots will out think man and he’s not talking a hundred years from now and neither is Stephen Hawking.

        • Stilgar Wilcox says:

          Thanks for the link. Fascinating stuff.

        • Bandits says:

          Robots are subject to the same limitations as life. An energy source. Batteries can’t cut it, so they will need to be tethered. The supply from the tether is limited by FF’s as are we. Then again if you watch Iron Man or iRobot the imagination is unlimited but not the awful truth.

          • Rodster says:

            True, but the thought is (Stephen Hawking and Eric Schmidt) AI will become SO advanced that Robots will NO longer need man and will devise and create tools for their existence. That’s the point about the progression of AI in Robots. That their capacity to exist will not be limited by man’s limited knowledge.

            http://www.independent.co.uk/news/science/stephen-hawking-transcendence-looks-at-the-implications-of-artificial-intelligence–but-are-we-taking-ai-seriously-enough-9313474.html

            Hawking Quote:
            “One can imagine such technology outsmarting financial markets, ‘OUT-INVENTING HUMAN RESEARCHERS’, out-manipulating human leaders, and developing weapons we cannot even understand. Whereas the short-term impact of AI depends on who controls it, the long-term impact depends on whether it can be controlled at all.”

            • timl2k11 says:

              From the linked to article: “everything that civilisation has to offer is a product of human intelligence”. This must be a cultural blindspot. Does human intelligence create natural resources? I guess forget peak oil because… human intelligence. Some of the smartest people on the planet are dumb in some very fundamental ways.

        • dashui says:

          I think u guys are all a bunch of Robophobics!

    • I am not very familiar with the Zeitgist Movement. I notice that on their website, they say,

      This “Natural Law/Resource-Based Economy” (NLRBE) is about taking a direct technical approach to social management as opposed to a monetary or even political one. It is about updating the workings of society to the most advanced and proven methods known, leaving behind the damaging consequences and limiting inhibitions, which are generated by our current system of monetary exchange, profit, business and other structural and motivational issues. . .

      The view held is that through the use of socially targeted research and tested understandings in science and technology, we are now able to logically arrive at societal applications that could be profoundly more effective in meeting the needs of the human population, increasing public health. There is little reason to assume war, poverty, most crime and many other monetarily-based scarcity effects common in our current model cannot be resolved over time.

      This sounds a little too much to me like something a group of college professors would put together. In the real world, the laws of physics underpin the way the economy works, just as they underpin the way plants and animals grow. Professors like to think that their modern theories can fix everything, but a lot of modern theories are totally bunk–for example, the view that a population of 7 billion can live on the renewable resources of the earth. Without reading much of their material, I would expect that they believe something along these lines, if everyone would just share. I am not sure what they think would happen when the population gets to 10 billion or 14 billion.

      I personally don’t have a problem with organized religions–I feel that they serve a useful purpose.

      • We wont have long left to find out. Already approaching midway into 2014 and we can see the wheels well and truly starting to fall off in the real world. Limits to growth played out in the West.

        2015 is the point at which aggregate fossil fuel extraction rates head south and when that happens it’s game over. We know this because we witnessed first hand the damage caused as soon as conventional peaked in 2006. We faced $147 in 2007 and then societal chaos 2008 onwards. This time we expect the same again but by an order of magnitude greater as soon as uncoventional fails to offset the decline of conventional since 2006 which is rapidly approaching.

        This time politicians have nothing left when the curve shifts violently downwards off the plateau. Worse it will just keep moving downwards causing panic and chaos.

        2006 – conventional peaked
        2007 – $147pb obliterating Western consumption debt based economies
        2008 – Financial Armageddon led to QE, ZIRP, Desperate attempts re unconventional (fracking, tar sands, shale, deep sea etc.)
        2009 – plateau (QE/ZIRP/FRACK)
        2010 – plateau ”
        2011 – plateau ”
        2012 – plateau ”
        2013 – plateau ”
        2014 – plateau ” Rising pressures in US/EU/Ukraine/Oil Majors/Russia/Iran/China)
        2015 – decline in unconventional starts and then total global aggregate decline
        2016 – rising prices will further obliterate Western consumption debt economies
        2017 – decline accelerates (chaos)
        2018 – decline accelerates (more chaos)
        2019 – decline accelerates (even more chaos)
        2020 – decline accelerates (chaos squared)

        If things were bad in 2008 as we “only” reached plateau then what the hell are things going to look like 2015 onwards?

        • Lindon says:

          Agritech — That timeline looks accurate to me, with one exception. Once the declines start to hit us in 2015, the economic obliteration will begin immediately — we won’t have to wait until 2016. By expert usage of the mass media propaganda tools at their disposal, TPTB have done an excellent job so far of keeping the masses uninformed about the dire situation our finance/credit-based economy is in. Once the first fuel shortages start to hit, my guess is that it will be a “shot heard round the world” — they won’t be able to hide it or explain it away. Once investors realize that we’re on the downhill side of peak oil, picking up speed as we rush toward the bottomless pit of that curve, confidence will vanish, panic will set in, chaos squared will be the result.

        • St. Roy says:

          Your simplified characterization of the past few years and forecast for the future is spot on. I put this comment in my “predictions folder”.

        • $147 didn’t hit until 2008, but the price rise started in 2007, and things started falling apart then.

          I agree we face a scary future, but it is a little hard to tell precisely what will go wrong–will the problem be high prices or low, or banks failing? One scenario is that oil production drops, and then prices spike, which is the one you are showing. And that may very well be right. But I suppose other scenarios are possible as well. Interest rates spike, and oil prices drop. Banks fail. Perhaps war starts. Or some countries stop accepting payment from other countries (like Japan and Ukraine), reducing total demand.

          • Hi Gail,
            Apologies you’re absolutely correct, Brent Crude did indeed hit its peak of 147 in July 2008, we had the Lehman’s debacle Sept 2008, oil prices started to rise in 2007, so the speed that “chaos strikes” in whatever form it chooses to manifest may be sooner as a result of falling rates of unconventional extraction.

            We think if rates of uncon. extraction collapses sometimes (2015/2020) prices will certainly rise as demand outstrips supply. Demand destruction will automatically kick in leading to a collapse in price relative to demand as happened when conventional peaked in 2005/2006.

            There’s a precedent we can look to.

    • Sylvia says:

      Robots and AI need energy, pull the plug and they are done. Thinking alone is not enough to compete with living organisms. We can’t even build a maintenance free car ;-)

    • Timothy says:

      The zeitgeist movement is the brainchild of Jacque Fresco. It is a nice fantastical dream that will never see the light of day. It might have worked if it was implemented a hundred years ago. At this point it is far too late and the requirement that we act as a global citizenry in order to track and fairly distribute resources is insanely unlikely given the history of our species ability to cooperate.

  5. Mel Tisdale says:

    Thanks for another very informative post, Gail. Though, I cannot see this ending well, sadly. What a pity we have wasted the peace that broke out in the 80s.

  6. Robin Clarke says:

    I disagree with the comments above. Look at your own experience of trying to persuade people about peak oil. Even if they “know” the facts they are still highly resistant to *understanding* or *believing” them and their implications. (The doubters of Copernicus understood well the implication that the stars would have to be stupobogglingly-astronomical distances away, they just couldn’t *believe* it could be so,)

    Now put on top of that the fact that if you are dealing with the people “at the top” then these are those who have most to lose, fall furthest, with the greatest emotional investment in the status quo in all its aspects (greedism, boastism etc). (I was reading about some hunters in Siberia who will be completely unaffected by the end of fossil fuels not least as no-one anywhere near ever uses them.)

    Now put further on top of that the further fact that groups of people such as those “in charge” do not have one mind but many. And it is immensely even more difficult for such groups to move their beliefs to a new, let alone unpleasant set. They don’t do heresy well (understatement), and nor do they do “pessimism” well. Endless Growth is the key tenet of their religious faith.

    Furthermore, these people choose at an early age that they want to be in charge, and they look and see that the polit and econ graduates give the orders and the phys chem biol maths grads follow them (else are sacked). They thereby develop an immovable delusion that pol/econ factors control phys/chem/biol (when in reality it’s the other way round). Need more oil? – change the price or invade a country.

    Do you seriously think many a Mr Corporate Millionaire has fireside chats with his wife about how there isn’t going to be any petrol for their Lamborghinis in the next decade and they’d better learn how to grow spuds and skin rabbits with their bare hands?

    • Lindon says:

      Robin, in the Joint Operating Environment (JOE) of 2010, the U.S. Military strategic planners specifically outlined the dangers and security challenges that fossil fuel shortages would bring, and offered an “as soon as” year of 2015 when we would first hit “shortages”, with dire worldwide strategic consequences. Recently, a U.S. Air Force Colonel has been making the rounds, discussing the dangers of peak oil with different groups. The U.S. Military, and the German Military, and let’s just safely assume that all militaries of any nation worth mentioning are aware of the approaching dangers.

      Mr. Corporate Millionaire may be sitting by the fire thinking technology will keep him sitting pretty and no worries, but the military is planning and strategizing for future conflicts brought about by energy (and food) shortages. Since the politicians tend to be the ones who approve the budgets for the militaries, and so need to know what kinds of concerns they need to be prepared for, it is a very safe bet that the politicians — top ones at least — know exactly what issues are at play when it comes to oil/NG shortages.

      From my point of view, it is ignorant to assume that the CIA, NSA, other intelligence services, military and top political/financial elite are clueless about the approaching dangers brought on by peak oil. They don’t talk about it in public, they appear to clueless, but as usual they are just putting on a public face which hides their real intentions and thoughts.

      • Robin Clarke says:

        Thanks Lindon for reply but I still think you don’t get the difference between “knowing” facts and breaking out from one paradigm to another. The military have long understood that oil is a key requirement for their fighting forces (planes, tanks, ships). They also see that resource shortages will be a cause of conflicts. This is all within the standard military paradigm. But these politico-people are math/physics dumbo illiterates. They imagine that there will always be some new invention or discovery coming along. Like the nutcase who insisted that belief in intergalactic visitors is perfectly reasonable because we “still don’t know everything about physics” (and therefore anything could be possible).

        • Lindon says:

          The politico-people are master manipulators and they are the puppets of big money. The politicians do what they are told to do or they don’t get re-elected. The true powers that be do not include many, if any, politicians as key members — although POTUS probably has his own parking space at the meeting hall. What is happening in Ukraine is far more complex than you seem to realize. It is much more than greedy evil rich guys jockeying for wealth. Politicians are just actors on the stage, saying their lines. The real powers are the ones behind the curtain, pushing the buttons and writing the scripts. And those people most definitely are aware of the coming collapse and all its implications. It is okay if you don’t understand or believe that. Most people, including you, seem to be caught up in the MSM and blog-related hype that America is trying to start a war to intimidate Russia or to get missiles positioned closer, or whatever. But the truth is hidden behind all the hype. Wait and see.

          • edpell says:

            Don’t leave us hanging. What do you see as the purpose of the five billion dollar Ukraine destabilization?

          • Robin Clarke says:

            Lindon, I agree with your first half there – master manipulators and puppets of big money.
            But you are mistaken in your further notions of what I believe is going on under the Ukraine events. As I said in another comment here, it is simply the military-industrial complex is always looking out for profitmaking war-starting opportunities. There’s no need for any other theories about why it is happening, the US/K has a huge string of “good” war invasions to its credit in the 80 yrs since the Really Great Good War invasion against those gas-chamber-operating monsters across the Rhine. The fact that there is a peculiar energy relationship between R and Ukr is incidental, though not of course immaterial. There’s also a consideration that they always select as enemies those that threaten the dollar supremacy, hardly surprising given that they themselves live in the dollar half of the world.

        • Robin Clarke says:

          Can I also add that while the military-industrial complex controls the world (this side at least), there is a huge difference between politicos and military staff. The military advisors who wrote those reports are more akin to technicians (who rather plausibly believe in the supremacy of real-world physical power), far from being math/physics/reality-illiterate unlike the politicos I have commented on elsewhere hereabouts.

        • xabier says:

          Robin

          I don’t think the fact that many of those ostensibly in charge are from an economics/law/arts background has that much bearing on the matter.

          For instance, I am a mere arts graduate from an ‘elite’ university – it has produced many of the leading politicians and civil servants in Britain – and I am capable of grasping these issues and the implications, even if not able to do all the maths for myself.

          The intellect of these people should not be underestimated, although strictures on their morality and greed for power are probably deserved!

          More of an impediment is the reluctance of all human beings – whatever their intellect or form of education – to face profound issues and catastrophic possibilities, and the restrictive effects of existing institutions.

          It is possible that the military have a much better grasp on these issues than anyone else, as logistics is the greater part of military science: the tanks move, the planes fly, the troops are fed clothed and equipped, or one simply has no army! This concentrates the mind enormously, whereas politicians can be distracted by internal power struggles and personal delusions (as can some generals of course).

          Weighing up everything in the public domain, I do not believe that anyone in power is currently acting on the assumption of Collapse; but they certainly envisage a few hard jolts on the road, including major civil disturbances, and maybe even war – cyber war? – between the major power blocs, while maintaining their confidence in being able to finesse things more or less: this is, after all, the habitual assumption of those in power. The habit of propaganda, which has grown to nightmarish proportions since the two world wars, obscures much. Prospects are certainly rather bleak.

          • Lizzy says:

            Xabier! “arts graduate from an ‘elite’ university” — quelle surprise, whoever would have thought? (BTW – enough of the “mere”, say I, fellow arts graduate…)
            I agree with what you say: the Powers in this country are intelligent and well educated; but they (y compris the army) do tend to stuff things up a lot. I don’t know if the catastrophe to come is a known, a known-unknown or an unknown-unknown to them. God help us all.

            • xabier says:

              Lizzy

              I agree (as ever): history is one stuffing up after another: reading thousands of pages of diplomatic documents when I was a research student impressed me deeply with the capacity of human beings, however ‘well-informed’, to get things wrong – very badly! Something big, unexpected and very nasty usually comes roaring into view to surprise the experts.

              I have to say, I utterly loathed the students who at the age of 19 clearly had their sights set on politics and joined the university clubs for their kind. And those who went into the civil service were distinctly…..shifty, if very ‘Establishment': ambitious, but in a different way.

              I’ve begun to take prayer very seriously – it seems to be, maybe, our only hope. That and stocking the wood shed: God helps those who……….:-)

            • xabier says:

              Lizzy

              At least one can enjoy great weather in England!

          • Lindon says:

            Do “they” know or do “they” not know? That is the question. An anecdotal contribution to those seeking an answer to this question: On one of the peak oil related websites I frequent daily, there are a number of experts in the oil business, who are currently working in the oil drilling/production business and have been for a long time. One of the regular and highly respected (by me) posters has a consulting company, and his company’s mission is to help businesses prepare for the coming oil shortages. According to this poster, EVERY CEO and business exec he talks to is aware of the dire energy future that our world faces. They don’t talk about it, other than subtly preparing for it there are no real action items that can be put on the to-do list, but they all know about it, they worry about it, and we can assume that many if not most are preparing for it in their own way. It is naïve to assume that highly educated and informed individuals working in government — elected and non-elected — are so stupid that they can see what all of us see coming. They KNOW! The fact that they are not directly addressing the issue is proof that a) they realize that nothing (much) can be done to prevent it, b) they are collectively trying to keep the masses calm and assured even as the wolves close in around us and c) their continued employment in the role they hold almost certainly depends on them not rocking the boat by divulging this information publicly.

            rockman, who use to post for a long time at The Oil Drum, posted on Peak Oil dot com a couple of days ago that everybody he knows in the oil business — which is just about everybody I imagine — has their finger on a hair trigger, ready to pull that trigger and bail immediately at the slightest sign of trouble. Everybody in the oil business knows they are scraping bottom of the barrel and that age of oil is about to go belly-up. And you think the politicians and the rich cats are so stupid they don’t know what everybody else knows? If so, you could not be more wrong.

            They know.

      • Robin Clarke says:

        Since the politicians tend to be the ones who approve the budgets for the militaries, and so need to know what kinds of concerns they need to be prepared for

        I doubt this too. For a start Warbarma Inc. are mere puppets of their masters, namely the military-industrial complex which controls everything else (except anti-war protesters to a little extent). And the politicians don’t spend weeks thoughtfully meditating over the reports they receive, but rather scan through the executive summaries then rubber stamp the recommendations. Especially if they come from their military-industrial bosses.

        • Lindon says:

          Robin, your assertion that politicians don’t spend weeks thoughtfully meditating over the reports they receive is totally unfounded. You have absolutely no way of backing that assertion up with fact. What about the House Committee on Homeland Security and the various committees formed to review and make recommendations on military security matters? Are you assuming that they are just a bunch of lazy bozos signing off on billions of dollars of defense spending without giving it a second thought? Robin, you are extremely naïve. Of course they know. I realize it is shocking to you — and to many others — to realize that our political system is engaged in a coordinated effort to portray a sense of normalcy and calm even as what looks to be an epic collapse is coming at us fast — it is SHOCKING to realize that we are all being lied to and manipulated. But you have to accept that fact. They know, Robin. They know.

      • I know I was invited a few years ago to participate in a symposium at the Rhode Island Naval War Academy. The admiral in charge was a follower of peak oil theory, and wanted to know specifically what kinds of problems to anticipate. I know I mentioned “low funding for the navy” as one of the problems. There were other “experts” invited as well, including one on the loss of fish in the oceans, and at least one on climate change.

        I have also read some other military documents related to oil limits. So I agree with you that the military is at least thinking about these things.

          • Thanks! I hadn’t seen that report before. It seems to be from 2011. It is a Ph. D. thesis, whose abstract says:

            IMPACT OF THE PEAKING OF WORLD OIL PRODUCTION ON THE GLOBAL BALANCE OF POWER, by Lieutenant Colonel GS Pascal Eggen, 91 pages.
            This research explores how the peaking of world oil production influences the global balance of power. On the one hand, the geological phenomenon of peaking, modeled by the Hubbert’s peak curve, gives the timeframe and the evolution of oil depletion. On the other hand, the impact of energy resources on economic and global balance is perceived differently in world politics. Idealism, realism and offensive realism lead to different societal behaviors. In this context, oil, as one of the main source of power for transportation, has a particular role to play. In this context, the relation between the peaking of oil and the global balance of power is scrutinized under the lens of system theory. Therefore, a simple model to describe the world is developed.

            This research has found that the peaking of world oil production will increase the resource awareness of great powers. While oil production will decline, nations will try to preserve their high level of organization. The world politics will shift from idealism, typical of our present growing economy, to realism and offensive realism. The economic rules will move to those of a negative sum game. As a consequence, minor geopolitical players will have to align will great powers, to ensure minimal losses in oil supply. Finally, the great powers will wait until the last moment to start mitigation measures against oil depletion. Indeed, too early a transition towards new sources of energy constitutes a risk to alter their current geopolitical position.

            According to Appendix A, Russia and Saudi Arabia were very close in oil exports at the time the analysis was done. If a person adds in natural gas exports, Russia would clearly come out ahead, in terms of total exports of oil and gas.

          • Thanks. This one is from 2010. The abstract says:

            THE UNITED STATES’ STRATEGIC INSECURITY-THE OIL NEXUS, by MAJ John A. Gagan, 77 pages.
            There’s not any doubt that oil is a finite resource and that the United States relies heavily on oil for homeland security, defense security, and economic security. Every facet of the American lifestyle is dependent on oil. The United States secured its status as a world Super Power around an industrial base driven by oil; accessible, cheap, and plentiful oil. The United States has enjoyed virtually unhampered access to oil for over one hundred years. However, in the first decade of the 21st Century, global demand for oil has accelerated at an unprecedented pace. As global supplies have become tighter, global competition for oil has increased. This study set out to answer the primary question of: “How does the United States’ dependence on oil create national security vulnerability?” Secondary questions include: “Is America’s dependence on oil a strategic vulnerability, what hazards are associated with America’s dependence on oil, and how can the United States mitigate those hazards?

            The findings of this study revealed that U.S. vulnerability to dependence on oil manifests in the realm of national homeland security, economic security, environmental security, and geo-political security, with economic security posing the greatest security vulnerability. Since the U.S. economy is driven by oil, it is a matter of national security that the U.S. maintains a safe, reliable, and ample supply of oil. As global competition increases for oil, securing those supplies will become more difficult, which leads to the most significant hazard associated with America’s dependence on oil: energy supply disruptions.

            • dashui says:

              I asked my uncle a retired army col. what percentage is the military dependent on oil? He said, “100%%”

        • An excellent website with a compendium of articles on many important topics, including peak oil and climate change: http://fabiusmaximus.com/about/authors/

        • Paul says:

          WORLD IS SLEEPWALKING TO A GLOBAL ENERGY CRISIS

          Mark C. Lewis, former head of energy research at Deutsche Bank’s commodities unit highlighted three problems facing the global energy system: “very high decline rates” in global production; “soaring” investment requirements “to find new oil”; and since 2005, “falling exports of crude oil globally.”

          According to Lt. Col. Davis, scepticism of the oil industry’s bullishness about future production is growing amongst senior Pentagon officials:

          “A lot of high-ranking officials are starting to ask exactly these hard questions about the sustainability of the current energy system. You’ve got to remember that for the military, it doesn’t matter what you want to do. What matters is what you can do, and it’s our top priority to make sure we understand potential limits to our operational capability. Even the EIA is forecasting that we could see a peak of shale production by 2018 followed by a plateau and decline, and the Pentagon knows this. But our transport infrastructure is totally dependent on liquid fuels. How are we going to sustain that infrastructure with these decline rates? That’s why serious questions are being asked by high level US military officials as to what exactly the Army, as well as American society in general, is going to do to address this challenge.”

          http://www.theguardian.com/environment/earth-insight/2014/jan/17/peak-oil-oilandgascompanies

          The military knows – and the banking community at the highest levels knows…

          • The people who don’t know are the ones who get their news from advertisements on television, claiming that everything is wonderful with respect to oil and gas supplies. There seem to be a lot of folks like that around. Also, the fact that oil prices haven’t gone up recently lulls people into a false sense of security.

            • Paul says:

              Of course people trust the MSM – in spite of the fact that they print lies (actually advertorial) day after day after day — they are bought and paid for.

              Case in point the MSM ran massive articles on this product — without questioning the claims that ‘research demonstrated these were better than running shoes’

              And now we see this was all a lie… and the MSM simply printed this garbage without a second thought (how much did the PR company pay – how much advertising was tied to the article)

              http://fittish.deadspin.com/vibram-fivefingers-still-stupid-now-culpable-1572955736

    • Peter S says:

      I agree with you. Although I imagine the “powers that be” (for lack of a better term) have very different private conversations to their public conversations. I’m not a fan of conspiracy theories, And you make very good points about people basically being willfully ignorant. I think sometimes it’s just a type of normalcy bias – the total shock to the system, the mentality, the whole way of thinking, living and being, would be too great. So a comfortable illusion is more comfortable. Everyone is capable of this.

    • Interesting points! I am sure that a lot of people in government are of the “civil servant” mentality, but I expect that there are many who got where they are because they want to be “in charge.” If they have a long ways to fall, they are not going to be very amenable to anything that disagrees with the BAU scenario.

    • Paul says:

      No I don’t think corporate millionaires have this chat — but strategists at the top levels of government are most definitely having this chat — their think tanks are modeling outcomes — and their militaries are making preparations.

      There is no way that the top leaders are not aware of what is imminent:

      http://www.spiegel.de/international/germany/peak-oil-and-the-german-government-military-study-warns-of-a-potentially-drastic-oil-crisis-a-715138.html

      QE and ZIRP are the economic policies that they are using to fend off disaster for as long as possible. You do not print trillions of dollars unless you are truly desperate — and aware of what not taking action means

      • Lindon says:

        Exactly.

        If we judge the US government not on its words but on its actions, then we get a clear picture of a government that is highly aware of the dire consequences of oil shortages and taking drastic measures to militarily AND financially stave off collapse for a while longer. QE, ZIRP, the “war on terror”, the Iraq invasion and occupation, all the little proxy wars and now this Ukraine situation — consider them all from the perspective of a global financial elite and a U.S. government that is determined to keep BAU going a little longer while at the same time positioning itself for a coming collapse that cannot be avoided.

      • edpell says:

        Google understands the need for energy and spends time and money on it.

  7. Robin Clarke says:

    I also note that this post comes just as the most outrageous news comes from (or more to the point doesn’t) Odessa. The western media are right now covering up a most outrageous war crime sponsored by the Washington regime with collusion of the UK regime’s lies. There has been a pretence that 40+ people were “accidentally” “killed by a fire” in Odessa. What really happened is that a gang of overtly fascist thugs was helped by the Washington regime to “democratise” Kiev by bloody force (shooting under false flag at the other Maidan protesters). And then this week the Kiev junta sent some of their thugs to carry out a masacre of peaceful protesters (women, even pregnant) deliberately arranged to take place in the Odessa building while a pretence of being burnt to death was arranged to provide whitewash deceit to the media.
    You can see the ugly truth that’s being covered up at the following link here (I guess can translate webpages if not read Russ): Note that it is very unpleasant stuff including a pregnant office worker strangled. Key point is most of the dead had only heads burnt and clothes unburnt. Because they were all murdered by the Washington-sponsored murderers of the Kiev junta.
    http://communitarian.ru/publikacii/genotsid_russkogo_naroda/odesskaya_hatyn_kak_ubivali_odessitov_v_dome_profsoyuzov_materialy_dlya_podgotovki_k_mezhdunarodnomu_tribunalu_06052014/
    The only thing those people “at the top” understand is criminal brutality and more criminal brutality. Fat change of understanding peak oil!

    • Robin Clarke says:

      The arms trade needs regular wars like Dracula needs regular bloodsucking opportunities. Had been a bit quiet since Libya enjoyed the benefit of their attention. They tried to start another war in Syria but the Kremlin chess-player outwitted the fake birth cert Nobel Peace laureate who consequently ended up with red lines over his face.
      So now really thirst-parched for more war-blood.
      So they channel 15 bn of US taxpayers’ dollars to helping right-sector/svoboda fascist thugs take control in Kiev, who then send an “army” of more selected thugs to kill the peaceful “terrorists” in the East, and thereby precipitate a war “started by Putin”. Add lies to taste and stand back while cooking….
      I appreciate that you over there are not all to blame for this but can you please tell your regime to f off from over here or we’ll engineer for gangs of communist kulak-killers to take over in Canada then invade Pennsylvania etc.

      • “The geography of the Ukrainian defense enterprises, with which Russia links its strategic doctrine, strikingly coincides with the geography of the points of instability in Ukraine. We see that some forces in these regions are creating the prerequisites for legitimizing the annexation of the regions based on the Crimea scenario. We should note that one of the points with a high concentration of such objects is the city of Kyiv.”
        and
        “Dmitriy Rogozin, the main supervisor of Russia’s defence industry and its deputy prime minister, made a brief inspection of the key facilities of the Ukrainian defence industry in early December 2013. In particular, this official was especially curious to see Ukrainian manufacturers of rockets and missiles, including the state-owned Makarov Yuzhnyy Machine-Building Plant (Yuzhmash, Pivdenmash) and the state-owned Yangel Yuzhne (Pivdenne) Design Bureau. At Pivdenmash, the Russian delegation was interested in learning about assembly of rockets and missiles. Rogozin did not pass Ukrainian shipbuilders by, namely the Mykolayiv-based Black Sea Shipyard (manufacturer of big ships) and the state-owned company Research and Production Complex for Gas Turbine Manufacturing Zorya-Mashproekt (power units for warships). Rogozin’s inspection trip included Zaporizhzhya’s aircraft engine making concerns, the Ivchenko-Progress Design Bureau and Motor Sich, as well as the pearl in the crown of Ukrainian aircraft construction, the Kiev-based state-owned company Antonov. There Mr Rogozin discussed cooperation in the manufacturing of An-148/An-158 aircraft and a schedule of joint works under the An-70 military transport aircraft programme, and raised the issue of resuming batch production of the An-124-100 Ruslan.” http://gorshenin.eu/news/199_a_key_to_understanding_putins.html

    • The article you link to has a lot of pictures included that don’t make sense if the problem was just that the building burned down. It is sad how politics works today.

    • Stefeun says:

      Lots of information and videos about what really happened at Odessa, and other events in Ukraine, on Olivier Berruyer’s blog:
      http://www.les-crises.fr/actu-ukraine-8-mai-2014/

  8. Stilgar Wilcox says:

    “The US/European approach to this problem is to loan the Ukraine $17 billion to pay for past natural gas bills. The hope is that with this loan, the Ukraine will be able to make changes that will allow it to afford future natural gas bills.”

    Either money is water and there is a never ending supply of it, or there is some way of cooking the books so debts can be walked away from without any fiscal repercussions, or politicians are idiots to think the Ukraine will ever pay back a 17 billion dollar loan, or any of the other multitude of ways they find to toss money around like it’s a never ending supply. In all my life I have never seen so much borrowed and printed money by the West than in the years since the 08/09 near collapse.

    As far as the idea of policing parts of the world with the military that will inevitably collapse, that seems to be as ludicrous an idea as tossing money at a losing cause, because once there is collapse there won’t be any world economy to pay for the military or police.

    • Lindon says:

      Stilgar, I would file that $17 billion Ukraine loan under “Tricks to keep BAU going for a little while longer”.

      • Stilgar Wilcox says:

        Yes. Probably no hope involved on their part of ever getting it back, let alone even a good stream of some repayments. It’s like their saying, “Here, Just take this stuff and keep going a while longer, please. 17 billion is nothing compared to what we’ve already thrown around. Pay it back, or not, we’re just trying to keep the proverbial red queen running faster in a fantasy filled desperate game of kicking the can down the road, hoping cheap energy will return.”

        • Lindon says:

          Yep. $17 billion is as easy as a click of a mouse button on the Fed’s master terminal these days. It roughly equates to giving Ukraine (actually, giving it to Russia via Ukraine) a gallon of gas and saying “See that steep dropoff about 20 miles down the road — this gallon of gas will get you right to the edge of that bottomless pit, which is as far as you need to go.”

          • edpell says:

            Everybody knows the Ukraine will never payoff its debt, just as the US will never pay off its debt.

            • Paul says:

              The Fed sent around 1.5 trillion dollars to European banks in 2012 – LTRO – to prevent a massive collapse…. I am not aware that this was or will ever be paid back.

              This and the Ukraine loan demonstrates that central banks will do absolutely anything to try to maintain BAU as long as possible

              Bernanke would even pimp Yellen if that meant another year of BAU (I suspect we might only get another minute or two out of that though….)

            • MJ says:

              I agree with you, Paul. We are clearly at the point on no return here financially in the United States. Even the Republican Party has given up on fiscal responsibility long ago. The Tea Party means well, but can really do nothing at this stage of the game beause of our energy demands and shortfalls.
              The question is when will the House of cards fall?

  9. cal48koho says:

    Another fine post from one of the most sensible intelligent bloggers alive. I am a little surprised that you are moving into uncharted territory as a political commentator but with little to no intelligent political comment from the MSM, you are turning into the best available. Refreshing to see the situation from Russia’s point of view. It would seem That companies like Exxon might find themselves in difficult position being pulled in 2 directions.The US government level of competence seemed to hit bottom during bush/cheney,or so I thought. Wrong. The intelligence and State Departments seem to be in a flat spin. It does appear that the US has been behind the so called Kiev revolution, and it appears that it is yet another botched intervention by an overextended aging empire that can’t say No. As bad as it is now, imagine where we would be with Sarah and John McCain in charge.

    • You will note that I did not mention the name of a single political figure in my post. Keeping track of all of the politicians is beyond what I can handle.

      • xabier says:

        Gail

        Politicians. like terrorists, should be denied ‘the oxygen of publicity’.

  10. edpell says:

    Gail, you may be stuck in a BAU frame of mind. We think BAU will not continue. We expect a continued shift to low cost countries. Russia needs to sell oil and gas to buy stuff. If it can buy cheaper stuff from say China it will need less cash per BOE. Sure, ideally it sells to high cost producers that are used to high prices and then buys from low cost producers. If the high cost producer can not afford to pay they serve no purpose and business will be done directly with the low cost producers of items that Russia imports. What does Russia import?

    If the profit margins drops low enough it would make more sense for Russia to keep the reserves in the ground in hopes of future improvements in technology that would make them profitable. It seems to be the case that the five majors are lower production maybe Russia should too.

    • ordinaryjoe says:

      “What does Russia import?” Thats a great question. What do they need all these $ and Euros for? They still manufacture a lot of their goods and that gets paid for in rubles. Saudi I understand- they have nothing but oil, they need $ and euros to buy everything. Why Russia tho? Sure BMWs are nice but how many of those do you really need? Russia has energy and the ability to turn it into most of the things that energy makes. For many years it has been discussed that China will create its own consumer class and become autonomous why no discussion of Russia making this transition? If not autonomy a China Russia Brazil Ruble Yuan Ria? trade would seem to be logical and workable. If you have energy, and you have manufacturing capability why do ideas like revenue, and profitability apply? If you have those two things consumption seems able to continue.

      • It is hard for Russia to compete with China on manufactured goods. (1) China’s energy costs are lower, because coal is a lot cheaper than oil or gas. (2) China’s labor costs are lower, because most people don’t need to heat their homes very much (or if they do, it is with coal). Also, China has been willing to take on huge debt. Russia is not able to do this, perhaps because of its recent bankruptcy.

      • It is hard for Russia to compete with China on manufactured goods. (1) China’s energy costs are lower, because coal is a lot cheaper than oil or gas. (2) China’s labor costs are lower, because most people don’t need to heat their homes very much (or if they do, it is with coal). Also, China has been willing to take on huge debt. Russia is not able to do this, perhaps because of its recent bankruptcy.

    • I am not at all convinced that oil and gas left in the ground now will ever be extracted. It is just too difficult to keep the whole system going that is needed for extraction. Once the system is gone (electric grid, trained engineers, drilling rigs available for rent, operating refineries and pipelines, financial system, etc.) it will be just too difficult to get the oil and gas out. In fact, most coal will likely stay in the ground as well. That is why I don’t lose much sleep over IPCC climate projections.

      Russia could indeed make its rubles go farther if it buys from China and other Asian countries, rather than the US or Europe. The CIA Factbook says,

      Imports – commodities:

      machinery, vehicles, pharmaceutical products, plastic, semi-finished metal products, meat, fruits and nuts, optical and medical instruments, iron, steel
      Imports – partners:

      China 16.6%, Germany 12.2%, Ukraine 5.7%, Japan 5%, United States 4.9%, France 4.4%, Italy 4.3% (2012 est.)

      It was not getting a whole lot from China in 2012. It is hard to get food from China. Some of the other things could come from there.

      • palloy says:

        Could you hazard a guess as to which country(ies) could keep things going the longest? As long as Russia has the equipment in place to keep pumping energy for itself, and basic food self-sufficiency, it won’t matter who owes what to which foreign banks. To put it another way, if governments were wise and had planned for Peak Energy Collapse, how much extra time could they buy for themselves?

        • That is a good question. Russia has some food stuffs, but I am doubtful if enough. This list shows Russia importing meat and sugar. They import an awfully lot of manufactured goods, from cars and car parts and other vehicles, to computers, to medicines, to telephones. The problem would be that on their own, they would not be able to keep the vehicles repaired. As computers wore out, they would need new ones.

          China would be closer to self-sufficient, except that it needs imports from a lot of countries to make the things it makes. So it might be able to do fairly well, if Russia would help it on the energy front, and if it could continue to import raw materials. It might need additional food, also.

          Iran has been forced to operate on its own for a while, because of US sanctions. It has oil, gas, and food, so might do all right.

          Some parts of Africa may be far enough away from outside influence that they can do OK on their own. I don’t think that there is very much, though. Population has risen so much in recent years, that population is likely to be a problem. If we hadn’t “helped” them so much, they might be doing sort of OK.

        • Paul says:

          Oil extraction requires a functioning global market economy. If the global economy collapses demand for oil collapses – prices collapse below what is profitable – and the oil that is in the ground in Russia or anywhere — will stay in the ground.

  11. Patrick says:

    Thanks for contributing that unique perspective on the Ukraine crisis. The energy conundrum is so stupendously absent from all the heated reporting on this topic that it boggles the mind. I tend to believe that this comes close as being the most powerful manifestation of denial that I have ever witnessed.

    I tend to agree with Robin Clarke that the decision-makers do not wish to accept the consequences of energy scarcity into their deliberations, as the consequences are simply to awful. Whatever happens, be it sanctions, a “hot” war or the descent of Ukraine into decrepitude, the outcome is the same: the ability to extract and afford energy will be shrunk again. I also tend to believe that these lost capacities will be gone to never return.

    Isn’t that what systems theory suggest would happen during the collapse of complex systems and the potency of the various feedback loops?

    • I just tried to explain to someone else that oil and gas left in the ground will likely be left there for good. Once the necessary systems for extraction, processing and distribution are gone, it is virtually impossible to put them back in place again.

      I agree that systems theory says that there will be steps down. How big they will be depends on how much of the total system is damaged by the failure of one part of the system.

  12. Peter S says:

    Regarding this part, can anyone explain something to me?

    ” Mark Lewis, in a presentation at the November 2012 ASP-USA meeting estimated that Russia needed a price of $115.90 a barrel, to cover both its cost of extraction, plus Russian budget needs from taxes. If costs are rising at, say, 10% per year, the current required cost today would be about $134 barrel. Current oil prices are not much over $100 barrel,”

    Doesn’t this mean that Russia is, and has been for years, making a loss on every barrel it produces? That’s unsustainable over even a few weeks or months, unless they decided to borrow trillions of dollars to pay for it perhaps. How are they still pumping oil and gas?

    • edpell says:

      Gail, can you break the 115.90 into its cost part and the profit to run government part?

      It may be that Russia is eating its seed corn, that is using and wearing out infrastructure (sunk cost) to allow current income. This of course ends badly when the infrastructure fails and their is no saved capital to replace it.

      • I don’t have the breakdown, but I expect the “profit to run the government” is the big part. The way oil extraction works is the government takes the majority of the money (as much as 90% in some parts of the world) and leaves the company with very little. Even in the US, “government take” can run as high as oil extraction costs.

        This is a map of “government take” by Barry Rodgers. Payments to the government are an essential part of oil company costs, but are omitted from EROEI calculations. And yes, oil companies can be left with too little for reinvestment. Russia tries to handle this by charging different rates for different parts of the country, and changing rates as oil prices change. It basically tries to figure out “what the market will bear.”

    • Peter S says:

      As well as “how”, I should also have asked, “why”. Why would they run this industry at a loss? In previous posts we’ve seen that big oil companies are selling assets to cover costs and payments. Russia would appear to be in an even worse position – actively losing money to sell oil to people at lower prices (if I read this post correctly).

      • Joe Clarkson says:

        Mark Lewis’s slide from the ASPO conference showing ‘breakeven’ oil price requirements did not segregate production costs and the amount needed for government subsidy from his suggested ‘breakeven’ price. Russia is not selling oil for less than it costs to produce, but it needs a certain price to cover not only the cost of production but also provide enough money to cover costs of government operation and government subsidies. If the selling price is lower than it would like, it must simply cut back on funds sent to the government.

        Large IOC production is unlike Russian production in one respect. The IOCs cannot find any new oil that they can produce profitably at today’s prices, so they are cutting back on exploration and development investment. They are still making money on their legacy fields. Russia probably still has oil and gas in the ground it can produce and sell for more than production cost, but production cost rises are squeezing their margins, leaving less for government operations, that is unless they ramp up overall production significantly, something they don’t seem to be doing.

      • Russia makes its money as an oil and gas exporter. According to the EIA, oil and gas revenue account for more than 50% of federal budget revenues. It has a few other industries, including coal mining and some farming. Its people depend on the wealth these industries generate.

        What we are looking at is what Russia needs to run its current programs–road construction, perhaps the subway in Moscow, schools, all kinds of things. A country that doesn’t have money for promised programs closes some of them–doesn’t repair its roads as well; pays smaller pensions to its pensioners. I know when I visited Russia two years ago, we were told that tap water was not safe to drink. Back when Russia was part of the Soviet Union, it had potable water, at least in major cities. I understand that immunizations for children have gone downhill too. We saw quite a few older women selling little bunches of “lilies of the valley” and other flowers, as way of begging.

        With an oil exporter, the revenue really fills multiple purposes:
        1. Provides tax revenue for government programs (often the majority of such revenue)
        2. Provides money for developing new fields.
        3. Provides money for extraction from existing fields.
        4. Provides money for ancillary needs–refineries, pipelines, and other such things. (These may be neglected if revenue is low.)

        Governments without enough funds start asking for proposals from independent oil companies to do the development, in return for a share of the proceeds. The independent oil companies may be “hurting” as well. So it may be hard to get any reasonable bids for development. Brazil and Mexico are in this condition.

      • Paul says:

        I don’t think the industry itself is running at a loss… there costs do not exceed the 100+ sale price of a barrel of oil.

        But like all countries they are deficit spending… so if they are netting say $40 on a barrel — they are spending that + say another $10 on running the country.

        I would assume the difference is made up by selling bonds?

        • Actually, Russia has run up very little debt. I am not certain why, except that its credit rating is low, and communism doesn’t have a history of running up debts. Russia defaulted on its debt in 1998, so this may have a bearing as well. (The Russian oil and gas companies themselves run up debt.) Russian taxes are very high in relationship to extraction costs (say, 3 x extraction costs). When oil and gas export revenues aren’t enough, the government gets less taxes, and cuts back on programs. The economy tends to shrink.

    • The situation with the price being too low is mostly in the last 2 or 3 years, because the cost of oil extraction is going up quickly. Steve Kopits estimated 10.9% for a big piece of these costs. I would expect the overall increase to be a little less than that, at least in the US. The results could be a bit different in Russia, but the general pattern is the same. So the problem is a relatively recent one.

      Part of what gets shortchanged when there are not enough dollars are public programs that are funded by taxes, like roads. Another part of what gets shortchanged is the “exploration and production expenses”. To some extent, this can be offset by getting outside partners like Exxon-Mobil or BP to supply some capital. But the outside partners are struggling too. Part of what happens is that building the needed infrastructure for new oil and gas fields gets put off. (Russia has used the “drill it as you needed it” model of development.) If too many companies around the world do this for oil, we will hit world “peak oil.”

      In the case of natural gas, the development of the Russian Shtokman natural gas field has been postponed, because prices are not high enough to justify the costs. This gets to be a problem for citizens of Murmansk, a large city near the field, because supplies from elsewhere can be inadequate.

      • Lizzy says:

        Thanks for interesting post, Gail. I wonder if ‘expense’ of getting oil out will be countered by governments simply ordering (at gun point?) workers to just do the work. Correct me if I’m wrong: I am realising that a lot of what I took to be fact in days gone by, was possibly propaganda or one-sided. But didn’t the Russians have prisoners doing most of the donkey work in mining and oil-type work?

        • Paul says:

          Not sure if this is possible — because oil extraction is not like building pyramids – which requires only grunt slave labour…. this industry requires tremendous sophistication in terms of equipment… it relies on a global supply chain… I don’t think you can say to someone in Korea making one of the thousands of parts involved in an oil rig ‘work for free or die’…. it’s just too complicated for that….

          • Lizzy says:

            Good point, Paul. For my sins I work in an oil-expro-related business, and one of my brothers is the manager of a drilling rig. It’s all very international, as you say. Still, once the oil is found – unless it’s 5 miles beneath the surface of the sea — just keeping the extraction pumps going is not massively complex, is it? I’m not an engineer. It’s when we have to be clever to get it out — artificial lift, etc — that you need high levels of skill and ingenuity, it seems to me. I’ve been in the business 15 years, and few people I meet are super bright; most are just like us.

            • The costs come in building the big platforms, not in paying the handful of people who operate the machinery, once everything is up and running. The decision making is high tech behind telling what the workers do.

          • Peter S says:

            But they do have slave labor in North Korea. Hundreds of thousands of prisoners, farming, mining, producing in the most barbaric conditions imaginable. If you haven’t read about it, I suggest you do, but it is tough reading. Very heavy and sad.

            I have heard that that is the only way the North Korean regime survives. Put briefly: the slaves (“prisoners”) consume very little (they are given a starvation diet), work about 19 hours a day & 7 days a week, with primitive equipment and conditions (sticks for shovels, decades old engines jerry rigged to run on charcoal instead of oil) and do not consume what they produce; the produce goes to China (you may have bought products or food produced through slave labor, and never know) or feeds the country; there’s a tiny upper class, a lot of poor people in the country kept in line out of pure fear of being sent to the concentration camps (secret police, rumors, reports from friends and family members sent to the camps for few months as a way to warn and scare people, with complete silence in the country’s media); and hundreds of thousands of actual slaves producing until they die. Average life of prisoners is 40-45.

            It is possible. But lets hope it never comes to that, and it just isn’t possible. There is a country we should pray for.

            • MJ says:

              That is how the Soviet state under Stalin survived by the same methods.

            • North Korea is an example of a society with little fossil fuel use. That is not its only problem, but a person can see how badly low fossil fuel use can work out in practice. Perhaps other countries could do better, with the same fuel use. Norway, back before oil, had a much more “flat” organizational structure, I believe.

        • Extraction of oil is done by high-level professionals, including contractors from around the world. Actually, the cost of these salaries is not a big part of the total. A lot more of the cost is the cost of rented equipment (at least the way extraction is done in the US). Also, a big part of the shortfall in funding relates to the taxes needed to keep Russia as a whole operating. Russia depends on oil and gas taxes for over half of its federal budget, according to the EIA. These funds are used for things like roads and other infrastructure.

          I don’t see a big need to use prisoners in extraction. We are talking about precision, high-tech work, using computer-assisted machinery.

  13. Jon Freise says:

    Hi Gail,
    Thank you for this excellent piece.

    One of those mind stretching concepts I picked up from reading Howard Odum is that A flow of money is actually a flow of energy (often in the form of steel, labor, fuel, trucks, equipment, etc) moving the opposite direction. Money runs one direction through and economy, and energy runs the opposite way.

    The money that is paid back to the producer is actually created from the producers energy! Thus the producer and consumer problem are actually the same.

    The producer needs more energy, (typically as more drill pipe, rigs, pipelines, etc) to invest in depleting oil fields. The consumer is expected to somehow come up with more energy, (typically as goods and services, to pay back to the producer). But how is the consumer supposed to produce an increasing return flow of energy when the supply amount is falling? There are two ways: 1 the consumer becomes efficient faster than costs rise (which takes energy and thus is nearly impossible) or 2 the consumer must cut “unnecessary” energy use like home heat, light after dark, powered transport, etc.

    Economics tends to separate supply and demand. But for energy they are tied together. The producer problem and the consumer problem are both the same problem of falling Energy Return on Energy Investment.

    • I agree that supply and demand are closely tied together. Adding to your example, the consumer receives wages, which is what allows him to buy products made with energy. These wages stagnate in times of high production cost for energy (low EROEI).

      Government funding is tied into the same equation. It receives its funds (1) Directly from taxation of energy products as they are extracted, and (2) as a percentage of wages individuals using energy products receive. Both of these tend to stagnate when the production cost of energy is high (low EROEI).

      It is the connection with wages and government funding that tends to bring the system down. When wages are low, citizens need more government programs. It is at this time that the government is unable to provide the programs needed.

      • xabier says:

        Gail

        Not only are the programmes – welfare etc – hard to afford, but in, for instance, the UK, up to 25% of jobs are funded directly by government (education, health, etc). This government employment is particularly important in the poorer regions.

        • Good point.

          I know that one of the major stories in our local paper today is that many road improvements are to be put off indefinitely, because of federal funding cutbacks. This affects jobs as well as the quality of roads available.

  14. MrColdWaterOfRealityMan says:

    Gail,

    Your post is supporting an idea that’s been jelling in my mind for some time now. I don’t think that hydrocarbon energy production will be killed by lack of suppy or ever declining EROEI. I think, in the end, it will be killed by money.

    Specifically, the lack of money. I think there’s some economic threshold below which hydrocarbon location, acquisition, refining and distribution are no longer viable activities. We can’t pay an infinite amount for hydrocarbon energies. Could we pay 5 times more? 10 times? And still find hydrocarbon energy useful? I don’t know. I do know, however, that the cheap easy hydrocarbons are gone, and that what’s left is expensive.

    Should the world go through, for example, a 10-year depression where the oil price plummeted, exploration more or less stopped, and drilling, refining and distribution were sharply reduced, would we *ever* be able to scale up the whole process again? Or would the world’s hydrocarbon energy supply drop to a trickle, permanently? A depression would start its own feedback loop. A bad economy inhibits hydrocarbon production, which in itself supress the economy, and so on.

    This is the question that bugs me these days, because this scenario could happen suddenly and in my lifetime, triggered by a war in Russia, or Iran, or by inevitable economic cycles, or the next Wall Street bubble pop, or China’s economy tanking. Or perhaps all of the above within a few years of each other. There seem to be a lot of risk factors.

    I’m hoping you can think of a good reason why I’m wrong. I hope I am. If not, dark times ahead.

    Cheers!

    • I think you are right. Someone I was corresponding with likened the world’s financial system to a computer’s operating system. If you wreck a computer’s operating system, the computer isn’t much good. The same problem occurs with the world’s financial system, and the economy it is associated with.

      The financial system is what hooks everything together. Money is in effect a promise for energy based goods and services in the future. As long as the amount of those goods and services keep rising, because cheap energy keeps rising in availability, we are in good shape. But once it becomes clear that there is less in the future, rather than more, then they system will start seizing up. Banks and pension plans will find themselves unable to honor the promises they have made.

      The problem with oil prices is a two way problem: (1) Oil producers need ever-higher oil prices for extraction. (2) Consumers cannot afford ever higher prices, because their salaries aren’t rising. If oil prices rise, we get recession in oil importing countries. If oil prices stay the same or fall, oil producers find that they don’t have enough money to pay everything they need to–money for new investment in new field; extraction in fields under development; dividends to policy holders; taxes and other fees to governments. Right now, we are experiencing the second half of the problem. Oil companies have been borrowing more to keep up, and also cutting back in the development of new fields.

      However it works out, it is not likely to work out well. Banks depend on promises, which are related to future oil and energy production. If the production isn’t there, the money in the bank either won’t be there, or won’t buy very much.

      If there is a huge depression, and we cut way back on oil production, I doubt we will be able to scale it up again. For one thing, we will stop training new engineers–we have a great plenty engineers, if we cut back on oil production. So why train more? One reason is the current engineers get old and retire. The same with pipelines–if we cut way back, we won’t add pipelines. We may not even be able to keep up the ones we have. If production drops too much, pipelines may have to be closed–there is a “minimum operating level”. Refineries may be a problem as well. It doesn’t make sense to run a refinery at 1/10 of capacity. And you need to have the whole rest of the system working as well. In particular, you need the electric grid to keep functioning, because pipelines and refineries both depend on the electric grid.

    • Paul says:

      I think it was Steve Keen (Aussie economist) who was one of the first to predict exactly what you are suggesting…

  15. Pingback: Russia and the Ukraine – The Worrisome Connection to World Oil and Gas Problems | Our Finite World | Olduvaiblog

  16. Great analysis Gail!
    Sorry for not dropping by in so long, but things have been very busy.
    Anyhow, I’ve done a couple of podcasts on the financial side Ukrainian situation readers might be interested in:
    Financial WWIII
    Fictional Wealth & Putin’s Billions
    Another one coming tomorrow, Ukraine Re-Redux
    RE

  17. Rodster says:

    It appears Germany is throwing in the towel with regards to renewable energy.

    “GERMANY: Renewable Energy Policy “Complete Failure”… Bring On The Dirty Coal Monsters”
    http://srsroccoreport.com/germany-death-of-renewable-energy-bring-on-the-dirty-coal-monsters/germany-death-of-renewable-energy-bring-on-the-dirty-coal-monsters/

    • jeremy890 says:

      Rodster, I believe you also need to read the comment section to the above link. It really explains the situation better than your headline. It is more complex.

    • Stilgar Wilcox says:

      “This wasn’t much of a problem when solar and wind were only a small part of the electric power generation pie. However, now that the total amount of generated solar and wind power account for 13% of Germany’s electricity, it’s become a BIG PROBLEM…. and will only get worse as more renewable sources are added.”

      And that’s at only 13%!

      • Daniel says:

        Yes you are right about the comment section…so many times people will just read a story and go….”ok I am an expert now and I fully understand!” This comment section is full with so called experts. It is very difficult to parse through the nuances of a story and we still don’t know the whole truth….there is so much dis-information out there. Hell for all we know this is a plan to get the U.S and other countries to consume much less so that we don’t fry the planet. I think this is a good site for information, I think when it starts to fall apart is the in the comment section when people offer up their predictions of the future when we are entering a situation in which has never happened before. We just don’t know and won’t until it happens but yes the government knows and is watching sites like this one.

        • Peter S says:

          ” I think this is a good site for information, I think when it starts to fall apart is the in the comment section when people offer up their predictions of the future when we are entering a situation in which has never happened before. ”
          I agree with that. We have no idea what will happen, we only know the problem. Predictions are sometimes necessary, but can be dangerous – or hugely biased by our own politics (it’s so easy to read people’s personal politics and beliefs in comments) – if not careful. But the article and Gail’s work is very informative.

    • I am sure that you have seen this article as well, EON Urges EU Policy Revamp as Power Markets Face Crisis.

  18. palloy says:

    http://www.bloomberg.com/news/2014-05-07/europe-seen-limited-in-options-to-reduce-russian-gas-use.html
    Europe Gas Options Seen Limited by Costs at $200 Billion
    By Anna Shiryaevskaya and Isis Almeida
    May 8, 2014

    Europe will struggle to eliminate its dependence on Russian natural gas any time soon, with Sanford C. Bernstein & Co. estimating the cost at more than $200 billion.

    Existing projects and anticipated future supply suggest the region’s reliance on Russia can drop to 25 percent by the end of the decade, from 30 percent now, according to Wood Mackenzie Ltd., a consultant. That’s about the same proportion as in 2011. While Europe has 12 options for replacing Russian gas, they would require $215 billion of infrastructure and boost annual costs by $37 billion, analysts at Sanford C. Bernstein said last month.

    Group of Seven leaders pledged yesterday in Rome to find new sources of energy for Europe to prevent Russia from using its oil and gas as a political weapon. Russia has said it may cut off gas supplies to Ukraine because of unpaid bills, something it did in 2006 and 2009. That boosted gas costs across the region because Ukraine is the transit point for about half of Russia’s exports to Europe.

    “In the short-term, there isn’t really a whole lot they can do,” Thomas Pugh, a commodities economist at Capital Economics in London, said yesterday by phone. “Energy security was taken as a given and it wasn’t something people were talking about a few months ago.”

    Negotiators from Russia, Ukraine and the European Union agreed to guarantee no disruptions in gas supply through the end of this month, EU Energy Commissioner Guenther Oettinger said last week after a meeting between the three parties in Warsaw.

    [more]

    • xabier says:

      Dropping from 30% to 25% still leaves Russia yanking the cord on the European pig (PIIG?) , does it not? That no-one was talking about energy dependence is also a lie: I recall a document referred to by Ugo Bardi which stated that EU leaders had been informed that energy matters would become central to their foreign policy in the very short term. Aother case of ‘Shsh! talk quietly we don’t want to upset the children’ (ie the citizens of Euro-topia).

    • When 100% of the gas that is pumped is used by someone, it is hard to make big changes. There is no “surplus” sitting around somewhere.

  19. ordinaryjoe says:

    Thank you for the super informed analysis Gail! I really appreciate your perspective from a energy standpoint, one that excludes the political aspect. The topic sure brought a bunch of posts on quickly!

    I too would like to know about the assertion that Russia is operating in the red both for oil and natgas. That doesnt seem right. Unlike the west Russia cant just erase insolvency with printing right? Could it be that for various reasons Russia’s infrastructure has lower extraction costs than associated with the west? Dont some of the same cost parameters you mention for Chinese goods apply to Russias extraction costs?

    Gail doesnt it seem self evident to you that when the 17B Ukraine loan comes due another loan will be granted as we have seen so often in regards to sovereign debt in recent history? In the end another loan is always made. It really amounts to the same mechanism as the Fed buying US treasuries via proxies, same faces only the CB, proxies, and debt instruments ala sovereign bonds names are different. Whats that old saying; if you owe the bank a million thats your problem, if you owe the bank 17B thats the banks problem.

    The way I read your article is very optimistic. The solution is already in place. The Ukraine is important enough to get eternal debt status and a great majority of the debt capital they receive goes to Russia via their gas bill and helps with Russia’s liquidity problem. The spice must flow! BAU If any spice spigot gets turned off then I will be afraid- very afraid.

    • 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.

      ( a reposting )

      • ordinaryjoe says:

        I was never any good at musical chairs as a child either. I never could tell when the music was going to end, I never got the pie not once. :)

        • xabier says:

          ordinaryjoe

          Get political: when it stops, push someone off their seat, and claim you foresaw it all along……..

    • xabier says:

      Yes Gail, thank you for the posts and, above all, for the freedom of discussion we find here, which isn’t really found on other sites. You are much appreciated and not taken for granted.

    • You are right. As long as the IMF can keep handing out debt, a lot of problems can be papered over. The question is how long this will be the case.

      Like most oil and gas exporters, Russia relies on taxes related to oil and gas to fund its governmental programs–I would imagine everything from roads to pensions to schools. The EIA says that over 50% of its federal tax revenue comes from oil and gas. If Russia’s tax revenue is “running in the red” relative to budget, they don’t have enough funds to pay for the programs they would like. If Russia doesn’t have money, I would expect Russia would cut back on programs. Russia has very little debt itself–the oil and gas companies are the one that carry the debt.

      I am not sure exactly what the story is with respect to Russia’s not carrying a lot of debt. I know Russia defaulted on its debt in 1998, so it probably does not have as many potential buyers for its debt. Also, Russia’s credit rating isn’t very good (but better than the Ukraine’s), so its rate for borrowing would be higher.

      Regardless of what Russia’s oil extraction costs are, operators have to make big tax contributions to maintain the finances of the government of Russia. This is pretty much the way it is for all oil and gas exporters: Quite a bit of the revenue goes for government purposes. If a country (such as Saudi Arabia or Russia) operates as an oil and gas extraction operation, it is necessary to keep the whole country operating–streets, schools, and whatever else is needed, or the oil and gas business won’t be able to keep operating.

      • dashui says:

        I noticed the IMF loan is in SDR’s not $. I wonder if this means anything….

        http://www.bitcoinassay.com/blog/2014/5/5/imf-loan-to-ukraine-in-sdr-not-us-dollars

        • ItPutting the loan in IMF loan in SDR could very well be a step away from the US dollar as reserve currency. Of course, as the link shows, the backing for the IMF SDR loan is really a basket of currencies–US $, Euro, Japanese Yen, and British Pound. All are approximately equally bad off. If one goes down, they most likely all go down. Yes, it is worrying.

          It is our lack of cheap-to-extract energy that is causing a lot of our problems today, including low economic growth, lack of wage growth, and the difficulty young people are having in finding good jobs. It is behind our US dollar reserve currency problems as well.

  20. Stilgar Wilcox says:

    “Should the world go through, for example, a 10-year depression where the oil price plummeted, exploration more or less stopped, and drilling, refining and distribution were sharply reduced, would we *ever* be able to scale up the whole process again? Or would the world’s hydrocarbon energy supply drop to a trickle, permanently? A depression would start its own feedback loop. A bad economy inhibits hydrocarbon production, which in itself supress the economy, and so on.”

    Your question is for Gail, however that’s what I also assert, Mr. CWRM. Although I think at this point it would only take something like 3-5 years. This is why many people like myself suggest a shark fin decline in oil production.

  21. edpell says:

    If I were the Ukraine and I believed that BAU was ending what would I do?
    1) not worry about external debt it will never be paid
    2) stop buying nat gas, but keep keep collecting the transit tax on the nat gas going to EU
    3) shift to an ag economy using all best practices like permaculture, no till, …
    4) build dirt and gravel local roads that can be maintained by hand
    5) install some sort of hardened internet service between towns based in libraries and town halls, text based, power from solar (over built and sheltered, yes it will eventually fail, but if made like bear will survive for 60 years)
    6) kick out all foreign advisers, bankers, NGOs, …
    7) declare peace with everyone
    8) allow only citizens who live 365 days a year in country to own land, particularly farm land
    9) enjoy life, enjoy local food, enjoy not being part of Europe’s endless wars

    • Steve Rodriguez says:

      If I were the USA and I believed that BAU was ending what would I do?
      1) not worry about external debt it will never be paid
      2) stop importing oil, but keep keep collecting the transit tax on the nat gas going to EU
      3) shift to an ag economy using all best practices like permaculture, no till, …
      4) rebuild local roads as they deteriorate; maintain as dirt/gravel by hand
      5) install some sort of analog service between towns based in libraries and town halls, text based, power from solar (over built and sheltered, yes it will eventually fail, but may be useful bridge to whatever comes next)
      6) kick out all foreign advisers, bankers, NGOs, …
      7) declare peace with everyone
      8) allow all citizens who live 365 days a year in country to own land, particularly farm land
      9) enjoy life, enjoy local food, enjoy not being part of BAU

    • Ukraine does have very fine farmland. Whatever they can do that will allow them to continue to maintain production (at least for their own people) would be helpful. They may need to diversify crops, if they are to be self-supporting. (I don’t know.) I am sure at one time, production was done with horses–not sure what the status is today. If they can go back in that direction, it would be helpful. This article says,

      You could call it the latest foreign invasion. No tanks this time, but a state-of-the-art agricultural army is on the move.
      In large swathes of the country fleets of ultra-modern combine harvesters are bringing in the harvest from new mega farms.

      This will work for a little while, and then it will fall apart, just as it does everywhere else in the world.

  22. Gail,

    I don’t think there is anything too complicated about what is underway in Eastern Europe: Putin is trying to push the price of petroleum and natural gas by rattling the saber.

    Sadly for Putin, the price is holding steady; meanwhile, Russia’s foreign currency collateral is flying out of the country. Something has to give, either the oil price must jump (w/ more funds proportionately flowing to Russia) or ability to pay for fuel must drop: Russia’s national account is deleveraging.

    Because there is shrinking collateral relative to claims against it (including Russian currency) the rouble is effectively underwater.

    Of course, just like a bank in the middle of a run, the Russians won’t stand aside and watch the forex leave (with the rouble becoming worthless), the interest rates in Russia will jump. If this doesn’t work there will be capital controls, effectively ‘closing the bank’ … but also cutting off Russian domestic credit (and Putin’s nose to spite his face.)

    The best evidence of peak oil is the inability of the threat of war in an oil producing- or transport bottleneck to push on the price. It means the customers are broke and cannot bid against each other for fuel.

    • Stilgar Wilcox says:

      “The best evidence of peak oil is the inability of the threat of war in an oil producing- or transport bottleneck to push on the price. It means the customers are broke and cannot bid against each other for fuel.”

      That is a bit of reality there – because as we know anything that threatens supply usually jolts oil price higher, but in this case there is no movement. Price has hit a ceiling, above which the consumer cannot afford. This is the face of peak oil, the point where price needs to go higher but doesn’t. A limit has been hit and when another recession hits and oil price drops further down, that will most likely initiate the descent from peak as numerous expensive plays fold up like a lawn chair. As the world economy continues to weaken, the price will follow it down until TPTB will be scratching their heads wondering what to do besides blame some other country and start a war to get their resources and appease the masses.

      • Paul says:

        On an earlier articles someone posted a link to a released doc that indicated the US invaded Iraq because Saddam – with his few million barrels a day of production — was able to leverage that to influence geopolitics — i.e. he could cut production if he didnt get his way…. clearly that indicates very tight oil supplies…

        Of course Russia has leveraged this situation with Europe…. the US obviously would like Putin even less than Saddam — but Putin has a big gun backing him (nuclear arsenal)

    • InAlaska says:

      My feeling is that in a peak oil world, wars become increasingly difficult to finance and or prosecute. All the nations in the world are now in an interlocked situation, either dependent on each other for financing and credit, as oil exporters or importers, as consumers or producers. In any direction any particular nation turns it is faced with the choice between two impossible outcomes. Contrary to the apocalyptic vision of resource wars, I think its just the opposite. Either we work together to support each other’s economies or we all sink together.

      • I am guessing we see a lot more smallish local skirmishes. Russia-Ukraine. China-Viet Nam. Perhaps at some point, between US states or Canadian provinces. Atlanta has been fighting with neighboring states for years with respect to water, but mostly in the courts. I expect there could be more arguments such as these, escalating to a different level.

    • Thanks for the points you make. I think your observation at the end is very good:

      The best evidence of peak oil is the inability of the threat of war in an oil producing- or transport bottleneck to push on the price. It means the customers are broke and cannot bid against each other for fuel.

      We are reaching a point where everyone is broke–both energy producers and energy consumers.

  23. Don Stewart says:

    Dear Gail and All

    If you read Gail’s explanation for how energy decline equates to declines in income and thus in tax receipts, and compare the statistics on employment, I think you have to conclude that she is at least partly correct. See the quote below. If you search on ‘100 million americans unemployed’ you will find other sources for similar numbers. The only quibble I have is that the people who are not working are not paying much in the way of federal taxes and probably weren’t paying very much 10 years ago, either. Something like 120 percent of federal income taxes are paid by the top 20 or 30 percent…Charles Hugh Smith writes about that frequently. So Federal tax receipts are heavily leveraged to the income of the upper classes…who are the recipients of the Federal Reserve’s largesse. (Whether the fact that tax receipts are not in such bad shape because we are able to print the money, give it to the wealthy, and then tax it is a good thing or a bad thing is a philosphical problem that I don’t care to comment on.) The employment numbers do tell you a lot about retail sales, home prices in the lower price brackets, the dominance of ‘all cash’ home sales, SNAP, and other phenomena related to lower income people.

    The big blow to federal income tax receipts would be serious unemployment among the professional class. On the expenditure side, the rising cost of medical care and retirement benefits are major headwinds. And, of course, the US war budget is something like a thousand times the UN’s peacekeeping budget…but it is fairly stable, I think.

    Don Stewart

    http://rt.com/usa/156800-americans-economy-unemployed-work/
    ‘If you add the current number of Americans without a job (9.75 million) to the number of US citizens not in the labor force (92.02), you come up with 101.77 million working age Americans who do not have work, according to data from the US Bureau of Labor Statistics (BLS).

    Now compare that figure to April 2000, when 5.48 million Americans were unemployed and 69.27 million Americans were not participating in the labor market. The number of Americans 14 years ago without work was 74.75 million. That means that the number of working age Americans without a job has risen by 27 million since the year 2000.’

    • edpell says:

      Don, your calculation at the end is the best I have seen regarding unemployment.

    • InAlaska says:

      But you have to factor in the natural growth in the population in 14 years. With that in mind, I wonder if we have merely been treading water, neither growing or shrinking our labor market.

      • Don Stewart says:

        Dear InAlaska
        The labor force participation rate has been plummeting. During the boom years, it was rising steadily. It has now fallen back to where it was 30 years ago. On top of that, many of the ‘employed’ are part time.

        I also read this interesting statistic…I can’t remember where. A decade or so ago, there were twice as many women working as on welfare. Now, there are more on welfare than working.

        No matter whether you look at wealth, income, jobs, or full time jobs, the period from 2000 until the present has been very hard on the lower income groups. You can also single out groups such as college graduates, who have fared miserably.

        If you look at housing, there has been a shift from owner occupied to corporate owned but rented out. That is what is behind all the ‘no mortgage’ closings. Millions of houses have been foreclosed and bought for cash by corporations.

        Not a pretty picture…Don Stewart

        • InAlaska says:

          Dear Don,
          No, I agree that the 2000s have been the “lost decade” I was simply wondering if you had taken account of population growth in your figures. If college grads had, and are having a hard time, imagine what the high school grads are having to face. I wonder how many empty nests have filled back up again as children flock home to live with their better established parents. Perhaps, finally, the baby boomers will start taking some responsibility for what has happened. But I doubt it.

          • MJ says:

            “I want my MTV”…Baby Boomer mantra. Will turn into…”Take care of ME!”

      • It is much worse than treading water. When a person looks at percentage of the total population with jobs, this is the shape of the curve (hasn’t been updated recently). A lot of our early “growth” came from adding women to the work force.

        Employment as percentage of US population

    • I think part of the problem is that wages have stagnated, and there is more part-time work. It doesn’t make sense for women with low paid-part time jobs to put their children in child care–the cost is just too high. Others have given up on finding work. I know the handicapped are having an especially hard time finding jobs.

      • Stefeun says:

        According to O.Berruyer (& Piketty & Saez), all the wealth created in US since 2009 (till 2011, but I guess it’s even worst today) has been capted by the top 1%, but not only: they have also taken additional 20% from the bottom 99%.
        See charts on:
        http://www.les-crises.fr/inegalites-revenus-usa-3/#
        (this is part 3, which gives more compiled results; raw figures in parts 1 & 2)
        So it’s clearly meaning that work doesn’t pay any longer; big money is provided by speculation only.
        And the smaller the size of “elite” (top 1%, top 0,1%, top 0,01%) the bigger the distortion.

  24. gwb says:

    Another excellent article from Gail, as always…

    Just one comment that has nothing to do with energy: Ukrainians call their country “Ukraine”, not “the Ukraine”, which makes it sound like something less than a sovereign country. The phrase “the Ukraine” is adapted from Russian and dates from the Soviet and earlier eras, when Ukraine was a territory within Russia/USSR; it has something of a condescending ring to Ukrainians. Here’s a good commentary on the subject:

    http://www.washingtonpost.com/blogs/the-fix/wp/2014/03/25/ukraine-or-the-ukraine-its-more-controversial-than-you-think/

    • Someone wrote me an e-mail about that as well. Sorry. I was educated back in the Soviet era, when it was called “the Ukraine”. I suppose I could go back and take out the extra “the’s,” but the copies would still be wrong. If I find time, I will go back and fix the article.

  25. Don Stewart says:

    Dear Gail and All
    Here is a very different perspective on employment, which I think everyone should read. I’m not necessarily saying that these guys are right.

    http://www.oftwominds.com/blogmay14/nature-of-work5-14.html

    The main article if by Charles Hugh Smith, with references to many other articles he has written, and at the bottom the audio of his interview with Gordon T. Long. (Charles is promoting his new book).

    Let’s suppose, for the sake of discussion, that Charles is correct and that robotics and automation are the death-knell of much traditional, middle-class wage jobs. As you listen to them talk, try to figure out how many people have the skills they are describing. Yet the cost of employing those who do not have the skills keeps going up. So the jobs for those without the skills decline even faster.

    Why do the low skilled cost so much? I submit that part of the answer is that just being an American is expensive in terms of energy use. If a person is just getting a welfare check, their energy footprint is probably several multiples of the energy footprint of many people in sub-Sahara Africa. As energy costs increase, and as welfare expenditures rise to try to keep the unemployed from being pushed further under water, then the vicious circle operates faster and companies automate and robotize more rapidly.

    Just some thoughts…not the revealed truth, by any stretch….Don Stewart

    • edpell says:

      Don, of course. Americans are over priced. I remember listen to a radio interview with someone from the world bank about 20 years ago. He wanted US wage rates to come in line with global wage rates. There is no reason a worker in the US should make more than a worker in Indonesia or Bangladesh. This applies to the unskilled and the Ph.D., M.D., J.D..

      • Don Stewart says:

        Dear edpell
        Do you remember when Bush said in Rio that ‘the American way of life is not on the negotiating table’…meaning that the US would continue to consume as much energy as possible. It would be ironic if the revolution wrought by Reagan and the Bush clan turns out to be one of the causes behind our current pain. We built an even more extravagant life style, and we reinforced that lifestyle with law and custom. Now, those who are not working cannot really live low energy consumption lives. And a high energy consumption life apparently dooms them to unemployment.

        Or so it seems to me….Don Stewart

        • InAlaska says:

          Don, edpell,
          Of course back then, for Bush to say anything else would have been political suicide. Maybe not so much anymore with the evidence of rapid climate change all around us. Imagine how different things might have been had a President Al Gore been working to counter the “doubling down” of our energy extravagance. He did win the presidency, by the way, but it was taken from him by a stacked Supreme Court. If there are historians by which to judge, that election may have been the hinge point upon which things could have been turned around. It was the last opportunity and it was missed!

          • Don Stewart says:

            Dear InAlaska
            It is amusing to remember the Bush/ Gore debate on tax reductions. You may remember that, at that time, the US was running hefty surpluses and the debt was falling. Gore was in favor of ‘running the debt down to zero’. Bush wanted tax cuts, saying that Reagan had proven that ‘deficits don’t matter’.

            One of the disadvantages of modern life is that all the dumb things you ever said are still around to haunt you.

            Don Stewart

            • InAlaska says:

              I remember that the surplus was called “the Peace Dividend.” We could sure use some of that dividend now. Instead we had two wars, which we paid for with debt, soaring debt and monetary issues, mounting energy use, climate change, pollution and a world that mistrusts the US and rejects its leadership.

        • VPK says:

          Globalization was just another term for Exploitation.

        • Paulo says:

          Hi Don,
          re statement: “We built an even more extravagant life style, and we reinforced that lifestyle with law and custom. Now, those who are not working cannot really live low energy consumption lives. And a high energy consumption life apparently dooms them to unemployment.”

          All true, however within knowledge of energy constraints lies the possibility that individuals can deliberately change their wants and needs. My wife and I did this some years ago while working full-time. It allowed us to stop working (formally) in our middle fifties. My son, now thirty has embarked on an ambitious short-term plan to pay off his house and property within a few years. My daughter and family live in a smallish modest home and supplement their food with gardens and orchard. They have just one child.

          I have taken great pains to not doom and gloom them with decline facts and future prospects. However, I do believe our example of a good life lived off the conveyor belt rat race to the nowhere of other people’s values have provided an example that there other ways to live beyond amassing wealth, bigger homes, toys, and other forms of status.

          regards…Paulo

          • Don Stewart says:

            Dear Paulo
            I heartily applaud everyone who is doing something practical, as you seem to be.

            My comment was prompted by two observations:
            1. Many poor people in the US have no idea what to do with real food and see no reason why they should garden. Dependency on processed food has been drummed into them. Poor immigrants think very differently, in many cases.
            2. If you examine the governmental requirements that are imposed on people trying to live very simply, you see obstacle after obstacle. For example, cooking a big meal and inviting the neighbors and charging them five dollars a head will land you in jail.

            It’s really hard to know where to begin to change things.

            Congratulations on your success…Don Stewart

            • Jeremy says:

              Hello Don,
              Just a quick take on the book you recommended a few articles ago by Anni Kelsey,
              Edible Perennial Gardening”. I purchased it via Amazon and left a review there if anyone wishes to read it. Overall, worth the price (@$20US inc. shipping) and solid overview of the topic with a first class production of numerous photos and illustrations.
              A link to her website and blog is http://www.anniveggies.wordpress.com

            • interguru says:

              A harried single mother dealing with two screaming kids and working two jobs is not going to be amenable to gardening. Instead she will fix something quick, or go to McDonalds whose meals are cost competitive to cooking them yourself.

            • Don Stewart says:

              Dear interguru
              With all due respect. I think your answer, while typical of a great many on this site, misses the major point. There is no way that any single individual, or even a small group of people, can save everyone from their own folly or just plain bad luck. We have tried government salvation, and that doesn’t seem to be working out too well either.

              I believe that anyone with a solution of any kind is going to find that it works for some people, some of the time. Casting stones at the person with the solution is a pointless exercise.

              The harried mother of two feeding them junk food is poisoning herself and her children. I look at that as something akin to the Black Death…stuff happens, and a third of the people die. Meanwhile, the sun shines and the birds sing… even as a snake gets the bird eggs. Spend all your time fretting about snakes eating bird eggs and you become a twisted person.

              Don Stewart

            • timl2k11 says:

              Or anyone living in an apartment or housing development.

            • MJ says:

              Don, your response was somewhat poetic

          • ordinaryjoe says:

            A while ago back their was a article in the paper about a man who was living under a bridge who died. He was heir to some fortune and had several checks upon his person at the time of his death each exceeding $10,000. Mentally ill? As it becomes clear that the notions we have about moral consumption and its relationship to $ dissipate moral individuals seek a replacement.. As no replacement exists the one thing within a moral individuals control gets actualized; reduction of consumption sometimes radically. The phenomena of the 50s-60s hobos is worth mentioning. Current like phenomenas are occurring. While death is the ultimate end of consumption it seems self evident to me that ending ones life is immoral also if not as immoral as unbridled consumption. To those here who have adopted “if you grow it you get to eat it” as a rule of thumb you have my utmost respect. All species compete for resources. The paradox of the human species is our ability to perceive morality and our inability to apply it to our consumption..

          • xabier says:

            Paulo

            In England, poorer people tend to pay for electricity and gas by putting (expensive) credits on a meter, as they are not allowed credit and to settle monthly. The utility companies now plan to take the power supply away from them completely if they do not use enough to satisfy the companies: they are not to be allowed to reduce their consumption below a certain point. Want to lead a modest low-consumption life? Don’t try it!

            • Paulo says:

              Xabier and others,

              I have heard this about electricity use and billing. I would like to remark that I have been oh so lucky in life, opportunities, and choices. I’m not sure why, but it seems that way. One thing I have been aware of lately is how damn hard it is for people to claw their way out of their circumstances. It is easy for many to say you should do this or that, but quite another to get safely from A to B, or get ahead. I always had a lifeline of family. I did not take their money for education, (being an independent cuss), but I always knew I could tap the well for schooling if I had to. With that safety line it is relatively easy to go forward and prosper. My kids had the same lifeline.

              Don made some observations about the diet of poor Americans. I know he is right. If you have never been taught to cook from scratch, budget, shop wisely, and plan meals for a week you have lost some structure and focus that is a foundation for success. If you have never been encouraged or told, “you can do anything you set your mind to”, you will probaly not be willing to take risks or know what it is like to feel strong and/or capable. My folks grew up poor in the Depression. Dirt poor. They also knew how to live with the basics and had the hunger to propel themselves forward. They had old world skills, desire, and the timing of the fossil fuel bonanza. They became middle class over time. They passed on life skills and an oral history of life in the Depression. I loved the stories and could sit by the hour with a few beers or ryes and listen to my Dad talk about Grandma’s garden, raising racoons for fur to sell (they got $10/pelt which was huge money), fishing, or how they would play cards or listen to the radio at night because there was nothing else to do in a Minnesota blizzard. I used this knowledge to live simply and be content with striving for less in my own. My wife and I live a lot like my grandparents did with the gardens, cooking, self sufficiency (minus the racoons because I shoot them and heave them in the river for the eagles to eat…..they eat my chickens, damnit). My kids have retained middle class, so far, but are more consumers than I ever was. As an example, while they can budget and are great cooks they don’t shop as wisely as they should and often buy from the deli departments. I keep my mouth shut and think, “ouch”. I suppose one day they will discover that the deli is too expensive and cook a roast, instead. I am pleased they heat with wood and watch the electricy rates and consumption.

              I just wanted to say that it is easier to survive with the backing of family, and easier to transition if you have been raised with the skills and mindset of the past and simpler life. It is easier to acquire new skills with a trade background and hands-on work ethic. If you are urban poor without decent support or living skills, the future will be hard, indeed.

              Paul

            • Those are good points. Children who move from school district to school district, as their parents (or parent) move around in search of a job, have a hard time of it. They may not get any support for help for homework, either.

          • Interguru says:

            Some of us who are locked into, mortgages, long commutes, and big ( possibly unsellable ) houses can still make a big difference. We can cut back on eating animal products, especially red meat. Chicken and dairy somewhat less. They are prodigious users of energy and carbon.

            Your next car can be more efficient. Cut back on travel.

          • Years ago, my children wondered why we didn’t live in the biggest, fanciest homes available. With both my husband and myself in fairly high-paying professional jobs, we could afford to do so. We told them it was a conscious choice not to. A person doesn’t own “stuff.” The stuff owns you. Once you have it, you need to spend your time taking care of it. It constantly needs fixing of some sort, and you have to either do it yourself or hire someone else to do it. Both my husband and I had grown up with religious values that didn’t necessarily assume “more” was better, so we did not see a need to.

            I suppose it would have been different, if we were struggling on minimum-wage part time jobs, as many young people today are. Then just trying to cover the basics would be a huge challenge.

            • Rodster says:

              Bravo to you !

              I came from a poor family growing up in the 70’s so many of the luxury items other kids had we did without. The more i’ve owned in my life the more had to worry about. As i’ve gotten older i’ve become less materialistic. I prefer to live as stress free as possible and living with the thought, “I’m not taking it with me”.

      • In the earliest days, economies grew up in the warm countries. UK and other European countries were able to prosper as coal was added. The warm countries started using coal more slowly, because they didn’t need coal for warmth. Now the temporary advantage the cold countries got, by being first with fossil fuel use, is going away. Instead, we are seeing resource depletion first.

    • Interesting! Of course, if we lose the electric grid, pretty much all of these mechanical substitutes for labor will go away. Losing oil imports will lead to huge agricultural problems in many places.

      I think you are right, about just being American adds quite a bit to our footprint. All of the roads, schools, hospitals, electric power lines, and other things we have become accustomed to add to our energy footprint. The food we eat is all produced in an energy-intensive way. We can think about changing our light bulbs to LEDs, but this doesn’t fix the underlying problem.

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  28. interguru says:

    OT but might be a good discussion. I am sure that almost everyone is aware of Capital in the Twenty First Century by Thomas Piketty (http://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century) which posits that growing inequality is an inevitable result of unregulated capitalism.

    Trillions of electrons have been sacrificed by the copious discussion of his thesis. One thing that makes the book impressive, and hard to refute, is that he has compiled extensive economic data from the last 200 years to support his argument.

    During this time we were harvesting easy resources ( energy, water, land ). We, on this blog, agree that the easy resources are gone. How does this change his argument, if at all?

    • First of all, I haven’t read the book, (neither have most of the others who are discussing it).

      Second, Piketty conflates the tally of industrial means (the sum of unsecured credit) w/ capital, he expects money-wealth to grow due to returns-on-money. Capital is non-renewable resources, money is debt; technically infinitely reproducible, certainly not the case with non-renewable capital which continually dwindles … Piketty has his primary thesis entirely backwards!

      Third, Piketty confuses purchasing power with claims against it which is a political statement rather than a matter of economics.

      Fourth, Piketty doesn’t understand real returns on money loans, it is not interest. Rather it is the requirement that the borrower repay his loan with money that is costlier to him than the loan is to the lender. For example, the lender will offer a discountable bill or tender (a check or a ledger entry) whilst requiring payment in gold. The ledger entry costs the lender nothing, the gold is hard to come by and extremely costly. If the gold cannot be had the lender takes the borrower’s collateral, which might be his property or even his freedom. (This was the cause of the American Revolution, btw.)

      Fifth, Piketty assumes that industrialization is a state of nature that can be ‘fixed’ or adjusted … it’s not and it can’t. It will be abandoned or it will destroy itself, there are no other choices.

      Sixth … Piketty doesn’t seem to understand how the credit regime works; that the wealthy tycoons are borrowers rather than lenders, that industrialization cannot pay its own way and must rely entire on constant increase in loans, that the lenders are ascendent b/c the entire economy relies utterly upon them … that we rely upon them to finance our annihilation of capital.

      Piketty, like other notable establishment economists, offers a pleasing myth … a public relations campaign for business as usual. Piketty meets the public expectation of what an academic economist is supposed to be like: how he looks and sounds, where he is from, what schools he has attended and where he teaches, where he lives and who he associates with. He’s an actor reading from a script. If Piketty had not written his book some other left-of-center economist would have done so.

      Finally, I haven’t read the book but it seems enough others have for me to get a handle on it. I suspect it covers the same ground as David Graeber’s ‘Debt, the First 5,000 Years.’

      • James Howard Kunstler also has similar thoughts about Piketty:

        http://kunstler.com/clusterfuck-nation/piketty-dikitty-rikitty/

      • Don Stewart says:

        Dear steve from virginia
        I, also, have not read Piketty’s book. I did read someone who said that he explains the greater economic equality of the immediate post-WWII years by referring to the enormous destruction of WWI and WWII. Those who were rich in 1910 had the most to lose, and many of them lost most of what they had to lose. Those who had nothing in 1910 still had nothing in 1950, and so there was greater equality in 1950 than there had been in 1910.

        You say:
        ‘Second, Piketty conflates the tally of industrial means (the sum of unsecured credit) w/ capital, he expects money-wealth to grow due to returns-on-money. Capital is non-renewable resources, money is debt; technically infinitely reproducible, certainly not the case with non-renewable capital which continually dwindles … Piketty has his primary thesis entirely backwards!’

        It sounds to me as if Piketty understands that wealth is based on real assets, as shown by his analysis of the effects of the wars. The way I would interpret his book, never having read it, is:

        ‘If you play the financial capitalism game in a fairly stable economic environment, then some few people are going to end up with most of the money.’

        Such a rule is echoed by the current ‘law of technological survival': given a hundred new Internet search engines enabled by new technology, one will become dominant and most all the rest will disappear.

        There are quite a few parallels between internet search engines and fiat money. Should it surprise us that their pattern of succession is similar?

        Don Stewart

      • Thanks! It sounds like you have at least read through the reviews pretty well. We seem to have an awfully lot of economic mythology “out there,” with new books being added to round out the ranks.

    • Paul says:

      Capitalism is the best system only in that it is the most efficient and quickest in depleting the earth’s finite resources.

      Once Thomas understands that — along with the fact that these resources are finite — then perhaps he can write a book that I might actually read

      • Interguru says:

        The paper Causal Entropic Forces (http://www.alexwg.org/publications/PhysRevLett_110-168702.pdf) proposes that emergent phonomena, such as hurricanes, or life itself, which arise from a chaotic system’s self-organization, come about in order to deplete existing energy more quickly. (Don’t try to read the paper. I’m a physicist, albeit in a different field, and am struggling to get past page 2).

        The author even extends it to behavior of groups of living organisms and even human behavior. Capitalism fits this definition — it is the most efficient way to deplete excess energy.

        • Steve Rodriguez says:

          When I can’t penetrate highly technical and theoretical reports, I find it helpful to read the article backwards and forwards from a point in mid-article with a lower admission fee. The effect is similar to scouting a range before delving into finer scale exploration of the niches within. If I survive the scouting trip, I then start over from the top.

        • It is sort of like “Nature abhors a vacuum” only it is “Nature abhors unused available energy.” (Causal Entropic Forces)

    • I suspect that growing inequality is a result of the laws of physics. Wealth distribution would seem to follow similar distribution patterns to the distribution of cities by size (and the distribution of stars by size). We get more big cities, and greater disparity between large and small, as energy usage increases.

      If energy usage falls, we may all be poor again, and income disparity will largely disappear. So will very large cities.

      • Read this prescient paper by Eugene Odum – you’ll find it fascinating in the light of Piketty: http://www.mnforsustain.org/energy_ecology_economics_odum_ht_1973.htm

        “6. During times when energy flows have been tapped and there are no new sources, Lotka’s principle requires that those systems win that do not attempt fruitless growth but instead use all available energies in long-staying, high-diversity, steady-state works.

        Whenever an ecosystem reaches its steady state after periods of succession, the rapid-net-growth specialists are replaced by a new team of higher-diversity, higher-quality, longer-living, better-controlled, and stable components. Collectively, through division of labor and specialization, the climax team gets more energy out of the steady flow of available source energy than those specialized in fast growth could.

        Our system of man and nature will soon be shifting from rapid growth as the criterion of economic survival to steady-state non-growth as the criterion of maximizing one’s work for economic survival (Figure 1). The timing depends only on the reality of one or two possibly high-yielding nuclear energy processes (fusion and breeder reactions) which may or may not be very yielding,

        Ecologists are familiar with both growth states and steady state, and observe both in natural systems in their work routinely, but economists were all trained in their subject during rapid growth and most don’t even know there is such a thing as steady state. Most economic advisors have never seen a steady state even though most of man’s million year history was close to steady state. Only the last two centuries have seen a burst of temporary growth because of temporary use of special energy supplies that accumulated over long periods of geologic time.”

        • Paul says:

          See these articles re steady state economy http://ourfiniteworld.com/tag/steady-state-economy/

        • xabier says:

          Steady state/growth state.

          Economic science is perhaps rather like a religious sect: in a sect, attitudes, habits, expectations, even ways of dressing, can become frozen at a moment in time – the lifetime of the founder of the sect or his disciples, and members have difficulty in evolving in a changed environment.

          Similarly, economic ‘science’ does seem to be mentally imprisoned by the axioms and expectations which were established at the time of its foundation, say 1750 to 1800. If one reads Malthus for instance, it is clear that the fundamental question he attempted to answer (apart from the population question) was ‘How do we get immediate high growth?’. For instance, one chapter will ask ‘This is a fertile and populous country, why is it poor?’ and another ‘This is a sparsely populated and infertile country, why is it rich?’

          Today, politicians too only wish to hear or talk about growth, as do bankers, and economists are merely their lapdogs – they need funding and tenure and salaried posts and not to upset the boat. And this is quite apart from group-thinking and unconscious bias.

          So the growth paradigm naturally governs all discourse and is hard to break away from, however increasingly implausible it might seem as we enter the age of universally fraudulent economic data and analysis (eg employment stats in the US, etc) and patronising propaganda declaring ‘green shoots’ are sprouting like weeds.

          Researchers and theorists like Picketty (academic member of the highly centralized and floundering French state) will inevitably only come up with the results they are seeking and which will be for the most part pleasing to the Establishment, confirming their prejudices, and will be in any case not immune from personal and political bias.

        • Perhaps what H. T. Odum said made sense in 1973, with what we knew then. Herman Daly wrote his book, Steady State Economics in 1977. I don’t think Steady State Economics makes any sense now know, though.

          There are two very different situations:

          (1) When species are generally in balance with the rest of nature, through adaptation. Then a steady state makes sense. If humans followed the same population pattern and resource use pattern as chimpanzees, there would be at most a few million (with an “m,” not a “b”) humans in the world. We would live in a few areas of the world, eat uncooked food, and live in natural surroundings–not houses, perhaps caves.
          (2) When homo sapiens are in a long-term growth pattern in dominating the biosphere. In my view, our domination likely started when we learned to control fire over 1 million years ago. With the control of fire, we could eat cooked food (allowing the energy that would have gone into building big teeth and large disgusting apparatus to go into brain development), move to colder climates, build sharper stone tools, burn down woods to drive out potential game.

          In my view, a steady state economy is totally absurd for humans. We are now adapted to needing external energy to maintain our growth trajectory. As much as we would like to walk away from external energy (in the form of burned biomass, fossil fuels, or other similar sources), we are physically not adapted to do so. As far as I can see, in the best case, a much smaller number of humans could survive with only the energy from biomass, wind, and water, with a very different lifestyle than today. But even this would still have the growth problem, because the use of external energy will give dominance over other species. Even if humans drop back in numbers, they will use the burning of biomass to build back up again.

          If 7 billion of us are to remain alive, we need fossil fuels to maintain our way of life–renewables just plain are not enough. The high cost of extracting fossil fuels is becoming more and more problematic, with cost either being too high for the consumer or too low for the producers or both. Because of diminishing returns, we need more and more fossil fuels (and more and more of the population working on fossil fuel extraction and processing) just to remain at the same “steady state.” This is not possible because of resource depletion.

  29. Paul says:

    This is the best explanation for Ukraine that I have come across:

    Steve Weissman | Ukraine: Who Will Control Eurasia’s Oil and Gas?

    Weissman writes: “The conflict has gone more primal, the high-minded pretensions less persuasive. The world’s sole hyper-power still has game. And, contrary to conventional wisdom, the moving force is not Putin’s tactical genius (or home-court advantage) but the audacity of Washington’s strategic game plan, which US ambassador Geoffrey Pyatt let slip when he first arrived in Kiev last September.”

    http://readersupportednews.org/opinion2/277-75/23508-ukraine-who-will-control-eurasias-oil-and-gas

    • MJ says:

      Thank you, Paul, I appreciate the article and your valuable contribution to the follow up on Gail’s article. It is much clearer now,
      “It’s always about money”.

      • Paul says:

        Actually — I should have prefaced that post with ‘the best article I have seen — other than Gail’s’ :)

      • xabier says:

        MJ

        Money….. and psychosis! ‘Those animals the Gods wish to destroy, they first make….human’.

    • Stefeun says:

      Thank you Paul, excellent article.
      Let me comment some other quotes from it:
      “At the close of World War I, the British geographer and geostrategist Sir Halford John Mackinder had spelled out the logic in more elegant terms. “Who rules East Europe commands the Heartland,” he wrote. “Who rules the Heartland commands the World Island. Who rules the World Island commands the World.”
      (…)
      The stakes could not have been higher. Washington – not Moscow or Beijing – would dominate the World Island and its enormous flow of oil and gas, while the European allies would either play second fiddle or – to borrow from US assistant secretary of state for European and Eurasian affairs Victoria Nuland – “Fuck the EU.” ”

      I also keep thinking that V.Nuland’s “F* the EU” was much more important and revealing than this small mistake EU-MSM presented us; as if priority was to forget -and forgive- about it asap.
      For those who don’t remember exactly, a transcript of the phonecall (link from RSN’s article):
      http://www.bbc.com/news/world-europe-26079957

      and with sound (don’t know if this is a reliable source, but many other “copies” are easy to find on Youtube):

      And she keeps on pushing!:
      Victoria Nuland Issues New Threats To Russia, May 16, 2014 • 8:52AM
      http://larouchepac.com/node/30793

      What Ukraine really needs*, BY WILLIAM PFAFF, Japan Times, May 16, 2014
      (*: not the Neocon “Project for a New American Century”!)
      http://www.japantimes.co.jp/opinion/2014/05/16/commentary/what-ukraine-really-needs/#.U3eAn8saySO

  30. Smack MacDougal says:

    Ms. Tverberg

    You claim Russians are starting to experience economic contraction cause by a low revenue situation, not collecting enough taxes, not receiving enough oil and gas revenue.

    Can you substantiate your claims? I have written a rebuttal which challenges your claim. You don’t seem to have the right numbers regarding Russian oil production, REBCO pricing, Russian government revenue and outlay.

    Also, Russians are even close to being a “marginal producer.” They’re in the top three! There 204 countries producing less than 1 million barrels a day. Those countries likely have most of the producers who, should prices fall, their marginal cost would exceed price.

    To disabuse yourself, read PUTIN’S RUSSIANS AREN’T MEDDLING IN UKRAINE BECAUSE OF OIL

    • MJ says:

      Nice to have the “Revenue”, but does it cover the “Expenses”? Your article does not mention that at all.

      • Smack MacDougal says:

        Did you not see how tiny those deficits are? Must I write every conclusion out for you?

        • MJ says:

          OK, spell out for us all we are not running out of $20 a barrel oil.

          • Smack MacDougal says:

            Do you have a mouse in your pocket? Who are the “we” of whom you speak? There is no “we.”

            You might want to familiarize yourself with actual prices for oil Bloomberg and prices deflated for inflation WEST TEXAS INTERMEDIATE SPOT PRICE FOB CUSHING, OK IN FRBUs.

            World oil output has grown 6% since 2009 alone. The people at the EIA say world oil output for 2013 ran to 32.97 BILLION barrels.

            Running out? LOLZ.

            • Harry says:

              I don’t think anyone here is trying to make the case that we are running out of oil, Smack. Rather the law of diminishing returns is leading to price volatility and a constriction of capital investment.

            • Smack MacDougal says:

              Price volatility from diminishing returns? That’s rich.

              Deflating for inflation, the true price of WTI on 2014-01-01 stood at $7.96 a barrel. That is 87.6% of the average price of $9.09 since 2001-01-01.

              The true price per barrel has been dropping since Q1 2012 and is far from the true price peak of $21.33 hit Q2 2008.

              The true price for Q4 2013 is 2.7 times lower than Q2 2008.

            • I have made the point several times that the price of oil is now too low for many exporters to make the money they need to and too low for energy companies to continue their exploration and drilling without borrowing huge amounts. This is a huge problem. You are not reading what I have written. The cost of extraction keeps going up, but people can’t afford the oil, so the price does not rise to the level that is needed. This is a huge problem.

            • Smack MacDougal says:

              Oh and the current true price for WTI is a $1.12 higher than the average of $6.84 from the available WTI data since 1986, deflated using the Federal Reserve Banking Units deflator.

            • Harry says:

              No. Price volatility as featured on this EIA graph since approx 2004: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=rwtc&f=D

            • Smack MacDougal says:

              Again what volatility? Reading that EIA chart, from ’86 to ’99, prices trade within a small range, except for a short-term spike in 1990.

              From 1999 to 2008, prices run in a steady climb up. There is a price crash in the second half 2008, hitting a bottom. Prices resumed climbing since.

              Again, what volatility?

            • timl2k11 says:

              OK “Smack”, so you have your very own deflator so you can live in your own make believe world where everything is OK. Gail has an extensive, respectable body of work. In http://ourfiniteworld.com/2013/10/02/our-oil-problems-are-not-over/ you see that (in figure 3) in the 60’s oil production was growing at nearly an 8% rate per annum. Now it is not even growing at 1% per annum (and that’s net energy, not counting backing out the increased energy it takes for extracting unconventional oils and depleted wells). How do you explain that if we still have oil in abundance as you claim on your blog?
              You came here from Zero Hedge and read one article. There are dozens and dozens of well researched articles Gail has posted which you have neglected to read and than come on here trashing Gail. That is intellectually lazy and rude.

            • Our problem with oil is financial; it is not “running out.” Prices are either (1) too high for consumers, or (2) too low for producers, or (3) both. We are currently at either (2) or (3)

    • andrey says:

      Very good indeed, but only half work is done :( Total revenues of major producers, total oil and gas sales…What’s lacking is the budget inflows sources, % of those from producers revenues. just for the purpose of estimation it could be assumed that out of profits what’s transfered to the government equels to it’s share of ownership in the enterprise in % out of net profit which is close to 100%. Now there is lot’s of evidence that 50% of Russian budget comes from oil and gas exports. So if total revenues of major producers is around 500B$ and they manage to transfer 210B$ (50% of the budget inflows) they are left with around 280-300B$. That could be taken as a cost of doing business as I assume that what’s left in those companies is only enougth to cover OPEX. CAPEX is financed out of loans. Out of all this plus ammount of barrels/mmbtus the price of oil and gas extraction could be calculated with certain error.

    • Harry says:

      I would suggest that Mr Bowker’s need to drum up investment capital for his sweet-spot provides a fairly clear motive for his extravagant claims. Furthermore, the very existence of a practice as freakish and damaging as fracking is evidence enough that we are reaching limits.

    • Harry says:

      On a personal note, Bowker’s surname is highly apt as every single one of his quotes made me want to vomit copiously.

    • DMFan says:

      I tend to agree with Smack MacDougal . While I appreciate all of GT hard work and analysis it concerns me that there is a lack of critique and there is also a real doomerism going on in the thread, and its consistent over threads. There’s an overfitting of a collapse narrative around facts that by their nature that have a large margin of error.

      The real world is a highly complex adaptive system and as 2008, when push comes to shove, Gov’s seem to work out deals. I think countries can tolerate a lot more austerity than people can believe, look at Greece. Nearly all the worlds gov’s are running in major deficit, so why not Russia for a lot longer.

      Constantly portraying a imminent collapse narrative (1-2 years has been) could lead people to make some unbalanced decisions with their life.

      • Harry says:

        DMF, we are currently teetering atop the largest credit bubble in history. Interest rates are about as low as they can be. Financial assets are being levitated via printed money. Sovereign debts are spiralling ever upward. Capex costs for our oil, our master resource, are rising at 10% per annum. Individual countries can tolerate austerity within the context of a functioning whole. The totality implodes without perpetual growth. Imminent collapse seems fairly likely to me. Certainly I think it sensible to make decisions based on a glass half-empty assessment of our predicament.

      • ordinaryjoe says:

        “Constantly portraying a imminent collapse narrative (1-2 years has been) could lead people to make some unbalanced decisions with their life.”

        Your concern seems genuine. The possibility of BAU continuing for a bit is real. You advocate balanced decisions, I applaud that. The question is what you are balancing. When somthing is empty, devoid of substance, it becomes hard to balance it. I find one part of your post very substantial- whatever your decisions are make sure they speak to your heart at well as your mind- balance! . Understanding the problems of industrial civilization is a win win. If collapse occurs, I will have no delusions. Win. If BAU continues I dont have to cope with chaos. Win. If anything a understanding of the nature of the human situation leads to the appreciation of the positive aspects of it , philosophy, free discussion, ecetera. I am very grateful to this blog. I enjoy each day very much. Is that unbalanced?

      • Interguru says:

        Rome didn’t collapse in a day. ( I am aware that both the finance and logistics were MUCH simpler then.)

        • Church of Bob says:

          Do we really know how much oil is still in the ground? I don’t and I don’t think anyone here does and if they say they do they are lying….Also the economics of this system is so complex we can make educated guess but to say we are all going to die in two years time well that is very, very unprofessional. I remember reading a response on here by a depressed kid about how he would have to work hard physical labor and massive die off murder, rape, etc.. for the rest of his life…and if he took his life based on comments here…….. well I think that Sucks! I don’t think any of you on here would like to see that happen to a family member….

          • We know that a lot of economies have collapsed over the years. Even if the collapse starts within two years (or perhaps has already started), it doesn’t mean that everyone will die within some specified period of time. Collapse has a slow-motion aspect. But we do know that political changes are often part of collapses–government cannot get adequate funding, and because of this collapse. Financial system collapses are also part of these collapses.

            I don’t think it was here that you read the terribly depressing remark. If you did, let me know the name and date, and I can perhaps remove it.

          • MG says:

            Dear Church of Bob,

            many of us face serious problems. That is the reality. The collapse of individual countries, areas, regions can be fast or slow. Gail Tverberg writes about the imminent collapse present in our finite world, not about the fast and inevitable die off. Japan is already on this path and despite this fact it is still the country with a quite high standard of living. But the population of Japan started to shrink…

            Many of us seek the answers for various strange or cruel things happening in our lives, e.g. why the previous generation had a better life, why our personal life is deteriorating, why marriages are breaking up, why one can not get a job, find a partner for starting a family, why he or she is not paid enough for his work, why parents toil in vain to secure a better life for themselves and their children etc.

            The manipulated picture of our present situation (in this case of the region, where I live) can look like this:

            ..but the numbers about the population decline, the unemployment, the low wages, the low pensions etc. are the reality of our daily life.

            And the reality for some people in certain areas is the war, crime, rape, murder, physical labor and the massive die off.

            Many people live in much harsher conditions than you or I. Nobody says that the whole humanity will immediately die, but it is certain, that many of us face problems that we can not solve because we lack the fosil fuel energy that has already been consumed. If we understand this fact, we can behave much more rationally, also in the critical situations that we encounter now or anytime soon.

            To live with less external energy at our disposal is inevitable for all of us.

          • Rational Analyst says:

            Dear Church of Bob,

            This is Gail’s blog for an open exchange of information about facts of limits to growth, and speculations/analysis of what the future may hold. I challenge you to cite where Gail said or endorsed someone else saying that “we all are going to die off in two years.” If some person logged in here and claimed he/she was depressed by the information herein, that is that person’s problem, not Gail’s (or anyone Else’s) responsibility. People are responsible for their ow agency. Do you want Gail to post the ‘Happy Song’ and that be it? Gail’s articles and the majority of the comments are some of the most intelligent, well reasoned, and civil discussion I have seen on the Internet (or anywhere else) on these topics. I am suspicious that you post is that of a ‘concern troll’, one who seeks to censor a blog to suit one’s own preferences. In my opinion, you owe an apology to Gail for attempting to blame her for causing some person to be uncomfortable.

            • Paul says:

              Do we know how much oil remains in the ground? Absolutely not.

              But we do know there is a LOT left.

              And we do know is that we have extracted the cheap and easy stuff.

              And we definitely know that what remains is VERY expensive to extract — fracking and tar sands need oil to sell at minimum $80/barrel to break even.

              And we most absolutely definitely know that $100+ oil destroys growth:

              HIGH PRICED OIL DESTROYS GROWTH
              According to the results of a quantitative exercise carried out by the IEA in collaboration with the OECD Economics Department and with the assistance of the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

              For anyone knew to this blog – the problem is not that we are out of oil — it is that we are out of CHEAP OIL.

              If you are going to be able to participate and contribute positively to the discussion, that is the first thing that one has to get one’s mind around.

            • interguru says:

              Beautifully said.

            • Stefeun says:

              Paul,
              just for fun; found this the other day when we were talking about GDP vs oil-price:
              http://www.frbsf.org/education/publications/doctor-econ/2007/november/oil-prices-impact-economy

              “What are the possible causes and consequences of higher oil prices on the overall economy? November 2007″
              The conclusion:
              “The lack of major output effects of oil price shocks since the 1970s calls into question what role they played during the two recessions of that period. In other words, one possible reason why oil shocks seem to have noticeably smaller effects on output now than they did in the 1970s is that the world has changed. Another is that the effects of oil shocks were never as large as conventional wisdom hold, and that the slow growth of that decade had to do with other factors.”
              Nov.2007…

            • Paul says:

              The difference between now and then is that those shocks were short-lived … and involved external circumstances that could be controlled.

              US peaks? Embargo causes gas lines? A war cuts off supply from some country? The US could deal with this stuff — secure new sources — get the Saudis to open the valve — use the big stick with the likes of the Saudis to get them agree to channel most of the money pay them for oil back into the purchase of US debt — the quid pro quo being you agree to protect the House of Saud (from you… haha) – very much the way the Mafia and Triads protect storekeepers in their hoods…

              But now things are different — the Saudis have no spare capacity http://www.forbes.com/sites/greatspeculations/2011/03/04/the-truth-behind-saudi-arabias-spare-capacity/ essentially the problem is different this time — there are no easy solutions.

              There is of course fracking and tar sands – those can be used to offset the shock of 147 oil — but they are mediocre solutions because they cannot supply what is needed – CHEAP oil…. so we also get QE Zirp as ‘solutions’

              Really there are no solutions — unlike the 70’s we have no good options.

              This is the smoking gun:

              HIGH PRICED OIL DESTROYS GROWTH
              According to the results of a quantitative exercise carried out by the IEA in collaboration with the OECD Economics Department and with the assistance of the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

              They key phrase is ‘sustained $10 increase’ — we have never had to deal with a sustained increase until recently – so sure – it is accurate to state that previous spikes in oil did not have long term effects.

              Since that report came out in 2003… we have massive increases in the price off of the $25 benchmark quoted —- we have been over 100 for years now — and we cannot go back to 25 or 50 or 70… because our ‘solutions’ (fracking tar sands) require 80 to break even.

              This gives new meaning to the terms ‘sustained’ — high priced oil is here to stay.

              And we know what sustained high oil prices do to the economy — thanks to the IEA report

      • We don’t know how collapse will exactly play out. Clearly some things we have (clothing, shovels, pots and pans, shoes) will last for a number of years, regardless of our ability to make more. So this affects where we are headed. Even if collapse comes tomorrow, we don’t know how it will play out. The existence of “stuff” we currently have will to some extent soften the blow.

        A lot of people psychologically cannot think about collapse. If there is nothing you really can do (and that is often close to the case), then it makes sense to shut the subject out of your mind. All you can do anyhow is take one day at a time, and make decisions based on what you know then.

    • I am not talking about the amount of Russia’s production (which is high–up with Saudi Arabia’s), or even the direct cost of producing Russia’s oil. I am talking about the combination of

      (The cost to produce Russia’s oil and gas) + (the taxes needed from oil and gas by Russia, to meets its budget needs)

      The taxes depend on the selling price of oil and gas, as well as the cost of extraction. Russia gets all it can, subject to the need to leave enough funds in the companies to run their operations.

      The combination of these costs, per barrel, is high. Russia’s economy is largely focused on natural resource extraction. It gets over half of its federal government revenue from oil and gas. It can’t just go and tax someone else.

      Russia is marginal in the sense of being “high cost” when the need for all of the taxes is included. Every other country includes taxes as well. Even the US has high taxes on oil and gas companies. (Renewables get subsidies instead of high taxes–very strange world. I wonder how they will substitute for oil and gas.)

      This is Barry Rodgers’ “government take” map of the world. In some parts of the world, the government takes over 90% of what is left after production costs.

      • Smack MacDougal says:

        “The taxes depend on the selling price of oil and gas, as well as the cost of extraction”.” ~ Gail Tverberg

        Taxes do not depend on costs at all. Right there reveals you don’t understand trade at all.

        Taxes are an unearned share of profits. Without profit, there cannot be taxes.

        “Russia is marginal in the sense of being “high cost”” ~ Gail Tverberg

        Do you know the production cost per barrel for REBCO? How does it compare to WTI? Brent? Making a claim without hard numbers is mere rhetoric, whether from deception or from stupidity.

        You don’t seem to understand the concept of marginalism. Bidders decide price and price decides which producers produce at the margin and which producers must exit because their costs exceed revenues.

        “I am talking about the combination of … the taxes needed from oil and gas by Russia, to meets its budget needs.” ~ Gail Tverberg

        The 2014 FY budget deficit for Russians, 0.5 percent of GDP. The 2015 FY budget deficit for Russians, 1% GDP. The 2016 FY budget deficit for Russians, 0.6 percent of GDP.

        The current FY deficit for Americans is 4% of GDP! That is 4 times more than the Russians in their expected worse year!

        Ms. Tverberg, your premise that Russians are being forced into a takeover of Ukraine because of oil and government funding lacks basis in reality.

        A far likelier reason is push back by Russians against U.S. political establishment policy of encirclement of Russia, Iran and China. Even bungling Obama has “pivoted” to Asia.

        In short, U.S. leaders have pushed to get NATO forces and weapons systems as close to the border of Russia as they can. In so doing, it cuts down the distance needed to launch attack against Russians while lengthening the distance Russians must overcome to counterattack.

        Putin and his team likely understand that if the U.S. and its proxies get to the Russian border, Russians get subordinated to a U.S. dollar / Euro regime.

        • ordinaryjoe says:

          Keep writing civil and respectful or GTFO. GTFO would be my choice. Your rudeness shows you care not about the facts of your argument. We like Gail and we like our little polite blog.

          • Smack MacDougal says:

            The psychology of online behavior and group dynamics amuses. Look at you ordinaryjoe, seeking status among your peers by attacking the outsider, me.

            Telling someone to GTFO hardly could be construed as “polite” by any sane, right-minded one.

            Gail should stick to actuarial science because she seems to not know anything about trade, prices, investing, politics, power, oil and so on.

            Gail seems to be spinning a false narrative driven by a slew of false beliefs.

            • Bob Valiant says:

              You are being uncivil. Please stop.

            • ordinaryjoe says:

              I know when I see language designed to disrupt. If you have a contribution to make make it. This is a community. I value it. If you are sincere keep your posts civil and polite. I see your intent as to disrupt. I wont guess at your motives. Express your viewpoint in a civil manner, join the community prove me wrong. Civil and respectful sharing of ideas keeps blogs a valuable communication. Rudeness and disruption detract from blogs, rendering many no longer capable of functioning. Your characterization of Gails motives and IQ fit disuptive attacks on blogs to a T. You obviously have command of the English language. Explain why you differ from Gails analysis. If you wish to communicate do so, I see only intent to disrupt in your posts.

          • Smack MacDougal says:

            Telling someone to GTFO is uncivil. Telling someone he is being uncivil is uncivil.

            You two jokers seem to have a problem with the civility. Ms. Tverberg has a problem understanding oil, commerce, public finance, politics and power.

            • ordinaryjoe says:

              Once again no intent to communicate- Characterization used to disrupt. Your attacks on this blog are subtle, you demonstrate some skill in disruption. You have identified just the level of characterization tolerable on this blog and mixed it with false attempts to communicate so that when you are called on your disruption you argue intellectual suppression. Prove me wrong. Communicate how you differ from Gails analysis without characterization.

            • Smack MacDougal says:

              Again, you hallucinate and agitate against me hoping that others rally behind you to get Ms. Tverberg to block me.

              Facts remain. I presented a case that disproves Ms. Tverberg’s thesis. I referenced that case in my blog providing a link that anyone can click, which of course, is how most have used the Internet going on 25 years.

              Ms. Tverberg offered rebuttal to my original comment, to which I responded, again with facts.

              Ms. Tverberg doesn’t seem to have a problem with my exchange with her.

              You are suffering from cognitive dissonance. When presented with facts that dismantle Ms. Tverberg’s false narrative, you perceive the truth. Yet, because you cannot have leader, your empress get exposed for not wearing clothes, you attack the outsider, the messenger who has revealed the truth about Ms. Tverberg.

              You might believe you are a participant in a cyber community, but it looks more like a cult, replete with idol worship and a mythology that must be protected at any price.

              Good luck!

        • MG says:

          You miss the fact, that Russia is a very big country with harsh climate zones. The costs od keeping such big country together are higher than in mild climate. Russia could build the Soviet Block based on their cheaper natural resources. When the populations rose and the attainability of natural resources sank, the Soviet Block started to crumble. The story of Ukraine today is not about the power of Russia, but about the weakening of Russia and continuing downfall of Ukraine, where the civil war is starting in its energy intensive industrial areas. Every large country/empire needs a lot of energy for its operation. No one knows how long the USA or other bigger countries will stay intact as regards their territory and when they fall apart into pieces. The story of energy decline is the story of implosion, zombification, deflation, when the current infrustructure and the energy hubs deteriorate and the population goes down.

          • MG says:

            My comment was meant as a reply to Smack MacDougal.

            Just one more addition: Where does Gail Tverberg say “Ms. Tverberg, your premise that Russians are being forced into a takeover of Ukraine because of oil and government funding lacks basis in reality.”? Please read carefully…

            Russia needs profits, Ukraine needs profits, USA needs profits. The diminishing returns make profits impossible and the system falls apart due to implosion. This is not about the fight over natural resources, but the fight for keeping the system going on.The USA, Ukraine and Russia have their own growing problems now, you need energy to solve the problems. Ukraine needs energy, but Russia needs profits. Who will pay it? Also Slovakia rejected to sell the gas to Ukraine without any guarantess from the EU. That is the problem.

        • Russia has different tax laws that we do. It changes the taxes monthly, to get as much as the market will bear. The taxes depend both on extraction costs and price available in the market place. I am not sure how different it would be from calculating pretax profits, and taking, say, 90% of it.

          • Smack MacDougal says:

            Taxes have nothing to do with costs. You don’t understand trade (commerce) at all.

            All prices get governed by the one, true, infrangible law of trade — the Law of Prices. The Law of Prices holds the winning bids of purchase and sale in the face of what is on offer sets the price.

            All firms get governed by the Axiom of Profit — the sum of sales on prices set by winning bidders must at least equal the cost of production otherwise a producer goes to ruin.

            If the price of something is $10 and cost to produce is $10, there is no profit. Politicians can’t levy taxes on $0. If the cost to produce is $11, there is a -$1 loss. Politicians can’t levy taxes on -$1 loss.

            The ability of politicians to collect taxes works the same the earth over and through all of history. Jurisdictional tax laws can’t overcome reality of the constraints to trade — the Law of Prices and the Axiom of Profit.

            Only through subsidy, can politicians steal from some and either give buying power to bidders, forcing up prices to at least break even or pay for costs of producers to give the appearance of profit.

            I have read some of other work on your blog. Your beliefs are fraught with fallacy.

            You claim “Since 2005, (1) world oil supply has not increased,” Yet, the EIA shows that world oil output has grown 6.7% since 2005.

            From the start of 2005 to peak credit in April 2008, loans and leases in bank credit grew 40.6%! Oil production barely grew at 1.3%. Clearly, oil is not causal for credit. Yet, you seem to hold such a silly, false belief!

            You claim “Oil supply limits appear to be a primary cause of the 2008–09 recession.” Yet, the reality is, an immense credit expansion arose and when expected forthcoming profit failed to materialize, collapse quickly followed. This is the same story of every undue credit expansions.

            From an interim low of $1,286.14 trillion (inflation-adjusted) in January 1994 to a peak of $3,354.06 trillion (inflation-adjusted) in April 2008, credit grew 160.8%. During the same period, world oil output grew 23.3%.

            If oil were the driver of credit, then explain how before the advent of petroleum, banking and credit expansions arose.

            Between January 1, 1980 and January 1, 1990, credit grew 19.9% (inflation-adjusted). Yet, world oil output only grew 3.8% during the same period. However, GDP grew a whopping 111%!

            Your doomsday, peak oil, oil-drives-credit prepper message lacks any basis in reality.

            • Smack MacDougal says:

              In short, economies grow because of efficiency in the production of property, which means the right of ownership and never the thing owned. Efficiency of production arises from technological advance.

              Economies exist because those of mankind need to produce property they don’t want to trade away in purchases and sales for property they do want.

              No one can enjoy something owned by someone else. They must trade for it first.

            • MG says:

              Smack MacDougal, some of your sentences are quite out of reality, e.g. “No one can enjoy something owned by someone else.” I can assure you, that when the resources deplete, the serious fights and wars start and no one cares from whom he or she steals…

              The perfect world is the world that has ample cheap energy for solving problems. The reality of resource depletion creates the world that goes into deep problmes due to the reality created based on the cheap (not local) resources. It means that many cities, towns, villages, states etc. will not exist, when the supply of energy like coal, oil and electricity stops. It is the energy that provides life, movement, flourishing economies. When there is lack of energy, then jobs can not be created, food can not be produced/imported. Many countries seem to be far from that point today, but there are many other countries that are in the latter, bad situation.

              Ukraine can grow its food, its western part is not so much endangered as the eastern part of the country, where the population is higher and falling: http://www.britannica.com/EBchecked/media/65677/Population-density-of-Ukraine. The natural population growth of Ukraine confirms this: http://en.wikipedia.org/wiki/File:Ukraine_natural_population_growth_rates.png.

              E. g. in such a developed country as the Czech republic, in the former heavily industrial areas of Ostrava and Liberec, there are already strong tensions between the white population and the still growing minority Roma population. Clearly, people look for the reasons why their economic situation is worsening. And they become extremely sensitive to population growth, special social benefits and protection provided to some groups of the society when they can not find work and are deeply in debt.

              http://www.romea.cz/en/news/czech/czech-republic-hundreds-of-rampaging-neo-nazis-attempt-pogrom-against-romani-people-in-ostrava

              This article in the Czech language says that the indebted person in the Czech republic is statistically most often from Ostrava and of middle age.

              http://www.tyden.cz/rubriky/byznys/osobni-finance/nejcastejsi-dluznik-muz-stredniho-veku-z-ostravy_292176.html#.U28Mm_l_u9Q

              The decline of the coal mining and heavy industry is harder to cope when the limits of growth hit also other parts of the economy…

            • Steve Rodriguez says:

              Costs=Taxes . Whether justifications for either withstand criticism is case by case. Let go of your dogma and pore into the issues with intellectual intensity and you will see that government (social cooperation) and business (competition for resources) are two sides of the same coin. Arbitrage, trust, regulation and enforcement may be applied to costs and taxes. Both are susceptible to depletion and the catastrophes that ensue from either mismanagement or entropy.

        • kesar says:

          Dear Smack,
          Did you ask yourself a simple question: what US and EU want to achieve in trying to separate Ukraine from Russia? This question doesn’t appear in MSM which quite confusing for it should be the main topic in current analysis. I hope you are not so naive to believe they want “peace, freedom and well-being” for Ukrainian “nation”?
          The goals of this soft-power, wave of propaganda and deep black operations are quite easy to discover: force Putin to sell oil & gas resources at lower price to EU, since EU is on the brink of debt collapse. They want to achieve this by two things: control over 30% of their distribution network (ukraininan pipelines) and secondly by introducing IOC to extract resources with more efficient technology and high capital and infrastructural capacity. The secondary goal might be to get access to the biggest chernozem/black earth deposits in Europe, which might feed the whole continent.
          Regards.

          • kesar says:

            Just to complete the list: US wants to isolate Russia from interfering their control over MidEast oil resources.

            • Rodster says:

              Gail, a new article saying that Europe has roughly 5 years of oil and Russia 50 years. Thoughts?

              http://rt.com/news/159644-low-reserves-fossil-europe/?utm_source=browser&utm_medium=aplication_chrome&utm_campaign=chrome

            • I am not convinced that high reserves really mean very much. The question is how long it is possible to keep the system together. If you can’t keep the system together, 50 or 100 years of reserves means nothing. If the country collapses in five years, most of the reserves will likely stay in the ground.

              On the other hand, Europe (excluding Norway) definitely does have a problem, with its low reserves. Energy production is low. It doesn’t have much of a chance of rising very much, very quickly–there is too little available. Its financial situation is likely to go downhill.

            • Paul says:

              I think we need to look at this on a nett global basis — rather than a country by country basis — if the total nett falls — even if oil production is rising in some countries — everyone sinks….

            • Rodster says:

              Gail, I was actually surprised that Russia only has 50 years of easy available oil in it’s inventory. That’s does not appear to be a lot of time left. That’s what I took away from the article that all the cheaper, available energy is going away rather quickly like Michael Ruppert alluded to in his movie Collapse.

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