A Different View of Venezuela’s Energy Problems

It would be easy to write a story about Venezuela’s energy problems and, in it, focus on the corruption and mismanagement that have taken place. This would make it look like Venezuela’s problems were different from everyone else’s. Taking this approach, it would be easy to argue that the problems wouldn’t have happened, if better leaders had been elected and if those leaders had chosen better policies.

I think that there is far more behind Venezuela’s financial and energy problems than corruption and mismanagement.

As I see the story, Venezuela realized that it had huge oil resources relative to its population, back as early as the 1920s. While these oil resources are substantial, the country misestimated how high a standard of living that these resources could support. To try to work around the issue of setting development goals too high, the country chose the path of distributing the benefits of oil exports in an almost socialistic manner. This socialistic approach, plus increased debt, hid the problem of a standard of living that could not really be supported for many years. Recent problems in Venezuela show that these approaches cannot be permanent solutions. In fact, it seems likely that Venezuela will be one of the first oil-exporting nations to collapse.

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Have We Already Passed World Peak Oil and World Peak Coal?

Most people expect that our signal of an impending reduction in world oil or coal production will be high prices. Looking at historical data (for example, this post and this post), this is precisely the opposite of the correct price signal. Oil and coal supplies decline because prices fall too low for producers. These producers make voluntary cutbacks because the prices they receive fall below their cost of production. There often are supply gluts at the same time.

This strange situation arises because prices must be high enough for the producers at the same time that goods and services made by oil (and other energy products) are inexpensive enough for consumers to afford. There is a two way battle taking place:

(1) Prices producers require tend to rise over time, because of depletion. The easiest to extract portion of any resource (such as oil, coal, copper, or lithium) tends to be removed first. What is left tends to be deeper, lower quality, or otherwise more difficult to extract cheaply.

(2) Prices consumers can afford for discretionary goods (such as cell phones and automobiles) tend to fall for a combination of reasons:

  • Wages of many workers fall because of competition from lower cost labor in other countries.
  • Some jobs are eliminated through the use of computers or robots.
  • Young people are increasingly being required to pay for higher education (beyond that which is provided free), leaving many with loans to repay, reducing their discretionary income.
  • Changes to US healthcare law (mostly starting January 1, 2014) lead to required health insurance premiums. While some citizens find cost savings in this approach, healthy young people often experience cutbacks in discretionary income as a result.
  • Rents and home prices keep rising faster than incomes.

When the discretionary income of the many non-elite workers of the world falls, they buy fewer finished goods and services. Finished goods and services are manufactured using commodities of many kinds, including oil, coal, copper, iron ore, and fresh water. When discretionary demand falls, commodity prices tend to fall. This is the problem we are encountering now. It tends to cause the prices of many commodities to fall below the cost of production. Eventually, producers decide to quit because production is no longer profitable. This is the issue that leads to peak oil, coal or copper.

Figure 1. Illustration showing why falling affordability creates a conflict between supply and demand.

If the Affordability Price Clash Mostly Affects Non-Elite Workers, Does It Matter? Continue reading

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How the Peak Oil story could be “close,” but not quite right

A few years ago, especially in the 2005-2008 period, many people were concerned that the oil supply would run out. They were concerned about high oil prices and a possible need for rationing. The story was often called “Peak Oil.” Peak Oil theorists have also branched out into providing calculations that might be used to determine which substitutes for fossil fuels seem to have the most promise. What is right about the Peak Oil story, and what is misleading or wrong? Let’s look at a few of the pieces.

[1] What Is the Role of Energy in the Economy?

The real story is that the operation of the economy depends on the supply of  affordable energy. Without this energy supply, we could not make goods and services of any kind. The world’s GDP would be zero. Everything we have, from the food on our dinner table, to the pixels on our computer, to the roads we drive on is only possible because the economy “dissipates” energy. Even our jobs depend on energy dissipation. Some of this energy is human energy. The vast majority of it is the energy of fossil fuels and of other supplements to human energy.

Peak Oilers generally have gotten this story right, but they often miss the “affordable” part of the story. Economists have been in denial of this story. A big part of the problem is that it would be problematic to admit that the economy is tied to fossil fuels and to other energy sources whose supply seems to be limited. It would be impossible to talk about growth forever, if economic growth were directly tied to the consumption of limited energy resources.

[2] What Happens When Oil and Other Energy Supplies Become Increasingly Difficult to Extract? Continue reading

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2019: World Economy Is Reaching Growth Limits; Expect Low Oil Prices, Financial Turbulence

Financial markets have been behaving in a very turbulent manner in the last couple of months. The issue, as I see it, is that the world economy is gradually changing from a growth mode to a mode of shrinkage. This is something like a ship changing course, from going in one direction to going in reverse. The system acts as if the brakes are being very forcefully applied, and reaction of the economy is to almost shake.

What seems to be happening is that the world economy is reaching Limits to Growth, as predicted in the computer simulations modeled in the 1972 book, The Limits to Growth. In fact, the base model of that set of simulations indicated that peak industrial output per capita might be reached right about now. Peak food per capita might be reached about the same time. I have added a dotted line to the forecast from this model, indicating where the economy seems to be in 2019, relative to the base model.1

Figure 1. Base scenario from The Limits to Growth, printed using today’s graphics by Charles Hall and John Day in Revisiting Limits to Growth After Peak Oil with dotted line at 2019 added by author. The 2019 line is drawn based on where the world economy seems to be now, rather than on precisely where the base model would put the year 2019.

The economy is a self-organizing structure that operates under the laws of physics. Many people have thought that when the world economy reaches limits, the limits would be of the form of high prices and “running out” of oil. This represents an overly simple understanding of how the system works. What we should really expect, and in fact, what we are now beginning to see, is production cuts in finished goods made by the industrial system, such as cell phones and automobiles, because of affordability issues. Indirectly, these affordability issues lead to low commodity prices and low profitability for commodity producers. For example:

  • The sale of Chinese private passenger vehicles for the year of 2018 through November is down by 2.8%, with November sales off by 16.1%. Most analysts are forecasting this trend of contracting sales to continue into 2019. Lower sales seem to reflect affordability issues.
  • Saudi Arabia plans to cut oil production by 800,000 barrels per day from the November 2018 level, to try to raise oil prices. Profits are too low at current prices.
  • Coal is reported not to have an economic future in Australia, partly because of competition from subsidized renewables and partly because China and India want to prop up the prices of coal from their own coal mines.

The Significance of Trump’s Tariffs Continue reading

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Electricity won’t save us from our oil problems

Almost everyone seems to believe that our energy problems are primarily oil-related. Electricity will save us.

I recently gave a talk to a group of IEEE electricity researchers (primarily engineers) about the current energy situation and how welcoming it is for new technologies. Needless to say, this group did not come with the standard mindset. They wanted to understand what the electricity situation really is. They are very aware that intermittent renewables, including wind and solar, present many challenges. They didn’t come with the preconceived notion that oil is the problem and electricity will save us.

It wasn’t until I sat down and looked at the electricity situation that I realized how worrying it really is. Intermittent wind and solar cannot stand on their own. They also cannot scale up to the necessary level in the required time period. Instead, the way they are added to the grid artificially depresses wholesale electricity prices, driving other forms of generation out of business. While intermittent wind and solar may sound sustainable, the way that they are added to the electric grid tends to push the overall electrical system toward collapse. They act like parasites on the system.

We end up with an electricity situation parallel to the chronic low-price problem we have for oil. Prices for producers, all along the electricity supply chain, fall too low. Of course, consumers don’t complain about this problem. The electricity system also becomes more fragile, as we depend to an ever greater extent on electricity supplies that may or may not be available at a reasonable price at a given point in time. The full extent of the problem doesn’t become apparent immediately, either. We end up with both the electrical and oil systems speeding in the direction of collapse, while most observers are saying, “But prices aren’t high. How can there possibly be a problem?”

Simply removing the subsidies that come from Production Tax Credits doesn’t fix the situation either. In one sense, the problem reflects a combination of many types of direct and indirect subsidies, including state mandates and the requirement that intermittent renewables be allowed to go first. In another sense, the problem is that, in a self-organizing economy, energy prices (including electricity prices) can only rise temporarily. The increase in energy prices is made possible by a growing debt bubble. At some point, this debt bubble collapses. Raising interest rates, as the US is doing now, is a good way of collapsing the debt bubble.

Furthermore, the subsidies for intermittent wind and solar discourage other innovation because they lead to terribly low wholesale prices for innovators to compete against, particularly in areas where hour by hour competitive rating is done. The ultimate problem is that if one type of electricity production is subsidized (even if in subtle ways), all electricity producers must be subsidized. Governments cannot possibly afford such widespread subsidies.

A PDF of my presentation can be found at this link: An Electricity Perspective on the Fragile State of the Economy. In this article, I offer some comments on these slides.

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