WSJ, Financial Times Raise Issue of Oil Prices Causing Recession

The idea that high oil prices cause recessions shouldn’t be any surprise those who have been following my writings, or those of Dave Murphy, or those of Jeff Rubin. Yesterday, though, the Wall Street Journal finally decided that to mention the idea to its readers, in an article called “Rising Oil Prices Raise the Specter Of a Double Dip“. The quote they highlight as a “call out” is

When Consumers spend more at the pump, they often cut back on discretionary purchases.

The WSJ shows this graph, linking oil price hikes to recessions:

Figure 1. Wall Street Journal graphic showing connection between oil price rise and recession.

A Financial Times blog by Gavyn Davies says something very similar:

Each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices. Sometimes (e.g. in the 1970s and in 1990), the surge in oil prices has been due to supply restrictions, triggered by Opec or by war in the Middle East. Other times (e.g. in 2008), it has been due to rapid growth in the demand for oil.

But in both cases the contractionary effects of higher energy prices have eventually proven too much for the world economy to shrug off.

In this post, I explain what the WSJ and Financial Times articles are missing regarding the connection between oil and the economy. I also explain how the inability of oil prices to rise very far suggests that the downslope may be considerably steeper than most models based only on the Hubbert curve would predict.

Impacts of High Oil Prices on the Economy

The graph shown in the WSJ is very familiar. On November 5, 2008, I wrote a post called Jeff Rubin: Oil Prices Caused the Current Recession that included this graphic from this publication of CIBC World Markets.

Figure 2. Jeff Rubin's graphic showing connection of oil prices and recessions.

A more recent analysis by James Hamilton called “Historical Oil Shocks” published (here or here) as a National Bureau of Economic Research Working Paper shows that almost an “if and only if” relationship exists between oil price shocks and U. S. recessions. According to page 26 of his paper,

All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War.

Table 1. Significant post-World War II recessions and their connection to oil shocks (from Hamilton paper "Historical Oil Shocks")

My own research relates to reasons why changes in oil price can be expected to have a disproportionate effect on the economy. It has not entirely been published, but has been presented at conferences including the 2009 Biophysical Economics Conference and at the 2010 Advances in Energy Conference in Barcelona, Spain, and will shortly be written up in a book in Springer’s Brief’s in Energy Analysis series, under Professor Charles Hall. My analysis indicates some of the reasons for the connection between oil price spikes and recessions are as follows:

Cutbacks in Discretionary Spending. If a person (or state government, or other organization that cannot easily pass through its costs) faces an increase in oil costs, it has a tendency to cut back in discretionary spending, since many oil expenditure are for necessities, like commuting to work. This is an exaggerated graphic I put together in a post I wrote called There is plenty of oil but . . . showing that because most incomes do not rise when oil prices rise, there is a compression in discretionary spending.

Figure 3. Exaggerated graphic pointing out connection between oil price rise and discretionary income.

In Figure 3, I combine food and oil prices, because food prices tend to rise at the same time as oil prices. This occurs because oil is used very extensively in raising crops (operating farm machinery, herbicides and pesticides, irrigation, fertilizer) and in food transportation and packaging. A comparison of FAO’s Food Price Index and Brent oil prices (spot prices from the EIA) shows a high correlation:

Figure 4. Comparison world food price index and Brent oil price shows very similar trend.

Interest Rates and Inflation Rates. Higher oil food prices directly affect the inflation rate. Furthermore, if prices of other types of goods rise because of higher transportation costs, this also tends to raise inflation rates.

In the 2004 -2006 period, when oil prices rose, the Federal Reserve raised target interest rates, from 1% to over 5%, specifically mentioning rising oil prices, and their expected impact on inflation rates as a problem. To the extent that these higher interest rates affected consumer loans, the higher interest costs also acted as a reduction to income, over and above higher food costs.

The WSJ doesn’t seem to think that the Federal Reserve will again raise target interest rates this time. The WSJ reports:

In part because it is driven by something other than increased demand, the rising price of oil is unlikely to prompt the Federal Reserve to move more quickly toward raising short-term interest rates, now near zero, or otherwise moving to tighten credit. That could change if higher energy and goods costs begin to seriously feed into prices of other goods and services. But with unemployment high, a large share of U.S. manufacturing capacity still idle, and little sign that public or market expectations for inflation are moving up, Fed policymakers see the chances of inflation rising by more than their informal target of about 2% this year as remote.

Of course, it isn’t necessary for the Federal Reserve to raise target interest rates in order for interest rates on debt to rise. If investors can see that inflation is heating up, they will demand higher interest rates to compensate for the higher expected inflation rates. CNN Money shows the chart shown in Figure 5 in a February 7 article titled Bond shoppers: 10-year yields pushing near 4%.

Figure 5. CNN Money graphic showing rising interest rates affecting 10-year treasuries.

These higher interest rates on 10-year treasuries tend to translate to higher rates for other types of loans, such as mortgages, as well. So interest rates seem already to be headed higher, perhaps in part reflecting the inflationary impact of higher oil prices over the past year.

Decline in Home Prices. Another type of discretionary purchase is the purchase of a home. A person needs to have considerable discretionary income to purchase a more expensive home.  So cutbacks in discretionary income tend to reduce demand for homes, and because of this, home prices tend to drop.  Figure 4 shows that oil prices started rising in 2004. The timing of the 2006 -2007 home price drop matches very well with what a person might expect, based on the 2004-2006 oil price rise and the interest rate rises that followed the run-up in oil prices.

Debt Defaults. If oil and food prices are higher, some of the more marginal buyers are likely to find it difficult to keep up their payments, and miss payments. In the 2006-2007 period, many of the more marginal home buyers were holders of subprime loans, but there are many others as well. Businesses facing cutback in buying because of reduced demand for discretionary good are also likely to be affected by reduced demand, and find it difficult to pay their mortgages.

Eventually, banks figure out that loan applicants are likely to have a hard time repaying their loans, and cut back on offering credit because it doesn’t make sense to offer loans to people (and businesses) who are likely not to be able to repay them.

Balance of Payments. If oil prices rise, balance of payments are likely to get more out of balance than otherwise, with oil sellers benefitting from the higher oil prices.

What oil price level is needed for recession?

The WSJ article linked above says:

Most economists reckon that the price of oil would have to rise to at least $120 a barrel, and stay there, to threaten the recovery.

It is not clear how good an estimate we can expect from economists regarding when oil can be expected to affect the economy. The question of oil prices has only recently begun appearing on the radar screen of most economists.

One factor that may make recent estimates too low is the recent disparity between West Texas Intermediate oil prices and Brent prices. Most US analysts follow West Texas Intermediate (WTI) oil prices. These are the oil prices shown in Figure 1. WTI prices are now depressed relative to most other oil prices, as I discuss in this recent post, because of processing/shipping issues in the US Midwest. Another oil index, Brent, which many think is more representative, i$114 barrel now. So while WTI prices are “only” at around $100 barrel, other more representative oil indices are already higher.

Figure 6. Figure by Hall, Balogh, and Murphy showing relationship between oil price and recession.

Furthermore, other analyses show lower oil prices can lead to recessions. Charles Hall, Steven Balogh, and David Murphy did an analysis of the connection between the price of oil and when recession can be expected (Figure 6). In their view, recession is likely when oil amounts to more than 5.5% of GDP. When their analysis was done in 2008, this corresponded to a price of about $85 barrel.

If rising oil prices leads to recession, what are the implications for future oil supply?

If there were no problem with oil prices leading to recession, prices could keep on rising as much as they need to, to encourage additional production and to encourage alternatives. It is the fact that high oil prices cause recession, and the fact that recession tends to causes oil prices to drop, that prevents oil prices from continuing to rise, in a fashion that would allow oil companies, and makers of alternatives to be able to rely on the higher prices. This hampers the continued growth of oil supply.

If we think about it, extracting oil requires investment at many steps along the way: whenever exploration is done; whenever a new well is drilled, or “fracking” is done; when a decision is made to replace a broken oil and water separator; even when decisions are made to hire and train new staff members. As long as oil prices are rising enough that there is an adequate gap between the cost of production and what the oil can be sold for, there is the possibility that there will be enough funds left to reinvest.

In terms of Charlie Halls “cheese slicer model,” if the Energy Return on Energy Invested (EROI) is high enough, there will be enough energy coming out of the red arrows of Figure 7 for both (1) New Investment in Oil Extraction and (2) Demand for New Products that Use Oil. (See Nate Hagen’s post, At $100 oil, what can the scientist say to the investor?)

Figure 7. Charlie Hall's Cheese Slicer Model, showing arrows for various components of the reinvestment process. This version is theoretically for 1970.

On Figure 7, there are two red arrows. The one pointing to the right is the one relating to discretionary spending, and the one pointing down is the one for reinvestment. What happens is that over time, the easy-to-extract, high EROI oil, is depleted, and it takes more and more energy the extract the remaining oil. As the EROI declines, the size of the investment for new oil extraction keeps going up (the black arrow across the bottom gets larger).

Barklay’s recently illustrated their view as to how much the cost of oil production is increasing (Figure 8) in a publication called The Return to Scarcity.

Figure 8. Barklay's estimate of the cost per barrel of oil production.

A rise in oil cost of production generally corresponds with lower EROI. I don’t know whether Barklay’s analysis is precisly correct, but it is clear that the cost of oil production has been rising, both in dollar terms, and in energy required to produce the energy we are using. What happens when increasing energy is required to produce oil is that the amount of energy coming out of the red “discretionary use” arrows becomes less and less, so the arrows become smaller.

Figure 9. Charlie Hall's Cheese Slicer Model, as of 2030.

As the red arrows denoting discretionary output become smaller (compare Figure 9 to Figure 7), the need for investment (big black arrow at the bottom) becomes larger, causing a serious conflict between what is needed for investment, and what is available for investment.

It seems as though we may already be reaching this point of conflict, especially if oil prices do not keep rising. We have been able to disguise this conflict in the need for investment funds partly through borrowing, but if credit restrictions associated with recession occur, it will become increasingly difficult to find adequate funds for investment.

The small arrow to the right for discretionary purchases (for Figure 9, compared to Figure 7) indicates that there is a constriction in demand for goods of all kinds (including those using oil), because the system of extracting oil uses so much energy itself. If the red arrow to the right were bigger, it would denote higher demand for goods and services, even goods and services made with expensive oil. But with weak demand, we get recession, rather than demand for goods produced from high-priced oil. At times, this lack of demand may manifest itself as a glut of high-priced oil on the market, because people can’t afford it. The net effect of all of this is that the lack of energy “push” from the red arrows is what brings the system to a halt. This may look like a lack of “oil demand” to economists.

The way I visualize the situation is to think of oil resources as a triangle, with the easiest to extract at the top, and the most difficult to extract at the bottom. These resources would include both conventional and unconventional oil. These resources would also include oil that can be gotten through very advanced (and expensive) extraction techniques, as well as oil that can be extracted very simply (and cheaply).

Figure 10. Schematic diagram of economic and non-economic resources

Right now, many people assume that all of the oil resources that we can “see” will eventually be economic. But if prices cannot rise high enough, then there is a limit on which of this oil can be extracted. It is not obvious from just looking at the available resources where this might be, but the limit is there. For example, if the limit where the economy goes into recession is $120, and if a particular “high-tech” extraction method needs a price of $140 to be economic, then that approach is not going to be economic, and what looks like usable oil resources using that method is likely to prove to be a mirage. Technology improvements may cause some oil extraction to move above the line, that would otherwise be below the line, and lack of investment funds may cause some oil to move below the line.

Many people see Hubbert’s Curve as predicting a peak and slow decline, based on M. King Hubbert’s analysis of how individual reservoirs depleted. It seems to me that Hubbert’s analysis more or less says what will happen to conventional liquid oil, extracted using low tech methods. But it really doesn’t tell us much about how much oil from lower quality sources or extracted using more and more advanced techniques will prove to be economic. The cutoff really takes place when prices are not high enough relative to production costs, so that there are not enough funds for investment and to support continued demand for energy-using products by consumers.

Once we start reaching economic limits (marked by serious recession and inadequate funds for reinvestment), we are likely to be well past the point where 50% of the oil that is economic to extract has been removed. Lack of funds for reinvestment can act to cut of future development fairly quickly, it would seem to me. If prices are not very high, say $60, much of the more expensive oil production will cease.

It should be noted that this model is not really complete. There may be other types of limits in addition to the cutoff relating to what is economic. We are hearing about the possibility of the breakup of Libya and damage to oil fields. To the extent that political turmoil makes it impossible to extract oil, then even what appears to be economic in Figure 10 may prove to be impossible to extract.

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 financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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46 Responses to WSJ, Financial Times Raise Issue of Oil Prices Causing Recession

  1. Pingback: WSJ, Financial Times Raise Issue of Oil Prices Causing Recession … — Debt Free Forever!

  2. Delving Eye says:

    Hi Gail,

    Not your fault, but:

    In Figure 1, “Wall Street Journal graphic showing connection between oil price rise and recession,” I think WSJ got the color of the box (for recession) in the key wrong. Shouldn’t it be the darker hue of blue?

  3. Pingback: From Jasmine Revolution to oil shockwave | OurWorld 2.0

  4. Neil Howes says:

    Hi Gail, you wrote Our problem is that even most of what we consider “renewable” has a huge non-renewable component. There are a few things are truly renewable–

    This is a “huge” exaggeration. Vestas published a life cycle analysis of its 3MW wind turbine which would produce about 150,000MWh over a 20 year life-time. Per MWh produced the life-cycle fossil fuel use would be 68MJ(23MJ oil, the rest coal and NG) or about half a gallon of gasoline(132MJ/gallon). Now an electric vehicle would be able to travel 5,000miles using one MWh of wind energy, compared with the average ICE vehicle travelling 15miles on half a gallon. In other words renewable wind energy uses about 0.3% of the FF energy that it directly replaces.
    But this is the FF used today by Vestas at todays prices and the energy mix of electricity production in Denmark. Much of this especially coal and NG can be and will be replaced by wind generated electricity. Some oil will be difficult to replace, oil used for lubrication of turbines but the amount is tiny, grams/MWh and this could be replaced by air or magnetic bearings, but there will be small amounts of oil available for many thousands of years once we stop burning it for energy.

  5. Neil Howes says:

    Hi Biycle Dave,
    you wrote However, I seriously doubt that any technology based solutions (as you and many others suggest – and I could add a list of my own) have any hope of being implemented in a meaningful time-frame.
    In WWII, the US auto industry switched from building cars to building planes, tanks and other war machinery. Are you saying that it will be more difficult to switch from producing ten million 2009 model ICE vehicles to ten million 2012 model Chevy Volts? Sure its going to take 20-30 years to replace existing vehicles but about 50% of vehicle miles are driven in < 6year old vehicles so savings in gasoline are going to be rapid. Since about 60% of VMT are really non-essential, we could see a big drop in oil consumption when it really becomes expensive, even without dramatic mpg improvements.
    I would argue that the problem is well understood( need to dramatically reduce oil consumption). Ten to 20 dollars/gallon will provide all the motivation and co-operation. Just look at most nations that are presently paying 200-300% higher prices than US.
    Perhaps, as the prospect of collapse becomes more apparent, we will rise sufficiently to the occasion to “muddle through” and avoid the worst of what could happen – I think this is the most optimistic scenario.
    If the worst that happens is that many second SUV’s are parked while school kids walk, parents commute by mass transit or walk or bicycle or havens forbid actually car pool, its not going to be too bad. Even more drastic families may only have one electric or PHEV for most trips and have to use the second vehicle for rare occasions when the EV is being used and they have run out of milk and have to drive 2miles to the local store. Our grandparents had stories of walking 10 miles through snow to get to school, I very much doubt that future grandchildren will think having to walk 3 miles for a McDonalds fix, or 2miles to a train station is going to sound as impressive a hardship.

  6. Neil Howes says:

    Jan Steinman wroteDid you see my missive about efficiency, above?
    Yes I did Jan, Jeavons paradox would not apply to where efficiency gains occur as the price rises.
    The gasoline engine has had a century of continuous development. I don’t think we’re going to see it double in efficiency any time soon.
    The efficiency gains of a hybrid vehicle is not only due to a more fuel efficient engine but how is is being used, regenerative braking etc. A Chevy volt will give another large gain in mpg( gasoline) over a Prius because a lot of the miles traveled will be exclusively in electric mode. So in 30 years we have gone from a transportation system( single passenger ICE vehicle) averaging 15mpg, to a similar vehicle (plug in hybrid) averaging >150mpg( gasoline). Add in much more efficient transportation systems( car pooling) mass transit and there is still lots of room for future major reductions in oil use, for basically performing the same function.
    Do you know how many more electric power plants we’re going to need if that happens? I can’t recall details, but I saw numbers once, and it was scary — something like building one new coal-fired power plant per week for the next ten years.
    Actually, we could replace > 80% of the ICE vehicles with electric using existing power infrastructure, providing they were recharged at night(off-peak periods) when there is considerable surplus generating capacity.

    • Jan Steinman says:

      Neil, I don’t believe you addressed my concerns about resiliency and “brittleness” of high-efficiency solutions.

      Your Prius requires globe-spanning supply chains and billion-dollar semiconductor wafer fabrication plants. I’ve worked in one of those — you wouldn’t believe the energy, exotic materials, and supply chain required to make a fairly simple microprocessor!

      Coltan from the Congo (fueling civil war there) is needed for the Prius’s numerous tantalum capacitors. Neodymium crucial to electric car motors comes primarily from China, who has begun to restrict exports for strategic reasons.

      I’m not sure I understand your math when you claim that 80% of internal combustion engines could be replaced with electric cars charged at night. Can you explain?

      I can’t find any figures for the amount of spare electricity capacity there is at night, but at least 20 million barrels of oil per day are used for transportation; that’s approximately 140 Petajoules, or 38 Gigawatt-hours, or roughly the full output from 38 large power plants.

      Perhaps I’m lacking some important data here, but could we actually take 38 large power plants off-line at night, and if we could, wouldn’t that be a better thing to do than for us to continue to do all that driving?

      And that’s without considering the losses involved, at least 30% fuel-to-wheels loss for electric vehicles. So make that 49.4 “spare” large power plants that we need.

      • Neil Howes says:

        The US has about 900GW of electrical generating capacity but uses less than 400GW during off-peak periods, because sufficient capacity is required for peak demand, usually in afternoons and early evenings.
        80% of the 250million cars and trucks(200million electric vehicles) would require 5-25kWh per off-peak charging say 1kW over a 10 h period x 200Million= 200GW.Electric vehicles do not have to use the same energy as ICE vehicles they replace because of the higher efficiency of electric drive(75%) compared to gasoline engines(15%) and energy recovery of hybrids. Thus a Chevy Volt can travel 5miles using 1kWh(3.6MJ) compared to a similar sized vehicle using 1/6th gallon(30mpg) to travel 5 miles( 132MJ/gallon= 22MJ/5miles). Thus an EV would use about 20% of the energy of a similar sized ICE vehicle.
        Yes it would be better if US cities were built so that everyone could travel by electric mass transit, as they were 100 years ago, but its going to take another 100years at least to correct urban and suburban design. In the meantime the US vehicle fleet is being replaced every 15 years so moving from ICE to EV could be fairly rapid and require few changes in infrastructure.
        I dont see a problem with global supply chains and expensive semiconductor fabrication, the bottom line is a Prius is no more expensive than a low mpg SUV, and electronic components are much less expensive than vacuum tube operated devices that were once built locally. We could go back to 50 year old technology but it was so inferior why would people do that?
        Neodymium is relatively abundant and not essential for electric motors, but if prices rise US and Australian sources will be developed.

        • marty schoffstall says:

          Maybe we can do better than this with some tweaks to the NEV and LSV regulations. I’d love to see a NEV2 set of regulation that allows for 35 mph, this would allow for substantial commuting in suburban/town/urban environments. LSV’s which require state’s to pass regulations @25 would allow me access to 95% of my 45,000 person town, unfortunately PA has not done so. I’d like to see LSV federal regulation to trump the state’s as it does for NEV’s.

          PV is more than capable of powering the LSV’s and NEV’s so the grid isn’t an issue here. Lastly, they also should play into a descent strategy, they are even simpler than ICE.

        • Jan Steinman says:

          Neil, I think we’re just going to have to agree to disagree here. I know you have some bad numbers here that cause me to doubt your other numbers. You seem to be “cherry picking” the data — taking the absolutely worst case for internal combustion and the absolutely best case for electric. For example, you compare “tank or battery to rubber” fuel economy, conveniently ignoring the thousand-mile transmission line, fed by a 35% efficient heat engine, that the electric vehicle uses.

          But that’s understandable, because you’re comparing something that exists to something that exists only in your mind.

          I think it’s fair to say that switching our current transportation needs from fossil sunlight to renewable electricity is a tremendously complex challenge, so please forgive my suspicion of people who glibly toss out some wildly optimistic numbers and imply that life can go on as we know it, if we would only do things MY way.

          It’s not that I’m anti-EV. Quite the contrary; I’m in the process of building one. It’s just that I’m extremely skeptical that anything can be done that will allow us to carry on at more than a small fraction of what we’re doing now.

  7. La Curee says:

    Nice posting I have linked your blog to mine.
    Long time lurker occasional commentator on The Oil Drum,

  8. Amit says:

    Money is a function of net energy. However, to me it appears that the only true currency is the one which corresponds to a renewable energy resource. Such a currency will always hold it’s value, as the basis for it’s existence is more dependable.
    Money corresponding to non renewable energy will result in inflation as soon as the underlying resource starts to deplete. This has started to happen now, and will only stop when the non renewable portion of the money supply is removed from the system.

    • Our problem is that even most of what we consider “renewable” has a huge non-renewable component. There are a few things are truly renewable–burning biomass in small quantities, solar thermal (mostly), small hydro, small wind. But we don’t get much energy out of those. And we deceive ourselves if we think solar PV or large wind is renewable.

      • Amit says:

        Yes, I totally agree. Currently the renewable and non renewable are intertwined. But this should give away with time as the non-renewable production starts to fall and the non-renewable economy also falls apart.
        In addition to the renewable you mention, we also need to consider Human and Animal energy output(based on renewable agriculture and sustainable practices). I don’t think our current human or animal population can be sustained without the non renewable portion of energy in the system.

        Another thing is that there is a usage pyramid for non renewables. The top of the pyramid is the discretionary expenditure of energy (cruising, air travel, personal automobiles etc). The bottom of that pyramid is the stickier part, for example use of kerosene/coal as a fuel for cooking in India and other parts of the world. The top can be cut easily just like the human body cuts fat when faced with lack of food, the bottom layer is going to cause a lot of trouble…

      • marty schoffstall says:

        i like the categorization there

        true renewal: small biomass, solar thermal, small hydro, small wind

        i’d like to put up for consideration another category

        10yr descent: small pv with batteries (12.5kw<), medium wind (50kw<) with batteries

        Descent is not something we've discussed much but it does have great value. If I can run my table saw, drill press, et al for awhile I can build a lot of wagons, and tools for the future and others.

        I'm believing that the large central power plant, with its fuel delivery, staffing requirements, and transmission is much more brittle than a bunch of off-grid pv installations for descent.

        • Jan Steinman says:

          Marty, don’t forget vegoil-powered diesel engines for perhaps 20 or more years of descent.

          Older diesels can be maintained for quite a long time with nothing more than hand tools. (Damn new ones have computerized injection, which is totally dependent on exotic materials and long supply chains.)

          Personally, I think PV or wind electricity is much more brittle than a good old-fashioned diesel generator, due to reliance on the semiconductor industry for inverters.

        • You are probably right about a large central power plant probably being more brittle than smaller battery backed stations. But either one depends on replacement parts, and once they are in short supply, it will be a problem. It may be that batteries can be remanufactured for a while.

          It is hard for us to even think of all of the supply lines that are necessary. It is likely Liebig’s Law of the Minimum that will affect us.

        • marty schoffstall says:

          I like vegoil, and the technology to make it is simple: a press and modest filtration. Just have to start the engine with diesel to warm everything up. Now, I have to figure out how to do soybeans on the small scale (10-20 acres) and find non-GMO seeds – according to the surveys i’ve seen, unavailable in Pennsylvania as of yet.

        • Jan Steinman says:

          Marty, I’d discourage you from using soybeans for oil. Soy is not a particularly good source of oil. But it is heavily subsidized and promoted, and they make oil out of it because they have a lot of it, not because it is particularly good at it!

          Soy would not be so dominant if it weren’t for corn’s dominance. Corn is nitrogen-hungry; soy is a nitrogen fixer. Industrial agriculture is addicted to a too-simple rotation of corn and soy, when they should be doing perennial polyculture.

          It’s argued that besides oil, you get good protein cake out of soy that can be fed to animals. But animals need fat, too, and robbing the soy of its oil before feeding it as an unnatural food for ruminants is just stupid. Ruminants need grass and browse!

          All these arguments are made up in support of soy. It’s not that soy is evil, but isn’t anything evil in excess?

          As an oil crop, rapeseed has higher yield in northern climates, but it suffers all the disadvantages of any annual planting. Rapeseed seedcake (after oil extraction) makes a good organic pesticide and repellant.

          We’re planning to experiment with chinese chestnut, a perennial that can produce more oil than soy — nearly as much as rape — year after year, without re-planting. But they take years to get established, and modern humans are not accustomed to waiting for their fuel.

      • Ikonoclast says:

        I wonder if you can do a post on this topic? I mean the EROEI of ostensibly renewable energy sources. I’d be particularly interested if you could point to comprehensive quantitative studies and analyses of all the major renewables. It need hardly be said that energy accounting is a complex issue. I am not aware of any comprehensive studies in the public domain (free of paywalls etc).

        You said, for example, “we deceive ourselves if we think solar PV or large wind is renewable”. Can you point to the scientific studies which support this statement? I am not saying I disbelieve you. I just want to see the evidence and evaluate it for myself.

        I do accept that a very small positive EROEI on solar PV and large wind (in practical terms for saving our civilization) is no better than a negative EROEI.

        • EROEI is not the issue. The issue whether we can make more wind and solar PV, just using renewable energy, and there is no possibility that we can. What we get is intermittent electricity, and this, by itself, is of little use. These are only useful as part of a complex system that includes many other parts. Keeping the whole system going, manufacturing more, and transporting it to the new location all require fossil fuels, and will for the foreseeable future. If we lose fossil fuel (or just oil) we lose the extenders.

          You are right, though, I should write a post about this issue.

          The EROEI that have been computed for wind and solar PV are quite incomplete, and as I said above, are not really the issue. I see the EROEI as being primarily useful for comparing one wind turbine to another, or one solar PV panel to another.

  9. Arthur Robey says:

    I guess energy makes things happen.
    Money is how we keep score. It is an accounting tool.

    How am I going?
    Have I passed the Turin test?

    I wonder how good these avatars are?

  10. Neil Howes says:

    Increased efficiency only works as long as there are not supply interruptions.
    Gail, you have made a good case that if oil consumption by the US economy represents more than about 6% of of GDP, it will cause a contraction in the economy.
    What you seem to be dismissing are very large efficiency gains , for example a move from 25mpg vehicles to 50mpg vehicles or direct substitution, for example 67% of vehicles running on electricity rather than oil, or a combination of efficiency gains and substitution. In time this could lead to the US economy requiring much less oil, so in theory, we could see $200/barrel or even $300/barrel oil still representing <6% of the US economy. I could envision a growing economy where oil is only used for some petrochemicals, and for air transportation, at which point the oil price would be irrelevant for the economy as a whole. One problem would be if the substituted energy( say electricity) used for transport accounted for more than 6% of GDP. At least for road and rail transport it would appear that electricity prices could be very dramatically higher before they could represent 6% of GDP. For example replacing a oil based SUV (25mpg; $3 of gasoline/25miles) with an electric vehicle( 5-10kWh/25miles; about 50-100cents/25miles of travel) would suggests electricity prices could rise 300-600%.

    • Bicycle Dave says:

      H Neil,

      In a perfect world where nearly all people understand the problems we face and are highly motivated to deal with them in a truly rational and cooperative fashion, I suspect that we could mitigate many of the unpleasant consequences of declining oil supplies. Although I doubt that any effective solution will support millions of private cars (electric or not) very far into the future.

      However, I seriously doubt that any technology based solutions (as you and many others suggest – and I could add a list of my own) have any hope of being implemented in a meaningful time-frame. The problems are not widely understood, the motivation is not present, and cooperation appears to be most unlikely.

      Perhaps, as the prospect of collapse becomes more apparent, we will rise sufficiently to the occasion to “muddle through” and avoid the worst of what could happen – I think this is the most optimistic scenario.

      • Bicycle Dave says:

        I miss the ability to edit a post! “H Neil” was supposed to be “Hi Neil”.

        • Sorry! WordPress software is cheap (actually free), but it does have its limitation.

          The upside is that there is no need to have my own tech support person, if I can live with the limitations.

    • Jan Steinman says:

      Neil wrote: “What you seem to be dismissing are very large efficiency gains , for example a move from 25mpg vehicles to 50mpg…”

      Did you see my missive about efficiency, above?

      I used to think efficiency “would save us.” But it’s a chimera.

      The gasoline engine has had a century of continuous development. I don’t think we’re going to see it double in efficiency any time soon.

      And even if it did, it would do so at the cost of resilience. Even today’s high-mileage cars get there via dependence on exotic materials and control computers that require tremendous supply chains and energy-intensive infrastructure.

      It takes several billion-dollar semiconductor wafer fabrication plants to produce a fuel-injection computer. It takes a skilled machinist and a 50-year-old vertical mill to make a carburator.

      “or direct substitution, for example 67% of vehicles running on electricity rather than oil…”

      Do you know how many more electric power plants we’re going to need if that happens? I can’t recall details, but I saw numbers once, and it was scary — something like building one new coal-fired power plant per week for the next ten years.

      • Actually, we do have a huge amount of natural gas capacity in the US already built. Much of this is used only a small percentage of the time. If we could produce enough extra natural gas to run these generating stations more hours, we probably would be OK generating more electricity without building more power plants. (NG power plants are very cheap to build. They are also very cheap to operate. I understand some even operate without any staff at all, just computer controls.) What we are maxed out in electrical generating units that use coal or nuclear. We will need to build more generating plants if we want to expand the use of these.

        • Bicycle Dave says:

          Hi Gail,

          It seems that Neil is suggesting that we could continue the private car paradigm for some time with electric power. Jan is questioning the viability of greatly increased reliance on electricity for automobiles.

          You have written before about the limitations of NG over the longer run. I’m not sure what you are suggesting in this comment.

          …we probably would be OK….

          From your previous writings, I would gather that you would not be in favor of promoting a transportation model that relied upon private electric automobiles and using NG for electricity generation – at least not as any kind of sustainable model.

          I can see limited-range, slow-speed, neighborhood electric vehicles (glorified golf carts) that are relatively easy to build and have modest battery/electricity requirements. But, not electric cars that have nearly the same functionality enjoyed today by millions and millions of happy motorists.

          Where do you weigh in on this?

          • I have a hard time believing that any high-tech solution will work for very long. We are up against limits in so many ways, including investment capital, so I really don’t see us transitioning to NG cars, or electric cars, except on a very small scale. With any of these solutions, we need to keep paved roads, and we need to keep up our international trade system, so we can get repair parts for cars. Maybe a relatively few will buy electric golf cart type vehicles.

            I see the outcome looking more like severe recession, with governments being overthrown in quite a few countries. With less stability, it will be harder and harder to get all of the exotic materials we have grown to depend on.

    • Skintnick says:

      This proposed managed transition (how long would it take, 10 years even in a healthy economy?) is all very well, but we’re at crisis point and it hasn’t even got beyond first base.

  11. Jeff Crunk says:

    This bodes ill for Time Magazine’s contention that Ray Kurzweil’s Singularity is near. I’m as fascinated by the profound disconnect between the popular imagination and our finite world.

  12. George Mobus says:

    The geopolitical issues (unrest in the ME) that may also contribute to diminishing oil availability and thus higher prices is another example of a negative feedback. One of the major factors fueling the unrest is the rising price of food and other staples. Since the common citizens in these countries spends a much larger proportion of their incomes on food, even a 2% rise is difficult to handle.

    So while a lot of focus is put on the ‘political’ aspects of the unrest, i.e., the demands for democracy or at least getting rid of tyrants, the pressure that is building is much more biological than sociological (it is easy to blame a tyrant when things aren’t going well, but it isn’t always the tyrant’s fault!)

    But then as the unrest disrupts the flow of the oil (or as in Dune, the spice) that just exacerbates the fuel price problem and leads to yet higher food prices. This is a downward spiral from which there is no escape because the dynamic is governed by the depletion of the resource even as the cost of extraction continues to increase (EROI).

  13. RobM says:

    Very nice post. You and others have made this point in the past, but it is also illuminating to draw a triangle for the economic viability of alternate energy sources. Since oil is required to create and maintain the alternate energy capital stock, we can expect less and less alternate energy to be viable as oil becomes more expensive. I think people call this the “receding horizon”. There seems to be no solution to our predicament other than to consume less.

    • I think it is a combination of “consume less,” and prepare for the possibility that may be supply interruptions, in the not terribly distant future. A lot of planning has been done assuming that increased efficiency will play a big part. Increased efficiency only works as long as there are not supply interruptions.

    • Jan Steinman says:

      “Increased efficiency only works as long as there are not supply interruptions.”

      I have doubts over whether “increased efficiency” works at all!

      The well-known Jeavons Paradox aside, there’s the problem of diminishing returns: 100% efficiency would be infinitely expensive to achieve.

      David Holmgren stresses shooting for the “maximum power point” when pursuing efficiency, that “sweet spot” where the cost of achieving efficiency gets the maximum return. This is essentially an ERoEI calculation, and it typically follows a parabolic curve.

      A more troubling aspect of chasing efficiency is that it is generally achieved at the cost of resilience and diversity, making for a “brittle” efficiency that cannot tolerate change — another way of Gail’s saying in only works without “supply interruptions.”

      More than anything else, we need to be working on resilience, rather than efficiency. What good are 20% efficient solar cells if they depend on rare earth minerals that are only found in a few districts in China? Better to focus on solar heating than PV, because it can be done with local materials. What good are LED and CFB lights if they require a billion-dollare semiconductor wafer fabrication plant? My bet is we’ll soon be using electric lights that any glass-blower can produce locally.

      Bottom line: chasing efficiency is often a chimera. Nature herself is no more than about 6% efficient in photosynthesis, but it is a very resilient and robust process!

      • marty schoffstall says:

        I am with you on the sweet spots, and focusing on solar (and in some cases biomass) heat. I want the resiliency for the supply disruptions because we’ve had them in the past and we’ll have them in the future.

        My northeastern sweet spot is removing fuel oil burners.

        • Jan Steinman says:

          “My northeastern sweet spot is removing fuel oil burners.”

          That’s good, because I can pick them up for free then!

          Using home-grown or restaurant-harvested vegetable oil, the “oil gun” from these furnaces are a versatile renewable heat source!

          All you have to do is shoot one of these suckers into a cob oven for a few minutes, then you can bake bread. Or make a thin “box” out of fire brick, shoot one of these underneath it, and you’ve got a pizza oven. Or shoot it into a copper coil, and you’ve got a water heater.

      • I agree that resilience is what we need now, but the ideal that is being put in place is efficiency. Resilient systems are the ones that will last longest. Ultimately, we need to have systems in place that can be repaired by locally trained people using local materials. These requirements eliminate a lot of high tech solutions over the long haul.

  14. marty schoffstall says:

    Another economic consideration might be where the money flows for whatever nation you are interested in. From a US perspective, in 2008 60% of the oil was imported, so very roughly 60% of that increase goes offshore, alternatively based on Pickens number for 2010 of $338B for import costs, a 20% increase in 2011 (with no demand destruction) means an additional $67B.

    Assuming that is taken from discretionary income which could have been used at my neighborhood masseuse, US manufactured car lot, virginia winery, etc this is a significant loss to the economy. And of course there is actually a compounding affect, as some percentage of what I give the masseuse can also goes to US cars, virginia wine, or my organic vegetable stand.

    Lastly I would like to suggest that the run from $100B to $400B from 2000 to 2008 according to PIW, has been building towards a split horizon effect. Inflation in energy coupled to its exit from the economy leads to deflation in other categories or at least lack of keeping up with overall inflation.

    This of course is mitigated by the ability to issue T bills (printing money) and others wanting to hold them, though I’d argue with the QE’s we’re past the point of others wanting to hold all of them. Which of course impacts currency exchange, increasing import costs.

    And now we have a party! Feedback loops.

    • That is a good point about 60% going offshore. At least with natural gas, we are keeping the costs here. I am a little confused as to how precisely we should count US vs. Imports. In a way, it is BTU content that is important, but this isn’t easy to get.

      And you are right about feedback loops. The dollar is recently lower, and that makes things worse as well.

    • Jb says:


      Not sure where you are; I’m in Charlottesville. I worked the 2010 grape harvest at Virginia Wineworks. Lots of hard work, water, and petroleum go into growing / processing grapes here since the climate is less than ideal. Some wineries even use helicopters to stir up the air on nights in the spring when there is a frost warning. One bad night and the whole crop can be lost! Several wineries in the area are going out of business.

      • marty schoffstall says:

        I have a small stake in a winery in Northern Virginia with a very old friend who has 50kw of solar to run it, and it is next to his house. no helicopters, but i agree that it is power hungry, he is at 3000 cases moving to 4500, so this isn’t gigantic, it is essentially a family affair with some temp help. He is helping me build my vineyard here in Pennsylvania and I’m very concerned about the operating energy budget, and not very on the imbedded. I’m hoping that my 60 acre farm with 6 acres of grapes, 20 acres of truck and the rest in wheat and orchards, supplies the market building the Amish built for me last year. It is integrated into a neighborhood, so we’re really trying to remove the transport costs (market building is solar power, water is from the roof run off, etc etc).

  15. Kenneth says:

    Great as always.
    2011 will be a watershed year for the Peak Oil community, thanks to Middle East contagion. We will likely fall back into recession or worse if the turmoil spreads.
    Saudi Arabia has promised to make up any oil supply deficits. This will help verify what excess capacity they really have.

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