An Economic Theory of Limited Oil Supply

We seem to hear two versions of the story of limited oil supply:

1. The economists’ view, saying that the issue is a simple problem of supply and demand. Substitution, higher prices, demand destruction, greater efficiency, and increased production of oil at higher prices will save the day.

2. A version of Hubbert’s peak oil theory, saying that world oil production will rise and at some point reach a plateau and begin to decline, because of geological depletion. The common belief is that the rate of decline will be determined by geological considerations, and will roughly match the rate at which production increased.

In my view, neither of these views is correct. My view is a third view:

3. An adequate supply of cheap ($20 or $30 barrel) oil is no longer available, because most of the “easy to extract” oil is gone. The cost of extracting oil keeps rising, but the ability of oil-importing economies to pay for this oil does not. There are no good low-cost substitutes for oil, so substitution is very limited and will continue to be very limited. The big oil-importing economies are already finding themselves in poor financial condition, as higher oil prices lead to cutbacks in discretionary spending and layoffs in discretionary industries.

The government is caught up in this, as layoffs lead to more need for stimulus funds and for payments to unemployed workers, at the same time that tax revenue is reduced. There can be a temporary drop in oil prices (as there was in late 2008), as recession worsens, but eventually demand rises again, oil prices rise again, and the pattern of layoffs and increased governments financial problems occurs again.

Without substitutes at a price that the economy can afford, economies will adapt to lower amounts of oil they can afford by worsening recession, debt defaults, and reduced international trade. There may be tendency for international alliances (such as the Euro) to fall apart, and for countries to break into smaller units (Catalonia secede from Spain, or countries break up the way the Soviet Union and Yugoslavia did).

At some point, probably not too many years in the future, the amount of oil extracted from the ground will drop, reflecting a combination of geological and economic factors. The fall may very well be quite steep. While we can’t expect to extract more than geology will allow, there is nothing to say that political and economic factors will allow extraction of this amount. If civil war breaks out in an oil producer, production may drop quickly. Or if oil prices drop because of severe recession, drilling of new fields and wells may drop off quickly, leading to lower production as existing wells deplete, and not enough new supply as added. There may also be disruption in international sales of oil.

What the Economists’ View Misses

The economists’ view misses the fact that it is external energy that makes the economy operate the way it does. (See my earlier posts, here, here and here.) If energy products are higher priced, energy importers can afford less of them, and there is a tendency of their economies to shrink back to what their economies can afford—fewer employed workers and fewer government programs. I talk about the connection between employed workers and energy consumption in The Close Tie Between Energy Consumption, Employment and Recession.

Figure 1. World GDP, oil consumption and energy consumption growth rates, based on data of USDA, Angus Maddison, and BP’s 2012 Statistical Review of World Energy data.

As the growth rate in energy supplies decreases (oil by itself, or in total), the economy tends to shrink back.  Initially (in the 1970s and 1980s), the economy shrinking back looked like it was slowing down – no longer undertaking big new initiatives like interstate highway systems and major electrical grid expansions, and adding new initiatives for taking care of the poor. Then the economy shrinking back morphed into a bigger emphasis on debt financing; less concern about keeping up infrastructure the way it had in the past; and switching from manufacturing of goods to production of services, to keep energy needs lower.

Another way of keeping down energy use was by keeping wages down. Since wages translate to purchase of things that energy can make, lower wages allow an economy to “get by” with less energy consumption. In the US, the quest for lower wages has manifested itself in many ways—the failure of men’s median wages to rise after the mid 1970s, the increasing use of women (at lower average wages) in the workforce, and later outsourcing of jobs to countries overseas with lower wages (and thus less energy consumption by workers).

Figure 2. Per capita oil consumption in countries with recent bank bailouts, based on data of the US Energy Information Administration.

Eventually, the economy shrinking back has become more disruptive. It looks more like recession, with job layoffs, debt defaults, and serious government funding problems. Governments find themselves going deeper and deeper into debt, as tax revenue lags, and there is more need for stimulus funding and benefits for unemployed workers. In such an atmosphere, government stability is at risk. This seems to be where quite a few of the European countries are right now. The United States is not far away either, with many of its problems hidden by deficit spending, “quantitative easing,” ultra low interest rates, and the fiscal cliff.

The Myth of Substitution

A big part of the economists’ problem in figuring out the problem with limited cheap oil supply is their assumption that energy is not very important. It doesn’t cost very much, so why worry about it? Certainly, there should be substitutes. For example, if we can’t afford to make goods, we should be able to switch to the production of services, since these don’t require as much energy to produce. This might be a method of substitution.

But think about this. In our own life, our own energy comes from food. If someone told you that we were having a problem with food supply, but the economists said not to worry, we would find a substitute, how convinced would you be that economists really knew what they were talking about? Do you feel less hungry after a haircut, or a trip to get a loan at a bank (two standard types of services)? Perhaps they were underestimating the importance of food.

Something like that happens with other forms of energy as well. It is virtually impossible to substitute away. There is a little substitution over time of one form of energy for another, just as there is substitution of wheat for corn. But in general, each type of energy has its own uses, and it is hard to substitute one type for another. A car runs on gasoline. It is possible to substitute up to 10% or 15% corn ethanol in the gasoline, but unless significant changes are made, it is not possible to run the car on natural gas or on coal.

A big part of economists’ problem with overestimating the role of substitution is their missing the adverse impact of high oil prices (or other high energy prices) on the economy. As I have explained previously, when oil prices rise, both the cost of food and cost of commuting tend to rise. Workers cut back on discretionary spending, so as to have enough money for commuting and food expenses, leading to layoffs in discretionary industries. Housing prices stagnate or drop, as people cut back their expectations of moving to a higher priced home. Governments find themselves in increasingly poor financial condition, trying to fix these problems, with lagging tax revenue. All of this creates substantial economic problems, which cannot be overlooked.

The comment a person often hears is, “As soon as the price of oil rises high enough, _______ will substitute for it.” This doesn’t work for a couple of reasons: (1) By the time the price rises that high, the economy will be “in the tank” anyhow; a high-priced substitute doesn’t fix the problem. (See my post High-Priced Fuel Syndrome) (2) Substitutes generally use oil in their production, either directly or indirectly, so when the price of oil rises, the price of the substitutes tends to rise as well, although probably not as much as the oil price rise.

Substitution to date is not taking place very quickly. On a worldwide basis, 87% of current energy use comes from fossil fuels, based on BP’s 2012 Statistical Review of World Energy Data. The remainder is divided as follows, in the year 2011:

▪               Nuclear amounted to 5% of the total;

▪               Hydroelectric amounted to 6% of the total, and

▪               Renewables (including wind, solar, biofuels, wood, waste, geothermal, and others) come to a total of 2% of world energy supply.

There has been some substitution away from oil for a long time, because oil is high priced. Often, this occurs through electrification of various processes. The electricity used in this process is today mostly from natural gas and coal, with lesser amounts from nuclear, hydroelectric, and other renewables.

The speed with which substitution of electricity for oil is taking place varies, with stationary applications working best, and transportation being slow to change. According to the US Energy Information Administration, in 2011, only 0.3% of US transportation fuel was electricity. The rest of transportation was divided as follows: Oil, 92.7%; Biofuels, 4.3%; Natural Gas, 2.7%.

Another application which is a significant user of oil, but for which little substitution toward electricity is readily available, is in food production. Oil is used in operating farm machinery, in making herbicides and insecticides, and in transporting food to market. This is a reason why many people are interested in local food production, using techniques that use less oil.

What the Peak Oilers Missed

If a person goes back and looks at M. King Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels, they will discover that Hubbert talks about a very optimistic scenario: the use of nuclear energy rising, before the use of oil and other fossil fuels begins to decline. See my post, Will the decline in world oil supply be fast or slow?

Figure 3. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

Elaborating further on this idea, Hubbert, in his 1962 paper, Energy Resources – A Report to the Committee on Natural Resources, writes about the possibility of having so much cheap energy that it would be possible to essentially reverse combustion–combine lots of energy, plus carbon dioxide and water, to produce new types of fuel plus water. If we could do this, we could solve many of the world’s problems–fix our high CO2 levels, produce lots of fuel for our current vehicles, and even desalinate water, without fossil fuels.

The problem that arises if we don’t have such a substitute for fossil fuels is a severe one. How do we keep our current economy operating, if oil prices, or fossil fuels in general, become high priced, and start interfering with the economy? At some point, the interference will become so great that recession will set in, in many major oil importing nations. Oil prices will drop, and oil producers will not be able to extract oil at those prices. There may be major financial impacts as well—governments dropping out of the Euro, the US government facing a financial cliff, and other countries (Japan, Britain, and China, for example) facing difficulties as well.

In my view, the shape of down slope in oil production is likely to be steeper than the pattern by which oil supply increases. Geology determines the maximum amount of extraction, but it doesn’t determine how much will actually be extracted.  Economic conditions need to be right for the extractions to take place. Low oil prices by themselves could cause political upheaval in some oil exporting nations. If there are huge international trade problems, this could reduce demand as well.

Why International Trade Can Be Expected to Contract

Huge economic growth since World War II has been enabled by increased international cooperation and increased globalization. It is now possible to make many high-tech goods using trained specialists who travel around the world and raw materials imported from countries that will put up with high levels of pollution. These high-tech goods can be very cheap, if they are assembled in a country such as China with cheap labor.

Once countries start operating in a mode of “not enough energy to go around,” the model of global cooperation starts disintegrating. If unemployment becomes an increasing problem, then countries are no longer be willing to let in cheap labor from lesser-developed countries. We can see this happening in the United States, with respect to workers from Mexico.

If oil is becoming a problem, we will see more spats, of the type recently occurring between Japan and China, leading to lower trade. There may even be more resource wars. Large countries encountering financial problems will see individual units wanting to go their own way, with the parts that are doing better economically wanting to disassociate themselves from the have-nots.

Figure 4. Oil as a percent of total 2006 energy consumption for European countries, based on BP’s 2012 Statistical Review of World Energy

High oil prices are likely to lead to more defaults on loans. In fact, Figure 4 shows that the countries most at risk of defaulting tend to be the ones that imported the largest percent of their energy from oil in 2006, before the recent crisis begin. As the world encounters more and more loan defaults, this too can be expected to erode interest in foreign trade. Such trade will likely not disappear, but may be carried on to a greater degree between trusted partners, or on more of a barter basis. For example, a certain quantity of oil may be traded for goods that the oil-producing country can use.

Businesses, Governments and Consumers form a Networked System

The way the world operates today, each business is added to the existing web of governments, businesses and consumers that exists today. Some businesses succeed, while others fail. Success or failure depends the laws that are in effect, the resources that are available, what competition there is, and the purchasing power of customers.

If energy is in short supply, more and more governments and businesses will fail, and increasing numbers of consumers will find themselves without jobs in the traditional economy. Banks may be overwhelmed by debt defaults. At some point, supply chains will become so disrupted that it will be hard for anything other than small local businesses to succeed.

This will correspond to what Joseph Tainter talks about as moving to a state of lower complexity. We don’t know exactly when or how this will happen, but it appears that we are already moving in this direction. The next years seem likely to be challenging ones!

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.
This entry was posted in Financial Implications, Oil and Its Future and tagged , , , , . Bookmark the permalink.

156 Responses to An Economic Theory of Limited Oil Supply

  1. Pingback: Two short articles on energy, economics and the future | Progressive Resource Portal

  2. A widely heralded view holds that nuclear power is experiencing a dramatic worldwide revival and vibrant growth, because it’s competitive, necessary, reliable, secure, and vital for fuel security and climate protection.
    That’s all false. In fact, nuclear power is continuing its decades-long collapse in the global marketplace because it’s grossly uncompetitive, unneeded, and obsolete—so hopelessly uneconomic that one needn’t debate whether it’s clean and safe; it weakens electric reliability and national security; and it worsens climate change compared with devoting the same money and time to more effective options. These are the conclusions published in an in-depth research about nuclear power published by the Rocky Mountain Institute.

    The full report can be downloaded here:
    http://www.olino.org/us/articles/2010/09/13/the-nuclear-illusion

    • Mel Tisdale says:

      It is not possible to have any respect for a report on nuclear power generation that does not mention thorium, fluoride or LFTR and only mentions molten salt in relation to a so called renewable energy source.

      Quite frankly, climate change and the need to fight it is far too important for such airy fairy Green drivel. I’ll go with Professor James Lovelock anytime than I would any member of the Green brigade that I have had dealings with (a considerable number, having once sat on its U.K. division’s Defence Policy Working Group), or anything produced by something with ‘Rocky Mountain’ in its title for that matter, but that might just be bias on my part.

      • Bruce Carman says:

        Mel, the cumulative effects of peak global crude oil production and oil exports, population overshoot, massive debt overhang and gov’t spending to GDP, falling net energy and real private GDP per capita, and fiscal constraints from the massive global Boomer demographic drag will overwhelm, if not exacerbate, any effects from atmospheric warming that has been occurring since the end of the Maunder Minimum and the last Little Ice Age (and confluence of the Gleissberg and Suess cycles) in the late 18th to early to mid-19th centuries. We can do next to nothing to prevent the cumulative effects of the former factors, which is to say that climate change is no less beyond our control to mitigate at this point. The best we can hope to do at this point is what the human ape species (and sub-species) has been doing for millions of years to date: adapt and evolve.

        Regrettably, population overshoot and evolution implies that most of us and our progeny won’t successfully adapt. If this is the mostly likely outcome hereafter for the next century, what is one to do today and in the immediate years ahead?

        • Mel Tisdale says:

          Bruce, if you have children, for their sake, please go and study climate change. I recommend skepticalscience.com, which is one of the top ‘go to’ sites on the subject. If you haven’t got children, then please do so for the sake of mine.

          The main forcing on climate is CO2, amplified by water vapour – over which we have little or no control. The warming that has occurred since the start of the Industrial Revolution is clearly inline with the increase in the production of CO2 that the Industrial Revolution set in motion. The only cycles of significance are the Milankowiec cycles that are mainly responsible for ice ages, but they are miniscule in effect compared to CO2. The rate of warming was steady up to about half-way through the last century but is clearly increasing. Current predictions are that we could be in for around 4 C rise by the end of this century. All the descriptions I have seen of what that will mean are simply horrendous and horrendous for my son in particular as far as I am concerned.

          I suppose I could adapt to losing a leg, but I would much prefer not to, quite frankly. We can learn to adapt to 4 C, but not in anything like the numbers that currently exist, and certainly not the numbers projected for the middle of this century. In short, Bruce, it is going to be hell. I know that those of us that believe in climate change are often seen as alarmists, but honestly one would have to be myopic not to see the changes already taking place and we have only had 0.8 C so far. From the known dynamics of the climate system we can be fairly certain that we are guaranteed at least 2 C warming even if we stopped producing CO2 instantaneously, which absent some cataclysmic event, is not going to happen.

          Heaven knows, the financial system is in a mess and how that is going to resolve itself is anybody’s guess. What better time to hit the reset button? If we carry on with business as usual, it will not simply be future generations that will have to cope, it will be us. We are already experiencing extreme weather events, which may possibly be due to climate change (the jury is still out). They certainly fit what the science says is likely to happen (a meandering jet stream that gets stuck in one location or other.) This summer it was America that mainly suffered from a drought and the U.K. that suffered from deluge. Both were long-lived because the jet stream got stuck in one place. Next year it might get stuck somewhere else. The point is, how can farmers plan when there is little predictability regarding the weather? What then for food supply (and prices)?

          Sorry Bruce, but I think we have to take a more responsible attitude to climate change than saying we will have to adapt, we owe it to the next generation, if not ourselves.

          • Bruce Carman says:

            Mel, all points well taken. What I meant to imply is that the cumulative effects are already entrained to such an extent that I doubt that anything short of “a reset” to a material standard of consumption for the West back to the 1880s-1930s will make little difference in terms of effect on the climate over the course of a generation or lifetime.

            Then again, I suspect that the effects of Peak Oil and population overshoot will send us eventually back to before the onset of the peak Fossil Fuel Age and the auto- and oil-based economic model of development. Population collapse = anthropogenic climate change solved.

            • Mel Tisdale says:

              Bruce, you would possibly be correct that population growth would solve the climate change situation if there were no such things as tipping points. These silent affairs slip past while no one notices. By the time we do, it will be too late. The positive feedbacks will have come into play (e.g the permafrost melts, releases more methane – a potent greenhouse gas – into the atmosphere, which causes more melting of the permafrost and thus more methane release). That process is happening now, but at a tolerable rate. It could so easily accelerate to a runaway condition. We do know from the science that we are awfully close to a situation where all we will be able to do is cling on and see where the ride takes us. So, if we wait for population growth to ‘solve’ the situation, we will have committed those that survive the privations brought on by that same population growth to a very dire existence. In short, time is a luxury that we cannot afford. Perhaps if we were discussing colonies of amoeba, then we could wait and see what happens, but we are not conducting a biology experiment, we are fighting for our own species, possibly even its survival, unless a having a massive die-off and horrendous living conditions for those that avoid taking the deep six holiday can be said to be survival.

              If we tackle climate change now, then we will be better able to cope with population growth. If we don’t, then it will almost certainly make population growth all the more difficult to cope with, which will then solve what remains of climate change according to your thesis. The one point that must not be forgotten is that CO2, the main culprit (water vapour, while the most potent greenhouse gas, is only an amplifier), remains in the atmosphere for 60 to 100 years, so in truth, waiting for population growth will actually do very little to combat climate change anyway because the harm will really have already been done.

              I don’t know about you Bruce, but I want much better prospects for my children and grandchildren than they clearly currently face, even if we stopped all greenhouse gas production now.

              As a rider, I would like to draw attention to the very clever manipulation of the situation that the denialati have practised, and the scientific community seem not to have not spotted. If you follow discussion on the issue of climate change, it is all too often the argument revolves around whether climate change is anthropogenic (The ‘A’ in AGW) or not. That is a pure diversion. It is like the captain of a cruise-liner, after seeing an iceberg dead ahead, deciding not to alter course or speed to avoid it because the iceberg is not anthropogenic in origin. It matters not what is causing the warming, it isn’t, but it could well be the sun at some other time. What we do know is that the greenhouse effect that in fact keeps us alive is over active. We also know that we pump greenhouse gasses into the atmosphere, so it makes sense to cut down on their production in an attempt to compensate before the situation gets out of hand. No matter how Christian a person or a nation claims to be, it is far from Christian behaviour to cite the need to generate wealth even though “money is the root of all evil” and that generation of wealth will commit countless numbers of the globe’s citizens to a terrible future, even many in that same nation.

          • I also have a feeling that there is little we can do to stop destructive CO2 emissions. There is just too much denial about it everywhere in the world and even if you get an educated west to change habits, there is quite a bit of coal and gas plants who still need to run in order to give us electricity. If you look at the charts of coal consumption, China has doubled its numbers over the past 10 years (about the same timespan we have had the biggest warming trends). The only way that number is going down is a complete economic collapse reducing the need for that much electricity around for manufacturing and all kinds of office buildings. Question is then what people will be spending their time on and in which regard they will still consume fossil fuels. A world without the intense “shopping mania habits” will at least cool down consumption of fossil fuels quite a bit I would think.

            A scenario that I think is more and more likely is that the economic downscaling will happen at the same time as the climate hits us pretty hard in ways that will make people think there is something wrong with the climate. But people have very short memories when it comes to things that isn’t good for them (a smoker quitting and beginning again) so it only takes a bit news headline like “global warming has stopped” (like a recent one we heard again) – and the latest one I read: “south poles ice cap is growing” (many think its earth equilibrium thing and we shouldn’t worry about north pole melting). So the question is really if governments will act on these changes and start listening to the big consensus of scientists ringing the alarm bells. If not that, we will still be forced to brace ourselves for several changes in the near future, some will be more prepared than others. But again I am afraid its the poor who will suffer first.

            • Mel Tisdale says:

              John Christian, first, please see my reply to Bruce Carman > (Bruce you would …)

              Regarding China’s coal fuelled power generation, there are several points that need to be made here:

              First, China claims, and let’s face it, has a right to claim, that we in the west are to blame for the current warming (re the 60 to 100 year longevity of atmospheric CO2). There position that we have no right to demand action on their part while the west does little. America, until recently the biggest producer of atmospheric CO2, has a very poor history of inaction on the matter. From a distance one gets the impression that America is full of people loudly claiming to be Christian while deliberately riding around in over-sized SUVs and shouting Yi Ha! In effect saying to hell with “Do unto others …” I suppose the truth is not quite that bad. It is difficult to take the moral high ground in those circumstances. One thing that must not be forgotten is the invisible hand of the fossil fuel industry and the profits it continues to make while we all play chicken with the climate. A tragedy of the commons if ever there were one. (If you have not seen it, please see CLIMATE OF DOUBT (PBS FRONTLINE) on Youtube. Note how many members of the denialati are funded by the fossil fuel industry.)

              Second, China is very active in making solar panels and has installed a large number of wind turbines, perhaps to no avail as it happens, but ‘good intentions’ all the same.

              Third, China is very active in developing thorium nuclear reactors. It is here that the west is really missing a trick. If it were not for the Greens and their knee-jerk ‘anything nuclear is automatically bad, regardless of the facts’ reaction to same, I am sure that we would have solved any technical difficulties with thorium reactors by now and so climate change would not be anything like the danger that those who spend their lives working on the issue (and are not funded by the fossil fuel industry) say it is. It is going to be China that will be selling the technology to the rest of us, instead of the other way round.

          • Well, I hope China is able to find good alternatives to the immense coal usage growth they have had during their economic boom. Its just that once a country becomes wealthy it seems power consumption just grows a lot, just like us here in the west have enjoyed for a long time. I am not so sure that these new power sources will replace coal but come in addition to coal for a long time. Also not so sure continued CO2 emissions the way we have seen these past 30 years is an experiment we want to run on the atmosphere… although little seems to be done with the matter as long as the average person still questions whether CO2 is really a greenhouse gas.

            • Mel Tisdale says:

              There is no helping anyone so ignorant of fundamental science that they dont believe that CO2 is a greenhouse gas. It is even worse not believing in the greenhouse effect, as some don’t.

    • Thanks for the link. I haven’t looked at enough of the report to see whether this is just an analysis of the “Western world” or if it considers China and India. My impression is that the view of nuclear is fairly different in different parts of the world. The West is backing away from nuclear, but perhaps not others. Also, Amory Lovins seems to be sure renewables will save the day, and this influences as least some of what he says. But the cost is indeed high in the US, especially if one includes full decommissioning and storage of spent fuel.

      • Bruce Carman says:

        Gail, Mel, and John, China has reached the so-called “middle-income trap” phase of development around $7,000 real GDP per capita (PPP terms) as did the US in the late 1920s and Japan in the late 1960s. The US and Japan enjoyed the luxury of having $10-$15 oil (2012 dollars) to fuel development, whereas China now faces permanent trade deficits for energy, food, and materials. China’s growth boom is over. Real GDP per capita historically is a linear function to population growth, whereas real GDP per capita is a biophysical log-linear function to population.

        With China having to import half of oil consumption of around 4% of GDP, with global oil production and exports having peaked, China’s GDP will decelerate to 2% or less in the years ahead in the best-case scenario. A decline of China’s FDI of just 1% equivalent of GDP risks a Great Depression-like contraction in the years ahead, given the multiplier to fixed investment, production, and exports.

        China (and India) is (are) 40-80 years too late to the oil- and auto-based uneconomic development model. As has been said, China will grow old before growing rich enough to become a world hegemon to challenge Anglo-American oil empire.

        • Mel Tisdale says:

          If you are right, Bruce, then there are going to be a lot of very disappointed Chinese people who have been fed the dream of living the way the West does. That can only lead to political upheaval, even within the Chinese undemocratic system. The question that should concern the West most is what the Chinese leadership will or can do about it. There are many scenarios, some are quite scary and have the potential to make our worrying about economic growth as trivial as worrying about the gas bill when the bailifs are in the process of evicting you. We live in troubled times.

          • Bruce Carman says:

            Yes, Mel, historically every 50-60 years (corresponding to capitalism’s Long Wave Trough depression phase) since the 17th century the Middle Kingdom experiences social upheaval, the last four periods coinciding with xenophobia and reaction against westerners and a turning inward by the Chinese to deal with domestic instability, including Mao’s revolution, Boxer Rebellion, Opium Wars, and the White Lotus Rebellion.

            Should the historical rhythm repeat, the end of the western-induced growth boom in China-Asia will be followed by economic, financial, social, and political crises, increasing internal social unrest, the PLA generals exerting more influence in Beijing (perhaps eventually taking over), deteriorating trade and diplomatic relations with the US/West, and an eventual breakdown of relations with the US/West, along with the end of globalization, i.e., Anglo-American imperial trade regime.

            Neither the US/West nor China can afford regional or world war for the remaining vital resources and shipping lanes of the planet, but the more desperate states’ elites become in fearing for loss of status, privilege, and power, the more likely they are to go to war with “other” to diffuse internal threats.

            • Mel Tisdale says:

              Anyone who has studied modern nuclear weapons (MX and Trident D5 – not the C4 version) will know that deterrence only applies to lowly equipped nuclear states. Certainly between Russia and the U.S.A. it all comes down to who fires first will win overwhelmingly. Failing that, nuclear armed terrorists are a scary concept. All options are remarkably cheap for the aggressor, so perhaps lack of affordability is not too much of a hindrance to having a war.

  3. Mel Tisdale says:

    Having examined 9/11 in some considerable depth, I know there is more to the event than meets the eye. Take the fact that the NTSB analysis of the FDR from flight 77 shows it descending steeply into the Pentagon, having flown to the left of the Navy Annex. (Remember this NTSB analysis, not some weirdo with some political axe to grind.) Whatever knocked over the lampposts (lightpoles in AmE) had to have flown straight and level to the right of the Navy Annex, otherwise it would not have hit the lampposts. Many of the Pentagon employees were ex-frontline soldiers and some talked of smelling cordite immediately after the impact(s?).

    There are a considerable number of other features about the events of that day that beg questions that can only be answered by an independent fresh investigation (The Vice Chairs, Kean and Hamilton, of the 911 Commission wrote afterwards that they believed that the 911 Commission was set up to fail, and the time it took to set it up – over 400 days – Challenger and Titanic disasters, and the JFK assassination each around 10 days – certainly lends credibility to their view). The point that I am driving at is that 9/11 spawned a whole raft of legislation and so many new security bodies that one could be forgiven for thinking that it was all planned in order to ensure that come a period of turmoil, the U.S.A. was at least prepared for it and had the ability to impose some semblance of control by having the legislation and official bodies functioning beforehand. What other reason would Bush and Cheney have for insisting on attending the Commission hearing together, not under oath, with no written or taped record of what was said and in private?

    How this fits in to Bruce Carmen’s comment I am not sure, perhaps I need a few more dots to join up before it all comes clear. Perhaps others might be able to provide them, or this comment by me provide some dots for them to join up. All I know is that I don’t have the big picture – yet.

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  5. What you do not really address here Gail is that the very same people who control access to Oil ALSO control the credit creation bizness. Money serves as proxy for energy, and as long as you have the ability to create credit, you can strip anyone else of all they own.

    You need to leave behind the conventional monetary analysis to see how this is being manipulated. When you look back historically, it becomes much more clear. Read Tall Tales of Paul Bunyan. I think you will see here how the Money and the Energy will collapse in tandem.

    http://www.doomsteaddiner.org/blog/2012/10/27/tall-tales-of-paul-bunyan/

    RE

    • Back in the good old days, profits might be accumulated and used to fund future investment. Now, EROEI is so low, that profits tend to be few. Also, the nature of energy investments now is that more upfront funding is needed. Finding all of the funds needed for investment would be a problem, except for our amazing financial system, which seems to reward debt. At this point, interest rates tend to be artificially low as well.

      Now, cutting off credit availability causes a huge problem. We saw this in the latter part of 2008. Not only did the price of oil drop, and investment in new oil extraction, but also the price of coal, uranium, natural gas, and most minerals. Businesses in general cut back, as credit availability dried up.

      In a way, the credit creation business is now central to all production, energy and otherwise. It depends on trust that what is borrowed will be paid back. Once this starts to disappear, it seems like there will be a very big problem. I am not sure I would phrase the problem exactly as you do, but it is clear that many things are closely tied together.

      • Bruce Carman says:

        Gail, speaking of profits, the flattening yield curve at low to negative real net margins for banks (including after charge-offs) and same for insurers and other non-bank financial firms reduces profits and thus discourages growth of lending, apart from short-term loans against receivables and solid collateral of the largest cash-rich borrowers.

        Hereafter, uneconomic activity will be largely funded by the largest cash-rich firms from retained earnings, which reduces the trend growth of real GDP and means contraction per capita since the ’07-’08 peak. There will not be sufficient growth of uneconomic activity to provide the necessary rate of growth of profits and capital accumulation beyond depreciation/replacement to build out “alternative energy” or “renewables” at anywhere near the required scale.

        Moreover, in the context of the storm damage in the NE and Atlantic seaboard, drought conditions (perhaps a mega-drought in the Southwest), etc., the insurance industry that emerged after WW II did not exist as it is currently constituted in the previous two debt-deflationary regimes of the 1930s-40s and 1880s-90s. As with the yield curve effects for banks’ profits, insurers face a similar low- or no-return environment hereafter, reducing ROI and rendering most insurance products such as annuities and other “investments” unprofitable. Insurers can raise premia to poilcyholders only so much before the increasing costs in a slowly growing economy become prohibitive. The high replacement costs of the mature built out infrastructure for the developed world and the liabilities to insurers imply that the private insurance industry is no longer viable.

        • I would agree with you on pretty much all of these things.

          Don Stewart earlier asked me a question about catastrophe insurance. Catastrophe insurance is a very short-term type of coverage, so in some ways is the best type of coverage for an insurance company to write in a low-interest economy. If there start to be major defaults on an insurer’s portfolio, that becomes a problem, but low interest rates are not, because of the short-term nature of the coverage.

          When it comes to other insurance products and bank products, the low interest rates and flat yield curves become a major problems. Annuities don’t make sense if the interest rates are very low, because expenses become high relative to interest. Even investments that are supposed to follow the stock market are problem, because with stock markets are likely contract.

          I think the vast majority of the “insurance” of infrastructure is self-insurance or insurance through government programs (officially or otherwise). The high cost of replacement, relative to what was paid originally, will be a huge problem. I think this will be more of an issue for governments and self-insurers (for example, utilities or utility groups), than for insurance companies, per se. Insurance companies tend to gravitate toward “small” risks–homes, small businesses, automobiles. They also tend to limit their exposure through programs which leave more of the risk with the homeowner or business-owner, such as deductibles that are a percentage of the value of the insured property. The bigger risks tend to get moved into self-insurance and government programs. These seem to me to be the ones that will be hit hardest.

  6. Pingback: Guest Post: An Economic Theory of Limited Oil Supply »

  7. Ed Pell says:

    For me this is one of your best articles ever. You paint the big picture clearly with a minimum of distraction. Super job.

    Ed Pell

    p.s. You may want to edit this sentence
    “There may be tendency for international alliances (such as the Euro) to fall apart, for countries to break into smaller units (Catalonia secede from Spain, or countries break up the way the Soviet Union and Yugoslavia did).”

  8. to paraphrase the book title, a good way ” to influence people and lose friends” is to bring up the subject of overpopulation, climate change, energy depletion and food shortage. A casual mention that you’ve got leprosy couldn’t clear the room faster.
    And that is a major part of our problem.
    Folks commenting on here and other similar sites are aware of what’s happening, but the majority are still in a state of denial. In a chat only the other day, with an intelligent man, the subject of energy (in the context of the way we live) came up. His reaction? “Do you really think energy is that important?” He runs a housing division of a municipal corporation, with an operating budget of £15m. That is typical.
    The universal answer to what we face seems to be “They” will come up with something. That is the most terrifying comment of all.

    • Hehe, I get rather blank stares when I show people e.g. charts about peak oil and depletion. Its like I made up the charts or something. Obviously for the majority of people, the food magically appears in the shops, petrol is conjured up in the petrol pump, electricity to charge the iPad is an endless source from the plug in the wall and “the weather has always been changing”. Very few people are really in touch with the world around us, and very few understand the foundation for our current civilisation – and noone dare consider that its a fragile dependency we have on the planets resources. As you say most think its science that creates the energy and stuff around us. Very few seem to grasp the notion of depletion of the raw materials in which stuff is made from, and neither that it costs a lot of energy – a type of energy which we are about to run out of.

      I have presented Rune Likverns charts about Norwegian oil production to friends and can show very clearly that it has been halved over the past 10 years. The same chart tell us that Norways oil adventure ends some time in 2040 – probably its stretched a bit with a few minor finds. That is within my lifetime, and when my kids want to perhaps buy their own car or something. I hardly get a raised eyebrow and certainly not any food for discussion around the theme. Perhaps a few comments about thorium power plants to save the day… although I dont see that happening within the timeframe we are talking about, and certainly not fast enough to move the whole car pool into an electric one (although Norway is far ahead in this actually due to smart tax rules).

      A lot of people like to complain that we also subsidise our farmers by way too much as well, and that its a waste of money. What they dont see is that way more should go into farming, as the days of cheap energy to get oranges from California and Grapes from South Africa is about to end. I understand why they think like this too, its because noone with real power and influence has come out to tell them the state of the game – the few who actually do are considered “activists” and “doomers”. The media is also not very good at making clear conclusions about things they report. They can do a lengthy article about the sad conditions for the polar bear, sitting alone on a tiny ice sheet, but fail totally to educate that its very likely that its caused by global warming due to high CO2 concentrations from our way of life. Media has backed out of this totally as its considered “bad news for the business” – and noone really want people to be realistic about their consumption and the damage we are doing to the planets ecosystem. Ignorance is bliss!

    • People, even those studying energy, seem to be unaware of the problems we are facing. It is amazing. I guess the problem is not quite out enough in the open for people to see what is happening. Either that, or the problem is so serious, that they can’t really face it, if they do understand it.

      • I’ve forgotten the source, but an oft quoted piece of wisdom goes something like: “Humans will always do the right thing but only after exhausting all possible alternatives”.

        Gail, I think that many people do see the problem, or dare to steal quick glimpses of it, but our first instinctive reaction is to believe that by tweaking a few things, like building lots of wind farms, the big monster of a problem confronting us may just magically dissolve, because… well because we earnestly want it to dissolve. And don’t we all!

        So we clutch at straws, then a deeper awareness grows and in time many thoughtful people will most certainly pass through this early phase of denial and wishful thinking, as many already have… but only after exhausting all possible alternatives… and with the very best of intention.

        We will make heroic and impressive attempts to do just that and I suspect this is what we will be witnessing, and reporting on, for the next decade or so. We have to accept human nature for what it is.

        • Mel Tisdale says:

           Description of page you’re linking to
          I wonder if we have the luxury of a decade in which to make the transition, Chris. The Arctic, as we know, is warming more rapidly than the rest of the planet and the permafrost is melting ever more rapidly as a result (re the recent example of a complete woolly mammoth that has just appeared as a result of its icy burial site having melted sufficiently to reveal it). The more the permafrost melts, the more methane it releases and thus the warmer the Arctic becomes and so melts the permafrost all the more. A fine example of positive feedback if ever there were one.

          We are playing a dangerous game of chicken. If the process becomes one of runaway positive feedback, there will be little that we will be able to do to stop it. It will be a buttocks clenching ride until the climate has flipped to another stable state. Whether that new state will support humans or not remains to be seen, I’m afraid. All I do know is that nearly all the predictions of the last IPCC report (no. 4) have been overshot or are only just within the upper error bars. Furthermore, there are dangers that have only just become apparent. It has now been discovered that the boundary between the atmosphere and the Arctic ocean is home to a biological process that releases methane trapped in the ocean into the atmosphere. This was discovered as a result of the ice loss in the Arctic (when ice is present, the process stops), which increased the amount released. With ever diminishing ice cover, this process has to increase pro rata and thus add to the positive feedback process.

          In the U.K. there used to be a radio programme aptly called The Goon Show. In one episode, Eccles, an idiot who would have done well in politics, has the job of being the lookout in the crows’ nest of a ship (I think it was actually a prison that was being taken to France to give the prisoners a holiday). Eccles shouts “Land ahead!” This is immediately followed by the sound of the ship/prison running aground. Eccles says “I should have said that sooner!” Perhaps we are all behaving like Eccles regarding how slowly we are reacting to the dangers presented by climate change.

          • Mel Tisdale says:

            Ignore the first line – finger trouble!

          • Chris Harries says:

            Sure, Mel. Totally agree. I’m not advocating patience on the grounds that we have time to be patient, we just can’t defy the laws of gravity, so to speak. The problem, as Paul Ehrlich described recently, is that human evolutionary history did not progam us to deal with distant threats, we were evolved to keep ourselves from harm’s way of immediate physical threats, like charging beasts.

            Maybe some bright psychologists out there know how to deal with human nature in a way that works. We do know that shock therapy sometimes works wonders, but then we are told that people don’t react productively to what is passed off as doomsday scaremongering. Not even repeated extreme weather events will knock us off our perch.

            • Mel Tisdale says:

              I know that you are right Chris. I am just keeping up the fight until I can see that it is lost. Old Mother Nature will have it her way, regardless of what we humans say. I just hope that there is some retribution for all those politicians and media folks when the ungazi really hits the fan.

      • Bruce Carman says:

        Most major mass-social movements require a generation to diffuse fully but only 3-5 years to achieve critical mass of mass-social awareness and recognition at the tipping-point threshold. We in the US are 27-42 years into the fall off of the plateau of peak domestic crude oil production and the subsequent 60% decline per capita since 1970.

        Yet, we are at a critical threshold of 3-4 years since the Jubilee threshold of debt growth and the subsequent meltdown, therefore, we are likely to see the multi-decade cumulative effects from declining oil production per capita and the financial meltdown manifest at an accelerated rate hereafter, probably as a consequence of the next global recession and stock bear market.

        However, the world is only 7 years into global peak oil production, a decline per capita of 10-11%, and approximately where the US was in the mid- to late 1970s. The US was able to import and burn oil at $10-$40/bbl and borrow $42 trillion over the past 25-40 years, but China-Asia and the rest of the world does not have that luxury with oil at $85-$100. I expect Peak Oil and population overshoot to cause a contraction in oil exports and real GDP per capita and manifest effects globally must faster than what happened after US peak crude production.

        Yet, we cannot get the vast majority of economists, politicians, CEOs, and financial media pundits to publicly even admit that the structural effects of Peak Oil and population overshoot are bearing down on us worldwide. Without a public affirmation of the causes, there is little chance that effective long-term solutions will be proposed or attempted.

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