Ten Reasons Why High Oil Prices are a Problem

A person might think from looking at news reports that our oil problems are gone, but oil prices are still high.

Figure 1. US crude oil prices  (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

Figure 1. US crude oil prices (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

In fact, the new “tight oil” sources of oil which are supposed to grow in supply are still expensive to extract. If we expect to have more tight oil and more oil from other unconventional sources, we need to expect to continue to have high oil prices. The new oil may help supply somewhat, but the high cost of extraction is not likely to go away.

Why are high oil prices a problem?

1. It is not just oil prices that rise. The cost of food rises as well, partly because oil is used in many ways in growing and transporting food and partly because of the competition from biofuels for land, sending land prices up. The cost of shipping goods of all types rises, since oil is used in nearly all methods of transports. The cost of materials that are made from oil, such as asphalt and chemical products, also rises. 

If the cost of oil rises, it tends to raise the cost of other fossil fuels. The cost of natural gas extraction tends to rises, since oil is used in natural gas drilling and in transporting water for fracking. Because of an over-supply of natural gas in the US, its sales price is temporarily less than the cost of production. This is not a sustainable situation. Higher oil costs also tend to raise the cost of transporting coal to the destination where it is used.

US Energy Prices as % of Wages and as of GDP. Ratio  to GDP provided by EIA Short Term Economic Outlook - Figure 27, converted to Wage Base by author, using same wages as described for Figure 3.

Figure 2. US Energy Prices as % of Wages and as of GDP. Ratio to GDP provided by EIA Short Term Economic Outlook – Figure 27, converted to Wage Base by author, using same wages as described for Figure 3.

Figure 2 shows total energy costs as a percentage of two different bases: GDP and Wages.1 These costs are still near their high point in 2008, relative to these bases. Because oil is the largest source of energy, and the highest priced, it represents the majority of energy costs. GDP is the usual base of comparison, but I have chosen to show a comparison to wages as well. I do this because even if an increase in costs takes place in the government or business sector of the economy, most of the higher costs will eventually have to be paid for by individuals, through higher taxes or higher prices on goods or services.

2. High oil prices don’t go away, except in recession.

We extracted the easiest (and cheapest) to extract oil first. Even oil company executives say, “The easy oil is gone.” The oil that is available now tends to be expensive to extract because it is deep under the sea, or near the North Pole, or needs to be “fracked,” or is thick like paste, and needs to be melted. We haven’t discovered cheaper substitutes, either, even though we have been looking for years.

In fact, there is good reason to believe that the cost of oil extraction will continue to rise faster than the rate of inflation, because we are hitting a situation of “diminishing returns”. There is evidence that world oil production costs are increasing at about 9% per year (7% after backing out the effect of inflation). Oil prices paid by consumers will need to keep pace, if we expect increased extraction to take place.  There is even evidence that sweet sports are extracted first in Bakken tight oil, causing the cost of this extraction to rise as well.

3. Salaries don’t increase to offset rising oil prices.

Most of us know from personal experience that salaries don’t rise with rising oil prices.

In fact, as oil prices have risen since 2000, wage growth has increasingly lagged GDP growth. Figure 3 shows the ratio of  wages (using the same definition as in Figure 2) to GDP.

Figure 3. Wage Base (defined as sum of

Figure 3. Wage Base (defined as sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

If salaries don’t rise, and prices of many types of goods and services do, something has to “give”. This disparity seems to be  the reason for the continuing economic discomfort experienced in the past several years. For many consumers, the only solution is a long-term cut back in discretionary spending.

4. Spikes in oil prices tend to be associated with recessions. 

Economist James Hamilton has shown that 10 out of the last 11 US recessions were associated with oil price spikes.

When oil prices rise, consumers tend to cut back on discretionary spending, so as to have enough money for basics, such as food and gasoline for commuting. These cut-backs in spending  lead to lay-offs in discretionary sectors of the economy, such as vacation travel and visits to  restaurants. The lay-offs in these sectors lead to more cutbacks in spending, and to more debt defaults.

5. High oil prices don’t “recycle” well through the economy.

Theoretically, high oil prices might lead to more employment in the oil sector, and more purchases by these employees. In practice, this provides only a very partial offset to higher prices. The oil sector is not a big employer, although with rising oil extraction costs and more US drilling, it is getting to be a larger employer.  Oil importing countries find that much of their expenditures must go abroad. Even if these expenditures are recycled back as more US debt, this is not the same as more US salaries. Also, the United States government is reaching debt limits.

Even within oil exporting countries, high oil prices don’t necessarily recycle to other citizens well. A recent study shows that 2011 food price spikes helped trigger the Arab Spring. Since higher food prices are closely related to higher oil prices (and occurred at the same time), this is an example of poor recycling. As populations rise, the need to keep big populations properly fed and otherwise cared for gets to be more of an issue. Countries with high populations relative to exports, such as Iran, Nigeria, Russia, Sudan, and Venezuela would seem to have the most difficulty in providing needed goods to citizens.

6. Housing prices are adversely affected by high oil prices.

If a person is  required to pay more for oil, food, and delivered goods of all sorts, less will be left over for discretionary spending. Buying a new home is one such type of discretionary expenditure.

US housing prices started to drop in mid 2006, according to data of the S&P Case Shiller home price index. This timing fits in well with when oil prices began to rise, based on Figure 1.

7. Business profitability is adversely affected by high oil prices.

Some businesses in discretionary sectors may close their doors completely. Others may lay off workers to get supply and demand back into balance.

8. The impact of high oil prices doesn’t “go away”.

Citizens’ discretionary income is permanently lower. Businesses that close when oil prices rise generally don’t re-open. In some cases, businesses that close may be replaced by companies in China or India, with lower operating costs. These lower operating costs indirectly reflect the fact that the companies use less oil, and the fact that their workers can be paid less, because the workers use less oil. This is a part of the reason why US employment levels remain low, and why we don’t see a big bounce-back in growth after the Great Recession. Figure 4 below shows the big shifts in oil consumption that have taken place.

Figure 4. Percentage growth in oil consumption between 2006 and 2011, based on BP's 2012 Statistical Review of World Energy.

Figure 4. Percentage growth in oil consumption between 2006 and 2011, based on BP’s 2012 Statistical Review of World Energy.

A major part of the “fix” for high oil prices that does takes place is provided by the government. This takes place in the form of unemployment benefits, stimulus programs, and artificially low interest rates.

Efficiency changes may provide some mitigation, as older less fuel-efficient cars are replaced with more fuel-efficient cars. Of course, if the more fuel-efficient cars are more expensive, part of the savings to consumers will be lost because of higher monthly payments for the replacement vehicles.

9. Government finances are especially affected by high oil prices.

With higher unemployment rates, governments are faced with paying more unemployment benefits and making more stimulus payments. If there have been many debt defaults (because of more unemployment or because of falling home prices), the government may also need to bail out banks. At the same time, taxes collected from citizens are lower, because of lower employment. A major reason (but not the only reason) for today’s debt problems of the governments of large oil importers, such as US, Japan, and much of Europe, is high oil prices.

Governments are also affected by the high cost of replacing infrastructure that was built when oil prices were much lower. For example, the cost of replacing asphalt roads is much higher. So is the cost of replacing bridges and buried underground pipelines. The only way these costs can be reduced is by doing less–going back to gravel roads, for example.

10. Higher oil prices reflect a need to focus a disproportionate share of investment and resource use inside the oil sector. This makes it increasingly difficult to maintain growth within the oil sector, and acts to reduce growth rates outside the oil sector.

There is a close tie between energy consumption and economic activity because nearly all economic activity requires the use of some type of energy besides human labor.  Oil is the single largest source of energy, and the most expensive. When we look at GDP growth for the world, it is closely aligned with growth in oil consumption and growth in energy consumption in general. In fact, changes in oil and energy growth seem to precede GDP growth, as might be expected if oil and energy use are a cause of world economic growth.

Figure 5. Growth in World GDP, energy consumption, and oil consumption. GDP growth is based on USDA International Macroeconomic Data. Oil consumption and energy consumption growth are based on BP's 2012 Statistical Review of World Energy.

Figure 5. Growth in World GDP, energy consumption, and oil consumption. GDP growth is based on USDA International Macroeconomic Data. Oil consumption and energy consumption growth are based on BP’s 2012 Statistical Review of World Energy.

The current situation of needing increasing amounts of resources to extract oil is sometimes referred to as one of declining Energy Return on Energy Invested (EROEI). Multiple problems are associated with declining EROEI, when cost levels are already high:

(a) It becomes increasingly difficult to keep scaling up oil industry investment because of limits on debt availability, when heavy investment is made up front, and returns are many years away. As an example, Petrobas in Brazil is running into this limit. Some US oil and gas producers are reaching debt limits as well.

(b) Greater use of oil within the industry leaves less for other sectors of the economy. Oil production has not been rising very quickly in recent years (Figure 6 below), so even a small increase by the industry can reduce net availability of oil to society.  Some of this additional oil use is difficult to avoid. For example, if oil is located in a remote area, employees frequently need to live at great distance from the site and commute using oil-based means of transport.

Figure 6. World crude oil production (including condensate) based primarily on US Energy Information Administration data, with trend lines fitted by the author.

Figure 6. World crude oil production (including condensate) based primarily on US Energy Information Administration data, with trend lines fitted by the author.

(c) Declining EROEI puts pressure on other limited resources as well. For example, there can be water limits, when fracking is used, leading to conflicts with other use, such as agricultural use of water. Pollution can become an increasingly large problem as well.

(d) High oil investment cost can be expected to slow down new investment, and keep oil supply from rising as fast world demand rises. To the extent that oil is necessary for economic growth, this slowdown will tend to constrain growth in other economic sectors.

Airline Industry as an Example of Impacts on Discretionary Industries

High oil prices can be expected to cause discretionary sectors to shrink back in size. In many respects, the airline industry is the “canary in the coal mine,” showing how discretionary sectors can be forced to shrink.

In the case of commercial air lines, when oil prices are high, consumers have less money to spend on vacation travel, so demand for airline tickets falls. At the same time, the price of fuel to operate airplanes rises, making the cost of operating airplanes higher. Business travel is less affected, but still is affected to some extent, because some long-distance business travel is discretionary.

Airlines respond by consolidating and cutting back in whatever ways they can. Salaries of pilots and stewardesses are reduced. Pension plans are scaled back. New more fuel-efficient aircraft are purchased, and less fuel-efficient aircraft are phased out. Less profitable routes are closed. The industry still experiences bankruptcy after bankruptcy, and merger after merger. If oil prices stabilize for a while, this process stabilizes a bit, but doesn’t really stop. Eventually, the commercial airline industry may shrink to such an extent that necessary business flights become difficult.

There are many discretionary sectors besides the airline industry waiting in the wings to shrink.  While oil prices have been high for several years, their effects have not yet been fully incorporated into discretionary sectors. This is the case because governments have been able to use deficit spending and artificially low interest rates to shield consumers from the “real” impacts of high-priced oil.

Governments are now finding that debt cannot be ramped up indefinitely. As taxes need to be raised and benefits decreased, and as interest rates are forced higher, consumers will again see discretionary income squeezed. New cutbacks are likely to hit additional discretionary sectors, such as restaurants, the “arts,” higher education, and medicine for the elderly.

It would be very helpful if new unconventional oil developments would fix the problem of high-cost oil, but it is difficult to see how they will. They are high-cost to develop and slow to ramp up. Governments are in such poor financial condition that they need taxes from wherever they can get them–revenue of oil and gas operators is a likely target. To the extent that unconventional oil and gas production does ramp up, my expectation is that it will be too little, too late, and too high-priced.


[1] Wages include private and government wages, proprietors’ income, and taxes paid by employers on behalf of employees. They do not include transfer payments, such as Social Security.

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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51 Responses to Ten Reasons Why High Oil Prices are a Problem

  1. mb50 says:

    Reblogged this on Mb50's "Liquid Mud" Blog.

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  5. I recently put up an unofficial version of my Energy article (from a year ago), called, Oil Supply Limits and the Continuing Financial Crisis. It is on a separate “page” and can be reached at this link.

  6. Don Stewart says:

    Let me turn the question around and ask if there are any advantages to high oil prices. Most obviously, of course, is that to the extent that high oil prices reduce the size of the money economy, they have all sorts of ecological benefits.

    But over a longer term, high oil prices and a reduction in the size of the money economy also selects for humans who are capable of living more efficiently. If we take as examples of the most inefficient we can consider the very rich people that Nate Hagens describes having worked for–no matter how much they had, they wanted more, and were unhappy if they didn’t get it. Furthermore, happiness did not last if they did get what they wanted. High oil prices probably select these people right out of the gene and meme pool. When we look around for examples of people who are capable of living a good life with simple physical requirements, the question gets a little more complicated. Those of these kinds of people that we hear about are likely to live both a public and a private life. If their public life involves making extravagant use of travel to spread their message, we might cut them a little slack–but not too much.

    If we focus on the private lives, each of us can probably find people to admire: Thomas Merton at Gethsemani monastery in Kentucky; Thich Nhat Hanh at Plum Village in France; Ralph Nader in New York City; Thoreau at Walden Pond; an old hippie farmer I know who says that ‘if a man can’t be live well on $30,000 a year, he’s just not trying’. Some of these people also live very frugal public lives. We can also find examples of people with large public lives achieved frugally, such as Sharon Astyk. And I have heard about a mild-mannered actuary who ducks into alleys, strips down to her leotards, and flies through the air without benefit of fossil fuels, slaying errors.

    If high oil prices select for these kinds of people, and against the people Nate was working for, then the world will be a much better place. What we are talking about here is meme selection, as opposed to physical changes such as metabolic efficiency selection. Memes spread, but are also subject to decay (as we can see if we examine the differences between the dominant memes of the Depression generation and the Baby Boomer generation). Continued high oil prices would tend to keep the new memes in place.

    Don Stewart

    • You should go into comedy writing. A mild-mannered middle-aged actuary in leotards flying through the air without fossil fuels would be strange sight, I am afraid.

      It would be nice if high oil prices select for people who can live the simpler life. There are certainly a lot of people in peak oil writing and in sustainability writing who are getting along on modest incomes. There are a few who are trying hard to figure out, “How can we make money from this?” Sometimes the latter is of necessity. It is hard to get along on zero income.

      Dmitry Orlov talks about the fact that it was the men who were all absorbed in their jobs, and lost them, who were most disturbed by the fall of the Soviet Union. The women kind of went on as before, since the things they were doing were less disturbed. There is an inborn instinct, especially in men, toward hierarchical behavior. This may be related as well.

      To some extent, people do what they are taught. Television advertising and economic teaching of today seem to suggest that “more stuff” is what life is all about. Some (but certainly not all) religious teaching is in the opposite direction. So is most of the sustainability discussion. I suppose there are a few sustainability folks where are interested in impressing the neighbors with their new Prius and new bamboo imported floors, though.

      • Don Stewart says:

        I am sure you are far too young to remember Superman. So forgive the lame analogy. Superman, disguised as ‘Clark Kent, mild mannered reporter’ would regularly run into an alley and emerge in his tights and then jump into the air and fly around New York City. He fought for ‘truth, justice, and the American Way.’ I can’t remember the exact story of his super-powers, but he was from Krypton and there were atomic mishaps somewhere along the way.

        A couple of days ago I read a history of collapses, such as the dinosaurs, and the conclusion was that more metabolically efficient creatures tended to fill the new niches (such as us mammals). I can’t find the story anymore.

        One of the things which has amazed me for quite a long time is that humans use such crude methods to get a few feel-good hormones flowing. A man will go out and buy a two ton automobile and drive it around trying to feel good. A tiny little bit of electrical impulse in the right location in the brain can accomplish the same task…without having to move 2 tons. Now assume that almost everyone is trying to get the feel good hormones flowing by manhandling the world with increasingly hard to get energy. But a few people can feel good by meditating or fantasizing or whatever. It seems that those who can manage their own happiness without manhandling the world will be selected for.

        Since all you Peak Everything writers have mostly learned to live solely on the mindless adoration of your penniless readers, it seems like you may become the new royalty.

        Don Stewart

        • Not to worry. Supermman has continued even into the 21st century, so I am easily old enough to remember it.

          There are a lot of differences in people.

          Some of us are naturally “cheap” to begin with. We get more of a thrill from figuring out which car is least expensive to own, or buying a house in a neighborhood where prices aren’t too high, than trying to impress others with the huge house or car we own. The book, The Millionaire Next Door, written back in 1998, sold very well. The millionaires were mostly pretty inconspicuous. The ones buying huge homes and cars were often ones who couldn’t afford them.

          Writers about peak oil have to get their excitement some way. I’m sure it varies. Having loyal readers helps.

        • GermanStacker says:

          The thing you describe is called “mainstream”, no need to wonder. Having a big car and a big house are still number one status symbols. Watch any mainstream movie. Look at the new values in China, they are happily saying good-bye to the simple live of their ancestors. Look what they do just to be able to drive a car.
          Of course in Western societies, you have the more intellectual kind, but not too many. And it is passed on to the next generation, of course with the help of media and advertising. Any kid that wants to live in a 2-room apartment with its parents, when their friends all have big houses? How about the choice between going to work in an overcrowded subway, or maybe still prefer driving your air-conditioned mobile living room?
          Living simply and enjoying it, that is mostly a conscious choice, often later in life. Maybe helped by health issues, that is one of the few accepted reasons (like cycling to work). Even then, it reduces your social choices. You have less stories to tell, like where you drove last weekend, where you are going next holidays, the problems your son has building his new house, etc. I don’t believe living the simple way will become any kind of mainstream, until the time when many people are a lot poorer.

          • But I also think that a conscious choice to learn and be creative instead of being entertained will also make people more stationary. I think a lot of people are just fooled into thinking “whats normal” so they often choose to drive around like crazy to visit here and there to feel “complete” (not to mention something to write on facebook). I often ask, show me your passions, show me something you master, don’t show me what you can buy and places you can visit with your money. There is no achievement in travelling to Egypt by plane, there is achievement in lecturing me about the history of Egypt and learn one of their crafts. I think people have become mindless zombies with the constant need to be entertained, that its very hard for many to even consider that its in their power to learn and master almost anything if they set their mind to it.

            I couldn’t help but laugh a bit inside when I heard my neighbors drive to a nearby ice rink to go ice skating, knowing it involved a drive, standing in a queue, skating with hundreds of others around you and most likely standing in a queue to buy snacks for the kids. My wife and I took a stroll with the kids around our neighborhood and found that a local duck pond had frozen solid thick ice and worked brilliantly as a makeshift ice rink – and the kids were having a blast.

            I also notice that kids around out playing as much, and neither do they visit each other much (if they do its to play video games). And I often watch and hear of parents taking the kids to the cinema, to the theater, to swimming, to MacDonalds, to whatever…. to entertain their kids. Don’t get me wrong, I don’t think we should keep kids from all kinds of activities, but does it have to happen every blasted weekend?!? That is the problem, the constant entertainment pressure is making parent into transportation and wallets because they are unable to say “no, not today kids, play outside please”.

            The fact is that energy is still so cheap today that we choose a lifestyle that involves a lot of jetsetting around. But its really not needed for any of us to live complete and happy lives, as there is a lot you can learn to master even in and around your home. It will also generally give you a less stressful life, and likely a safer one as well since your chances of getting killed in a car accident is minimized when you don’t have to drive around all the time (stressed out parents + cars = disaster).

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  8. gazon says:

    Fig 4, for consumption of petrol in Spain is out of date. The situation is much worse.
    It fell 6,5% last year, and it is now at the levels of the 90’s, that is, it has fallen 30% and more.
    (link in Spanish, but not difficult to understand)

    • Thanks for the information. Some of the published numbers are estimates, and get revised downward, with later information. My amounts would not include 2012 information either. The point is the same–the petrol is going to China and India.

  9. simon says:

    hi Gail, do read TheGuardian’s Jo Confino latest article there titled “Climate Change and Resource Scarcity May Wipe Out Pensions Industry” (www.guardian.co.uk/sustainable-business/climate-change-resource-scarcity-pension-industry-actuaries#start-of-comments).

    I commented is like he’s channeling you. He gives on overview on many of the things you’ve written and are concerned about.

    • I made a comment over at the Guardian too, pointing people to this web site. I made a comment earlier in response to someone else that I gave a Skype presentation a few years ago to the “Resource and Environment Group” that is cited in the acknowledgements and seems to have provided some backing for this report. I am not a “pension” actuary, so I couldn’t do the pension modeling they are doing in this report. (But I could pretty much guess the approximate results.)

  10. Sean Powers says:

    “Governments are also affected by the high cost of replacing infrastructure that was built when oil prices were much lower. For example, the cost of replacing asphalt roads is much higher. So is the cost of replacing bridges and buried underground pipelines. The only way these costs can be reduced is by doing less–going back to gravel roads, for example.”

    Gail, I’m not sure I completely buy that governments would go back to gravel roads. Since the fuel economy of the vehicles traveling on asphalt roads is noticeably higher than on gravel roads, it would seem to be a net loss (albeit the cost would be transferred from the government to the individual). I can imagine this taking place perhaps on lightly traveled or country roads, but not on major arteries. I can see more toll roads becoming commonplace, however.

    • I agree that gravel greatly reduces fuel economy of vehicles. It also makes travel much slower.

      I expect we will see a lot more toll roads. I think we will see a lot of roads go to pieces though, because there are not enough people who can afford the tolls to keep them up.

      The Wall Street Journal had an article called Roads to Ruin: Towns Rip Up Pavement back on July 17, 2010. It said,

      Paved roads, historical emblems of American achievement, are being torn up across rural America and replaced with gravel or other rough surfaces as counties struggle with tight budgets and dwindling state and federal revenue. State money for local roads was cut in many places amid budget shortfalls.

      In Michigan, at least 38 of the 83 counties have converted some asphalt roads to gravel in recent years. Last year, South Dakota turned at least 100 miles of asphalt road surfaces to gravel. Counties in Alabama and Pennsylvania have begun downgrading asphalt roads to cheaper chip-and-seal road, also known as “poor man’s pavement.” Some counties in Ohio are simply letting roads erode to gravel.

      If there is not money to go around, something will have to “give”. I think roads are one of our weak spots. I sure hope the new electric cars are made to work on rutted, gravel roads.

      • David F Collins says:

        Cars get better mileage on good roads than bad. Think of riding a bike on a good road as compared to a bad one. (I prefer a well-maintained dirt road to a chuck-holed, alligatored paved road any day!) Tires last longer on good roads. The whole car does! What came first, Rome’s abandonment of its roads or its empire?

        Rationally, expensive fuel should result in less travel, less transport, which in turn means less requirement for roads, which leads to rational road abandonment and optimized road maintenance elsewhere. Such rationality, unfortunately, requires recognition of the situation, which I fear is not to be expected of current leadership (investors, politicians, style setters, etc). Bicycle Dave, for instance, is ahead of the pack in this perspective.

        Big problem: Where is the pack? Is there a pack?

        • Jan Steinman says:

          I’ve been trying to be “the pack” of the future. But the status quo keeps telling me I need to pack it in.

        • I think that the issue is that the reason why road maintenance is given up is because governments can’t afford to do it any more. People without jobs can’t afford to pay tolls either. As long as most everyone has jobs, things work OK. But once there are a lot of layoffs, it becomes hard to collect enough tolls (or taxes). I am not sure planning will go into which roads lose upkeep. It may be happenstance–for example, which ones were toll roads to begin with, that couldn’t raise tolls enough to keep up with maintenance.

    • Thanks! I hadn’t seen that report.

      The British actuaries seem most willing to talk about this issue. The report that you link to acknowledges “support and input of the Resource and Environment Group of the Actuarial Profession”. This seems to be the same British “Resource and Environment Group” that I gave a one-hour Skype presentation to a while back, and have corresponded with. More recently, they asked me to write an article for the September 2012 issue of The Actuary magazine, which is sent to British actuaries, which I did. I have also corresponded in the past with Nick Silver, who is one of the authors of the report.

      The report doesn’t show a list of references, but I wouldn’t be at all surprised if my writing indirectly influenced the report.

      I will make sure that US actuarial groups in related areas see a copy of this report.

    • Notice the replies to that article and how little people believe in either climate change being a serious risk, and that we actually live on a finite resource planet. The problem with climate change isnt necessary more powerful storm systems or rising waters. The problem is really what kind of mass extinction follows in its footsteps as average temperatures get up into 6 degrees C over average. It really doesn’t matter if it rains a bit more some places, and crops fail because of drought if 90% of the species goes down the drain as sea temperatures rise and acidify. But those are doomer predictions, and besides 6 C over average is still like 5 C away from us so pleeenty of time right?

      I think with the rapid melting of the north pole summer ice showing serious signs of exponential and “tipping point climate change” we will also experience some other forcing factors like a rapid rise of methane coming from these areas in the coming years. Who knows really, perhaps by 2050 we are at 6 C over already if we go on with business as usual. This is a typical case of the example that Chris Martenson likes to bring up with the drop of water in the Stadium – when do you realise there is a problem? With exponential change in a system the “stadium” could be 10% full and you wouldn’t think there was any problem, but in fact you are minutes away from disaster. Its a classical case of our inability to understand exponential change as Al Bartlett preaches.

      Lets hope we have more time than some models seem to predict. Even the most optimistic ones from IEA seems pretty gloomy in my eyes, and no doubt might be enough to trigger a number of self enforcing cycles of warming. That the majority of the world still don’t regard this as the single biggest threat to civilisation and indeed the planets current species is beyond me. We better be 100% sure that this isn’t a real problem if one should choose to ignore it.

  11. Arthur Robey says:

    Gail Tverberg for President! No.I would not do that to you. They have to get another Patsy.

    Economists are profoundly Left Brain thinkers. Their models dominate their reality. So much so that they think that “money” has a substance. Hence the absurd statement that oil is only 5% of the economy.
    I think that I have put this video up before on this site, but it is worth re-watching.
    If you want to hear an example of sever Left Brain thinking listen to Professor Stephenie Kelton.
    There is no doubt that she is bright. Her affliction comes from the massive amount of study that she has had to do in order to get her Professorship.
    There is a mention of oil, but I could almost hear her thinking “What has Oil got to do with Economics? Economics is about real things; things like Money.”

  12. Michael Lloyd says:

    I have been following this blog for some time and I really appreciate the wide perspective taken.

    Each post and the comments tend to send me off to do some further research on some topic or other. Some time ago, the phrase “embedded energy” was mentioned in a comment (by Gail, I think). As a physical scientist (Ret.d) this phrase jarred but Google came to the rescue in that the phrase appeared to be synonymous with ’embodied energy’.


    Notwithstanding the comprehensive coverage of factors mentioned in the Wikipedia reference for determine embodied energy, there seem to me to be a major omission.

    This omission is the energy component of knowledge and information. Now it would be relatively straightforward to calculate the energy components for print and computer media. However, to obtain a more accurate figure, the calculation would need to include the energy component for education and training and the cumulative energy component for information acquired over decades, centuries and millennia.

    Moreover, in looking to the future, any reduction in net energy available to the human race is likely to have some significant impact of the generation of new knowledge and information.

    The eleventh reason why high oil prices are a problem?

    • The “Emergy” folks have looked at energy flows required for education. They have in fact come up with factors (which are in their own language, and a little cryptic to the rest of the world–the higher the transformity in the right column, the more energy required) based on how rich society must be for people to be able to stay out of the general workforce and devote time to research, teaching, write books, etc. Here is one of their exhibits:

      Emergy of Education

    • Jan Steinman says:

      Michael, check out the work of HT Odum regarding the embedded energy cost of information, or of “complexity” in general. I think you’re correct in stating that lower energy availability means lower levels of knowledge and information. This is a thorn in the side of the “technology will save us” crowd!

      Complexity and connectedness are forms of embedded energy. Check out the “panarchy” model espoused by Buzz Holling (et. al.) to see some theoretical basis for where we’re headed.

      • Michael Lloyd says:

        Thank you for the suggestion. I have looked at the blog Prosperous Way Down (http://prosperouswaydown.com) but haven’t really got into it so far. I will redouble my efforts and get to grips with their language.
        I am very much interested in systems methodology. Systems methodology was not part of my earlier formal education in the sciences. The reductionist methodology was in the ascendant at the time.

        • Jan Steinman says:

          YES! Mary Logan’s blog is the most approachable way to get familiar with the teachings of her father! Prosperous Way Down and this blog rank as my top two!

          • There is also a book, Prosperous Way Down by H. T. Odum and Elizabeth Odum.

            I met Mary Logan and her mother, Betty Odum, lat January, when Mary invited me to a conference at the Univ. of Florida a year ago in January. At that conference, I presented informally a little of my work and also learned more about Emergy. Mary was thinking then about starting her blog, so we talked about the details of setting up a blog.

          • Iaato says:

            Thanks, Jan! And Gail was a huge help in cutting through the confusion!


  13. GermanStacker says:

    Wonderful piece of analysis, thanks! It seems to me this kind of the big picture, real story and straight thinking is hardly found elsewhere in the general flow of information, especially not in economist “explanations”.

    • It seems like I have said 75% of this in other posts, but I keep getting so many questions about it, I thought it would be helpful to put it together in a different form.

  14. Bicycle Dave says:

    Hi Gail,

    Your analysis makes sense to me, however I often hear economist types put a far different spin on this. Many of them argue that the “tail can’t wag the dog” – they claim that the cost of FFs is a relatively small expenditure relative to our overall economy. I’m not sure of the usual percentages given, but I recall something like only 5 or 10% of GDP goes for the purpose of buying these fuels. So, they contend that it would take enormous increases in these costs to have an adverse impact on the overall economy.

    To me, this sounds like severely failed logic considering factors like the ” Liebig’s Law of the Minimum” or even the old “Weakest Link In The Chain” saying. I know you have talked extensively about the ripple effect of high energy cost – especially oil. Why do you suppose that these economists think that the service industry, the defense industry, the electronic gadget industry, etc can simply have their GDP component aggregated and compared against the energy component as if they are all in their own independent silos?

    • Jan Steinman says:

      “I often hear economist types… claim that the cost of FFs is a relatively small expenditure relative to our overall economy… So, they contend that it would take enormous increases in these costs to have an adverse impact on the overall economy.”

      That’s because they’re “flat” thinkers, whereas oil is at the base of a cost hierarchy.

      Consider that the fulcrum of a playground teeter-totter is but a small fraction of the length of the entire thing, but shifting it a bit one way or the other can allow a 200 pound adult to balance with a 50 pound child.

      Energy underlies everything we do in our economy — everything! It’s strange and frightening that economists who routinely discuss “leverage” cannot understand that!

    • These folks don’t seem to understand the idea that oil does far more than what its dollar value would seem to suggest. It really is like another employee, that is able to take on tasks humans can’t handle by themselves. The “oil employees” have now demanded a raise. The total amount produced won’t increase, so it is hard to give “oil employees” a raise, without either reducing the amount other (real) employees are paid, or reducing profits for the company. The one approach that might work, if there is some demand for higher priced products (but not the full amount of demand for the current price of the products) is to close down the least profitable part of the company. (It this were an airline, it might mean canceling flights that often were not completely full, and laying off employees of all types for those flights.) With the scaled-back size of the company, it might be able to go forward, and charge the higher price needed because of the higher energy cost, but to a scaled back group of customers. The net result would be similar to what I suggested in my post How is an oil shortage like a missing cup of flour? If oil prices are too high, it becomes necessary for “make a smaller batch,” just as the situation that happens if you don’t have enough flour to make a full batch of cookies. This is pretty the situation that happens in recession.

    • phil harris says:

      Dave, Jan & Gail
      Gail seems pretty much ‘on the money’.
      Some economists are more serious than the generality: Michael Kumhof of IMF Research Dept. says that ignoring the peak oil issue would be “highly unscientific, even irresponsible”,
      Here is a ueful interview with him based on two IMF Res. Dept. 2012 papers.

  15. PeteTheBee says:

    the non-sustainable natural gas prices have been going on for what, 4 years? at least, probably 4.5.

    perhaps sustainable means something different to you. it’s certainly been sustained for a long time. i agree if you want another couple decades they’ll probably go up.

    • Maybe what I should say is that current levels of natural gas production at these prices is unsustainable. I agree that it is difficult for natural gas prices to go up. If nothing else, coal prices tend to act as a cap for natural gas prices in the US (although we have seen a lot of spikes in the past). With so many small companies with use or lose leases, there tends to be a lot of natural gas overproduction.

      There will continue to be some natural gas production at these low prices, because some natural gas (particularly that associated with oil that fully covers both natural gas and oil costs) is cheap to produce. But I doubt that there will be enough of this for very long.

    • Michael Lloyd says:

      ‘Sustainable’ always seems like another of those words that are in common usage but have different meanings for different people.

      If we are talking of energy and energy delivery systems then your 4 years is not a long time. If we are talking of investing, making a profit and getting your money back, then 4 years could be way too long.

      I’m not likely to invest in Chesapeake, even given this analysis!


  16. Jan Steinman says:

    It was very interesting to read your take on the impact on discretionary industries, as exemplified by the airline industry.

    I’d like to see a similar analysis on non-discretionary industries, such as food and agriculture.

    While it is possible for some segments of the population to move down the food chain — doing more cooking of raw foodstuffs, rather than buying processed food, for example, the fact remains that we all eat for a living. I don’t have any good mental models for what happens when a declining resource meets inelastic demand.

    • I think how agriculture fares depends on how well the current “system” will hold together. As long has we have the major parts of the system that we are used to (banks that can be used to pay employees; operating farm machinery; a system of making and distributing hybrid seed, fertilizer, and herbicides, and pesticides) then we can have business as usual. If something happens to “break” the system, such as the US dollar losing its reserve currency status so that interest rates skyrocket overnight and the value of the dollar drops, then we could find serious breaks in the system quite quickly. So far, things have held together amazingly well. It would seem likely that if a break does come, it will relate in some way to all of the debt problems around the world.

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