What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs

Nearly everyone believes that oil prices will trend higher and higher, allowing increasing amounts of oil to be extracted. This belief is based on the observation that the cost of extraction is trending higher and higher. If we are to continue to have oil, we will need to pay the ever-higher cost of extraction. Either that, or we will have to pay the high cost of some type of substitute, if one can be found. Perhaps such a substitute will be a bit less expensive than oil, but costs are still likely to be high, since substitutes to date are higher-priced than oil.

Even though this is conventional reasoning based on experience with many substances, it doesn’t work with oil. Part of the reasoning is right, though. It is indeed true that the cost of extracting oil is trending upward. We extracted the easy to extract oil, and thus “cheap” to extract oil, first and have been forced to move on to extracting oil that is much more expensive to extract. For example, extracting oil using fracking is expensive. So is extracting Brazil’s off-shore oil from under the salt layer.

There are also rising indirect costs of production. Middle Eastern oil exporting nations need high tax revenue in order to keep their populations pacified with programs that provide desalinated water, food, housing and other benefits. This can be done only through high taxes on oil exports. The need for these high taxes acts to increase the sales prices required by these countries–often over $100 barrel (Arab Petroleum Investment House 2013).

Even though the cost of extracting oil is increasing, the feedback loops that occur when oil prices actually do rise are such that oil prices tend to quickly fall back, if they actually do rise. We know this intuitively–in oil importing nations, deep recessions have been associated with big oil price spikes, such as occurred in the 1970s and in 2008. Economist James Hamilton has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes (Hamilton 2011). Hamilton also showed that the effects of the oil price spike were sufficient to cause the recession of that began in late 2007 (Hamilton 2009).

In this post, I will explore the reasons for these adverse feedback loops. I have discussed many of these issues previously in an academic paper I wrote that was published in the journal Energy, called “Oil Supply Limits and the Continuing Financial Crisis” (available here or here).

If I am indeed right about the path of oil prices being down, rather than up, the long-term direction of the economy is quite different from what most are imagining. Oil companies will find new production increasingly unprofitable, and will distribute funds back to shareholders, rather than invest them in unprofitable operations. In fact, some oil companies are already reporting lower profits (Straus and Reed 2013).  Some oil companies will go bankrupt. As an example, the number two oil company in Brazil, OGX, recently filed for bankruptcy, because it could not profitably find and extract Brazil’s off-shore oil (Lorenzi and Blout 2013).

Oil companies will increasingly find that the huge amount of debt that they must amass in the hope of producing profits sometime in the future is not really sustainable. The Houston Chronicle reports that an E&Y survey of Oil and Gas Companies indicates that the percentage of companies that expect to decrease debt to capital ratios jumped to 48% in October 2013 from 31% a year ago (Eaton 2013). If companies with huge debt loads cut back production to the amount that their cash flow will sustain, oil extraction can be expected to fall–just as it can be expected to fall if oil and gas companies go bankrupt or give back investment funds to shareholders.

The downward path in oil production is likely to be steep, if oil prices do indeed drop. The economy depends on oil for many major functions, including most transportation, agriculture, and construction. Increasingly expensive to extract oil is a sign of diminishing returns. As we utilize more resources for extracting oil (oil, steel, water, human labor, capital, etc.), there will be fewer resources to invest in the rest of the economy, reducing its ability to grow. This lack of economic growth feeds back as low demand, bringing down the prices of commodities, including oil. It is because of this feedback loop that I believe that the path of oil prices is generally lower. This path is the opposite of what a naive reading of “supply and demand” curves from economics textbooks would suggest, and the opposite of what we need if the economy is to continue on its current path. 

Adverse Feedback 1: Wages stagnate as oil prices rise, tending to slow economic growth.

Suppose we calculate average US wages over time, by dividing “Total Wages” by “Total Population,” (everyone, not just those working) and bring this amount to the current cost level using the CPI-Urban inflation adjustment. On this basis, US wages flattened as oil prices rose, both in the 1970s and in the 2000s. The average inflation-adjusted wage is 2% lower in 2012 ($22,040) than it was in 2004 ($22,475), even though labor productivity rose by an average of 1.7% per year during 2005-2012, according to the US Bureau of Labor Statistics. Between 1973 and 1982, average inflation-adjusted wages decreased from $17,294 to $16,265 (or 6%), even though productivity reportedly grew by an average of 1.1% per year during this period.

Figure 1. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP's 2013 Statistical Review of World Energy.

Figure 1. Average US wages compared to oil price, both in 2012$. US Wages are from Bureau of Labor Statistics Table 2.1, adjusted to 2012 using CPI-Urban inflation. Oil prices are Brent equivalent in 2012$, from BP’s 2013 Statistical Review of World Energy.

To see one reason why wages might flatten, consider the situation of a manufacturer or other company shipping goods. The cost of goods, with shipping, would rise simply because of the cost of oil used in transport. Companies using oil more extensively in producing their products would need to raise prices even more, if their profits are to remain unchanged. If these companies simply pass the higher cost of oil on to consumers, they likely will sell fewer of their products, since some consumers will not be able to afford the products at the new higher price. To “fix” the problem of selling fewer goods, companies would likely lay off workers, to reflect the smaller quantity of goods sold–one reason for the drop in wages paid to workers shown on Figure 1. (Note that Figure 1 will reflect reduced wages, whether it results from fewer people working or lower wages of those working.)

Another approach businesses might use to deal with the problem of rising costs due to higher oil prices would be to reduce costs other than oil, to try to keep the total cost of the product from rising. Wages are a big piece of a business’s total costs, so finding a way to keep wages down would be helpful. One such approach would be a wage freeze, or a cut in wages. Another would be to outsource production to a lower cost country. A third way would be to use increased automation. Any of these approaches would reduce wages paid in the United States. The latter two approaches would tend to have the greatest impact on the lowest paid workers. Thus, we would expect increasing wage disparity, together with the flattening or falling wages, as companies try to hold the cost of goods and services down, despite rising oil prices.

The revenue received by businesses and governments ultimately comes from consumers. If the wages of lower-paid consumers flattens, these lower wages can be expected to reduce economic growth, because with lower wages, these workers will have less income to buy discretionary goods and services. The higher-paid workers may have more income, but this won’t necessarily feed back into the economy well–it may inflate stock market prices, but not feed back as spending on goods and services, necessary for growth.

There is even a feedback with respect to debt. The portion of the population with falling inflation-adjusted wages will find it harder to borrow, making it more difficult to buy big-ticket items such as cars and houses.

Adverse Feedback 2: Consumers cut back on discretionary spending because of the higher cost of food and oil, leading to more layoffs and recession.

Clearly, based on Figure 1, consumers cannot expect wage increases to match oil price increases. Even workers who work in the oil industry cannot expect wage increases equal to the increase in the price of oil, because part of the increase in cost comes from the need for more workers per barrel of oil. For example, it is more labor-intensive to extract oil from a large number of small wells, each of which require fracking, than it is to extract oil from a few larger wells, none of which require fracking.

One cost that tends to increase with the cost of oil is the cost of food (Figure 2). The cost of food and the cost of commuting are necessities for most workers. They will cut down on discretionary expenditures, if necessary, to make certain these costs are covered.

Figure 2. FAO Food Price Index versus Brent spot oil price, based on US Energy Information Agency.

Figure 2. FAO Food Price Index versus Brent spot oil price, based on US Energy Information Agency. *2013 is partial year.

If wages are inadequate, workers will cut back in such area as restaurant meals, vacation travel, and charitable contributions, leading to even more problems with a lack of jobs in these and other discretionary sectors.

It might be noted that even countries that export oil can encounter difficulties as oil prices rise. These countries need a way to get the extra revenue from selling high-priced oil over to the many residents who must buy higher-priced food, but do not benefit from the wages paid to oil workers. It is not a coincidence that the Arab Spring uprisings took place in several oil exporting nations in early 2011, when food prices peaked on Figure 2.

Adverse Feedback 3: Higher oil and food prices together with stagnating wages lead to cutbacks in spending for new cars and new homes, falling prices for new homes, defaults on home and car loans, and banks in need of bailouts.

Purchasing more-expensive homes and new cars are types of discretionary spending. If consumers find their incomes are squeezed by high oil prices, they will cut back on  expenditures such as these as well, leading to layoffs in the home construction and auto manufacturing industries.  Such cutbacks can also result in bankruptcies of auto and home builders.

If people buy fewer move-up homes, the price of resale homes will tend to fall. This in turn makes defaults on mortgages more likely. Layoffs will also tend to make defaults on mortgages more likely, as well as missed payments on auto loans.

Figure 3. S&P Case-Shiller 20-City Home Price Index, using seasonally adjusted three month average data. April 2006 is the peak month.

Figure 3. S&P Case-Shiller 20-City Home Price Index, using seasonally adjusted three month average data. April 2006 is the peak month. Data is latest shown on website as of November 2013.

Most people do not associate the drop in US home prices with the rise in oil prices, but the latest rise in oil prices began as early as 2003 and 2004 (see Figure 2), and the drop in home prices began in 2006. Some of the earliest drops in home prices occurred in the most distant suburbs, where oil prices played the biggest role.

Banks increasingly found themselves in financial trouble, as defaults on mortgages and other loans grew. These defaults are often blamed on bad underwriting. While bad underwriting may have played a role (and may also have helped prevent the US from falling into recession even earlier, when oil prices began rising), the falling prices of homes created part of the default problem, as did job layoffs associated with higher oil prices.

All of these feedbacks led to a need for more government involvement–lower interest rates to try to hold the economy together, get spending back up, and raise home prices.

Adverse Feedback 4: Cutbacks in consumer debt combined with flat wages appear to have led to the decline in spending that precipitated the July 2008 drop in oil prices. Consumer debt still remains depressed.

Oil prices started falling in July 2008, and did not hit bottom until the winter of 2008 (Figure 4).

Figure 4. West Texas Intermediate Monthly Average Spot Price, based on us Energy Information Administration data.

Figure 4. West Texas Intermediate Monthly Average Spot Price, based on us Energy Information Administration data.

What could have precipitated such a fall? Many people consider the bankruptcy of Lehman Brothers on September 15, 2008 to be pivotal in the financial crisis of 2008, but the drop in oil prices started months earlier. What could have precipitated such a steep drop in oil prices?

It seems to me that the real underlying cause was a mismatch between what goods cost (such as high food and oil prices) and the amount consumers had available for spending. There are two basic sources of consumer spending–wages and increases in debt. If consumer debt suddenly starts decreasing, rather than increasing, consumer spending can be expected to fall (especially if wages are not rising).

In fact, consumer debt did start falling at precisely the time that oil prices crashed. Mortgage debt started falling in the third quarter of 2008, reflecting a combination of falling home prices and mortgage defaults. As noted previously, both of these were indirectly related to high oil prices.

Figure 5. Us Home Mortgage Debt, based on Federal Reserve Z.1 data.

Figure 5. US Home Mortgage Debt, based on Federal Reserve Z.1 data.

Other consumer debt fell at the same time. Revolving credit (primarily credit card debt) hit a peak in July 2008, and began to fall (Figure 6).

Figure 6. US Revolving Credit outstanding (primarily credit card debt), based on Federal Reserve G.19 Report.

Figure 6. US Revolving Credit outstanding (primarily credit card debt), based on Federal Reserve G.19 Report.

Adverse Feedback 5: Even after high oil prices have been in place for several years, many governments find themselves trapped by the need for deficit spending and ultra-low interest rates to cover up problems with stagnant wages and inadequate demand for homes and cars at “normal” interest rates. 

With the slack in consumer debt, US government debt soared (Figure 7). Governments in Europe and Japan found themselves in a similar bind.

Figure 7. US government publicly held debt, based on Federal Reserve Z.1 data.

Figure 7. US government publicly held debt, based on Federal Reserve Z.1 data.

Even as US Federal Government debt soared, it was not enough to fully make up for the cutback in debt elsewhere in the economy (Figure 8).

Figure 8. US Debt based on Federal Reserve Z.1 data.

Figure 8. US Debt based on Federal Reserve Z.1 data.

How do governments get themselves caught in such a bind? Businesses can to a significant extent overcome their problems with high oil prices by laying off workers and finding lower cost methods of production. Individuals, however, find that the wage problems persist as long as oil prices remain high and businesses have the option of replacing their services with lower cost workers elsewhere. Globalization definitely makes this problem worse.

When workers have job problems, governments find themselves in the unfortunate position of trying to fix the situation by providing more unemployment benefits, food stamps, and disability benefits. Governments also find themselves with lagging tax revenue, because businesses increasingly are located in offshore tax havens, and workers’ incomes are lagging.

Adverse Feedback 6: Rising prices of oil have contributed to long term inflation. If oil prices start falling, this tends to create the opposite problem–deflation. Once oil price deflation starts, it may lead to a self-reinforcing debt default cycle.

Not all inflation is related to higher energy prices, but some of it is. This is one reason the US government sometimes gives an inflation estimate “excluding volatile food and energy prices.” Inflation over the years appears to be one way that a small amount of diminishing returns has fed into the economy.

The concern a person has is that deflation will tend to lead to debt defaults. Clearly lower oil and gas prices mean that oil and gas businesses will become less profitable, and loans in this area will tend to default. But loans related to other types of commodities may tend to default as well. There will also tend to be layoffs in these industries, and in surrounding communities.

Also, with deflation, the low interest rate policies of governments no longer have the stimulating impact that they would have without deflation. So governments will have to concoct negative interest rate plans, and see if they can make these work, to take the place of current plans.

One question is how effective today’s Quantitative Easing and ultra-low interest rate programs have been. We know that they have tended to blow bubbles in asset prices, such as stock market prices. But are ultra-low interest rates part of what allowed oil prices to re-inflate after the July 2008 drop? Certainly, they have helped hold up auto and home sales, and have supported oil drilling operations that rely heavily on debt.

To some extent, the current system appears to be held together with duct tape. It looks like it could fall apart on its own, or it could fall apart as governments try to reduce their deficits by higher taxes and lower spending (See Figure 7). Adding deflation to the combination would seem to be another way of making the current approach for covering up our problems even more vulnerable to collapse.

The frightening thing is that there is already some evidence that oil prices (and commodity prices in general) are starting to trend downward. The chart I showed in Figure 4 showed West Texas Intermediate (WTI) oil prices–a price that is often quoted in the US. On Figure 9, I show WTI oil prices alongside Brent, another oil benchmark. Brent reflects world oil prices to a greater extent than WTI price does. It seems to be showing a recent downward trend in world oil prices. To the extent that this downward trend in prices feeds back into inflation rates and makes Quantitative Easing work less well, this downward trend becomes a potential problem. Its effect would tend to offset the stimulating effect on economies that lower oil prices would normally have.

Figure 9. Brent oil price compared to West Texas Intermediate oil price, based on EIA monthly average spot prices.

Figure 9. Brent oil price compared to West Texas Intermediate oil price, based on EIA monthly average spot prices.


Oil and other fossil fuels are unusual materials. Historically, their value to society has been far higher than their cost of extraction. It is the difference between the value to society and their cost of extraction that has helped economies around the world grow. Now, as the cost of oil extraction rises, we see this difference shrinking. As this difference shrinks, the ability of economies to grow is eroding, especially for those countries that depend most heavily on oil–Japan, Europe, and the United States. It should not be surprising if the growth of these countries slows as oil prices rise. The trend toward globalization can only make this trend worse, because it gives businesses an opportunity to lower wage costs by outsourcing part of their production to lower-cost countries (that use less oil!). When costs are reduced in this manner, businesses are also able get the “benefit” of more lax pollution laws overseas.

We saw in Figure 9 that global oil prices seem already to be trending downward, as growth in countries such as China, Brazil, and India is faltering. At the same time, oil from easy to extract locations is depleting, and oil companies have no choice but move on locations where more resources of all kinds are required, leading to diminishing returns and ever-higher cost of extraction. The way I view our predicament is shown in Figure 10.

Figure 10. Our Oil Price Predicament. Over time, the amount affordable by consumers at a given price falls, while the price required by producers to earn a profit rises.

Figure 10. Our Oil Price Predicament. Over time, if we want to maintain constant oil consumption, the price consumers can afford tends to fall, while the price required by oil producers in order to earn a profit tends to rise.

Over time, in order to maintain constant oil production, the price consumers can afford tends to fall, because governments need to “take back” the huge deficit spending they are using now to prop up the system. At the same time, prices required by producers tend to rise, as the mix of oil production moves to more difficult locations.

While in theory oil prices could spike again because of rising demand of the less developed countries, it is hard to see how this price spike could be sustained. We would likely run into the same problems we had before, with more layoffs and plus credit contraction leading to a cutback in demand in the US, the European Union, and Japan. These users represent a big enough share of the total that their drop in demand would tend to bring world prices back down.

The problem this time, though, is that governments seem to be getting close to being “out of ammunition,” in trying to fight what is really diminishing returns of one of the major drivers of our economy. I don’t know exactly how things might play out, but experience with prior civilizations suggests that “collapse” might be a reasonable description of the outcome.

This entry was posted in Financial Implications and tagged , , , , by Gail Tverberg. Bookmark the permalink.

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.

428 thoughts on “What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs

  1. Don

    The tragedy of South America is that the Spanish didn’t even bring ‘civilization’. What a disaster it all was.

    I was (blackly) amused when a banker said to me, in a discussion on this, ‘But look at how their GDP rose under the Spanish! What was it pre-Columbus? Nothing!’

    Thinking of that kind really is ‘advanced stupidity.’

    • The zinger is that, in stealing all the silver “because it was MONEY” and all they needed to have ‘MONEY’ was to have silver, they created massive inflation in Spain that essentially ruined the economy of the colonial power.

      Those who believe that gold or silver IS inherently, Money, appear not to have learned that lesson.

      • rather like the fantasy of finding asteroids made of some precious metal or other—it’s ‘valuable’!
        The entire world stock of gold (as an example) is about 130000 tons
        if you extend the fantasy, and found a solid gold asteroid and somehow brought it back to earth, the ‘economy’ that paid for the expedition would be destroyed by the glut of millions of tons of additional gold
        this is essentially what happened to Spain, yet the greatest minds in the world of economics refuse to grasp this.
        Gold and silver has no inherent value

        • People have valued gold & silver for thousands of years & I’m sure that in the future it will continue to be valued.
          Not everyone has products to trade with and hauling a carcase or wood to market would be rather awkward if trade was all we had.
          Silver & gold will be used as money as it’s far more portable than a bunch of eggs or milk & can be exchanged for other items or even for your labor.

          The native americans used certain processed sea shells as money, other people used carved stones, gems, pelts, copper etc as valuable trade items.

          Some form of “money” will continue to be of value in trade.

          Our green pieces of paper will only be good as kindling. ;^)

      • Earl

        Yes, it wrecked Spain for the whole 17th century, and much of the 18th. One could say that it never recovered. The depopulation was dramatic,

  2. A key element that needs to be taken in consideration in the 2013 International Energy Agency (IEA) World Energy Outlook (WEO) is the key statement that the oil industry capital expenditure has risen by nearly 180% since 2000 but with the global oil supply (adjusted for energy content) rising only by 14%.

    This is the clear sign of a rapidly declining Energy Return Over Energy Invested (EROEI)…

    In other words oil economics have become completely dislocated from historic norms since 2000 (and especially since 2005) and the industry is now desperately investing at exponentially higher rates to gain increasingly smaller new amounts of net energy. One should recognize that this is a situation clearly unsustainable over a long period of time…

    What is the impact of this situation on future economic growth, which most politicians are still expecting will save the day by reducing the relative size of the current high debt (in particular sovereign debt) with respect to GDP:

    1) If the oil industry is now sucking from the available capital pool 180% more funds to produce only slightly more net energy than in 2000, the amount of capital available to fund other projects is considerably reduced;

    2) If we have today only 14% more net energy available than in 2000 to power the world economy, there is no doubt that global growth is now hitting the “energy wall” because there is now only a very limited supply of available energy to power any potential new material economic activity… No wonder that most of the reported economic growth since 2000 was related to financial sector “paper” gains mostly derived from speculative activities, in particular on the OTC derivatives market (the largest casino on Earth)… With the currently high depletion rates needing to be constantly offset, there was simply almost no additional net energy available to power any potential new material project ! One wonders what will happen with the even higher tight oil & shale gas depletion rates when that unconventional production represents a significant part of the overall oil & gas production mix…

    Of course this macroeconomic picture varies on a country by country basis and even on a region by region basis depending on the local net energy availability situation and on the local marginal cost of that energy.

    Charles Hall’s important work – as described in his seminal “Energy and the Wealth of Nations” – concludes that EROEI mathematics will make it very difficult for a complex high-tech society to survive when its average EROEI falls below 11/1…

    Hence, given that the future survivability of a growing number of states is now at stake, tensions are therefore likely to rise rapidly. For example:

    1) Scotland preparing to hold a referendum on independence in September 2014 and, if it wins, thereafter taking a very significant part of the North Sea oil & gas reserves with it…

    2) China flexing its military muscle to attempt to bring the Senkaku islands and its potential oil & gas reserves within its exclusive jurisdiction…

    3) China and Russia siding with Iran and forcing the US to “abdicate” a military option against Iran that would give the US exclusive control over the remaining Persian Gulf oil & gas reserves…

    P.S: Drawing an EROEI & net energy map of our emerging “brave new world” would be an interesting exercise…

    • I think the problem is partly about declining EROI, but more than declining EROI and net energy.

      Our economy is like a machine. It cannot operate on a different fuel mix than what it has been built to operate on. Talking about substitutability when we are essentially out of time is an exercise in silliness. The issue is that the machine stops running, and we need to build a new machine that operates on a different fuel mix. If we can do this at all, it must be local small-scale economies, it seem to me. Current EROIs are irrelevant.

      • we only know the functioning of one type of machine, basically the one that runs on wheels using explosive power. Essentially this is a form of leverage.
        There just may be something different out there, but so far, nothing seems likely to be available in the near or even distant future. Doing work efficiently means overcoming friction, the wheel seems to be the best way of doing that. Wheels are levers, levers need energy input to move them. We either use wheels or carry/drag stuff with muscle.
        All machines are levers, Fossil fuels simply allowed us to have bigger and better levers.
        We use levers to gain mechanical advantage, and by doing so, improve and sustain humankind
        At our current rate of demand I cannot conceive of any kind of ‘alternative’ machine that will maintain that advantage, or even come close to maintaining it.
        Maybe there a people cleverer than me who can, but it all comes down to mechanical advantage in one way or another. We move our levers in 2 ways, either by muscle power, or by heat application.
        Remove the heat, and we only have muscle, either our own or that of animals.
        I dont think there is an ‘alternative’ machine, no matter what the scale. As long as we think in ‘machines’ we are never going to grasp how big the problem is.

        • Agreed some more. The vast majority of us wont grasp how big the problem is until it has, almost literally, GRASPED us, by the throat. For those of us who got it a decade ago it took a couple of years to get p[ast the existential paralysis that ensued.

          Now consider entire populations trying to do that at the same time as trying to figure out how to feed their kids and deal with all the modern illnesses, without medication.

          • “I have discounted wind and water power as being too insignificant to affect our problem very much…”

            As Gail points out, wind turbines run on a steady stream of replacement parts!

            But if you look to the past, there may be some wiggle room for both technologies, but probably for direct mechanical motion, rather than for producing high-quality electricity.

            The Dutch are famous for windmills, which can be used for grinding grain or pumping water. Likewise, primitive water power.

          • Jan, when thinking about the Dutch and windmills, it’s important to consider numbers. in 1800 there were around 2.5 m people, now there’s 16m, 20% of the land is below sea level. It would be impossible to sustain that using wind power. Like everybody else, the Dutch have switched to diesel and electricity to stay above water

            • I think it is clear there is no “silver bullet,” that we have seriously overshot carrying capacity, that many people will have to “go away” — hopefully, with as little pain and stress as possible. If I manage to live into my 80’s, I’ll still be part of that solution before 2040. Natural attrition of baby-boomers — perhaps sped along by lack of heroic life end-of-life support — should help.

              But don’t you see “appropriate technology” uses for wind and water for those who will try to carry on? Or do you think it’s useless to even try?

          • no—I think we should and will try and go on trying.
            That isn’t the danger. The danger lies in the vast majority refusing to accept that there is any kind of problem.
            They will continue to demand the status quo–or better.
            That is clear right now, where there is a certainty that ‘prosperity’ in the context that we think of as normal, is purely a matter of political will or religious dogma. Vote for me and I will return gas to $2 gallon. (Bachmann) millions voted for her–there are many others of similar ilk. I think Obama has done his best (speaking as an outside observer), but ultimately he is faced with the same problem. He knows the facts, that endless borrowing doesn’t get rid of debt, the economy can only be sustained on cheap oil, and there isn’t any.
            I really believe that the emperor knows he’s got no clothes on, but he daren’t mention it either. Right or wrong–he ain’t stupid.
            He’s just sitting at the front of the same rollercoaster as the rest of us.
            When his system doesn’t work, you can be certain that a preacher/president will be voted in, because there will be literally nothing else on offer. Several lined up last time round.
            It won’t work of course, but then there will be no alternative to violent revolution. Desperate measures. Equally pointless, but nevertheless violence is certain. Syria right now is a resource war, under the guise of religion. The youth of oil producing nations are going to have a very nasty shock when they realise that their food supply depends on oil sales. They too will revolt, probably blaming someone else’s god. We in the oil dependent west face the same difficulty and denial. (and god obsession)
            But large scale conventional warfare cannot be sustained, (as WW2) so what alternative is there?
            Asymmetric wars are going on right now, as things get even more desperate, it will go nuclear.

      • Exactly. We USED to have a problem that looked like trying to change the tyre on a bike while you were rising it at full speed down a hill. Now, we are out of time even to do that, we are at full speed and at the bottom of the hill there is a cliff. Or a wall. The ONLY option for a few of us is to jump off the bike and accept the inevitable broken bones, grazes and other injuries rather than hit the wall or go over the cliff.

        Or grow wings.

        In the end, all the stuff about renewable electricity, biofuels and hydrogen is no more than a tech spin on magical rescue thinking. The future belongs to some, only some, among those who are growing stuff, including fuel trees, harvesting and holding water – LOTS of water – and being fanatical about nutrient flows. If you aren’t already in that group, you aren’t even on the manifest for the onward journey of spaceship earth.

        And if you ARE on the list, you have about a 10% chance.

      • As usual, your so right Gail, we insist in shifting the chairs on this sinking “Titanic”, air powered cars, electric cars, cars fueled with alcohol etc cannot “fuel” our future. They just don’t get it, they ALL require OIL to be built & maintained.
        It’s too late to avoid the horrendous tragedy of billions of people starving, waring or dying of once preventable or curable diseases.
        We have to stop trying to keep what worked yesterday going in the face of declining, essential resources. We need to start making small towns sustainable & not waste our time & resources trying to keep the big cities “sustainable” because they are huge energy sinks & when those resources can no longer flow in the amount needed to support them, then those big cities will be unlivable & hordes of desperate people will be flooding out of them seeking relief.

        Looking at how governments have behaved in the past, I would not be surprised to see governments murdering their own people to maintain control. They could cut the electricity in the winter, remove powered snow shovels & the lack of electricity will also stop the water pumps, sewage treatment & close hospitals.
        In the warmer areas, they could spay militarized diseases over the big cities to kill the millions that exist in them. Of course the “important” people would be warned ahead of time so they could flee to their vacation homes away from those targeted cities.

        The problems I see with making small towns sustainable is that the “leaders” & citizens still don’t get it.
        Here they are planning for another golf course on the chilly, windy coast! How stupid!!

        I wonder what it will take to wake people up to the fact that it’s not the 1950’s any more, we are not energy independent, we are not food secure, we have lost our manufacturing to slave worker countries, we have lost the skills our ancestors had to be sustainable without electricity, diesel plows & farm equipment, chemical fertilizers,pesticides, herbicides, diesel trucks to haul their products off to the processors or cities.
        We will undergo drastic changes in the future thanks to climate change & loss of cheap energy.
        There will be no “recovery”.
        But TPTB keep trying to bring back yesterday & that cannot happen.
        Because of all this, we will have a collapse.

  3. Dear Ms. Tverberg,
    Thanks for your fascinating article on the possibility of oil prices falling. I noticed it on your blog a few weeks ago, but just now had time to read it.

    The main question I have is whether:

    a.) your analysis is correct because the deflationary feedbacks of higher energy costs will, ceteris paribus, bring down oil prices significantly in the next few years, as you eloquently argue
    or b.) oil prices will fall temporarily in the aftermath of an oil shock similar to the 2008 oil spike but will remain relatively high in real terms by historical standards.
    or c.) your analysis is incorrect because oil prices will still rise in real terms as a more basic supply outpacing demand dynamic would predict

    Your arguments for lower prices are very compelling. One thing I struggle with in terms of lower oil prices is the fact that a barrel of oil costs about $100 now but it contains the energy equivalent of 25,000 hours of human work. Since, even in the world’s poorest countries, it costs much more than $100 to feed a human enough for him/her to supply 25,000 hours of work, it seems that the value of oil is still far beyond $100 per barrel. So, even if the dollar cost went up significantly more, there may still be a demand for oil.

    I realize that net energy, or declining EROI, is key to whether or not some oil reserve is profitable to exploit…

    Also, it may be that consumption in the developed world will fall, as we seem to be at the edge of limits in fiscal and monetary policy, as you have demonstrated, and consumers in North America, W. Europe, and Japan can reduce their marginal consumption of oil and still survive. But, in the developing world, maybe a small per capita marginal increase in oil consumption is probable because many developing nations are currently in a better fiscal situation and there is a lot of gain for a small increase in oil consumption. (e.g. a family in Philippines or Thailand using a tricycle (i.e. motorcycle with sidecar) more frequently.

    I’m still scratching my head regarding all of this, but your article has brought up many issues which I had not really considered, so thanks very much! I am a high school teacher and I have shared your post with my students.

    Kind Regards,
    Hugh Kelly

  4. @Gail:
    Hi Gail:
    I know you’re really from Missouri and won’t believe it till you see it and taste it, etc., but I really wish you’d accept the possibility — only the possibility, not yet the reality — that electric vehicles are gradually carving out market share that will only increase. Here are some references:
    12% of Norway’s 2013 auto purchases were electric vehicles. http://www.electric-vehiclenews.com/2013/12/norweigian-electric-car-sales-hit-12.html
    0.1% of US were plug-in EV’s, but 3+% were hybrid electric. And the numbers are climbing.
    Berkeley Labs has completed development of Lithium-Sulfur batteries, which provide 100% longer range than Lithium-ion. This will raise ranges to 300 – 400 miles, possibly more. http://www.electric-vehiclenews.com/search/label/Battery%20News
    The big issue is still price. But the life cycle cost is cheaper because the fuel is cheaper (although Big Electricity may have learned how to gouge from Big Oil…) Still, the cost difference of $0.65 versus $3.00 per gallon equivalent is immense for a vehicle that gets say 30 miles per gallon, drives 500 miles per month for 5 years. The fuel cost differential (above costs) is $12,000 less $2700, or an 80% reduction of cost.
    The roads maintenance issue is a canard, IMHO, since plenty of oil will still be pumped and refined into asphalt. Currently, only a small percentage of every BBL is turned into asphalt. Also, concrete is also used and its use as pavement could be expanded.
    The one thing that you’re right about, Gail, is that it hasn’t all happened yet. But these things are beginning to happen. I know, I think you would have felt the same way about the Wright Brothers, whose first flight occurred about a hundred and ten years ago.
    Cheers, Chris

  5. Dear Gail
    This is from the article on Megafauna in Wikipedia. You will note that fluctuations in the population of megafauna can contribute to climate change. When megafauna ruled the world, temperatures were 10 degrees C warmer than the present. I think most people would say that humans couldn’t survive a 10 degree C increase in temperature. When humans slaughtered more recent megafauna, the reduction contributed to cooling.

    ‘Large populations of megaherbivores have the potential to contribute greatly to the atmospheric concentration of methane, which is an important greenhouse gas. Modern ruminant herbivores produce methane as a byproduct of foregut fermentation in digestion, and release it through belching. Today, around 20% of annual methane emissions come from livestock methane release. In the Mesozoic, it has been estimated that sauropods could have emitted 520 million tons of methane to the atmosphere annually,[44] contributing to the warmer climate of the time (up to 10 C warmer than at present).[44][45] This large emission follows from the enormous estimated biomass of sauropods, and because methane production of individual herbivores is believed to be almost proportional to their mass.[44]
    Recent studies have indicated that the extinction of megafaunal herbivores may have caused a reduction in atmospheric methane. This hypothesis is relatively new.[46] One study examined the methane emissions from the bison that occupied the Great Plains of North America before contact with European settlers. The study estimated that the removal of the bison caused a decrease of as much as 2.2 million tons per year.[47] Another study examined the change in the methane concentration in the atmosphere at the end of the Pleistocene epoch after the extinction of megafauna in the Americas. After early humans migrated to the Americas about 13,000 BP, their hunting and other associated ecological impacts led to the extinction of many megafaunal species there. Calculations suggest that this extinction decreased methane production by about 9.6 million tons per year. This suggests that the absence of megafaunal methane emissions may have contributed to the abrupt climatic cooling at the onset of the Younger Dryas.[46] The decrease in atmospheric methane that occurred at that time, as recorded in ice cores, was 2-4 times more rapid than any other decrease in the last half million years, suggesting that an unusual mechanism was at work.[4’

    Today, there is concern that the enormous number of cows is contributing to methane emissions in sufficient quantity to result in dangerous warming. According to a couple of other Wikipedia articles, there were once 60 million bison in North America. There are now 90 million cows in the US. Doing a detailed analysis of the impact of replacing bison with cows is beyond my capacity, but they are genetically close together and the numbers of ruminants today seems to be roughly what it was back in the olden days. We have replaced wild with domesticated and eliminated the huge ones. Bison are more likely to injure visitors to Yellowstone than bears are likely to injure visitors. A natural bison also had very little fat (modern bison have been cross bred with cows to give them more fat while retaining some of the romance of the frontier). Cows could be manipulated to have more fat or less fat, and were far more tame. You can understand why ranchers preferred the cows. If wooly mammoths had a distinctively different ecological niche than cows, I don’t know what the distinction is…but I don’t claim expertise in the area.

    Don Stewart

    PS Albert Bates, in The Biochar Solution, states that reducing cows to what can be grass fed and using the grain to feed humans could support 11 billion or more.

    • Don,
      I don’t believe the earth can support 11 billion people even if we converted to a vegetarian diet. There are two very important limitations. One is fresh water, the other is temperature. During hotter summers crop yields have decreased significantly. Higher temperatures and climate change are shifting rain fall patterns, run off, and soil moisture content, limiting total crop production. We are seeing more severe and longer droughts resulting in the loss of arable crop land. Farmers have been exploiting aquifers for irrigating food crops and as temperatures rise and droughts occur they are taking too much water causing rapid decline in groundwater reserves. Fracking also uses a large amount of water and is polluting ground water thus reducing water availability. Ethanol will consume 40% of the 2013 U.S. corn crop so now we are feeding our cars ‘corn’ as well as confined animals. Combine all these factors and I don’t believe the earth will come close to feeding 11 billion people, even if you could convince them to become vegetarian. And being mostly vegetarian myself, I can also add another limitation. Few people know how to cook vegetarian meals!


      • Dear Jody
        Part of the problem is my lack of precision. Another, equally important part, is that we are facing a sort of ‘limits to growth’ scenario. That is, change in one factor has consequences for other factors.

        I think Albert was simply taking the current harvest of grains and adding into the human diet all the grains fed to animals or to biofuels plants. The numbers come out somewhere around 11 billion.

        Such a calculation ignores lots of other stuff such as the effects of climate change, depletion of aquifers, maldistribution of farmland, debt levels, and all the other evils which afflict us. If you were having a discussion over a beer with Albert, I am sure you would find that he is painfully aware of all those things.

        Don Stewart

        • Don,
          I’m sure that he is. But when someone says the world can feed 11 billion people there are too many people that think “No problem. We have plenty of time.” Just like peak oil “half the oil is still in the ground…No worry. I still have plenty of time.” People don’t read the fine print!

          One of the main reasons I stopped eating meat regularly was to reduce our family’s consumption of resources. But try to tell people to change their behavior and you hear “I wouldn’t be able to do that.” “I don’t want to drive less, eat less, waste less, garden, or cook….” Americans want to waste their time doing all the endless things we do to entertain ourselves. The list is endless.

          How can Americans make any effective change in our consumption of resources if we aren’t willing to consume less? The only thing that slow our consumption is a great recession, chronic under or unemployment, and rising prices. Eventually the choice is taken away, and people can’t afford to over consume. Unfortunately, now it’s China’s turn. Meat consumption is expanding as rapidly in China as auto sales.


          • Dear Jody
            I am afraid that the issue of ruminants is quite complex, and solving it requires more than just ‘consume less’. Albert covers this in a chapter titled The Role of Ruminants.

            First, he covers the usual facts that confinement animals consume insane amounts of water, fossil fuels, and grains which might feed humans.

            But, second, he covers the facts as laid out by Alan Savory that grasslands cannot thrive in the absence of ruminant grazing. Grass has no way to get rid of dead material in the absence of grazing. In fact, it is designed for grazing because its meristem is right down at ground level. So a cow is taking care of the excess material in a way that doesn’t hurt the grass at all. In addition, the cow is depositing manure which keeps the soil food web which supports the grass very happy. The cow is heavy, so its hooves push surplus grass into the soil, creating just the right amount of disturbance and composting the surplus right in place. Albert states that traditional grasslands such as the Great Plains, Outback Australia, and the Ural mountain foothills once had 20 percent carbon in the soil. I don’t know the source of his information, but if his numbers are correct then the Aborigines were doing a pretty good job in the Outback.

            And third, rotational grazing is a marvellous way to restore topsoil. The Australians, especially Geoff Lawton and Darren Doherty, are very strong advocates of rotational grazing to grow topsoi rapidly. Here in the Southeast US, I haven’t heard any results from other methods which come close.

            Joel Salatin, in one of his videos with Joe Mercola, says that all cows should be one hundred percent grass fed. Mercola demures that a lot of beef is labeled ‘grass fed’, but is actually finished on grain, and what is a city dweller to do? Salatin says that the city dweller should make a trip to visit the farmer, look him in the eye, and ask about ‘grain finishing’. A cow finished on grain is a sick cow.

            I do not wish to get embroiled in arguments about sick cows and whether eating beef is deadly. If we just accept the fact that grasslands are designed to be grazed, and that rotational grazing is the fastest demonstrated method to restore topsoil, then we are likely to be very cautious in laying down hard and fast rules.

            In his chapters on reforestation and afforestation, Albert gives some examples of very harsh landscapes which are now growing trees. Perhaps we can grow trees in places where grass was growing 400 years ago–or maybe only cactus. See Geoff Lawton’s update from last week on his Greening the Desert project in Jordan:

            I draw these conclusions:
            1. There are things we can do to sequester a lot of carbon.
            2. We also need to rapidly ramp down fossil fuel consumption.
            3. Fossil fuels are very valuable, in terms of human survival, to produce products such as biochar and to establish forests and to green the desert. Fossil fuels should not be squandered in Iowa cornfields which are just about consumption and nothing about capital accumulation.
            4. We will have to live differently. This is the conclusion that Art Berman comes to in his talk to the Houston Geological Society:

            For those people who have not read Albert’s Biochar book, I recommend it highly. I am rereading it in anticipation of Albert’s visit to our neighborhood in early February. I am impressed with his ability to communicate the nature of the knife edge humanity will need to walk in order to survive. We should be feeling urgency and humility at our ignorance and impatience with our procrastination.

            Don Stewart

          • Eating less will only make it possible to feed more people so they can have even more children!
            I still eat a little meat and I’ll be dammed if I’m going to go vegan just so more people can breed even more poorly fed children. We cannot solve the problem of too many people by eating less, that will only result in more hungry people.
            We are in a trap of our own making, The number of people that we will be able to feed will decline & there is no way we can prevent this.
            The best we can do now is to get as many farmers as possible to cut their use of fossil fuels, have crops rotated with legumes, then other crops before putting that land back into pasture to recover.
            I drive as little as possible, I have a small gas frugal auto, I cook my own meals but like it or not, I still have to do some driving thanks to the way we overdeveloped the land and sprawled everyone away from the shops. Our only local market is scheduled to close to I am being forced to drive even further to do my grocery shopping. They have made living in towns & cities too expensive so that forces people to commute many miles from their homes/apartments to work.

            We must stop trying to feed more & more people by using chemical extenders, sawdust, & other non food extenders & just produce real organic food. I think that would also improve the health of the survivors as well as the land. There is way too much crap in our “food”.

            The plow has lost the race with the breeders, we must recognize that we cannot feed a constantly growing population & it’s foolish to keep trying.

            • Might seem like a “chicken and egg” sort of issue, but among ecologists, it’s quite clear that excess food creates more people, not the other way around.

              So the coming fossil-sunlight food crunch will solve the “population problem.”

              If there ever is a time of plenty, this very fact will automatically lead to an increase in the population until the natural state of starvation and misery is restored. — Richard Dawkins

          • Eating less doesn’t necessarily mean there is more food for others when food supplies are diminishing. And just because we eat less meat doesn’t mean others will eat more meat. It really depends on the price of meat for most families.

  6. Isn’t it a crime that our actions are like that of yeast in a petri dish? We have named ourselves Homo sapiens sapiens but we certainly don’t act like it do we. Way back in the 1960’s I thought we had too many people then so I made sure I didn’t get pregnant, why add to the problem?

    Unfortunately, it’s the uneducated & stupid who have the most children or those poor folks who still live in a theocracy who are denied birth control & abortions.There are still stupid fundies here who are doing their best to turn this country into a theocracy without birth control or abortions but who also refuse to pay for child care for those poor women who were forced to have children against their will.
    They only care about those “children” from conception to birth, after that, tough luck kid.
    We are YEAST! We are also toast.

    • Hello, Yes, that reminds me of some of the songs in the 1960’s and 1970’s when I was growing up songs saying that there are far too many of us even back in those days, there have been so many changes that I have since then. My first trip to Asia was an eye opener on how crowded the world is outside our US borders, but I mostly grew up in rural Californian and now we are in Oregon, there are still some places with lots of land in some countries but not in most of Asia.

      The subject of birth control is a tough one, many think that two should be the limit, that would replace mom and dad but perhaps since there are too many of us on the planet one child may be appropriate if we want to decrease the population, but the problem with that is soon there will be far too many old people and not enough young folks to make an economy work to pay old folks pensions and care. A difficult subject and many have their opinions based upon their beliefs.

      Well nature will prevail either way, I am still hoping for the Star Trek type “star ships” to take about 80 percent of us to the new beautiful bountiful garden planets…. For my family we would prefer to remain here in our home planet after many leave, just a dream? but time will tell.


      • Hello, One thing I posted about being too many old people, and – if we were to somehow cut down the birthrate, it would help, — but in thinking about that it would only last about a generation and it would re balance it self due to die offs of the older generation and fewer children being born. So we would have a hard time for perhaps 20 years with the older generation needing care from a shrinking younger generation…

        It would be the most natural and less warlike way, not like End of More describes in our nuclear end days with the big bombs. I really do not think so, at least really hope not, as I think that there are those that would not allow those bombs to be launched.

        Perhaps things are already under way to this, seems to be lots of sick people these days. I think it is from what we eat mostly. So some could argue that we are killing our selves off by eating all of these processed and fast foods.

        If you eat the foods that you see mostly at the stores and fast etc. you may get sick as it is not a healthy diet.

        I do see so many more sick people now than when I was a kid in the 1960-1970 period, lots more people suffering ailments and in little electric wheel chairs, some are veterans and many more I fear ate the the junk foods that line the shelves.

        My point is even to buy fresh meat these days often there are additives, for many there are I think too many additives in our foods now compared to 30 years ago. Shop carefully and read labels if you are worried about this.

        So many basic items in our food stores contain processed foods even things like a fresh turkey is pumped full of wheat and broths that some can get sick from.

        We will be healthier for it, it is very expensive to shop at some stores for specialty goods and we will pay twice the price for everyday items like chicken or produce. But there are some good stores out there that provide things like organic chicken and cage free eggs and organic veggies and these are worthwhile to support. The food does taste better too I found. It is harder and takes more time and expense to make food at home for a working person and if you grow your own even more time will be needed but you will likely be healthier.


      • Travel to another star with earth like planets is out. The nearest star is several light years away & is a white dwarf, the burned out core of a dead star. Other stars with planets are much to far away for any hope for us to escape to & they are uninhabitable, too hot or too big.

        I wouldn’t do like china did & limit people to just one child. That unfortunately resulted in the abortion of female fetuses & the birth of too many males, but I do approve of limiting us to just 2 healthy children then sterilize the women & man to prevent any more being born.
        Of course this won’t happen, there would be too much protest & resistance for it to work. So I fear our numbers will continue to climb until it’s stopped by war, disease & starvation just like the other “dumb” animals.
        I also hope we won’t be so stupid as to use the nuclear option, that would be ghastly!
        We are being ruled by those who don’t plan beyond the next quarter & who’s superstitions won’t allow them to think rationally. They seem to believe that we are exempt from the limits imposed by nature.
        Oil allowed us to delude ourselves that we were capable of over coming limits to resources & energy but nature will soon prove us very wrong.

  7. Hello All,
    Over population, food and water insecurity is much worse in some regions of the world than others. It is destabilizing many countries and will likely get much worse over the next decade. It is a highly complex issue and will not be solved with one size fits all solutions. I recommend anyone interested should read “Countdown”. I found it to be a very balanced and well written book.

    When I wrote “we need to consume less resources” I was referring to all resources not just food. Learning to live on less means we spend less money, incur less debt, and are better prepared for a future when we enter into scarcity of food, water, and energy. If we take this endeavor seriously we really start to think about the things we use, where they come from, how we get them, the energy embedded in them, and what if anything will be available to replace them. It forces us to look closely at our lifestyle and make conscious decisions about the things we “need” versus the things we “want”. Wants we can live without.

    If we do this long enough, with the understanding that much of the things currently available are going to go away anyway, maybe abruptly, we are better prepared to live on less. One of the unexpected benefits of doing this is that I have learned to simplify my life and reduce stress I never realized I had. I feel satisfaction and happiness in ways I never expected. I have also found it interesting how many other people in my community are doing the similar things as me. We may come from different social, political, religious, and economic viewpoints, but there are many people who are already struggling to make ends meet, or who believe that something is going wrong in the world, or worry about our future. The Great Recession is still taking it’s toll on us. We are all going to have to adjust our lifestyle eventually.

    I don’t believe we can fix the dilemma we are in. The most important thing we can do is to uncouple our lives from the global economy, and that mainly means consuming less of anything that requires oil. We need to prepare for a future in which we are dependent on our own efforts and connected to the resources of our local community. Whether we agree with each others view points or not, I think we need to accept the fact that we won’t survive without helping each other. A community is made up of many different kinds of people with many different talents and abilities.


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