The Real Oil Extraction Limit, and How It Affects the Downslope

There is a lot of confusion about which limit we are reaching with respect to oil supply. There seems to be a huge amount of “reserves,” and oil production seems to be increasing right now, so people can’t imagine that there might be a near term problem. There are at least three different views regarding the nature of the limit:

  1. Climate Change. There is no limit on oil production within the foreseeable future. Oil prices can be expected to keep rising. With higher prices, alternative fuels and higher cost extraction techniques will become available. The main concern is climate change. The only reason that oil production would drop is because we have found a way to use less oil because of  climate change concerns, and choose not to extract oil that seems to be available.
  2. Limit Based on Geology (“Peak Oil”). In each oil field, production tends to rise for a time and then fall. Therefore, in total, world oil production will most likely begin to fall at some point, because of technological limits on extraction. In fact, this limit seems quite close at hand. High oil prices may play a role as well.
  3. Oil Prices Don’t Rise High Enough. We need high oil prices to keep oil extraction up, but as we reach diminishing returns with respect to oil extraction, oil prices don’t rise high enough to keep extraction at the required level. If oil prices do rise very high, there are feedback loops that lead to more recession and job layoffs and less “demand for oil” (really, oil affordability) among potential purchasers of oil. One major cut-off on oil supply is inadequate funds for reinvestment, because of low oil prices.

Why “Oil Prices Don’t Rise High Enough” Is the Real Limit

In my view, our real concern should be the third item above, “Oil Prices Don’t Rise High Enough.” The problem is caused by a mismatch between wages (which are not growing very quickly) and the cost of oil extraction (which is growing quickly). If oil prices rose as fast as extraction costs, they would leave workers with a smaller and smaller percentage of their wages to spend on food, clothing, and other necessities–something that doesn’t work for very long. Let me explain what happens. 

Because of diminishing returns, the cost of oil extraction keeps rising. It is hard for oil prices to increase enough to provide an adequate profit for producers, because if they did, workers would get poorer and poorer. In fact, oil prices already seem to be too low. In years past, oil companies found that the price they sold oil for was sufficient (a) to cover the complete costs of extraction, (b) to pay dividends to stockholders, (c) to pay required governmental taxes, and (d) to provide enough funds for investment in new wells, in order to  keep production level, or even increase it.  Now, because of the rapidly rising cost of new extraction, oil companies are finding that they are coming up short in this process. 

Oil companies have begun returning money to stockholders in increased dividends, rather than investing in projects which are likely to be unprofitable at current oil prices. See Oil companies rein in spending to save cash for dividendsIf our need for investment dollars is escalating because of diminishing returns in oil extraction, but oil companies are reining in spending for investments because they don’t think they can make an adequate return at current oil prices, this does not bode well for future oil extraction.

A related problem is debt limits for oil companies. If cash flow does not provide sufficient funds for investment, increased debt can be used to make up the difference. The problem is that credit limits are soon reached, leading to a need to cut back on new projects. This is particularly a concern where high cost investment is concerned, such as oil from shale formations. A rise in interest rates would also be a problem, because it would raise costs, leading to a higher required oil price for profitability. The debt problem affects high priced oil investments in other countries as well.  OGX, the second largest oil company in Brazil, recently filed for bankruptcy, after it ran up too much debt.

National oil companies don’t explain that they are finding it hard to generate enough cash flow for further investment. They also don’t explain that they are having a hard time finding sites to drill that will be profitable at current prices.  Instead, we are seeing more countries with national oil companies looking for outside investors, including Brazil and Mexico. Brazil received only one bid, and that for the minimum amount, indicating that oil companies making the bids do not have high confidence that investment will be profitable, either. Meanwhile, newspapers spin the story in a totally misleading way, such as, Mexico Gears Up for an Oil Boom of Its Own.

US natural gas is another product with a similar problem: the price is not high enough to justify new production, especially for shale gas producers. The huge resource that some say is there is simply too expensive to extract at current prices. Would-be natural gas producers cannot tell us this. Instead, we find a recent quote in the Wall Street Journal saying:

“We are not dealing with an era of scarcity, we are dealing with a situation of abundance,” Ken Cohen, Exxon’s vice president of public and government affairs, said in an interview. “We need to rethink the regulatory scheme and the statutory scheme on the books.”

Cohen could explain that without natural gas exports, there is no way the natural gas price will rise high enough for Exxon-Mobil to extract the resource at a profit. Without exports, Exxon Mobil will lose money on the extraction, or more likely, will have to leave the natural gas in the ground. With low prices, the huge resource that Obama has talked about is simply a myth–the prices need to be higher. Of course, no one tells us the real story–it seems better to let people think that the issue is too much natural gas, not that it can’t be extracted at the current price. The stories offered to the news media are simply ways to convince us that exports make sense. Readers are not aware how much stories can be “spun” to make the current situation sound quite different from what it really is.

What Goes Wrong with “Climate Change” and “Limit Based on Geology” Views

The Illusion of Reserves. Oil and gas reserves may seem to be “be there,” but a lot of conditions need to be in place for them to actually be extracted. Clearly, the price needs to be high enough, both for current extraction and to fund new investment. Other conditions need to be in place as well: Debt needs to be available, and it needs to be available at a sufficiently low rate of interest to keep costs down. There needs to be political stability in the country in question. Something as simple as a continuation of the uprisings associated with the Arab Spring of 2010 could lead to the inability to extract reserves that seem to be present. Other requirements include availability of water for fracking and the availability of skilled workers and drilling rigs.

In the past, we have been far enough away from limits that issues such as these have not been a big problem. But as we get closer to limits and stretch our capabilities, these become more of a problem. Right now, availability of debt at low interest rates is a particularly important issue, as is the need for adequate oil company profitability–things that are easy to overlook.

Wrong Economic Views Leading to Wrong Oil Views. Economists have put together economic models based on a world without limits. A world without limits is the easy approach, because mathematical relationships are much simpler in a world without limits: a relationship which held in 1800 is expected to hold in 1970 or in 2050.  A world without limits never offends politicians, because growth always seems to be possible, meaning a never-ending supply of jobs and of goods and services for constituents. A model without limits produces the simple relationships that we are accustomed to, such as “Inadequate supply will lead to a rise in price, and this in turn will tend to create greater supply or substitutes.” Unfortunately, these models omit many important variables and thus are inadequate representations of the world we live in today.

In a world with limits, there are feedback loops that cause high oil prices to lead to lower wages and more unemployment in oil importing countries. Thus “demand” can’t keep rising, because workers can’t afford the higher oil prices. Oil prices stagnate at a level that is too low to maintain adequate investment. High oil prices also feed back into slower economic growth and a need for ultra-low interest rates to raise demand for high-priced goods such as cars and homes. 

When prices remain in the $100 barrel range, they are still high enough to damage the economy. Businesses are not much damaged, because they have ways they can work around higher oil prices, especially if interest rates are low.  Most of the ways businesses can work around high oil prices involve reducing wages to US workers–for example, outsourcing production to a lower cost country, or cutting the pay of workers, or laying off workers to match lower demand for goods. (Lower demand for goods tends to occur when oil prices rise, and businesses raise their prices to reflect the higher oil costs.)

Workers are still affected by costs in the $100 barrel range, and so are governments. Governments must pay out higher benefits than in the past, to keep the economy afloat. They must also keep interest rates very low, to try to keep demand for homes and cars as high as possible. The situation becomes very unstable, however, because very low interest rates depend on Quantitative Easing, and it does not appear to be possible to continue Quantitative Easing forever. Thus, interest rates will need to rise. Such a rise in interest rates is likely to push the country back into recession, because taxes will need to be higher (to cover the government’s higher debt costs) and because monthly payments on homes and new car purchases will tend to rise. The limit on oil production then becomes something very remote from geology–something like, “How long can interest rates remain low?” or “How long can we make our current economy function?”

The Interconnected Nature of the Economy. In my last post, I talked about the economy being a complex adaptive system. It is built from many parts (many businesses, laws, consumers, traditions, built infrastructure). It can operate within a range of conditions, but beyond that range it is subject to collapse. An ecosystem is a complex adaptive system. So is a human being, or any other kind of animal. Animals die when their complex adaptive system moves out of its range.

It is this interconnectedness of the economy that leads to the strange situation where something very remote from the real problem (oil limits) can lead to a collapse. Thus, it can be a rise in interest rates or a political collapse that ultimately brings the system down. The path of the downslope can be very different from what a person might expect, based on the naive view that the problems will simply relate to reduced supply of oil.

A Case Study of the Collapse of the Former Soviet Union 

The Soviet Union was major oil exporter and a military rival of the United States in the 1950s through 1980s. It also was the center of a huge economic system, involving many other countries. One thing that bound the countries together was the use of communism as its method of government; another was trade among countries. In effect, the group of communist countries had their own complex adaptive system. Things seemed to go fine for many years, but then in December 1991, the central government of the Soviet Union was dissolved, leaving the individual republics that made up the Former Soviet Union (FSU) on their own.

While there are many theories as to what all caused the collapse, it seems to me that low prices of oil played a major role. The reason why low oil prices are important is because in an oil exporting country, such as the FSU, oil export revenues represent a major part of government funding. If oil prices drop too low, there is a double problem: (1) it becomes unprofitable to drill new wells, so production drops and, (2) the revenue that is collected on existing wells drops too low. The problem is then a huge financial problem–not too different from the financial problem the US and many of the big oil importing countries are experiencing today.  

Figure 1. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Figure 1. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

In this particular situation, oil prices (in inflation adjusted prices) hit a peak in 1980. Once oil prices hit a peak, FSU oil production very much flattened. There was a continued small rise until 1983, but without the very high prices available until 1980, aggressive investment in new oil extraction dropped back.

Not only did FSU oil production flatten, but FSU oil consumption also flattened, not long after oil production stopped rising (Figure 2). This flattening helped maintain exports and the taxes that could be collected on these exports.

Figure 2. Former Soviet Union Oil Production and Consumption, based on BP Statistical Review of World Energy, 2013.

Figure 2. Former Soviet Union Oil Production and Consumption, based on BP Statistical Review of World Energy, 2013.

Even though total exports were close to flat in the 1980s (difference between consumption and production), there were some countries where exports that were rising–for example North Korea, shown in Figure 4. This mean that oil exports for some allies needed to be cut back as early as 1981. Figure 3 shows the trend in oil consumption for some of FSU’s allies.

Figure 3. Oil consumption as a percentage of 1980 consumption for Hungary, Romania, and Bulgaria, based on EIA data.

Figure 3. Oil consumption as a percentage of 1980 consumption for Hungary, Romania, and Bulgaria, based on EIA data.

A person can see that oil consumption dropped off slowly at first, and increased around 1990. All of these countries saw their oil consumption drop by at least 40% by 2000. Bulgaria saw is oil consumption drop by 65% to 70%.

The FSU exported oil to other countries as well.  Two countries that we often hear about, Cuba and North Korea, were not affected in the 1980s (Figure 4). In fact, Cuba’s oil consumption never seems to have been severely affected. (It is possible that exports of manufactured goods from the FSU dropped, however.) Cuba’s drop-off in oil consumption since 2005 may be price-related.

Figure 4. Oil consumption as a percentage of 1980 oil consumption for Cuba and North Korea, based on EIA data.

Figure 4. Oil consumption as a percentage of 1980 oil consumption for Cuba and North Korea, based on EIA data.

North Korea’s oil consumption continued growing until 1991. Its drop-off was then very severe–a total of an 83% reduction between 1991 and 2010. In most of the countries where oil consumption dropped, consumption of other fossil fuels dropped as well, but generally not by as large percentages. North Korea experienced nearly a 50% drop in other fuel (mostly coal) consumption by 1998, but this has since somewhat reversed.

By 1991, the FSU was in poor financial condition, partly because of the low oil prices, and partly because its oil exports had started dropping. FSU’s oil production left its plateau and started dropping about 1988 (Figure 2).  The actual drop in FSU oil production meant that oil consumption for the FSU needed to drop as well–a big problem because industry depended upon this oil. The break-up of the FSU was a solution to these problems because (1) it eliminated the cost of the extra layer of government and (2) it made it easier to shift oil consumption among the member republics, so that those republics that produced more oil could keep it for their own use, rather than sending it to republics which did not produce oil. This shortchanged non-oil producing republics, such as the Ukraine and Belarus.

If we look at oil consumption for a few of the republics that were previously part of the FSU, we see that oil consumption was fairly flat, then dropped off quickly, after 1991.

Figure 5. Oil consumption as a percentage of 1985 oil production for Russia, the Ukraine, and Belarus, based on BP Statistical Review of World Energy 2013.

Figure 5. Oil consumption as a percentage of 1985 oil production for Russia, the Ukraine, and Belarus, based on BP Statistical Review of World Energy 2013.

By 1996 (only 5 years after 1991), oil consumption had dropped by 78% for the Ukraine, by 61%  for Belarus, and by “only” 47% for Russia, which is an oil-producing state. At least part of the reason for the fast drop off was the fact that in the years immediately after 1991, oil production for the FSU dropped by about 10% per year, necessitating a quick drop off in consumption, especially if the country was to continue to make some money from exports. The 10% drop-off in oil production suggests that the decline in oil production was more than would be expected from geological decline alone. If the decline were for geological reasons only, without new drilling, one might the expect the drop off to be in the 4% to 6% range.

When oil consumption dropped greatly, population tended to decline (Figure 6). The decline started earliest in the countries where the oil consumption drop was earliest (Hungary, Romania, and Bulgaria). The steepest drop-offs in population occur in the Ukraine and Bulgaria–the  countries with the largest percentage drops in oil consumption.

Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data.

Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data.

Some of the population drop is from emigration. Some of it is from poorer health conditions. For example, Russia used to provide potable water for its citizens, but it no longer does. Some is from conditions such as alcoholism. I haven’t shown the population change for North Korea. It actually continued to increase, but at a much lower rate of growth than previously. Cuba’s population has begun to fall since 2005.

GDP growth for the countries shown has tended to lag behind world economic growth (Figure 7).

Figure 7. GDP compared to world GDP - Change since 1985, based on USDA Real GDP data.

Figure 7. GDP compared to world GDP – Change since 1985, based on USDA Real GDP data.

Nearly all of the countries listed above have had financial problems, at different times.

Belarus’s GDP seems to be doing better than the rest on Figure 7. Belarus, like the Ukraine, is a pipeline transit country for Russia. In Belarus, natural gas consumption has increased, even as oil consumption has decreased. This increase is likely helping the  country industrialize. Inflation occurred at the rate of 51.9% in 2012 according to the CIA World Fact Book. This high inflation rate may be distorting indications.

Conclusion

We can’t know exactly what path our economy will follow in the future. I expect, though, that the path of the FSU and its trading partners is closer to the path we will be following than most forecasts we hear today. Most of us haven’t followed the FSU story closely, because we wrote off most of their problems to deficiencies of communism, without realizing that there was a major oil component as well.

The FSU situation may, in fact, be better that what the Industrialized West is facing in the next few years. The FSU had the rest of the world to support it, offering investment capital and new models for development. Oil production for Russia was able to rebound when oil prices rose again in the early 2000s. As situations around the world decline, it will be harder to “bootstrap.”

One of the things that hampered the recovery of the FSU was the fact that the communist economic model proved not to be competitive with the capitalistic model. In a way, the situation we are facing today is not all that different, except that our challenge this time is competition from Asian economies that we have not had to compete with until the early 2000s.

Asian economies have several cost advantages relative to the Industrialized West:

(1) Asian competitor countries are generally warmer than the industrialized West. Because of this, Asian workers can live more comfortably in flimsy homes. They also don’t need much salary to cover heating and can more easily commute by bicycle. It is often possible to produce two crops a year, making productivity of land and of farmers higher than it otherwise would be. In other words, Asian competitor countries have an energy subsidy from the sun that the Industrialized West does not.

(2) Asian competitors are often willing to ignore pollution problems, reducing their costs relative to the West.

(3) Asian competitors generally depend on coal to a greater extent than we do, keeping their costs down, relative to countries that use higher-priced fuels.

(4) Asian competitors are less generous with employee benefits such as health care and pensions, also holding costs down.

Economists, through their wholehearted endorsement of globalization, have pushed industrialized countries into a competitive situation which we are certain to lose. While oil prices tend to push wages down, competition with Asian countries makes the downward push on wages even greater. These lower wages are part of what are pushing us toward collapse.

To solve our problems, economists have proposed a shift toward renewable energy and the implementation of carbon taxes. Unless these changes are done in a way that actually reduces costs, these “solutions” are likely to make us even less competitive with low-cost competitors such as those in Asia. Thus, they are likely to push us toward collapse more quickly.

To support this position, economists point to climate change models based on the view that the burning of fossil fuels will increase greatly in the decades again. In fact, if collapse occurs in the next few years in the Industrialized West, carbon emissions are likely to fall quickly. Because of the interconnectedness of the world system, the rest of the world will likely also encounter collapse in not many more years, and their carbon emissions are likely to fall quickly, as well. Even the “Peak Oil” emissions that are used in climate change models are way too high, relative to what seems likely to be the case.

If I am right about collapse being a possibility for the Industrialized West, then our problem will be that we as nations become so poor that we can no longer find goods to trade with Asian countries. Most of our goods will not be competitive as exports, and we won’t be able to simply add more debt to rectify the situation. Thus, we will become unable to buy many goods we depend on, including computers and replacement parts for wind turbines.

Breakups of many types are possible. The European Union may cease to operate in the way it does today. The International Monetary Fund is likely to cease operating in the way it does today, because of the collapse of many of its members who provide funding. The US will be subject to strains of the type that lead to break up. If nothing else, oil producing states will want to withdraw, so that they are not, in effect, subsidizing the rest of the US economy.

It is unfortunate that economists are tied to their hopelessly out-of-date economic models.  Part of the problem is that the story of “collapse around the corner” doesn’t sell well. The alternate story economists have come up with really isn’t right, but it is pleasing to the many who benefit from subsidies for renewables, and it makes politicians look like they are doing something. The specter of climate change in the distance gives an excuse to cut back oil use, among other things, so has at least some theoretical benefit.

It is unfortunate, however, that we cannot look at the real problem. Unless we can understand the problem as it really is, it is impossible to find solutions that might actually be helpful.

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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347 Responses to The Real Oil Extraction Limit, and How It Affects the Downslope

  1. Jorge Vilchis says:

    Dear Gail
    Merry Christmas to you and your family, and a happy new year !!

    Thank you for all the articles you wrote at TOD and you keep writing here.

    Jorge Vilchis.

  2. Archie Stanton says:

    Leo,

    I was interested in you ideas for nuclear power, and I looked up the current published plans for China’s nuclear power plant expansion.

    China is aiming to produce 6% of its electricity by nuclear power by 2020, and 16% by 2030.

    Although these numbers are better than nothing,,,this performance seems to be in line with the U.S. build-out of nuclear power…is it true that most U.S. nuclear power plants were built between the mid 1960s and the early 1980s? Ans the U.S produces ~19% of its electricity from nuclear power.

    I am surprised that China cannot do better, that is, build out nuclear plants much faster, given that:

    1) They are a late-comer to the game and there are various designs to select from

    2) China has over 1 billion people

    3) China has a goodly number of people trained as engineers and scientists, and contruction workers and metal fab skilled labor is probably a dime a dozen

    4) China enjoys a robust trade surplus

    5) China has a government-driven command economy, combined with goodly portions of capitalism…

    These are the factors that allowed ancient empires to build pyramids and such…if China picks one or two designs and can license-build them, it seems that they should be able to build/complete /at least/ several dozen plants per year, and likely more.

    Putting the analyst hat on…what are their limiting factors? Water for plant cooling? Concrete production? NIMBY from the rural farmer peasants? Steel/reactor vessel production? Waste management? Come on, they can crush each of these challenges if they put their collective party minds to it! Chines version of Yucca Mountain? Can do easy..legend has it they may already have thousands of miles of tunnels for unknown purposes.

    I am at a loss how China, given all of its resources and advantages in commanding its economy, cannot do better…why can’t they build nuclear reactors faster?

    I think this is a worthy issue to research…if China is being held back from its potential maximum build-out, what hope is there for other counties lacking one or more of China’s advantages to rapidly build out nuclear power plants in their countries?

    This published China timeline is worrisome…there must be some factor(s) holding them back.

  3. Paul says:

    Sorry I have duplicated the posts of others… i just popped on to post that link then read up the page and see others have already done so.

    Of course that research should be screaming front page news across the MSM – but instead we’ll read how fracking will give us 100 years of energy.

  4. Dr. Z says:

    As for Gail’s comments on the FSU, and the price of oil in relationship to it’s collapse… I don’t understand how the pre-1989 economy of the Warsaw Pact nations functioned. While one can assume that the Soviets traded predominantly (domestically), but a great deal of trade was confined to solely within the Warsaw Pact nations. If each WP nation had it’s own currency, was the ruble the central currency? The relationship of market forces on a centrally-planned economy seems nebulous. There is a clear relationship between the progression from prolonged lows in oil prices to collapse of the USSR, but the details of such an event are perhaps many?

    • Leo Smith says:

      I have a different (and possibly totally erroneous) preceptin of te collpase of te USSR. It had been a leaky iron curtain for decades. Western culture, Western lifestyles and Western goods could not be kept out. The maintenance of what were in fact occupied and clonised countries was dependent on the maintenance of belief in a percieved externa threat, and in some kind of actual advance in living standards: so long as this was happening, people were more or less content. When it became apparent that the massive engine of it was not able to match US and NATO outputs of weaponry, living standards stagmnated, and dissilusion set in. likewise such elements of western culture as did leak across were very un threatening, and therefore deeply subversive…and hne what breached svoite deneses was not an aramy of missles or bombers, but a light plane piloted by a german landing ion Red Square, the myth of soviet defence against a hostile west was seen to be ridiculous in the extreme.

      The Soviet people no longer feared the West as much as they feared Moscow.

      The rest is, as they say, history.

      • I am sure that there are many aspects to collapse.

        Sometimes it is hard to separate cause and effect. With oil supply stagnating, the Soviet Union would look like it was falling behind the West. (Lack of technology improvements could play a role as well.)

  5. Scott Walker says:

    Hello, well we made it through another Christmas and it was not bad, the world seems calm but let us hope it stays that way.

    In the new year I will be watching the fed with the Tapering of bond buying (QE). I expect that rates will begin to rise either next year 2014 or early 2015 which will cause the Fed to reinstate QE at even a higher amount which will lead to inflation and higher prices and energy will be sought after and the higher prices will be paid for it while prices of food, gas and things like gold and silver will once again begin to rise at some point next year early 2015.

    We would be facing the opposite if it was different and the we had no FED that could print money. So my outlook is inflationary, not collapse in most areas but in some and some will do well while others suffer depending on your location and situation.

    Although stocks and bonds have done well they may be in their last good year or even less.

    I just see inflation ahead that has been bottled up for some time, just waiting to emerge.

    So I am out of stocks and bonds, but just holding real assets like real estate, if it is a main home with some water and wood lands and paid for much better. Stocks look to be topping to me and rates soon to go up which will rock even the real estate market. Not much safe places to hide in this environment. I like precious metals, quality real estate, farm investments (if I could afford one), well the Fed has the ability to create inflation so I see not a collapse ahead but just higher prices, interest rates in the years ahead, kind of like the stagflation of the 1980’s but this time more inflationary. So we will all just get by on less.

    For example this year we were just pleased to have a good Christmas Holiday meal but our tree is bare no presents except for a new baby in the family. The days of the the tree loaded with presents are gone for us but we really have all we need. Some younger families will buy lots of gifts, but not like we saw in the 1980-1990’s it seems to me as people are more careful not to over extent finances and credit which is wise I believe. Good to buy something that is really needed now a days not just toys for us adults.

    Merry Christmas Everyone.

    Scott

    • Scott Walker says:

      Hello just to reply to myself on the inflation I see coming, I did want to mention that the QE Taper will likely bring down the markets and will be infact deflationary at first, but the Fed reaction will likely be an even larger dose of QE and that reaction likely inflate some prices, depending on how bad things look perhaps the things to watch are oil, gold, aside from the bond and stocks, gold and oil and many assets (even that farm and house you may like) may initially fall before the FED starts an even larger QE and for for those that can invest may have an opportunity before the next campaign to re-inflate.

      So if you have not bought that farmhouse, we may see a dip ahead before prices rise again. I know this may differ from Gail’s view, but I will put it out there anyway. Surely gas and oil will become scarcer in the years ahead, but not for a few more it seems.

      Scott

      • Scott Walker says:

        hello Just a correction I expect that 2014 could be a deflationary year as the fed attempts to taper but perhaps 2015 we may see the higher rates , but that could be if the fed does not start to buy bonds again. So my bet is that 2014 will be a bit deflationary and then 2015 will be seeing new huge QE program if not before then and that could inflation that has been latent. Any thoughts anyone?

        Scott

        • SlowRider says:

          If we are really at the big Peak/Turning Point/End of Prosperity/Collapse….. then 2014 or 2017 don’t matter much, and what the reactions of governments will be is difficult to say – although going for inflation has a good historical record.
          I have just been reading there are about 350 Chinese billionaires today, may be many more. They sure have some big money to invest in real assets, and they won’t buy US government bonds only 🙂

        • The big danger if QE is cut back is that interest rates will rise. If interest rates rise by very much, the economy is likely to go into deep recession for many reasons. For one, the government will need to raise taxes to pay interest on its own debt. For another, the people’s monthly payment associated with buying new cars and homes will increase. There are likely to be debt defaults.

          I don’t know that other countries will stand for countries again attempting to bail themselves out using QE. If they do, the effect of QE is to pump up stock and bond prices, not particularly inflation of the price of goods.

      • My view is a dip in prices–probably not an increase. So yes, your view does differ from mine. Even if goods cost more to produce, this doesn’t mean that buyers can afford them. What actually may happen is discontinuity–lack of goods available at any price.

  6. Ikonoclast says:

    Leo Smith is spot on and very amusing in his characterisation of the Isle of Wight fiasco and its implications for modern society and its alternatives. Leo and I have had our strong disagreements on certain points. However, there is much we could also agree on.

    I am not religious but I often think of the Tower of Babel story when thinking of our modern civilisation. It is a story of hubris and of building too high. We have ratcheted up world population and technology to such a high level that there is no easy “come-down”. We are committed to continuing on the high-tech, high-energy path (if possible) because the alternative is that millions or billions will die in squalor and misery.

    It is a real dilemma. If we keep going on the high-tech, high-energy path we make the ensuing crash even worse. If we attempt to limit things now (like global population) we run into all sorts of political and social problems. The bottom line is we can’t have 7 billion plus people AND a high-tech, high-energy consumption society. Indeed, it doesn’t even seem likely we could sustain 7 billion indefinitely at a lower level of average consumption. This is because of overshoot, ecological damage and depletion of various resources.

    I think we are all floundering around a bit, wondering what will happen next. This is the final hiatus, the last calm before a kind of protracted “perfect” storm of interacting Liebig Minimums. System disjunctions are very chaotic times.

    • Stan says:

      Ikonoclast wrote: “Leo Smith is spot on and very amusing in his characterisation of the Isle of Wight fiasco…” (see http://news.bbc.co.uk/2/hi/business/1298197.stm)

      Hmmmm…it becomes obvious that every participant in a pyramid scheme must believe that there is an infinite supply of people who will joining in the next lower levels of the pyramid…they don’t recognize that there is a “finite” supply of pyramid participants.

      Considering how many pyramid schemes have come and melted-down – and that people are still joining in – it is becoming clearer why so many refuse to understand how finite the world resources are.

      Happy Holidays. y’all.

      Stan.

    • I am afraid the Tower of Babel story is probably a good analogy for where we are now.

    • Paul says:

      We’re in ‘The Long Emergency’

  7. Don Stewart says:

    Dear All

    A few weeks ago I mentioned Bill Gammage’s interview which is available on YouTube. Bill wrote The Biggest Estate on Earth: How Aborigines Made Australia. The recommendation prompted a torrent of criticism, the gist of most of which was that these people were just as destructive as everyone else. Since I hadn’t read the book at that time, I did not respond in any detail to all the criticisms of Gammage’s thesis.

    I will give you a brief analysis, but first I want to recommend for your quick study a picture, which can be found here:
    http://holmgren.com.au/permaculture-pocket-knives/

    It isn’t necessary to read the article. The important point is that David Holmgren’s son has crafted a knife from trash. There are frequent comments here about the impossibility of recycling. But if you believe your eyes, you have to admit that it is possible. Now this is not a microchip, but it is probably more useful than a microchip when the chips are down 🙂

    Here is the major point that I will try to make in this post. Most of us here believe that a certain type of civilization is coming to an end and that survivors, if any, will have to live differently. But we don’t know exactly how differently. Very crudely, we might think of three situations:
    1. Like today but with more strategic use of fossil fuels. Many biological food systems (rotational grazing, permaculture, natural farming, etc.) fit this description. Simple Living systems fit this description.
    2. Retrogression to the iron age, with lots of recycling. The Holmgren knife is an example.
    3. Retrogression to the stone age. And a stone age retrogression is where Gammage’s book may give us some invaluable clues. Because the Aborigines WERE living in the stone age. Furthermore, they were quite content and saw no reason to adopt the ways of the English settlers. (Australia began to be settled by the English in 1788.)

    The contrast between the English and the Aborigines could not have been more stark. The English came from a land where life was hard, the Aborigines had constructed a land where life was easy. The principle tool used by the Aborigines was the skillful use of fire. We might call theirs a ‘knowledge economy’. The Aborigines religion told them that the responsibility for land was parceled out to specific families, and those families must preserve and enhance the productivity of that land in perpetuity. The English religion said (in practice) that land was useless until converted into money. If you read the book Scarcity, and note the symptoms which arise when humans perceive scarcity, and follow Gammage’s pages and pages of evidence, you will see that the English initially discovered abundance, but created scarcity, and suffered the consequences.

    I cannot here describe the bales of evidence that Gammage offers, nor describe all the sophisticated methods the Aborigines uses to garden Australia. But consider this point: Oliver Holmgren makes a metal knife and David Holmgren carries a metal knife; the Aborigines made stone knives which were heavy and so they just left them at each campsite. The next time they camped there, they had a knife ready to use. The English would be scared of theft; theft was rare among the Aborigines, and wasn’t a big deal if it did happen. The point here is to think fluidly about what it means to live frugally, to live in the iron age, and to live in the stone age.

    I will leave you to ponder the many obstacles in the way of taking 7 billion people back to an idyllic stone age existence, but I will mention a couple.
    1. The knowledge which the Aborigines had was astonishing. How would we ever reclaim it? (Gammage knows a lot.)
    2. The culture encompassed all of Australia. HOW they did varied with the situation, but WHAT THEY WERE ACCOMPLISHING was uniform. How do you pull that rabbit out of the hat?
    3. The religion strongly enforced an ecological way of life in a non-hierarchical society. Exactly how do you propose that we do that?
    4. In contrast to New Guinea, violence was unusual. What magic elixer distinguished the Aborigines from the New Guineans?
    5. The Aborigines kept population below the carrying capacity of the land, which allowed some slack for floods and droughts. Few societies have managed such a feat. How?

    To me, one of the most poignant stories relates to one of the last bands of Aborigines in Tasmania. They were being rounded up and killed or deported by soldiers. Part of their religion was to take care of the land with burning. The small band was reduced to a fraction of their normal size. They knew the soldiers were near, and that if they started a fire, the soldiers would find them. And yet they started the fire which their religion and knowledge about the health of the land required. I cannot imagine how I would persuade a Black Friday crowd to adopt that world-view.

    Don Stewart

  8. Pingback: El limite real de la producción petrolífera y cómo afecta al decrecimiento [ENG]

  9. dogtrainer says:

    Gail,

    This is one of your best works thus far; you were able to make good arguments expressing technical concepts in non-technical terms.

    However, there remains gaps in your arguments-analysis around your theme of finite resources–of our finite world. If you could somehow figure out ways to talk more about the role of government in the development, pricing, and distribution of these finite resources as compared to the private sector’s role.

    Finally, the biggest gap in your analysis is role of integrity for individuals and groups of individual in private and public institutions as these individuals in these entities shape our finite world. For example, what would the price of gold per ounce in dollars really be (today) if the price of gold was not heavily manipulated? If gold was honestly (truthfully) priced would the price of oil be at its current price (all in dollar for example)? Therefore, if inflation was lower would not we have that $40.00 a barrel full employment economy?

    • You make the mistake of thinking that the economy of the ‘western’ industrial world is based on money and its exchange for goods and services (that is the well known economic model of taking in each others washing in exchange for money handed over the garden fence..there are Nobel prizewinners who advocate that, so you are in good company).
      We built our industrial infrastructure on the available energy embedded in cheap oil, coal and gas. Unfortunately the word ‘cheap’ (eg $2 barrel). is misconstrued in terms of monetary value. We think of ‘cheap’ oil like we think of cheap furniture or a cheap house, this a danger we face, demanding that oil ‘must’ be cheap again.
      Oil is like no other product, yet we lump it it in with everything else as if we manufacture it for profit. We don’t, oil manufactures everything for us. The real meaning of cheap or expensive hydrocarbon fuel can be assessed by the effort needed to get hold of it, which (when oil was $2 barrel), about 10c worth.
      Thus for every 10c of effort, we got $2 worth of usable energy. So why can’t we have that oil party again?
      The answer is really very simple. Those oil costs apply to the 1930s when the USA was awash with seemingly unlimited oil, and Saudi Arabia was only being guessed at. So everyone went oilcrazy, and built cities like Detroit exclusively to service an oil burning society. The endgame on that is apparent in Detroit right now. The city is bankrupt (the first of many) because oil got too expensive to burn. The city was built on the difference between 10c extraction costs, and the $2 selling price. It has been a model for our industrial society, and a pointer to where we’re all headed, because most people refuse to accept that we no longer have that cost differential on which to support ourselves.
      If you can’t accept that, take a look at Saudi today. They are repeating the excesses of Detroit, on steroids!
      They too delude themselves that colossal buildings represent ’embedded value’ and will remain so after their oil has gone, and endlessly circulating ‘property money’ will support an economy based on infinite excess. A $10bn tower is ‘worth’ $10bn forever plus compound interest. Accountants are paid to say it is so.
      The reality is of course that such value as there is in them remains intact only so long as oil can be pumped out of the ground at a sufficient rate to support them. When the oil stops, the buildings will fall down, just as surely as Detroit’s municipal excesses are falling apart right now.
      Still not convinced about what the real value of oil is?
      Put a gallon of fuel in your car, drive it carefully for 30 miles to use up that gallon.
      Now collect a team of 50 men to haul your car back to your start point, offer them a basic rate of, say, $15 an hour. It should take about 10 hours. You paid $3 50 for fuel from which you extracted $7500 worth of actual work
      The correlation between oil at 2c and $2, or $3 50 and $7500 is clear, we have been living on the ‘excess’ of oil for almost a century, now the party is over.

      • Dear EOM,
        Very succinctly put! It reminds me of a meeting years ago with a middle management man from a large pharmaceutical company in the process of ‘downsizing’ to their core business (which is a euphemism for layoffs and out sourcing services). He liked to use the phrase “Stretch goals” as justification for the demanding those left with jobs should just work harder.

        The meeting was set up to discuss plans for setting up a composting operation that would handle a large volume of the solid waste. He believed that personnel could handle hundreds of thousands of cubic yards of material using only a one yard loader bucket on a farm tractor. I argued that this was hardly going to be adequate for our needs. I tried to convince him with logic by calculating how many hours it would require to move all the materials. Came out to 20 hours a day, seven hours a week, not including maintenance time. I’ll never forget his comment. “I’m not disagreeing with your math, but if we give our stretch goals you would be surprised what they can accomplish!”

        Some people have difficulty understanding reality!
        regards,
        Jody

        • Stan says:

          Jody wrote: “Some people have difficulty understanding reality!”

          Or maybe they understand reality but are convinced that magical, mystical thinking can work in the particular situation.

          tan.

          • Dave says:

            Perhaps I am misinformed, but it is my understanding that “…magical, mystical thinking…” is fundamental to all religions. It is indeed one of the few things common to ALL religions.

            That Americans demonstrate widespread magical, mystical thinking can best be demonstrated by the most recent Harris Poll which suggests that a majority of Americans believe in miracles (72%), the devil, hell (both at 58%), and the Virgin birth (57%).
            According to the Harris poll 42% of Americans believe in ghosts, 36% each believe in creationism and UFOs, 29% believe in astrology, & 26% believe in witches.

            Sorry to break the bad news, folks. Magical, mystical thinking dominates American voters, juries, your families, and your neighbors.

            • There is no way of proving what the ultimate force underlying all of the natural laws we observe really is. If, in fact, a god (or gods) are behinds these natural laws, then the mystical thinking these people are doing may, in fact, be correct. There are some things we simply don’t know. I am not the one to shoot down these beliefs. We need all the help we can get in our current predicament.

            • Leo Smith says:

              That’s why I am praying that people will wake up smell the coffee and stop relying on belief 😉

          • The ramblings of people in relatively high office, (such as Inhofe and others) are such a sad reflection on the great American nation, to be held as a laughing stock that such people can be voted into office at all.
            Soon the next lineup of comic acts will begin to pitch for the presidency, in the last audition they all failed. But I think the great danger is, that when it becomes obvious that voting for prosperity doesn’t make it happen, a real godfreak will make it to the white house. Maybe by 2016—certainly by 2020.
            As the economy crashes–who will be blamed? Why the same folks who always get blamed—the infidels of course. And I don’t mean the followers of Allah
            And who are these infidels? Easy–they are the folks who don’t believe what you believe in, get rid of them and Jesus will return to fill up all the oilwells, and all will be right with the world.
            A ridiculous notion?
            Lets hope so, but the insignia on the belt buckle of the SS read: Gott Mit Uns. The similarities are all in place. The Nazi regime got rid of ‘unbelievers’—the actual faith is irrelevant.
            Already the US has a military infected with religious belief, and leaders inclined to zealotry. when the nation tips into economic chaos, as it must, the military will be required to maintain civil order. Under a godcrazy president and senate majority, you have the makings of a theocratic dictatorship.
            The mechanism for that is in place right now.

          • And don’t forget that 54% of Americans believe that the Earth was created less than 10000 years ago

          • Dave says:

            I agree that “magical, mystical thinking” is essential to the “out of the box” thinking essential to the paradigm shifts (Kuhn, “The Structure of Scientific Revolutions” 1970) which characterize all major new discoveries in any field.

            However, innovative mentation is fundamentally different from defective cognition:

            From http://www.washingtontimes.com/news/2004/feb/16/20040216-113955-2061r/?page=all

            An ABC News poll found that 60% of Americans believe in the story of Noah’s ark and a global flood.

            In other words, a guy & his family used exclusively wood & some primitive tools to make a boat big enough to hold representative samples of every land-dwelling living thing (plant & animal) on earth. Also required was food & fresh water. Rough approximation of size would be on a scale of the biggest cruise ship, supertanker, or aircraft carrier.

            What we have here is not just “magical, mystical thinking”, but a fundamental inability of certain types of cognition. We know from Piaget the famous child psychologist, that there are stages of cognitive development that occur sequentially in normal people. At a certain age for example, a normal kid knows that a parent who leaves a room does not magically “disappear”. The parent is just moving to a different point in space & continues to exist (& will therefore return at some point). Depending upon level of cognitive impairment, some kids never reach this stage, or do so at a much later age than “normals”.

            A normal kid probably knows by age 13 that one man & his family cannot build a supertanker out of wood. Piaget never addressed this directly, but probably would have called it the “Ark” stage of development. All his other rules apply however. That is, a normal intellect of age 13 knows a man & his family cannot build an Ark. Someone with moderate cognitive impairment achieves this level of awareness at age 18. Those with severe cognitive impairment never get it, but can vote, breed children who share their impairments, & serve on juries.

            • I agree that the Noah’s arc myth is a stretch, but from the beginning of time, people have been making up stories to describe phenomenon they don’t understand. Today, we have Ben Bernanke making up stories about the economy and the Federal Reserve making up stories about a return to growth, and the Federal Reserve being able to fix the economy.

              Politicians have any number of stories. Wind turbines will save us; solar panels will save us; biofuels will save us. Of course, they all depend on fossil fuels, so it is hard to understand how–but the stories help win votes, and get academic papers published.

              We also have stories about what is important in life, like “He who dies with the most toys wins.” If you are concerned about energy, perhaps dying with a Tesla brings you close to nirvana. There seem to be an amazing number of people who believe such a story.

              I am more concerned about people believing the current myths that are being passed around, than I am about people who are fixed on old myths that clearly are out of date. People need a way of passing along what appear to be “best practices” to their children. Religions are a way of doing this.

              There are certainly many churches (including Christian Churches) that do not believe that the Bible is literally true. If you go to the liberal churches, you are likely to hear that the walls of Jericho fell down many years before Joshua supposedly marched around those walls. You may hear comparisons of the Old Testament creation myth with other creation myths of the time, such as with those of the Babylonians. The point is then not what the creation myth says, but how the differences in the myths explain different views of God (or gods).

              I don’t know why people get so disturbed with one particular set of wrong beliefs. We seem to have any number of wrong beliefs now being promulgated, some by politicians, some by economists, some by financial planners, and even a few by religious leaders.

        • xabier says:

          Reminds me of the managers in the Nazi slave factories, who took some time to grasp that inflicting a poor diet on the slaves led to decreasing productivity. Albert Speer, with a better grasp of reality, had to tell them to increase the rations in order to meet the targets.

          ‘Stretch goal’ is terribly Nazi-like. Corporate life, oh dear……….

          Happy New Year to all! Whatever is coming, there are much worse things than death, and we are none of us very likely to be slaves in a war economy.

      • “Put a gallon of fuel in your car, drive it carefully for 30 miles to use up that gallon. Now collect a team of 50 men to haul your car back to your start point, offer them a basic rate of, say, $15 an hour. It should take about 10 hours.”

        I can put a gallon of gas in my car to travel 30 miles to get to my destination in 30 minutes. But, 98% of the time my purpose of this trip is to get me to my destination, not my 4000 pound car. I also have another choice of riding my bike, not using any fuel, getting to my destination in 2 hours and living 10 years longer from exercising.

        EndMore, like most good conservatives you need to let go the past and embrace the future. We aren’t going back to the 1930’s. We need to plan for the future and not be a deer staring into headlights. The choice is yours.

        If you fail to plan, you plan to fail,

        55 MPH is the beginning of a path to a fossil free transportation system

        • Going back to the 30s wasn’t suggested or even imagined.
          My reference to the 30s was a reference to the reason why we had cheap oil, and to illustrate the fact that millions of people fail to grasp why oil was cheap then but not now
          My reference to the energy extracted from a gallon of fuel was intended to offer an easily understood example of our lifestyle and the sole source of that lifestyle.
          comparing that to the fact that you can cycle 30 miles instead, (and stay fitter I agree) bears no relevance to the unsustainability of that lifestyle.
          Unfortunately my comparisons on energy extraction/per gallon of fuel can be scaled up, (think 40 ton food trucks) whereas a cycle ride cannot. Try sustaining your current living environment (all of it,) by the exclusive output of your own muscles. That will not make you fitter, it will make you dead no matter how much planning has gone into it

      • Paul says:

        Superb post.
        One way I look at this is in the past for one barrel of oil you got say 100 slaves. Now you get perhaps 12.

        I was in Dubai last year – hadn’t been there since 1992 when I played in an ice hockey tournament (yes – they were wasting energy on ice rinks well before the giant ski slope).
        I couldn’t believe the changes – absolutely massive sky scrapers blasting AC…

        The thought that crossed my mind was that because these buildings would not be habitable without cheap energy — this was going to be the mother of all ghost towns in the not so distant future. The utter hubris of building a city like this!

        I recall some years ago a developer speaking about building a residential development in Dubai — and proposing to pump air conditioned air onto the streets!!!!

        Insanity knows no boundaries

        • xabier says:

          Alas, not hubris – lack of imagination and sense.

          Amusing that the insanities of Western civilisation have found their final expression in Arabia, the source, in the Middle Ages, of the mathematical sciences……

          Super-heated climate = thick adobe walls in one form or another. This has been forgotten even in Spain. Concrete boxes to fry in………

          But then the English, once they were wealthy enough to do it, built in brick, much less sensible than thick mud and straw over a wood frame.

          If Humanity had a collective head, it would be a rather thick one.

    • As I think about the situation, gold is something which as no intrinsic value, except perhaps as an item of jewelry and a high-priced metal for filling teeth. Whether or not gold is used as a medium of exchange, and how much is required to buy a given object, depends on government policies.

      In fact, if people were like other animals, and simply found what they themselves needed to eat, and fought off their own enemies, absolutely nothing would have value, except the food they gather. It is the fact that humans have found ways to store up energy, and go beyond our boundaries that have made goods more valuable. In the earliest days, the item of value might have been a large animal that was hunted down using a stone tool, or “cornered” using fire, and then shared with the group. If we were restricted to what we could catch with our bare hands, we would not be hunting big animals. But with the help of stone tools, and the controlled use of fire, we could do a lot of things that gave us an advantage over other animals. Indirectly, it is this use of energy that is what leads to additional value the humans find for some goods, apart from the day-to-day foods we gather ourselves and eat (not many now!).

      One of the things we could do with the controlled use of fire was refine gold from gold ore. This eventually came to have value, as a result of its being used as a medium of exchange.

      I presume from your question you want me to analyze what governments and public/private institutions are now doing to the value of gold that it distorting its value relative to the long-term trend. I am not sure this is really the right direction to go. We need to be looking forward, and seeing what role gold will play in the future–which may be quite different, and likely will be different in different parts of the world. What people really need is food, water, clothing, shelter, and transportation. Gold may or may not be used as an intermediary in getting these things. Perhaps having some gold is worthwhile, if a person has assets and wants to diversify them. But I don’t think we can necessarily say, “The price of gold should only be going up,” or any other similar statement.

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