Reasons for our Energy Predicament – An Overview

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system. 

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and services affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transport food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energy in 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

Figure 1. Average weekly West Texas Intermediate “spot” oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30’s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply 
  3. GDP growth 
  4. Wage growth
  5.  Debt growth 
  6. Growing government programs 

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

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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434 Responses to Reasons for our Energy Predicament – An Overview

  1. Daddio7 says:

    The whole world is on the up escalator. Any country that gets off wont slow it down and will only be left behind. Only crushing military regimes like N. Korea can hold its people back. It would be wise to prepare for the Collapse but the moneyed interest want to keep the escalator humming.

    We as individuals can make our own preparations and form small groups to ride out a panic but we will be swept along by whatever happens globally just like Dr. Zhivago.

  2. Ghung says:

    The problem with substitution is that, at comparable price points, it doesn’t actually substitute for anything; it supplements. It’s a Jevons thing. Increasing oil production didn’t stop increasing uses of coal. Any new “substitute” quickly gets sucked into growth if its utility and price is in a comparable range. If it’s higher, it doesn’t get developed until prices can support it (tight oil and fracking as examples). This is why so-called alternatives aren’t alternatives at all. They’re just another drop in an energy bucket that gets emptied as fast as it gets filled. It’s all an economic tug-of-war between costs and economic utility. Such has it always been. Masking it with a complex system of financialization doesn’t change that. Indeed, entropy will take its cut, reducing overall efficiency as complexity increases.

    If it takes more energy to catch a rabbit than you get from eating the rabbit, decline sets in. If it takes more energy to produce the capital to buy the rabbit than you get from eating the rabbit, or more than others can/will pay for the rabbit (after you’ve taken your cut), decline sets in. Eventually the rabbit gets a pass.

    At least rabbits breed like rabbits.

  3. Gail, I follow your commentary with great interest – agreeing with most if not all of what you say, but as a good skeptic – still try to poke holes in your perspectives.

    Regarding oil prices and reserves, I think our assumptions on production prices are so loose as to be ineffective for meaningful projection. You make the assumption that oil companies need $100+/bl to produce, yet as recently as 2008 oil prices fell to nearly $30/bl and production and sales continued without a major fluctuation in production. So, we know that some oil can be sold for about $30+/bl for some period of time and some oil companies apparently can still make money at these price levels. Consequently, I believe that oil companies in general highly inflate their costs of production and that actual production costs vary widely depending on sources and producer efficiency and consequently profit margins also vary.

    We may well see the current cut back in major oil co. production not so much because of the lack of a high enough price, but rather because a lack of profit levels to which they have grown accustomed. There is a difference between this and just insufficient market prices. Major oil companies operate much more like public utilities – not worrying about their costs because they are controlling the market and the prices. When demand decreases as it has in recent years, then they have a much more difficult time setting prices – while competing with much smaller and leaner oil production companies who can operate more efficiently and may have much lower costs – and lower margin expectations.

    I’m not saying that what we observe in oil markets is driven by my perspective above totally, but I think it is one of the factors with varying affects in what we see in the oil markets. Perhaps big oil is just going to set back until the lower cost producers have sold off their cheaper produced oil – before they sell off their reserves at the profits they have come to expect.

    Even if my perspective is correct, it doesn’t change the eventual out come for petroleum depletion, but it does have an impact on the timetable. Fluctuating oil prices also have an affect on alternative energy development – whether by design or accident. Every time oil prices fall for extended periods it pushes developing alternative energy companies over the edge – especially those who naively depend on higher oil energy price forecasts instead of recognizing they have to compete at the lowest recent historical prices to remain viable.

    And a final comment, we really can’t talk about our petroleum economy without also realizing that 95% of our food production comes from petroleum based NPK fertilizers – for which there are currently no replacements at the scales required. A rapid decline in the petroleum industry economies of scale will send global food production into chaos that make our global energy deficits seem trivial.

    • the vast majority of people are convinced that food comes from supermarkets, not oil and gas wells

    • jphsd says:

      Did you consider what the investment profile looks like? Oil dropping to $30 a barrel didn’t stop the existing wells from pumping but it most certainly did influence whether or not new projects would be started. Any drop in production would only become apparent over a longer timescale.

      • Looking at the price chart in article you can see that price and price inflation slope was interrupted over several years. I agree that lower oil prices affect profit motive and that affects exploration and development, and continued lower prices may restructure the oil industry to one having many more smaller and leaner less utility like producers – rather than the current majors and NOCs. My entire point is that is almost impossible to know what the actual cost of oil really is. To automatically assume that it is over $100/bl because OPEC and the majors say so, doesn’t seem credible – to me. OPEC it self bases oil prices not on costs, but on what they think their countries oil resources are worth in the long term and what they think they can force consumers to pay – again no cost basis and the latter reason being dominant – what consumers will pay.

        • OPEC doesn’t set prices, I am afraid. They adjust their production, so that they produce less when prices are low. OPEC doesn’t have the power it claims to have.

          • I think you are arguing semantics. Controlling production does set the price.

            • OPEC has a lot less power to change production than they claim. I noticed that Ron Patterson has a good recent post on OPEC production explaining the situation. http://peakoilbarrel.com/can-depend-call-opec-opec-peaked/

            • The Patterson post is good, but unfortunately it only considers recent past (current) production. For example it ignores Iraq’s vast untapped proven reserves (5th largest in the world – some say could be the largest) because of large areas of unproven reserves and plain unexplored areas. I suspect other ME/OPEC countries are in similar situations of having oil, but for one temporary reason or war or another can’t access and produce it – except maybe Saudi Arabia who seems to have completely peaked. I think the demise of the OPEC cartel and it’s market control is largely wishful – and not without justification vengeful thinking. Global oil prices will be impacted by OPEC decisions for some time to come. If fracking costs and gov. parasitism is as great as you say – then I’m sure the frackers don’t want OPEC to go away – as long as their production quotas support prices.

            • Paul says:

              I don’t buy this premise: “For example it ignores Iraq’s vast untapped proven reserves (5th largest in the world – some say could be the largest) because of large areas of unproven reserves and plain unexplored areas.”

              If there are recoverable reserves in Iraq then they would be recovered. The US spent trillions in an illegal invasion of Iraq killing tens of thousands – which demonstrates their extreme level of commitment to doing what it takes to steal — I mean secure — Iraqi oil.

              One of the first things they did was secure the oil fields and the oil ministry building. The various factions can car bomb the hell out of each other but go near the oil fields and the hellfire missiles and drones will come raining down on them.

              if there were a mother load of oil to be extracted they would extract it. If there were unexplored areas they would not be unexplored for very long. If they have not – then I don’t believe they exist

              This sounds like another MSM propaganda story along the lines of ‘fracking will get the world 100 years of oil’

              I am not aware of any other countries where fear is keeping the Big Oil out. If there is oil — they will get it.

              Look at the middle east – the biggest bee’s nest in the world — the US sets up bases in Saudi – the centre of Islam and they support the House of Saud which is full of whoremasters and coke snorters who mock Islam — which drives the people into a frenzy.

              But can the people do anything about this? Nope – not so long as the US protects the House.

              The US has demonstrated both the willingness and the capability to go into any of these underdeveloped countries and extract oil. I do not buy that there are significant untapped reserves anywhere in the world waiting to be found – but which are left alone because Big Oil fears to tread there.

            • Paul, A little more reading on the subject might broaden your perspective and reduce your fears of MSM propaganda – which begs the question – where do you get yours? Here are some of my propaganda sources:

              http://www.businessinsider.com/biggest-untapped-oil-fields-2012-7?op=1
              http://books.google.com/books?id=Bq-wmEqZ6PMC&pg=PA125&lpg=PA125&dq=Iraq%27s+vast+untapped+oil+reserves&source=bl&ots=ZkrkoghaBW&sig=36Of6iiY-vFr5vR-XN6XrTnfJUg&hl=en&sa=X&ei=qkoZU43nOcLu2gXpkoD4AQ&ved=0CGEQ6AEwBw#v=onepage&q=Iraq%27s%20vast%20untapped%20oil%20reserves&f=false
              http://www.reuters.com/article/2014/03/05/iraq-oil-idUSL6N0M22P120140305
              http://en.wikipedia.org/wiki/Oil_reserves_in_Iraq
              http://www.eia.gov/countries/country-data.cfm?fips=iz
              http://www.reuters.com/article/2014/01/09/us-iraq-anbar-oil-idUSBREA080AI20140109
              http://www.ft.com/cms/s/0/5b24f674-f5e6-11dc-8d3d-000077b07658.html#axzz2vFOusTbt
              http://www.globalpolicy.org/component/content/article/185/40502.html

              and finally to understand that even though we know where resources (not just oil) might be generally in the middle east – we are still finding new ones and are a long way from being able to cost effectively plunder them. Sometime we can discuss why the USGS surveys are misleading and in many cases not worth the paper they are written on regarding the general the availability of global resource reserves – why BTW are generally overstated by the USGS.

              http://www.nytimes.com/2010/06/14/world/asia/14minerals.html?pagewanted=all&_r=0

            • Paul says:

              My view of the New York Times is that is is useful only in that when I read an article there I can generally expect that it is a lie. That allows me to rule out that version of events as I go about my day seeking the truth.

              Whatever oil remains is not being extracted because it is too expensive to be extracted – as I will demonstrate using a number of articles:

              Big oil counts the cost of tapping new discoveries – FT.com

              “One hundred dollars per barrel is becoming the new $20, in our business.” With that pithy analysis, John Watson, chief executive of Chevron, summed up the oil industry’s plight.

              As companies pursue the ever more challenging oil reserves that they need to increase or merely sustain their production, their costs have risen to the point that the most expensive projects, such as deepwater developments or liquefied natural gas plants, need an oil price of at least $100 a barrel to be commercially viable.

              Now a growing number of oil executives are saying that has to change. As discussions at the IHS Cera Week conference in Houston made clear, cost-cutting is back at the top of the industry’s agenda.

              The issue has come to a head after three years in which the price of crude has drifted down, in part because of the extra supply coming on to the market from the US shale oil boom, while costs have continued to rise.

              The result has been a squeeze on margins, declining returns on capital, and underperforming share prices.

              Chevron and ExxonMobil’s shares have both risen 11 per cent in the past three years, and Total’s by 8 per cent, while Royal Dutch Shell’s have fallen 2 per cent. In the same period the S&P 500 index rose more than 40 per cent.

              Futures prices show oil is expected to fall further, with five-year Brent at about $91 a barrel, suggesting that the pressure on oil producers’ profits will intensify.

              Shares in companies such as Schlumberger and Halliburton, which provide services to the big oil groups, have over the past five years comfortably outperformed their customers. Under mounting pressure from their shareholders, oil companies are being forced to act.

              In part, the roots of the industry’s cost problem lie in part in the increasing technical difficulty of the new projects being developed, such as large LNG plants or offshore oilfields in deep water. They demand complex equipment such as drilling rigs, specialised materials such as sophisticated steel pipes, and highly-skilled engineers, all of which are in limited supply.

              As Peter Coleman, chief executive of Woodside Petroleum of Australia, put it when explaining the soaring cost inflation in the country’s LNG projects: “Everybody jumped into the pool at the same time, and we’re all trying to fight for the same floatable toys.”

              Paolo Scaroni, chief executive of Eni of Italy, argues that his rivals’ rising costs also reflect their failure to discover more easily-developed resources. Companies such as Exxon and Shell have been adding production in the oil sands of Canada and US shale, which generally have higher costs per barrel because of the need for techniques such as hydraulic fracturing to extract the resources from the shale, or processing to separate the oil from the sand.

              Exploration is more risky, but offers higher returns, Mr Scaroni says. Because with oil sands and shale the resources are known, “you are sure of everything, but the point is profitability is lower than if you make a discovery”.

              Christophe de Margerie, chief executive of Total, adds another explanation: companies – including his own – have lost sight of the need to control costs. When oil prices are rising, managers are tempted to relax on cost control because their projects will still be profitable.

              “If you have $110 [per barrel], and the budget is at $100, it’s easier. You can say ‘we’ve made it’. But what about the ten dollars? Where are they? Gone with the wind,” he says. “That’s not the way engineers or commercial people should behave.”

              All the large western oil companies have reached similar conclusions. Andrew Mackenzie, chief executive of BHP Billiton, the mining and energy group, suggests the oil companies have reached the same point the miners were at a couple of years ago: facing up to the need to improve productivity in an environment of weaker commodity prices.

              Total, Chevron and Shell have announced cuts in capital spending, and were joined on Wednesday by Exxon. Several companies have been “recycling” projects: delaying them to try to work on improving their economics.

              BP’s Mad Dog phase 2 development in the Gulf of Mexico, Chevron’s Rosebank oilfield in the Atlantic west of Shetland, and Woodside’s Browse LNG project in Western Australia are among the plans being reassessed.

              Mr Coleman told the Houston conference that as originally planned Browse had an estimated budget of $80bn, which was “not a commercially acceptable risk”.

              The prospect of an investment slowdown already appears to be having an impact. David Vaucher, an analyst at IHS, says the firm’s survey of oil and gas production costs shows they levelled off last year, in a sign that the industry is moving into a more sustainable balance.

              Day rates for drilling rigs have started to fall, even for advanced deepwater rigs. The prospect of further falls has helped send shares in Transocean, one of the largest rig operators, down 20 per cent in the past 12 months.

              However, Mr Vaucher observes that costs tend to be easier to raise than to cut.

              At Total, Mr de Margerie still sees a lot of work to be done. He is promising a cost-saving plan throughout the company, a new process for designing projects to build in cost control right from the start, and reshaped relationships with service companies.

              “You need to create a new culture,” he says. “Yes, safety first, yes environment. But also at the same time, yes cost is important. And to achieve a project with lower cost is good.”

              http://www.ft.com/intl/cms/s/0/b7861cc8-a51b-11e3-8988-00144feab7de.html#slide0

            • Paul says:

              FORTUNE — If it wasn’t clear before, it certainly is now: Big Oil has got some big problems.

              In a year in which oil remained near historic highs at around $100 a barrel, ExxonMobil (XOM), the all-around best-in-class energy company, said on Wednesday at its analyst meeting in New York that its return on capital employed (ROCE) for 2013 was 17%. Let me repeat that — 17%. This is bad, people.

              Admittedly, achieving a 17% ROCE is something many companies would kill for — even other energy companies. But this is ExxonMobil. No other energy company is as skilled or as adept at maneuvering the political and economic quagmire that comes with drilling for fossil fuels than Grandpappy Exxon. In the 2000s, ExxonMobil’s ROCE, which is a measure of profitability and efficiency of how capital is employed, was legendary for its strength and power, with 35% considered the internal benchmark. Achieving a level below 30% was considered failure among Exxon’s conservative lot, according to a longtime engineer at the firm.

              But the financial crisis put an end to ExxonMobil’s profit party. Oil and natural gas prices plummeted, and, as one would expect, so did Exxon’s ROCE. It still stayed in the mid-20% range, which, while disappointing, wasn’t the end of the world. But investors cut the company some slack. They thought that once the tumult was over Exxon would again reign supreme.

              MORE: Banks may be lending too much

              And now we have this — 17%. Even amid high oil prices, the company couldn’t even hit 20%? Even more embarrassing, Chevron (CVX), the other big U.S. energy company, is expected to beat Exxon hands down when it comes to ROCE — it has done so every year since 2010.

              This must be very disturbing for Rex Tillerson, ExxonMobil’s chief executive. On Wednesday, Tillerson took action, which he believes will boost Exxon’s legendary profitability — spend less. In a surprise move, Tillerson said that 2014 will see a $4 billion, or about 10%, decrease in ExxonMobil’s ridiculously large $40 billion capital expenditures budget. Spending less capital means that the ratio will go up, provided that profits stay level. That’s probably a good bet considering that it takes years, even decades, for a project to start paying off.

              So is Tillerson making the right move? The markets don’t think so — Exxon’s stock price sank 3% after the announcement, dragging the entire Dow Jones Industrial Index (INDU) down with it. Tillerson must be very confused. He is doing exactly what he thought shareholders and analysts wanted — delivering a higher ROCE.

              But while ROCE is an important metric, it isn’t the only thing investors care about. People who invest in ExxonMobil tend to be conservative value players, more interested in consistent cash flow with long time-horizons than with hitting some financial target. For example, Warren Buffett, the king of value investing, disclosed last November that he had accumulated a nearly 1% stake in ExxonMobil during the second quarter of 2013, equating to some $3.45 billion.

              At the same time he bought Exxon, Buffett slashed his relatively large stake in dimming energy giant ConocoPhillips (COP), which, at the time, was going through a major reorganization. Some investors found his choice strange as ConocoPhillips’ stock was up 27% for the year at that point, while Exxon’s stock was up only 8%. But it plays to the theme of value investing. Exxon’s earnings are stable, with defined long-term earnings potential, while COP’s future had been up in the air. Uncertainty isn’t ideal for value investors, even if it means giving up some of the upside.

              Exxon has made a point to be as consistent as possible with its returns, despite, of course, the volatility in oil prices. When it says it is going to invest $40 billion, investors trust that the company will deliver world-class returns on that money over the next few years.

              That’s why when Tillerson said on Wednesday that he was cutting the CapEx budget, investors ran for the exits. They had projected that Exxon would continue to plough money into new projects and that those projects would yield strong and consistent 20% to 30% returns over time. Sure, it is nice to have that extra $4 billion returned to shareholders, but that’s just this year. Value investors are in it for the long haul and cutting CapEx means that they should expect decreased revenue down the road.

              To be sure, no one is saying that Exxon should invest in unprofitable ventures just to keep busy — too many companies already do that. It was just disappointing for investors to hear that the company doesn’t believe it can deliver a strong enough return to justify its carefully planned CapEx budget.

              Then there is the big fear — did Exxon think a 17% ROCE was a strong enough return to justify last year’s massive capital expenditure outlay? If so, what exactly does Exxon think its future projects will yield if it can so easily slash so much off of it — 15%? Maybe 10%? You can see how this might have caused a bit of a panic.

              finance.fortune.cnn.com/2014/03/06/exxon-performance-spending-cuts-rattle-investors-nerves/

            • Paul says:

              Kashagan fails to live up to promise FT.com

              What happens when geology, politics and corporate bureaucracy collide? The answer is Kashagan, the $50bn oilfield in the Caspian Sea that has been plagued by delays, cost overruns and technical difficulties.

              Discovered in 2000, the world’s most expensive standalone oil project finally started producing oil last year – almost a decade later than had been first envisaged by the seven-member consortium behind the project. The partners include Eni, Royal Dutch Shell and Total.

              But Kashagan, dubbed ‘cash-all-gone’ by industry watchers, is still not producing the hoped for volume of oil. In fact, it is currently sitting idle.

              The latest twist in the project’s history came in October when output was halted after a leak in a pipeline that transports a toxic gas associated with the oil to an onshore processing centre.

              It remains unclear when production will resume. The results of an investigation into what went wrong, together with a new development plan for the field, are due at the end of this month.

              Sauat Mynbayev, chairman of Kazakhstan’s state energy company KazMunaiGas, said this week that the restart of the field would probably happen in the second half of this year. “However, we should speak about it in terms of probability, and not talk about the volume of extraction yet,” he added.

              Analysts believe the field is unlikely to produce more than 100,000 barrels a day when it does come back on stream. To put that figure in perspective Kashagan was expected to produce 180,000 b/d in its initial phase before ramping up to 370,000 barrels a day by the start of 2015. (Once all three phases of the project are completed – at some point over the decade – the field is expected to yield more than 1m b/d).

              “Given the extremely harsh winter, our expectation is for Kashagan to ramp up in the second half of 2014 at the earliest, although there is a growing risk that the field’s start will be pushed back to 2015,” Energy Aspects, a consultancy, wrote in a recent report. “Thus the field is set to disappoint relative to market expectations and will not be a source of growth in our view.”

              The infrastructure at Kashagan is built on artificial islands to avoid damage from ice in waters that freeze for five months a year in temperatures that can drop to minus 30 degrees.

              Adding an extra layer of complication is the make-up of the consortium. No one partner has a big enough stake to take control, which has slowed down the decision making process, say analysts. Politics have also proved challenging with the consortium forced to renegotiate its contract with the Kazakh government several times.

              What return the partners make will depend on the oil price. Analysts say projects in the former Soviet Union sit at the higher end of the cost curve and typically require prices of about $100 a barrel to break even. However, Kashagan is reckoned to be much lower.

              http://www.ft.com/intl/cms/s/0/779905f0-a550-11e3-8070-00144feab7de.html#axzz2vLp4lwZ5

            • Paul says:

              To paraphrase Chomsky – read as many sources as possible – MSM and non MSM – and you might be able to come close to finding truths.

              I spend minimum 12 hours a day in front of a computer – for the most part doing research on a range of topics – particularly those related to geo-political events and energy – because that is where my interests lie.

              Here’s a tip – dump the New York Times – the bastion of liberal propaganda – and have a look at Zero Hedge. That site breaks more stories than the entire MSM combined in a year.

              But then how difficult is that when the competition is comprised of whores who suck the teat of their corporate owners, their cronies, and the politicians who are in bed with them.

            • Paul says:

              http://www.nytimes.com/2010/06/14/world/asia/14minerals.html?pagewanted=all&_r=1&

              I am sure there are a lot of minerals in the mountains of Nepal and Tibet too – and at the bottom of the oceans. I bet there are huge deposits of minerals on the planets and asteroids.

              Just as there is plenty of oil remaining in the ground.

              The problem is that it is EXPENSIVE to extract these resources.

              Here’s the formula re: expensive resources:

              High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.

            • While I agree regarding the “death spiral” – probably not caused by the same limitations as most see herein. I also generally agree that resources are becoming more difficult and costly to produce, but not necessarily accurately reflected in their prices. Because I don’t see unbiased information that suggests that cost and prices are directly linked in things like petroleum, or healthcare, or insurance, and lots of other market manipulated products. I’m always wary of Big Oil’s proven ability, if not modus operandi of manipulating the markets to their profit advantage.

              “Expensive” is a relative term – that mixes both costs and the price that the market will pay. Since 1970 I remember numerous commodities “shortages” of sugar, fertilizer, silver (remember the Hunt bros.), coffee, oil and a number of other commodities including gold and interest rates – where those commodities became very “expensive” – but the production costs and in some cases the availability of those commodities were relatively unchanged, but the public perspective and resulting prices were manipulated by their respective marketers.

              As an aside to market manipulation by corporate interests not unlike Big Oil – the best example I know of where an industry has raped the public while “crying rising costs” is the hurricane disaster/insurance industry. With the spate of hurricanes in 2004-2005 my coastal FL hurricane insurance went from $1000 per year to $7000 per year. If the respective hurricane insurance companies had been putting the appropriate amount of my previous years premiums into the risk pools as they say they do and were legally supposed to, this one in one hundred year event could have been paid for with minimum discomfort to both insurance companies and premium payers. Instead the insurance companies had been diverting risk pool money to profits and dividends and consequently their risk pools were totally inadequate if not near non-existent when the hurricanes finally came. Not unlike the mortgage and credit default bankers a few later – the Justice Dept. quietly ignored and chose not to prosecute these insurance companies. Now, in spite of a below average hurricane frequency since 2005 we continually hear about increased hurricane frequency as part of climate change propaganda. I’m not a climate change denier, but hurricane frequency increase just isn’t part of the support data – as yet. Who benefits from this kind perspective manipulation? The insurance companies and a host of businesses that make money from disaster fear.

              Going back to Big Oil – just the fact that an oil cartel like OPEC exists announces in your face that the oil market not only can be manipulated well above actual costs, but that it actually is manipulated whether by supply/demand control or other manipulations. In the case of oil it may be a combination of more difficult production costs for newer wells and market manipulation. Given the 20-30 year avg. life of oil an gas wells (non-fractured) clearly Big Oil is charging us now for future increases – or just for profit. Big Oil is aware that the majority have finally come to accept the finite nature of natural resources including petroleum deposits. If I were an oil executive I would be foolish not to utilize that perspective to justify and enhance higher prices than I actually needed to increase my profits. If Chris Nelder is correct (http://www.smartplanet.com/blog/the-take/the-energy-transition-tipping-point-is-here/?tag=nl.e660&s_cid=e660&ttag=e660&ftag=TRE4eb29b5) and Big Oil sees the end of petroleum energy and transportation in sight due to replacement by cheaper alternative energies – then logic would say you would try to make every dollar possible before then. We can argue over the details and motives regarding oil price and marketing, but in the end none of us are going to all the data necessary to come to undeniable conclusion.

              In any case, I see our end coming by petroleum industry economics rather than physical petroleum limitations per say, but rather tied to petrochemical economics necessary for the production of non-substitutable commodities – most especially phosphorus. Petroleum energy can and is being substituted and replaced by alternative energies. However, it appears to me that we don’t adequately see petroleum’s economic link to food production. Unless new sources of energy are dramatically cheaper than petroleum has ever been, sourcing ever diluted and increasingly limited essential food production resources like phosphorus will be economically impossible in the next few decades – if not sooner. One my physicist friends whose Ph.d. was in mass transfer says “Nothing is impossible with cheap enough energy.” He means with enough cheap energy current critical resources can be extended indefinitely by affording the economic mining of resources at more dilute levels and or by reversing reactions in commodity resources back to their useable states regardless of the energy necessary to do so – because the energy is so cheap.

              Whether that energy source will arrive in time – if ever – is the real question of our day and on which our species’ future now appears to depend entirely upon. Essentially unless we make a high yield energy production system like fusion happen in the near term, I don’t see a cheap enough energy source necessary to offset the changes in the costs of petrochemicals (with the decline of the petroleum industry) required for processing/producing NPK, or even recycling wastes to meet even a fraction of the current populations food needs. Most people don’t understand that neither potassium or phosphorus ores are not useable out of the ground and have to be chemically processed to forms that are available to plants. The petrochemical industry is the only current at scale source for those chemicals – change its cost structure very much and all bets are off on our species ability to adapt and feed itself as we have for the past 100 years or so. Otherwise, and without NPK It takes years for soil organisms to make phosphorus compounds available – the natural phosphorus cycle and why permaculture and organic production techniques regardless of human labor available can never feed the existing population.

              Again my point is regardless of the FED printing money that has no collateral basis, regardless of debt that mathematically can’t be repaid, regardless of how much available oil is in the ground – we have serious physical limitations effecting our food supply, that unlike other economic factors – limitations that once reached can’t be manipulated or propagandized – that are being ignored regarding planning and abused regarding prioritization and preparation – not unlike the FL hurricane insurance company risk pools pre-2004. It seems to be part of human nature that we are more reactionary than proactive.

            • Paul says:

              If you have a look at the FT article the problem is the price of oil is too LOW – Exxon and Chevron are cutting back on investments because they are unable to make money even with oil over $100.

              Even if the market is 100% manipulated it does not matter – because if these companies and OPEC were to shift the price higher then the market will completely collapse.

              Because the global economy cannot deal with 100 oil let alone 130 or higher.

              To reiterate:

              High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes ===== economic death spiral.

              That would lead to oil prices crashing (as happened briefly in 08) and that would lead to even less exploration and extraction reducing the supply and ultimately bankrupting the industry.

            • Paul says:

              Here’s another hopeless piece of rubbish from the NYT – not a word about how for every 1.50 invested in shale 1.00 is returned —- they present this total joke as if this is going to save Japan.

              Give me a break — this is the sort of stuff one would expect in The Enquirer.

              They might as well have ran a headline “Energy Coup for Japan – Former Kamikaze Pilot Flights into Space in Cessna and Tows 5000 Tonne Chunk of Frozen LNG to Tokyo”

              Or better still “Japan Trains Mermaids to Capture Frozen Methane from Ocean and Declares 100 Years of Cheap Energy!”

              An Energy Coup for Japan: ‘Flammable Ice’

              http://www.nytimes.com/2013/03/13/business/global/japan-says-it-is-first-to-tap-methane-hydrate-deposit.html?pagewanted=all

            • What is needed is the existence of credit for buyers of cars, homes, business equipment, and many other things to keep the price of oil up. If credit goes away, the price of oil will drop way down, regardless of what OPEC does. Even Iraq needs a high price for oil, to build all of the infrastructure it needs.

            • Gail and Paul,

              I have read many of the same articles that you have and you are certainly accurately quoting them and interpreting them as they are written. While I respect your opinions, I’m a bit more skeptical of their source articles (MSM or WSJ, or whatever) and their universal potential for manipulation. Remember the media in general has a memory shorter than their shoe strings and most writers wear loafers. Add to poor memory the fact that we now live in the age of “paid content” where it is increasingly hard to know the motivations of what is written and even when accurate, whether that accuracy has been skewed by weighting of opinions, or omission of contradicting data.

              Regarding recent articles on increasing major oil capex, and the claimed need for higher prices for higher production costs – and declining demand:

              I would posit that current major oil company capex reductions are simply an adjustment to reduce immediate future production in the face of decreasing demand and acknowledgement of higher availability of increasingly lower cost alternative energies – same strategy that OPEC uses when prices fall – reduce production. Consequently in the face of lower oil demand and potentially shrinking petroleum energy markets, if you are marketing executives for major oil companies – you start media campaigns about the cost of production being higher, as opposed to your corporations unwillingness to have lower volumes of profits. The question is whether the public really wants to continue to fund the life styles that petroleum company profits have afforded their executive staffs and their dividend receivers. In any case the market will sort this out over time I think.

              New drilling deeper and in more remote locations has undeniably become more expensive over time as shallow deposits have been exhausted. I would counter that new technology has made drilling and oil recovery far more cost efficient. For example, octopus rigs (with eight or more multiple horizontal wells radiating from one central platform – make wells much more cost efficient because it lowers rig costs seven or more times by eliminating new set up costs, leases, time and logistics. Additionally, octopus rigs are much more efficient in getting more of the oil from a specific deposit than single multiple wells and they don’t require as much post-peak production additional manipulations – like pumping in CO2, water, etc. make get more oil from the deposit that a single well could reach. Technological efficiency improvements have gone a long way in improving petroleum development efficiency – and that doesn’t include fracking that gives old wells new life and existing wells more efficient and thorough utilization has yet to be adopted much outside of the US. To paraphrase Shakespeare “The lady (major oil companies) doth protest (cost increases) too much, methinks.” New technology is a serious offset to deeper and more remote wells.

              In spite of recovering from recession, 2010, 2011, 2012, and 2013 were all record or near record profit years for many of the major oil companies – especially Exxon. I can’t see how companies of this scale can post record profits (in the multi-billions) multiple years running and a year later “poor mouth to the media” claiming they are so poor that they are “selling assets to maintain dividends” and expect anyone with more than 12 months of memory to find their supposed financial woes credible, due any sympathy – or immediate justification for higher prices – which I’m sure we will see shortly. There are are at least two obvious and logical conclusions – either major oil companies have no financial/resource projection capability that allows them to invest wisely previous years profits because they are run by incompetent morons (which doesn’t jibe with all those previous profits), or they are in the midst of a major misinformation campaign to justify higher prices to maintain and grow profits on lower demand due to lower oil demand from growing less expensive alternative energy competition.

              http://thinkprogress.org/climate/2013/02/01/1525441/exxon-chevron-2012-profit/

              http://thinkprogress.org/climate/2012/01/31/415242/exxonmobil-made-411-billion-in-2011-but-pays-estimated-176-percent-tax-rate/#

              http://money.cnn.com/2012/07/26/news/companies/exxon-
              profit/http://www.gasbuddy.com/gb_retail_price_chart.aspx

              Regarding Gail’s comment on declining oil demand due to US oil production increases, a lack of credit for cars and homes:

              If you only have a US perspective the effects of decreased credit, and a declining US economy might be true along with US oil production going up – at least in the short term. However, as US auto demand has slumped – Asia’s had grown rapidly. China now is the largest car market in the world. They are forecasted to have three times the car sales as the US market by 2020 in less than six years. China has been and will probably continue to be slow on adopting EVs. So, they represent offset to oil demand in China or Asia’s growing oil demand. So, while US transportation fuel may be down, global demand for oil continues to grow as less develop countries expand their living standard and economies. Oil is a global market in spite of slight differences various source prices like WTI and Brent. Energy is is the true global reserve currency and oil will be continue to be the primary form of transportation energy, albeit declining in fits and starts for a few years more.

              http://www.businessinsider.com/chinese-auto-sales-are-going-to-be-enormous-2013-4

              Again, I would have to side with Chris Nelder and think that long term declines in petroleum production won’t relate to oil production costs and availability as much as competition with other alternative energy form prices, but rather shrinking demand from alternative energies. At the same time I understand that Chris also has an alternative energy bias. In any case, our use of petroleum and other fossil energies will decline and higher supposed oil costs and or marketing campaigns will only hasten the decline of petroleum energy and fuels.

              The decline of petroleum combustion for fuels and energy is good news environmentally. However, if we don’t account for plan the overall petroleum economy-of-scale declines along with the primary (95%) fuel and energy petroleum sectors and resulting higher costs/prices regarding petroleum based petro-chemicals (5.o% of the petroleum industry), but which 95% of world food production is dependent upon, we will have far more serious problems as a species with food shortage related economic, social, political and ultimately military (resource wars) problems than we have from petroleum caused environmental problems. BTW the earliest projected food crises come decades before serious climate change issue begin to affect most of the world. As some one with a 40 year career in biotechnology and food production technology development, I don’t see even minimal consideration of the level of seriousness that petroleum decline and the potential for related food shortages require – not even remotely close to the consideration level needed.

            • Paul says:

              When trying to determine the truth it is effective to look at many sources and use some common sense.

              Fact: BP is selling assets to be able to pay dividends. If they were profitable and lying about it why would they be doing this? If they were profitable then why is there share price negative while the S&P is up 40%? That would be illegal and that would open them up to massive shareholder lawsuits.

              Fact: EXXON and Chevron are cutting capex – you can easily get your hands on financial reports as they are listed companies – so how could they lie about that? That would be illegal and that would open them up to massive shareholder lawsuits.

              Fact: http://www.csmonitor.com/Environment/Energy-Voices/2013/0412/The-decline-of-the-world-s-major-oil-fields

              Common Sense: we know that the easy to extract oil is mostly gone – we know that what is left is without question is going to be more expensive to find and extract – we know that expensive oil nearly ripped down the global economy in 2008.

              Do you think that the elites of the world are going to allow the likes of Rex Tillerson to tear their worlds apart by playing PR games and lying about the situation — and ramping the price of oil up to $147 to line their pockets?

              Not a chance in hell. They would smack him in the head and get him in line without a second thought.

              FACT: THE CHEAP OIL IS GONE – THAT IS WHY WE ARE FRACKING – THAT IS WHY WE ARE PRINTING MONEY – THAT IS WHY WE HAVE INTEREST RATES AT 0 – AND THAT IS WHY AT SOME POINT WE ARE GOING TO COLLAPSE – AND THE AGE OF OIL AND INDUSTRY WILL BE OVER.

            • Paul, Again most of the oil being sold today was drilled and expensed 15-20 years ago and some as much as 30 years ago. What I’m saying is that today’s oil company income has no direct relationship with the cost of the oil currently being sold by the oil company. So, if you look at oil price history charts you see that oil companies have received steadily increases in price since 2000. They still should have another 15 years life of wells drilled when oil was selling for $30-40 in 2000. The should be raking in profits from those less costly wells by your reasoning. And, indeed they have I sent you the refs. of Exxon’s record profits 2010-2013 – a year latter they’re selling assets to pay dividends? Don’t buy it regardless of the “common sense” that oil is getting more expensive. I have heard that my entire life as I watched prices go up and down more than 300%.

              Sure, Exxon is a modern day riches to rags story. I get oil is necessarily becomes more expensive as the resource declines in availability and increases in costs, but profit structures at Exxon’s scale and history don’t change that rapidly with 20-30 year well life and go south in 12 months. If you don’t think books are cooked as part of corporate strategy and self-interests at the highest level – then you are naive. We commonly talk about an entire nation(s) – our nation – cooking their debt books, unemployment records, raiding social security funds, etc. and yet you find it incomprehensible that it might be done at the giant oil corporate level?

              Do you remember a company called Enron? “At the end of 2001, it was revealed that its reported financial condition was sustained substantially by an institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. >>>Enron has since become a well-known example of willful corporate fraud and corruption. <<>>affected the greater business world by causing the dissolution of the Arthur Andersen accounting company<<<." (http://en.wikipedia.org/wiki/Enron). While helpful – Sarbanes–Oxley has been described as a less than perfect solution to stopping major accounting fraud.

              I suggest you review the lists at these links – and note the disproportionate number of oil companies 1. (http://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals). 2. (http://www.therichest.com/business/top-10-corporate-scandals/). Almost, all involved deceptive financial record keeping at some point. My point being sometimes companies get away with it and sometimes if you're really successful – it gets to be a habit before it takes you down. Perhaps I'm just overly cynical, but today almost nothing is as it may seem where large amounts of money are involved, but is rather is more probably the perception that is being bought and sold through today's "media."

            • Paul says:

              “What I’m saying is that today’s oil company income has no direct relationship with the cost of the oil currently being sold by the oil company.”

              It has EVERYTHING to do with the share price of the company.

              This is a forward – not backwards – looking dynamic as in what have you found lately – how much did it cost to find – how much will it cost to extract – and what is the market price for oil.

              Let’s say I was running a fund of 10 billion dollars. I know Exxon has just cut its capex stating that new exploration/extraction will not be profitable with oil at $110. Being a good manager I would know that oil at $110 is killing economic growth – so I am certain that oil will not go much higher than the current price – otherwise we get a recession and the price of oil will crash destroying the share price of Exxon.

              Exxon/Chevron say ‘but we have all these old fields that are profitable at $110 so we’re just going focus on those assets – cut costs – and maintain our 30% margins – and pay some nice dividends – invest your 10B with us!’ (this is actually what they said last week)

              BP says ‘what we are going to do is start to sell assets to generate some cash flow – and pay dividends – invest your 10B with us!’ (this is actually what they have done)

              I’d realize that both companies have just stated that we have reached peak CHEAP oil – that companies have no growth prospects and will at best remain stagnant for some years – then barring a miracle – collapse.

              Because that’s what stagnant public companies do – particularly those in the resource industries – because it is all about growing proven economically extractable reserves.

              The moment that stops – the fat lady warms up.

              Now I might ride the wave of these dogs a little longer because Exxon will no doubt pay solid dividends if they stop drilling dry holes – as will BP if they sell the family jewels.

              But the writing is on the wall – get the stops in place because when the herd runs sniffs this out and realizes there are greener pastures out there – they will do this http://www.youtube.com/watch?v=whixkUJbdO8

            • Paul says:

              I would fully support a policy from the Fed of secretly buying Big Oil shares to keep them from collapsing.

              If the market concludes the growth prospects for companies such as Exxon are limited or non-existent, then we are very quickly toast.

              Anything that delays the inevitable is worth doing. Regardless of how outrageous it seems.

            • timl2k11 says:

              Great link, Gail. And very interesting discussion below that article. Someone gave a link to a panel discussion of some very knowledgeable shale industry insiders about how long they think the shale boom can last. It’s an hour long, but worth it if you want to know the mindet and possible blindspots of those inside the industry.

      • Paul says:

        Once again — oil was at $30 for a very very short period — if it would have stayed there nothing would have been pumped because every barrel extracted would have lost money

    • The thing you have to understand about oil production is that there is a huge amount of investment that going in on the front end–leasing the land, hiring the right experts to decide exactly how and where to drill, and then actually getting the drilling gear in place. Over time, there is often more drilling that needs to be done.

      When oil prices drop to $30, oil companies stop going out and leasing new land. They probably also stop working on some of the next steps, as well. But they have some wells already drilled, that will continue to flow for a while, with essentially no work. The reason why oil production hardly budges when oil price drops is because of the huge inertia of the system. The wells that are already drilled will keep producing oil for a while, unless an active step is taken to stop them.

      Actually, a big part of the costs of oil companies is taxes and other government fees. In most countries, these are variable, with the price of oil. In the US, they tend to be closer to fixed costs. Some of these are state taxes, and some are federal. In the Bakken, the “government take” is higher than the direct costs. According to an article in the oil and gas journal from May 2013, on average, for a barrel of oil from the Bakken that sells for $80 a barrel, Capital Expenditure is $22.60, Operating Expenditure is $7.50, and “government take” is $33.29. These amounts do not reflect dividends to stockholders, which are pretty much required (because pensions buy they stocks, and depend on them to pay dividends). Among oil exporters, the “government take” is often 70% to 90%. Needless to say, oil extraction is a big source of revenue for oil exporters (and even for countries like the US).

      You may have missed my last post, when I was talking about oil companies now having cash flow problems, because prices at $100 barrel are not high enough for all of their expenses. Some companies are selling assets to have enough money to pay dividends–not a good sign.

      • Actually, I did read your last post and several other columns on similar topics – on the recent majors drop in production and retrenchment – including a very good one by Chris Nelder. “The reason why oil production hardly budges when oil price drops is because of the huge inertia of the system.” That’s part of my point.

        I have to admit I didn’t realize the various governments’ bites were quite so large. I need to look into that further. I have interviewed a few independent oil producers and worked a few years for Sunoco a few decades ago – and my reference to their operating like public utilities is not an exaggeration – cost sensitivity wise. You may remember just a few years ago when we were all up in arms over Exxon declaring record profits during a recession – a couple of years running. The majors operate in their own sphere, independents in an entirely different one – with lower cost and perhaps higher risk though that might be debatable. I do appreciate your opinion and information, but I still think much of oil pricing – at least up until very recently has been more about what the market would bear.

        • Paul says:

          Disagree.

          Fracked oil needs roughly USD80 per barrel to turn a profit. And that is increasing as the low hanging fruit gets fracked. The market sets the price in that if the market will not pay at least that then the oil will stay in the ground.

          But that’s not the only thing impacting the price – the fact that Big Oil is drilling many dry holes also means that when they do hit oil they have to sell at a higher price to offset the massive losses on failed exploration.

          I believe in kazakhstan BP has wasted 30B already with nothing to show for it. They have to make that up somehow or they go out of business. So the price of a barrel needs to be even higher.

          I recently posted that for every 1.50 invested into fracked oil returns 1.00. How does something so illogical continue? Not because oil companies are like utilities rather sleazy companies like Chesapeake pay PR firms to float the story about 100 years of oil – QE and ZIRP money that is floating around looking for a good story flows in — and you create a wave. Retail follows. And eventually the whole thing does what a wave often does – it smashes on jagged rocks.

          This is a good summary of the situation http://www.businessweek.com/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power

          • Fracking is significant to US only at this point in time and while it effects US imports has little impact on the costs, price or supply of oil globally. You need to remember that the average life of an oil well is 20-30 years. Most of the oil sold today was drilled 10-15 years ago with those cost structures (before fracking started as well) – but the price of oil is based only on what people are willing to pay for it now and in the immediate future. Point being – there is no direct link between the actual cost of oil production and current market price. Oil companies use current difficulties to help justify market prices, but their profits come from wells drilled decades ago. This cost disconnect can be quite substantial and I’m not sure that it’s either justified or deserved – especially when it isn’t necessarily well invested in new production and technology.

            • A lot of what you and I think of as profit gets absorbed by governments as taxes. They do their best to get as much as possible from the industry. As I pointed out last week, the big companies now have a cash flow problem because they have not been able to bring about new production as planned.

        • Jim King says:

          Gail and Durwood, you are both right about oil production continuing even if it is loss-making due to low price. The bite is long term.

          As long as they think they see light at the end of the tunnel (or hope they will soon), businesses will usually continue to operate at a loss if they can afford to, in order to minimize the magnitude of the total losses. It usually costs less to operate at a loss than to shut down and restart later, for lots of solid reasons, including negative perceptions of the business in financial markets which affect stock prices and debt costs, and rust (and other deterioration) never sleeps at shut down infrastructure.

          Investing in new production and facilities is another matter. The bite of lower prices is longer term rather than short. The time to bring new oil production to market is several years, perhaps a decade or longer for complex, expensive projects. Once delayed, will they ever appear potentially profitable again, or the capex be available? Major price drops that last long enough will show up as less production way down the road, often with little or no apparent effects on production in the short term.

    • newyorker says:

      Maybe we can go back to mining guano and transporting inon sailing ships, like we did pre-haber process.

  4. SlowRider says:

    Although you have said most of it before, you managed to connect the dots again, in a slightly different fashion. It is very convincing how you show the financial situation will be at the center of events. Where else do we read about QE and the debt system propping up commodity prices so that these commodities can even be extracted economically, at all. That seems like a ponzi scheme.

    • In some sense, our whole economy is a like a ponzu scheme. As long as it can keep growing, everything is fine. Let is switch to contraction, and we have a real problem. Economizing doesn’t really help, because it pushes the economy to contraction quicker (assuming it is successful).

      • Gail, I would be very interested in your view of the feasibility of whether a non-growth and shrinking economy is functionally possible. I’ve asked a number of noted economist this question and never got much of an answer. Admittedly we all are so used to thinking in terms of growth.

        • Christian says:

          Economists will not think good of lack of growth, as they will never give us a way out of this situation. Their profession is dead and confined to lie saying it is not.

        • A non-growth society would still require a rising amount of fossil fuels, just because we are reaching diminishing returns–ores are of lower quality, oil is harder to get at, water increasingly requires desalinization, we need to do more and more to fight pollution. The rising amount of fossil fuels, especially oil, is a deal killer.

          If we use a flat or shrinking amount of fossil fuels, the economy will shrink by a big enough amount that we are likely to have huge debt defaults. It will also be impossible to fund current governments, leading quite likely to government collapses. Restarting the economy in such a scenario is doubtful. Long supply lines are based on promises to pay. At some point, businesses will stop believing promises to pay, because there are so many defaults. Local businesses will probably still work, but these will be smaller and use only local resources.

  5. Karl North says:

    Gail,

    Your view that in a declining economy due to the end of cheap oil, solutions to the problems like debt/credit, government funding, currency reform, capital re-allocation, employment are virtually impossible is correct, and has been nicely stated in many of your posts. But your view of limited options depends on an unstated assumption: that these solutions must happen in the present form of political economy. My question is why make that assumption? Admittedly a fundamental shift in the form of political economy is unlikely because power is so concentrated in few hands, but there are precedents – the partial command economy in WWII, for example. And if we do not even consider alternative systems, that makes them even less likely.

    Here is one scenario of an alternative, one that I limit to a rough sketch because there already exists a vast literature on the subject. Because of the interdependency in the system, multiple issues would have to be addressed at the same time. If the government took over the banking and other capital allocation that we call finance/investment, and returned to progressive taxation that recaptured the wealth and income of the rich, government could address multiple issues. It would be possible to simultaneously enact a debt jubilee, re-allocate the diminishing resources of our society in the energy descent to the creation of a transition economy (e.g., relocalize and scale down production including energy), create institutions of interest-free credit, make essential services like health, education and pensions public again, reform the currency, enable transitional employment and alter other institutions and policies to serve the public interest, not private capital. It could be done in a way the provided for a minimum of economic security for all during and after these changes. Partial versions of public control have existed at one time in other economies – the European economies for example – even under capitalism, and still function in partial or tarnished form today. Even in the US the Nebraska State Bank is an institution that is a step in this direction. Many argue that the “long emergency” as it deepens will propel us toward some sort of command economy anyway, so why not explore a version that might serve the whole public?

    The main obstacle to such a scenario in the US today is not technical but cultural. Private control of everything – physical resources, investment, essential services, income and wealth distribution – has been so glorified and public control so demonized that a fundamental shift in the collective consciousness is hard to imagine, and therefore politically difficult. Other cultural obstacles are well known to your readers: widespread denial of the end of cheap resources and addiction to The American Way of Life, to give just two examples. But because otherwise the human species faces a very steep slope down, aren’t alternative systems at least worth considering in your blog?

    • The way I see things, the government is being put in a very bad position now because it has promised far more than it can deliver. If it is going to do different things that it has promised (like relocalization, taking over banking, etc.) , it will need to cut back even farther on the things it has promised, like unemployment insurance, food stamps, Social Security, and Medicare. I am not sure it has the expertise to do the things you mention. If we get into delocalization, there are a whole set of problems associated with compensating existing owners for land, training people, and deciding how to do this so the land isn’t just further wrecked. I am not convinced that anything more could be done than is being done on pumping low interest rate money into the economy either–think of all of the student loans for example.

      So I am not really convinced that there would be something that could be easily done. It is almost better to work outside the government.

      • Christian says:

        Good points Karl. Gail is too kind to go further in revolution. But government can do anything it wants if all politicians agree, or if it has no reservations for using force, or if it convinces the masses this is the way things must go for them to keep living. (Or if the masses convince the government instead.)

        Closing banks or taking them over has no monetary cost, neither a political one if they fail (twice!). Land ownership issues on relocalisation can be properly addressed without a penny, using tax traps on big property for instance (if actual collapse doesn’t left landowners unable to even feed themselves). I think our situation is so extreme, or will be, that it could even be a good instance to one way or another put an end to big property. After all, inheritance has always been the main contradiction in liberal -in the US called conservative- political economy, since it goes against the principles “we are all born equals” and “each individual must seek his destiny by his own means”.

        Furthermore, I’m not sure “a lot and a plot” approach would be the best, given we are used to live in agglomerations and given we urbanites are not skilled on gardening. It would possibly be better to relocate people in small towns whose dwellers share some land and its products, and so will be in better shape to start, sharing skills also. As I see it, the historical moment is so significant –the culmination of humanity- that things can and will change in ways we could never have imagined. And I encourage anthropology reading, as Graeber works, because it’s the only science that really transcends our actual society.

        • garand555 says:

          In order for a government to apply force on the scale you are talking about requires energy. Those MRAPs and Bearcats suck down a lot of fuel, and there are supply chains to worry about in the midst of what would be turmoil. If there is to be a re localization of the economy prior to an economic collapse, it will not come from Washington DC. It will have to come from the locals. That is another way of saying “You think that globalization is a mistake, and that we need to go back to more local economies? What are YOU going to do about it.”

    • Paul says:

      Sounds something like Soviet Russia or Maoist China.

      Re: debt jubilee. Let’s think that through – governments unload all their debt – think of the counterparties involved – companies that are owed on govt contracts would collapse – 100s of millions of jobs gone

      All pension obligations would be dissolved – 100’s of millions of people with no income.

      Our system is simply far too complicated to endure a debt jubilee – you pull out one piece and the whole thing implodes (cancelling all debt pulls out many many pieces)

      Look at what happened when Lehman was let go – the global economy seized up.

      And people talk about a trillion dollar coin or debt jubilee as if that would be the ticket.

      It’s not – and even if it did reset the financial system, it would not overcome the primary issue of the end of cheap oil

      Have a look from p.56 on at what the implications are of removing a single card from the house does http://www.businessweek.com/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power

      • Christian says:

        Paul, it seems you don’t realize the financial way of living has become just untenable, and this under the premises of limits to growth you do say to accept. And this seems to be the case for other people here as well, intellectually understanding this game is over now or in the near future but not willing to really accept it. You talk about “epic starvation”; how does it match with trying to maintain the “house of cards”?

        Soviets and Mao wanted to grow, which is not my case. And I’m worried about how to maintain, and even improve, democracy under a severe twist in society, which you’ll notice if you read all that I write. Btw how much democratic you think your country is? Just an example: in Florida a third of color males can never vote in their whole life because of just being imprisoned once when teens by the racist judicial system standing there. But my concerns are not echoed by those just whining while imagining future “state of exception” and TPTB and governments trying to keep BAU at work at any (social) price. May be you secretly allow TPTB to infringe democracy because you just can’t imagine another kind of society, or you are very well placed in this one and all your fears are in loosing your standing. And it seems some people here don’t get what 50% unemployment of those under 30 means, as in Greece or Spain, and it is obvious they don’t have lost their jobs or incomes.

        Erasing pensions doesn’t mean aged people starving, because the State can subsidize them but under a different (and more equal) paradigm. Do you have your 401k? Do you believe it really exists?

        It is as if you just don’t read what I write. “Debt jubilee a ticket”, “restart the financial system”; go and reread my points.

        If anything, Argentinean experience teach us money and finances are not at all eternal.

  6. MJ says:

    The Petri dish of human cells is just about filled. That’s about the sum of it all, the rest is just drama.

  7. notaneoliberal says:

    Just like to point out that fertilizer is not made from petroleum. Nitrogen is made from natural gas. The p and k are not made from fossil fuels (in terms of feedstock) at all.

    • Natural gas is part of the petroleum product spectrum. While there are other sources fro nitrogen such as methane clahrates, none of these methods are in commercial production now. However, potassium and phosphates use huge amounts of primarily with petroleum fuels and they use large amounts of petro-chemicals from petroleum to process the ores into bio-available fertilizers. So, NPK fertilizers and 95% of global food production is entirely currently dependent on the existing petroleum industry and more importantly – the scales at which it currently operates – less our current food economics change drastically. I worry about this far more than whether we run a debt economy or not.

    • Oil is used to transport P and K. Quite a bit of nitrogen fertilizer is now made in China using coal, rather than natural gas. (Natural gas is used in the US.)

  8. Ikonoclast says:

    There are several dynamics which mandated and enforced a business as usual approach. These prevented us from taking preventative action in the 1970s when it was still possible. These dynamics also prevent us from taking any mitigation action today.

    1. Propensity for natural increase. Given benign or conducive conditions, the population tends to increase, seemingly without limit.

    2. Optimism bias. For most of our evolutionary history, having an optimism bias was a good survival trait and it was positively selected.

    3. The capitalist system. This system was predicated on and dependent upon endless growth, unlimited resources and the ignoring of negative externalities.

    4. Offensive realism. States and empires must seek to become bigger and more economically and militarily powerful than rivals otherwise they are destroyed in conflict. Unilateral de-growth and de-militarisation are open invitations to being conquered and destroyed.

    In a de-growth phase, the nations and empires which shrink and collapse the slowest are the ones which become relatively stronger compared to the others. This is true even though ALL are becoming absolutely weaker. Thus, in the collapse phase, the geostrategic issue will be to collapse slowest. The extra relative strength accrued in this manner will actually allow a bit more resource plundering from weaker regions. Slow collapse might even have as its reward some stasis periods where survival is tolerable for a while.

    Which places are best placed to collapse slowest? To collapse slowest or among the slowest a modern nation must be;

    1. Already a major power or a mid-power with a major power ally.
    2. Not already in ecological overshoot or not too severely in ecological overshoot.

    To cut a long story short, the nations which fit the above bill are Russia, USA/Canada (taken as a resource whole), Brazil and Australia. Russia, Brazil and Australia are not yet in ecological overshoot. Russia has by far the best resources to population ratio. The USA is in some considerable ecological overshoot. Canada is not. Taken as a resource whole USA/Canada may be at the cusp of resource overshoot. USA, using its power, can continue taking resources from elsewhere to cushion its decline.

    Regions/countries like Africa, the Middle East, Indian sub-continent, China, Japan, Europe (sans Russia), S.E. Asia and middle and south America excluding Brazil and maybe Argentine are already in bad ecological overshoot.

    So, the superpowers of the declining world will be Russia and USA/Canada. Australia and Brazil/Argentina might do passably well as tributary resource suppliers to USA/Canada. The only country that could conceivably overthrow this calculation is China via resource plunder of the rest of the world and expansion into Russia and central Asia. However, I think China has too many problems looming to achieve that. Russia’s nuclear deterrence and the USA’s Pacific power also contain China to roughly its current territory where it is badly in overshoot.

    To sum up, you cannot ignore geostrategy and the conflict of modern empires. This dynamic will play a huge role in outcomes. Russia and USA/Canada look relatively well placed. The EU, China and India look badly placed for the geostrategic struggle in the collapse phase. However, there are sets of mistakes which Russia and the USA will have to avoid. Otherwise, they might play into China’s hands. But that is outside the scope of this post.

    • Daddio7 says:

      This is the best explanation to geopolitics I have ever seen. You must have read Niven and Pournelle’s “Mote in God’s eye”.

    • Christian says:

      Good analysis, Ikonoclast, although Argentina is not a resource supplier to the US but to China (food). There are some parts of Latin America overshooted, as you say, but it is not generally the case. Another point: given China’s historic relentlessness to invade and expand, I’m not sure as so many people here do -perhaps projecting their own worldview- Chineese will now go out en masse for plunder. More generally speaking, 1-4 may or may not to be the case, but I’ll let you to discover why and where.

    • InAlaska says:

      I agree with your geopolitical assessment. US/Canada will be the least bad place to be. Once again, the splendid isolation of our two oceans will buffer us. Although Russia will be relatively resource rich, it will be surrounded on all sides by fiercely desperate people and nation states. Nuclear-armed Europe to the west, Nuclear-armed China to the south (with a billion Nuclear-armed Indians and Pakistanis right behind them). That will be a messy place to be trying to eke out a living.

    • Paul says:

      Even had we stopped 50 years ago that would still have meant massive suffering.

      Of course nobody was going to willfully enact policies that ended growth – even now, when people are choking on smog in China and climate change is a massive threat there is not a single serious voice in business or politics suggesting even a re-think.

      Nope – if the Arctic melts that’s awesome – we can get at the oil trapped under the ocean!

      Of course now we have 7.2 billion people so the end of growth (caused by the end of cheap resources) will not only result in massive suffering – it will cause billions of deaths. Thanks to the green revolution that brought us chemical based farming.

    • The Western Hemisphere definitely looks less populated than the Eastern Hemisphere. It is hard to know on the very cold part of the world how much in overshoot they are.

      Russia tends to be cold, as does Canada. The short growing season and need for heating all winter keep the carrying capacity down. India and much of China are relatively warm countries. This gives an advantage we don’t often think about, of more heat from the sun, allowing more crops per year.

      It is hard to know how all of this will work out. Clearly, major cities anywhere will be a problem.

      • Danny says:

        I used to live in the south with no air conditioning and working outside, it wasn’t bad when you got used to it. I can’t imagined people there now living without air conditioning. All that air conditioning has killed the culture- people used to travel at night, sit on porches, take breaks in the heat of the day. Without cheap abundant energy we have to have different rhythms. I now live in MT and even when it is -27 with blizzard people still go about their day…using much more energy….

        • Calista says:

          Fascinating lack of social customs allowing us to adapt to our environment. I wonder when we’ll bring them back? Personally I’m looking forward to the siesta.

          • xabier says:

            The essence of Modernity is the defiance of custom, and hence, eventually, of environment.

            It began with the French Revolution which destroyed customary feudalism, and really took off with oil and gas-based architecture and mobility, which destroyed traditional urban and architectural models.

            Perfect example: the Gulf State Arab, driving in a SUV to a European-style Modernist glass- and- concrete, thin-walled bunker for work, or living in one as his home.

            Actually, a modern Spaniard or Mexican is a better example, as traditional dress has disappeared too.

      • InAlaska says:

        Living in Alaska for the last 22 years, the climate has definitely moderated with warmer shorter winters and warmer longer summers. I can grow green beans now where it never used to be possible. It gets hot now in the summers because we have 24 hours of daylight in June-Aug. and the earth just keeps heating up. No cool evenings on the porch, here. As the southern climate shifts northward, Alaska, Canada, Russia, Northern Europe may be pretty good places to live (for awhile).

  9. Don Stewart says:

    Dear Gail and Others
    A common conclusion from discussions on this website is that everything is going to be horrible. I participated in a Webinar this evening that I believe everyone should pay attention to. It is a discussion between Ruth Buczynski, a psychologist in Connecticut and Kelly McGonigle, a PhD researcher at Stanford. The general subject was stressful situations and how an individual perceives them and reacts to them. Consider the following as bullet points written by an amateur, and most certainly not accurate in detail, but perhaps indicative of broad themes.

    Our brain changes itself much like a muscle. If we want to strengthen a muscle, we must strain it beyond its comfort zone. If we want our brain to handle stress better, we must stress it beyond its comfort zone.

    Stress makes us more social. We make more oxytocin, which is associated with loving and caring. The oxytocin effect is particularly strong in people who are not usually very responsive to oxytocin. So a person who is usually a loner, but who finds themselves in a stressful situation, and reaches out to others, shows the greatest increased response to oxytocin. This is in contrast to the assumption that the usual response is ‘fight or flight’. (It is also consistent with what Janine Benyus said at the Omega Institute seminar last fall.) Affiliation is a core response to stress.

    Cueing the affiliation response to stress makes you healthier. Oxytocin is cardio protective and anti-inflammatory. IF you choose the sociability response, rather than fight or flight. The affiliation response also changes our epigenetics, affecting the neuroplastic parts of the brain.

    Caring for others buffers us from stress. We can choose to train ourselves in compassion. Training in compassion, in Kelly’s lab, results in decreased worries, increased happiness, with no change in stress. (My comment: In short, the stress is real and recognized as such, but the emotional response changes.)

    A lab in Germany trains people off the street in about 6 hours.

    Increased activity in the reward networks in the brain. We no longer collapse in the face of suffering. The training fundamentally alters our tendency to avoid suffering or unpleasantness. The training can be seen as a chain of meditation techniques:
    1. Mindfulness meditation…what is happening right now?
    2. Metta meditation…good wishes for everyone
    3. Compassion…recognizing that bad things are happening and doing what we can

    Kelly is currently involved in laboratory tests with patients with chronic pain and with war veterans with PTSD. Anecdotally, she is getting very good results.

    Pain is a complex mind/body experience. The mind interpretation is more important than the raw sensation.

    Suffering is particularly dependent on the Interior Cingulated Cortex. Patients in frmi machines can pretty quickly learn neurofeedback techniques to control pain. The machines, of course, are expensive. But it seems that ordinary meditation may have a very similar effect on the Interior Cingulated Cortex. So there are available methods for teaching your brain to regulate your brain.

    Finally, Kelly talked about willpower. Decades of studies have convinced most researchers that willpower is a finite resource. If we are using our willpower to resist sugary desserts, we have less to spend on exercising or resisting credit card debt. However, it turns out that the mindset controls the effect of the use of willpower. If we perceive that willpower is limited, it is limited and we don’t have enough to go around. If we perceive that will power is like a muscle, and the more we use it, the more powerful it becomes, then the more we have available.

    Final Advice: Embrace our brain’s bias for avoidance, and move away from avoidance strategies.

    My Coda: I hypothesize that people involved in Transition Towns and solar power and permaculture and such endeavors who are able to look clearly at the challenges, but remain focused on what they can do to ameliorate the situation, in conjunction with others, will be far better off than those who either delude themselves, or those who give up because everything is hopeless, or who try to grab what they can for themselves while the grabbing is good.

    Don Stewart

    • xabier says:

      Don

      Agreed: and I would add that good habits once established and regular, enable us to direct our willpower to other areas, – the habits having settled the struggle.

      I do not have to struggle not to buy crap at the mall, or book a foreign holiday, or buy a new suit, because the thought no longer really occurs to me now and advertising leaves me unmoved. I have evolved a different pattern of life which moves in a different direction.

    • Don,
      Thanks for the large-hearted post.

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