Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?

Oil and other commodity prices have recently been dropping. Is this good news, or bad?

Figure 1. Trend in Commodity Prices since January 2011. Brent spot oil price from EIA; Australian Coal from World Bank Prink Sheet; Food from UN's FAO.

Figure 1. Trend in Commodity Prices since January 2011. Brent spot oil price from EIA; Australian Coal from World Bank Prink Sheet; Food from UN’s FAO.

I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long time–since World War II, at least–is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty.

Many people have the impression that falling oil prices mean that the cost of production is falling, and thus that the feared “peak oil” is far in the distance. This is not the correct interpretation, especially when many types of commodities are decreasing in price at the same time. When prices are set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.

A person can tell from Figure 1 that since the first part of 2011, the prices of Brent oil, Australian coal, and food have been trending downward. This drop in prices continues into September. For example, as I write this, Brent oil price is $97.70, while the average price for the latest month shown (August) is $105.27. It is this steeper, recent drop, which many are concerned about.

We are dealing with several confusing issues. Let me try to explain some of them.

Issue #1: Over the short term, commodity prices don’t reflect the cost of extraction; they reflect what buyers can afford.

Oil prices are set on a worldwide basis. The cost of extraction varies around the world. So it is clear that oil prices will not match the cost of extraction, or the cost of extraction plus a reasonable profit, for any particular producer.

If oil prices drop, there is a temptation to believe that this is because the cost of production has dropped. Over a long enough period, a drop in the cost of production might be expected to lead to lower oil prices. But we know that many oil producers are finding current oil prices too low. For example, the Wall Street Journal recently reported, “Royal Dutch Shell CEO: Can’t deny returns are too low. Ben van Beurden prepared to shrink company in order to boost returns, profitability.” I wrote about this issue in my post, Beginning of the End? Oil Companies Cut Back on Spending.

In the short term, low prices are likely to signal that less of the commodity can be sold on the world market. Commodities such as oil and food are very desirable products. Why would less be needed? The issue, unfortunately, is affordability. Affordability depends largely on (1) wages and (2) debt. Wages tend to be fairly stable. The likely culprit, if affordability is leading to lower demand for desirable products like oil and food, is less growth in debt.

Issue #2: Economic growth tends to produce a debt bubble. 

Many economists believe that technological innovation is the key to economic growth. In my view, economies need a combination of the following to have economic growth of the type experienced in the last 100 years:1

(Increase in debt) + (cheap-to-extract fossil fuels) + (cheap-to-use non-fossil fuel resources) +  (technological innovation)

In such a case, debt keeps increasing as an economy grows. Unfortunately, this economic growth is only temporary, because resources tend to become more expensive to use over time, making the “cheap” resources required for economic growth disappear.

The problem underlying the rising cost of resources (both for fossil fuels and others) is that we tend to use the cheapest-to-extract resources first. Technological innovation continues to occur, but as diminishing returns hit both fossil fuels and other resources, there are larger and larger demands on technology to keep costs in line with what workers can afford. Eventually, the cost of resources (net of technological improvements) rises too much, and economic growth is cut off. By this time, a huge mountain of debt has been built up.

Let me explain further how this happens. Without fossil fuels, the world is pretty much stuck with the goods that can be made with wood, or from other basic resources such as animal skins, cotton, flax, or clay. A small quantity of metal and glass goods can be made, but deforestation quickly becomes a problem if an attempt is made to “scale up” the quantity of goods that require heat in their production.2

Once inexpensive coal became available, its availability opened the door to technological innovation, because it provided heat in quantity that had not been available previously. While ideas such as the steam engine had been around for a long time, the availability of inexpensive coal made the production of metals needed for the steam engine, plus train tracks and railroad cars, available at reasonable cost.

With the ability to make steel and concrete in quantity (both requiring heat) came the ability to make hydroelectric dams and electrical transmission lines, thus enabling electricity for public consumption. Oil, as a liquid fuel, paved the way for widespread use of additional innovations, such as private passenger automobiles, mechanized farm equipment, and airplanes. Between coal and oil, many workers could leave farming and begin jobs in other sectors of the economy.

The transformation that took place was huge: from wooden tools and human or animal labor to a modern industrial society. How could such a big change take place? Before the change, the ability to generate a profit that might be used for future capital investment was very limited. Also, the would-be purchasers of products made in an industrial economy were very poor. I would argue that the only way of bridging this gap was debt. See my earlier posts, Why Malthus Got His Forecast Wrong and The United States’ 65-Year Debt Bubble.

The use of debt has several advantages:

  1. It allows the consumer to buy the end product made with the new resources, assuming the end product isn’t too expensive relative to the consumer’s earnings.
  2. It gives resource-extracting businesses the money they need to buy equipment and to hire workers, prior to the time they have earned profits from resource extraction.
  3. It gives the companies the ability to build factories, before they have accumulated profits to pay for the factories.
  4. It allows governments to fund needed infrastructure, such as roads and bridges, before having the tax revenue available to pay for such infrastructure.
  5. Most importantly, the “demand” generated by (1), (2), (3) and (4) raises the price of resources sufficiently that it makes it profitable for companies in the business to extract those resources. 

Because of these issues, debt and cheap fossil fuels have a symbiotic relationship.

(1) The combination of debt, inexpensive fossil fuels, and inexpensive resources of other kinds allows the production of affordable goods that raise the standard of living of those using them. The result is what we think of as “economic growth.”

(2) The economic growth provides the additional income needed to pay back the debt with interest. The way this happens is indirectly, through what is sometimes described as “greater productivity of workers.” This greater productivity is really human productivity enhanced with devices made possible by fossil fuels, such as sewing machines, electric milking machines, and computers that allow workers to become more productive. Indirectly, the higher productivity of workers benefits both businesses and governments, through higher sales of goods to consumers and through higher taxes. In this way, businesses and governments can also repay debt with interest.

Higher-priced resources are a problem. Higher-priced resources of any kind tend to “gum up the works” of this payback cycle. Higher-priced oil in particular is a problem. In the United States, when oil prices rise above about $40 or $50 barrel, growth in wages stops.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided by total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

With higher oil prices, the rise in the standard of living stops for most workers, and good-paying jobs become difficult to find. There are a couple of reasons we would expect wages to stagnate with higher oil prices:

(1) Competition with cheaper energy sources. When oil prices rose, countries using a very high percentage of oil in their energy mix (such as the PIIGS in Europe, Japan, and United States) became less competitive in the world economy. They tended to fall behind China and India, countries that use much more coal (which is cheaper) in their energy mix.

Figure 3. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 3. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

(2) Need to keep the price of goods flat. Businesses need to keep the total price of their products close to “flat” despite rising oil prices, if they are to continue to sell as much of their product after the oil price increase as previously. Oil is one major cost of production; wages are another. An obvious way to offset rising oil prices is to reduce wages. This can be done in several ways: outsourcing work to a lower cost country, greater automation, or caps on wages. Any of these approaches will tend to produce the flattening in wages observed in Figure 2.

Based on Figure 2, an oil price above $40 or $50 per barrel seems to put a cap on wages, and indirectly leads to much less economic growth. Even if we didn’t hit this oil price limit–for example, if we had discovered a liquid fuel that could be produced in quantity for less than $40 barrel–we would eventually hit some kind of growth limit. For example, the limit might be climate change or too much population for food production capability. Even too much debt can be a limit, if citizens’ incomes don’t rise in a corresponding manner. At some point, it becomes impossible even to make interest payments if the debt level is too high. Indirectly, citizens wages even support business and government debt, because business revenues and tax revenues depend indirectly on wages.

Issue #3: Repaying debt is very difficult in a flat or declining economy.

Once growth stops (or slows down too much), the debt bubble tends to crash, because it is much more difficult to repay debt with interest in a shrinking economy than in a growing one.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The government can hide this issue for a very long time by rolling over old debt with new debt and by reducing interest rates to practically zero. At some point, however, the system seems certain to fail.

Not all debt is equivalent. Debt that simply blows bubbles in stock market prices has little impact on commodity prices. In order to keep commodity prices high enough for producers to want to continue to produce them, the debt really has to get back into the hands of the potential buyers of the commodities.

Also, any changes that tend to reduce world trade push the world economy toward contraction, and make it harder to repay debt with interest. Thus, sanctions against Russia, and Russia’s sanctions against the US and Europe, tend to push the world toward debt collapse more quickly.

Issue #4: Rising oil and other commodity prices are a problem, especially for countries that are importers of those commodities.

Most of us are already aware of this issue. If oil prices rise, or if food prices rise, our salaries do not rise by a corresponding amount. We end up cutting back on discretionary purchases. This cutback in discretionary purchases leads to layoffs in these sectors. We end up with the scenario we had in the 2007-2009 recession: falling home prices (since higher-priced homes are discretionary purchases), failing banks, and many without jobs. See my article Oil Supply Limits and the Continuing Financial Crisis.

The reason that low oil and other commodity prices are welcomed by many people now is because the opposite–high oil and other commodity prices–are so terrible.

Issue #5: Falling oil and other commodity prices are a problem, if the cost of production is not dropping correspondingly. 

If commodity prices drop for any reason–even if it is because a debt bubble is popping–it is going to affect how much companies are willing to produce. There is going to be a tendency to cut back in new production. If prices drop too far, it is even possible that some companies will leave the market altogether.

Even if it doesn’t look like a country “needs” the current high oil price, there may still be a problem. Oil exporters depend on the high taxes that they are able to obtain when oil prices are high. If they cannot collect these taxes, they may need to cut back on programs such as food subsidies and new desalination plants. Without these programs, civil disorder may lead to cutbacks in oil production.

Issue #6: The growth in oil sales to China and to other emerging markets has been fueled by debt growth. This debt growth now seems to be stalling.

Growth in oil consumption has mostly been outside of the United States, the European Union, and Japan, in the recent past. China and other emerging market countries kept demand for oil high.

Figure 5. Oil consumption by part of the world updated through 2013, based on BP Statistical Review of World Energy 2014 data.

Figure 5. Oil consumption by part of the world updated through 2013, based on BP Statistical Review of World Energy 2014 data.

Ambrose Evans-Pritchard reports, China’s terrifying debt ratios poised to breeze past US levels. He shows the following chart of China’s growth in debt from all sources, including shadow banking:

Figure 6. China's total debt, based on chart displayed in Ambrose Evans-Pritchard article.

Figure 6. China’s total debt, based on chart displayed in Ambrose Evans-Pritchard article.

This rise in debt now seems to be slowing, based on a Wall Street Journal report. A person wonders whether this stalling debt growth is affecting world oil and other commodity prices.

Figure 7. Figure from WSJ article PBOC Struggles as Chinese Borrowers Hold Back.

Figure 7. Figure from WSJ article PBOC Struggles as Chinese Borrowers Hold Back.

Other emerging markets also seem to be experiencing cutbacks. Since 2008, the United States, Europe, and Japan have had very easy money policies. Some of the money available at low interest rates was invested in emerging markets. Now the WSJ reports, Fed Dims Emerging Markets’ Allure. According to the article investors, investors are taking a more cautious stance on new investment because of fear of rising US interest rates.

Of course, other issues affect debt and world commodity demand as well. If interest rates rise, they many have a tendency to shrink new lending, in general, because loans become less affordable. Sanctions of one country against another, such as the US against Russia, and vice versa, also tend to reduce demand.

Issue #7: Debt bubbles have been a problem in past collapses.

According to Jesse Colombo, the Depression was to a significant result the result of debt bubbles that built up during the roaring twenties. Another, longer-term cause would seem to be the loss of farm jobs that occurred when coal allowed tasks that were previously done by farm workers to be done by either electricity or by horses pulling metal plows. The combination of a debt bubble and loss of jobs seems to have parallels to our current situation.

Many believe the subprime housing bubble crash contributed to the Great Recession. The oil price spike of 2007 and 2008 played a major role as well.

Issue #8: If we are facing the collapse of a debt bubble, it is quite possible that prices of many commodities will fall. This could possibly lead to a collapse in the supply of many types of energy products, more or less simultaneously.  

Figure 8, shown below, is a very rough estimate of the kind of decline in energy use we could be facing if a debt collapse leads to very low prices of many types of fuels simultaneously. Prices of many commodities crashed in 2008, and it was only with massive intervention that prices were propped up to 2011 levels. After the beginning of 2011, prices began sinking again, as shown in Figure 1.

Figure 8. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 8. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Clearly governments will try to prevent another sharp crash in commodity prices. The question is whether they will be successful in propping up commodity prices, and for how long they will be successful. In a finite world, fossil fuel energy production eventually must decline, but we don’t know very precisely what timeframe.

Issue #9: My steep decline contrasts with the “best case” forecast of future oil consumption given by M. King Hubbert. 

M. King Hubbert wrote about a scenario where another type of fuel completely takes over, before oil and other fossil fuels are phased out. He even discusses the possibility of making liquid fuels using very cheap nuclear energy. The way he represents the situation is the following:

Figure 9. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.

Figure 9. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

In such a scenario, it is possible that oil supply will begin to decline when approximately 50% of resources are exhausted, and the down slope of the curve will follow a symmetric “Hubbert curve.” This situation seems to represent a best possible case; it doesn’t seem to represent the case we are facing today. If a debt collapse occurs, much of the remaining fuel is likely to stay in the ground.

Issue #10: Our economy is a networked system. Increasing debt is what keeps the economy inflated. If wages fail to keep pace with debt growth, the system seems likely to eventually crash.

In previous posts, I have represented the economy as a self-organized networked system, consisting of businesses, consumers, governments (with laws, regulations, and taxes), financial system, and international trade.

Figure 10. Dome constructed using Leonardo Sticks

Figure 10. Dome constructed using Leonardo Sticks

One reason the economy is represented as hollow is because the economy loses its capability to make goods that are no longer needed–such as buggy whips and rotary dial phones. Another reason why it might be represented as hollow is because debt is used to “puff it up” to its current size. Once the amount of debt starts shrinking, it makes it very difficult for the economy to maintain its stability.

Many “peak oilers” believe that if we have a problem with the financial system, all we have to do is start over with a new one–perhaps without debt. Everything I can see says that debt is an essential part of the current system. We could not extract fossil fuels in any significant quantity, without an ever-rising quantity of debt. The problem we are encountering now is that once resource costs get too high, the debt-based system no longer works. A new debt-based financial system likely won’t work any better than the old one.

If we try to build a new system without fossil fuels, we will be really starting over, because even today’s “renewables” are part of the fossil fuel system.3 We will have to go back to things that can be made directly from wood and other natural products without large amounts of heat, to have truly renewable resources.

Notes:

[1] This is really a simplification of the real issues. As world population grows, it is necessary to obtain an increasing amount of food from the same arable land. Thus, it is necessary to find new processes to increase food production, at the same time that soil is quite possibly degrading. Soil is in a sense a “resource other than fossil fuels,” but I have not mentioned this issue specifically.

Growing pollution problems are in some sense an indirect cost of extracting fossil fuels and other resources. These represent another growing cost that I have not specifically identified. Furthermore, there are indirect expenses that do not fit neatly into any category, such as required desalination plants to handle growing populations in areas where water is scarce. We may need to consider mitigation expenses of all types as part of the “cost of resource extraction.”

My point is that it becomes increasingly difficult to offset these many cost increases with technological innovations. Furthermore, if no changes are made, a larger and larger share of both the workforce and resources are required for maintaining the status quo, leaving fewer workers and a smaller quantity of resources to “grow” the economy.

[2] Wind and water are additional sources of energy, but they are sources of mechanical energy, not heat energy, so are not helpful unless they can be converted first to electricity, and then to heat. In quantity, they never were very large in pre-fossil fuel days.

Figure 11. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Tony Wrigley from Opening Pandora's Box. Figure originally from Energy and the English Industrial Revolution, also by Tony Wrigley.

Figure 11. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Tony Wrigley from Opening Pandora’s Box. Figure originally from Energy and the English Industrial Revolution, also by Tony Wrigley.

[3] Of course, any existing “renewable” will continue to work until it needs repairs that are unavailable. Other parts of the system (such as electric transmission lines, batteries, inverters, and attached devices such as pumps) may fail more quickly than the renewables themselves.

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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1,074 Responses to Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?

  1. Daniel Hood says:

    Nice article Gail, it’s called the QE Trap?

    We know money is debt and debt is money via the Fed controlled fiat fractional reserve system currently controlling much of the interconnected but “fracturing” deglobalizing world. Remember the endless debates/discussions during the 2008 credit crunch? Inflation versus deflation etc. No one was talking about the supply side of conventional/unconventional oil back then, it was all about sub-prime, banks, debt, deleveraging, deflationary threat etc. Post 2008 Lehmans collapse, ZIRP, fracking & gigantic quantities of QE propped up the entire interconnected global system. That was until the Fed began its tapering programme/experiment. I suggest it’s this tapering programme causing the current round of debt deleveraging/deflation being experienced. Surprised you haven’t mentioned it unless I missed it, will have to double check, (apologies if so).

    “Clearly governments will try to prevent another sharp crash in commodity prices.”

    Why of course they will, they’ll just fire up the printing presses again as they always said they would do and they’ll go nuclear on negative interest rates to encourage the banks to lend even further. Do you not remember Bernanke going over and over how he would fight debt deflation with every policy tool in his armoury? Why would Yellen be any different to Greenspan, Bernanke? Rather than allow debt deleveraging, deflation, credit contraction to take hold on her watch, she’ll simply flood the global economy with more cheap money and she’ll find a way to get the banks to start lending.

    Wasn’t it Ludwig Von Mises (Austrian economic theory) that said…

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

    The Fed’s tapering programme is the most likely culprit for the current threat of deleveraging, deflation, credit contraction and I’m suggesting this wont bring the house down because she’ll simply fire up the printing presses once again. They will do everything to fight debt deflation. They will NOT voluntarily abandon further credit expansion as the late Ludwig rather astutely suggests. We’ve been here before 2008 when the world was screaming about debt deflation, deleveraging, credit contraction etc.

    “In a finite world, fossil fuel energy production eventually must decline, but we don’t know over precisely what timeframe.”

    I believe that timeframe will be around 2015-2020 when unconventional fails to offset declines in conventional and when that moment arrives, we’ll commence the downwards phase of the off the plateau and to the right. In the meantime those electronic printing presses will continue along with some creative accounting. Those banks will be forced into lending whether they like it or not.

    • Stilgar Wilcox says:

      “I suggest it’s this tapering programme causing the current round of debt deleveraging/deflation being experienced.”

      Great post, DH. Several months back I was predicting on this site the Fed could not taper to zero or the stock market plummet, along with the economy sliding into a deep recession, and if so they would start printing again. Somehow the 2nd qtr. charged off to the races at 4.2% GDP growth (after a minus 2.4% in the first qtr.), and I figured there must be something I’m not getting. Now after reading your post, I’m wondering if my hunch was correct, just that it is showing up in the manner you describe above instead.

      • Daniel Hood says:

        SW thanks, it seems obvious to me, unless I’m missing something. “The Western world” and the current Head Mafiosa in charge today at the Fed can in no way end the monumental money printing experiment she inherited from Bernanke, for the moment she does we enter the mother of debt deflationary depressions. Well it seems it’s becoming a reality but I’m telling you now, the elite would rather trigger WW3 than allow a deflationary death spiral to gather momentum. The Fed cartel through its central banking subsidiaries and interconnected banking cabal has to keep finding, creating, blowing bubbles. Internet, housing, stock market, developing economies, commodities, cleantech, space travel, mars etc. you name it, they’ll find it/they’ll create it and they’ll blow as hard as they can.

        You’ll also hear confusing/conflicting statements/signals to the market by Yellen and other members of the Fed committee about withdrawing the “stimulus” “tapering QE” “raising interest rates” which is a complete load of crap given the horrific debt mountains and liabilities the West faces. They’ll NEVER stop printing and they’ll NEVER raise rates again, they wouldn’t dare. It’s akin to lighting the nuclear fuse with a 10 sec timer. In fact the only thing that’s tapering into thin air aside from the debt based economy is fracking which is by definition Peak Oil. Why would you switch to uncoventional if the world is looking rosey with conventional? We’re eating the barrel nevermind scraping it.

        Take it as an absolute given Yellen will fire up the presses soon, she’s got no choice. She’ll hire Saatchi & Saatchi to come up with some PR rebranding and Orwellian doublespeak concocting some name for QE given its “negative connotations” on the international debt markets.

        Finally we all know the only way out of this is the mother of deflationary depressions due to the voluntary switching off of the printing presses (never gonna happen) or the eventual destruction of the currency (never gonna happen) or more ominously war (higjhly likely).

        Modern day Rome must not make the same mistakes of the past for new markets, new territories, new resources must and will be conqeured.

        • Suzanne says:

          “Finally we all know the only way out of this is the mother of deflationary depressions due to the voluntary switching off of the printing presses (never gonna happen) or the eventual destruction of the currency (never gonna happen) or more ominously war (higjhly likely).”

          Why do you think we will have the wars? Sure, I know WWII helped to get us out of the Depression, but can you connect the dots between deflationary depression, declaring a war, and the publicly stated justification for a war. Wouldn’t we have to raise taxes or add debt to fight the war (would the public go for either) and who will we be fighting? I don’t consider our efforts in the Mideast to be much of an economic stimulus for the country. (It is good for the defense industry, but I haven’t seen a lot of trickle down for the rest of the country. Hiring doesn’t seem to go up with these smaller wars.)

          • Daniel Hood says:

            Hi Suzanne, I’ve probably said too much already, sorry for the ultra doom and gloom but I guess people on here want to debate all theories/conclusions warts and all.

            When this all kicked off in 2008 (which let’s face it, was the first opening energy broadside fired at us re: conventional energy) triggering the sub-prime banking/financial crisis etc. thus exposing our fragility there were serious financial commentators/players in the game predicting the logical conclusion to this mess would be war and here we are with the first proxy salvos being fired Ukraine/Syria/Iraq.

            Those commentators include heavyweights such as Nouriel Roubini, Kyle Bass, Hugo Salinas Price, Charles Nenner, James Dines, Jim Rogers, David Stockman, Marc Faber, Jim Rickards, Paul Craig Roberts, Martin Armstrong, Larry Edelson, Gerald Celente and others warning of a wider war.

            Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. War is an inevitable consequence of the current global economic situation.

            I’m sorry to say this could be part of a wider game of geo-strategic chess being played to confront Russia, Iran, China to try to check their ambitions as the West declines.

            You ask some great questions about raising taxes/adding debts etc. but today the elite don’t call war….war, they obfuscate and apply doublespeak. I think they call it “humanitarian intervention” or something.

            May I remind you what the late Ludwig Von Mises said…

            “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

            The elites willl not voluntarily switch off the presses but equally they know if they continue printing a final total catastrophe of the currency system (the petro-dollar) as world reserve currency would be destroyed and with it Western hegemon.

            They will allow neither to happen without putting up a fight. They will sell and market war to the public in creative ways yet to be determined and I think we’re starting to see it.

    • Paul says:

      Agree on your time frame. When shale peaks the game ends soon after — unless we find some other major new oil field with easily extractable oil between now and then.

      Also agree that one way or another the central banks will never sit on their hands and allow deflation – deflation = death

      • Stilgar Wilcox says:

        deflation=death, particularly if the commodity oil keeps dropping in price, making non-conventional production cost prohibitive. Got to keep the spice flowing or it’s game over.

    • I agree that the scale back in the US QE program may be contributing to the recent drop in commodity prices of all kinds–but of course, not the longer term drop, dating back to early 2011. One question that you have no doubt run into as well is what is going on internationally, to try to offset this. You no doubt have read about the excessive buying by some buyers located in Belgium.

      One thing that confuses the situation is the fact the US interest rates are still very low. In fact, interest rates on 5 and 10 year treasuries are now lower than they were at the beginning of the year. There is a lot going on in the rest of the world as well–we end up with a “flight to quality.”

      • Daniel Hood says:

        Hi Gail thanks for the reply. I think both the US/China central banks are the key players in all this. Both are attempting to voluntarily “deflate their respective bubbles” before a repeat of 2008. Yellen is no fool (although I say that with extreme with caution!) Personally I think it’s a balancing act they’re trying to coordinate through their central bank policies which the “Austrians” of course say distorts the markets through central banking’s “top down” manipulations.

        To my mind, there’s no question the world is slowly fracturing, decoupling, deglobalizing. Have you ever come across an economist called Jeff Rubin? https://www.youtube.com/watch?v=QhsMr49AKM8. “Jeff Rubin on Oil and the End of Globalization”

        In addition, we’re certainly seeing BRICS challenging the Western world order. Encourage you to read the following, the title’s a little off-putting but the content is worth the read to understand what may be in store and how this may fit into the current paradigm.

        http://eng.globalaffairs.ru/number/The-Threat-of-War-and-the-Russian-Response-16988

        Funny you should mention Belgium, I’m going to introduce an associate to the OFW community, Valéri Natanelov. he’s currently based in Belium launching his new commodities platform so maybe we can ask him.

        He holds a Phd in Commodities, Pricing and Risk, MSc in Agroeconomics & BSc in Bioengineering so he should be well qualified enough to do some forensics.

        http://www.aroundcommodities.com/ I encourage you all to subscribe to the platform to learn more about commodities. It’s an interesting platform.

        • Thanks! I know Jeff Rubin–have met him at conferences. When he used to work at CIBC World Markets, I wrote about his articles at The Oil Drum.

          Someone else linked to the Global Affairs article as well. Right now, the BRICS aren’t doing so well.

          • Daniel Hood says:

            It’s unusual for economists to call out the fact the economy is nothing more than an energy equation bound by the laws of physics on a finite planet masked in layers of financial instruments, driven by debt and technology. Kudos to him for that, for there are many that even today after all that has/is happening, refuse to budge from their faith based “religion”.

            Agree re: BRICS, I note fires are being fanned in Hong Kong, will be interesting to see how the Chinese authorities deal with the protests and as they see things “outside interference”. The British Deputy Prime Minister Nick Clegg summoned the Chinese Ambassador to protest over their plans for HK today which should go down well! Also note Modi was being charmed by Obama recently which is ironic given he was banned from entering the US for 10 years before becoming PM elect.

            Here’s another great site if you’re a data geek on country profiles…stats, charts, maps compiled from multiple sources. Particularly energy production, consumption, exports, imports – trends for coal, crude oil, gas, and other petroleum products.

            http://www.indexmundi.com/

            Great site Gail, any plans to further develop it?

            • I have run across indexmundi, but haven’t used it a whole lot. Quite often, I knew an original source for the same information.

              I have thought about trying to write a guide to posts or some such thing. Do you have a different idea?

            • Daniel Hood says:

              Look at the positives, in an effort to bring more transparency to the complexities of the interconnected global economy and as founder of OFW you’re certainly developing both a brand and a cult following of contrarian thinkers! The usual route to building something more sustainable/viable is to start off as a simple WP blog which you’ve already done, but there’s nothing to stop this humble project advancing into a well known portal providing multilingual daily news, commentary and research (News, Research, Events, Experts, Directory etc.) From there you could launch related conferences under OFW brand.

              I can see OFW as the go-to-source for most of those contrarian thinkers from around the world that would like to see latest breaking news, receive in depth analysis of latest events/data…

              Maybe see what others on here think, set up an ideas forum on how to further develop things.

              I think B9K9 hints at it below in a post to me…

              “I suggest that after one is fully conversant with what is occurring at the surface level (as you and many others are), the next logical step is to to not only start teasing out what comes next, but get positioned to play.”

              There’s clearly value in the intel and network…:)

            • The thing stopping me is the fact that I haven’t been trying to make this into a money-making site. I don’t even allow ads on the site, and I don’t have a contribution button.

              As long as I am working on this alone, this “works.” I have a husband who is working, a house that is paid for, and a small pension since I retired early. But if I start doing anything more elaborate, I need a whole structure of employees and administration. This takes a whole different way of thinking. It also requires a higher time commitment of someone, most likely me.

              I find I have a hard time switching back and forth between one mode of thinking and another. This makes it hard to do something as “simple” as write a book.

            • fireofenergy says:

              JFK’s AWESOME vision (of nuclear, space exploration and planetary development) was removed from the arena. Since then, things have been going downhill, almost exactly as (perverted world leaders) planned. Check out the old John Birch literature. The council on foreign affairs have members that admitted something to the effect that “America has to go down”. This is one explanation as to why all the past presidents since then have blown money on stupid things and reduced money for strategic things (such as rare earth elements mining. China makes parts for our military because they are “allowed” to hold the monopoly on REE). Another reason why we don’t have a SCIENTIFICALLY SOUND and strategic energy platform is because the public itself does not want it (they have been doped into thinking that pharmacueticals and fashion is more important, and that nuclear energy is somehow “bad”).
              I remember reading that John Birch literature decades ago and the ONLY thing they screwed up on is saying that the U.S. would allow the Chinese to literally take over in about the year 2000 (they were just trying to make a point as to what happens when we cede our sovereignty).

              Everybody must fight these global leaders with pro-nuclear, pro REE, pro “we need MORE energy” activism… or they will “allow” the oil to run dry!

            • Daniel Hood says:

              Good points, why take on the extra hassle/risk/time. Sounds like you’re nicely positioned to move off-grid as best you can given the circumstances. The contribution button is always good to have I guess towards basic mantainenance.

  2. There are just two main types of energy:
    1) negative-pressure potential energy (gravitation)
    2) positive-pressure actual energy (any thermal energy)

    Binding energy belongs to the second type and is called positive:
    A bound system typically has a lower potential energy than the sum of its constituent parts — this is what keeps the system together. Often this means that energy is released upon the creation of a bound state. This definition corresponds to a positive binding energy. https://en.wikipedia.org/wiki/Binding_energy

    Any banknote is a bond:
    banknote : a promissory note issued by a central bank, serving as money http://www.collinsdictionary.com/dictionary/english/banknote

    Therefore, banknotes bind human beings into a more bound state, which has a negative-pressure potential energy and thus exerts gravitational suction: http://hyperphysics.phy-astr.gsu.edu/hbase/thermo/phase.html#c4
    At the same time, the process of human beings’ binding by banknotes is accompanied by release of positive-pressure binding energy, which counteracts the above-mentioned gravitational suction.
    Therefore, money-prenting exters a growth-inducing effect only so long as it accelerates:

    And since any inflation, however modest at first, can help employment only so long as it accelerates, adopted as a means of reducing unemployment, it will do so for any length of time only while it accelerates. “Mild” steady inflation cannot help—it can lead only to outright inflation. That inflation at a constant rate soon ceases to have any stimulating effect, and in the end merely leaves us with a backlog of delayed adaptations, is the conclusive argument against the “mild” inflation represented as beneficial even in standard economics textbooks. —Hayek, Friedrich August ♦ 1980s Unemployment and the Unions: Essays on the Impotent Price Structure of Britain and Monopoly in the Labour Market Institute of Economic Affairs, 1984 http://books.google.com/books?id=zZu3AAAAIAAJ&q=%22only+while+it+accelerates%22&dq=%22only+while+it+accelerates%22&hl=en&sa=X&ei=HBhsUYjUGMv34QSW-YDgDg&redir_esc=y

    That is why the moment of peak debt, when the rate of debt accrual begins to decrease, is the moment when collapse-inducing gravitational suction overcomes the collapse-inhibiting thermal pressure. A red supergiant collapses into a neutron star in milliseconds.

  3. fireofenergy says:

    There is no surviving post peak unless that becomes a term within a system that uses a more powerful form of energy. Either there will be a well developed global civilization that finally weans itself from dirty fossil fuels, or there will be such death and decay that you will not survive no matter well you zombie proofed your solar homestead.
    The point is implement the tech fix for civilization as a whole. That would be the combination of solar, wind, efficiency, conservation, minimizing driving petro (or coal powered electric) vehicles and of course, advocating for some best form of advanced nuclear. What’s more important, right now, is to make aware to others, these many solutions based upon the facts. The basic truths are: 1; we will eventually run out of oil, possibly sooner than we think, 2; excess CO2 from the much hyped (and still accelerating) 19th century mindset of “just burn things” has already been proven to cause warming and ocean acidification (unfortunately, on a global level), and 3; that there ARE solutions.
    Before Al Gore, there was a guy named Alvin Weinberg who developed the meltdown proof nuclear reactor (the MSRE in the 60’s). He predicted that in a world where nuclear became restrained, there would be about 380 ppm CO2 by the turn of (the last) century which could cause global implications. Unlike Al Gore, he had a real and powerful solution, capable of displacing almost all fossil fuels. However, he knew that his idea was put on hold (he was fired from head of ORNL) and even suggested many times NOT to use the same reactor type which was optimized for the military (a variant of today’s LWR). He admitted that there was a probability of some kinds of accidents because it’s just not prudent to mix water and solid fuel in the civilian world.
    World leaders do know this, and thanks to Al Gore, we all know it too!

    • fireofenergy says:

      Here’s a link direct into the mind of Alvin… (hopefully it works).
      http://www.osti.gov/scitech/servlets/purl/4033193

      • fireofenergy says:

        Here is the one about excess CO2
        http://www.osti.gov/scitech/servlets/purl/7219049
        From page 18
        .

        Global effects
        (1) Proliferation: Countries wishing to rely primarily on the nuclear option
        can do so whether or not the United States abandons nuclear power. Thus, a
        domestic moratorium on nuclear energy would have little effect on proliferation
        unless the rest of the world abandoned nuclear power.
        (2) CO,: Should 20 percent of the world’s fossil fuel be burned, the CO,
        concentration might double; this could lead to unacceptable changes in the
        world’s climate. A U.S. moratorium per se would have little effect on this
        possibility; however, loss of the nuclear option through much of the world,’which
        is a conceivable consequence of a U.S. moratorium, might make it more difficult
        to respond quickly to a perceived danger from higher CO, levels in the
        atmosphere.

    • It is simply a myth that all of the “new renewables” can replace fossil fuels. Our economy is much too complex,and there are way too many gaps. Even if we could replace the energy of fossil fuels (which we can’t) we would also need the other uses of fossil fuels, such as medicines, fabrics, building materials, plastics, roofing material, lubricating fluid, and road material.

      New renewables mostly make electricity. We can’t even keep the transmission lines repaired without oil.

      • fireofenergy says:

        I wasn’t promoting renewable energy (unless it was made by nuclear electricity).

        Nuclear’s potential is like a million times more abundant than fossil fuels. Renewables are great for homeowners and other enthusiasts wanting to offset a little bit of fossil fuels (I like to make solar lights, for example) however, at the global level, I totally agree that renewables are crap because solar will lower the baseload threshold in the day which will make nuclear to cease and quit. To make matters worse, the cheap NG that they are dependent on (the other 70% of the time) will become much more expensive. We’ll be left with NO backup plan!

        Only nuclear, advanced nuclear (and batteries for EVs) can do the job of replacing a good majority of fossil fuels. From there, hydrocarbons would only need to be used for ammonia, tires and roads, etc, NOT for burning (except for heavy equipment, which isn’t much compared to all the burning going on today. It would last much longer).

        By not aggressively deploying (some best form of advanced) nuclear, we are insuring no future – plain and simple!

        • N. George says:

          I am also a fan of nuclear, but I tend to appreciate the renewables because of some reasons. The idea of an electric tractor recharged from solar panels and irrigations powered by wind is so appealing that I cannot consider the future of the planet without it.
          IFR was stopped from US Senate (S.Amdt. 2127 to H.R. 4506) for 6 votes, I think that this event is one of the most important historic event of our times, that we are presently ignoring. If Paul and Gail have right and we will end up falling down on the Nord side of the Everest , this can be one of the reasons…

          • Paul says:

            How many times must I post this till the message gets absorbed?

            And I want sea water to do what oil does — even if you say it doesn’t….

            Ten Reasons Intermittent Renewables (Wind and Solar PV) are a Problem
            http://ourfiniteworld.com/2014/01/21/ten-reasons-intermittent-renewables-wind-and-solar-pv-are-a-problem/

            Solar – After Hundreds of Billions of Dollars of Subsidies and R&D and this is what we get?
            http://reneweconomy.com.au/wp-content/uploads/2014/04/bernstein-energy-supply.jpg

            The German Solar Disaster: 21 Billion Euros Burned
            http://www.thegwpf.com/german-solar-disaster-21-billion-euros-burned/

            Spain’s disastrous attempt to replace fossil fuels with Solar Photovoltaics
            http://energyskeptic.com/2013/tilting-at-windmills-spains-solar-pv/

            • PeterEV says:

              And how many times do I have to tell you that it is working for me and my family?????
              The numbers are there. You throw out the German and Spanish links above as it is proof positive that it will never work for anybody when the articles contain sentences that say:

              “Solar advocates can learn from this analysis as well to design solar PV with far less dependency on fossil fuels. That can only be done by realistically looking at all of the inputs required to build a solar PV plant. Narrowing the boundaries to avoid these realities is not good science and leads to wasted money and energy that could have been better spent preparing more wisely for declining fossil fuels in the future, i.e. Heinberg’s “50 Million Farmers“.”

              Heinberg’s article is talking about farming but isn’t solar about harvesting the energy of the sun?

              In the German link is this statement: “Bosch had failed to restore the competitiveness of the division Solar Energy – because of the strong price erosion of up to 40 percent.” What is the erosion the author is referring to?

              If Germany is dependent upon Russian Natural Gas, is there a way for them to reduce their reliance upon NG?

              If you do your homework, the numbers will show you if a solar installation can work economically. ***Paul, can solar work for **me**???*** Show me the numbers one way or the other. 35N 80W. 1500 sq ft. conventional ranch house w/ crawl space. $0.11 per kwhr and $3.30 per gallon gasoline; 9k miles a year driving using an EV. That should be enough for a ball park figure.

            • Paul says:

              Well maybe you should contact the energy ministers in Germany and Spain and explain to them what they are doing wrong…

              You should also make a bid of a dollar for solyndra which is in bankruptcy — take over the company and turn it around using your methods of making solar work.

        • Paul says:

          Don’t let the facts get in the way….

  4. Adam says:

    There’s a lot of life left in old Gaia yet, and we can’t predict the far distant future. In 500 million years’ time from now (for example), it’s likely that Earth’s climate will have calmed down, and a reasonable amount of easily retrievable coal and metal will have formed. It’s not impossible that our present-day cockroaches will have survived multiple apocalypses and morphed into a new species of intelligent humanoid, then the factories will eventually start up again and pollute the world anew.

  5. theedrich says:

    An overview:

    “It has often been said that, if the human species fails to make a go of it here on the earth, some other species will take over the running.  In the sense of developing intelligence this is not correct.  We have, or soon will have, exhausted the necessary physical prerequisites so far as this planet is concerned.  With coal gone, oil gone, high-grade metallic ores gone, no species however competent can make the long climb from primitive conditions to high-level technology.  This is a one-shot affair.  If we fail, this planetary system fails so far as intelligence is concerned.  The same will be true of other planetary systems.  On each of them there will be one chance, and one chance only.

    “[I]f we insist on always following the easy path we could end up as a criminal species.”

    — astrophysicist Fred Hoyle Of Men and Galaxies (University of Washington Press:  Seattle, 1964, pp. 63-70)

    In the question of the survival of civilization (which is really what we are talking about here), the arguments and evidence produced by investigators such as Gail or Heinberg’s Post Carbon Institute are extremely compelling.  Their conclusions are essentially the same as those of the Club of Rome or Joseph Tainter:  global civilization is nearing its own demise.

    Countervailing arguments are often based on rule-proving exceptions, on denial that the planet is finite, on astrological drivel, on misrepresentation of peakoilers’ arguments, on the omission (ignorant or deliberate) of critical information, or on outright lies.  Political spokesmen specialize in the latter, since the clueless electorate always demands magic.

    What Hoyle said of our species applies, mutatis mutandis, to our current civilization.  After our downfall it will be impossible ever again to ascend to our level.  There simply are no “solutions” which will permit continuation of the American hallucination.  The Marxist fantasy will certainly not work — although it will clearly accelerate population reduction, given its history of having murdered around 148 million people in the 20th century, according to University of Hawaii professor R.J. Rummel.  Allah’s beheaders might also join in that fray.  In any case, the road ahead looks grim indeed.

    Domestically, among other absurdities, the U.S. government is currently promoting higher education for absolutely everyone.  After all, back-breaking student loans will increase the country’s debt load — viewed as a good by politicoes —, and millions of body-piercing, two-digit IQs taking courses in ethnic studies, women’s studies and TV soaps will keep such “students” off of the official unemployment rolls — one more plus for the regime’s façade.  And yet another demonstration of Tainteresque diminishing returns.

    In a slightly more rational move, all across the country this past summer and fall of 2014, road crews have been feverishly working on interstate and other highways in a massive final effort to spread money around and keep the economy afloat in the expanding economic Sargasso Sea.

    But the handwriting is on the wall.  We have passed the point of no return;  and after us, all the king’s horses and all the king’s men will not be able to put Humpty Dumpty together again.

    • Paul says:

      Exactly!

      • fireofenergy says:

        The geologic time it takes to “re-create” a hydrocarbon and metals rich crust is in the same context as the spacetime required to access other planets. Nevertheless, due to geologic activity, there would be more than one chance per habitable planet for advanced civilization to achieve permanent transition from mere fossil fuels.

        The odds are such that life must abound in this galaxy, however, the fact that we don’t observe extra-terrestrial activity strongly suggests that they could never overcome the challenges to transition from diffuse renewable sources, and limited (and planet killing) sources. They could simply appear to be non-existent from our point of view, such that they do not exponentially build Dyson rings, visit Earth, etc, (or have upgraded from biological and robotic, to quantum bodies).

        The transition to nuclear does not guarantee the way to “dominion of the universe”, however, is the ONLY path known at this time which offers a physically proven way to provide modern amenities to over 10 billion humans and save the biosphere of a single planet from fossil fueled GHGs and resource wars..

        • Jan Steinman says:

          “the fact that we don’t observe extra-terrestrial activity”

          Some people believe otherwise.

          I’m not advocating this, but think about it for a moment… don’t you think any extra-terrestrial capable of detecting us, then travelling light years to Earth — don’t you think they’d be capable of hiding their presence?

          Absence of evidence is not evidence of absence. It seems rather arrogant for us apes, just a couple million years down from the trees, can make a judgement like this. We don’t directly observe subatomic particles nor radio waves, either.

          (BTW: my mother and siblings are absolutely convinced I was abducted. I have no belief nor evidence either way, except at that time of my life, I used to have terrifying nightmares of seeing our house from the roof, then seeing it get smaller and smaller, seeing the outline of the state of Michigan, seeing North America, seeing the Earth disappear into a blue dot…)

          • Adam says:

            > my mother and siblings are absolutely convinced I was abducted.

            Why did your mother and siblings think that, given that they couldn’t share your dreams? (Open question, since I certainly believe there are mysteries that humans will never penetrate).

            • Jan Steinman says:

              “Why did your mother and siblings think that”

              My Mom claims to have seen UFOs in the area on several occasions.

              My sister told her at the time (and still remembers) that “the monkey men took Jan away.” She said she told them she wanted to go too, but they said they came for me. They told her this without talking; the words came into her head. She said they walked right through the wall with me. On other occasions, my brother said he saw them peering over the windowsill.

              I have no memory of any of this, except the nightmares. As an adult, my Mom sent me a copy of Whitley Streiber’s Communion, with the cryptic note: “Sound familiar?” Even after reading it, it made no sense to me why she’d send that. Then the next time we met, she told me the stories.

              I neither believe nor disbelieve — it’s irrelevant to my present life. But it does make me more tolerant of things beyond what is commonly accepted.

            • Adam says:

              > “My Mom claims to have seen UFOs in the area on several occasions.”

              The problem is, if you can’t identify them, then you don’t know what they are. However, highly experienced trained military men, etc., have seen craft that they just cannot explain. And often it is the least imaginative people who see these things. Look up “Robert Taylor UFO Livingston Scotland” for an event in 1979 where the police got involved and partially corroborated the story given to them by a bewildered forester. He’s dead now, but you can see him tell of his encounter on YouTube.

              No UFOs in my life, but I recently counted up the anomalous experiences in my life, and they come to around eleven. Minor things but ones that should never have happened and were inexplicable, so I tucked them away in the recesses of my memory for long enough, while I tried to cling to a Dawkins-esque certainty about how life and the world should work. Maybe such mysteries are sent as an antidote to our human arrogance and presumed omniscience. Those who believe in the certainty of eternal economic growth are also in need of such an antidote, of course.

          • or stolen by gipsies

          • I think you are pulling our legs.

            • Adam says:

              Yet you as a religious person believe in things that are just as strange, Gail. We all have our different flavours of scepticism. Mind you, given all this monkey business that Don Stewart has been talking about, I wouldn’t put it past him to have set some space bonobos on poor Jan. Don definitely has to be prime suspect here…

  6. Don Stewart says:

    Dear Gail and All
    Charles Hugh Smith posted a link to this post by Gail on his weekend note to subscribers. Said ‘highly recommended’.

    Don Stewart

  7. Barbara says:

    I like the honesty expressed in the comments here about the end of BAU (Paul, Gail and others) and when I tested myself on Ben Iscatus’ (slightly tongue in cheek) Postindustrial Quiz, I realised how utterly impossible it would be for me. https://sites.google.com/site/iscatusben/postindustrial-quiz So yes, let’s delay it as long as possible!

    • Stilgar Wilcox says:

      17 – TV, stereos, MP3 players – Board games; sing, make your own music, read and tell stories.
      I like that one because people will go back to more social interaction. As far as points scored, well it looks like although being aware of the coming collapse, I’m completely hooked into BAU, grid and all. The only thing I’ve done so far is build a cache of survival food and other items for us. Hoping though to get solar installed next year and at least start storing away seeds for starting a vegetable garden and plant some fruit trees.

    • Paul says:

      Definitely – there is no middle ground – it’s BAU or primitive living…

      • Suzanne says:

        “Definitely – there is no middle ground – it’s BAU or primitive living…”

        Why does that have to be the case? Let’s say income and resource inequality kill off many of the people on earth. Those who are left have collected enough land and resources to provide for themselves pretty well. They can grow their own food. They have enough energy to provide for their needs.

        A great number of people in the world right now don’t contribute anything to the world economy. If they disappeared, no resources or manufacturing or commercial agriculture would disappear with them. But by eliminating billions of people, the planet would not be taxed as much as now.

        True, if we didn’t have labor in every place, some items would be lost, but many of those would be non-essentials.

        In other words, if 9/10ths of the world’s population disappeared, and the remaining people judiciously used the resources that were left, why would a good standard of living collapse with the remaining people if they planned well?

        • Paul says:

          The reason I disagree is because when the collapse comes – and billions die — that will be the end of the industrial revolution – which means the system that allows for the extraction of what remains of energy and other resources will be gone — without high tech we cannot extract, refine and transport oil.

          No oil means at best we revert to a very primitive lifestyle but without any of the skills to live that way.

          • Suzanne says:

            I believe the Industrial Revolution is being replaced with a newer system where far fewer people are required to keep the world functioning. So I think those who are left can live well enough without millions of people beneath them contributing in some fashion.

            In other words, I think the Post-Industrial Revolution doesn’t need many people. And that is a threat to the livelihood of all the people formerly used to make things and get resources out of the ground.

            As the wealth accrues to the very, very small number of people at the top, I think they have less and less incentive to care what happens to the rest of the world. They could create private, self-sufficient estates. Now, one could argue that they wouldn’t have access to certain aspects of modern medicine. True, but the hardiest of them would still survive.

            We’ve got the survivalists trying to gather what they would need for a world collapse. Let’s assume that most of them aren’t that wealthy and can’t build massive self-sufficient compounds. But why couldn’t a community of billionaires start planning what they would need and be prepared to exist without the help of the masses? I think in a way, they already have closed themselves off from much of the world. Their wealth is traded back and forth amongst themselves anyway.

            • Suzanne says:

              I suppose what I am asking is this. If most of the world’s population has disappeared and you no longer need to supply them with anything, and a small group of pioneers needed to survive using what was still in existence, why couldn’t they?

              Some of you are saying that without oil, they can’t function. But, why can’t they survive at a small scale? I can’t imagine that all of human population will die off simultaneously. So in various areas you are going to have survivors. They aren’t going to go back to the Stone Age because they will still have artifacts and resources left behind. From those they will carve out an existence. It will be different than what they might have now, but it won’t likely be death.

              Cuba has been surviving for decades using what was left behind, modifying it, and making do with what they could provide for themselves and the imports they were getting from the Soviet Union and the like. It hasn’t been the US, but it hasn’t been cave living, either.

            • Paul says:

              Do you mean BAU will continue but a scaled down version?

              How does that happen without oil?

            • Suzanne says:

              And what about a culture like the Amish? They are pretty self-sufficient and many of them live off the grid. What if pockets of people went back to using animal, wind, and water power and grew they own food, their own materials for building, etc.

              Again, this isn’t modern America, but it isn’t the Stone Age either. And a lifestyle like this doesn’t have to support billions of people. Just enough to keep the human population going. If the world never again has enough oil to climb back to the current level, so what? I don’t think all of humanity is going to be wiped out immediately and those who are left may make a decent life for themselves. Having a mostly agrarian, localized culture is not necessarily a bad thing. And if the world never again gets to its current level because of lack of oil, maybe that isn’t necessarily a doomsday scenario, either.

            • Paul says:

              On an earlier article I posted some points about a discussion I had with an Amish farmer in St Jacobs a few months ago.

              There are just as plugged into BAU as everyone else — they farm using petrochemicals — their land will be dead just like all other industrially farmed land on the planet when petrochemical inputs stop.

              Clearly they are better positioned than most to deal with a collapsed global economy but they are no immune to what is coming.

              If they survive they would cope better because they fall from a lesser height than everyone else.

            • The Amish are pretty dependent on current systems that require fossil fuels–metal production, for example, and the making of roads. They use metal plows, for example, something that were not generally available before coal was available. I expect that they buy dishes from the store, made with fossil fuels, and pots and pans for baking with. The may have metal stoves for heating and cooking. They probably use saws and nails. I am not sure what else they use–perhaps emergency rooms to set broken legs, and hospitals when babies are born, fabric from stores, and shoes made in factories around the world.

              I understand that there are differences among Amish groups. What they have done is take a partial step back.

            • Paul says:

              They most definitely use the banks — as the one guy told me – he has 12 kids — and the boys all need land — the only way he can do that is through bank loans…

              After chatting with this guy for half an hour or so I concluded that I had the Amish all wrong — they are not really that different from the rest of us — they simply pick and choose which parts of BAU that they want to work with … but they most definitely do not reject it

              They are on the wheel of death just like us and require eternal growth because their population is constantly growing

            • Suzanne says:

              “They use metal plows, for example, something that were not generally available before coal was available.”

              And why can’t surviving populations go back to the days of coal? Again, my point is that the entire species of people will not disappear the minute oil is no longer pumped from the ground. I think it will take quit a bit to kill off all people. And if something is so powerful that it kills all people, then most likely Earth itself will become unlivable for many forms of life. That means there are much bigger problems than loss of oil.

            • Jan Steinman says:

              “And why can’t surviving populations go back to the days of coal?”

              Undoubtedly, some will be able to.

              But I see three confounding factors:

              1) There are roughly seven times as many people as there was the last time humans lived on coal.

              2) The “low hanging fruit” is gone, and modern coal extraction requires moving much more overburden out of the way before you get to the coal.

              3) Many coal-age cities were built where the coal was, where it is presently exhausted. Then coal mining shifted far away, requiring petroleum to move it to where people needed it. There are no population centres within a mule-train’s distance of Colstrip, Wyoming, for example, and no coal mines within oxen-cart distance of New York City or London.

              The combination of these ingredients would make a general regression to coal problematic and spotty. Will steam trains be revived for moving coal around? Seems unlikely.

            • Suzanne says:

              “There are roughly seven times as many people as there was the last time humans lived on coal.”

              And if things get bad, probably large populations will disappear. I seriously doubt that every person on Earth will be gone. The ones who are left will figure something out. If not coal, they’ll come up with something else. Maybe they’ll end up burning tires.

              The solutions don’t have to support billions of people spread out across the planet.

            • Paul says:

              Maybe they’ll end up burning tires.

              good point — that is likely going to happen when people need to keep warm….

              I don’t think anyone is disputing your expectation that humans will be extinct…. my expectation is that some live but they are living in a situation between Neanderthal man and Mad Max… hardly a positive outcome

            • Jan Steinman says:

              “The solutions don’t have to support billions of people spread out across the planet.”

              I think for most people, it must “support billions of people spread out across the planet,” or you can’t really call it a “solution.”

              I like how John Michael Greer puts it. He notes that “problems” have “solutions,” and that by casting the situation as a problem invites people to “solve” the problem.

              Rather, he says that we instead have a “predicament” or “dilemma,” which has no solution, only “coping strategies.”

              Sorry to wax pedantic, but I think the word “solution” does imply continuing with at least the present population. Individuals may come up with personal solutions, but not 7,200,000,000 people.

            • You need a system to extract and process coal. Our current system depends on oil, and it depends on banks being available to pay workers.

              Perhaps in a few parts of the world, you can pick up pieces of coal with little effort, and use them to build a little local economy. But without today’s oil based transportation, and without banks to pay workers, your system is going to be very small and local. Unless you have metal ores nearby, you are not going to be refining metals.

            • Suzanne says:

              You guys are missing my point. You say nothing will work and we’re headed for worldwide collapse. And I keep pointing out that no bad things get, humans will survive unless the planet has become nearly uninhabitable. And if that is the case, the loss of oil won’t matter at all. The loss of coal won’t matter. The loss of banks won’t matter.

              You say it will go from BAU to essentially nothing because there are no solutions. And I am saying I see the world settling into something in between because humans as a species have managed to survive much worse than anything you are suggesting.

              “But without today’s oil based transportation, and without banks to pay workers, your system is going to be very small and local.”

              Yup. And that’s okay in the history of Earth.

            • Paul says:

              “humans as a species have managed to survive much worse than anything you are suggesting”

              Here is what we need to survive this time:

              – potential meltdown of all nuclear installations globally
              – the end of industrial agriculture — which means that most of the 7.B people on earth starve
              – the end of modern medicine
              – the end of modern sewage and sanitation systems
              – the end of much of the clean water supply
              – disease on an epic scale
              – the end of energy other than trees

              This time is different – this time we have massive over shot the carrying capacity of the planet – there is no way 7.2B people should be on this planet.

              I am not aware of another disaster in which at least 90% of the population of the planet was wiped out. I have no doubt that the majority of the 7.2B people will expire when the collapse hits.

            • Lidia17 says:

              Don’t forget the acidification of the oceans, the loss already of 90% of large fish species, reduction in phytoplankton, virtual absence of the large numbers of game species that were a staple in past eras, reduced plant and tree viability due to ozone and other pollutants, reduced microbial and fungal activity in the soil likely for the same reasons … Just look around you anywhere to see the trees dying, the insects absenting themselves.. the entire web of life is unraveling.

            • Paul says:

              BUT — if we had a cheap and clean energy source all these problems would magically disappear — at least that is what the green brigade believes… when if fact of course the exact opposite would happen…

              Funny how one could explain that to a 6 year old — but the green brigade would not only not get it — they would be offended and angry if you attempted to convey this to them.

            • Agreed. We have a lot of problems at one time.

            • Suzanne says:

              “Do you mean BAU will continue but a scaled down version?”

              No, I think there will be significant changes ahead. What I don’t necessarily think will happen is that the whole world will be plunged into a Stone Age existence.

              I think someone people can amass enough resources to live decently even if most people don’t survive.

            • Paul says:

              Without oil I cannot see how we can have anything even remotely resembling what we have at present.

              Sure Larry Ellison has bought an island and he can stock it with everything he will need to live a reasonable life… and he just might.

              But he needs security — and if I am the head of the security I might just decide that I don’t need Larry any longer — I might decide that I have the guns — and I might just put Larry into a row boat and send him off … and establish my fiefdom….

              All the money in the world will be useless when BAU stops functioning….

            • Suzanne says:

              “… if I am the head of the security I might just decide that I don’t need Larry any longer — I might decide that I have the guns — and I might just put Larry into a row boat and send him off … and establish my fiefdom….”

              You could kill off Larry, but if you are one of the privileged people to share his compound, you may decide there is no reason to kill him. If you have created a tribe, you may decide to keep the tribe functioning.

              “All the money in the world will be useless when BAU stops functioning….”

              Yes, I don’t think money or gold is worth much. You can’t eat either. Let’s say you are Ted Turner and you have become the biggest private land owner in the country. You’ve got a resource there. Will the masses attack you for your land? Stop and think about this. We already have the 1% amassing fortunes and no one has led a revolution yet. In fact, we’ve got voters who keep supporting policies that enrich the 1%.

              Based on likely climate change scenarios, people in very poor countries will suffer the first. So let’s say a good chunk of the world is starving, but America has maintained the illusion that it is protected. By the time it gets ugly here, maybe some of the other parts of the world have become empty. So perhaps the wealthy will tell the Americans not to turn on them because everyone else is dying, but our system is working for them.

              By the time it really catches up to people who might want to overrun the very wealthy, they may also have been convinced that they are part of the tribe and it does no good to kill off the leader.

              What I am saying is that humanity has survived a lot (pre-oil) and continued to survive. I think at least a small part of humanity will survive the oil decline because what is needed to keep a small part of humanity alive should be much, much less than what it takes to keep billions of people alive.

            • fireofenergy says:

              That small band of people might not have access to the antibiotics necessary to fight off the global stench, because even they will need the current civilization to sustain the supply chains required. It is best to fight for the planetary civilization with hope and vision because we (and the biosphere) will have no physical hope otherwise.

            • Suzanne says:

              “It is best to fight for the planetary civilization with hope and vision because we (and the biosphere) will have no physical hope otherwise.”

              On the one hand, you have people in this discussion saying that we will end up with global collapse and there is no solution. On the other, you have people saying technology and ingenuity will save us.

              I’m suggesting that the future could be something in-between. Climate change and lack of resources will likely impact some people and countries and they won’t survive. However, I don’t think mankind will be wiped out or go back to the Stone Age. There should be enough resources to keep groups of people alive. It could be a different life, but not necessarily a bad one.

            • Suzanne says:

              “There are just as plugged into BAU as everyone else — they farm using petrochemicals — their land will be dead just like all other industrially farmed land on the planet when petrochemical inputs stop.”

              Land isn’t dead when petrochemicals aren’t used. It may not be as productive, but you can still grow things on it unless it is nothing more than sand.

              There’s a difference between what you need to do to have industrial production and what you need to do to feed people on a more localized basis. People have eked out an existence with small plots of not-very-fertile land since the beginnings of farming.

              I’m not saying when oil becomes too expensive to buy and too scarce to consider using as fuel that there won’t be repercussions. What I am saying is that mankind as a whole has survived plagues, droughts, etc. and there will people who survive a reduction in oil. You would have to wipe out most of all living things on Earth to kill off all the people.

              And the reason we won’t go back to the Stone Age is that unless people forget everything they have learned, their lives will be different. For example, in the Stone Age people didn’t know about optics. People understand now how lenses work. So even if there isn’t much fuel to manufacture glass, people still have a better understanding of what to do with glass than they did when people lived in caves.

              Slash the world’s population considerably but continue to access all the world’s knowledge and the survivors will come up with something.

            • Paul says:

              “Land isn’t dead when petrochemicals aren’t used. It may not be as productive, but you can still grow things on it unless it is nothing more than sand.”

              That contradicts what a permaculture expert advised me when she evaluated some land for me in BC a year ago… she never ever touch a piece of land that has been farmed with petrochemicals because it will grow nothing without intensive organic inputs over a considerable period of time.

              Heck – even if you don’t add organic inputs to soil that has been farmed without chemicals — it will grow nothing after you run a few crop cycles that deplete the nutrients….

            • Suzanne says:

              “Heck – even if you don’t add organic inputs to soil that has been farmed without chemicals — it will grow nothing after you run a few crop cycles that deplete the nutrients.”

              What you do is rotate crops and plow some of under if you have no other source of organic matter. Grow clover, then plow it under. You don’t ever do crop cycles year after year, growing the same crops and never replenishing organic matter. But you can do it by using the crops that grow there. And if you have animals and people, you can toss in their decomposted waste products.

              There are definitely ways to turn sterile land into productive land and that don’t involve petrochemicals.

            • Paul says:

              I know how it’s done…. but what do you eat in the period between collapse and being able to grow a crop?

            • Jan Steinman says:

              “what do you eat in the period between collapse and being able to grow a crop?”

              I’m wondering if you’ve ever actually grown anything!

              It isn’t like flipping a switch. You don’t go from abundance to not being able to grow anything, just because some chemicals were used in the past!

              If your yield is down 50%, you just have to plant twice as much.

            • Paul says:

              Have you tried to grow a crop on a field that has been industrial farmed?

              I have not.

              But I have specifically asked a person who trains organic farmers and who has decades of experience in this field about this and I was told specifically that it takes up to two years to rejuvenate land that has been farmed this way – that it will grow nothing without a huge amount of work – that it is effectively dead soil – to never every buy land that has been farmed using these methods

              Of course you know better so I guess we defer to your incredible wisdom and experience organic master grower.

            • Jan Steinman says:

              “Have you tried to grow a crop on a field that has been industrial farmed?

              All the time! Permaculture is a way of managing change, not some “magic wand.”

              “… it takes up to two years to rejuvenate land that has been farmed this way – that it will grow nothing without a huge amount of work…”

              Yes, farming is always “a huge amount of work,” even in good situations.

              But “grow nothing?” I think you’re just hearing what you want to hear, Paul. You can certainly put land to work for you while repairing it. But not with the attitude that nothing will grow — all your actions will be flavoured by that bias, and the land will hear you and respond appropriately. 🙂

            • Paul says:

              Jan – I was looking at some properties with one of the leading permaculture experts in New Zealand today and we were discussing soils in various regions — the discussion moved to industrially farmed land — he indicated 3-5 years of intensive organic inputs would be required to grow a crop in soils that have been farmed with oil and gas inputs (this is in line with what I was told by a Canadian expert)

              98% of all agriculture land is farmed using these methods.

              Which brings us back to the question – what will people eat when the petrochemical inputs are no longer available? 3 years is a hell of a long time to go without a meal…

            • Jan Steinman says:

              “Black and white thinking,” Paul. The truth lies in-between.

              I can guarantee that any expert you talk to is going to tell you exactly what you’re expecting to hear.

            • Paul says:

              Yes of course Jan — you know better than all the experts I am talking to…

            • Jan Steinman says:

              “you know better than all the experts I am talking to…”

              Why, thank you, Paul! That’s very gracious of you! 🙂

            • Paul says:

              I’ve got a line on an old apple orchard that has been sprayed to high hell with poisons for decades … and the soil humped and pumped with chemical fertilizers

              But since you say this is not of any concern I will ignore the local expert’s advice not to buy this land at any price — and go for it … I expect a bumper crop out of this within the next few months…. what could go wrong [sacr :)]

            • Jan Steinman says:

              “since you say this is not of any concern”

              I said no such thing. Please stop lying about what I say.

            • Paul says:

              But I thought you said that it was no problem to farm on land that has been farmed industrially i.e. with intensive petrochemical based fertilizers and pesticides…

              And you questioned if I had every grown anything in my life when I suggested that soil farmed this way was effectively dead.

              Didn’t you also challenge the comments from two consultants that I have hired over the past couple of years – both of whom have dedicated their lives to organic farming – both of whom train organic farmers — who both said ‘3-5 years of intensive organic inputs to get a crop out of soil that has been industrially farmed’?

              I seem to recall reading that — but perhaps I was only experiencing a jet-lag induced delusion?

              So I should not buy the commercial apple orchard and try to grow food on that soil?

            • Jan Steinman says:

              “But I thought you said that it was no problem to farm on land that has been farmed industrially”

              You thought wrong. “Black and white” thinking again.

              I was arguing with your direct quote that “nothing would grow.” Of course there will be problems! That’s what farming and Permaculture is largely about — solving problems!

              I then outlined a program for obtaining significant (if reduced) yields while transitioning to fully-organic techniques.

              “you questioned if I had every grown anything in my life”

              I really don’t recall saying that, and it does not sound like the sort of thing I would say.

              “Didn’t you also challenge the comments from two consultants that I have hired over the past couple of years – both of whom have dedicated their lives to organic farming – both of whom train organic farmers — who both said ‘3-5 years of intensive organic inputs to get a crop out of soil that has been industrially farmed’?”

              Given that “a crop” is an extremely vague and general statement, then yes, I challenge your recollection of their comments. Mostly, I can’t believe any Permaculturalist worth their salt would deny that you would not get “anything” from such soil, and I strongly suspect that’s your interpretation of their remarks, rather than exactly what they said.

              Might they have said something like, “It’s going to take a few years of heavy inputs to get a good crop” rather than “any” crop?

              “So I should not buy the commercial apple orchard and try to grow food on that soil?”

              Depending on the price and one’s financial position, I’d jump at the chance to get a commercial orchard at a bargain price. I can think of a dozen ways you could obtain yields from it while you build it up to its full potential.

              On the other hand, I’d balk at buying high-priced “organic” land that depended on continuous inputs. If you aren’t using Permaculture techniques to return borrowed nutrients to the soil, you’re mining it just as surely if you buy tonnes of organic inputs as you are if you buy tonnes of chemical inputs.

              Sustainable agriculture isn’t simply “organic” agriculture.

            • Paul says:

              Jan – the commercial orchards in NZ are generally planted in poor soils that can only support the trees if they are fed chemical fertilizers… they are also heavily sprayed… I have been warned off touching anything in the areas where there are large orchards, particularly apples…

              When the SHTF oil and gas will stop flowing — and the latest article by Gail unequivocally supports that statement.

              No oil means no petrochemicals for industrial farming.

              I agree – you can grow on soils that have been farmed with these inputs – but ONLY after years of soil repair.

              98% of all farmland is farmed using these inputs. Therefore almost our entire food supply is completely reliant on these inputs.

              Take them away and you have land that will not support a crop — 7B+ people cannot wait years to fix the soil. And even if you could fix it overnight you could not feed 7B+ people with organic farming methods.

              Therefore billions are going to starve to death. The entire planet is going to resemble a famine in Sudan…

              That is the point I have been trying to make.

              Unless you believe the oil and gas will continue to flow and be refined (which would mean that BAU would need to continue) then surely you’d have to reach the same conclusion?

            • Don Stewart says:

              Paul
              For what it’s worth, from Elaine Ingham…Don Stewart
              Increasing Yields By Improving Soil Health

              We can return the soil to a condition of health. It’s not going to cost millions for us to do that. It’s not even going to cost hundreds of thousands of dollars. It’s not going to take years to achieve this goal. We can get there within one growing season. As soon as you get started and you really understand and grasp what each of the different organism groups do for you, and then make certain that you have those organisms functioning – performing their jobs – in your soil, all of the benefits of having this improved soil food web can indeed be yours. So, we’re talking about getting rid of disease problems and pest problems. If you’ve got the biology right, you don’t have those problems.

              We’re going to increase yields typically but that’s because of the consequence of improving the biology in your soil, getting the soil structure built so water and oxygen move into your soil easily and rapidly but is held. You have that water-holding capacity. You’ve got fully oxygenated systems. Your roots will then grow as deep as they possibly can and that requires all of the food web.

            • Paul says:

              Don – one of the people I spoke to about this wrote the training manuals for BC organic farming and has been doing this for decades … the other has 40+ years of experience in this business…

              They are saying 3-5 years….

              And even if they are wrong and you are right… if it takes say one year to rejuvenate these soils…

              What do 7.2 billion people eat during that year?

              Which has been my point from the very beginning.

            • Don Stewart says:

              Paul
              It’s easy enough to give Elaine Ingham’s ideas a trial in a small bed. If it works, it works. If it doesn’t, you can forget about it.

              Elaine does not guarantee that a financially strapped commercial operation can instantly transition from extractive production to sustainable production. If one bad quarter will bankrupt you, then you are pretty well a captive of whatever you are doing. But she claims it doesn’t take very long, that you will make more money after the transition because you buy fewer inputs, and that you begin the process of soil restoration.

              Don Stewart

            • Paul says:

              Don – I am not talking about making profits… I am talking about 7B+ people who will have no food — because the land has been ruined by industrial farming…

              Ingram or whomever can play in their sand box and try this and that but that is irrelevant…

              One cannot grow a crop in industrially farmed soil without extensive organic inputs…. and that means that billions will definitely die — because they cannot wait a year or whatever it will take to fix the soils of the world.

              That is the bottom line

            • Don Stewart says:

              Paul
              Feel free to disagree with Elaine…once you know what she is talking about.
              Don Stewart

            • Jan Steinman says:

              “That contradicts what a permaculture expert advised me when she evaluated some land for me in BC a year ago… she never ever touch a piece of land that has been farmed with petrochemicals because it will grow nothing without intensive organic inputs over a considerable period of time.”

              That was no “permaculture expert,” Paul.

              Permaculturalists delight in restoring worn-out, chemical-laced lands, using bioremediation and other techniques. Search for Paul Stamet’s work with mushrooms for cleaning up soil polluted with diesel fuel, for example.

              Of course, that comment might be out-of-context. But words like “grow nothing” make me think something is not quite right about either the comment or the “expert!”

            • Paul says:

              Yes you are the permaculture master — and this person who has been doing this for nearly 50 years knows nothing… and charges big bucks to evaluate properties and provide comprehensive advice and analysis… that is of course bogus.

              Since you are the real deal then perhaps you should start up a consultancy business — you could even buy up land that has been farmed using petrochemicals on the cheap — then apply your magic formula– and change them in days back to crop supporting soils — and flip the land for huge dollars.

              But I guess Chris Martenson already has this on his site — all I have to do is pay for access and I can have the magic formula is it?

              Of course you can repair the soil but it does not happen overnight — I did not say you could not — but to my point — so what do people eat while they are trying to fix the soil that has been poisoned with petrochemicals?

            • Jan Steinman says:

              There’s no need to be rude, Paul.

              Let’s just agree to disagree on this one. Soil doesn’t go from 60 to zero any more than it can go from zero to 60. Yes, there is a period of reduced productivity when reverting from chemical to organic methods. I was only arguing with your assertion that “nothing will grow” after chemical inputs cease.

              Read the land. It knows what it needs. You’ll first see lots of “weeds,” but these will be dynamic accumulators with deep tap roots that pull up nutrients the soil needs. Far from “nothing will grow,” there will be a flurry of growth of things you don’t think you want after ceasing chemical farming! Mulch them in-place to get the most benefit, or turn it over to goats for a couple seasons, who will “pre-compost” those nasty weeds and spread their nutrients over the field. Goats can turn abused soil into milk and meat, while the soil is healing. (They can also do a lot of damage, and need to be used with care.)

              The next thing is perennials. Perhaps your vaunted Permaculture mentor was telling you that “no annual crop will grow,” because the land is so busy repairing itself with weeds. But guilds of perennials that mimic the weeds will grow on abused land. Alfalfa is a good choice, as it has deep roots that work the way thistles do, bringing up calcium, magnesium, iron, and other depleted traces — all while also fixing nitrogen!

              Finally turn to “alley cropping” for what you consider essential annual crops. Intersperse them on-contour with perennial food plants, preferably nitrogen-fixing ones, like Eleagnus umbulata or Hippohae spp. Red alder will do in a pinch, and will feed your woodstove in only a few years, while your primary coppicing wood is maturing for future firewood.

              You seem to be a “black and white” thinker. I’d encourage you to spend more time in the gray areas. Uncertainty is your friend. When you “know” everything that’s going to happen, you stop learning; you only look for confirmation of your own biases. To me, that seems to be where you are “stuck.”

              I’m not going to reply to any more of your postings. Life is too short for me to spend much energy on negative, wounded people.

          • Very primitive living is business as usual, just very old fashioned.
            The possibility of reverting to primitive living is based on the assumption that the gravitational potential–the continuum’s analog information–is not unicentric, and the Earth is not orchestrating the entire universe by means of analog (nonquantized) signal exchange.
            This assumption is false, because physics holds that the universe’s vacuum is unicentric (unipolar):

            “The vacuum is really an expression of the continuous or noncountable nature of mass-energy (“mass”, as the source of gravity). Continuity, as we will see, automatically makes mass-energy unidimensional and unipolar. It is also responsible for quantum-mechanical nonlocality and the instantaneous transmission of the static gravitational force—though not the acceleration-dependent inertial or GTR component, or the inertial reaction force that we actually measure in systems with localised mass (and with which gravity is often confused).” —Rowlands, Peter ♦ The Nilpotent Dirac Equation and its Applications in Particle Physics 2003, p. 10 http://arxiv.org/pdf/quant-ph/0301071v1#page=10&view=FitV

            Therefore, the terrestrial life orchestrates the entire universe by means of analog signal exchange (which is instantaneous, in difference from quantized signalling), and the efficiency of the orchestration will only increase with time.

        • I am doubtful it would be all that easy to change to a lower population world:

          (1) To a significant extent, we have already extracted the “easy to extract” resources. So we are left with low quality ores, depleted aquifers, soil in poor condition, and oil and other fossil fuels that are expensive to extract. The problem of extracting these resources is going to become increasingly difficult with time, regardless of how many people are on earth.

          (2) We don’t have a say over which members of the world’s population disappear. Plague is a likely cause, or nuclear problems could be one issue. Nuclear war could be as well. The people who die may very well hold high positions. It is not like a couple thousand years ago, when a huge share of the population was farmers.

          (3) Today’s just in time supply lines require very specific supplies to be available, very quickly.

          (4) How would debt be repaid, with so many fewer people? Wouldn’t there be a huge number of defaults? What would happen to financial institutions and insurance companies? How would they function with all of the defaults?

          (5) We would still have as many miles of electrical transmission lines to repair as in the past, and as many miles of roads to repair. Freezing and thawing would happen as often as in the past. We would need a much higher proportion of the population to work in road repair, electrical transmission repair, etc. raising the cost significantly of these items, and reducing funds available for other purposes.

          • Suzanne says:

            “(4) How would debt be repaid, with so many fewer people? Wouldn’t there be a huge number of defaults? What would happen to financial institutions and insurance companies? How would they function with all of the defaults?”

            I don’t think the debts would be repaid. But I don’t think that would matter much. I think a lot of the world’s wealth right now is artificial — mere record keeping, and if the entire system were hacked and the debt holders’ wealth disappeared, the world would still be able to go on. The more concentrated the paper wealth, the fewer people who might be effected if went away.

            “(5) We would still have as many miles of electrical transmission lines to repair as in the past, and as many miles of roads to repair. Freezing and thawing would happen as often as in the past. We would need a much higher proportion of the population to work in road repair, electrical transmission repair, etc. raising the cost significantly of these items, and reducing funds available for other purposes.”

            Again, I think the world would function without all of that. Just at more of a pre-industrial time.

            • InAlaska says:

              I’m with you Suzanne. End of BAU only means the end of a corrupted system. Gail, forget about repaying debt and maintaining transmission lines. Who is saying that? People will revert to a simpler life using their brains and hands and wits to fashion a decent life out of the remnants of what’s left. It won’t be billions. It’ll be a few millions living scattered. Across the entire planet.

            • Lizzy says:

              Hi Suzanne, my great-grandparents in NZ lived exactly like that, and it wasn’t that long ago, 1880’s.

            • PeterEV says:

              In the book, 1493, the Spanish bankers loaned the G’ovt money at **high** interest rates for a number of dubious projects, ventures and wars. The bankers were repaid with the flow of silver from the New World. When a number of those Spanish ventures went bankrupt, the bankers loaned the Gov’t more money. The bankers made out well because of the high interest rates. The accumulated interest prepaid the cost of the bankruptcies.

              Today, we are being robbed. The US Gov’t has borrowed $18 trillion of which $12 trillion is purported to be from fraud. The Gov’t is collecting about $3 trillion or $6 of debt for every tax dollar we pay in. Remember also that income tax is about half of all taxes collected. The rest are social security, medicare, excise and corporate taxes.

              If you want to see a flat footed Congress critter, just confront them with the above facts either in person or in writing. I have. It’s not pretty. My suggestion is to write them. The do respond to numbers.

          • Paul says:

            Primitive living at best…

  8. Don Stewart says:

    Dear Gail and All

    This interesting comment appeared on the Peak Oil News website Nice words about Gail…Don Stewart

    “International oil prices have remained relatively flat over the last few years thanks, in large part, to a massive and unexpected increase in U.S. production.”
    That’s what we thought was happening also; shale production was keeping prices down, but after taking a closer look at the data it turns out that is not what has been happening. Oil has been approaching its maximum supportable price. In regard to this article, Hall is half right, and Forbes is totally wrong. Hall thinks that shale production will crash, and in this respect he is right. We already see this happening in the Eagle Ford as condensate production from the formation is in steep decline. These mini reservoirs are hitting their dew point in increasing numbers. As this effect hits an increasing number of older shale condensate fields around the country, there soon won’t be enough rigs on the planet to compensate for their decline.
    Hall’s estimate that prices will go to $150/barrel is not likely to happen. If it does it will look like the 2008, $147 bounce, which immediately fell back to $30. Gail Tverberg published a report a few months ago where she stated that the economy could not support prices much above a $100/barrel. After rerunning some numbers we have now substantiated her estimate. We came to the conclusion that $117/b is the maximum price that the economy can afford to pay for petroleum. Prices can not go above that for any sustained period of time. If Hall gets his $147/b bounce, he had better sell his positions fast, before the bottom drops out again.
    Forbes, of course, is having its usual love affair with the technology genie. Drilling more wells from one pad occurred because she waved her magic wand, and presto. It had nothing to do with the fact that engineers have spent the last 60 years developing, and improving this technology. And presto, in the flash of an eye, she will come up with another wonder just in time to save the day.
    Forbes is back in fantasy land, and Hall is walking one mighty flimsy tight rode. If Hall pulls this one off, he will have earned it.
    http://www.thehillsgroup.org/

    • kesar says:

      I see some scenarios when oil is reaching $147/b again.
      The first one is very high inflation. And the government can do it, when all other tricks will fail.
      The second would be war/martial law/emergency state or this kind of government/administration methods. This is orwellian 1984 -like scenarios / variants. Whole nation works on energy/mineral extraction and the standards of living are deteriorating every year. But at least we won’t kill each other for the last available resources.

    • Thanks for the quote! I see that is really a comment to the PeakOil.com article. The comment was made by “shortonoil.” (He may be associated with TheHillsGroup.org site linked to at the bottom of the comment). Hall referred to is someone named Andy Hall, who wrote an article in Forbes Magazine making the $150 forecast.

    • Stilgar Wilcox says:

      I like the storyline informing people of a system that indoctrinates them into being followers, ready to accept groupthink. Yes, remember people to question everything.

      The one I liked in the series is, “Are you not entertained?!”
      I thought that was not only a question for the depicted audience of ancient Italy, but currently for viewers (like myself) of the movie that are obviously entertained by such extreme violence. I wonder if we have changed that much, as we watch football players collide head on and UFC style fighting? Maybe many of us are more prepared for post peak oil than we think, as we will certainly need to joust for the right to pass through the coming bottleneck.

  9. edpell says:

    I think we all understand basic economics. What BAU economists do not take into account is that some items do not have a series of replaces with only slightly higher cost. Some items like oil do have replacements that are slightly higher, they have replacements that are 10x higher. Also, BAU economists will not talk or think about human death as a natural part of economics. The price of food goes to high people die, bringing supply and demand back in to balance.

    The economists at the MIT school of Management who wrote the Limits of Growth knew and published this far and wide.

    • Lidia17 says:

      Yeah, well, edpell, I went to MIT 1977-1981 (sorry Harvard) and what pisses me off to this day is that I never even heard of The Limits to Growth until about 2008. So much for “far and wide”. The “MIT School of Management” doesn’t exist. There is the Sloan School of Management which is a typical cornucopianist technocratic endowment grad. school extraction entity only distinguished from Harvard’s business school in its slightly less prostrate and inbred student body. All of these schools are funded by big-business entities, and so findings unsympathetic to BAU are naturally scuttled. Bain Capital was a major pied piper among my classmates, as was McDonnell-Douglas, Sandia Labs, Lockheed-Martin, etc. You can imagine.

    • InAlaska says:

      Economists also fail to account for the fact that oil is not just another commodity but is actually that “master resource,” sort of the keystone of the economic arch. Take away the keystone and the arch collapses. You cannot substitute oil in an economy when oil IS the economy.

  10. ravinathan says:

    I often hear the claim, repeated like a mantra that the forces of supply and demand will resolve the economic problems resulting from high priced oil. Just as often, these persons are conflating the micro with the macro. With respect to a single product, with the availability of substitutes, demand and supply can be treated as independent variables but not in the macro economy where the returns to the factors of production (wages, interest, dividends, rents) that are inputs to the aggregate production function, determine aggregate demand. As oil prices increase and economic surpluses diminish, wages are insufficient to support the high price of energy. This is made worse in a social system where the majority of the economic gains are claimed by a minority whose marginal propensity to consume is relatively low. Unfortunately, in our current predicament, redistributing the economic surplus would only lead to a faster depletion of oil since the surplus will go to people with a greate marginal propensity to consume. Just imagine what would have happened if the Feds QE money creation had been distributed equally to all Americans to the tune of $50,000 per head? We would certainly have seen a much higher consumer inflation, faster energy depletion and a much higher oil price with a resulting demand for higher interest rates that would have killed the party. That’s why this is a predicament.

    • Lidia17 says:

      I really don’t think that’s true. $50k distributed per capita would largely have gone to paying off onerous debt: student loans, car loans, mortgages. IMHO. That’s why it couldn’t happen. The bailouts could have gone to the citizenry to pay off outstanding loans to the banks, but that would have been anathema to those entities—we needed to pay them off directly for them not to implode the system.

      • ravinathan says:

        “50K distributed per capita would have largely gone to pay off debt..”
        And they would stop borrowing after that? One step linear reasoning can be very misleading.

      • edpell says:

        I find the system does not serve me and mine. I want the banks to go bankrupt. The system is evil. It serves only the few.

        • ??? Without banks and other financial systems our whole current system falls apart.

        • PeterEV says:

          Hey Ed,

          The financial system builds hospitals, houses, roads, bridges, bicycle factories, etc. The system tries to stabilize agriculture prices so the farmers have some support to plant.

          There are those who play the game to the detriment of the good and they are the “evil one”. I think you need to separate the good from the bad, the poorly planned from the well planned. Be proud of the good steps you have taken.

          Back in the late 90’s, I talked with a banker about a forecast of this coming decade. He evidently had similar information from a forecasting service. This era is not unsurprising to either one of us. He did not want to talk about anything past 2010 and I could see he was deeply worried. He did not want to go there. He was making 20-30 year business loans based on this forecast. What if he gets it wrong or not quite right? Does the bank go out of business?

    • That is a good way of describing our problem. The macro system doesn’t work the way people intuitively think it will.

    • edpell says:

      Supply and demand will drive the system to a new equilibrium point. They fail to understand the new point has billions of humans removed. How many billions is up for debate.

  11. Paul says:

    The European-wide embrace of “green” energy policies has been tough particularly for manufacturers. Under Chancellor Merkel, Germany has embraced a massive shift to green energy that has helped raise electricity costs for companies by 60% over the past five years to double the rates in the United States.

    The Russians, Europe’s one relatively inexpensive energy source, may have calculated that, in the long run, China may prove a better customer than the Europeans. Ironically, some European countries, including Germany, have been forced to boost their use of coal, certainly not much of a climate change win, to make up for shortfalls created by shuttering nuclear plants and overreliance on often erratic green energy.

    Ultimately, high energy prices tend to fall most painfully on the middle and working classes in the form of higher electricity bills. Some may see their jobs threatened as European employers look for lower-cost alternatives, such as in the energy rich South and middle of the United States.

    http://www.newgeography.com/content/004535-the-sick-man-of-europe-is-europe

    Go green — at your peril….

    • The pollutant emission restrictions, adopted by rich countries, have depressed the price of coal and thus made it more affordable for the poorer countries. As a result of those “environment-preserving” regulations, the global consumption of coal and the concomitant emissions have soared in the past few years.
      The same holds true for any resource-saving technologies and policies. Lowering the per capita consumption of a resource in one part of the planet will make it more affordable in the poorer and much more populated parts of the planet. The result will be a net increase in the global consumption of the resource.
      The corollary is that humanity as a whole in no smarter than yeast when it comes to resource consumption.

    • N. George says:

      The Energiewende is under development because Germany afords it. This is not getting them into peril, at least for the lifetime on wind turbines and solar panels (next 20 years). It is costly and reliant on the neighbours grid and nuclear agree, but gets them an extra chance if the world collapses. Don’t try to understand their trasiition from financial point of view because is futile. Try to understand it from collapse point of view….it is an national asset, that provides 30% of electricity consumption and created a national industry. That makes them more resilient to unforseen risk.

      • edpell says:

        I agree with you. I also agree with Gail. After the financial system falls the electric companies will not be able to pay their linemen to maintain their lines. Then the German solar PV and wind turbines will be used but only locally. That is OK as a post collapse fall back islands of industry. Gail would go on to say the semiconductor parts in the inverts will be unavailable as the 10 billion dollar global chip factories close due to lack of finance. In the long run true but semiconductor can go for 50 years before failing. Also they will transition to direct DC usage with no inverters. Yes, in 200 years the panels themselves will be shot but still a good investment if viewed as collapse insurance.

        • edpell says:

          When I say semiconductors can go for 50 years I mean the existing chips. I do not mean the factories.

      • Paul says:

        The German Solar Disaster: 21 Billion Euros Burned
        http://www.thegwpf.com/german-solar-disaster-21-billion-euros-burned/

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  14. fireofenergy says:

    It seems that debt would best be used to build a BETTER energy economy, one that develops the least costly yet most abundant source. From there, all cars should be electric (or at least hybrids).

    Without energy, there is no basis of a modern economy. This is why we need investment in nuclear fission and then fusion. People will still have to refrain from having too many children, and might have to conserve a bit (and definitely use efficiency wherever possible). But it’s much better not to have to ration. Agrarian economies could only support upwards of about a billion people. That’s because they didn’t know how to steam reform methane into ammonia (needed for fertilizer) and because they didn’t apply the scientific method.

    Oil economies WILL eventually fall IF anti-nuclear people get their way.

    • Jan Steinman says:

      “Agrarian economies could only support upwards of about a billion people. That’s because they didn’t know how to steam reform methane into ammonia (needed for fertilizer) and because they didn’t apply the scientific method.”

      I might agree with your major premise, but I disagree with your antecedents.

      Plants need many nutrients, primarily bioavailable nitrogen, phosphorous, and potassium. Nitrogen can be fully and easily supplied through animal manures, cover crops, and companion planting. An agrarian economy based on current sunlight would be most pressed to supply the needed P and K, not nitrogen, which is what the Haber-Bosche method you refer to produces from natgas.

      Your second minor premise seems a bit arrogant. Humans have developed lots of agricultural skills over the past 14,000 years or so, through observation and experimentation. Native Americans taught the supposedly advanced Europeans to bury a fish with each corn plant, for example.

      Indeed, “agriculture” as we know it is fatally flawed, and must go away in a sustainable future, replacing annual crops (which require mechanically disturbed soil) with perennial crops. The “annual crop hole” is one we’ve dug for ourselves though the (ab)use of fossil sunlight.

      There is much re-learning to be done. Let’s not assume that our fossil-sunlight-driven science is in any way superior to ancient ways of doing things.

      • fireofenergy says:

        To Jan, thanks for pointing out that pre industrial people were good at farming. We need to learn how to grow our food better, such as locally with hydroponics. I’m just saying that it is highly doubtful for 10 billion to do it the way they did. We need to get off fossils and at the same time develop the planetary civilization. I assume we will need to continue making ammonia for the extra fertilizer either from natural gas and then from clean energy, air and water.
        Perhaps, more plant life is also needed, such as the greening of the deserts which would help to sequester excess CO2.

    • Interguru says:

      As the saying goes “For fifty years fusion has been twenty five years in the future and will continue to be so”. I worked on a fusion project ( http://en.wikipedia.org/wiki/Trisops ). I also worked for the US Department of Energy Office of Fusion Energy. Even if fusion can finally pass the test of feasibility, more energy out than you put in, the engineering obstacles would make it overwhelmingly expensive. It will never be cost competitive.

      • Even if fusion can finally pass the test of feasibility, more energy out than you put in, and the engineering obstacles do not make it overwhelmingly expensive, it will not save humanity.
        Humanity will soon run out of copper, lead, etc., etc. Even if we assume that fusion energy will be used to extract metals from sea water, it will not save humanity. It will be replaced by nanobots and made redundant.

        Men are inherently competitive.
        The emergence of nanobots will enable “knowledge-enabled mass destruction”.
        Therefore, nanobots are not compatible with the existence of more than a single man.
        Eventually, there will be a SINGLE couple of eternally young humans, serviced by a host of nanobots. This is what technological SINGLULARITY implies.

        • fireofenergy says:

          Humanity will NOT soon run out of copper, just as we will not soon run out of lithium. If the price doubles, the supply increases tenfold! The boundaries to limits are nowhere close to reality (yet) on this one. The crust has plenty of raw materials. My only concern is that of extraction in an environmental acceptable manner. Malthusians at heart have been predicting the end yet science always throws them the curve ball. We have the tech, do we have the will (willingness to pay higher prices) to survive?

          • “It’s clear that other parts of the economy are being sacrificed to pay for ‘hundred dollar oil’, or vain attempts at inferior substitution; similar to an addict selling things or not paying bills to support his addiction. Some of these things are considered discretionary by those who do the sacrificing; not so discretionary for those who make their livings in those sectors, or planned to retire on the surplus they thought they had produced. It seems these ‘surpluses’ are being targeted to provide the illusion that we, collectively, haven’t overshot our resource base. Prices creeping up relative to incomes, pension funds disappearing, increasing costs of necessary services; how much of this is due to our perceived need to support the increasing costs of our oil addiction? I, for one, can’t call this ‘resilience’. It’s triage.”
            http://www.theoildrum.com/node/10213#comment-976184

            It is now obvious that the price of oil cannot stay above $100 even with the help of exponential money printing. The price of copper cannot double for the same reason.

          • On the one hand, exponential money printing stimulates the economy’s “software”–the financial sector.
            On the other hand, exponential money printing depresses the economy’s “hardware”–the real sector.
            The financial “software” acts as a gravitational syphon, with the real-sector “hardware” in the role of the syphon’s bending point–the fulcrum of leverage. Without the real-sector fulcrum of leverage, debt acts as ordinary collapse-causing gravity. When the weakened fulcrum snaps, the whole house of cards goes in an instant.

            For example, a star applies its gravitational suction (debt) to the “fulcrum of leverage” of its electron degeneracy pressure. This results in the star’s temporary heating and expansion, instead of collapse. But when the electron degeneracy pressure “fulcrum of leverage” eventually snaps, the star collapses in an instant:

            Each successive nuclear burning stage releases less energy than the previous stage, so the lifetime in each stage becomes progressively shorter. For a 20 MSun star:
            *Main sequence lifetime ~ 10 million years
            *Helium burning (3-α) ~ 1 million years
            *Carbon burning ~ 300 years
            *Oxygen burning ~ 2/3 year
            *Silicon burning ~ 2 days
            *The iron core’s collapse into a temporary neutron star ~ a few milliseconds
            http://2012wiki.com/index.php?title=Novelty_theory#Peak_Debt

            In the end of the year 2014 AD, the “red supergiant” of mankind’s economy will undergo such an instantaneous implosion into a supercompact “neutron star”: http://2012wiki.com/index.php?title=Image:Diminishing_Returns_from_Each_Dollar_of_New_Debt_in_US_Economy.jpg

            • The growth phase of a star’s life is just a pressure buildup phase, by way of which the star accelerates the overall speed its gravitational collapse.
              This principle of the fastest descent to lower total potential energy holds true for the global economic growth too. The global economic collapse will be instantaneous, not gradual.

            • Paul says:

              100% agree. When the financial system snaps — civilization ends — in a matter of days — maybe weeks…

            • If this is actually true, this would be good news. The big issue is the shape of the downslope–How can we survive it? How can we avoid a mad-max scenario? A big issue is avoidance of human suffering.

              If the collapse could actually be shown to be instantaneous, we would not need to worry about a whole lot of future events–taking care of spouses, children and grandchildren, in case of collapse; taking care of ourselves after collapse; worrying about the climate, or about getting enough food from badly degraded soil, or about nuclear power plants that cannot be properly decommissioned..

              If everyone goes at once, and there is nothing we can do to prepare, than in many ways, we are “saved” from what everyone has been worrying about.

            • Paul says:

              Why do we fear death? Is it because it is the one thing in live that we have no choice in – we die alone – and we leave our loved ones behind?

              If that is the case then what is there to fear — we all get to die at roughly the same time — we don’t miss out on anything (except a bit of misery and suffering for those who hang on by their finger tips a slight while longer)

              Better than dying alone rotting in the quiet room of the hospital no?

              It’s as if Jim Jones came back and offered us 7.2 B cups of purple kool aid.

            • In physics, energy is understood as angular momentum (The Planck quantum of action, h, has precisely the dimensions of an angular momentum). Therefore, the global economy can be modeled as a combination of gravity (debt) and the released angular momentum (the gross domestic product). When “human particles” are falling into a gravitational well (well of synergetic interindebtedness), their latent angular momentum (latent heat) becomes synergetically intensified into overt angular momentum (heat), half of which becomes radiated away, so that the infalling “human particles” need to compensate for the radiated angular momentum by sharing the remaining angular momentum (angular-momenut bonds, derivatives and other means of interindebtedness). In other words, a chaotic cloud of “human particles” (rural humanity) turns into a Saturnian ring–a “global economy” (urbanized humanity):

              “Since a circular orbit has the lowest energy for a given angular momentum, the gas can only sink further into the gravitational potential and accrete onto the primary, if it can lose some angular momentum. Finding the process by which this is done in real systems is called the angular momentum problem. We have illustrated it here with the example of mass transfer in a binary, but the same problem arises for the formation of stars from interstellar clouds or the accretion of gas onto the massive black holes in AGN. In these cases, the initial angular momentum due to random motion of the gas clouds is many orders of magnitude larger than can be accommodated by the accreting object. Rather than accreting directly, the gas forms a disk, acting like a temporary ‘parking orbit’.” —Murdin, P. (ed.) ♦ Encyclopaedia of Astronomy and Astrophysics 2002

              The global economy has reached the state of a “Saturnian ring” and is about to leave the “temporary parking orbit” of the status quo:

              “There is something missing in investors’ reasoning that leads to their current complacency, and that is an understanding of the circularity of confidence in a fragile system. Since the system is fundamentally unsound, all it would take is a loss of confidence to set off a collapse in the purchasing power of money, a major currency or the global stock and/or bond markets.” —Elliott’s Paul Singer on How It All Will End: “Badly, We Guess” Zero Hedge, 29 April 2014

              The collapse-preventing thermal pressure of humanity’s “heat of crystallization” (synergy of urbanization) compensates the gravitational suction of humanity’s debt burden only so long as the heat release accelerates:

              “China’s urbanization speed would slow down about 2013 after years of accelerated pace, chinanews.com.cn said Wednesday, citing a report by the Chinese Academy of Social Sciences. China’s urbanization rate was 45.68 percent in 2008 and is expected to rise to 52.28 percent in 2015, 57.67 percent in 2020 and 67.81 percent in 2030, and then stay at that level for a long time, the report said.” —Jiawei, Zhang ♦ China’s urbanization speed to peak about 2013 China Daily, 15 April 2010 http://www.chinadaily.com.cn/china/2010-04/15/content_9734079.htm

          • Jan Steinman says:

            “If the price doubles, the supply increases tenfold!”

            I’ll have some of what he’s smoking!

            I wonder what the going rate on a live Dodo bird is right now… by this logic, there should be flocks of them!

            You only need to look at oil prices to disprove this theory. Oil prices have more tripled since 2008, but the supply has basically stayed the same.

            You really need to see Simon Michaux’s presentation. He’s been in mining for decades, and sees “peak mining” around the corner. Copper is near its peak rate of extraction, with grams recovered from tons of ore.

            • Lidia17 says:

              Jan, these fools will never get it. They’ll bid $5million on the last bluefin tuna and wonder why there aren’t more of them popping out of the woodwork…

          • Paul says:

            “Humanity will NOT soon run out of copper, just as we will not soon run out of lithium.”

            Absolutely correct – we will never run out of any resource.

            Take copper — when the concentrations of copper require too much energy to extract and refine the metal — then we will no longer extract copper—- it will remain in the ground — and we try to substitute something else for it…

            Likewise with oil … of course the problem with oil is that it cannot be substituted for…. we NEED oil. But the economy cannot function on expensive oil.

          • We have the tech, do we have the will (willingness to pay higher prices) to survive?

            The answer is,”No.” The wages aren’t there. The additional debt is what we have been using instead, to try to afford higher prices, but the additional debt is really not working. We are getting “maxed out” on more debt. It is only an illusion that we can really afford the higher prices without higher wages.

        • Paul says:

          I bet you my hybrid trees that sprout solar panels happens before fusion.

        • This is hard for me to believe. Where do you get this idea from?

          • Bill Joy (co-founder and chief scientist of the Sun corp.): The 21st-century technologies – genetics, nanotechnology, and robotics (GNR) – are so powerful that they can spawn whole new classes of accidents and abuses. Most dangerously, for the first time, these accidents and abuses are widely within the reach of individuals or small groups. They will not require large facilities or rare raw materials. Knowledge alone will enable the use of them …. Thus we have the possibility not just of weapons of mass destruction but of knowledge-enabled mass destruction. –Why the future doesn’t need us http://archive.wired.com/wired/archive/8.04/joy_pr.html

    • We do need a lot of external energy for a modern economy. The way the economy is constructed now, we need suitable liquid fuels, not just electricity, because we have so many uses for liquid fuel. Electricity has a place too, but it will be a very long time before it replaces the need for petroleum. Even if nuclear could be made to work safely, it only solves part of our problem.

      • fireofenergy says:

        Nuclear MUST be made to operate safely, because it is the only source that can prevent a 5 billion person dieoff. We have the tech to build electric cars, and batteries do have a ESOI of up to 10. Closed cycle nuclear has an extremely high EROEI (no mining necessary) which affords the negative ESOI of ammonia, made from just air and water necessary for liquid fuels for industry (in the far future). The ammonia gained from the Haber Bosch process only comprises some 2% of the total energy consumption (so, no big deal with that, either, for the meantime).
        We need to make positive change of energy inputs to this economy to occur. It will not happen if we don’t make it happen.
        Decades ago, nobody would have thought that ordinary people would have the power of super computers at their fingertips. The economy could never afford all that! But it did and MUST now afford a complete nuclear takeover of the old fashioned and planet killing idea that we are limited to mostly just burning stuff.
        It will happen by the standardization of modular units made at the factory VOID of silly environmental prejudice. Though they rant and scream at rallies and somehow write their own laws (like when Clinton terminated advanced nuclear research in 1994), they know nothing about how to safely contain radioactive elements. By weeding out the non scientific inputs, cost would go down, considerably. That is what MUST happen if we are to save our buts from the mass dieoff (the renewables alone are not reliable enough to make themselves, their storage, inefficiency of said storage and power ten billion people). There could once again be much investment (and subsidy) into (the global mass deployment of molten salt or other safe) reactor technology. The kids don’t want to die, just yet. Ya, we MUST do this!

        In this way, oil usage (for just heavy equipment) can be conserved to last many, many times longer. Actually, I believe that the sector, including flight and commercial transport comprise less than 1/4th of all energy usage. The big converters of hydrocarbons into excess CO2 are residential, industrial electric, and cars. Perhaps even solar can power a full third of that, as long as the advanced nuclear is made to be somewhat load following in combination with extra heat storage (its own molten salt without the molten fuels mix, or even an adjacent giant gravel store). This way, much more economic activity can be realized by the making of trillions of new products – solar panels and aluminum supports (with nuclear derived electricity – of course).

        • You need a fossil fuel system to make the reprocessing system for uranium. Also, no reprocessing is 100% complete, so you always have to be adding a little to the system. You also need the fossil fuel system to make and repair the transmission lines. Nuclear power plants only last 60 years or so; fossil fuels are needed for both building new plants and decommissioning old ones.

          We don’t have a way of conserving oil for later. There is a minimum operating level for the system. In fact, it is not even clear that oil companies can shrink very well. We need to keep the whole system going–new petroleum engineers being educated; new more sophisticated extraction systems being developed; new pipelines being built and old ones being repaired. We also need roads and electrical systems to be updated and repaired. All major systems need to be kept operating, including schools and hospitals.

          Also, demand for oil needs to stay high enough that the oil price makes extraction economically feasible. This becomes a problem in a big scale-back.

  15. louploup2 says:

    debt is an essential part of the current system. We could not extract fossil fuels in any significant quantity, without an ever-rising quantity of debt.”

    I believe this is another very well stated fundamental truth. Thank you Gail for being so articulate. It makes me think of debt as the transfer of assets in the sense of stocks in systems analysis, energy in thermodynamics or entropy analysis, or any real, biophysical material thing with value to people (which is almost everything under heaven in one context or another). Other words are “subsidies”, “theft”, and “money”. And there’s only so much. The limits of debt make manifest limits to growth.

    I (and my spouse and intellectual partner) have a growing sense of dis-ease filtering through our society. We live in booming Seattle, but even here the increasingly fragile governance and economy infects the political economic discourse.

    How many more “Great Recessions” before some sort of collapse? Living in today’s history is frightening and exhilarating all at once for this lefty boomer.

    • “debt is an essential part of the current system. We could not extract fossil fuels in any significant quantity, without an ever-rising quantity of debt.”

      It is an understatement. All atoms and molecules, of which you consist, have been borrowed into existence at the expense of entering a negative-energy bound state.

      Debt (negative potential energy) is the physical vacuum between elementary particles. The vacuum (i.e., the world’s debt) has been acceleratedly inflated since the birth of the first particles of matter.

      Debt (negative potential energy) is the noumenal (spiritual) component of the universe, as opposed to its phenomenal (physical) component.

      Read more:
      http://2012wiki.com/index.php?title=Novelty_theory
      http://2012wiki.com/index.php?title=The_end_of_the_world

    • Thanks for your vote of confidence. There are many who think the economic system is simply a human construct that can be changed at will, or replaced with a new system, with no real influence on the final outcome.

  16. dolph says:

    I think Brad Bloomer above is someone who has bought into the infallibility of America and that our way of life is “non-negotiable”. He accuses others of lacking even a basic understanding of economics, but the same thing could be said of him.

    I think he makes the mistaken assumption that people out there in society are actually affording these products – cars, houses, oil etc. Once you make room in your economic worldview for the role of debt, then you begin to realize that it simply isn’t true. If systemic debt keeps rising, it means that the system is continually pulling more and more demand forward. Seen in this light, it doesn’t take a genius to realize that debt collapses do occur, and with them go demand, and bankruptcy is revealed. 2008 was just the beginning, we face another leg down shortly.

    Still, I think the case can be made that people like Gail and Paul are too pessimistic in their complete dismissal of the role of human flexibility. Ultimately, people will learn to get by with the resources that they have available, one way or another.

    • Paul says:

      Dolph – it’s mighty fine to dismiss the conclusions that a number of have reached with a ‘we’ll get by with the resources that remain’

      But you need to provide some detail.

      What resources will remain? As has been discussed when the economy collapses there will be no way to extract, refine and transport oil. Most of the surface coal is gone — how do we mine and transport that?

      I expect that the only energy source that will be available will be trees.

      You really need to convince us that this will still be possible if you want your comments to be taken seriously. As it stands they are based on nothing but hopium… it seems that is often the default position that many run to when faced with facts that point to a very terrible outcome.

      Just because we don’t want a terrible outcome doesn’t change things. One cannot hope this away…

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  19. jkanen says:

    Reblogged this on jkanen.

  20. interguru says:

    Throughout almost all of history slavery was widespread in all ( or almost all ) societies, it is condoned in the Hebrew Bible (with some humanitarian caveats ). The glory of democratic Athens was only extended to the free men, a minority of the population. While their philosophers were philosophizing slaves did the work needed to run the city. Some worked under unbelievably gruesome conditions. Those in the mines could never stand up and typically lasted a year.

    Abolition of slavery did not become widespread until the 18th century, by coincidence just as the fossil energy boom started. Now there is very little “official” slavery even as it is still practiced under the table.

    If you go to a construction site, you will see one diesel fueled backhoe doing the work of 50 men. Perhaps this is what made the abolition of slavery possible. All this leads to a question. When fossil fuels dry up will slavery come back? Comments welcome.

    • ordinaryjoe says:

      Yes. Oil has been everyones slave. Now the slave is in ill health and cant work hard soon it will die. Whether we find an appropriate way to distribute consumption, labor and wealth to replace the oil slave is the critical issue facing our species.

      • Good observation:

        Oil has been everyone’s slave. Now the slave is in ill health and can’t work hard; soon it will die. Whether we find an appropriate way to distribute consumption, labor, and wealth to replace the oil slave is the critical issue facing our species.

    • “When fossil fuels dry up will slavery come back?”
      No. All electrons and protons are quanta of angular momentum in an irrotational superfluid vacuum. Electrons and protons lose their angular momentum (heat) by radiating it into the ambient vacuum, whose metric expansion redshifts the radiated photons out of existence and thus makes the loss of angular momentum (heat) irreversible. As the continuum becomes colder over time, its electrons and protons are forced to lend their angular momenta to each other by crystallizing into a state of mutual constructive interference–harmony. Said otherwise, a cacophony turns into a symphony. The panuniversal symphonic orchestra of electrons and protons currently has a collective conductor–humanity. However, an orchestra with multiple conductors cannot produce anything but an incoherent cacophony. Therefore, having reached the peak of its collective development in the end of 2014 AD, mankind will collapse into a single couple of humans. A symphonic orchestra is the extended body of its conductor. That is why the last couple of humans–the Eschaton–will have overt (apocalyptic) psychokinetic power over the entire universe.
      Read more:
      http://2012wiki.com/index.php?title=The_end_of_the_world
      http://2012wiki.com/index.php?title=Novelty_theory

      • This is kind of “over the top” for me.

        I would say, in a networked economic system, we can’t go backward. We need a lot more energy than what human slaves might be able to supply, to run modern equipment. No matter how good the slaves, they are not going to make up for loss of oil in operating modern seeding machines, and modern harvesting machines. To use slaves again would require new ways of producing goods, and new customs (How do bosses treat their slaves? Can slaves marry?), and changed economic systems. It is doubtful that we could put such a big change into place in a matter of a few years. Things would totally fall apart, before we got the new system with slavery in place.

        • The universe abhors multiplicity (disgregation, absence of synergy), and strives for singularity (synergy).
          The gravitational life cycle of the universe is simple:
          Disorganized complexity (nonnegated multiplicity) –> organized complexity (seminegated multiplicity) –> singularity (negated multiplicity).
          Mankind is currently at the stage of organized complexity (seminegated multiplicity)–7.2 billion human particles are organized (seminegated) into a global economy. The next stage is singularity–a single couple of superhumans.

    • fireofenergy says:

      No, nuclear will be oil’s replacement. We need not decline ourselves from the scientific method and fall back into the horrible ravages of any pre-industrial age!
      There is enough energy in (this partial bit of) E=MC2 to convert air and water into liquid fuels and still have enough to build itself, its little bit of necessary storage (for load leveling) and to develop the AWESOME planetary civilization. Machines can be used to make the batteries (as long as the batteries have a high enough Energy Stored On Investment) whilst we continue on… to develop fusion, necessary to really “go out there” and divert the next asteroid strike.

      • Paul says:

        The world cannot run on nuclear energy (98% of all farming is done with petrochemical inputs) Nuclear energy cannot happen without oil.

        Next…

        • fireofenergy says:

          Nuclear energy will provide the power to make clean liquid fuels from air and water. However, less energy is spent making batteries than to make liquid fuels. For example, the energy stored on investment ESOI, for a battery is between 2 and 10, whereas ammonia, less than 1. I have to search how much CO2 is emitted for just the Haber Bosch process to know whetherornot this is a major fraction of all global emissions. Nuclear can and will power the production of most all other things such as electric cars and their batteries. The stationary storage, pumped hydro as a ESOI of over 100!

            • edpell says:

              There are alternatives
              Beyond Oil and Gas: The Methanol Economy by George A. Olah, Alain Goeppert and G. K. Surya Prakash (Dec 2, 2009)

            • Paul says:

              1. If it were the answer then why is it not happening.

              2. If it were the answer and it were happening it would not really be the answer — because if we had a proper substitute for oil that was cheap — that would only allow us to continue our exponential economic growth — and that would mean even more pressure on all other resources.

              Infinite substitution is not possible in a finite world – at some point you run out of crucial affordable substitutes.

              We have run out of affordable new supplies of the one that most definitely cannot be substituted – oil.

          • ESOI that you referred to is Energy Stored on Investment, according to this article http://news.stanford.edu/news/2013/march/store-electric-grid-030513.html

            My gripe with ESOI is the same as my gripe with EROEI: It gives a very misleading ideas about the feasibility of renewables and of batteries, because everything we are working with are add-ons to the fossil fuel system. The whole fossil fuel system has to be there, or everything collapses. There is a whole lot that has to take place, such as building of roads, schools, and other infrastructure to keep our system going. In order for these measures to “work” properly, they need to be a lot broader. They need to take into account the fact that the true energy invested includes the energy that is needed to keep our whole fossil fuel system operating, as well as governments and the services they provide.

            If the fossil fuel system contracts, the whole system falls down (except those objects currently in existence have stored energy). There is no possibility of running anything similar to today’s economy long-term, using these devices. Perhaps a few individuals can have some personal benefit from them, but we should not be focusing all our efforts on a way to improve the lives of a few well-to-do individuals.

    • Paul says:

      Good points. I think highly likely.

  21. While I agree with Gail’s general presumptions that debt and energy are the primary drivers in the global economy and may well be its demise – the weakness in her current economic scenario based on the price of oil from 2011 is that when viewed in a longer context – the price oil is still rising over time. In fact since 2000 the slope of increase is much greater than previously. (http://en.wikipedia.org/wiki/Price_of_petroleum). Three years does not a trend make in an industry whose wells useful life can span three decades.

    Gails assumptions about the costs of oil production are difficult to verify and may sufficiently neglect to account for the avg. 15 year production life of oil wells. The oil we are buying today on the average comes from wells drilled at petroleum prices and drilling costs15 or more years ago, not at the cost of wells drilled today. Oil companies are benefiting from oil prices and margins that have almost doubled since 2000. This means that the returns oil companies enjoy today from their 2000 drilling investments, and are not problematic in and of themselves at all.

    The oil industry investment decisions they make today regarding wells they drill for the future do grow increasingly problematic as the probability of drilling success decline (and costs increase – though not necessarily proportionately due to technology advances) with the resource availability. If the 2011 minor oil price decline (not too unusual) in oil prices continue for a decade (as they did from 1990 to 2000) or more, then her article predictions would be prophetic. It’s just too soon to tell – but as always – not to speculate.

    If I were to speculate, I would venture that long before leaders (government leaders. and corporate emperors) allow the world to descend into resource shortage chaos – causing the loss of their power, they will chose strategies that will allow their interests to have greater – if not unfettered access to the global critical resources that remain. Today it is far easier (physically and fiscally) to reduce the numbers of those at the dinner table – than it is to enlarge the pie. That is the unavoidable logic that all world leaders will come to – if they haven’t already, and that probability says at least one leader will implement.

    • fireofenergy says:

      That’s what I am afraid of. Instead of using the advanced nuclear option, it seems “everyone” is going to the “let’s go back to using less” option. We can only conserve within the fossil fueled box for so long.
      Therefore, since are leaders should already know this, and that they are not developing advanced nuclear such as Alvin Weinberg and Charles Till were cut from, we are already on a seemingly planned path to doom. Perhaps, it’s just the nature of money. The sure solution to the excess CO2 problem also points to nuclear, and nobody can say “world leaders do not know about climate change”. Thus, again, why would we not develop nuclear on a modular and standardized scale? It is because anti-nuclear forces (apparently) want deprivation and force costs up by imposing their NON-scientific regulations.

      • edpell says:

        Fear not, China is run by people who know enough to form rational policy.

        • InAlaska says:

          “Fear not, China is run by people…..”
          China is run by people who know how to kill millions of their own citizens (reference the Cultural Revolution and “the Great Leap Forward”…

          • Paul says:

            And the US is run by people who know how to kill and maim millions — as demonstrated by their track record.

            The Chinese are no different – the country is run by people who want more power and more wealth — the same the world over… and who have no problem killing if it furthers these goals

      • It is hard for me to see nuclear, except in the context of a world filled with fossil fuels. Fossil fuels allow us to build the nuclear power plants. They allow uranium to be processed. If we decide to reprocess spent uranium instead, we will need fossil fuels to make this approach work. Fossil fuels allow us to decommission power plants. Fossil fuels are what provide the electricity to start and restart nuclear power plants. Nuclear is not a substitute for fossil fuels, it is an add-on to fossil fuels.

    • Paul says:

      “The oil industry investment decisions they make today regarding wells they drill for the future do grow increasingly problematic as the probability of drilling success decline”

      As we have seen – Big Oil is cutting capex — because they have concluded that only high hanging fruit remains… and the ladder they need to get at it is extremely expensive… so they have decided to harvest what is left of the low hanging fruit…

    • I am not convinced that government leaders and corporate emperors have the powers you claim they have, to keep the world from descending to resource shortage chaos. Central banks have printed money since 2008, trying to first raise oil prices to the point where extraction would continue, and second, trying to keep oil prices up at a high enough level. See my post, The Connection Between Oil Prices, Debt Levels, and Interest Rates.

      Also, the cost of extraction has been rising by more than 10% per year. See my post, Beginning of the End? Oil Companies Cut Back on Spending. Oil companies do not have infinitely deep pockets. The way that they have been able to finance investment in new wells in the past is through cash flow generated from the production of older wells. They are not getting enough cash flow from old wells now, and this is a huge problem. They are cutting back in new drilling as a result. This can hardly end well.

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  24. Brad Bloomer says:

    A debt bubble collapse will bring the end of the supply of oil? Give me a break. I haven’t seen so much ignorance in an opinion piece in a long time. In contrast to Ms Tverberg, I do not know of anyone who has “the impression that falling oil prices means that the cost of production is falling.”

    Oil prices are set by supply and demand, and they have nothing to do with the cost of production nor with the existence of too much or too little debt. Oil prices have been declining in recent years solely due to the miracle of American technology squeezing oil out of shale through the rapid advances in horizontal drilling. This has resulted in the U.S. producing increasing amounts of oil every year to the point where today we produce more oil than any country in the world except Saudi Arabia. Globally, the resulting rapid supply of oil has outstripped the continuing slow growth of demand to put some downward pressure on price.

    Moreover, the oil price has nothing to do with “affordability.” Peoples worldwide will always pay whatever it takes to buy gas to heat their homes and factories and gasoline/diesel to run their cars and trucks. It is an idiotic statement to say that, “Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.” Consumers will always be able to “afford” those necessities, simply cutting back on other discretionary items which are not necessities (such as beer, cigarettes, movies, a night on the town, vacations, etc., etc.) Example: in Europe gasoline costs $6-7 a gallon. But there are just as many cars on the road as in the U.S. (per capita). Amazing how they find a way to afford it, no?

    Finally, it betrays a total ignorance of economics to state that commodity prices don’t reflect the cost of extraction. At $60/barrel or under (much less $50 or $40), drilling horizontal wells into shale to produce oil would grind to a halt. And the resulting drop in supply will/would push the price back up above the cost of extraction plus a margin of profit.

    • Paul says:

      HIGH PRICED OIL DESTROYS GROWTH

      According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

      http://www.iea.org/textbase/npsum/high_oil04sum.pdf

      You seem like an MBA type — I leave it to you to work out what $147 does to the economy…

      (of course you would know that you inflation adjust that then for every 10 buck increase subtract 0.4% from growth in a developed economy)

      Bingo!!! You got it – what you get is the collapse of the global economy then trillions of stimulus to try to offset the end of growth caused by high priced oil.

      Now where is my honorary doctorate?

    • Brad,
      The concept of supply and demand is not understood by most here at Our Finite World. Gail will flat out tell you Economist don’t understand energy( as if she does), so they don’t understand anything.

      “Gail Tverberg says:
      September 22, 2014 at 6:42 pm
      I am not convinced that there really is a solution, unless we get some help from a Higher Power.”

      Gail prefers to wish for magic and tell you how everything else won’t work.

      Next you will hear from copy and paste ZeroHedge Paul defending Gail :

      • Brad Bloomer says:

        Well, DBDmBBB, I’m glad there’s someone out there who understands how the world works. I had never heard of Our Finite World until Barry Ritholtz included this “Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?” story on his Big Picture reads. Wish I had not elected to read it!!!! Such a bunch of drivel.

        • Paul says:

          Maybe you need to check this out:

          THE PERFECT STORM (see p. 59 onwards)

          The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

          http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

        • fireofenergy says:

          Why would you consider this question not worth investigating?
          It leads me to conclude that the desire of money will lead to mass starvation. It also leads me to believe that she may be wrong and that the continued exponential extraction of fossil fuels will in itself cause the death of (most of) mankind along with (most of) the animals – due to the possible collusion of both the proven effects of excess CO2 as a planet warmer and as ocean acidifier (reinforcing each other to convert the Holocene into a anthropocene).
          Ultimately, though, I wonder why world leaders are not using science to counter both of these high probability outcomes – with the power of advanced nuclear energy (it’s not as if they don’t know)!

      • ordinaryjoe says:

        “concept of supply and demand is not understood by most here at Our Finite World.”

        The understanding of supply and demand is greater here than any place I have found. Understanding a system includes understanding its flaws and there are considerable flaws in all aspects of the ideas we were indoctrinated in regarding supply and demand. The unspoken part of supply and demand is that fiat currency perfectly regulates the relationship between the two aspects. Consider the word supply. That word does not encompass the idea of finite resources or their cost of extraction in energy. Consider the word demand. This word denotes that fiat currency will always work to acquire energy. Each denotes ideas that are inappropriate to what is occurring. The indoctrination we are subject to regarding relationship between these two words presents the relationship as a law of physics, something that works every time all the time, this is a falsehood. DBDBBB do you have any interest in seeking the truth?

        “”Gail Tverberg says:
        September 22, 2014 at 6:42 pm
        I am not convinced that there really is a solution, unless we get some help from a Higher Power.”

        Gail prefers to wish for magic and tell you how everything else won’t work.”

        I would argue that your use of the term “supply and demand” represents a much clearer example of a individual “wish for magic” to solve the situation our species finds itself in than belief in a higher power.

        • Stilgar Wilcox says:

          “Consider the word supply. That word does not encompass the idea of finite resources or their cost of extraction in energy.”

          Good point Ordinary joe, Nor does supply & demand cover a resource, oil, that fits into Liebegs Law of the Minimum, in which a reduced amount of that resource relative to its need will lead to economic contraction.

          It’s not like widgets you can just make more or less depending on demand (without concern for resource depletion), if oil supply wanes price rises, true enough, but if net energy from that source dips below what people can afford then the economy caves. The low hanging fruit has been tapped and we are now on to the more expensive (less energy filled) sources while wages remain stagnant. An affordability ceiling has been hit and is descending while capex rises – as they pass in the night we are up a creek without a paddle.

          Here’s an extreme hypothetical example: Let’s say people eat Blue Fin Tuna and their evolution has been based on consumption of this one source of protein. Let’s say no other source of protein exists but their population keeps rising. Then it starts to become more scarce and price rises. They even start blue fin tuna farming, but it does not make up for the depletion of natural sources. Then price rises to the point people can no longer afford enough to support their protein needs and unrest begins to take hold. Then only the wealthy are eating this tuna, and at some point the whole civilization collapses due to riots. In this example rising price did not produce more tuna, because depletion exceeded reproductive capacity.

          In the case of oil, also a finite resource, rising price does not produce more oil if that price exceeds it’s utility to support wages that will keep the economy growing. Demand drops setting a ceiling on capex. Once the cost of extraction of new resources is capped, then all we can do is burn what is affordable below the cap. This will mean the first sources to go offline will be marginal/non-conventional oil and we will end up using conventional oil until the economy caves.

          • Calista says:

            So widgets or computer code for that matter fit traditional economic models but physical, earth based resources do not? I realize that is a simplification but might help explain the need for different models to those not well versed in economics.

            • Stilgar Wilcox says:

              Calista, I think Paul puts it best in one of his posts above with, “The economy is a surplus energy equation, not a monetary one.” I would put it as a net energy equation. As the net energy declines due to more expensive to extract and process oil, the affordability of the end user declines.

              The exact best example to use is a finite resource. That tells you everything because it will simply get more expensive to find and process, aka, tar sands, deep offshore, Orinoco heavy oil, fracking tight oil, etc. Of course we got a better bang for the buck when oil was 3 bucks a barrel, because of the huge amount of available net energy.

            • I have a little problem with the term “net energy,” because there are so many kinds of energy, and netting one kind against another doesn’t make a whole lot of sense to me. In a way, I prefer surplus energy. We need surplus energy of a variety of types to run our current economy. Oil is the one we are having trouble making, without needing a lot of resources of other kinds (including scarce fresh water, where fracking is done).

            • B9K9 says:

              “The economy is a surplus energy equation, not a monetary one.”

              It might be more concise to state that life itself is a surplus energy equation. Consider the ubiquitous yeast experiment:
              – population overshoot
              – resource depletion
              – environmental degradation
              – die-off

              If a population of herbivores exceeds the carrying capacity of the stored solar energy contained in edible plants, they will experience a die-off if they cannot migrate to new(er) verdant fields.

              Same exact situation is true for carnivores with respect to stored solar energy contained in prey animals. Omnivores like h sapiens are more flexible/adaptable, thus resulting in pre-industrial civilization population numbers.

              Add fire to the equation, and you can see how quickly h sapiens became like a plague upon the land in terms of its excess solar energy consumption. Even as far back as 3-5,000 years ago, ancient writers observed the forests amongst original fulcrums of civilization were decimated. (Why is there a symbol of a Cypress tree on the Lebanese flag?)

              You cannot squeeze blood from a stone, nor can yeast produce more sugar, even though demand explodes as population grows. All this confident talk about market functions regulating supply/demand in the context of finite resources is a result of either ignorance or trolling.

              The PTB know that no additional supply is forthcoming no matter the demand. However, they also know societal control is based on keeping people busy & active; idle fingers are the devil’s workshop and all that. (Again, to quote Voltaire, if doG didn’t exist, he’d have to be invented just for the control aspect.) Consider that in order for the US to keep a lid on its domestic population, it MUST engage in international intrigue to maintain supply lines to ensure economic growth.

              Once you’re able to view the world in a top-level macro perspective, everything, and I mean everything, makes perfect sense. Even better, you’ll be able to accurately predict the next series of moves because the PTB are absolutely locked into the script. They think they’re in charge, but their just actors in a Punch n’ Judy skit.

            • We hit diminishing returns with an awfully lot of things, including new inventions, so the problem is more widely spread, than you might think.

              But you are right, physical earth-based resources are especially subject to depletion, and thus not subject to traditional economic models.

          • Paul says:

            Excellent analogy!

          • Brad Bloomer says:

            With apologies, Mr. Wilcox, I disagree with the following [mod: re-worded]: “In the case of oil, also a finite resource, rising price does not produce more oil if that price exceeds it’s utility to support wages that will keep the economy growing. Demand drops setting a ceiling on capex. Once the cost of extraction of new resources is capped, then all we can do is burn what is affordable below the cap. This will mean the first sources to go offline will be marginal/non-conventional oil and we will end up using conventional oil until the economy caves.”

            Demand drops only marginally in periods of economic recession and quickly rebounds afterwards. Global demand has been growing gradually, but inexorably, for decades. Even a real economic depression would only cause a temporary blip to appear on the long-term chart. It is a shibboleth to say that a “rising price does not produce more oil.” Prices rise when demand exceeds supply, and producers react to the price rise by producing more crude—thereby capping the price rise at a new equilibrium level.

            To repeat the mantra, as supply constraints come into play, the oil price rises to balance the equilibrium between supply and demand.

        • Brad Bloomer says:

          Ordinary Joe – I would submit that neither you nor Gail Tverberg understands the concept of supply and demand. It’s simple Economics 101 at any university.

          • ordinaryjoe says:

            Well Ill put that on my to do list. Economics 101. <<>> You have no idea of my academic achievements. [mod: deleted personal comment] I wouldn’t be surprised if your major was economics as every economics major I have met would call the sky orange if their professor told them it was. That includes the very attractive very spoiled one I dated for about three months.

            • Jan Steinman says:

              Putting on my moderator hat for a moment: Hey kids, play nice in the sandbox.

              I use the “Mother† is reading” rule. Pretend you’re your mother, and re-read what you wrote before you press “Post Comment.” Would she be proud of what you wrote? If not, edit and repeat until you’ve made dear old mom proud.

              † If your mother wasn’t a particularly nice person, substitute the person you respect and admire the most here.

            • Paul says:

              A picture tells a thousand words when it comes to Economists:

              http://www.econosseur.com/assets_c/2009/03/6a00d83451eb0069e201156e9a5b7e970c-thumb-510×348.jpg

            • That is a great cartoon!

            • VPK says:

              Paul, was real well behaved. Had several moments to bust folks bubble about their future, but let them live their dream…the nightmare will soon be here.
              When Randy Udall (I really enjoy his way of explaining our situation), a few posts honoring him were posted. This one being one of the best:

              “We’re living like gods right now. And our challenge is to figure out how to return to earth, how to become mortal again. In an energy sense, we’re not living like royalty. We’re not living like Cleopatra. We’re living like gods. And this life has made us sort of insane. …

              http://www.smartplanet.com/blog/the-take/randy-udall-an-energy-heros-journey/

              Living like gods, we have no experience with going sailing off a depletion cliff. We have no cultural strength or wisdom that would really guide us in this moment. What do we do? How do you deal with this when production and drilling dissipate like this, and go in different directions? And when half of the natural gas that will be consumed in the U.S. today comes from wells that are less than three years old?”

              Great words and we are not only a “little “insane, we are mucho INSANE

            • Paul says:

              Quite the man — one has to wonder if he stepped off the planet at exactly the right time

            • VPK says:

              Yeh, that he was, and he reminded us to be humble about our predictions. God knows what these Petro boys will come up next? Read Russia tried to explode nuclear charges deep underground to release fossil fuels….is that next?
              Randy wrote an excellent piece years ago in 1999 title “When Will the Joy Ride End?”. that will make you wonder, what are we thinking?
              http://www.oilcrisis.com/debate/udall/joyride.htm

              “We are an Oil Tribe, the Petroleum Clan, imbibing about 3 gallons per person per day. The automobile is our most cherished icon, a new car our symbol of success. The local gasoline station is our secular temple where each week 150 million Americans “fill ‘er up.” An average American drives 1,000 miles a month, 12,000 miles a year, the distance to the Moon every 20 years. The Oil Tribe numbers 265 million. Together we weigh about 34 billion pounds. Hungry for speed, addicted to motion, we consume our weight in petroleum every 7 days.”

            • B9K9 says:

              “That will make you wonder, what are we thinking?”

              We aren’t; people who mistaken believe h sapiens possesses even limited agency will be forever disappointed. Which brings up another point: why do certain people who understand what is occurring continue to position themselves as humanity’s critics? I mean, what kind of pseudo-power trip is it to self-identify as a judge of others actions?

              If we consider that long before we evolved into bald great apes, we were swimming in the world’s oceans in vast schools of fish, then it’s trivial to draw the same exact parallels with any group(ing) of individuals. Once you understand our core behavioral imperative(s) (ie safety, sex, food & shelter), then you can move beyond the head shaking, better than thou attitude.

              This train is going to hit the wall at mach speed – it was programmed into our destiny when the first lung fish lurched upon the shore. To be OK with where we’re at, and to understand why we do what we do, is to put one in position to accurately predict the next series of steps that humanity is going to embark upon.

            • edpell says:

              Yes, B9K9, overshoot, die off. Those who are the alphas or align themselves with the alphas have the best odd in the transition. After the transition a return to the ag life ruled by the thigs at the top and everyone else farming. If the transition takes us far enough back then nomadic egalitarianism. I hope for the deep transition but expect the shollow transition.

            • edpell says:

              shallow
              As Orlov said find a competent soldier and make him your friend part of the family.

            • B9K9 says:

              Or become that soldier. So, you are absolutely correct. Next, what do you (personally) do about it?

              Kunstler had a nice essay about all the young men. Clearly, harnessing this group is truly the world’s greatest resource, especially as the real peak is recognized once non-conventional plays out.

              If they cannot be controlled, they will form the opposition – so they must, at all costs, be first co-opted. But if they are brought into the fold, trained and programmed, who’s to say how long they will remain loyal?

              We are going to get a first hand look at what, for thousands upon thousands of years, occupied a central place in the minds of both ancient & modern kings. Consider the fall of the Czar – all of those millions of peasants thoughtlessly thrown to the machine guns & artillery, only to get the last laugh.

              I keep alluding to this, but the keys are the control mechanisms. For some, it might be religion, others, ethnic/race pride, still more, nationalism & patriotism. I learned long ago, that if I was able to figure something out, someone else was way ahead in already designing and deploying. That mean in this instance, that programs are already underway and active.

              So the key are the tells – if you find/see them, you need to be able to realize what you’re seeing, and know how to act upon them. Doing so, you can get position yourself to be in the right place @ the right time. The next phase will beyond Wall St – what’s coming is the real deal.

            • ordinaryjoe says:

              “I use the “Mother” rule.”
              Can I call the trolls muthas? 🙂

          • Jan Steinman says:

            The economists all think that if you show up at the cashier’s cage with enough currency, God will put more oil in ground. — Kenneth Deffeyes

            With finite resources, for “supply and demand” to work, there must be “substitutability.”

            What is going to substitute for fossil sunlight?

          • Paul says:

            Brad – I think we all understand that concept fairly well.

            Let’s move on from there — and what you appear not to understand — specifically that when the price of something increases to a level where it is unaffordable it is generally substituted for by a lower cost alternative.

            Unfortunately there is no alternative to oil – at any price.

            So what ends up happening is the price blasted off as conventional oil peaked in 2005 — and because there was no substitute the price shot off the charts peaking at 147…. And that of course crushes growth…

            But soon after Drill Baby Drill was unleashed and shale oil surged onto the market to reduce the pressure…. oil dropped closer to 100 (still a HUGE drag on the economy).

            When shale peaks (many say within 2 years) then we are back to a supply problem — and unless someone has a new source of oil at that time…

            Then I am afraid – we are done. As in the industrial age and civilization as we know it…

            Is over.

            • fireofenergy says:

              You are mistaken. There is a substitute for oil, albeit at a higher price. Of course that entails nuclear engineers and chemical engineers being “allowed” to work together to develop and deploy the best nuclear reactor design at the global level. From there we make batteries and electric cars, and also ammonia for fuel for heavy equipment.
              Don’t EVER say “impossible”:-)

            • Paul says:

              You really don’t get it.

              The reason that we would need to substitute something for oil is because the cost to extract oil is too high

              And you are saying the solution is to substitute with something that is even more expensive?

              You do know that your suggestion makes zero sense…

            • What is impossible, is running our economy on high-priced substitutes for oil. Our economy treats the higher price as diminishing returns. The higher price of oil means that resources need to be taken away from other uses in order to produce the oil substitute. In total, we are worse off, since at best we get the same amount of (oil + oil substitute), but a smaller amount of other goods.

          • Stilgar Wilcox says:

            Brad, if you think the people responding to you including Gail have not had econ 101 (and 102), you most certainly are wrong. Your position on supply & demand is the disconnect between economists and peakists that has been argued for many years now. Not sure how new you are to this topic – I have not seen your moniker before. It’s a resource that continually over time has a lower EROEI, that is it cost more to get the same amount of energy. It’s like walking into the Yellow River as an early settler and finding big nuggets of gold. Then pebbles, then grains, then particles, then washing down the hills to extract gold dust. Diminishing returns until it is no longer economically feasible to get the gold dust out and make a profit. Oil companies are now running into the same phenomenon with rising capex. They need oil to be more expensive to substantiate their expenses. At the same time the net energy from the oil extracted is less, and that has knock on effects to the economy. As prices rise for most everything, wages remain fairly stagnant and the result is a lowering of oil affordability for the end user. Like Paul says there is no perfect substitute for oil. You can grow palm oil but the EROEI is so low it only works because the price of oil is so high. But as we can see Brent oil price has dropped from 120’s, to 110’s to 100’s and now into the 90’s at a time when supply has only gone up slightly while demand remains strong. The concern is the affordability is declining as the world economy weakens. Look at the EU countries in recession or flatlining and that’s even after adding prostitution and street sold drugs to their GDP.

            Do a thought experiment: If oil supply was suddenly reduced greatly enough to raise price to 150 a barrel, how long do you think it would take for demand destruction to take place and price to drop back down to about 100.

            A good test for this scenario is the recent reduction the SA (saudia Arabia) did in August of 400k barrels. We will see how much oil price rises probably by Winter sometime and how long it can remain higher.

          • Lidia17 says:

            Brad, what is it with you and “the university”? “The university” is wrong, and Gail and others are right. “Supply and demand” only works in a universe without limits. Of course they have to teach unlimited growth in Economics 101; if they taught anything else, there’d be a revolution.

            The thrust of Gail’s post is correct, and worse, the same rationale applies to food. You can’t conjure up food Supply just because there is Demand for it, not even with cannibalism. There’s going to be a time, rather soon, when farms go bust because the inputs to produce food are so costly they can’t make a profit at it (this is already happening). It’s going to be the Great Depression x100, but never ending and only getting worse. Right now 10 fossil fuel calories go in to making one calorie of food. That can’t go on, and won’t. In the short term, small farms can switch to CSA models, but that still assumes that people can afford it.

            Have you noticed lately, going in to Staples or Office Depot, or one of those, that lots of folders and binders and things that were once made out of paper are now made out of plastic? That’s because instead of spending the 10:1 to grow trees, it’s easier just to go straight to petroleum, 2:1 or whatever.. Most people’s clothes are made of plastic for the same reasons (acrylic, polyester, nylon and so forth)… open your eyes. Petroleum was the substitute for previously expensive labor and raw materials. There is no substitute for petroleum except labor (lot of surplus) and raw materials (severe deficit). Then take into account that a physically-laboring human needs twice the number of calories of a cube-dweller…

            I advise reading Frederic Soddy: Wealth, Virtual Wealth and Debt.

          • I suggest you read some of my other posts including Peak Demand is Already a Huge Problem, Beginning of the End? Oil Companies Cut Back on Spending, and Why Standard Economic Models Don’t Work–Our Economy is a Network.

            Simple Economics 101 is based on the situation where we are not running into limits. The world changes as we approach limits.

        • Paul says:

          To add to that… most people have their own wish for magic… fusion, nuclear, solar, etc… all proven not to be the answer… at least with the higher power it is impossible to prove that one way or the other —- so one at best needs to be agnostic on that one… (I personally think it is unlikely)

        • Agreed 🙂

          I would argue that your use of the term “supply and demand” represents a much clearer example of a individual “wish for magic” to solve the situation our species finds itself in than belief in a higher power.

      • Something or someone is behind the “big bang” that took place years ago and behind the amazing order that underlies the universe. I don’t think it is unreasonable to hope for help from this Higher Power. I certainly don’t think it will be in the form of the Rapture that quite a few seem to believe in. We know a lot of very strange things happen, suggesting that more is going on than we really understand. I really see two possibilities:

        (1) Help from a Higher Power that will lead to some other kind of existence that we cannot at this point imagine. Perhaps it will be life in another dimension.

        (2) Most (or all) of us dying, as this current cycle comes to and end. If this death is truly the end, we have nothing to fear in death either, except perhaps for physical pain prior to death.

        The Earth will cycle from state to state, as it always has. The temperature will continue to cycle, and will readjust to changing conditions. The world will be populated with species that are adapted to new conditions. We have nothing to fear. The system is set up to be self-correcting. Even if we added more carbon dioxide to the atmosphere, somehow the system will deal with this issue.

    • You seem to be upset by what I said. Let’s start with

      Oil prices are set by supply and demand, and they have nothing to do with the cost of production nor with the existence of too much or too little debt.

      Demand is the willingness and ability to buy goods and services that use oil in their production. Most people can’t buy a new house or a new car without increasing debt. A lot of businesses can’t invest in a new factory without debt. Oil companies are increasingly finding that they need to go into debt, simply to finance new development. If credit is cut off, the ability to buy goods will very much be cut off, leading to lower prices. This is both obvious and well known. This is why central banks are working so hard to try to keep interest rates very low, and credit very available.

      You seem to understand the long term relationship between price and cost of production, at least to some extent when you say

      At $60/barrel or under (much less $50 or $40), drilling horizontal wells into shale to produce oil would grind to a halt.

      We are now dealing with a situation where wages are lagging. We frequently read stories about lower median family incomes, as fewer family members are working and more who are employed are working part time. When wages are lagging, governments seems to resort to increased debt. But this has limits. Young people with a lot of college loans don’t buy houses. The huge amount of debt in China used to finance the construction of millions of new concrete homes seems to be imploding, thanks to overbuilding and the high cost of these loans relative to incomes.

      You talk about the possibility of oil prices bouncing up again, if people cut back on discretionary spending. An example you give is cutting back on vacations. Isn’t vacation spending a way of spending for oil? Cutting back on vacations reduces demand for oil, sending prices lower. The whole situation doesn’t work the way you would like. Everything I can see says that oil prices are now being held up by quantitative easing and zero interest rate policies. See my post The Connection Between Oil Prices, Debt Levels, and Interest Rates.

  25. John Steeley says:

    Gail,

    We’ve been in a speculator-lead commodity bubble for some time now. It is actually connected to the real estate bubble we’ve already (largely) worked through. The demand for “real” assets was/has been a response to the Nasdaq/Internet bubble. Like all bubbles, this commodity bubble will ultimately deflate. Many commodities, like nat gas and coal have already deflated significantly.

    I can’t go in to great detail right now, but let me say flat out that there is no evidence whatsoever of “peak oil”. None. The high oil prices we’ve experienced for nearly a decade now are purely the result of “investor” hoarding of both the physical commodity and synthetic financial contracts and ETFs. If you look at proven oil reserves in relation to demand we’re at RECORD levels. Actual reserve and demand data paints quite the opposite picture of “peak oil”. Note that we’ve experienced bubble price levels in many commodities over the last decade, like gold, coal, nat gas, copper, etc. Is it really possible that we’re experiencing “peaks” in all of these commodities at the same time?

    As for oil production and the cost of oil production, this is probably the most misunderstood aspect of this issue. As for production, it basically follows demand very tightly and always has. Why? Because it’s very difficult and expensive to store above ground. We’re actually at record levels of proven reserves and potential production right now. We’re way oversupplied. The only thing stopping a flooding of the market with oil is, simply, there’s no one to sell the extra oil to. The current high cost of oil production is largely a function of reflexivity as George Soros has described it. The rush of speculative funds into oil raised the price, which in turn opened up higher cost reserves, which raised the cost of production. This has happened for other commodities like gold. In fact, the general rise of all commodities has affected the cost production of all other commodities. For example, higher transportation costs due to high oil prices has raised the cost of mining across the board. As the commodity bubble deflates, especially with respect to oil, the cost of production for all commodities will fall as higher cost production folds and expenses fall.

    One final thought… At the end of the day, the deflating of this bubble is not just good news – it’s great news. We’ll be benefitting from gross over-investment in the entire commodity space for many, many years to come. We’re in the early stages of a period that should be similar to the 80s and 90s, which was after the last commodity bubble.

    • Paul says:

      I am sure Gail will have plenty more to say on this but I will keep it short…

      “Proven reserves” data are complete and utter nonsense. Of course the geniuses at CNBs – who are treated like they are the 2nd coming of Christ by the finance community – will tell you otherwise….

      But as David Stockman says, they are presstitutes… they are not journalists…

      So let’s dig through the dung pile and work out what is really happening…

      For one, they are massively over-stated:

      e.g. EIA cuts recoverable Monterey shale oil estimate by 96 pct http://www.reuters.com/article/2014/05/21/eia-monterey-shale-idUSL1N0O713N20140521

      e.g. THE TRUTH BEHIND SAUDI ARABIA’S SPARE CAPACITY
      http://www.forbes.com/sites/greatspeculations/2011/03/04/the-truth-behind-saudi-arabias-spare-capacity/

      Also — and this ties into the above — how are reserves stated? What is the price point at which they determine they are recoverable? Is oil included if it needs a break even point of $200? I betcha it is…

      As for your comments on why oil is priced where it is – it is priced there because the cost to extract most of the new oil coming onto the market is upwards of $80 a barrel.

      If it costs me $10 to make a sweater in my factory in Bangladesh — and the market will only pay $8… then guess what — I shut my factory doors and get a job driving a taxi

      I leave you these articles to ponder:

      Oil and gas company debt soars to danger levels to cover shortfall in cash
      http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

      A Big Summer Story You Missed: Soaring Oil Debt http://thetyee.ca/Opinion/2014/08/29/Soaring-Oil-Debt-Summer/

      WORLD IS SLEEPWALKING TO A GLOBAL ENERGY CRISIS
      http://www.theguardian.com/environment/earth-insight/2014/jan/17/peak-oil-oilandgascompanies

      THE DECLINE OF THE WORLD’S MAJOR OIL FIELDS
      http://www.csmonitor.com/Environment/Energy-Voices/2013/0412/The-decline-of-the-world-s-major-oil-fields

      Why the Oil Industry is Running Into Major Trouble
      http://www.nakedcapitalism.com/2014/06/joe-costello-oil-industry-running-major-trouble.html

      • Paul says:

        Toil for oil means industry sums do not add up (FT.com)

        Rising costs are being met only by ever smaller increases in supply
        The most interesting message in this year’s World Energy Outlook from the International Energy Agency is also its most disturbing.

        Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.

        According to the 2013 WEO, the total world oil supply in 2012 was 87.1m barrels a day, an increase of 11.9mbd over the 75.2mbd produced in 2000.

        However, less than one-third of this increase was in the form of conventional crude oil, and more than two-thirds was therefore either what the IEA calls unconventional crude (light-tight oil, oil sands, and deep/ultra-deepwater oil) or natural-gas liquids (NGLs).
        This distinction matters because unconventional crude has a higher cost than conventional crude, while NGLs have a lower energy density.

        The IEA’s long-run cost curve has conventional crude in a range of $10-$70 a barrel, whereas for unconventional crude the ranges are higher: $50-$90 a barrel for oil sands, $50-$100 for light-tight oil, and $70-$90 for ultra-deep water. Meanwhile, in terms of energy content, a barrel of crude oil is worth 1.4 barrels of NGLs.

        Threefold rise

        The much higher cost of developing unconventional crude resources and the lower energy density of NGLs explain why, as these sources have increased their share of supply, the industry’s upstream capex has increased. But the sheer scale of the increase is staggering: upstream outlays have risen more than threefold in real terms over the past 12 years, reaching nearly $700bn in 2012 compared with only $250bn in 2000 (both figures in constant 2012 dollars).

        Coinciding with the rise in US tight-oil production, most of this increase in upstream capex has occurred since 2005, as investments have effectively doubled from $350bn in that year to nearly $700bn in 2012 (again in 2012 dollars).

        All of which means the 2013 WEO has the oil industry’s upstream capex rising by nearly 180 per cent since 2000, but the global oil supply (adjusted for energy content) by only 14 per cent. The most straightforward interpretation of this data is that the economics of oil have become completely dislocated from historic norms since 2000 (and especially since 2005), with the industry investing at exponentially higher rates for increasingly small incremental yields of energy.

        The industry has been able and willing to finance such a dramatic increase in its capital investment since 2000 owing to the similarly dramatic increase in prices. BP data show that the average price of Brent crude in real terms increased from $38 a barrel in 2000 to $112 in 2012 (in constant 2011 dollars), which represents a 195 per cent increase, slightly greater in fact than the increase in industry capex over the same period.

        However, looking only at the period since 2005, capital outlays have risen faster than prices (90 per cent and 75 per cent respectively), while in the past two years capex has risen by a further 20 per cent (the IEA estimates 2013 upstream capex at $710bn versus $590bn in 2011), while Brent prices have actually averaged about $5 a barrel less this year than in 2011.

        Iran not a game changer

        That prices have fallen slightly since 2011 while capex has risen by a further 20 per cent is a flashing light on the industry’s dashboard indicating that its upstream growth engine may finally be overheating.

        Without a significant technological breakthrough reversing the geological forces that have driven the unprecedented increase in upstream investment over the past decade, prices will have to rise further in real terms from here or else capex – and with it future oil production – will fall.

        It should also be emphasised that this vast increase in capex has occurred during a prolonged period of record-low interest rates. Once interest rates start rising again, this will put further pressure on the industry’s ability to make the massive capital outlays required to keep supply growing.

        Of course, the diplomatic breakthrough achieved with Iran over the weekend could provide some much needed short-term relief to the market, as Iran’s exports could ultimately increase by up to 1.5m barrels a day if and when western sanctions were to be fully lifted. But this would not change the dynamics of the industry’s capex treadmill in any fundamental sense.

        Even if global oil demand only grows at 1 per cent a cent a year, those extra barrels would be would be fully absorbed by the market within about 18 months. And that is probably how long it would take for Iran’s production and exports to return to pre-sanctions levels in any case.

        Alternatively, if we take the IEA’s estimate that global production of conventional crude oil from all currently producing fields will decline by 41m barrels a day by 2035 (that is, by an average of 1.9m barrels a day per year), then Iran’s potential increase of 1.5m barrels a day would compensate for just 10 months of natural decline in global conventional-crude output.

        In short, behind the hubbub of market hype about a new age of oil abundance, the toil for oil is in fact now more arduous and back-breaking than ever.

        This should worry everybody, because with the evidence suggesting that consumers are reluctant to pay much above $110 a barrel, it is an open question what happens next to the industry’s investment plans and hence, over time, to the supply of oil.

        Mark Lewis is an independent energy analyst and former head of energy research in commodities at Deutsche Bank; Daniel L Davis, a lieutenant colonel in the US Army, is co-author

        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

        • John Steeley says:

          “Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply.”

          Oil producers are only producing enough oil to satisfy demand. Saudi Arabia has been talking about this for years. If they don’t have someone to sell their oil to, they won’t bring it to market. The truth is we are awash in oil thanks to the capital expenditures you mention. See data for proven reserves. We’re at record highs nominally and in relation to current demand.

          • ordinaryjoe says:

            Proven reserves is crappy metric. What we need is is a proven reserves with proven cost of extraction in energy metric. Wonder why we dont have that?

            • John Steeley says:

              Yes joe I’ve heard that. Whenever reliable decades-old data sets get in the way of a good end-of-the-world-as-we-know-it story, by all means the thing to do is ignore or disparage it.

              BTW the total cost of extraction won’t matter for a long time. Massive over-investment = massive sunk costs. APA said a couple years ago that it costs $17/barrel to bring oil to market after the exploration, drilling, etc. costs are sunk. In SA it costs well under $10/barrel to bring their oil to market.

              Remember that in the late 90s, nearly 20 years after the last oil bubble began to deflate, oil dropped to $10, or roughly half the “cost of production”. This latest oil bubble resulted in even higher real (inflation adjusted) prices and has lasted longer than what we experienced in the 70s and early 80s (which was the last time we were bombarded with “peak oil” theories). As a result, I expect to see oil below $50, perhaps well below, before this is over.

            • Brad Bloomer says:

              If you ever see the WTI crude oil price at $50 or below, it will be the op of a lifetime to buy oil stocks. Believe me.

            • Paul says:

              Why would you buy oil stocks if oil went below 50?

              You are aware that if prices stayed at that level for more than a very short period of time oil companies would collapse into bankruptcy. Fracking would end completely as would tar sands. Exploration for new oil would stop.

            • Paul says:

              ” APA said a couple years ago that it costs $17/barrel to bring oil to market after the exploration, drilling, etc. costs are sunk. In SA it costs well under $10/barrel to bring their oil to market.”

              If that is the case then why did Big Oil start slashing capex with oil well over $100?

              Why are there very few wells being sunk into the North Sea?

              Could it be that a $80+ margin was not exciting enough?

              Now if you are referring to old fields then all fine and dandy — the profit margins are still big — but conventional oil peaked in 2005 — cost to bring find and bring new oil to market is pushing towards $100…

              As I am sure you are aware — Big Oil goes bankrupt unless it increases proven reserves… they cannot for long just sit on what remains of the low hanging fruit

            • Lidia17 says:

              I wonder, with all these profit issues.. will some/any “democratic” states start taking over fuel extraction directly? Maybe the question is not if, but when? Thoughts, anyone?

            • Paul says:

              I think essentially they already have — without QE ZIRP I don’t see fracking and much new exploration happening — these activities are all about debt – without the low interest policies the cost of cash would discourage them…

              So the central government is for all intents and purposes funding oil extraction.

            • When states took over oil extraction in the past, it was so that they could directly get access to the resulting profits. Now when profits are scarce, and it seems to take more funds than are available for investment in new fields, some of these countries (Mexico and Brazil come to mind) have been courting outside investors, hoping that they will provide the hard-to-find investment funds.

              I don’t see democratic states getting into this, because
              (1) The profit incentive is increasingly not there. Oil companies are already taxed heavily.
              (2) Democratic states are increasingly “hurting” themselves. The live on the profits of an economy, including oil profits. They would need to make additional investment via more debt–something that is increasingly not working.
              (3) A great deal of technical expertise is needed.

              The countries that might be able to do a takeover include Argentina (hurting), UK, Australia, United States and Canada. Also, perhaps some of the African countries. I don’t see likely candidates.

            • Economic patterns can be expected to change greatly, as a finite world approaches limits. This is something that was never built into economic models. It wasn’t needed back in the day when we were distant from limits, but it is needed today. What happens is that past patterns at some point become misleading, but most people continue to rely on them. This gets us into huge problems. Even written papers from noted academics follow wrong reasoning.

            • ordinaryjoe says:

              “ago that it costs $17/barrel to bring oil to market after the exploration, drilling, etc. costs are sunk. In SA it costs well under $10/barrel to bring their oil to market.

              Remember that in the late 90s, nearly 20 years after the last oil bubble began to deflate, oil dropped to $10, or roughly half the “cost of production”. This latest oil bubble resulted in even higher real (inflation adjusted) prices and has lasted longer than what we experienced in the 70s and early 80s (which was the last time we were bombarded with “peak oil” theories). As a result, I expect to see oil below $50, perhaps well below, before this is over.”

              You disparage my desire for a very simple metric proven cost of extraction in energy then start talking about $ price? Your ‘proven ” metric is worthless without real cost of extraction in energy. If you have real interest in getting to the truth why not just provide the metric instead of calling me a doomer and writing about $. Do you find it unusual that a peer requests a appropriate metric rather than a bogus one?

            • By the way, the International Energy Agency put out a report called World Energy Investment Outlook, in which it discusses the problem of finding enough investment capital to actually get the supposed reserves out. I talk about this report in my post, IEA Investment Report–What is Right; What is Wrong.

    • Paul says:

      And finally … the Ku-De-Ta …

      Keep in mind that the company putting this research out provides specialist information on energy to investment banks — I don’t imagine they’d put this in front of their clients unless they were damned sure of their conclusions…

      The punch line starts on p.59:

      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

      But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

      http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

      • John Steeley says:

        One, the “financial crisis” was NOT the result of a debt bubble. The recession was caused by massively poor investment into structures nobody needed and the speculator-lead oil/commodity blowoff in 2008. The “real asset” meme was the gasoline that fueled the blowup. Certainly massive over-investment in China was a factor as well. This will all correct in time.

        As for energy production and cost of extraction, keep a couple things in mind. In the late 90s oil prices fell to $10/barrel. $10! Did our REAL energy situation change that much from 1998 to 2008? Absolutely not. Look at oil reserve and production data. There’s no significant difference in the data whatsoever. The only thing that changed was investor perceptions.

        As I mentioned before, one cannot look at oil, all by itself, and make any conclusion as to why the price is still so high. When you look at coal and nat gas, for example, back in 2008 you see similar price blow-offs and increases in the cost of production. Was it really possible that back in 2008 we were experiencing simultaneous “peak” periods in all of these commodities at the same time? No. It was all just a matter of using good money to chase and make bad investments. This is all self-correcting.

    • Ken Barrows says:

      When can you do into great detail? Show me the great positive cash flow from the highest marginal cost oil.

      • John Steeley says:

        There isn’t and there won’t be. The highest cost oil fields, coal mines, etc. will be shuttered as prices fall. Production costs will fall across the entire commodity space over time, but it won’t be enough to save the highest cost producers.

    • The thing I think you miss is the fact that the easiest to extract resources are pulled out first, and the with the more difficult to extract pulled out later. Whether or not the cost of extraction increases is a fight between (1) technology improvements and (2) the geological trend toward more difficult, expensive extraction. In the early years, the upward trend in the cost of extraction (looking across fields) is small. It is not until later–particularly the time since the early 2000s–that the upward trend in the cost of extraction overwhelms the benefit that technology changes gives. We are dealing with a cost curve something like this:
      cost of extracting a barrel of oil

      Companies talk about reserves–but those reserves can be produced only if the price of oil is high enough. Many companies are finding that the price is not high enough. As an example, just yesterday a news item was Norway’s Statoil shelves Alberta oilsands project. The Alberta oilsands are listed among the reserves, yet the price is not high enough to justify extraction. If oil price falls further, the problem will be greater. See Oilsands investments at risk from low crude prices, report finds.

      The issue is worse with amounts classified as “technically recoverable resources” rather than reserves. Oil price may need to be exceedingly high, for these to be extracted.

      There is also the issue of up-front funding needs and debt. Back in the good old days of low oil extraction costs, it was possible for oil companies to “bootstrap”–pay for the cost of new development with the cash-flow generated from prior development. Now, with rapidly rising extraction costs, companies need more and more debt, to try to finance new extraction. Sometimes this is sort of possible with today’s low interest rates. But if interest rates go up, developers will suddenly see a big rise in their costs. And companies reach their borrowing limits, putting a cap on how much can be borrowed. See Oil and gas company debt soars to danger levels to cover shortfall in cash.

      There is the additional issue of OPEC countries needing high oil prices so that taxes on oil can be high enough to provide the revenue needed to provide the government programs that citizens expect–things like food subsidies and desalination plants for water. This <http://www.docstoc.com/docs/153511391/Goldman-Sachs—-Top-380-Global-oil-price-updateGoldman Sachs Report says that OPEC needs $100 barrel to balance its budget by 2015.

      You may think these high prices are a bubble, but unfortunately they are needed for extraction. This is a huge problem. Also, the reserves may not really be there, as illustrated with the oil sands example.

    • richard says:

      Thank you John Steeley! Your optimisim brightened my morning. I trust you will share my sense of humour when I say : Enjoy your Richard Mottram moment when it comes (google for the quote) 🙂

      And for the rest of us doomers …
      “Our analysis of the 50 largest publicly traded oil and gas companies (ex-FSU) shows that cost inflation continues to increase sharply within the global upstream oil and gas industry. In 2011, production costs increased by 26% while the unit cost of production increased by 21%, which was higher than longer term trends. In 2011, the marginal cost of production the same companies increased 10.8% to US$92.26/bbl.”
      http://patzek-lifeitself.blogspot.co.uk/2012/04/discrete-charm-of-living-at-peak.html

  26. Don Stewart says:

    Dear Gail and All
    A common theme here is that we have no alternative but to try to continue our way of life…anything else will be a disaster. I just listened to a conversation with Dr. Alan Christianson, who has looked pretty deeply into the causes of obesity.

    There are currently more than 2 billion overweight people on Earth. The projections are that by 2030, a majority of the people on Earth will be obese, with 18 percent morbidly obese. These rates of obesity and morbid obesity will be about 40X the rates in 1960.

    Dr. Christianson has concluded that the basic problem is our circadian rhythms. Our bodies are designed, for example, to have high cortisol in the mornings and low cortisol when we go to bed. However, many people now have low cortisol in the mornings and are barely able to drag themselves out of bed, but have high cortisol in the evenings. Since cortisol is a gatekeeper for many hormones, nothing works right when our cortisol is screwed up.

    Dr. Christianson recently performed a trial with 40 people who had tried (and failed) with at least 5 diets in the last 3 years. The rules were simple: eat a high protein breakfast and get at least 30 minutes of sunshine within an hour of waking up. The cortisol circadian rhythms showed significant improvements, and the participants lost an average of 2 inches around the waist.

    Dr. Christianson remarked that ‘unfortunately our modern life no longer gives our bodies the right signals’. Another doctor joked that what we need is sunlight and orgasms…both free.

    Before someone claims that we absolutely have to have massive batteries to supplement solar in order to power big screen TVs late at night, I think they should balance the projected 60 trillion dollars (US) penalty from the expected 2030 obesity epidemic against any supposed benefits of running a 24/7 economy.

    As in so much of life, we seem to be running into the limits to energy use…more energy now produces sickness and death. Dr. Christianson noted, for example, that our bodies are designed for significant day/ night temperature differentials, but now with air-conditioning we experience temperatures right around 70 degrees 24/7. Another circadian rhythm out of whack.

    A fundamental cause of cortisol malfunction is stress of all kinds: too much fructose, mental stress, lack of exercise, too few orgasms, processed foods, pollution, and all the other things that come with our modern world…enabled by massive amounts of energy.

    Don Stewart
    PS Book will come out in 2015…discretion advisable before believing everything I think I heard.

    • Jan Steinman says:

      “A common theme here is that we have no alternative but to try to continue our way of life…anything else will be a disaster.”

      Is that how you see things?

      Au contraire! I think of this as an eclectic bunch of people searching for alternatives. Do I got that wrong? (Do I need to go hang out somewhere else?)

      As for diurnal cortisol levels, I find tulsi tincture does more for me that caffeine does. Gives me lots of energy in the morning, without the edge that coffee has.

      • Don Stewart says:

        Dear Jan
        Regarding coffee. I always drank it, but felt a little guilty about it. Then I learned that flowering plants provide caffeine to pollinators. The purpose is that caffeine improves the memory of the pollinator, which makes them more likely to come back to the same flower.

        Since then, I have celebrated my coffee…but only in certain circumstances. If I need to concentrate on something, I go to the cafe and get a cup of coffee and take my book and notebook and pen and colored pencils and puzzle out what I am trying to learn. If possible, I do it early and sit outside, which takes care of the sunshine angle. If I can’t sit outside, I try for a window seat.

        I don’t drink coffee as a social event or just because I think I need a buzz in the middle of the PM.

        Think like a flower, I guess….Don Stewart

        • Jan Steinman says:

          “Regarding coffee.”

          Try tulsi sometime. Simultaneously energizing and calming. And you can grow it in temperate climes. A dropperful of homebrew tulsi tincture in some green tea in the morning, and I’m ready for anything, up to and including the end of civilization.

          • fireofenergy says:

            Thank you. My energy related concerns led me to something healthy! I wrote it down and will tell others at work.
            Hopefully, this natural plant will help me to better focus my intent into coherent actions (concerning nuclear as the solution to excess CO2 and the way out of “peak oil”).

      • InAlaska says:

        Am not sure about the orgasms part of the good Dr’s analysis. I think that too many orgasms = too many babies. At 7b and rising, isn’t this the biggest problem of them all?(;^D

        • Don Stewart says:

          Dear InAlaska
          I have recently written in these pages about non-intercourse orgasms. The good Doctor used the phrase ‘orgasmic activity’. I believe here words were ‘more orgasmic activity and oxytocin’, the oxytocin being an outcome of orgasm.

          Remember my post about Uri Alon, the neuroscientist, and his discovery of network motifs? And his discussion of the importance of Improv Comedy and the principle of ‘Yes…And’.

          Don Stewart

    • Thanks for telling us what you think you heard. I can believe eating that our current rhythm is distorted.

  27. Paul says:

    The ultimate doomsday prepper? 100% ‘green’ sounds like he knows what is coming (and wants to make a little cash along the way by inviting tourists to visit…)

    Larry Ellison Bought an Island in Hawaii. Now What?

    Larry Ellison, the billionaire co-founder of the Oracle Corporation, bought 97 percent of the Hawaiian island of Lanai. Ellison wants to make Lanai a premier tourist destination and “the first economically viable, 100 percent green community,” but things haven’t gone as planned.

    http://www.nytimes.com/2014/09/28/magazine/larry-ellison-island-hawaii.html?src=longreads&_r=0

  28. Paul says:

    Update on the demise of the USD reserve currency:

    China Says It Will Never Support Sanctions Against Russia
    http://www.zerohedge.com/news/2014-09-24/china-says-it-will-never-support-sanctions-against-russia

    Normally the US would murder any leader who attempted to reject the USD reserve currency and replace the leader with a more ‘sensible’ person (i.e. puppet) — however the Big Dogs present a much more difficult problem … they are armed to the teeth — and the US cannot directly attack them without tipping the entire apple cart over… that’s one of the many problems the globalists apparently did not think through when the offshored all the jobs to places like China…

    Looks like the US has put a leash around it’s own neck… and it very much restricted in movement…

  29. John Galt III says:

    Debt Collapse

    I would recommend that the readers here watch Japan. Their fiscal situation is terminal. Currently, half their tax revenues goes for debt service – half for interest and half for expiring notes, bills and bonds. Their blended interest rate (the average rate of all their bond issuance) is about 1%. If government blended rates head to 4% in Japan for any reason whatsoever, then 100% of government tax revenue goes to pay JGB (Japanese Government Bond) Interest. They will have no money for pensions, medical care, defense, anything. I suspect the collapse will look like Greece a few years ago when things went very badly in the course of 18 months,

    Google Kyle Bass on this topic. I happen to believe his analysis is correct. He said that the Yen is a disaster waiting to happen and that is what is occurring.

    The collapse of the Yen and JGB market will be the first domino. After Japan, keep an eye on France. As Western countries debt bubbles collapse, there will be a very difficult time for all of us to face. The US should be last in this sequence but we will not avoid it – our politicians just don’t care enough. The FED is ending another round of QE currently. If the stock market drops 20% or so and the economy looks to contract, the FED will ramp up another round QE again. The FED is totally stuck and this QE policy will continue until we collapse as well

    I spend my waking hours trying to figure out how to survive this coming mess.

    MBA – Harvard 1980

    • kesar says:

      Do we add our dimplomas at the end of the post from now on?
      Strange habit. Intelectual hierarchy terrorism.

      • Lidia17 says:

        Heh. I never met anyone who went to Harvard who didn’t let me know it within the first five minutes of acquaintance.

        • kesar says:

          Seems like intelectual aristocracy.
          Chapeau bas!

          • Jeremy says:

            I’m losing sleep as I write!
            Harvard?…..when living in the Boston area, dropped by often, liked Tufts University in Medford better.
            Anyway, in Charlott,. North Carolina, State “leaders” are trying to attract major Japanese Auto manufacturers here to the state because of the “recovery of the economy” here in the United States! No worries about such matters of oil.
            From what I see, there is no concern as far as fossil fuel availability is concerned.
            Also, saw Obama on TEEVEE claiming we will be “leaders” as far as Climate Change.
            Say reduce emissions by 20% by 2030!
            Hmmm, since we have INCREASED emissions since the last round from 2ppm to 3ppm a year, that should not be too difficult. The first cuts are the easiest.
            That is a recipe for disaster.
            This should be a real good show.

            • Paul says:

              Yet in spite of the facts … the masses remain deeply embedded in the matrix… imagine the shock (and dismay) when they finally realize it was all a illusion …

      • I don’t have an MBA from anywhere.

        • kesar says:

          Gail, you confirm my deep suspicion that one does not need MBA to be a wise man. On the contrary, I know personally many idiots with MBAs and professorships.
          I have MBA and my today’s perspective is that it was just another source of propaganda, although very useful in our world.

          • You probably know more about this than I do.

            I know that Black-Scholes pricing model, which seems to be popular in MBA programs and underlies many hedging and derivative models, assumes independence of events, when this is not in fact the case. (Oil limits affect a lot of different areas of the economy at once, for example.) As a result, the model tends to produce “too narrow tails” and leads to what are perceived to be Black Swan events. But it does make the calculations easier.

            And of course, general economic models assume that economic growth will continue indefinitely. When a person puts these two flawed models together, there is a lot of “stuff” MBA programs can teach. (I am sure there is other “stuff” as well–I just am not certain what it is.) But starting out with two flawed models is a major problem, in my view.

            • kesar says:

              Well, I was probably too radical and harsh in my opinion about MBA study. In fact I learned a lot there and I met really interesting people. My reservations are probably just frustration, that I was so fooled in regard to economics. This is the negative part of the study, when after 25 years of studying the science you recognize that it’s not a true science but rather set of not substatiated assumptions. And it all began already with Adam Smith, then Walras equations and finally the LINK, DSGE and ACE macroeconomic modelling. When you look at these models there is no input side (natural resources and energy) and no output (entropy and pollution). It should be quite obvious for every person that something is wrong with this. In terms of laws of termodynamics it’s perpetum mobile, but it took me 25 years to finally get it. So you see, this is the part where education is misleading. And the false prophets of this ideology should be judged based on the mess we are in.

            • Our system of writing peer reviewed papers based on what has been written in the past tends to perpetuate wrong thinking. It seems to create an endless cycle.

        • InAlaska says:

          I have an MS and an MA. That and a dollar will buy you a cup of coffee.

    • interguru says:

      “MBA – Harvard 1980”

      Is this a positive or negative sig. The US economy has been in the hands of ivy league MBAs for decades, and they led us directly over the cliff in 2008.

      The comment itself is good, and may be correct.

      • John Galt III says:

        Assume I was writing about climate and finished with:
        Geography Major
        Climatology Minor
        U of Wisconsin 1975

        Those facts might suggest I have the credentials to speak about climate issues with perhaps a bit more knowledge than the average person. In fact those were my areas of study at UW.

        As far as Ivy League degrees, I couldn’t agree more. We have had two presidents in succession with advanced degrees from Harvard and I detest both of them: Obama and Bush.

        What led us over the cliff in 2008 was the Community Reinvestment Act and the elimination of Glass-Steagall presided over by one William Clinton with an advanced degree from Yale. He was as stupid as his successor Bush One with an advanced degree from Yale. So, as far as your Ivy League’s comments you can extend them to Ivy League Law Degrees as well. You will get no quarrel from me.

        • interguru says:

          “Community Reinvestment Act ”

          The worst players in the mortgage market were in the shadow banking system ( such a Countrywide ) and were not subject to the act.

          • John Galt III says:

            I was in the mortgage business from 1997 to 2010. You have no idea what you are talking about. I mean NADA. The worst fraud was in Fannie Mae and Freddie Mac. Countrywide
            was as close to the GSE’s as any bank. Angelo Mozillo, Countrywide’s CEO and founder had every Democrat of importance in Wash DC bribed. That is why he was fined only and didn’t serve a day in jail.

            • Lidia17 says:

              My sister went to Pepperdine, and they gave Mozilo an honorary degree! So Christian of them! They are also famous for being the intellectual home of Kenneth Starr. When she came out of there with her precious MBA, what she wanted to do was start a Rent-A-Center scheme for those multi-thousand-dollar sets of wheels seen on cars owned by a certain Southern Californian demographic. They taught predation well there, and cheaper than Harvard.

              Instead of doing Rent-A-Wheel, she pooped out a couple of psychopathic children and joined a Rapture church, so it’s all good. 🙂

        • InAlaska says:

          Let’s not forget that President Clinton was a Rhodes Scholar! Remember the Peace Dividend anyone?

    • Stilgar Wilcox says:

      Good post, John. I agree on Japan. Regarding QE, I think things so far have actually worked out better than the Fed could have imagined. They are winding it down and all hell hasn’t broken loose in the form of a stock market crash nor has inflation gone through the roof. Unless needed to avoid collapse, I would expect the Fed will stay clear of QE. The bigger question is what happens to inflation when they sell those 4.5T in bonds created during QE? And what happens when interest rates rise? The fiscal noose is certainly being cinched tighter as we continue BAU in spite of high oil prices.

      • John Galt III says:

        Many think QE has worked.

        My worry which is shared by hedge managers and investment consultants like: Paul Singer, James Rickards, James Grant, William Fleckenstein, Marc Faber and Jim Rogers is that the FED will go back to easing as soon as there is 1) any bear market, 2) sub par growth 3) pressure by Congress or the Administration to go back to easy money because of any unforeseen financial event. I don’t believe Yellen has the guts to refuse. The jury is out on that one. Remember the QE may end for the time being but not ZIRP.

        The Fed can’t sell their assets without an abrupt increase in rates. John Hussman has discussed this at length.

        Let me put it this way. Let’s say you suddenly came in to $10 million. Would you lend it to the US government by tying it up for a paltry 2.50% for 10 years. If you were in France @ 1.75%, in Japan at 0.55%. Those debt securities are priced to perfection.

        • Jan Steinman says:

          “Let’s say you suddenly came in to $10 million. Would you lend it to the US government by tying it up for a paltry 2.50% for 10 years. If you were in France @ 1.75%, in Japan at 0.55%.”

          Hey, if you’re gonna throw money away — if you suddenly come into $350,000, EcoReality Co-op will pay you 3.75%, secured on title! (Our credit union just increased our mortgage by 20 basis points, for no good reason…)

          • Stilgar Wilcox says:

            http://www.ecoreality.org/wiki/Welcome_to_EcoReality!

            Jan, the link I found for EcoReality Co-op is the above link. Is that it?

            • Stilgar Wilcox says:

              Jan, I had a different link copied/pasted than what that link goes to – not sure why it went to a different page.

            • Jan Steinman says:

              The link you listed didn’t include the exclam at the end for some reason. I’ve created a #REDIRECT so it will get to the home page with or without the exclam.

              The simplest way to get there is http://www.EcoReality.org, which then redirects to the “welcome” page you referenced.

          • PeterEV says:

            You take the National Debt of say $18 trilllion and divide it by the amount of tax collected say $3 trillion and the amount of debt in your name is $6 for every tax dollar you paid into the Federal Government. This includes: income tax (about 43%), social security, medicare, excise tax, and corporate tax through any products you buy from corporations who still do pay income tax. This is the other 57%

            if you paid $10K in income tax, your share of the debt is $60k plus $60k/.57. The full amount is roughly $60K plus another 79K totaling 139K. A lot of that debt is from QE and was designed to cover up the mal-investments caused by deregulation. The bottom is that no one has gone to jail from campaign contributions paid to various congressmen for creating this regulatory mess.

            If the RICO laws were applied to this situation, there would be a lot of congressmen, lobbyists, Wall Streeters, and bankers being prosecuted. Where are our States’ Attorney Generals????. What is the Attorney General of the United States doing???? This is fraud on a massive scale.

            Since no one is prosecuting this situation, where are we headed?

            • Jan Steinman says:

              “if you paid $10K in income tax”

              What is this “income tax” of which you write?

              I’ve been living on under $12,000 a year for nearly 20 years. I vowed I’d legally not support all the horrible things done with taxes. The lower I go, the more free I feel!

              Beat the rush! Practise voluntary poverty NOW!

            • PeterEV says:

              Good for you but the $3 T came from somewhere and I know I am part of it along with about 100 million others. I wrote letters to my congressmen and woman and to that fellow in the white house to apparently no avail.

              I just want to point out that there is a way of bringing some of these figures down to where you and I can understand them in everyday terms.

            • Jan lives in Canada, so he is not necessarily part of the US numbers.

            • Jan Steinman says:

              “Jan lives in Canada, so he is not necessarily part of the US numbers.”

              Canada is pretty much a US clone these days — in many ways, much worse. Many, many so-called “regulatory agencies” have been “captured” by the industry they are supposed to be regulating, perhaps moreso than in the US. And the person in power, whom more than six out of ten Canadians voted against, has autocratic, near-dictatorial powers, due to the nature of Parliamentary government. (If you have a majority, you make the rules.)

        • Stilgar Wilcox says:

          “The Fed can’t sell their assets without an abrupt increase in rates. John Hussman has discussed this at length.”

          That I am aware of, but how long can they hold them before they have to sell?

        • Paul says:

          I am very doubtful that QE has been reduced at all. Note that some mysterious buyer of US debt emerged with Belgium as the proxy… where did all those billions come from?

          Once you get on the money printing train there is no getting off — the Fed has been caught out with LTRO and other schemes to keep the hamster running — no doubt these are just the tip of the iceberg….

          When you are facing the end of the world — you do anything — but you don’t tell anyone — because that would destroy CONfidence.

        • I agree that an increase in interest rates would bring the system down. No one–governments or ordinary citizens–can afford the higher payments that would be required. Demand for all kinds of things would drop, including oil. Oil prices would drop considerably more than they already have.

        • InAlaska says:

          I would ask the executives of PIMCO what they think about the selling of Fed assets into the bond market…except they both resigned while there was still time to get out with their shirts.

      • Paul says:

        Stilgar – recall in the past few years when the Fed hinted that QE was going to taper – the stock market started to quiver… interest rates started to shift… And the Fed each reacted with more loosening..

        Now we are told they have actually tightened — yet the stock market is relatively stable as are interest rates…

        Smoke = Fire. I do not believe for a second that they are pulling back

    • Paul says:

      Japan is a windshield waiting for a moose – it is defying gravity — it is in the Twilight Zone — it is in suspended animation — a train headed for the wall at 1000mph…. Kyle Bass is 100% right — timing is everything though…. he’s been short a long time… wonder how long he can wait…

      BA from Crap Canadian University – almost 2 decades of real world experience starting running mostly failed businesses — avid mountain biker — organic farmer — enjoy reading in spare time – surfing internet – smashing matrices — etc etc… 🙂

      • interguru says:

        Paul — you are mixing your metaphors
        ————————-
        ‘Debt: “Japan a bug in search of a windshield” ‘
        from http://blogs.vancouversun.com/2011/07/27/debt-japan-a-bug-in-search-of-a-windshield/

      • John Galt III says:

        Bass uses about 1% of his assets in the JGB trade. He makes up for that with his Yen short which is making him a lot of money.The convexity is huge. Owners of JGB’s get very little in interest, so they sell calls against their positions for added income. The problem is the currency is collapsing so fast you would be a fool to own these bonds.

        I mean you get 50 basis points a year while you lose 10 to 20% in the currency. This is why virtually no one but the Japanese own the stupid things.

        • Paul says:

          I was short Yen … then realized that it could only go so low because Korea and other exporters would stand for the Japanese to devalue massively…. so I dumped quite some time ago… the Yen has not really dropped much since…

          Bass did well initially but his short position has been stagnant.

          Generally in recent years money in an index fund has destroyed the returns of money in hedge funds.

      • edpell says:

        A windshield waiting for a moose, ah those Canadians are so colorful and polite.

    • John–Thanks for your views. I agree that Japan’s situation looks frightening. I knew the Japanese government’s level of debt was very high, but didn’t realize that 25% of tax revenue goes for interest and 25% goes for expiring bonds, bills, and notes. Japan, even more than the US and Europe, needs very low interest rates.

      I will keep on eye on France as well.

  30. Pingback: Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply? | Our Finite World | qualicuminstitute.ca

  31. Stilgar Wilcox says:

    http://abcnews.go.com/Health/wireStory/ebola-vaccine-ready-year-end-25721068

    ‘Red Cross Team Attacked While Burying Ebola Dead’

    “A Red Cross team was attacked while collecting bodies believed to be infected with Ebola in southeastern Guinea, the latest in a string of assaults that are hindering efforts to control West Africa’s current outbreak.

    Resistance to efforts to control the disease — from outright denials that Ebola exists to fears that the very people sent to combat it are in fact carriers — has frustrated efforts to end or even slow the disease’s spread in all three of the most affected countries, Liberia, Sierra Leone and Guinea, say officials.”

    The reason I’m posting this article is because of that line in the last paragraph; “denials Ebola exists”. There is so much denial even in the developed countries of peak oil, global warming and by many posters here by what Gail has written in this latest post. I suggest going back and slowly reading it again, then waiting some time to see if it is correct.

    • xabier says:

      Stilgar

      I think this is rather like what happened in Europe when aristocrats tried to introduce the potato to their peasants as a new and nutritious food: the latter thought it was a plot to poison them, and followed a conspiracy narrative.

      What will kill us first: reality, or patterns of thought which we can’t escape?!

  32. gman says:

    Wow this is new twist on Peak Oil..not that prices will be too high for consumers but too low for producers? Prices for all factors for producers and consumers can and do adjust or are substituted for..as long as the prices changes are not too swift. No mention of the progress in solar and electric cars? That will crush demand for oil. That would leave only the lowest cost production of oil viable for the many other uses for oil. Timber, coal and whale oil have all had there day..oil will too.

    Secular bull (opposed to bear mkt bounces) market rallies are always in times of falling commodity prices. maybe this is more sinister but more than likely not.

    This blog is an interesting brew of the “debt threat/hyperinflation, peak oil and survivalist” crowds. T