Ten Reasons Why a Severe Drop in Oil Prices is a Problem

Not long ago, I wrote Ten Reasons Why High Oil Prices are a Problem. If high oil prices can be a problem, how can low oil prices also be a problem? In particular, how can the steep drop in oil prices we have recently been experiencing also be a problem?

Let me explain some of the issues:

Issue 1. If the price of oil is too low, it will simply be left in the ground.

The world badly needs oil for many purposes: to power its cars, to plant it fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics.

If the price of oil is too low, it will be left in the ground. With low oil prices, production may drop off rapidly. High price encourages more production and more substitutes; low price leads to a whole series of secondary effects (debt defaults resulting from deflation, job loss, collapse of oil exporters, loss of letters of credit needed for exports, bank failures) that indirectly lead to a much quicker decline in oil production.

The view is sometimes expressed that once 50% of oil is extracted, the amount of oil we can extract will gradually begin to decline, for geological reasons. This view is only true if high prices prevail, as we hit limits. If our problem is low oil prices because of debt problems or other issues, then the decline is likely to be far more rapid. With low oil prices, even what we consider to be proved oil reserves today may be left in the ground.

Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.

While many claims have been made that US shale drilling can be profitable at low prices, actions speak louder than words. (The problem may be a cash flow problem rather than profitability, but either problem cuts off drilling.) Reuters indicates that new oil and gas well permits tumbled by 40% in November.

Offshore drilling is also being affected. Transocean, the owner of the biggest fleet of deep water drilling rigs, recently took a $2.76 billion charge, among a “drilling rig glut.”

3. Shale operations have a huge impact on US employment. 

Zero Hedge posted the following chart of employment growth, in states with and without current drilling from shale formations:

Jobs in States with and without Shale Formations, from Zero Hedge.

Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge.

Clearly, the shale states are doing much better, job-wise. According to the article, since December 2007, shale states have added 1.36 million jobs, while non-shale states have lost 424,000 jobs. The growth in jobs includes all types of employment, including jobs only indirectly related to oil and gas production, such as jobs involved with the construction of a new supermarket to serve the growing population.

It might be noted that even the “Non-Shale” states have benefited to some extent from shale drilling. Some support jobs related to shale extraction, such as extraction of sand used in fracking, college courses to educate new engineers, and manufacturing of parts for drilling equipment, are in states other than those with shale formations. Also, all states benefit from the lower oil imports required.

Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.

With low oil prices, it becomes much more difficult for shale drillers to pay back the loans they have taken out. Cash flow is much lower, and interest rates on new loans are likely much higher. The huge amount of debt that shale drillers have taken on suddenly becomes at-risk. Energy debt currently accounts for 16% of the US junk bond market, so the amount at risk is substantial.

Dropping oil prices affect international debt as well. The value of Venezuelan bonds recently fell to 51 cents on the dollar, because of the high default risk with low oil prices.  Russia’s Rosneft is also reported to be having difficulty with its loans.

There are many ways banks might be adversely affected by defaults, including

  • Directly by defaults on loans held by a bank
  • Indirectly, by defaults on securities the bank owns that relate to loans elsewhere
  • By derivative defaults made more likely by sharp changes in interest rates or in currency levels
  • By liquidity problems, relating to the need to quickly sell or buy securities related to ETFs

After the many bank bailouts in 2008, there has been discussion of changing the system so that there is no longer a need to bail out “too big to fail” banks. One proposal that has been discussed is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports, such an approach has been approved by the G20 at a meeting the weekend of November 16, 2014. If this is true, our bank accounts and pension plans could already be at risk.1

Another bank-related issue if debt defaults become widespread, is the possibility that junk bonds and Letters of Credit2 will become outrageously expensive for companies that have poor credit ratings. Supply chains often include some businesses with poor credit ratings. Thus, even businesses with good credit ratings may find their supply chains broken by companies that can no longer afford high-priced credit. This was one of the issues in the 2008 credit crisis.

Issue 5. Low oil prices can lead to collapses of oil exporters, and loss of virtually all of the oil they export.

The collapse of the Former Soviet Union in 1991 seems to be related to a drop in oil prices.

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Oil prices dropped dramatically in the 1980s after the issues that gave rise to the earlier spike were mitigated. The Soviet Union was dependent on oil for its export revenue. With low oil prices, its ability to invest in new production was impaired, and its export revenue dried up. The Soviet Union collapsed for a number of reasons, some of them financial, in late 1991, after several years of low oil prices had had a chance to affect its economy.

Many oil-exporting countries are at risk of collapse if oil prices stay very low very long. Venezuela is a clear risk, with its big debt problem. Nigeria’s economy is reported to be “tanking.” Russia even has a possibility of collapse, although probably not in the near future.

Even apart from collapse, there is the possibility of increased unrest in the Middle East, as oil-exporting nations find it necessary to cut back on their food and oil subsidies. There is also more possibility of warfare among groups, including new groups such as ISIL. When everyone is prosperous, there is little reason to fight, but when oil-related funds dry up, fighting among neighbors increases, as does unrest among those with lower subsidies.

Issue 6. The benefits to consumers of a drop in oil prices are likely to be much smaller than the adverse impact on consumers of an oil price rise. 

When oil prices rose, businesses were quick to add fuel surcharges. They are less quick to offer fuel rebates when oil prices go down. They will try to keep the benefit of the oil price drop for themselves for as long as possible.

Airlines seem to be more interested in adding flights than reducing ticket prices in response to lower oil prices, perhaps because additional planes are already available. Their intent is to increase profits, through an increase in ticket sales, not to give consumers the benefit of lower prices.

In some cases, governments will take advantage of the lower oil prices to increase their revenue. China recently raised its oil products consumption tax, so that the government gets part of the benefit of lower prices. Malaysia is using the low oil prices as a time to reduce oil subsidies.

Most businesses recognize that the oil price drop is at most a temporary situation, since the cost of extraction continues to rise (because we are getting oil from more difficult-to-extract locations). Because this price drop is only temporary, few business people are saying to themselves, “Wow, oil is cheap again! I am going to invest a huge amount of money in a new road building company [or other business that depends on cheap oil].” Instead, they are cautious, making changes that require little capital investment and that can easily be reversed. While there may be some jobs added, those added will tend to be ones that can easily be dropped if oil prices rise again.

Issue 7. Hoped for crude and LNG sales abroad are likely to disappear, with low oil prices.

There has been a great deal of publicity about the desire of US oil and gas producers to sell both crude oil and LNG abroad, so as to be able to take advantage of higher oil and gas prices outside the US. With a big drop in oil prices, these hopes are likely to be dashed. Already, we are seeing the story, Asia stops buying US crude oil. According to this story, “There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the US anymore.” 

LNG prices tend to drop if oil prices drop. (Some LNG prices are linked to oil prices, but even those that are not directly linked are likely to be affected by the lower demand for energy products.) At these lower prices, the financial incentive to export LNG becomes much less. Even fluctuating LNG prices become a problem for those considering investment in infrastructure such as ships to transport LNG.

Issue 8. Hoped-for increases in renewables will become more difficult, if oil prices are low.

Many people believe that renewables can eventually take over the role of fossil fuels. (I am not of the view that this is possible.) For those with this view, low oil prices are a problem, because they discourage the hoped-for transition to renewables.

Despite all of the statements made about renewables, they don’t really substitute for oil. Biofuels come closest, but they are simply oil-extenders. We add ethanol made from corn to gasoline to extend its quantity. But it still takes oil to operate the farm equipment to grow the corn, and oil to transport the corn to the ethanol plant. If oil isn’t around, the biofuel production system comes to a screeching halt.

Issue 9. A major drop in oil prices tends to lead to deflation, and because of this, difficulty in repaying debts.

If oil prices rise, so do food prices, and the price of making most goods. Thus rising oil prices contribute to inflation. The reverse of this is true as well. Falling oil prices tend to lead to a lower price for growing food and a lower price for making most goods. The net result can be deflation. Not all countries are affected equally; some experience this result to a greater extent than others.

Those countries experiencing deflation are likely to eventually have problems with debt defaults, because it will become more difficult for workers to repay loans, if wages are drifting downward. These same countries are likely to experience an outflow of investment funds because investors realize that funds invested these countries will not earn an adequate return. This outflow of funds will tend to push their currencies down, relative to other currencies. This is at least part of what has been happening in recent months.

The value of the dollar has been rising rapidly, relative to many other currencies. Debt repayment is likely to especially be a problem for those countries where substantial debt is denominated in US dollars, but whose local currency has recently fallen in value relative to the US dollar.

Figure 3. US Dollar Index from Intercontinental Exchange

Figure 3. US Dollar Index from Intercontinental Exchange

The big increase in the US dollar index came since June 2014 (Figure 3), which coincides with the drop in oil prices. Those countries with low currency prices, including Japan, Europe, Brazil, Argentina, and South Africa, find it expensive to import goods of all kinds, including those made with oil products. This is part of what reduces demand for oil products.

China’s yuan is relatively closely tied to the dollar. The collapse of other currencies relative to the US dollar makes Chinese exports more expensive, and is part of the reason why the Chinese economy has been doing less well recently. There are no doubt other reasons why China’s growth is lower recently, and thus its growth in debt. China is now trying to lower the level of its currency.

Issue 10. The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.

There is a natural limit to the amount of debt that a government, or business, or individual can borrow. At some point, interest payments become so high, that it becomes difficult to cover other needed expenses. The obvious way around this problem is to lower interest rates to practically zero, through Quantitative Easing (QE) and other techniques.

(Increasing debt is a big part of what pumps up “demand” for oil, and because of this, oil prices. If this is confusing, think of buying a car. It is much easier to buy a car with a loan than without one. So adding debt allows goods to be more affordable. Reducing debt levels has the opposite effect.)

QE doesn’t work as a long-term technique, because it tends to create bubbles in asset prices, such as stock market prices and prices of farmland. It also tends to encourage investment in enterprises that have questionable chance of success. Arguably, investment in shale oil and gas operations are in this category.

As it turns out, it looks very much as if the presence or absence of QE may have an impact on oil prices as well (Figure 4), providing the “uplift” needed to keep oil prices high enough to cover production costs.

Figure 4. World

Figure 4. World “liquids production” (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.

The sharp drop in price in 2008 was credit-related, and was only solved when the US initiated its program of QE started in late November 2008. Oil prices began to rise in December 2008. The US has had three periods of QE, with the last of these, QE3, finally tapering down and ending in October 2014. Since QE seems to have been part of the solution that stopped the drop in oil prices in 2008, we should not be surprised if discontinuing QE is contributing to the drop in oil prices now.

Part of the problem seems to be the differential effect that happens when other countries are continuing to use QE, but the US not. The US dollar tends to rise, relative to other currencies. This situation contributes to the situation shown in Figure 3.

QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of un-affordability of oil and other commodities.

The problem we have is that, because we live in a finite world, we reach a point where it becomes more expensive to produce commodities of many kinds: oil (deeper wells, fracking), coal (farther from markets, so more transport costs), metals (poorer ore quality), fresh water (desalination needed), and food (more irrigation needed). Wages don’t rise correspondingly, because more and more labor is needed to provide less and less actual benefit, in terms of the commodities produced and goods made from those commodities. Thus, workers find themselves becoming poorer and poorer, in terms of what they can afford to purchase.

QE allows financiers to disguise a growing mismatch between what it costs to produce commodities, and what customers can really afford. Thus, QE allows commodity prices to rise to levels that are unaffordable by customers, unless customers’ lack of income is disguised by a continued growth in debt.

Once commodity prices (including oil prices) fall to levels that are affordable based on the incomes of customers, they fall to levels that cut out a large share of production of these commodities. As commodity production drops to levels that can be produced at affordable prices, so does the world’s ability to make goods and services. Unfortunately, the goods whose production is likely to be cut back if commodity production is cut back are those of every kind, including houses, cars, food, and electrical transmission equipment.

 Conclusion

There are really two different problems that a person can be concerned about:

  1. Peak oil: the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.
  2. Debt related collapse: oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil “demand” (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.

In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently.

The timing of collapse may not be immediate. Low oil prices take a while to work their way through the system. It is also possible that the world’s financiers will put off a major collapse for a while longer, through more QE, or more programs related to QE. For example, actually getting money into the hands of customers would seem to be temporarily helpful.

At some point the debt situation will eventually reach a breaking point. One way this could happen is through an increase in interest rates. If this happens, world economic growth is likely to slow greatly. Oil and commodity prices will fall further. Debt defaults will skyrocket. Not only will oil production drop, but production of many other commodities will drop, including natural gas and coal. In such a scenario, the downslope of all energy use is likely to be quite steep, perhaps similar to what is shown in the following chart.

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Related Articles:

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

WSJ Gets it Wrong on “Why Peak Oil Predictions Haven’t Come True”

Eight Pieces of Our Oil Price Predicament

Notes:

[1] There is of course insurance by the FDIC and the PBGC, but the actual funding for these two insurance programs is tiny in relationship to the kind of risk that would occur if there were widespread debt defaults and derivative defaults affecting many banks and many pension plans at once. While depositors and pension holders might try to collect this insurance, there wouldn’t be enough money to actually cover these demands. This problem would be similar to the issue that arose in Iceland in 2008. Insurance would seem to be available, but in practice, would not pay out much.

Also, I learned after writing this post that bail-ins were mandated for US banks by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. In the language of the summary, bank depositors are “unsecured creditors,” and are thus among those to whom the burden of loss is transferred. The FDIC is not allowed to borrow extra funds, beyond bank funds, to cover this loss.

[2] LOCs are required when goods are shipped internationally, before payment has actually been made. They offer a guarantee that a buyer will be able to “make good” on his promise to pay for goods when they arrive.

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 inadequate supply.
This entry was posted in Financial Implications and tagged , , , , , , . Bookmark the permalink.

1,056 Responses to Ten Reasons Why a Severe Drop in Oil Prices is a Problem

  1. Don Stewart says:

    Dear Gail and All
    I have frequently said that the vast majority of traffic on the internet is a waste. Here is a guy with more credibility than I have saying pretty much the same thing.

    If things get tough and internet servers have to be shut down, will we have the intelligence to organize ourselves to save what is valuable?

    Don Stewart

    • edpell says:

      The old media told us what was happening?! It told us what the masters wanted us to believe. Suspect?!

      Meritocracy?? Maybe in Sweden not in the U.S.

    • edpell says:

      I wrote a scathing evaluation of this guy but it disappeared into the bit bucket…. not worth repeating.

      • Don Stewart says:

        Dear edpell
        I am not at all in favor of censorship. The problem is, I don’t know exactly what I AM in favor of. It is pretty clear to me that, as Net Energy declines, the ability of people to post frivolous pictures of themselves on servers needs to decline. It may be that it will be self-correcting as income and frivolous consumption and the advertisements they support decline.

        A key skill for the early 21st century is learning how to very quickly sift the wheat from the chaff.

        The conversation between James Howard Kunstler and John Michael Greer had an interested statement by JMG. He claimed that any reasonably good printed encyclopedia was more convenient and more useful than an internet search. I find that statement dubious, but I do agree with him that the internet can be a big time waster.

        Don Stewart

        • edpell says:

          Don, I agree most of what is on the internet is boring, foolish and uninteresting. But if that is what people choose to do that’s their problem. Indeed, that is why this blog is so appreciated. Most debate on the internet turns into na na you are a poo poo head name calling very quickly.

          • Don Stewart says:

            Dear edpell
            I have zero interest in trying to convince people to ‘get serious’ with the internet, or with censoring what can appear on the internet.

            However, I think that some serious discussion is in order for people who:
            *Think the internet is a very good platform for exchanging serious information
            *Are willing to think about ‘the cult of the amateur’ vs. ‘professionalism’

            For example, here are some results from a Behavioral Economist about stories:
            http://greatergood.berkeley.edu/article/item/how_stories_change_brain

            I forget exactly what is in this. I believe he covers oxytocin, but, if not, you can search on Zak’s name plus oxytocin.

            So we see that The Heroes Quest is an effective story model, but most stories told by amateurs are not effective.

            Zak studied oxytocin in people who are engaging in twitters and face books and such, and found that oxytocin does increase. Which makes people more trusting. He studied people at a wedding and found that the bride’s oxytocin is sky-high, her mother’s oxytocin is very high, and then working down the line with less oxytocin in simple friends who are attending.

            Since oxytocin is a ‘feel good’ hormone, and makes us more trusting, what is not to like? Well, it turns out that there has been extensive research on oxytocin, and sometimes the effects may be counterproductive. It makes us less skeptical when we ought to be asking hard questions, for example. If we are experiencing frequent oxytocin with ‘our group’, we are less tolerant of ‘those people’…which may explain why religious groups tend to be intolerant. Life is about balance, and being in a constant fog of ‘feel good’ does not help us navigate through life’s rocky rapids. Nor is being under the constant control of testosterone good for us.

            The same thing applies to cortisol. In the mornings or when beginning a new project, we benefit from some cortisol because it focuses our attention and helps us work harder. But toward evening, we are designed to slow down, in a natural setting, and cortisol ebbs and we sleep soundly. When humans watch TV late at night, they interfere with the natural cortisol cycle, don’t sleep well, and develop chronic diseases. The same thing is true about ranting and raving on the internet in the wee hours.

            My argument is that communications and computing technology have given us a powerful and wonderful gift. I sincerely hope that any downslope manages to save both of them. I think that quoting statistics about how much electricity it takes to keep all the ‘not valuable’ stuff on the air is missing the point. As things get tough, the wheat will probably get sorted from the chaff. When people cut back on buying, the internet will no longer be free (meaning: paid for by commercials), but it may still be extremely valuable to us.

            Don Stewart

  2. Wee Willy Winky says:

    David Stockman: the explosion of mainly oil and gas production did not reflect the natural economics of the free market, and certainly no technological innovation called “fracking.” The later wasn’t a miracle; it was just a standard oilfield production technique that was long known to the industry, if not to CNBC. It became artificially economic during recent years only due to the massive and continuous distortions of both commodity prices and capital costs caused by the world’s central bankers.

    Stockman is so tantalizingly close to understand what the true nature of this crisis is. How is that he cannot appear to ask the obvious question which is ‘why would the central bankers supply the fuel for the fracking explosion?’

    As T Boone Pickens stated the other day, without shale oil the price of oil would have marched well past the $147 level of 2008. Of course he’s not going to say it but everyone knows what high priced oil does to an economy so in effect he was saying that fracking has kept civilization in place for a few years longer.

    Strange how a switched on fellow like Stockman can’t connect the dots. He is not the only one of course.

    To even think the unthinkable is unthinkable for most.

    • Creedon says:

      Merry Christmas to all. I have just read JMG Christmas eve post. He makes a point which makes me feel rather dumb. In 2012 we passed what the Hillsgroup calls the “half way point for oil,” it take one half of a barrel of oil to produce a barrel of oil. Now correct me if I am wrong, but doesn’t that mean that when the EIA publishes total liquids numbers like 85, 90, 95 MBD or whatever they are that half that number is being used to produce the oil, so that obviously the oil that we have available to use is half the EIA published number. In other words the net energy is the energy we have available to use after the oil used to bring the oil up is subtracted. John Michael Greer makes this obvious point, so I must give him credit. Net energy is the energy that we have available to use and it is steadily going down. The fracking fields are probably actually producing very little net energy. The bottom line is that this means that the world economy will have to continuously contract.

      • Creedon says:

        Put another way, a larger and larger part of our economy, jobs, money, ect, are being devoted to producing something, ‘oil’, that has less and less value over time, so at some point the economy that is spending so much labor and money producing something of less and less value must collapse.

      • We use close to 100% of the energy that is extracted in some way or other. Some of the oil product is used as a raw material, so that is not really used as energy. Some of it ends up as waste heat, so we can argue that that doesn’t get productively harnessed.

        I don’t think we really know when we hit 50% on oil extraction and processing. There is a very nebulous line as to what is included and what is not. In the Middle East, they clearly need some of the energy from oil to keep order in the economy. The price has to be high enough that tax revenue can be used to build desalination plants, roads, and create jobs in various ways for the population which might otherwise revolt. If a person includes only oil-lifting energy costs at the well-head (which is what is in EROEI), it gives a very low estimate. Adding refining and distributing costs adds more. Taking into account the amount that workers get indirectly through their wages adds yet another layer. Adding the amount the government gets through the tax revenue it collects adds yet another layer. We may very well be at 50%, if the various indirect layers are included–I just don’t know.

        • Don Stewart says:

          Dear Gail and Creedon
          First, I will admit that I don’t know exactly what The Hills Group has in mind. I have not spent the money for their detailed studies.

          However, I can add some general comments which may be helpful…or not.

          A couple of decades ago, Harold Morowitz wrote in his book Energy Flow in Biology: ‘the flow of energy through a system acts to organize that system’.

          When the system gets organized, we call it a dissipative structure. Dissipative structures tend to evolve in time to more efficiently turn the energy coming into them into low grade heat.

          We might expect that the Global Capitalism system is pretty efficiently turning fossil fuel energy into low grade heat. Therefore, we might also expect that any reduction in the flow of fossil fuel energy will require a new organization of the system. This isn’t really about EROEI as we know that computation, it is about an emergent system which is dependent on energy flows. And if the energy flows are declining, then a new and simpler system MUST take the place of the current system.

          We might think of a lion in the Serengeti. The energy available is what is fixed by photosynthesis (neglecting the energy which warms the earth). Suppose that climate change results in the desertification of the Serengeti, with a parallel loss of energy from photosynthesis. Then Nature will reorganize the system. Lions may just no longer have a place in the newly desertified plain. Calculating the EROEI of a vanished lion in a vanished ecosystem is probably not very informative.

          It might be true that Global Capitalism had been rapidly financializing everything as a response to increasing fossil fuel availability, but that the financialization reached a crisis point in 2007-2009, and the Global Capitalism system was in the process of reorganizing itself to get rid of the huge financial institutions which no longer made sense—just like our lion in the Serengeti.

          However, our real world human lions control institutions called Central Banks. Lions, human or otherwise, do not take kindly to their own demise. And so the governments of the world have doubled down on the financialization of everything and have used strong-arm tactics (from seizing your assets to funding fracking with junk bonds to war with Russia) to try to keep the old Lions in place.

          Nassim Taleb has written about the necessity for ‘small tremors’ to release the pressure which otherwise builds up and results in a devastating earthquake. The Central Banks and political powers have been unwilling to permit those ‘small tremors’, so we can’t really look at the current situation and draw any firm conclusions about how the global economy is reacting to less fossil fuel energy. If we believe Taleb, we might expect a devastating earthquake which changes everything very quickly.

          From George Mobus’ current blog post addressing oil prices:
          ‘Chaotic systems that are being driven (forced) often undergo dramatic shifts, say from one attractor basin to another. The sign that such a shift is pending is sudden swings in some parameter, up and down. Such swings portend catastrophic changes, like a swarm of small earthquakes just before a major one. Look for it soon, coming to a planet near you.’

          Azby Brown, who later wrote his book on Edo Japan, wrote The Very Small Home: Japanese Ideas for Living Well in Limited Space in 2005, with the first US edition in 2012. From the Foreword by a Japanese architect:

          ‘There is a short essay written in the thirteenth century that is still treasured by the Japanese today. An Account of My Hut was penned by the poet and literary recluse Kamo no Chomei after he took to living a refined yet simple life in a small country cottage. The image of this pastoral existence of quiet contemplation exists as an ideal in the Japanese mind to this day, and is echoed in the rise of the new small home so ably introduced by Azby Brown in the present volume.

          On rereading Chomei’s account of his serene lifestyle, I was surprised at the number of similarities between his age and ours. Chomei lived through a period of repeated political disturbances. The once-static world of the all-powerful aristocrats collapsed. The samurai came to power, but their rule was far from stable. The national economy was in a state of confusion, and famine was rife. Successive natural disasters rocked the nation, further destabilizing the lives of the inhabitants.

          The last ten to fifteen years in Japan have been no less turbulent…Economic confusion, the Hanshin Earthquake, and terrorist activities…have increased the general anxiety within society. Nearly 800 years earlier, living in similarly troubled times, Chomei erected his ten-foot-square hut … and wrote an essay on his modest dwelling that has become a landmark of Japanese literature.’

          A couple of notes from me:
          *The Edo society grew out of this very turbulent period. Things got much better in Edo.
          *It is sobering to realize that some Japanese recognized their problem a decade ago, recognized that it resulted from systemic changes, and yet the recent election kept in power a government which thinks that printing money can solve the problems.
          *Chomei was apparently able to distance himself from the turmoil around him. That is worth thinking about as we consider Lifeboats.
          *The ‘ten by ten’ dimension calls to mind William Powers book Ten By Ten written about his time in rural North Carolina.

          Azby’s book is beautiful, by the way, depicting some gorgeous small houses. The Ten by Ten that Powers lived in is beautiful if you think Thoreau was onto something interesting.

          My point is simply this. Our US government has decided to double down on sub-prime loans, and the federal mortgage lending institutions are going to try to resurrect the boom times in housing. A very different direction would be the construction of very small houses, not excessively burdened with government regulations or debt. The small houses might very well be a rational response as our economic system resets itself to lower fossil fuel use. It is hard to see how doubling down on sub-primes is a rational response to anything.

          JMG’s prescriptions run to the sorts of solutions which were developed in the 1970s…and so they resemble the ten by ten hut from 800 years ago, Thoreau’s experiments from 150 years ago, or the very small house from a decade ago. But most of these solutions are vulnerable to government hostility, and to the hostility of those few who control almost all of the assets.

          My conclusion has been that we must have some sort of government and concentrated wealth collapse in order to make the changes that we have to make. If we are exceptionally lucky, we will see the emergence of an Edo like government…which, for all its faults, saw much improved ecological and economic conditions. If we are unlucky, we will get what the Japanese got when the aristocratic order gave way to the rule of the samurai.

          Don Stewart

          • Don Stewart,
            Outstanding post.

            “In times of stress, the genes assume control and reason disapears.” — Reg Morrison

            Mysticism – Slide 23
            By selectively preserving the mystics ancestors evolution not only gave us the weapon that would catapult us from obsolescence to world domination, it also took out a shrewd insurance against our species’ overwhelming reproductive success. Only such a deliciously rewarding and tamper-proof device as mysticism could have prevented us from foreseeing the danger of overpopulation a long, long time ago.

            And the corrosive mental derangements born of religious and political mystical beliefs will easily derail our global efforts to cooperate and survive our population peak—just as they did on Easter Island more than three centuries ago. By this means, the Gaian processes will ensure that fanatics of all kinds, both religious and political, will feed and inflate humanity’s growing fears during the next two stress-filled decades.

            This will ensure that distrust and hatred between nations, races, and religious and political groups reaches a crescendo as the environment begins its savage counter-offensive against the current plague of Homo sapiens, the biosphere’s primary destabiliser.

            Looked at in this light the multitude of bonding mechanisms that bind us into semi-tribal groups both large and small now seems certain to midwife our species’ collapse.

            Torture and genocide have been the milestones of mysticism throughout history … the Crusades, the Inquisition, the Holocaust, Ruanda, Pol Pot’s Killing Fields, and a million other nameless obscenities. — Reg Morrison

            http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB4QFjAA&url=http%3A%2F%2Fregmorrison.edublogs.org%2Ffiles%2F2011%2F11%2Fenigma_code-1fz5tz1.pdf&ei=rjltVP23EdGmyASt-IK4AQ&usg=AFQjCNFo7t_cYt3PdZie49vz31mdzajt3g&sig2=IPUbm4zrADFrq1ktJCkVUw&bvm=bv.80120444,d.aWw

            So, prepare for the rule of the samurai, unfortunately.

            • InAlaska says:

              this is an interesting, actually fascinating slide show but it seems to be carrying a flaw in its logic: if our genes control our behavior and tends to counteract our logical neo-cortex, than why is our genetically controlled behavior leading to species collapse and possible extinction? This makes no sense to me, or it wasn’t articulated very well.

            • Wee Willy Winky says:

              Good point.

              Could it be that our survival and breeding instincts, which like any animal, usually end up stressing the resource base resulting in a die-back, have been thwarted by our ‘intelligence’

              i.e. we have denied the normal die-offs by growing more food by using fossil fuel resources

              Perhaps, because our genetic code has not evolved to deal with a situation that has occurred over a relatively tiny amount of time, the result is that we are now facing an extinction event.

              Effectively we have done exactly what we are genetically hard-wired to do. When an abundance of food presents itself, we consume and we grow our population until we reach the limits.

              Unfortunately, because the increase in population is based on a food supply that is produced by artificial means, when the foundation for the food supply disappears (i.e. the oil and gas inputs), we don’t just get a die-back.

              Instead we wipe out the species, and possibly the planet.

              I don’t see any contradictions between what is happening, and what that essay argues.

            • Don Stewart says:

              Dear Wee Willy
              Here is a good explanation for why most people do nothing about climate change. Same logic applies to other problems such as accumulating debt, soil erosion, nuclear war with Russia, mineral depletion, etc…Don Stewart

            • Reg Morrison, I believe, is one ‘Key’ component that will help us connect the dots.

              InAlaska,
              Before I continue, I should let you know where I stand at the moment: I have a bleak view of humanity for the next 20 years. Humans failed their moral duties, exactly as expected, because of our built-in flaws. Some of us might develop the intellect to realize it, but believing that you can change, that you can properly label it, it is nonsense. A major impediment to understand.

              Let me give you two examples:

              First:
              Believing in the principles of Growth and Progress (such as our religion and education system do) represented not just economic heresy but a dereliction of moral duty….. yet these excuses constitute our primary defense.
              Alternatively, as spiritual beings, we were “just obeying orders.”
              We would be better advised to tell the truth and plead insanity, because we are merely servants of our genes.
              Our time bomb is mysticism. Its delivery system is language. And its hiding place? The unfathomable coils of our DNA.” — Reg Morrison excerpts
              http://www.amazon.com/The-Spirit-Gene-Humanitys-Illusion/dp/0801436516

              Second:
              An interesting debate that took place some years ago between Carl Sagan, the well-known astrophysicist, and Ernst Mayr, the grand old man of American biology. They were debating the possibility of finding intelligent life elsewhere in the universe.
              And Sagan, speaking from the point of view of an astrophysicist, pointed out that there are innumerable planets just like ours. There is no reason they shouldn’t have developed intelligent life.
              Mayr, from the point of view of a biologist, argued that it’s very unlikely that we’ll find any. And his reason was, he said, we have exactly one example: Earth. So let’s take a look at Earth. And what he basically argued is that intelligence is a kind of lethal mutation … you’re just not going to find intelligent life elsewhere, and you probably won’t find it here for very long either because it’s just a lethal mutation …
              He pointed out that if you take a look at biological success, which is essentially measured by how many of us are there, the organisms that do quite well are those that mutate very quickly, like bacteria, or those that are stuck in a fixed ecological niche, like beetles. They do fine. And they may survive the environmental crisis. But as you go up the scale of what we call intelligence, they are less and less successful. By the time you get to mammals, there are very few of them as compared with, say, insects.
              If nothing significant is done about it, and pretty quickly, then he will have been correct: human intelligence is indeed a lethal mutation. Maybe some humans will survive, but it will be scattered and nothing like a decent existence, and we’ll take a lot of the rest of the living world along with us.
              http://www.chomsky.info/talks/20100930.htm

          • Calista says:

            I think I’m lost now. I get the concept of EROI, it is pretty straight forward. Gail speaks of one of the drivers to our problems is that the value of the energy returned from fracking is lower than previously. Meaning we can do less work. Is that the same thing as EROI? Or is that the actual energy value of a barrel of oil from Bakken is less than the energy value of a barrel of oil from Ghanwar? Not taking into account how much energy it took to get it out of the ground.

            Are these two different things or the same thing said in different ways?

            • Two different things said with the right information

              First: Condensate versus conventional oil (CvsC)
              http://www.fluidynenz.250x.com/aug10/condensate.html

              Second: By Professor Patzek
              A better way of looking at it, is to subtract the actual oil production from the population-based projections and calculate the unrealized oil consumption.
              By this standard, the peak of global per capita consumption happened in 2005, and we now live in an era of permanent destruction of consumption.
              The US and EU consume more per capita, have exported their manufacturing elsewhere, and are unable to withstand the high price of oil.
              Hence the destruction of demand for 1.6 million bbl per day that already happened in the U.S. A similar destruction trend will continue to happen in the future, because the U.S. can no longer compete for expensive oil with China.

              http://patzek-lifeitself.blogspot.com/2012/11/a-gobal-oil-peak-or-plateau.html

            • Also, China’s “mix” of fuels, with its emphasis on coal, makes its average energy cost lower. Our use of oil makes needed salaries higher, which is part of our problem competing in a world economy.

            • Don Stewart says:

              Dear Calista
              I’m not going to try to answer for Gail in terms of EROEI.

              I will suggest two thought experiments which, I think, will get you into territory which is not explored in the EROEI world.

              The first thought experiment is looking at rotational grazing (wholistic grazing, pulsed grazing, other names). Most of the work is being done by the sun and the grass which photosynthesizes, and the soil food web which creates plant usable nutrients and good soil structure, and the cows and sheep which graze on the grass. But rotational grazing, in its modern form, also uses PV panels connected to copper wires which keep the cattle in a small area so that the benefits of the grazing are maximized.

              Suppose you are given an EROEI for electricity generated by PV panels. Does that tell you anything useful? Probably not. The fencing is a very small part of the total cost, and it is necessary to keep control of the animals. So, if you are the farmer, you would tend to look at the total operation, which is mostly dependent on free sunlight. Whatever may be the EROEI for a whole bunch of PV panels in the Mohave Desert trying to generate commodity electricity for Los Angeles isn’t your concern.

              So the first thought experiment alerts us to be wary of sweeping statements about EROEI. The EROEI for PV panels may be high or low, but what really counts is the productivity of the total grazing system.

              The second thought experiment is about Emergent Properties. As a system acquires more energy flow, it makes new structures. Think of how the land areas of Earth changed as photosynthesis evolved. Think of how cooking increased the flow of calories to the human body and enabled large brains. As a system loses energy flow it will be forced to change its structures again. We can say that it will have to become simpler. Some of the change may happen by physical evolution or cultural evolution, and some by extinction.

              Now consider a Confined Animal Feeding Operation. It is quite an energy intensive way to get animal meat to a grocery store. As energy flows into the economy decline, will CAFOs disappear and be replaced by rotational grazing on grass? And since rotational grazing on grass cannot supply the same amount of meat as grain fed cows in CAFOs, then the human diet will have to change also. But that also means that lots of things change in the whole agricultural system.

              The lesson I take away from the second thought experiment is that complex systems work out new Emergent patterns as energy flows increase, and will have to work out ‘de-Emergent’ patterns as energy flows decrease. There is also no guarantee that the new pattern which emerges as energy flows decrease will be an optimized dissipative system…it may be pretty wasteful of energy, until time has passed and evolution has done its work to devise more efficient structures.

              I’m not opposed to work which identifies the EROEI of some activity, but when fundamental things are changing, they may not be as much help as some people think they will be.

              Don Stewart

            • Calista says:

              I’m replying to Don here just because his email came through last and it is the easiest to tag a response to. Thank you to both of you for the additional methods of thinking about this. If, IF, I’m understanding this correctly and they’re separate things then the two items: lower EROI, lower energy value are actually additive? Meaning that the problem is not fully fleshed out if one just looks at EROI or just looks at lower energy values.

              So not just that EROI has dropped from 80 to 20 or whatever you figure today but that it went from 80 @ 95% energy value to 20 @ 70% energy value (picking random numbers for illustration only)

              I begin to wonder if either act as negative feedback in the production loop? Or if they both /have/ been acting as positive feedbacks and now they’ll both act as negative feedbacks?

            • I would agree that when fundamental changes are taking place, it is easy to be misled by things such as EROEI calculations. The major point is that you have to keep the whole system operating, even if you are using tiny amounts of grid electricity, or batteries made and imported using parts from around the world. Looking at the small amount of energy in a piece is not helpful, because it is the system as a whole that is not sustainable.

            • Don Stewart says:

              Gail
              I don’t know. Both you and Ugo Bardi are smarter than I am. You tend to see the ‘collapse of everything and back to the stone age, but with a lot of baggage we have to carry’, while Ugo sees ‘strong networks’. He discusses the issue on page 161 of Extracted.

              ‘A complex system will normally react to an external influence by rearranging its internal structure in order to minimize the effect of the external force’.

              Then he contrasts a city street grid system with a mechanical watch. ‘A city transportations system is enormously more resilient than, say, a mechanical watch. It is their very complexity that makes complex systems so resilient, despite their apparent fragility. Though the study of network resilience is in its early stages, network theory point to the same conclusions.’

              For that last sentence, he references a 2006 article:
              C. Hawes and C Reed, Theoretical Steps towards Modelling Resilience in Complex Systems. Published in Proceedings of the 6th International Conference on Computational Science and Its Applications.

              Don Stewart

            • Calista,
              First: Just out of curiosity, why are you so focus on “Return on Investment”?
              Second: Do you live in America?

            • Calista says:

              I wouldn’t describe myself as “focused on return on investment” but instead attempting to understand the different moving pieces. Far more people than myself have used this term and it seems to be a fairly standard method of discussing one aspect of the issues we’re facing.

              EROI is something those around me are familiar with but they don’t get the next steps that the money we throw into the system isn’t going to give them the results they expect ie better healthcare, better education etc. and my encouragement is to use the little resources they have at hand in ways that would be more productive, well, those are difficult points to get across. But if I can explain the lower rate of return (yes, unfortunately I’m stuck in the language that others have used to frame the issues) that they might see why it is a ponzi scheme and why we’re stuck between point a and point b.

              I am also asking that question because I read and what I read isn’t perfectly clear, I’m still trying to wrap my head around the different moving pieces. So I asked. 😀

              As for your other question, I am not a gambler and the rest of the assumptions that go with answering that question would be wrong.

            • Calista,

              Thanks for your candid answer.

              Not sure if my answer will help, but you tell me:

              Stop using metrics such as EROI and GDP. Neither are good tools to understand our current situation.

              On oil, follow depletion rates of existing fields; and the picture will become clear and easy to explain.

              The biggest problem that we ‘the world’ face is the collapse of American Empire.

              As you probably know, the US dollar became the global reserve currency in 1944 (Bretton Woods). It meant Europe borrows dollars; then, with these dollars, Europe buys resources from Africa, Asia, and South America. US was the enforcer, through Coup D’états in South America, war in Asia (Vietnam), and Proxy-Wars (East Timor).

              Bretton Woods’s arrangement was very profitable to the US, and offered good jobs to US middleclass.

              However, in 1971, US oil peaked. So, the world panicked, and started to redeem dollars for US gold. Keep in mind, because of the Vietnam War, Asia had lots of dollars.

              So, Nixon closed Bretton Woods (Gold for dollars). And US economy faced a depression, high-inflation, and shortages.

              In 1973, US fixed its economy by forcing Saudi Arabia to only sell oil in dollars (Petrodollar). Followed by OPEC, in 1975. Global dollar demand help stabilize US economy.

              However, that too could no longer help US economy generate jobs, because US didn’t have enough oil to grow, so in the 1980’s US starts running large deficits; financed by the Petrodollar.

              In 2008 US deficit scheme collapsed.

              Then, came the US Central Bank (Fed) to the rescue (TARP, QE, and the list is long).

              Calista, this is it. US is out of choices. Either the world keeps taking dollars and giving it back to America….

              Or, America will have to take by force.

              “The BRIC’S Bank is anti Petrodollar, not anti Money Power” — Anthony Migchels

            • Calista,

              I am sorry; I meant to say the DECLINE RATE, instead of DEPLETION RATE.

            • I don’t like the EROI label because it has a very definite calculation behind it, which I don’t consider broad enough, so I use different wording. When I am talking about is the same thing, but calculated in a different way. I am not talking about the energy content of the Bakken oil, although it tends to be lower as well. I am talking about the energy used in making this oil, so that the net energy is lower.

            • Gail,
              You wrote: “China’s “mix” of fuels, with its emphasis on coal….”

              That’s a good point because I was born in Brazil, even that I live in DC. So when I go to Brazil my friend’s cars have, usually, two choices: Ethanol or gasoline. And they seem to be always in Ethanol.

              If they have a foreign made car, gasoline is what they use.

              Now, if you take a cab in Brazil, they will have a switch on the panel of the car and it gives the cab-driver 3 choices; but it is always on the natural-gas position (cheapest fuel in Brazil).

              But, if the cab is heavily loaded, or it is going up hills, the driver will switch off to ethanol. Gasoline is there, because that is how engines are built, but they never use it.

              Not sure with the newest car models.

              Anyway, I thought you, and your readers, would appreciate these inside bits of information.

          • Quitollis says:

            Ha! Military orders are historically the precondition of aristocracy a la Normans. You can’t expect people to vote to be serfs. So, samurai as a precondition of Edo style aristocracy. Me of course as the lord of the manor. The great crescendo shall give way to rural idyll.

          • Jan Steinman says:

            “My conclusion has been that we must have some sort of government and concentrated wealth collapse in order to make the changes that we have to make.”

            Coming soon, to a civilization near you! (Wherever you are!)

            I agree (and perhaps in opposition to Gail, who seems to think current government is “a good thing”) that there is not much worth saving from the current nation-state system of governance.

            Perhaps one unexpected benefit of the neo-liberalist mantra of “push costs down to local government” is that local government has been weaned a bit from the Federal teat. I think local and regional governments will largely supplant the rule of the nation-state. We may yet see the return of the ancient “city-state” method of governance, in which case, those in outlying regions should form their allegiances pronto.

            • A system that sort of works is better than no system, in my view. We don’t have anything very obvious to collapse “down to”. If we could easily go to another lower-energy system, it would be one thing. But it is hard to see what it might be.

            • Jan Steinman says:

              “We don’t have anything very obvious [in terms of government] to collapse “down to”. If we could easily go to another lower-energy system, it would be one thing. But it is hard to see what it might be.”

              I agree that a powerful Federal system is hard to get away from.

              I think the Swiss canton/gemeinde system could be a good example of the future. The Swiss federal government is not very strong and collects a relatively small amount of taxes. It is concerned with stuff like foreign policy, but stuff like social programs (even immigration, outside of broad guidelines) is pushed down to the canton (state/province) or gemeinde (community). You file three returns, and most of your income tax goes to the local community. I seem to recall that the federal government collects less than 25% of the taxes, whereas in the US, it collects more like 90%, and then re-distributes it to smaller entities.

              For example, if you meet the broad Swiss national tests for length of legal residence, etc., a committee of people from the local community in which you plan to settle ultimately determine if you can immigrate or not. This has resulted in things as simple payola (in some communities, you pay them upwards of seven figures to live there) to a grilling by the local burghers on local customs and history — all conducted in the local dialect. This is not just in the boondocks: in 1992 (at least), you were interviewed in Sweissedeutch in order to immigrate to the capital, Bern.

              This seems to me to be the essence of a neo-tribalism that could arise. Perhaps Switzerland will “make it” in the post-carbon age.

          • Christian says:

            Don, we know some Japanese are more prone to Edo than to Daichi, and Fukuoka is another example. Perhaps you know Hayao Miyazaki, possibly the most important filmmaker in the history of the country. His movie My Neighbor Totoro was the most viewed local film in Japan. All his movies are anime, firstly intended for children, and almost always focus on low tech and no/few FF. Very good stuff

  3. Christian says:

    Russia’s gov lost 20% of its USD in 2014, 3/4 of it in the second half. Assuming oil stays at 60 (of course, the assumption has absolutely no grounds), I guess they can hold on for half a year or more

    http://www.bloomberg.com/quote/RUREFEG:IND

    • Christian says:

      Are we talking about russian reserves vs. junk bonds?

    • Christian says:

      In 2001, Argentina’s reserves falled steadily down to 17 bn, and this was the critical point where they started falling exponentially and unstoppably, to finally reach zero in just a month or so. Taking account of inflation and population growth this could be rounded to 20 bn now. In fact, they reached 25 bn a year ago and many people were getting nervous about it, but the gov reacted and put it to 35 now I think (China’s 11bn swap could be helping). But we are not engaged in currency war. Taking account of populations size, 20 bn would be 80 for Russia and 25 would be 100 bn.

      So Russia still has some 300 bn to go through by its own. Moscow has lost 75 bn in 2013 second half, for a 20 dollars or so fall in the mean price of oil relative to the first half (some 90 usd vs 110). 60 usd as a mean price would entail almost a 200 bn loss in 2015 first half and so with 300 they could theoretically get september before reaching criticallity and going broke.

      In case oil mean price would be 30, Vlad’s deadline would happen to be june. Anyway, he would survive to attend next IMF SDR meeting, scheduled to be held in april or may I can’t recall.

      That’s just to play with figures

      • Christian,
        US have been attacking (Currency Wars) the world since 1944. The problem now is that Europe and Asia are coming together (gas-pipelines), with Russia right in-between (with their own banks), so the US won’t be able to collect rent (currency war) them, if they don’t use the dollar.

        But Europe and China know that they can no longer finance US lifestyle because US needs are too big.

        Just to put in how unsustainable is the US delusion (problem):

        World oil production as of July 2014: 77 million barrels a day

        But let’s say 80 million barrels a day. And let’s price each barrel at $100 dollars a barrel.

        So: 80 million X $100 dollars a barrel = $8 billion dollars a day. $8 billion X 365 days = $2.9 trillion dollars.

        US healthcare cost (alone) in 2013 = $2.9 trillion dollars

        See the Problem?

        Bankrupted US Healthcare
        Leaves 1 out 5 Americans without it
        And it bankrupts about 1 million American families a year. Families with healthcare insurance.

        However,
        Oil goes to billions and billions of people worldwide. US alone consumes about 1/5
        Oil employees millions and millions more people than the US healthcare
        World’s food production for 7 billion people depends, pretty much entirely, on oil

        The question to ask: “When will the world say enough is enough?”

        Then, the whole house of cards comes crashing down.

        http://peakoilbarrel.com/eias-world-production-numbers/

        http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/highlights.pdf

        • Christian says:

          Isaura

          I have a slightly different view. USD was set as world reserve currency in 44, while this was an agreement among “free” world countries. It wasn’t until early 70´s usd betrayed its part of the deal and became petrodollar, leading to the situation you describe as being at war with the rest.

          At the present moment Russia is the only country remaing outside usd system (debt to gdp ratio: 10%), so it’s the only place where the Fed can still expand to delay its collapse. That’s why we are witnessing a currency war among the Fed and Russia’s CB, dollar vs. ruble: the former willing to absorb the other and Russians willing to avoid the harsh devaluation and the general impoverishment that would be imposed as a condition to receive usd loans.

          Russia doesn’t wants to get caught on the usd trap, but I am not so sure to what extent the rest of the world is willing to get out of it. Europe didn’t really supported De Margerie when he proposed selling Total’s products in euros (and it’s likely he was murdered because of this). And I wouldn’t say in Arg. the prevailing opinion is to move away from usd (all politicians are willing to pay usd debt and get more loans); I don’t see Dilma throwing usd into the garbage bucket… But in case usd ever gets subsumed under SDR to avoid the crash of the house of cards, people won’t be sorry neither, and usd devaluation would be fine to all of us indebted in dollars but unable to print them…

          And, as always, China is waiting silently… Perhaps they’ll give us a big surprise one of these days, showing what kind of deals they’re doing with the russian bear and forcing Obamacare to go under the bus

  4. edpell says:

    Gail, I agree the system “as is” will seize up and stop. But then a new system can be imposed by the government. In which the government allocates money. Yes, it will be emitted as debt but debt the government knows will never be paid back. The money will not be a store of value simple an immediate permission to use existing resources. If citizens want to pay their property tax and keep their house they will work for money, not to mention buying food. Oil producers will be funded as oil is needed to keep the government including military and police and food production going. Yes, it will be a bumpy slope downwards but I feel production can be commanded to continue for (?) 30 years. No, not for all but for some.

    • Edpell,

      First: What you’re saying can not apply to the reserve currency of the world, otherwise that reserve currency would have America’s exorbitant privilege (Charles de Gaulle) as it resulted in an asymmetric financial system where foreigners see themselves supporting American living standards and subsidizing American multinationals.

      Second: Here is the problem that is hidden from the America public:
      Private-money (Bank-Money, example, dollar) and usury (interest) on the power of PRIVATE SECTOR.
      This will then be turned into debt (serfdom), inflation, hyperinflation, deflation, and depression throughout society.

      Here is the solution that you are NOT supposed to talk about:
      Sovereign Money: http://sovereignmoney.eu/

      “Once a nation parts with the control of its currency and credit, it matters not who makes the nation’s laws. … Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile.” — Mackenzie King, Canadian Prime Minister 1935-1948.

      And to put ‘money’ into perspective:
      If you asked an American in 1910 “what money is” he would have shown you a gold coin. If you had shown him a dollar bill he would tell you, “this is not money; dollar is a bank-note. It can become worthless overnight.”
      Now, try to explain this concept to an American today as their source of information is misinformation and obscurity… and therein lies the problem of our monetary collapse”– Keith Weiner, at “Monetary Metals

      • Wee Willy Winky says:

        Thanks for that quote. I have seen a similar one from Nathan Rothschild.

        If anyone was wondering who ultimately controls the world stop wondering. The Fed is a private entity that prints the reserve currency. Therefore the owners of the Fed control the world.

        No wonder they are ordering the gassing of women and children in Syria and the shooting down of an airliner over Ukraine. The Russians cannot be allowed to destroy the reserve currency.

        Of course destroying the USD does not destroy those who control it, but it would force them to go through the hassle of gaining control over whatever replaced the USD.

          • Wee Willy Winky says:

            Need to add another layer at the top: Owners of the Central Banks (the people who give the central bankers their marching orders)

            These men prefer to remain behind the curtain in the dark corner. They are beyond seeking glory, they let their stooges like Obama and Yellen and Draghi absorb the limelight. They are not interested in fame, they are interested in power, in controlling the world.

            And they do. When you have the power to print the foundation of the global economy i.e. the Reserve Currency. Then you run the world.

            Ever wonder why nobody save Ron Paul questions why a private entity has the exclusive right to print USD? Absolutely never will you see this questioned in the MSM.

      • Creedon says:

        Before I continue, I should let you know where I stand at the moment: I have a bleak view of humanity for the next 20 years.
        Can you give us a thumbnail sketch of what you see coming in the next two decades.

        • Creedon,
          There are mainly three events:

          1) Collapse of the US Empire
          2) Relentless decline of energy that will lead to shortages of everyday needs and food
          3) And the worse of all: Decline that will lead to the extinction of the most dangerous animal ever to walk the earth: Homo sapiens.

          How the collapse of the US Empire unfolds (unknown even for the players and diplomats involved, because the conducting negotiations and nations expectations are all moving targets) could exacerbate the other two.

          Keep in mind that 2 and 3 will happen. How US goes down is the key in how fast 2 and 3 unfolds.

          Oversimplified… But you will get the picture

          So, as US goes down, we are left ‘Mainly’ with three scenarios:

          a) BRIC’s (mainly Russia and China) let US being in charge. Quick Example: US builds and owns the pipelines. Russia supplies the oil/natural-gas, and China owns the manufacturing.
          Under this scenario US can collect rent and is able to buy time. Petrodollars saved.

          b) IMF (SDR’s) gets involved and gets to collect these rents. Good for some US financials but US dollar and US middleclass collapses. US oil consumption would have to go down by more than half. So, this scenario, for me, is a NO NO because US politicians and their families wouldn’t survive for five hours. Martial law would have to be used to enforce government authority. But, for how long? Once the government can’t pay the military.

          NOTE: Accordingly to James Rickards (“IMF is the ultimate backup when central banks fail.”), SDR will become the next reserve currency and US will debase the dollar against gold and tax gold profit very high. And the US will blame the SDR (IMF) for the dollar collapse.
          The Death of Money: The Coming Collapse of the International Monetary System by James Rickards
          http://www.amazon.com/The-Death-Money-Collapse-International/dp/1591846706/ref=pd_ybh_7

          c) US go on the attack. This is what I believe will happen
          US starts Proxy-wars on the boarders of Russia
          US crash the prices of all commodities thus bankrupting the world
          US floods the Middle East with guns and ammunitions
          Military Coup D’état in South America thus overthrowing elected governments and crashing unions (wages)

          If these don’t work, I can see the US dropping a couple nuclear bombs, say in Iran and Syria, as warning for the Russians and Chinese.

          Creedon,

          Russia and China will never attack the US. Then, the question to ask is: If Russia and China don’t give in to US demands, how long will Russia and China go without retaliating.”

          Here is your WW-3. And, if it goes nuke, say that you survive, how long you give to the nuclear radiation to kill everything, and everybody else.”
          Answer: Less than 10 years

          There’s your answer!

          “I don’t know (how WW-3 will be fought). But I can tell you what they’ll use in the fourth. They’ll use rocks!” – Albert Einstein

          • ayepookylipsnow says:

            This is really what it comes down to. Do TPTB really exist? If they do will they abandon their plans to rule everything and be content to rule just a continent or so of serfs or would they rather use the vast powers of destruction that exist to fry everything and live out their lives amusing themselves in various ways in their bunkers. On the other hand Russia could fold- again- and be assimilated into the borg, China along with it, and we FINALLY get to see the NWO. It wont be a pretty sight. 6.5 billion people are going to die regardless. Or something else. My vote is for something else.

          • Creedon says:

            Thanks for your view of the future.

            • Creedon, ayepookylipsnow,

              A quote that should be added to this discussion:

              “Decayed civilizations always make war on independent intellectual inquiry, art and culture for this reason. They do not want the masses to look into the pit.
              This obliteration of “false hopes,” requires an intellectual knowledge and an emotional knowledge. The first is attainable. The second, because it means that those we love, including our children, are almost certainly doomed to insecurity, misery and suffering within a few decades, if not a few years, is much harder to acquire.” – Chris Hedges

    • The problem is that the government is very likely to fail, fairly early on. It seems to me that at best, what you will have is new smaller governmental organizations, each issuing currency that is good only in their small domain. With such money, it will be impossible to do oil production, because the international trade that is necessary to keep the oil extraction system operating (spare parts, new equipment, trained professionals, international drilling rig companies) will “dry up”.

      • Jan Steinman says:

        “you will have is new smaller governmental organizations, each issuing currency that is good only in their small domain.

        Y’mean, like this?

        Unfortunately, the $$ is largely a tourist thing at the moment. About 0.05% of our market sales involved $$ last year — one $$5 bill! The SSI Monetary Fund would like to see it become a “real” currency, and are working on plans to ensure it is viable in an emergency. ($$ is apparently the only currency in the world that is as much as 50% backed by gold — for each $$1 issued, $0.50 worth of Canada Maple Leaf coin is put in a safe somewhere.)

        With such money, it will be impossible to do oil production”

        YAY! Bring it on!

        Seriously, I imagine powerful fiefdoms arising around the best producing wells, able to continue extraction by tribute from the surrounding region. But perhaps even that is too optimistic.

  5. Don Stewart says:

    Dear edpell
    Oxytocin. I know a lot of professional photographers who have quit photographing weddings because they are ‘sick and tired of dealing with the mother of the bride’. Now, if you met these women at The Junior League, you would probably get along just fine. What makes them become ogres at their daughter’s wedding.

    One hypothesis is the oxytocin effect. The mother of the bride is second in the oxytocin lineup, right behind her daughter. The father of the bride and the groom are down the list. The father of the groom is probably not significant at all…he’s probably giving odds on how long it will last.

    We know that oxytocin increases our bond to ‘our group’, but estranges us from ‘those people’. We might speculate that the mother of the bride is tolerating ‘his side’, is strongly bonded to ‘our side’, and considers the hired help the enemy. After all, they may screw up what should be the most beautiful day of her precious daughter’s life. And so the photographer and the caterers and such servants are blamed for anything which doesn’t cast the most glorious light on the bride.

    Don Stewart

    • Quitollis says:

      Don, you come out with some really interesting stuff. It seems that the hormone oxytocin plays an important social role, in trust, generosity, empathy, recognition, bonding, pairing, sexual performance, maternal behaviour etc. It is a part of how we have evolved as a social animal. Ethnocentric behaviour is also produced by the “bonding hormone” oxytocin itself.

      It seems that evolution has designed us toward ethnocentricity and that modern cosmopolitanism is inevitably problematic. It may be that the promotion of non-ethnocentric environments and behaviour actually makes us overall less empathetic and less social, which would spell social dysfunction, a lack of social cohesion for multicultural societies like the US and the UK.

      Which is why the MSM goes full out everyday in the attempt to stigmatise natural ethnocentric behaviour, people are not “wired” for multiculturalism, they are wired for their own ethnic group. It may be that the governments are trying to take us down a “moral” path that is radically contrary to how we are naturally designed and which will just make people anti-social, dysfunctional and less happy.

      Likely global economic collapse will resolve many of these issues.

      http://en.wikipedia.org/wiki/Oxytocin

      quote:

      Recent studies have begun to investigate oxytocin’s role in various behaviors, including orgasm, social recognition, pair bonding, anxiety, and maternal behaviors.[4] For this reason, it is sometimes referred to as the “bonding hormone”. There is some evidence that oxytocin promotes ethnocentric behavior, incorporating the trust and empathy of in-groups with their suspicion and rejection of outsiders.[5] Furthermore, genetic differences in the oxytocin receptor gene (OXTR) have been associated with maladaptive social traits such as aggressive behaviour.[6]

      […]

      Oxytocin and intergroup bonding: Oxytocin can increase positive attitudes, such as bonding, toward individuals with similar characteristics, who then become classified as “in-group” members, whereas individuals who are dissimilar become classified as “out-group” members. Race can be used as an example of in-group and out-group tendencies because society often categorizes individuals into groups based on race (Caucasian, African American, Latino, etc.). One study that examined race and empathy found that participants receiving nasally administered oxytocin had stronger reactions to pictures of in-group members making pained faces than to pictures of out-group members with the same expression.[76] This shows that oxytocin may be implicated in our ability to empathize with individuals of different races and could potentially translate into willingness to help individuals in pain or stressful situations. Moreover, individuals of one race may be more inclined to help individuals of the same race than individuals of another race when they are experiencing pain. Oxytocin has also been implicated in lying when lying would prove beneficial to other in-group members. In a study where such a relationship was examined, it was found that when individuals were administered oxytocin, rates of dishonesty in the participants’ responses increased for their in-group members when a beneficial outcome for their group was expected. [77] Both of these examples show the tendency to act in ways that benefit people with which one feels is part of their social group, or in-group. Oxytocin is not only correlated with the preferences of individuals to associate with members of their own group, but it is also evident during conflicts between members of different groups. During conflict, individuals receiving nasally administered oxytocin demonstrate more frequent defense-motivated responses toward in-group members than out-group members. Further, oxytocin was correlated with participant desire to protect vulnerable in-group members, despite that individual’s attachment to the conflict.[78] Similarly, it has been demonstrated that when oxytocin is administered, individuals alter their subjective preferences in order to align with in-group ideals over out-group ideals.[79] These studies demonstrate that oxytocin is associated with intergroup dynamics. Further, oxytocin influences the responses of individuals in a particular group to those of another group. The in-group bias is evident in smaller groups; however, it can also be extended to groups as large as one’s entire country leading toward a tendency of strong national zeal. A study done in the Netherlands showed that oxytocin increased the in-group favoritism of their nation while decreasing acceptance of members of other ethnicities and foreigners. [80] People also show more affection for their country’s flag while remaining indifferent to other cultural objects when exposed to oxytocin.[81] It has thus been hypothesized that this hormone may be a factor in xenophobic tendencies secondary to this effect. Thus, oxytocin appears to affect individuals at an international level where the in-group becomes a specific “home” country and the out-group grows to include all other countries.

      • Wee Willy Winky says:

        You may be correct that governments are trying to ram a square peg into a round hole with the multicultural thing. We sort of get along so long as there is enough to go around, but watch what happens when there isn’t.

        My understanding of the massacres that took place in Rwanda some years ago were related to not enough to go around as Tutsi and Hutu populations increased putting heavy demands on finite farmland.

        This resulted in the most vile atrocities being committed.

        Don’t think that this can’t happen where you live? Are you 100% sure?

        This was posted earlier and is a relevant and insightful read regarding what truly drives our behaviour and the illusions that mask the reality which is that we are all just deviant apes at the end of the day (who believe we are special) http://regmorrison.edublogs.org/files/2011/11/enigma_code-1fz5tz1.pdf

        We humans have a preoccupation with creating institutions that attempt to mask this reality, one of the most important ones is religion.

        Most religions try to suppress our genetic instincts but of course they totally fail.

        Are we really any less murderous because of religion? Of course not, we murder and plunder as wantonly as we have since the beginning of time. In spite of religion telling us this is sinful behaviour continue to kill each other and we do not share because that is OUR NATURE.

        We of course always come up with justification after justification for the reasons why we commit these acts. Religion has been an abysmal failure in attempting to curb such acts and in fact, throughout history, religion has recognized that it cannot tame the beast, and therefore has embraced it. Look at how many times religion has sanctioned war and genocide.

        Over tens of thousands of years nothing has changed. Absolutely nothing. We are no more civil to each other than we ever were. And we never will be.

        Because we are hardwired to survive and procreate. And if anything gets in the way of those too primordial urges, heaven help them. Our default is violence and brutality.

        But hold on you say, where I live that is not the default position, we get along.

        I call bullshit on that. We get along only because we in the west have pillaged the resources of the rest of the world so that we have an abundance. Does the US not use 25% of all resources with only 5% of the population?

        I say again, if you think your country could never be a Rwanda, just wait to see what happens when the abundant resources are no longer available.

        Humans are humans are humans. And not only that, we are animals and we act on the same drives as all animals. Some are not better than others. Some just are born into better circumstances.

        • Quitollis says:

          “Don’t think that this can’t happen where you live? Are you 100% sure?”

          W, I live in the UK. Religious wars ceased in central Europe with the Peace of Westphalia. AFAIK, countries drew their alliances in later wars in terms on national interest and without regard to religious sect. The UK continued to have religious sectarian uprisings and civil wars through the modern period (Irish republicans and Scottish jacobites) and we had the IRA/ Unionist terrorist campaign/ civil war into the 1990s, with some of it still going on. NI showed us what we are capable of and it aint pretty.

      • Quitollis says:

        Some “heresies”

        1 “Love is universal”. Actually no it isn’t, ingroup preference increases in proportion to natural oxytocin-driven bonding.

        2 “Ingroup preference is hate”. Actually no it isn’t, see 1.

        3 “Equal preference between in and out groups is love.” Actually no it isn’t, see 1.

        4 Equal preference is not driven by love, it is driven by other psychological motives that usually pass for love, eg. the desire to appear “moral” or acceptable, to conform, to function successfully in a multicultural society, the interests of one’s own ingroup within that society etc.

        5 The dominant universalist ideology in our societies is based around moral and psychological myths. Its discourse is more akin to that of the religious zealot than the reasonable scientist.

        6 The dominant ideology is a part of the ‘superstructure’ of ideas that is driven by the development of the modern economic base toward globalism and the mass importation of workers.

        7 It has deeper roots in middle eastern religious ideas adopted during the historical period.

        8 It is unnatural and it is harmful to societies and citizens.

  6. Don Stewart says:

    Dear Gail and All
    For those of a mathematical bent who enjoy modeling fossil fuel decline, I suggest a look at Mobus and Kalton’s Principles of Systems Science. George says a lot of copies have been sold, so maybe your friendly local library can get you a loaner.

    On page 230 is a Quant Box addressing System Dynamics of Fossil Fuel Depletion. I won’t try to reproduce the equations here (my skill typing equations is pretty poor). Briefly, you can use a spreadsheet to make your own projections.

    The results are similar to Ugo Bardi’s Seneca Cliff or Gail’s hand drawn graphs. Gross production rises exponentially and then goes off a cliff. Net production peaks earlier and exhibits the same ‘off the cliff’ behavior.

    Don Stewart

  7. interguru says:

    This discussion is getting too technical and too serious, so I am starting a new thread — a thought experiment.

    If we could preserve one item to show the post apocalyptic population what life was like in the age of abundant energy, what do you nominate?

    I will start with this one, “Christmas Light Display as Seen by Drone Wizards in Winter”

  8. Don Stewart says:

    Dear Gail and All
    A few more thoughts about oxytocin, collapse, Donald Trump, the petrodollar, etc.

    Several years ago I was working in Atlanta. I was at a party, where a young female lawyer was also present. I lived about a block from where she did. She didn’t have a car, and I offered her a ride home. On the drive, we got to talking about Donald Trump and his prenuptial agreement with Marla Maples and how her father had essentially sold her to Trump. Since she was a lawyer, I assumed she would be very cynical about marriage, and sympathetic to pre-nuptuals. She surprised me by saying ‘a prenuptial is the death of a marriage’. We didn’t have time to talk about it before I delivered her to her door, but the surprise I received when she said that stayed with me.

    Now, let’s look a little more closely at information theory and language and oxytocin. Gregory Bateson defined information as ‘a difference which makes a difference’. Let’s suppose you are reading one of my posts and you reply to me ‘Stewart, you are full of s..t. Well…I either was or I wasn’t, and you have given me some information which may be of some value to me.

    But, amazingly, let’s suppose that you respond by congratulating me on an insightful post. My oxytocin factory in the brain will get busy. You will be noted in my book as ‘a friend’. If I subsequently congratulate you on ‘a brilliant post’, then your oxytocin factory gets busy. This is like the rounds of gift-giving studied by the behavioral economist I linked to. Far better than trading compliments on the internet, of course, would be if I baked you a cherry pie and you gave me a bunch of collard greens in return.

    I think we can say that Donald Trump probably fails most oxytocin tests. Instead, it’s all about money. The Ford Motor Company and Wal-Mart have both been famously at war with their suppliers. But the suppliers keep coming back because of the money. And the money, I submit, is what keeps the Global Capitalist enterprise alive. If money represents oil, and if oil is in decline, then that means that the Global Capitalist enterprise is in decline.

    The oxytocin exchange triggered by the exchange of cherry pies and collard greens operates at a much more primitive level, and is sustainable in ways that a money system based on oil is not sustainable.

    I also want to comment on the richness of the oxytocin exchange. Let’s suppose Wal-Mart pays me a hundred thousand dollars in return for the delivery of 50,000 widgets. The payment really doesn’t contain much information, as Bateson would define it. I don’t know if Wal-Mart will re-order next month, how much they will be willing to pay, etc. But once the oxytocin exchange pathway is working well, then trust between the parties is the glue that holds it together. I now have some information about my trading partner which makes a difference.

    I want to observe that it probably doesn’t make any difference about superficial differences is the oxytocin exchange is based on mutual help. I looked at some farm records from before the Civil War. A white family lived next to a free black family, and they happily traded work with each other. You couldn’t get much more of a social difference than a fairly prosperous white family and a poor free black family in a society which practiced slavery, and where it was strictly illegal to teach a slave to read. Yet the exchange of cherry pies and collard greens and the oxytocin pathway made everything work.

    So when we say that ‘we can’t imagine what might replace the Global Capitalist system’, I suggest that we need to step back and look at the system that Mother Nature designed us to live within. And learn how to make cherry pies and grow collard greens.

    Don Stewart

  9. Quitollis says:

    The OECD reckons that the drop in oil price is set to boost the 34 developed economies by 1% overall but oil producers are set to lose out. Norway to lose 6.5% GDP, Russia 5%. (The modest boost to OECD overall seems to be the only “point” to low oil prices, OPEC are undercutting themselves by maintaining low oil prices.)

    http://www.telegraph.co.uk/finance/oilprices/11309207/Russias-crisis-has-no-end-in-sight-as-50-oil-looms-says-OECD.html

    quote:

    Preliminary calculations by the Paris-based think-tank suggest the recent oil price fall to $60 a barrel from $115 this summer will boost growth across the club of 34 developed nations by 1pc through cheaper oil import bills alone.

    However, Ms Mann said countries that rely heavily on oil revenues to fuel growth such as Norway will see as much as 6.5pc shaved off GDP in 2015.

    While the OECD has not calculated how the Russian economy will be affected by the fall in oil prices, the country’s central bank has said GDP could contract by 5pc next year if oil stays at around $60 a barrel.

    *

    The IMF paints a similar picture. Saudi needs about $100 a barrel to break even, so why maintain high production and low prices?

    http://blog-imfdirect.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/

    quote:

    As Chart 8 shows, the effect is, not surprisingly, negative for oil exporters. Here again, however, there are substantial differences across countries.

    In all countries, real income goes down, and so do profits in oil production; these are the mirror images of what happens in oil importers. But the degree to which they do, and the effect of the decline in the price of oil on GDP depends very much on their degree of dependence on oil exports, and on what proportion of revenues goes to the state.

    Oil exports are much more concentrated across countries than oil imports. Put another way, oil exporters depend much more on oil than oil importers.

    • Thanks! I thought it was interesting that neither the IEA nor the IMF seemed to think that derivatives exposure to oil prices, and the impact on banks, was important enough to mention. Also, the impact of rising interest rates, as default rates rise in parts of the world. It is very tempting to think the impact is symmetric and offsetting, but this is not really the case.

Comments are closed.