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 financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
This entry was posted in Financial Implications and tagged , , , , , , . Bookmark the permalink.

1,055 Responses to Ten Reasons Why a Severe Drop in Oil Prices is a Problem

  1. The graphs below “tell me a story” that “something different” is happening now:
    WTI Crude Oil

    Brent Crude Oil

    • James says:

      And what, pray tell, is the story?

    • PeterEV says:

      Deffeyes is famous for predicting conventional crude oil production would peak in 2005. Basically, he was right until 2008 and then again in 2011 according to the above chart. After that, any increases in crude oil production have been made up by US tight oil. If no new and massive conventional oil production is created, the above chart would indicate that the date of conventional peak oil production is 2011.

      It could be that world conventional and unconventional crude oil production could peak before US tight oil peaks. But looking at the graph, it would not make much difference.

      I have seen other graphs that show we still have massive amount of coal. Will we convert that coal to gasoline and diesel using the Fishcer-Tropsch process? At what price for a barrel of oil would the Fishcer-Tropsche process become economical? I am looking at this from a pure economical point of view without considering any environmental, etc. costs. I see this as the next area of “growth”. Any thoughts??

  2. Leo Smith says:

    Renewables are independent of oil: They do not make any difference to oil consumption by and large since overwhelmingly they still need oil type products to ensure continuity and supply. And the minuscule amount of power they generate is offset almost 1:1 by he increased losses they push onto fossil based plant.

    Renewables are merely a green cosmetic lipstick applied to what must always be a fossil or nuclear based grid, for stability. Only where there is a low populations density and high hydro, do they signifgicantly reduce the need for fossil fuelled power stations. Or fossil fuel itself.

    • garand555 says:

      As I like to say, renewables are only as renewable as the equipment used to harvest the energy.

    • James says:

      And they waste time, money, resources, and human brain power on trying to perfect a non-solution solution. But really, renewables are mostly about inflating a “green” financial bubble in the wake of a deflating carbon energy based bubble(s), which is of course a fool’s errand, but likewise of course, desperate times do call for desperate measures, now don’t they?

      But the larger point is that all these various and sundry green solutions in net probably use more fossil fuel energy in their total production and consumption cycles than they ever saved in the first place. Just like bio-fuels, another net energy loser that was only made to seem attractive in the first place by misguided government subsidies.

  3. Javier says:

    The market is trying to find an oil price that will satisfy both producers and consumers. Alas due to rising costs of production and a much lesser increase in the profit (benefit) that can be extracted by an economy from a barrel of oil, that price no longer exists. As you point out, when producers price dominates due to satisfactory demand, we get a set of problems, and when consumers price dominates due to reduced demand, we get a different set of problems.

    The main prediction would be that the business cycle will result in an alternate of periods of demand destruction (economic crisis) and periods of production destruction with the price of oil being the transmission chain. There will be no good times, only transition times between both periods, as the one we have enjoyed, for as long as our economies continue to depend on oil.

    No, high oil prices were not there to stay and no, current “low” oil prices are not here to stay either. What are here to stay are destructive economic cycles that will be played at the same time as flocks of black swans come home to rooster. Impossible to predict the path, but very easy to predict the outcome.

    • Don Stewart says:

      Dear Javier
      For some related data and models, see Ugo Bardi’s current article
      http://cassandralegacy.blogspot.com/2014/12/fossil-fuels-are-we-on-edge-of-seneca.html

      Don Stewart

      • edpell says:

        Good article. This is the first time I understand why a Seneca peak shape. If one just works through a resource you get the Hubbert bell curve. If one uses the resource to speed up the working through you get the Seneca curve.

      • Javier says:

        Thank you Don,

        I already read the original Seneca cliff articles by Ugo. This last article is a simple model on how to get there through higher production costs. Not very different from Tom Murphy’s Energy Trap model and the same basis. If you add Jeffrey Brown’s Export Land Model, what you get is a truly scary picture.

        But you have to add cycles. There are cycles everywhere, specially in complex systems. Economic cycles will likely play a role. The result could very well be similar to the step descent suggested by John Michael Greer, rather than a linear descent.

        Javier

      • Thanks for the link. Bardi talks about “reinvesting a constant percentage of profits of resource extraction,” but it seems to me that this is based on an idealized model of profit, similar to that used in the by the modelers behind the book Limits to Growth, rather than the real situation.

        In the real world, there is debt involved, and interest on that debt. In fact, everything I can see says that this debt is necessary to the process–perhaps not for those drilling the wells, but for consumers and for businesses selling products to consumers.

        Real world profits are determined by a number of different considerations including (1) the amount of goods and services that can be produced by oil, compared to the inputs required to produce those goods and services [Bardi’s profit?], (2) the share of what remains that must be used to service debt, and (3) the selling price of oil, which is indirectly determined by what consumers can afford, based on the incomes they earn. These incomes are influenced by the true benefit oil is adding to the economy. So the financial real profit is related to what Bardi is talking about, but it probably falls off considerably faster.

        • Don Stewart says:

          Gail
          I am not sure I follow Ugo’s logic. But I think it is related to falling EROEI or declining marginal returns. That is, the same amount of profit invested begins to return less future oil and therefore less profit, which starts a spiral downward. We can see this currently as companies cut capital expenditures in an effort to arrest the decline in profitability.

          As for the debt question. I think that Charles Hugh Smith has it right: Risk can be transferred from one person to another, but it cannot be erased. Consider the fact that most new businesses fail. If you are about to start a business, you can:
          a. Pay for it with your own funds
          b. Borrow some money, in the form of bonds or notes
          c. Take in some partners (e.g., sell stock)
          d. Some mixture of a, b, and c

          If you go to school and study finance, it used to be largely about (d)….now I think it is mostly about financial fraud and speculation. At any rate, if you build with bricks and mortar, you have to pay for the materials and you have to pay the workmen. That money has to be current money, and the materials and work will be current work.

          In the absence of banks, if you follow (b) or (c) or (d), then you are pledging future profits to repay the initial investors plus some return. With fractional reserve banking and the Federal Reserve, the banks loaning the money just loan the money into existence. They don’t have to give you money out of accumulated savings. The only deterrent to the banks is the risk that your business will fail and they will never get the money back.

          As I understand monetary policy history in the US, the frontier interests (such as Andrew Jackson) saw an enormous continent just waiting for exploitation, and didn’t want to have to convince Eastern or European investors to loan them money. They favored a variety of moves which would make the creation of new money easier. To the extent that the frontier actually did pay off, the easy money gamble was a good bet. However, there were decade long depressions during this period and vast numbers of banks failed, along with most of the railroads which were started with borrowed money.

          Academic studies say that the 3rd Industrial Revolution (20th century) paid off the gambles which were made. The 4th Industrial Revolution (21st Century) hasn’t really paid off for society…although it has generated some billionaires. The 4th Industrial Revolution has involved relatively modest amounts of debt. I don’t think Facebook or Ali Baba had much debt when they went public.

          One could visualize a 5th Industrial Revolution which converted society to Renewable Energies such as solar and wind and nuclear. I think you would be the first to say that these will never pay off. Suppose that the Federal Reserve simply prints an awful lot of money and puts it into circulation to fund the 5th Revolution. But the 5th Revolution sputters out and produces little to nothing. Then we have the classic case of too much money chasing too few goods (assuming that companies figure out fairly quickly that things aren’t working).

          I outlined a little model for thinking previously. I posed the question of what would happen if a couple of super-giant oil fields were discovered a couple of thousand feet beneath the Sahara. I think it is safe to say that those fields could be exploited with money from accumulated savings. However, the Finance people in the exploiting companies would actually use strategy (d), and maybe even some of the fraud and speculation. But I think it is a mistake to say that exploiting those two super-giants is impossible without debt. It may very well be true that the hypothetical 5th Revolution can’t happen without debt, because many people think the same way you do. Therefore, the search for deep pockets and going into debts which can be defaulted, all the while paying handsome executive salaries.

          Don Stewart

          • Don,

            Thanks for your thoughts.

            The problem that arises with diminishing returns is that you start out with extracting resources where you need practically no accumulated savings or debt. This is the oil that is barely below the surface, practically in your back yard. Or the cheap Saudi oil that you mention.

            You gradually move to worse and worse quality resource. These require more and more front end investment, in order to hopefully obtain the oil or other energy product we desire. So we gradually move the system to more and more debt. (This issue gets missed in EROI studies, because “time of investment relative to time when output is produced” is ignored. Getting oil out immediately is no different from producing a 30 year battery that needs to be set in the sun to work.)

            If we could wind the clock back 100+ years, to where diminishing returns had not run its course so badly, I would agree with you that energy investment without debt would be possible. Now, though, it becomes an impossibility.

            There is also the issue of affordability of goods by buyers. As wages erode, they have greater debt needs to buy, for example, more fuel efficient cars that cost more.

            • Don Stewart says:

              Gail
              ‘A fuel efficient car’ may be a motor scooter. I see many more of them on the road. I doubt very many of them are financed. There are also a lot more bicycles, and I doubt that any of those are financed. Instead of ‘fuel efficient cars’, think ‘transporation’ and things open up.

              I get constant advertisements from a guy wearing a white hat inviting me to be part of ‘the shale revolution’. That would just take money out of my pocket and put it in the pocket of the shale driller. I assume that what they are selling is shares, as opposed to getting a loan. It may be companies that are so ‘sub-prime’ that they can’t even sell junk bonds…and so need to find suckers.

              My point is simply that any actual drilling and laying of pipelines and hauling of water that happens is a current expense, and has to be paid for with current money. Whether that money is raised through retained earnings, through new equity, or through various types of debt instruments is a matter for the Finance officer. There may be subtle reasons why debt works better than retained earnings, but I think the fundamentals remain. (Fraud, for example, is a lot easier with debt than with retained earnings.)

              Don Stewart

    • The question is the extent to which bounces back and forth in prices can really happen, before the “system” breaks.

      • Javier says:

        I consider that the system is already broken, Gail. It was a system built on continuous growth and growth has stopped. What we are experiencing could be analogue to the tail spins of a plane falling. Wether we destroy demand or production, we will lose oil use. As we lose altitude we will be gaining speed.

    • James says:

      That’s it! A whipsaw of destruction on the way down to match the whipsaw of growth we experienced, albeit completely took for granted, on the way up. Another well noted human foible: we take our good fortune for granted and our bad fortune to heart. We’re about to take a whole lot of the latter to heart.

  4. Seppo says:

    Recently in the Peak Oil site, ROCKMAN had looked at how much US consumers paid for car fuels yearly, and (EIA data…) the money used had about halved in 2008…2013 period or so. Hmm. No money left?

  5. John Burman says:

    Call me idealistic! What if there was no “growth” of economies but simply better distribution of resources so that eveyone had enough within a stable economy – would that not be a practical solution. We don’t need shopping as recreation, the majority in the first world are drowning in unnecessary goods. Everyday life today is what luxury was only 150 years ago. Life is about more than consumerism – surely our ethics and culture have been dumbed down enough by now. I think we will go through great pain until we relearn why we are here. As Solzenhitsyn indicated after looking at both sides of the economic equation, all these problems boil down to a consciousness problem (he was a green/nationalist at heart) and we have to change our ‘needy attitudes’ or binge on our limited resources until we die the death of a thousand ‘cuts’.

    • Harry Gibbs says:

      The problem is that the global economy works as a totality or it barely works at all. All systems are optimized for their current level of delivery and become reliant on the latest technological advances. We cannot regress to a simpler paradigm.

      https://ourfiniteworld.com/2013/05/15/what-would-it-take-to-get-to-a-steady-state-economy/

      • John Burman says:

        If you have travelled you will have seen that in reality behind the facade of diplomacy much of Africa is barely out of the iron age, while many parts of Asia are still in the middle ages economically and are far from reliant on the latest technology – we can easily regress to a simpler paradigm.

        As Gail says in the article you refer to.
        “If our civilization does collapse to a lower level, but not all the way back to zero, it seems likely that humans will again repeat the pattern they have experienced, over and over. They will again increase population and resource use, if resources are available. This pattern seems to be an instinct for all species, which is why it is virtually impossible to eliminate. Humans will then again collapse back to a more sustainable level.”

        I don’t fully agree with this. I hope that we attempt to find a way to create a sustainable system within these cycles of growth and decline. Egypt did it for 2 thousand years based on a core ideology probably Gnostic, plus endless soil fertility brought down by the flooding Nile. China had a sustainable system for 4000 years based on total soil management and a core ideology Daoism, which they then exchanged 70 years ago for state controlled slavery with total pollution, to make shiny junk for the West. I could go on.
        It is unfortunate that the most stupid way of living is in the hands of those who control most of the world’s resources – that is what could change to get in line with the rest of the world, who are living in as you put it ‘a simpler paradigm’.

        • Harry Gibbs says:

          The global economy is a self-organising entity, adhering as it must to the laws of thermodynamics. Its function when viewed from this perspective is the ever faster dissipation of useful energy, with the principle of maximum entropy production expressing itself as the profit motive. In other words, humanity as a collective entity has no choice but to hoover up resources at an increasingly rapid rate until the structures it has built to accomplish this keel over due to insufficient inputs. It is pointless to characterise an entropic force as stupid or greedy even though such traits may be observable within it.

          None of the civilizations you mention were truly sustainable. No human civilization has ever voluntarily pursued degrowth. It is not in their nature to do this.

          We will regress to a simpler paradigm. Unfortunately it will not be by choice. The rapid failure of supply-chains and just-in-time connections will mean death and misery on an unimaginable scale. Very few people, even in Africa and Asia, live in truly self-sufficient fashion. There will be plenty of suffering there, too.

          • “None of the civilizations you mention were truly sustainable.”

            Please explain your definition of sustainable. In perpetuity? On a long enough timeline, the Sun will go out, nothing in the Universe, or even the Universe itself, is eternal.

            4000+ years seems like a pretty good run to me. Too bad they decided to build their heavy industry right on top of their fertile deltas. I don’t think they’ll be able to easily go back to rice paddies, with all the pollution, cement, asphalt and slums built over top.

            • Harry Gibbs says:

              Matthew, I was taking issue with John Burman’s use of the word sustainable in relation to China and ancient Egypt, the implication being that man had been living in a state of harmony with nature for millenia in those civilizations.

              What we actually see is a constant war of attrition between population growth and resource constraints with what Joseph Tainter called ‘the diminishing marginal returns of investment in social complexity’ always tipping the balance in favour of the latter.

            • I agree that China and ancient Egypt had a problem with resource limits. Egypt was somewhat helped along by getting more soil with Nile flooding every year, though.

          • Harry, I agree with you that the global economy is a self-organizing entity, adhering to the laws of thermodynamics.

            We can talk about how awful it is that some people are so wasteful of energy, but this is what the system is made to do. We really can’t fix it, no matter what we do. We take our wages and spend them on goods and services, all of which require energy.

            In fact, the economy is sometimes referred to as a dissipative structure. Other dissipative structures include hurricanes and plants and animals. All of these have finite lives before they collapse. Unfortunately, this is a basic problem we cannot fix.

            • James says:

              I would only add that the exponential growth economy also enabled and demanded a likewise exponential growth in the human population to service it. And that’s a problem if you’re one of the current 7.2B people alive and only sustained by an exponential growth cheap energy economy that’s in its death throes. When the cheap energy, which is to say the cheap money, which is to say the growth – exponential or not goes away, so does a large portion of that 7.2B population.

              Fortunately for most of us reading here, thanks to the first world Military Industrial Complex, developed to protect our betters but protecting us as all well, that won’t necessarily include us, immediately at least. But rest assured, it’s a bottoms up process, and it will get to us all eventually.

        • Javier says:

          China did not have 4000 years of sustainability (nor did Egypt), but a succession of cycles of creative/destructive periods, that perfectly reflect on its historical demographic population as bumps. Each of the down periods must have been accompanied by a lot of suffering and death from the peasants as the irrigation structures were destroyed by turmoil and had to be rebuilt several times. To a certain extent the cycles match the dynasties. Some authors defend that this repetitive creation/destruction in the chinese history might be one of the reasons that they fell behind Europe, where after the Middle Ages no similar downfall took place, despite the big lead of an earlier start.

          So sorry, but no historic precedent for sustainability in complex civilisations, only in simple organised small populations and not always. In general only when checked by resource constrains.

          • John Burman says:

            Europe sustained itself and grew powerful after the Middle Ages with superiour weapons and ships. By colonisation and stripping out the assets of South America, Africa, Asia etc. then enslaving their populations in the Roman model, destroying these very civilisations in some cases – a model for survival that is probably why we are in the mess we are in now. You are wrong in your last comment – go read ancient history and you will see that large populations were self sustained for thousands of years. Of course there were ups and downs and wars and revolutions within those systems – anyway nobody is talking about forever, that is silly.
            We can do better than raping the world in a few hundred years, depleting all the resources in exchange for junk. All those civilizations had core values which endured, even until today in some cases – we have Disneyland. Consciousness is what needs to change. I agree it will probably be by the painful method if we are incapable of acting rationally. This discussion could go on forever and its interesting to hear other opinions, go well all of you.

          • “China did not have 4000 years of sustainability”

            When you say sustainable, do you mean a perfect steady-state in which population is perfectly level for thousands of years?

            In reality, for many reasons, I’m confident sustainable systems look more like sine waves than flat lines.

            They did not deplete their soil nutrients; that is the important sustainable part I am referring to. Granted, they received vast amounts of nutrients from seasonal flooding, so they basically were fertilizing with potash. The only difference is they did not need to mine the potash, erosion and gravity supplied them with it with little to no effort on their part.

            • Javier says:

              What I mean is that they collapsed pretty regularly every several centuries. I don’t think collapses enter into anybody’s idea of sustainability.

            • garand555 says:

              “I don’t think collapses enter into anybody’s idea of sustainability.”

              Anybody who thinks that an economy needs to “breath” to get rid of the malinvestment thinks that partial collapses are part of sustainability. Granted, most of them probably don’t think of collapses based on a shortage of a keystone resource, but there are people who, so as long as it’s not complete Mad Max style collapse, will say “let it burn.”

    • pintada says:

      To paraphrase Mr. Burman:

      “All the problems caused by humanity would disappear if suddenly homo sapiens was a different species.”

      • John Burman says:

        Is that it? Come on, give us your vision of the future. As a philosophy professor said recently, “these days the problem is not in finding people whose views are contrary to yours but in finding people who have any opinion at all”.

        • HnH says:

          OK, I’ll bite. I give you my vision of the future.

          There is no stopping the current decline as too many people have too much of a vested interest to keep it going. So we will see it going down, as going down it must.

          The decline will be accompanied by ever slowing growth with evermore prolonged periods of deep recessions and ever higher taxes. Social tensions will flare ever higher and people will choose evermore radical political opinions. We will see a resurgence of communist and fascist leanings. We will also see evermore geopolitical strife, particularly in the Middle East (Israel vs. Arab countries, growth of ISIS or its successor), in Europe (between US/EU/ NATO vs. Russia), and Asia (China vs. US, Japan and other ASEAN nations). Africa will also get its share (East African countries vs. Egypt struggling over water from the Blue Nile).

          Sooner or later these tensions will erupt into full blown civil and international (possibly global) wars. Along will come pandemics of multiresistant strains of infections and illnesses we thought overcome, and widespread hunger. Hungry and desperate hordes will appear when the current nation states will gasp their last breath. They will pillage, rape and plunder, first in the cities and afterwards in the countryside where Farmers may still have some seed corns or living livestock left.

          If we are really lucky, the great killing will be over in a few years and the world will return to a state of much lower complexity. If not, it will drag on for a couple of decades.

          In Europe we are very likely to see the return of monarchies and, after a fashion, the reappearance of indentured farmers. Slavery will return to regions where it was extremely common (Middle East). For the US, I anticipate a breakup into three or more states.

          The whole world will experience something akin to the dark Middle Ages after the breakup of the Roman Empire. This period will last for a very long time. In some places and regional pockets a living style akin to the 18th century will manifest itself. Mostly though, the level of complexity will fall much further.

          The regions best prepared to weathering the storm are sub-Saharan Africa and, if it does not go up in flames due to a major war with the US/NATO, Russia.

          Eventually, after a period of stabilization, we will see the return of sailing ships and the reemergence of trade through old trade routes such as the Silk Road. Hopefully, our descendents will not have forgotten to prepare for the scourge of scurvy.

          • Who will look after the nuclear waste?
            Who will tend the Sarcophagus, if there is collapse?
            After the initial die-offs in a collapse, the big question is, will the planet be irradiated, or will humans be able to tend the 500+ reactors and 200,000+ tons of waste?

            • HnH says:

              If the collapse and the aftermath play out in any way that is remotely comparable to what I have written, humanity will forget about nuclear waste and irradiation pretty quickly.

              If you take Chernobyl as worst case, people living there in the next centuries will have abnormally high sickness rates, deformed children unable to survive, and so forth.

              In the first 50 to 150 years, they will probably regard the regions as cursed by the gods. Then, they will forget entirely and not know any better.

              I don’t even think that the majority will even be able to read and write. It will take a long time before they have the leisure to relearn it on a wider scale.

              In short, they will just deal with it and pray to their ancestors or their gods to bless the unborn child. Perhaps they will restart witch-hunts, because a strange person/woman gave the pregnant mother-to-be the “evil eye”.

            • Ann says:

              How will humans grow food when the weather is so unstable that the plants freeze in July one year and boil away in July the next year, with no way to transport food from one area to another? How will humans survive without any food from the oceans? What will happen when hydrogen sulfide has turned the seas purple and the clouds of gas drift over the shores? Bacteria that are resistant to all antibiotics will ravage domesticated animals and humans alike. Devastating floods, super droughts that last decades, storms that rip the land down to bedrock and scatter it in the mountains, heat that kills millions at a time, disappearing or polluted fresh water; all of these happening all over the world, continuously. Greenland and Antarctica melt away and raise the levels of the seas by dozens of metres. Even people who are surviving in a primitive way off the land will lose their food supplies of plants and animals to storms, disease, floods, heat, drought and over hunting. They will try to migrate (this is already happening) but will be denied passage or killed by those who live nearby. Trees succumb to surface ozone and pollution. Agricultural pests, immune to all treatments, spread quickly.

              I know Gail does not like the comment section to bring up climate change because her expertise is in financial matters. However, the growing consensus among climate researchers parallels her work on finance in concluding that the turning point has been passed. It’s over. We’re done. I don’t know what will strike first, but the combination of financial collapse, disease, dead oceans, polluted fresh water and unstable climate will wipe humans off the planet, along with many other species, ranging from all of them to most of them, according to how soon the collapse begins. Some bacterial or viral extremophiles may survive, deep in the rocks. I wish them success. In another few million years they might evolve to fill niches that don’t even exist today.

              Species go extinct. Humans now exhibit every quality of those species that extinguished themselves, even while knowing the process in excruciating scientific detail, we can’t stop. We’ve eaten or otherwise consumed or polluted every resource in our entire ecosystem, which is the whole planet.

              Say good night, Gracie.

              All comments here consist of people thrashing around trying to come to grips with the inevitable, trying to put it into words they can understand, processes they can see, beliefs they have held for generations. Don’t worry, it will all become clear to you as time passes. Just keep talking to one another. The pieces fall into place as you keep reading sites like this one. We’re all gonna die, but you knew that before. As for me, I want to watch the process unfold for a bit longer. I’ll train some young people in the ways of this farm, hopefully First Nations people, and when I’m ready, I’ll walk away, into the flaming Douglas fir and Ponderosa pine.

            • Jan Steinman says:

              C’mon, Ann — tell us how you really feel! 🙂

              You seem to be channelling Guy Mcpherson. I don’t disagree with your prognosis, but I say, “What’s the point?”

              Live in the moment. Do what’s right in the moment. Care for others. Hold relationships dear. Don’t let despair keep you from doing these things.

              And yes, read stuff like this blog to best understand what you can do. But I don’t find wallowing in “doomer porn” useful. It is as much a fixation with the future as “hopium” is, as dreams of a prosperous green future for all is.

              I had a dentist once who had a poster on his ceiling. It showed a cowboy caught in the instant of getting thrown from a rodeo bronco. And it said, “Hope for the best, prepare for the worst, and take what comes.” That about sums up how I look at things.

              Gotta go tend to a sick goat. She’s a “downer,” but I managed to move her next to a feed bin and I bring her water every few hours. Just spent $24.95 on 10 kg of black oil sunflower seeds for her. I’m also giving her precious homemade yogurt to get her rumen up and running again.

              Or I could spend the day wallowing in despair. I think I’d rather tend to a sick goat.

            • Jarle B says:

              “Gotta go tend to a sick goat. She’s a “downer,” but I managed to move her next to a feed bin and I bring her water every few hours. Just spent $24.95 on 10 kg of black oil sunflower seeds for her. I’m also giving her precious homemade yogurt to get her rumen up and running again.”

              Good to hear, Jan!

            • HnH says:

              @Ann
              I do not share this full on extinction outlook. Even McPherson has the opinion that a collapse of industrialized society will stave off the scenario you have painted. That’s what he wrote the last time I visited his site.

              As far as I am concerned, I see climate prognoses as faulty because most of them expect a BAU until 2050 or longer. We *know* that this is not going to happen.

              Unfortunately I forgot the presenter of the model, but this group of analysts calculated that oil would hit an EROEI of 1 between 2030 and 2035. That’s where the buck stops, at the very, very latest. Given the interactions with our economies and our debt driven financing imperatives, the collapse will be likely to occur much sooner.

              So what does that mean for us and living conditions on earth? I expect temperatures to rise, and some parts of the earth to become less hospitable or even inhabitable. What we will not see is the scenario you described, simply because our output of CO2 and other pollutants will be reduced so drastically that it will not matter anymore.

              It will take at least a couple of decades before we will be able to attain the output of the 1750s. In the meantime, earth and climate will have recovered and reached a new equilibrium. Hopefully.

            • Wee Willy Winky says:

              What does Guy suggest we do about all of the spent fuel ponds that need sophisticated systems to be managed for many decades?

              It is all fine and dandy to say one doesn’t think this is an extermination situation. But let’s have the explanation.

              I would like to be a point guard in the NBA because I would like to. But I cannot explain how that would be possible.

              There is a huge amount of time spent on discussing post-collapse scenarios but it is all really just pie-in-the-sky stuff that does not pass any of the litmus tests.

              Some of the obvious ones are:

              – the nuclear ponds
              – the dead soil
              – the starving hordes coming after the permaculture farmers
              – the likelihood of criminal elements showing up with weapons and taking what they want
              – endemic diseases that are surely going to ravage the planet

              Nobody has put forward any concrete solutions to any of the above.

              From what I gather the sentiment is that most are shoving those bad thoughts into a dark corner of the mind and just hoping for the best outcome.

              Therefore I believe Ann holds the high ground in this argument.

              But it is a good thing that hope, even if it is only a thin ray, wins the day. Because once that light is extinguished, the darkness to come would be more than most could deal with.

            • InAlaska says:

              Hey Ann,
              A wise Buddhist once told me that there is no such thing as the future, it doesn’t exist. And the past is dead and gone. The only moments we ever really have are the now. Living right now is the only thing we have to do. So, like Jan said, live for now, hold your friendships dear, do what you want and what you think is right. There is a time to live and so live right, and when it comes time to die, you will die well. Many native American societies, in fact societies throughout the world (the Vikings, the Samurai, the Romans), did not mind dying as long as it was a “good death.” Take care.

          • I wouldn’t take Chernobyl anywhere close to a worst case. Chernobyl had something like 190 tons of fuel, and it is estimated over 90% is contained in the sarcophagus (temporary: a permanent one is needed). There is maybe 1 or 2 percent of the radiation from 190 tons in the Exclusion Zone.

            In comparison, around 200,000 tons without the industrial capacity to build even temporary sarcophagi would be left to burn for decades, leaving very few areas of the Earth with livable contamination. 1000 times the waste with 100 times the exposure, like 10,000 Chernobyls spread across the Earth. Prevailing winds and currents from current reactor and spent fuel locations leave few areas unexposed.

            • NGeorge says:

              For God`s sake please end this “Paul like” lamentation about the spent fuel ponds…..as long this are sources of heat people will use them for district heat or fuel for gen IV+ reactors.
              The waste of today can become the resource of tomorrow…
              I think that the real challenge of our today humanity is to find a way to reduce the population and resource waste with peaceful means and consensus. One child policy + simplified hospital care + reducing the complexity of our existence is the only solution that we have. Humanity can exist without personal vehicles, oversized houses, stock market and cheap flights…..Perhaps this will be the world that will stay after the financial hoax will be turned in pieces by the infinite growth paradigm.

            • NGeorge:
              “I think that the real challenge of our today humanity is to find a way to reduce the population and resource waste with peaceful means and consensus. ”

              How much time do you think there is? Gail’s projection shows collapse around 2016. Your proposal would take generations of cooperation to achieve.

            • garand555 says:

              I think that you’ll find that a vast majority of that 200,000 tons doesn’t go up in flames and irradiate the world. A lot of those rods have been sitting in those pools not because they need to be there, but because people say “NIMBY” when it comes to storing them. Think yucca mountain. On top of that, evidence of natural nuclear reactors shows that the waste tended to not travel that far. Look up Oklo for that.

    • Unfortunately, the way the world “works” is that there is competition among species. Humans compete with germs, for example, as well as the wild animals that we have mostly killed off. Population of a species either grows or contract (or follows sort of a wave form, as its population grows and contracts among other species).

      The way humans are different from most other species is that we learned to harness external energy for our use. This started with learning to control burning of biomass over 1,000,000 years ago. This allowed us many advantages over other species:
      (1) We could cook some of our food, making more nutrients available; making plants that might not be suitable as food, suitable; cutting back time needed for chewing, allowing more time for crafts, such as making clothes; and allowing the human brain to grow in size, as the size of teeth and digestive apparatus shrunk.
      (2) We could expand our territory, living in colder climates.
      (3) We could use fire in scaring away predators and in catching those we wanted to eat.

      Gradually we added other types of energy use. We learned to train dogs to help in hunting. We learned to make primitive sails to put on small boats to catch the wind. With the advent of agriculture, we learned to control both plant and animal species to our advantage, cross breeding to enhance desirable characteristics. The use of fossil fuels is simply an extension of the many types of energy we have used over the ages. We needed something that was available in greater quantity, with causing deforestation, and coal became the fuel of choice–starting very early, but ramping up in the 1800s.

      Unfortunately, we are up against limits of a finite world. We are not doing well on stopping population growth (although developed countries look at their own native born population, and make claims in that direction). Using less isn’t good enough, because population growth soon overwhelms savings. Also, we are dealing with limits on fossil fuels and minerals of many kinds. Using less still means we are running through our supply, but perhaps a little less quickly. It is not really enough to fix the problem.

      The way our economy is hooked together, we cannot “go backward”. We have a networked system. It can only grow, as more population is added. The existence of debt makes this especially the case. It is an illusion that we can better distribute resources, and come out with a stable economy. Without fossil fuels, there are nowhere near enough resources to go around. Before coal use become widespread, world population was less than 1 billion, and Malthus was writing about the limits the world was hitting then. Now population is something like 7.2 billion.

      We have to use fossil fuels to keep up our current system. Substitutability among fuels takes changes in infrastructure and is expensive. In many cases, we have no ways of doing it. For example, electric airplanes are not very feasible. Also, even the materials we are using as substitutes are limited–so at best all we do in using substitutes is put off our limits problems a bit.

  6. ladrillez says:

    Dear Gail:

    You said:

    “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.”

    My question is WHY?

    Debt is an artificial concept. Debt can be avoided printing more money (there is no real limit) or by default (many little defaults or a big one). That creates winners and losers, but avoids the collapse. Doesn´t it?

    Thanks for your articles

    • gwiss says:

      Debt is only an artificial concept if you are a borrower. It is most certainly not an artificial concept if you are a lender. Have you ever lent money to someone? Did that hard earned money you handed away feel artificial?

      Humans have a very difficult time with the concept of money, because we repeatedly try to put it into a box as something that we have artificially created, the presumption being that because we created it on a whim, we can also therefore change it on a whim. In many ways, money is like words. Words are an arbitrary human creation, but the things they stand for are not arbitrary human creations. Changing the word does not change the underlying reality, rather we just end up confusing each other. Similarly, printing money does not change the underlying reality — it just misleads us as to the underlying reality, such that we make bad choices that we would not make if we really understood the true state of supply and demand.

      Money is a physical commodity. Money that is not worth something of its own accord outside of its role as denominator leads us to a situation where we are unsure of what the denominator is because we have lost this external reference. How can you know what your numerator is referring to if you don’t know what the denominator is? Printing money represents the process of changing the denominator, which of course will have dramatic effects on the numerator that the money in your pocket denotes.

      • ladrillez says:

        Thank you for younr answer Gwiss

        The problem is that Central Banks seems to print money thinking that money worths something. And they can continue going futher. We all knw that there is a limit, but nobody knows where this limit is. Doesn´t it?

      • Calista says:

        If your debt is in the form of student loans it does not feel intangible. Not when the government can garnish your wages, keep your taxes from your tax return, or go after your children or estate after your death.

        I found David Graeber’s (sp?) exploration of the meaning of debt much more useful. He looks at the moral underpinnings of debt and the origins of it as an “obligation” in other words a formalization of the small community relationships. A pleasurable read or listen as it is available online for a listen for free if you wish.

    • garand555 says:

      Running to the printing presses to service debt has historically had consequences. Most people don’t analyze the situation enough to really understand what is going on, but they notice the effect of more dollars chasing the same amount of goods. Prices go up in nominal terms. This leads to the necessity of either allowing deflation to force defaults or more money being printed. Very often, more printing will occur, which raises nominal prices even more. Eventually, people lose confidence in the currency, and they decide they’re going to spend their money before prices raise even more. This increases the money velocity, which raises prices and empties shelves. This is a loss in confidence in the currency. It is hyperinflation. While the limits to printing money are very fuzzy, they do indeed exist, and using money printing as a method of dealing with debt is, at best, a method of pushing the collapse back several years, but that collapse will come when the money becomes worthless.

      • B9K9 says:

        Printing money only has consequences if users have alternatives. So, put yourself in the position of bankers who needed to design & deploy a monetary system that both prevents/eliminates competition and suppresses inflationary effects. What would you do? Would you:

        a. make your currency the only available choice for critical resource inputs?
        b. create a tight inter-payment system where only your and allied currencies could be exchanged?
        c. sequester reserves in reliable public and black pools to limit inflation to chosen markets?
        d. fund and finance a military machine that so dwarfed all others combined in order to enforce a & b?

        Do you see how easy this is? Do you see it’s the very world each of us live in, and has been this way since WWII? There were some remarks upstream about denial; perhaps the greatest denial is coming to accept that we live in a post constitutional, post republican society.

        The inability to understand – or refusal to accept – that markets no longer exist, that economic activity is directed and controlled to achieve certain targeted goals, creates tremendous resistance to rationale thought. It may even lead one to conclude that real (ie finite resources) deflationary trends could overwhelm economic policy decisions.

        I’m sorry, but even limited war-time measures would quickly resolve such a minor issue. We are nowhere close to having real, honest to doG rationing, limits on assembly/free-speech, price controls, travel restrictions, universal conscription (for important “national energy programs”), etc. But when these programs are ultimately implemented (oh, you think they don’t know what Gail is writing about?), then all the academic explanations she so patiently lays out will become become just so much ether in wind.

        • garand555 says:

          Such policies lead to the enrichment of a select few at the expense of the middle class. The average person may not fully understand the dynamics, but they’ll eventually understand that having a boot on their throat and being poor so that some schmuck can fly around the world in a private jet is no good for them. With an oil shortage, there will be hard choices to make. Security, or food? If security is picked, it will be against a bunch of people who are hungry and were used to just being able to go to McDonalds or the grocery store to get food. That’s a whole different ballgame when it comes to motivation from what we are used to. The “elites” really aren’t all that smart, they just have control over resources that aren’t going to be there in the future. This is the stuff that The Reign of Terror is made of.

          • B9K9 says:

            I see that your handle is named after the single most important class of tools that allowed general emancipation. So you’ll have no difficulty recognizing the time period spanning the English, US & French revolutions (1650-1800) wasn’t a coincidence. Rather, it was the single point in time where commoners were able to both possess & bear military grade armaments equal to government forces.

            For 10, 20, 50 thousand years before that, the average man had precisely -0- chance against select, well fed, trained & directed force. The gun is what made men equal, but laws eventually got the upper hand by limiting the most powerful to arbitrary legal monopolies on violence.

            The People will take the boot and be happy for it, as long as they are fed and have their diversions. Don’t mistake a unique point in time as a basis for rationale opposition.

            • garand555 says:

              Without oil, the people will be hungry and the government won’t be able to bring its slick weapons to bear. Once the government starts to collapse, you’ll find that my Garand is military grade. The logistics for running F22s will be breaking down. On top of that, even the mighty US military has had a hard time winning against guerrilla forces. I agree that so long as the people are fed and provided with entertainment, they’ll do nothing and sit there in a slumber, but those conditions are not permanent.

              And it wasn’t the gun that made men equal. With or without an armed populace, you can have tyranny. If you go back to the period immediately before firearms were introduced into Europe for warfare, the Brits did very well with their longbows. The longbowmen were somewhere between the equivalent of machine gunners, riflemen and artillery men. Brittan had passed laws that required all men between certain ages to practice with their bows on every Sunday, implying that they were all armed with effective military grade weapons. At 10m-20m, an English longbow with a bodkin point would puncture the armor of the time. This requirement was so important that the monarchy passed laws banning certain leisure activities on Sundays, because it cut into practice time. The British people were logistically capable of overthrowing their government during this period, but they didn’t. They were fed and content to be British. There have been various cultures that had a citizen-militia model for defense throughout the ages.

            • garand555
              “People will take the boot” on their necks and interpret it as massage.

              When the people start going hungry, then your scenario (social collapse) will happen.

              But before that you will see financial, commerce, education, power grid and infrastructures collapses.

    • Long-term debt is making promises about “paying back in the future.” As such, it is not an artificial concept. If long-term debt is to be paid back with interest, it requires having more available in the future than is available today. In effect, then, long-term debt requires economic growth.

      Unfortunately, in a finite world, economic growth cannot go on forever. In fact, it has been slowing significantly. When this happens, our ability to pay back debt with interest becomes problematic. Governments can attempt to fix this with Quantitative Easing, which tends to lower interest rates.

      The danger now is that governments will stop printing, because they think QE is no longer needed, as oil prices drop. In fact, the dropping oil prices are a sign of not enough QE.

  7. theedrich says:

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

    In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse ….  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.

    What Gail is saying is based primarily on the closing jaws of economic and financial conditions.  It does not even include the many other problems that mankind’s “footprint” has caused.  When these other factors are stirred into the mix, it amazes one that we have been able to follow Wile E. Coyote as far off of the cliff as we have.  How long until we are all “Cyprusized”? — to say the least.

    I move that this article of Gail’s be headlined on the first page of the New York Times, and that she replace Krugman on its Op-Ed pages. Alas, the NYT has other priorities.

    • gerryhiles says:

      In my view you are correct about Gail, including that she will never make the NYT.

    • Thanks for the compliment.

      I am doubtful that even having a popular column in a major newspaper would be enough to change people’s way of thinking. We live in a world where everything we read revolves around the belief that we are in charge. What we do can make a difference. If in fact Nature is in charge and we are running headlong toward a profound change that we have little control over, then the situation is very different. Perhaps I should be telling people to attend the church or synagog or mosque or other religious group of their choice. Or if you are not religious, use your money to have a good time today. Changing investment strategy or buying an electric car is not likely to fix our problems. They are much more severe and immediate than most people can comprehend. Producing food locally may have some limited possibility, but it is hard to see that this will be a solution for 7.2 billion people.

      • garand555 says:

        “…Producing food locally may have some limited possibility, but it is hard to see that this will be a solution for 7.2 billion people.”

        It won’t be a solution for 7.2 billion people, but it will be one of the few solutions for those who make it through the bottleneck.

      • Jan Steinman says:

        “buying an electric car is not likely to fix our problems”

        In general, I agree, but it might help fix one’s problems, no?

        In many ways, it’s borrowing from the future as surely as debt is. And yet, if done as part of a re-localization effort, an electric vehicle (along with local electric power) could help create a “local bubble” of sufficiency.

        I think it’s important to divorce what could be a reasonable strategy for an individual, family, or community from what will work for 7,200,000,000 people — we all know there are no solutions in the latter case!

        David Holmgren notes (in Permaculture Principles) that one can justify using a non-renewable resource if it is used to provide a capital basis for sustainability. Earthworks is often cited: use diesel excavators to create ponds and a water management system that will be useful for as long as they are maintained with human labour.

        It seems to me an electric vehicle could be similar. I agree that going down to your dealer and buying a new one is probably not the best approach, but as a businessperson, I see converting a utility vehicle to electricity as using current non-renewable resources in order to enable sustainable food production in the future.

        • Don Stewart says:

          Dear Gail and Jan
          Rather than talk about ‘us’ saving 7.2 billion, I prefer to estimate the fraction of the 7.2 billion who will actually do what they need to do to survive. It’s just my guess, but I would say something south of a billion.

          Don Stewart

          • Jan Steinman says:

            “Rather than talk about ‘us’ saving 7.2 billion, I prefer to estimate the fraction of the 7.2 billion who will actually do what they need to do to survive.”

            I don’t disagree with you at all. But it does seem that a lot of things that might be practical for individuals or small groups of people get dismissed because they won’t scale to 7,200,000,000.

            That sort of thinking is what got us where we are! 7.2 billion, all dependent on one thing, all in lock-step. No matter the colour of your skin, the language you speak, what part of the Earth you live on, or what religion you profess, we all pretty much worship at the Church of Growth through fossil sunlight. It’s time for some real diversity.

            The only one who can help us now is Xavier Onasis.

          • garand555 says:

            And there are a couple of ironies in there.
            1) The places where people are dirt poor and they use more traditional agricultural practices than our industrial system will probably fare the best.

            2) Even if the non-industrial carrying capacity for the planet is 3 billion, a lot of people who could have otherwise survived will not, because they lack the requisite skills to survive. Too many people have NO ideas about where their food comes from other than the supermarket or a restaurant. They don’t even consider the idea that the corn in their food had to be grown somewhere. If the supply chain breaks down, a lot of these people are going to be in big trouble, even if the land to grow their own food was available to them. I’ve literally seen the argument “But hunting is cruel! Why don’t you just buy your meat at the grocery store instead of killing an animal!” I think that being so disconnected from the natural world that we are part of is a travesty.

            • Don Stewart says:

              Dear garand555
              I suggest Irony #3 is that most Americans might consider rioting as a solution to the problems.

              Don Stewart

            • garand555 says:

              Yes, just look at what happened when the EBT system had a glitch that put it offline for several hours in a few states. Now, imagine what would happen if 50 million EBT cards suddenly stopped working permanently, or simply did not provide very much in the event that food costs tripled and benefits remained the same. And consider the soccer moms who show up to the store and find the shelves empty should price controls, rationing and general supply chain breakages occur. Most people refuse to believe that it can happen here, so they will not be mentally prepared for such a break, and quite a few will become irrational. Very few of us have ever known true scarcity.

            • Don Stewart says:

              Dear garand555

              One more thought for you. People who are dirt poor farmers don’t necessarily know much about ecological farming or nutrition. David Kennedy, who has worked for decades in the South with very poor people, recounts that he was standing in someone’s front yard under a moringa tree trying to explain why they should eat leafy greens. They complained that they didn’t have the money to buy them. (Moringa leaves are among the most nutritious foods on the planet.)

              Here is George Mateljan’s advice to holiday eaters in the West: pay attention to your immune system. A weak immune system opens one up to all sorts of infections and chronic disease. So people not only have to know something about growing food, they have to be knowledgable about what mixes of food they really need to eat. Western Science has done some good things.

              Don Stewart

              That’s why this is the time of year it is particularly important to include immune-boosting foods as part of your Healthiest Way of Eating. Included among these foods are those fish rich in omega-3 fatty acids (such as wild salmon and sardines), which help reduce inflammation, increasing airflow and protecting lungs from colds and respiratory infections. Fruits and vegetables rich in vitamins C, E and pro-vitamin A (such as spinach), and vegetables like onions, provide antibiotic protection and serve as anti-inflammatory agents. The selenium and zinc found in nuts and seeds are also supportive of immune function by assisting in the production and function of white blood cells that help ward off illnesses and infections.

              The flip side to eating healthy foods to build a healthy immune system is avoiding foods that detract from immune function. At the top of this list are sugar and refined grains. Did you know that based on USDA estimates, the average American consumes 12 teaspoons of sugar a day, which equates to about TWO TONS of sugar during a lifetime! And one 12 oz. can of soda contains 8 tablespoons of sugar. Refined grains, while not directly delivering sugar, provide few nutrients for the calories they contain and are quickly converted into sugars in the body. Refined grains also contain little of the natural fiber of the whole grain from which they came; fiber helps remove toxins from the body that would otherwise need attention from your immune system.

            • Jan Steinman says:

              “The places where people are dirt poor and they use more traditional agricultural practices than our industrial system will probably fare the best.”

              Matthew 5:5 Blessed are the meek, for they will inherit the earth.

              So that’s what Jesus had in mind! :-0

            • garand555
              I found this statement very telling:

              The first European settlers to North America mostly died of starvation, with (according to some historians) a side order of stupidity. They picked unnecessary fights with Native Americans, sought gold and silver rather than planting food or fishing, and drank foul water.
              As Charles Mann points out in his fascinating book 1493: Uncovering the New World Columbus Created, one-third of the first three waves of colonists were gentlemen, meaning their status was defined by not having to perform manual labor. During the winter of 1609–10, aka “the starving time,” almost everyone died; those who survived engaged in cannibalism.

              http://www.slate.com/articles/health_and_science/science_of_longevity/2013/09/life_expectancy_history_public_health_and_medical_advances_that_lead_to.html

            • InAlaska says:

              Jan,
              Do you really believe in that “lamb of God” stuff? Meek and Mild. Turn the other cheek. When have the meek ever inherited anything but the sword?

  8. gerryhiles says:

    As usual I agree with you Gail, but you seem to have left out the fact that low oil prices are part of the economic sanctions against Russia.

    Sure all sanctions will probably back fire, but it should not be forgotten that the belief in Washington is that anything that harms Russia must be good, even if it harms frackers temporarily.

    It is the ideology of the Cold War, when the bet was on that the US could afford an arms race longer than the USSR (which it could), only this time around there have been major game changes, symbolized by Putin.

    Only the US has squandered trillions on a continued arms race (against who?) whilst Russia has won the “energy race” without doing much at all, except be a reliable supplier of oil and gas.

    Thanks to US sanctions there is now a deal with China and thanks to US/EU sanctions South Stream has now been cancelled, in favour of the much cheaper Turk Stream, with the icing on the cake being Putin telling Erdogan, “Back off from Syria, or no deal.”

    Putin has been playing chess and has made a mockery of Ziggy-inspired US foreign policy, if you know what I mean, as you should if you are reasonably informed.

    Where it could all go horribly wrong is if the dying Empire of Chaos takes the Samsn Option of nuclear war to take all of us down.

    • Edward Park says:

      It’s not sanctions that have reduced the oil price. It is unaffordability. I ride a bicycle thousands of miles a year, and the absence of autos on the roads is massive. Also, take a look at closed gasoline stations, everywhere. I have a friend in the bottom of the oil barrel business, and his customers are dying out. They cannot make money on the fuel sales, and customers don’t buy the newspapers, soda, beer, etc in the amounts seen 15 years ago. Just look at the per capita income decline as calculated by Shadow Government Stats using the 1990 deflator. Unbelievable. And there is nothing to stop this decline short of a debt collapse.

    • To keep economic growth “going,” we badly need the global economy working together to produce goods and services. Sanctions against Russia or Iran or North Korea or whoever are simply counterproductive. The fact that we did something voluntarily doesn’t make it any less counterproductive.

      On the other hand, economic growth cannot continue very long. As this becomes apparent, it will become obvious that there is not enough to go around. If there is not enough to go around, the classic answer is to fight with neighbors for what is available. The sanctions against Russia may be an early part of this process.

      • InAlaska says:

        Gail, you are right. In a competitive economic system, in order for there to be winners, there have to be losers. Its a zero sum game. But in a networked economy bumping up against hard limits, working cooperatively may be the best answer for extending that system.

        • And by co-operating, do you mean fixing the supply and price of oil, as a global cartel?

          • Jan Steinman says:

            “And by co-operating, do you mean fixing the supply and price of oil…”

            Sure, using the Rimini Protocol.

            • This is what Wikipedia says about the Rimini Protocol:

              The Rimini Protocol (also called Uppsala Protocol) is a proposal made by the geologist Colin Campbell in 2003. It is intended to stabilise oil prices and minimize the effects of peak oil.

              To achieve this, producing countries would not produce oil in excess of their present national depletion rate: i.e., roughly speaking, the oil burnt, expended or exported must equal the oil produced or imported. Furthermore, it would be required that importing nations stabilize their imports at existing levels. This would have the effect of keeping world prices in reasonable relationship to actual production costs and let Third World countries afford their oil imports.

              The intent seems to be to (1) Stabilize oil production for producers and (2) Stabilize oil imports or importer, with the hope of “keeping world prices in reasonable relationship to actual production costs and let Third World countries afford their oil imports”.

              Somehow, this doesn’t all add up to me. In a world of diminishing returns, “stabilizing oil production,” means that the cost of production can be expected to rise year after year. Thus, oil producers will need a higher and higher price, to maintain their production. Oil producers will need a larger and larger share of the oil produced as well, as input for their production. So there will be less oil to export.

              Stabilizing oil imports, in a period of ever-higher prices and ever falling supply hardly seems helpful.

              And of course, now oil prices are low. The issue is low prices rather than high.

              The Rimini Protocol protocol, if adopted 100 years ago, might have slowed growth in oil usage. It doesn’t seem very helpful now to me.

          • InAlaska says:

            Yes, I believe that fixing the price of oil would be good cooperation. Just like fixing the price of gold.

        • What we are doing now in pushing back globalization. That isn’t working co-operatively.

    • I suspect a lot of that has to do with China. Between credit issues, and the recent discoveries that vast amounts of commodities pledged as collateral for loans either did not exist or had multiple pledges against them, there is a lot less demand for pieces of paper claiming to represent a physical commodity.

      It will take a while for the dust to clear, and when it does, we’ll see if there is any growth left to have, or if it is collapse time.

    • The drop in oil prices is simply part of a world situation where debt-growth is slowing as income growth is slowing. Citizens (including governments and businesses) are becoming less able to afford goods made with commodities of all types. This is felt as dropping commodity prices.

      I felt like I had to mostly leave this subject out of this post, if I was to focus it on the topic a lot of people are worried about today, namely falling oil prices. But I agree, the problems are probably as bad on a lot of other commodities.

Comments are closed.