The price of oil is down. How should we expect the economy to perform in 2015 and 2016?
Newspapers in the United States seem to emphasize the positive aspects of the drop in prices. I have written Ten Reasons Why High Oil Prices are a Problem. If our only problem were high oil prices, then low oil prices would seem to be a solution. Unfortunately, the problem we are encountering now is extremely low prices. If prices continue at this low level, or go even lower, we are in deep trouble with respect to future oil extraction.
It seems to me that the situation is much more worrisome than most people would expect. Even if there are some temporary good effects, they will be more than offset by bad effects, some of which could be very bad indeed. We may be reaching limits of a finite world.
The Nature of Our Problem with Oil Prices
The low oil prices we are seeing are a symptom of serious problems within the economy–what I have called “increased inefficiency” (really diminishing returns) leading to low wages. See my post How increased inefficiency explains falling oil prices. While wages have been stagnating, the cost of oil extraction has been increasing by about ten percent a year, described in my post Beginning of the End? Oil Companies Cut Back on Spending.
Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:
- The amount consumers can afford for oil
- The cost of oil, if oil price matches the cost of production
The fact that oil prices were not rising enough to support the higher extraction costs was already a problem back in February 2014, at the time the article Beginning of the End? Oil Companies Cut Back on Spending was written. (The drop in oil prices did not start until June 2014.)
Two different debt-related initiatives have helped cover up the growing mismatch between the cost of extraction and the amount consumers could afford:
- Quantitative Easing (QE) in a number of countries. This creates artificially low interest rates and thus encourages borrowing for speculative activities.
- Growth in Chinese spending on infrastructure. This program was funded by debt.
Both of these programs have been scaled-back significantly since June 2014, with US QE ending its taper in October 2014, and Chinese debt programs undergoing greater controls since early 2014. Chinese new home prices have been dropping since May 2014.
Figure 1. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.
The effect of scaling back both of these programs in the same timeframe has been like a driver taking his foot off of the gasoline pedal. The already slowing world economy slowed further, bringing down oil prices. The prices of many other commodities, such as coal and iron ore, are down as well. Instead of oil prices staying up near the cost of extraction, they have fallen closer to the level consumers can afford. Needless to say, this is not good if the economy really needs the use of oil and other commodities.
It is not clear that either the US QE program or the Chinese program of infrastructure building can be restarted. Both programs were reaching the limits of their usefulness. At some point, additional funds begin going into investments with little return–buildings that would never be occupied or shale operations that would never be profitable. Or investments in Emerging Markets that cannot be profitable without higher commodity prices than are available today.
First Layer of Bad Effects
- Increased debt defaults. Increased debt defaults of many kinds can be expected, including (a) Businesses involved with oil extraction suffering from low prices (b) Laid off oil workers not able to pay their mortgages, (c) Debt repayable in US dollars from emerging markets, including Russia, Brazil, and South Africa, because with their currencies now very low relative to the US dollar, debt is difficult to repay (d) Chinese debt related to overbuilding there, and (e) Debt of failing economies, such as Greece and Venezuela.
- Rising interest rates. With defaults rising, interest rates can be expected to rise, so that those making the loans will be compensated for the rising risk of default. In fact, this is already happening with junk-rated oil loans. Furthermore, it is possible that the US Federal Reserve will raise target interest rates in 2015. This possibility has been mentioned for several months, as part of normalizing interest rates.
- Rising unemployment. We know that nearly all of the increased employment since 2008 in the US took place in states with shale oil and gas production. As these programs are cut back, US employment is likely to fall. The UK and Norway are likely to experience drops in employment related to oil production, as their oil programs are cut. Countries of South America and Africa dependent on commodity exports are likely to see their employment cut back as well.
- Increased recession. The combination of rising interest rates and rising unemployment will almost certainly lead to recession. At first, some of the effects may be offset by the impact of lower oil prices, but eventually recessionary effects will predominate. Eventually, broken supply chains may become a problem, if companies with poor credit ratings cannot get financing they need at reasonable rates.
- Decreased oil supply, starting perhaps in late 2015. The timing is not certain. Businesses are likely to continue extraction where wells are already in operation, since most costs have already been paid. Also, some businesses have purchased price protection in the derivative market. They will likely continue drilling.
- Disruptions in oil exporting countries, such as Venezuela, Russia, and Nigeria. Oil exporters generally get the majority of their government revenue from taxes on oil. If oil prices remain low, oil-related tax revenue will drop greatly, necessitating cutbacks in food subsidies and other programs. Some countries may experience overthrows of existing governments and a sharp drop in oil exports. Central governments may even disband, as happened with the Soviet Union in 1991.
- Defaults on derivatives, because of sharp and long-lasting changes in oil prices, interest rates, and currency relativities. Securitized debt may also be at risk of default.
- Continued low oil prices, except for brief spikes, because of high interest rates, recession, and low “demand” (really affordability) for oil.
- Drop in stock market prices. Governments have been able to “pump up” stock market prices with their QE programs since 2008. At some point, though, higher interest rates may draw investors away from the stock market. Stock prices may also decline reflecting the poor prospects of the economy, with rising unemployment and fewer goods being manufactured.
- Drop in market value of bonds. When interest rates rise, the market value of existing bonds falls. Bonds are also likely to experience higher default rates. The combined effect is likely to lead to a drop in the equity of financial institutions. At least at first, this effect is likely to occur mostly outside the US, because the “flight to security” will tend to raise the level of the US dollar and lower US interest rates.
- Changes in international associations. Already, there is discussion of Greece dropping out of the Eurozone. Associations such as the European Union and the International Monetary Fund will find it increasingly difficult to handle problems, as their rich countries become poorer, and as loan defaults become increasing problems.
In total, eventually we are likely to experience a much worse situation than we did in the 2007-2009 period, although this may not be evident at first. It will be only over a period of time, after some of the initial “dominoes fall” that we will see what is really happening. Initially, economies of oil importing countries may appear to be doing fairly well, thanks to low oil prices. It will be later that the adverse impacts begin to take over, and eventually dominate.
Major Concerns
Inability to restart oil supply, even if prices should temporarily rise. The production of oil from US shale formations has been enabled by very low interest rates. If there is a major round of debt defaults by the shale industry, interest rates are unlikely to fall back to previously low levels. Because of the higher interest rates, oil prices will have to rise to an even a higher price than required in the past–in other words, to more than $100 barrel, say $125 to $140 barrel. There will also be a lag in restarting production, meaning that high prices will need to be maintained for some time. Bringing oil prices to a high level for a long time seems impossible without crashing the economies of oil importers. See my post, Ten Reasons Why High Oil Prices are a Problem.
Derivatives and Securitized Debt Defaults. The last time we had problems with these types of financial instruments was 2008. Governments around the world made huge payments to banks and other financial institutions, in order to bail them out of their difficulties. The financial services firm Lehman Brothers was allowed to go bankrupt.
Governments have declared that if this happens again, they will do things differently. Instead of bailing institutions out, they will make changes that will make these events less likely to happen. They will also make changes in how shortfalls are funded. In many cases, the result will be a bail-in, where depositors share in the losses by “haircuts” to their deposits.
Unfortunately, from what I can see, the changes governments have made are basically too little, too late. The new sharing of losses will have as bad, or worse, impacts on the economy than the previous government bailouts of banks. Regulators do not seem to understand that models used in pricing derivatives and securitized debt are not designed for a finite world. The models appear to work reasonably well when the economy is distant from limits. Once the economy gets close to limits, many more adverse events occur than the models would have predicted, potentially causing huge problems for the system.1
What we are likely to be encountering now is a combination of defaults of many kinds simultaneously–derivatives, securitized debt, and “ordinary” debt. Many of these risks will be shared among institutions, so that banking problems will be widespread. The sizes of the losses are likely to be very large. Businesses may find that funds intended for payroll or needed to pay suppliers are subject to haircuts. How can they operate in such a situation?
It is even possible that accounts under deposit insurance limits will be subject to haircuts. While deposit insurance is available in theory, the amount held in reserve is not very great. It could easily be exhausted by a few large claims (the scenario in Iceland a few years ago). If governments choose not to make up for shortfalls in funding of the insurance programs, the shortfalls could end up with depositors.
Peak Oil. There seems to be a distinct possibility that we will be reaching the peak in world oil supply very soon–2014 or 2015, or even 2016. The way we reach this peak though, is different from what most people imagined: low oil prices, rather than high oil prices. Low oil prices are brought about by low wages and the inability to add sufficient new debt to offset the low wages. Because the issue is one of affordability, nearly all commodities are likely to be affected, including fossil fuels other than oil. In some sense, the issue is that a financial crash is bringing down the financial system, and is bringing commodities of all kinds with it.
Figure 2 shows an estimate of future energy production of various types. The steep downslope is likely because of the financial problems we are headed into.2
Figure 2. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings. Renewables in this chart includes hydroelectric, biofuels, and material such as dung gathered for fuel, in addition to renewables such as wind and solar. (It is based on an IEA inclusive definition.)
A major point of this chart is that all fuels are likely to decline simultaneously, because the cause is financial. For example, how does an oil company or a coal company continue to operate, if it cannot pay its employees and suppliers because of bank-related problems?
Our Long-Term Debt Problem. Long-term debt is an important part of our current system because (a) it enables buyers to afford products, and (b) it helps keep commodity prices high enough to encourage extraction. Unfortunately, long-term debt seems to require economic growth, so that we can repay debt with interest.
Figure 3. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.
Economists conjecture that economic growth can continue, even if the extraction of fossil fuels and other commodities declines (as in Figure 2). But how likely is this in practice? Without fossil fuels, we can exchange baby-sitting services and we can give each other back rubs, but how much can we really do to grow the economy?
Almost any economic activity we can think of requires the use of petroleum or electricity and the use of commodities such as iron and copper. A more realistic view would seem to be that without the materials we generally use, our economy is likely to shrink. With this shrinkage, long-term debt will become increasingly impossible. This is one of the big problems we are encountering.
Our Physics Problem. Politicians and businesses of all types would like to advance the idea that our economy will continue forever; the politicians and businesses of every kind are in charge. Everything will turn out well.
Unfortunately, history is littered with examples of civilizations that hit diminishing returns, and then collapsed. Research indicates that when the early economies underwent collapse, the shape of the decline wasn’t straight down–declines tended to take a period of years. Not everyone died, either.
Figure 4. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov in Secular Cycles.
Physics gives us a reason as to why such a pattern is to be expected. Physics tells us that civilizations are dissipative structures. The world we live in is an open system, receiving energy from the sun. Examples of other dissipative structures include galaxy systems, the solar system, the lives of plants and animals, and hurricanes. They are born, grow, and eventually stop dissipating energy and die. New dissipative structures often arise, if sufficient energy sources are available to dissipate. Thus, there may be new economies in the future.
We would like to think that we can stop this process, but it is not clear that we can. Perhaps economies are expected to reach limits and eventually collapse. It is only if economies can add large amounts of inexpensive energy resources (for example, by discovering how to make use of fossil fuels, or by discovering a less-settled area of the world, or even by adding China to the World Trade Organization in 2001) that this scenario can be put off.
What Can We Do?
Renewable energy has recently been advertised as the solution to nearly all of our problems. If my analysis of our problems is correct, renewable energy is not a solution to our problems. I mentioned earlier that adding China to the World Trade Organization in 2001 temporarily helped solve world energy problems, with its ramp up of coal production after joining (note bulge in coal consumption after 2001 in Figure 5). In comparison, the impact of non-hydro renewables has been barely noticeable in the whole picture.
Figure 5. World energy consumption by source, based on data of BP Statistical Review of World Energy 2014. Renewables are narrowly defined, excluding hydro-electric, liquid biofuels, and materials gathered by the user, such as branches and dung.
Guaranteed prices for renewable energy are likely to be an increasing problem, as the cost of fossil fuel energy falls, and as buyers become increasingly unable to afford high energy prices. Issues with banks, making it difficult to pay employees and suppliers, are likely to be a problem whether an energy company uses renewable energy sources or not.
The only renewable energy sources that may be helpful in the long term are ones that do not require buying goods from a distance, and thus do not require the use of banks. Trees growing in a local forest might be an example of such renewable energy.
Another solution to the problems we are reaching would seem to be figuring out a new financial system. Unfortunately, debt–and in fact growing debt–seems to be essential to our current system. We can’t extract fossil fuels without a debt-based system, in part because debt allows profits to be moved forward, and thus lightens the burden of paying for products made with a fossil-fuel based system. If a financial system depends on the accumulated profits of a system without fossil fuels, it can expand only very slowly. See my post Why Malthus Got His Forecast Wrong. Local currency systems have also been suggested, but they don’t fix the problem of, say, electricity companies not being able to pay their suppliers at a distance.
Adding more debt, or taking steps to hold interest rates even lower, is probably the closest we can come to a reasonable way of temporarily putting off financial collapse. It is not clear where more debt can be added, though. The reason current debt programs are being discontinued is because, after a certain level of expansion, they primarily seem to create stock market bubbles and encourage investments that can never pay back adequate returns.
One possible solution is that a small number of people with survivalist skills will make it through the bottleneck, in order to start civilization over again. Some of these individuals may be small-scale farmers. The availability of cheap, easy to use, local energy is likely to be a limiting factor on population size, however. World population was one billion or less before the widespread use of fossil fuels.
We don’t have much time to fix our problems. In the timeframe we are looking at, the only other solution would seem to be a religious one. I don’t know exactly what it would be; I am not a believer in The Rapture. There is great order underlying our current system. If the universe was formed in a big bang, there was no doubt a plan behind it. We don’t know exactly what the plan for the future is. Perhaps what we are encountering is some sort of change or transformation that is in the best interests of mankind and the planet. More reading of religious scriptures might be in order. We truly live in interesting times!
Notes:
[1] Derivatives and Securitized Debt are often priced using the Black-Scholes Pricing Model. It assumes a normal distribution and statistical independence of adverse results–something that is definitely not the case as we reach limits. See my 2008 post that correctly forecast the 2008 financial crash.
[2] Points are plotted at five-year intervals, so the chart is a bit more pointed than it would have been if I had plotted individual years. The upper limit at 2015 is an approximation–it could be a year or so different.
Don, I continue here
Don’t forget you live in a rural fertile part of the US, not in HK, Rome or MENA sands. I do live also in a place wich could be though of as not in ecological overshoot, and sadly that is why we are both somewhat positive about the future while others are not. But as things really are from a social and systemic point of view, it’s difficult to believe that even in Córdoba many people will survive.
On one side, while the country exists we are expected to sustain poorer provinces with our crop exports via national export taxes, so we can’t really lower production or we’ll be punished one way or another. It’s not easy to get a solution for this. Even planting some trees in the fields would reduce exports, so settling more people there and going massively organic is really difficult. And there is also land ownership. There are very few small plots, and the mean plot is 100 ha. This is worth 1 Musd, which is a lot of money here (mean price for a house in the city is less than 100 Kusd). So, very few people can afford to move; most would need to team up, sell their houses, go living in the field and endure one or two annual partial baths of roundup from the planes spreading surrounding plots, which are not always accurate performing the task. And learn a lot of things they’ve never dreamed to learn and do. And be waiting for the zombies.
So it’s difficult to see how transition would work, excepting some rural zones in the hills where there is not much monoculture and surely not roundup, there is wood, people are culturally less modern and not so much densely settled, and without motorized wheels almost nobody will reach the place. In fact, you can be pretty sure nobody will do it if you set some guards in a couple of key points. Of course provincial gov understands all the situation, surely better than me, so they are trying to help this people but not much the rest.
In case lights went off tomorrow, I wouldn’t bet more than 3% of Argentineans would be alive next january. Here, letting aside Buenos Aires megalopolis systemic constraints are far more important than natural constraints and it is to expect most of the fertile land will remain comparatively uninhabited, as it is today. You would still have a family each 100 ha. but without a tractor nor a market. At most, they can receive some relatives coming from town and accomodate them in a tent. It’s not impossible that in small towns in the plain, where some grains are stocked (but not always), some people will survive also (if they have wood enough for cooking, which is usually not the case). And it’s hard to imagine how a slow collapse would change this, and what “slow collapse” could mean. At least, that’s how I see it at the present moment.
“There are very few small plots”
Do you have suburbs there, or is it very high density and then large farms only? How temperate is the climate? Supposedly, people can survive and even make a living with 1000 square feet per person in gardens; you don’t need several hectares. Of course, more land does make it easier.
Also, if you are worried about collapse and dealing with starving mobs, the requirement for several families to pool together and buy a 100 hectare farm is actually an advantage in some ways. It is just not so simple to find several people that you can live and work and cooperate with on a joint venture, to the extent of living on a rural farm.
Very high density and then large farms, small suburbs. I am not an expert on gardening; we have some 750 mm of yearly rain and climate is temperate-to-hot, yearly max 40 and min -2ºC, or so. Perhaps an hectare could be enough for a family, I really dont’ know. Water is pumped in almost all urban environments, that’s a big problem, almost everybody should move and underground water is scarce in many places. And as you say, it’s not easy to create joint ventures or communities.
Dear Christian
My grandchildren live in a city where, if the lights went out very suddenly, perhaps the same 3 percent would be alive a year from now. The homesteader we will be visiting has made a deliberate choice, which strikes her neighbors as very odd. While she thinks she is living ‘in relative luxury’, many who visit her ask ‘how can you live like this?’
Here is the distinction I make in terms of the young people. Do you want to show them somebody who is doing something and being pretty successful at it? Or do you want to fill them full of gloom and doom and hopelessness and the accompanying depression? That’s one of the reasons I make room for the Organic Grower’s School each year and the Carolina Farm Stewardship Association meeting…lots of people actually doing things. Dirt under the fingernails people. And it’s why I worked on the small farm for many years after I ‘retired’.
I have recently been working with the homesteader on a joint effort to promote gardening. She bemoans the difficulty of getting people to eat healthy food. She has some foodie friends from a big city nearby who have ‘a place in the country’ near her. She is twisting their arms to get them into our project. As she says, ‘one person or couple or family at a time’. Will our effort convince Obama not to start a nuclear war? ….But it is what we CAN do.
Don Stewart
Don, you do the right things, of course. Don’t worry about nuclear war, it’s just a horror tale intended to keep people controlled; I know about this.
Bakken oil wells and the Red Queen’s revenge: http://www.reuters.com/article/2015/01/12/us-shale-output-northdakota-kemp-idUSKBN0KL1V920150112
Reuters is pretty mainstream to be discussing the Red Queen. It seems more and more ideas that were quite fringe are being discussed more publicly.
Price is still falling, exponentially or so. Hard to hide this will have consequences
Thanks! It is generally a good article. It seems like the statement at the end requires a leap of faith, though:
(Love/ Hate in Nature and Aquinas, Oxytocin)
I saw tarantula wasps on the TV today and they got me thinking. The wasp will attack and overpower the much bigger spider. Why? It does not kill it but paralyses it and drags it off. It plants an egg in it and buries it. The baby wasp will eat the spider alive, saving the vital organs until last, to keep the meal alive as long as possible. The wasp then emergies as an adult.
http://en.wikipedia.org/wiki/Tarantula_hawk
There we have an act which is loving in regard to the baby wasp and horrific toward the spider. Love and hate are naturally two sides of the same coin. Love and hate are two aspects of the natural preference of the species toward its own over the other. Hate is the natural consequence of love, which is preference.
To quote the frankness of the Bible: “Jacob I have loved and Esau I have hated.” (Romans 9) In other words the biblical God has chosen the one in preference to the other. The tribe of Jacob is prefered and cared for, while the tribe of Esau is abandoned and viewed as a competitor.
The hormone oxytocin plays a parallel role in humans. The “bonding hormone” that is responsible for trust, generosity, empathy, pairing, mating etc. also naturally makes us distrustful and hostile to the outgroup. For bonding is naturally the preference for one over another. Love and hate are two sides of the same coin for humans as for all other animals. It is totally natural that humans should prefer their own ethnic and religious ingroup and it is totally unnatural that they should be forced by the state, media and now the Church to “love” all people equally. It is a nonsense grounded in total confusion of how people naturally behave and even of what the words mean.
http://en.wikipedia.org/wiki/Oxytocin
Aquinas expressed the medieval Scholastic understanding of love and hate, likely drawn from Aristotle, that love is the cause and hate is the natural and logical consequence. Sadly it seems that our present age is bereft of basic philosophy and is totally confused by bizarre liberal-leftist political sloganeering designed to psychologically manipulate and control people in unnatural social environments.
http://www.newadvent.org/summa/2029.htm#article2
Article 2. Whether love is a cause of hatred?
quote:
On the contrary, Augustine says (De Civ. Dei xiv, 7,9) that all emotions are caused by love. Therefore hatred also, since it is an emotion of the soul, is caused by love. Love and hate are two necessary aspects of the one same thing.
I answer that, As stated above (Article 1), love consists in a certain agreement of the lover with the object loved, while hatred consists in a certain disagreement or dissonance. Now we should consider in each thing, what agrees with it, before that which disagrees: since a thing disagrees with another, through destroying or hindering that which agrees with it. Consequently love must needs precede hatred; and nothing is hated, save through being contrary to a suitable thing which is loved. And hence it is that every hatred is caused by love.
[…]
Reply to Objection 2. Love and hatred are contraries if considered in respect of the same thing. But if taken in respect of contraries, they are not themselves contrary, but consequent to one another: for it amounts to the same that one love a certain thing, or that one hate its contrary. Thus love of one thing is the cause of one’s hating its contrary.
Btw, I am not arguing that people need be habitually aggressive or “hateful” in a modern sense in order to be loving, obviously the human psyche and social reality is more nuanced than that. My point is simply that the polar opposites of love and hate are necessarily and intimately connected. They are two aspects of the preference that is naturally inherent to every act of will.
Preference has a sharp edge in Nature. Every species lives by devouring other species. I have eaten various meats and vegetables this day and all of them died that I might. Indeed I have shared food with my own family rather than others. My country has provided resources for my purchase rather than for people elsewhere in the world. The preference of one over another is inherent to life itself.
Dear Quitollis
If you paid attention to Frans de Waal’s talk, you see that he emphasized that certain chimps or monkeys or elephants knew each other, and cooperated. The need to cooperate over the long term shapes short term behavior…but sometimes only after aggressive impulses have been served. There isn’t much room for cooperation between an individual of a species which eats the individuals of another species. Nevertheless, an emergent property which we see frequently is that the ecological relationships look ‘designed’. That is, squirrels do eat acorns, but also distribute the acorns beyond the area that the unaided tree could manage. However you characterize the behavior of the oak tree and the squirrel, the arrangement is mutually beneficial.
As Janine Benyus described, most plants make sugars which they feed to fungi which bring them nutrients from distances that the plants can’t reach. The fungi also facilitate communications between distant members of the same species. You can call that behavior symbiosis or cooperation or knowing which side your bread is buttered on or whatever. The net result is the achievement of results that a single individual could not achieve.
Among humans (who have quite sophisticated social patterns), tit for tat is common. If I don’t know you, I will tend to offer cooperation first, but retaliate in kind if you fail to reciprocate. I do not know if research with non-human primates reveals tit for tat behavior.
Don Stewart
Don, I said before that cooperation is a competitive strategy, I have never denied the role of cooperation in the competition for life. However cooperation does not change the basic competitive character of survival.
You are trying to find exceptions to disprove the rule, to give examples of cooperation in order to deemphasize competition, which is nonsense. My advice is that you should get some serious scientific books to read instead of “right on” nonsense.
Without evaluating your particular claim about monkeys and elephants (a side issue and you never change your tendentious drift in any case) the reality remains that species compete to survive and that all species live by devouring other species.
Elephants are prey to lions, tigers, crocodiles and many other predators, mainly while they are young or weak but some species will occasionally have a go at them even in their prime. They are herbivores that scoff 600 pound of other species a day. Chimps are prey to leopard, lions, pythons, crocodiles. They are omnivores, they eat insects, “birds and their eggs, and small to medium-sized mammals, including other primates”.
It is not about tit for tat, if you are talking about aggression. It is the nature of life for species to eat one another and for groups to compete for territory and resources. There is nothing that you can cite that would disprove that basic reality.
And we have already seen that primates commonly live in hierarchies based on violence and domination.
In fact I am going to break off here, because your method is flawed, to mischaracterise Nature in order to promote your idea of autonomous, egalitarian, pacifist vegan communes. Your best bet is to just get some proper neutral books on the animal kingdom that do not suffer from “right on” agenda bias.
Quitollis
If you think I said ‘autonomous, egalitarian, pacifist vegan communes’, it is well that we quit.
Don Stewart
Ok Don.
http://it.pinellas.k12.fl.us/Teachers3/millersusan/images/34DCF3AA9C4E427ABF368F5AD34D27A7.gif
spiders are beautiful
wasps are beautiful
elephants are the mostest beautifulest
Q that fish is red in tooth and in claw you monster!
Q, but you’re going to let Don breed anyway, don’t you?
You couldn’t be more right.
The thing is, the permaculture crowd cannot admit you are right because acknowledging the facts would ruin the post-apocalypse plan. This in turn would lead to utter despair. Don’t want to go there.
Rather than admit that man has never gotten along, that conflict and war have been the rule not the exception, some instead try to invent a paradise where there is only peace and love and plenty (organically grown of course).
Thorium reactor technology is more likely to happen than man co-existing in a peaceful cooperation.
Someone will always want more, and they will take it by force. Always.
“Someone will always want more, and they will take it by force. Always.”
Good luck to those lone wolves trying to attack a group of 100+ armed people working together.
A group co-operating with each other will out-compete a bunch of solo, Last Man On Earth types, of that I am pretty confident.
I don’t recall anyone suggesting being unarmed or trying to accept every passing stranger into their community during or after the collapse. I do recall Don talking about Oxytocin making people more strongly bonded to members of their tight-knit community, and more suspicious and aggressive towards outsiders.
Now we’re in business! I couldn’t agree more.
Get the boiling pots of oil ready to heave onto the barbarians at the gate.
I would disagree with your statement that ‘man has never gotten along’, because that suggests an emotional component to conflict. Sure, that certainly exists in typical 1:1, 1:2->n relationships, but not really on a larger scale.
Rather, we can eliminate sentimental value on a macro level, because people are conditioned to preemptively co-operate with others as part of a deep-seated competitive strategy. However, conflicts must reconcile themselves to the realpolitik of the situation: it’s just too bad that someone has to go. Or, in other words, sucks to be you if you’re the loser.
Ultimately, we ‘modern’ sapiens have never really experienced the kinds of truly life threatening challenges that shaped our species over 2m years. These impulses and survival skills are all there, deep down in the reptilian brain. When this show gets underway, it won’t be a single lone wolf attacking an armed village of 100. Instead, it will be cunning group of 10-15 desperately trying to defeat the resources of a large group if their own women and children are to survive.
This is is how it’s always been, including just 150 years ago on the N American plains.
If there is not enough to go around, then to protect a person’s own family, it is necessary to have bad relations with others who are competing for the same resources.
“:If there is not enough to go around, then to protect a person’s own family, it is necessary to have bad relations with others who are competing for the same resources”
Done every day in the backstabbing of corporate culture and popularized with the television show survivor. Primary theme regardless of race religion or political belief- I AM ENTITLED. Must be an Oxytocin deficiency out there. Long boiling oil ETF BOIL.
Consider this primary model of equivocating treachery with success implications for “cooperating communities”.
Best bet is trust family and long term relationships. Shared sweat and blood. White man speak with forked tongue.
Don’t you think the high and mighty will somehow survive all these, and laugh about the deaths and destruction after it is all over?
Some will, for sure. As to who that will be it will depend on their connections as well as how they can pay for people to help them out. So if their wealth is all fiat currency and is invested in stuff of little use, they will cease to be wealthy. Etc.
Gender issues had been arised recently. As we can see, very few women are on the LTG issue, be it at OWF or at different blogs and organizations. This would be related to the obvious fact that involved features (tech, economy, violence) are more related to men, that we are more expected to deal with them. I’ve also seen women more horrified with what is coming than men, generally speaking. Anthropologically, I would say this is related to the fact in most cultures -surely in ours- men are more related to the outer, the distant, the unknown and risky while women are related to the inner, the near, the known and secure.
Of course it is a big paradox that Gail, which is today arguably the most important LTG author, is a woman. I think only she has the final answer, but I’d suggest a couple of ideas. Firstly, I bet she wouldn’t be doing this if she wasn’t a religious woman (so she has a male figure attached, and above her: God). Secondly, this inversion (a woman leading a typically male’s affair) is very convenient to the extent it avoid excess controversy and differencies that would arise among men: only a woman can get so much hegemony in the field. And thirdly, I’d relate it to the fact that (public) finances had recently got headed by women (as Yellen and Lagarde). But I think also IMF’s and Fed’s top chairs are not really the upper sits in the financial world, and that the real masters remain hidden (as I’ve previously wrote about “the families”). This public financial twist to women is indeed still to be digged out, but I would suggest it is related to the fact that the economy tanks; as finances no longer “work”, they can be given to women.
So, it is not that -as has been suggested- women have difficulties understanding Gail’s stuff, it’s rather not their business upon actual social gender division of work.
And we have the other basic social trait, age. We know ASPO was mainly constituted by retired people, because this gave them the required freedom of speech. Gail is also retired, as some commenters here. Indeed, it seems at OFW many commenters are rather senior and this is also probably related to the fact that, having already lived the most important part of their lives, they are more prone to accept a future that appears to be uncertain and probably deadly. Younger people find it more difficult -and would try almost only if they have kids, as in my case-, and for teenagers this is just absolutely impossible -they just can’t think about it nor talk about it at all.
There are also interesting variations among different sites according to the country they represent, but I’ve still didn’t digged out enough about this.
Dear Christian
I will come at your questions about gender and age from a little different perspective. This morning, I was reading some more in Mobus and Kalton’s Principles of Systems Science. In Table 13.1 they list the system types and the appropriate model types. For complex nonlinear adaptive systems (ecosystems) they list both system dynamics models and agent based models. If you don’t know what an agent based model is, you can find a discussion in Wikipedia. Briefly, the model is built up from the decisions of many autonomous agents who are following rules of behavior, but will sense the environment differently depending on their particular circumstances.
Now consider an 18 year old American. What choices do they have? I can think of at least the following:
1. Traditional heavy college and professional memberships (e.g., lawyers, doctors, generals).
2. Light college and a two year certificate (e.g. dental assistants, cosmetologists)
3. Apprenticeship (e.g., plumbers, construction)
4. Child entrepreneurial geniuses (e.g., Steve Jobs, Zuckerberg)
5. Gray market entrepreneurship (e.g., gypsy cab)
6. Black market entrepreneurship (e.g., drug dealer, thief)
7. Live with parents for decades and scrape by
8. Game the welfare system
9. Some form of homesteading or communal living in relative poverty
I can’t think of very much that appears on this site that will help that young person make a good decision. They are better off spending their time on other things. Dmitry Orlov, in his interview by Carolyn Baker, discusses the difference in the atmosphere of the mostly hispanic community where he lives with the atmosphere of a white community or black community with comparable income levels. What accounts for the difference?
Or consider the urban Chinese of 1990, whose income has multiplied by 4, but who is no happier today making four times the money. Does this site have any useful advice?
I have seen some evidence that Filipinos working in Hong Kong are among the happiest people living in Hong Kong. Yet the relationship between the Chinese in Hong Kong and the Filipinos has been completely reversed since 1950. The Chinese used to go to Manila to do menial work, but the people from Manila now do the menial work in Hong Kong. How can the Filipinos in Hong Kong be happy? This site will give them no hints.
I’m not knocking this site. It does what it does, and it does it well. But it isn’t comprehensive enough to be very interesting and useful to young people, I think. I can think of theories about being a mother and how they might impact one’s worldview, but, never having been a mother, I would be just speculating.
Don Stewart
Dear Don
The sociological approach I like to use doesn’t see a fundamental contradiction between systemic models and agent models; both are rather as the two sides of a coin. Do you think of mankind as a complex nonlinear adaptive system? People are never totally autonomous and only constricted by the environment, because they have incorporated this environment (the social structure, as we like to say), which constitute them as agents (that’s the “rules of behavior”). And, inversely, the system doesn’t determinates all the features of the agents, because (given human brain is the most complex existing system in the universe) there is always a chance the agent gets out of some of the determinations it has incorporated; in fact, this always happens to some extent.
It seems you are suggesting this site doesn’t helps young people as (free) agents willing to choose a path for life. But this freedom is limitated by the social structure, which is permanently sending messages telling them what they must do and that doing (1) would be the best and doing (9) is a folly. But we know the future will not be as was the past and so the messages are wrong. I think sites like this one are so much in contradiction with the structure that they crash almost all incorporated “rules of behavior” and face young people with the dilemma of keeping in the structure (and almost surely get dead, perhaps pretty soon) or leave the structure (as in (9)), which means some social ostracism (from parents and possibly other people) and, as zombie apocalypse is not to discard, possibly death also; success is not guaranteed neither. Besides, there are geographical and economical constraints as HK youth would understand instantly it should leave the country in order to have a future; this would hit both Filipinos and Chinese as well.
As for being a mother, there are many ways of being a mother, according to the position in the social structure and some other circumstances. Just as with being a father.
Greetings
Christian
Dear Christian
Let me give you a concrete example. I know a 7th grade student who just scored in the 88th percentile on the SAT. Would anyone suggest that he read the ‘there is no hope’ stuff which is the staple here?
I’d rather give him the opportunity to wrestle with the real problems, than convince him that nothing can possibly be done.
Don Stewart
Don
I’m not saying he should be here or not, just that it is really difficult he would. But perhaps there is something very important you are missing: SAT, IQ and the like are embedded in the actual structure, which is falling apart; and these concepts doesn’t reflect natural skills but are rather social institutions, just as IBM, the Red Cross and Los Angeles Lakers. And as I’ve been arguing with Paul, the ability of imagining oneself in a different social context -and so the chances to go toward it- is inversely proportional to the rank one has in the present context. So high academic or economic performance are as good a prognosis of living in the actual structure as they are a bad one of living in a different one.
I am not so sure the only staple here is “no future”; as I’ve said recently, we have solutions for many problems, solutions that are rather lacking in the “real” world you are referring to, mainly because “out there” the problems themselves are not precisely focused. But in order to these solutions become a reality SATs and IQs must rather be left apart. In the specific case you are mentioning, I would not suggest to this kid going hapilly to la la land just because of high qualifications. What will he do with his PhD or MD (in case society doesn’t collapse before he gets the degree)? Will it be useful to farm? To act as a blacksmith? As a carpenter? As a herbal doctor? I would rather advise to him starting some really useful learning, according to the times we are living on.
In the case of my own son, I will send him to elementary school -which he is expected to start next march- far more because of socializing issues (so he will be able to meet peers and play with them) than because I want him to be instructed on the institutions of a dying world. I know very well that, as things are going, formal instruction will do more harm to him than good. He is really young, though, and I’m glad school will not harm him very much. He is already able to pick up a fruit from a tree with a stick and he is learning to garden (as I do it myself). I teach to him some things on ancient cultures, with image books. He is too young so he doesn’t gets many things but he gets the world can be really different. I’m happy I’ve studied some anthropology and lived in many places, so I understand and accept how much different it can be.
Dear Christian
In 6 weeks, the boy and I and some others will visit a homestead. The female homesteader is a PhD, and knows a great deal about a lot of subjects. She has built a lot of infrastructure which lets her grow food in a hard environment. She has built rocket mass heaters, and doesn’t have air conditioning. She hauls her water 200 feet in a bucket. I could go on and on about her accomplishments. But you get the idea.
The day before our visit, we will sit down and talk about what we are going to see. The first question is:
What sorts of problems does a homesteader have to solve? We will write them down on easel paper.
During the visit, we will have our journals to record how we detect that she is solving those problems, and how many different uses the infrastructure she has built is serving.
These two questions are closely related to the questions that Google asks prospective employees during the preliminary telephone interview. They are also directly related to IQ and creativity.
I should note that this boy scored very well on SAT subjects he has never been taught.
In short, my judgment is that he is far better off working to solve actual problems than hanging around with a bunch of old guys who are convinced it is all futile.
Don Stewart
Good to know it! I don’t mean PhD and IQ are just lies, just that they are not really related to solving problems in future societies where academic credentials will rather be worthless. In fact, most of LTG authors and most people trying to get out of this society are indeed educated persons, because education helps very much understanding such a complex thing as LTG and researching how to live differently (this is not so valid for economic capital, though). BUT remember that the vast majority of PhD, even within fields so much related as anthropology or economics, doesn’t try to get away.
And keep in mind also that it is one of this “old guys who are convinced it is all futile” who is taking this kid to a trip into the future.
As I see it, young people tumbling down at OFW get two choices: forget us and return to BAU (wich most will choose, because in so many cases leaving BAU is too much complicated and BAU is still working anyway) or remember us and go to permaculture and transition. In all cases they will not stay at OFW very long, it just makes no sense.
“And keep in mind also that it is one of this “old guys who are convinced it is all futile” who is taking this kid to a trip into the future.”
And keep in mind most kids don’t have such an old guy as a relative or a relationship.
“Let me give you a concrete example. I know a 7th grade student who just scored in the 88th percentile on the SAT. Would anyone suggest that he read the ‘there is no hope’ stuff which is the staple here?
“I’d rather give him the opportunity to wrestle with the real problems, than convince him that nothing can possibly be done.”
Don, you habitually, constantly construct straw men in order to mischaracterise everyone else and to reinforce your messiah complex. You are not Jesus and you are not about to “save” anyone by preaching faith, hope and charity. Get over it.
“I know a 7th grade student who just scored in the 88th percentile on the SAT. Would anyone suggest that he read the ‘there is no hope’ stuff which is the staple here?”
No. I would recommend reading about permaculture, maybe http://www.lowtechmagazine.com and focus on gardening, carpentry, etc as hobbies that will hopefully provide benefit in any future, rather than filling a young mind with despair or having that child reject all of it and go with the status quo.
Well done Matt, I see I was not wrong choosing this Ministry for you
Or consider directing him into military training. The meek will get trampled on. The strong will run the show.
Cadets or Scouts is certainly not a bad idea, learn some discipline, get some time on the range, I don’t know if you have air cadets there, he could get power license by 16 to fly a single engine aircraft. If I could go back in time and be 12 again, I would love to go for that, and Survival Instructor.
I was thinking more along the lines of learning leadership skills and how to manage a squad of men who kill first and ask questions never.
“I was thinking more along the lines of learning leadership skills and how to manage a squad of men who kill first and ask questions never.”
For a 12 year old? Pretty harsh, and good luck getting hardened killers to obey a 12 year old. I’d say wait for 18 and regular military service, but who knows if there’s time for that.
Obviously not at 12.
But that said, unfortunately most people will be dead by the time a 12 year old has reached an age where such training would be appropriate. So all moot.
No need to be squeamish.
On tonights TV news is a young boy [under 10] killing two men called spies.
Well WWW has revealed himself as an authoritarian sadist who despises humanity – though not his own absolute opinion on everything.
Someone at OFW – it is not worth remembering who – proposed being the new world leader and nominated WWW as the new Goebbels, of course.
I agreed with you about a lot WWW, until you gave full rein to your sadistic streak.
It is one thing to see disaster coming, but something else to rejoice in it.
It is one thing to see a train headed for a broken bridge and try to warn the passengers, but it is entirely different to dance on the passengers graves for you having been ‘right’ about their predicament.
You boast about never having had children – though I doubt that that was actually a choice – and you clearly lack empathy.
It seems to be beyond your ken to both understand what is coming AND try to ameliorate suffering, like Gail did her son, I did my daughter and still try to do for others in my present circumstances, which involves Court battles against abuse by an “Aged Care” Corporation.
You are using this blog to promote your unique brand of nihilism just as much as David promotes his utopian Thorianism..
Please, both of you, give us a break, get your own blogs.
This is my first time on this blog and likely my last. I am not here to promote anything. I came because I actually have significant amount of my retirement in Exxon stock (as do my in laws) and wanted to get some informed opinion on how they might fare in the immediate future.
I never expected to make more than a post or two and somehow that snowballed. I would like to quit posting, frankly. But I don’t want to leave legitimate questions or false impressions unanswered.
To paraphrase Conrad, civilization is but a thin veneer covering the truly savage nature of mankind.
When the SHTF we are going to see that very thin veneer ripped off the exact minute the grocery stores are emptied.
Your previously wonderful neighbour who used to greet you with ‘good day Gerry’ will no longer be wonderful when his family is faced with starvation. Instead he will do just about anything to attempt to feed his family including fight with you like a wild animal over a few scraps (after all, we are nothing more than wild animals when it comes down to it, so why would anyone expect anything more?)
And you will either be able to defend your turf, or you will die.
I have no reservations whatsoever about recommending military training and arming oneself to the hilt.
You may see that as sadistic.
I see it as wise and practical advice for anyone who is hoping to be alive post-collapse.
“Your previously wonderful neighbour who used to greet you with ‘good day Gerry’ will no longer be wonderful when his family is faced with starvation. Instead he will do just about anything to attempt to feed his family including fight with you like a wild animal over a few scraps (after all, we are nothing more than wild animals when it comes down to it, so why would anyone expect anything more?)”
If in a urban, sub-urban or town environment, what about sedatives in the water to demotivate the masses sufficiently until the mass starvation is over? Or burn large quantities of hash oil to pacify the angry mobs?
When I was a young man I had military training WWW, but nothing to the level of the SAS, SWAT teams and mercenary military units now operating around the world.
Do you seriously imagine that you – let alone some barely trained youth – stand a chance against professional killers.
You read like some gung-ho red-neck from Alex Jones sites, whilst simultaneously preaching that we are all doomed anyway.
I’ll stick with trying to humanely help others whilst I still can (at 71) even if I and everyone else might be dead tomorrow, because some mindless gung-ho freak takes the military option, which you seem to favour in a very contradictory way.
If you revisit my comment, what I suggested was joining the military and learning how to lead professional killers.
Farmers will be the servants of such people, as they always have been
Well put, Gerry. I’m still wondering who (what) he (it) is
All my life, I have been involved in primarily a male world. The restaurant at CNA Insurance where I started work was called The Men’s Club. (There was also an employee cafeteria.) My supervisor would joke and say, “I saw a woman in The Men’s Club today.” I would ask, “Who?” He would answer, “She was waiting on tables.” When I would look at printouts of numbers of employees by department, I would find things like “Claim Supervisors 6; Claim Adjustors 30; Women 26.” Young people don’t understand how much things have changed in a fairly short time.
Women have always been involved in the role of teacher, from way back. My husband is a college professor, and thus a teacher of sorts. This is an accepted role for women. In many ways, what I am doing involves teaching. Of course, it also involves figuring out what to teach. Somehow, figuring that out seems to come fairly easily for me, partly because my readers offer me a lot of worthwhile suggestions of things I should look at.
Whether or not I am retired is a matter of definition. I am working at this, rather than in the insurance industry. I am not really trying to make money at it. My husband works, and we own our home, so there are not huge financial pressures for me to earn more money which will go into a bank account which will disappear anyhow.
You are right, though, that people who get into this subject are disproportionately at the end of their careers. At that point, they have the financial ability to leave the work force and the skill sets needed to analyze numbers and write reports. Younger people are busy with their children besides working and are preoccupied with what this means for them personally.
Well, at least women weren’t listed along with furniture… Things had evolved, yes, in so many directions (now there are four or five genders indeed… Complexity, complexity, complexity…) In LatAm many women reached presidency in this century, indeed.
The important thing is women were or still are neglected in public life because it is assumed home and kids are their “natural” task. I published an article once, it was called Dolls and Guns. It was a research on gender roles in the judiciary: penal jurisdiction is still almost only worked on by men, family jurisdiction by women and the commercial one is mixed.
But I’m still surprised the way family laws evolved here. In Arg., until 1985 men had full parental rights upon their kids (and upon their wifes, because divorce was forbidden; this was middle ages law, but it was not really enforced upon women, it was just that people couldn’t marry again and fathers had full rights upon the kids, deciding where they would live, which school they would attend, etc.). At that date divorce was allowed and custody law was changed, creating two characters: one of the parents has the custody (and kids live with him, usually her) and the other must put the money (and see them at week-ends and vacations). It is not writen that the first role is up to the mother and the other to the father, but in case of conflict judges always give the first role to the mother. The father must prove she is a prostitute or a drug addict or knuts in order to get the custody and roles are inversed. So we went from a patriarchal situation where the father had full rights to another, still sexist, where women are actually in charge of kids and men provide.
This is a big source of concern for me. Since I separated from my son’s mother the kid is living equal periods with both of us; we agreed upon this and never went to see a judge. But, as if she moves to another town she can take the kid with her and the judiciary will support her, she used this as a tool to get a couple of things from me. Worst, now she is considering moving with her actual friend who lives in a nearby town and, as the kid is about to enter school, he would be living with her 5 days a week, which I found really sad. At least, she is far more wealthy than I am and she won’t try to get money from me (I have no income, anyway, so judges couldn’t help her if she wanted).
I am without income since a year (I sold my shop to her, as she was threatening me she would move to her parents town -which is very far- taking the kid with her because of lack of income -but her family is wealthy) and I’m burning capital since that time. There are no job offers around -and of course each day economy worsens- and I prefer spending my time on LTG anyway. But capital to burn is finite and it is approaching limits as well, and I’m wondering what to do to get some cash. I have a couple of ideas related to LTG, because I don’t want to leave the subject. Hope it will work, given the State will give me nothing because I don’t fit requirements.
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Dear Gail and All
For those who follow Dmitry Orlov, he has posted the interview by Carolyn Baker:
http://cluborlov.blogspot.com/2015/01/interview-on-lifeboat-hour.html
It’s all thought provoking, but I especially like the last 20 minutes or so, beginning at 34 minutes with his summary of the impact of climate change. Then other topics, such as the relationships between whites, hispanics, and blacks. He reminds me of a Man From Mars who is just calmly observing the strange behavior of the Earthlings, and particularly the American Earthlings.
Don Stewart
Plus you get to learn that Stalin was not the ogre he was portrayed as but in fact he was a autonomous, egalitarian, pacifist vegan loved by all.
Here is an excerpt of an analysis of global production data from 2,222 oil fields by energy consultant Wood Mackenzie of oil once it reaches various price benchmarks (run today by CNBC).
“If oil prices keep falling, at some point it’s not profitable to pull it out of the ground. But we’re not there yet, according to an analysis of production costs by an energy consulting firm.
In fact, even if the Brent price index falls another 20 percent from Friday’s closing price—to $40 a barrel—just 1.6 percent of the world’s oil supply would represent unprofitable production.
Energy consultant Wood Mackenzie analyzed production data from 2,222 oil fields around the world to see just how much further oil prices would have to fall to make them “cash negative”—costing more to operate than the oil is worth. That price can act like a brake on production, according to Wood Mackenzie analyst Robert Plummer.
“Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply,” he said.
Among the first to shut off the spigots would be U.S onshore production from the trickle of crude emanating from aging, so-called stripper wells. Wood Mackenzie estimates there’s about a million barrels per day coming from a collection of older wells that produce only a few barrels a day. The cost of keeping them going varies between $20 and $50 a barrel. So if the price of crude drops below $40 a barrel, some producers may decide to stop pumping.
“Operators may prefer to continue producing oil at a loss rather than stop production—especially for large projects such as oil sands and mature fields in the North Sea.”
-Robert Plummer, analyst, Wood Mackenzie
Below $40 a barrel, the next likely production slowdown would come from Canadian tar sands fields, which start to lose money when the Brent price hits the high $30 range. But turning the flow off and restarting it again is a complex process, involving injecting steam into the ground, which makes it costly to restart, according to Wood Mackenzie. On the other hand, fuel represents a major cost for oil sands production, so lower oil prices could help lower overall production costs.
In the U.K., North Sea oil fields start to lose money below $50 a barrel, according to the analysis. But many of them are older fields reaching the end of their lives, so stopping production could mean slowing down for good. That decommissioning process can be expensive, so some companies may decide to operate at a small loss rather than spend the money to close down operations, the analysts noted.
Production costs also include government taxes and royalties, which could be reduced or suspended if those governments want to keeping production going. Some of the “heavy oil” projects in Latin America, including those in Venezuela and Colombia, become money losers at lower prices, which could spur those governments to offer some kind of royalty relief, the analysts said.
Overall, the analysis found, the impact of $40 oil on global production would be very small, based on data covering some 75 million barrels a day of production. At $50-a-barrel Brent, only 190,000 barrels a day is unprofitable, representing just 0.2 percent of global supply. Seventeen countries supply oil that is cash negative at $50, with the main contributors being the United Kingdom and the United States.
At $45 a barrel, only 400,000 barrels per day, or just 0.4 percent of global supply, are unprofitable. Half of that is from conventional onshore production in the U.S. And at $40 a barrel, just 1.5 million barrels per day represents unprofitable production, or just 1.6 percent of global supply. Most of that production comes from several oil sands projects in Canada.
Even when a field becomes cash negative, it doesn’t necessarily prompt producers to shut down right away, said Plummer.
“The first response is usually to store oil produced in the hope that the oil can be sold when the price recovers,” he said. “Operators may prefer to continue producing oil at a loss rather than stop production, especially for large projects such as oil sands and mature fields in the North Sea.”
Here’s the link: http://www.cnbc.com/id/102326971
“In fact, even if the Brent price index falls another 20 percent from Friday’s closing price—to $40 a barrel—just 1.6 percent of the world’s oil supply would represent unprofitable production.”
I am having a hard time accepting that as fact.
““In fact, even if the Brent price index falls another 20 percent from Friday’s closing price—to $40 a barrel—just 1.6 percent of the world’s oil supply would represent unprofitable production.””
Cost per barrel only, not including any of the initial costs like the rights, drilling, exploration, interest on debt, I could see it. Its like, we already lost that $6 million, it will only cost us $35 per barrel to keep pumping, so we might as well make $5, otherwise we lose the lease after we sunk millions into it. We’ll see how much of this talk we have in August.
The only way that this would make sense is if the author is talking about the remaining marginal costs of production on fields that are pretty much in place. There is a huge difference between total costs, and “lifting costs” after the land is leased, and all of the preparatory work has been done.
Dear InAlaska
Thanks for posting the article. A number of people are writing similar articles. But here is what occurs to me. The depletion of existing fields is estimated to be about 6 percent per year. If oil prices remain below 50 dollars, then probably very little new production will be brought on-line after, say, the middle of 2015. So we would expect oil production to decline by 6 percent between the middle of 2015 and the middle of 2016. Unless prices go up, there would be an additional 6 percent decline by the middle of 2017.
I think that the amount of production which is actually shut down is not the elephant in the room. If prices stay low, we will find ourselves on a Hubbert or Seneca type decline. Since oil is essential to industrial production, we would also see a rapidly shrinking economy. With financial and political repercussions, etc.
Am I missing something?
Don Stewart
Don,
No you are not missing anything. I think what this article means, if it is a correct analysis, is that the production of oil will continue to occur even at prices far below what is generally thought of as profitable. For a number of reasons, wells will continue to produce oil at price per barrel into the $20s (because of the need to pay debt, because its cheaper to keep them pumping than it is to shut them down, because once they are shut down they can be reopened, etc). This says to me that the system is more robust than we are giving it credit for and it may be quite some time before oil production drops to a level where it causes bankruptcies, bank failures, supply chain disruption, the Seneca Cliff.
…”This says to me that the system is more robust than we are giving it credit for and it may be quite some time before oil production drops to a level where it causes bankruptcies, bank failures, supply chain disruption.”
Exactly. Oil from established sources will continue to be produced. Look at Russia, they will sell at every price, and if they have to let people suffer they will do so, same story for all exporters. That’s not the problem. The problem will be developing new extraction at these prices. But the market will recognise that and price will rise enough. Armageddon has to wait.
“”This says to me that the system is more robust than we are giving it credit for and it may be quite some time before oil production drops to a level where it causes bankruptcies, bank failures, supply chain disruption.””
Seems to me more like a ceramic, really hard and brittle. Unable to bend to changing conditions. People operating a business at a loss until they go bankrupt, because if they try to stop operating, they will go bankrupt. If the oil price rebounds, they will be fine; if not, they will be much worse off. More money lost now means less money to invest in the future. Either production decline or price shock in the future.
All of the derivatives and the financing that oil companies have added in recent years take oil companies farther and farther away from the “supply/demand model” that economists think about. Instead, they add brittleness or stickiness to the system.
I bet that humanity finds a way around these financial limits, in order to finally reach “real” peak oil. Running the engines has top priority.
InAlaska,
How do you reconcile your post with this:
By Steven Kopits:
Between 1984 and 2005 the world had a 25% oil surpluses. Since 2006, global oil production is declining.
From 2005 to 2013, the world spent $4 trillion dollars on upstream [not including pipelines, refinery, transportation, wholesale] exploration and production. And another $3.5 trillion dollars to maintain current legacy [fields]. Result: Oil production has fallen by 1 million barrels per day [mbpd].
For Comparison: Between 1998 and 2005, $1.5 trillion dollars spent added 8.6 mbpd.
To put into perspective: Germany GDP: $3.5 trillion dollars. So if you compare to 1998/2005 period, the world ‘vaporized’ the GDP of Germany on oil production. And the world still came up short 1 million barrels a day.
How challenging is the situation: 2014 Capex [upstream] Expenditures Trend: About $300 billion. Current forecast Capex: $193 billion. Over 30% decline. Shell, 2nd largest oil company in the world, not only cut capex by 20% but, since 2013, it has been borrowing money to pay dividends.
https://www.youtube.com/watch?v=dLCsMRr7hAg
——
It would only cost Shell about a billion dollars to develop a really good liquid fluoride thorium reactor prototype. Maybe they ought to think about cutting their losses and re-educating their engineers.
Please, David, desist from religious fervour about Thorium, which has nothing to do with Gail’s facts that we live on a finite planet.
What is the point of posting here if you totally disagree and posit Thorium as THE way to keep, consumption of resources going as they are ad infinitum .
What don’t you understand about finite resources on a finite planet?
escravaisaurabr,
I’m not sure you are making the same connections from the article as I am. The analysis simply states that oil can, and will, be produced at prices levels below profitability. This suggests to me that we are farther away from a collapse than previously thought. Once a well is in place and producing oil, it will tend to continue to produce oil even if the price per barrel sinks below what it would cost to add that well at current costs. It does not address whether oil production is declining and I have no doubt that oil production will decline over time. Whether global oil production has reached a terminal decline yet is still in question.
ISTR a comment that no well will be shut in unless it produces less than one barrel of oil per day. Wells are still being drilled, some in the hope that oil prices will rise, others because their jobs depend on not understanding the facts. US shale oil production will peak in mid to late 2015. Oil companies were cutting back projects in late 2013 because supply was already exceeding demand, so why would they reassess those projects until they are absolutely sure on a return on capital? One thing is for sure, some time in the foreseeable future oil production will fall.
We will need growth or at minimum, a slower decline in economic activity to get oil production equal to oil consumption. That will eventually cause the price of oil to rise, and that will encourage investment in new oil production. The days of build it and they will come, are over.
This is a link to an analysis by the North Dakota Department of Mineral Resources. https://www.dmr.nd.gov/oilgas/presentations/FullHouseAppropriations010815.pdf At current price levels, they seem to expect that North Dakota oil production will start declining in 2015. (Page 10)
There are different “cost levels”. Once a field is up and running, most of the cost have already been spent. The only costs that need to be covered are the ongoing costs of production. So it makes sense to keep a field operating, almost as low as the price goes. That is part of what you are reading in the analysis. Also, the point about having to pay decommissioning costs, if a company decides to close its wells for good. That keeps production going, it there is even a chance of the price going up.
If a company want to start new production some where, then there is a much broader set of costs that must be considered. The company would like to operate on a “cash flow positive basis”–that is, have enough profit from existing wells, to be able to pay dividends to policyholders, and also to have money available for new investment, so it doesn’t have to go to the bank. If it has debt, it would like to be able to service the debt. It would also like to cover the company overhead. And of course there is quite a bit of taxes to be paid.
In this post I did a while back, http://ourfiniteworld.com/2014/02/25/beginning-of-the-end-oil-companies-cut-back-on-spending/ the focus was on keeping cash flow positive. That is why the prices were a lot higher.
I’m interested in Gail’s comments on this explanation for plunging oil prices:
http://www.resilience.org/stories/2015-01-12/the-oil-price-fall-an-explanation-in-two-charts
Merely the end of QE strengthening the dollar and overproduction. The author is very optimistic and suggests this is a normal sequence of events.
It doesen’t make any sense. Price tripled between jan 09 and mar 11, while mean prod to cons ratio was almost zero
I’m not sure how much a range of a little over 1% point matters in terms of supply and demand ratio. We’re talking about 85 million barrels of oil consumed per day worldwide. It seems even a small percentage over or under could add up quickly, however. Maybe someone can share their thoughts. If negligible, we could perhaps remove supply and demand from the equation. That would leave QE, remaining strictly within the logic of the article. Prices do seem to be responding to a trajectory of when the first round started to when the last round ended. Nevertheless, this explanation is probably too simplistic, even though QE is considered an unconventional monetary policy according to wikipedia, and there was a hell of a lot of it going on lately. There are so many factors, and Gail’s ideas do appear valid. I’m not interested in confirming biases, however. The system is so complex, it might not be possible for anyone to have the complete picture.
I know Art from The Oil Drum, and in fact, saw an early version of the post. I am not really convinced–or maybe I don’t really understand his chart. For one thing, the rises and falls in oil production don’t correspond very well to where oil prices rise and fall. And I don’t really understand how he came up with his production surpluses and deficits. I seem to have a knack for getting Art angry with me when I ask questions about things like that, so I decided to take a “pass” on asking him questions about it. So I am not convinced.
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Dear Gail and All
I am not the brightest bulb in the world, so I keep finding things in Mobus and Kalton (M&K) which help me clarify my thinking. Consider, for example, their discussion on page 618 through about 621.
A Systems Analysis usually begins by breaking things down into components. For example, a very broad brush decomposition would treat a corporation as essentially a black box which takes inputs and turns them into outputs plus waste. A finer decomposition would separate the corporation into major departments such as logistics, manufacturing, accounting, etc. The question which the analyst has to answer is ‘How finely should I decompose?’ M&K make the point that manufacturing systems are much less complex than biological systems, or human social systems. I would argue that human reward systems (e.g., hormones) are similarly complex. M&K point out the dangers of stopping the analysis of the more complex systems at superficial levels.
One of my arguments here has been that many of the analyses of our current predicament stop their treatment of human and biological systems at too superficial a level. The analyses do not consider whether more primitive systems such as hormones and small groups, or sunshine and plants, can replace manufactured products.
Then M&K point out the difference between Adaptation and Evolution. Adaptation means that some organism already has the ability to cope with some environment, but may not be using that capability. For example, humans have the ability to cope with the tropics, but I live in the temperate zone and so do not exercise tropical adaptations. Evolution, on the other hand, requires the creation of new structures. For example, once upon a time, some of our distant ancestors evolved eyes. Eyes, in turn, created many additional possibilities. If the world warms 3 degrees C over the next decade or two, then some argue that humans would have to evolve fundamentally new physiology…a daunting assignment we would likely fail at.
I believe that analyzing our predicament in terms of adaptation and evolution is a fruitful way to think. For example, humans are physiologically adapted to live as hunter-gatherers, or as Edo farmers, or as citizens of a fossil sunlight powered global industrial system. Physiologically, there is no barrier that I can think of to returning to life as a hunter-gatherer or as an Edo farmer.
The social organization question is a little trickier. I have been part of many small groups which have formed for a specific purpose, and which functioned socially much as hunter-gatherers or Edo farmers. The members of those groups could move fluidly from their ‘corporate’ lifestyle to the very different way of relating to others in these small groups in the woods or in the garden. So I would say that humans still have the social ability to adapt to much simpler economic systems.
Things get more problematic when we consider an industrial system or a financial system or a political system. These systems have undergone true evolution. That is, new structures are created and drive old structures to extinction. The traditional blacksmith is extinct (to my knowledge), with the exception of some who practice it as an art. But, sometimes, a close look will reveal that old ways survive. For example, consider this session at the upcoming Organic Growers School in Asheville, NC:
‘Draft Horse Teamster Roundtable
Interested in using animal power on your farm? This discussion with regional teamsters will go over the basics of incorporating draft horses onto your farm—including costs, equipment, lessons learned and much more!’ Horse logging is increasing in popularity, in response to the damage done by heavy equipment.
So moving from a tractor to a horse or mule or ox may present certain logistical difficulties, but is not a giant evolutionary leap.
More generally, we can say that global capitalism tends to eat its own parents. Simpler ways of producing iron have largely been forgotten. Open fires which produce bio-char have had to be rediscovered. The industrial seed companies destroy heirloom breeds every chance they get. Heirloom animal breeds are similarly destroyed.
So we can think of industrial organizations as being NOT generally adapted to less energy intensive methods of production, but instead as having to go through the painful process of EVOLVING new and lower energy intensive methods.
Financial systems are currently organized around debt. Therefore, as discussed extensively here, they are very resistant to anything which threatens the repayment of debts. As illustrated by the recent history of Europe, the political powers are willing to take draconian steps to preserve the sanctity of debt. And yet we know that the debts which are currently on the books will never be repaid. It is difficult to be optimistic that Finance can evolve toward anything less complex. Finance may have to be rebuilt from the ashes.
Finally, political systems. In theory, a Democracy should be able to evolve fluidly. Just convince a majority of the people that change is needed, and, Voila, change happens. Yet all of us know that it doesn’t work that way. Currently, the US is engaged in a game of Nuclear Chicken, which makes no sense at all in the larger frame of reference. Unfortunately, it makes perfect sense to the Deep State. And the Deep State is in control. Just as with Finance, it is easy to understand how political systems will go down with the ship…as is recounted in the Decline and Fall narratives of previous civilizations. As with finance, political systems may have to rise from the ashes.
In summary, I think that using the M&K distinction between adaptation and evolution helps us think about the issues we face with additional clarity. And, perhaps, think about what specific things we might want to be doing in our own self-interest.
Don Stewart
Dear Gail and All
In terms of our physiology and social adaptations, please see this informative and entertaining talk by Frans de Waal:
http://www.ted.com/talks/frans_de_waal_do_animals_have_morals?utm_source=newsletter_daily&utm_campaign=daily&utm_medium=email&utm_content=button__2015-01-12#t-690402
The fairness and empathy paths which are present in other primates and monkeys and elephants have no atrophied among humans. We can still access them as a foundation for an economy not entirely actuated by money.
This video is not good news for all the ‘red in tooth and claw’ crowd here.
Don Stewart
Thanks! I like the eat our own parents analogy.
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Did Iran just make a direct threat? “Iran vows to help Venezuela to stem oil price fall”
“Iran’s supreme leader Ayatollah Ali Khamenei told Venezuela’s president on Saturday he backed coordinated action between Tehran and Caracas to reverse a rapid fall in global oil prices which he described as a “political ploy hatched by common enemies”.
http://www.reuters.com/article/2015/01/10/us-iran-venezuela-opec-idUSKBN0KJ0M620150110?utm_content=buffer27479&utm_medium=social&utm_source=linkedin.com&utm_campaign=buffer
Anyone hazard a guess how Iran intends to help Venezuela? I thought the Venezuelans went cap in hand to the Chinese recently?
As for recent geopolitical events, things are getting interesting, I’m sensing somethings about to blow up completely for after the Paris attack, it’s now evident ISIS, Al Qaeda in Iraq/Levant and Al Qaeda Arabian Peninsula are now operating in unison, they’ve joined forces. This cross-alliance is now being joined by the Taliban who in response to the global “unity rallies” pledged total allegiance representing an ominous escalation & expansion of the global jihad terror movement and the threat it poses to the US, the West as a whole, the rest of the ME & Israel.
I’m now more convinced than ever WW3 is about to trigger on our current trajectory.
We have competing enemy oil producers all looking to blow their enemies up before they’re taken down themselves against the backdrop of debt laden diminishing returns systems and now throw in the rapidly expanding integrated “Islamic Jihad Caliphate” exploiting the power vacuums and chaos unfolding.
My analysis is much different: Not much ability to project power globally (unless attacking a kosher grocery store is power). No consistent way to earn hard currency! Kills more muslims than any crusade. Hardly a threat to world peace.
You forget the integrated support they’re being given by the Sunnis across the planet. It’s the same as the support Israel gets from the global Jewish community.
Don’t underestimate their growing strength
I must stock up on my Barbour gear ready for the collapse.
https://www.youtube.com/watch?v=PP38pgLYsQg
These shooting skills should be handy when the supermarkets are emptied.
Hey, somebody talked about the chance of being in charge of the world… I take the job! We have some solutions for mankind’s problems here, we’d do far better than existing authorities when BAU disappears. We can take care of the ponds and we have carbon farming and glomalin… The team would be like this:
Of course, Gail should take Economy Ministry and run a world tab. Don would get Agriculture and Alaska Global Security (I’m affraid you should share it with some Russian). Ed would get Nuclear Stuff and Paul Winki Goebbels chair ant take care of the media. I think Stef is the younger and so he gets Youth, and Quitollis Family Planning. Matt perhaps you go to (low) Tech? B9, if we find some aliens (or if we need them for ideological purposes) you take Earth Foreign Affairs. Xabier speaks spanish and I like very much his english and so he would be my spokesman. We can invite Nafeez Ahmed to take Cultural Issues and some Cuban for Health Ministry. In case we are to hang some banksters to please the masses we charge the task to Tyler Durden. And Hydrocarbons Ministry (with full powers), I would give it to my friend Jean Laherrère; he is too old and so perhaps we’d need somebody else.
I should change my name to avoid hurting religious sensibilities. Everyone must hold a picture of Seneca on his desk and the flag would be full white with the downslope on it, alla LTG’s cover. Get ready, we are expected to start next september!
I am voting for Christian. In my new position, everyone on this blog gets to breed, as far as I can see, except for Don. He is too wordy and overly persistent. His pacifist veganism suggest a certain moral delinquency. Only kidding, Don.
LOL!
Sounds fun. How much does the position pay?
Very good question. What about 100 gallons of gas, a couple of goats, a sack of wheat and a barreel of bourbon each month? As a bonus, you can have a trip to the Caribbean with all you family twice a year and a medicine against loosing your hair
Christian,
You have my vote!
[b]UK oil firms warn Osborne: Without big tax cuts we are doomed[/b]
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11338769/UK-oil-firms-warn-George-Osborne-Without-big-tax-cuts-we-are-doomed.html
Now read these prescient words from Steve Kopits in an interview of 2013:
“The marginal consumer banged into the price of the marginal barrel, on a static basis, somewhere in 2011 at about $110-115 Brent. There was a price at which the marginal global consumer would rather reduce oil consumption than pay more, and that price is around $110-115 Brent.
But since 2011, depending on rapidly rising oil prices is no longer a viable strategy. The global economy has said, “this is how much we’ll pay and no more.” At the same time, geology just kept marching along right down the back half of Hubbert’s peak, and costs have continued to rise.
You are looking at a world in which the marginal consumer is beginning to reject the marginal barrel. And if you run this out for a period of time, you will peak out the oil supply. I think the peak occurs in a finite time frame—not 2030, not 2020. Maybe 2014 or 2016—I’m not exactly sure, but sometime pretty soon.
But if the cost of production is increasing, then the value of reserves is falling. Put another way, current levels of government take are likely unsustainable. Oil companies will need tax relief in one form or another. Far from being able to raise taxes on oil companies, the sober reality is that governments are going to have to get used to getting less. Expect this theme to come front and center in the next couple of years. If government take is reduced quickly, then oil production levels could be sustained for a few more years.”
It’s quite workable for an economy to have no taxation at all on corporate entities [ excepting rent seeking behaviour]. Government revenue is no longer connected to the tax take which now is just there to allow government to steer the economy away from unwanted inflation levels.
It’s quite workable, but it means government funding ends up significantly lower. That’s an omen for the near future in the UK. Expect welfare programmes to even more significantly reduced.
No, tax take is irrelevant today in the credit money system. This is just for Commonwealth or Federal governments who issue currency, not applicable to users of currency, like local governments or you and I.
In the UK or anywhere else the decision to cut welfare is a political one, disguised as an economic argument. False though! Politicians refuse to learn. If its ignorance, it’s wilful.
But there are surely limits to credit money? If a government just creates money to cover all its needs, surely it will get found out eventually? OK, many governments are doing the same for now, but for how long can it continue? It’s Wily Coyote time eventually, then it’s no longer possible to walk on thin air.
Im afraid some here will take issue with you placing the words money and credit next to each other- ingrates. Once rid of this burdensome “oil standard” like that other albatross the “gold standard” debt money will really gain strength out of its nothingness. Just more imaginary rules that change as they become problematic. This versatility proves ultimate strength. The elimination of the oil standard will prove the true versatility of debt money and allow it to reach its potential. The source of the value of debt money wealth is resource theft, everything else is smoke and mirrors. While the oil standard was a useful symbol representing the primary resource theft, all these standards ruined the beauty of debt money. Debt money will now fulfill its destiny and become a pure representation of resource theft with no “peg” or “standard” to limit its versatility and mar its beauty.
I have answered this “Flaw” in other posts.; But if you read up on Bill Mitchell, he will dispel doubts; This one specifically addresses limits [question 1]
http://bilbo.economicoutlook.net/blog/?p=29878&cpage=1#comment-37098
I think we are reaching Wile E. Coyote time, very soon.
There are only so many goods to distribute in the world. It doesn’t matter how you change the way the analysis is done, with taxes or not, the government can only get control of so many units of food, and so much materials to build houses. They can’t build an unlimited number of houses or distribute an unlimited amount of food, no matter what the scheme.
Who is saying they could?
Certainly I wasn’t. Remember this;
The government can ONLY buy what is for sale!
Governments have grown over the years. They have taken on more functions and borrowed more money. It is really hard for them to shrink.
I feel Governments step in when the corporate world and small businesses can’t or won’t take up the slack in employment when “sea changes” occur. For example farming is now so mechanised farmhands have lost jobs. Where do they go? Jobs are lost overseas, but the workers still live here. What happens to them? I guess the Government steps in.
The Government can of course find projects like infrastructure for increased employment.
So it needn’t be just featherbedding, but there would no doubt be some of that.
Governments haven’t done a very good job so far. They are funded by taxes, and taxes only go so far. Governments are part of what get squeezed by diminishing returns. The total output of the economy must be shared by all participants. The availability of cheap energy products is largely what determines the output of the economy. Governments can hand out money to others, or they can create unproductive jobs as a cover for the handout, but without more cheap energy products, they really can’t increase the total productivity of the economy.
Excellent concise summary!
The availability of cheap energy products is largely what determines the output of the economy. …is the missing link in all models. Or missing link in a lot of economist’s heads.
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Dear Gail and All
Here is some interesting data from Steve Keen on debt, via Albert Bates blog. See the link to Keen down in the body, find the video from Max Keiser, and go to the 6 minute point. Steve’s conclusion is that virtually every country in the world is over indebted, and prone to financial collapse.
http://peaksurfer.blogspot.com
Don Stewart
…which is the reason a globally coordinated (unified?) currrency is desirable as a means to slow collapse, if that is desireable.
http://philosophyofmetrics.com/2014/01/21/sdrs-and-the-new-bretton-woods-part-one/
I beleive slow collapse is preferrable. That desire on my part makes me perhaps the most cynical of misanthropes if you hold with some lines of thinking on OFW. Specifically, if we collapse fast, some may survive and re-evolve more appropriate societies; wheras if we collapse slow, humans have more time to deplete resources, sealing their fate as evolutionary dead-ends.
Thanks! That is a good video. This is a direct link of the video with the interview of Steve Keen at the 6:00 minute mark: https://www.youtube.com/watch?v=YOAbUb7hMgE
According to the video, according to one study (by Richard Vey??- I couldn’t understand the name), economies that got into debt had two characteristics:
1. Total debt of businesses plus individuals (not including financial debt) exceeded 150% of GDP
2. That debt had grown by at least 20% in the previous five years.
Nearly every economy on earth meets these standards today.
Of course, Steve Keen doesn’t mention our oil problems.
Richard Vague, Gail
He has a new book out “The Next Economic Disaster” why it’s coming and how to avoid it.
This book is likely related to the statements Steve Keen made on the video about a recent analysis saying that the world is hitting credit limits, when I could not figure out who he was referring to. According to book summary of “The Next Economic Disaster,”
Looking at the Table of Contents of the book, the sole topics are too much debt, how to deleverage, and how to restore growth. He doesn’t bring in limits of a finite world or derivatives.
Jim Rickards in the Daily Reckoning says the financial problems with $50 oil are worse than the 2007 subprime crisis:
“Rickards.Posted Jan 8, 2015.
Oil below $50 is more than low enough to do an enormous amount of damage in financial markets. Losses are all over the place. We don’t know necessarily where they are right now. But I guarantee there are major losers out there and they’re going to start to merge and crop up in unexpected places.
The first place losses will appear are in junk bonds. There are about $5.4 trillion dollars – that’s trillion – of costs incurred in the last five years for exploration drilling and infrastructure in the alternative energy sector. When I say alternative I mean in the fracking sector.
A lot of it’s in the Bakken and North Dakota, but also in Texas and Pennsylvania. That’s a lot of money. It’s been largely financed with corporate and bank debt. These companies issued some equity, but it’s mostly debt.
Here’s how it works. Suppose I’m an oil exploration company. Let’s say I borrowed a couple hundred million dollars to drill for oil using fracking technology. The bank — the lender, bond investor or whoever — says: “Well, Jim, you just borrowed $200 million. How are you gonna pay me back?”
And I’d say: “Well, I’m going to sell my oil at $80 a barrel.”
To which the bank says: “How do I know that’s true?”
Oil below $50 is more than low enough to do an enormous amount of damage in financial markets…
So I go to Morgan Stanley, JP Morgan or Citibank and I buy what’s called a swap contract. It’s a kind of derivative. Citibank or whoever basically agrees to pay me the difference between $80 and the actual price of oil.
So if oil goes to $50 and I have a swap contract with Citibank that guarantees me $80, they have to pay me the $30 difference. That way, I’ve locked in the $80 price.
That’s not a free lunch. Oil producers give away the upside. If crude prices go to $150 they might have to pay the lenders the difference. But oil companies try to protect their downside.
Oil companies are protected because when oil goes to $50 because they can call up the bank and say: “Hey, bank, send me the other $30 a barrel because we have a deal.” And the bank will have to send it to them.
Through the derivative contract the loss now moves over to the bank. It’s not the oil company that suffers the loss, it’s the bank. This is the case with the global financial system today — you never know where the risks end up.
So the first iteration is that some of the oil companies – not all of them — have shifted their risk over to the banks by doing these derivative contracts.
You might be saying to yourself: “Aha, so the banks are going to have all the losses.”
Not necessarily. The banks are just middlemen. They might have written that guarantee to an oil company and have to pay the $30 difference in my example. But the bank may have also gone out and sold the contract to somebody else. Then it’s somebody else’s responsibility to pay the oil company.
Who could the somebody else be? It could be an ETF. And that ETF could be in your portfolio. This is where it gets scary because the risk just keeps getting moved around broken up into little pieces.
Citibank, for example, might write $5 billion of these derivatives contracts to a whole bunch of oil producers. But then, they may take that $5 billion and break it into thousands of smaller one or ten million dollar chunks and spread that risk around in a bunch of junk bond funds, ETFs or other smaller banks.
When many oil producers went for loans, the industry’s models showed oil prices between $80 and $150. $80 is the low end for maybe the most efficient projects, and $150, of course the high end. But no oil company went out and borrowed money on the assumption that they could make money at $50 a barrel.
So suddenly, there’s a bunch of debt out there that producers will not be able to pay back with the money they make at $50 a barrel. That means those debts will need to be written off.
How much? That’s a little bit more speculative.
I think maybe 50 percent of it has to be written off. But let’s be conservative and assume only 20 percent will be written-off. That’s a trillion dollars of losses that have not been absorbed or been priced into the market.
Go back to 2007. The total amount of subprime and Alt-A loans was about a trillion. The losses in that sector ticked well above 20 percent. There, you had a $1 trillion market with $200 billion of losses.
Here we’re talking about a $5 trillion market with $1 trillion of losses from unpaid debt — not counting derivatives. This fiasco is bigger than the subprime crisis that took down the economy in 2007.
I’m not saying we’re going to have another panic of that magnitude tomorrow; I’m just trying to make the point that the losses are already out there. Even at $60 per barrel the losses are significantly larger than the subprime meltdown of 2007. We’re looking at a disaster.
On top of those bad loans, there are derivatives. Right now, some of the producers are kind of shrugging, saying: “We went out and borrowed all this money on the assumption of $80, $90, $100 oil. But we also sold our oil production forward for a couple of years at $90. So we’re fine.”
That’s not true in every case, but it is true in a lot of the cases.
But the problem with derivatives is that you don’t know where the risk ends up. I don’t know where it is, and neither does the Federal Reserve, neither do the bank regulators. The banks might know their piece of it, but they don’t know the whole picture. That means we have to keep digging and digging.
The losses out there are larger, potentially, than the subprime crisis. The losses could actually be bigger than the sector’s borrowings because you can create derivatives out of thin air. And as I say, they could be in your portfolios.
There’s still time to call your investment advisors or broker to see whether you have any of this risk buried in your portfolio. You might not, but even if you don’t it may be time to take a little more defensive posture. That could be a little more cash or other hedges. That way when things start to collapse around you — even if you’re not taking a direct hit — you’re not collateral damage.”
– END –
Just to add fuel to that fire, the DTCC [Depository Trust and Clearing House] hasn’t been able to keep up with all the trades it is supposed to register, now it’s all high speed trading. According to Bix Weir, 99% of trades are not registered. Everything is ceded to Cede and Company, which could mean nobody knows who owns what, the banks don’t own their mortgages etc. Who is going to sort it out?
It’s the Age of Expedients giving way to an Age of Consequences [where Success = Failure
and Assets = Liabilities].
That doesn’t sound good either.
I’ll add a couple of comments on derivatives. First, it takes lots of time to settle derivatives contracts – Lehman Bros are still arguing about settlements, mostly about derivatives. Second, derviatives are all about counterparty risk – and that is why the banks want derivatives first in the queue for payout, and backed by the taxpayer.
Thanks! Those are good points too.
That is a great article. This is a direct link to it. http://dailyreckoning.com/ponzi-finance-50-oil/
One issue is that Rickards may overstate the amount of fracking losses–he doesn’t really offset the income to date. But the other issue is that there are other derivatives, other than oil, that will be affected as well.
On the human nature question. If one gets into a fight one has a 50% chance of loosing. Hence unending fighting is not a good strategy.
On the value of oil well the military needs lots of it and is willing to pay what ever it costs. Farming needs oil and we hope will pay whatever it takes.
Ed, don’t take this the wrong way but peace wins every war.
Dems and Repubs want infrastructure projects, which seems to mean road, road, road. Speed up that energy dissipation I’m not getting any younger and I want to see how this turns out.
World currency is a no-go. You want to see the problem with a united currency but sovereign economies, look no further that Europe. Spain and Greece’s economies tanked, but they cannot correct the normal way, with devaluation which would make their exports much more competitive. Instead they have to endure a horrible level of austerity which the ensuing political instability.
“Spain and Greece’s economies tanked, but they cannot correct the normal way, with devaluation which would make their exports much more competitive. ”
The problem there is that people are unwilling to take pay cuts, or debt write-downs. Also, this is a feature of an endless growth, maximum consumption system.
I would not recommend a single world currency as the only one. I would recommend local currencies at the State/Province/Territory or even city/regional/county level, nation currencies, and then a single neutral world currency that is not a national currency the way USD is.
How would you ever get agreement on a single world currency? If it were adopted, I think it would eventually produce the New World Order we so fear. I do like your idea of more currencies. In the US we would have to amend the Constitution if individual states were to have their own currencies. The Euro has proven to be a really bad idea and I would hope the EU would go back to individual currencies.
“How would you ever get agreement on a single world currency?’
Well one way would be to present a unthinkably uncertain dichotomous scenario.say nuclear war or primary resource theft ending due to low price. In our current state of evolution humans dont like uncertainty. Give a good dose of manifested uncertainty- where the fundamental idea of what is is questioned,. turn off the grid. No fuel for the food trucks . For a month say? Then present a seriously uncertain outcome VS a certain but painful outcome as the choices. Everyone will do trade with platypus tails as a unit after that if you say so. The beautiful thing about a false dichotomy is in essence it lets you decide if you are presenting it.. After a month of the trucks not rolling no one will care if its the truth or not anyway.
I met a guy last month who wouldn’t keep the new hundreds. Like the old notes were better. I enjoyed playing along. I told him “yeah they look just like the EURO” . Righteous indignation filled the room and a good time was had by all..
A single world currency has all the flaws seen today in the Euro. It’s a non starter.
“A single world currency has all the flaws seen today in the Euro. It’s a non starter.”
A non starter.
You mean like a sovereign country giving its monetary system to a group of unknown individuals who promptly issue a currency filled with enough occult symbols to fill a sorcerers notebook.
Individuals who had been tossed out twice before the second time with great effort by Andrew Jackson. Individuals who promptly involved us into banker war 1 and then banker war 2 openly making bets on both sides and then going on to serve in the executive branch?
A non starter
You mean like a health care act that mandates individual participation in private contracts that is far as I can see (not very far) is designed to take all personal wealth from the citizen?
A non starter
Like the details of the DTCC post you made below?
John neither you or I have enough imagination to know what a non starter is. We could chew peyote for a week climb Kilimanjaro without sleep and stand on our heads at the summit and the hallucinations would be tame compared to reality.
No Billy, just the Euro concept is a non starter. and that is based on seeing how it is travelling now i.e., evidence. So yes it is a non starter!
As for the rest of your comment, yes we can rave on forever without reward about the bankers/”banksters” who are always going to muddy the economic scene. It’s a bit off topic to carry on about the shenanigans of the IMF and the depredations carried on in its name, but it seems it gets your goat too.
Re the DTCC what are you trying to say?
“Re the DTCC what are you trying to say?”
Is my communication that hard to understand or are you purposely pretending not to understand?
Lets examine the term non starter. My understanding of the term is that it refers to ideas that are eithor so inherently flawed, or corrupt that their should be no chance of implementing them. My examples were just a few of many many of the incredible incredible non starters that were indeed started, exist and we live with today. All of these examples are deeply involved with monetary systems which is what we are discussing. I dispute your assertion that these examples are off topic.
“which could mean nobody knows who owns what, the banks don’t own their mortgages etc.”
So this is not example of a non starter that none the less exists? You posted about the DTCC because what is occurring there is is a good idea meticulously implemented that is based on sound economic and monetary principles?
No, I didn’t know where you were coming from, so maybe that was unclear. I see your definition of Non Starter. We know it started, we know its not working. so, effectively, the Euro idea is a non starter. It doesn’t mean it never happened, just that it was not a sound idea, wishful thinking rather than proper enquiry.
My post about the DTCC represents a poorly managed entity, not a non starter. It has been overtaken by events, the advent of high speed trading. So, I read 99% of trades are not registered, it means it’s not doing its job. A “good idea” you ask? You’ll have to decide for yourself.
@ John Doyle
I would argue with the collusion between the Fed the ECB and the BOJ the intent for common currency is clear and already in effect. Whats mucking it up is the oil standard for the dollar which is why its got to go just like the gold standard had to go. Wheres the separation? Is your stance that the “non starter” is that the separate countries of Europe did not each cede their sovereignty to a separate central bank rather than one central bank? Since they are all ONE bank whats the difference?
http://www.businessinsider.com/the-thinly-veiled-fed-bailout-of-europe-2011-12
Devaluation makes imported goods more expensive, ( i,e, a pay cut ) and forces foreign creditors to take a write down. It is a way of ramming it down unwilling throats.
Devaluation resets the country’s currency to a level commensurate with its total assets and GDP.
External factors are often out of its control so devaluation can reflect a necessary adjustment. It can be like a cascade across economies as one after another they fail to match reality. But it can rebound. IKEA now for example has decided to use Italy for manufacturing so China has lost out there. Japan started being cheap now it outsources manufacturing but soon will do it again at home. The USA the same, manufacturing is returning. Devaluation can cope. Not devaluing can lead to loss of the country’s assets to corporate predation, e.g., Greece and many third world countries.
Investors are just placing bets, so it’s to be understood they will lose sometimes. Countries should avoid signing over their assets as collateral. That way lies misery.
Good point!
Stef, I’ve seen discussions are improving chez l’homme pétrole, at least there are no more long kwh calculations (they finally got oil is not used in electricity generation, ha)
I am told the provincial gov is still distributing chickens and such. Now they’re targeting peasants groups they always neglected and were politically hostile (must get some extra votes with this transition policies as well, why not? It’s cheap). Wonder what will happen in the end.
I understand the situation in Cordoba province is really atypical, possibly unique. Most of the country, and of the world, is stucked in heavy ecological overshoot. There are three ag very rich provinces here, but administratively Buenos Aires has to deal with some 12 million Buenos Aires banlieu dwellers, and Santa Fe (Cordoba’s twin province by size and population) is wondering about transition but it is placed besides a big commercial river (Paraná) and so its destiny as an exporter is stronger. Santa Fe is also flat (nowhere to hide) and culturally more internationalized, while Cordoba has its own genre of popular music (cuarteto). In the hills we have some wood also, which is almost completely lacking in the fertile plains. In the end, it seems geography is determining cultural, economical and transitional possibilities
Reg. nukes, I’m starting to look at the issue as one of will rather than skill. Logistics could be complicated but surely not impossible and solar stuff could easily pump water for a couple of decades (compare this level of complexity with nuclear tech itself). This could be even done automatically to some extent. I’m even wondering if Guy McPherson is not a super troll of transition. I think he even talks about a dilemma between collapsing the economy or keeping the nukes cool, which is completely false: economy will collapse anyway and cooling the ponds without it is not really unfeasable
Gail, you talked this time of small surviving groups but you could mention also that somewhere (I’d rather prefer not to say precisely where) there are government transition moves (chickens, organic gardening, no more ag machinery credit, possibly something else I’m not aware). Main local University started a three year gardening free course. This could help somebody else to take some steps. Wonder if in another place in South America something like this is happening.
We had this suspicious blast and Dioxitek also, will see soon if this was intended and what for (to just pressure against Embalse’s life extending procedures or to really knock down the nuclear industry). An injured person already died, the first victim of some Transition War?
Solar pumping water for a couple of decades has several underlying assumptions:
(1) The solar will still work.
(2) The pump will still work, or be kept repaired to work (a bigger assumption).
(3) It will still make sense for you to live in the same place, where the pump is needed, or (alternatively) you will have the means to carry all of the apparatus elsewhere, and reinstall it.
(4) You and your family will still be alive to care about whether the pump arrangement works. Thus, no other big catastrophes-climate, nuclear power, earthquake, epidemic, etc.
(5) The soil will not be so degraded that you can get food from the area, with your solar pump arrangement.
As I’ve said, automation is limited. Indeed, oversizing panels, batteries and pumps helps. Redundancy is a good tactic.
I dosen’t understand (3), given the apparatus are to be used in the pond, which is immobile.
Reg. (4), I don’t see any interest in making suppositions on other big catastrophes. It is not to guarantee 100% such a plan will work, 99% is enough for me.
Reg. (5), why should the soil be degraded? And how is it related to pumps? Besides, as nukes are located along rivers or lakes, water provision is indeed guaranteed.
Dear Gail and All
Add another prognostication on oil prices to the pot:
http://peakoil.com/consumption/t-boone-pickens-sees-100-oil
Pickens has apparently put all his money into oil investments. His money is where his mouth is.
Don Stewart
My prognostication is that T. Boone Pickens will be disappointed.
Thanks! I wish him good luck.
Quote from Steve Ludlum, “The decrease in the dollar price of crude is ipso facto marketplace repricing more valuable dollars. The lower bound is where dollars become a proxy for crude and are hoarded. At that point all things are discounted to the dollar because the dollar traded for crude is more favorable than a trade of anything else for crude, that includes other currencies as well as dollar-denominated credit.”
Not many people were predicting dollar in the role as the last man standing, especially with all that hype around the trendy wave of bilateral swap deals outside the dollar system etc.
What is perhaps not understood or appreciated well is the simple fact, such deals are indeed in the making and will progress, but they take place on the level of players, which are diversified in money, power, time and influence. They simple don’t care that much about can kicking decade or two here and there, it’s less relevant if your are or believe you are all set and dandy.
And rightly so, it’s not very intuitive, the situation in the US domestic finances, economy and social order could be near basket case level, but that’s not what matters at all, up to a point. The main issue it’s the world reserve currency and it has been cemented as such even during the last four decades of this roughly 400yrs system of order. In short, it will likely go out as the very last thing of that particular system.
This obviously makes resiliency efforts less predictable both in method and timing, and often times also makes life bordering on insanity. In actuality presents the PO/finiteworld bottleneck situation worse for most of us. It’s very hard to be with one foot in the future and the second one in the slow motion of today.
Excellent post, Worldofhanuman
Dear Gail and All
Sorry…failed to post link:
https://agenda.weforum.org/2014/10/wellbeing-replace-gdp-policy-making/
Don Stewart
Dear Gail and All
We have several times discussed the issues around GDP and human welfare. Here is an update from Richard Easterlin, professor of economics. Look particularly at the results for China.
As I look at it, what I see is that GDP is essential to repaying debts. If you don’t have debts, then GDP is much less relevant. Debt was the rattlesnake under the rock we turned over.
Don Stewart
GDP (or whatever you want to call it) is essential to getting oil out of the ground, also other fossil fuels and creating metals. If you want food made with today’s equipment and water that is clean from the tap, then GDP is essential. If you can get along with food you plant with the simplest of tools, and water from a nearby creek or a well with a bucket you pull up on a rope (that you can replace when it wears out), then GDP doesn’t matter.
GDP also matters for things like pensions, Social Security, and Medicare.
If the inflation-adjusted cost of oil extraction rises 10 percent a year, then loaning money into existence must accelerate to outpace the concomitant devaluation of the money plus cover the 10 percent annual rise in the cost of oil extraction.
Good point!
Hi Gail, greetings from Indonesia. Thank you for your excellent writings.
I realize that the situation is quite different in Indonesia. In November 2014, the President reduced the subsidy for gasoline, therefore rising the price from 6500 Rupiah to 8500 Rupiah per liter. This price hike also hiked prices of almost everything.
Now in January, the subsidy was not only reduced, but completely eliminated. Because of the lower price of oil, the gasoline price dropped from 8500 Rupiah to 7600 Rupiah per liter. But the commodity prices stay flat. Do you think Indonesian economy can run a bit longer?
There have been a number of countries that have been cutting back their subsidies for oil, or raising their taxes on oil. In a way, what is happening is that the government is trying to get part of the advantage of lower prices, either through lower subsidies or through greater tax revenue.
At this point, it looks like everything can go on a bit longer–at least until dominoes somewhere around the world start creating problems. It is hard to know what will happen when and where. Oil production will likely stay up for a few months longer. Big defaults will take a while to happen, so the next few months, things may turn out to be quite good. It will be over time that thing fall apart–probably at different paces in different parts of the world.
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Seems to be an interesting book:
Manfred Weissenbacher: Sources of Power: How Energy Forges Human History, ABC-CLIO, 2009
http://www.abc-clio.com/ABC-CLIOCorporate/product.aspx?pc=D8717C
p. 643:
“By July 2008 the oil price reached $147 and some began calling this a kind of slow-motion oil price shock. However, the word shock may have been inadequate altogether, as it had to be expected that meeting future demand for oil at prices previously considered reasonable would be difficult. After all, the global oil discovery rate (of cheaply producible oil) had not kept up with global production rates for a while. Thus, higher oil prices were likely to become a permanent condition, unless or until being automatically adjusted downward as soon as they would lead to a global economic crisis that would in turn curb the demand for oil. Such scenario had at least to be expected if the world was indeed getting close to a global oil production peak, and the great Age of Oil was bound to come to an end.”
http://books.google.sk/books?id=dcYHzuFLZP0C&printsec=frontcover&hl=sk#v=onepage&q&f=false
There is some talk that the spiralling security situation in France, coupled with economic stagnation and a lack of reform, risks a protectionist Le Pen presidency in 2017 that would “trigger a collapse in economic output across Europe, a banking crisis and a meltdown in the financial markets.” This could just be exaggeration from the centre right Telegraph but if true the stakes are high for TPTB, more so than if a Syriza government were elected in Greece in a fortnight. Likely a European meltdown would have global implications.
http://www.telegraph.co.uk/finance/economics/11331700/An-extremist-backlash-in-France-could-eventually-bust-Europes-economies.html
quote:
France is in a state of shock, its democracy defiled by barbaric, bloodthirsty terrorists. Journalists and the policemen protecting them have been murdered. A new form of terrorism has reached the West, with quasi-military operatives hunting down their targets.
[…]
A National Front victory would signal the final demise of the EU and euro: she has pledged to exit both, with the unravelling guaranteed to happen in the worst, most irrational way possible. It ought of course to be possible for clever politicians to negotiate the dismantling of the disastrous single currency in a sensible way and to replace the dirigiste, increasingly centralised EU by a pure trading block – but Le Pen’s brand of aggressive, protectionist, anti-market poujadisme would merely precipitate a monumental and entirely destructive crisis in international relations.
Her vision is the very opposite of the free-trading, decentralised Europe that British Eurorealists have long advocated. Under Le Pen’s world view, free trade and economic integration would come to an abrupt halt; the shock would be similar to the return of trade barriers that followed the Great Depression and helped to prolong and worsen it. The National Front would undoubtedly repeat the errors of the US Smoot-Hawley tariffs of 1930. A Le Pen victory would thus be bound to trigger a collapse in economic output across Europe, a banking crisis and a meltdown in the financial markets.
France’s tragedy is that it is an economic basket case, the result of decades of failed statist policies from all parties; many of its voters are thus more likely to listen to extremists’ siren voices. The economy probably grew by 0.4pc last year; expansion this year will be anaemic at best. The most recent manufacturing and services purchasing managers’ index climbed to an eight-month high of 49.7 in December – but even then the private sector economy was still shrinking slightly.
Remarkably, public sector spending is continuing to rise as a share of French GDP, a process which goes against what is happening elsewhere and which dooms the economy to permanent under-performance. State expenditure reached the equivalent of 57.3pc of GDP last year, the highest in at least 15 years, according to the OECD, and is set to dip only trivially to 56.8pc of GDP this year and 56.6pc next year…
I wouldn’t necessarily agree with your assessment of how France is going. If you are quoting MSM sources you would be well advise to seek out the underlying agenda, because it will be distorted. I haven’t been in France for years but I have been to Japan recently. It’s also been subject to a misinformation case about being in the doldrums. Being there it’s obvious that’s not true, that Japan is motoring along comfortably. If you believed all the articles about stagflation etc there would be panic at every turn.
As for public sector growth, we are all doing it. When farms mechanise, or jobs are outsourced who takes up the slack? It’s not very productive, if at all, but our whole modern civilization has moved past infrastructure to maintenance, leisure, sport, including intra-bank games and so on.
We are of course on our way out, but to go out comfortably is not criminal.
I like LePen. I do not think the global corporation should rule the world.
How does the government expect to pay for all of this? There is clearly a problem.
As a friend of mine wrote, the only way out of the security mess is to have everyone gainfully employed, not just in France. However now we see [or some of us do] economies tanking,for all the reasons Gail et al have shown, full employment is never going to happen in the economic paradigm ruling the current economic picture.
As I have shown elsewhere, MMT has solutions, but even it may be up against answers if the collapse starts speeding up.
“As a friend of mine wrote, the only way out of the security mess is to have everyone gainfully employed, not just in France.”
A bound (interindebted) system is at a negative level of potential energy: http://hyperphysics.phy-astr.gsu.edu/hbase/thermo/phase.html#c4
Said otherwise, modern people are energetically impotent, genetically incapable of working.
The following link does as good a job of summing up our current oil and financial problems as anything that I’ve seen recently. It also says pretty much the same thing as the hillsgroup has been saying, although it adds some interesting things in regard to the future of currencies world wide.
http://www.doomsteaddiner.net/blog/2015/01/09/black-swan-dive/
A few lines from the above link that describe where we are heading in regard to the death of the dollar. The end-game of dollar preference is crude-driven dollar deflation as took place in the US in 1933. Dollars were held as ‘gold in hand’ and business in the country was the buying and selling of currency to obtain gold which was necessary to settle contracts. The deflationary impulse was ended when the world’s governments ended specie and fixed convertibility, cutting the currency links to gold. The need will be for the US to end the dollar’s convertibility to crude, to go ‘off crude’ as countries went ‘off gold’. The alternative is for dollars to vanish from circulation and cease to be a medium of exchange. Local currencies emerging in the dollar’s place will be of little use in the obtain of fuel imports, the country will be limited to the petroleum that can be sustainably produced on its own soil.
Dollar preference is self-limiting. Dollar preference in 2015 is the demise of the euro, yen, ruble, peso, real … their unraveling illuminates widespread mismanagement. Doubts about currency regimes take root. The differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the dollar other than a military machine that is debt-dependent and failure-prone. Dollar preference condemns the rest which starts the clock on the ultimate death of the dollar.
That is an excellent essay, but I will need to read it a couple of more times to absorb and understand all the specifics of what he is stating.
Thanks
Steve is not easy to understand, but he often has worthwhile insights. I discovered him back in my Oil Drum days. He has been on some of the Doomstead Diner podcasts with me.
Very thought provoking article. Thanks creedon. A fundamental question in my mind has been how can the most precious substance in the world drop against a currency issued by a financial institution/government with unpayable debt. There have been explanations but none that tied all the ends together like this. Gail what do you think of the article?
Ludlum proposes the death of the dollar as a currency as it is hoarded for exchangability for oil as all other trades become dwarfed by the value in $/oil cross. Either the world economy dies as the reserve currency disappears in a vacuum of hoarding or the very mechanism which gave it value in the first place- exchangabilty with oil- is disassembled.
I think Ludlum brings up interesting ideas, but I would not assign high probabilities to each one.
I see the financial system, with all of its debt and derivatives, and sliced and diced debt and derivatives as the weak link.
Ludlum may look at hoarding differently than I do, though. Or maybe he is looking at what is left after the melt-down.
Thanks! I always enjoy Steve Ludlum’s thoughts (aka Steve from Virginia). As I understand it, he is a retired orchid grower who has taken up the study of the financial system on his own. He has an interesting way of putting things. Sometimes, it takes a big of deciphering to figure out what he is saying.
Dear All
Now is a good time to observe, with some amusement, the various explanations and forecasts offered about oil.
Today, Charles Hugh Smith and Chris Martenson agree that oil is in a ‘head fake’. Down now, up much more later. Watch for the IOCs buying shale patches when the price gets low enough.
And The Hills Group:
‘Without a swift rise in oil prices, a wave of write-downs and impairment charges could be about to wash over the industry.’
And shortonoil responds:
This could be a bit of a problem! The Etp model, which historically has been 96.5% accurate, informs us that when there is a bounce in price it will be a maximum of $25/ barrel. From there it will again begin to decline into the 60s in 2016.
http://www.thehillsgroup.org/depletion2_022.htm
Because petroleum is a foundational commodity, that is you can not run our present civilization without it, the 1% to the 99% will all go down together. The 99% will have no assets, and the 1% who hold their debt will find that it has become worthless. Even the assets that they foreclose upon will be of no value. Without the 99% to maintain them, they will fall into irreparable decay. This will occur as depletion continues its ride to the bottom, and the social structure unravels without the energy needed to keep it together.
Back to me. I had figured out that assets which are dependent on oil (a house in the suburbs, a car, etc.) would be worthless if there is no oil. I hadn’t figured out that attempts by the 1 percent to seize them to as debt payments would be futile. Might be a pleasant thought as you go broke!
Don Stewart
I don’t agree with Charles Hugh Smith and Chris Martenson. Any price rise will be short lived. It won’t be “up much more later” unless wages and debt increase.
I agree with Gail; a recent quote from Shortonoil; ”
shortonoil on Mon, 12th Jan 2015 3:51 pm
“Price of oil continues to fall. Has it become less valuable? Fewer BTU per barrel?”
It is amazing, and will probably be tragic that on a site dedicated to the decline of oil that so many can fail to understand the implications of the concept of depletion. A concept that was discussed, and recognized over 2000 years ago by our ancestors. A reality that is as obvious as the inevitability of death itself. Yet they deny it, and replace it with streams of regurgitated media hyperbola acting more like programed autotomata than cognitive functioning biological creatures. One must ask, is it possible that thinking humans can be conditioned into robotic appliances? Has the “Brave New World” arrived?”
Every forecast on the economy and commodity prices should come with a government-type health warning. That said, I *think* this time around the various players may begin to doubt their ability to predetermine outcomes. There is a huge difference between the Deep State seizing an opportunity to put a strategic plan into operation, and the ability of the “Front Office” to get their public to believe in it anymore. Trust is in the process of being lost, and if we have any sense, there will be more caution and agreement on the way forward from now on. Is it too much to plan for the worst and hope for the best?
Dear Gail and All
The question about cooperation and competition persists. I mentioned that I heard Janine Benyus talk on the subject, but couldn’t find any references. I did a new search and came across this from the Omega Insitutute. Apparently, they sat down with her for a little follow up on her talk:
http://www.eomega.org/learning-paths/sustainable-living-nature-environment/nature-doesnt-compete-it-cooperates
It seems to me that this is a correct statement:
The design that you see when you look at Nature is the result of an effort of lots of different species to cooperate. You can also find examples of head to head competition, but cooperation is the dominant pattern. Within a species, there tends to be more competition. An oak tree may drop a million acorns for every one that becomes a mighty oak in its maturity. Acorns generally do not cooperate.
Humans, however, are a social species. We evolved to cooperate in small groups. Solitary humans have poor prospects for survival. Nature has given us bonding hormones which help smooth over the rough edges.
We have evolved to a global financial capitalistic economy which has greatly increased the level of cooperation beyond anything which can be mediated by personal relationships and hormones. Money, in effect, replaces the hormones.
If the monetary system fails, then we will be, first, disoriented and not very productive trying to operate in what is now an unfamiliar environment. Any small groups which are operating, at the time of the crisis, with considerable mediation by hormones and specialization of functions among the group (think of a Shaker village) is likely to survive better than most.
After the crash, then the process of sorting out how individuals can form small groups and cooperate, and how the small groups can cooperate, will proceed…but not rapidly enough to avoid a lot of deaths among the unprepared or the simply unlucky.
It’s hard to tell how rapidly new human societies might form. Those who survive will have memory of what is possible. We can be pretty sure any society will have to be hierarchic as it adds complexity beyond, say, 150 people. We can also expect that it will not have the abundance of resources that the first complex human societies found, as we have depleted soils and minerals and clean water. The scarcity of resources may be ameliorated by the fact that most of the humans have simply disappeared, and there is considerable salvage laying around.
Don Stewart
The Omega Institute was form when five doctors bought an abandon Hasidic summer camp. They are the board. They have brought in over 500 million dollars tax free. There is the branch in the Caribbean for the winter board meeting, etc… Cooperation does work.
Of course there are limits to cooperation. Omega pays no tax to the town to maintain the road used by their customers, no tax to the fire department used to protect their millions of dollars worth of buildings. It would cut into the profits of the board of directors.
edpell
I really don’t care about your complaints about Omega. I have no connection with them. They sponsored a meeting where a number of thoughtful people spoke. I got to watch for free by video link. One of them was Janine Benyus. Janine had some things to say about cooperation and competition. I don’t think evaluating what she had to say has very much to do with the moral qualities of the Board of Directors of Omega.
Don Stewart
“Omega pays no tax to the town to maintain the road used by their customers,”
Roads are normally paid for by gasoline tax, if various levels of government decide to divert those funds to other purposes or into their own pockets, that’s too bad. Unless The Omega Institute fuels without using gas stations, they and their customers are paying road tax.
Thank you Don, excellent points!
We have evolved to a global financial capitalistic economy which has greatly increased the level of cooperation beyond anything which can be mediated by personal relationships and hormones. Money, in effect, replaces the hormones.
It seems obvious but this system has made each state participant “dependent” on the whole system.
It’s a clever design and I wonder if this was the original intention at beginning, say Bretton Woods? I’m not much for conspiracy theories, but this is so compelling, it is hard to resist. The idea of a world government lashed together by a single global economic system…and the elimination of open-ended wars…liberal (or neo-liberal?) democracies praising the elevated image of ourselves, the human species, accomplished…like a new Roman Empire.
It seems only Russia remains outside the system. I don’t believe China is outside the system!
Good point. I think Russia is being pushed outside the system, as is Iran. For maximum growth, we need everyone together. Of course, that growth can’t go one forever.
“For maximum growth, we need everyone together.”
Wrong, Gail.
Aggregation produces both positive-pressure binding energy and a negative-pressure bound state. When the former dominates over the latter, the system grows but becomes more fragile. When the latter begins to dominate over the former, the fragile system instantaneously implodes.
Growth peaks when 50 percent of the initial disgregated elements have been aggregated (cf. Peak Oil reached when 50 percent of the initial resource has been extracted).
Therefore, for maximum growth, we need 50 percent of everyone together.
In the year of 2014 AD, 50 percent of everyone came together: http://www.newscientist.com/articleimages/mg20827923.800/1-2011-preview-the-internet-peak-comes-into-view.html
Read more: http://2012wiki.com/index.php?title=Novelty_theory
Above I discussed social theory with Don, and I said agency approach and structural approach are both needed to truly understand what happens. So as for somebody intending or planning any kind of geopolitical or systemic reality, this is not at odds with the fact they need to do it and can’t act much differently. Situations that can be consistently called conspiracies are not more an act of free will than situations where say a waiter or a teacher need going to work every day. Only our social position -considerably lower than that of the members of the kind of conspiracy you are mentioning- makes us to believe they act more freely than us. But this is not true. They are not more free than say a couple of kids conspiring to give a scare to a third for fun.
Hi Christian,
I tend to believe that everybody is acting in their best interest as they perceive it. I believe this is very similar to what you are saying, perhaps a little more simplistic. What you are saying sounds very similar to Tolstoy:
“Man lives consciously for himself, but is an unconscious instrument in the attainment of the historic, universal, aims of humanity. A deed done is irrevocable, and its result coinciding in time with the actions of millions of other men assumes an historic significance. The higher a man stands on the social ladder, the more people he is connected with and the more power he has over others, the more evident is the predestination and inevitability of his every action.” and of course “Kings are the slaves of history.”
Nice quote alturium
Will mankind make it through its longest day?
“Will mankind make it through its longest day?”
And does it matter?
Any reactions to this potential breakthrough, or not?
German designed micro fuel cell, which transformes 40grams of gas into 56Watthours of electric energy. So, if roughly one 1 kilogram (kg) = 1.406 cubic meters (m3) then 1.4kWhrs could be made from such amount of gas, which cost bellow $.5USD per cubic meter. Is it any good if they could scale it up for home appliance size, e.g. peak load shaving for winter months on northern hemisphere with PV baseload? You can do it with batteries now but that expensive and not trouble free. Could it be scalable soon, or is it a toy dead end concept..?
http://derstandard.at/2000010141159/Kraftwerk-Mobile-Brennstoffzelle-laedt-Handys-mit-Feuerzeuggas
$0.50 per KwH is quite a lot, at that price point nearly all renewable energy becomes viable. Looking at Ontario, I see once you factor in all the fees, natural gas is currently about $0.30 per cubic meter, so nearly triple current electricity rates. It is an interesting idea, with some limited applications, but there is not so much methane in the world that we can run the world for a long time on just that.
Yep, the “promise” of fuel cell was/is in comparative simplicity, no maintanace, longevity etc. However, in practice it’s still much cheaper to burn methane in diesel engine for kWh, plus recuperate some of the heat from its cooling loop. That would be the best way to go, imagine some community “cogen power stations” say each for 3-7 family houses, that technology is mature has been around for decades, could be sourced today in that size for for low $100K.. Might be even again coupled with heat pumps with ground loop in each house to further increase overall efficiencies.
Now in summary, with that plan you need much less base load, mostly for the industry and shared public infrustrucutre (tram, trains, hospitals, ..). I guess that’s the way Germans, Austrians and others are actively trying to restructure into PO plateau, slow decline scenarios. There is also the PV and wind contribution. Obviously, this is not so easy done in countries with high urbanization and people living in highrise projects, major cities. We are simply victims of previous misjudgements and misconceptions, sunken cost in previous ideas of needed infrustructure and living arrangements ala Kunstler etc.
That’s why I say the energy demand destruction will continue massively into the near/midterm future especially in the west, primarily in Europe. Will the asians be able to grow a little bit on this available energy, minus the onset of PO depletion? Who knows, I’m afraid the system is able to withstand 1-2decades more in more or less current social-economic fashion, obviously that doesn’t negate the high probability of severe shocks along the way.
It very clearly is not a cheap replacement for oil–doesn’t even claim to be, so it doesn’t solve our current problems.
There are other problems for fuel cells. The output tends to decline with use, hence even a 5 percent per year decline in electrical output soon becomes unaffordable, unless the heat produced is highly valued. Some manufacturers are close to a viable domestic appliance, but the needed final improvements are elusive.
Great post Gail!!
I tried to pull up your 2008 post that predicted the financial crash but the post does my appear to be hosted by your site. Can you re-post that please?
Thank you.
http://www.theoildrum.com/node/3382
This is a link to a PDF of the Oil Drum post that predicted the 2008 financial crash, hosted on OurFiniteWorld.com. https://gailtheactuary.files.wordpress.com/2015/01/the-oil-drum-peak-oil-and-the-financial-markets-a-forecast-for-2008.pdf
This is a link to a follow-up post that I did later.
https://gailtheactuary.files.wordpress.com/2015/01/the-oil-drum-delusions-of-finance-where-we-are-headed.pdf
Yes! Finally someone writes about video. http://djpiter.pl
I am afraid I need a translation.
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I caught this interesting animation interpretation on what the end of oil may look like. I understand the filmmaker, Patrick Jean was paid by an agency/organization to produce this gem, but it never aired.
Motorville: An animated story about the USA’s oil addiction
http://youtu.be/hLwJIp7tKsY
And one of the prior posts here by Matthew Krajcik caught my attention about the utter insanity of perpetual growth. Interestingly a short while ago, I stumbled on this Keep your Eyes on the Prize blog:
http://www.resilience.org/stories/2015-01-07/keep-your-eyes-on-the-prize
Affirming to know there are others out there that understands, “Everybody has the same plan; continue obtaining the majority of their energy needs from fossil fuels while growing their economies. That’s the plan and if it does not make you uncomfortable on some level, then I would gently suggest that some more time ought to be spent studying energy’s role in supporting life, and especially complex arrangements of life.
…one key point lost on many people is that technology cannot create energy. It can only transform it.
…Instead I wish we could simply note that oil has no scalable substitutes, we support billions of people by growing food with it, and that every political, financial, portfolio, and institutional entity has the same underlying assumption”
As a scientist/engineer, I have grown up practicing conservation because I realized at a very early age that resources are finite. I have had to adopt the mindset of the ‘duck’ for the better part of my life. Conservation should not have been decoupled from energy efficiency technology.
One problem is those who don’t understand thermodynamics, don’t understand a physical
system dealing with kilojoules or kilograms makes things way more difficult than say, working in the
infinite space of the internet. What has been unfortunate is a great deal of folks assumed energy was like the computer science industry. They do not understand that the laws of physics don’t allow the speedy progress we witnessed during the information technology era. Gains in the energy sector come about incrementally. Energy has to be converted to a useful form; usually in the form of electricity or heat. And most importantly, the amount that can be obtained is limited, set by the laws of thermodynamics.
And then there is the matter of efficiency. Gasoline, diesel, LPG (liquified petroleum gas) and natural gas (NG) are efficient. They contain an energy rich density no single renewable energy systems technology posses, are relatively easy to transport and store in large quantities, and use in vehicles, buildings, or power processes. I therefore think energy innovation, in the short term, will come about with revolutionary changes in energy extraction, storage, distribution and application. And so, as difficult as this is for me to say…
…I see a game changer being the glut of natural gas from tracking shale deposits in the USA. IF,
HOWEVER THE GAS CAN BE EXTRACTED WITHOUT ENVIRONMENTAL DAMAGE, THIS
COULD BE THE CLOSEST DISRUPTOR FOR THE NEAR TERM FUTURE.
Ethane, typically reinjected into a natural gas well head or flared, can be used as an alternative transportation green(er), clean(er) fuel opportunity transitionally. I have indeed reconciled that until the electrical vehicle (EV) infrastructure can be fully realized, IF it will ever become fully realized, that helping the ‘smoke stack’ industry reduce their carbon footprint is just as using compressed liquid ethane in the transportation sector is favorable as any renewable energy solar farm, wind farm, or energy efficiency program at this juncture in time.
Alas, tragedy of the commons is upon us. Itiswhatitis…
“…one key point lost on many people is that technology cannot create energy. It can only transform it.”
That statement may be true, but if you succeed in tapping the nuclear binding energy present and then released when you fuse, say, two di-deuterium molecules into helium-4, then you have used technology to transform that great amount (minus some losses) into a form of useful energy.
If.
Yes, if we could run a pipe to the sun and taps its energy we could power the earth with that.
If we could turn sand into oil we could power the earth for quite some years.
If fusion were to ever produce cheap energy we could keep rolling for some years.
If if if if if. Lots of ifs.
Seems I have been hearing about ifs for decades now yet last I looked we burned record amounts of coal and oil last year.
So forgive me if I am cynical about these ‘next big things’ people mention here.
In the ultimate analysis, any useful energy is gravitationally condensed energy:
It takes billions of years to produce useful energy by condensing the primordial rarefied hydrogen plasma. At that, rarefied hydrogen plasma is a finite and nonrenewable resource. Humans can only spend and transform, but not produce useful energy.
This is an important point.
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Hi Gail
thank you for your well organized and detailed explanation as always!
but i think that if the collapse would start with financial problem as you said in the text, we will be able to probably solve it.
What I mean is we are now in the struggle with huge debt, not redeemable, i admit. It was because Central Banks including FRB bought large amount of public bonds and other assets through QE programs to deal with ongoing problems. if Central Banks give up their right for the assets they purchased and are holding, the debt problem we are stuck in will disappear! They didn’t pay a penny for purchasing those assets anyway. Then we can start again from the beginning. Don’t you think?
Debt and QE as I see them, are ways to fight the effects of diminishing returns from energy.
I don’ think this is much different than say you have a job paying 100k per year and you get a wage cut down to 75k. To compensate and maintain your lifestyle you borrow 25k from the bank. Then your salary gets get to 50k and you borrow 50k. And so on.
The difference is only one of scale. When there are too many debtors and not enough creditors, that’s when the banks start to print money. That can work for awhile but what cannot continue will stop.
In the meantime, every day, your salary is dropping because the cost to extract energy is increasing (10% a year I am told).
We need cheaply extractable oil to run BAU. QE can paper that over for some time (6 years now), but it is no panacea. The pushing on a string phase will come, just as the apple will fall.
Diminishing returns as I see it is like the air you breathe. It contains a percentage of oxygen and you need to take a certain amount of breaths per minute to function. If the percentage or ppm of oxygen decreases, you need to take bigger or more breaths per minute to function normally. The oxygen in the air could be analogous to the BTU’s within a gallon of gasoline or barrel of oil, or copper in a ton of ore, or protein in a ton of wheat.
Exactly. As a star self-gravitationally condenses, its latent heat becomes condensed into overt heat. Since the star’s latent heat is finite, the star condenses ever faster in response to the diminishing returns of collapse-delaying overt heat:
http://2012wiki.com/index.php?title=Novelty_theory
No I don’t agree with you. Our problem started long before QE.
If we could keep up economic growth, then we could (more or less) repay existing debt with interest. The problem is that we can’t. There is a huge mismatch between (1) promises outstanding and (2) future resources available to meet them. As the economy slows because of diminishing returns, the mismatch becomes greater and greater. Eventually, the financial system may fall apart. The result is very much like a Ponzi scheme for investments–more promises than can ever be paid back.
I need to write a post about this.
I know what you are taking about!
I am saying that we can give ourselves some temporary break for the current hardship we are facing by adopting the above-mentioned cancellation of those assets, not saying our fundamental problems arising from over-population can be solved. I don’t think the current resource scarcity caused by over-population will be easily addressed while we keep our business as usual.
I will wait for your next post about the current financial problem
thanks for reply
“It was because Central Banks including FRB bought large amount of public bonds and other assets through QE programs to deal with ongoing problems. if Central Banks give up their right for the assets they purchased and are holding, the debt problem we are stuck in will disappear! They didn’t pay a penny for purchasing those assets anyway. Then we can start again from the beginning.”
A large portion of the too-big-to-fail companies’ cash is currently reserved for servicing and redeeming the public bonds purchased by central banks. Therefore, cancelling the public bonds would be equivalent to distributing a huge amount of newly printed banknotes among the too-big-to-fail companies and would raise asset prices. This increase in asset prices would be tantamount to a wealth confiscation in favour of the select rich.
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Which countries will get most of the cheap oil?
http://fortune.com/2015/01/07/oil-winners-losers/
According to the research firm Oxford Economics, out of 45 countries, Slovakia is on the second place: it has one of the most open economies, i. e. the positive effect should be one of the highest. As was the negative effect of the 2008 fall, when tens of thousands jobs were lost.
http://spravy.pravda.sk/ekonomika/clanok/341777-z-lacnej-ropy-v-europe-najviac-ziska-slovensko/
The economy of Slovakia is still too dependent from energies (industry and metallurgy predominate) – not good prospects after the collapse. This is the reason why the impact of high/low oil prices is so visible here in every aspect of the life…
It is interesting that, according to this study, Japan gest a very little boost from low oil prices:
“One explanation is that Oxford includes the effect that oil prices could have on monetary policy. Lower oil prices would cause inflation to drop and potentially allow the Philippines to lower its 4% interest rate. Japan’s interest rates are already as low as they can go, so no boost from lower inflation there. What’s more, developing nation’s are less efficient, so the Philippines has a greater demand for oil relative to its population.”
Definitely, the low interest rates and the already high efficiency due to the use of higher, costlier technology will prevent some countries to get any economic growth from the fall of the oil price.
Thanks for the link. Of course, the article looks at a very narrow range of impacts. The fact that world oil production is likely to go down, and we likely won’t be able to get it back up again, is not a concern of Fortune for example. Or the impact of derivative defaults on banks. Or why oil prices are falling, and what effect that is likely to have.
Massive debt and slowing growth are a lethal combination: http://www.telegraph.co.uk/finance/economics/11333928/Bank-of-America-warns-of-lethal-damage-to-Chinas-financial-system-as-deflation-deepens.html
When Will Peak Oil Actually Arrive? Costs Way Too High and Rising
http://peakoilbarrel.com/wp-content/uploads/2014/02/World-Yearly.png
http://peakoilbarrel.com/will-peak-oil-actually-arrive/
Thanks for the link. http://peakoilbarrel.com/will-peak-oil-actually-arrive/
It is to a Ron Patterson post from February 2014 that I had almost forgotten about, talking about the likely fast peak of shale oil.
Here is Chris Cook’s take. He starts off with a similar QE-oil price graph like Fig 1 – the picture which tells 1,000 words – and then explains what Saudi’s pre-paid oil is all about
http://www.eurotrib.com/story/2015/1/1/195652/1093
The Euro Tribune article by Chris Cook http://www.eurotrib.com/story/2015/1/1/195652/1093 and the comments that follow make allegations that the Saudis were getting the benefit of some of the US QE money. In fact, it has been protecting them from the effects of prices going down.
One quote from Chris Cook in the comments:
Prepay investments seem to work somewhat like a prepaid credit card. All of this is very opaque.
After thinking about Chris Cook’s comment further, if he is right, it is only by extraordinary measures that the economy has been kept going from 2004, which is when oil prices hit $40 and $50 per barrel. That time period is also when the US started having problems with job creation. There are various dates on the peak of conventional oil production (depending how it is defined) but it is close to the date of the peak of conventional oil production.
So maybe what we have seen is peak oil delayed for 10 years, through all kinds of financial funny-business that helped oil prices rise high enough. We clearly need lots of debt to keep oil prices up high enough, but it may take more than that–particular kinds of financial funny business. It is only when the funny business can’t be kept up any more, that the financial system collapses. Perhaps the system by itself cannot keep oil prices up high enough to financially justify the extraction of the high-priced oil we now need. As I commented in my post, oil companies were cutting back on exploration and production budgets, even before oil prices dropped. The system wasn’t working well enough, even before the slow-down and stop.
I suppose another way out of our predicament (at least for a short time) would be someone figuring out a new way to artificially pump up oil prices again. But with economies so weak, the high oil prices would send the economies of Europe and Japan badly downward.
“I suppose another way out of our predicament (at least for a short time) would be someone figuring out a new way to artificially pump up oil prices again.”
Raising oil prices will raise the cost of oil production. Due to the law of receding horizons (the tendency for the target “high-enough” oil price to just stay on the horizon no matter how hard you struggle towards it), we would need to raise oil prices with acceleration.
http://2012wiki.com/index.php?title=Novelty_theory