The oil glut and low prices reflect an affordability problem

For a long time, there has been a belief that the decline in oil supply will come by way of high oil prices. Demand will exceed supply. It seems to me that this view is backward–the decline in supply will come through low oil prices.

The oil glut we are experiencing now reflects a worldwide affordability crisis. Because of a lack of affordability, demand is depressed. This lack of demand keeps prices low–below the cost of production for many producers. If the affordability issue cannot be fixed, it threatens to bring down the system by discouraging investment in oil production.

This lack of affordability is affecting far more than oil products. A recent article in The Economist talks about LNG prices being depressed. LNG capacity ramped up quickly in response to high prices a few years ago. Now there is a glut of LNG capacity, and prices are far below the cost of extraction and shipping for many LNG suppliers. At least temporary contraction seems likely in this sector.

If we look at World Bank Commodity Price data, we find that between 2011 and 2014, the inflation-adjusted price of Australian coal decreased by 41%. In the same period, the inflation-adjusted price of rubber is down 58%, and of iron ore is down 59%. With those types of price drops, we can expect huge cutbacks on production of many types of goods.

How Does this Lack of Affordability Come About?

The issue we are up against is diminishing returns. Diminishing returns mean that as we reach limits, it takes increased resources (usually both physical resources and human labor) to produce some type of product. Oil is product subject to diminishing returns. Metals of many kinds also are becoming increasingly expensive to extract. In many parts of the world, a shortage of water makes it necessary to use unusual techniques (desalination or long distance pipelines) to obtain adequate supply. The higher cost of pollution control can have a similar effect to diminishing returns on products with pollution issues.

When we graph of the cost of production of resources subject to diminishing reserves, the result is similar to that shown in Figure 1.

Figure 1. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

Figure 1. The way we would expect the cost of the extraction of energy supplies to rise, as finite supplies deplete.

What happens with diminishing returns is that cost increases tend to be quite small for a very long time, but then suddenly “turn a corner.” With oil, the shift to higher costs comes as we move from “conventional” oil to “unconventional” oil. With metals, the shift comes as high quality ores become depleted, and we need to move to mines that require moving a great deal more dirt to extract the same quantity of a given metal. With water, such a steep rise in diminishing returns comes when wells no longer provide a sufficient quantity of water, and we must go to extraordinary measures, such as desalination, to obtain water.

During the time when cost increases from diminishing returns were quite minor, it generally was possible to compensate for the small cost increases with technological improvements and efficiency gains elsewhere in the system. Thus, even though there was a small amount of diminishing returns going on, they could be hidden within the overall system.

Once the effect of diminishing returns becomes greater (as it has since about 2000), it becomes much harder to hide cost increases. The cost of finished products of many kinds (for example, food, gasoline, houses, and automobiles) starts rising, relative to the income of workers. Workers find that they must cut back on discretionary expenditures in order to have enough money to cover all of their expenses.

How Diminishing Returns Affect the Economy 

There are at least three ways that diminishing returns adversely affects the economy:

  1. Lower wages
  2. Less ability to borrow
  3. Squeezing out other sectors of the economy

The reason for lower wages relates to the fact that, as the cost of producing a commodity rises, the worker is, in some sense, becoming less and less productive. For example, if we calculate wages per worker in units of oil, as oil becomes more expensive to extract, we get something like this:

Figure 2. Wages per worker in units of oil produced, corresponding to amounts shown in Figure 1.

Figure 2. Wages per worker in units of oil produced, corresponding to amounts shown in Figure 1.

A similar chart would hold for other resources that are becoming more difficult to extract, or whose cost of production is becoming higher because of greater pollution controls. For example, we would expect the wages of coal workers to be falling as well.

Also, as we shift to higher cost types of energy, we become increasingly inefficient in energy production. Based on a 2013 analysis, in the United States, there are more solar energy workers than coal miners, even though we use far more coal than solar energy. The large number of workers required to produce solar energy is one of the reason that solar energy tends to be high-priced to produce.

When we look at wages of workers, we indeed see a pattern of falling wages, especially for workers below the median wage. Figure 3 from the Economic Policy Institute shows that even the most educated workers are experiencing declining inflation-adjusted wages.

A second major issue affecting affordability is debt saturation. Affordability is favorably affected by rising debt–for example, it is a lot easier to buy a new car or house, if the would-be purchaser can obtain a new loan. If debt levels stay the same or fall, this becomes a problem–fewer goods can be purchased.

Governments in particular are reaching the limits of their borrowing capacity. They cannot keep adding new debt, and remain within historic debt to GDP ratios.

Another way debt saturation occurs relates to young people with student loans. They find it too expensive to borrow more money for a new car or for a home. Furthermore, the fact that wages are not keeping up with price increases for many workers reduces the borrowing ability of the workers with lagging wages. This is true, even if no student loans are involved.

As mentioned above, a third issue is the fact that the inefficient sectors tend to squeeze out other portions of the economy by gobbling up a disproportionate share of workers and resources. The use of all of these resources doesn’t produce a lot of goods in the traditional sense–a desalination plant is expensive, but the amount of water produced per dollar of investment is not large. To the extent that the high costs of inefficient sectors are passed on to consumers, consumers find that they must cut back on discretionary spending. This cut-back in spending squeezes out discretionary spending, leading to cutbacks in discretionary sectors, and to reduced employment overall.

Figure 4. Author's view of the effect of diminishing returns on economy.

Figure 4. Author’s view of the effect of diminishing returns on economy.

Wishful Thinking by Economists

Back before diminishing returns started becoming a major problem, economists created models regarding how the economy would react to higher cost of energy production and other symptoms of diminishing returns. In their view, if the cost of oil extraction rises, oil prices will rise to match these higher costs. Alternatively, substitution will take place, or technological changes will allow greater efficiency, or customers will cut back on their use of the high cost product. Somehow, these changes will take place without a particularly adverse impact on the economy.

Unfortunately, the models don’t correspond very well to what happens in practice–at least not for very long. It takes inexpensive energy to produce goods that workers can afford. Higher priced energy does not work well in this regard. Feedbacks that are not reflected in economic models reduce both wages and debt, making it harder to buy goods requiring the use of more-expensive energy products.

Furthermore, if the price of one commodity, for example oil, rises, then countries with very much oil in their energy mix find themselves handicapped in trade with other countries that use less oil in their energy mix. For example, a country that depends on tourism (which depends on oil use) for very much of its revenue, such as Greece, finds it difficult to find customers when oil prices are high. Lack of revenue can lead to financial problems for the country.

Because of the networked way the economy really works, prices for commodities can’t rise for the long-term. They may rise for a while, as consumers and governments borrow more, in an attempt to continue business as usual. Ultimately, though, the situation can’t “work.”  Customers can’t afford to buy more homes and cars, unless their own wages are rising in inflation adjusted terms, and governments can’t collect enough tax revenue.

The issue we are dealing with here is lack of affordability. This is what will bring the system down–not the high priced scenario imagined by many. Decline will come through low prices, and a glut in oil supply, even if we are not looking for it from that direction.

Can commodity prices rise again?

It is not all that clear that they can rise again. It would be a lot easier for commodity prices to rise, if the problem were simply inadequate prices of one commodity, leading to a lack of that commodity. If the problem is inadequate demand for crude oil, coal, LNG, and iron ore the problem is much greater–especially if wages are still lagging.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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602 Responses to The oil glut and low prices reflect an affordability problem

  1. Don Stewart says:

    Dear Gail and All
    This essay is on the general topic of the affordability of energy and the odd ways that might play out as energy becomes less economical to acquire. Many of these thoughts were prompted by a visit yesterday to the Bureau of Engraving and Printing (BEP) (where they print paper money) in Ft. Worth, TX, and by reading the section on Systems Evolution on page 26 in Mobus and Kalton.

    What we see at the BEP is a highly automated printing and distribution process which is evolving to an ever less labor intensive process. The newest production line combines many previously separate printing operations into a continuous production line many yards long, attended by only 3 people. The plant operates 24/7, and is obviously dependent on both a lot of electricity as well as a lot of embedded energy in the form of many millions of dollars of infrastructure. Fossil fuels are involved in assembling the raw ingredients (papers and inks, most notably) as well as shipping the finished bills to the regional Federal Reserve Banks and then on to the local banks and ATMs.

    Now consider this statement in Mobus and Kalton:

    ‘If there is an abundance of inflowing FREE energy, that which is available to do useful work, then systems (as a general rule) will tend toward higher levels of organization and complexity.’

    Now let me pose some questions:
    First, is the current high level of automation, and the impending increase to even greater automation, more or less complex than the older, labor-intensive system? If energy costs continue to increase (the cost of producing energy), will automation be promoted or retarded?

    Second, how would we count the energy intensity? By looking at the electricity bill? By imputing something for the infrastructure? Would we also add in something to account for the energy required by the workers as they go about their daily lives?

    Third, what about the ghost workers who are no longer required? It seems to be true that automation is now destroying more jobs than it creates. Yet, we have some sense that the laid-off workers must be provided a decent standard of living. Should we impute an energy cost for the laid off workers?

    Fourth, it seems clear that the increase in automation is driven by the fact that the energy requirements of the new machinery are less than the energy requirements of the laid-off workers. The laid-off workers are paid from general tax revenues, and are never counted when the management is deciding whether to invest the money in the new machines. Is it possible to conceive of the decision as a societal decision rather than a profit maximizing decision by a single entity?

    Here are some preliminary conclusions that I have reached. Comments welcome:

    Increased automation and more layoffs and more low-paying jobs may be a result of the increased cost of energy. Organizations will invest in more energy intensive mechanical processes in a factory in order to avoid having to pay employees who use far more energy in maintaining their life styles. I am not at all sure that our naive ideas about complexity are helpful. The machines in the BEP may look complex, but they are far less complex than Americans trying to live in our modern world.

    It may be more useful to approach the issues in terms of competition for energy. The highly automated process versus the human trying to live like an American, or the Chinese rural peasant versus the highly automated process. At the present time, it seems that the highly automated machines are outcompeting Americans. At one time, Chinese factories were not particularly highly automated…but that may be changing.

    This all begins to sound somewhat dystopian…like some science fiction stories. The machines have won the war, and the humans are mostly little better than slaves.

    Don Stewart

    • (I am replying like a “regular” commenter from China.)

      Increased automation leaves a lot of workers without jobs. Quite a few of them drop out of the labor force–they go back to school, try to collect disability benefits, or somehow get funds. Or they take a low paid service job at a local retail establishment. If there are enough of them, the government gets called in to provide jobs for them or special programs for them.

    • edpell says:

      Don, it is not machines versus humans. It is humans who own and deploy machine versus humans that do not own and deploy machines. Yes, those who own the means of production win and those who have no capital goods to work for them are poor and at the mercy of the owners.

    • edpell says:

      Don and others, the American who uses gas to drive his junker F150 fifty miles to his job as a Walmart greeter can not afford gas compared to the Indian software engineer who car pools with 7 others in a VW turbo diesel van.

    • edpell says:

      Don, why do people believe the capitalist system will provide jobs/housing/food/clothing/transportation/education/entertainment for people who have IQs in the bottom third.

      • Don Stewart says:

        Dear edpell

        When I look at the workers on the plant floor at the BEP, I don’t see any great exhibit of skill. For example, one worker riffles paper so that the machines into which it is fed can separate the leaves effectively. If this worker were to disappear tomorrow, I think he could easily be replaced almost instantly. Consequently, I think his negotiating power is virtually zero (absent something like a union). When you move to, let’s say, an engineer who is designing the machines and the workflow, then the negotiating power is higher. And so we get the top 20 percent of the workforce, which is doing fairly well. The bottom 80 percent, I think, is exposed to the full force of the competition from the machines.

        In a Darwinian System, the people who have ‘disappeared’ from the labor force since 2008 would simply have died. Mostly, however, they have been allowed to take disability or get SNAP or, somehow, keep body and soul together. As they drop from the middle class to poverty, their demand for energy declines. Retail sales decline. All the symptoms we see, currently. In extreme cases, they sleep on the streets of NYC or LA, and their energy use drops to near zero. In short, in a Darwinian System, the energy and the machine combination outcompetes the humans, and total energy demand declines.

        Imagine a society with tools, but not automation. A worker is valuable because he or she can manipulate a tool with skill…whether it is a sewing machine or a farmer’s hoe or scythe or the shorthand and typewriter of the stenographer. Since all of these workers have a unique value, the distribution of income will be fairly flat. What I saw at the BEP would suggest a very steeply unequal distribution of income. Those who control the machines (not necessarily own them) will do pretty well….those who tend the machines will not.

        As more and more people are consigned to tending machines, or are ‘disappeared’ from the labor force, the distribution of incomes will become more and more unequal. In addition, we have the financial effects laid out by Piketty, which make the situation worse.

        I conclude that Financial, Automated Capitalism is unstable. Add in all the other challenges, such as Peak Resources, and everything looks pretty challenging.

        Don Stewart

        • MG says:

          Yes, the workers compete with the machines. The machines have no private life, no need for travelling, eating food unproductively etc.The machines are indispensable in getting the harder to get energy resources. The machines are what breaks the limits. They constitue more and more sophisticated tools in the hands of the people. More and more energy is spent for their production and maintenance, although their operation may be less energy intensive, as far as this is possible.

          This is another reason why the population decline is inevitable: the society simply does not need som much people. The people compete for the energy with the machines. If we do not provide the energy to the machines, we are finished immediately. If we provide them energy instead of consuming it for our fun, we can continue extracting harder to get resources for a while longer.

          This is especially true when we have two kinds of oil: the cheap conventional oil and the costly unconventional oil. The cheap conventional oil helps us as leverage in getting the harder to get oil.

          The problem is that now, when the prices are down, the cheap oil will be consumed and we will have no leverage for getting the harder to get oil. Those who think that the higher prices make the extraction of the harder to get oil profitable are mistaken. It is the cheap oil that makes possible the extraction of the harder to get oil. It would not be possible to extract the harder to get oil without the easy oil. In the same way, as it would not be possible to start the extraction of oil without the pipes and other techology created based on the coal extraction and processing.

          • Glenn Stehle says:

            @ MG

            I think you hit the nail squarely upon the head in your March 14, 2015 at 12:46 am comment when you stated “but this debt does not create the growth.”

            In almost all major contemporary economies money is created as debt.

            In his masterpiece on money — “Money: Whence It Came, Where It Went” — John Kenneth Galbraith heralds a history of money that spans several thousands of years, And the final judgment he comes to is that regardless of how money is created, whether it be fiat or “hard money” (gold and silver), or who is charged with creating it, that sometimes the creation of new money results in growth in the real economy, and sometimes it doesn’t.

            The question Gail raises is this: “Can contemporary real (as opposed to fictitious) economies experience real (as opposed to fictitious) growth in the absence of cheap and abundant energy inputs?

            Can capitalism and socialism survive $100 dollar oil?

        • Glenn Stehle says:

          @ Don Stewart,

          Is it possible that the elimination of slavery had nothing to do with man graduating to a higher moral plane, but came about for purely pragmatic reasons: that using abundant and cheap carbon energy was more efficient than using human energy?

          “If the physical parameters of the planet are declining, there is virtually no chance that freedom, democracy and a lot of the immaterial things we value will be going up,” is how Dennis Meadows puts it.

          • Don Stewart says:

            Dear Glenn Stehle
            About 80 percent of the goals of slavery could be accomplished by share cropping and the company store. Today, perhaps 50 percent of the goals of slavery can be accomplished by debt. I am no prophet, but I will hazard a guess. If industrial civilization crashes, then I would expect a reversion to something like share cropping and the company store. The rich, who aren’t actually all that rich by Davos standards, would control the share cropping and own the company store. However, since we are starting from extreme inequality, it might go the way of outright slavery. Many free people in ancient Rome, and in Czarist Russia, sold themselves into slavery rather than starve.

            Don Stewart

          • Tolstoy's Degenerate Grandson says:

            Of course slavery ended because oil was a more efficient way of getting work done!

            An oil powered machine does not get sick, die, run away or complain. No need to whip it because it will give you 100% 24/7.

            Which leads me to believe that slavery will make a big comeback post collapse, not that it has ever gone away

            • “Of course slavery ended because oil was a more efficient way of getting work done!”

              Unless you believe in non-linear time, what you are suggesting is not possible. Slavery was abolished first, then oil was produced.

            • Tolstoy's Degenerate Grandson says:

              Let’s substitute coal for oil. Because that was the first big deployment of fossil fuels and it made slavery for the most part no longer necessary.

            • “Let’s substitute coal for oil. Because that was the first big deployment of fossil fuels and it made slavery for the most part no longer necessary.”

              Not too many coal-powered potato harvesters or cotton pickers. Slavery was mostly used for growing crops, mining gold and silver, rowing oars (okay, that one actually was displaced by coal). I don’t think much slavery went into factories, skilled labour jobs, military (although British Naval service was pretty close to enslavement in the age of sail).

              The agricultural revolution, which proceeded and enabled the industrial revolution, lead to a much smaller portion of the population working on farms – say, from 90% down to 50%. This was done mostly by Mennonites and other religious orders that figured out crop rotation and other methods to increase yields and decrease manual labour, mostly through using work horses in place of humans.

            • Glenn Stehle says:

              Coal undoubtedly revolutionized the manufacturing process to a far greater degree than it did agriculture. The carbon revolution in manufacturing began in England in the 18th century, and by the 19th was all but complete.

              It was oil and natural gas and their byproducts (fertilizers, pesticides, etc.), however, which revolutionized agriculture. But these didn’t come along until the 20th century.

              Could this help explain why it was in the industrial north where the abolitionist movement first took hold, and why abolition was fought so fiercely in the rural, agricultural south?

            • “Could this help explain why it was in the industrial north where the abolitionist movement first took hold, and why abolition was fought so fiercely in the rural, agricultural south?”

              Absolutely. It is much easier to take the moral high ground when your livelihood does not depend on it.

              “It was oil and natural gas and their byproducts (fertilizers, pesticides, etc.), however, which revolutionized agriculture. But these didn’t come along until the 20th century.”

              The Green Revolution, or the (third?) agricultural revolution. This is separate from the 15th/16th century revolution. The first moved from 90% agrarian to 50%, freeing up workers to be loggers, miners and factory workers. The second moved us down to 1% farmers, while allowing up to ten-fold population increase, and a move towards the majority of people living in cities.

              The big difference is, the latest revolution only exists as long as there is oil, coal and natural gas. With it, the extra population, the urban density and all the service sector jobs. Is it possible to transition back to pre-20th century farming, and if so, how?

            • Tolstoy's Degenerate Grandson says:

              Matt Ridley: How Fossil Fuels Helped End Slavery

              Hay, water, and wind are ways of drawing upon the sun’s energy: the sun powers plants, rain and the wind. Timber is a way of drawing on a store of the sun’s energy laid down in previous decades–on solar capital, as it were. Peat is an older store of the sunlight–solar capital laid down over millennia.

              And coal, whose high energy content enabled the British to overtake the Dutch, is still older sunlight, mostly captured around 300 million years before. The secret of the industrial revolution was shifting from current solar power to stored solar power.

              Not that human muscle power disappeared: slavery continued, in Russia, the Caribbean and America as well as many other places. But gradually, erratically, more and more of the goods people made were made with fossil energy.


            • glennstehle says:

              Matthew Krajcik asked: “Is it possible to transition back to pre-20th century farming, and if so, how?”

              Well heck, don’t get me to lying.

              But what are the other options?

    • Glenn Stehle says:

      @ Don Stewart

      Some interesting and critical questions you raise.

      However, your underlying assumption seems to be that automation is, proximately speaking, more energy efficient than using human labor in the production process. This is an assumption which needs to be proven and not just assumed.

      Furthermore, is it not entirely possible that it is free, or nearly-free, carbon energy which enables the automation process? Have you ever read the analyses of how much energy a barrel of oil contains? And when nearly-free carbon energy depletes, is it not possible that the automation process will grind to an abrupt halt?

      In the larger social and economic framework, however, you do acknowledge that automation may ultimately be less energy efficient than automation, because all the displaced workers still must be provided with some sort of minimal material standard of living, which is not energy-free.

      Overall, however, you raise some key issues which need to be thought out and investigated in much greater depth.

      • Don Stewart says:

        Dear Glenn Stehle
        Is automation cheaper than employing people. There are pictures at the BEP showing rows of workers making paper money. Those pictures, as compared to now, reveal a steady and drastic replacement of humans with automation. I have to assume that automation has, for the most part, been cheaper than employing humans.

        Second, I agree that automation will not survive the death of fossil fuels. But neither will the employment of large numbers of humans to do things not related to necessities, such as food. We will probably go back to 80 percent working on farms…with probably no more than 2 billion humans on the planet.

        Third, I have come to believe that automation is now irrational from an overall perspective since it is giving us a large number of unemployable people, while reducing the wages of those who do find work. Automation is still rational for a government bureau, or a private company, but it makes no sense for the country or the globe. I distinguish between tool use and automation, as John Michael
        Greer has recently made the distinction.

        Don Stewart

      • “However, your underlying assumption seems to be that automation is, proximately speaking, more energy efficient than using human labor in the production process.”

        “Furthermore, is it not entirely possible that it is free, or nearly-free, carbon energy which enables the automation process?”

        Take into account that most of the food is produced using oil and natural gas inputs, so the 1000 calories powering the human labourer is, itself, a form of gallons of embedded fuel. The nearly-free carbon energy is what allows there to be so many people, and so few farmers as a portion of the population.

  2. VPK says:

    How much “cleanup” would their be a Fukushima without “oil”?
    “The sheer manpower and money dedicated to the house-to-house effort is staggering: In the last four years, the government has spent $13.5 billion on decontamination efforts outside the nuclear plant, and the budget request for the fiscal year starting in April is another $3.48 billion, said Seiji Tsutsui, director of the international cooperation office for radioactive decontamination at the Environment Ministry.
    At the peak, some 18,000 people were doing decontamination work; as of early February, that number had dropped to 12,000. The fruits of the laborers’ efforts are stacked in those giant sacks—5.5 million of them and counting. Decontamination – the activity is endless. The huge amount they are spending, maybe it would be better spent helping residents” resettle elsewhere, says Iwao Hoshi, a former city official in Minamisoma
    The scale and complexity of what Japan is trying to do in the aftermath of the 2011 meltdown at Fukushima is mind-boggling. Decontamination plans are being executed for 105 cities, towns and villages affected by the accident at Fukusima Dai-ichi, 140 miles northeast of Tokyo.
    But unlike the 1986 accident at Chernobyl, where authorities simply declared a 1,000 square-mile no-habitation zone, resettled 350,000 people and essentially decided to let the radiation dissipate over decades or centuries, Japan is attempting to make the Fukushima region livable again. It is an unprecedented effort.
    Tatsuhiko Kodama, director of Tokyo University’s Radioisotope Center, who has been recruited by Minamisoma to chair its Committee to Promote Decontamination, says the government’s plan is “nearly impossible” and makes no sense.

    “The government is simply putting soil into bags with no plan for recycling,” said Kodama, who has been visiting the area on a weekly basis. “The residents don’t trust the government so much.”
    and the “Big Show” continues….

  3. MG says:

    The energy redistribution by the governments is used to manage the man-made ecosystems, so that efficient and robust energy flows are secured. It is done e.g. by using navigation of money flows, setting various law limits in the area of education and business, providing funding, subsidies, stimulating economy via banking system etc., thus directing the energy in the economy.

    In the times of the crisis, the government uses the money for infrastructure projects to restore/create channels for energy flows. It helped in the past, when there were still untapped sources of cheap energy. But today, such activities of governments distort the picture of the reality, as now, when the sources of the cheap energy are depleting, the infrastructure projects do not help anymore. There is less and less cheap energy that could be channeled. That is e.g. why no infrastructure projects could help Japan to revive its economy and no infrastructure projects can, in the long term, save any economy, when there is no cheap energy.

    The difference between the left-wing or right-wing solutions is that the right-wing parties allow the rise of the debt by the citizens, while the left-wing parties allow the rise of the debt by the states. Today, when the infrastructure projects do not work anymore as before, the activities of the left-wing parties are no longer able to stop the citizens from going into the debt. And the right-wing stimulation of the economy using the creation of the cheap money does not help, too.

    When there is no cheap energy to extract and use by the economy, it is like the system starts to consume itself: the lack of maintenance destroys human and material assets. When the costs of the energy start to rise, there is still posibility to keep the material assets maintained using the long-term debt. But the human assets can not be maintaned by the long-term debt. The human assets need cheap energy for their maintenance and functioning.

    That is why the Greece could not be saved by the infrastructure projects financed by the European Union. And that is why the funds of the EU for various projects are often used for the desperate personal survival purposes via fraud: their ability to create the real economic growth stops after the money is spent anyway.

    This way the government of the Banská Bystrica Self-Governing Region (BBSK) in Slovakia started to reject the EU funds. The co-financing requires loans, which means further rise of the debt, but this debt does not create the growth. Thus we come to the point, when some of the broken regions simply start to reject the growth of their long-term debt required by the co-financing the infrastructure projects funded by the central governments, as these do not bring any real improvement to the given declining regions:

  4. wehavemetnitisus says:

    Wee willy please return. Eat some kim chi for breakfast

  5. Artleads says:

    This is just hitting my AOL news, so I imagine it’s old news here.

  6. Tolstoy's Grandson says:

    Reading that article reaffirms my thinking that we are approaching end of the book.

    As I see it, there was a pellmell dash to get as much oil infrastructure sunk while QE and other stimulus were able to stop the economy from collapsing due to high priced oil.

    That race has been completed and it has resulted in a desired glut of oil.

    Almost as if we were hoarding as much oil as possible in one giant last gasp to keep BAU on track for as long as possible.

    The time remaining can be calculated in how long the oil lasts from the already sunk infrastructure that does not care if oil is $50 or $20. Barring unforeseen circumstances that oil will be pumped, and when start to come down off the peak, the real chaos will begin.

    • Creedon says:

      Other than that supply will have to decline at some point, I don’t think you can predict much of anything. Mid Eastern countries are being ravaged currently and Europe is in more and more trouble all the time, while we are in the midst of an oil glut and in denial about the future. Who can possibly predict the outcome. If world oil supply were to suddenly drop 20 percent I’m sure there would be repercussions.

      • wehavemetnitisus says:

        Im not sure. Libya has gone offline twice and the trucks were and are still rolling, which brings to question where will the demand destruction and finite energy lines cross.

    • wehavemetnitisus says:

      This account seems probable. Any informed guesses as to time line till sunk infrastructure runs dry?

  7. Pingback: Gail Tverberg The oil glut and low prices reflect an affordability problem | Peak Energy & Resources, Climate Change, and the Preservation of Knowledge

  8. Nigella says:

    The Real Reason Behind the Oil Price Collapse

    It’s not overproduction in shale fields, and it’s not global economic stagnation. It’s something far more threatening to Big Oil’s business model

    • The problem is not too much supply, or not enough demand? And then you go on to link to “too much supply”. The problem is that there is a maximum price people can continue to consume oil at, and continue increasing consumption at. When the price is too high, the rate of increase in oil consumption falls, even into negative growth – i.e. decline. That is literally what affordability means.

      • Creedon says:

        When more than half a barrel of oil is required to produce a barrel of oil you can not have world wide economic growth. Its been said by Gail before, cheaply produced light sweet crude is required for economic growth. What you can have is stagnation and decline. It’s going to be up to the world to figure out how we’re going to react to this. Right now we’re not really realizing that there is a problem.

        • richard says:

          Even the BIS is taking notice …

          “A substantial part of the increased borrowing has been by state-owned major integrated oil firms from emerging market economies (EMEs). From 2006 to 2014, the stock of total borrowing (syndicated loans and debt securities) of Russian companies grew at an annual rate of 13%, that of Brazilian companies 25% and that of Chinese companies 31%. Borrowings of companies from other EMEs increased by 17% per annum. The increase in the leverage of EME companies contrasts with the stable leverage of comparable-sized large firms in the United States (Graph_2, right-hand panel). These EME companies have substantial existing production and therefore revenue. In many cases, their borrowing has coincided with large dividend payments to their sovereign owners. Hence, their behaviour appears similar to that of large, cash-rich firms in other sectors that have used very easy borrowing conditions in international markets to increase equity returns.”
          “First, the oil-debt nexus illustrates the evolving risks in the financial system. Rapidly rising leverage creates risk exposures in the non-financial corporate sector that may be transferred across the global financial system. Similarly, rising leverage puts a greater premium on the liquidity of the markets for the assets that back debt. Both developments underscore the need to better understand the functioning, behaviour and interaction of markets and intermediaries.”

          That last paragraph loses somenting in translation … 😉

          • Don Stewart says:

            Dear Richard

            I was talking with one of my daughters yesterday on the telephone. I told her that I have never seen such uncertainty about the future in all my three quarters of a century.

            Sticking just with the oil question, I said one side is saying that oil prices must and will increase to at least 70 dollars for WTI. (See Tom Whipple, today, and Boone Pickens very recently, among many.) On the other hand, we have Gail and the Hills Group saying that the Age of Oil is ending, few new wells are going to be drilled, and we will just scavenge the remaining oil. Prices will fall and finally be zero.

            As we were talking, an illustration of how oil prices could approach zero occurred to me. I asked my daughter:

            ‘How much would a medieval peasant have paid for a barrel of oil?’

            She immediately got the point. The answer is ‘nothing’. The peasant didn’t have the infrastructure to make use of the oil. Oil is not like a bushel of wheat. If one thinks that we are headed back toward some semblance of peasantry, that implies material scarcity, and oil would be of little value. Perhaps that is the reason shortonoil keeps talking about oil the way he does.

            I was also reading some yesterday in Mobus and Kalton (it’s good mental exercise). The basic systems diagram shows some inputs coming in from the left, a system which turns inputs into outputs in the center, and products and waste coming out on the right. If we define, say, fracking in the Bakken, as a the system of interest, and keep the boundaries conservative as all the ‘break even’ analyses do, then perhaps a Bakken well can be drilled for a hundred dollars a barrel.

            But then we have to include as one of the inputs an oil dependent society. Perhaps that is why shortonoil says that it now takes all the oil the well produces just to produce the oil. His equations are, implicitly or explicitly, counting in the oil dependent society as an input (cost).

            At any rate, I suggest the question about the peasant as something to ponder.

            Don Stewart

  9. Seems like yet another “confirmation” for likely BAU continuation in the midterm 2015-2020ish, and especially supported if we include the ongoing energy demand destruction in the west and slow down in the east.

    So, it is unlikely that substantial financial system reset will take place before this phase transpires for good, remember TPTB are firstly about squeezing the last possible blood drop from the living corps of sheeple, so they will prop it up to the full stop.

    Obviously, it could crash any minute any day theoretically, but recently unimaginable monstrosities now put in wide practice like negative rates or hidden proxy entities (Belgium, Luxemburg, Cayman offshore) sanitizing hundreds of $billions of new US gov debt, resulting as always in no questions asked, so happy BAUing.

    Frankly, “timing wrong again” is a good message afterall, we are granted several more years. Either spend it with loved ones inside BAU bubble or utilized this prolonged calm before the storm on some resilience home improvements or combination of thereof..

  10. Glenn Stehle says:

    Gail, it’s always a pleasure to read your analyses.

    We live in such a complex global system these days, with so many moving parts and so many unintended consequences, and so much deception and denial, that predicting the future has become almost a fools errand.

    One thing is for sure, though, and that is the highly reductionist theories which have evolved from the thinking of both Adam Smith and Karl Marx now seem hopelessly obsolete.

    Both ideologies, events are now revealing, fell victim to Positivism, which followed in the trajectory of 15th-century humanism and 17th-century modernism and concluded that man could make himself “master and possessor of nature.”

    As John Gray explains, “This Enlightenment faith — for it soon acquired the trappings of a religion — was most clearly expressed in an exotic, sometimes grotesque but vastly and enduringly influential early nineteenth-century intellectual movement that called itself Positivism.”

    And Positivism is the reigning mythology or “secular religion” of Modernity, the era in which we live.

    As Gray goes on to explain, Positivism held that “Through the use of technology, humanity would extend its power over the Earth’s resources and overcome the worst forms of natural scarcity. Poverty and war could be abolished. Through the power given it by science, humanity would be able to create a new world.”

    But as time goes on, Positivism is beginning to look more and more like just one more Utopian vision. The physicist Tom Murphy suggests in “Sustainable Means Bunkty to Me” that “the vast amounts of surplus fossil fuel energy we have enjoyed have made us dangerously overconfident and unable to see that we will have to cope with a diminishing supply rate that has been of paramount importance to our high-tech existence. He concludes that we face the sobering possibility of a substantial ratcheting-down of the lifestyle to which we have become accustomed.”

    And of course both the snake-oil salesmen of the right and the snake-oil salesmen of the left have no shortage of elixirs to save us from this dreary fate.

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  14. Daniel Hood says:

    It’s starting…the end of the Anglo-Saxon (Washington/London) petrodollar/Nato dominated world order. Goodbye America, it’s been nice knowing you. Even Europe has had enough, not to mention Russia militarily & China economically. Now we have Austria, Belgium, Denmark, France, Italy, Germany, Luxembourg, the Netherlands, Poland, Portugal and Spain saying get lost, we’ve had enough.

    (March 10, 2015) “China’s mega Int’ payment system is ready, will launch this year”

    (March 8, 2015) “EU President Jean-Claude Juncker calls for creation of an EU Army”

    (March 11, 2015) “The New Atlantic Rift: NATO vs The EU Army”

    (Sept 19th, 2012) “EU proposals for an EU Army would destroy Nato & threaten the transatlantic alliance (Read: Washington & London’s dominance)”

    Ass Sec State Victoria Nuland’s “F?ck the EU” jibe wasn’t so smart after all.

    Basically Brussels, Berlin, Paris et al are saying to Washington/London, game over in addition to Moscow, Beijing, Tehran and the rest of the world.

    • Daniel Hood says:

      Dr. Alexander Neu, Bundestag MP from Germany’s Left Party, agrees with Mr Piskorski in that the creation of a European army would limit Washington’s influence in Europe.

      “NATO is an instrument of American influence in Germany and the EU. It’s the instrument that allows the US to fulfil its agenda in Europe. A united EU army would question the dominant positions of the US within NATO.”

      This concept was lost over the last 20 years, because NATO and the US deemed themselves winners and saw no reason to meet Russia halfway.

      “But it’s impossible to imagine peace in Europe without Russia. Which is why I say: either the US supports peaceful policies in Europe, or Europe has to create its own peaceful policy, without the US, and create a new joint security system with Russia.”

      • Creedon says:

        Dan, your making a mistake in your thinking. You need to study people like Steve Ludlum. As strange as it seems, the American Empire and the dollar as the world’s reserve currency is going to be the last man standing. The rest of the world will go down first. Europe is on the way now. In Steve Ludlum’s poetic words, the rest of the world’s currencies will fail, which will start the clock ticking on America and the dollar. There is a sort of law that says that he that controls the debt, controls the world. We just happen to control the world’s debt.

        • Daniel Hood says:

          It’s not my thinking, it’s the EUs thinking as you can see. European leaders are calling for an EU army. The President of the European Union.

      • Kim G says:

        Given that Europe has almost entirely disarmed in favor of free-riding on the American tax payer, we should be delighted if they raise their own army and pay for it themselves. Personally, I’m tired of us both being and paying to be the world’s cop. Let them pressure Russia alone to get gas; we’re not the ones whose houses would freeze and whose economy would stop without Russian gas.

        However, given that most of Europe is broke, I seriously doubt they’ll find the money to act on their fantasies. They might have to stop retiring at age 55 to pay for it. There will be no European army of any consequence.

        • Daniel Hood says:

          We’ll soon find out who needs who. The US is saying to the EU “you need us” The EU is now signalling “we don’t need you. I think it was mentioned back in 2008, the world would start to decouple from the US and we’re seeing it globally.

          There is a clear rift between Washington, Brussels, Paris, Berlin.

          Seems to me the EU is opting for the Eurasian century.

          • Tolstoy's Degenerate Grandson says:

            Why not exchange the US ‘protector’ (as in you are under our protection and do what we want or you are our enemy) for the other mob family’s protection aka Russia?

            At least you know that you will be warm for the rest of the winter.

            Isn’t that exactly what the Ukraine concluded when they decided to stay under the Russian sphere of influence vs NATO?

            Didn’t work out so well for them as the US bludgeoned the country to make a point.

            Difficult to bludgeon all of Europe (as in attempt to unseat all the democratically elected leaders in favor of those who will kiss the American ring)

    • Glenn Stehle says:

      It seems to me like China-Russia and Germany-Russia alliances make a lot of sense.

      Putin’s strategy for worldwide energy domination seems to have worked, for if we look at combined oil, natural gas, coal and enriched uranium exports, Russia has left Saudi Arabia in the dust, that is speaking in terms of total energy exports and not just crude exports.

      What we’re talking about is productive might, not military might or financial might. Regarding the latter two, the US still enjoys dominance. A combination of Russia’s energy-producing might with Germany’s and China’s industrial-producing might seems to me a very symbiotic relationship.

      And history has shown that where productive — that is economic — might goes, military, financial and moral might are soon to follow.

      • Daniel Hood says:

        “A combination of Russia’s energy-producing might with Germany’s and China’s industrial-producing might seems to me a very symbiotic relationship.”

        I couldn’t agree more with you. The beginning of the Eurasian empire. Europe does not see Russia as an enemy, or it’s becoming clearer by the day, Brussels, Berlin, Paris do not see Russia as the enemy and are refusing to be drawn into hegeminic conflict hence their calls for an EU army which would neutralize NATO.

        That clearly has to have some threatened in the US.

    • gerryhiles says:

      Now you are talking some reality into all this hypothetical stuff, but Gail did not like it when I posted stuff about the Empire of Chaos coming undone, so don’t expect a welcome response.

      Mind you I did try to tie-in nine-eleven with current events and that is strictly taboo, so you might have more luck (I had that post censored it seems).

      • Glenn Stehle says:

        @ gerryhiles

        It seems to me that whoever or whatever caused the current rout in oil price, Putin came out the big winner.

        The blush is off the rose, and the myth of the “great US shale revolution” has now wilted away. The true cost of producing oil from non-conventional resources like shale now is evident to all except the most avowed true believers of American exceptionalism and U.S. full spectrum dominance.

        Meanwhile, polls show Putin’s image and popularity within Russia to have risen to all-time highs.

        Economic war always exacts a cost from both sides, but the US and US leadership seem to have paid a much higher price than Putin in the current contest to see who is going to be energy czar. Mitt Romney’s long-range plan for U.S. energy independence now lies in shambles.

        One popular theory being touted in Western MSM holds that the oil price rout was a conspiracy of Saudi Arabia and the US. There exists, however, some evidence to the contrary. Arthur Berman, for instance, noted in “Why we won’t see an oil price rebound yet” that there was no production cut after the November OPEC meeting because “Russia said no.” Then a couple of days ago Anjli Raval reported something similar in the Financial Times.

        “Rafael Ramírez, Venezuela’s representative at Opec, tried to pressure Mr Naimi into a production cuts deal and arranged a meeting with the Russians and Mexicans on November 25,” Raval reports. “The Saudi oil minister is said to have told the Russians that with both countries producing roughly 10m b/d, any potential cuts should be equal. The Russians refused.”

        But is Putin’s triumph sustainable? I think the time frame Gail is looking at is longer than the next 10 or 20 years. For the inexorable depletion of oil, natural gas and other natural resources, and the looming storm of environmental degradation, will eventually get the best of the BRIC’s progressive political economies too.

        • Pick your poison. The future is unknown. We can only make more or less “informed” bets.
          Let’s have some very basic options put on the table for say 2015-2030:

          1 by roughly 2020 the dedolarization effort of BRICs will reset the post WWII global system, US will crumble inside ala USSR/Orlov scenario, disorder-war will be mostly limited inside the former hegemon; Continue #3

          2 by roughly 2020 the dedolarization effort of BRICs will reset the post WWII global system, rough faction of US/global capital elites will at least attempt some limited nuclear exchange etc.; Continue #3

          3 by roughly 2020 the dedolarization effort of BRICs will help reset the post WWII global system, some sort of compromise and power sharing deal among the eastern and wester elites is reached, the period of 2020-2030 is relatively calm, while the the overall civilization complexities continue to deteoriate for another substantial “collapse round” before 2045

          It’s quite obvious that even such simplistic list of 3 scenario requires quite different adaption strategies from each broad circle of options also depending on place of residence and asset allocation, if you choose/bet wrongly, you loose dearly, that’s life isn’t it..

          • wehavemetnitisus says:

            or 4

            Realizing that all modern currency’s are a byproduct of fossil fuels and therefore limited in life by the availability of fossil fuels the party will soon be over regardless so why rock the boat by challenging the dollar and possibly ending the party before the booze is all dranken.

      • Daniel Hood says:

        Even the Australians are abandoning the US now the British have joined the Chinese controlled AIIB.

        Washington’s going crazy.

    • Rodster says:

      According to Martin Armstrong none of that will amount to a hill of beans. The dollar will still be king around the world.

      • Creedon says:

        Martin says a good bit the same thing that Steve Ludlum says. The dollar will be last man standing.

    • It doesn’t sound like anyone is getting along very well any more.

      • Daniel Hood says:

        Agreed Gail! My point is rather than taking nationalistic/tribal sides, who’s right, who’s wrong etc. we’ve been saying for years on this blog, we will likely see entropy in the exisiting world order, and it seems to me, we’re seeing accelerated entropy as nations form new alliances that better serve their interests given the growing issues as nations start to implode.

        If we’re seeing the bursting of the debt/carbon bubble, diminishing returns, plumetting EROEI etc. the risks of conflict both internally and externally are likely to increase exponentially.

        I believe we’re now starting to see this. The energy crisis, triggered financial crisis, economic, social, geopolitical.

        My fear is the rise of extremism as the world order collapses.

        • Tolstoy's Degenerate Grandson says:

          I am with you on that point.

          I wonder what would happen if you put 100 pit bulls in a cage and fed them unlimited amounts of Alpo for a year.

          Then you reduced the amount of food provided each day to 5kg of Alpo.

          The human beast as we know is the most vicious animal on the planet, far more dangerous than a pit bull.

          Throw into the mix hundreds of millions of guns, knives, hammers, and other tools that can be used to kill, along with religious fervor and zealotry.

          Use your imagination to work out what will happen when the industrial food production system grinds to a halt and the only food available is produced by small pockets of organic farmers.

      • Daniel Hood says:

        “In a surprise move, London announced Thursday that it will seek to join the Chinese-led Asian Infrastructure Investment Bank (AIIB), sparking an angry response from the U.S.”

    • Kim G says:

      I wouldn’t rush to any conclusions. Let’s see if that squabbling group can actually raise enough taxes to fund an army. I suspect that would be nearly impossible. See my comment below. Europe is broke, already suffers from high taxes, and is mostly in recession. This would be a terrible time to raise taxes, and there likely are few if any countries that would support actually having to pay the costs of a modern defense force that would have any credibility with the Russians, whom they most need to impress with an army.

      • garand555 says:

        Just keep this in mind: Whether or not it happens, WWIII has already been paid for. Wars are often stumbled into.

        • Kim G says:

          I rather doubt it has been paid for. We still haven’t paid fully for our latest escapades in the Mideast.

          • Jan Steinman says:

            “WWIII has already been paid for.”

            “I rather doubt it has been paid for.”

            I think what garand555 meant was that the bombs, tanks, and bullets for WWIII already exist. All one has to do is feed the troops.

            • garand555 says:

              Feed the troops? Nyet, comrade! Dodging fallout is more like it!

              We cannot afford another WWII style war, and either countries would collapse if we tried it for economic reasons, or the SLBMs and ICBMs that have been around for a while now would fly. It is those ICBMs and SLBMs that are already bought and paid for. WWIII is one of those wars that, when people say it would be over by Christmas, they might actually be correct, but not for the reasons that they think.

    • Tolstoy's Grandson says:

      At the end of the day Russia keeps Europe warm. The US cannot. It can only threaten.

      That’s call holding the trump card

      • Good point!

      • Daniel Hood says:

        Think about what resources/markets Beijing, Moscow, New Delhi (BRICSA etc). can provide Brussels (the EU) over the US? The dawn of the Eurasian empire. Just look at how big those developing markets are? Strip away the nationalistic emotions and look at the opportunities scientifically, objectively.

        If BRICSA are creating parallel systems to rival Washington/London which are clearly in decay, who would you choose to align your interests with looking ahead?

        Remember in politics, there are no friends, only interests in the name of stability and growth.

        I think the final century will belong to the East not to the old West. The US & UK are less than 400 million with fully developed decaying economies, BRICSA are gigantic opportunities/amrkets by comparison.

        • Tolstoy's Degenerate Grandson says:

          I wouldn’t bet on a Eurasian empire.

          Energy is a zero sum game and there is not enough of the cheap stuff left to maintain the global economy as a whole. And because the global economy is interdependent there will be no winners nor empires going forward.

          Total collapse is absolutely guaranteed. No country regardless of how much energy it has will survive. No person, no matter how many billions of assets he or she owns, will survive.

          Into the gutter with everyone. Or the grave.

          • Daniel Hood says:

            Precisely, but not everyone will go down together at the same time and in the same way. To state “total collapse is guaranteed” is too broad based and doesn’t really mean much. New alliances will be formed between those who have resources and those who need them, those who have markets and those who need them, those who have new financial structures and those who need them, those who have cheap labour, those who need them etc. which is exactly what was predicted, what we’re now seeing. I think the Russia/China alliance is an incredibly powerful one and an alliance that will dominate much of the 21st century. I also see the rising BRICSA alliance as a rival to the Washington’s/London’s 19th/20th century dominance. I’m on the ground in the BRICSA sphere so am witnessing it first hand. If you think of the poverty scale based on those who can afford travel, you’re only looking at things from a simplistic binary perspective downwards. I’d possibly place you in the scale affording plane travel, but a huge proportion of citizens in the rest of the world are nowhere near you. The millionaires/billionaires assume you’re poor because you can’t afford space travel. Those who can fly planes assume everyone else beneath them is poor, those who can afford car travel assume those who can only afford mopeds and below are poor etc.

            If the citzen who can’t afford shoes becomes more productive and is now able to afford a bicycle/moped then in so far as they’re concerned it feels like they’ve suddenly won the lottery from their perspective. To yours they’re “poor”.

            1. No shoes – $5p/d
            3. Bicycle – > $10p/d
            4. Moped > $15p/d
            5. Car > $30
            6. Plane >$100
            7. Space > $10,000

            The problem is, you see the trouble the US is in as a fully developed economy facing imminent entropy and thus assume the rest of the world will face the same kind of issues, this is not so simply because the rest of the world still has room to develop over the next century relative to where they were previously. As a specialist across food, energy, water security this is something I’m seeing. In the latter half of the 21st century all bets are off but for the time being developing economies still have room for growth and advancement.

            I believe that many nations now wish to decouple from the US which many understand to have been a massive drain on global resources.

            The US may have a powerful military but is in no position to challenge the whole world. So I respectfully disagree with you, I believe we are seeing the rise of the Eurasian trading empire sidestepping the US 20th century world order.

            • Daniel Hood says:

              Sorry I missed a data point out, got the numbers jumbled a little!

              1. No shoes – > $1 per day
              2. Shoes – >$5 per day

              Also bear in mind, the “average” US/Candian citizen consumes a massive 250KW/h per day per person. Only 6 other nations on earth consume more up to 400KW/h per day per person. UAE, Bahrain, Kuwait Iceland, Trinidad & Tobago, Luxembourg

              Just to put that into perspective the average Europen consumes half that amount at $125KW/h per day per person, the rest of the world consumes a fraction of those US/EU energy consumption numbers well below 75KW/h per day per person.

              Do you see who’s going to fall the hardest? The higher you are the harder you’re likely to fall.

            • “Do you see who’s going to fall the hardest? The higher you are the harder you’re likely to fall.”

              I think population density is also worth considering. Living farther away from things means you need to use more oil to get everywhere, but having a smaller population means more resources per person. I think densely packed countries with few resources will fall a lot harder than sparsely populated ones with lots of raw resources.

            • Jan Steinman says:

              I think densely packed countries with few resources will fall a lot harder than sparsely populated ones with lots of raw resources.”

              ‘Bout sums up why I moved to Canada.

            • Daniel…where did you get those “average kWh per day per person numbers?” According to the DOE/EIA and many other sources, the average kWh “per month per U.S. household” is somewhere between 907 and 11 kWh. Just curious.

            • Tolstoy's Degenerate Grandson says:

              Not possible.

              Because for civilization to exist we need a fully functional global financial system. Knock a single key player out of that and the whole thing collapses.

              Take Greece for example. It would not normally be considered a key player except that is owns a lot of money to banks in France and Germany, both of which are definitely key players. If Greece goes they go, and the dominoes fall.

              Or consider Lehamn. Not even a country. But when it went under it was sucking the entire world down with it. Only trillions of dollars of back stops halted total collapse

              We are all going to the bottom of the ocean together. The only question is which boat goes first. The rest will follow rapidly

            • Daniel Hood says:

              It’s happening regardless of whether you believe it’s possible or not. The evidence is clear. The world is decoupling from the US system. The only reason there’s so much turmoil is precisely because the $$$ is currently the world reserve fiat currency and the Fed’s been calling the shots. You have the SWIFT system, IMF, WTO and a vast repository of Washington controlled alphabet soup of institutions, but those days are coming to an end.

              You keep talking about the “system” currently it’s the $$$ system but it’s becoming clearer by the day the world is decoupling financially, militarily, economically etc.

              Yet another article indicating the US is being cast off by “allies”. No such thing as allies, only interests in the name of stability and growth.

              “In a surprise move, London announced Thursday that it will seek to join the Chinese-led Asian Infrastructure Investment Bank (AIIB), sparking an angry response from the U.S.”


            • Tolstoy's Degenerate Grandson says:

              Sorry but I don’t believe it. There wil be no decoupling.

              Was there a decoupling when Lehman Brothers collapsed?

              That was like an ant.

              And you are suggesting the if the elephant (America) goes down, the world will sniff for a moment, and move on?

              Boy oh boy oh boy are you in for a big surprise when this goes sideways.

            • Daniel Hood says:

              Date: 15th March 2015

              Last week marked a rare riff in the “special relationship” between the UK and the US. The countries clashed publicly after the UK announced that it would join the Asian Infrastructure Investment Bank (AIIB), a new multilateral financial institution that is a result of China’s budding efforts to project its influence abroad.

              The AIIB is just one of China’s recent efforts to remake the world’s multilateral institutions in its own image. In partnership with India, Russia, Brazil and South Africa, China also set up the New Development Bank, also known as the BRICS bank, last year, as well as a development bank led by the Shanghai Co-operation Organization and a currency reserve fund to help countries cushion against financial crises and shocks.

            • Daniel Hood says:

              I’m suggesting the world is creating parallel structures exactly as the US did post WW2. China is now doing the same backed by massive numbers.

              I think the US has to make a choice, either fight the world, surely a losing propostion, or share/give up power, dominance, infuence.

              You can keep saying, impossible, it’s not happening etc. or you can accept the fact that the rest of the world are creating systems in their own image.

            • Tolstoy's Degenerate Grandson says:
            • Daniel Hood says:

              Without question, but I believe they’re likely to last a little longer than the US during this last century re: civilization for numerous reasons that would require an entire blog to explain.

              As the world knows, the US is in a much more imminently “interesting” position than China given the staggering amounts of debt accumulated exponentially and the slight resource issue re: fracking, which we all know on this blog is nothing more than a sub-prime energy ponzi scheme currently bursting. Remember the US is the largest debtor nation in the history of the world with zero chance of paying back its debts.

              The only thing keeping the US afloat is its “exorbitant privilege” status as the world’s reserve currency but that privilege is ending.

              I’d also be a little skeptical reading articles coming out of the US on China, scope for nationalistic bias to creep in, which is understandable, we see the same in the energy sector when discussing fracking as a ponzi scheme set to implode.

            • Glenn Stehle says:

              @ Daniel Hood

              An intriguing topic you’ve brought up.

              I don’t think those on the left know quite what to think about China.

              As Benjamin Kunkel explains, Giovanni Arrighi seems to have been convinced that the new Chinese Century was a done deal, that the hegemonic transition was all but assured:

              “In his final book, ‘Adam Smith in Beijing’ (2007), the late Giovanni Arrighi expanded on Harvey’s concepts of the spatial fix and the switching crisis to survey half a millennium of capitalist development and to peer into a new, probably Chinese century.”

              As Kunkel goes on to explain, however, not everyone on the left is so sanguine:

              “In the recently published ‘Ecological Rift: Capitalism’s War on the Earth,’ John Bellamy Foster and his Marxist co-authors refer to the identification by a group of scientists, including the leading American climatologist James Hansen, of nine ‘planetary boundaries’ that civilisation transgresses at its peril.​ Already three – concentrations of carbon in the atmosphere, loss of nitrogen from the soil and the extinction of other species – have been exceeded. These are impediments to endless capital accumulation that future crisis theories will have to reckon with…. Of course, peak oil or soil exhaustion might easily coincide with faltering productivity.”

              Even Arrighi imposed certain conditions on the “happy scenario” where China takes its place as world hegmon in the Chinese Century. As Kunkel says:

              “One condition of this happy scenario was that the US abandon its armed imperialism and China remain committed to its ‘peaceful rise’; another, that the Chinese pioneer a green mode of growth distinct from ‘the Western, capital intensive, energy consuming path’. Otherwise inter-imperial war, the ultimate means of competitive devaluation in The Limits to Capital, loomed once more.”

              Tom Reife’s review of Arrighi’s work can be found here:

              Others on the left, however, are extremely critical of Arrighi’s China rosy portrayal of China. Here, for instance, is William I. Robinson:

              “Arrighi’s assessment of the coming ‘Asian age’ involves some of his most contentious
              arguments. He does acknowledge the sharp rise in inequalities in China,
              growing labour conflict, and ‘countless episodes of super-exploitation, especially
              of migrant workers’ (Arrighi 2007: 360). His view of China is nonetheless overly
              benign and often appears at odds with empirical evidence. Far from ‘husbanding
              of natural resources,’ empirical evidence suggests China’s economic expansion
              has wrought ecological degradation on vast tracks of the Chinese countryside
              and its cities are some of the most polluted in the world (see Economy 2004;
              Bochuan 1992). Chinese state and private firms have invested billions of dollars
              to extract natural resources from Latin America, Africa and elsewhere not
              unlike transnational corporations originating from the West. Far from the salutary
              effect that he purports the East Asian development path is having on Chinese
              workers – skilled labour that is able to self-manage production in Chinese
              enterprises – the ethnographic evidence suggests that the Chinese industrial
              export sector constitutes the new ‘satanic mills’ (Chan, 2001).”

              “Arrighi is optimistic that a coming Asian era will involve a ‘greater equality
              among the world’s civilizations’ as envisioned by Smith. It is hard not to detect
              here a romanticised view of the global South, which, he asserts, under the leadership
              of China and India, may put forward a new alliance – a new and more powerful
              Bandung – that would usher in a more progressive world order – ‘a socially more
              equitable and ecologically more sustainable development path’ (Arrighi 2007: 10).
              It is not clear, though, why the rulers of China and India would be any more
              benign or enlightened as agents of a new global hegemony than their Western
              predecessors. It appears here that Arrighi’s realism drives his political prognosis. Yet India in particular, but China as well, are ever more polarised class societies led
              by ruling political and economic elites whose own reproduction has become increasingly
              tied to the reproduction of global capitalism to the extent that they have integrated
              their countries ever deeper into the world capitalist system. Why would
              Chinese and Indian transnationally oriented elites and capitalists seek a socially
              more equitable and ecologically more sustainable development?”

            • Glenn Stehle says:

              Here’s the link to the William I. Robinson article:


            • Daniel Hood says:

              @ terrywright2014 my apologies I should’ve been clearer. If you search google for the free e-book “Sustainable Energy, Without the Hot Air” it was put together rather brilliantly by Professor David JC MacKay. I encourage everyone to read to gain a precise calculated understanding, although it relates specifically to UK’s energy policy but could apply to the US too. Even got all the juicy hardcore physics cals in there for you, if you’re a real boffin.

              He’s the Regius Professor of Engineering in the Department of Engineering at the University of Cambridge and from 2009 to 2014 was Chief Scientific Adviser to the UK Department of Energy and Climate Change (DECC)


              When you find the book, if you go straight to page 104, you see their estimated calculations (estimate of a typical affluent person’s consumption) according to the Prof. “The average American consumes about 250kWh per day.”

              Calculated like this from figure 18.1 which is the energy balance sheet. If you read the book all calculations are explained.

              Defence : 4KWh/d
              Transporting stuff: 12KWh/d
              Stuff: 48+KWh/d
              Food, Farming, Fertilizer: 15KWh/d
              Gadgets: 5KWh/d
              Light: 4KWh/d
              Heating/Cooling: 37KWh/d
              Planes: 30KWh/d
              Car: 40KWh/d

              Adds up to: 195KWh/d

            • Daniel Hood says:

              @ Glenn Stehle, thanks! Yes I think so too! Incredibly interesting to see such gigantic, rapid changes before our very eyes. The tectonic plates are shifting all over the place. Let’s pray there’ll be no mega earthquakes, eruptions, tsunamis etc.

              I wish I could envision the peaceful version of what you say re: China’s rise, old West’s decline, but given the warnings the Pentagon has continued to pump out since early 2000s and the recent events in the ME/Ukraine I’m not so sure. Granted the articles relate specifically to climate change but food, energy, water fall’s under its remit.

              · Secret report warns of rioting and nuclear war
              · Britain will be ‘Siberian’ in less than 20 years
              · Threat to the world is greater than terrorism



              I think it’s safe to assume Gail’s predictions are coming to pass, the debate now should shift to what collapse actually looks like, how will it manifest etc.

              I’ve always thought there will be those who in power who will refuse to give it up at any and all costs.

              Power is so hard for the political class and elites to give up. If history is our judge, we’re in for a violent time.

            • richard says:

              RE Data points, I’ll mention in regard to shipping stuff across the pacific, that in theory, if you build a big enough ship you might only need an outboard motor to do the work 😉
              Also some more data from Reuters …
              “Fuel consumption is strongly affected by the mode of transport chosen. Air services consume far more fuel per passenger or per kg of freight than ships, railroads, trucks or cars.”
              “The most obvious is between air transport, which is fast but uses enormous quantities of fuel, and surface shipping, which is slower but less fuel intensive. As a result, air freight tends to be reserved for small high-value items (batteries and aero engines) and perishables (cut flowers) while heavier, bulkier and lower value items go by sea, rail and truck.”
              “Consumption of gasoline, road diesel and jet fuel in the United States all peaked between 2005 and 2007 then started to fall both absolutely and compared with the previous trend. By 2013, total oil consumption across the United States, Europe and the advanced economies of Asia had fallen around 8 million barrels per day compared with the pre-2005 trend, according to a calculation by James Hamilton at the University of California.”

            • InAlaska says:

              Regarding your theory that Russia and China will form some type of Eurasian military or trade alliance, I’m afraid you are mistaken. Perhaps if they had a traditional of liberalism and democratic institutions that would work. But, like Russia’s non-agression pact with Nazi Germany in WWII: China and Russia may come to some sort of faux alliance of convenience, ultimately they will be at each others throats and rip each other apart as China needs more lebensraum and resources. Russia has both.

            • gerryhiles says:

              Methinks that you may be projecting a tad, neither China nor Russia have ever been on a Western-style imperial roll, or not for centuries and even then confined to contiguous lands.

              It was down to the West to “conquer the world” since Alexander, the later Roman Empire and then, with a bit of a break (a few hundred years) imperialism started all over again via the Spanish, French, Dutch, Belgian and especially the British Empire which morphed into the global, fascist(MIC) hegemon, causing wars and terrorism everywhere, from Libya to the Ukraine.

              The Washington Empire of Chaos is distinctly destructive as no other empire has ever been.

              Nothing comparable ever existed in the East. You project your indoctrinated Western perspectives/beliefs.

              Where we might agree is that in a short 300 years of the Industrial Revolution/current form of Global Civilization (living in compact cities of millions) we have reached the limit of all resources capable of feeding, clothing and giving shelter to teeming billions who really just mill around, doing more or less meaningless things, like posting to blogs and going to some conference in China.

              But we all gotta do what we gotta do, though I makes not a blind bit of difference.

              I root for Putin and the alternatives to SWIFT, the IMF, World Bank. BIS, Davos, etc., but BRICS, etc. alternatives are too late and locked into the same model of “exponential economic growth” anyway, which is NOT possible on a finite planet.

              Maybe, just maybe the East can come up with a stable, non-growth way of avoiding total collapse, but I doubt it.

              Meanwhile I think you are completely wrong to ascribe Washington/European-style imperialist motives to China or Russia

            • “Methinks that you may be projecting a tad, neither China nor Russia have ever been on a Western-style imperial roll, or not for centuries and even then confined to contiguous lands.”

              What an interesting series of qualifications.

              The Khans took over nearly all of Asia and into Europe, and held it for awhile. The Chinese tried to conquer Korea and Japan, but lost hundreds of thousands of soldiers and had to give it up. Japan tried to invade Korea, and lost hundreds of thousands of men in the (16th century?). My point is that the difference is not their intentions, just that they failed and Europeans succeeded at creating empires. The reason, technological advantage (and in the case of the Americas, biological advantage with diseases). “Remember, whatever happens, we have the Maxim gun, and they do not.”

              The Japanese tried to take over Asia in the early 20th century, and failed. “Never fight a land war in Asia” seems to be a good adage. Russia under the Czars included Alaska. The Soviet Union was not an empire? Oh, sure, qualified by saying only contiguous, because somehow expanding an empire over water is somehow completely different? Do countries that are in the sphere of influence but not fully integrated count, such as Cuba?

            • Tolstoy's Degenerate Grandson says:

              Absolutely correct.

              No empire has been global nor has any empire committed as many atrocities as the US.

              The US sets the benchmark.

              And that is why they have the biggest empire. That is why they get to consume 25% of the earth’s resources.

              The meek inherit nothing. The meek get a boot to the neck and a gun to the head and they hand over the goods or they get a bullet in the head.

              If the US were to act like the world’s kind uncle, they’d get beaten to a pulp and thrown in the gutter by the first thug who senses weakness and opportunity.

              The wolf does not take pity on the lame deer. Because he knows that if he does not take that deer some other wolf or animal will. And he will starve.

    • Daniel Hood says:

      Sorry ladies/gents

      Me again, this is the lastest “France, Germany, Italy to join China-led $50bn infrastructure bank”

      “America’s AIIB Disaster: Are There Lessons to be Learned? The U.S. needs a better response to Chinese-led initiatives than attempting to lead a boycott.”

      • Glenn Stehle says:

        Very interesting developments you point to there.

        The US first suffered humiliating military defeats in Viet Nam, Iraq and Afghanistan. Now humiliating financial defeats are beginning to occur.

        Funny how all this correlates with peak U.S. conventional (read ‘cheap’) oil in 1970. I know correlation does not constitute causation, but there is no instance of a global hegemon in the post-Renaissance era which has managed to maintain its military, financial and moral dominance once its productive might has been lost.

        For anyone except the most avowed neocon or neoliberal, the writing appears to be on the wall.

        • Daniel Hood says:

          Yep I believe we’re seeing the expedited collapse of the post WW2 US world order. What’s interesting is the fact that America’s interests and the rest of the worlds are no longer in alignment, that includes traditional US allies. To me it seems the rest of the world is decoupling from America militarily, financially, economically, socially, politically.

          Let’s not forget the US is in astronomical debt to the tune of $18+ trillion and rising unsustainably, with unfunded liabilities to the tune of $45+trillion. That makes the US the largest debtor nation in the history of our species. If you know anything about the exponential function over time, you’ll know that the ship taking on water can look empty right up until 1 minute to midnight, then you blink and before you know it, the the ship is sinking. For 59 minutes it all seemed so manageable until suddenly it wasn’t.

          So we have allies strategically abandoning the sinking ship at a time when we’re also seeing collapsing energy prices, WTI is at its lowest for 6 years, we should remember that most of the job creation was in those fracking states. The rig count numbers are collapsing, along with jobs, along with energy production.

          The question remains…what time is it?

          I don’t think the US system can hold out past 2020 without major turmoil.

          • glennstehle says:

            I have little doubt that the United States, as these imperial cycles go, now finds itself in decadence and decline.

            However, I don’t see the U.S. suddenly falling off a cliff to be in China’s best interest, or anyone else’s.

            One must keep in mind that a large part of that $18 trillion debt is owed to China. Is that capital that China is prepared to lose on such short order?

            Does China want to tear down the existing world capitalist system, or to get in? A friendly takeover, kind of like when Great Britain handed the baton of world domination over to the United States, would cause the least damage to the system. Nevertheless, it did take two world wars to unseat Great Britain from the captain’s chair.

            I’ve even heard some say that China now acts at times to save the US from its own stupidity, to keep the US from falling off a cliff.

            But even if it wants to, can China save the US and the world capitalist system, in the hopes of taking the helm? I have serious doubts. I’m not convinced that enough natural resources remain to fuel another round of economic growth and capital accumulation. China, I fear, may be trying to get into a burning house.

            • Daniel Hood says:

              I think this is the reason China and the non-aligned block are frantically creating parallel structures/institutions to circumvent the dollar as world reserve currency. In fact it’s happening before our eyes. Not to mention the fact, China’s strategic objectives are to kick the US out of SE Asia militarily and what better way to do that than to tear down the “exorbitant privilege” instruments the US has had a monopoly over.

              I think it’s impossible for a retreating US to challenge militarily both Russia & China combined post Afghan/Iraq/Libya/Syria/Ukraine, it would be most unwise.

              Seems to me traditional US allies desperate for new markets and stability are equally looking to a rising Eurasian empire, possibly the final empire of our species before we reach limits to growth given the impacts of climate change, dwindling resources etc. I think the old US dominated Western structures will implode on our watch, the East at a a later stage.

              I don’t think China needs the US for much longer and as these parallel institutions gather momentum we’ll see expedited decoupling. I think it was Peter Schiff from EuroPacific Capital that warned the world was preparing to decouple from the US. Frightening for both Neoliberals and Neocons I know, but all the evidence is pointing towards China as massive superpower with resource rich nations along with US allies joining the new club.

              Does China, Russia, Brazil, India, Africa etc wish to tear down the existing post WW2 US dominated capitalistic system?

              100% I’m absolutely becoming convinced having been on the ground.

            • gerryhiles says:

              My thoughts too, when it comes down to reality.

              My current fantasy is that Putin will somehow save us all, whereas I really know our species has consumed itself to extinction, short of divine intervention.

              I will not be holding my breath.

            • Tolstoy's Degenerate Grandson says:

              Putin would be doing the exact same thing as the US is doing if put in the same position.

              There is no good or evil. Never has been.

              There is only strength and weakness. And the US is perceived as weak and the vultures and jackals and lions and hyenas are all trying to rip pieces off the big old beast.

              Kindness is weakness. Kill or be killed.

            • Jan Steinman says:

              “There is only strength and weakness.”

              Seems a bit shallow to me.

              There is also big and small. My strategy is to be a small target. The cockroaches will be here long after we’re gone!

              There is also in-the-way and out-of-the-way. Anyone who knows the game “Risk” can tell you that countries that are gateways to continents change hands a lot. My strategy is to be out-of-the-way. That pear tree in the corner is gonna make it after some idiot cuts others down to put a house in the middle of an orchard.

              There is also cleverness and idiocy. This is where readers of this blog have an advantage; they are willing to think about deep causes of civilization’s ills, and to work on coping strategies. My strategy is to work smarter. The possum is a road-pizza, while the coyote is stealing your chickens.

              There are likely many more dimensions to it, as well. I just wanted to point out that bipolar thinking generally misses opportunities, and can be outright dangerous.

            • Don Stewart says:

              Dear Jan and All

              A few thoughts about the subject of ‘Me First’ vs. ‘Us First’.

              Kelly McGonigal, in The Neuroscience of Change, describes how we have two contrasting decision making apparatus. The first is in our mid-brain, closely associated with survival mechanisms such as flight or fight, and the sexual urges. This system tends strongly toward stereotyped behavior. We choose ‘before we are aware we are choosing’. So, for example, if we have an itch, we are very likely to scratch it, before we are conscious that we even itch.

              Things get more problematic when the obvious answer is also a dangerous answer. For example, if we have received criticism at work, and feel the need to get our neurotransmitters and hormones to give us some ‘feel good’, and our stereotypical behavior to stimulate those neurotransmitters and hormones is to stop for a cheeseburger and fries, we are likely to end up overweight and in poor health.

              What we SHOULD do is pause for a moment, think about our underlying values of appropriate weight and good health, and choose a different way to stimulate those neurotransmitters and hormones. Modern marketing is much about making sure that we DO NOT pause for a moment to consider anything.

              Nate Hagens says that we moderns in the OECD countries use fossil fuels to make stuff which we believe will stimulate our neurotransmitters and hormones.

              IF we are capable of pausing, we are likely to find that we can think of other ways besides cheeseburgers and fries to get the neurotransmitter and hormone response we want. And if we are particularly intelligent, we can probably figure out how to do it without fossil fuels. This system is located in the more recently evolved frontal part of the brain.

              I will give you my personal preference. In a tough situation, I want people who are capable of pausing and taking actions in accordance with their best values on my side. I don’t want people who are always simply looking out for Number One. My opinion is that the Looking Out For Number One people won’t last very long.

              History is, however, replete with examples of clan leaders who inspire fierce loyalty inside the clan, but who then lead the clan into quite destructive behavior against other clans.

              There is no reason to believe that the future will be all strawberries and roses, but neither is there reason to believe that it will be pure individualism.

              Don Stewart

            • Jan Steinman says:

              “In a tough situation, I want people who are capable of pausing and taking actions in accordance with their best values on my side. I don’t want people who are always simply looking out for Number One.”

              I’m willing to join your clan, Don!

            • Daniel Hood says:

              Yes I think it’s important to keep discussing the bare naked facts that we observe no matter how raw. It’s absolutely fascinating being witness to such gigantic changes coming to pass based on predicted years ago. I remember first discussing these issues way back in 2007 and most of my friends thought I was a screw loose. No one’s laughing today as the flood of data, news validates those early predictions.

              When I state these things, I’m in no way anti-US, or anti-West, on the contrary it’s going to be devastating to witness all the turmoil, but it’s vital we see things exactly as they are rather than how we’d like things to be. To my mind it’s easier to follow the science.

              For some, the psychological burden of decline can be a little heavy to cope with, it’s not hard to see why.

            • InAlaska says:

              Grandson of Tolstoy (formerly degenerate)
              “Kindness is weakness. Kill or be killed.”
              Paul, is that you again? It sounds like you…

            • Daniel Hood says:

              More evidence the world is decoupling from America


              According to international investor and entrepreneur Simon Black, the US is experiencing major economic blowbackafter two plus decades of aggression as the only global superpower:

              … After years of endless wars, spying, debt, money printing, bailouts, and insane regulations, the rest of the world has had enough. And they’re looking for an alternative.

              Enter the China led BRICS alliance and its New Development Bank and now China’s other investment bank entry AIIB. Simon takes liberty in his interpretation of Britain and Europe’s bold rebellion after decades relegated to being a mere puppet of the US Empire:

              Look, you have $18.1 trillion in official debt, you have $42 trillion in unfunded liabilities, and you’re kind of a dick. I’m dumping you.

  15. Peter Donoghue says:

    Did you realise that “politician” is an anagram of “I tip oil can”?
    Sorry – I’m scraping the bottom of the barrel.

  16. dolph says:

    I’m afraid Kim G that you are not seeing the big picture. Yes things may not collapse immediately. It is in fact precisely at the point of peak oil that you should expect to see a temporary glut and fall in prices, as we have never had so much energy production as we do now.

    As you point out, this will result in wells being shut down and production decline, but your analysis after this is incorrect. You say that oil can now rise in price, bringing back more production and people can gradually adjust. This is wrong because this is what happened for the past 7 years and what cannot continue going forward, for the simple reason that most everybody but the privileged few are tapped out and geologically we are at peak. A rising oil price does not make people more productive or wealthier, nor can it create more oil. Oil is finite. If we are at peak, we are at peak full stop, no amount of substitution or alternatives can make up for the decline in existing fields.

    You can think of this as similar to interest rates. Everybody knows the Fed is stuck and can never again raise interest rates, because even a minor rise now will distort the entire structure and result in bankruptcy. It’s the same with the price of oil. It can never again rise without bankrupting the consumption side, even if the production side needs the higher price. The result, is of course, permanent shortages. Which again, is exactly what you would expect as we begin the decline.

    Let me repeat myself for anybody reading this post. Given the price action in oil, this signals that we are pretty much at peak and a year or two at most away from permanent shortage. This is it, this is the big one. That’s the amount of time you have to get your affairs in order. I know all of this doom sounds like a broken record but if anybody wants to try to prove me wrong, go ahead.

    Do not underestimate us doomers. We have been studying this in detail every day for 7 years and some of us have been doing it for decades.

    • Tolstoy's Grandson says:

      This makes sense

      I suspect the plan looks like this:

      – drill baby drill or in real terms let’s get as much infrastructure in place as possible with oil prices high to be able to pump as much oil for as long as possible

      – that lasts only so long as the central banks are able to offset the impact of 100+ oil with various policies (QE, Zirp, Stimulus, Subprime etc)

      – essentially we’ve had a mad dash since peak conventional in 2005 to push the end game out as far as possible

      – as central banks saw that their policies were starting to push on a string (they’d have info way before us but the zero hedge link above is a fabulous example of pushing on a string) they would have decided it was time to allow the oil price to drop to where it was not such a massive drag on the economy

      – of course they know that 50 buck oil will kill off most exploration as well as making fracking and tar sands unprofitable

      Conclusion: same as yours. The already sunk infrastructure for fracking and other non-conventional oil is in place so that oil will continue to pump resulting in an ongoing glut. Prices will remain low until those supplies are tapped out (shale well production drops massively after a couple of years, many of these wells are well along the curve already) and we may see a huge price spike as we did in 2007. Then it is game over because there will be no ‘shale revolution’ this time to kick the can.

      We are in the eye of the hurricane now.

    • Kim G says:

      I make no assertion about whether we are at peak or not. Given that the advances in extraction technology (fracking and horizontal drilling) have been almost exclusively used here in the USA, I suspect we are a ways off from peak production yet. But that’s not really important to my initial point which was that the current price is the result of a supply glut, not some kind of issue with “affordability.”

      Make no mistake. As the world runs out of oil, poorer people will be priced out of the market and will get no oil. Sad, but true. I’m not going to comment on the fairness or rightness of that situation, but that’s life in an economy where price equilibrates supply and demand. That said, I would be willing to bet that the marginal utility of a gallon of gas for a Chinese riding a moped is greater than it is for a middle or lower-class US consumer driving a three-ton gas guzzler. Hopefully that latter group learns to conserve before the former is left without fuel. (However, the US ethanol policy making food and fuel substitutable doesn’t give one much hope. While we are putting corn in our gas tanks, poor people around the world are starving due to high food prices. Personally, I think this is an immoral policy, but there’s apparently no price too high to pay to get votes in the Iowa caucuses.)

      As for adjustment, we know the US economy can maintain some semblance of normality at $100/BBL so my guess is that we will manage to deal with that when the price returns there, a question of “when” and not “if” in my mind.

      As for your statement, It’s the same with the price of oil. It can never again rise without bankrupting the consumption side, even if the production side needs the higher price. I disagree, based largely on the above. Less than a year ago, we were paying around $100/bbl and the economy was still expanding, albeit weakly. Though the transition back to $100/bbl will likely be rocky, from my vantage point, it’s pretty clear that the American economy has a marginal utility of oil well above that price, and if it has to, it will pay it.

      • Creedon says:

        “It’s the same with the price of oil. It can never again rise without bankrupting the consumption side , even if the production side needs the higher price.” I agree. The laws of thermodynamics say that one unit of energy equals one unit of economic activity, both are going to become less in the future and relatively fast in geological time. Each year over the next decade or so there will be less and less economic activity and less and less oil produced. It has to do with the laws of thermodynamics. See the hills group study.

        • Kim G says:

          There’s an entire futures curve that says oil will be higher in the future.

          Now of course, the future hasn’t happened yet, but given the current price, the rapid decline rate of shale wells, and the cost of drilling new ones, I think the futures curve is probably right, assuming no recessions that aren’t already going on. The markets are viewing the current glut as temporary and have serious amounts of money riding on that worldview.

          So you will probably find that your prediction that prices will never rise again will prove incorrect. I wish it weren’t so (I like today’s prices), but I believe it will be so.

          • richard says:

            The past may say something different. While the 2008 peak at $147 was somewhat predictable, I have to confess that I was entirely wrong in my expectations of the bust that was to follow. IIRC oil fell to $35 per barrel amid high unemployment and a significant dip in world GDP. Hence you have to forecast GDP and unemployment, together with oil production and storage to arrive at a price estimate. If I forecast that oil prices in 2016 will exceed $80 per barrel without weakness in the US$, I am also saying things about GDP and unemployment. All other things being equal, I doubt that oil will exceed $60 per barrel in 2016, but I doubt that condition will prove valid.

      • Tolstoy's Grandson says:

        “As for adjustment, we know the US economy can maintain some semblance of normality at $100/BBL so my guess is that we will manage to deal with that when the price returns there, a question of “when” and not “if” in my mind.”

        Yes we will manage to deal with this and adjust.

        By consuming less of everything leading to a deflationary spiral of death which will be stopped by printing trillions upon trillions of dollars, engaging in sub-prime everything, and so on.

        We have been dealing high priced energy for some years now.

        The situation is most obviously under complete control.

        • Kim G says:

          I don’t recall the period from 2010 to mid-2014 being a “deflationary spiral of death.” In fact, I remember it as a period of sluggish growth accompanied by CPI inflation close to 1.5%, which culminated in some acceleration in Q3:14.

          For much of recent history, oil at close to $100/bbl has been the norm, and there has been no resulting disaster. And I suspect that a return to $100 by itself will not result in disaster, though it will result in a lot of hand-wringing, just as the recent decline has resulted in a lot of hand-wringing, on these pages and elsewhere.

          By the way you should note this little fact. Many economists expected that the current low oil price would result in higher consumer spending on other categories as consumers received a windfall. However, that has not happened. To me this suggests that the inverse is not likely to happen either when the price returns to a more normal level.

          • Tolstoy's Grandson says:

            I remember the period of 2010 to 2014 as a period of massive (as in trillions of dollars) of money printing.

            As a period where the central banks manipulated everything including the stock markets (which they have been actively bidding up), bond markets, gold.

            It was also a period when just above every set of data released has been a lie.

            It was also a period where I relied more and more on Zero Hedge for financial truths because the mainstream demonstrated that it was nothing more than a conduit for lies and quarter truths.

            If the central banks stopped the QE and ZIRP policies the economy would collapse within the time it would take a high frequency program to digest the announcement of such.

            Don’t delude yourself into thinking there is ever going to be a legitimate recovery. There will be no recovery (surely 7 years of Depression would have made you realize that).

            There is QE and ZIRP and when those fail, there will be nothing.

      • Daddio7 says:

        While it is debatable whether or not oil companies get subsidies farms defiantly do. So when you say food is used for ethanol you mean subsidized overproduction of corn that governments usually give away to aid programs is used for fuel.

  17. Rodster says:

    How appropriate that Gail happens to be in China !

    Beijing, You Have A Big Problem – In Ten Charts

    • Thanks for your China news. The English language version of China Daily talks about increased jobs pressure as well, and problems with funding the retirement program.

      According to the article,
      “The dependency ratio–the ratio of those not in the labor force to those typically in work is expected to change from 3.04-to-1 (3.04 workers supporting one retiree) to 1.3 to 1 in 2050, Yin said.”

      Yin is the minister of human resources and social security.

  18. Edward Boyle says:

    Productivity, affordability, profitabilty, growth all tied together. We had 1 billion people, high resource availability, plus new technology to use high eroei sources of energy and high savings, low debt economy. People were not consumers and goods were made to last so affordability was not a problem. Growth was needed to grow bank profits so short term cycles for goods was born plus ads and consumer credit. The govt. tax income relied on income tax and tax on business profits. So this consumer/bank/discard products cycle was important to keep factories moving and workers employed and govt. funded.

    Now we have 7 x people, mass consumption, debt globally maximized, energy and technolgy growth marginally productive. New workers , consumers in 2nd, 3rd world marginally productive. All leads to shrinking global economy, so that debt cannot be paid as dependent on profits. So NIRP, QE keeps govts. alive by buying bonds so social services remain in place, banks don’t collapse. The rich and the masses remain ok through welfare for poor, banks.

    Low Eroei oil production falls due to price fall, fracker debt default, oil price rises. Meanwhile
    global demand generally falls for goods and services, debt default occurs in various countries due to collapsing tax base. QE bond purchase to fund govt. fails. Voters reject austerity to repay absurd debt levels. System reset by political means in terms of debt. This however does not solve systemic problem of energy, consumerist waste culture based on debt. If we return to low waste, low debt system, jobs will remain scarce due to low production. Govt. will have low tax base. This looks like surviving on what one can get coops, self production. Bankruptcy of most property owners, renters not paying rent, water, heating systems stopping due to lack of payment.

  19. edpell says:

    It is the declining returns that we failed to consider. In the past we thought everyone will keep there job and there high salary and as resource decline price will increase and that is how the mismatch between supply and demand will play out. We were wrong. As people get less in return for more effort the people on the bottom of the pyramid loose their jobs or get paid less and less. The price of resource stays the same. It is just an ever increasing number of people who are kicked out of the system. Who can not afford the products of the system.

    How much the remainder of participants need the economy of scale provided by their former fellows is an open question. I think not as much as Gail as far a simple economics goes. But I think those who remain in the system have an increasing problem/cost of keeping those who can not afford food/shelter/clothing/transport/schooling in check. This is nothing new just magnitude of the problem is new and eventually unsustainable.

    • Stilgar Wilcox says:

      “But I think those who remain in the system have an increasing problem/cost of keeping those who can not afford food/shelter/clothing/transport/schooling in check.”

      That’s what I think will happen too, Edpell. All the associated fees of a BAU existence will continue to go up for those that can afford it, as more funds have to be siphoned off to maintain the lives of those contributing less to the system. Those fees, taxes, etc. will at some juncture begin to skyrocket until it reaches a threshold in which it simply no longer works because the few remaining can no longer pay the exorbitantly increased cost of living. This will be a reverse robin hood scenario until that doesn’t work either, then it will be time to move on to post life (whatever that is or isn’t), get busy tilling soil or hunting game.

  20. Kim G says:

    This is the most ridiculous analysis of the oil industry I’ve ever heard. It seems to be completely devoid of any reference to supply/demand forces and marginal utility of energy vs marginal cost. The biggest hole in the argument? The author does nothing to explain how oil at between $80 and $110 per bbl was “affordable” mid 2010 and mid 2014, and suddenly in the last nine months with no financial or economic crisis became unaffordable.

    Let’s be clear. Not all the oil underground will ever be extracted. However, oil will be extracted as long as the marginal revenue of oil companies exceeds the marginal cost of extraction. And that marginal revenue will be determined by marginal utility of energy use. Until very recently, in most of Europe, gasoline sold for well over $7 USD per gallon. So while US consumers may not find marginal utility at those prices (and hence not buy at those prices), European consumers will. Further, we’ve seen little demand destruction at prices over $100/BBL in the recent past, so the marginal utility of oil is there.

    No. The reason the oil price has collapsed is that supply overshot and wells cannot be economically shut down. Also marginal costs are lower than average costs, so completed wells will continue to pump as long as the marginal revenue exceeds that marginal cost. In the intermediate term, supply will decline as the fast-declining tight oil wells aren’t replaced, and then the price will rise again in the long term, stimulating more production and discouraging consumption.

    • “The author does nothing to explain how oil at between $80 and $110 per bbl was “affordable” mid 2010 and mid 2014, and suddenly in the last nine months with no financial or economic crisis became unaffordable.”

      People borrowed to continue consuming as if oil was $20 per barrel, and eventually got tapped out on credit.

      “Further, we’ve seen little demand destruction at prices over $100/BBL in the recent past, so the marginal utility of oil is there.”

      There is latency for effects to be seen. People in general don’t suddenly completely change their lifestyle simply due to the price of gasoline doubling in a few years. People like to conform, and if the majority of people are driving SUVs, people will do whatever they can to be normal. Prices dropping certainly don’t help, since the fluctuations disrupt the price signals. If the price kept climbing, and people were certain gasoline would cost twice as much in a couple years, they would make decisions accordingly.

      • Kim G says:

        According to the St. Louis Federal Reserve, US Household debt to GDP has been declining steadily since the end of the recession. So your point about debt is simply wrong.

        Your second point underscores my principal argument, namely, that the only thing that has really changed in the last nine months is the supply/demand balance in the international oil markets. Right? Peoples’ behavior hasn’t changed much in that time, though there has been some slowing in the global economy. I’d further add that if you look at US employment statistics, with the increase in employment in the last nine months, “affordability” of petroleum products has actually increased in the USA. And before you retort with comments on USD strength, note that US crude may not be exported, and there’s a ~$9 premium for Brent (internationally-traded benchmark) vs WTI (domestic benchmark). So there’s more of a crude glut in the USA than outside our borders, though there’s a glut there too. Or, put another way, petroleum products in the USA are increasingly affordable without a cost decline, and with the cost decline are becoming MUCH more affordable.

        And if you do a little more research, you will find that US storage is filling up quickly. We are now at an 80-year record level of crude storage in the USA, and the rest of the world is not far behind. Once that storage fills, it’s likely that spot and front-month crude prices will collapse further.

        None of this has anything to do with “affordability,” which implies demand destruction, something that *never* happens via falling prices.

        • Kim G says:

          P.S. The one thing that has happened to US consumer behavior in the last nine months is that they have increasingly been purchasing gas guzzlers at new car dealerships. If you look at the sales figures, sales of small, fuel-efficient cars are seriously lagging those of full-size pickups, SUVs, and other gasoline-thirsty vehicles. If affordability of gasoline were an issue, we’d expect to be seeing the opposite behavior.

          • B9K9 says:

            Interesting – a hasbara troll cruising OFW. Looks like Gail has either hit the big time, or the interns and newly hired grunts are starved for work.

            Here’s a bit of advice: Your credibility – and thus effectiveness sowing good old fear, uncertainty and doubt – would be greatly improved if you didn’t quote “official government statistics” (sic) as the foundation of your argument.

            Oops, strike part of that observation; the St Louis Fed (sic) is a private entity, isn’t it? Therefore, subject to neither Congressional oversight nor FOIA submittals. Hedonically adjusted GDP (sic) used in an attempt to prove a point *snort*.

            Upon further consideration, please continue posting for the enjoyment of all. Perhaps some may learn something useful from your disinformation techniques. Marginal utility of substitution *snort*. Please, you’re killing me.

            • Kim G says:

              So name-calling trumps actual facts? Good luck with that one! By the way, what is a “hasbara troll?” That’s one I’ve never heard.

              What makes you think I’m trying to sow fear? Are you afraid of a dispassionate analysis of the global oil market?

              And no, the Fed is not a private organization. It’s run by the government, and works under a government mandate.

              Why not try to refute an argument with facts and reason rather than name-calling? Or do you not have any facts or reason?

            • michael jones says:

              Wonder if Kim G thinks the “united States” is the whole “world”?

            • Nigella says:

              Kim, do you also believe the government line that the US has achieved near full employment?

            • InAlaska says:

              Or that there truly was an end to the recession?

            • Lizzy says:

              Can’t you stop that sort of personal attack? This site is mainly free from it.

        • “According to the St. Louis Federal Reserve, US Household debt to GDP has been declining steadily since the end of the recession. ”

          GDP is nonsense. Look up hedonic adjustments. It is a terrible way to measure how indebted people are. And don’t compare since “the end of the recession”, compare to 15 years ago, when oil was $20 per barrel.

          ” I’d further add that if you look at US employment statistics, with the increase in employment in the last nine months, “affordability” of petroleum products has actually increased in the USA.”

          If one person loses a $100,000 per year job, and that person and two previously unemployed people each get 20 hour per week $10 per hour jobs, is gasoline more affordable for those three people?

          • marmico says:

            If one person loses a $100,000 per year job, and that person and two previously unemployed people each get 20 hour per week $10 per hour jobs, is gasoline more affordable for those three people?

            Don’t you think that gasoline would be more affordable for 2 out of the 3 persons in your example?

            In the last five years, the addition of full time workers has overwhelmed the addition of part time workers in the labor force.


            • garand555 says:

              The very definition of unemployment is bogus. There are lies, damned lies, then there is the Bureau of Labor Statistics. Here’s how they define unemployment:

              “What are the basic concepts of employment and unemployment?

              The basic concepts involved in identifying the employed and unemployed are quite simple:

              People with jobs are employed.

              People who are jobless, looking for a job, and available for work are unemployed.

              The labor force is made up of the employed and the unemployed.

              People who are neither employed nor unemployed are not in the labor force.”

              That gives a nice little word problem to start setting up equations. Let the number people with jobs, the employed equal ‘E’ and the number of people who are unemployed, but looking for a job equal ‘U.’ Let the labor force = ‘L’. Then U+E = L, so we can use that to do some nice little substitutions. Furthermore, let the unemployment *rate* = R. R = U/L = (L-E) / (U+E). From that, we can see that we can shrink the unemployment rate, R, by making E bigger, or L smaller. Making L smaller means not counting people who are no longer in the labor force as unemployed, i.e. they’re not unemployed, but they’re still out of work. So is E getting bigger with respect to the total population, or is L getting smaller? The answer is here:

              And here:
              L is getting smaller.

              But there is still A LOT of debt sloshing around in the system that needs to be repaid:

              This implies that we need an employment:population ratio much more similar to what we had around the year 2000, else a lot of that debt will be flat out unserviceable. Growth has ended, yet the monetary system requires constant growth. Note that the one time that the debt actually declined, we got TARP, QE1, QE2, QE3, Operation Twist, etc… as a result. Real U3 unemployment is closer to 12%-15% and U6 is over 20%.

              Every person who has been rolled out of the labor force will find gasoline less affordable, unless they are being subsidized by the government. The total number of jobs added is a meaningless statistic unless the quality of the jobs is considered and it is also compared with the growth of the population. But it sure can make stocks soar.

            • garand555 says:

              Correction: R = the employment rate, which is simply 1 minus the unemployment rate.

            • wehavemetnitisus says:

              “People who are jobless, looking for a job, and available for work are unemployed.”
              Good post but my perception is that you can be looking for a job, available and still not be “unemployed”. my perception is the definition of “unemployed” is you are collecting unemployment compensation, If you choose not to file you go straight from employed to non participant and then if you get a job you go straight from non participant to employed.

          • Kim G says:

            If you flat-out don’t believe any government statistics without offering any alternative, I can’t help you. I can only argue with rational facts. You have offered no alternative data. In contrast, I have cited widely-accepted facts. In short, merely saying “I don’t believe anything you’re saying,” is not persuasive.

            Why would I look back fifteen years to evaluate a phenomenon which has only been happening for nine months at best? Why would it take fifteen years for this lack of affordability to suddenly (last 9 months) manifest itself? That makes no sense.

            As for your point on losing a good job and getting bad jobs, what’s important in macroeconomics is total aggregate income, which is rising.

            • Actually, what is important, based on an analysis of past civilizations that collapsed (Secular Cycles, Peter Turchin and Surgey Nefedov, Princeton University Press, 2009) is rising after-tax spendable income of working class citizens. If this amount is falling, rather than rising, the civilization is likely to collapse. Spending on commodities drops. It is not possible to collect very much in taxes from these citizens. Collapse comes from the need for ever-rising taxes, without the ability to get such revenue (except perhaps by extracting huge tax increases on high paid officials).

            • Kim G says:

              I would love to see hard tax data on any of the collapsed civilizations you mention. I personally doubt such data exist.

              (By the way, nowhere am I arguing that we aren’t running out of oil. Nor am I arguing that extracting the remaining oil is getting more expensive. Both of those ideas seem reasonably self-evident.) My point is that “affordability” is not the reason for the price collapse. Excess supply (currently) vs soft demand is the culprit. Once supply has been curtailed, or demand somehow rises faster, then price will rise again. And in the long run, price must equal or exceed marginal costs of extraction, or the extraction will stop. None of this has to do with tax regimes, though they can certainly help or hinder oil extraction depending on their nature.

            • I suggest you read Secular Cycles. The book isn’t cheap–it is an academic book. It isn’t easy reading. The civilizations often collapsed because the governments couldn’t collect enough taxes from the increasingly impoverished civilization. Or the amount and quality of people’s food supply declined because of their declining after-tax income, making them more susceptible to epidemics. This is part of the reason that there were so many big die-offs.

            • Kim G says:

              I don’t doubt that that is a worthwhile book. I’ve read Jared Diamond’s “Collapse,” which deals with similar themes.

              However, none of that has anything to do with the current global oil market.

              However, you might want to read a microeconomics 101 textbook; it would allow you to much better understand what’s going on in the current oil markets and allow you to see that your “affordability” theses is incorrect. Heck, even a quick review of global oil production levels (available at the DOE’s website or if you don’t trust the US gov’t, ad the International Energy Agency’s website), demand levels (available at the same sites), oil storage (available here:, though the data is provided by the DOE.) would quickly convince you that the current price is a reflection of a current glut, not some kind of “affordability” issue.

              See my other reply; the end of the oil era will be marked by high, not low prices.

            • cytochrome C says:

              You can have your own opinion, but not your own facts.

              People go postmodern when reality gets in the way.

            • marmico says:

              If this amount [after-tax spendable income of working class citizens} is falling, rather than rising, the civilization is likely to collapse.

              Okay. So what is the after-tax spendable income of U.S. working class citizens? Solve it in empirical terms not in the doomer dog wagging another word salad tail terms.

              Real disposable personal income per capita of all Americans is rising.


            • “Real disposable personal income per capita of all Americans is rising.”

              Please provide this same chart, showing only the bottom three quintiles. If a person goes from making $1 million per year to $10 million per year, that is not the same as 100 people going from $10,000 per year to $100,000 per year. I don’t care about the richest few or the corporations, for the purposes of this discussion; I care about the average person.

              If you want to go with the “working class” definition, we can use the middle three quintiles instead. Using US Census Bureau information, here’s a couple good sites with these numbers in after-tax income:

              Here we see everyone’s after-tax income has peaked and is in decline, with the richest affected the least. Now, let’s take into account average cost of living change from 1990 to 2015:
              shows that $100 in 1990 is now $181.54 in living costs. Did after-tax income increase by 80% from 1990 to 2015 for the middle three quintiles? No. The second quintile increased by about 20%, and the other two less. So we can clearly see that the working class people have less after-tax income when adjusting for cost of living, rather than using average income for everyone and CPI.

            • Median real income is down, even before adjusting for changes in tax levels. Also, the effect of commodity increases affects the working class much more than citizens in general, because they buy fewer high priced services and more food / car expenses in their total spending. Costs for these citizens have been rising more than the general inflation adjustment since 2000, because of the rise in oil prices since 2000.

            • Nigella says:

              See or or

              There is plenty of data on those sites that expose the government lies that you are reading in their official mouthpieces otherwise referred to as the mainstreammedia.

            • wehavemetnitisus says:

              “As for your point on losing a good job and getting bad jobs, what’s important in macroeconomics is total aggregate income, which is rising.”
              Kim g your arguments smell of untruths. Acronyms delivered with disdain. The very antithesis of Gails writings. Gail goes out of her way to explain things in common sense language not obscure with acronyms and disdain. kims writing is very smooth I think i would have to agree with the earlier assessment of what sort of creature we have here Acronym and buzzwords area great tools for obscuring the truth. If the premise of either is questioned it is implied that the questioner is too unintelligent to understand. All hallmarks of systematic and intentional untruthful communication, but very smooth delivery indeed. That sort of delivery doesn’t happen by accident.

            • Kim G says:

              Asserting that something”smells of untruth” isn’t exactly a refutation, is it? How about a real argument? Or do you not have one?

            • Tolstoy's Degenerate Grandson says:

              Let me help you along in your journey towards the epiphany. This is a very good start in terms of understanding the true state of the job situation in America:


            • garand555 says:

              “Asserting that something”smells of untruth” isn’t exactly a refutation, is it?”

              See my post above about unemployment. You can look at hedonistic adjustments in the CPI to see another way that “untruth” is being peddled to us. Or you can look at intangibles suddenly being included in the GDP calculation. Our government lies to us like crazy, which is basically no different from other governments today or throughout history. Our government is not to be trusted. It is made up of a bunch of incompetent greedy crony loving liars.

            • Kim G says:

              Reasonable people can disagree about what is the best way to calculate inflation. Just because you don’t agree with the method doesn’t make it a lie.

              As for hedonic adjustments, here’s an example. Take a regular automobile tire selling for $50 that is rated for 30000 miles. A year later, the tire industry adopts some new technology which allows the tire to get 45,000 miles, but it’s a more expensive process so the tire must now retail for $60 US. In that case, the actual cost per mile of tire life has fallen. If you don’t hedonically adjust your CPI measure for that, you are showing inflation where in fact there is none. So the basic idea of hedonic adjustments is correct. Where there is room, in my opinion, for debate is how much of an adjustment you make. Few examples are quite as clear-cut as the tire example.

              And yes, I realize the government has some incentives to err on the side of understating CPI inflation. But I don’t think this amounts to a lie. Anyone can delve into the CPI data and reweight it however they see fit. But the fact that big financial institutions (who have a strong interest in knowing the true inflation rate) don’t do this tends to make me think that all of the controversy about hedonic adjustments is without a ton of foundation. But of course you are free to disagree.

            • garand555 says:

              “Reasonable people can disagree about what is the best way to calculate inflation. Just because you don’t agree with the method doesn’t make it a lie. ”

              No, it’s a lie. The CPI is used for policy decisions, yet they don’t include food and fuel in the CPI calculations. If you want to live, you have to eat. If you want to live in modern society, you need fuel. And again, look to my post above on unemployment. I have no clue why you have faith in a government that has proven itself to be dishonest.

            • MG says:

              Dear Kim G,

              the collapse (a fast process) or the deflation (a slow process) are the fate of the mankind:

              The low oil prices with the high costs of the production will bring the system down. The mismatch between what we can pay and what are the real costs. The tricky thing is that although we have oil glut due to the high production of costly oil, the cheap oil is the key to the costly oil, as the cheap oil provides the leverge needed for the more and more energy intensive extraction of the costly oil. When we run out of the cheap oil, the oil producion is finished.

              The nature of this oil glut is in the fact that it was stimulated artificially. The affordability of the costly oil is low. Every costly product has low affordability.

              And why the high prices will not mark the peak oil? Because our fossil fuel based civilization is a big bubble, kept inflated by money printing and lending that hides the energy decline of the individual consumers. The broke people simply can not afford costly things, but only the cheapest stuff.

              The unconventional oil is the high-tech costly product. That is the problem…

            • Tolstoy's Degenerate Grandson says:


              If there is really a production related glut of oil it is 100% due to the fact that trillions of dollars of zirp cash have been made available to the fracking industry (on purpose) and this has resulted in many thousands of straws being jammed into the dregs of old oil fields to get as much oil out as fast as possible

              I suspect the reasons for this include:

              – conventional old had peaked and we need new swing supply fast or oil would quickly fire up past 147

              – the financial sham that is shale oil could only last so long so make hay while the sun shines

              – the economy could only endure 100+ oil prices for so long

              I reckon that because the PTB knew this was a short-lived phenomenon they wanted to get all costs sunk asap while they kept the global economy on life support.

              So our trust account was running on empty, but our rich uncle just died and bequeathed us $100,000, which we are ripping through to keep our fast lane lifestyle on track.

              But when the 100k is gone there be no further top ups.

              Do we make it to the end of the year on the 100K?

    • Read some of my other posts.

      The problem with standard analyses is that they are based on the assumption that limits are so far away that we don’t need to worry about them. In fact, limits are here right now, and they appear in a very different form than most have imagined. Anyone with any common sense knows that economic growth cannot continue indefinitely in a finite world. How that growth will stop is less obvious.

      I have, over time been teasing out the details. The economic models we have today don’t have enough variables in them. We need cheap energy of precisely the right kinds to run the economy. If we don’t have enough cheap energy, we don’t get enough good-paying jobs. We get more wealth disparity, and fewer new household formations–young people continue to live with their parents. These are the kinds of problems we have now.

      The cost of extracting oil remains high, even though the sales price of oil has dropped because of affordability problems. See my post

      Sorry I don’t have time to explain exactly what is happening–it is much too complicated.

      • Creedon says:

        I think to some extent the peak oil community has been getting it wrong. There is obviously a glut of oil in the world that has been caused by oil companies running up debts that are unsustainable. There is an article over at peak oil news on how the Iraqi government is accumulating debt to pay fee to the oil companies. Any where you look in the world the energy companies are accumulating unsustainable debts to produce a glut of oil. The thing to watch in the future is a break down in the debt and production of oil by the energy companies. The American empire and the dollars reserve status also play a role in this because much world oil production is dependent on this system. I agree with Kim G that to simply say that the current world oil glut is an affordability problem isn’t exactly correct. It would be more correct to say that the oil companies can not afford to continue to supply the worlds oil glut at current prices. The end of the oil age involves the reckoning involved in this system going into decline and maybe even collapse due to oil production adjusting to sustainable levels.

        • ” I agree with Kim G that to simply say that the current world oil glut is an affordability problem isn’t exactly correct. It would be more correct to say that the oil companies can not afford to continue to supply the worlds oil glut at current prices.”

          The United States is running out of storage for oil. The price is falling, and consumption is not picking up the slack. Did everyone suddenly start telecommuting to work? Did cars get 10 percent more efficient in the last 6 months? There is a glut. American, Canadian and Russian oil production have risen, most of the rest of the world has held even or declined, and the world is unable to suck up the glut, even at discounted prices.

          • richard says:

            “There is a glut.”
            Care to forecast whether oil production this time next year will be higher or lower than today? 🙂

            • “Care to forecast whether oil production this time next year will be higher or lower than today?”


            • In my view, oil supply will be lower a year from now, and lower yet two years from now. Supply of other fossil fuels will drop as well as the economy contracts.

            • richard says:

              Hi Gail,
              The flow of oil a year from now is what really matters. The price of oil in real terms a year on will decide whether oil gets released from storage, or held in reserve, and I am still puzzling over that.
              Pretty soon TPTB will recognise that a halving of the oil price equates to reducing their collateral to a quarter of its former value, and that is the foundation that hypothecates a lot of debt. OOps
              My best guess for 2016 is that oil will be released from storage to manage the price to $60 per barrel, or whatever price they need to keep world GDP from collapsing. That will support no more than a trickle of O&G projects, so no boost to GDP there.
              That means no way out but default or bankruptcy for excess debt.

        • Kim G says:

          It would be more correct to say that the oil companies can not afford to continue to supply the worlds oil glut at current prices.

          EXACTLY!!!! That is the correct interpretation of events.

          As for debts, look no further than the US shale patch. Lots of debt (~18% of the total high-yield market, AKA “junk bonds”) has been issued to pay for exploration and production of oil. Now that debt will be repayable when oil gets back over $70/80 per BBL, but right now a lot of it is going to become distressed if that doesn’t happen in the next six to twelve months.

          In principle, there’s nothing wrong with funding oil production via debt, but your oil price assumptions have to be correct, or the creditors will own the oil company eventually, something they don’t want.

          • Creedon says:

            I think the wall street terminology is, ‘oil is not priced to market. Whether consumers can afford to pay the price of oil that is priced to market is another question. Steve Ludlum would say that the oil price is now being set by consumers at gas stations all over the world, so essentially there is a consumer price and the price to produce the world’s current oil glut. The two are not the same.

            • Kim G says:

              There’s a glut because there’s a long time lag between the creation of exploration and production plans and the delivery of crude oil from the resulting wells. No one, not even Boone Pickens, foresaw the extremely rapid growth in US oil output five years ago. So all those fracking plans and the funds raised to execute them were based on an assumption of $90+ oil. At that price, fracking shale was a very attractive investment opportunity. Unfortunately for the suppliers, when everyone has the same business plan and does the same thing, gluts develop. But the pricing mechanism is already working on it, as you can see from the slashing of capex budgets around the globe. Eni, Italy’s largest oil company today announced its own capex cut, which apparently caught everyone by surprise as all the European oil companies were crushed in sympathy.

      • Kim G says:

        I’m not failing to understand you; I’m disagreeing with you. We can argue about how many years we have left of petroleum. (Many experts believe it’s 40-50 years at current production levels.) But I think we could agree on two things. First, the price of oil has collapsed in about nine months. Second, there’s no immediate danger of running out of oil in the next twenty or so years. So what we are discussing is a short-term phenomenon.

        Where we may not agree is in the following. I believe that when global oil supplies begin to contract noticeably the price will rise dramatically due to marginal benefits of consumption currently well above the price. And we’ve already got evidence of this. When oil supplies are temporarily disrupted, the price doesn’t fall; it rises. Second, note that during the time period when the global economy transitioned from whale oil to petroleum, the price of whale oil shot through the roof due to collapsing whale populations and rising demand for oil. So that and the fact that oil prices rally when there are supply interruptions suggest that the end of the oil era will be marked by high, not low prices for petroleum. Now, if you think the end of the oil era will be marked by falling prices, then we will have to agree to disagree. But I don’t see how falling prices will support efforts to get at those last drops of oil. Nor do I see how low prices would encourage conservation of a crucial, scarce resource. In fact, with all due respect, I don’t think your position on the reason for the falling oil price is at all supportable which is why I wrote my initial comment.

        I do agree that cheap oil (or some other cheap energy source) is a key element in widespread prosperity. And I think of oil like this: it’s kind of our “inheritance.” Once that inheritance is spent, we are all going to have to work much harder. Or, put differently, everything will be more expensive and we’ll have a lower standard of living.

        All of that fits perfectly well into a standard economic explanation. No need to invent more variables.

        • THe number of years of oil left depends on the price. If it is $50 barrel, there are very few years of oil left.

          • Kim G says:

            I totally agree with that. If someone (say governments) decreed that oil could not be sold for more than $50/bbl, many oil companies would stop producing oil. However, given the utility of oil, I believe (supported by recent history) that consumers are willing to pay FAR more for oil. And based on that belief, I believe that oil will continue to be extracted for many many years, albeit at mostly much higher prices. Today’s prices are an anomaly. In the future, prices will be higher and oil companies will respond by continuing to supply oil.

            • Chris Harries says:

              This is true according to orthodox economics. It is also true in relation to most commodities, so long as the resource holds out. The market will dutifully supply when prices rise. I think where this comes unstuck with a lifeblood commodity such as oil is that the high price that’s needed to sustain demand (even if that is delivered from limitless unconventional sources) has the ability to flatten the global economy – or is bound to. We seem to be teetering around that balance point. Both high and low prices spell really bad news for someone.

              Current low prices are a boon to oil importing nations, many of which were close to the wire, but terrible for a number of producers. High oil prices were sending too many economies into a tail spin. It’s a roller coaster ride from now on, no matter the price. But we can place bets.

            • Kim G says:

              Running out of oil will be a disaster for modern, industrial societies. Full stop. Fortunately, there’s a ton of natural gas, and then hopefully we can make some kind of transition to something more sustainable, whether that be solar, wind, or even nuclear, which properly done could be tremendously sustainable and free from greenhouse gases.

              Until then, we can successfully analyze supply/demand and prices within a well-established microeconomic framework that will shed light on what’s really happening.

            • garand555 says:

              I have not looked at 2014 numbers, if they are even out yet, but natural gas is not going to save us. You always hear about how the US has a glut of natural gas, right? In 2013, the US was a net natural gas importer. There is a lot of smoke surrounding “DRILL BABY DRILL!” and it should really be “BLOW BABY BLOW!”

            • Tolstoy's Grandson says:

              How do they pay more for it when their salaries have dropped substantially in inflation adjusted terms?

              In case you had not noticed, the global economy nearly collapsed in 2008 because people could not afford 147 oil.

              They can’t even afford 50 dollar oil.

              High priced oil > collapse

              Low priced oil > collapse

              Catch 22.

            • Kim G says:

              We’re talking about a phenomenon here that has lasted all of nine months, max. What do you think has happed to wages and salaries in the USA in that timeframe? I believe they’ve moved up a bit. Globally? probably the same.

              And you might want to look a bit deeper into the causes of the 2008 crash. Oil wasn’t the reason, though it certainly didn’t help.

            • “And you might want to look a bit deeper into the causes of the 2008 crash. Oil wasn’t the reason, though it certainly didn’t help.”

              That really is a matter of perspective. Oil prices rose from 2000 to 2005, so crazy ideas like 40 year 0 down mortgages became a thing to try to make growth happen, recession started in 2007, the price spike in summer 2008, Bear Stearns, Lehman, TARP, all of that is just effects of the rising energy price, failure to adapt to higher prices, and the need for endless growth.

              If, in the year 2000, people began rapidly preparing for $200 oil, things might be different. More efficient vehicles and better insulated houses, at the very least.

            • Tolstoy's Degenerate Grandson says:

              If you are going to post a comment claiming that inflation adjusted wages have been increasing then the onus is on you to prove that.

              Best of luck!

              (I guarantee you will find that wages are not rising and have been falling for many years now)

            • Creedon says:

              The following engineering study done by the Hills group explains the thermodynamics involved with the continuing fall in the price of oil as well as the future drop in world economic output. As the world economy continues to contract, less and less oil will be consumed.

            • Creedon says:

              The Hills group study predicts oil at 12 dollars a barrel in 2020 and they say that we will only be pumping oil from legacy fields at that point. All shale, deep water, oil sands will be over. It is my belief and theirs that oil as an energy source for the world will be over by about 2030, At that point we will be faced with a huge population and not enough energy to supply it. This is already happening in Egypt, Syria, Libya, Greece ect. These countries represent the wave of the future. I might add that it is also happening in Europe in a big way, really. The thing being missed here is that as energy supplies drop the economy will weaken and slow down in a big way. The world economy is already slowing down in a big way and we are at peak liquids. What happens when world oil supply drops 20 percent which has to happen at some point. What happens is we have the four horsemen of the apocalypse, famine, disease, violence and death. There really is no way around this at this point. The world as a whole does not recognize the problem. Where I disagree with Kim G is that when this oil glut ends due to oil going off line, we won’t have high prices, we will have shortages. That is, I believe the point at which the people world wide will wake up and say, Houston we have a problem, at least if they ever will. Beyond shortages we will have a world economy that will just continue to weaken. It’s also not beyond the realm of possibility that as the world gets into more and more trouble there will be nuclear war. Depopulation has to occur some way and that’s as good a way as any, although maybe more painful.

            • InAlaska says:

              Kim, I think you are missing most of the point of this site. For one thing, because oil is essentially the master resource, it cannot be substituted for like whale oil was substituted for 150 years ago. There is no substitute. Because of this, as we near depletion, normal price signals won’t work. Because our modern civilization is made of oil in nearly all respects, if it starts to break down in one area it pulls all the rest down with it because it is a networked economy. One of Gail’s theses is that with oil extraction its kind of “all or nothing.” Like a fire hose, its either all on or all off. We won’t be going after “those last drops of oil,” as you put it, because by that point the entire edifice will have collapsed.

            • Kim G says:

              Scarcity of a valuable and useful resource does not create lower prices. Full stop.

            • “Scarcity of a valuable and useful resource does not create lower prices”

              What happens if the high prices lead to increased supply, but the market is unable to increase demand at such a high price? Then, the oversupply runs out of room for storage?

            • Tolstoy's Degenerate Grandson says:

              It’s not scarcity that creates the lower price it is the fact that if the price is too high nobody can afford it, which collapses demand for a resource (such as oil).

              Oil is not a Ferrari. Mr Ferrari can keep his price at 500k per car come hell or high water and it does not matter one bit.

              We absolutely must have oil And we must have it at a low price or we will not have it at all.

              The global economy is 100% based on cheaply extractable oil. Without it growth ends. And Bill Gates is just as out of luck as you or me. His wealth will evaporate.

              As oil becomes more scarce again prices will likely go through the roof, for a very short period of time. And the wealthy will still fill up their luxury cars regardless of if a tank costs $500.

              But the price will ultimately collapse because the global economy explodes when the price of oil is high primarily because there is no way to substitute for oil (sorry solar panel people, it just isn’t possible).

              $100 oil was only possible for the past few years because QE and ZIRP were deployed to offset the toxic economic impacts of expensive oil. Of course such medicine has limits before it kills the patient, or fails to have any effect on the disease.

              The more scarce oil becomes the closer we get to the point where oil will be worthless because there will be no way to extract what is left.

            • InAlaska says:

              Kim G,
              “Scarcity of a valuable and useful resource does not create lower prices. Full stop.”

              Kim, you are continuing to miss the point that oil is a resource that stands alone. It is not just another scarce and valuable and useful resource. It is the only master resource. As such, its existence above ground is predicated on the idea that people can afford it. Because the economy is essentially made of oil, it does not play the same role as any other single commodity in the world. It needs to have a “sweet spot” price that is low enough so that average people can afford it, yet high enough that producers can afford to extract and refine it. However, because oil plays this keystone role in the world economy it doesn’t react as economists would expect it to. In a globalized world where wages are depressed at the same time that scarcity requires very expensive non-conventional extraction, any divergence from the sweet spot either causes demand destruction or production interruption. Either one of these two conditions, if perpetuated long enough, leads to the beginning of collapse.

        • cytochrome C says:

          “Second, there’s no immediate danger of running out of oil in the next twenty or so years. ”

          I would examine that in a bit more depth.

          I say a crunch will happen by the end of this decade.

          But, I’m with you on several points.

          • Tolstoy's Grandson says:

            The crunch will happen when supply peaks because capex has been slashed.

            Nobody will be looking for conventional oil with these prices. And you can’t just turn these things on like a tap.

            Final call is fast approaching.

          • Daddio7 says:

            Do you remember the speech President Carter gave about conserving energy? I remember in 1973 driving the 50 miles from my house to Jacksonville, Fl up I-95 one Saturday morning and only seeing two other cars. That wont happen again. Lack of financing and security may limit fuel supplies but every gas station in the US will not shut down at the same time.

            I lived on a farm and our gas supply wasn’t rationed.

            • Every gas station may not shut down at the same time, but every bank may shut down at pretty close to the same time. It is the financial system we need to be concerned about, and its ability to bring down the economy as a whole. The idea that we need to look at normal oil decline rates, or the speed at which oil stations closed in the past, isn’t really correct.

            • Tolstoy's Degenerate Grandson says:

              Energy and economic growth go hand in hand.

              Thank god Carter’s suggestions were deep sixed.

              If we reduce the burning of fossil fuels the economy collapses (no – solar, or nuclear or fusion or cow farts cannot fill the gap – sorry)

              What was he thinking?

              Damn good thing he was put out to pasture and Raygun’s minders pointed us in the right direction.

              Consume or Die! (Remember the Alamo)

        • “Second, note that during the time period when the global economy transitioned from whale oil to petroleum, the price of whale oil shot through the roof due to collapsing whale populations and rising demand for oil. ”

          And what, exactly, are we transitioning to now, in replacement for oil? Solar panels and windmills? If the replacement is inferior, the whale oil to crude oil transition is not an adequate example.

          • Kim G says:

            The point was not what was transitioned *to.* Had there been no petroleum, the price of whale oil would likely have risen even higher. Right? An increasingly scarce resource with no substitute? My point is that the end of petroleum is not going to happen with a big “going out of business” sale by all the oil companies. No. When that happens, the price of petroleum is going to go through the roof unless some rather more economical substitute is found. That is my point. Scarcity does not produce lower prices; it produces higher prices. Why is this so hard to understand?

            • “Scarcity does not produce lower prices; it produces higher prices. Why is this so hard to understand?”

              What happens if the consumer cannot afford $100 / gallon gasoline?

            • Tolstoy's Grandson says:

              Scarcity of Ferrari sports cars results in higher prices.

              A lot of people would love to own a shiny red car like this but they CANNOT afford one.

              You see where I am going with this?

            • InAlaska says:

              Kim G,
              “Scarcity does not produce lower prices; it produces higher prices. Why is this so hard to understand?” Its not hard to understand, its called DEMAND DESTRUCTION. If prices “go through the roof,” people can’t afford it so they stop buying it! Demand collapses and the price collapses with it. Shortly thereafter production stops. The world ends with a whimper, not a bang.

            • Kim G says:

              Your comment shows that you don’t understand demand curves. It’s beyond the scope of a comments section for me to explain it to you. But if you read up on demand curves, you will understand and agree with my point.

              Just because a lot of people can’t afford a particular commodity doesn’t mean its price will fall. Look at diamonds or gold. Most cannot afford these luxuries, but that doesn’t keep the price low.

            • Don Stewart says:

              Dear Kim G
              There is a difference between diamonds and gold and oil. Our economy can get along pretty well without diamonds and gold. It really can’t get along without oil. Humans MAY reconstruct the pre-oil or pre-fossil fuel economy, but that will be a quite different world from the one we live in today. In such a reconstructed world, I do believe that oil could sell for 400 dollars a barrel, and be quite a useful substance for making things like the landscaping fabric that Jan Steinman used for his French Drain. In other words, used for its unique chemical characteristics, but excluding its widespread use to generate heat to power engines mostly used for consumptive purposes.

              My note elsewhere on the potential for excess capacity driven deflation and the history of the Great Depression illustrate how the price of oil and other commodities could decline as our current economic system unravels. The difference from the Great Depression is that, this time, no monetary policy or government deficit spending can keep the current economic system going, much less bring back growth. We would have to accept the capital destruction involved in dismantling the current system, and reconstruct something a whole lot simpler.

              The current capital destruction underway in the fracking business and the tar sands is an example of what may play out on a larger scale.

              Don Stewart

            • Tolstoy's Degenerate Grandson says:

              Bad examples.

              Diamonds and gold are both 100% controlled markets.

              if the diamond cartel and the marketing machine that drives the price of diamonds were removed from the equation the price of diamonds would collapse. Because diamonds are not all that rare.

              As for gold, if the central banks and PTB were not manipulating the price of what is truly a scarce mineral, the price would likely be closer to $10,000 than $1000. If you disagree that gold is being manipulated then I suggest you google the hedge fund manager Grant Williams gold manipulation. The FT has also run stories explaining how paper gold is used to drive down the price of PM.

            • Tolstoy's Degenerate Grandson says:

              That’s a pretty darn good summary! (period.)

    • richard says:

      “The author does nothing to explain how oil at between $80 and $110 per bbl was “affordable” mid 2010 and mid 2014, and suddenly in the last nine months with no financial or economic crisis became unaffordable.”
      I’m not speaking for Gail, but I think you misread the arguement. If, as you suggest that oil at $80 and above is affordable, then consumption in places such as China would have pushed up prices enough to fund exploration and development in the expectation of profits, offsetting declines in US sales since 2006:
      I’m saying that irrespective of the demand and the price of oil in the market, if exploration and production are unaffordable after allowing for debt, risk, and opportunity costs, then oil supply will decline sooer or later. Further, you should look at the price of oil other than in US$ and at other economies to get a broader picture of where this is going. I think most would agree that the financial markets are in places where they have never been before in history, so it may be a year or two before we whow whether this experiment is a success.

      • Kim G says:

        Richard: I don’t think we are all that far apart in our view of this. At the end of the day, we don’t know what price of oil is “affordable.” All we know are the prices at which it exchanges hands. And we know that higher prices incent more production and lower consumption, and vice versa. Clearly oil is getting costlier to extract in terms of alternative uses for that capital. Hence my point that it will be extracted until the marginal revenue equals the marginal cost. So far, we’ve seen the world pay as much as $140 USD/BBL in the early months of 2008. So we at least know that at that price there are still ready buyers, though not happy ones.

        As for prices pushing up production, that’s exactly what we’ve seen with the shale revolution here in the USA in the past five years. US shale oil is the global highest-cost supply, and is what the Saudis are now trying to put out of business.

        So in fact, high prices have stimulated a tremendous amount of exploration and production. And the current low prices have put a brake on that as virtually every publicly traded oil company has slashed capex for 2015, and the rig count is falling. However it’s going to take a while before those shale wells deplete and lower supply.

        Since there’s a substantial lag between price signals and production, the oil price will likely remain volatile as long as there’s an oil market.

        As for oil prices in other currencies, as of now oil is priced in dollars. Clearly due to the weakness of most other currencies, foreigners aren’t enjoying as much of a fall in energy costs as we are in the USA. But that sometimes cuts the other way too. At the end of the day, the oil price is set by supply/demand interaction and not exchange rates.

        • We need oil because of the “work” the energy can do. When oil prices are high, less oil is purchased. It is the decline in purchases that are most of the problem. In a networked system, the cause behind the decline in consumption is not very obvious. Often it is because fewer young people have good paying jobs. Instead, they live at home with their parents and attend school longer. These young people don’t “need” oil because they don’t have jobs to buy the oil. Lack of oil feeds back as lack of good-paying jobs.

          • Kim G says:

            When you write, We need oil because of the “work” the energy can do. what an economist would say is that the marginal benefit of extracting oil exceeds its marginal cost, which is what I have been arguing.

            As for actual demand for oil, in the short term, it is very insensitive to price. Which is another way of saying that no matter how high the price, people keep buying it because they have to get to work, heat their homes, etc. But longer term, people buy smaller cars, insulate their houses, etc. This is why US oil consumption has declined modestly in the last decade; we are using it more efficiently due to its cost.

            I have done fairly extensive analysis of the US gasoline market, and only post-Hurricane Katrina when there simply was less gasoline to sell (and the price rose more than a dollar in a week) did I see any drops in weekly consumption. This means that price has to move a LOT to shift demand a little.

            By the way, your analysis is very US-centric. For every millennial who’s living in his parents’ basement, working a crappy McJob, and not spending much, there’s three or four Chinese youngsters (and others in the emerging world) who are consuming more energy than their parents ever could dream of. So all this focus on the American working class and their troubles isn’t the whole story of global energy demand. And I’d frankly be skeptical if the working class was consuming much less energy than they did five years ago.

            • Harry Gibbs says:

              “By the way, your analysis is very US-centric.”

              The economic erosion that Gail describes has been most salient in countries that use a lot of oil per capita and a high percentage of oil in their overall energy-mix, ie not China:


            • “The economic erosion that Gail describes has been most salient in countries that use a lot of oil per capita and a high percentage of oil in their overall energy-mix, ie not China:”

              The IEA study shows it has more to do with oil importing countries, and how far along development they are, with OECD countries suffering a 0.4% decline per $10 hike for each of the first two years, while most of Asia would have a 0.8% loss, heavily indebted developing countries a 1.6% loss, and sub-Saharan Africa suffering greater than 3% decline:

            • kthatsaynii says:

              “When you write, We need oil because of the “work” the energy can do. what an economist would say is that the marginal benefit of extracting oil exceeds its marginal cost, which is what I have been arguing”

              Which is why economists are bat poop crazy.

              Work is a reality measured empirically in the real world. It is a fact unlike the many illusions you refer to as “fact”

              All of the work in the modern world is done by fossil fuels. This work is what sustains human life at current population levels. Certain humans possess skills that allow them to exploit the power of fossil fuels more than others. A airline pilot for instance. An airline pilot understands the complex relationships that keep a aircraft in the air. A pilot would never propose that its the relationships themselves that keep the aircraft aloft without fossil fuel. That is why aircraft pilots are sane (Alaska bush pilots aside) and economists are bat poop crazy.

              The work that fossil fuels do is what keeps the “economy” alive.

              A mouse falls in a bucket of water. Oxygen no longer flows in its blood. The mouse dies. Supply and demand in regards to oxygen is not very applicable relationship to that mouse.

            • Jan Steinman says:

              “All of the work in the modern world is done by fossil fuels.”

              My aching shoulder, knees, and back wouldn’t go that far, having forked a tonne of goat manure out of the goat shed, and having moved a tonne of drain rock into a hand-dug french drain around the greenhouse! (6/296ths done!)

            • kthatsaynii says:

              “My aching shoulder, knees, and back wouldn’t go that far, having forked a tonne of goat manure out of the goat shed, and having moved a tonne of drain rock into a hand-dug french drain around the greenhouse! (6/296ths done!)”
              No fossil fuels were involved in creating the calories that fueled the work your body did?

            • Jan Steinman says:

              “No fossil fuels were involved in creating the calories that fueled the work your body did?”

              Don’t you think you’re setting an impossible standard here?

              I’d say, “damned few” fossil fuels were involved. In gross measure, we produce what we eat here. It is true that certain things are produced to excess, and they are traded for little bits of coloured paper that people are willing to trade for things we don’t produce, and that those little bits of coloured paper are quite oily.

              I’m reminded of a talk by Daniel Berrigan that I attended during the Viet Nam years. The rather hostile audience was pelting him with all sorts of ridiculously contrived questions about revoking violence. And one point, he cried out in exasperation, “What are you trying to do, kill off all the pacifists?”

              Don’t let the “perfect” be the enemy of the “better.” We teach people to move away from fossil sunlight — not to immediately cut themselves off — in the hope that should they find themselves cut off, they’d have some coping strategies.

            • Harry Gibbs says:

              Matthew, yes, obviously oil importing nations… For those too busy to look through the IEA document, for which many thanks, they suggest that developing (importer) nations are particularly vulnerable to rising oil prices because they use on average twice as much oil to produce a unit of economic output as OECD nations.

              It also says that in a climate of elevated oil prices, even OPEC nations will suffer in the long-term from lower oil revenues and falling GDP, as higher prices would not compensate fully for lower production.

            • kthatsaynii says:

              “Don’t you think you’re setting an impossible standard here?”
              Im not setting a standard at all. I asked a question. Using the body as a engine has advantages and disadvantages. The body is pretty portable and versatile machine. My self Id be looking around to see who has a front end loader or a tractor with a bucket to move that rock. Now 3 or 6 tons I might move using my body as a engine. The calories I would consume to do so would be primarily created by fossil fuels. I enjoy physical labor. There is something soothing in it. But if I am trying to get something done generally I will use a combustion engine if one is available. I figure use it or lose it.

              Thats nice that you are working toward sustainability in some sort of real fashion. How many humans could the planet support living that way half a billion perhaps two? I think you actions toward “better”are great but in contemplating our situation I believe the gap between where we are and where we need to be is just too large. When most people use their body as a engine the calories they consume will be directly derived from fossil fuels from the laborer in mumbai to the walmart worker in oshkosh. . Since you had a problem with my statement “all of the work in the modern world is done by fossil fuels” would you have a problem with the statement 99.9999% of the work in the world is done by fossil fuels? Was your indignation that I was robbing you of your righteous accomplishment of labor by calling attention to the calories that fueled it?

            • Jan Steinman says:

              “Since you had a problem with my statement “all of the work in the modern world is done by fossil fuels” would you have a problem with the statement 99.9999% of the work in the world is done by fossil fuels?”

              I have a problem with “all” because that makes my physical work invisible. Likewise, I have a problem with “99.9999%” because it is so obviously made up.

              As a scientist and engineer, my motto is, “If you can’t quantify it, don’t.” “Quantifying” can include tolerances and error bars, but blanket statements that include arbitrary “all” or even “99.9999%” statements seem more like hyperbole than researched fact to me.

              And what, exactly, is “all of the work in the modern world?” When I go outside, I see steam coming off manure piles, where billions of bacteria are “at work.” I see cumulous clouds carrying thousands of tonnes of water to heights man cannot achieve, with or without fossil sunlight. I see animals running and birds flying.

              By some measure, human use of energy has exceed the basic biological productivity of the Earth. But not by 99.9999%. Probably not even by 50%.

              If you define “all the work in the modern world” as “moving goods and services around by planes, trains, and trucks,” then of course, all of that work is done by fossil sunlight. But that’s a pretty anthropocentric view.

            • Jan Steinman says:

              PS: this message is coming to you from wind power. And even if we did not pay extra for that, it would be coming to you via hydro power, which in my locale, supplies over 99% of human electricity use.

            • kthatsaynii says:

              “having moved a tonne of drain rock into a hand-dug french drain around the greenhouse! (6/296ths done!)”
              Jan I hope that you have a crack team of oompa loompas at your place who quaried that 50 tons of rock, crushed it, sorted it and transported it to your property. Usually us unprincipled common folk use massive amounts of fossil fuels to do those things. Im sure that you wouldnt do that then raise the permie flag of victory for moving it the last three feet would you?

            • “having moved a tonne”
              ” I hope that you have a crack team of oompa loompas at your place who quaried that 50 tons of rock, crushed it, sorted it and transported it to your property”

              How did a tonne become 50 tons? How do you know the gravel wasn’t on the property already, as part of the ground? moving one ton of gravel by wheel barrow is not a huge deal, rocks are heavy, it would be overkill to use heavy equipment for such a paltry amount, unless you already owned a tractor. As Jan said previously, don’t let perfect be the enemy of better. Working towards less dependency is better than not, even if you cannot instantly jump to zero oil.

            • Jan Steinman says:

              “How did a tonne become 50 tons? How do you know the gravel wasn’t on the property already, as part of the ground?”

              This was rock that we had previously hand-picked out of a field, piling it up next to fence posts and at the ends of rows. It was placed in hand-dug trenches along the sides of our greenhouse. No dinosaurs were burned in the collecting or distribution of that rock!

              We did indulge in some landscape fabric — yes, a petroleum product — to wrap the rocks in, which should greatly increase the life of our french drain, which would silt up after a decade or so otherwise.

              This is in accordance with David Holmgren’s thoughts that the gift of fossil sunlight should be used for long-term earth-capital investment. While I’m sure some carbon was released in the manufacture and transport of that landscape fabric, at least we’ve put some more fossil sunlight back in the ground.

              Thanks for the defense, Matthew, but I pretty much ignore keyboard-jockey nay-sayers, preferring to just Do The Right Thing. I’d rather spend my time helping others who are also trying to Do The Right Thing than waste in on nay-sayers. And in not replying to them, I help keep flame wars down. So I suggest others also ignore the nay-sayers, rather than rush to my defense.

            • Jan Steinman says:

              PS: we do use a small tractor to move the rock from the field to the greenhouse. It runs on biodiesel that we make from restaurant waste, but I acknowledge that the methanol we use to make biodiesel is a product of natural gas, and that the waste cooking oil came from fields of fossil-sunlight-soaked oil crops.

              Yea, we are certainly “touched” by fossil sunlight. But I’d say we function on about 20% of average or less. Let he who is without sin cast the first stone: how much do you use?

            • InAlaska says:

              Speaking as one of those Alaska pilots, I must take offense! Bushpilots have to be the sanest people alive. If you don’t see the world clearly flying up here, you don’t last long. As the saying goes, “There’s old pilots and bold pilots, but no old, bold pilots.”

            • kthatsaynii says:

              “As a scientist and engineer, my motto is, “If you can’t quantify it, don’t.” “Quantifying” can include tolerances and error bars, but blanket statements that include arbitrary “all” or even “99.9999%” statements seem more like hyperbole than researched fact to me.”

              Ill try to meet your standard- limit my statements to the like of “I’d say, “damned few””

              “How did a tonne become 50 tons?”

              The algebra by which this is derived is quite self evident.

              “How do you know the gravel wasn’t on the property already, as part of the ground?”

              Its nice when a gravel bank is near a project. It still gets moved to the job “most of the damn time” using a combustion engine. French drains usually use bigger rock

              “This was rock that we had previously hand-picked out of a field, piling it up next to fence posts and at the ends of rows. ”

              Good for you. I have done the same utilizing rocks that were brought to the surface by heavy equipment/grading. Were the rocks that you collected brought to the surface by a combustion engine? I like using rocks that existed prior on job site but that is mostly athetics. Invariably what is collected is not enough and more gets brought in via dump truck.

              “This is in accordance with David Holmgren’s thoughts that the gift of fossil sunlight should be used for long-term earth-capital investment.”

              Never heard of the guy but could not agree more. Why do you characterize me as a enemy of efforts to make lasting infrastructure? Thats pretty much all I do. I gave kudos for efforts along those lines in my posts. Nor do I understand the need to try to invalidate the statement all work in the modern world is done by fossil fuel. It is a understanding of that that drives me to infrastructure in place for future generations. While fossil fuels exist they will be used, the work they perform is just too powerful and its basically free. When they end everything that we know will end socially, politically, and morally.

              “how much do you use?”
              Damned few

              “Speaking as one of those Alaska pilots, I must take offense! ”

              My apologies. The statement was meant half humorous and half as a compliment.

            • Jan Steinman says:

              “Nor do I understand the need to try to invalidate the statement all [emphasis mine] work in the modern world is done by fossil fuel.”

              I don’t think you read anything I wrote. My gripe is with the word “all.”

              I’ll respond no further on this topic.

            • kthatsaynii says:

              “I don’t think you read anything I wrote. My gripe is with the word “all.””

              I read everything you wrote. You are not being honest. The word “all” is not a absaloute in common use. When I attempted to dilute it slightly to reflect its common usage to appease your demands you turned around and accused me of making things up. You accused me of setting standards then out of the blue set standards for a common conversation. Perhaps a six sigma analysis of every statement is needed to express common communications? But only when you decide you are allowed to use language with complete vagueness as I pointed out. I have no idea what motivates you but it certainly is not “a gripe with the word all”. Your behavior is adversarial in its intent masked by supposed dedication to standards you dont observe yourself. I made multiple attempts to find the middle ground all of which you rejected.

          • Daddio7 says:

            Many in my family depend on the energy sector. One nephew is an engineer for a gas pipeline company. Another does software support for a gas utility. My oldest son is a contract manager for a German company that manufactures gas co-generation power systems. There is a huge investment in theses systems. People and governments will insure that these continue to function until the very end.
            For the less educated job prospects are dim. My youngest son is still in college. His high school buddy lives at home and works night shift at a fast food restaurant. At some point it’s all going to go bad but we will ride it as long as possible.

        • Tolstoy's Grandson says:

          We don’t know what is affordable? Sure we do. Keep subtracting 0.4% for every 10 dollar rise and see how soon you get to 0 when you start with 12 oil (the price of oil on 1998)

          Google price 1998 if you want to see the full table:

          Year Nominal Price Inflation Adjusted Price
          1998 $11.91 $17.26

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

          • Kim G says:

            By your math, GDP would have reached zero by last summer. Yet we know it was not zero. So your argument is clearly wrong somewhere, isn’t it?

            • garand555 says:

              Uh, no. If you’re a linear thinker, going from $12 to $147 means a decrease of 0.4%*(147-12)/10, which is 5.4%. If you are not, i.e. for the first $10, you subtract 0.4% of the current GDP, then subtract 0.4% of the resulting GDP for the next $10 rise (i.e. subtract 0.3984% or the original GDP,) it is even less than 5.4%.

              Just keep in mind, we hit a financial crisis not too long after oil hit $147/bbl.

            • Kim G says:

              Before the financial crisis when oil was $147, GDP growth was running between 2-4%. What you write implies that flat oil would have produced GDP growth of 7.4 to 9.4%, a figure I have a hard time believing.

              And yes, I am well aware of what oil did before the financial crisis. However, what caused the financial crisis was a lot of irresponsible lending to people who could not repay the debts. Did the oil rise move up the date for the crisis? Quite possibly, but it wasn’t the root cause.

            • Tolstoy's Grandson says:

              You seem to have forgotten what was driving that growth and overcoming the high price of oil which started to climb in 2001 and continued to climb to 147.

              Remember those those things called Liar Loans and Sub-prime Mortgages?

              Remember how all those janitors and gardeners others with minimal income were able to walk up to one of Angelo Mozilo’s offices and get a mortgage no money down for 750k on an income of 50k or less?

              Remember how they could also get a top up on the mortgage to buy furniture or a new car or a vacation?

              Remember how this free was driving growth in spite of very expensive oil?

              Remember how this all ended?

              And if you were to read Zero Hedge instead of BBG or the FT or cnBS you would know that the same things are happening all around you once again including subprime auto loans on a magnificent scale, and 0 down mortgages.

              High priced oil absolutely does put an end to growth. The central banks are painfully aware of that.

              And they are doing what would seem to be insane things which are not really insane.

              They are fighting for our very lives.

              Think about what happens if they don’t make auto loans to people who really don’t qualify. Subprime is a huge hunk of the auto market.

              Strip out that 25% or so ( and work out what would happen to the auto industry.

              Likewise for the housing market.

              The beast must grow, at all costs. It can only grow if it is fed cheap energy; it has a preference for oil.

              If you starve the beast of energy you can feed it financial gimmicks mixed with expensive oil. For awhile. But a diet of fraud breaks down the guts of the beast and causes it to fart and belch and go incontinent.

              And eventually, it breaks him down and kills him.

            • “By your math, GDP would have reached zero by last summer. Yet we know it was not zero. So your argument is clearly wrong somewhere, isn’t it?”

              Not good at math, I see. $100 barrel is $90 more than $10. $90 is nine (9) tens. 9 times 0.4% equals 3.6%. So $100 oil should cause a 3.6% reduction in GDP, leaving 96.4% of GDP intact, not zero percent.

            • garand555 says:

              “Did the oil rise move up the date for the crisis? Quite possibly, but it wasn’t the root cause. ”

              No, oil was the root cause. Capex has been increasing on oil at around 11% per annum since 2000 as per Steven Copits. While there are lag times that vary for different sectors, the price of oil will eventually propagate through our entire economy. When it becomes impossible to make money via honest means, as is required by our current monetary scheme that requires perpetual growth, the vultures will do whatever it takes to keep their status quo going.

              You’re not going to believe that, so I’ll put it this way: A bunch of crooked bastards rigged the system via complex financial schemes and lent a bunch of money to people who couldn’t afford it. The ever increasing prices, due to oil going up. that were based on the next greater fool theory hit a wall, because all of a sudden all of these ninja loans weren’t going to last long enough for the next greater fool to come in and scoop up the property. Without oil shenanigans, this would have been another savings and loans scandal, and some people would have gone to jail.

              If the US was blindly able to consume 25 million bbls/day at $25/bbl, we’d be humming along pretty nicely right now. The financial crisis might have taken another year or three to show up, and it would have been a shock to people directly affected, but we would have marched on.

          • “Sure we do. Keep subtracting 0.4% for every 10 dollar rise and see how soon you get to 0 when you start with 12 oil (the price of oil on 1998)”

            So, at $1250 / barrel the economy will be reduced 50%? I don’t think it will quite work that way. If it does, that just means we need enough technological innovation to get hedonic adjustments to cover the 50% loss.

        • Creedon says:

          The last data that I saw put shale oil depletion at 90 percent per well in three years and I have seen depletion rates faster than that. The time period for shale oil depletion to take place is not on the order of the time required to repay the debt.

          • Kim G says:

            The shale oil depletion rates are what is going cause the current oil glut to resolve itself within the year. As for the debt, it’s typically tied to an operator who has a large number of fields. The debts were incurred knowing about the depletion rates. What’s the big surprise is the oil glut and low prices now. How bad the debt problem becomes remains to be seen, but most of the junk bonds issued by E&P companies come due in 2016 and 2017, so there’s some breathing room. By then prices should have recovered (barring an unexpected recession) so the debt situation could well resolve itself.

            • richard says:

              Soon the proven reserves of shale oil companies will be re-evaluated in light of the fall in oil prices to early January 2015. For some companies that may lead to a breach of their covenants with their creditors, and possibly their banks. Depending on the creditor, bank, and outlook, additional collateral may be demanded, and if that is not forthcoming, the company can be in breach of its financial commitments. In that situation, a debt for equity swap may be the best outcome available. There would be others, of course.

    • MG says:

      The fact that the central banks fight the deflation is the most important sign that we have less and less energy at our disposal and something serious is happening. A lot of so called economic growth of todays times is funded by loans, mortgages, subsidies etc. That is why the growth in China stops, when their construction bonanza stops. As it already happened in Japan, USA or Europe.

      We need cheap oil for everyday operation and maintenance of our man-made ecosystems, not the costly oil that requires long term debt and that can be used effectively only for one-time and long-term investments like real estates construction, infrastructure projects.

      Once the construction bonanza financed by the debt is over, the consumption of oil goes down, the depletion of cheap oil continues and the economy can not restart the growth despite all the money poured into it – as Japan has already shown us…

      Lack of affordability can be fixed by the debt. The debt on the various levels of the system. But not indefinitely. The debt continues to grow, so the price of oil has lower and lower upper limit.

      It is like resignation…

      • Kim G says:

        The fact that the central banks fight the deflation is the most important sign that we have less and less energy at our disposal… What’s the cause and effect relationship of this? We seem to have (in the short term) more and more energy available to us. Look at US and global storage figures. We’re running out of places to put oil.

        That is why the growth in China stops, when their construction bonanza stops. Constructing buildings goes into the GDP calculation. So obviously when it stops or slows that component of GDP stops or slows. This is also true of the USA and any other economy.

        We need cheap oil for everyday operation and maintenance of our man-made ecosystems, … Agreed. Enjoy now it while it lasts as it will only be a temporary phenomenon since we are running out of the stuff.

        As for debt, I personally believe it is extremely unwise to use debt to fund current consumption (as opposed to productive investment), but alas, the world has other ideas. This is one of the *BIG* problems the world is facing today.

        • Tolstoy's Grandson says:

          We’ve been using debt for decades now and without it growth would have stopped long ago.

          Debt is so passe, the new thing is QE, or money printing.

          And I say “BRING IT ON” because high priced oil has stopped growth in its tracks. And money printing is our last gasp at delaying a guaranteed collapse

          Bravo central bankers. Bravo.

        • MG says:

          The deflation in energy terms is like you seeing a big tank full of oil, but you can not afford it. Like there is a store full of bread loafs, but you can not afford enough of them.

          So you starve, despited the fact that there is a lot of bread…

    • Nigella says:

      Unplug QE and ZIRP my friend and see how long this charade would go on.

      Do you think these policies can go on forever given the toxic side effects?

      • Kim G says:

        I don’t think that question bears on the argument at hand.

        • garand555 says:

          It absolutely does. How do you think that fracking companies financed their operations over the past few years? Many of them issued junk bonds. This was made possible by ZIRP and QE. Cheap money. The energy sector is something like 15% or 20% of the junk bond market, and the yields (interest they’re paying) have gone from around 4% to 10% because of the decline in oil prices. Keep in mind that they were selling these things when oil was around $100/bbl. Sub $50/bbl will eventually lead to a junk bond crisis, and how far that spreads is anybody’s guess. It has the potential to cause some serious carnage in the OTC derivatives markets, and if those decide to go BOOM! there is not enough currency in the world to bail that out.

  21. Reblogged this on Stephen Hinton Consulting and commented:
    Excellent piece explains why energy prices at a low do not necessarily mean the economy will pick up. Assumptions by economists about energy prices are not confirmed in our highly networked economy as Our Finite World explains.

  22. edpell says:

    I attended a local outreach on the part of the New York Public Service Commission explaining their Reforming the Energy Vision. It was quite reasonable. All electric energy suppliers will be allowed to participate in the market.

    One interesting point came up. In New York City there are 100,000 households that are completely off the electric grid. They did not get into the details of that.

    • Herm says:

      ya those are the people who have lost their jobs in the past few months and are living a completely green lifestyle they buy nothing (no money) they recycle food (dumpster diving) and they live in card board boxes under over passes dont think they have solar panels

    • John says:

      That’s not by choice LOL

  23. Terry Masters says:

    To all,
    I heartily recommend the book, “Green Illusions: The Dirty Secrets of Clean Energy and the Future of Environmentalism, by Ozzie Zehner.”

    “We don’t have an energy crisis. We have a consumption crisis. And this book, which takes aim at cherished assumptions regarding energy, offers refreshingly straight talk about what’s wrong with the way we think and talk about the problem. Though we generally believe we can solve environmental problems with more energy—more solar cells, wind turbines, and biofuels—alternative technologies come with their own side effects and limitations. How, for instance, do solar cells cause harm? Why can’t engineers solve wind power’s biggest obstacle? Why won’t contraception solve the problem of overpopulation lying at the heart of our concerns about energy, and what will?”

    As this retired electrical engineer began reading the book, I was dismayed at what I was reading. Perhaps, I thought, this is stealthy propaganda from the “other side.” But as I progressed through the chapters, I slowly became convinced that the author knows what he’s taking about, and that I and many others I know have indeed been harboring “green” illusions.

    Best to operate on reality, as far as we can deduce it. I believe this book helped me in that regard.


  24. wynnsol says:

    Dear Gail, Usually, I find you posts very informative and thoughtful. However, in this one, I feel you have made a rather glaring error. In the paragraph:

    “Also, as we shift to higher cost types of energy, we become increasingly inefficient in energy production. Based on a 2013 analysis, in the United States, there are more solar energy workers than coal miners, even though we use far more coal than solar energy. The large number of workers required to produce solar energy is one of the reason that solar energy tends to be high-priced to produce.”

    you equate two different types of ‘workers’. Coal miners are *production* workers – if they stop working, no more coal is produced. The number of workers in the solar energy field are largely *installation workers* – once they finish a job and they go away, the newly installed system continues to produce energy! The reason for the large numbers of solar workers is the huge rate at which solar systems are being installed.

    The cost of solar energy is rapidly falling, and will soon be competitive with coal, oil and even NG fueled electric plants, even without subsidies!

    There may well be other reasons that PV solar won’t/can’t save our butts, but I think your reasoning in the quoted para. needs rethinking.

    Thank you for your time.

    William Solomon

    • Unfortunately, there are a lot of mismatches in this whole system. When coal is extracted and burned, it produces energy now. When coal is extracted and burned to make a solar panel, it creates CO2 emissions now, with the hope that sometime, in the future (based on someone’s model), these higher CO2 emissions will offset some future coal emissions. The supposed 25 year lifetime of the solar panel really is limited by the lifetime of the electrical system it is part of. If the lifetime of the electrical system is five years and the solar panel is part of it, we have just generated a lot of CO2 for very little benefit. All of the installation workers spend their earnings on things oil to run their trucks and also to operate their personal automobile. I doubt either of these gets into the EROEI calculations–clearly the use on personal automobiles does not. The whole system is dependent on government spending on roads–this is used for oil, but doesn’t get into EROEI calculations either.

      People don’t think through the advance nature of the fossil fuel use for solar panels. This chart shows a calculation showing a 25 year payback of the energy in this calculation–energy in the panels +batteries. If an alternator had been included, the payback would have been slower. Of course, no human energy use ($$$ used to buy things) is included in EROEI calculations–these would be in addition.

      Graham Palmer estimate of solar EROEI

  25. KI Time says:

    ponder this . . . What if Geothermal Assist were made part of the public commons ??? Those trillions of dollars earmarked for additional OM bailout’s to prop them up TEMPORARILY might better be used to start migrating away from fossil fuel infrastructure !!! Every home that has a red banded NG furnace might be better served with real incentives to develop their own Geothermal Assist infrastructure for the long haul rather than replace it with a hard to maintain high efficiency NG furnace with a highly questionable supply !!! You have to have something waiting on the other side of a successful struggle against these fossil fuel Psychopaths.

    Note: Geothermal Assist is not the same as Geothermal. The latter is a High Tech solution that is employed in Iceland that converts volcanic heat into electricity. It’s hyped here as a way to promote our sick and parasitic trickle-up Monetary/Market Economy. It’s at least feasible to require homes to use Geothermal Assist here which is low tech simply harvests naturally occurring heat from about 150′ underground with no burning of anything. Compressors, which have been around for quite a while, are used to squeeze heat out of the water that’s been heated to 57 degrees underground so that you wind up with two tanks of water. One contains super hot water and the other super cold water. Use the super hot water to heat up air and force it into your home with a big fan in the winter. Use the super cold water in the summer to cool your home the same way. I was able to turn off my natural gas service, so they have absolutely no reason from me to sacrifice the 2nd largest forest on earth for that awful tar sands project, and poison our water with that awful fracking, and complete that awful Keystone pipeline that has utter failure written all over it no matter what kind of obfuscation they use to hide that FACT.

    • edpell says:

      I see how 57 degree water can be used a a heat source in winter. Where are you getting the cold water from?

    • Geothermal assist still requires keeping the rest of the system going–electricity, for example. And it does nothing to replace oil, which is our big problem. It requires a huge use of resources–for all of the pipes, and for digging the trenches and refilling the trenches. Money which is just pixels doesn’t really burn fossil fuels–it is just future promises, that won’t really pay off. You can’t substitute them for real fossil fuel use. And the fossil fuel use you are talking about likely won’t pay back in the time we will have to use it.

  26. Pingback: The Oil Glut And Low Prices Reflect An Affordability Problem | State of Globe

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  30. marmico says:

    I’m not following this affordability issue.

    The ratio of household expenditures on total energy and gasoline to wages and salaries is linked:

    Rarely in the 56 year history of the data series is energy less than 7.5% of wages and salaries. The average is 8.4%.

    • The problem with that data series is much like the problem with the Unemployment figures, which is that as soon as someone drops off the people being counted, it no longer contributes to the statistic being compiled.

      The issue in this case is that Gasoline expenditures by household only count households that are consuming gasoline. So if your household no longer has a car, you no longer get counted here because you don’t consume any gasoline.

      As a result, you will get a fairly constant number for this as demand destruction proceeds along. What you really need to have numbers for are things like total gasoline consumption per capita, miles driven per capita etc. These are hard stats to get. What graphs and tables i have been able to find show is roughly a 5% decline for the FSoA over the last 5 years, but quite a bit larger for Europe. The supply-demand equation for oil on the Global scale does not require much more than 5% difference before you end up with a glut in supply, which is what the current situation is.


      • Jan Steinman says:

        “What graphs and tables i have been able to find show is roughly a 5% decline for the FSoA over the last 5 years, but quite a bit larger for Europe.”

        Ugo Bardi had a graph on his site not too long ago that shows that Italy’s petroleum consumption is down to 1965 levels — implying the economy is down to those levels, as well, no?

        • Yah, based on the graphs Ugo dropped on, it’s around a 25-35% consumption drop in Italy. I’m not sure how that data was compiled though, and it seems larger than likely to date, though possible for sure.


      • marmico says:

        So if your household no longer has a car, you no longer get counted here because you don’t consume any gasoline.

        You are positing that the increase in households without a vehicle from 8.87% in 2005 to 9.22% in 2012 has a material impact on the numerator in the gasoline/wage ratio. Prove it. It seems highly probable that 2015 will be the fourth consecutive year that affordability has improved.

        The affordability issue is a red herring.

        • ” Prove it. It seems highly probable that 2015 will be the fourth consecutive year that affordability has improved.”-MM

          Well, first off I am not in the bizness of proving anything. I’m a macro observer of trends, I don’t pour over graphs and charts like my good friends Gail Tverberg and Steve Ludlum. I’ll leave it to them to crunch the numbers, I digest the results.

          Now, on the macro level, it’s pretty clear that your contention that affordability has improved is incorrect, because if that was true, more people would be buying more gas. If less people are buying less gas, affordability must have diminished, not improved.

          Simply looking at the price of gas doesn’t tell you whether it is more affordable or not, you also need to know what is occuring with the consumer’s income during the same period, and what percentage of the population remains employed. Also fairly obvious is that over the time period a smaller percentage of the population is employed all the time in the industrial economy, and more of them are employed in lower wage service economy jobs. Gas does not become more affordable when you go from $50/hr Union Auto Worker to $10/hr Starbucks Barrista, obviously.


        • The issue I see is that with limited oil supply, is that young people can’t find good jobs. They go to school endlessly, and live with their parents the whole time. They don’t form households. Or if they do, the form a household of say, five or six young people, each with low paying jobs. So the oil use per household stays pretty much the same–the problem is “inhibited household formation”.

          It takes oil to have good paying jobs. It is the jobs that we are missing. Or the jobs we do have are service jobs that pay a lot less than say, construction jobs. (We no longer need to build houses, when few young people can afford houses.) The lack of oil problem is really a lack of good-paying jobs problem. But it is hard for people to see that cheap oil is need for high-paying jobs.

          • InAlaska says:

            Just to clarify: you mean “cheap to produce” oil is needed, not “cheap to purchase” oil? Because we now have the latter and it hasn’t led to better jobs. It may have led to more jobs, but not better paying jobs.

          • marmico says:

            The employment-population ratio of the 16-24 year old cohort (young people) has been in secular decline since 1979. It has no material impact on either the numerator nor the denominator in the aggregate gasoline/wage affordability ratio.

            From July 2013 year over year to July 2014, there were 401,000 net jobs additions for the cohort of which 50% were in the high paying, low petroleum intensity sectors of information, financial activities, professional and business services.


    • The amount spent on oil doesn’t buy a large enough quantity of oil when prices are too high. It is the quantity that counts, relative to what the built infrastructure requires.

  31. The issue of course is how debt gets distributed out, since money is debt.

    Early on Debt got distributed out in enough quantity to consumers for them to buy the energy that extractors were selling. The debt was distributed out by Wages early on, but increasingly over time the wages have not kept up, consumers were forced to take on retail level debt to keep buying.

    Today, the only place debt gets issued out to is to the very largest of corporations and banks. They invest in further extraction, but consumers do not have money to burn the energy. They are credit starved.

    To get prices to rise, credit has to be issued out to the consumers, but they have no ability to pay off that credit. So far nobody is doing Helicopter drops of money to consumers, so the demand is being destroyed.

    Enough demand destruction, price falls and then extractors go outta biz.


    • I think you are right. But extending credit to people who can’t repay loans doesn’t work.

      • InAlaska says:

        I have an acquaintance of somewhat modest means who was just given a zero down payment, zero interest auto loan for a $60,000 SUV. Does it matter if the loan is ever repaid as long as the economic transaction is completed?

        • I have a niece who, the day she left dental school (in a dental specialty), bought someone else’s dental practice. Her parents are of limited means, and she hadn’t been working, so I am sure that this was pretty much 100% financed by debt as well.

          • ” so I am sure that this was pretty much 100% financed by debt as well.”

            I think there is a huge difference between purchasing something productive – an existing business, compared to a depreciating consumptive asset – a new SUV. She should be able to make money to repay the debt, using the business and education bought with the debt. The other guy, will having a new $60,000 SUV increase his earning power?

            • It depends on whether enough people will use the high priced specialty dentistry she is doing–implants and such. Also, she is concerned about fraudulent misrepresentations by the seller regarding the practice.

  32. MG says:

    Regardless the price, less and less oil is provided for the sectors of the economy that are not involved in oil extraction, transportation and processing. This way, some sectors of the economy become more and more “dried out”, as the oil is the blood of the economy.

    That is why neither high oil prices, nor the low oil prices can fix the situation. Surely, the lower oil prices reflect the fact that the oil becomes less and less affordable. Some groups of the consumers are “crowded out” via shrinking production and less jobs. Not via less jobs and then shrinking production. This loop starts with shrinking production, when the production is being moved into cheaper regions, countries, continents, where the oil is used more efficiently due to lower coal prices or lower wages of the workers.

    Then come loans and mortgages that try to fix the affordability by reducing the gap between the wages of the workers and the oil and its resulting products and services.

    When this does not help anymore, we see the rise of the electronics and the communication technology that tries to keep the system together as the physical ties start to weaken due to the lack of oil. (No need to be personally present on a certain place when the cables or waves can transmit your image and sound, transmit important documents or even money etc.) This way e.g. people create and maintain personal ties via internet today. Otherwise there would not be enough oil to transport them everywhere and their productivity would go terribly down. The rise of smartpones etc. is nothing else than keeping the productivity (and the system together) in the world where we lose oil. That is why we often encounter close people being together but looking into their smartphones. They just try to keep their personal or working ties which otherwise would be lost…

    • MG says:

      The lack of affordability is the key also to population decline: less marriages, higher divorce rates, more singles and the popularity of dating sites reflect the lack of affordability of personal life in the physical world where more and more work is required to keep the life-support system functioning…

    • You may be right about this. The virtual world takes the place of seeing other people close up.

  33. David Knight says:

    My economist friend Brian Davey comments:
    “In fact it is a tad more complicated because this is not a linear process but evolves through a series of crises. Thus, in a nutshell what has happened so far is this:

    High energy costs undermine peoples’ ability to service their debts.
    This makes real investment in productive activity not something that pays and encourages speculation on asset values (as they call it in the financial papers “the hunt for yield” – for something that will actually yield a profit ).
    The asset speculation is funded by the banking system and eventually goes bust leaving the banks insolvent.
    Because the banks are “too big to fail” (and the consequences of letting them fail would be a chain reaction implosion as was revealed by letting Lehman Bros go bust) so they are bailed out even though really insolvent.
    The bail out involves a concealed recapitalisation by socialising the losses – making the rest of society pick up the losses through austerity policies which bankrupts states and peoples.
    Attacked by austerity people are impoverished and only the rich are able to benefit by the super low interest rates as well as the privatisation and other vulture activities.
    Austerity means there is not sufficient demand (aggregate purchasing power) to get growth going again but new bubbles are blown with super low interest rates ensured by central banks – e.g. in shale oil and gas.
    This brings more oil and gas on stream (temporarily) but the bubbles are unable to generate enough sustained new demand to continue paying the high production costs and prices collapse.
    The price collapse means that investment in oil and gas and fossil fuels means that production begins to fall at a faster rate.
    The [steep] slide down the other side of the oil and gas peak begins – while everyone is pre-occupied with the financial crisis governments attack ordinary people to try and rescue both the finance and the fossil fuel sectors”

    • I would generally agree with his scenario of what has happened so far. And I agree that everyone will be pre-occupied with the financial crisis as the collapse goes on. There are various ways this problem can be described.

  34. bobski2014 says:

    Essentially surely the issue is one of fundamental physics. Economies were able to expand primarily because the incredible (and cosmologically seemingly unique) energy densities of coal, oil and gas – not to mention Uranium – were uniquely “efficient”. The EROEI is phenomenal.

    Nothing else either approaches these energy density levels, nor can it. You can be as fancy with your technologies as you like, you are on a hiding to nothing. You can forget the so-called “renewables” and their requisite dependence on highly diffused energy. The more of those we choose or are forced to use, the worse our situation MUST get. It is in the end inescapable.

    Add to this inescapable fundamental, the diminishing returns so eruditely illuminated by Gail, and you get a hint of our predicament. Be careful not to confuse a predicament with a problem. Problems have solutions; predicaments don’t. All you can do with a predicament is to hope to be able to ameliorate it, and often you cannot. Perhaps there is a chance for some individuals – your best option may well be to try to become one of those. Don’t rely on governments or politicians.

    • Daddio7 says:

      We are at a unique point in human history. We are more networked than ever but governments and armies are more powerful. Not saying that they will but a wise government could convince its citizens to equally sacrifice for everyone’s survival. At least those areas that have energy reserves, water, and arable land. Many places lack these so that’s where the armies come into play. Or it could become every man for himself.

    • InAlaska says:

      With 7 billion human brains and rising (perhaps to 12 billion by 2050) that is a lot of computing power. Imagine how many more potential Einsteins, Newtons and Hawkings are now on the planet than just 50 years ago. When we reach “peak brains” perhaps we will be able to think our way out of this predicament.

      • InAlaska says:

        In addition, those 12 billion brains will all be networked through the internet. This has the potential to overturn many of our cherished doomer assumptions.

        • Chris Harries says:

          It’s a nice thought that more brain power can overcome the immutable laws of physics. I don’t believe in that dream, but I’ll hold on to it… because I would very much like us to defy the laws of physics.

          • jason says:

            What law of physics are you talking about? I work with a lot of people with PHD’S in physics and they say that their beliefs are constantly changing….what was believed 20 years ago is much different than today. I think our major problems today are financial and how does the FED manipulate the machine so that no one sees. The markets today are all being manipulated. The FED is assuming bad debt and wiping it off the books. You are looking at all this from a 1900’s construct; the game has changed and there are no rules.

            • Jan Steinman says:

              “there are no rules.”

              What happens if you are forced to go on a 600-calorie-a-day diet? And what happens if you need to expend 1,500 calories in order to obtain those 600 calories?

              Not only will no amount of brain power or human innovation save you, but your own brain power and muscle power will diminish, further constraining your ability to obtain any sustenance.

              I don’t think many “Kurzweilians” have ever had to feed themselves. An irrational belief that human innovation will triumph is generally fed from a grocery store or restaurant.

            • Chris Harries says:

              Jason, you’ve found a physicist who says that the laws of thermodynamics (for example) are no longer relevant? Physicists are physicists, not magicians, and would be the first to tell you that there are immutable barriers. This does not make physics irrelevant, far from it…. humans can create amazing things, but the boundary between magic and physics will always be there.

              Technology has been so successful in delivering our needs and wants to date that our culture has developed a Faith that it will always do so. That’s a big part of our predicament.

            • Jan Steinman says:

              “you’ve found a physicist who says that the laws of thermodynamics (for example) are no longer relevant?”

              Playing devil’s advocate here, I’m sure there are “cornucopian physicists” out there, who think fast breeder reactors or thorium reactors could keep humanity suspended in the air like Wile E. Coyote, without breaking any physical laws.

              Not sayin’ I agree with them; just sayin’ I’ll bet they’re out there.

            • John says:

              The fundamental laws of physics have not changed unless you attend Uni is Somalia.

    • Edward Boyle says:

      EROEI falls to low level so that bank loans of oil multis cannot be serviced. Say a bank needs 5% interest. Fracker invests 1 billion loaned money. Oil out over 5 years is 1, 5 billion. Pay wages, costs, profits, taxes, interest on loan. Break Even Point is EROEI most important or no drilling. If you buy a house interest rates, income, tax subsidies are all make or break issues. Oil companies are disinvesing low EROEI assets. When interest rates climb this will be end of cheap speculation in low profitability, marginal return assets. They have to sell what they already pumped, regardless of price, if no storage, so end customer gets cheap gasoline. This is unimportant to big picture. This is like end of season sale. You know it is not going to last.

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  36. Chris P Rice says:

    Thanks Gail.
    To add to this, Europe at the moment is about to start QE and the Euro has dropped to almost parity with the dollar. The price at the pumps dropped recently as predicted but the exchange rate is reversing this now. Any extra discretionary income is being eroded again. We are back to the affordability issue.
    I read on zerohedge a survey On how Americans were planning to spend the extra income from falling oil prices. A substantial portion were just planning on paying down debt.
    Another plan over here is going to change futures trading for electricity in 2017. Chairs on the Titanic?

    • richard says:

      “Chairs on the Titanic?”
      That may be closer to the truth than you expect – the Titanic was built for the Emigrant Trade, and most of the profits came from the Third Class passengers, and some from a government subsidy for carrying the Mail. It could be said that those who contributed least got most of the lifeboats.

  37. Rodster says:

    Shortonoil backs up Gail’s claim that we have been at tipping point for some time where it takes more energy to get equal energy. At that point it’s not worth getting if you have to spend more resources to try and get the same amount of energy in return.

  38. Jan Steinman says:

    It seems to me that deflation is only half of the picture.

    Energy deflation leads to renewed growth, no? Which then leads to higher energy prices, which leads to demand destruction, which leads to deflation…

    It seems to me there will be a saw-toothed descent, rather than a smooth or stair-stepped one. Once it is fracked, there’s no reason to not pump a well; the marginal cost of getting that oil is low. But there are a lot of wells drilled that haven’t been fracked yet. These can be held in reserve, for the next energy spike.

    I just can’t imagine low oil prices lasting forever. But perhaps I simply lack imagination.

    • Makin Bacon says:

      That’s the cycle and we have been climbing up the saw-tooth since 2009. I can’t imagine low oil prices for long either. Best to prepare for the next down turn because nothing goes in a straight line !

      • richard says:

        “I just can’t imagine low oil prices lasting forever. But perhaps I simply lack imagination.”
        Around the time the first Iron Bridge was built, it was cheaper to hire labourers to tow barges than to hire horses. In that context, the cost of calories had to be lower than the wages paid to tow the barges. If the cost of bread rose too high, it was unaffordable. There are some parallels with oil today, but the capital cost distorts the picture. It is all about what happens at the margins of consumption.

      • Nigella says:

        high priced oil didn’t end well in 2007

    • Whether or not energy deflation leads to renewed growth depends on how far down the line we are toward collapse already (interest rates below zero, for example), and how much energy production can actually be maintained at low prices.

      We saw in 2008 that the low prices lasted only a few months, before QE was instituted. Perhaps there was renewed growth, but it didn’t last for long. Companies needed $100 oil.

      My big concern now is that banks will fail, and that the pain of these failures will be transferred to depositors. There may also be failure of governmental systems–perhaps the Eurozone will fall apart, for example.

      My other big concern is that oil and coal and natural gas supply will drop off rapidly, with low prices and collapsing governmental structures. It will be hard to get a saw-toothed down-slope in such a situation.

      • bwhill says:

        Hi Gail,

        We have been talking about a Maximum Consumer Price for over a year, and put this page up last September:

        Depletion not only affects the quantity of a resource that can be extracted, it affects its quality. This is true of all natural resources; with minerals, yield per ton declines. With oil, dollars produced per unit volume declines. This is true because the energy content of a unit of petroleum is fixed by its molecular structure, but the energy required to produce it increases with time as entropy production accumulates in the system. The laws of physics says that this must happen. With a fixed energy content, as production energy increases, the energy remaining for the general economy declines. Since energy is a commodity with a market value, the value of the petroleum to the end user declines. At some point the end consumer can no longer justify paying a price high enough to cover its production cost.

        That is what happened in 2012 to the “average” barrel of oil. At $104/barrel the “average” barrel became too expensive for the “average” consumer, and prices fell. The high cost producers were priced out of the market. Of course, it will probably take a few years for all of these production facilities to be shut-in, but shale, bitumen, ultra deep water, and high sulfur extra heavy are now, long term, no longer economical to produce. The end consumer can no longer afford them.

        We are in the process of preparing Version II of “Depletion: A determination for the world’s petroleum reserve”. It will include the affordability factor that the first version did not include. We will also be including a White Paper on the “Economic Impact of Petroleum Depletion”. If you would stop over at our site, and send us an email address in the comment section we will be happy to send you an advanced copy when it is ready.

        BW Hill

        • Jan Steinman says:

          “as production energy increases, the energy remaining for the general economy declines. Since energy is a commodity with a market value, the value of the petroleum to the end user declines.”

          BW: perhaps I’m just dense, but I’m not connecting these dots very well.

          What is it (besides high price) that causes a decrease in value to the end user?

          My naive mind says if petrol goes down to $1 a litre, people start saying “Happy days are here again!” Indeed, it appears that sales of SUVs and other gas hogs is on the upswing. (Fools!)

          If there is some other mechanism besides price that keeps demand low, I’d like to understand it. Is it the aggregate increase in price of everything else (food, lodging) that consumers are dealing with?

          • bwhill says:

            Jan Steinman says:

            BW: perhaps I’m just dense, but I’m not connecting these dots very well.
            What is it (besides high price) that causes a decrease in value to the end user?

            I don’t know if you have ever heated with wood, but any kid from New England can tell you that a cord of nice dry red oak is worth about 10 cord of freshly cut poplar. You can build a roaring fire with poplar, and freeze to death beside it in the winter. A cord of poplar just doesn’t supply much energy (heat). If you are selling wood a cord of nice dry oak may bring a $125; a cord of poplar you probably won’t be able to give away. Its not worth the energy to haul it into the house! The value of the wood is proportional to the energy it can deliver.

            The same can be said for petroleum; its value is proportional to the energy it can deliver. A gallon of 35.7° API crude can deliver about 28,000 BTU of usable energy to the non energy goods producing sector of the economy. A gallon of shale oil probably zero (0). As conventional crude has depleted out we have attempted to substitute lower quality oils for it. A lot of this stuff is not worth hauling into the house!

            To complicate the issue a little more, as petroleum is extracted it takes more and more energy to extract it. At some point none of it becomes worth the effort to use. You don’t get any energy out of it. Its value has then fallen to zero (0).


            • Jan Steinman says:

              I understand what you’re saying; I just don’t see how that provides “less value” to the end consumer.

              If gas is $1 a litre in 2005, pre-peak conventional, or gas is $1 a litre in 2015, with Wile E. Coyote’s legs spinning furiously in free space after running off a cliff, what difference is the value to the end consumer?

              You said, “the value of the petroleum to the end user declines.” I don’t see it. I’m not getting poplar for the $1 of petrol that goes in my tank today, and I didn’t get oak for the $1 of petrol that went in my tank in 2005 — a litre of petrol still has the same number of kWh, no?

              I don’t mean to beat a dead horse. I’m just stuck on that “to the end user” part. The “end users” I know are celebrating that gas isn’t $2 a litre, like it was not too long ago! And some of them are buying bigger cars than they would have otherwise!

            • emergist says:

              Jan, try it this way. The economy is the end user, though we in aggregate equal the economy. So it doesn’t matter how much a particular individual benefits from oil, but how much the economy benefits from oil. Peak oil appears as an oil glut because the feedback from declining EROEI is a low oil price, which reflects how much the marginal oil production benefits society. If prices stayed high then the economy would keep drilling because high prices would be signaling a benefit to society, a case where oil production would never peak. We may or may not see whip sawing in prices based on how much marginal oil being produced benefits society. If we whip saw to high prices again this reflects that we placed too little into capital formation of energy sources that benefit society, but the hills group could be right and we may walk the line of always spending just enough on development of oil fields where we are tapping energy sources that provide little benefit and we will see continued low prices. I think it was Dennis Meadows that said something like, when we reach turning points in our models, you have to throw the model out the window. I think the models showing peak oil in the past are correct, it is just that instead we have fought to pump oil that benefits no one and place large black sun worshipping squares (solar panels). Our descendants will probably be pissed at the pointless CO2 in our atmosphere and the ugly sun worshipping black square artwork.

            • Daddio7 says:

              I am quite happy my ancestors were force to leave Great Britain. It’s sad that millions of indigenous people perished during the founding of the United States. All this death and destruction has lead to the highest standard of living in human history. Oil and coal usage has resulted in billions of people surviving infancy and living to enjoy life.

              All of this is ending but who could have been prescient and powerful enough to have stopped it? Even now only a few people think they are the problem, it’s all those other people. But it’s fun to talk about.

            • Jan Steinman says:

              “who could have been prescient and powerful enough to have stopped it?”

              No king or ruler, no small group of people. It would (will!) require a “paradigm shift” among the masses. Witness the Great Depression, which instilled thrift and frugality into an entire generation.

              I think a great ruler or small group of people could have inspired a paradigm shift, but it obviously didn’t happen.

            • John in Nova Scotia says:

              I think you have missed the idea of increased efficiency of energy conversion from the chemical state to the heat state. I for one actually heat my house with poplar and it keeps me very warm because I have purchase a new high efficiency wood stove. The same principle applies to both the internal and external combustion engines and their associated ancillary equipment.

          • Nigella says:

            problem is people dont have jobs or they have less income and massive debt so a drop in oil doesnt have the same effect

            in the past an oil price drop wasnt the end of the world because production costs were very low, different story now

            • jason says:

              it is always a different story, history does not repeat. Everyone is now predicting the future….they are almost always wrong. The future is very hard to predict because it is so dynamic. Only in a vacuum. It is just too dynamic. For all we know there is already a way to replace oil….but we can’t just throw cheap easy energy into the mix. Energy must always remain expensive.

        • Thanks for your offer.

          By the way, one of the issues that impacts spending is the need for governments to collect rising taxes, to cover their commitments. Part of this relates to the demographic shift–more people are reaching retirement age. There is of course the problem that people have with more debt demands on their income as well. The fact that the US mandated purchase of healthcare policies didn’t help either–spendable income goes down, with each of these increments.

          • bwhill says:

            Jan Steinman says:

            You said, “the value of the petroleum to the end user declines.” I don’t see it.

            A gallon of octane has an energy content of about 120,000 BTU. It has always had an energy content of 120,000 BTU, and always will. But, to produce a gallon of octane in 2012 took about 4 times as much energy as it did in 1975. Since the end consumer must pay for all the production costs (one way or the other) the consumer is paying a lot more for that gallon of octane today than they were in 1975. Since they are paying more, but getting exactly the same thing, its value has gone down for them.

            From a monetary perspective it is not immediately obvious. The reason for that is because a dollar’s ability to buy a BTU has gone down 6.8 times since 1975. In 1975 a dollar was able to buy 42,300 BTU, by 2012 it could have bought 6,280 BTU. When the day arrives, when it won’t buy any BTU, it has become absolutely worthless!


      • Nigella says:

        difference between now and the past is that when we had cycles of high oil killing growth then a knock down in the price then a recovery, repeat over and over is that then even at a low price the price was not below the cost of production of most oil not the situation now as most oil production is losing money especially the only types of production that are no peaked out (shale tar sands)

        this is a very different and new can of worms we are playing with

    • InAlaska says:

      “I just can’t imagine low oil prices lasting forever. But perhaps I simply lack imagination.” This scenario is very clearly the undulating plateau that some peak oil theorists predicted would occur for an indeterminate number of years at the apex of the oil age. Prices will rise and fall in a seesaw fashion with an overall downward trend toward terminal decline. It’ll go up and it’ll go down in price until it just goes down and stays down.

    • garand555 says:

      If an oil company can afford to frack a well, they will do so at these prices. They’re going to try to make up for the lower prices with volume. Of course, in many instances, that’s going to be selling even more at a loss to make up for the loss, but I suspect that the wells that don’t get fracked are either expected to be low producers, or they will remain unfracked due to the costs of fracking them. Besides, tight oil has mind boggling depletion rates.

      Although, I will say that I expect the low prices to cause a financial crisis before the extraction rates rapidly decline.

    • John says:

      Capitalism is cutting it’s own throat. I love it!!! The sweetest of all ironies of all time.

  39. gerryhiles says:

    Dear Gail, as usual I agree with you overall, but missing is the factor that the Empire of Chaos has been trying to destroy any opposition since the supposed end of WW2, since when the Empire has waged countless wars, including the Cold War against the Soviet Union, which included bankrupting them with an arms race and getting bogged-down in Afghanistan..

    How can people be so ignorant as not to know that 9ll was a false flag to motivate sheeple for endless war,

    Most people replying here have NO idea about the real world of finite resources and totally corrupt politicians. lawyers,, banksters etc..

    • Makin Bacon says:

      You nailed it. Amen

    • I would prefer less inflammatory rhetoric. I am not sure that we can impute much motivation behind actions–very often, we have a disorganized group of individuals, working on trying to keep things together the way that they have been. What their exact motivation is, we don’t know. There does seem to be an underlying intent to hide the problems we are facing regarding resource limits, though, perhaps because the subject is so frightening.

      • gerryhiles says:

        Nothing I write is rhetorical, compared with Breedlove, John McCain, Jen Psaki and the whole bunch of organized criminals fomenting WW3.

        They are VERY organized. Did Colin Powell just go off the cuff with his WMD lies at the UN?

        Sorry Gail but you are severely missing on what has been going on since even long before the Gulf of Tonkin red flag.

        Have you never heard of the Trilateral Commission, AIPAC, the PNAC, Chatham House, Stratfor, nor even the CIA?

        How can you possibly say that all these are a “disorganized group of individuals”?

        Why not include the World Bank, the IMF and BIS?

        Sure it is scary Gail, but that does not make facts go away … such as three steel-framed buildings collapsing into their own foot-prints, at free-fall acceleration within a few hours of each other.

        Never happened before Gail and will never happen again – unless organized as the “New Pearl Harbour” to initiate endless war.

        You are not to scared to confront finite resources, so why not confront the fact that elite groups of banksters and politicians organize to keep their Ponzi, financial, MIC scheme going in the face of what they KNOW cannot be sustained for much longer.

        I reject being dismissed as “rhetorical”.

        I am just as much stating verifiable facts about “peak finance” as you are about “peak oil”.

        • gerryhiles says:

          BTW you just went to China for a conference, so how can you say you are part of a disorganized group trying to achieve something?

          Assumedly you are opposed to Washington military and dollar hegemon, but you refuse to accept the fact of the Empire of Chaos.

          Why? You have just witnessed the planned destruction of Yugoslavia, Afghanistan, Iraq, Libya, Somalia, Syria and the Ukraine, but you still do not get it Gail

          • Tolstoy's Degenerate Grandson says:

            Why oppose US hegemony when you are one of the beneficiaries?

            US hegemony results in the US people enjoying 25% of the earth’s resources.

            The punch line here is, if not the US some other country would be pillaging the world’s resources and you’d be living like those we pity in the third world.

            That is the way it is and always has been.

            Better to be the pillager than the pillagee. When there is no other option

            • Glenn Stehle says:

              Tolstoy’s Degenerate Grandson said: “Why oppose US hegemony when you are one of the beneficiaries? …. Better to be the pillager than the pillagee. When there is no other option”

              Tiberius Gracchus blew some pretty serious broadsides into that imperial talking point:

              “The wild beasts in Italy had at least their lairs, dens and caves whereto they might retreat; whereas the men who fought and died for that land had nothing in it save air and light, but were forced to wander to and fro with their wives and children, without resting place or house wherein they might lodge…. The poor folk go to war, to fight and die for the delights, riches and superfluities of others.”

            • Tolstoy's Degenerate Grandson says:

              Answer this.

              Would you rather be an American citizen.

              Or a citizen of Iraq, Libya, Syria, Afghanistan, or Ukraine. All countries that the US has pillaged and destroyed in recent years.

              It is important to note that as the US weakens, other powers stand ready to assume the mantle of world despot, ah I mean loving and kind leader, standing ready to plunder ah I mean help the down trodden by air dropping sacks of wheat as a PR stunt (a few grains to the plundered)

              Remind me when we had a world leader that was benevolent. Romans? Mongols? Spanish? British?

              This is not Disney Land.

              We are animals, we live under the law of the jungle. The only difference is that our jungle is a little more sophisticated. But when it comes down to it, we kill to survive. Our prosperity in the west is 100% built on a foundation of intimidation, murder and thievery. As has been the foundation of every single dominant civilization that came before us.

              If you acknowledge that, and toss the nonsense that religion teaches into the bin where it belongs, your conscience will rest easy.

              Of course it is best to be the King or in his close circle, but still better to be one of the King’s soldiers than a soldier on the other side of the line.

            • Glenn Stehle says:

              • Tolstoy’s Degenerate Grandson says: “Would you rather be an American citizen. Or a citizen of Iraq, Libya, Syria, Afghanistan, or Ukraine.”

              It depends on which citizen in the US you’re referring to, compared to which citizen in Iraq, Syria, Afghanistan or Ukraine you’re referring to. Would I want to be some war veteran thrown away by US society, suffering from war-induced emotional disorders and living under some bridge, or some well to do elite living in Iraq, Libya, Syria, Afghanistan or Ukraine? I think I’d choose the latter.

              • Tolstoy’s Degenerate Grandson says: “It is important to note that as the US weakens, other powers stand ready to assume the mantle of world despot, ah I mean loving and kind leader, standing ready to plunder ah I mean help the down trodden by air dropping sacks of wheat as a PR stunt (a few grains to the plundered)”

              Your point of view comes from an old and time-honored tradition: C. Wright Mills, Max Weber, Marx, Voltaire, Strausz-Hupe, Bodin, Hobbes and Mao Tse-tung being some of its leading lights. It was undoubtedly Mao who summed the theoretical tradition up most succinctly: “Political power grows out of the barrel of a gun.”

              But, as Hannah Arendt notes in ‘On Violence’, “there exists another tradition and another vocabulary no less old and time-honored.” And this theoretical tradition holds that power rests in the people. “It is the people’s support that lends power to the institutions of the country…. All political institutions are manifestations and materializations of power; they petrify and decay as soon as the living power of the people ceases to uphold them.”

              • Tolstoy’s Degenerate Grandson says: “Remind me when we had a world leader that was benevolent. Romans? Mongols? Spanish? British?”

              I thought FDR did a credible job of demanding that the sacrifice of depression and war be shared equally, and also that the material abundance after the war be shared.

              • Tolstoy’s Degenerate Grandson says: “We are animals, we live under the law of the jungle. The only difference is that our jungle is a little more sophisticated. But when it comes down to it, we kill to survive.”

              That sounds a lot like social Darwinism to me.

              As historian Sidney Fine reports, “it would be difficult to overestimate Spencer’s [the leading proponent of social Darwinism at the time] popularity in the United States during the quarter century after the Civil War.”

              “The new titans of American industry indeed looked to social Darwinism to bless their victories in the market and resulting accumulations of vast wealth,” Robert H. Nelson explains in ‘Economics as Religion’. “In the advance of the world, old ideals like social justice, fairness, equality, and so forth will do more harm than good; they impede — even though they can never permanently frustrate — the evolutionary workings of the iron laws of economic progress.”

              Social Darwinism is also the ideology which informed National Socialism. The only difference is that in German racial science it was the nation and/or racial group, and not the individual as in liberal theory, which constituted the unit of natural selection, as Francois Haas explains.

              “Ruthless toughness” was a “quality held in the highest esteem by the rulers of the Third Reich,” Arendt notes in ‘Eichmann in Jerusalem’.

              “Be harsh and remorseless,” Hitler instructed his generals before the invasion of Poland. “Act with brutality, close your hearts to pity. It is the stronger man who was always right.”

              And that philosophy worked in Poland. However, it stalled in Great Britain, and seriously backfired in Russia. As C.L. Sulzberger explains:

              “Many Russians greeted the Nazi invaders as friends come to free them from Stalinist oppression. Had the Germans fostered this initial good will, they might have won Russian support against the Communist regime; but in Nazi philosophy, with its fantasy of a master race, the Russians were Untermenschen — subhumans — fit only for slave labor. Hitler had ordered a completely ruthless campaign — and he was not disobeyed. Russian good will turned to hate…. [A]s Nazi repressive measures grew more savage, the resistance gradually took on organization and disciplining. Very soon the partisans behind the lines were playing an important part in the war.”

              • Tolstoy’s Degenerate Grandson says: “Our prosperity in the west is 100% built on a foundation of intimidation, murder and thievery. As has been the foundation of every single dominant civilization that came before us.”

              And a vast, sparsely populated frontier with boundless natural wealth had nothing to do with it?

              And furthermore, “intimidation, murder and thievery” don’t seem to be in any particular short supply. If that’s all it takes, it seems like Mexico, or any number of contenders as far as that’s concerned, should have become dominant civilizations.

              • Tolstoy’s Degenerate Grandson says: “If you acknowledge that, and toss the nonsense that religion teaches into the bin where it belongs, your conscience will rest easy.”

              I would beg to differ. And this is true regardless of whether we’re talking traditional religion or the more secular forms of religion which evolved in the 18th century, such as the “political theology” of Thomas Jefferson.

              Jefferson “articulated for his fellow Americans a set of shared beliefs fundamental to the development of a national faith,” explains Thomas E. Buckley. First, “a sense of common beginnings rooted in historical events;” second, “an insistence on natural rights derived from a law of nature;” and finally, “the acknowledgement of dependence on a divine Providence overseeing the American experiment.” The Declaration of Independence repeats these themes.

            • Tolstoy's Degenerate Grandson says:

              Compare apples to apples:

              – a soldier in the US army or a soldier in the afghan army
              – a truck driver in america or a truck driver in afghanistan
              – a middle class citizen in america or —– oops — no middle class in afghanistan – only a few elites and warlord and the rest live in dire conditions

              FDR? I am not referring how a leader distributes the plunder to his tribe. I am talking about where the plunder came from. You are aware that the United States of America is built on a foundation of genocide and thievery. It stated with the killing off of the natives and it has carried on to this day.

              I don’t stand in judgment. The native tribes of America were killing each other long before the British showed up. And if they had the means you can bet your bottom dollar they would have slit the throat of every Brit and seized their ships sailing to Britain to behead the Queen and steal her jewels.

              “And a vast, sparsely populated frontier with boundless natural wealth had nothing to do with it?”

              Yes of course — the ‘boundless wealth’ is what we have been fighting over. Unfortunately the world is finite and the wealth is not so boundless so expect the action to heat up (as it is)

              Jefferson. Do I need to point out the irony that Jefferson was a slave master and that his country was founded on genocide?

              As I have pointed out it is good to be on the wining side. Because although you never get enough of the spoils, you do a hell of a lot better than the losers.

              Would you have chosen to stand with Jefferson or the slaves?

              If you think it is better to be on the losing side then feel free to emigrate to Iraq, or Libya, or Afghanistan.

              Let me guess. You will make up some sort of excuse for staying put then hit the button your Nespresso machine and indulge in a second fresh from the bakery light and airy croissant.

              It is wonderful to be on the winning side isn’t it? Seriously, isn’t it?

        • Glenn Stehle says:

          @ gerryhiles

          I’m completely with you on this.

          I am American, but have lived in Mexico for the past 15 years. And even though Mexico is very much under the US imperial jackboot, much more reality about the ugly underbelly of US empire does manage to leak out here than in the United States.

          Here, for instance, is a story that might help open Gail’s eyes:

          As it turns out, it was the CIA who ordered its bosom buddy, the Mexican drug capo Carlos Quintero, to torture and kill the DEA agent Kike Camarena. Camarena had discovered that the CIA was working hand-in-glove with the Mexican cartels to transport drugs to the United States. The CIA was using the funds to finance its illegal operations in other parts of the world. Camarena found out about all this and was going to blow the whistle, so the CIA ordered him eliminated.

          This was far from an isolated event.

          Not much coverage of the US government’s underworld activities exists in the English-speaking press. But there are some exceptions. Probably no one, for instance, has done more research on how US empire (or any empire, as far as that goes) works than the Canadian writer Peter Dale Scott. I have two of his books, “The Road to 9/11: Wealth, Empire, and the Future of America” and “American War Machine: Deep Politics, the CIA Global Drug Connection, and the Road to Afghanistan.” They are elaborately and impeccably researched. Here’s Scott:

          “In my book The Road to 9/11, I have argued that there has existed, at least since World War Two if not earlier, an…American deep state…, combining intelligence officials with elements from the drug-trafficking underworld. I also pointed to recent decades of collaboration between the U.S. deep state and al-Qaeda, a terrorist underworld whose drug-trafficking activities have been played down in the 9/11 Commission Report and the mainstream U.S. media.”

          And here’s Scott in a more recently published article:

          “In the last decade it has become more and more obvious that we have in America today what the journalists Dana Priest and William Arkin have called two governments: the one its citizens were familiar with, operated more or less in the open: the other a parallel top secret government whose parts had mushroomed in less than a decade into a gigantic, sprawling universe of its own, visible to only a carefully vetted cadre – and its entirety…visible only to God.

          “And in 2013, particularly after the military return to power in Egypt, more and more authors referred to this second level as America’s ‘deep state’.”

          “The State, the Deep State, and the Wall Street Overworld”

          As Reinhold Niebuhr observed, “individuals have a moral code which makes the actions of collective man an outrage to their conscience. They therefore invent romantic and moral interpretations of real facts, preferring to obscure rather than reveal the true character of their collective behavior.”

          Nevertheless, Gail, if you prefer factual reality over “romantic and moral interpretations,” you need to acknowledge the reality of US empire.

          • gerryhiles says:

            Very well stated and with a lot more detail than I previously had. Thanks.

          • richard says:

            I tend to think of the Deep State problem (not limited to the US BTW) as an order of magnitude smaller than Peak Afforability, and perhaps even smaller than Peak Finance. I would also tend to assume that your links barely scratch the surface, though they are interesting in themselves. There are only a limited number of battles you can fight, so choose carefully.

            • glennstehle says:

              @ richard

              I tend to think of the Deep State problem as being a symptom of Peak Oil, Peak Affordability, Peak Finance, or, if you will, Peak Everything.

              The U.S. Deep State has experienced explosive growth over the past thirtyfive years, and especially over the past decade. I believe this is so because, as the empire’s productive (economic) power and moral authority have waned, it has tried to make up for this loss with financial and miliatry maneuvers. As Hannah Arendt points out in ‘On Violence’, “Rule by sheer violence comes into play when power is being lost.”

              And this is no laughing matter. “The United States, for example, may no longer be able to win wars, but it can unleash enormous damage to itself and others by imprudent actions,” Immanuel Wallerstein warns in “Consequences of U.S. Decline.”

              Wallerstein predicts a “decline, probably a serious decline, in the relative standard of living of U.S. citizens and residents,” and warns that the “political consequences of this latter development are hard to predict in detail,” but they “will not be insubstantial.”

            • richard says:

              @Glenn – The Deep State you refer to is a symptom, not a cause. It was and is created merely by the dynamics of money and debt. The current state of the US and states synchronised to its financial system is that the financial sector has become a parasite to the host economy, with the imposed debt burden as a means to transfer wealth from productive to unproductive hands.
              The designed way of handling contraction of the financial sector is via default and bankruptcy. This is no longer allowed to happen, (arguably since 1971 when the US reneged on the gold standard) requiring additional controls and structures to prevent collapse.
              Except that you cannot print oil. And physical threats will not create oil nor make it more affordable.

          • Tolstoy's Degenerate Grandson says:

            I don’t see how anyone can dispute that the US is the largest empire to ever exist.

            And it maintains that position using a combination of smarts backed by the willingness to commit the most heinous acts as a means to an end.

            Morality has no place here.

            And it never has in the ‘great game’

            Having any sort of morals will get you dead real quick. Because the other guy is ready to use the dirtiest of tricks to get you if given the opening.

            Recall this scene from Apocalypse Now:


            “I’ve seen horrors,…

            …Horror. Horror has a face … and you must make a friend of horror. Horror and moral terror are your friends. If they are not then they are enemies to be feared. They are truly enemies. I remember when I was with Special Forces … seems a thousand centuries ago …

            We went into a camp to inoculate the children. We left the camp after we had inoculated the children for Polio, and this old man came running after us and he was crying. He couldn’t see. We went back there and they had come and hacked off every inoculated arm. There they were in a pile … a pile of little arms.

            And I remember … I … I … I cried … I wept like some grandmother. I wanted to tear my teeth out. I didn’t know what I wanted to do. And I want to remember it. I never want to forget it. I never want to forget. And then I realized … like I was shot … Like I was shot with a diamond … a diamond bullet right through my forehead …

            And I thought: My God … the genius of that. The genius.

            The will to do that. Perfect, genuine, complete, crystalline, pure. And then I realized they were stronger than we. Because they could stand that these were not monsters … These were men … trained cadres … these men who fought with their hearts, who had families, who had children, who were filled with love … but they had the strength … the strength … to do that. If I had 10 divisions of those men our troubles here would be over very quickly. You have to have men who are moral … and at the same time who are able to utilize their primordial instincts to kill without feeling … without passion … without judgment … without judgment. Because it’s judgment that defeats us.”

            Of course the VC side won that war.

            Of course this all sounds horrible. Because we have been told that we are fundamentally ‘good’ and a bit flawed, primarily by the church.

            So it is difficult to accept that we are beasts who are hardwired to survive. And when we need to (i.e. our survival is threatened by insufficient resources) every single one of us is capable of the most brutal acts of violence.

            The only reason these sorts of acts are only seen on the news are because we are the winners. We have pillaged the world and have lived in the land of plenty.

            Those ‘barbarous’ people are at each others throats because they do not live in lands of plenty.

            But soon we will find out that we are no better than them. We will be at each others throats the second collapse hits and the grocery stores empty.

            • Glenn Stehle says:

              Tolstoy’s Degenerate Grandson says: “So it is difficult to accept that we are beasts who are hardwired to survive. And when we need to (i.e. our survival is threatened by insufficient resources) every single one of us is capable of the most brutal acts of violence.”

              That’s so 16th-century. It was, after all, Francis Bacon who asserted in the 16th century that “The rebellions of the belly are the worst.”

              But a lot of water’s run under the bridge since then, and we’ve learned a thing or two.

              And one of the things we learned during the 17th to 20th centuries is that “the violence which occurs between men who are emancipated from necessity is…often not less cruel than the primordial violence with which man pits himself against necessity,” as Hannah Arendt put it. Arendt wrote of this in “Denktagebuch” immediately following WWII.

              In fact, looking back on the 20th century, what we learned is that violence motivated by idealism or morality can be far more brutal and unforgiving than that motivated by material self-interest or the survival instinct.

              “[T]o really get a mass atrocity going you need idealism — the belief that your violence is a means to a moral end,” notes the moral psychologist Jonathan Haidt. The major atrocities of the twentieth century were carried out largely by men who thought they were creating a utopia.

            • Tolstoy's Degenerate Grandson says:

              We’ve most certainly learned many things.

              We’ve learned to manufacture weapons of mass destruction that allow us to kill hundreds of thousand and destroy entire nations in a short period of time.

              Absolutely nothing has changed. Look around you mate. Look at the torture and the wars and the brutality of man against man. How is modern man any different that those that came before us?

              If anything we are worse.

              And the biggest change has of course been the brilliant creation know as the atomic bomb.

              Remind me of how many people were killed when we dropped two of these on Japan.

    • John says:

      Me thinks you credit these loons with far too much intelligence. I see a bunch of fat greedy little pigs who will do anything to maintain the status quo. Rome was exactly the same before it’s demise. The rich got richer and the poor, poorer, and no one saw a problem. They literally could not see it. Of course the end result of this thought process is exactly how you describe. It is a scary though that only about 5% of the population are truly aware of what is going on around them. I feel like I’m living the movie “They live”

      • gerryhiles says:

        Me? I often think of Alice in Wonderland – Lewis Carroll beat George Orwell to the punch in many ways.

        Poor Alice, the only sane person in a mad world … but then I have to wonder if Lewis Carroll picked the right gender to counter the madness, considering consumer-mad Kim Kardashian and the lying Jen Psaki.

        “Stop the World, I want to get off.”

  40. Makin Bacon says:

    Gail writes:

    “The issue we are dealing with here is lack of affordability. This is what will bring the system down–not the high priced scenario imagined by many.”

    Gail has been calling for collapse because of the lack of low cost energy for years and it hasn’t happened. Now she is saying “Decline will come through low prices, and a glut in oil supply”.

    I don’t know about you, but in my world. Lower prices makes a commodity more affordability.

    290K new jobs last month in the United States makes things a lot more affordable for a lot more people. Stock market and corporate earning at record highs. Apple selling millions of Dick Tracy phone watches. America’s oil production at a 40 year record high. Life expectance increasing. TV’s getting bigger and better. Cars getting more efficient. Computer getting cheaper. Electric Cars selling around the world. Gail on vacation traveling in retirement.

    Life is good

    • Coops says:

      It’s always hottest just before the sun starts to go down.

    • Life is good, as long as the oil (and coal and natural gas) keep flowing. At these prices, the flow won’t continue for long. That is the problem. You are right, though, if you ignore that detail, life is good.

      I am not on vacation–I am working. I will be teaching a course at Petroleum University in Beijing during my stay in China.

      • Makin Bacon says:

        The devil has always been in the details since the days you were knee high to a grasshopper. The price of oil will recover and continue to flow. The marketplace will balance supply and demand. With todays technology, oil production has not yet peaked and neither has the population. The plane for your returned flight home will need fuel and your good Life continues on. Economist never promised you a rose garden or for it to last forever. You just had faith it would until you realized the facts of life. Age usually brings wisdom.

        Humanity is destroying mother earth our only means of survival.

        Makin Bacon