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.

This entry was posted in Financial Implications and tagged , , , by Gail Tverberg. Bookmark the permalink.

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.

602 thoughts on “The oil glut and low prices reflect an affordability problem

  1. The War on Russia Explained

    The best analysis I have seen yet:

    Bingo. Ukraine has nothing to do with sovereignty, democracy or (alleged) Russian aggression. That’s all propaganda. It’s about power. It’s about imperial expansion. It’s about spheres of influence.

    It’s about staving off irreversible economic decline. It’s all part of the smash-mouth, scorched earth, take-no-prisoners geopolitical world in which we live, not the fake Disneyworld created by the western media.

    The US State Department and CIA toppled the elected-government in Ukraine and ordered the new junta regime to launch a desperate war of annihilation against its own people in the East, because, well, because they felt they had no other option. Had Putin’s ambitious plan to create a free trade zone between Lisbon to Vladivostok gone forward, then where would that leave the United States?

    Out in the cold, that’s where.

    The US would become an isolated island of dwindling significance whose massive account deficits and ballooning national debt would pave the way for years of brutal restructuring, declining standards of living, runaway inflation and burgeoning social unrest.

    He starts off well but finishes very badly.

    He says the countries involved are doing what countries have doing for centuries, namely fighting it out like junk yard dogs over a juicy bone.

    Then goes on a tirade against the US for uh hum, fighting for it’s life against junk yard dogs that are trying to tear America’s throat out.

    The author’s left-wingism seems to have gotten the better of him.

    Assuming he is an American surely he should not be trying to muzzle his side’s dog rather he should be injecting it with steroids and speed to give it an advantage. He should be hiring Michael Vick and Lance Armstrong to ensure his dog ‘can be all that he can be’

    Perhaps he is too deluded to understand that if his dog refuses to fight he, as an American enjoying 25% of the world’s resources thanks to his very vicious and successful dog, will be the one eating dog food.

    • Tolstoy’s Degenerate Grandson says:

      “Perhaps he is too deluded to understand that if his dog refuses to fight he, as an American enjoying 25% of the world’s resources thanks to his very vicious and successful dog, will be the one eating dog food.”

      This is an iteration of the “amoral realism,” — or “realpolitik,” as it is also referred to –of folks like Henry Kissinger. As Duncan Bell notes, it is “a deeply conservative position that fetishizes the state and military power, and disdains progressive change in the international order.”

      But in addition to its moral failings, it also departs significantly from factual reality. Surely you must realize that the transnational elite which now rules over the globe has no nation, and that national interest is not its holy grail. Individual self-interest is. Liberalism (re-branded as neo-liberalism) now reigns supreme, having trumped over the naive groupism of both nationalism and Marxism.

      As Bell goes on to explain, there is an option to amoral realism, and that is moral realism. E.H. Carr, Hans Morgenthau, and Reinhold Niebuhr were amongst its leading lights, and from the 1930s up until the Vietnam War pretty much dominated US political thought. Then, beginning in the 1960s, they were displaced first by the amoral realists, who were in turn displaced by the neo-conservatives, this final transition becoming complete in 2000 with the election of George Bush.

      And despite his election promises in 2008, Barak Obama has followed the neocon straight and narrow faithfully.

      • The fact that there are no Russian or Chinese names on this list leads me to believe that the elites of the world are not one cohesive transnational group.

        And as we are seeing, it is a Russian/Sino alliance that is taking on the ‘new world order’

        And those that were formerly kissing the ring of the ultimate power (which would be the owners of the Fed — and if anyone doubts that the Fed controls the world just think about what having the power to print the world’s reserve currency — decide on interest rates — and who gets that money — puts into the hands of the owners of the Fed. They have more power than God – but then God has no power for obvious reasons)

        Are now lining up to kowtow to the new new world order that appears to have the upper hand.

        Bilderberg delegates in full

        • Chairman: Henri de Castries, Chairman and CEO, AXA Group
        • Paul M. Achleitner, Chairman of the Supervisory Board, Deutsche Bank AG
        • Josef Ackermann, Chairman of the Board, Zurich Insurance Group Ltd
        • Marcus Agius, Former Chairman, Barclays plc
        • Helen Alexander, Chairman, UBM plc
        • Roger C. Altman, Executive Chairman, Evercore Partners
        • Matti Apunen, Director, Finnish Business and Policy Forum EVA
        • Susan Athey, Professor of Economics, Stanford Graduate School of Business
        • Asli Aydintasbas, Columnist, Milliyet Newspaper
        • Ali Babacan, Turkish Deputy Prime Minister for Economic and Financial Affairs
        • Ed Balls, Shadow Chancellor of the Exchequer
        • Francisco Pinto Balsemão, Chairman and CEO, IMPRESA
        • Nicolas Barré, Managing Editor, Les Echos
        • José Manuel Barroso, President, European Commission
        • Nicolas Baverez, Partner, Gibson, Dunn & Crutcher LLP
        • Olivier de Bavinchove, Commander, Eurocorps
        • John Bell, Regius Professor of Medicine, University of Oxford
        • Franco Bernabè, Chairman and CEO, Telecom Italia S.p.A.
        • Jeff Bezos, Founder and CEO,
        • Carl Bildt, Swedish Minister for Foreign Affairs
        • Anders Borg, Swedish Minister for Finance
        • Jean François van Boxmeer, CEO, Heineken
        • Svein Richard Brandtzæg, President and CEO, Norsk Hydro ASA
        • Oscar Bronner, Publisher, Der Standard Medienwelt
        • Peter Carrington, Former Honorary Chairman, Bilderberg Meetings
        • Juan Luis Cebrián, Executive Chairman, Grupo PRISA
        • Edmund Clark, President and CEO, TD Bank Group
        • Kenneth Clarke, Cabinet Minister
        • Bjarne Corydon, Danish Minister of Finance
        • Sherard Cowper-Coles, Business Development Director, International, BAE Systems plc
        • Enrico Cucchiani, CEO, Intesa Sanpaolo SpA
        • Etienne Davignon, Belgian Minister of State; Former Chairman, Bilderberg Meetings
        • Ian Davis, Senior Partner Emeritus, McKinsey & Company
        • Robbert H. Dijkgraaf, Director and Leon Levy Professor, Institute for Advanced Study
        • Haluk Dinçer, President, Retail and Insurance Group, Sabanci Holding A.S.
        • Robert Dudley, Group Chief Executive, BP plc
        • Nicholas N. Eberstadt, Henry Wendt Chair in Political Economy, American Enterprise Institute
        • Espen Barth Eide, Norwegian Minister of Foreign Affairs
        • Börje Ekholm, President and CEO, Investor AB
        • Thomas Enders, CEO, EADS
        • J. Michael Evans, Vice Chairman, Goldman Sachs & Co.
        • Ulrik Federspiel, Executive Vice President, Haldor Topsøe A/S
        • Martin S.Feldstein, Professor of Economics, Harvard University; President Emeritus, NBER
        • François Fillon, Former French Prime Minister
        • Mark C. Fishman, President, Novartis Institutes for BioMedical Research
        • Douglas J. Flint, Group Chairman, HSBC Holdings plc
        • Paul Gallagher, Senior Counsel
        • Timothy F Geithner, Former Secretary of the Treasury
        • Michael Gfoeller, US Political Consultant
        • Donald E. Graham, Chairman and CEO, The Washington Post Company
        • Ulrich Grillo, CEO, Grillo-Werke AG
        • Lilli Gruber, Journalist – Anchorwoman, La 7 TV
        • Luis de Guindos, Spanish Minister of Economy and Competitiveness
        • Stuart Gulliver, Group Chief Executive, HSBC Holdings plc
        • Felix Gutzwiller, Member of the Swiss Council of States
        • Victor Halberstadt, Professor of Economics, Leiden University; Former Honorary Secretary General of Bilderberg Meetings
        • Olli Heinonen, Senior Fellow, Belfer Center for Science and International Affairs, Harvard Kennedy School of Government
        • Simon Henry, CFO, Royal Dutch Shell plc
        • Paul Hermelin, Chairman and CEO, Capgemini Group
        • Pablo Isla, Chairman and CEO, Inditex Group
        • Kenneth M. Jacobs, Chairman and CEO, Lazard
        • James A. Johnson, Chairman, Johnson Capital Partners
        • Thomas J. Jordan, Chairman of the Governing Board, Swiss National Bank
        • Vernon E. Jordan, Jr., Managing Director, Lazard Freres & Co. LLC
        • Robert D. Kaplan, Chief Geopolitical Analyst, Stratfor
        • Alex Karp, Founder and CEO, Palantir Technologies
        • John Kerr, Independent Member, House of Lords
        • Henry A. Kissinger, Chairman, Kissinger Associates, Inc.
        • Klaus Kleinfeld, Chairman and CEO, Alcoa
        • Klaas H.W. Knot, President, De Nederlandsche Bank
        • Mustafa V Koç,. Chairman, Koç Holding A.S.
        • Roland Koch, CEO, Bilfinger SE
        • Henry R. Kravis, Co-Chairman and Co-CEO, Kohlberg Kravis Roberts & Co.
        • Marie-Josée Kravis, Senior Fellow and Vice Chair, Hudson Institute
        • André Kudelski, Chairman and CEO, Kudelski Group
        • Ulysses Kyriacopoulos, Chairman, S&B Industrial Minerals S.A.
        • Christine Lagarde, Managing Director, International Monetary Fund
        • J. Kurt Lauk, Chairman of the Economic Council to the CDU, Berlin
        • Lawrence Lessig, Roy L. Furman Professor of Law and Leadership, Harvard Law School
        • Thomas Leysen, Chairman of the Board of Directors, KBC Group
        • Christian Lindner, Party Leader, Free Democratic Party (FDP NRW)
        • Stefan Löfven, Party Leader, Social Democratic Party (SAP)
        • Peter Löscher, President and CEO, Siemens AG
        • Peter Mandelson, Chairman, Global Counsel; Chairman, Lazard International
        • Jessica T. Mathews, President, Carnegie Endowment for International Peace
        • Frank McKenna, Chair, Brookfield Asset Management
        • John Micklethwait, Editor-in-Chief, The Economist
        • Thierry de Montbrial, President, French Institute for International Relations
        • Mario Monti, Former Italian Prime Minister
        • Craig J. Mundie, Senior Advisor to the CEO, Microsoft Corporation
        • Alberto Nagel, CEO, Mediobanca
        • H.R.H. Princess Beatrix of The Netherlands
        • Andrew Y.Ng, Co-Founder, Coursera
        • Jorma Ollila, Chairman, Royal Dutch Shell, plc
        • David Omand, Visiting Professor, King’s College London
        • George Osborne, Chancellor of the Exchequer
        • Emanuele Ottolenghi, Senior Fellow, Foundation for Defense of Democracies
        • Soli Özel, Senior Lecturer, Kadir Has University; Columnist, Habertürk Newspaper
        • Alexis Papahelas, Executive Editor, Kathimerini Newspaper
        • Safak Pavey, Turkish MP
        • Valérie Pécresse, French MP
        • Richard N. Perle, Resident Fellow, American Enterprise Institute
        • David H. Petraeus, General, U.S. Army (Retired)
        • Paulo Portas, Portugal Minister of State and Foreign Affairs
        • J. Robert S Prichard, Chair, Torys LLP
        • Viviane Reding, Vice President and Commissioner for Justice, Fundamental Rights and Citizenship, European Commission
        • Heather M. Reisman, CEO, Indigo Books & Music Inc.
        • Hélène Rey, Professor of Economics, London Business School
        • Simon Robertson, Partner, Robertson Robey Associates LLP; Deputy Chairman, HSBC Holdings
        • Gianfelice Rocca, Chairman,Techint Group
        • Jacek Rostowski, Minister of Finance and Deputy Prime Minister
        • Robert E. Rubin, Co-Chairman, Council on Foreign Relations; Former Secretary of the Treasury
        • Mark Rutte, Dutch Prime Minister
        • Andreas Schieder, Austrian State Secretary of Finance
        • Eric E. Schmidt, Executive Chairman, Google Inc.
        • Rudolf Scholten, Member of the Board of Executive Directors, Oesterreichische Kontrollbank AG
        • António José Seguro, Secretary General, Portuguese Socialist Party
        • Jean-Dominique Senard, CEO, Michelin Group
        • Kristin Skogen Lund, Director General, Confederation of Norwegian Enterprise
        • Anne-Marie Slaughter, Bert G. Kerstetter ’66 University Professor of Politics and International Affairs, Princeton University
        • Peter D. Sutherland, Chairman, Goldman Sachs International
        • Martin Taylor, Former Chairman, Syngenta AG
        • Tidjane Thiam, Group CEO, Prudential plc
        • Peter A. Thiel, President, Thiel Capital
        • Craig B. Thompson, President and CEO, Memorial Sloan-Kettering Cancer Center
        • Jakob Haldor Topsøe, Partner, AMBROX Capital A/S
        • Jutta Urpilainen, Finnish Minister of Finance
        • Daniel L. Vasella, Honorary Chairman, Novartis AG
        • Peter R. Voser, CEO, Royal Dutch Shell plc
        • Brad Wall, Premier of Saskatchewan Province, Canada
        • Jacob Wallenberg, Chairman, Investor AB
        • Kevin Warsh, Distinguished Visiting Fellow, The Hoover Institution, Stanford University
        • Galen G.Weston, Executive Chairman, Loblaw Companies Limited
        • Baroness Williams of Crosby, Member, House of Lords
        • Martin H. Wolf, Chief Economics Commentator, The Financial Times
        • James D. Wolfensohn, Chairman and CEO, Wolfensohn and Company
        • David Wright, Vice Chairman, Barclays plc
        • Robert B. Zoellick, Distinguished Visiting Fellow, Peterson Institute for International Economics

        • “And as we are seeing, it is a Russian/Sino alliance that is taking on the ‘new world order’”

          From what i’m seeing is that they are no different than the West. They are making it obviously clear that they want a greater seat at the table of the IMF. So the same corrupt cartel that bankrupted the West are now moving to the East to finish the job. It will just be BAU 2 when the shift takes place. That off course is unless someone from NATO or from the US over in Ukraine decides to go nuclear if Putin gives them a major butt whoopin if they keep escalating things over in his backyard.

          • Absolutely no different.

            Why would it be any different?

            The game is called “King of the Castle” The king sits high and mighty eating the finest food and drinking the best wines and enjoying the prettiest damsels. He surrounds himself with allies who are kept sweet with titles and lands of their own, who will fight for him when an usurper shows up.

            Of course if the usurper is able to offer more to the king’s allies, and appears to be stronger than the king, the allies will change sides in a heart beat.

            Are we not seeing that happening now as America’s allies look to be forsaking their ‘king’

            If the world doesn’t collapse before this plays out then expect the Chinese and Russians to square off at some point. No room for two kings. Just like there is no room for two alphas in the chimp pack.

            Or in other words:

            • Tolstoy’s Degenerate Grandson says:

              “The game is called ‘King of the Castle’ The king sits high and mighty eating the finest food and drinking the best wines and enjoying the prettiest damsels. He surrounds himself with allies who are kept sweet with titles and lands of their own, who will fight for him when an usurper shows up.

              Of course if the usurper is able to offer more to the king’s allies, and appears to be stronger than the king, the allies will change sides in a heart beat.

              Are we not seeing that happening now as America’s allies look to be forsaking their ‘king’”

              Your narrative sounds very barbaric.

              In fact, it sounds almost identical to how William Manchester describes early barbarian societies and polities.

              “Because the first medieval rulers had been barbarians, most of what followed derived from their customs,” Manchester writes in ‘A World LIt Only by Fire’. “Chieftains like Ermanaric, Alaric, Attila, and Clovis rose as successful battlefield leaders whose fighting skills promised still more triumphs to come…. Lesser tribesmen were grateful to him for the spoils of victory…. [T]he early kings had been chosen for merit, and early kings wore crowns only ad vitam autoculpam — for life or until removed for fault.”

              But your narrative also sounds incomplete. It reduces the human condition to a materialistic meritocracy. But, as Manchester goes on to explain, a barbarian chieftain’s “retinue always included pagan priests — sometimes he himself was one — and he was believed to be either favored by the gods or descended from them.”

              And it wasn’t long before the barbarian chieftains and their descendants morphed into kings and monarchs, who were enthroned by the church. Manchester, for instance, describes how Pepin the Short, Charlemagne’s father, “was crowned and solemnly armed with a royal scepter. The Holy Father exacted promised from him that he would defend the Church, the poor, the weak, and the defenseless; he then proclaimed him anointed of the Lord.”

              “Hereditary monarchy, like heredity nobility, was largely a medieval innovation,” Manchester continues. “The conspicuous sacerdotal role in the crowning of kings, who then claimed that they ruled by divine right, was characteristic of Christianity’s domination of medieval Europe.”

              In societies which have not degenerated into decadence and corruption, things like sacredness. honor, chivalry, duty, and loyalty play extremely important roles in motivating human behavior.

              As the moral psychologist Jonathan Haidt put it, “the world we live in is not really one made of rocks, trees, and physical objects; it is a world of insults, opportunities, status symbols, betrayals, saints, and sinners.”

            • Remind me of the period when humans were not ‘barbaric’

              We are hard wired to be ‘barbaric’ because life at all levels is a battle for survival.

              When food is finite and populations are always growing, violence is the guaranteed result.

              Throw a piece of meat to 10 starving wolves. Is their reaction barbaric?

              Nothing has changed in the thousands of years that humans have existed. We are absolutely no different than the primitive tribes who were killing each other over control of hunting territories. The only difference is that we have more powerful weapons.

              Just wait a little longer if you disagree.

              Watch what happens when 7 billion humans are left with almost nothing to eat because the industrial farming machine grinds to a halt.

              All wars and violent acts that came before will be put mere sparks compared to the raging inferno that is coming.

        • @ Tolstoy’s Degenerate Grandson says: “The fact that there are no Russian or Chinese names on this list leads me to believe that the elites of the world are not one cohesive transnational group. And as we are seeing, it is a Russian/Sino alliance that is taking on the ‘new world order’ ”

          “Us” vs. “Them” framing is very beguiling because it has just enough truth to it to be verisimilar, and because it punches certain hot buttons in the human psyche — buried just below the surface within the ancient reptilian part of our brains. “Us” vs. “Them” framing, to cite a very recent example of this, worked like a charm for Benjamin Netanyahu in the final days of his just-completed campaign in Israel.

          “Us” vs. “Them” framing is, of course, what political and economic entrepreneurs do. As Rogers Brubaker explains, groups are “constructed” by political, economic and cultural (e.g., religious) leaders, and are not “real, substantial things-in-the-world.”

          Click to access Ethnicity%20without%20Groups%20Brubaker.pdf

          So in this vein, riddle me this: If it’s Eurasia vs. the rest of us as you claim, then how do you explain that China has loaned the US government trillions of dollars, and that it is the owner of a substantial chunk of the US government’s $18 trillion in T-bills? And weren’t the Chinese some of the biggest buyers of agency debt, until they got spooked in the wake of the 2008 GFC and offloaded it?

          And how do you explain that “Chinese corporations have taken on $1.5 trillion in foreign debt in the past year or so, where previously they had none”?

          As Anne Stevenson-Yang goes on to explain: “If defaults start to cascade through the economy, it will be more difficult for China to hide its debt problems now that foreign investors are involved. It’s here that a credit crisis could start.”

          • “As Anne Stevenson-Yang goes on to explain: “If defaults start to cascade through the economy, it will be more difficult for China to hide its debt problems now that foreign investors are involved. It’s here that a credit crisis could start.”

            I’m amazed they’ve hid their situation this long. Their GDP according to Asian economists were not in the double digit range when China was claiming that growth. China has been able to get away with it by just reinvesting into it’s own economy “ghost cities and factories”. The US like to use the term drill baby drill, well China should coin the phrase build baby build even if it stays empty.

            No one mentions the larger shadow banking problem China could be faced with. Their shadow banking system is bigger than the US. The Chinese basically Xeroxed the financial, banking and economic models from the West and are just tweaking it.

            It appears the next phase of the economic world order is heading East but the East has many problems. Brazil’s economy and it’s currency are in bad shape. India is reliant on cheap labor and a growing population who now find themselves competing with other cheaper labor. Russia is too reliant on it’s energy supplies and China is too reliant on it’s Walmart trinkets and building Apple devices. When all hell breaks loose I seriously doubt China will be able to hold it all together with a 1.2B+ population that will be madder than hell, which is why China needs a GDP growth rate of at least 10% to keep their natives from being restless.

            • @ Rodster

              If you happened to have missed it, here’s a very interesting article on China:

              The Coming China Crisis

              The author, Richard Vague, gets a lot right in his analysis. He doesn’t, for instance, succumb to the defactualized nonsense we hear from both sides of the ideological divide in the United States. To wit:

              “Neither of the two dominant economic theories of our time forecast the coming storm. The doves—those more in favor of lower interest rates and government stimulus—were sanguine, unconcerned by rapid loan growth. The hawks—those more focused on curbing the money-supply expansion through higher interest rates—were sounding dire warnings of inflation. Both were wrong, but neither has since changed its theory.”

              However, missing from Vague’s analysis are the factors which Gail brings to the conversation: depleting natural resources and environmental degredation.

              Unmistakable is the correlation between 1) the rapid run-up of private debt in the world’s major economic powers and 2) the onset of high oil prices. Both began in the early 1970s.

              I suppose the million dollar question is this: “Is the run-up in private debt being caused by high oil prices, or is it just another run-of-the-mill crisis of capitalism?”

              Gail argues the former. If she is right, then the problems facing the world are far more intractable than Vauge forsees. His solution to the surfeit of private debt: “If too much capacity and too many bad loans are the problems, the solutions are time and capital: time for organic growth to absorb the excess capacity, and capital to repair banks and borrowers.” But if Gail is right, then the real “organic growth” Vague speaks of will be extremely difficult to achieve, unless people can find some way of being productive without consuming large quantities of fossil fuels. And what are the possiblities of this?

            • @ Rodster

              Michael Hudson’s interview on the RealNews Network is also very good:

              Europe Tilts East Towards China

              Hudson: The World Bank, under U.S. congressional pressure, has said, look, we’re not going to finance countries becoming independent of the United States; our function is to make them export more to the United States and to buy from the United States. So the funding of the World Bank has mainly been to fund infrastructure developments, vastly overpriced, to Third World countries to create money for American engineering firms; also to lend out dollars and to indebt countries to it; and worst of all, to promote privatization. And that’s really the big difference between the Chinese Development Bank’s philosophy and the World Bank.

              The interviwer, however, challenges Hudson’s notion that China is, or would be, any better than the US:

              PERIES: Now, I have actually seen and witnessed what China’s impact has been in some of the Latin American countries where they have huge investments in infrastructure development projects, which often isn’t in the best interests of those countries. For example, China brings in a number of their labor, thousands of Chinese workers, to those sites to work, and they’re basically importing labor, not hiring the local labor for these projects. Now, that’s what I witnessed. How do we know that China is really going to be different, apart from the discussions they’re having with you? Is that reflected in any policy? Or are they trying to have these conversations in a more collaborative way with the southern countries?

          • Why have the Chinese loaned the US money?

            Oh I dunno. Perhaps because the Chinese know that when you loan someone money you control them.

            Or that eventually you turn the foundation they are built on into quicksand.

            In case you hadn’t noticed that by purchasing US debt the Chinese currency weakens which means Chinese products are cheaper which means the US manufacturing industries get destroyed.

            It’s a chess game. And as we can see, America has lost.

            Irrelevant though, because everyone is about to lose.

      • Further on this, of course Obama followed the same strategies because a) he takes his orders from the people with the real power and b) he is no fool and he understands how the world works: you are either the brute or you are the brutalized.

        In the book the author references a leading Chinese philosopher who reflects on the brutality of the British and states to the effect:

        I have no problem with what the British did. In fact I expected them to do what they did because we were weak and corrupt. If it were not the British it would have been some other country.

        We can wallow in self pity and moan and bitch about the cruel British but that would accomplish nothing. We would continue to be pounded into submission and remain a vassal state.

        What we need to do is to modernize and move to a position of strength both economically and militarily. Only then will we be able to assert ourselves when powerful countries attempt to overrun us.

        He is exactly right.

        There is no room for kindness or weakness on the world stage. The world is finite and every group is fighting to the death for a piece of the limited pie.

        You better be ready to bare knuckle fight, or get behind a tough guy (and kiss the ring) otherwise you will be left beaten in the gutter scrambling around for scraps.

        If you think about this it is not much different from how primitive tribes operate.

        If you want to be the alpha you need to kill the existing leader. Alternatively you get on side with him (but he gets all the hot chicks and the choice cuts of meat) and you go to war to defend your resource base, or to seize the resources of other tribes.

        • “You are either the brute or you are the brutalized.”?

          “There is no room for kindness or weakness on the world stage”?

          “The world is finite and every group is fighting to the death for a piece of the limited pie”?

          Well I must say, how very Machiavellian.

          And I suppose it goes without saying that this doctrine does run through Western Civilization like a thread: from Machiavelli to Thomas Hobbes, and then to Bernard Mandeville and Adam Smith (the liberals), to Herbert Spencer and William Graham Sumner (the social Darwinists), to the amoral realists like Henry Kissinger, and finally to the neoclassical economists, the neo-liberals and the neo-cons. As the Russian scientist Peter Turchin has observed, this doctrine climaxed in the the 20th century with what are now “the dominant theories in social and biological sciences: the rational choice in economics and the selfish gene in evolutionary biology.”

          But, as Turchin explains in great detail in “War and Peace and War,” the doctrine is, for the most part, fiction. Human behavior is far more complex than the two alternatives we’ve been presented: the naive group-ism of Marxism, Nazism and neo-conservatism, or the naive individualism of liberalism and neoliberalism. There is a moral universe out there which is completely absent from these supposedly competing, but in reality both fundamentally Machiavellian, theories. Man, it turns out, is a hyper-social animal who, now and in his ancient past, quite often found cooperation, both in his individual and group conduct, to be more conducive to human fitness than conflict. And, as Turchin goes on to explain, morality is the glue which makes cooperation possible.

          As Turchin goes on to explain, Machiavelli’s morality-free political philosophy ended up being a disaster for Florence. When the Spanish troops attacked Prato, which guarded the northern approaches to Florence, “after only a brief struggle the troops recruited by Machiavelli broke and ran away…. Machiavelli was dismissed from his post and banished. He withdrew to a small farm that his father left him, and there wrote the book that made him famous.”

          • “There is a moral universe out there which is completely absent from these supposedly competing, but in reality both fundamentally Machiavellian, theories.”

            Maybe in the exalted halls of the world’s ivory towers there is a moral universe. In the philosophy classes, or perhaps the theology classes.

            It does not apply to the real world. Never has. Never will.

            Try running a country using the moral universe theory. The jackals will be licking their lips as they prepare to fight amongst themselves to strip your bones.

            And let us not forget the most famous proponent of the moral universe. He met his end with nails through body and was left to rot on a cross.

            Most of us are coddled and have not the slightest clue that we are typing away here joyfully while having a cup of fine coffee and a light flaky croissant in our warm wonderful homes rather than stressing over how we will feed our kids another day is 100% on the backs of the losing countries that we pillage.

            Countries who would have at our throats without a second thought so that they could swap places with us.

            Ironically it is the pillaging (made possible by our reality based elites who understand you either pillage or be pillaged) that allows us to have our hallowed halls of higher learning where we foment these nonsensical ideas about a moral universe.

            And ironically we have nothing but vitriol for the men and women who make sure that we, the silly sheep who believe that the wolves across the pasture can be our friends, are kept safe from those wolves by any means necessary.

            You want to see the US empire go down quickly?

            Elect a philosophy professor who believes ina moral universe as president, give him or her real power, and you will soon have an intimate understanding of what it is like to live like this:

  2. 100,000 Layoffs And Counting: Is This The New Normal?

    Bullish! As we know., all bad news is good news in the matrix. Why? Because it prods the central banks to ACT. The worse the news the bigger the reaction i.e. the more money they print.

    Time to front the stock markets and go long on this news.

    The secret to investing in the new normal is to work out which industries, or too big to fail companies are going to fail, and buy their stocks.

    Because the central banks will also be buying their stocks to ensure they don’t collapse and they will also be shoveling billions of dollars at 0 interest which the companies will use to buy back their own stock so that they don’t collapse.

    Welcome to insanity.

  3. Dear Gail and All
    See this link announcing a new Peak Oil journal:

    The usual European suspects are involved.

    You might particularly note the comments. Shortonoil explains why he thinks his methods are better than those employed by Colin Campbell and others.

    shortonoil states once again that 84 percent of all the oil which will ever be produced has already been produced. Which leads to this exchange in the comments:

    ‘So short, how does it feel to be the tip of the tip of the spear of truth?’

    ‘Over the next five years we will see an avalanche of bankruptcies in the petroleum industry. Production will plunge!’

    Don Stewart

  4. I love it when philosophy professors arrive to enlighten us with the repetitive conflict between object and subject, whether it is cast as ‘amoral relativism’ or ‘protestant ethic’. There is only you, and you only exist in your head; no chemical bath, no self-awareness, no “you”. To be truly, fully enlightened, we should look to the French:

    Après moi, le déluge means “after me, the flood,” and is used to refer to a person’s irresponsible or selfish lack of concern in what will happen after they have gone or moved on. Today it’s often associated with politicians and CEOs looking to secure their own interests at the expense of other people’s, but popular history claims the words were first used by the French king Louis XV, who repeatedly disregarded warnings of discontent among the French people in the lead up to the French Revolution. When the Revolution finally broke out in 1789 (fifteen years after Louis’s death), it eventually led to the execution of his grandson, King Louis XVI, in 1793.

    PS Hi Paul – are you really living off royalties? What happened to the farm in Bali?


    Friday March 20th, 2015
    Page 10A, 12A
    (Photos): Signs Cropping Up In Energy And Farm Sectors That Point To Weakening Rural Economy In Colorado, Neighboring States; Index At Lowest Level In Five Years
    (Inset): Rural Mainstreet Index – Figures greater than 50 indicate economic expansion . . . (see hard-copy or website for figures in this chart)
    by Steve Raabe
    Colorado and neighboring states are showing signs of a weakening rural economy amid challenges in the energy and farm sectors. Creighton University’s Rural Mainstreet Index sank to its lowest level in 5 years. The index uses surveys of bank CEOs to measure rural economic prospects in Colorado and 9 other Western and Midwestern states. “The stronger U.S. dollar is undermining the farm and energy sectors by weakening agricultural exports, crop prices, livestock prices and energy prices,” said the report’s author, Ernie Goss, a regional economics professor at Omaha-based Creighton University. “Rural main-street businesses dependent on export, agriculture or energy are experiencing pullbacks in economic activity,” Goss said. The regional index dropped to 43.6, its lowest level since February 2010. An index number above 50 suggest economic growth. Scores below 50 point toward future declines. Colorado’s index number in March was 40.6, down from 47.2 in February. It marked the second consecutive month of a sub-50 ranking after 11 straight months of tallying above 50. “It’s not dire by any stretch of the imagination,” Goss said. “The low numbers have not really hit the economy just yet. They are just a shot across the bow. We would have to see several months of low numbers before having a big concern.” The Mainstreet index report illustrates a dichotomy between rural and urban economies. Colorado’s strong growth in employment is largely a reflection of Front Range economic activity, while the index report uses indicators such as farmland prices, farm equipment sales and banking activity in rural areas. The fundamentals of supply and demand are affecting Colorado’s economy in different ways. The past year’s downturn in energy prices have been caused primarily by surging domestic oil production. But lower crop and livestock prices are a function of increased supply from large harvests as well as weakened demand in export markets. Goss said that potential job losses in Colorado’s energy sector will be offset, in part, by increases in tourism generated by cheap gasoline. In a separate report issued Thursday, the Applied Information Management Institute reported that Colorado has the nation’s 8th-best job prospects as measured by the ratio of unique online job postings to the number of unemployed people. Occupations showing the highest growth rates were automobile sales and service, sales and unskilled entry-level positions. The largest declines were in customer service, insurance and transportation.

  6. 10 to 20 years ago China agreed to “sterilize” 1 trillion dollars of their U.S. government bond holdings. They have kept their word. China holds 1.250 trillion dollars. That is the 1.0 trillion sterilized that will “never” be used and 250 billion used for day to day account settlements. That is the way it looks to me.

  7. Yes, this will end badly but what will give first? Now we are wash in oil heading for $20 per barrel. All our oil tanks are full. Life is good.

    • “To me the notion of the economy not growing would be a good thing if it were done on purpose, i.e. the world governments planned for and intentionally implemented non-growth oriented policies.”

      Monbiot seems to not understand the dire implications of stopping growth, intentionally or otherwise.

      • Do you mean Mobus doesn’t understand?

        You can read the Mobus and Kalton textbook for more on systems which are shrinking, stable, and growing. All are possible.

        Don Stewart

  8. Dear Gail and All
    Here is a link to four short vignettes from Elaine Ingham dealing with food and agriculture. (Actually 3 vignettes. You will find one duplicate).

    The first vignette about synthetic fertilizer lays out the basics regarding the failure of the Green Revolution. Far from saving us, it is poisoning us. Food is not the primary problem, the primary problem is water pollution. There are many other subtle nuances which are not covered in this short vignette.

    I also recommend the answer to the scale question. Scale is a common problem in agriculture. Elaine give a straightforward answer on what the farmer and gardener need to do. The answer does not involve chemicals. I will point out that spraying the underside of leaves on a small farm or garden is labor intensive. I have seen pictures of machines for large farms which can spray the underside of leaves.

    The vignette on biochar is also interesting. However, Elaine is not giving an answer which is comprehensive if one assumes that, as the Hills Group predicts, the Oil Age is ending. And, as George Mobus predicts, climate change is now a systemic threat to humans and lots of other species. Elaine assumes, as near as I can tell, that we are going to have lots of oil for a long time. Biochar comes into its own when it is made at the farm or community scale, is innoculated with the necessary biology, and is incorporated into the soil, perhaps with a key line plow. As such, the biochar can provide heat for cooking and warms a stove for heating, sequesters carbon for hundreds of years, and provides a welcoming home for microbes. Elaine is correct that plain biochar doesn’t do very much except sequester carbon. If you have followed the recent news that the trees in the Amazon have lost considerable ability to sequester carbon, the carbon sequestration alone may make biochar worthwhile.

    Don Stewart

    • “Elaine is correct that plain biochar doesn’t do very much except sequester carbon.”

      Isn’t the main reason to use biochar to hold moisture in the soil? Is there something that needs to be done to enable that?

      • Dear Matthew
        The thing that really holds water is humus. If bare biochar holds water, I am not aware of it….but I might just be ignorant on the subject. If the biochar is inoculated so that it harbors lots of microbes, then there will be a vigorous soil food web which will make lots of humus which will hold lots of water…and the microbes will release lots of minerals from the soil in the soluble form the plants need, when they need them.

        What about the ancient biochar? Did those people inoculate it? Or is it just that, over time, the microbes colonize it? Microbes colonize spaceships, so my guess is the latter. But again, I don’t know for sure.

        Don Stewart

        • I’ve not used biochar, but it is my understanding that the most likely way that the pre European Amazonian civilizations probably made biochar by simply burning waste in pits and burying those pits. However they actually did it, I do know that they were unaware of germ theory back then, so it is more likely that the colonization occurred naturally. I also know that even to this day, Terra Preta is still the most fertile soil in the Amazon.

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