Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse

Why are commodity prices, including oil prices, lagging? Ultimately, the question comes back to, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing.

It looks to me as though we are heading into a deflationary depression, because the prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening. Instead, Janet Yellen is talking about raising interest rates later this year, and  we are seeing commodity prices fall further and further. Let me explain some pieces of what is happening.

1. We have been forcing economic growth upward since 1981 through the use of falling interest rates. Interest rates are now so low that it is hard to force rates down further, in order to encourage further economic growth. 

Falling interest rates are hugely beneficial for the economy. If interest rates stop dropping, or worse yet, begin to rise, we will lose this very beneficial factor affecting the economy. The economy will tend to grow even less quickly, bringing down commodity prices further. The world economy may even start contracting, as it heads into a deflationary depression.

If we look at 10-year US treasury interest rates, there has been a steep fall in rates since 1981.

Figure 1. Chart prepared by St. Louis Fed using data through July 20, 2015.

Figure 1. Chart prepared by St. Louis Fed using data through July 20, 2015.

In fact, almost any kind of interest rates, including interest rates of shorter terms, mortgage interest rates, bank prime loan rates, and Moody’s Seasoned AAA Bonds, show a fairly similar pattern. There is more variability in very short-term interest rates, but the general direction has been down, to the point where interest rates can drop no further.

Declining interest rates stimulate the economy for many reasons:

  • Would-be homeowners find monthly payments are lower, so more people can afford to purchase homes. People already owning homes can afford to “move up” to more expensive homes.
  • Would-be auto owners find monthly payments lower, so more people can afford cars.
  • Employment in the home and auto industries is stimulated, as is employment in home furnishing industries.
  • Employment at colleges and universities grows, as lower interest rates encourage more students to borrow money to attend college.
  • With lower interest rates, businesses can afford to build factories and stores, even when the anticipated rate of return is not very high. The higher demand for autos, homes, home furnishing, and colleges adds to the success of businesses.
  • The low interest rates tend to raise asset prices, including prices of stocks, bonds, homes and farmland, making people feel richer.
  • If housing prices rise sufficiently, homeowners can refinance their mortgages, often at a lower interest rate. With the funds from refinancing, they can remodel, or buy a car, or take a vacation.
  • With low interest rates, the total amount that can be borrowed without interest payments becoming a huge burden rises greatly. This is especially important for governments, since they tend to borrow endlessly, without collateral for their loans.

While this very favorable trend in interest rates has been occurring for years, we don’t know precisely how much impact this stimulus is having on the economy. Instead, the situation is the “new normal.” In some ways, the benefit is like traveling down a hill on a skateboard, and not realizing how much the slope of the hill is affecting the speed of the skateboard. The situation goes on for so long that no one notices the benefit it confers.

If the economy is now moving too slowly, what do we expect to happen when interest rates start rising? Even level interest rates become a problem, if we have become accustomed to the economic boost we get from falling interest rates.

2. The cost of oil extraction tends to rise over time because the cheapest to extract oil is removed first. In fact, this is true for nearly all commodities, including metals. 

If costs always remained the same, we could represent the production of a barrel of oil, or a pound of metal, using the following diagram.

Figure 2

Figure 2. Base Case

If production is becoming increasingly efficient, then we might represent the situation as follows, where the larger size “box” represents the larger output, using the same inputs.

Figure 3

Figure 3. Increased Efficiency

For oil and for many other commodities, we are experiencing the opposite situation. Instead of becoming increasingly efficient, we are becoming increasingly inefficient (Figure 4). This happens because deeper wells need to be dug, or because we need to use fracking equipment and fracking sand, or because we need to build special refineries to handle the pollution problems of a particular kind of oil. Thus we need more resources to produce the same amount of oil.

Figure 4. Growing inefficiency

Figure 4. Growing inefficiency (Notice how sizes of shapes differ in Figures 2, 3, and 4.)

Some people might call the situation “diminishing returns,” because the cheap oil has already been extracted, and we need to move on to the more difficult to extract oil. This adds extra steps, and thus extra costs. I have chosen to use the slightly broader term of “increasing inefficiency” because it indicates that the nature of these additional costs is not being restricted.

Very often, new steps need to be added to the process of extraction because wells are deeper, or because refining requires the removal of more pollutants. At times, the higher costs involve changing to a new process that is believed to be more environmentally sound.

Figure 5

Figure 5. An example of what may happen to make inputs in physical goods and services rise. (The triangle shape was chosen to match the shape of the “Inputs of Goods and Services” triangle in Figures 2, 3, and 4.)

The cost of extraction keeps rising, as the cheapest to extract resources become depleted, and as environmental pollution becomes more of a problem.

3. Using more inputs to create the same or smaller output pushes the world economy toward contraction.

Essentially, the problem is that the same quantity of inputs is yielding less and less of the desired final product. For a given quantity of inputs, we are getting more and more intermediate products (such as fracking sand, “scrubbers” for coal-fired power plants, desalination plants for fresh water, and administrators for colleges), but we are not getting as much output in the traditional sense, such as barrels of oil, kilowatts of electricity, gallons of fresh water, or educated young people, ready to join the work force.

We don’t have unlimited inputs. As more and more of our inputs are assigned to creating intermediate products to work around limits we are reaching (including pollution limits), fewer of our resources can go toward producing desired end products. The result is less economic growth. Because of this declining economic growth, there is less demand for commodities. So, prices for commodities tend to drop.

This outcome is to be expected, if increased efficiency is part of what creates economic growth, and what we are experiencing now is the opposite: increased inefficiency.

4. The way workers afford higher commodity costs is primarily through higher wages. At times, higher debt can also be a workaround. If neither of these is available, commodity prices can fall below the cost of production.

If there is a significant increase in the cost of products like houses and cars, this presents a huge challenge to workers. Usually, workers pay for these products using a combination of wages and debt. If costs rise, they either need higher wages, or a debt package that makes the product more affordable–perhaps lower rates, or a longer period for payment.

Commodity costs have been rising very rapidly in the last fifteen years or so. According to a chart prepared by Steven Kopits, some of the major costs of extracting oil began increasing by 10.9% per year, in about 1999.

Figure 6. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is

Figure 6. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is “Compound Annual Growth Rate.”

In fact, the inflation-adjusted prices of almost all energy and metal products tended to rise rapidly during the period 1999 to 2008 (Figure 7). This was a time period when the amount of mortgage debt was increasing rapidly as lenders began offering home loans with low initial interest rates to almost anyone, including those with low credit scores and irregular income. When debt levels began falling in mid-2008 (related in part to defaulting home loans), commodity prices of all types dropped.

Figure 6. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank

Figure 6. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank “Pink Sheet” data.

Prices then began to rise once Quantitative Easing (QE) was initiated (compare Figures 6 and 7). The use of QE brought down medium-term and long-term interest rates, making it easier for customers to afford homes and cars.

Figure 7. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Figure 7. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

More recently, prices have fallen again. Thus, we have had two recent times when prices have fallen below the cost of production for many major commodities. Both of these drops occurred after prices had been high, when debt availability was contracting or failing to rise as much as in the past.

5. Part of the problem that we are experiencing is a slow-down in wage growth.

Figure 8 shows that in the United States, growth in per capita wages tends to disappear when oil prices rise above $40 barrel. (Of course, as noted in Point 1, interest rates have been falling since 1981. If it weren’t for this, the cut off for wage growth might even be lower–perhaps even $20 barrel!)

Figure 8. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Figure 8. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided by total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

There is also a logical reason why we should expect that wages would tend to fall as energy costs rise. How does a manufacturer respond to the much higher cost of one or more of its major inputs? If the manufacturer simply passes the higher cost along, many customers will no longer be able to afford the manufacturer’s or service-provider’s products. If businesses can simply reduce some other costs to offset the rise in the cost in energy products and metals, they might be able to keep most of their customers.

A major area where a manufacturer or service provider can cut costs is in wage expense.  (Note the different types of expenses shown in Figure 5. Wages are a major type of expense for most businesses.)

There are several ways employment costs can be cut:

  1. Shift jobs to lower wage countries overseas.
  2. Use automation to shift some human labor to labor provided by electricity.
  3. Pay workers less. Use “contract workers” or “adjunct faculty” or “interns” who will settle for lower wages.

If a manufacturer decides to shift jobs to China or India, this has the additional advantage of cutting energy costs, since these countries use a lot of coal in their energy mix, and coal is an inexpensive fuel.

Figure 9. United States Percentage of Labor Force Employed, in by St. Louis Federal Reserve.

Figure 9. United States Labor Force Participation Rate by St. Louis Federal Reserve. It is computed by dividing the number of people who are employed or are actively looking for work by the number of potential workers.

In fact, we see a drop in the US civilian labor force participation rate (Figure 9) starting at approximately the same time when energy costs and metal costs started to rise. Median inflation-adjusted wages have tended to fall as well in this period. Low wages can be a reason for dropping out of the labor force; it can become too expensive to commute to work and pay day care expenses out of meager wages.

Of course, if wages of workers are not growing and in many cases are actually shrinking, it becomes difficult to sell as many homes, cars, boats, and vacation cruises. These big-ticket items create a significant share of commodity “demand.” If workers are unable to purchase as many of these big-ticket items, demand tends to fall below the (now-inflated) cost of producing these big-ticket items, leading to the lower commodity prices we have seen recently.

6. We are headed in slow motion toward major defaults among commodity producers, including oil producers. 

Quite a few people imagine that if oil prices drop, or if other commodity prices drop, there will be an immediate impact on the output of goods and services.

Figure 10.

Figure 10.

Instead, what happens is more of a time-lagged effect (Figure 11).

Figure 11.

Figure 11.

Part of the difference lies in the futures markets; companies hold contracts that hold sale prices up for a time, but eventually (often, end of 2015) run out. Part of the difference lies in wells that have already been drilled that keep on producing. Part of the difference lies in the need for businesses to maintain cash flow at all costs, if the price problem is only for a short period. Thus, they will keep parts of the business operating if those parts produce positive cash flow on a going-forward basis, even if they are not profitable considering all costs.

With debt, the big concern is that the oil reserves being used as collateral for loans will drop in value, due to the lower price of oil in the world market. The collateral value of reserves works out to be something like (barrels of oil in reserves x some expected price).

As long as oil is being valued at $100 barrel, the value of the collateral stays close to what was assumed when the loan was taken out. The problem comes when low oil prices gradually work their way through the system and bring down the value of the collateral. This may take a year or more from the initial price drop, because prices are averaged over as much as 12 months, to provide stability to the calculation.

Once the value of the collateral drops below the value of the outstanding loan, the borrowers are in big trouble. They may need to sell some of the other assets they own, to help pay down the loan. Or, they may end up in bankruptcy. The borrowers certainly can’t borrow the additional money they need to keep increasing their production.

When bankruptcy occurs, many follow-on effects can be expected. The banks that made the loans may find themselves in financial difficulty. The oil company may lay off large numbers of workers. The former workers’ lack of wages may affect other businesses in the area, such as car dealerships. The value of homes in the area may drop, causing home mortgages to become “underwater.” All of these effects contribute to still lower demand for commodities of all kinds, including oil.

Because of the time lag problem, the bankruptcy problem is hard to reverse. Oil prices need to stay high for an extended period before lenders will be willing to lend to oil companies again. If it takes, say, five years for oil prices to get up to a level high enough to encourage drilling again, it may take seven years before lenders are willing to lend again.

7. Because many “baby boomers” are retiring now, we are at the beginning of a demographic crunch that has the tendency to push demand down further.

Many workers born in the late 1940s and in the 1950s are retiring now. These workers tend to reduce their own spending, and depend on government programs to pay most of their income. Thus, the retirement of these workers tends to drive up governmental costs at the same time it reduces demand for commodities of all kinds.

Someone needs to pay for the goods and services used by the retirees. Government retirement plans are rarely pre-funded, except with the government’s own debt. Because of this, higher pension payments by governments tend to lead to higher taxes. With higher taxes, workers have less money left to buy homes and cars. Even with pensions, the elderly are never a big market for homes and cars. The overall result is that demand for homes and cars tends to stagnate or decline, holding down the demand for commodities.

8. We are running short of options for fixing our low commodity price problem.

The ideal solution to our low commodity price problem would be to find substitutes that are cheap enough, and could increase in quantity rapidly enough, to power the economy to economic growth. “Cheap enough” would probably mean approximately $20 per barrel for a liquid oil substitute. The price would need to be correspondingly inexpensive for other energy products. Cheap and abundant energy products are needed because oil consumption and energy consumption are highly correlated. If prices are not low, consumers cannot afford them. The economy would react as it does to inefficiency. In other words, it would react as if too much of the output is going into intermediate products, and too little is actually acting to expand the economy.

Figure 12. World GDP in 2010$ compared (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014).

Figure 12. World GDP in 2010$ (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014)

These substitutes would also need to be non-polluting, so that pollution workarounds do not add to costs. These substitutes would need to work in existing vehicles and machinery, so that we do not have to deal with the high cost of transition to new equipment.

Clearly, none of the potential substitutes we are looking at today come anywhere close to meeting cost and scalability requirements. Wind and solar PV can only be built on top of our existing fossil fuel system. All evidence is that they raise total costs, adding to our “Increased Inefficiency” problem, rather than fixing it.

Other solutions to our current problems seem to be debt based. If we look at recent past history, the story seems to be something such as the following:

Besides adopting QE starting in 2008, governments also ramped up their spending (and debt) during the 2008-2011 period. This spending included road building, which increased the demand for commodities directly, and unemployment insurance payments, which indirectly increased the demand for commodities by giving jobless people money, which they used for food and transportation. China also ramped up its use of debt in the 2008-2009 period, building more factories and homes. The combination of QE, China’s debt, and government debt together brought oil prices back up by 2011, although not to as high a level as in 2008 (Figure 7).

More recently, governments have slowed their growth in spending (and debt), realizing that they are reaching maximum prudent debt levels. China has slowed its debt growth, as pollution from coal has become an increasing problem, and as the need for new homes and new factories has become saturated. Its debt ratios are also becoming very high.

QE continues to be used by some countries, but its benefit seems to be waning, as interest rates are already as low as they can go, and as central banks buy up an increasing share of debt that might be used for loan collateral. The credit generated by QE has allowed questionable investments since the required rate of return on investments funded by low interest rate debt is so low. Some of this debt simply recirculates within the financial system, propping up stock prices and land prices. Some of it has gone toward stock buy-backs. Virtually none of it has added to commodity demand.

What we really need is more high wage jobs. Unfortunately, these jobs need to be supported by the availability of large amounts of very inexpensive energy. It is the lack of inexpensive energy, to match the $20 per barrel oil and very cheap coal upon which the economy has been built that is causing our problems. We don’t really have a way to fix this.

9. It is doubtful that the prices of energy products and metals can be raised again without causing recession.

We are not talking about simply raising oil prices. If the economy is to grow again, demand for all commodities needs to rise to the point where it makes sense to extract more of them. We use both energy products and metals in making all kinds of goods and services. If the price of these products rises, the cost of making virtually any kind of goods or services rises.

Raising the cost of energy products and metals leads to the problem represented by Growing Inefficiency (Figure 4). As we saw in Point 5, wages tend to go down, rather than up, when other costs of production rise because manufacturers try to find ways to hold total costs down.

Lower wages and higher prices are a huge problem. This is why we are headed back into recession if prices rise enough to enable rising long-term production of commodities, including oil.

1,163 thoughts on “Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse

  1. On the question do we know enough to live at a 1800 level. There is a piece of land north of me. It has a strange property boundary extension of a path 20 feet wide and 200 feet long. It goes to a 50 foot diameter circle. Until you walk over and look you do not know about the vernal pool that forms every year and that a wise farmer holds on to to water the stock.

    How many humans know where the seasonal water sources in their area are located?

  2. Matthew – further to that last comment — one thing we are fairly certain of is that shale bought us the last 7 years.. without it we’d be done.

    Solar has bought us nothing

    • I presume you mean the Bakken, not the “Balkans.” Basically, there are a lot of companies working in the area who have ideas about how they could do things a little better, and would like to sell them to whoever has cash to pay for them. Quite a few of these ideas relate to the associated natural gas, much of which continues to be flared, despite a January 1, 2016 target for reducing the flaring. Basically, it is not cost-justified (EROI probably less than 1.0, if EROI to the consumer could be computed, which it cannot) to properly separate this gas, process it, and send it to markets.

      A number of ideas were presented. One idea was to simply use the flared mixture of gases to boil down the returned flow-back water, so it wouldn’t need to be trucked away. That way there would at least be a positive benefit from burning these gases. Someone else wanted to build a plastics factory in North Dakota, so that they might be able to use the ethane for plastics. The N.D. natural gas seems to have too much ethane in it, to meet standards for what is needed in furnaces and kitchen appliances.

      • EOR, enhanced oil recovery. They could heat the water and send it back down the hole to make the oil less viscose and more extractable.

  3. Dear Gail and Finite Worlders

    This will be a little philosophical digression, triggered by reading the physicist Frank Wilczek’s book A Beautiful Question.

    The Beautiful Question comes in two forms:
    Does the world embody beautiful ideas?
    or alternatively,
    Is the world a work of art?

    Wilczek’s answer is ‘Yes’, based on his analysis of the last few thousand years of art and science.

    You will have to read his book for a full explanation, but I will only take some of his conclusions and apply them to our confrontation with a Finite World.

    A note on amateurism. On pages 227 and 228 he leads us through the following:
    *The Core (his name for the Standard Model) provides a secure foundation, in physical law, for all applications of physics to chemistry, biology, materials science, engineering in general, astrophysics, and major aspects of cosmology. Its fundamentals have been tested with a precision more than adequate for those applications, and in more extreme conditions.

    The Core does…embody beautiful ideas. But those ideas are both strange and deeply hidden. It takes some imaginative growth, and some willing patience, to grasp their beauty.

    The challenge of achieving honest understanding, as opposed to crude and/or wishful thinking, is eternal…Nevertheless, I hope I’ve shown you that there are beautiful things in geometry that you (an amateur) CAN glimpse, through imagery and intuition, without lengthy study. Similarly here, I will present images and explanations that will allow you to glimpse some beautiful aspects of the Core. Not coincidentally, they’re the most central aspects!’

    My note: Wilczek’s emphasis on geometry is similar to Adrian Bejan’s emphasis on geometry in explaining Constructal law.

    On page 222, Wilczek considers places of worship, and mosques in particular:
    ‘Places of worship embody the aspirations of their architects, and the communities they represent, to ideal beauty. Their chosen means of expression feature color, geometry, and symmetry. Consider, in particular, plate HH (a beautiful modern mosque). Here the local geometry of the ambient surfaces and the local patterns of their color change as our gaze surveys them. It is a vibrant embodiment of anamorphic and anachromy—the very themes that our unveiling of Nature’s deep design finds embodied at Nature’s core.’

    If we compare the beauty of a mosque with heavily decorated Christian churches, we find some differences, related to the differences in the religions.
    ‘Color and geometry, symmetry, anachromy, and anamorphy, as ends in themselves, are only one branch of artistic beauty. Islam’s injunctions against representational art played an important part in bringing these forms of beauty to the fore, as did the physical constraint of structural stability (we need columns to support the weight of the ceilings, and the arches and domes to distribute tensions). Depictions of human faces, bodies, emotions, landscapes, historic sense, and the like, when they are allowed, are far more common subjects for art than those austere beauties.

    The world does not, in its deep design, embody ALL forms of beauty, not the ones that people without special study, or very unusual taste, find most appealing. But the world does, in its deep design, embody SOME forms of beauty that have been highly prized for their own value, and have been intuitively associated with the divine.’

    What follows now are my own meditations based on Wilczeks evidence and meditations. Wilczek observes that energy scarcity forces more structure into existence. Think of the seconds after the Big Bang with virtually no structure to the universe. But now the universe is cold, and we see structure everywhere. Similarly, I expect that as we humans move from a super-energetic world based on fossil fuels to a much less energetic world based on solar energy, we will be forced to adopt more structure. For example, extended families will not be the amorphous creature they are now, but a key ingredient in terms of our survival strategy. Someone’s value for their skill set will not depend very much on diplomas on the wall, but much more on demonstrated ability to do intelligent work. And so forth.

    Similarly, I suspect that the choice of a mate will be less a function of transient sexual fantasies and depend much more on an assessment of the ‘grit’ that the person has. Recent research has revealed that humans can make accurate assessments of another person’s empathetic reactions within 20 seconds. So Nature has given us the tools, many now atrophied, to survive in a low energy world.

    In terms of discussion on this web site, I think it is important to distinguish between a Catholic cathedral and an austere Mosque. The Catholic cathedral is filled with images which tell us what we want to hear: a personal God; s saviour; ability to avoid the messiness of being human (immaculate conception); supernatural assistance (the saints). Islam may have invented those things also, but the Mosque is a call back to a very much more basic relationship with the world. It is the difference between Biology (girls are pretty for a reason and peacocks tails serve a function) and Physics (everything is Energy, congealed or active). While we humans will always be biological creatures, I think that Physics is going to play a very large role in our fate over the next century. Consequently, commenters who keep trying to divert the discussion into things we wish were true biologically are not contributing to the discussion: but it doesn’t feed 9 billion; but people don’t want to work hard; but it would be hot in the summer and cold in the winter.

    I don’t want to belittle biology. Anyone who has studied soil knows that what happens there can be very beautiful indeed. Out of a constant search for lunch emerges the feeding of plants with the nutrients they need, just at the time they need them; the carbon and nitrogen cycles; the creation of new soil from bedrock and subsoil; pest resistance; etc. But, just as with Physics, we don’t get everything we might want. Humans are NOT the central concern of life in the soil. We can hunt and gather easily, but when we turn to agriculture, everything involves more work. There is little point in complaining about it…we just do the best we can.

    Similarly, the question of whether humans are necessarily violent. Humans clearly have the ability to both be violent and to cooperate. All the history and science that Wilczek cites would not have been possible without human cooperation. But those were also centuries of wars and other conflicts. Once again, we are asked to see the beauty hidden by the merely topical. Our survival may well depend on our ability to find the beauty and leverage it.

    I recommend that you make time to read Wilczek’s book, and draw your own conclusions.

    Don Stewart

    • “Similarly, the question of whether humans are necessarily violent. Humans clearly have the ability to both be violent and to cooperate.”

      As I understand it, young, single men have more testosterone and tend to be more violent and greater risk takers. Being around a pregnant woman causes hormonal and epigenetic changes that makes a man become less aggressive and more cooperative; at the same time, being around a man causes changes in a pregnant woman that makes her more motherly. Permanent brain re-wiring from hormones and genetics responding to specific environmental factors.

      Perhaps one of the best early responses to collapse will be to castrate any single, childless young men to quickly lower their testosterone without creating more mouths to feed.

      • Matthew Krajcik
        But when a band of roving bandits attacks the village, you want all those testosterone soaked young men who are trying to impress young women with their bravery.

        Don Stewart

        • “But when a band of roving bandits attacks the village, you want all those testosterone soaked young men who are trying to impress young women with their bravery.”

          The Janissaries were effective eunuch soldiers. I’m not sure that testosterone is particularly useful in gun-based warfare.

      • Or, to decrease population, infanticide of males would be an idea. If eunuch soldiers are effective, so too might women soldiers.

        • “Or, to decrease population, infanticide of males would be an idea”

          Only effective in the short term. By 1950, Japanese population was back on trendline, completely erasing the loss of men from the war. Better to have women married to eunuchs, then to have one man be a baby daddy for ten women.

  4. Figure 12 Figure 12. World GDP in 2010$ (from USDA) compared to World Consumption of Energy clearly shows that money is only a meter of energy.

    This thesis is the basis of the following calculation of the real value of a barrel of oil:
    The average industrial electricity price in the USA is approx. 7 cents per kwh. All goods produced in the USA have their origin in an industrial environment where electricity costs 7 cents per kwh.

    Electricity is normally produced by means of coal. But in this case I assume that oil is used to turn the generator that generates the electricity. Furthermore I assume that only 40 % of the energy in the diesel comes out as electricity during this process.

    A liter of diesel contains 35 MJ. These 35 MJ can be converted into almost 10 kwh. A barrel of diesel (oil) contains 160 liters x 10 kwh=1600 kwh. However, only 40 % is finally converted into electricity:
    1600 kwh x 0,40 = 640 kwh. A barrel of oil is worth 640 kwh x 7 cents = 44,8 dollars.

    (And yes, of course I know that a barrel of oil is not pure diesel)

      • All equipment used to bring the oil to the surface is produced under industrial circumstances, and workers’ wages finally also end up in the consumption of industrial goods. If he goes to the barber shop or to his lawyer his payment will be a part of their income which again goes into consumption of industrially manufactured articles. If the worker chooses to place some of his money in the bank, the bank will know how to lend it to others who use the money to pay for industrial goods. Taxes? – governments know better than anyone else how to spend money …….. money is just a meter of energy consumption!

        • I agree. This is part of the reason that “energy payback” calculations don’t make much sense. Energy is used throughout the economy. We can’t just separate the “energy at the wellhead,” excluding wages, rent, interest payments, and other costs of doing business.

          • We can’t just separate the “energy at the wellhead,”…………..
            Who does that? There is no need. One only has to find a starting point. If the energy returned this year is less than say five years ago, what is the problem, one then asks. What has changed, what am I using more of, what is costing me more and why.
            These are simple questions to answer. If the iron ore is becoming further away from the port, if the quality is falling, using more fuel to transport and refine and blend. More food and accommodation for increased workforce. Those things are intuitive. Anyone should be able to determine just by simple observation that EROI is declining. What need is there to investigate debt, bank fees or the price of under pants.

    • Neils as a bush pilot I have pumped more barrels by hand than most here: 1 barrel is 45 imperial gallons or 50 US and 205 litres – that alters your equation

      • If so: 1 barrel = 205 liters of ‘diesel’ converted into 2050 kwh x 0,4 (efficiency) = 820 kwh x 0,07 USD = USD 57,4

        • Sorry – one more error – my energy converter calculates with kilos not liters, therefore:
          57,4/0,85 = 68 – (one liter of diesel only weights 0,85 kilos)

          Value related to the energy content of one barrel of oil is approx. 68 dollars.
          If one barrel of oil only costs 20 dollars there would be plenty of net energy left to use.

          (The same calculation can be made for coal, you just have to know the average price of one kilo of the coal type used in energy plants.)

        • The unit oil is sold in is called a barrel that is 42 imperial gallons, or about 159 liters, at least in America and Canada. This is likely different than the capacity of an actual physical barrel you buy somewhere, since it is based off the original wooden barrels used in the 19th century, not modern steel or plastic ones.

          It looks like WTI is at around $45, so it actually costs what it is worth! Of course, this is likely below many companies’ production cost.

    • You have figured out why no one in their “right mind” would burn oil for electricity, if oil prices are much above $20 barrel. Back when oil was $20 barrel, your figures suggest that the oil value of electricity at 3.5 cents per kWh (a more reasonable historical price of the fuel component of electricity) was equivalent to $22.4 dollars for a barrel of oil.

        • With these calculations I have made an attempt to find the balance point where the oil from an oil well is self sustaining and so to speak can go on and on paying its own expenses but has no energy left over to other activities (building schools, roads – you name it). In a way this oil well is neutral – or with other words -absolutely futile. If on the other hand a given oil well is ‘satisfied’ with 38 dollars, there will be 30 dollars left to drive other activities (building houses, paying pensions – you name it).
          In a very long period up to 1972 oil prices were quoted at 20 dollars per barrel. At that time the ‘world’ had 68 minus 20 dollars, i.e. 48 dollars, left to drive other activities than paying the expenses for the oil extraction. These 48 dollars are what I call the ‘net energy’ of the oil well. With an oil price of 68 dollars per barrel the net energy is zero. With an oil price of 80 dollars the net energy is minus 12 (the oil well actually sucks money out of the surrounding economic environment). And you are right when you claim that we need very low energy/oil prices to ‘let the world go around’.

          • We can break this down a bit further, to get more accurate numbers.

            “Refineries in the United States produced an average of about 12 gallons of diesel fuel and 19 gallons of gasoline from one barrel (42 gallons) of crude oil in 2013. Many other petroleum products are also refined from crude oil. Refinery yields of individual products vary from month to month as refiners focus operations to meet demand for different products and to maximize profits.”

            One US gallon is about 3.785 liters:

            So there are 12 * 3.785 liters = ~45 liters of diesel and 19 * 3.785 = ~72 liters of gasoline.
            Diesel has about 35.8 MJ/L, Gasoline 32.4 MJ/L:

            (12 * 35.8) + (32.4 * 19) = ~ 1045 MJ. 1 MJ ~= 0.2777777777778 KwH, so 1045 MJ = ~290 KwH.

            Average industrial electricity rates in the USA is 6.65 cents per KwH:

            So the value of all the energy in an average barrel, excluding chemicals used for purposes other than as energy (about 11 US Gallons), is 290 * 6.65 / 100 = $19.29 USD. You can put in your own efficiency estimates. There is a huge premium on diesel and gasoline for their portability, convenience, etc compared to electricity.

          • We really use different kinds of energy products for different things. Energy is a high-value energy product. No reasonable person would use it for electricity production, unless they were on an island, and had no other alternatives.

            EROI calculations mix together low value and high value energy products. Using an equal amount of a low valued energy product (say natural gas) to produce oil is perfectly reasonable. But even using a small quantity of oil to produce a low-valued energy product (such as intermittent wind energy) is of doubtful value. Something gets lost in the calculation.


    For anyone that thought we decadent westerners had changed our colors, seen the light of peak oil and were committed to making a change to EV’s, above is an article about GM putting 877 million into an overhaul of a truck plant. Trucks are big now because fuel is less. When will they ever learn?

    Wow, I wish there was a button to click on that would take posters to the last post instead of getting carpool tunnel syndrome repeatedly hitting the ‘more comments’ button to get to the last comment. No complaints though – got to love this website.

    • “Wow, I wish there was a button to click on that would take posters to the last post instead of getting carpool tunnel syndrome repeatedly hitting the ‘more comments’ button to get to the last comment. No complaints though – got to love this website.”

      Just use e-mail updates, you only get the newest posts.

  6. Just a snippet of how bad the economy is in my area. A local Chevrolet dealership is advertising 0% interest on a 72 month loan. Yikes !

    • No paywall, only free registration required. All of the 8 tested panels have an Energy Pay Back Time (EPBT) less than 2.5 years, although some were as low as half a year, and the lowest at 0.22 of a year. At a glance, it looks like they considered everything from mining the raw ores, transport, processing, all the way to end of life disposal and recycling of the panels. They cover environmental impacts, CO2 emissions, probability and sensitivity as well as the EPBT. It looks like they are using some kind of standardization of Mediterranean conditions for calculations, particularly for the Perovskite panels which seem to still be in the R&D stage.

    • I found this article about the paper you mention. It says,

      “The research team reports the energy payback time for solar panel technology made with perovskites could be as quick as two to three months, easily beating silicon-based panels, which typically need about two years to return the energy investment.

      “People see 11 percent efficiency and assume it’s a better product than something that’s 9 percent efficient,” said Fengqi You, corresponding author on the study and assistant professor of chemical and biological engineering at Northwestern’s McCormick School of Engineering and Applied Science. “But that’s not necessarily true. One needs to take a broad perspective when evaluating solar technology.”

      I will believe it when the installed price comes way down. It needs to be able to produce electricity at something like 4 cents per kWh, including backup.

  7. Dear Finite Worlders
    A highly recommended interview. If you are pressed for time, start at the 39 minute mark:

    This is the story of an MD who has become disgusted with drug based psychiatry. Humans are resilient and tough, and don’t need to be on lithium for decades.

    Most relevant to our Finite World and Collapse concerns, stress results in a restructuring of our psyche which grows us mentally and physically and spiritually. The attempt to avoid stress by drugging the population is disastrous. (See JMG’s blog today for something similar. Also Kelly McGonigal’s book The Upside of Stress, or her TED talk.)

    Don Stewart
    Click on the second interview, Kelly Brogan, MD

    • “The attempt to avoid stress by drugging the population is disastrous. ”

      On the contrary, most of modern society is designed to maximize stress, not to avoid it. This helps drive people to consume more things they don’t need, and spend more on healthcare, and be more readily to submit to authority.

  8. Another article in the Daily Telegraph that proclaims US shale as being a long-term phenomenon that will outlast Saudi Arabia,

    From the article,

    ‘The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells.

    Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.
    It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said.
    The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil.’

    They also use the argument made on here sometimes that even if shale operators go bankrupt someone else will come along and pick up the slack and just start operating the wells starting afresh. Is it really this easy? And will there be a large amount of companies that will try and make a go of shale if others fail?

    It did make me laugh when it states that the Permian basin in Texas could, ‘ could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world.’

    Also I don’t know if Gail or anyone else has heard of this but what is ‘clean fracking’? They state this could be used in China by using plasma pulse technology which would negate the use of water.

    Is this another ‘hopium’ article?

    • One of the issues with fracked oil production is that it is hard to pick up all of the costs (including overhead costs and interest costs). Another issue is that it is difficult to properly forecast how long (or short) the production of each well will last. The way that the companies have justified their high costs is through the use of models that claim the wells will produce profitably for a very long period of time–something like 40 years. They continue to use these models when quoting costs, even though there seems to be little justification for believing in such long well life.

      The ratio of disbursements to revenue in the first quarter of 2015 was 4.15, based on the results of a group of companies. This means that shale companies are bleeding cash badly. But they can use their phony models to show almost anything.

      I know about one method might qualify as “clean fracking,” although I have not heard it referred to in that ways. It seems to be more expensive than the water-based method right now, though, in most applications.

      In the clean method, instead of using water as the fracking fluid, the fluid used is co-produced natural gas from some nearby wells, chilled to make a liquid. If I remember correctly, fewer additives are used as well. (The use of fewer additives may be irrelevant, however.) One of the major things that changes is that there is no flow-back water to dispose of. This water is full of radioactivity and other pollutants, so it is a problem to dispose of. Because there is no flow-back water, presumably any additives stay in the well. The natural gas comes back up again, so there should be no loss of natural gas in the process.

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