Low Oil Prices: Why Worry?

Most people believe that low oil prices are good for the United States, since the discretionary income of consumers will rise. There is the added benefit that Peak Oil must be far off in the distance, since “Peak Oilers” talked about high oil prices. Thus, low oil prices are viewed as an all around benefit.

In fact, nothing could be further from the truth. The Peak Oil story we have been told is wrong. The collapse in oil production comes from oil prices that are too low, not too high. If oil prices or prices of other commodities are too low, production will slow and eventually stop. Growth in the world economy will slow, lowering inflation rates as well as economic growth rates. We encountered this kind of the problem in the 1930s. We seem to be headed in the same direction today. Figure 1, used by Janet Yellen in her September 24 speech, shows a slowing inflation rate for Personal Consumption Expenditures (PCE), thanks to lower energy prices, lower relative import prices, and general “slack” in the economy.

Figure 1. Why has PCE Inflation fallen below 2%? from Janet Yellen speech, September 24, 2015.

Figure 1. “Why has PCE Inflation fallen below 2%?” from Janet Yellen speech, September 24, 2015.

What Janet Yellen is seeing in Figure 1, even though she does not recognize it, is evidence of a slowing world economy. The economy can no longer support energy prices as high as they have been, and they have gradually retreated. Currency relativities have also readjusted, leading to lower prices of imported goods for the United States. Both lower energy prices and lower prices of imported goods contribute to lower inflation rates.

Instead of reaching “Peak Oil” through the limit of high oil prices, we are reaching the opposite limit, sometimes called “Limits to Growth.” Limits to Growth describes the situation when an economy stops growing because the economy cannot handle high energy prices. In many ways, Limits to Growth with low oil prices is worse than Peak Oil with high oil prices. Slowing economic growth leads to commodity prices that can never rebound by very much, or for very long. Thus, this economic malaise leads to a fairly fast cutback in commodity production. It can also lead to massive debt defaults.

Let’s look at some of the pieces of our current predicament.

Part 1. Getting oil prices to rise again to a high level, and stay there, is likely to be difficult. High oil prices tend to lead to economic contraction.  

Figure 2 shows an illustration I made over five years ago:

Figure 1. Chart I made in Feb. 2010, for an article I wrote called, Peak Oil: Looking for the Wrong Symptoms.

Figure 2. Chart made by author in Feb. 2010, for an article called Peak Oil: Looking for the Wrong Symptoms.

Clearly Figure 2 exaggerates some aspects of an oil price change, but it makes an important point. If oil prices rise–even if it is after prices have fallen from a higher level–there is likely to be an adverse impact on our pocketbooks. Our wages (represented by the size of the circles) don’t increase. Fixed expenses, including mortgages and other debt payments, don’t change either. The expenses that do increase in price are oil products, such as gasoline and diesel, and food, since oil is used to create and transport food. When the cost of food and gasoline rises, discretionary spending (in other words, “everything else”) shrinks.

When discretionary spending gets squeezed, layoffs are likely. Waitresses at restaurants may get laid off; workers in the home building and auto manufacturing industries may find their jobs eliminated. Some workers who get laid off from their jobs may default on their loans causing problems for banks as well. We start the cycle of recession and falling oil prices that we should be familiar with, after the crash in oil prices in 2008.

So instead of getting oil prices to rise permanently, at most we get a zigzag effect. Oil prices rise for a while, become hard to maintain, and then fall back again, as recessionary influences tend to reduce the demand for oil and bring the price of oil back down again.

Part 2. The world economy has been held together by increasing debt at ever-lower interest rates for many years. We are reaching limits on this process.

Back in the second half of 2008, oil prices dropped sharply. A number of steps were taken to get the world economy working better again. The US began Quantitative Easing (QE) in late 2008. This helped reduce longer-term interest rates, allowing consumers to better afford homes and cars. Since building cars and homes requires oil (and cars require oil to operate as well), their greater sales could stimulate the economy, and thus help raise demand for oil and other commodities.

Figure 2. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Figure 3. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Following the 2008 crash, there were other stimulus efforts as well. China, in particular, ramped up its debt after 2008, as did many governments around the world. This additional governmental debt led to increased spending on roads and homes. This spending thus added to the demand for oil and helped bring the price of oil back up.

These stimulus effects gradually brought prices up to the $120 per barrel level in 2011. After this, stimulus efforts gradually tapered. Oil prices gradually slid down between 2011 and 2014, as the push for ever-higher debt levels faded. When the US discontinued its QE and China started scaling back on the amount of debt it added in 2014, oil prices began a severe drop, not too different from the way they dropped in 2008.

I reported earlier that the July 2008 crash corresponded with a reduction in debt levels. Both US credit card debt (Fig. 4) and mortgage debt (Fig. 5) decreased at precisely the time of the 2008 price crash.

Figure 3. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data of the Federal Reserve.

Figure 4. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data from the Federal Reserve.

Figure 6. US Mortgage Debt Outstanding, based on Federal Reserve Z1 Report.

Figure 5. US Mortgage Debt Outstanding, based on the Federal Reserve Z1 Report.

At this point, interest rates are at record low levels; they are even negative in some parts of Europe. Interest rates have been falling since 1981.

Figure 6. Chart prepared by St. Louis Fed using data through July 20, 2015.

Figure 6. Chart prepared by the St. Louis Fed using data through July 20, 2015.

I showed in a recent post (How our energy problem leads to a debt collapse problem) that when the cost of oil production is over $20 per barrel, we need ever-higher debt ratios to GDP to produce economic growth. This need for ever-rising debt contributes to our inability to keep commodity prices high enough to satisfy the needs of commodity producers.

Part 3. We are reaching a demographic bottleneck with the “baby boomers” retiring. This demographic bottleneck causes an adverse impact on the demand for commodities.

Demand represents the amount of goods customers can afford. The amount consumers can afford doesn’t necessarily rise endlessly. One of the problems leading to falling demand is falling inflation-adjusted median wages. I have written about this issue previously in How Economic Growth Fails.

Figure 7. Median Inflation-Adjusted Family Income, in chart prepared by Federal Reserve of St. Louis.

Figure 7. Median Inflation-Adjusted Family Income, in chart prepared by the Federal Reserve of St. Louis.

Another part of the problem of falling demand is a falling number of working-age individuals–something I approximate by using estimates of the population aged 20 to 64. Figure 8 shows how the population of these working-age individuals has been changing for the United States, Europe, and Japan.

Figure 8. Annual percentage growth in population aged 20 - 64, based on UN 2015 population estimates.

Figure 8. Annual percentage growth in population aged 20 – 64, based on UN 2015 population estimates.

Figure 8 indicates that Japan’s working age population started shrinking in 1998 and now is shrinking by more than 1.0% per year. Europe’s working age population started shrinking in 2012. The United States’ working age population hasn’t started shrinking, but its rate of growth started slowing in 1999. This slowdown in growth rate is likely part of the reason that labor force participation rates have been falling in the United States since about 1999.

Figure 9. US Labor force participation rate. Chart prepared by Federal Reserve of St. Louis.

Figure 9. US Labor force participation rate. Chart prepared by the Federal Reserve of St. Louis.

When there are fewer workers, the economy has a tendency to shrink. Tax levels to pay for retirees are likely to start increasing. As the ratio of retirees rises, those still working find it increasingly difficult to afford new homes and cars. In fact, if the population of workers aged 20 to 64 is shrinking, there is little need to add new homes for this group; all that is needed is repairs for existing homes. Many retirees aged 65 and over would like their own homes, but providing separate living quarters for this population becomes increasingly unaffordable, as the elderly population becomes greater and greater, relative to the working age population.

Figure 10 shows that the population aged 65 and over already equals 47% of Japan’s working age population. (This fact no doubt explains some of Japan’s recent financial difficulties.) The ratios of the elderly to the working age population are lower for Europe and the United States, but are trending higher. This may be a reason why Germany has been open to adding new immigrants to its population.

Figure 9. Ratio of elderly (age 65+) to working age population (ages 20 to 64) based on UN 2015 population estimates.

Figure 10. Ratio of elderly (age 65+) to working age population (aged 20 to 64) based on UN 2015 population estimates.

For the Most Developed Regions in total (which includes US, Europe, and Japan), the UN projects that those aged 65 and over will equal 50% of those aged 20 to 64 by 2050. China is expected to have a similar percentage of elderly, relative to working age (51%), by 2050. With such a large elderly population, every two people aged 20 to 64 (not all of whom may be working) need to be supporting one person over 65, in addition to the children whom they are supporting.

Demand for commodities comes from workers having income to purchase goods that are made using commodities–things like roads, new houses, new schools, and new factories. Economies that are trying to care for an increasingly large percentage of elderly citizens don’t need a lot of new houses, roads and factories. This lower demand is part of what tends to hold commodity prices down, including oil prices.

Part 4. World oil demand, and in fact, energy demand in general, is now slowing.

If we calculate energy demand based on changes in world consumption, we see a definite pattern of slowing growth (Fig.11). I commented on this slowing growth in my recent post, BP Data Suggests We Are Reaching Peak Energy Demand.

Figure 11. Annual percent change in world oil and energy consumption, based on BP Statistical Review of World Energy 2015 data.

Figure 11. Annual percent change in world oil and energy consumption, based on BP Statistical Review of World Energy 2015 data.

The pattern we are seeing is the one to be expected if the world is entering another recession. Economists may miss this point if they are focused primarily on the GDP indications of the United States.

World economic growth rates are not easily measured. China’s economic growth seems to be slowing now, but this change does not seem to be fully reflected in its recently reported GDP. Rapidly changing financial exchange rates also make the true world economic growth rate harder to discern. Countries whose currencies have dropped relative to the dollar are now less able to buy our goods and services, and are less able to repay dollar denominated debts.

Part 5. The low price problem is now affecting many commodities besides oil. The widespread nature of the problem suggests that the issue is a demand (affordability) problem–something that is hard to fix.

Many people focus only on oil, believing that it is in some way different from other commodities. Unfortunately, nearly all commodities are showing falling prices:

Figure 12. Monthly commodity price index from Commodity Markets Outlook, July 2015. Used under Creative Commons license.

Figure 12. Monthly commodity price index from Commodity Markets Outlook, July 2015. Used under Creative Commons license.

Energy prices stayed high longer than other prices, perhaps because they were in some sense more essential. But now, they have fallen as much as other prices. The fact that commodities tend to move together tends to hold over the longer term, suggesting that demand (driven by growth in debt, working age population, and other factors) underlies many commodity price trends simultaneously.

Figure 13. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank

Figure 13. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank “Pink Sheet” data.

The pattern of many commodities moving together is what we would expect if there were a demand problem leading to low prices. This demand problem would likely reflect several issues:

  • The world economy cannot tolerate high priced energy because of the problem shown in Figure 2. We have increasingly used cheaper debt and larger quantities of debt to cover this basic problem, but are running out of fixes.
  • The cost of producing energy products keeps trending upward, because we extracted the cheap-to-produce oil (and coal and natural gas) first. We have no alternative but to use more expensive-to-produce energy products.
  • Many costs other than energy costs have been trending upward in inflation-adjusted terms, as well. These include fresh water costs, the cost of metal extraction, the cost of mitigating pollution, and the cost of advanced education. All of these tend to squeeze discretionary income in a pattern similar to the problem indicated in Figure 2. Thus, they tend to add to recessionary influences.
  • We are now reaching a working population bottleneck as well, as described in Part 4.

Part 6. Oil prices seem to need to be under $60 barrel, and perhaps under $40 barrel, to encourage demand growth in US, Europe, and Japan. 

If we look at the historical impact of oil prices on consumption for the US, Europe, and Japan combined, we find that whenever oil prices are above $60 per barrel in inflation-adjusted prices, consumption tends to fall. Consumption tends to be flat in the $40 to $60 per barrel range. It is only when prices are in the under $40 per barrel range that consumption has generally risen.

Figure 8. Historical consumption vs price for the United States, Japan, and Europe. Based on a combination of EIA and BP data.

Figure 14. Historical consumption vs. price for the United States, Japan, and Europe. Based on a combination of EIA and BP data.

There is virtually no oil that can be produced in the under $40 barrel range–or even in the under $60 barrel a range, if tax needs of governments are included. Thus, we end up with non-overlapping ranges:

  1. The amount that consumers in advanced economies can afford.
  2. The amount the producers, with their current high-cost structure, actually need.

One issue, with lower oil prices, is, “What kinds of uses do the lower oil prices encourage?” Clearly, no one will build a new factory using oil, unless the price of oil is expected to be sufficiently low over the long-term for this use. Thus, adding industry will likely be difficult, even if the price of oil drops for a few years. We also note that the United States seems to have started losing its industrial production in the 1970s (Fig. 15), as its own oil production fell. Apart from the temporarily greater use of oil in shale drilling, the trend toward off-shoring industrial production will likely continue, regardless of the price of oil.

Figure 15. US per capita energy consumption by sector, based on EIA data.

Figure 15. US per capita energy consumption by sector, based on EIA data. Includes all types of energy, including the amount of fossil fuels that would need to be burned to produce electricity.

If we cannot expect low oil prices to favorably affect the industrial sector, the primary impact of lower oil prices will likely be on the transportation sector. (Little oil is used in the residential and commercial sectors.) Goods shipped by truck will be cheaper to ship. This will make imported goods, which are already cheap (thanks to the rising dollar), cheaper yet. Airlines may be able to add more flights, and this may add some jobs. But more than anything else, lower oil prices will encourage people to drive more miles in personal automobiles and will encourage the use of larger, less fuel-efficient vehicles. These uses are much less beneficial to the economy than adding high-paid industrial jobs.

Part 7. Saudi Arabia is not in a position to help the world with its low price oil problem, even if it wanted to. 

Many of the common beliefs about Saudi Arabia’s oil capacity are of doubtful validity. Saudi Arabia claims to have huge oil reserves, but as a practical matter, its growth in oil production has been modest. Its oil exports are actually down relative to its exports in the 1970s, and relative to the 2005-2006 period.

Figure 16. Saudi Arabia oil production, consumption, and exports, based on BP Statistical Review of World Energy 2015 data.

Figure 16. Saudi Arabia’s oil production, consumption, and exports based on BP Statistical Review of World Energy 2015 data.

Low oil prices are having an adverse impact on the revenues that Saudi Arabia receives for exporting oil. In 2015, Saudi Arabia has so far issued bonds worth $5 billion US$, and plans to issue more to fill the gap in its budget caused by falling oil prices. Saudi Arabia really needs $100+ per barrel oil prices to fund its budget. In fact, nearly all of the other OPEC countries also need $100+ prices to fund their budgets. Saudi Arabia also has a growing population, so it needs rising oil exports just to maintain its 2014 level of exports per capita. Saudi Arabia cannot reduce its exports by 10% to 25% to help the rest of the world. It would lose market share and likely not get it back. Losing market share would permanently leave a “hole” in its budget that could never be refilled.

Saudi Arabia and a number of the other OPEC countries have published “proven reserve” numbers that are widely believed to be inflated. Even if the reserves represent a reasonable outlook for very long term production, there is no way that Saudi oil production can be ramped up greatly, without a large investment of capital–something that is likely not to be available in a low price environment.

In the United States, there is an expectation that when estimates are published, the authors will do their best to produce correct amounts. In the real world, there is a lot of exaggeration that takes place. Most of us have heard about the recent Volkswagen emissions scandal and the uncertainty regarding China’s GDP growth rates. Saudi Arabia, on a monthly basis, does not give truthful oil production numbers to OPEC–OPEC regularly publishes “third party estimates” which are considered more reliable. If Saudi Arabia cannot be trusted to give accurate monthly oil production amounts, why should we believe any other unaudited amounts that it provides?

Part 8. We seem to be at a point where major debt defaults will soon start for oil and other commodities. Once this happens, the resulting layoffs and bank problems will put even more downward pressure on commodity prices.

Wolf Richter has recently written about huge jumps in interest rates that are being forced on some borrowers. Olin Corp., a manufacture of chlor-alkali products, recently attempted to sell $1.5 billion in eight and ten year bonds with yields of 6.5% and 6.75% respectively. Instead, it ended up selling $1.22 billion of bonds with the same maturities, with yields of 9.75% and 10.0% respectively.

Richter also mentions existing bonds of energy companies that are trading at big discounts, indicating that buyers have substantial questions regarding whether the bonds will pay off as expected. Chesapeake Energy, the second largest natural gas driller in the US, has 7% notes due in 2023 that are now trading at 67 cent on the dollar. Halcon Resources has 8.875% notes due in 2021 that are trading at 33.5 cents on the dollar. Lynn Energy has 6.5% notes due in 2021 that are trading at 23 cents on the dollar. Clearly, bond investors think that debt defaults are not far away.

Bloomberg reports:

The latest round of twice-yearly reevaluations is under way, and almost 80 percent of oil and natural gas producers will see a reduction in the maximum amount they can borrow, according to a survey by Haynes and Boone LLP, a law firm with offices in Houston, New York and other cities. Companies’ credit lines will be cut by an average of 39 percent, the survey showed.

Debts of mining companies are also being affected with today’s low prices of metals. Thus, we can expect defaults and cutbacks in areas other than oil and gas, too.

There is a widespread belief that if prices remain low, someone will come along, buy the distressed assets at low prices, and ramp up production as soon as prices rise again. If prices never rise for very long, though, this won’t happen. The bankruptcies that occur will mean the end for that particular resource play. We won’t really be able to get prices back up to where they need to be to extract the resources.

Thus low prices, with no way to get them back up, and no hope of making a profit on extraction, are likely the way we reach limits in a finite world. Because low demand affects all commodities simultaneously, “Limits to Growth” equates to what might be called “Peak Resources” of all kinds, at approximately the same time.

1,093 thoughts on “Low Oil Prices: Why Worry?

  1. Pingback: Deflation statt Inflation: Das andere Gesicht zukünftiger (Energie)Armut

  2. Commodity contagion sparks second credit crisis as investors panic

    Falling commodity prices have caused panic in credit markets and just like 2007 the contagion is spreading

    The collapse in commodity prices has sparked a second credit crisis as investors dump high-yield bonds, shattering the fragile confidence necessary to support global markets. Those calling it a Lehman moment forget their history. Current events have chilling similarities to the Bear Stearns collapse and mark the start of a new crisis, not the end.

    Canary in the mine

    The world of commodity trading has been thrown into chaos as the cost of borrowing to fund operations soars. Glencore has become the poster child for the sector’s woes as its shares have more than halved in value during the past six months. More worrying has been the impact on the group’s credit profile.

    More http://www.telegraph.co.uk/finance/markets/questor/11923223/Commodity-contagion-sparks-second-credit-crisis-as-investors-panic.html

      • Instead of explaining the slump as, “Its structural, its structural, its structural,”the head of OECD should have said, “its lack of rapid growth in very cheap energy products, its lack of rapid growth in very cheap energy products, its lack of rapid growth in very cheap energy products.”

        Perhaps that is structural, but it is not what he is saying.

        • It really is beyond what they have been programmed to think about. They are told the invisible hand of the market will meet all needs. The idea that we might run out of a fundamental input like cheap energy is outside their sphere of possible thoughts.

    • Yawn.

      You’re problem is that you live in reality. You keep insisting that reality matters. I know because I’ve been there but I decided to reconcile myself to fantasy, to the world of politicians, bankers, corporations, the media. Of myths and happy talk, of science fiction, optimism, and human self congratulation. Of technology and kumbaya. Of pretending and the play of words and images.

      It’s more fun! You get to see how the matrix works from the inside and you can play and laugh with it. And you can go to work in air conditioning and chow on carbohydrate foodstuffs when you get home. And if not you can go on food stamps.

      If I have to choose between this, the matrix, and reality (plowing the fields or suffocating in a mine until I drop dead from exhaustion), I choose the matrix.

      • Where you live is determined by mother nature, you have no choice. What you think about on the trip is up to you. I enjoy knowing.

      • ‘We can ignore reality, but we cannot ignore the consequences of ignoring reality.’

        Enjoy Koombaya Land while you can — because reality is going to smash it to pieces….

        A plane can appear to be flying — for awhile — even if the wings and engines have fallen off… but when it inevitably slams into the ground — you get a moment of reality as you look out the window and see the ground approaching at terminal velocity….

        • Don’t get me wrong, I know it’s over. There’s nothing we can do, humanity screwed up big time. America screwed up big time.

          But there’s no life outside of the matrix. I also know this. You have to enjoy the remainder of this fossil fuel life because there’s nothing on the other end, either for future generations or in the grave that awaits us.

          Each of us in our own way is choosing how we will live out the end. Think about the people that get to see the beginning and development of a civilization. It must have been interesting. We get to witness the end. We get to play out the end. This is also interesting in a way.

          • The Elders had a great plan …. brilliant in fact…. they invented democracy to control the sheeple… they took over the media to control the thoughts of the masses ….they took control of the money supply and created the central banks which further entrenched control…. everything was going so smoothly….

            And then they ran out of cheap to extract energy… and now they are racing about squealing like stuck pigs …. because the grand plan is about to be smashed on the rocks… and their response is — print more money….

            Rather amusing …. actually…. the best and the brightest…. acting like rats with their tales on fire….

            I feel a wee touch of schadenfreude

            • “And then they ran out of cheap to extract energy… and now they are racing about squealing like stuck pigs …. because the grand plan is about to be smashed on the rocks… and their response is — print more money….”

              You are hilarious. It is really an EU problem you are trying to project on the US.

              Of the top 10 commodity traders, only 4 are from the US, and only 2 are really involved in Energy and Metal commodities. The two biggest ones, Koch Industries and Cargill, are privately held which aren’t listed on any exchange. Cargill is involved in a lot of Biodiesel and Solar. The Koch brothers, own cattle, paper/pulp, as well. The other two Archer Daniels Midland and Bunge, are almost purely involved in Food and Grain.

              The 5 of 6 are from Europe, and are mostly gas/oil, and metals, like Glencore, Trafigura, Gunvor, Mercuria, Vitol.

              The last one, the Noble Group, is Singapore.

              In otherwords, the EU is in trouble, similar to the Lehman brothers, so what is the EU going to do about it? We know more or less what China is doing.

            • If the economy were growing, as a result of a growing supply of very cheap fuel, none of these commodity traders would be in trouble. So I agree that it is a lack of very cheap fuel that is causing all of these problems–even if they are different types of commodities.

              We are now in a sufficiently interconnected world that a major debt problem one place is a major debt problem everywhere. Supply chains are now worldwide.

            • “If the economy were growing, as a result of a growing supply of very cheap fuel, none of these commodity traders would be in trouble. ”

              I don’t agree. Prices for commodities were too high. It wasn’t a supply/demand problem. They tried to corner the market, which created a bubble. They just weren’t smart enough to realize what they had done and are now over leveraged. (or maybe they did and wanted to crash the EU)

              Then the market reacted by new production from higher cost sources, new alternative technologies, and efficiency. Now the market tanked. It will correct itself. But the companies that are overextended, will most likely crash and burn.

              I don’t know if the EU will bail them out or not.

              The best thing the US can do is try to buffer the impact of the ripple effect when prices go high again.

    • That is a great article. Glencore has been borrowing at an effective interest rate of 4%. Now its interest rate is up to 7.4%, after briefly spiking to 10%. It can’t make money as a commodity trader with that kind of interest rate. Several other companies have the same problem.

  3. How long can Potemkin World continue? It is amazing to me how long it has worked. I guess I will be surprised when it finally breaks.

  4. A few thoughts on gold:

    Why gold is such a symbol of money like no other metal? Because gold is yellow like fire and it shines almost eternally, as it is highly corrosion resistant – exactly like fire. It is this quality of gold, the symbolism of the energy of the fire, that makes people believe in its value as a carrier of energy.

    But what happens when we more and more miss the real energy? The value of gold goes down and down…

    Source: http://www.gcasset.com/chart-perspective-gold-100-year-historical-prices/

    Source: http://inflationdata.com/inflation/Inflation_Rate/Gold_Inflation.asp

    After the Grat Depression, the price of gold was faling until until 1970. Then it started to rise, falling for a while from 1974 to 1976 and then reached its peak in 1980. Then it was falling until 2001. Then it started to rise until 2012. From 2012, it goes down.

    It seams that the energy symbolism of gold can correlate with the world per capita energy consumption:

    Highest per capita oil consumption correlates with the highest price of gold:

    Maybe it is not 100% valid, maybe something needs to be corrected, but I have come to such tentative conclusions…

    • “A few thoughts on gold:”
      oh my! That first graph of gold prices eerily mirrored the 1980 event of when the Hunt brothers tried to corner the silver market. (it also drove gold up, thus the spike on the gold chart.)

      In other words, if you just want to analyze the technicals, It looks like someone like glencore, noble, trafigura, were trying to corner the commodity market.

      The Hunt Brothers went bankrupt because they were over leveraged. Similar to the EU, China commodity traders.

      • Dear kesaro,

        I was just trying to figure out why gold is such a key metal regarding money. That it is its resemblance to fire that makes people subconsciously believe in its power to transfer energy.

        The visual information is more important than words. For many people, the meaning of the words can be easily twisted, they can be misinterpreted, but the photo is unecvivocal. That is why I also presume that the majority who come to this site and read something, do not understand it, and still believe that there is “somebody” who is responsible for the fact that their standard of living is deteriorating, the price of gold is manipulated etc.

        So, I would say, for the simple minded people, the gold can preserve and transfer energy. The problem for them is rather not enough money, than not enough energy. They believe in pictures of the ideals that are still farther and farther from the reality.

        If all people understand what is going on, the value of gold would be much lower.

        • Dear MG,

          In my opinion gold is so precious in so many cultures, because the gold IS the medium of energy transfer. You need a lot of energy to extract and process it currently and even more in the ancient times. And this energy is embedded for eternity. It is “indestructible”. This property made gold so valuable for generations.

          I have ambivalent feelings about gold and silver. Both are totally usless excluding industrial purposes, which will be unavailable after the BAU collapses.

          On the other hand the post-collapse world will need some means of exchange. Barter will be not enough at some point. At the end of the day the value will be what people believe in. Gold might be the currency again at some point. Who knows.

          • Dear Kesaro,

            the medium of energy transfer is the pipe, the wire, the road, the river… The gold is also the medium of energy transfer, as it reflects the light on its surface. Its appearance and the history of use made money of it. The silver also reflects light and is used for production of mirrors. The copper did not rust, so it was used as money, too. More recently came nickel, that is something between silver and copper: not so shiny as silver, but still corrosion-resistant and cheap to produce.

            The cheapest to produced money are electronic money. Thus, the money creation also followed the path of more and more efficiency: from golden to electronic money. Recently, there were no problems with the Greek banks after the people started to withdraw money. The ECB simply sent some electronic money and all was o.k. The use of electronic money was also encouraged that also protected banks from being wihout the money.

            So, the gold is an outdated money. Now, we have mathematics instead of money: when an equation does not work, the central banks simply insert some additional numbers (electronic money) into it and it works again. Until, one day, the system collapses, as the trust can not be created out of nothing…

            And back to the gold: who will sell you anything for gold when the trust will be missing? The trust that you can provide some energy for exchange will be more and more important than money. If you are not trusted to provide energy for exchange, you are an energy sink and no one will care about you…

            • I mostly agree with you, but I am still ambivalent toward gold. Currency is the fabric of trade. It is crucial element of every culture and civilization. People will need money as means of exchange in post-collapse world. Please choose whatever you wish for that role, but gold has many very usefull properties for that purpose. If you see any other, better currency proposals please name them.

            • Dear kesaro,

              my reasoning comes from the situations where the society etc. does not function due to e.g. harsh climate, weak crops, war etc. In such situations, the produced stuff and crops must be distributed according to other key that ownership of money. And that key is mostly energy: if you are important for the survival of the society, you will get more. If you are an energy sink, you wil get little or nothing. This is the base for the creation of the justice. If the society lets die those upon which it is dependent, then the society dies out. It is the same as with the natural resources depletion. The human resources depletion contributes to the fall of the society, too.

              The question is what exactly are the qualities that are needed in the post-collapse world for the survival of individuals and societies? The creation of gold currency needs wood that is better for heating. The protection of gold from stealing needs energy, so it is better not to have any gold, because the burglars can come and not only take your gold, but kill you, too…

            • MG you don’t answer your own/my question. What is the most currency/means of exchange in after-collapse world in your view? Gold has some advantages in this matter IMO. Please propose something more suitable and then we can exchange arguments.

            • Dear kesaro,

              I think that the barter trade will be on the rise, as the industrial production will be declining. The people will try to keep various useful things that will remain from the industrial past and they will not sell these things but rather exchange them for something they need.

              The gold has no practical value in everyday life/as regards the survival, why should anyone keep it? Due to this economization, the presence of the currency will be superfluous. There was a lot of gold burried during the hard times because the people were affraid they will lose it, i.e. during such times it is not safe to have gold (that attracts simple-minded aggresive people).

              The shrinking world lacks the energy, so the mutual help is crucial. The currency is dependent on the states. When the states are collapsing, the currency is collapsing, too. If somebody wants gold for something, then o.k. But if somebody wants e.g. a piece of cloth and has no gold and there is no way form him to earn this gold, so he can offer just his work or something else he has got.

              The main point is that the prevailance of poverty excludes the use of gold or any currency. When the majority of the population are slaves or serfs they do not need currency, as practically nothing can change their life, especially saving money, hoarding gold etc. Their position within the system is firm and clear. They work and somebody else, responsible for them, gives them for their work what they need. This is the view of a stagnating world, as the progress stopped at some level of resource depletion due to the lack of energy for further expansion. That were the Medieval Ages that strived hard to surpass the Roman and Greek civilizations, but practically could not. Only the use of fossil fuels succeded in that…

  5. “Central bank cavalry can no longer save the world”
    (linked in the GlobalResearch article Christian linked to yesterday)

    “By David Chance
    LIMA (Reuters) – In 2008 central banks, led by the Federal Reserve, rode to the rescue of the global financial system. Seven years on and trillions of dollars later they no longer have the answers and may even represent a major risk for the global economy.

    A report by the Group of Thirty, an international body led by former European Central Bank chief Jean-Claude Trichet, warned on Saturday that zero rates and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures.

    “Central banks have described their actions as ‘buying time’ for governments to finally resolve the crisis… But time is wearing on, and (bond) purchases have had their price,” the report said.(…)”

    Are they really as clueless and powerless as they say?
    Maybe their next rabbit is too weird to be pulled off the hat too soon..?

      • Wow! Now that’s a negative article. I hadn’t really thought of Russia’s stepping up in the Middle East as kicking the US out, but that may be exactly what has happened. And if does look like confidence in US currency could be eroding to the point that folk don’t flock to it as they have in the past. I’ve never experienced a pull-back of the markets when the US dollar doesn’t do very well. Since I’m Canadian and Canadians tend to do a great deal of business with the US, I’m trying to work out what a global economic pull-back and a weak US dollar would look like… From the view inside and out of the US.

        • “I hadn’t really thought of Russia’s stepping up in the Middle East as kicking the US out, but that may be exactly what has happened. ”

          I see it more as the US drew Russia in to help with the IS problem. The US pretty much had its hands tied, at the Iraq border because of the UN policies.

          The other trick here is that the Russian economy is tanking, and Russia actually has deep coffers and quite a few assets because of the lack of debt and they need to spend money to prop up their economy. Military spending is usually their method of operation for that.

          To me, the bigger surprise is they announced 175GW of renewable energy was going to be installed which is about the same amount and same time line as India’s 175gw. (most likely more successful at getting it installed too. ). However, India has secured all of the financing, and I am not sure Russia has.

  6. Dear Ed
    You said you want to grow new brain cells. Slightly tongue in cheek, let me point to an outstanding example of the ability to grow brain cells.

    Birds that survive the winter in northern climates can’t count on finding seeds with deep snow on the ground. So some of them hide seeds during the warmer months.

    ‘Colin Saidanha at Lehigh University wondered how a chickadee could remember where it had hidden thousands of seeds months later. The simple question led to an amazing discovery about chickadee brains. In the fall, when chickadees face extraordinary memory challenges, their hippocampus increase its size by 30 percent. The hippocampus is the part of the brain responsible for memory, and by adding anew cells to its mass, it can increase the storage capacity of cache locations. Brains, however, are energy hogs, so in the spring, when insects once again become abundant and chickadees no longer need to think about where they hid their seeds, their hippocampus shrinks back to it normal size.’

    So I guess that a very good solution would be to have some chickadee genes in your lineage.

    Don Stewart

    • Don, I enjoy and learn from your posts on the brain and its chemistry. Likewise on farming but more personal interest on psychology, physiology, culture. I hope you are having as happy and upbeat a day as your post suggests. 🙂

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