Why “supply and demand” doesn’t work for oil

The traditional understanding of supply and demand works in some limited cases–will a manufacturer make red dresses or blue dresses? The manufacturer’s choice doesn’t make much difference to the economic system as a whole, except perhaps in the amount of red and blue dye sold, so it is easy to accommodate.

Figure 1. From Wikipedia: The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

Figure 1. From Wikipedia: The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

A gradual switch in consumer preferences from beef to chicken is also fairly easy to accommodate within the system, as more chicken producers are added and the number of beef producers is reduced. The transition is generally helped by the fact that it takes fewer resources to produce a pound of chicken meat than a pound of beef, so that the spendable income of consumers tends to go farther. Thus, while supply and demand are not independent in this example, a rising percentage of chicken consumption tends to be helpful in increasing the “quantity demanded,” because chicken is more affordable than beef. The lack of independence between supply and demand is in the “helpful” direction. It would be different if chicken were a lot more expensive to produce than beef. Then the quantity demanded would tend to decrease as the shift was increasingly made, putting a fairly quick end to the transition to the higher-priced substitute.

A gradual switch to higher-cost energy products, in a sense, works in the opposite direction to a switch from beef to chicken. Instead of taking fewer resources, it takes more resources, because we extracted the cheapest-to-extract energy products first. It takes more and more humans working in these industries to produce a given number of barrels of oil equivalent, or Btus of energy. The workers are becoming less efficient, but not because of any fault of their own. It is really the processes that are being used that are becoming less efficient–deeper wells, locations in the Arctic and other inhospitable climates, use of new procedures like hydraulic fracturing, use of chemicals for extraction that wouldn’t have been used in the past. The workers may be becoming more efficient at drilling one foot of pipe used for extraction; the problem is that so many more feet need to be drilled for extraction to take place. In addition, so many other steps need to take place that the overall process is becoming less efficient. The return on any kind of investment (human labor, US dollars of investment, steel invested, energy invested) is falling.

For a time, these increasing inefficiencies can be hidden from the system, and the prices of commodities can rise. At some point, however, the price rise becomes too great, and the system can no longer accommodate it. This is the situation we have been running into, most severely since mid-2014 for oil, but also for other commodities, dating back to 2011.

Figure 2. Bloomberg Commodity Index from Bloomberg", reflecting a combination of 22 ETFs in Energy (35%), Agriculture (29%), Industrial Metal (15%), Precious Metals (16%) and Livestock (5%)

Figure 2. Bloomberg Commodity Index from Bloomberg, reflecting a combination of 22 ETFs in Energy (35%), Agriculture (29%), Industrial Metal (15%), Precious Metals (16%) and Livestock (5%)

The higher cost of producing oil and other energy products affects the economy more than a shift from chicken to beef.  

The economy is in a sense more dependent on energy products than it is on our decision whether to eat chicken or beef. If the cost of producing oil rises, and that higher cost is carried through to prices, it affects the prices of many things. It affects the cost of food production because oil is used in the production and transport of food. The higher cost of oil also affects nearly all transported goods, since oil is our primary transportation fuel.

Some of the impacts of higher oil prices are clearly adverse for the economy.

If higher oil costs are passed on to consumers as higher prices, these higher prices make goods less affordable for consumers. As a result, they cut back on purchases, often leading to layoffs in discretionary sectors, and recession.

The higher cost of oil products (or of other energy products) also tends to reduce profits for businesses, unless they can find workarounds to keep costs down. Otherwise, businesses find themselves in a situation where customers cut back on purchasing their products. As we will discuss in a later section, this tends to lead to reduced wages.

Some of the impacts of higher oil prices are somewhat positive.

Rising oil prices clearly encourage rising oil production. With this, more jobs are added, both in the United States and elsewhere. More debt is added to extract this oil, and more equipment is purchased, thus stimulating industries that support oil production. The value of oil leases and oil properties tends to rise.

As noted previously, the cost of food supply depends on oil prices. The cost of producing metals also depends on oil prices, because oil is used in extracting metal ores. As the prices of metals and foods rise, these industries are stimulated as well. Values of mines rise, as do values of agricultural land. More debt is taken out, and more workers are hired. More equipment is purchased for producing these products, adding yet more stimulation to the economy.

The higher price of oil also favorably affects the many countries that extract oil. Part of this effect comes from the wages that the workers receive, and the impact these wages have, as they cycle through the economy. For example, workers will often want new homes, and the purchase of these new homes will add jobs as well.  Part of the effect comes through taxes on oil production. Oil production tends to be very highly taxed, especially in parts of the world where oil extraction can be performed cheaply. This tax money can be put to work in public works programs, providing better schools and hospitals, and more jobs for citizens.

It is inevitable that the price of oil must stop rising at some point because of the adverse impact on spendable income of consumers.

The adverse impact of higher oil prices on the spendable income of consumers comes in many ways. Perhaps one of the biggest impacts, but the least obvious, is the “push” the higher cost of oil gives to moving manufacturing to locations with lower costs (cheaper fuel, such as coal, and lower wages), because without such a change, higher oil prices tend to lead to lower profits for many makers of goods and services, as mentioned previously.

The competition with lower-wage areas tends to reduce wages in the US and parts of Europe. This push is especially great for jobs that are easily transferred to other countries, such as jobs in manufacturing, “call-centers,” and computer tech support.

Another way businesses can maintain their profit levels, despite higher oil costs, is through greater automation. This automation reduces the number of jobs directly. Automation may use some oil, but because the cost of human labor is so high, it still reduces costs overall.

All of these effects lead to fewer jobs and lower wages, especially in the traditionally higher-wage countries. In a sense, what we are seeing is lower productivity of human labor feeding back as lower wages, if we think of the distribution of wages as being a worldwide wage distribution, including workers in places such as China and India.

Normally, greater productivity feeds back as higher wages, and higher wages help stimulate higher economic growth. Lower wages unfortunately seem to feed back in the reverse direction–less demand for goods that use energy in their production, such as new homes and cars. Ultimately, this seems to lead to economic contraction, and lower commodity prices. This is especially the case in the countries with the most wage loss.

The drop in oil prices doesn’t do very much to stop oil production.

Oil exporting countries typically have relatively low costs of production, but very high taxes. These taxes are necessary, because governments of oil exporters tend to be very dependent on oil companies for tax revenue. If the price of oil drops, the most adverse impact may be on tax revenue. As long as the price is high enough that it leads to the collection of some tax revenue, production will take place–in fact, production may even be increased. The government desperately needs the tax revenue.

Even oil companies in oil-importing countries have a need for revenue to pay back debt and to continue to pay their trained workers. Thus, these companies will continue to extract oil to the best of their ability. They will aim for the “sweet spots”–places that have better than average prospects for production. In some cases, companies will have derivative contracts that assure them of a high oil price for several months after the price drops, so there is no need to reduce production very quickly.

The drop in oil prices, and of commodity prices in general, makes debt harder to repay and discourages adding new debt. 

We earlier noted that a rise in the price of commodities tends to make asset prices rise, making it easier to take out more debt, and thus stimulates the economy. A drop in the price of oil or other commodities does the opposite: it reduces asset prices, such as the price of the property containing the oil, or the farmland now producing less-expensive food. The amount of outstanding debt does not decline. Because of this mismatch, companies quickly find themselves with debt problems, especially if they need to take out additional loans for production to continue.

Another part of the problem is that on the way up, rising prices of oil and other commodities helped lift inflation rates, making debt easier to repay. On the way down, we get exactly the opposite effect–falling oil and other commodity prices lead to falling inflation rates, making debt more difficult to repay. Commodity prices in general have been falling since early 2011, leading to the situation where interest rates are now negative in some European countries.

The costs of producing commodities continue to rise, as a result of diminishing returns, so this fall in prices is clearly a problem. Low prices make future production unprofitable; it also leads to an increasing number of debt defaults. There are many examples of companies in financial difficulty; Chesapeake Energy is an example in the oil and gas industry.

Where oil supply and demand goes from here

The traditional view of the impact of low oil prices seems to be, “It is just another cycle.” Or, “The cure for low prices is low prices.”

I am doubtful that either of these views is right. Falling prices have been a problem for a wide range of commodities since 2011 (Figure 2, above). The Wall Street Journal reported that as early as 2013, when oil prices were still above $100 per barrel, none of the world’s “super major” oil companies covered its dividends with cash flow. Thus, if prices are to be sufficiently high that oil companies don’t need to keep going deeper into debt, a price of well over $100 per barrel is needed. We would need an oil price close to triple its current level. This would be a major challenge, especially if prices of other commodities also need to rise because production costs are higher than current prices.

We are familiar with illnesses: sometimes people bounce back; sometimes they don’t. Instead of expecting oil prices to bounce back, we should think of the current cycle as being different from past cycles because it relates to diminishing returns–in other words, the rising cost of production, because we extracted the cheapest-to-extract oil first. Trying to substitute oil that is high in cost to produce, for oil that is low in cost to produce, seems to bring on a fatal illness for the economy.

Because of the differing underlying cause compared to prior low-price cycles, we should expect oil prices to fall, perhaps to $20 per barrel or below, without much of a price recovery. We are now encountering the feared “Peak Oil,” because much of the cheap oil has already been extracted. Peak Oil doesn’t behave the way most people expected, though. The economy is a networked system, with high oil prices adversely affecting both wages and economic growth. Because of this, the symptoms of Peak Oil are the opposite of what most people have imagined: they are falling demand and prices below the cost of production.

If low prices don’t rise sufficiently, they can cut off oil production quite quickly–more quickly than high prices. The strategy of selling assets at depressed prices to new operators will have limited success, because much higher prices are needed to allow new operators to be successful.

Perhaps the most serious near-term problem from continued low prices is the likelihood of rising debt defaults. These debt defaults can be expected to have a very adverse impact on banks, pension plans, and insurance companies. Governments would likely have little ability to bail out these organizations because of the widespread nature of the problem and also because of their own high debt levels. As a result, the losses incurred by financial institutions seem likely be passed on to businesses and individual citizens, in one way or another.

 

 

 

 

 

 

 

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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1,389 Responses to Why “supply and demand” doesn’t work for oil

  1. Don Stewart says:

    Dear Finite Worlders
    A thoughtful article by a small farmer in Britain, who has appointed himself God for a day and redesigned British Agriculture.

    http://www.resilience.org/stories/2015-11-24/of-pigs-peasants-and-pastoralists

    In Gail’s previous post, I noted that Albert Bates now thinks the world can feed itself ‘organically’, but part of his optimism arises from the fact that he has gotten meat and dairy almost completely out of his diet. You will see that this author reduces the meat allotment per person in Britain by about 90 percent. He also multiplies the number of farmers by 10.

    Since one of Gail’s dominant motifs is that ‘we can’t get from here to there’, I’ll spend a little time on that subject. I agree with the author that quite a bit of the ‘grass fed beef’ business is made up of rich people wanting to eat food that doesn’t poison them. However, taking Joel Salatin’s farm as an example: Fifty years ago it was a worn out piece of land with huge gullies which wouldn’t support much of anything agricultural, and there is no doubt that his methods which used animals to restore fertility were effective. So one thought to keep in mind is that animals may be quite useful as a transition mechanism. Once we again have fertile land, we can decide whether the land needs to continue with animals or may be converted to lower on the food chain human crops. By ‘we deciding’, I mean that the particular farmer will respond to market signals. If potatoes pay better than cows, then the farmer will grow potatoes. If governments want more potatoes and less beef, then they may need to intervene in the market.

    The author also supports the notion that crops should be grown without herbicides and pesticides and with minimal tillage. My ideas are somewhat different. I worry a great deal about the efficiency of using small farms to grow garden crops. The author makes a joke about the city condominium dwellers being responsible for their own transportation. I think the thing that makes sense is that most garden crops are grown in gardens. So transportation of perishables and refrigeration are minimized. But several things will have to happen to make gardens the default solution. First, people are going to have to come to the conclusion that growing their garden veggies, or buying from a local gardener, is a lot more sensible than driving somewhere to buy them…or eating a steady diet of junk food. Hard times have a way of changing minds..

    Second, some NGOs need to make a serious effort in terms of gardening. See this link:
    http://www.groundswellinternational.org/sustainable-development/western-north-carolina/growing-food-where-people-live-in-polk-county-nc/
    Take a look at the pictures and you see so much that must seem inexplicable to someone in Haiti…where this organization also works. The housing in this ‘slum’ must look unbelievably luxurious to someone who has a dirt floor. Yet this is one of the poorest counties in North Carolina, with poor health and welfare indicators. You will see the excavator making the garden near the street. This program has been successful beyond the expectations of the NGO, perhaps because the NGO has a person responsible for follow up. Many of these gardens have been started and abandoned in other places.

    Third, governments will have to realize that there is no alternative (I hope Maggie Thatcher is turning in her grave!). That it’s best to use the excavators now while we still have them. That soil takes some time and work to regain fertility and Monsanto and company have zero to contribute to that project. That many of the boosters which help soil begin to recover are the products of industrial civilization, and things will get harder and the regenerative cycle longer if that industrial civilization falters. So rather than measure GDP, our governments need to measure soil and water quality and carbon sequestration.

    Fourth, that debts cannot be allowed to determine the course of productive activity. I saw a recent guesstimate that one third of the debts in the world cannot be repaid. The other two thirds also cannot all be repaid, I think, without warping what we are doing economically. So we need to get to a regenerative agriculture, and we need to get debt driven decisions out of that process. It is hard enough from a purely physical and biological standpoint, without having the bankers and the bankruptcy court involved. I see no alternative except for government intervention….or the collapse of governments. Government collapse brings its own problems. We can look with horror at Syria and Yemen and other places the West has ‘improved’.

    I could write much more on this subject, but I think this is enough to suggest some of the issues. If the suggestions for government initiatives seem hopelessly naive, then Lifeboats are the only alternative I can think of.

    Don Stewart

    • Javier says:

      All life on this planet has existed in somewhat of a steady state form of existence plus evolution for millions of years, the peaks and troughs due to population growth within species aside.

      On the whole, all other species do not consume more resources than they need for their basic survival. Human beings are an anomaly. Our bigger brains lead to greed and over-consumption and that will be the cause of our downfall.

      Even if we carrried out a life or death push for radical downsizing across developed nations, it would still result in massive population decline. There appears to be no way around the crunch.

      And I highly doubt that govts will be managing any such endeavour because they’ll be too busy keeping up appearances to the bitter end. And by then, it’ll be too late to reorganise into anything useful. When it comes to it they will hoard what they can for themselves. They should have started down this road many years ago. Instead, they continue to go to war over resources.

      But I like the idea of a baseline steady state way of life with a greater focus and allocation of resources to rational development. The only problem is that this would require a level of dictatorship that people are not comfortable with. You would have to invest heavily in indoctrination (North Korea style) for a baseline fair distribution to be established. A few billion could eke out a life with minimum standard of living. Surplus resources dedicated to technological advances, but something tells me this is not the way optimal progress happens. Probably invloves messy dynamics, black swans, serendipity more than strictly organised systems.

      And even then, instinct would rear its ugly head as some members of the commune deem themselves more worthy than others. This is the problem with gift economies too. You’d be back to capitalistic inequality in a heartbeat because… humans.

      • Fast Eddy says:

        Your post reminded me of a situation in which a government forced a nation back to a primitive state…. a 100% agrarian state… with little or no technology … where anyone exhibiting modernity including wearing eye glasses… was shot dead.

        Let’s take a glimpse into one possible future — not one where populations are denied technology … one where it is simply not available because there will be no energy….

        Or perhaps a future where anyone who dares to pursue any form of progress is put to death — because progress is known to have resulted in the Apocalypse.

        Forget The Road….

        I give you … Year Zero – Kampuchea:

        Concept:

        The idea behind Year Zero is that all culture and traditions within a society must be completely destroyed or discarded and a new revolutionary culture must replace it, starting from scratch. All history of a nation or people before Year Zero is deemed largely irrelevant, as it will ideally be purged and replaced from the ground up.

        In Cambodia, so-called New People – teachers, artists, and intellectuals were especially singled out and executed during the purges accompanying Year Zero.

        https://en.wikipedia.org/wiki/Year_Zero_%28political_notion%29

        Do we need some revision on Pol Pot?

        Was he the only leader who saw the future and was attempting to prepare his people for a world without oil?

        • Greg Machala says:

          I hate to admit it but I believe the only way forward with any chance of survival is under a dictatorship. Too much free will creates aspirations, friction, greed and all the other human nasties that cause problems. Freedom sounds good and works (somewhat) when energy and resources are abundant. But, freedom falls on its face when resources and energy become scarce. When there is scarcity, someone has to be in a position of ultimate power to make the tough decisions of who lives, who works and who dies so society as a whole has a chance for survival. It seems barbaric but, so goes life in the real world.

          • Fast Eddy says:

            If progress is designated public enemy number one….

            Then why not have an IQ test at the age of 5 … anyone scoring over 85 gets sent to the gladiator ring to fight other high IQ individuals

            What a great way to eliminate all bankers and lawyers — I am sure I could get elected as King of Idiot World on that platform 🙂

            Or they get a wack in the head with a shovel as many times as necessary to knock them down to the desired IQ level…

            Whatever it takes.

            • “Or they get a wack in the head with a shovel as many times as necessary to knock them down to the desired IQ level…

              Whatever it takes.”

              In Aldous Huxley’s Brave New World, they dosed the babies with alcohol in order to create the desired number of infants at each desired intelligence level. But then, they made the babies in labs and controlled population as well.

          • Ed says:

            So, North Korea leads the way. They live within their means and when they do not they starve the poor while maintaining the political and military.

          • unfortunately a dictatorship requires a dictator
            dictators need help
            In 1933 Hitler promised dictatorship–and that’s what the Germans got—another ponzi scheme. He created the SS to do his dirty work—as far as i know, Hitler never went near a concentration camp. there’s never a shortage of willing help in that respect.
            The German elite lived well–the rest of Europe–particularly eastern Europe did not.
            I fear that a future dictatorships, particularly in the USA will be theo-fascist. In a country in which half the people believe the world is 6000 years old are highly likely to vote into office a godbothering nutcase (check current candidates) who promises a return of the American dream (cue the 1000 year Reich)—it’s all happened before folks.

            • Greg Machala says:

              Yes it is very depressing how cult-ish, ignorant and gullible people can be. We are social creatures but it seems (if we are left to our own devices) we tend to form some barbaric and primitive social structures. Periods we see as dark ages seem to more the norm than the exception.

            • “Yes it is very depressing how cult-ish, ignorant and gullible people can be. ”

              There are 100 men in a room. The air supply is suddenly reduced so that only 60 men may live. What happens? What should happen? Should they draw lots, have a vote? Is there time? Or do they divide into two groups and fight until there are only 60 men? Does the fighting reduce the air supply so that only 50 men may live? Do they divide based on skin color, language, religion, or whether they are wearing red or blue clothes? Is the religion or skin color the cause of the conflict, or merely the justification for why one group killed the other?

            • Hierarchical behavior seems to be the way that humans and other species determine who will live. The ones at bottom are most likely to catch illnesses if nothing else. There is research about this kind of thing–Craig Dilworth in “Too Smart for Our Own Good: The Ecological Predicament of Mankind.”

              I talk somewhat about this in Human Population Overshoot–What Went Wrong.

          • You may have a point. The population doesn’t really understand what the issues are—just want it better. If there are cheap energy resources to make things better, that works, but not otherwise.

          • FinalCountdown says:

            Tribal cultures were humankinds greatest achievment but a benevolent king is not far behind.

    • I eat very little meat myself. I perhaps could have used beef => chicken => vegetables in my article. People who don’t eat a lot of meat seem to live longer–but I am not sure that that is necessarily helpful.

      • Stilgar Wilcox says:

        Here’s a healthy recipe. Take an onion pita pocket bought at the bakery dept. in the store and warm it up, then put in some fat free cream cheese, sliced red onion, avocado, soy based phony hamburger meat, and put in some 50/50 organic lettuce. It’s quite tasty and very healthy.

      • FinalCountdown says:

        I eat meat very sparingly too. When I find a deer by the side of the road thats still warm. Thats about 6 months worth for me. I often do hard physical labor. I cant seem to keep the strength needed without a bit of meat.

        • There are differences in people’s energy consumption–also probably in what men need to eat versus women.

          I eat quite a bit of nuts. Also milk, eggs, cheese. Where you are, those things may be less available.

  2. richard says:

    Thanks Gail, another thoughtful article.
    I can maybe add a couple of points: Your last paragraph mentions the knock on effects. I recently listened to a young woman working in the pensions industry. She has no expectation that the financail services industry will provide her with a viable pension when she retires. That is a potential huge hole for government credibility.
    The second point is that much of your focus is the oil price in dollars. Some resource economies are doing well enough because their currency is devalued in reference to the dollar. Just sayin’

  3. Rodster says:

    Global debt defaults near milestone http://www.ft.com/cms/s/0/40146b80-91bf-11e5-94e6-c5413829caa5.html

    “Global debt markets are on the cusp of an unwelcome development with the number of companies defaulting on their obligations set to reach the century mark, driven largely by struggling US shale gas providers.

    Currently, 99 global companies have defaulted since the year began, the second greatest tally in more than a decade and only exceeded by the financial crisis which saw 222 defaults in 2009, according to Standard & Poor’s. US companies account for 62 of this year’s defaults.”

  4. Stefeun says:

    Economists should forget about money and prices.
    This is not economics, only mere chrematistics (https://en.m.wikipedia.org/wiki/Chrematistics), and certainly not a science.

    Real economy is about physical flows, and about the way/speed at which we’re using/depleting/destroying our resources, both renewable and non-renewable ones.
    Debt increase and other Ponzis are only slightly delaying the outcome.

    • Greg Machala says:

      Yes but the smoke and mirrors really does lull the vast majority of proles into believing that the metrics which they live their lives by are very real and based on solid science. Electricity was discovered and is now a normal thing that is to be expected without question in every home. Smart phones will always get smarter every year (and the people that use them, dumber?). Once a road is made 8 lanes wide it will never need to be rebuilt and it will permanently solve traffic congestion. Oil just re-creates itself like magic as we burn it; the cost of oil should therefore never rise. Technology has increased exponentially and will continue to do so forever. Taking ones daughters to ballet and their son to soccer practice is “normal” and the Lexus SUV is the way to do it as a sign of success. Going to college and getting a degree will bring one a good income and stable life filled with stuff that’s valuable. Computers will always be more powerful every year (it is a law of nature). Cars will always get better mileage every year (it is a law of nature). Green energy is here and everything is looking so bright. Cars are normal, natural things that will always be. Buying a home with trans-generational architectural cues on the facade is a sign of wealth. Buying a home with granite counter tops, towel warmers and exotic stone tile floors is a worthy goal because you saw it on TV show in HD no less. That homes will always appreciate in value in the long term. A Lexus is better than a Chevrolet for status. A Chevrolet is better than a horse. Things will always just get better if we can continue to study and understand this thing we call Economics. Perhaps the next step is Quantum-Economics. That should bridge the gap between Theoretical Economics and Relative Economics (sounds so real doesn’t it).

  5. Fast Eddy says:

    How interesting …. inflation appears to be dead…. the pig gets another coat of Mabelline…

    That pig is startin to look real perty to Joe Sixpack down there in the basement with no money to take Jenny Sue out to dinner….

    http://www.bloomberg.com/news/articles/2015-11-24/go-ahead-sell-the-peso-mexico-doesn-t-care-what-you-do-anymore

    • Stilgar Wilcox says:

      “inflation appears to be dead”

      Please tell our homeowners association that (9% increase), water/sewer (up 50%), food bill up 14%, property tax up, county up with a new separate annual bill of 242. for fire protection, electricity up 15%, healthcare up 18% all in 2015.

      Even though commodities may be down, we the consumer are not feeling it except maybe at the fuel pump or when we get a tank full of propane. Those are cheaper but they do not make up for the increases noted above.

      One thing you can be sure of in this world, most people and their businesses are doing everything they can to become millionaires/billionaires.

  6. Stilgar Wilcox says:

    The following is a condensed version of Ron’s latest post:

    http://peakoilbarrel.com/a-surprising-look-at-oil-consumption/#more-10261

    He writes that oil consumption up thru 2014 (no 2015 data yet) by country gives us an indication of economic activity. The higher the consumption, the greater the economic activity. Here is a summary of the different parts of the world and their consumption patterns:

    Middle East: UP & still going up
    China: UP historically by 6.5% per annum, but leveled off recently
    Russia: Up slightly, but FSU (formers soviet union countries) leveled off
    Europe: DOWN sharply
    US: Down from historical high, but up slightly recently (not as affected by recession as the EU)
    Mexico: Down
    Japan: Down

    The following is his summation:

    “My comment: The recent decline in oil prices had at least as much to do with falling consumption as it did rising production. We don’t yet have consumption numbers for 2015 yet but from the build in inventories it does not look like that consumption has improved significantly.

    With China’s economic growth slowing it looks like world oil consumption will get worse before it gets better. This is one reason I expect oil prices to stay low for quite a while longer.”

    That’s an interesting look at the world economy from a standpoint of oil consumption. His comment that “oil prices had at least as much to do with falling consumption as it did rising production”, is noteworthy as we can see what parts of the world have falling consumption and their resultant effect on price.

    Yesterday I predicted once over supply depletes price will rise once again to 70-80 a barrel. I still hold to that because in 2015 dollars 40 something for a barrel of oil is relatively low, and given some more time for that lower price to influence economic activity positively, I think world GDP will rise and with it consumption and the price of oil. But we shall see what happens…

    • Stilgar Wilcox says:

      https://research.stlouisfed.org/fred2/series/M12MTVUSM227NFWA

      That’s a graph showing US miles driven rising sharply since 2011. So apparently US consumption is UP. But that’s not a surprise to me as everywhere we go on the roads lately (at least in CA) the traffic density is way up. People get out and about when fuel is less and spend more.

      As an example of this, my wife and I have been going on long day trips because of the low price of fuel. Apparently others are doing the same.

    • I am always suspicious that the agencies don’t have a good split between the current production-demand problem. My view is similar to Ron’s– a big piece of the problem is demand. BP does give oil consumption growth for 2014 for several countries/ groups that Ron didn’t show (for 2014).

      It shows Mexico -5.0% (2014 vs 2013 for oil consumption)
      Former Soviet Union 0.3% (I wonder what 2015 % change looks like-a lot lower, I would expect)

      China +3.3% (down from 4.3% prior year; 4.9% two years prior) And I am sure 2015% change is lower yet

      Total Africa is +4.2% –It is hard to imagine the increase is as great in 2015, if commodity prices are down

      Equador +4.7% for 2014 over 2013. Has to be lower this year.

      • Harry Gibbs says:

        Ecuador’s situation has rather flown under my radar, especially with Brazil garnering all the headlines, but I came across this interesting little interview today:

        “After a year of record-low oil prices, Ecuador’s government has lost close to 50 percent of its revenue… For Ecuadorians, all of this anxiety over the future is particularly distressing because until recently, things were pretty good here. Ecuador was a beacon of stability compared to some of its other oil-rich neighbors like Venezuela. Billions were spent on new airports, schools, hospitals and an impressive new highway system crisscrossing the Andes. Analysts now say the one thing Ecuador forgot to do was save money for the bust.”

        http://www.npr.org/2015/11/25/457415531/ecuadors-oil-bust-draws-parallels-to-1990s-financial-crisis

        • I visited Ecuador a few years ago, to see the shakedown that the government was attempting of Chevron–they were having financial problems early on. I became aware of the situation then. More recently, Ecuador has been getting oil related loans from China, just as Venezuela. The leaders of Ecuador and Venezuela have been friends in the recent past. Many people don’t connect the problems of the two countries.

        • Fast Eddy says:

          Wonder how they service these debts…

          This raises the question of what are the central banks doing behind the scenes — are we seeing only the tip of the iceberg in terms of how much funding it being dished out to prevent the first domino from falling?

          What about companies like Glencore and Noble Group — how are they not imploding? How are they not being downgraded to junk status?

          I suspect the invisible hand is everywhere….

  7. Stilgar Wilcox says:

    http://www.zerohedge.com/news/2015-11-24/trump-waterboarding-you-bet-your-ass-id-approve-it-even-if-it-doesnt-work

    I mentioned in an earlier post people were desperate and that could be seen in the interest in Trump, which I described as a fascist. Well the article above certifies that description as accurate. Trump in an interview today said he would reinstate waterboarding and would use it even if it didn’t work because those kind of people deserve it. Does anyone know what waterboarding is? They force someone on to their back, hold down their arm and legs, put a wet rag in their mouth then pour water on to the rag. That initiates a gag response that keeps happening until the water stops being poured. It’s torture. Anyone who has ever gagged on something they ate, we all know the feeling. Imagine hours of that feeling. That’s waterboarding. Any political candidate advocating such a tactic is a fascist. Should be an interesting election.

    • Ed says:

      I would call them sadists.

    • jphsd says:

      As push comes to shove, we need to beware the charismatic charlatans who promise a return to the golden days. JMG over at Archdruid Report has a few posts on this topic.

      • Stilgar Wilcox says:

        Agreed Ed, sadists.

        jphsd, no doubt, as history is replete with examples of people voting in the like’s of Mussolini/Hitler when things are not as good as they once were. What they don’t realize is things can get a lot worse in a hurry with the wrong leader.

    • Fast Eddy says:

      trump-waterboarding-you-bet-your-ass-id-approve-it-even-if-it-doesnt-work…..

      That’s actually pretty funny (if you don’t think about the implications)….

      I am all for a Trump presidency — in times like this we need a court jester…. if he does win it’s because the Elders concur — they want to be entertained as we sink into the morass…

      For those of you aghast that I would vote for Trump if I were American — don’t fret — it’s not as if the presidency has any power…. he’s a stooge… these are the types calling the shots

    • Stilgar Wilcox says:

      And low and behold, just a day or so after posting an opinion post about Trump being a fascist, here’s an article today on the very subject:

      http://www.csmonitor.com/USA/Politics/Decoder/2015/1125/Is-Donald-Trump-really-a-fascist

      “Is Donald Trump really a ‘fascist?’
      Some in the GOP are beginning to use the term – evocative of the dictatorships of World War II – to describe the billionaire presidential hopeful.

      That’s the (loaded) word some in the GOP are beginning to use to describe the billionaire presidential hopeful. It seems his recent nativist statements – including his apparent endorsement of a national registry for Muslims in the US, and support for the surveillance of mosques – have pushed Republicans who think Trump is unelectable over the edge.”

      • Fast Eddy says:

        After Bush the angry proles wanted change…. the Elders gave them Obama…. after Obama they appear to want a fascist…. if that is correct then the Elders will give them Trump.

        Don Draper takes the pulse —- and reports back to his masters….

        • Stilgar Wilcox says:

          What caught my attention was the historical significance of a fascist candidate. Hitler and Mussolini were voted in when things were going bad for both of those countries, much like many Americans now feel things are going bad for them. What these people don’t realize is it’s diminishing returns that is giving them that indigestion of the monetary type.

          Is a fascist candidate simply a sign of the times? Are the people becoming frustrated and angry, thus seeking a fascist to play out their feelings? Will war follow? It did in WWII. A lot of people have predicted hard times due to peak oil would lead to war. We shall see if Trump gets elected and what follows during his presidency.

          • MJ says:

            Also, both Mussolini and Hitler were viewed in the context of being “clowns”, not to be taken too seriously and of extreme views that would provide stability and “order”, in a world of danger and uncertainty. Trump is looked in the same manner, and fascinating how History is repeating itself.
            I suppose the rationale is the Congress will “control” him if elected with the Supreme Court if needed.
            I personally believe he is just a prop to open the way for another similar figure to step in those shoes.
            It is just a manner of time. Democracy only fictions in a society of asic abundance and educated citizens, both lacking.

        • InAlaska says:

          Donald Trump has never polled higher than 25% among Republican primary voters. That is less than 10% of the total American voting public. He will never win a general election. Your “Elders” are a fantasy.

  8. dolph9 says:

    This is a duplicate post but the first didn’t post correctly. You know I had a revelation today. I realized this collapse is going to be really slow. Painfully slow. In historical terms, fast, but in our terms, slow.

    Does it depress me? You bet it does. I’m as excited about collapse as anybody, there are many aspects of this modern world that I despise. But I realized that they won…modern man won. We have been absolutely obliterated by the world of play, images, media and fantasy. The world of the screen. And of government and corporate propaganda. Reality and those of us who deal with reality have lost.

    It’s a bit like growing into an old curmudgeon and looking back on missed opportunities, or, say, always being the bridesmaid, never the bride. I just sort of realized today that it’s all BS. Everything. Truth doesn’t matter. Nothing we are talking about at this blog matters. I guarantee nobody will ever be interested in what we have to say. And the thing about BS is…it never runs out. The human capacity to produce and live with BS is infinite. By a long distance, the major economic activity the world over is the endless production and consumption of meaningless, repetitive BS.

    You think this is going to change now? Guess again! It all can be produced at lower levels and endlessly recycled.

    Whatever truth is, people despise it. They just aren’t interested, not now, not 50 years from now. All everybody wants is food, sex, and entertainment, to be “social” and share the details of their pathetic lives with each other. That’s it. That’s all industrial civilization needs to provide. We don’t need any more expansion, exploration, or discovery. We don’t need to reach for the stars, we don’t need growth. We need just enough fuels to provide food and distractions to people.

    And you and I are the ones that made this possible. We did the right thing, we worked, we were honest, we were solid and dependable. And we did this for “humanity” and the “children” etc. We believed in America, we believed in the world, we payed our taxes, we swallowed this hook line and sinker. And guess what, now the children are all grown up and they are looking to kill us off and enjoy what we once did. They are mad as hell and they aren’t going to take it anymore! They want their 15 minutes of fame and they will get it. That’s what all this “black lives matter” nonsense in America is about, for example. They don’t want dignity, or work, or to be left alone by cops. They want money and fame. They want to be seen, even if it’s with their clothes off. Same with the Donald Trump clowns. Same with virtually everybody who works in the media. Everybody wants the same thing…look at me, I exist! Point the video cameras at me and post it on the internet! I count, I’m precious, I’m a star! What I look like, and whatever drivel comes out of my mouth, is important! And this is true even as the actual importance of people has never been lower.

    It’s too late to change this, this has occurred by the very development of our systems. And it wasn’t going to end any other way, was it? I mean, think clearly on this. The end result of all human activity was always going to be the saturation of trivia and BS. It wasn’t going to be truth, or beauty, or science, or art, or erudition, or peace, or humility, or sustainability, or any of that nonsense. Let’s be honest, those things never had a chance.

    And let’s be honest…everybody here is wishing for collapse and I don’t blame you. I understand where it comes from. You want to be rid of the BS. But it’s not going to happen, might as well accept it.

  9. Fast Eddy says:

    Deere and Co. reports its earnings. The agricultural equipment producer is expected to post lower sales than last year by almost $2 billion, as the industry closes in on its worst sales year since 2009.

    Investors will be looking to its 2016 forecast, a bellwether for the sector

    http://www.wsj.com/articles/deere-earnings-what-to-watch-1448389584

  10. Pingback: Why “supply and demand” doesn’t work for oil | Achaques e Remoques

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