Debt: The Key Factor Connecting Energy and the Economy

There are many who believe that the use of energy is critical to the growth of the economy. In fact, I am among these people. The thing that is not as apparent is that growth in energy consumption is dependent on the growth of debt. Both energy and debt have characteristics that are close to “magic” with respect to the growth of the economy. Economic growth can only take place when growing debt (or a very close substitute, such as company stock) is available to enable the use of energy products.

The reason why debt is important is because energy products enable the creation of many kinds of capital goods, and these goods are often bought with debt. Commercial examples would include metal tools, factories, refineries, pipelines, electricity generation plants, electricity transmission lines, schools, hospitals, roads, gold coins, and commercial vehicles. Consumers also benefit because energy products allow the production of houses and apartments, automobiles, busses, and passenger trains. In a sense, the creation of these capital goods is one form of “energy profit” that is obtained from the consumption of energy.

The reason debt is needed is because while energy products can indeed produce a large “energy profit,” this energy profit is spread over many years in the future. In order to actually be able to obtain the benefit of this energy profit in a timeframe where the economy can use it, the financial system needs to bring forward some or all of the energy profit to an earlier timeframe. It is only when businesses can do this, that they have money to pay workers. This time shifting also allows businesses to earn a financial profit themselves. Governments indirectly benefit as well, because they can then tax the higher wages of workers and businesses, so that governmental services can be provided, including paved roads and good schools.

Debt and Other Promises

Clearly, if the economy were producing only items for current consumption–for example, if hunters and gatherers were only finding food to eat and sticks to burn, so that they could cook this food, then there would be no need for the time shifting function of debt. But there would likely still be a need for promises, such as, “If you will hunt for food, I will gather plant food and care for the children.” With the use of promises, it is possible to have division of labor and economies of scale. Promises allow a business to pay workers at the end of the month, instead of every day.

As an economy becomes more complex, its needs change. At first, central markets can be used to facilitate the exchange of goods. If one person brings more to the market than he takes home, a record of his credit balance can be kept on a clay tablet for use another day. This approach works as long as the credit can only be used at that particular market. If the credit balance is to be used elsewhere, or if the balance is to hold its value for a period of years, a different, more flexible approach is needed.

Over the years, economies have developed a wide range of debt and debt-like products. For the purpose of this discussion, I am including all of them as debt, broadly defined. One type is what we think of as “money.” Money is really a portable promise for a share of the future output of the economy. It can provide time shifting, if this money is held for a time before it is spent.

Another type of debt is a loan with a fixed term, such as a mortgage or car loan. Such a loan provides time shifting, allowing something to be paid for over a significant share of its life. Equity funding for a company is not really a loan, but it, too, allows time shifting. Those purchasing shares of stock do so with the expectation that they will be repaid in the future through price appreciation and dividends. It thus acts much like a loan, for the purpose of this discussion. There are many other types of promises regarding future funding that are closely related–for example, government loan guarantees, derivatives, ETFs, and government pension promises. All indirectly add to the willingness of people and businesses to spend money now–someone else has somehow made promises that remove uncertainty regarding future income flows or future payment obligations.

The Magic Things Debt Does

It is not immediately obvious how important debt is. In fact, neoclassical economists have tended to ignore the role of debt. I see several, almost magic, ways that debt helps the economy.

  1. Debt brings forward the date when an individual or company can afford to purchase capital goods. Without debt, the only way to afford such a purchase would be to save up the full price in advance. Using debt, a business can add a new machine to allow it to produce more goods before the business saves up money from its prior operations. A young person can afford to buy a house or car, long before he could save up funds for such a purchase. With the help of debt, the price of capital goods can be financed over much of their working life.
  2. Adding debt raises the prices of commodities. Commodities, such as lumber, iron, copper, and oil are what we use to make cars, houses, and factories. “Demand” for these commodities rises because more people and businesses can afford to buy capital goods that use these energy products. Often these capital goods also use energy products over their lifetime (for example, gasoline to operate a car), so there is a long-term impact on the demand for energy products, in addition to the demand associated with making the capital goods. Of course, with higher prices, it becomes profitable to extract oil and other energy resources from more marginal areas of production. More companies enter the field. As long as prices remain high, they are able to earn a profit.
  3. Adding debt stimulates the economy, almost like turning the heat up on a stove. When debt is added for any purpose–even starting a war–it starts a whole chain of purchases, each of which acts to stimulate the economy. If a young person takes out a loan to buy a car, the purchase of the car leads to the salesman having more money to buy goods for his family. The company selling the cars is able to make a bigger profit, which the business can reinvest or pay to shareholders as dividends. The purchase of the car leads to more demand for metals used to make the car, and thus tends to increase the number of mining jobs. Each new worker in turn is able to buy more goods and services, starting a beneficial cycle that gradually radiates out through the economy.
  4. Adding debt tends to lead to higher asset prices. Clearly, (from Item 2), adding debt can raise the price of commodities. Adding debt can also make it possible for more people to afford real estate and investments in the stock market. For example, Japan greatly ramped up its debt level between 1965 and 1989.
    Figure 1. Annual growth in non-financial debt (in Yen), separated into private and government debt, based on Bank of International Settlements data.

    Figure 1. Annual growth in non-financial debt (in Yen), separated into private and government debt, based on Bank of International Settlements data.

    During this time, a major price bubble occurred in land prices (Figure 2).

    Figure 2. Land Prices in Japan. Figure from Of Two Minds by Charles Hugh Smith.

    Figure 2. Land Prices in Japan. Figure from Of Two Minds by Charles Hugh Smith.

    There is a reason why this bubble could occur. Because of the stimulating effect that debt had on the economy, more people had the wealth to buy real estate, especially if this too was sold on credit. Once private debt levels stopped rising rapidly, price levels crashed both for land and stock prices. TheBubbleBubble.com explains what happened: “By 1989, Japanese officials became increasingly concerned with the country’s growing asset bubbles and the Bank of Japan decided to tighten its monetary policy.” Doing so popped both the home and stock price bubbles.

  5. Adding debt adds to GDP. GDP is a measure of the goods and services produced during a period. Many of these goods and services are bought using debt, so it is not surprising that adding more debt tends to add more GDP. The amount of GDP added is less than the amount of debt added, even when inflation growth is considered as part of GDP.
    Figure 3. United States increase in debt over five year period, divided by increase in GDP (with inflation!) in that five year period. GDP from Bureau of Economic Analysis; debt is non-financial debt, from BIS compilation for all countries.

    Figure 3. United States increase in debt over five-year period, divided by increase in GDP (including inflation) in that five-year period. GDP from Bureau of Economic Analysis; debt is non-financial debt, from BIS compilation for all countries.

    The general tendency is toward the need for an increasing amount of debt per dollar of GDP added. This is especially the case when oil prices are high. In the US, the ratio of non-financial debt to GDP added was almost down to 1:1 for a time, back when oil prices were less than $20 per barrel (in today’s dollars).

  6. Adding debt tends to increase wealth disparity.  Adding debt tends to increasingly divide an economy into “haves” and “have-nots.” Many of the “haves” own the means of production, including an ever-increasing amount of capital goods, and thus can earn profits and dividends from these capital goods. Others are high-level officials in businesses and the government who earn high salaries. Interest payments also tend to transfer payments from the poor to the more wealthy. We might say that the common laborers are increasingly “frozen out” of the economy that otherwise is heating up. This shift started to take place in the United States about 1981.

    Figure 3. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis IRS data, published in Forbes.

    Figure 4. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis of IRS data, published in Forbes.

  7. Adding debt is something that governments can influence, either by lowering interest rates or by borrowing the money themselves.  Actions by governments to reduce interest rates can be effective, because they lower monthly payments that borrowers need to make to take out a loan of a given amount. Thus, they tend to encourage more borrowing. In Figure 5, below, note that the decrease in interest rates in 1981 corresponds precisely with the rise in debt to GDP ratios is Figure 3 and the shift in income patterns in Figure 4.
    Figure 4. Ten year treasury interest rates, based on St. Louis Fed data.

    Figure 5. Ten year treasury interest rates, based on St. Louis Fed data.

    Figure 6 later in this post shows that changes in Quantitative Easing (QE) (which affects interest rates and the level of the US dollar relative to other currencies) also correspond to sharp changes in oil prices. Changes in the level of the dollar also affect demand for oil. See a recent post related to this issue.

What Goes Wrong as More Debt Is Added?

It is clear from the discussion so far that quite a few things go wrong. These are a few additional items:

1. There are limits to government manipulation of debt levels.  First, interest rates eventually drop so low that they become negative in some countries. Negative interest rates tend to cause bank profitability to drop and lead to hoarding by those who planned to use savings for retirement.

Second, government borrowing doesn’t work as well at stimulating the economy as investments made by the private sector. A likely reason is that private sector investments are made when the borrower believes that the return on the investment will be high enough to pay back the debt with interest, and still make a profit. Government investments often do not meet this standard. Some reports indicate that Japan’s government has used borrowed money to fund bridges to nowhere and houses with no one home. China’s centrally directed economy seems to lead to similar over-borrowing problems. Chinese businesses also borrow to cover interest on prior loans.

2. Ratios of debt to GDP tend to rise, worrying government leaders. Debt is a way of accessing the benefits of Btus of energy, in advance of the time they are really available. As the amount of easy-to-extract oil depletes, the cost of oil extraction gradually rises. Unfortunately, the amount of “work” a barrel of oil can perform–for example, how far it can make a truck travel–doesn’t rise correspondingly. As a result, the higher price simply reflects increasing inefficiency of extraction, and thus the need to use a larger share of the economy’s output to extract oil. The amount of debt needed to keep GDP rising keeps growing, in part because oil is becoming higher priced to extract, and in part because goods that use oil in their production also tend to rise in cost. As a result, the ratio of debt to GDP tends to spiral upward.

3. Rising debt allows for a temporary false valuation of the benefit of energy products. The true value of oil and other energy products comes primarily from the Btus of energy they provide, such as how far a truck can be made to travel. Thus we would expect that the true value of energy products would remain relatively constant over time. If anything, the value of energy products will tend to rise by a small amount (say, 1% per year) as technology improvements lead to growing efficiency in their use.

What we think of as the magic hand of the economy determines a price for commodities at all times, based on “supply” and “demand.” This price clearly is not very close to the future energy profit that the energy products will actually provide, because it tends to vary widely over time. We don’t know what the true value of a barrel of oil to society is. If the true value is $100 per barrel (in today’s money), then back when oil prices were $10 or $20 per barrel (in today’s money), there would have been $80 to $90 (equal to $100 minus the actual price) of “energy profit” that could be pumped back into the economy as productivity gains for workers, interest on debt, and dividends on stock, tax revenue, and money for new investment. The economy could (and did) grow quickly. There was less need for added debt, because goods made with oil were cheap. Wages for workers could rise rapidly, as they did in the 1950 to 1968 period (Figure 4).

If prices approach the true value of oil (assumed to be $100 per barrel), the extra energy profit would pretty much disappear. The economy would increasingly become “hollowed out.”  Productivity gains that lead to wage gains would mostly disappear. Businesses would find it hard to earn adequate profits, and would cut back on dividends. Some companies might need to borrow money in order to pay dividends. World economic growth would slow.

Prices can even temporarily overshoot their true value to the economy, then drop sharply back. This happens because prices are set by demand, and demand depends on a combination of wage levels and debt levels. Oil prices can be high for a while, if borrowing is temporarily high, and then fall back as it becomes clear that profitable investments are not really available if oil is at such a high price level.

4. Wages of non-elite workers tend to drop too low. Workers play a very special role in the economy: they both (a) provide the labor for the economy and (b) act as consumers for the economy. If workers aren’t earning enough, there is a problem with many of them not being able to buy the goods and services the economy produces. This is especially the case for purchases such as homes and cars, which are often bought using debt. Indirectly, this lack of ability to afford the output of the system puts a downward pressure on the price of commodities, particularly energy commodities. Prices may fall below the cost of production, or may not rise high enough.

Figure 6. World oil supply and prices based on EIA data.

Figure 6. World oil supply and prices based on EIA data.

The reason that wages of the less educated, non-managerial workers tend to lag behind is related to the issue of diminishing returns. A workaround is a more “complex” society, with bigger businesses, bigger government, more capital goods, and more debt. In some cases, manufacturing is shifted to parts of the world with lower wages. Non-elite workers increasingly find themselves with too small a share of the output of the economy. Figure 7 shows some influences that tend to lead to too low wages for non-elite workers.

Figure 7. Illustration by author of why an economy that doesn't grow leads to falling wages for workers.

Figure 7. Illustration by author of why an economy that doesn’t grow leads to falling wages for workers. All amounts are guess-timates, to show a general principle.

When wages for a large share of workers drop too low, there is a problem with workers not having enough money to buy goods like cars and houses. The economy tends to contract. This is a different form of too low Energy Return on Energy Invested (EROEI) than most people think of. In my view, low return on human labor is the most important type of EROEI. Falling wages of a large share of workers can lead to economic collapse, because there are not enough buyers for the output of the system.

5. Eventually, debt defaults become a problem. As the world becomes more divided into “haves” and “have-nots,” falling ability to repay a debt becomes more of a problem. To some extent, this happens at the individual level, with auto loans, student debt, and mortgages. If commodity prices fall or stay too low, it happens to commodity producers, including oil producers. It also happens to countries, especially to those who are dependent on commodity exports.

The rise in the cost of oil extraction is another factor. As the cost of extraction begins to exceed the benefit of oil to the economy (assumed above to be $100 per barrel), the energy profit from oil is no longer sufficient to allow the economy to grow as in the past. Without economic growth, it becomes much harder to repay debt with interest.

Figure 7. In a period of economic decline (Scenario 2), the amount a debtor has left over after repaying debt plus interest is disproportionately large, leaving the debtor with inadequate funds for paying other expenses. In a period of economic growth (Scenario 1), the overall growth in incomes tends to compensate for the need to pay back the debt with interest.

Figure 8. In a period of economic decline (Scenario 2), the amount a debtor has left over after repaying debt plus interest is disproportionately large, leaving the debtor with inadequate funds for paying other expenses. In a period of economic growth (Scenario 1), the overall growth in incomes tends to compensate for the need to pay back the debt with interest.

6. At some point, we reach peak debt. The economy acts like a pump. As long as there are sufficient energy profits coming through the system (based on $100 per barrel minus the actual oil price, in our example), wages can rise and corporate profits can rise. Asset prices can rise, and energy prices can stay high. Once these energy profits start falling back, wages stagnate and business profits decline. Businesses cut back on borrowing, because they see fewer profitable opportunities for investment. Individuals cut back on borrowing, because with their lower wages, it becomes more difficult to buy a house or car. Governments try to fight declining demand for debt, but eventually reach limits of the economy’s tolerance for negative interest rates.

Once debt begins contracting, the contraction tends to bring down commodity prices. This is a huge problem for commodity producers, because they need prices that are high enough to cover their cost of production. Ultimately, falling debt, together with falling wages, and lack of energy profit have the potential to bring down the system.

Conclusion

The situation we are facing today is one in which growing debt has been holding up oil prices and other commodity prices for a long time. We are now reaching limits on this process, as evidenced by growing wealth disparity, low commodity prices, and the frantic actions of government leaders around the world regarding slow economic growth and the need for more stimulus. These issues are becoming major ones in the upcoming US political election.

Those studying oil issues from an EROEI perspective tend to miss the connection with debt, because EROEI analysis strips out timing differences. In my view, debt is essential to oil extraction, because it brings forward an estimate of the value of the oil and other energy products, so that businesses of all kinds can make use of the “energy profit” in paying their employees and in paying their taxes. Most people don’t think of the issue this way.

In this article, I suggest a different way of thinking about the limit we are reaching–oil prices can’t rise above some price limit without adversely affecting the economy. It is the savings below this limit that aid productivity growth and government funding. Perhaps researchers should be examining this price limit approach more carefully. This is not the same approach as EROEI analysis, but has the advantage of having fewer “boundary issues.”  It also offers a check for reasonableness of EROEI indications developed through conventional analysis. If an energy product needs a government subsidy, it is doubtful that that energy product is really providing an energy profit.

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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695 Responses to Debt: The Key Factor Connecting Energy and the Economy

  1. Fast Eddy says:

    Let me tell you how all this ends.

    It ends with investors accepting that they can pretend no longer and profits are sliding into recession.

    It ends as the equity market spirals into a deep bear market as company management reach the end of the road in the face of the recessionary conditions and ‘kitchen sink’ years of EPS manipulation.

    It ends as corporate bond spreads explode as years of excess debt accumulation lead to widespread corporate bankruptcies, making the recession much deeper.

    It ends with social unrest and double digit budget deficits (again).

    It ends with investors losing faith with the Fed as the resumption of QE proves ineffective in reviving the economy.

    It ends in deeply negative interest rates, currency and trade wars, helicopter money and ultimately inflation.

    In a nutshell, it ends badly.

    http://www.zerohedge.com/news/2016-05-08/albert-edwards-let-me-tell-you-how-all-ends

    I disagree. It ends in mass starvation … violence… epic releases of radiation … and finally – extinction.

    Albert may know this – but he’s not going to say it.

    • Sorry, this always has been and still is a planet of “do-ers”, meaning all life forms, every organism is extremely busy doing its thing, and it’s not enjoying going into night voluntarily. It’s unlikely the collapse scenario of this fossil-energy-techno civilization would equal 100% global human extinction level. That being said, I agree I’d not want to be part of the collapse tremors, nor to be among first generations of the post event “survivors” with some feel and knowledge what has been lost both in civilization brakeup and ecology deprivation. Few hundred years after (several more cycles of 4th turnings) it will be mostly psychologically cleaned out into neo~pastoral settings, jolly good again even in relative proximity to former civilization hubs of Europe/US, obviously with some toxic hazard no go zones here and there, predominantly former industrial infrastructure valleys.

      • bugout says:

        Doing our thing is killing. Killing other species and our own. Our slave oil has negated this a bit.
        One it and the food it provides is gone yes we will be doing onto others before they do onto you.

    • Vince the Prince says:

      The FUTURE is NOW
      A Fast Eddy Production

  2. Fast Eddy says:

    How Wall-Street Hocus-Pocus Inflates S&P 500 Revenues

    For example, Telecom Services. According to Wall Street data, revenues in the sector soared 11.2% year-over-year. FactSet cautions that the biggest – or rather only – contributor to growth was AT&T, which reported $40.5 billion in revenues, up a dazzling 24%.

    Alas, AT&T is a slow-growth or no-growth behemoth. So it acquires companies to grow its revenues. The last big fish it caught was DirecTV, whose revenues now adorn AT&T’s income statement. But DirecTV wasn’t included in the “Telecom Services” sector before the acquisition. The acquisition brought it and its revenues into the sector.

    Without that one deal, year-over-year revenue growth in the Telecom Services sector would have been a nearly invisible 0.3%. The dazzling revenues growth of 24%? A mirage caused by M&A.

    AT&T’s acquisition of DirecTV combined two S&P 500 companies into one and put both their revenues under one ticker symbol (T). This made room in the S&P 500 index for another company.

    So Signet Jewelers was added to the index last July to fill that vacant slot. In the fourth quarter, this addition inflated S&P 500 revenue growth by $2.4 billion year-over-year. But not a single extra thing or service was sold to get that “revenue growth,” and there was zero impact on the economy.

    http://wolfstreet.com/2016/05/09/wall-street-inflates-sp-500-revenue-growth/

  3. Trousers says:

    It turns out you can all relax about this stuff now because we in the UK know exactly what is behind the problems the world economy is facing today.

    We know because every time we see under performing economic data the media and politicians are quick to to tell us the reason.

    It’s all being produced by fears over the possibility of Brexit!

    You see if the UK votes to leave the EU then it’s Armageddon I’m afraid but if we remain then everything is going to be fantastic.

    I’m sorry to have to inform you that the future of human populations on this planet depends on the British electorate but there it is.

  4. Fast Eddy says:

    Saudi Arabia’s Oil-Bust Cash-Flow Debacle Begins to Bite

    It was supposed to be the biggest, most ambitious, most lucrative infrastructure project Spain’s construction industry had ever undertaken on the Arabian Peninsula. Launched three years ago, the high-speed rail link project between Medina and Mecca was a dream come true worth some €6.7 billion, the perfect payoff of decades of patient lobbying of the House of Saud by Spain’s former King Juan Carlos I. But now it’s a rotting financial albatross around the necks of 12 large Spanish companies.

    Even from the beginning, things were not easy. Within a year and a half, the project was suffering significant delays. And two months ago, the consortium asked the Saudi government for more funds — “an absolute minimum of €1.4 billion” — to cover the Saudi Railways Organization’s “unforeseeable demands,” such as, amazingly, keeping desert sand off the tracks.

    None of the consortium partners want to take responsibility — or the attendant financial hit — for keeping sand off the tracks. And the House of Saud, already hemorrhaging money due to the oil bust, is in no position to pay Spanish companies extra funds for it.

    Now, news is leaking that the Saudi Railway Organization stopped paying advances on the consortium’s work over six months ago. According to the Spanish financial daily Expansión, the consortium could be owed hundreds of millions of euros in late payments. Although the reasons for non-payment are as yet unconfirmed, sources in Spain are blaming it on the House of Saud’s acute cash-flow problems.

    Saudi Arabia’s oil-dependent economy is in a bit of a pickle. For its budget to break even, the country needs an oil price of $104 a barrel, claims the Institute of International Finance. The current price is around $45. According to the IMF, Saudi Arabia may run out of financial assets needed to support spending within five years. So severe is the problem that the House of Saud now has little choice but to do something it hasn’t had to do for decades: ration its spending.

    To mitigate such economic pressures, Riyadh is planning a massive sell-off of major government entities, including up to 5% of Aramco, presumably the largest oil producer in the world, valued at $2 trillion.

    Ominously, commercial banks recently began tightening lending to anyone outside of the government. As the cash flow problems of both the government and large domestic companies stack up, stories proliferate across the Middle East of salaries and contracts not being honored.

    Saudi Arabia’s Oil-Bust Cash-Flow Debacle Begins to Bite
    by Don Quijones • May 7, 2016
    Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditPrint this pageEmail this to someone
    Hangover of oil dependence has only just begun.
    By Don Quijones, Spain & Mexico, editor at WOLF STREET.

    It was supposed to be the biggest, most ambitious, most lucrative infrastructure project Spain’s construction industry had ever undertaken on the Arabian Peninsula. Launched three years ago, the high-speed rail link project between Medina and Mecca was a dream come true worth some €6.7 billion, the perfect payoff of decades of patient lobbying of the House of Saud by Spain’s former King Juan Carlos I. But now it’s a rotting financial albatross around the necks of 12 large Spanish companies.

    Even from the beginning, things were not easy. Within a year and a half, the project was suffering significant delays. And two months ago, the consortium asked the Saudi government for more funds — “an absolute minimum of €1.4 billion” — to cover the Saudi Railways Organization’s “unforeseeable demands,” such as, amazingly, keeping desert sand off the tracks.

    None of the consortium partners want to take responsibility — or the attendant financial hit — for keeping sand off the tracks. And the House of Saud, already hemorrhaging money due to the oil bust, is in no position to pay Spanish companies extra funds for it.

    Now, news is leaking that the Saudi Railway Organization stopped paying advances on the consortium’s work over six months ago. According to the Spanish financial daily Expansión, the consortium could be owed hundreds of millions of euros in late payments. Although the reasons for non-payment are as yet unconfirmed, sources in Spain are blaming it on the House of Saud’s acute cash-flow problems.

    Saudi Arabia’s oil-dependent economy is in a bit of a pickle. For its budget to break even, the country needs an oil price of $104 a barrel, claims the Institute of International Finance. The current price is around $45. According to the IMF, Saudi Arabia may run out of financial assets needed to support spending within five years. So severe is the problem that the House of Saud now has little choice but to do something it hasn’t had to do for decades: ration its spending.

    To mitigate such economic pressures, Riyadh is planning a massive sell-off of major government entities, including up to 5% of Aramco, presumably the largest oil producer in the world, valued at $2 trillion.

    Ominously, commercial banks recently began tightening lending to anyone outside of the government. As the cash flow problems of both the government and large domestic companies stack up, stories proliferate across the Middle East of salaries and contracts not being honored.

    Just this week Saudi construction firm Binladin Group laid off over 12,000 Saudi employees. A further 77,000 out of a total 200,000 foreign workers were shown the door, though approximately 50,000 of them are refusing to leave the country because they haven’t been paid for at least four months.

    It’s not just in Saudi Arabia that infrastructure projects are feeling the crippling knock-on effects from the oil crisis. This week Qatar Railways Company terminated the €1.5 billion contract of an international consortium that was building the stations of the Doha Metro project. The company did not give any reason for the contract termination but emphatically insists that every effort will be made to “ensure continuity of the project.” It even hired a replacement contractor to back up its claim.

    More http://wolfstreet.com/2016/05/07/saudi-arabia-cash-flow-oil-bust-unpaid-bills-layoffs/

    • thanks for the link back to wolf street Eddy—good one. I hadn’t seen that site before

      I’d also missed out on the fact that Saudi had terminated it’s “protection” contract with the Pakistani army–surprised there hasn’t been more made of that in the general news.
      If Saudi can no longer afford to protect itself, then it no longer has anything to pay their wages.
      If that’s the case, then saudi really is in deep do -do’s, and the rest of us. If Isis comes screaming out of the desert then fighting over the oilwells will shut them down anyway–what little there is left there.

      It means Saudi must be close to collapse—re the comment the other day about “IF” we have no oil by 2020 by prince wassname—and also reinforcing my guessdate of 2022 for overall collapse

      • Fast Eddy says:

        Wolfstreet has fewer articles than Zero Hedge – but the quality of the articles is far superior.

  5. Kim says:

    Gail, as I understand you, it looks like debt in its different forms (including money) act as a transmitter of information, such as neurotransmitters and endocrine system of our body, directing the use of resources within society. The problem is that current economic system is not smart enough (some may say it’s not smart at all), and when eventually an imbalance occurs it causes a malfunction somewhere in our metabolic chain. In a situation of steady growth imbalances can be considered normal and can be easily overcome, but these are more likely and more dangerous in a situation of declining energy affordability, with the risk that the nervous / hormonal system itself becomes finally affected (global financial crisis), leading to a deep and widespread drop in metabolism non proportional to the magnitude of inputs restriction (international trade crash, worker strikes, government crises, infrastructure failures and so on).

  6. Gail

    You have stated that solar power is a net loss of energy after you take the embedded energy used to make and install the solar cells into account. Has the recent reduction in cost and increase in efficiency changed this calculation?

    • doomphd says:

      There’s some solar/wind power folks over at Ron Patterson’s PeakOilBarrel.com site that are telling me not to worry, that electric-powered heavy-duty trucks and hydraulic lifts, all-electric factories, trains and ships are a no-brainer for the alt-energy, all-electric future. I guess I’m a Luddite for suggesting that such alt-energy is just “hamburger helper” for FF, and will be gone when the FF goes away. Sure, their recent growth rates are fast, but when will solar-wind power break out of under 2% of the energy mix and replace the other 80% or so that’s powered by FF?

      Actually, their comments are pretty harsh when I suggest they’re delusional and in need of a broader perspective. They’ve almost hurt my feelings, so I have to come back here and reread Gail’s posts and the comments to regain my senses.

      • Fast Eddy says:

        Try posting this

        Replacement of oil by alternative sources

        While oil has many other important uses (lubrication, plastics, roadways, roofing) this section considers only its use as an energy source. The CMO is a powerful means of understanding the difficulty of replacing oil energy by other sources. SRI International chemist Ripudaman Malhotra, working with Crane and colleague Ed Kinderman, used it to describe the looming energy crisis in sobering terms.[13] Malhotra illustrates the problem of producing one CMO energy that we currently derive from oil each year from five different alternative sources. Installing capacity to produce 1 CMO per year requires long and significant development.

        Allowing fifty years to develop the requisite capacity, 1 CMO of energy per year could be produced by any one of these developments:

        4 Three Gorges Dams,[14] developed each year for 50 years, or
        52 nuclear power plants,[15] developed each year for 50 years, or
        104 coal-fired power plants,[16] developed each year for 50 years, or
        32,850 wind turbines,[17][18] developed each year for 50 years, or
        91,250,000 rooftop solar photovoltaic panels[19] developed each year for 50 years

        http://en.wikipedia.org/wiki/Cubic_mile_of_oil

        A partial list of products made from Petroleum (144 of 6000 items)

        One 42-gallon barrel of oil creates 19.4 gallons of gasoline. The rest (over half) is used to make things like:

        http://www.ranken-energy.com/products%20from%20petroleum.htm

        Renewable energy ‘simply won’t work’: Top Google engineers

        Two highly qualified Google engineers who have spent years studying and trying to improve renewable energy technology have stated quite bluntly that whatever the future holds, it is not a renewables-powered civilisation: such a thing is impossible.

        Both men are Stanford PhDs, Ross Koningstein having trained in aerospace engineering and David Fork in applied physics. These aren’t guys who fiddle about with websites or data analytics or “technology” of that sort: they are real engineers who understand difficult maths and physics, and top-bracket even among that distinguished company.

        Even if one were to electrify all of transport, industry, heating and so on, so much renewable generation and balancing/storage equipment would be needed to power it that astronomical new requirements for steel, concrete, copper, glass, carbon fibre, neodymium, shipping and haulage etc etc would appear.

        All these things are made using mammoth amounts of energy: far from achieving massive energy savings, which most plans for a renewables future rely on implicitly, we would wind up needing far more energy, which would mean even more vast renewables farms – and even more materials and energy to make and maintain them and so on. The scale of the building would be like nothing ever attempted by the human race.

        In reality, well before any such stage was reached, energy would become horrifyingly expensive – which means that everything would become horrifyingly expensive (even the present well-under-one-per-cent renewables level in the UK has pushed up utility bills very considerably).

        http://www.theregister.co.uk/2014/11/21/renewable_energy_simply_wont_work_google_renewables_engineers/
        http://techcrunch.com/2011/11/23/google-gives-up-on-green-tech-investment-initiative-rec/

        • Ed says:

          New York State needs 75GW continuously. That could be 75 1GW plants say four per year for 12 years. Sited off the south shore of Long Island. Waste pools right in the Atlantic ocean never runs dry. After 10 years cask and drop in deep ocean within the 200 mile limit. The empire state must never go dark. Sunt , et duces secuti sunt.

  7. Yoshua says:

    A depletion of natural recourses should lead to inflation. If we continue to print dollars, but produce less oil, then the price of oil should rise.

    But if the printed dollars only go to the elite at the top of the pyramid and there is no trickle down… if the printed dollars only inflate equity prices… then there is no inflation at the base of the economy.

    Stagnated wages and debt up to the eyeballs at the base makes sure that there will be no inflation at the base of the economy. A rise in the oil price would only act as a brake on the economy and slow the economy down, which would lead to lower demand for oil and bring the price down again.

    U.S oil producers who, who also had access to the printed money, need a higher price on oil to be able to pay off their debt and make a profit on their investments. They must then be protected with futures at a higher price than the market price for oil, to be able to continue their oil production.

    Someone has to make a loss on the futures to keep the oil producers alive. Those losses could of course be hedged by gains in inflated equity prices. I could work for some time… at least until the inflated stock market bubble pops.

  8. Perferoy Wintada says:

    Oil discoveries slump to 60-year low
    Slowdown in exploration activity as energy companies seek to conserve cash

    The Financial Times, May 8, 2016
    https://next.ft.com/content/1a6c6032-1521-11e6-9d98-00386a18e39d

    Discoveries of new oil reserves have dropped to their lowest level for more than 60 years, pointing to potential supply shortages in the next decade.
    Oil explorers found 2.8bn barrels of crude and related liquids last year, according to IHS, a consultancy. This is the lowest annual volume recorded since 1954, reflecting a slowdown in exploration activity as hard-pressed oil companies seek to conserve cash.
    Most of the new reserves that have been found are offshore in deep water, where oilfields take an of average seven years to bring into production, so the declining rate of exploration success points to reduced supplies from the mid-2020s.
    The dwindling rate of discoveries does not mean that the world is running out of oil; in recent years most of the increase in global production has come from existing fields, not new finds, according to Wood Mackenzie, another consultancy.
    But if the rate of oil discoveries does not improve, it will create a shortfall in global supplies of about 4.5m barrels per day by 2035, Wood Mackenzie said.
    That could mean higher oil prices, and make the world more reliant on onshore oilfields where the resource base is already known, such as US shale.
    Paal Kibsgaard, chief executive of Schlumberger, the world’s largest oil services company, told analysts last month: “The magnitude of the E&P [exploration and production] investment cuts are now so severe that it can only accelerate production decline and the consequent upward movement in [the] oil price.”
    The slump in oil and gas prices since the summer of 2014 has forced deep cuts in spending across the industry. Exploration has been particularly vulnerable because it does not offer a short-term pay-off.
    ConocoPhillips is giving up offshore exploration altogether, and Chevron and other companies are cutting back sharply.
    The industry’s spending on exploring and appraising new reserves will fall from $95bn in 2014 to an expected $41bn this year, and is likely to drop again next year, according to Wood Mackenzie. There also has been a predominance of gas, rather than oil, in recent finds.
    In spite of the decline in activity, the total combined volume of oil and gas discovered last year rose slightly, but the proportion of oil dropped from about 35 per cent in 2014 to about 23 per cent in 2015.
    Bob Fryklund of IHS said: “We’ve hunted a lot for oil over the years, and now the areas that are oil-prone are fewer than the areas that are gas-prone.”

    • The problem I have with this is that resource discoveries depend on price. There is a huge amount of very heavy oil we know about that could be extracted if the price were high enough. The problem is basically that the price is too low, not that there is no oil to be “discovered.” Of course, I see price as the limit, not the amount of oil in the ground.

      • Perferoy Wintada says:

        Price is important, but wouldn’t quantity play a role too? For example, if there was an offshore field with small pockets of oil, with none more than 10k barrels, then price gets X by 10,000 barrels to determine if it makes economic sense to produce. Being offshore with very high expenses those pockets would be too small, but if it was on land it might produce a small profit. So many factors I’m sure come in to play, like sulphur content, API, depth, cost of lease, location, accessibility, etc.

        • Veggie says:

          Correct. Those smaller offshore “pockets” are called Stranded Reserves and would most likely not get developed due to economics.

  9. Yoshua says:

    Almost six months ago, jihadists unleashed a murderous rampage on the French capital

    http://observer.com/2016/05/the-world-needs-to-know-what-really-happened-last-november/

    A spy joke. When you look at the man in the mirror in the morning and ask your self: who is that guy really working for ? Then it’s time for a holyday.

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