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

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

  1. Fast Eddy says:

    11 Signs That The U.S. Economy Is Rapidly Deteriorating Even As The Stock Market Soars

    #1 Total business sales have been declining for nearly two years, and they are now about 15 percent lower than they were in late 2014.

    #2 The inventory to sales ratio is now back to near where it was during the depths of the last recession. This means that there is lots and lots of unsold stuff just sitting around out there, and that is a sign of a very unhealthy economy.

    #3 Corporate earnings have declined for four consecutive quarters. This never happens outside of a recession.

    #4 Profits for companies listed on the S&P 500 were down 7.1 percent during the first quarter of 2016 when compared to the same time period a year ago.

    #5 In April, commercial bankruptcies were up 32 percent on a year over year basis, and Chapter 11 filings were up 67 percent on a year over year basis. This is exactly the kind of spike that we witnessed during the initial stages of the last major financial crisis as well.

    #6 U.S. rail traffic was 11 percent lower last month than it was during the same month in 2015. Right now there are 292 Union Pacific engines sitting idle in the middle of the Arizona desert because there is literally nothing for them to do.

    #7 The U.S. economy has lost an astounding 191,000 mining jobs since September 2014. For areas of the country that are heavily dependent on mining, this has been absolutely devastating.

    #8 According to Challenger, Gray & Christmas, U.S. firms announced 35 percent more job cuts during April than they did in March. This indicates that our employment problems are accelerating.

    #9 So far this year, job cut announcements are running 24 percent above the exact same period in 2015.

    #10 U.S. GDP grew at just a 0.5 percent annual rate during the first quarter of 2016. This was the third time in a row that the GDP number has declined compared to the previous quarter, and let us not forget that the formula for calculating GDP was changed last year specifically to make the first quarter of each year look better. Without that “adjustment”, it is quite possible that we would have had a negative number for the first quarter.

    #11 Barack Obama is poised to become the first president in U.S. history to never have a single year during his time in office when the economy grew by more than 3 percent.

    http://theeconomiccollapseblog.com/archives/11-signs-that-the-u-s-economy-is-rapidly-deteriorating-even-as-the-stock-market-soars

  2. Fast Eddy says:

    An arrow … into the foot of the beast…. howls of pain ….

    The retailer apocalypse continues this morning with Macy’s crashing almost 10% in the pre-market after missing top-line and slashing its outlook citing the “uncertain direction of consumer spending,” which seems odd given the confidence with which The Fed, Obama, and every talking head proclaims the US consumer’s health. Comp store sales plunged 6.1% (almost double expectations) and this comes at a time when clothing inventories are at an all-time record high relative to sales.

    “We are seeing continued weakness in consumer spending levels for apparel and related categories. In particular, our sales trend relative to expectations meaningfully slowed beginning in mid-March, and first quarter results are below our original outlook. Headwinds also are coming from a second consecutive year of double-digit spending reductions by international visitors in major tourist markets where Macy’s and Bloomingdale’s are key destinations, as well as a slowdown in some center core categories – further intensifying the challenges associated with growing topline sales revenue,” said Terry J. Lundgren, Macy’s, Inc. chairman and chief executive officer.

    http://www.zerohedge.com/news/2016-05-11/macys-massacred-after-slashing-outlook-uncertain-consumer-inventories-reach-record-h

    Then we have http://www.wsj.com/articles/a-widespread-chill-in-art-sales-1454012388

    One has to wonder what action the Fed is going to take —- as posted earlier corporate earnings continue to fall…. retail sales are in deep recession…. banks are getting hammered… commodity producers are in a world of hurt…

    This cannot go on much longer without big layoffs happening (which would exacerbate the problem)… and mega bankruptcies…

    How does the Fed float all boats again?

    As we are seeing in China … one trillion dollars of new heroin is already wearing off… http://www.zerohedge.com/news/2016-05-11/chinas-trillion-dollar-q1-credit-surge-already-wearing

    And in Japan the situation is even worse… epic shots of heroin are having almost no impact…

    • psile says:

      America’s looking better than ever bro!

      • Vince the Prince says:

        That “Pig” is not only wearing lipstick, but a holster

        http://www.zerohedge.com/news/2016-05-11/militarization-americas-police-despite-obama-promises-war-weapon-spending-soared-201

        The Militarization Of America’s Police: Despite Obama Promises, War-Weapon Spending Soared In 2014/15
        Tyler Durden’s pictureSubmitted by Tyler Durden on 05/11/2016 18:30 -0400

        The militarization of America’s police has been a topic of concern for years (most openly since The Boston Marathon bombing in 2013) but reached a crescendo in 2014 amid Ferguson’s riots when the average joe was exposed to MRAPs up close and personal. In October 2014, President Obama began planning to increase funding for military equipment transfers to the police, but then in May 2015, he flip-flopped – proclaiming his goal to de-militarize the police. However, this was another lie. As Forbes reports, despite Obama’s pledge to demilitarize the police new federal data shows that 2014 and 2015 were peak years for shipments of surplus military gear to local police departments across America

        The Great Madness continues

        [The plutocrats believe there are some things worse than war]: the confiscation of special privileges; the abolition of unearned income; the overthrow of the economic parasitism; the establishment of industrial democracy. The plutocrats would welcome a war that promised salvation from any such calamities; they would also welcome a war that promised greater foreign markets, the destruction of foreign competition, more security for property rights and a longer lease on life for plutocratic despotism
        …. The plutocrats won another point – a point desired by every despot. They won the right to impose restrictions upon the freedom of speech, of press and assemblage, which are the foundation of democracy. The plutocracy bought the press, subsidized the pulpit, placed their representatives in control of the schools, and by the use of the police and postal censorship they restricted individual liberty.

        Beside and beyond this economic, political and social power the Plutocracy had millions of deluded people in its grip incapable of thinking because of the fearful war madness that possessed their souls

        Scott Nearing from his “The Great Madness”

        http://www.bigeye.com/madness.htm

        • Fast Eddy says:

          He forgot to mention that the plutocracy has delivered epic prosperity to hundreds of millions of people….

          It is of course not possible to raise everyone’s boat in a finite world — so those of us who have won the lottery and been favoured by the plutocrats should count our lucky stars.

          As for democracy — that was never going to happen because that would never work. Democracy is a sham. The people are too stupid and too pliable to ever govern themselves — as we have seen — they will turn on anyone who tells them they have to ‘live within their means’ and they will embrace anyone who tells them that they can ‘live large’

          We all know where democracy ends up — debt and bankruptcy.

          We’ve had a nice 100+ year run under the guiding hand of our current masters. I don’t think many would argue that they have not been kinder and gentler than the monarchies that preceded them.

          I always find it bizarre than anyone who has been on the winning side — who has enjoyed roads without potholes… medical care… food… cinemas… electricity… autos… schools…. vacations…

          All the the trappings of ‘the good life’ …

          Would complain about the hand they were dealt… that they would criticize their masters…

          First off…. the master has been a good master … and second … attacking the master is like trying to scream into a hurricane — you’ll only lose your voice … and finally so long as the master delivers prosperity those who have the power to attack him will continue to kiss the ring because they have a deal with the master whereby a truce is maintained and they get to live very large ….if the master fails to deliver prosperity then said people will try to take their place …. and if they do you can only hope that the new master shares the wealth like the old one

          I learned all of this from a cab driver in Beijing some years ago — I asked him what he thought of the communist party — he said he hated their guts — as did most people — however he said they were tolerated — because they were delivering prosperity…

          There is a saying in Hong Kong — as long as people have a BMW in the driveway – or believe they have the chance to someday have one — nobody gives a flying fock about democracy …

          • bandits101 says:

            “In 1984’s film “Ghostbusters,” there’s a comical scene in which a man is being interviewed for the role of the newest member of the “ghost busting” team, and his interviewer asks him the question, “Do you believe in UFOs, astral projections, mental telepathy, ESP, clairvoyance, spirit photography, telekinetic movement, full trance mediums, the Loch Ness monster and the theory of Atlantis?” He answers, humorously, “If there’s a steady paycheck in it, I’ll believe anything you say.”

            I copied that from a book review but it sums up what we are dealing with. From global warming deniers, to peak oil, to economic collapse, to human induced ecological disaster, to extinction or to miricle technology like space solar, electric cars, solar panels and windmills. If there is a pay check in it somwhere, there will always be some bozo willing to say or do whatever is required. Even the Communists in China.

            • Stilgar Wilcox says:

              “If there is a pay check in it somwhere, there will always be some bozo willing to say or do whatever is required. Even the Communists in China.”

              Exactly. There is a poster on a peak oil site whom I will not divulge his identity, but he works in the oil business. His position no matter how many articles he is presented with regarding damaged streams, land etc. from fracking (because they don’t know where the stuff is going to go with all that pressure applied) is in denial because it’s in his own best interest. How else does a species destroy the very environment we need to exist if not by bribes?

          • as you are saying Eddy, the industrial revolution delivered democracy

            before that it did not and could not exist.

            And before someone starts screaming about ancient Greece etc— Athens had 100000 citizens plus 150000 slaves (their “energy source”)–, and women were not allowed the vote

            in other words the Athenians had the liesure to enjoy democracy. As our liesure time disappears, so will our democracy

            • Stefeun says:

              Small correction, Norman:
              Slaves are tools, not energy sources ; the energy source is the food they eat.

              As for democracy, I fully agree. Suffice to look at what our current one relies on: servitude of 85% of the human population (and 100% of the other species and resources).

            • obviously food is the ultimate energy source.

              i was trying to keep my comment brief rather than verbally wander though the various stages of support that a ”democratic” existence requires

          • Vince the Prince says:

            He didn’t forget…he wrote “The Great Madness” in 1917, before all you spoke of…that is your job at hand as a modern Scott Nearing! Well done…
            BTW…Dr Nearing did write of the offer of joining in gravy train for himself, but declined since he set a higher standard of living than the measure of riding a BMW and was wise to see it as just a tepid payoff by the TPTB for their ‘buffers’.

            • Fast Eddy says:

              Oh come now… if Scott at the money to purchase a BMW and a private jet …. he’d have done so.

              When he started to make money selling books he indulged in winter flights to Florida in the winter.

            • Vince the Prince says:

              Sorry to disagree 100%. You forget both Scott and Helen came from well to do backgrounds. Just because you would elect to do so , does not mean everyone is in your own self centered mold, of me’ myself and I
              As far as indulging winters in Florida….I personally knew Helen near the end of life…not speaking like you of make believe. She had a friendship with a couple there and they were gracious enough to share a spot for her in her (their) very advanced age. Just because you don’t think it was right, does not mean it was not so. They, in turn, shared and gave away much in their own lives. Something that is foreign to some gimmie folks.

              Like to see what you would be capable of in your 80’s /90’s …

              Oh, hope you’re still able to squeeze the bottle for Roundup. LOL

        • xabier says:

          Interesting on the arms to the police.

          Obama is rather like my former mother-in-law, whom I nicknamed ‘Mrs Ghandi’, of whom it was said ‘She was never caught knowingly telling the truth’.

          Can’t wait to see how much he and his ghastly family make when out of office at last. Will they beat the Clintons?

      • Fast Eddy says:

        That’s one pretty pig…. but it’s still a pig 🙂

  3. Rodster says:

    “I learned all of this from a cab driver in Beijing some years ago — I asked him what he thought of the communist party — he said he hated their guts — as did most people — however he said they were tolerated — because they were delivering prosperity…”

    And there in lies China’s problem. As long as they can keep the gravy train rolling, they keep the Serfs at bay. When their eCONomy collapses those same Serfs will be coming after their leaders with pitchforks and torches.

    • Fast Eddy says:

      Doesn’t that apply to every country?

      3 meals from anarchy ….

      • Germanicus says:

        Is the best definition of “mandate of heaven” isn’t it ?

      • Rodster says:

        My comment was based on the theory of the so-called financial experts that China will come out of the next financial crisis smelling like a rose and will introduce the next world’s reserve currency, the gold backed Yuan.

  4. Fast Eddy says:

    Let’s update that axiom … since we now are totally reliant on electricity…

    A night without electricity would mean rioting and looting. 3 days means anarchy

    Of course we will soon be without electricity – forever… and that means mass starvation and overheating spent fuel ponds

  5. richard says:

    A date with debt. Not much else in the article:
    http://www.zerohedge.com/news/2016-05-11/central-banks-and-rise-extremism
    “Failure or not, odds are that today’s central bankers will double down on their failed philosophy. If you don’t believe me, ask any German life insurer buckling under the strain of running their business. It’s no wonder regulators estimate that insurers will begin to fail after 2018 due to the impossibility of operating in a negative interest environment with over 80 percent of said insurers’ investments in fixed income.”

  6. Vince the Prince says:
  7. Don Stewart says:

    Dear Finite Worlders
    Final sentence in today’s Zero Hedge story on the bankruptcy of Linn Energy and Penn-Virginia.
    ‘As a result, now that two more energy companies are about to see their interest expense slashed drastically going forward, the only real impact on the company will be that their all in production costs will decline substantially, allowing both to pump more oil at even lower prices, and thus adding to the global supply imbalance, ‘

    These sentences illustrate, I think, the subtleties involved in claiming that debt is the driver of decline, rather than depletion or thermodynamic failures. So long as those who hold the digital money that has been created with abandon, especially since 2007, believe the Economics 101 story that the oil price MUST rise once the pesky geopolitical issues are resolved, then they will continue to pour money into the oil companies. Their choice is constrained by the fact that seizing the assets returns only pennies on the dollar. But the net result is that the companies keep on producing.

    Here is the thermodynamic failure explanation from a current post at Peak Oil by BW Hill:
    ‘Doing the same thing over, and over and expecting a different result is called “insanity”. The EIA has used the same algorithm for the last thirty years, and it has never worked. They estimate what the world economy will be at some point in the future, “assume” that the oil will be available to supply it, and project a price! Now what could go wrong?
    Since ECON 101 seems to be all that they understand, why haven’t they asked the simple question of, “at what price does demand destruction begin forcing the price back down”. Or does the EIA take the same stance that the oil companies do, and that is that oil is a magical substance that the economy will pay anything to acquire; whether it has the money to do so, or not!
    Simply put, none of these pundits have established what the value of oil is to the economy. The simple reason is that you can’t do it using ECON 101 to derive that number. Oil has a value to the economy because it can do work; it does that by providing energy. Without an energy determination there is no way to establish a price, and ECON 101 can not give an energy determination. So we did it another way:
    http://www.thehillsgroup.org/depletion2_022.htm
    That tells us the maximum possible price on a time line. $76 is not in the cards for 2017. ‘

    Now, the thermodynamic explanation may be right or it may to faulty, but the choice between ‘debt drives the ship’ vs. ‘thermodynamics drives the ship’ is not as simple as many people believe.

    Don Stewart

    • Yoshua says:

      The petroleum industry consumes half of the global petroleum production since 2012 ?

      • Don Stewart says:

        Yoshua
        We’ve been over the 2012 issue before.

        If you want to read about a similar, but different, situation, see:
        http://www.zerohedge.com/news/2016-05-12/peak-economy-failure-fed-policy-exposed-5-painful-pg-charts

        The gist of the Zero Hedge post is that much of the economy simply cannot grow. Someone with an exceptional idea (such as the smart phone WAS an exceptional idea) may prosper, but the bread and butter economy is contracting. The writer blames it on the Fed, but Hill blames it on thermodynamic issues in the oil business….the economy can’t grow because it is no longer receiving enough potential work in the form of transportation fuels. (A little oversimplified.) The writer thinks policy changes can make outcomes different. Hill is much more pessimistic because oil necessarily depletes. In both cases, they detect underlying reasons why the economy is shrinking. In both cases, they see financial manipulation as simply obscuring the truth…good money chasing bad.

        Don Stewart

        • Yoshua says:

          One of them is looking at the engine (the economy) and the other is looking at the energy (petroleum) the engine runs on. They both see a decline in real terms (from a different advantage point). The engineer (the Fed) is manipulating the numbers to show an increase in speed.

          We are living in an illusion of economic growth, while the economy is really contracting.

    • MM says:

      A Barrel, what is a Barrel ?
      People counting Barrels of oil do one thing every economist woul outright laugh at:
      “Selling all car models and makes at the same price”.
      There exists WTI Barrels and Brent Barrels. but they all have the same price? What do you pay for: a Barrel or the Energy?
      Wondering if Bloomberg one day adds a chart for BTUs

  8. Yoshua says:

    A strong dollar doesn’t make economic sense for the U.S economy which is heading for recession. A strong dollar doesn’t make sense for the U.S corporations or for U.S oil producers, since a strong dollar is making U.S exports uncompetitive and oil production unprofitable. So it doesn’t make any sense for the Fed to start rising interest rates… but that is exactly what the Fed is doing.

    A strong dollar makes sense for the European economy, since it makes the euro weaker, which helps European exports.

    A strong dollar makes political sense in a war against Russia after the conflict over Ukraine. Europe was faced with a sanctions war, the loss of the Russian market, high oil prices and a strong euro at the start of the war with Russia. This might have collapsed the Eurozone.

    The strong dollar turned the tables. The collapse in oil prices is now hurting Russia and helping Europe to cope with the war.

    The war, the end of OPEC, the collapse in oil prices and the end of QE3, all took place in 2014.

  9. Pingback: The real oil limits story; what other researchers missed | Our Finite World

  10. Sorry I haven’t been around much the last few days. I will be leaving on vacation May 15. I expect to still be on the Internet some while on vacation, but I wanted to finish the post before I left.

Comments are closed.