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. Rural says:

    The fire situation in Fort McMurray now looks like it could have global implications. Here’s the article: http://www.cbc.ca/news/business/fort-mcmurray-economists-1.3570061

    Summary: 900k to 1 million barrels of production have been suspended because of the fire. We aren’t sure how long that will last, but it could be a couple of weeks and with so many oil workers affected by the fire, production may not bounce back instantly.

    Most of the article focuses on the implications for the Canadian economy, but around 1 million barrels of oil production disappearing for a couple of weeks may be interesting for global oil markets.

    • Vince the Prince says:

      This just end

      West Texas Intermediate crude prices added 1.2% in recent trading to $44.84 a barrel. The United States Oil Fund (USO) added 1% in in recent trading. Oil snapped back from earlier losses in morning trading. As wildfires spread, analysts are upping their estimates how much production will be taken off line. Paul Cheng at Barclays notes that the evacuation of residents from Fort McMurray, Alberta, means that that majority of workers who operate the oil-production facilities will likely be impacted for some time. He notes that the implications of the fire on global oil supply shouldn’t be underestimated:

      “How big is the impact on global oil supply? The short answer is, it could be huge if the shut-in prolongs for an extended period of time. We estimate 2Q16 global supply exceeds demand by 1.2 mmb/d while the full year gap will average only 0.5 mmb/d.

      In other words, based on our current estimate of the production shut-in related to the fire, in one fell swoop, we have rebalanced the global market and the world will likely face significant supply deficit if the current outages persist beyond mid-year.”

      http://blogs.barrons.com/focusonfunds/2016/05/06/albertas-fires-could-have-huge-impact-on-global-oil-supply/

  2. MG says:

    The truth is that we need robots and automation instead of us, as:

    1. We are not able to produce things cheaply anymore.
    2. We are not able to handle the increasing complexity.

    The rising debt is this rising dependence on the resources that are not local. The “global man” is a new kind of species, that started to spread around the world with the use of fossil fuels, as his survival is dependent on the resources from more and more parts of the world.

    The global man will surely die out first. I am affraid, there are not many local people around the world now.

    • Rodster says:

      Except, robots don’t buy cars, shop at Walmart or Amazon, eat at fast food or fancy restaurants. They don’t buy houses or rent apartments, they don’t take vacations or go on cruises. The only thing robots are good for is to take away from the economy as they don’t contribute anything at all. They also replace workers who can’t contribute to the economy to keep it functioning. So in the long run the economy collapses because there are not enough individuals with enough money to sustain the economy.

      • Ed says:

        Robots contribute to the owners. They increase profit. Work without salary. If it comes down to 1000 rich families owning robot factories that supply the other 1000 factories and families then it works for them. There would be not be seven billion overloading the planet. Yes, the transition will be tricky but again robot police, robot state police, robot FBI/DHS, robot military will help there. Gail I can already hear you saying economy of scale. Yes, the per unit prices will increase at lower scale but it does not matter The owners just apply the required level of robots, energy, and natural resources to make the number of units required by the factories and the families. The rule of thumb is 20% per unit cost reduction for a doubling in volume. So a reduction of 7 billion to 7 million is a cost increase of 10X. That is OK the owners can afford to pay it. This is the wrong wording really. The owners pay nothing they consume robots, energy, and natural resources. So the 7 million will consume as much as 70 million at the current economy of scale efficiencies. That is still a factor of 100 lighter load on natural resource and energy than today.

      • been watching too many repeats of terminator

  3. Pingback: Debt: The Key Factor Connecting Energy and the Economy – Enjeux énergies et environnement

  4. Spacing Guild says:

    ego man will be here ’til the lights go out. In spite of reason he will try to inseminate – not a big fan of siggy but he did have a point (haha)

  5. Don Stewart says:

    Stilgar Wilcox and Others
    Relative to shortonoil and the prospects for the world economy and the Ft. McMurray fire. Shortonoil said this today, at Peak Oil in the comments on the Fire article:

    ‘The market, evidently, is becoming aware that burning up a few tar sands producers is not going to change that dynamic.’

    Everything I have seen says that the tar sands are a miserable source of energy. For example, they burn a lot of natural gas to cook the tar. Now if they are not cooking the gas, then either the surplus gas will go into the US market, further depressing disastrously low prices, or else the natural gas companies will just lose revenue. In short, when a Canadian bank claims that so many barrels per day are at risk, they are not giving a ‘net’ figure. We could say the same about ethanol from US corn. The loss of energy from the disappearance of ethanol would not be very significant, because it takes so much energy to produce the ethanol.

    When shortonoil quotes a number for how much production would have to disappear to get the price of oil up to the 66 dollars that he thinks is the maximum in 2016 (55 dollars next year), he is taking a ‘net’ approach, I believe. The feedback loop in that case is that if the OPEC plus Russia consortium decides to reduce output, they are simultaneous reducing the size of the global economy, which reduces demand. So they would have to reduce production by more than the current ‘surplus’.

    Don Stewart

    • Stilgar Wilcox says:

      That’s interesting, Don and I agree regarding tar sands, but still don’t see how by 2019 world oil production is no longer economical. Right now those price points and years you mention seem reasonable because oil was north of $100 with lots of incentive to produce all sorts of non-conventional and expensive conventional sources, and since then the glut has caused oil to plunge in price (boom-bust cycle), but once the over supply has dwindled price will rebound somewhat. Not north of $100 I don’t think, but maybe as high as my guess which is $60-80 as an upper range for several years to come. At that price range fracking in the Bakken will probably resume in the sweet spots.

      Peak oil will hit or could be hitting now but the time scales involved are always difficult to pinpoint. I err on the side of being conservative now, meaning with a view things will take longer to fall apart, in great part due to so many nails in the coffin predictions that have come and gone. For example I remember back in 07 a top notch number crunching contributor to the Oil Drum was certain Russian oil was about to drop like a stone, but didn’t and is now at a historic high at this much later junction in 2016. Matthews ‘Twilight in the Desert’ suggested the Saudi’s were about to have the same type of thing happen to them and it would spell disaster for the world economy. The Saudi’s are still producing just as much as back then. We all know the ramifications when this puppy falls apart, but my position is one of patience at this point. But it won’t take long to see if short is on to something or not.

      • Don Stewart says:

        Stilgar
        I have previously pointed out the advantages and disadvantages of a mathematical model. The advantages are that mathematical models enable the user to make precision estimates. Where does Hill get his numbers 66 dollars this year and 55 dollars next year? They come from the curves in the model. No impressionistic approach can yield such precision. The downside is that a mathematical model of a very complicated world is likely to misrepresent something. We can get sucked into believing the equations just because they are so beautiful.

        That said, the Hill’s Group put together the only model I know about which considered all sides of the equations. Not only how much work can be accomplished with a barrel of oil, but also how much work has to go into the production of a barrel of oil and its products, and also how much money can be generated by the economy to pay for the oil. Greer’s cryptic statement in answer to my question hints that he may be thinking along the same lines. I doubt he has a mathematical model.

        If you follow the discussions between Hill and others, both on the daily Peak Oil postings and also the special Q and A section they set up, I think you see this:
        *An unfortunate amount of mudslinging and belittlement…seems to be typical of the site
        *The Etp model which is based on ‘economically rational actors’. So long as somebody can make money extracting and processing oil, they will do so
        *Along the way, there will be upheavals. Bankruptcies, for example. To the Etp model, a change of ownership in a bankruptcy is irrelevant. But in the real world, bankruptcies and failed states are earth shaking. As I understand it, 2030 has always been the Etp models prediction of the ‘dead state’ when the average existing well will no longer be profitable. The Etp model predicted that the peak of oil production was in 2012, when half of the oil produced was required to produce the oil…which implies that production cannot increase. The Etp model predicted that the peak return to society from the production of oil occurred around the year 2000….costs were still reasonable and ability to pay was high…yielding a surplus. The Etp model predicts that the ability to pay is falling steadily. As I covered in a previous post, the new data Hill plugged into the model on the waste heat generated by burning the oil products tipped the model over into one where overproduction in a desperate search for cash flow would become the norm.

        From that last prediction flows Hill’s concern that, by 2019, the industry may fall apart. And his words yesterday about the industry cannibalizing itself. Suppose the industry basically went bankrupt in 2018. Do you think that the financial interests who pick up the pieces could construct an industry which was solely about squeezing the last few barrels out? There are firms on Wall Street who have specialized in taking over failed companies and milking them for cash. Hill has said that it will be instructive to see what happens in Russia, as he sees that country as basically milking their fields for cash. He has been less positive about what is happen in Saudi, but has cautioned that the Saudi plan to sell some of Ghawar may reflect their inside knowledge that it really is twilight in the desert.

        Hill has made ancillary calculations about tar sand and light tight oil. As I understand him, he doesn’t see either as having much to do with transport fuels. Light tight oil is unsuited, in his view, as a transportation fuel. Tar sands are uncooked oil, and have to be cooked to yield a transportation fuel. The process is just never going to be economical.

        Don Stewart

        • Stilgar Wilcox says:

          “Suppose the industry basically went bankrupt in 2018. Do you think that the financial interests who pick up the pieces could construct an industry which was solely about squeezing the last few barrels out?”

          The quick answer is no. However, that’s probably not going to happen. There is a certain amount of flexibility with healthier companies taking over where weaker one’s fall out. It’s a rough business when the profits are thin and a wild, expanding one when profits are huge. So I personally don’t expect a major fallout, but of course the economy needs to hold together.

          It’s interesting the different viewpoints that can be ascertained via some of the different peak oil type websites. Ron Patterson’s website is technically oriented – a bit too dry for my liking, but there are posters there that are very optimistic about the oil business lasting much longer than 2018-2020. I think they tend to avoid economic issues to have a more pure view of the oil business, but still there are multiple viewpoints on the subject. In fact, you mentioned peak oil dot com, which has the poster Rockman. He works in the oil bus. and he has mentioned how oil pockets keep getting smaller and more difficult to find, but he’s also somewhat optimistic from the standpoint of the business going through boom and bust cycles, simply seeing this one as just another in a long line of them.

          I’d actually like to see the whole kit and caboodle, oil business and the world economy go belly up from the standpoint of stopping the carnage, the ecological damage that is not far from eliminating most other large fauna from the planet. But I’m also a realist, from the standpoint that so much vested interest, trillions of dollars worth of infrastructure, trillions of assets are not going to be given up on so easily. Even in the case of a major economic dislocation, adjustments would be made, new currencies printed, defaults wiped off of ledgers, and so on to keep this situation moving forward. Even Trump talks openly about defaulting on the US debt. We’ve already seen the measures CB’s are willing to do to kick the can down the road. I think we are in the sunset period, but that will be a time period of many ups and downs with civilization holding on by any means conceivable to some form of BAU. For those that understand the situation like many on these peak oil websites, it will be a shocking and illuminating downward trek.

          • Don Stewart says:

            Stilgar
            Something Ugo Bardi said, coupled with Hill’s comment about the empirical data on waste heat which replaced his previous assumption of theoretical waste heat, caused me to make the connection between the ‘waste heat’ generated by the economy as being a cause of collapse. If the economy is using the work potential of their primary energy sources (whether grain fed slaves or oil powered ICEs) to produce ‘waste heat’, then that economy is hastening its day of reckoning. That perception is totally at odds with Keynesian ideas. To the Keynesian, digging holes and filling them up is OK, because it keeps the money circulating. Our measures of National Income came into being after WWII, and used Keynesian ideas as their basis for accounting. So the idea of measuring needs never rears its ugly head in Washington, DC.

            Yesterday, Hill posted some comments on Peak Oil to the effect that Americans are going to discover, the hard way, what is necessary and what we wish for. If Hill’s equations are anywhere near correct, the work that our present economy and oil production and processing system can deliver has been declining now for 15 years or so. Yet absolutely nobody wants to talk about that. Instead, we amuse ourselves by counting barrels of oil equivalents.

            I heard yesterday from a guy in Florida who just got his PhD in middle age. He had a long work history doing the grunt work for researchers, so he understood how to do a scientific study. He began to garden in his back yard. He meticulously kept records of all the inputs and he valued his outputs based on what they cost in the grocery store. He said that he was clearing enough money to pay off a modest sized house in about 20 years. His point there was that low income people who were willing to garden could pay off their house by avoiding the cost of buying food. So much for Gail’s theory that debt is absolutely essential. Of course, such a course is not politically acceptable in the US. There is a vocal interest group who holds that requiring poor people to work for food is immoral (after all, Jaime Dimon doesn’t have to grow his own food!). And the Big Ag lobby loves food stamps because it generates business for them. And neighborhood associations think vegetable gardens are ‘untidy’.

            Trump’s solution is to keep most things working as they work now, just default on the debt. Hillary probably thinks that keeping on keeping on with Extend and Pretend will work. I think Hill is correct that we will have to re-discover the difference between needs and wants. Whether it is too late, I am not sure. I do suspect that a self-sufficient village somewhere in a backwater may be a better place to ride out the big tremors.

            Don Stewart

            • “So much for Gail’s theory that debt is absolutely essential.” You clearly don’t understand what I am saying.

            • bandits101 says:

              “He said that he was clearing enough money to PAY OFF a modest sized house in about 20 years. His point there was that low income people who were willing to garden could PAY OFF their house by avoiding the cost of buying food………….. So much for Gail’s theory that debt is absolutely essential”…………….

              So what is he PAYING OFF?
              If everyone “avoided the cost of buying food”…….Suggesting that it is a solution for a minority let alone majority, is outright laughable. The food industry and support is the biggest.

  6. Fast Eddy says:

    The sums are non-trivial as well. America’s GDP in 2015 was about $18 trillion. Wages’ share–about 42.5%–is $7.65 trillion.

    If wage’s share was 50%, as it was in the early 1970s, its share would be $9 trillion. That’s $1.35 trillion more that would be flowing to wage earners.

    That works out to $13,500 per household for 100 million households.

    http://www.zerohedge.com/news/2016-05-06/no-wonder-were-poorer-wages-share-gdp-has-fallen-46-years

    • The wages and salaries number seems to include Employer Contributions for pension, healthcare and social security/medicare. Especially the medical component of this has been escalating.

      Also, thanks to ObamaCare, the poor part-time hourly workers now are forced to buy health insurance (which is not included in their wages), even though they likely don’t have money. They end up with not enough money for everything.

  7. Ki says:

    Just found this Ode to Elon Musk’s Tesla corporation, it even criticize some blogs similar to Gail’s like Ecotricity, the best information displayed are some energy flow charts, (something I do not see often on this type of blogs by the way). And it completely fails at establishing a solid argument about the things it disregards by any other way than saying “We must shift from fossil fuels by supporting the Electric Vehicle”.
    The Best conclusion it gets is this: “At some point in the future, either really soon or just a little soon, we’ll have no choice but to stop running everything on fossil fuels, because they’ll either be gone or too expensive.” However it does recognizes the high probability of an economic collapse.
    I think this is rather a huge marketing campaign as I saw a similar article on a specialized newspaper in my country. Worryingly must people sticks to the idea of an easy way out through consumer technology. I’ll leave the link for those interested.

    http://waitbutwhy.com/2015/06/how-tesla-will-change-your-life.html

  8. Tim Groves says:

    One day soon we’ll have no choice but to stop running everything on fossil fuels.
    And on that day Elon Musk will be commuting to work on a bicycle made of bamboo.

  9. Yoshua says:

    U.S credit/debt expansion

    The petrodollar: Oil prices seems to follow the credit/debt expansion.

    Since oil is priced in dollars, the Fed’s money supply expansion and financial institutions credit/debt expansion and U.S GDP expansion, still seems to be the driving force behind the rise in the oil price… or the collapse in the oil price.

    • Yoshua says:

      Yes, I just realized that Gail has pointed this out a million times. 🙂

    • Yoshua says:

      Well… there isn’t a perfect match between the charts from 1990 to 2000, and then at 2014 something happens: QE3 ends when the U.S shale oil is on line, the credit expansion still continues, but the oil price collapses.

      • Other currencies fall relative to the dollar when QE ends, so that the debt outstanding in dollar terms drops. We buy oil in dollars. See this chart from my previous post.

        Brent oil price vs world debt outstanding

        • Yoshua says:

          Yes, it’s of course the global credit/debt expansion in dollar terms that drives the oil price up.

          Since the Chinese yuan is pegged to the dollar, the strong dollar has today also a negative effect on Chinese exports. China would really need to devalue the yuan against the dollar to make Chinese exports competitive on the global market again. But a massive devaluation of the yuan would deflate the global debt bubble in dollar terms even more.

          When stock markets in China crashed last summer, the oil price started to crash too. When China devaluated the yuan last august, the stock markets around the world started to crash and oil prices followed even further down the hole.

          • There is also the possibility that Saudi Arabia and the other Middle Eastern countries will not be able to maintain the peg to the dollar. If that happens, Saudi Arabia will be able to get more value for selling the oil at a given dollar figure, just as Russia has been able to. The US will find that oil suddenly costs relatively more than it has recently. This will tend to push the United States toward recession, and make its debt harder to repay.

            If others have other view of how this works out, I would be interested in hearing. I may be missing something.

        • Creedon says:

          http://peakoil.com/business/russia-nears-launch-of-ruble-priced-oil-trading-platform I’ve given up feeling that I know for certain what determining factors will effect the future. If any country were truly successful in trading oil outside the dollar, it would obviously have an effect on our currency.

          • Thanks for pointing this out. I understand that there is a certain amount of trade in other goods done outside the dollar already. I suppose that the expectation is that there is less demand for dollars, so the dollar will fall relative to other currencies.

  10. richard says:

    Just trying to give a glimpse of the scale of the challenge :
    http://www.zerohedge.com/news/2016-05-06/these-9-charts-explain-global-economic-slowdown-and-why-central-banks-cant-fix-it
    “Productivity grew at an annual rate of less than 1% in each of the last five years. The average annual rate of productivity growth from 2007 to 2015 was 1.2%, well below the long-term rate of 2.1% from 1947 to 2015.”
    “art of the problem for the developed world is that the services sector makes up much of its economy. Getting higher productivity in dry cleaners, restaurants, and hairdressers is much harder than it is in manufacturing or in agriculture. While productivity grows in the services sector, that sector alone cannot deliver significant increases in the overall productivity rate.”

    Add to that the changes in some parts of the world to population growth or aging,
    and at the very least, the stresses between continental changes are pushing nations to lock in access to resources sucjh as crude oil.

    • Good article. And of course energy use affects pretty much all of the things in the article–productivity of workers, number of jobs available, service or non-service. But no mention of energy.

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