Oops! The economy is like a self-driving car

Back in 1776, Adam Smith talked about the “invisible hand” of the economy. Investopedia explains how the invisible hand works as, “In a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large.”

We talk and act today as if governments and economic policy are what make the economy behave as it does. Unfortunately, Adam Smith was right; there is an invisible hand guiding the economy. Today we know that there is a physics reason for why the economy acts as it does: the economy is a dissipative structure–something we will talk more about later.  First, let’s talk about how the economy really operates.

Our Economy Is Like a Self-Driving Car: Wages of Non-Elite Workers Are the Engine

Workers make goods and provide services. Non-elite workers–that is, workers without advanced education or supervisory responsibilities–play a special role, because there are so many of them. The economy can grow (just like a self-driving car can move forward) (1) if workers can make an increasing quantity of goods and services each year, and (2) if non-elite workers can afford to buy the goods that are being produced. If these workers find fewer jobs available, or if they don’t pay sufficiently well, it is as if the engine of the self-driving car is no longer working. The car could just as well fall apart into 1,000 pieces in the driveway.

If the wages of non-elite workers are too low, they cannot afford to pay very much in taxes, so governments are adversely affected. They also cannot afford to buy capital goods such as vehicles and homes. Thus, depressed wages of non-elite workers adversely affect both businesses and governments. If these non-elite workers are getting paid well, the “make/buy loop” is closed: the people whose labor creates fairly ordinary goods and services can also afford to buy those goods and services.

Recurring Needs of Car/Economy

The economy, like a car, has recurring needs, analogous to monthly lease payments, insurance payments, and maintenance costs. These would include payments for a variety of support services, including the following:

  • Government programs, including payments to the elderly and unemployed
  • Higher education programs
  • Healthcare

Needless to say, the above services tend to keep rising in cost, whether or not the wages of non-elite workers keep rising to keep up with these costs.

The economy also needs to purchase a portfolio of goods on a very regular basis (weekly or monthly), or it cannot operate. These include:

  • Fresh water
  • Food of many different types, including vegetables, fruits, and grains
  • Energy products of many types, such as oil, coal, natural gas, and uranium. These needs include many subtypes suited to particular refineries or electric power plants.
  • Minerals of many types, including copper, iron, lithium, and many others

Some of these goods are needed directly by the workers in the economy. Other goods are needed to make and operate the “tools” used by the workers. It is the growing use of tools that allows workers to keep becoming more productive–produce the rising quantity of goods and services that is needed to keep the economy growing. These tools are only possible through the use of energy products and other minerals of many kinds.

I have likened the necessary portfolio of goods the economy needs to ingredients in a recipe, or to chemicals needed for a particular experiment. If one of the “ingredients” is not available–probably because of prices that are too high for consumers or too low for producers–the economy needs to “make a smaller batch.” We saw this happen in the Great Recession of 2007 to 2009. Figure 1 shows that the use of several types of energy products, plus raw steel, shrank back at exactly the same time. In fact, the recent trend in coal and raw steel suggests another contraction may be ahead.

Figure 1. World Product Consumption, indexed to the year 2000, for selected products. Raw Steel based on World USGS data; other amounts based of BP Statistical Review of World Energy 2016 data.

Figure 1. World Product Consumption, indexed to the year 2000, for selected products. Raw Steel based on World USGS data; other amounts based of BP Statistical Review of World Energy 2016 data.

The Economy Re-Optimizes When Things Go Wrong 

If you have a Global Positioning System (GPS) in your car to give you driving directions, you know that whenever you make a wrong turn, it recalculates and gives you new directions to get you back on course. The economy works in much the same way. Let’s look at an example: 

Back in early 2014, I showed this graph from a presentation given by Steve Kopits. It shows that the cost of oil and gas extraction suddenly started on an upward trend, about the year 1999. Instead of costs rising at 0.9% per year, costs suddenly started to rise by an average of 10.9% per year.

Figure 1. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is "Compound Annual Growth Rate."

Figure 2. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is “Compound Annual Growth Rate.”

When costs were rising by only 0.9% per year, it was relatively easy for oil producers to offset the cost increases by efficiency gains. Once costs started rising much more quickly, it was a sign that we had in some sense “run out” of new fields of easy-to-extract oil and gas. Instead, oil companies were forced to start accessing fields with much more expensive-to-produce oil and gas, if they wanted to replace depleting fields with new fields. There would soon be a mismatch between wages (which generally don’t rise very much) and the cost of goods made with oil, such as food grown using oil products.

Did the invisible hand sit idly by and let business as usual continue, despite this big rise in the cost of extraction of oil from new fields? I would argue that it did not. It was clear to business people around the world that there was a large amount of coal in China and India that had been bypassed because these countries had not yet become industrialized. This coal would provide a much cheaper source of energy than the oil, especially if the cost of oil appeared likely to rise. Furthermore, wages in these countries were lower as well.

The economy took the opportunity to re-optimize. Part of this re-optimization can be seen in Figure 1, shown earlier in this post. It shows that world coal supply has grown rapidly since 2000, while oil supply has grown quite slowly.

Figure 3, below, shows a different kind of shift: a shift in the way oil supplies were distributed, after 2000. We see that China, Saudi Arabia, and India are all examples of countries with big increases in oil consumption. At the same time, many of the developed countries found their oil consumption shrinking, rather than growing.

Figure 2. Figure showing oil consumption growth since 2000 for selected countries, based on data from BP Statistical Review of World Energy 2016.

Figure 3. Figure showing oil consumption growth since 2000 for selected countries, based on data from BP Statistical Review of World Energy 2016.

A person might wonder why Saudi Arabia’s use of oil would grow rapidly after the year 2000. The answer is simple: Saudi Arabia’s oil costs are its costs as a producer. Saudi Arabia has a lot of very old wells from which oil extraction is inexpensive–perhaps $15 per barrel. When oil prices are high and the cost of production is low, the government of an  oil-exporting nation collects a huge amount of taxes. Saudi Arabia was in such a situation. As a result, it could afford to use oil for many purposes, including electricity production and increased building of highways. It was not an oil importer, so the high world oil prices did not affect the country negatively.

China’s rapid rise in oil production could take place because, even with added oil consumption, its overall cost of producing goods would remain low because of the large share of coal in its energy mix and its low wages. The huge share of coal in China’s energy mix can be seen in Figure 4, below. Figure 4 also shows the extremely rapid growth in China’s energy consumption that took place once China joined the World Trade Organization in late 2001.

Figure 3. China energy consumption by fuel, based on BP 2016 SRWE.

Figure 4. China energy consumption by fuel based on BP 2016 Statistical Review of World Energy.

India was in a similar situation to China, because it could also build its economy on cheap coal and cheap labor.

When the economy re-optimizes itself, job patterns are affected as well.  Figure 5 shows the trend in labor force participation rate in the US:

Figure 4. US Civilian labor force participation rate, based on US Bureau of Labor Statistics data, as graphed by fred.stlouisfed.org.

Figure 5. US Civilian labor force participation rate, based on US Bureau of Labor Statistics data, as graphed by fred.stlouisfed.org.

Was it simply a coincidence that the US labor force participation rate started falling about the year 2000? I don’t think so. The shift in energy consumption to countries such as China and India, as oil costs rose, could be expected to reduce job availability in the US. I know several people who were laid off from the company I worked for, as their jobs (in computer technical support) were shifted overseas. These folks were not alone in seeing their jobs shipped overseas.

The World Economy Is Like a Car that Cannot Make Sharp Turns 

The world economy cannot make very sharp turns, because there is a very long lead-time in making any change. New factories need to be built. For these factories to be used sufficiently to make economic sense, they need to be used over a long period.

At the same time, the products we desire to make more energy efficient, for example, automobiles, homes, and electricity generating plants, aren’t replaced very often. Because of the short life-time of incandescent light bulbs, it is possible to force a fairly rapid shift to more efficient types. But it is much more difficult to encourage a rapid change in high-cost items, which are typically used for many years. If a car owner has a big loan outstanding, the owner doesn’t want to hear that his car no longer has any value. How could he afford a new car, or pay back his loan?

A major limit on making any change is the amount of resources of a given type, available in a given year. These amounts tend to change relatively slowly, from year to year. (See Figure 1.) If more lithium, copper, oil, or any other type of resource is needed, new mines are needed. There needs to be an indication to producers that the price of these commodities will stay high enough, for a long enough period, to make this investment worthwhile. Low prices are a problem for many commodities today. In fact, production of many commodities may very well fall in the near future, because of continued low prices. This would collapse the economy.

The World Economy Can’t Go Very Far Backward, Without Collapsing

The 2007-2009 recession is an example of an attempt of the economy to shrink backward. (See Figure 1.) It didn’t go very far backward, and even the small amount of shrinkage that did occur was a huge problem. Many people lost their jobs, or were forced to take pay cuts. One of the big problems in going backward is the large amount of debt outstanding. This debt becomes impossible to repay, when the economy tries to shrink. Asset prices tend to fall as well.

Furthermore, while previous approaches, such as using horses instead of cars, may be appealing, they are extremely difficult to implement in practice. There are far fewer horses now, and there would not be places to “park” the horses in cities. Cleaning up after horses would be a problem, without businesses specializing in handling this problem.

What World Leaders Can Do to (Sort of) Fix the Economy

There are basically two things that governments can do, to try to make the economy (or car) go faster:

  1. They can encourage more debt. This is done in many ways, including lowering interest rates, reducing bank regulation, encouraging lower underwriting standards or longer term loans, taking out greater debt themselves, guaranteeing debt of non-creditworthy entities, and finding new markets for “recycled debt.”
  2. They can increase complexity levels. This means increasing output of goods and services through the use of more and better machines and through more training and specialization of workers. More complex businesses are likely to lead to more international businesses and longer supply chains.

Both of these actions work like turbocharging a car. They have the possibility of making the economy run faster, but they have the downside of extra cost. In the case of debt, the cost is the interest that needs to be paid; also the risk of “blow-up” if the economy slows. There is a limit on how low interest rates can go, as well. Ultimately, part of the output of the economy must go to debt holders, leaving less for workers.

In the case of complexity, the problem is that there gets to be increasing wage disparity, when some employees have wages based on special training, while others do not. Also, with capital goods, some individuals are owners of capital goods, while others are not. The arrangement creates wealth disparity, besides wage disparity.

In theory, both debt and increased complexity can help the economy grow faster. However, as I noted at the beginning, it is the wages of the non-elite workers that are especially important in allowing the economy to continue to move forward. The greater the proportion of the revenue that goes to high paid employees and to bond holders, the less that is available to non-elite workers. Also, there are diminishing returns to adding debt and complexity. At some point, the cost of each of these types of turbo-charging exceeds the benefit of the process.

Why the Economy Works Like a Self-Driving Car

The reason why the economy acts like a self-driving car is because the economy is, in physics terms, a dissipative structure. It grows and changes “on its own,” using energy sources available to it. The result is exactly the same effect that Adam Smith was observing. What makes the economy behave in this way is the fact that flows of energy are available to the economy. This happens because an economy is an open system, meaning its borders are permeable to energy flows.

When there is an abundance of energy available for use (from the sun, or from burning fossil fuels, or even from food), a variety of dissipative structures self-organize. One example is hurricanes, which self-organize over warm oceans. Another example is plants and animals, which self-organize and grow from small beginnings, if they have adequate food energy, plus other necessities of life. Another example is ecosystems, consisting of a number of different kinds of plants and animals, which interact together for the common good. Even stars, including our sun, are dissipative structures.

The economy is yet another type of a dissipative structure. This is why Adam Smith noticed the effect of the invisible hand of the economy. The energy that sustains the economy comes from a variety of sources. Humans have been able to obtain energy by burning biomass for over one million years. Other long-term energy sources include solar energy that provides heat and light for gardens, and wind energy that powers sail boats. More recently, other types of energy have been added, including fossil fuels energy.

When energy supplies are very cheap and easy to obtain, it is easy to ramp up their use. With growing supplies of energy, it is possible to keep adding more and better tools for people to work with. I use the term “tools” broadly. Besides machines to enable greater production, I include things like roads and advanced education, which also are helpful in making workers more effective. The use of growing energy supplies allows growing use of tools, and this growing use of tools increasingly leverages human labor. This is why we see growing productivity; we can expect to see falling human productivity if energy supplies should start to decline. Falling productivity will tend to push the economy toward collapse.

One problem for economies is diminishing returns of resource extraction. Diminishing returns cause the economy to become less and less efficient. Once energy extraction starts to have a significant problem with diminishing returns (such as in Figure 2), it is like losing energy resources into a sinkhole. More work is necessary, without greater output in terms of goods and services. Indirectly, economic growth must suffer. This seems to be the problem that the economy has been encountering in recent years. From the invisible hand’s point of view, $100 per barrel oil is very different from $20 per barrel oil.

One characteristic of dissipative structures is that they keep re-optimizing for the overall benefit of the dissipative structure. We saw in Figures 3 and 4 how fuel use and jobs rebalance around the world. Another example of rebalancing is the way the economy uses every part of a barrel of oil. If, for example, our only goal were to maximize the number of miles driven for automobiles, it would make sense to operate cars using diesel fuel, rather than gasoline. In fact, the energy mix available to the economy includes quite a bit of gasoline and natural gas liquids. If we need to use what is available, it makes sense to use gasoline in private passenger cars, and save diesel for commercial use.

Another characteristic of dissipative structures is that they are not permanent. They grow for a while, and then collapse. Later, new similar dissipative structures may develop and indirectly replace the ones that have collapsed. In this way, the overall system is able to evolve in a way that adapts to changing conditions.

What Are the Likely Events that Would Cause the Economy to Collapse?

I modeled the system as being like a self-driving car. The thing that keeps the system operating is the continued growth of inflation-adjusted wages of non-elite workers. This analogy was chosen because in ecosystems in general, the energy return on the labor of an animal is very important. The collapse of a population of fish, or of some other animal, tends to happen when the return on the labor of that animal falls too low.

In the case of the fish, the return on the labor of the fish falls too low when nearby supplies of food disappear, and the fish must swim too far to obtain new supplies of food. The return on human labor would seem to be the inflation-adjusted wages of non-elite workers. We know that wages for many workers have been falling in recent years, because of competition from globalization, and because of replacement of human labor by advanced machines, such as computers and robots.

Figure 6. Bottom 50% income share, from recent Piketty analysis.

Figure 6. Bottom 50% income share, from recent Piketty analysis.

Besides the problem of falling wages of non-elite workers, earlier in this post I mentioned a number of other issues that make the wages of these workers go less far. These include growing government spending, and the growing costs of education and healthcare. I also mentioned the problem of rising debt, and the increased concentration of wealth, as we try to add complexity to solve problems. All of these issues make it hard for “demand”–which might also be called “affordability”–to be sufficiently great to allow commodity prices to rise to the level producers need for profitability.

Prices Play a Very Important Role in the Economy

The pricing system is the communication system of the economy, as a dissipative structure. One use of energy is to create “information.” Prices are a high level form of information.

One big area where prices come up is with respect to the whole portfolio of products needed on a regular basis, which I mentioned earlier (water, food, energy products, and mineral products). In order for the system to continue working, the prices need to be both:

  • Affordable by consumers
  • High enough for producers to cover their costs, including a margin for taxes and reinvestment

Now, in 2017, prices are “sort of” affordable for consumers, but they are not high enough for producersOil companies will go out of business if these low prices persist.

Back in 2007 and 2008, we had the reverse problem. Prices were high enough for producers, but too high for consumers (especially non-elite workers). This is a big part of what pushed the economy into recession.

We noticed back in Figure 1 that quantities of energy products/goods tend to move up and down together. A similar phenomenon holds true for prices: commodity prices tend to rise and fall together (Figure 7).  The reason this happens is because when the world economy is moving swiftly forward (higher wages, more building activity, more debt), demand tends to be high for many different types of materials at the same time. When the economy slows, prices of all of these commodities tend to fall at the same time. Inflation tends to fall as well.

Figure 6. Prices of oil, call and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.

Figure 7. Prices of oil, coal and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.

If prices cannot rise high enough for producers, it is likely a sign that wages of non-elite workers are already too low. The affordability loop mentioned earlier is not being closed, so prices cannot stay up at a high enough level to maintain production.

Most Modelers Overlook the Fact that the Economy Is an Open System

Most energy models are based on one of two views of the world: (1) fossil fuel energy supply will eventually run short, so we must use it as sparingly as possible; or (2) we want to reduce the use of fossil fuels as quickly as possible, because of climate change. Because of these issues, we want to leverage the fossil fuel energy we have, to as great an extent as possible, with energy that we can somehow capture from renewable sources, such as the solar energy or wind. With this view of the situation, our major objective is to create “renewables” that use fossil fuel energy as efficiently as possible. The hope is that these renewables, together with the actions of governments, will allow the economy to gradually shrink back to a level that is somehow more sustainable.

Implicit is this model is the view that the economy, and the world in general, is a closed system. Our current government and business leaders are in charge; they can make the changes they would prefer, without the invisible hand causing an unforeseen problem. Very few have realized that the economy cannot really shrink back very much; past history, as well as the nature of dissipative structures, shows that economies tend to collapse. The only economies that have at least temporarily avoided that fate have shifted toward less complexity–for example, eliminating huge government programs, such as armies–rather than yielding to the temptation to add ever more complexity, such as wind turbines and solar panels.

The real situation is that we have a here-and-now problem of too low wages for non-elite workers. Commodity prices are also too low. Intermittent renewables such as wind and solar are thought to be solutions, but it is well-known that intermittent renewables cause too-low prices for other types of electricity generation, when added to the electric grid. Thus, they are likely part of the low-price problem, not part of the solution. Temporary solutions, if there are any, are likely in the direction of cutting back on government expenditures and reducing regulation of banks. In fact, with the election of Trump and the passage of Brexit, the economy seems to again be re-optimizing.

We also know that dissipative structures do not shrink back well, at all. They tend to collapse, instead. For example, you, as a human being, are a dissipative structure. If your food intake were cut back to, say, 500 calories per day, how well would you do? If you could not get along on a very low calorie diet, how would you expect the economy to shrink back to a renewables-only level? Renewables that can be used in a shrunken economy are scarce; we don’t have a huge number of trees to cut down. We cannot maintain the electric grid without fossil fuels.

The assumption that the economy is a closed system is pretty much standard when modeling our current energy situation. This occurs because, until recently, we did not understand that the self-organizing properties of inanimate systems were as important as they are. Also, modeling of the economy as a closed system, rather than an open system, makes modeling much easier. The problem is that closed system modeling doesn’t really tell the right story. For a discussion of some of the issues associated with this mis-modeling, see the recent academic paper, Is the increased use of biofuels the road to sustainability? Consequences of the methodological approach.

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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2,573 Responses to Oops! The economy is like a self-driving car

  1. CTG says:

    Events are unfolding at amazing speed and it is accelerating. Unprecedented in history of mankind. A lot of metric/statistics/etc are at all time highs, all time low, since Lehman, since 1987, etc.

    A flap of a butterfly’s wings in Amazon will cause a great thunderstorm in London – chaos theory.

    Anything, any event, big or small can cause an extinction event. Only a fool will comment that it will or will not be an issue.

    Cornered animals are especially vicious because it is a do-or-die situation. Will this be another pile on the camel’s back or will it be the straw? No idea….

    http://www.zerohedge.com/news/2017-03-06/wikileaks-releases-encrypted-vault-7-torrent-will-unveil-password-tuesday-9am

    • I could be wrong, but this will be nothing again.
      As of today you can run 1080p documentary video how the Seizure Lady candidate is eating Syrian child brains with a long spoon and at least half the country won’t be bothered at all.. We are way past the moment at which information and civil discourse can change a thing..

      • Not so sure about that…
        It’s just that there’s no meaningful discourse at the Nation State level. At the top table at The Bank of International Settlements … well well well

        I have a funny feeling it’s different amongst that grade of human.

        • Well, that’s related to the issue I posted about, the wiki leaks is mostly just a “low level” fluff. Color me unimpressed providing “yet another evidence” how the delegated political class and some mid upper level of fat cat are corrupted and immoral, .. , who knew.. lol

          However, the leakers have several times outed themselves by admitting they are not interested in the core structural stuff shaping longer cycles, including the layers like you suggested, BIS, .. etc.

          • Yep, that’s pretty much it, you can’t blame the leakers; it takes a life time of study–and the right social position to comprehend the System in its Totality. No one is to blame really.

            What is concerning; is that all of my friends whom are far older than me couldn’t see the System. So they were all relying on belief to varying degress.

            Interestingly, in the personal notes of all the US unofficial leadership that I read; they all used to word DOOM to describe the situation facing America.

            Amazing, really.

            Cathal Haughian
            http://www.beforethecollapse.com/about

            • Yep, all the hoopla so far today was just another dump of details on cyber spying and inter agencies fight.. Well, we have had similar stuff uncovered for past several decades on many fronts already to no avail. Nothing new under the sun, stealing, spying, lying, ..
              Perhaps one of the “benefits” and or (goals of it) will be temporary shift of balance more towards the mil guys faction “around” Trump for a moment.

            • Fast Eddy says:

              I was watching Snowden yesterday — and clearly what the NSA is doing is driven by the desire to control the world — of that there can be no doubt. The Terrorists are a means to this end … scare people (911) — then roll out the surveillance unopposed.

              This is a clear violation of the US constitution — it is ILLEGAL.

              Has anything been done about it? Nope.

              Is the MSM screaming STOP? Nope

              Are the elected reps voting to stop this? Nope

              Is the http://www.zerohedge.com/news/2014-11-18/surveillance-state-wins-senate-votes-allow-nsa-bulk-data-collection-continue

              The Elders run the show….

            • The primary purpose of surveillance is to build up a database of control files on every decision maker. Then, they’ll obey. That’s why you must choose; I chose China.

            • Many lack the context to attain Understanding. Like how the fish are last to see the water.

              Sitting in China, and being well informed, my summary is that Trump is backed and protected by a New York based Family–The Rotschilds.

              The Rockefelar Network controls the USA historically and is smarting quite openly, they were the pro War faction in recent years. Their Network is vast, including CIA, CNN, NYT, WaPO, CFR etc.

              The Rotschild faction is systematically attacking the Network; first the media and now Intel branches.

              So, in China we’re essentialy watching a kind of civil war at the very top, reminiscent of the recent power struggle here between Bo XiLi and Xi.

              The wild card is a dirty nuke or assassination; impeachment is a real possibility.

              You’d be crazy to be exposed to significant risk going forward; I’m all in 100% Gold. May buy some crypto. And I had no gold two months ago.

              Good Luck to my American Friends,

              Cathal
              http://www.beforethecollapse.com/about
              http://www.beforethecollapse.com/about

          • Fast Eddy says:

            I am sure Snowden and Assange have held back the stuff that would tear the system to bits — Snowden in particular would have access to all the secrets the NSA has on every world leader the world over — the deals behind the deals etc etc etc…

            But what point in revealing these things? If anything — you hold that info back as your get out of jail card.

            Ultimately nothing will change – both are wasting their time.

      • CTG says:

        My point is that we will never know what the trigger will be. We must cherish every moment of our lives.

        • Yep, recently I just caught myself off guard starring (while FW narrative buzzing in the head) at my shiny zinc plated wheel barrow and shovel, what fantastic tools. My ancestors of few hundred yrs past would be proud and humbled by such technology at the same time..

  2. Fast Eddy says:

    In Alaska ya’ll who sing god bless america every morning…. ya’ll ought to watch this ..

    Ya’ll are living inside the epicentre of the evil empire.

    https://thepiratebay.org/search/snowden/0/99/200

  3. Joel says:

    The people don’t believe the Empire is evil, the media suppress that view point. Some are aware of the cruelty of the past and present, not a popular topic of discussion. Donald said he will make things great so there’s that, one can only hope and change, it’s an embarrassment…

    • Most of the US public has not been part to any serious pain on domestic soil at least since the Civil War era, that’s what, ~150yrs ago? This is often overlooked important factor shaping the nation’s psyche in contrast to the rest of the world.

      Obviously, there were some ongoing trends slightly altering that like waves of immigration from war torn countries, incl. replant of elites of Nazi regimes from Europe and S. America etc. Also some wounds have been made by the Vietnam war and the overall social decay from at least 1970s. But the major point still stands, the US in unfit to face up to any serious dislocation in contrast to 2.5-3rd world “immunized” realities..

  4. Tim Groves says:

    The economy is like a self-driving car.
    Imagine if it ran on batteries!

    • Joel says:

      Breath taking fantasy, one can only dream, the city of Atlantis ran on zero point modules sort of a battery. Battery technology is improving, as a consultant I used to run a development team for a battery powered under water vehicle. Played around with battery powered bicycles about a decade or more ago. My conclusion then was if range was a concern and slower top speed acceptable, it was better to improve endurance fitness than screw with batteries. To fat to think about riding now, I hear you can live for years on body fat, Java the Hut is immortal….

  5. Glenn Stehle says:

    This IEA statment repeats some of the themes that Gail has itereated, that the low oil prices don’t justify enough investment in higher-cost oil to insure future supply. The underlying subtext is that growth in lower-priced shale production won’t be enough to satisfy future demand growth, and will not end up being be the marginal barrel.

    IEA’s Birol: 20% Upstream Investment Needed This Year
    https://ourfiniteworld.com/2017/02/20/oops-the-economy-is-like-a-self-driving-car/

    Global upstream investment in 2017 would need to increase at least 20 percent above last year’s total to meet future demand growth, said Fatih Birol, International Energy Agency (IEA) executive director.

    That level of investment is critical after two years of record plunge, he said. Without it, spare capacity could be as low as 2 percent in 2022 – a 14-year low.

    “Global investment is not encouraging,” he told reporters Monday during the first news conference of the 2017 CERAWeek in Houston. “It’s very worrying for us in terms of supply.”

    Releasing the IEA’s Market Report Series Oil 2017 findings, Birol said demand will increase by 7.3 million barrels per day (MMbpd) between now and 2022. The growth will be driven by Asian demand, particularly India which is expected to overtake China as the ‘center of oil demand growth,’ Birol said. While Asia will continue to draw resources from the Middle East, trade routes in general will shift and lengthen.

    Global production capacity during the next five years will grow 5.6 MMpd, led by the United States, Brazil and Canada, he said.

    An apparent lack of investment this year to balance demand growth with shrinking capacity is the “main worry,” Birol said. Without intervention, the market will tighten amid supply security concerns increased volatility.

    As such, double digit spending growth is needed to meet demand growth and “give us some peace,” Birol said.

    • Duncan Idaho says:

      • Glenn Stehle says:

        That’s a legitimate analysis, backed up by a fair weighing of the facts and empirical data, and quite the opposite of the defacutalized nonsense from Art Berman and SRrocco spout and that Fast Eddy posts ad nauseaum. It’s more in line with what the IEA is thinking, which is somewhat more pessimistic about shale potential than what those in the shale industry are saying.

        It’s going to take some more time to see just how productive the shale plays will be, and what the actual extraction cost will be. Nevertheless, I think we know enough already to conclude that shale oil and natural gas breakeven costs have come way down from a couple of years ago.

        The ranking of the major oil basins for the lowest extraction costs is as follows (also illustrated on graph that Duncan Idaho posted):

        1) Permian
        2) Eagle Ford
        3) Bakken

        U.S. shale required prices to break even are higher than many are asserting, according to research by KLR Group released today. But if the IEA’s current demand/supply analysis is correct, it’ll be a moot point in three years.

        KLR’s models show U.S. oil and gas breakeven WTI prices are $50/bbl and $3.35/Mcf, significantly above many estimates. Using a standard 10% ROR forces cost of supply much higher, with oil ranging from $71/bbl to $91/bbl and gas from $4.20/mcf to $5.70/mcf.

        Several factors contribute to costs being higher than expected. According to KLR, all-in well costs across a company’s entire drilling program are about 120% above single well estimations.

        Trouble wells can easily cost double expectations. Actual well recoveries are generally 15%-30% below type curves. Almost all anomalous events in a well’s lifetime are negative, and these occurrences are typically not included in forecasts. The higher full-cycle well cost and lower well recoveries make actual industry capital intensity about twice the values given in single well representations, according to KLR.

        Midland and Eagle Ford show lowest oil breakevens

        The Midland basin and eastern Eagle Ford have the lowest required oil costs due to lower capital intensity and higher oil cuts. These basins require a WTI price of $71/bbl-$80/bbl to create a 10% ROR.

        The Bakken has higher capital intensity than the Midland basin and lower realized oil price, but does have the highest oil cut of major U.S. oil plays. An oil price of about $90/bbl is required for a 10% ROR in the Bakken, according to KLR.

        The Midland basin is considered the lower bound of the cost of U.S. supply, while the Bakken is considered the upper bound of supply cost.

        Gas: Marcellus is lowest breakeven

        According to John Gerdes and the KLR team, the Marcellus has the lowest breakeven costs of any major U.S. gas play.

        Low capital intensity drives this advantage, but is partially offset by lower realized prices due to transportation bottlenecks. KLR estimates that $4.20/mcf-$4.50/mcf gas prices are required to generate a 10% ROR in the Midland. The Utica sees similar price realizations but higher capital intensity than the Marcellus, driving its 10% ROR cost up to $5.00/mcf.

        • Kurt says:

          Uh oh. Now you’ve done it. Cue FE.

          • Glenn Stehle says:

            I worked in the trenches in LGBT advocacy back before it was cool to be gay, so I know all the tell tale signs of fanatatical religous fundamentalism.

            And Fast Eddy demonstrates every characteristic of being a fundamentalist religous fanatic:

            1) Violently certain of their assertions, speculations and predictions.

            2) No reality and no common sense can penetrate their minds.

            http://www.azquotes.com/picture-quotes/quote-an-empty-head-is-not-really-empty-it-is-stuffed-with-rubbish-hence-the-difficulty-of-eric-hoffer-13-41-90.jpg

            3) Distort and cherry pick empirical information. Factoids — theories, hypoetheses, opinions, speculations, predictions, theology, secular ideology, etc. — are passed off as having the same authority of “facts.”

            4) Extrmemley poor use of logic, instead opting to use their paralogic.

            5) Exhibit a great deal of beligerence and hostility to anyone who presents empirical data that shows their speculations and predictions to have already been proved wrong (by things which have already occurred).

            All in all, the type of fundamentalist religious fanatacism that Fast Eddy engages in is the 180º opposite of what the scientific process should look like. But as Kip Hansen notes in this post, science, and especially climate science, frequently falls way short of best scientific practices too:

            What’s wrong with ‘alternative facts’?
            https://judithcurry.com/2017/02/26/whats-wrong-with-alternative-facts/

            • Eddy never struck me as being a godbotherer

              more or less sane i would have thought

            • Glenn Stehle says:

              Norman Pagett,

              What does sanity have to do with it?

              Because of my many years in the trenches fighting against the Christian Right, I know more about peope like Fast Eddy than he knows about himself. These people are not insane. And the best of them, like Ralph Reed, are extremely intelligent, charming, and beguiling.

              Fanatical religious fundamentalism — whether of the traditional sort or the new secular ideological variety — is about people who are so in love with their own theories, hypoetheses, opinions, speculations, predictions, theology, or secular ideology that it blinkers them to any alternative facts, and carries them far afield of factual reality.

              It’s a common condition that runs throughout human history, and is not the definition of insanity.

            • Fast Eddy says:

              Glenn – I see all religious people as fanatics…. organized religion is a cult.

              Think about it – every Sunday you gather and some clown preaches to you — and you make a sign of the cross and moan eh-men …. you drop to your knees and worship the man in the sky — who like Caesar can on a whim give you the thumbs down sending you to the fires of hell to burn forever.

              This is madness. Total madness. Total delusion.

              It would be a colossal joke if it were not for the fact that religious and political leaders urge the fanatics to kill each other on a regular basis.

              Death to religion. Death to cults.

              Post BAU I might consider rising up as the anti-Pence….. anyone who even dares to mention Jesus or Allah or any of these fakes —- will get the sword. Absolutely NO exceptions

            • does a frenzied Oh-my-god also carry the death sentence?

              just in case

            • Fast Eddy says:

              I will show mercy and any utterance of the word allah god jesus etc… will result in the Cutting Off of The Tongue with The Sword.

              COOTTTS.

            • well that won’t go down too well with the blasphemer i have in mind

              suddenly i prefer Trumprule

            • timl2k11 says:

              I must admit, Fast Eddy/Paul does seem to behave like a “religious” (I use the term loosely) fanatic doomster. Why? Because he makes overly confident statements about “insta-collapse”. I don’t doubt “instal-collapse” because it terrifies me, I doubt it because there are so many moving parts that the “shape” or “path” of collapse seems impossible to know for sure. Perhaps the USA will suffer dramatically reduced living standards, gradually, thus easing the pressure on the “system” for a time. I don’t know.

            • i can understand your point

              but an aircraft also contains 000s of moving parts

              the failure of any one of them can bring the plane down

            • timl2k11 says:

              Taking your airplane analogy, depending on which part fails, in some instances one system can compensate for the failure of another, as when, for example, on United Airlines Flight 232, the engines were used to steer the aircraft when all flight controls were lost. Now the economy does not have a “pilot”, but, like an airplane, it does have many systems which can be used for purposes they were never intended for.

            • the aircraft analogy was a generalistion

              but to be absolutely specific, if the aircraft runs out of fuel it falls out of the sky

              we are running out of fuel and there are no viable alternatives

            • timl2k11 says:

              It does make sense to me that we will try to keep the illusion of infinite growth going until we essentially fall of a cliff so to speak. I guess my point is that it is possible there may be events that *impair* the system without destroying it, and then a “re-adjustmtent” ensues. I suppose my real fear is that this will be a long, painful, drawn out collapse, and I’m hoping to disabuse myself of such beliefs.

            • you could be right about a long slow drawn out slowdown and a peaceful existence in centuries to come. nobody can know precisely.

              i make my forecast on the imbalance of global society as it is right now:

              1 Bn people reasonably comfortable
              6.5 Bn in a state from poverty to outright starvation

              If that balance is not redressed, then we’re well and truly screwed, because the havenots will not obediently roll over and die, or remain as they are, essentially supporting the ”haves” in thier comfortable lifestyles.

              Politicos can argue about the details, or frack themselves into bankruptcy, or argue about famine relief—that is the equation we have to deal with, and the gap is going to widen, and not in countries 6000 miles away, but literally on our own doorsteps.

              The employment isnt there to enable people to earn enough to live, because cheap surplus energy isnt available to support the labour of people. This is the imbalance of our society. It has nothing to do with politics, and everything to do with the industrial infrastructure we regard as normal and infinite.
              The haves and havenots are with us now, and the vast majority have no concept of what created their predicament, only that they see stuff they cannot afford even on a modest scale.

              in any society, mass deprivation never ends peacefully.

            • timl2k11 says:

              Imbalance, that’s a good point. I’m loving your book by the way. Very well written.

            • yes i’ve come to see imbalance of society as one of or major problems.

              people will not surrender willingly what they have, so the nature of things would suggest they will have it taken from them

              it is that act of taking that will give us an unpleasant few years till balance restores itself.

              glad you like the book btw

            • Fast Eddy says:

              Norman – how about this:

            • hkeithhenson says:

              “the failure of any one of them can bring the plane down”

              That’s normally not the case. Planes are able to fly with a lot of damaged equipment. Not long ago I was on a plane where half the cabin air quit. The pilot loaded a little more fuel so he could fly a little lower and we took off. Even an engine out doesn’t bring the plane down.

            • Fast Eddy says:

              Keith – how’s everything — do you mind to take Glenn with you when you head back to DelusiSTAN?

            • Fast Eddy says:

              Religious fanatics do not make use of facts.

              I have posted facts that demonstrate that 99%+ of all agricultural land is farmed using petrochemicals which destroy the soil — so therefore there will be epic famine post BAU — likely everything grows or moves will be consumed by 7.5 billion starving people.

              Show me how that is not a fact?

              I have posted facts that demonstrate that if a spent fuel pond is not maintained it will release 14,000 or so Hiroshima bombs of radiation. There are 4000 ponds around the world.

              Show me how that is not fact? Or show me how we manage 4000 spent fuel ponds without electricity – diesel – engineers – computers – spare parts when BAU goes.

            • hkeithhenson says:

              ” I don’t know.”

              That’s a healthy outlook. If there is anything that will pull humanity back from the fire, it’s the expansion of knowledge. For example (a wild one), people could have a big leaf installed so they can be fed by just lying in the sun. This isn’t beyond what can be imagined coming out of biological research.

            • timl2k11 says:

              “This isn’t beyond what can be imagined coming out of biological research.”
              Hmm, I find that example a bit bizarre.
              ¯\_(ツ)_/¯

            • Glenn Stehle says:

              timl2k11,

              Most of the commenters on this thread, and Gail herself, fall into the determinist school.

              According to this philosophy, humans have no will to change the course of events, but are trapped in exorable natural process controlled by an omnipotent and omnipresent deus esconditas>/i>. One of these quasi-devine puppeteers is evolutionary theory. Another is the “invisible hand.”

              These deterministic theories have their origins in John Calvin’s deterministic theology of divine selection and pre-destination.

              The opposite philosophy/theology to this is what is known as Pelagianism or Humanism. Both of these attribute the free will, and thus the ability, to man to change his destiny.

              For more on this, you might want to check out my comments above on this same thread, where I cite some references which explain this in much greater detail:

              https://ourfiniteworld.com/2017/02/20/oops-the-economy-is-like-a-self-driving-car/comment-page-17/#comment-117590

            • Fast Eddy says:

              Facts? Did I hear someone ask for facts?

            • Joel says:

              Norman said
              “does a frenzied Oh-my-god also carry the death sentence?
              just in case”

              If you start making exceptions right away my guess things will fall apart, one must hold the line, sort of an honor thing. Who knows this is out of my league…

              Was late on the post, he shows mercy, its settled.

        • Duncan Idaho says:

          Glenn-
          Just adding a bit of equanimity and data from a legitimate source.
          hint: (It’s best if we all do this)

          • Glenn Stehle says:

            Why don’t you talk to Fast Eddy about that?

            • Kurt says:

              I sense that FE has donned the tin foil hat, entered the storage container, and is currently composing an extensive rant – 3…2…1…

            • Jarvis says:

              Glenn, could you take a minute and review FE cash flow chart he posted above. I’m convinced Our FE has it right and I think shale oil is a dead duck. Could you give me your interpretation?

        • timl2k11 says:

          OK so a minimum oil price of $70 dollars is required to make a reasonable profit, with oil stubbornly around $50 a barrel, how could these shale companies make money?

          • Glenn Stehle says:

            The lucky ones who are making profits are the newer entrants who don’t have a bunch of sunk investment and debt overhang in wells that were completed using older technology, and in the shoddier basins. Wells were much more expensive to drill and produced less oil.

            They don’t have the debt overhang, they use the latest of technology, and only drill in the sweetest of spots where the wells produce much more prolifically. Extraction costs may be as low as $30 per barrel, allowing them to make a 10% return at $50 per barrel oil price. Remember, $50 is the average cost.

            But I agree with KLR that, for the Permian and Eagle Ford shale basins to become active again on a widescale basis, a price of at least $60 to $70 will be required, and for the Bakken maybe even $90.

            I think most of the pioneers in the shale business lost money even at $100 per barrel. This is the part of Art Berman’s analysis I agree with.

            Why do companies invest in money-losing ventures? You tell me.

            Big Companies without Profits – Amazon, Twitter, Uber and Other Big Names that Don’t Make Money
            http://www.foxbusiness.com/markets/2015/10/30/big-companies-without-profits-amazon-twitter-uber-and-other-big-names-that-dont.html

            • Fast Eddy says:

              Yes sure Glenn… sure… so producers have knocked over 50 bucks off the price required to produce a barrel of oil …. holy jesus mother of mary we’ve got us a miracle… the ‘The Second Coming’ is not hype… Jesus is here — he is on a pilgrimage to Shale Land —- he touches a shale play and voila —- the oil magically comes to the surface….

              Is he off to Alberta next? They could use some of that magic too.

              FYI: red ink does not generally imply profitability….

            • Fast Eddy says:

              Why do people invest in companies that lose money?

              Generally because these are companies that have huge potential upside — if a tech company has massive traffic — but loses money – the hope is that they will be able to monetize that traffic and become the next Google or Facebook – both of which lost a lot of cash at one point.

              Everyone – except you it seems — knows that shale is a dog — shale wells deplete very rapidly — there is no long term monetization opportunity —- these are very short plays…

              Why does the money pour in? Because if the money does not pour in – the oil stays in the ground — and we die.

              ‘Whatever it takes’ — means — whatever it takes. We are fighting for our lives here

          • Fast Eddy says:

            They dont

        • Fast Eddy says:

          What more do you need Glenn? This says it all…. if $50 was profitable then you would not see a sea of red….

  6. Duncan Idaho says:

    Global upstream investment in 2017 would need to increase at least 20 percent above last year’s total to meet future demand growth, said Fatih Birol, International Energy Agency (IEA) executive director.

    You think?
    http://www.oilandgas360.com/will-oil-supply-keep-demand-2020/

    • Joel says:

      They make it sound like things will be pretty much BAU for the next 5 years or I interpreted that badly.

      • Duncan Idaho says:

        3 years I would say was their analysis.
        But who knows? Many of the guys actually pumping and drilling are saying 2018.
        I guess we just have to see.

        • Joel says:

          Lots of people like even numbers, trying to stay positive here, more of an odd number chap myself. So in that localized area 2018 maybe a turning point ?

          • Fast Eddy says:

            HSBC is suggesting 2018….

            View at Medium.com

            I wonder if they are pushing an Apocalypse Fund on the back end of this report….

            • Joel says:

              A marketing opportunity for sure. Gaming for profits right to the bitter end.

            • doomphd says:

              I gave a seminar last year and used Gail’s now famous graph showing global energy use over time, with a steep drop off in 2015. I think she made that prediction in 2012, so I added 3 year error bars to make it 2015 ± 3. So, if we go down in 2018, that will be within the error envelope, another accurate prediction from Gail!

              not sure how we will acknowledge this feat, assuming it happens. maybe a special awards ceremony at FE’s End of the World party? FE, can we all attend and maybe not go home afterwards?

            • ITEOTWAWKI says:

              “maybe a special awards ceremony at FE’s End of the World party? FE, can we all attend and maybe not go home afterwards?”

              Not a bad idea, only problem is how do we get to NZ?

            • Bergen Johnson says:

              These type of predictions have been made since I first read about peak oil in 2005. Fact is oil business supply fluctuates with price/demand. There isn’t going to be any collapse of the oil industry, not anytime soon anyway. It’s in the black. It wouldn’t do what it does if it didn’t make money.

    • Fast Eddy says:

      This would seem to indicate we are in serious trouble…

  7. timl2k11 says:

    Hi all,
    I’ve been following this blog for many years, yet for some reason it’s still not intuitively clear to me why, if the resources for growth are available, the economy can’t grow without debt. It’s also not clear to me why a “steady-state” economy is not at least, in theory, possible. I know I must be missing something, but I can’t quite figure out what. Could it have something to do with human psychology? (and none of this BTW is Gail’s fault or anyone else here, you all do a great job of presenting the pertinent information). Can anyone help me see what I’m missing? Thanks.

    • Greg Machala says:

      “if the resources for growth are available, the economy can’t grow without debt” – the resources take energy to extract. As resource extraction continues, it takes increasing amounts of energy to extract the same amount of resource. At some point so much energy is used to extract resources there is less and less energy available for the rest of the economy to function. Debt doesn’t matter at this stage. Debt only works to grow the economy if there is cheap energy available in the future. There is not more cheap energy now or in the future.

      • Artleads says:

        A lot of the construction looks like wood and other materials. Hard to see at this size. Not sure how the cardboard and related technologies figure in terms of resource and energy extraction. Insulation seems better than average.

        http://www.msn.com/en-us/lifestyle/home-and-garden/living-in-a-box-incredible-cardboard-homes/ss-AAn1Rar?ocid=spartandhp#image=7

      • Fast Eddy says:

        It boggles the mind that some people cannot see that when growth stops — we very quickly return to the stone age.

        Must have something to do with normalcy bias.

        One could overcome this by turning off the electricity to their home for a few days…. surely that would drive the message home…. even though it is nowhere near what collapse will look like

        Of course nobody will do that — because that would shatter their sanity

        • unravel says:

          I think its better rephrased as “when DEBT growth” stops … the idea that “tangible” growth just stops and causes sudden collapses things is difficult because we see /think in terms of physical realities in front of us. How can they just disappear?
          As far as i can see the financial system requires a continual increase in debt burden. Someone somewhere has to take this burden on. This is where the stopping at a point makes more sense.

        • Bergen Johnson says:

          “It boggles the mind that some people cannot see that when growth stops — we very quickly return to the stone age.”

          Ever heard of a recession? There was a big one that started in 2008 but we didn’t go back to the stone age. How do you address that?

          • Fast Eddy says:

            When I use the term stop I mean as in forever.

          • simple

            money was printed to kickstart the ”economy” and get out of recession in 2008
            the problem is that the printed money was in fact a debt on our collective future

            and as money is only a token of energy, it follws that the debt incurred is based on the assumption that sufficient raw energy will be available in the future to service that debt of $trn’s

            the situation is exactly the same as you getting into subprime on your house, and borrowing more money as a 25 year loan—on the assumption you will have a job for the next 25 years paying enough to pay back the loan–ie producing sufficient energy over 25 years

            if you cant do that–you lose your house.

            now decide if the world will be producing sufficient oil for the next 25 years—because if not, you’d better start looking for a flint mine

        • ITEOTWAWKI says:

          “Ever heard of a recession? There was a big one that started in 2008 but we didn’t go back to the stone age. How do you address that?”

          FE don’t go too hard on him 😉

        • Kurt says:

          No hot water. That freaks everyone out.

    • Money is a token of energy exchange—
      I bake and sell you a loaf of bread–I take your money, and use it to buy more flour–which is a product of wheat—which is grown from the earth by the farmer. (that is the base energy resource).The farmer borrows money to buy a tractor. on the assumption that I and others will continue to buy his wheat (forward debt)

      The cash is passed hand to hand, it is not used as part of the food production process.

      You consume the bread I sold you–and in so doing, you have dissipated the energy the farmer produced in the first place.

      This is why steady state economies cannot exist in our current environment.

      If you had sufficient land area to grow all the food you eat–plus animals for clothing, timber for building etc etc, then a steady state economy could exist—but only for you, if you made no demands outside, for healthcare, schools, police, weapons and so on. (maybe think Arctic wilderness) Your dissipating energy gets exclusively used to get hold of more food.
      You would probably die by 50, leaving your land to be used by someone else.

      As to “growth” you cannot have growth in a steady state economy, and neither can you have “infinite growth” on a sphere with a constantly expanding population.
      It is the nature of every species to grow to maximum availability of resources, or die in the attempt.
      Nature intends things to be that way, we are merely gene-carriers, we don’t have much say in the matter in a collective sense

      • timl2k11 says:

        Thank you. While the causes of the Great Depression are somewhat opaque to me, just to play devil’s advocate, why did we have that “mini-collapse” (the Great Depression), despite abundant resources at the time? I ask because perhaps that will help us know what the “trigger” for collapse will actually be, not that it matters (since it is inevitable), but just out of intellectual curiosity.

    • JT Roberts says:

      Hi Tim

      I hope that was a genuine question so I’ll treat it that way. What most don’t understand is the relationship between money and economy. Economies are built on energy flows. Capital represents a hold on future energy. All activity in the economy consumes energy that has to be supplied at the moment of consumption. For a future to exist it has to have energy in place which requires investment. So to your point you can front load development by a pay as you go system in essence a steady state economy. In that scenario growth is impossible because you can only cycle equity. If you attempt to grow your economic activity without capital creation you end up with a deflationary system. If you attempt to remain at a steady state you end up with a problem because now it’s based on personal productivity which declines with age. There is no appeal in that. To overcome the inconvenience of these realities the world has embraced capitalism. In particular fiat currency. Now it’s possible to grow your capital “currency” at the rate beyond current consumption. The way this is primarily done is through governmental deficit spending. When a government borrows from a central bank the money is immediately spent into the economy absorbing the rate of growth thereby stabilizing the perceived value of the currency. This also provides the revenue needed to run the government agencies, which is actually parasitical but the masses have been conditioned to accept this as the cost of “democracy “.

      With that reality in place the real issue becomes perpetual growth. Why? Because to generate the interest currency required to service present debts demands an increase in the money supply. However to prevent devaluation of the currency it also demands the growth of energy stocks. So in essence this website has revealed a paradox. Perpetual growth is impossible in a finite world but capitalism can’t function without perpetual growth.

      This was well identified in 1972 with Limits to Growth but here’s the rub. The government knew it would crush them if they implemented any of the fixes needed so they chose to do nothing. Business as Usual. However you can’t outrun the consequences.

      No doubt you see a lot of banter on this site. It’s all very informative, but anyone who doesn’t understand the paradox simply will lose the argument.

      • I agree very much.

        Both debt and “equity” are “pay you back later” systems. They depend on energy supplies actually being available, so that goods and services can actually be made, so that we can in fact, pay back the debt later.

        Because of diminishing returns with respect to energy extraction, it takes more and more future promises, to obtain a unit of today’s energy. Thus, we need an increasing amount of debt, just to stay even with respect to energy extraction. We end up with a Ponzi Scheme, of ever rising debt. Then someone decides to raise interest rates, and the whole thing tends to fall over.

      • timl2k11 says:

        Thank you. So, if I understand correctly, in very general terms, once it becomes apparent (to the “investors”) that growth in energy stocks is not possible no one will want to invest in future production as there will be no return on that investment… no incentive. Is that roughly correct?

    • Joel says:

      tim said “Could it have something to do with human psychology?”

      It has too I think. In a winner takes all world, with the winners being able to change the rules one might say, they want it all full control. Debt based money, eternal debt serfs supporting the tribe on top. It’s a rigged game…

      • We have had it for a long time. The power and wealth get more and more concentrated in the few.

        • Joel says:

          Gail,
          Not a new trend, I know, it is something to behold. I’m glad someone moderates our comments, its easily to go overboard when your old with poor balance.

        • you have to imagine a large metal tray—sprinkled with thousands of tiny droplets of oil

          as the tray gets moved this way and that—at random–the oil droplets will shift around

          over time, the oil droplets will become concentrated into bigger and bigger pools until only one big pool of oil is left.

          • Joel says:

            Like becoming “one” with all the others, total oneness, a state of bliss! Just total peace and serenity, I feel it now…

      • timl2k11 says:

        I think you are right. At crucial part of the economy (in addition to energy) is human motivation and incentive. If the future looks bright, people are motivated to be (more) productive because they know there will be a future reward, i.e. in modern society work is not just a means to pay the bills but an investment in one’s future well being. If the future does not look bright, but in fact looks dim, there is no future reward for (hard) work. Thus the “system” becomes depressed – in the collective psychological sense – and productivity falls commensurate with expected future outcomes. Energy is the “hard” limit (subject to physical laws), psychology is the “soft” limit (subject to perceptions and beliefs).

        • Joel says:

          Faith in the system is a big deal I think. Your soft/hard limits view sounds like a good one. In the old days forced labor was a common theme in conquest of other lands. How things play out will be something for sure. I would not have minded being born a decade earlier. The old meritocracy vs aristocracy divide was quite something too. I’m very grateful to have lived in the cheap oil era.

        • People with little education are particularly left out of the system now. They see that they cannot succeed, and turn to drug dealing to try to make a little money, and take to using drugs themselves. Needless to stay, their children end up in terrible shape.

    • Glenn Stehle says:

      timl2k11 says:

      I’ve been following this blog for many years, yet for some reason it’s still not intuitively clear to me why, if the resources for growth are available, the economy can’t grow without debt…..

      Could it have something to do with human psychology?

      It has more to do with brainwashing.

      Gail and most of those who frequent this thread are so brainwashed into banking doctrine and their “invisible hand” theology that they cannot even remotely imagine that there are other ways of creating money other than through debt production. They’re like fish swimming in water, and aren’t even aware of the water aroudn them.

      In a place like the United States where, as Senator Durbin put it, “the banks are still the most powerful lobby on Capital Hill, and they frankly own the place,” the chances of creating money in a manner other than through debt creation are probably remote.

      But in places like China or Russia, where the state is above the bankers, and the bankers are subserviento to the state, and not vice versa as in the United States, other ways of creating debt could be implemented.

      Here are some passages from an essay that explains an alternative way of creating money that does not involve debt creation:

      Modern Money and Sovereign Currency
      https://www.researchgate.net/publication/312496026_Modern_Money_and_Sovereign_Currency

      Realities today, far from representing a sovereign currency system, represent a state-backed banking rule. In spite of a long list of dysfunctions of fractional reserve banking―from lack of money safety via the distortion of economic and financial cycles, to monetary and financial instability and proneness to crisis―that system is maintained on grounds of an almost inextricable mutual dependency of government and banks; with
      governments running high levels of deficits and debt, and banks creating overshooting money supply and BIP-disproportionate levels of financial investment (asset inflation)….

      This again is banking doctrine rather than chartal currency teaching. Money certainly is a medium for paying debt, i.e. to get rid of debt, and thus has of course developed historically in a context of debt of various kinds. Debt and credit existed before monetary units of account were developed, just as such units of account existed long before coin currencies came into existence…

      [But] classical commodity theories of money…ignores or misrepresents 2,500 years of coin currencies when money typically was not lent into circulation against interest, but spent into circulation by the rulers of the realm free of interest and redemption. Debt money, i.e. the false identity of credit/debt and money, isn’t a natural necessity at all.

      Modern money can freely be created, and of course it can be spent into circulation debt-free — pure water, so to say, not contingent upon credit and debt at source.

      Pure resources must not be abused. Just because modern money can freely be created, there must be some arrangement for making sure that there is neither too much nor too little money and that additions to the money supply keep within certain limits set by economic productivity and potential growth. Money and capital markets, contrary to what they are supposed according to efficient market hypotheses, perpetually fail to achieve the task, because there are no effective limits to banks’ deliberate creation of money on account, or intermittently, their deliberate extinction of credit and bank money….

      However, any economic paradigm with enough common sense to it will surely place much value on sound finances, private and public alike. NCT does so; and this is one of the reasons for aiming at overcoming the present system of fractional reserve banking, because this system clearly has proved to be a historical basket case of unsound finances and soft currency economy indeed….

      Therefore, from a currency point of view it needs to be determined by law what shall be money in the sense of currency in general circulation, under whose control and responsibility modern fiat money shall be created, according to what procedures, and who shall benefit from the seigniorage, i.e. the special profit that accrues from creating new currency….

      To put it differently, the banking-school rationale is based on the axiomatic classical belief in the ‘invisible hand’ of markets, i.e. the medieval Scholastic theologem of God’s wise manus gubernatoris unfailingly creating a harmonia mundi unless distorted by evil machinations.

      In neoclassical economics, the latter are normally projected onto government interference. Banking scholars demand that the government does not meddle in monetary and banking affairs, for money is seen as a means of exchange which is spontaneously—or market-endogenously, as it is called—created among traders….

      With regard to money, this is but another way of saying it should
      be left to the big banks and financial actors of the time, while the
      government should limit itself to protecting property and enforcing private
      contracts. In this respect, banking theory again reflects the unreflecting idea
      of any (neo)classical economics that markets would have some sort of
      absolutist private status beyond the state…

      The monetary system is constitutive of the entire economy and comes with important consequences for state and society at large. Money governs finance, as finance governs the economy. This is certainly no linear causation. It entails feedback interdependencies. These, however, unfold around the systemic hierarchy of money, finance and the economy. Who controls the issuance of money and the main pathways of money flows is in possession of the most powerful instrument of societal control besides lawbased command powers backed by force….

      Another element of banking teachings is to deny the necessity, even the possibility, of separating the control of the currency from the banks’ credit business. Starting from their own business practices, bankers tend to identify money with credit….

      To conclude, the decisive difference between currency and banking teachings is not about a gold standard. It is about the question of who ought to be entitled to the prerogative of issuing and controlling a nation’s money supply: whether the banking industry on a basis of private contracts (banking position) or a state authority, or a state-controlled institutional arrangement based upon public law (currency position); including the question of whether money is seen as a common good and a sovereign state’s monetary prerogative of constitutional necessity, or whether money is seen as a private commodity under private control.

      • Joel says:

        Glenn,
        Very bold statement:
        “It has more to do with brainwashing.

        Gail and most of those who frequent this thread are so brainwashed into banking doctrine and their “invisible hand” theology that they cannot even remotely imagine that there are other ways of creating money other than through debt production. They’re like fish swimming in water, and aren’t even aware of the water aroudn them.”

        I get it, but really most are brainwashed. I’m sorry that it’s digressed to this point and I feel guilty to have taken part. I tend not to read some of the bigger posts here so not sure of what everyone believes, just a new arrival myself.

        Making sense of the fast collapse, slow collapse and BAU beliefs all on one thread is tough. Still trying to make sense of it. Hard to envision a mass die off one’s own species, maybe the fish analogy is good?

        • yorin says:

          “that there are other ways of creating money other than through debt production.”
          Debt creates money but easy to extract energy allows money. No energy no money. Money has zero worth without energy. This has always been true. There is no true money “creation” whether from debt, green stamps, or willy wonka certificates.

          • Joel says:

            It’s not my quote, but I am glad you didn’t bother Glenn, all set on green stamps. The company town/store/script model works for me, offer them no exit. Like the mining towns of old, but on a global scale.

      • timl2k11 says:

        Gail and others did once try to convince that money is debt, but I just don’t see it, it seems like a fundamental error, but maybe it’s inconsequential. If the cash on my desk is debt, than what isn’t? That would imply anything that has an agreed upon value is debt too, so, everything, although obviously certain things are better suited for money.

        • yorin says:

          What does it say on your “money”? Federal reserve note. A note is a iou- debt.

          • timl2k11 says:

            This is a fundamental category error everyone seems to make that I just don’t understand. Let’s say that we don’t have bank notes and everyone is using silver to conduct transactions. Is that silver “debt”? Of course not, no more than the pens on my desk, or the milk in my fridge, both which could conceivably be used as “money”. Anyway, still, I guess it’s much ado about nothing.

            • the reason people used precious metals as a medium of exchange, was that:

              a—it contained a certain work-value

              b…it didnt deteriorate over time

              Paper money started as an iou for metal coinage, then gradually took over as units of exchange as carrying coinweight around got too cumbersome.
              The next stage became “ledger money” by which debt could be created out of nothing.

              Once debt was created out of nothing, and the money itself had no tangible existence, we were permanently locked into a debt-future economy by which everyone had to actually believe the money was there, even though it wasnt.
              Pretty much everyone lives within that debt bubble, dependent on future renue/work to pay today’s debt.

              If you cant grasp that, imagine what would happen if everyone suddenly realised that collective debt was based on just the collateral of ”belief”—the belief that your home was worth 200k—for no better reason than everyone says it is, and someone is willing to take on a debt to pay that $200k.

              Of course if the purchaser has $200k in gold coins stashed away—and buys my house with it, that’s fine, but very unusual. In any event it would have to enter the bank’s ledger system.
              But the gold represents the labour of those who extracted it from the ground, and even so, I have to use those coins to buy another house or whatever else i want—ie I buy the results of someone else’s labour.

              whatever ”money” you use, it is only a measure by which labour/energy is measured

            • ITEOTWAWKI says:

              I highly recommend the documentary “Money as debt” by Paul Grignon to understand what paper money is and what it’s origins are. (Which NP started alluding to in the previous comment)

            • timl2k11 says:

              I’ll definitely check it out! Thanks.

          • timl2k11 says:

            I would also add this observation, according to investopedia… “A banknote is a negotiable promissory note issued by a bank and payable to the bearer on demand.” That definition no longer makes any sense. Since fiat money is now backed by nothing, there is nothing “payable to the bearer on demand”. I.e. they are intrinsically worthless.

      • I will try again explaining the need for debt, in another post. If you buy something, the person you buy it from gets a certificate essentially saying that he can also buy something. This is where the debt comes in. When there is a built in time lag, then it is possible to almost create something out of nothing, with the magic of debt. A business can say, “Help me now, and I will give you a certificate that will allow you to buy someone else’s output now. Mine isn’t ready yet.” The business can do this because of debt it has obtained, or because of shares of stock it has sold. Our economy is full of these certificates good for future goods and services. Of course, they only are valid if the economy is functioning in the future.

      • unravel says:

        “an alternative way of creating money that does not involve debt creation:”

        What use is money if it isnt a debt?
        The passage above as I see it implies some sort of money without INTEREST creation … not debt creation. This is not capitalism. Its more like barter.
        Good luck with winding the clock back & convincing the Oil cos to go down that road.

    • Rainydays says:

      An example. People need houses to live in and transportation to get to work etc. That’s why we need debt so houses and cars can be affordable to people without having to save up for decades. This provides myriads of jobs and keep people happy. That’s why you need debt to provide goods for a growing population, for example for people just entering adulthood who has nothing saved up.

  8. Fast Eddy says:

    I’ve never seen Star Wars… but wasn’t Darth Vader supposedly good — and then he was evil – something about the dark side?

    America’s the world’s policeman … is looking more like the world’s director of gulags….

    http://www.zerohedge.com/news/2017-03-07/wikileaks-hold-press-conference-vault-7-release-8am-eastern

    We’ve benefited from the Elders’ empire — but as BAU winds up — and there is not enough to even throw us a few crumbs…. expect these methods…. to be used against anyone who dares stand against this.

  9. Lastcall says:

    Wasn’t there a car crash not long ago of a close friend of Putin?
    I see now why Nokia is re-releasing its old model phone and think maybe the share price will bump a little ….

  10. dolph says:

    You only have two choices. This was always the case, but collapse brings it into better focus
    -work whatever hours, in whatever capacity, for whatever wage
    -kill yourself

    That’s it. Interesting, isn’t it. Understand this truth and you will understand how collapse will play out.

    • unravel says:

      this understates the interconnectedness of the entire system that we work in… & the faith required for fiat currencies to operate. Once faith collapses, you won’t have much choice in your work or faith in the value of your wage…

    • yorin says:

      You forget the most popular human choice door #3 pillage.

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