Why oil prices can’t rise very high, for very long

Oil prices are now as high as they have been for three years. At this writing, Brent is $74.14 per barrel and West Texas Intermediate is at $68.76. These prices aren’t really very high, if a person looks at the situation from a longer term point of view than the last three years.

Figure 1. EIA chart of weekly average Brent oil prices, through April 13, 2018.

There is always a question of how high oil prices can go, and for how long.

In fact, we have many resources, of many kinds, whose prices of extraction keep rising higher. For example, obtaining fresh water for the world’s population keeps getting more and more expensive. Some parts of the world need to resort to desalination.

The world economy cannot withstand high prices for any of these resources for very long. Certainly, it cannot withstand high prices for a combination of necessary resources, because people need to cut back on other purchases, in order to afford the necessities whose prices are rising. This article is a guest post by another actuary, who goes by the pseudonym Shunyata. He explains in a different way why high resource prices cannot last, whether they are for oil, or natural gas, water, or even fresh air.

Dear Readers:

As you are no doubt aware, Gail has created a fantastic portfolio of blogs that explore our energy/financial/economic system, blogs that reveal many hidden or misunderstood aspects of our situation. I have found these discussions invaluable and share them wherever I am able; to solve our societal problems we need to develop a societal understanding of these issues.

The problem I face is helping other people, like my grandparents, get a foothold in this complex discussion. They can understand why oil might “run out,” but trying to understand the problematic financial situation is more difficult. I like metaphors to explain things – metaphors that allow my grandparents to understand the major elements of the situation. The metaphors I am using are to the oil industry. My grandparents have been following the oil situation for a long time. If a person has been following the oil industry, they may be helpful.

Below you will see how I explain Gail’s detailed writing to my grandparents in three short chapters. I hope you find this outline helpful in your own discussions, and I welcome your suggestions for improving the transparency of the story.

PRODUCTION COST

What if air had to be produced from wells and purchased by businesses and families to conduct their normal affairs?

If air is readily available in the ground, we can always extract what we need, making it easy for businesses and families to operate, or even to grow.

What happens if air becomes harder to extract? Perhaps the easy air is gone and we are increasingly looking at extracting deep water air, or air dissolved in shale stone.

Technology may be able to help; sometimes it can help a lot. But there is an immediate production cost shock in funding the development of that technology. This cost shock occurs whether we are talking about conventional air or solar-based renewable air.

There is a lower but permanent increase in production cost, both to fund the complexity of the technology (a deep water air rig just costs more to operate than a land rig) and to pay off any debt needed to build the new technological infrastructure. This cost increase occurs whether we are talking about conventional air or solar-based renewable air.

This cost increase is a permanent drag on the economy. Wages don’t rise to compensate for the higher cost of air. There is no substitute for air, and air simply isn’t available in the quantities the economy previously enjoyed – unless we stop doing things that we were doing before and redirect those resources toward producing the same amount of air we used to have.

DEBT

In a modern financial system, we use “money” as a proxy for economic activity. In a barter system, I can obtain goods and services by trading my work product for your work product. But carting around packages of finished goods is unwieldy, so we use “money” as a medium of exchange. If you and I are both willing to trade our finished goods for a symbolic piece of paper, then I can trade my goods and services for paper, bring that paper to you and trade it for your goods and services. This medium of exchange makes it easy to trade complex goods and services over long distances, or at different points in time.

How would lending work in this barter system? Someone could produce many finished goods, trade it for symbolic paper, but not immediately trade it for other goods, and “save” their paper for later. Debt is a process of borrowing someone else’s saved symbolic paper to purchase goods and services for themselves. This is helpful when I need to build a deep water air rig but don’t have the money myself. I can borrow someone else’s money and pay them back later, after my rig is bringing in revenue.

This simple borrowing process only works if some people aren’t consuming goods and services in the economy, and are instead allowing others to “borrow” their ability to consume. What if there isn’t enough saving to make large borrowing possible? What if I want to maximize economic activity and don’t want people to defer their own individual consumption?

If we want more funding than barter can provide, this can be done in more than one way:

[a] Money can be loaned into existence. This happens every day, when people decide to buy a car, and take out a loan for that purpose. Or people buy something with a credit card, and decide to carry a balance, rather than pay it off immediately. Nearly all loans today represent new money to the system.

[b] Governments can also obtain money by issuing bonds. Or they can simply issue money certificates without having any backing for the money.

Let’s call the process of adding funding to the economy, over and above what would be available by debt, “money printing.” In each of these cases, symbolic paper is added to the economy without previous work having been performed.

[1] Money printing can be helpful when it represents an investment in growing the overall economy. Investment in deep water air rigs will make air more available in the economy and will spur an expansion of economic activity. In this case the goods and services in the economy eventually “grow into” the amount of money that has been printed and the extra economic activity in the future is used to repay the debt.

[2] Money printing is unhelpful when it simply becomes someone’s savings (i.e. growing wealth inequality). The economy is still obligated to repay the debt (usually through taxes) and economic activity becomes sequestered in wealthy people’s savings, without ever creating demand for someone else’s product.

[3] Money printing is also unhelpful when it is used to fund more air consumption without any investment in air production. For example, a family that borrows money for an air vacation (or for basic daily air subsistence):

  • Now has a debt–repayment of which will reduce future air consumption
  • Has created no permanent demand for air and does not require permanently expanding air production for the economy–so their vacation air demand tends to increase the cost of air for all other consumers.

PRICE
What happens when we put these two chapters together? When air becomes more difficult to extract:

[1] Production cost goes up permanently.

[2] Economic activity is redirected to maintain air production, and overall economic activity is reduced. With reduced overall economic activity there is a reduced need for air, resulting in excess air supply and a temporary reduction in air price.

[3] If air consumers spend their available money on air and defer other purchases, there is an additional reduction in economic activity, additional excess supply and further reduction in air price.

[4] Reduced price means less revenue to air producers.

[5] Owners of idled air rigs still have debts to pay (money borrowed to build air rig in the first place). They are willing to undercut the market price of air just to get revenue to pay their debts, even if they aren’t making a profit otherwise. This drives the price even lower.

So air prices fall, even though the cost of air production continues to rise.

This begins to look like an economic crisis. A natural response of governments is to print money so that consumers have more money available to purchase air, without deferring other purchases.

This can work for a while, but ultimately fails when there is no overall growth in economic activity to match the increased money supply. The debt comes due (usually in the form of higher taxes). There isn’t enough productive activity in the economy to easily pay back the debt. As a result, consumers must defer even more of their consumption to repay debt, ultimately resulting in even lower air prices.

Eventually either the debt market or air market runs the risk of failing entirely.

[1] When economic activity falters, people can no longer repay their debts (or earn enough income to pay taxes toward government debt). Either of these outcomes is bad both for borrowers and lenders.

[2] If economic activity falters, market forces push air producers to a zero-profit price point. At this point, producers have enough money to keep the rigs running and cover debt payments, but no more. Ultimately this cannibalizes the ability of air producers to maintain existing air supplies. They are unable to purchase replacement machines, if any one breaks. They cannot make new investments.

Clearly, this situation cannot continue. High prices cannot be passed on to consumers, or they will be unable to buy other necessities of life. At the same time, if the producers do not get high enough prices, they cannot continue to provide the air or any other commodity that is needed.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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1,703 Responses to Why oil prices can’t rise very high, for very long

  1. Michael Kirby says:

    If you replace the word “Air” (or oil) with “Land” Doesn’t this describe pretty much any major metro area over the last 100 years?

    Land prices go up. One of two things happen.

    1) You have a crash. People who own land go out of business, new people come in and buy it up cheap, and the process repeats.

    2) People get really creative and efficient at using land (build up, more productive space utilization), allowing for land prices to remain high, yet still be affordable.

    So I don’t think it is a necessary truth that #1 will happen, it could be #2. Or it could be a combination. Where some segments of the economy hit #1, while others go with #2.

    Mike

    • Shunyata says:

      Your (2) is efficiency gains. This can work for awhile, but only to a point. If you want transport a load between cities, there is a minimum amount of energy that must be expended. Efficiency just keeps you from spending more than this minimum amount.

      • Greg Machala says:

        I agree – efficiency helps and is probably the first thing that is attempted to keep fixed costs under control. The next step is probably job losses. I think cutting staff works for a time. But, when too many companies start cutting jobs it becomes a problem of people not being able to afford the output of the economy.

      • Michael Kirby says:

        I agree. I just think we’re no where near the “point” where efficiency can’t be exploited.

        If everyone who drives to work today drove with 1-person car-pool.

        Or we did just a little better in planning housing / work location closer for major metro areas.

        These are huge gains to be had.

        Certainly if the goal is everything is exactly the way it is today, no changes in lifestyle at all, then the limits are much closer in time.

        People are flexible.

        Mike

    • snolken says:

      the world has never been in this economic situation before,and will probably never come there one more time……………….

  2. Lewis Austin says:

    Great summary, but I don’t understand this:
    [2] Money printing is unhelpful when it simply becomes someone’s savings (i.e. growing wealth inequality). The economy is still obligated to repay the debt (usually through taxes) and economic activity becomes sequestered in wealthy people’s savings, without ever creating demand for someone else’s product.
    It seems this would only be true if wealthy people invested in bullion which just sat there. But don’t investors invest in bonds and stocks which are investments in productive activities?

    • Shunyata says:

      Stocks and bonds give you the right to a share of productive activity, but purchasing that right doesn’t increase activity. Whether you pay $1 or $1,000,000 to own half of the company doesn’t change what the company actually does.

      • Greg Machala says:

        That is a very good point, it is energy that controls how and what a company can do, not its stock price. Perhaps that is why stock prices are skyrocketing. The energy and stock price has decoupled.

      • Greg Machala says:

        Everyone seems to be looking to the stock market as a barometer of economic health. However, the system whereby we use money – to buy things made with energy – is breaking down. What may happen and I think this will happen rather quickly is – the banking system will fail. The whole dollar trade system will collapse virtually overnight. No one will trust money. Governments will try to instill martial law, but the energy supplies to sustain martial law will not be there for long before utter chaos ensues, the electric supply becomes unstable. Once that point is reached, it will be impossible to turn things around. This is why everything and the kitchen sink (and human lives) will be thrown at this to stave off the inevitable as long as possible. So, the forecast would seem to call for more acts of desperation.

        • gerryhiles says:

          And the stock market and banking now is mainly a casino. Money changing hands, winners and losers, but not much investment in business, which was the original intent that’s long gone.

          • Very low interest rates facilitate the high prices, because indirectly, debt can be used to facilitate some of the purchases. I haven’t studied ETFs and derivatives, but I would suspect that they are part of the web as well.

        • JT Roberts says:

          Correct Greg

          That will be the Great Tribulation.

          Matt 24:21

      • Tom S says:

        No, definitely not. When a corporation issues bonds, they get money from it which they can use to buy more capital equipment.

        Furthermore, a corporation can issue more shares, and thereby raise money by selling stock. They can use that money to buy more capital equipment.

        As a result, it does change what the company actually does. It does increase the economic activity of that company.

        Only when you buy shares from someone else (not the company issuing new shares) are you just getting an ownership stake with no change in the company.

        -Tom S

        • Shunyata says:

          The original comment was that stock or bond investments lead to economic activity. Since most transactions do not involve new issuance of stocks or bonds, there is no impact on economic activity.

          Yes companies can issue new shares, which can translate into capital investment. But sometimes new money, whether from debt or stock issuance is only used to bring risk capital up to desired targets. This happened widely following the 2008 crash and does not lead to capital investment.

          Similarly corporations can issue debt to buy back common stock shares. this is happening widely today and does not lead to capital investment.

        • The big activity in recent years has been buying back shares of stock and replacing them with debt at a low interest rate. This allows reported earnings per share to rise. If desired, the company can issue more shares of stock later, often to company insiders. This helps concentrate ownership of the company.

      • zenny says:

        Some bong holders…not a typo. Generous Motors may beg to differ.
        Tesla is the next batter up.
        Sorry for the code Gail I will Try to keep it to a dull roar

  3. Harry Gibbs says:

    I think Shunyata has had a good stab at this. Summarising our predicament in simple terms is actually incredibly hard, especially as the ramifications thereof run contrary to some of our most ingrained and cherished narratives about our capabilities and our place in the universe.

    I’ve stopped trying to educate people, partly because there is not much IMO that can be done to mitigate and partly because only those who have made a conscious decision to open their minds and ‘go on the journey’ are likely to view you as anything other than a crackpot.

    This was my attempt at a simple summary:

    The fundamental problem is that we are running an infinite growth paradigm on a planet of finite resources – although in truth it is not really us doing the ‘running’. The global economy as a totality is a self-organising complex system that is only consciously controllable in niches by individual humans and groups of humans. The whole is something we have automatically constructed over time – it as an expression of our nature, just as an ants’ nest is an expression of the nature of ants.
    We are driven to transform raw materials into an ever greater number of goods and services with competition and problem-solving needs constantly forcing technological advancement and rising complexity. We achieve all this via the dissipation of ever greater amounts of energy, generating in the process ever more entropy (pollution, waste materials etc.).

    But of course there are only finite amounts of energy sources and minerals on the planet, so our quest is ultimately doomed to failure. Furthermore we will always naturally go for the easiest to extract resources first. This means that we have a physical resource-base that is constantly shrinking in quantity and quality and/or accessibility. Meanwhile maintaining existing infrastructure and battling the growing entropy soaks up more and more of the available energy, leaving less and less for growth.

    Perched precariously on top of this shrinking and degrading pool of natural capital is a financial system that can only exist in a state of growth. The primary reason that growth is essential to the survival of the global economy is that debt is built into it. Governments use debt to pay for infrastructure, services and programmes before they collect taxes; companies use debt to start up and/or access resources before they become profitable; individuals use debt to pursue higher education and purchase ‘big-ticket’ items like cars and houses. The entire fractional reserve banking system is a form of debt.

    Debt is the promise of a more profitable tomorrow that we use to ‘ramp up’ our purchasing power in the present. In fact we can understand growing debt and financialisation as an attempt by the global economy to compensate for the encroachment of the growth-limiting factors outlined above, going all the way back to Nixon’s cancellation of the direct international convertibility of the US $ to gold back in 1971.

    Debt must be paid back with interest accrued, so a debt-based system is fine until tomorrow is less profitable than today – then it takes on the characteristics of a Ponzi scheme.

    We have now reached the point at which each tomorrow really will be less profitable than today. Energy and resource-constraints are biting, as evidenced by the dramatically rising extraction costs of oil, for example, and we have a worryingly flat throughput of energy per capita. Wages of non-elite workers, which are themselves an expression of how much ‘energy profit’ is flowing through the system, have been stagnant for too long and workers are struggling to afford the output of the system. Many parts of the global economy are debt-saturated, ie existing debt precludes legitimate net growth, despite what GDP may say, and new debt is less and less able to stimulate economic activity.

    Trump’s protectionism and the increasingly fractious and polarised politics we are seeing in various parts of the world are a predictable response to this underlying sense of lack and the unease it generates. When people feel that their economic prospects are constrained or threatened they will vote accordingly. Demagogues can rise to power; wars can start.

    Perhaps more likely than WW3 is that the financial system, as a vulnerable nexus for the various limits to growth, breaks, as it so nearly did in 2008. Certainly the central banks are now in a much weaker position to cope with any downturn – interest rates cannot be cut significantly from where they are – and their ongoing interventions have in any case begun to morph from solutions to problems.

    • Greg Machala says:

      “Perhaps more likely than WW3 is that the financial system, as a vulnerable nexus for the various limits to growth, breaks, as it so nearly did in 2008” – I agree. The global financial system is on the verge of utter collapse. I think there is a very high risk of another global finanicial crisis that would rival 2008 coming in the next year or two.

    • Harry Gibbs says:

      “Summarising our predicament in simple terms is actually incredibly hard, especially as the ramifications thereof run contrary to some of our most ingrained and cherished narratives about our capabilities and our place in the universe…”

      I meant to add here “,which means that people respond to hearing it in all sorts of peculiar, unexpected ways and what was originally intended to be a neat summary then mushrooms into a series of unwieldy counter-arguments.”

      • Greg Machala says:

        I think it makes things easier to understand if people can accept that we are not stewards of the Earth (regardless if we want to be or not).

        • Harry Gibbs says:

          I’m sure it would but that is a viewpoint most people seem inclined to cling to, regardless of how much evidence there is to the contrary.

          Another surprisingly common misconception is that technology generates energy, and if you talk about an energy crisis most assume that we can invent our way out of it. Some people genuinely believe that the means for generating abundant, cheap energy already exist but that evil fossil fuel firms are sitting on them. Others simply won’t be talked down from the renewables ledge.

          Trying to convince anyone of the overall situation is certainly thankless and probably pointless if you are of the view, as I am, that the financial system will break so quickly and irreversibly and with such unpleasant and wide-ranging consequences that there probably isn’t a huge amount that can be done to prepare (could be wrong there, of course), so I tend to keep my counsel.

          • Shunyata says:

            Reductio Absurdum is a great technique in these situations. Just ask the question, “So let’s say the evil Oil Companies got your point. What would you have them do next?” And when they answer ask, “What effect would that have on your grandparents?” It’s fascinating to watch people as the consequences sink in.

            • Tom S says:

              Hi,

              It’s not clear what you’re getting at here.

              Let’s say oil companies have been suppressing an innovation that would allow cars to get 100mpg. Presumably, the people who believe that would want oil companies to disperse the innovation, and have it become widely deployed. At which point, my grandparents (and everyone else) would require far less fuel to travel a given distance.

              It’s not clear what you’re getting at here.

              -Tom S

            • (Really responding to Tom S)

              Less oil use leads to lower oil prices. The companies pumping the oil go bankrupt. The oil exporting countries cannot collect enough taxes, so their governments are overthrown. This leads to less oil supply and lots of debt defaults. Banks need to be bailed out, or they fail completely. If they are not bailed out, companies using the banks for payroll services cannot pay their employees.

              Of course, if the innovation you are talking about really makes auto transportation very cheap (100 mpg, and cheap otherwise), then we reach a situation where the innovation actually increases demand. People in India suddenly find that they can afford. Young people in Europe and the US can afford cars. We have more demand not only for oil, but for all the products used to make cars. This enables more oil extraction.

              As I have commented before, “The economy grows when the price of energy services (the delivered cost of energy, including efficiency gains) tends to fall over time. This is what allows businesses to use increased amount of energy products to leverage the labor of workers. It is also what allows citizens to use their wages to buy goods such as cars or motorcycles.

          • JT Roberts says:

            Great summary. And your right you can’t explain it to the average person which seals the situation.

        • xabier says:

          Far from being stewards of the Earth, it’s a huge and eventually doomed endeavour to keep a moderately complex garden in whatever order has been decided upon.

          As a garden relates to Nature as a whole, so our civilization relates to the whole.

          • I would agree. It is the nature of plants and animals to build ecosystems to maximize the use of available solar energy resources. We can use our human energy to try to work around this normal situation, but it doesn’t work very well. Just digging with a stick we find on the ground doesn’t do enough. We soon find that we need tools. We also need soil amendments brought from a distance. Tools require energy to make. Some of them can use energy such as diesel to operate; others just use human energy. Even transporting soil amendments long distances with only the use of our hands becomes an impossible task.

        • zenny says:

          Point taken BUT that stuff in the spent fuel ponds is a game change IMHO

      • wratfink says:

        It’s hard to even find an easy place to start talking about the financial problems with most people…much less the energy problems we face.

        Most people still think loans are made from other people’s saving deposits in the bank.

    • SomeoneInAsia says:

      QUOTE: ***The global economy as a totality is a self-organising complex system that is only consciously controllable in niches by individual humans and groups of humans. The whole is something we have automatically constructed over time – it as an expression of our nature, just as an ants’ nest is an expression of the nature of ants.***

      I feel kind of unhappy with this. It makes it sound as if we humans really don’t possess any free will, that we could never have chosen collectively to follow any way of life that’s more sustainable, being presumably doomed by our very genes from the start to pursue this path of infinite growth. The whole global economic order was actually set up mainly by a small handful of people known otherwise as the 1% or 0.1%, who have been manipulating the rest of us to their own ends. Not all of us are to blame. Right?

      By the way, ‘Shunyata’ is Sanskrit (the classical language of India), meaning ’emptiness’ or ‘the void’ in Buddhist philosophy. I wonder if we have a Buddhist actuary here. 🙂

      • Shunyata says:

        More accurately, shunyata is the concept that our “idea” of reality is “void” of any actual reality. The true nature of things cannot be encompassed by what we think about them.

        • Harry Gibbs says:

          Right, Sunyata – the conceptual mind is a remarkable tool but limited. You can write a PhD thesis on honey but that sort of intellectual analysis is not a patch on actually tasting it.

          SomeoneInAsia, you are in good company. I know many smart people who believe that a relatively small number of humans and more precisely a pathological ‘wetiko’ mentality with its origins in Western Europe are responsible for our collective predicament. A close examination of human history does not bear this out IMO. We have never been very good at living in balance with our environment, even in our hunter-gatherer days. Wherever ancient humans went the megafauna quickly disappeared…

          • SomeoneInAsia says:

            QUOTE:***We have never been very good at living in balance with our environment, even in our hunter-gatherer days. Wherever ancient humans went the megafauna quickly disappeared…***

            Maybe, but the damage wrought by the modern industrial way of life is still worse than anything from the past by several orders of magnitude.

          • zenny says:

            Well we did build the Pyramids

      • xabier says:

        Well, I would say that this situation is almost beyond credit or blame, moral categories hardly apply.

        How we live is an elaboration of basic human behaviour, but the turning point came with the release of the coal genie from the deeply-buried bottle, and then some others searched out the lamp with the oil genie hidden within.

        Why? Because not to do so meant the collapse of the civilization which had become dependent upon coal, and to have refrained from participating would have led to political annihilation in a world composed of competing power blocs and states.

        The oil genie kept his promises, our wishes were granted, but as the tale relates there’s a significant downside.

        • xabier says:

          Just imagine if the British and Americans had taken the advice of D H Lawrence, and decided to abandon industrialized modernity to dance around fires in tight-fitting (but manly!) red trousers, living and working in an Arcadian idyll – a new barbarism in other words.

          They would in fact have become the slaves of those neighbouring peoples who had embraced oil-technology to the full, as the barbarians had found themselves serving cool drinks to Roman senators….

        • Sungr says:

          “Why? Because not to do so meant the collapse of the civilization which had become dependent upon coal, and to have refrained from participating would have led to political annihilation in a world composed of competing power blocs and states.”

          As a kid, I knew elders in my family who lived through the post-Civil War era and were part of the industrial revolution in the 1900s. Knowing these people was a lucky twist for me because one generation of my family had skipped having kids until they were near their 50th birthday. So I ended up as a teenager who had a good relationship with an 80yo grandfather who told me much.

          My grandfather was born in a covered wagon in Nebraska and was part of a builder family that traveled all over the country in the late 1800s. He went on to become an electrician in Cleveland- reaching his 60y anniversary as a Master electrician.

          But to the point. These people who were part of the early industrial revolution just LOVED all the innovative new products and lifestyles that were constantly appearing. Both of my grandparents families absolutely fell in love with the automobile. In fact, these people became almost instant surburban commuters in the 1910s-20s. They loved their cars. They loved all of these new industrial products with a passion. In the US having a radio or TV became instantly the norm for most families and they soon forgot what life was like without these products- and would never go back to agricultural serfdom lifestyles.

          Anyway, these people did not view fossil fuel use & industrialism as any kind of collapse prevention or sustainer of financial systems etc. They viewed the new industrial lifestyles as new and warm and wonderful. They had boundless enthusiasm for the whole process.

          Of course, WW1 started people thinking that the industrial lifestyle also had some pretty severe costs.

          • Harry Gibbs says:

            No doubt there was some good, old-fashioned simian status anxiety bound up with that enthusiasm for comfort, novelty etc.

            • Sungr says:

              True.

              These people- and all before them- had a deep understanding of how a person is ground down by dawn-dusk farming chores. They knew what it meant to die behind the plow at 39 years old.

          • Karl says:

            I likewise feel blessed to have had a grandfather born in 1924 west Virginia. Modernity came late to Appalachia, and his family didn’t get electricity or a car until after he came back from the war. At 38 years old, it gives me perspective about how brief this burst of modernity has been. They used to say shirtsleeves to shirtsleeves in 3 generations. That would appear about right…….

            • SomeoneInAsia says:

              QUOTE:***These people- and all before them- had a deep understanding of how a person is ground down by dawn-dusk farming chores. They knew what it meant to die behind the plow at 39 years old.***

              I sometimes wonder if no FF automatically means (for the vast majority) a life of miserable back-breaking toil behind the plow. There is a lot of interesting ‘low-level’ technology people in the past came up with for leveraging their work in the fields so it became less back-breaking, more efficient and more productive. Examples include the seed-drill, the hand-cranked rotary winnowing fan, the fool-pedalled square pallet chain pump for irrigating fields, and so on — all operated by human (or animal) muscle. No FF. Gail also mentioned in a previous post the use of the wheelbarrow.

        • SomeoneInAsia says:

          QUOTE:***…and to have refrained from participating would have led to political annihilation in a world composed of competing power blocs and states.***

          Ah, HAAAA!!

        • xabier says:

          And I’ll add to that: because FF civilization felt so nice and ever more comfortable for the mass of people – the geostrategists, generals and great industrialists had their own games and concerns, of course, but for tha mass of people it was miraculous and seemed only good.

          And even the lives of the rich improved dramatically. Until WW2 , for instance, it was quite common for the British aristocracy to have to wear outdoor clothes to move along the freezing corridors between the rooms of their old houses (unless they had married an American heiress who’d insisted on modernizing).

          My favourite example: the US ambassador promised Chrchill that when the war was over, he’d make a present of central heating for the PM’s country house and HQ, Chequers, as he’d had so many miserably cold days there, wearing an overcoat all day long……

  4. Greg Machala says:

    Since modern society MUST have oil and other energy products to sustain and grow the financial system, it would seem logical to assume that oil supply should increase with time and oil price should decrease with time for a growth based financial system to function. If prices rise as “demand” increases, this can work for a while IF energy products are not close to limits (1970-2000). Once energy products near the maximum rate of extractability (2000-2008), the supply and demand “law of economics” breaks down. Since energy products fuel the economy, if they become expensive, the economy slows. There is an increasing drag on the economy as it takes more energy just just to get energy. Thus more resources are moved to energy extraction sector and Job losses occur elsewhere. The job losses must occur because less net energy is making its way into the general economy. Now, fewer people can afford energy products, this causes what appears to be gluts of energy and commodity products and prices drop below the level of production. But the glut really isn’t a glut, it is an affordability problem. The bottom line is our economy can no longer really afford energy products. What a predicament eh. Economy needs energy – economy cannot afford energy products. Debts skyrocket, things become increasingly unstable.

    • Sungr says:

      “Since modern society MUST have oil and other energy products to sustain and grow the financial system”

      The “financial system” is just an inter-active intelligence system of allocating resources- It’s not a goal in itself.

      Not to say that high-power operators haven’t engineered ways to milk the financial system as a source of personal profits- especially after the computerization of financial operations.

      I’m not sure why we couldn’t have different types of “financial systems” that might work better than our current financial-military disaster.

      • Greg Machala says:

        I suppose we could have a different type of financial system. But, how would it work and how would we transition to it?

      • I think a lot of people think that the financial system is primarily for facilitating barter. I don’t see this as the case. I see two primary roles of the financial system:

        1. A price setting function, that works in a self-organized way, given the rules the system is given.

        2. A system to facilitate matching of investment with the time that investment will actually be in use. This system is a time-shifting function, in which someone (or a group) can use a resource now, to facilitate an investment, and pay it back later, when that investment “pays off.” There should be more goods and services then, if the investment works out as planned. This time-shifting function increases “demand” for commodities of all kinds, and allow their prices to be higher than they otherwise would be.

        People who do not understand the need for such a system assume that we could get along without it. I think that we have had reciprocal promises from hunter-gatherer days. Part of the group would agree to hunt; part would gather; and part would do day care or work on finding flints and sticks. There would be an agreement to save up until they got back, and share with the rest of the group. The informal promise to abide by the rules would be enforced by kicking anyone out of the group that didn’t follow the rules.

        I might point out that governments often provide time-shifting promises, without actually calling it debt. Governments say, “I will pay you a pension when you reach a certain age. That way you don’t need to have as many children; thus you can spend more years in the labor force. All you need to do is pay taxes on an ongoing basis.” This works very much like debt, but it doesn’t work if people have too few children or if resources get strained.

        Without promises, economies of scale are not possible. Neither is the use of capital goods (machines, trucks, computers, factories, railroads, pipelines, electricity transmission lines, etc. Diminishing returns would like lead to immediate collapse, rather than collapse a few years later. We can’t get along without promises. A lot of them go through the financial system.

        • theblondbeast says:

          The time function is huge! Economists talk about “capital formation” required to accomplish any major task. What this really means is organizing the activities of large groups of people for some major undertaking – like building a bridge.

          Marx had his labor theory of value. Certainly there is an “energy” theory of value possible out there – where the cost of energy input plus the human labor contributes to value.

          • I agree. A person has to understand the importance of time-shifting. Once it is gone, the economy is finished.

            The economy cannot run on barter alone, no matter what people think. David Graeber in “Debt: The First 5,000 Years,” talks about debt being part of very early financial systems. The financial system could exist without tokens for trading, but it could not exist without debt.

  5. Mike Rank says:

    Outstanding comment on the sorry state of our highly debt-leveraged global economy. Politicians simply cannot ever resist the demand for more entitlements. Capitalist systems cannot grow without ever-increasing credit. Unless disposable income increases along with credit growth, the global economic system breaks down. We are quickly approaching that point. The next crash will be catastrophic. Flight to safety will be to government bonds initially. But how long before the world realizes it is still a paper asset whose coupon quickly becomes uneconomic as investors demand ever-higher interest rates to compensate for the immense amount of global debt? When that happens the only real asset left is gold in bullion form – in your possession – which cannot be hypothecated or printed. Gold has been money for thousands of years. Sadly, very few outside of the Orient understand that gold holds its value in a deflationary bust and accelerates in value in a hyperinflationary environment. One of the two or one followed by the other is the likely outcome of today’s debt-leveraged global economy.

    • doomphd says:

      Recall that you can’t eat gold, and the scenarios you plan for will quickly deteriorate into ones in which access to food and security will trump possession of precious metals.

      • zenny says:

        I hear that all the time but you do find gold in pyramids so I have a bit and silver has other uses for health
        The Venezuelans with gold are eating and staying alive if they know who to bribe.
        I know the first and last name of every person on my island…Me takes my chances

  6. BahamasEd says:

    [quote]These prices aren’t really very high, if a person looks at the situation from a longer term point of view than the last three years.[/quote]

    Prices are low in comparison from 2005 to 2015 but still high above the price from before that.
    I believe that WTI should be trading between $35 and $50, that it is trading $18 above that tells me that oil end products are a bad investment right now. In that it’s difficult to buy oil end products (gasoline, diesel etc) and do something with them to turn a profit.

    I look around and I see a lot of cash flow, but not much profit after accounting for all costs.

    • Shunyata says:

      Comparisons to the past don’t mean too much. There are too many confounding variables, many of which aren’t even properly “visible” in historical data. So you wind up using “models” to interpret the past data. And, lo and behold, you wind up finding your own opinion (encoded in your model) confirmed by your model results!

      The only thing that matters is whether the current price allows proper functioning in the current economic landscape. The current situation is a little more objectively evaluated, although still at risk of contaminating opinions

  7. gerryhiles says:

    The only part missing is compounding interest payment to private banking cartels, e.g. Rothschild & Associates (Western governments don’t print money, they borrow it). That’s where increasing amounts of taxation go, leaving ever less for governments to pay pensions, repair infrastructure, etc.. Compounding interest MAKES exponential growth a necessity and of course that is impossible on a finite planet.

    Other than this a good set of analogies anyone (nearly?) can understand.

  8. Third World person says:

    so our 250 thousand years of evolution come to
    this our industrial civilization can not handed high oil price

    what a evolution homo species are

  9. Tom S says:

    I read the article and it seems to me that this step in the reasoning is wrong:

    “[2] Economic activity is redirected to maintain air production, and overall economic activity is reduced. With reduced overall economic activity there is a reduced need for air, resulting in excess air supply and a temporary reduction in air price.”

    That is clearly wrong, in my opinion. If economic activity is redirected to maintain air production, then overall economic activity is NOT reduced. It is shifted from one place to another. Consumers buy a smaller SUV and more air. Less SUV-making equipment is used and more air-extracting equipment. The overall economic activity is the same even without any capital growth. Granted, CONSUMPTION is down, because people have to buy air which used to be free, but economic activity remains the same. Why would economic activity overall be reduced when we shift resources from one place to another?

    Importantly, why has much of the world (such as China, India, Bangladesh, and so on) maintained fairly high growth rates? The size of the economy in China has doubled in the last 15 years, and increased greatly in India, despite high oil prices much of the time. Those places are where much of the human population lives. As a result, there clearly hasn’t been a reduction in economic activity as a result of high oil prices.

    -Tom S

    • Shunyata says:

      You are absolutely correct. The activity level remains the same, but we are now getting less far ahead (can afford less overall consumption) for the same effort. In the limit, if everyone is just working just to breathe, we have no discretionary consumption.

      Even if the terminology is imprecise. I think my grandparents understand this to be a reduction in economy activity, not a maintenance of the status quo.

      • Tom S says:

        “In the limit, if everyone is just working just to breathe, we have no discretionary consumption.”

        Sure, but we’re not approaching that limit now. Most people in the world do not spend all their money just to eat and buy oil.

        “Even if the terminology is imprecise. I think my grandparents understand this to be a reduction in economy activity, not a maintenance of the status quo.”

        Sure, but using your grandparents’ definition, why would the price of oil have to come down? Why couldn’t the price of oil rise enough for oil companies to make a profit? Couldn’t I forego my cell phone and spend that additional money on oil indefinitely?

        -Tom S

        • BahamasEd says:

          “Couldn’t I forego my cell phone and spend that additional money on oil indefinitely?”

          Not really, because you have to use the oil you buy to make a profit so you can afford to live and buy more oil to restart the cycle.

          I buy oil and burn it, using money I’ve already made. Once I run out of money I will have to stop buying oil.

          In the real world you have to make a profit, at the end of each year your total net worth has to increase if you want to grow (net worth = what you can sell your assets for – your total liabilities).

          • Shunyata says:

            Foregoing your cell phone puts someone out of work and reduces the demand for oil to produce and maintain cell phones. Downward pressure on oil price! You must have consumption of additional good to keep the economy going.

        • Greg Machala says:

          “Sure, but we’re not approaching that limit now. Most people in the world do not spend all their money just to eat and buy oil.” – That is true. But, that is also an impossible state. It could never be reached. So, at some point between this end state limit and where we are now, things will break down. I think what Shunyata is demonstrating is that there is an end to all this and what must end will eventually stop.

  10. daddio7 says:

    Here is what we could do if people would cooperate. Most people have jobs that do not create wealth. I call those non productive jobs. Unlike oil, people can actually only consume a set amount of air. It can not be used up for entertainment or luxuries. Once a person has enough they can live fine without having to obtain more.

    The people who do produce wealth then have excess to buy services and entertainment with. Non productive people use vast amounts of oil to provide these and earn enough to sustain their families and themselves, and of course to fund their own desire for services and entertainment. What if no oil was used to provide services and entertainment?

    Word trade does little to increase productivity, mostly wealth that is created in some countries is sent to another to buy luxuries. Vast amounts of fossil fuels are used to manufacture and transport these products, what if none of that happens?

    If no one is occupied doing non productive things the need for oil drops dramatically. Those people could then concentrate on productive jobs. Those who are extremely productive could be encouraged in some way to work hard enough to fund those who are incapable of being productive themselves.

    If you say that sounds like how China was under Mao you are mostly right. In most was they were doing fine, Nixon opening up trade gave those hundreds of millions of idle hands some to do other than feed themselves and breed. Now look at what those many trillions of dollars we sent them have created.

    The wealthy of the word control the governments. Nothing is going to change. The .01% do not care if it all goes down in flames, they have a plan to ride it out. If you are lucky you may be one of the survivors left to provide them with the services and luxuries they want.

    • Shunyata says:

      I suspect none of our situation is orchestrated, or even particularly under any control whatsoever. As my grandfather would say, “Whenever a manager gets involved, its darned difficult to tell the difference between a crook and an incompetent.”

    • I don’t really understand what you mean by, ” Most people have jobs that do not create wealth. I call those non productive jobs.”

      A homemaker stays at home and raises her children. This, over the long term, produces children who can eventually hold down jobs. It may also enable her husband to work. A grandmother often provides a similar function.

      Who are you thinking of? Why would anyone hire someone, if the person is not doing something that is in some sense productive?

      • theblondbeast says:

        I was thinking about this the other day while corresponding with another advocate of this “MMT solution” who advocate full employment, and what we often discuss here about the low real wages problem.

        Evaluating productivity usually amounts to measuring the dollar value of output for the dollar value of input. From this standpoint MMT advocates the government should be the Employer of Last Resort (ELR) and money-finance (as opposed to debt finance) activities and buying until full employment obtains. It seems like by definition paying a wage for a service which would not have a positive dollar value on the market fits the bill for unproductive. One argument about real wages is that this activity by government has introduced competition with the private sector for wages and it doesn’t have much value beyond introducing currency into circulation.

        So productivity relates to real wages and energy based on the observation that sale price has to exceed cost of production, and the cost of production includes the cost of labor and the cost of energy inputs. So rising energy costs put pressure on wages and productivity.

        This interesting article examines the problem since 1970 and introduces something I think you may find valuable: https://piie.com/blogs/realtime-economic-issues-watch/growing-gap-between-real-wages-and-labor-productivity

        I had never heard the term “real product compensation” before. But since 1970 the increase in the price of products has matched the increase in gross output resulting in flat real wages.

        • As the economy grows, it adds more and more non-essential goods and services. Healthcare is one of these services. Its exploding cost has made everyone else poorer–inefficiency in the extreme.

          Education is another area that absorbs workers with benefit far less than the expenditures. Adding education allows employers to use level of education as a screening device to show conscientiousness, but it very often has little to do with ability to do a particular jobs. It does keep unemployed students out of the workforce for a while. Faculty members spend lots of time writing papers of minimal benefit to society, while teaching is handled by low-paid adjunct faculty.

          What you are seeing is the effect of the changing economy, as it adds more and more of these services that mostly provide jobs to people, but add little true benefit to the economy.

          In China, the jobs have been building apartments that people cannot afford. Many versions of the same issue.

      • daddio7 says:

        I am sure you know how wealth is created. Productive jobs are ones that create wealth and ones that support wealth creation. Truck drivers, road pavers, tractor mechanics, they help needed manufactured goods get distributed and food grown. I would say pro football players do not create any wealth or support those who do. Ballet dancers, hair dressers, Disney World, talk show hosts and other entertainers also. Many jobs, like mall dress shop clerks, just facilitate luxury purchases.

        Sadly there are people who would take your wealth or even your entire country so police and an army are needed and civil servants to help manage it all. And of course the teachers but most children spend way too much time in class.

        Of course life is much better with services and entertainment, even in Medieval Europe travailing entertainers found work. We haven’t even touched our eating and dwelling place choices. We can still have a comfortable, modern lifestyle using a tenth of the fossil fuels we now use. We can no longer allow entrepreneurs to use vast amounts of resources trying to make their second $billion. Oil drilling and other energy production will have to be run as public utilities for the benefit of the country, not to enrich CEOs and stock holders.

        • The thing that we don’t often think about is The price of essential goods and services must fall if the economy is to grow, since nearly all growth in jobs and GDP will be in non-essential items, which tend to be services.

          The productive jobs you are talking about are those where people work to produce essential goods and services. Their jobs generally require considerable energy use. Farmers are essential; so are workers paving roads. Their jobs take a disproportionate share of the energy we use today.

          If we get rid of the “non-essential jobs,” then the people holding these jobs will have no way of buying essential goods and services. Demand for oil, gas and coal will drop, and so will their prices. The system will collapse, from lack of affordable demand. Also, governments will not be able to collect enough taxes.

          We will not have a comfortable lifestyle because oil exporting countries will collapse because of low prices. Companies extracting fossil fuels will tend to file for bankruptcy and won’t have buyers.

          We are dealing with an interconnected system. We cannot just “get rid of” parts we no longer can afford. Perhaps a government can decide to disband and army it can no longer afford, but it is hard to make a change on a wider basis than this.

      • zenny says:

        I am told that I need to generate 3.5 x my cost just to pay for the support staff that I have.
        The kind of people that want me to take this.
        Why Cultural Sensitivity Training Is Ineffective and Insensitive….Not sure if i Need a lawyer or another job. OH and I am no SJW

        • I can remember years ago when it was common to have less staff. As a child, I went to a dentist who answered his own telephone and took his own appointments. He washed his hands afterward, and started where he left off. Needless to say, he cleaned teeth as well.

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