Low Oil Prices: An Indication of Major Problems Ahead?

Many people, including most Peak Oilers, expect that oil prices will rise endlessly. They expect rising oil prices because, over time, companies find it necessary to access more difficult-to-extract oil. Accessing such oil tends to be increasingly expensive because it tends to require the use of greater quantities of resources and more advanced technology. This issue is sometimes referred to as diminishing returns. Figure 1 shows how oil prices might be expected to rise, if the higher costs encountered as a result of diminishing returns can be fully recovered from the ultimate customers of this oil.

Figure 1. Chart showing expected long-term rise in oil prices as the full cost of oil production becomes increasingly expensive due to diminishing returns.

In my view, this analysis suggesting ever-rising prices is incomplete. After a point, prices can’t really keep up with rising costs because the wages of many workers lag behind the growing cost of extraction.

The economy is a networked system facing many pressures, including a growing level of debt and the rising use of technology. When these pressures are considered, my analysis indicates that oil prices may fall too low for producers, rather than rise too high for consumers. Oil companies may close down if prices remain too low. Because of this, low oil prices should be of just as much concern as high oil prices.

In recent years, we have heard a great deal about the possibility of Peak Oil, including high oil prices. If the issue we are facing is really prices that are too low for producers, then there seems to be the possibility of a different limits issue, called Collapse. Many early economies seem to have collapsed as they reached resource limits. Collapse seems to be characterized by growing wealth disparity, inadequate wages for non-elite workers, failing governments, debt defaults, resource wars, and epidemics. Eventually, population associated with collapsed economies may fall very low or completely disappear. As Collapse approaches, commodity prices seem to be low, rather than high.

The low oil prices we have been seeing recently fit in disturbingly well with the hypothesis that the world economy is reaching affordability limits for a wide range of commodities, nearly all of which are subject to diminishing returns. This is a different problem than most researchers have been concerned about. In this article, I explain this situation further.

One thing that is a little confusing is the relative roles of diminishing returns and efficiency. I see diminishing returns as being more or less the opposite of growing efficiency.

Figure 2.

The fact that inflation-adjusted oil prices are now much higher than they were in the 1940s to 1960s is a sign that for oil, the contest between diminishing returns and efficiency has basically been won by diminishing returns for over 40 years.

Figure 3.

Oil Prices Cannot Rise Endlessly

It makes no sense for oil prices to rise endlessly, for what is inherently growing inefficiency. Endlessly rising prices for oil would be similar to paying a human laborer more and more for building widgets, during a time that that laborer becomes increasingly disabled. If the number of widgets that the worker can produce in one hour decreases by 50%, logically that worker’s wages should fall by 50%, not rise to make up for his/her growing inefficiency.

The problem with paying higher prices for what is equivalent to growing inefficiency can be hidden for a while, if the economy is growing rapidly enough. The way that the growing inefficiency is hidden is by adding Debt and Complexity (Figure 4).

Figure 4.

Growing complexity is very closely related to “Technology will save us.” Growing complexity involves the use of more advanced machinery and ever-more specialized workers. Businesses become larger and more hierarchical. International trade becomes increasingly important. Financial products such as derivatives become common.

Growing debt goes hand in hand with growing complexity. Businesses need growing debt to support capital expenditures for their new technology. Consumers find growing debt helpful in affording major purchases, such as homes and vehicles. Governments make debt-like promises of pensions to citizen. Thanks to these promised pensions, families can have fewer children and devote fewer years to child care at home.

The problem with adding complexity and adding debt is that they, too, reach diminishing returns. The easiest (and cheapest) fixes tend to be added first. For example, irrigating a field in a dry area may be an easy and cheap way to fix a problem with inadequate food supply. There may be other approaches that could be used as well, such as breeding crops that do well with little rainfall, but the payback on this investment may be smaller and later.

A major drawback of adding complexity is that doing so tends to increase wage and wealth disparity. When an employer pays high wages to supervisory workers and highly skilled workers, this leaves fewer funds with which to pay less skilled workers. Furthermore, the huge amount of capital goods required in this more complex economy tends to disproportionately benefit workers who are already highly paid. This happens because the owners of shares of stock in companies tend to overlap with employees who are already highly paid. Low paid employees can’t afford such purchases.

The net result of greater wage and wealth disparity is that it becomes increasingly difficult to keep prices high enough for oil producers. The many workers with low wages find it difficult to afford homes and families of their own. Their low purchasing power tends to hold down prices of commodities of all kinds. The higher wages of the highly trained and supervisory staff don’t make up for the shortfall in commodity demand because these highly paid workers spend their wages differently. They tend to spend proportionately more on services rather than on commodity-intensive goods. For example, they may send their children to elite colleges and pay for tax avoidance services. These services use relatively little in the way of commodities.

Once the Economy Slows Too Much, the Whole System Tends to Implode

A growing economy can hide a multitude of problems. Paying back debt with interest is easy, if a worker finds his wages growing. In fact, it doesn’t matter if the growth that supports his growing wages comes from inflationary growth or “real” growth, since debt repayment is typically not adjusted for inflation.

Figure 5. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Both real growth and inflationary growth help workers have enough funds left at the end of the period for other goods they need, despite repaying debt with interest.

Once the economy stops growing, the whole system tends to implode. Wage disparity becomes a huge problem. It becomes impossible to repay debt with interest. Young people find that their standards of living are lower than those of their parents. Investments do not appear to be worthwhile without government subsidies. Businesses find that economies of scale no longer work to their advantage. Pension promises become overwhelming, compared to the wages of young people.

The Real Situation with Oil Prices

The real situation with oil prices–and in fact with respect to commodity prices in general–is approximately like that shown in Figure 6.

Figure 6.

What tends to happen is that oil prices tend to fall farther and farther behind what producers require, if they are truly to make adequate reinvestment in new fields and also pay high taxes to their governments. This should not be too surprising because oil prices represent a compromise between what citizens can afford and what producers require.

Figure 7. Illustration indicating that the world has already reached a point where no oil price works for both oil suppliers and oil consumers.

In the years before diminishing returns became too much of a problem (back before 2005, for example), it was possible to find prices that were within an acceptable range for both sellers and buyers. As diminishing returns has become an increasing problem, the price that consumers can afford has tended to fall increasingly far below the price that producers require. This is why oil prices at first fall a little too low for producers, and eventually seem likely to fall far below what producers need to stay in business. The problem is that no price works for both producers and consumers.

Affordability Issues Affect All Commodity Prices, Not Just Oil

We are dealing with a situation in which a growing share of workers (and would be workers) find it difficult to afford a home and family, because of wage disparity issues. Some workers have been displaced from their jobs by robots or by globalization. Some spend many years in advanced schooling and are left with large amounts of debt, making it difficult to afford a home, a family, and other things that many in the older generation were able to take for granted. Many of today’s workers are in low-wage countries; they cannot afford very much of the output of the world economy.

At the same time, diminishing returns affect nearly all commodities, just as they affect oil. Mineral ores are affected by diminishing returns because the highest grade ores tend to be extracted first. Food production is also subject to diminishing returns because population keeps rising, but arable land does not. As a result, each year it is necessary to grow more food per arable acre, leading to a need for more complexity (more irrigation or more fertilizer, or better hybrid seed), often at higher cost.

When the problem of growing wage disparity is matched up with the problem of diminishing returns for the many different types of commodity production, the same problem occurs that occurs with oil. Prices of a wide range of commodities tend to fall below the cost of production–first by a little and, if the debt bubble pops, by a whole lot.

We hear people say, “Of course oil prices will rise. Oil is a necessity.” The thing that they don’t realize is that the problem affects a much bigger “package” of commodities than just oil prices. In fact, finished goods and services of all kinds made with these commodities are also affected, including new homes and vehicles. Thus, the pattern we see of low oil prices, relative to what is required for true profitability, is really an extremely widespread problem.

Interest Rate Policies Affect Affordability

Commodity prices bear surprisingly little relationship to the cost of production. Instead, they seem to depend more on interest rate policies of government agencies. If interest rates rise or fall, this tends to have a big impact on household budgets, because monthly auto payments and home payments depend on interest rates. For example, US interest rates spiked in 1981.

Figure 8. US short and long term interest rates. Graph by FRED.

This spike in interest rates led to a major cutback in energy consumption and in GDP growth.

Figure 9. World GDP Growth versus Energy Consumption Growth, based on data of 2018 BP Statistical Review of World Energy and GDP data in 2010$ amounts, from the World Bank.

Oil prices began to slide, with the higher interest rates.

Figure 10.

Figure 11 indicates that the popping of a debt bubble (mostly relating to US sub-prime housing) sent oil prices down in 2008. Once interest rates were lowered through the US adoption of Quantitative Easing (QE), oil prices rose again. They fell again, when the US discontinued QE.

Figure 11. Figure showing collapsing debt bubble at the time US oil prices peaked, and the use of Quantitative Easing (QE) to stimulate the economy, and thus bring prices back up again.

While these charts show oil prices, there is a tendency for a broad range of commodity prices to move more or less together. This happens because the commodity price issue seems to be driven to a significant extent by the affordability of finished goods and services, including homes, automobiles, and restaurant food.

If the collapse of a major debt bubble occurs again, the world seems likely to experience impacts somewhat similar to those in 2008, depending, of course, on the location(s) and size(s) of the debt bubble(s). A wide variety of commodity prices are likely to fall very low; asset prices may also be affected. This time, however, government organizations seem to have fewer tools for pulling the world economy out of a prolonged slump because interest rates are already very low. Thus, the issues are likely to look more like a widespread economic problem (including far too low commodity prices) than an oil problem.

Lack of Growth in Energy Consumption Per Capita Seems to Lead to Collapse Scenarios

When we look back, the good times from an economic viewpoint occurred when energy consumption per capita (top red parts on Figure 12) were rising rapidly.

Figure 12.

The bad times for the economy were the valleys in Figure 12. Separate labels for these valleys have been added in Figure 13. If energy consumption is not growing relative to the rising world population, collapse in at least a part of the world economy tends to occur.

Figure 13.

The laws of physics tell us that energy consumption is required for movement and for heat. These are the basic processes involved in GDP generation, and in electricity transmission. Thus, it is logical to believe that energy consumption is required for GDP growth. We can see in Figure 9 that growth in energy consumption tends to come before GDP growth, strongly suggesting that it is the cause of GDP growth. This further confirms what the laws of physics tell us.

The fact that partial collapses tend to occur when the growth in energy consumption per capita falls too low is further confirmation of the way the economics system really operates. The Panic of 1857 occurred when the asset price bubble enabled by the California Gold Rush collapsed. Home, farm, and commodity prices fell very low. The problems ultimately were finally resolved in the US Civil War (1861 to 1865).

Similarly, the Depression of the 1930s was preceded by a stock market crash in 1929. During the Great Depression, wage disparity was a major problem. Commodity prices fell very low, as did farm prices. The issues of the Depression were not fully resolved until World War II.

At this point, world growth in energy consumption per capita seems to be falling again. We are also starting to see evidence of some of the same problems associated with earlier collapses: growing wage disparity, growing debt bubbles, and increasingly war-like behavior by world leaders. We should be aware that today’s low oil prices, together with these other symptoms of economic distress, may be pointing to yet another collapse scenario on the horizon.

Oil’s Role in the Economy Is Different From What Many Have Assumed

We have heard for a long time that the world is running out of oil, and we need to find substitutes. The story should have been, “Affordability of all commodities is falling too low, because of diminishing returns and growing wage disparity. We need to find rapidly rising quantities of very, very cheap energy products. We need a cheap substitute for oil. We cannot afford to substitute high-cost energy products for low-cost energy products. High-cost energy products affect the economy too adversely.”

In fact, the whole “Peak Oil” story is not really right. Neither is the “Renewables will save us” story, especially if the renewables require subsidies and are not very scalable. Energy prices can never be expected to rise high enough for renewables to become economic.

The issues we should truly be concerned about are Collapse, as encountered by many economies previously. If Collapse occurs, it seems likely to cut off production of many commodities, including oil and much of the food supply, indirectly because of low prices.

Low oil prices and low prices of other commodities are signs that we truly should be concerned about. Too many people have missed this point. They have been taken in by the false models of economists and by the confusion of Peak Oilers. At this point, we should start considering the very real possibility that our next world problem is likely to be Collapse of at least a portion of the world economy.

Interesting times seem to be ahead.

 

 

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
This entry was posted in Financial Implications and tagged , , , , . Bookmark the permalink.

1,393 Responses to Low Oil Prices: An Indication of Major Problems Ahead?

  1. Duncan Idaho says:

    We Want Trump!
    Homo sapiens are on tract for a extinction.
    Rather short for a species.

    • Yoshua says:

      Macron called the protesters: Thugs!

      So…will be open fire?

    • Uncle Bill says:

      One Thing Leads to Another….another great tune from the 80’s by the FIXX

      In our 2012 interview with The Fixx lead singer/lyricist Cy Curnin, he explained the meaning of this song, which deals with malleable politicians. “If you’re going to be a liar, you’d better be a damn good liar and remember what you said, or the whole thing’s going to get pear shaped,” said Curnin. “That was 30 years ago, and look where the system is now. A lot of people stand on ballot boxes and say a lot of things and lie in order to get elected and do nothing. So those songs I’m pretty proud of

      Yes, indeed, bulleye…we readily accept lies that lead ourselves to Extinction…bravo

    • Davidin100millionbilliontrillionzillionyears says:

      “Homo sapiens are on tract for a extinction.
      Rather short for a species.”

      we have no data for the expected lifespan of a self-conscious so-called “intelligent” species…

      throughout the universe, perhaps all self-conscious so-called “intelligent” species have come to extinction far sooner than the average species…

      the evolution of a species to self-consciousness and intelligence may be followed by relatively quick extinction…

      for homo sapiens, we can hope so!

      because this will end all human suffering…

      sounds wonderfully good to me…

  2. amos says:

    Hello Gail,
    thanks for your great work!!!
    For me EROI follows the second law of thermodynamics:

    It’s like a ticket from El Azizija to Wostok Station.
    Entropy of an isolated system can never decrease.
    At the very beginning entropy was zero, at the end entopy will reach 99 percent.
    Google translator tell you more about that:

    http://www.dasgelbeforum.net/forum_entry.php?id=441986

    Best regards,
    soma2amos

    • Davidin100millionbilliontrillionzillionyears says:

      the Sun blasts the Earth with a large amount of energy daily…

      so then is the Earth really an “isolated system”?

      • Amos says:

        Everything has an expiration date!”

        The irreversible remaining life of the earth would be even without human intervention only about 400 million years.

        Approximately every 62 million years has been due on the Earth a regulation.
        The Homo sapiens is now on the planet for about 400,000 years and sends through its high reproductive rate to surpass the 3rd mass extinction on Earth 245 million years ago by Methanosarcina with a rate of extinction of 90% of all species in a matter of fact shorter time ,
        From El Azizija to Wostok Station, we have made ourselves wide.

        According to the Stefan-Boltzmann formula, the average radiated power of the sun acting on the earth is 174 petawatts, and it is easy for all species to live, except since the invention of the steam engine, the man of industrial times.
        The world’s energy needs of humanity in 2010 was 140 PWh.

        This represents an increase of about 49% compared to the 1990 PWh. More than 85% of global primary energy needs are currently covered by fossil fuels, such as oil and gas, and hard coal and lignite.

        The front-runners in energy consumption in 2010 were the US with 87,216 kWh / a per capita, followed by Europe with 40,821 kWh / a per capita and China with 34,774 kWh / a per capita.

        However, some people, as we know from experience, are still able to survive well today with just 5,000 kWh / a.

        The world demand for electrical energy currently stands at around 17% of 140 PWh.
        Electrical energy is about four times more valuable to humans than heat energy due to the flexible usable entropy stage. 10 kWh of electricity therefore always cost significantly more than 1 liter of oil, which you have to burn only lossy to generate electricity from it.

        Entropy is the primary variable of thermodynamics that can be accounted for. Entropy can be stored, transported and produced. Bodies respond to an entropy supply with a temperature increase (sensible heat), a volume change, or a change in state (latent heat). The entropy is measured in Joules per Kelvin (J / K) or Watts per Kelvin.

        Example: If an energy current of 1000 W flows into the pan from a cooking plate and the boundary layer between plate and pan is at a temperature of 127 ° C, the entropy current has a strength of 2.5 W / K.
        This heat conduction is unfortunately completely irreversible, that is, it is irreversible.
        If I operate this energy conversion for 60 minutes, it currently costs me in Germany about 0.25 €.

        This is dirt cheap, because if I wanted to provide this energy from my own physical strength, I would have to pedal for ten hours vigorously in the pedals.
        For a worker with a minimum wage of 8 euros, this cooking costs only 2 minutes of his life.
        A Klaus Zumwinkel costs of course, this cooking process much less life.
        It would be interesting to know how many seconds an American has to work minimum wages for a kWh currently? I suspect less than 60 seconds.

        We are convinced that we will have to reduce our energy requirement to 5,000 kWh / a per capita for at least another 20 years, and we can not change anything for the time being. Humans always change their behavior, as Rousseau has already realized if there is no other way out.

        • Humans will need to move to warm, fairly wet areas of the earth, and live in a near hunter-gatherer lifestyle to get to 5,000 kWh / a per capita, I expect. Humans will still need fuel for cooking, no matter whatever else they get along without. If they want any metals at all, it sends the fuel requirement way up.

        • Tim Groves says:

          A friend recently clued me in about a way of cooking spaghetti using much less energy than if it7s boiled for 7, 9, 11 or however many minutes. Soak it in cold water for a few hours before cooking, then bring to the boil, and it’s done.

          It works, and the product is edible, but I miss that al dente finish.

          Similarly, brown rice can be cooked to perfection in a thermos pot (just pour on boiling water and screw down the lid!) if it’s roasted for about 15 minutes beforehand. You can roast enough in a frying pan for about ten pots full, which makes it an economic prospect both time and money-wise. The traditional alternatives are to boil brown rice for an hour or more at normal pressure or for half an hour in a pressure cooker.

        • Someone actually gets it!

          Compared with insolation, the energy humans are currently deriving from fossil fuel burning is utterly trivia. Commenters suggesting that a transition to renewable energy is not humanly possible are drinking a very toxic soda indeed. We need to switch human industrial energy consumption from burning fossil fuels (prehistoric stored sunlight) to more contemporary solar-derived energy. How hard can it be?

          • Harry McGibbs says:

            “Solar and wind capturing devices are not alternative energy sources. They are extensions of the fossil fuel supply. There is an illusion of looking at the trees and not the forest in the “Renewable” energy world. Not seeing the systems, machineries, fossil fuel uses and environmental degradation that create the devices to capture the sun, wind and biofuels allows myopia and false claims.

            “Energy Return on Energy Invested (ERoEI) is only a part of the the equation. There is a massive infrastructure of mining, processing, manufacturing, fabricating, installation, transportation and the associated environmental assaults. Each of these processes and machines may only add a miniscule amount of energy to the final component of solar or wind devices. There would be no devices with out this infrastructure…”

            http://sunweber.blogspot.com/2011/12/machines-making-machines-making.html

            Also, the article doesn’t mention it but nitrogen trifluoride (NF3) and sulfur hexafluoride (SF6) are byproducts of the manufacturing process of solar panels. They are extremely potent heat-trapping gases. NF3 has a g r een house gas potency that is 16,600 times greater than CO2; SF6 is 23,900 times more potent.

            • EROEI calculations have major problems. The idea that any energy source with an EREOI above some set level (5:1 or 2:1 or 1:1) is acceptable is just plain nonsense. To the extent that EROEI works as a proxy for energy cost, it is really the average EROEI for the whole system that matters. You cannot remove a high EROEI energy source and substitute a lower EROEI energy source without major problems.

              Also, EROEI discussion diverts attention from the issue of quantity. Energy consumption per capita seems to need to rise. This can only happen if price is very low. This only happens with very high EROEI energy sources.

          • The problem is that the conversion of this solar energy to the energy we need, when we need it, if far higher than world systems can handle. It is also very demanding of resources of various types. It can only be built with the fossil fuel system. We cannot do it fast enough, and cheaply enough, to possibly work.

          • Amos says:

            In a few years after the wave in that scenario the nature has solved the issue:

            Don’t know the english word for the feeling of a man who stops consumption of heroin.
            In Germany we call it “he is on cold turkey”

  3. Yoshua says:

    API crude inventories

    Crude Inventories :
    Crude: +5.36M
    Cushing: + 1.4M
    Gasoline: + 3.6M
    Distillates: +4.3M

    Those numbers are just freaking crazy!

    • Duncan Idaho says:

      A little over half of what the US uses in a day.

    • Davidin100millionbilliontrillionzillionyears says:

      gee, could rising inventories mean that there is falling demand?

      and/or less affordability for oil byproducts by the average person?

      inquiring minds need to know…

      and…

      could rising FF inventories be a sign of a global recession on the horizon?

      like…

      2019?

    • API estimates tend to be way off. Let’s wait for EIA numbers.

      One issue I hadn’t noticed is that the US seems to be dumping oil from the SPR into the marketplace. 2.0 Million barrels in the week ended 11/23. Stupid move! It started dumping SPR reserves the first week in October. That is part of the crude oil stock fill. The total reduction since the beginning of October is 9.45 million barrels.

      • Dave Kimble says:

        > the US seems to be dumping oil from the SPR into the marketplace … It started dumping SPR reserves the first week in October.

        And the result has been a 34% fall in the price of WTI from $76.50 on 3 October to $50 on 24 November. Its remarkable what an average 1.5 Mbpd for 6-7 weeks can do.

        This was probably to penalise MbS for the Khashoggi murder. Meanwhile the MSM keep telling us that he was a democratic freedom-lover, when in fact he was an islamist who fought with the Mujahadeen and befriended Usama bin Laden in Afghanistan against the Russians (strictly for “journalistic purposes” of course). https://thearabweekly.com/sites/default/files/styles/article_image_800x450_/public/2018-10/ill.jpg

      • All that is out at this point is the Summary. Bold added by me. It says:

        U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 7.3 million barrels from the previous week. At 443.2 million barrels, U.S. crude oil inventories are about 6% above the five year average for this time of year. Total motor gasoline inventories increased by 1.7 million barrels last week and are about 4% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 3.8 million barrels last week and are about 5% below the five year average for this time of year. Propane/propylene inventories decreased by 1.3 million barrels last week and are about 3% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 8.3 million barrels last week.

        Total products supplied over the last four-week period averaged 21.2 million barrels per day, up by 7.6% from the same period last year.[Wow!] Over the past four weeks, motor gasoline product supplied averaged 9.1 million barrels per day, up by 0.2% from the same period last year. Distillate fuel product supplied averaged 4.1 million barrels per day over the past four weeks, up by 5.1% from the same period last year. Jet fuel product supplied was up 3.7% compared with the same four-week period last year.

  4. Duncan Idaho says:

    DOW:
    -799.36 (3.10%)

    At least it wasn’t 800.

    • Volvo740 says:

      Not even close!

    • I found this regarding markets today:

      The U.S. New York Stock Exchange and Nasdaq are both closed on Wednesday to mark the day of mourning for the late former President George H.W. Bush, who died on November 30 at age 94. This is the first time the market closed for the death of a president since 2007 for former President Gerald Ford. Stock index futures will reopen Wednesday evening at 6 p.m. as usual.

  5. Volvo740 says:

    B**S for the KKKlllliiimmaate cchhaaaaanggeee story. Today I had to scrape my wind shield. There you have it!

  6. piers says:

    Look at this!

    http://www.free-energy-info.com/indexOct2018.html

    Now I won’t need to spend any money ever again.

  7. Harry McGibbs says:

    “Liquidity is like good health. You don’t really appreciate it until you lose it. Investors are starting to appreciate it. As volatility has surged, first in the stock market and now in credit markets, liquidity is starting to dry up across segments of the corporate bond markets.

    “The ominous widening of spreads in the high-yield bond market — from 322 basis points on Oct. 2 to 422 points on Nov. 20 — could be a sign of trouble to come.”

    https://www.cnbc.com/2018/12/03/investors-worry-liquidity-crisis-might-loom-on-fixed-income-horizon.html

  8. Harry McGibbs says:

    “The [US] housing market recession is coming. In recent months, we’ve seen shares of homebuilder stocks get hammered. Existing and new home sales have declined sharply. And the pace of home price appreciation has now declined for six straight months.

    “The factors weighing on housing are not particularly new or novel — a lack of affordable housing supply and the rise in mortgage rates to seven-year highs are pressuring the market.”

    https://finance.yahoo.com/news/housing-market-recession-coming-224827298.html

  9. Harry McGibbs says:

    “Activity in Germany’s services sector eased in November due to rising cost pressures and waning business optimism, slowing growth in the private sector of Europe’s largest economy to a near four-year low, a survey showed on Wednesday.”

    https://www.euronews.com/2018/12/05/german-private-sector-growth-slows-to-near-four-year-low-pmi

    • Harry McGibbs says:

      “Japan’s economy is expected to have contracted more sharply initially estimated in the third quarter, with analysts in a Reuters poll forecasting a steep drop in capital spending in a sign of rising headwinds in 2019 as global demand ebbs. The poll of 16 economists predicted the world’s third-biggest economy to have shrunk an annualized 1.9 percent in July-September, worse than the preliminary reading of a 1.2 percent contraction.”

      https://www.reuters.com/article/us-japan-economy-gdp/japans-third-quarter-economic-contraction-seen-deepening-as-businesses-cut-spending-reuters-poll-idUSKBN1O40L0

      • Tim Groves says:

        But PM Abe has a cunning plan! Japan is preparing for the Tokyo Olympics in 2020 and the Osaka Expo in 2025. This will keep a lot of people too occupied to notice the price of soy sauce going up.

        Actually, I have my doubts as to whether the Osaka Expo will open. BAU might not last that long.

    • I bet that Eastern Europe is doing better than Western Europe. I haven’t seen the information yet, however.

      • Harry McGibbs says:

        Gail, you are quite right. Poland and Romania in particular are posting the best growth figures in the EU. You wonder how long that will last though, as they look to be quite reliant on manufacturing goods that are bought in the rest of the EU, which is starting to look shaky.

        • Poland and Romania (and other countries following a similar path) are likely the ones that are importing the diesel products that Western Europe is finding so scarce.

          If we believe BP data, European diesel consumption has been rising more quickly than world diesel consumption since 2012. Since 2012, European diesel/gasoil consumption is reported to have increased by 8.3%, while world diesel/gasoil consumption has rising by 6.1%.

          If we look at the broader category “Middle Distillates,” which includes jet fuel/kerosine as well as diesel/gasoil, the increase for Europe between 2012/2017 has been a total of 10.1%, versus 8.4% for the world as a whole.

          I am suspicious that Eastern Europe is “eating the lunch” of Western Europe. The US is exporting increasing amounts of diesel, but they are not going to Western Europe. Eastern Europe seems to be the part of the world that can best compete with China and India. They have coal to support their operations, so they are not as dependent on wind turbines and solar panels. Their costs can be low, while Western Europe’s costs soar.

  10. Harry McGibbs says:

    “…the world economy may be facing grimmer prospects in 2019.

    “In a fresh sign of mounting growth woes, Federal Reserve Chair Jerome Powell said last week that interest rates are “just below” neutral, a distinct change from his remarks in early October that the Fed was “a long way” from neutral.

    “The change in phrasing by Powell, who has been under fire from US President Donald Trump about rate hikes, is considered a hint that Fed rate hikes may slow.

    “The significant change in the Fed’s rate path apparently points to concerns that US economic growth might not hold up if the current monetary policy continues into the new year.

    “The news follows General Motors’ recent announcement that it will lay off 14,000 workers and close five facilities in North America, which the car company said would prepare it for the future world of autonomous and electric vehicles. This move inevitably deepened global recession fears.

    “Also, the recent slump in crude oil prices indicates slowing demand growth, a portent of sluggish global GDP expansion.”

    http://www.globaltimes.cn/content/1130281.shtml

    • Harry McGibbs says:

      “Oil fell on Wednesday as a swelling supply glut and signs of an economic slowdown weighed on crude prices a day ahead of an OPEC meeting at which the producer club is expected to decide supply cuts.”

      https://uk.finance.yahoo.com/news/u-oil-prices-slide-global-markets-economic-concerns-010646834–finance.html

      • Oil?
        I’m wondering about the counter trend in spiking electricity pricing though, it’s either just VERY lagging indicator, so it will crash with delay after the oil crash – affordability/GFCII etc. scenario fully takes place.

        Or it is indeed very different phenomena largely based on the peculiar situation in Europe – Germany which closed her fleet of NPPs, but over expanded on (spikey) wind, now continues to enlarge that natgas (Russian fuel sourced) driven baseload backbone as well as handy cheap imports from Austrian Hydro and Czech Nuclear, Polish coal among other things..

        Shorting this epic Electric Mountain would be trade of the century, but given the above it might not eventually happen exactly in the same fashion as in other historic cases.. that’s why I put it to audience’s attention here..

        • Harry McGibbs says:

          “Since June energy prices in the UK and Europe have risen significantly leaving many energy managers with a large overspend on budget forecasts for winter 2018 and beyond.

          “The wholesale gas cost for 2019 calendar year rose 46% between 1st April and 30th September, and wholesale electricity 36%. This has moved the energy content of a typical electricity bill from 43% to 48% even accounting for a 9% increase in non-energy elements.

          “So what changed in the market to make such a dramatic impact in a few months?

          “At the start of the summer there was a lot of nervousness about the volume of gas stocks not only in the UK where we had experienced the third coldest March in 37 years, but also in Europe.

          “2018 was a year of high infrastructure maintenance, including the Russian pipelines, and consumers over the summer needed to compete with the gas storage system for production. This background issue was then compounded by two main factors:

          “The EU agreed to limit the volume of carbon for auction to increase the price of coal generation.

          “This formed part of the policy of geared towards hitting carbon reduction targets. The carbon price consequently rose from €7 to €21, the highest since 2008.

          “This pushed up the price of coal generation in Europe, and it became more attractive to generate electricity from gas fired generators.

          “Carbon price became a main driver of UK gas price over this time, and therefore also of electricity.”

          https://www.openaccessgovernment.org/energy-prices-future-for-europe/55356/

          • Thanks, that’s understood.

            But what this means into the future is the question at hand?
            Namely, should the carbon pricing scheme remain more or less “intact”, the electricity price is not likely going to crash and burn hard during GFCII.. Also traditional natgas suppliers of the area (besides RU) meaning UK, Norway, Algeria, .. are exactly not likely to increase and or maintain their level of current production into the future.. hence again support crutch under the electricity pricing.. Plus both the US and Gulfies are eyeing world markets to dump their natgas (although pricier liquefied variety) as well.

            In my eyes it all goes evidently back to slow /stair case / regionally diverse collapse scenarios..

            • What is going to crash and burn is the economy of Western Europe. Citizens cannot afford their current high prices of electricity. Economies of Western Europe have a hard time creating enough value with the energy products that they use, so that they can afford to buy oil and gas from the world market. As the price of electricity rises, whether because of the cost of the underlying product or because of carbon costs, it pushes Europe farther and farther down. Added to this is the high cost of all of renewable subsidies, if these don’t make it back into the pricing scheme, and instead are paid out of government coffers. (They may, in fact, get back into the pricing scheme in Europe, creating part of the problem.) Expect spreading riots, if this continues.

          • That is a very interesting article! Thanks for linking to it. It points to the folly of depending on renewables. It talks about the low wind problems and the cold winter problem. Also closing the Rough storage unit in UK.

            The article is about the impact on businesses. No doubt, this is part of what is affecting the bad GDP growth. There is also an impact on consumers. It might be somewhat less, because much more of their energy costs are “fixed.”

            • Harry McGibbs says:

              I can see that the UK steel industry is up in arms about our particularly exorbitant electricity costs:

              “British steelmakers pay twice as much for electricity as their French competitors and 50 percent more than their German rivals, an industry report showed on Wednesday, piling pressure on the sector as Britain prepares to leave the European Union.

              “A study by the industry, The Energy Price Scandal: A Fair Power Deal for UK Steel, shows the average electricity price for steel producers in the UK this year is about £65 per megawatt hour (MWh).

              “It is £31/MWh in France and £43/MWh in Germany.

              “The energy cost difference between German and UK steelmakers has rocketed from £18/MWh in 2017-18 to £22/MWh in 2018-19; and between French and UK power prices from £17/MWh in 2017-18 to £34/MWh in 2018-19.

              “A typical steel site could use more than half a million MWh each year.

              “UK Steel director-general Gareth Stace said: “This is the third year we have analysed the disparity between the electricity prices faced by UK steelmakers and those of their EU competitors, and the third year it has increased.

              ““This price disparity can now add up to £17 to the cost of producing a tonne of steel.

              ““This can be the difference between winning and losing a supply contract.””

              https://www.mirror.co.uk/news/politics/steel-bosses-demands-electricity-price-13684967

            • I can believe this.

              This shows the folly of depending upon intermittent renewables, and trying to added carbon taxes on top. It is possible to kill your economy, when fluctuations work in the wrong direction.

            • I advise everybody to re-read latest article from Dr. Tim at Surplus, basically he presents the trend which I called years ago, that renewables start to make economic sense on their own just in the very latest (brief?) stage before larger collapse-reshuffle-reset..

              It’s already the case in some countries with very high electricity costs, and it will be sheer no brainer with cheap used parts laying around from massive OEM industries (e.g. power electronics and large volume e-car batteries) as we are scaling up from hundred thousands to millions y/y production capacities.

              Now, the problem will be further segregation of people depending on overpriced and increasingly fragile centralized networks (like the grid, sewage, food) and the elite strata with some over reach into parts of middle classes which would be able to run many of these systems on their own.

              Obviously this is only temporary -brief- period as long as these parts last and or can be still sourced – exchanged, serviced as used, so no more than ~20-30yrs. Well again from zoomed out macro view that’s not worth the attention, yet from personal stance such incoming development drives attention.

              You see it’s like the medieval times, you can escape the plague on your second, third place of residence or even through (paid for) complete foreign land relocation. But as poor feudal subject not so much..

            • This is a link. I sort of scanned it. He hasn’t figured out that he has an energy per capita problem, and it is the per capita part that kills him. He can back out the energy cost of energy, but I don’t think it gets him to the solution he needs.

              Look at where the UK is now. We saw this article today.
              The energy price hike and what it means for European businesses

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.