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.
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1,594 Responses to Low Oil Prices: An Indication of Major Problems Ahead?

    • Davidin100millionbilliontrillionzillionyears says:

      and it comes very quickly… (of course!)…

      ever think how fast your great great great grandparents lives went by?

      it’s good… ends human suffering…

      human extinction will be wonderful…


      BAU tonight, baby!

      (hey, I had a great day of gambling on American football)…

  1. kevin moore says:

    I tried to post this video earlier. Let’s see if it works this time. I’m sure someone hads linked this before but it’s wirth another look.

  2. Duncan Idaho says:

    1929- Didn’t the market crash this day?

    • Harry McGibbs says:

      The first huge drops in value were in October. It was a dishonest market (insider dealing was rife), a market absurdly inflated by cheap ‘margin’ debt, and a market they, mostly, didn’t think could crash:

      “There will be no interruption of our permanent prosperity.” (E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928).

      Groucho Marx, who lost all his investments in the crash, asked his broker if stock valuations could really keep rising forever and was told, why, of course – it is a truly globalised economy now!

      All sounds a bit familiar. 😀

      • Duncan Idaho says:

        Only more globally significant today.

      • Much like home prices can never decline. The value of a college education will always be high.

        • Harry McGibbs says:

          There are always a few sane voices, like you, Gail, pointing out what is only obvious to most in hindsight. Paul Warburg said a few months before the crash:

          “If the orgies of unrestrained speculation are permitted to spread, the ultimate collapse is certain not only to affect the speculators themselves, but to bring about a general depression involving the entire country.”

          • xabier says:

            A year ago I was having a pint or two with a couple of bankers, who expressed astonishment at younger colleagues who were prepared to risk crashing the system through speculation, thinking only of what they could make personally. But of course, those two had already made their pile…..

            Still, get rid of bankers and we’d face some other evil: witness the Soviet bloc, etc.

        • zenny says:

          No idea if this is true but it made me laugh…The average college grad pauses when asked what is 7×5 plus 35…Then they look confused when they fail the job interview for clerk.

          • I have had clerks in the store who couldn’t figure out the cost of one fruit, if the fruit sells for three for $1. Calculators are depended on for everything.

      • Tim Groves says:

        “There will be no interruption of our permanent prosperity.”

        Good, I always like upbeat affirmations.

        “Groucho Marx, who lost all his investments in the crash, asked his broker if stock valuations could really keep rising forever and was told, why, of course – it is a truly globalised economy now!”

        It was the 1929 crash that turned Groucho into a Marxist!

  3. Duncan Idaho says:

    1958 — Good Ol’ USofA: Atomic bomb named ‘Santa Fe’ exploded above ground; winds blow fallout over LA where thermal inversion holds it over the city for several days. Not that the residents can tell the difference — it’s a glow in the dark kinda place.
    (I was in LA then)

    • Chrome Mags says:


      Duncan, then there’s this too:

      “A nuclear-powered Soviet spy satellite that fell to Earth in 1983 apparently burned up in the upper atmosphere, releasing at least 80% of the 110 pounds of radioactive uranium in its reactor, U.S. scientists said in a report published today.

      That radioactivity has dispersed throughout the upper atmosphere, increasing the amount of the most radioactive form of uranium there by 50%, Department of Energy researchers said in the new issue of Science magazine. Most of the particles will return to the Earth’s surface during the next 20 years, they said.

      Radiochemist Edward Martell of the National Center for Atmospheric Research in Boulder, Colo., said there may be a risk from even the small amounts. “I don’t think you can ignore the carcinogenic potential of uranium,” he said.

    • doomphd says:

      me also in LA area. we were told to stay inside and avoid drinking any rainwater. enjoyed watching the glow over the San Gabriel mountains at night.

  4. Baby Doomer says:

    • Duncan Idaho says:

      Berman is a source that I check into.
      And he is in Texas, where the delusion is part of the requirement.

  5. Sagebrush Country says:

    A question raised in both Kevin Moore’s posted video and Baby Doomer’s posted article is whether capitalism and markets can solve our problems and prevent collapse. I go back and forth on this one. I already know people who no longer drive because they can’t afford it, but find it doubtful that fully electric cars will ever be in their price range (not to mention this is not that green of a solution). But will a democratic socialist government forcing policies such as improved mass-transit infrastructure be any better? The costs and energy requirements are astronomical. Forcing people to pay the real cost of transportation in the form of user fees, whether personal car or mass transit doesn’t seem viable as indicated by Paris protests. Curious what others think about the question or what answers they might have.

    • Ed says:

      Is there enough affordable oil in the ground to run the global economy for the next 20 years? The answer under capitalism is, no. The answer under socialism is, no.

      • Tim Groves says:

        But under democratic socialism, who knows!? Once the Democratic Socialists of America get the “radical political, economic, and social changes in the established order” that they are seeking, they will realize “the simple dream of a comfortable standard of living, of community, and of equity” and sustainable gasoline at a price affordable to all will rain down like mana from heaven, surely.


    • Davidin100millionbilliontrillionzillionyears says:

      “… whether capitalism and markets can solve our problems and prevent collapse. I go back and forth on this one.”

      well then, why not stop going back and forth?

      Ed is correct…

      only cheap and highly affordable and dense energy resources can “solve our problems”…

      too bad we’ve burned most of it already…

      the remaining FF, when extracted, gives much lower surplus energy…

      only higher surplus energy can help us…


      don’t look for something that can “solve our problems”…

      give up…

  6. Chrome Mags says:


    ‘Deflation threat returns to haunt Chinese economy as risks from US trade war linger’

    Someone yesterday was stating deflation was a top ten threat while someone else claimed it is not, however it appears deflation may indeed be a top 10 threat in China, per this article.

    •Both consumer price index and producer price index fell on a monthly basis due to weak demand and a steep drop in oil prices
    •Bad news follows slower than expected drop in imports and exports

    • I don’t think about deflation and China, but perhaps I should.

      If oil prices are down, there is a good chance a lot of other commodity prices are down as well – copper, iron,

      Many businesses cannot make money in a falling price arena. They have a lot of fixed costs. If they try to lower wages, then the workers cannot repay the loans they have taken on. Home prices are likely to drop as well, if workers’ wages fall.

  7. Third World person says:

    The farmer’s biggest enemy? The Indian state

    The late farmer leader Sharad Joshi used to recite a poem that described the Indian farmer’s plight perfectly. It addresses the non-farmer from the farmer’s point of view, and it goes:
    “I die, my friend, and so do you./ I die, my friend, and so do you./ I sell my produce cheap, and die. You pay so much that you die too.”


    very sad situation of indian farmers

    • Third World person says:

      this remind of one of beautiful indian song

      We’ll have to live as we have come in this world
      We’ll have to live as we have come in this world
      If life is poison, then we’ll have to drink it
      We’ll have to live as we have come in this world
      If life is poison, then we’ll have to drink it

      • Hubbs says:

        Sounds why reportedly a lot of farmers in India are committing suicide by drinking poison insecticide sold by big Agra like Monsanto/Bayer which essentially destabilized the agricultural process, much in the way fiat currency destabilizes the monetary system. The farmers got caught in a debt trap. They were in such debt to Monsanto that life was hopeless. Because the GMO seeds were not able to withstand any of the usual stresses that heirloom seeds could, a catastrophic harvest eventually resulted and the farmer was wiped out.

        Farmers used to grow crops using heirloom seeds (honest money). No, the harvests may not have been as bountiful as they could have been if buying Monsanto seed, Monsanto fertilizer, Monsanto pesticide (glycosphate) etc when a season had been a culmination of optimum conditions, but at least the heirloom seeds offered a more predictable harvest as the seeds had acquired a resistance to drought, mold, and other chronic conditions, whereas with the genetically modified strains (organisms) (GMOs), were so susceptible to even the slightest stresses that a boom harvest became a bust (kind of like the boom and bust created by Central Banks and fiat and complexity of modern society enabled by fiat.)

        • One article I read recently said that overall suicide rates have been dropping in India and in a lot of other countries. Russia especially has seen a big decline. The only place where a big increase has taken place is the US. It seems like this was an Economist story.

          I have read the same story about farmers committing suicide. I wonder if there is some exaggeration somewhere.

      • xabier says:

        A chalice offered to us by the gods, and we have no choice…….. Quite true, TWP.

    • Lastcall says:

      People under estimate how bad the State will be for them as growth goes into reverse; especially those parts of the economy with both the vulnerability of fixed assets (particularly land) and little political clout (depopulated rural areas).

      A quick read of the history of collapsing empires shows how long the wealth pump towards the centres of power can remain intact.

    • xabier says:

      Farmers always, always, get stamped on and crushed. It was the same in Europe: the city people in Italy made the farmers grow wheat for their nice white bread, and left the farmers to had eat bean and barley bread.

  8. Yoshua says:

    Will the Fed bail out the stock market? Can it at this stage. Should it?

    (The bottom shows RSI. Don’t know what it is.)


    • Robert Rapier is distinguishing between crude oil and oil products. He says the US is a net importer of crude oil, amounting to abut 4 million barrels excess. It makes up the difference on product exports.

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