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.

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

  1. Baby Doomer says:

    Tear down this…middle class.

  2. Harry McGibbs says:

    “Mexican President Andres Manuel Lopez Obrador’s declaration of war on “neo-liberal” economics has shaken investors holding Petroleos Mexicanos bonds, fueling concern about the future of the highly-indebted state oil company he has pledged to revive… Fitch and Moody’s have in recent weeks flagged concerns about Pemex’s $106 billion of financial debt – the highest of any state oil company in Latin America.”


    • Davidin100millionbilliontrillionzillionyears says:

      I probably won’t read it…


      as a general rule, everything is better when there is more prosperity…

      I doubt this has much at all to do with socialism…

      it’s probably all about wealth…

      • Duncan Idaho says:

        You should read it——

        • Davidin100millionbilliontrillionzillionyears says:

          okay, I did skim it…

          “According to Ghodsee, it’s about social safety nets. If, she argues, you build a society that supports women and doesn’t punish them for having children or devalue their labor, it turns out they’ll be happier and have better sexx.”

          yes, if “you build a society” etc, and therefore need the prosperity/resources/wealth to actually build such a society, does that make socialism the root cause for the effect she describes?

          no, I don’t think so…

          a dirt poor socialist country would have different results…

      • you only get socialism when there’s enough surplus energy to spread around

        democracy is essentially the same thing

        • Davidin100millionbilliontrillionzillionyears says:

          thanks, Norman…

          I was thinking about that on and off all day…

        • Dictatorships are popular when there is pretty much no surplus. As they say, a committee of one, gets thing done. Having a king works, because then the line of succession is clear.

  3. Harry McGibbs says:

    “Theresa May has vowed to fight a vote of no confidence in her premiership, warning restive Tory MPs that toppling her could result in Brexit chaos.

    “A secret ballot will run between 6pm and 8pm after Conservative backbench leader Sir Graham Brady announced he had received the necessary 48 letters to trigger a no-confidence vote in the prime minister.

    “Ms May endured a brutal prime minister’s questions clash, where she faced calls to resign over the chaos ahead of tonight’s vote. If she loses, the Conservative party will immediately start seeking a new leader.

    “The drama comes after Ms May shelved a crunch Commons vote on her Brexit deal on Monday in the face of near-certain defeat.”


    I think us Brits subliminally (for the most part) tend to believe ourselves to be too savvy and too ironic and sophisticated in outlook to be taken in by a demagogue, as some of those foolish continentals were in the 30’s.

    But I can well imagine that, if this political paralysis were to worsen and we were to crash out of the EU without a deal with disastrous economic repercussions, the public might be tempted to listen to a charismatic strong man, offering a clean break with the old political paradigm. Certainly it seems much less of a stretch than it did a year ago.

    • Tim Groves says:

      Upon landing at Heathrow after her trip to Brussels, Mrs May walked out of the plane, and to loud cheers waved a piece of paper in her hand and said “Brexit in our time!”

      The only problem for Mrs May and the rest of the Brits is that the EU is shaping up into a latter-day version of Hotel California. You can check out any time you want, but you can never leave.

      • Harry McGibbs says:

        Lol, Tim. She is certainly ineffectual and self-deluding in the Chamberlain mould. I really think it is an impossible situation though.

        The farmers up here would love for us to remain in the EU somehow, as they are stuffed without those subsidies. I hardly know what to wish for, as every possibility seems to entail significant collateral damage.

        I do know what I fear most – a no-deal scenario. FWIW the bookies are offering 5/2 on that, so they still see it as one of the less likely possibilities.

        • Tim Groves says:

          Cheer up. We Brits have always fought against the odds! How about a no-deal scenario with Boris as the next PM? I can imagine that being a heck of a roller-coaster ride.

          I remember when the UK went into the common market, much against the wishes of the majority of people, and suddenly all that cheap Australian and New Zealand beef and lamb and butter and cheese was no longer cheap. And suddenly the UK fishermen had to share their traditional fishing grounds with the Danes, Dutch,Germans and Spanish. I would guess that some of the Brexit voters are motivated by the sentiment that if the country could extract itself from the EU, it could regain some of the things that were good about the good old days, although to a large extent, joining the EEC was to some extent done as a solution to what was not so good about those times.

          I wonder if—after the betrayal they suffered in the 1970s—the Australians and the New Zealanders are going to want us back as best buddies in the hostile world of the 2020s. .

          • Harry McGibbs says:

            “How about a no-deal scenario with Boris as the next PM? I can imagine that being a heck of a roller-coaster ride.”

            And like a heck of a roller-coaster ride, it would certainly induce severe nausea.

          • we havent fought against the odds

            we had predominance in coal and iron till 1914, that produced the british empire

            after that we went into decline, relying on imported oil to survive

            • Not a coincidence that peak coal and iron came at the time of WWI. Also, the flu epidemic was probably made possible by the weakened health condition of workers with inadequate pay.

            • Tim Groves says:

              You’re quite right, of course.

              I was quoting from memory something the Right Honorable James Hacker said in Yes Prime Minister.

  4. Third World person says:

    hey guys elon musk saying that Australia’s energy emergency is easily fixable

    this guy is a genius /s

  5. Chrome Mags says:


    “Total public debt outstanding has jumped by $1.36 trillion, or 6.6 percent, since the start of 2018
    and by $1.9 trillion since President Donald Trump took office.”

    “The Trump administration had said that the tax cuts would pay for themselves by generating increased revenue from faster economic growth, but the White House has acknowledged in recent weeks that the deficit is growing faster than it had expected.”


    • Duncan Idaho says:

      Rape and scrape— who cares about the future?

        • Duncan Idaho says:

          “An honest politician is one who, when he is bought, stays bought.”

          — Beloved & Respected Comrade Leader Simon Cameron (Abe Lincoln’s Secretary of War)

        • Chrome Mags says:

          That’s a good one, BD. Trouble is they don’t even realize their being used. I guess that’s what happens when people develop a cult following.

      • Tim Groves says:

        Duncan, you should see the mess made in producing photovoltaics and wind turbines, and the estimates of the amount of new landfill and general blight that infrastructure is going to be producing half a century from now. It makes clean coal look, what’s the word…. ah yes, clean, by comparison. But as you say, who cares about the future?

        • JesseJames says:

          No one talks about the waste nightmare awaiting in 20-30 yrs. All those solar panels, batteries and windmill blades…mostly toxic.

    • I can’t check now, but my impression has been that US mortgage debt for individuals has been pretty flat recently. Some other pieces of debt have been rising. It is really the whole “package” of debt that matters. If, in fact, mortgage debt is not growing much, then Federal Government debt may need to grow fairly rapidly to keep the total package of debt growing.

  6. Rodster says:

    “Brexit: stage one in Europe’s slow-burn energy collapse………..
    The Brexit fiasco and French riots are accelerating symptoms of Europe’s earth system crisis”
    Nafeez Ahmed

    View at Medium.com

    My prediction of the resurgence of the far-right was based on analysing the probable consequences of a long-term ‘system-failure’ in which we are unable to return to the levels of economic growth we had become accustomed to in the heyday of the 1980s and 90s. That system-failure, I explained, is rooted in the economics of the energy production that enables economic growth:
    “…. a full and lasting recovery… is likely to be impossible in the constraints of the current system, because we’re running short on the physical basis of the last few decades of exponential (and fluctuating) ‘growth’ — and that is cheap, easily available hydrocarbon energies, primarily oil, gas and coal.
    The turning point has arrived, and without that global cheap energy source in abundant supply, we cannot continue growing, no matter what we do. Something has to give. Our economies need to be fundamentally, structurally, transformed. We need to transition to a new, clean, renewable energy system on which to base our economies. We need to transform the way money is created, so that it’s not linked to the systematic generation of debt. We need to transform our banking system on the same grounds. Whitehall, and the three political parties, recognize only facets of the picture, but they don’t see it as a whole.”

    • Rodster says:

      We can’t transform to a different energy system because the amount of energy and debt it requires. And we can’t switch to a new money system without billions dying because everything would collapse as a result.

      • Davidin100millionbilliontrillionzillionyears says:

        I just want to state the obvious here:

        “We can’t transform to a different energy system because the amount of energy and debt it requires.”

        because such an energy system must be built and maintained by the higher surplus energy in (formerly abundant cheap) FF…

        and as each component of the new system ages and fails, there always will be the need for the higher surplus energy in FF to rebuild…

        the author seems to almost get to that conclusion, then fails to grasp it right at the end of his line of thinking…

      • Loki's dark side says:

        You can’t win, you can’t break even and you can’t get out of the game.

    • Tim Groves says:

      “We need to transition to a new, clean, renewable energy system on which to base our economies.”

      May I suggest that either Dr. Ahmed is being disingenuous here or else he hasn’t looked into the details of how we should go about trying to fulfill this need or ours.

      If there was a nice new clean renewable energy system available to meet our needs, we’d be building it now, surely, instead of pouring our resources into ineffective energy technologies and pretending they are going to safeguard our future prosperity.

      • Ahmed does not come from a practical, engineering point of view. If he did, he would see the problems. Instead, he is a firm believer in EROEI theory. As long as a (bad) calculation seems to prove the EROEI is high enough (relative to a poorly calculated lower bound) he is convinced that the proposed solution will work.

      • jupiviv says:

        “May I suggest that either Dr. Ahmed is being disingenuous here”

        He isn’t being disingenuous in the least. We do need a rapid global transition to clean, renewable energy that more than pays for itself, resource and energy -wise, within a decade or so after it has replaced fossil fuels almost entirely. It just won’t happen.

        • Tim Groves says:

          Jup, the sentence I quoted doesn’t stand on it’s own in splendid isolation. It is rooted firmly within the larger context of the paragraph in which it is located, and that context reads like a plea for just such a transition to just such a new renewable energy system.

          A person being disingenuous might use the exact same sentence in the exact same context with ulterior motives. They might be confident, as you and I are, that the transition to a new system just won’t happen, but they might be employing “we need blah, blah, blah” as a motivating tactic to sell the idea of “renewables” to a gullible public in the hope of profiting from the gravy train.

          Whether Dr. Ahmed is among the duplicitous and is employing this rhetoric for an ulterior motive despite being convinced it isn’t true, or whether he is among the gullible who think it is true, or whether he’s among the sanguine who is aware it isn’t true and is implicitly lamenting the fact ISN’T CLEAR from sentence itself. But it becomes SOMEWHAT CLEARER from the context.

          As for your own sentence “We do need a rapid global transition to clean, renewable energy that more than pays for itself, resource and energy -wise, within a decade or so after it has replaced fossil fuels almost entirely,” I strongly disagree with that. What I think we do need is to give up on “clean, renewable energy” and embrace a mix of “dirty FFs and nukes” that will keep us going long enough for us to develop warp drive, dilithium crystals, zero point energy and starship engines the size of walnuts. Then we can explore strange new worlds, seek out new life and new civilizations, and boldly split infinitives that no man has split before!

Comments are closed.