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?

  1. adonis says:

    Do not discount the elders so quickly finite worlders they may still have a couple of tricks up their sleeve to keep the ‘lights on’ .Read this article i am providing a link to and remember get some silver while you still can it could be the last best investment to survive and thrive during the next depression.

    http://webcache.googleusercontent.com/search?q=cache:dZv1unNOSWMJ:https://www.imf.org/en/News/Articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency+the%20winds%20of%20change%20the%20search%20for%20digital&hl=en&ct=clnk

    • Gregory Machala says:

      You can’t print resources -; that is the bottom line. That is what we are up against now. Debt is piling up. Resources are not cheap anymore. They are getting difficult to physically access and to sell profitably. Money, no matter what it is, has to be backed by energy and resources. All those debt promises out there are not going to be made whole with real goods and services. Another currency isn’t going to magically make goods and services appear out of thin air (like the money does).

      • adonis says:

        what about a combination of nuclear solar and wind backed by a pile of debt set on negative interest rates.thats called free money it pays itself off .

        • Davidin100millionbilliontrillionzillionyears says:

          what about aliens arriving and showing us how to produce incredibly cheap and incredibly abundant energy?

          or, perhaps a bit likelier:

          what about a combination of ending all subsidies for nuclear solar and wind, and backing the coal and oil and natural gas industries with piles of debt so that we can have larger surplus energy?

          • Artleads says:

            I’d go for that. But you must enjoy punishment if you wish to share this view within your community. Actually. try saying that coal should be king, and other FFs might best be seen as boutique supplements for coal.

        • Davidin100millionbilliontrillionzillionyears says:

          adonis…

          the clock is ticking…

          in 5 days, when December 19th arrives, doesn’t your promise kick in to make no more “reset” predictions?

          • Kurt says:

            Is that a Monday? Anyway, we’ve been through this. The youngers are in charge now and their plan be is going to keep BAU going for quite some time.

          • adonis says:

            DECEMBER 18th is the date of the big one,that is why fast eddie has disappeared

            • Davidin100millionbilliontrillionzillionyears says:

              oh, no!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

              “they” got Eddy!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

              can any of us really be safe?

      • But as history (and present times) tend to amply demonstrate, you or rather TPB can “easily” reshuffle and redistribute, juggling all the necessary core subsystem in a way to stay on top while the world around them fluidly changes..

        For example, in practical terms, the Russians still can export some energy carriers (notably natgas) in exchange of some high end imports, notably high end lithography derived like CPUs and other electronics and or various niche technologies without domestic analogues available, imported both from the West and increasingly from the East as well.

        Now, we return full circle to the art of maintaining power, hence you have to bamboozle the public, that from now on they have to live merrily on way less resources and frivolous opulence footprint, hence onslaught of PR / propaganda like “globulal werming”, “refugee welcoming” culture, where people in the end gladly return to bicycles and train service, and further on the road obviously even swallow various openly authoritarian measures in personal freedoms etc which are going to take place.

        But as we have seen some factions of the elite are not capable to perform this as smoothly as others (e.g. Putin vs. Macron) or more precisely Macron (and his cadre of civil service lieutenants) vs. some incoming other hard on populist next time after him..

        In summary, this system has got some legs, lets assume up to two decades of quasi BAU in some selected core industrial countries, plus few more time of suspended collapse after that before key infrastructure could no longer be maintained and staffed. Other parts of the world are not that lucky already as we speak, not mentioning the immediate future developments in store for them..

        • jupiviv says:

          “But as history (and present times) tend to amply demonstrate, you or rather TPB can “easily” reshuffle and redistribute”

          I could be wrong but I think history demonstrates the inverse of that statement. In other words it is precisely the elites’ belief in their ability to change an already changing world to suit their narrow needs, that tends to hasten their demise.

          • Yes, good point, but we are sort of picking up the opposite end points of the same continuum so to speak. Lets make practical observation again, TPTB (mostly core of the industrial civilization) certainly DID manage the transition from reaching that important threshold in ~1970s cunningly and superbly, at least from their vantage point + few % top pop of the elite workforce servicing them. The results are clear = gaining 40yrs+ of plush existence at the expense of:

            – their own salaried class citizens working longer hours (pairs/families) with less benefits
            (partly offset by advances in technology hence longer lifespan yet of dubious quality)

            – bamboozling China and wider Asia they can join the rich club, while only JAP and South Korea seem to keep at least some advantages to themselves to a degree relatively speaking out of that process

            – bamboozling CEE+Russia similarly to above as they were actively sabotaged doing the Asian maneuver (mid late 1980s as well), hence they were incorporated into the “global club” on very inconvenient terms, basically as 2nd, or rather third class passengers, now even pressed for paying up for the master class’ own excesses (migration-forced relocation wave)..

            – throwing the Latin America under the bus
            ..
            ..
            In summary, planned and executed success. Is it going to last for ever, most likely not.
            As mentioned recently (Dr. Tim’s thesis) the French are getting restless while they lost only ~7% of prosperity since ~2000 so far, while there are ~neighboring countries doing ~2x worse already, i.e. are on the trajectory further down the road and not rioting, it’s all relative..

            So, it might be that countries such as France, i.e. with “premature rebellion trigger” problem might end up shutting down the system sooner than otherwise assumed but I doubt it for now, the real shock will come only with that add on debilitating demographic slump effect apparently starting ~2025 onward, plus incompatible migrant waves finally taking over formerly fairly homogeneous societies around say past ~2035.. I always have to chuckle when mostly 50-60yrs+ old Belgian, French or Dutch rejuvenate inside out heritage site cathedrals at great financial expense, while it will be very soon (in next 2-3 decades) all remodeled (thrown out) into mosques.

            Again, it all points towards future trends punctuated by various interwoven waves, steps, and reshuffles.. hard to navigate. For example people ask, shall I leave the city now or wait till next decade, or perhaps it doesn’t matter at all given specific local and or even in global terms and “fast scenarios”.

            • Gregory Machala says:

              The difference now vs 1970 or 1929 is we still had energy that was profitable to extract. We don’t have that anymore. Something has to give.

            • MG says:

              The idea that Europe will be taken over by Muslims is a complete fiction. The reality is that the incoming Muslims will most probably become atheists. The ultimate energy decline will be marked by the rise of atheism.

              The energy starved Iran, with its fallen birth rate is the example of that:

              https://www.mnnonline.org/news/christianity-and-atheism-growing-in-iran/

            • Gregory and Norman> Nope, the point is the system clearly re-calibrated for more expensive energy (via backstopping it by mountain of fraudulent debt) after 1970s, so you have it very wrong. Without the debt the NorthSea natgas shelf and another projects would not have been possible to launch off and sustain, since most of the gains evaporated into 3-4decades of frivolous personal consumption anyway, was not “meaningfully” reinvested into the energy economy by for example new fleet of NPPs to kick the can few more decades than by renewable crap installations.

              We are know at another crossroad, when formerly docile pop is again with their backs to the wall (well sort of since ~10-20% prosperity fall is not much), hence new trick from TPTB is demanded NOW.

              Will they deliver, if so how long is it going to last this time, hardly another ~40yrs, that’s almost certain.

            • Sorry for all these typos, I’m currently more sober than the proverbial judge, the old fellow Jean-Claude J., the protective father of all things European..

            • jupiviv says:

              The factors that enabled the transition to greater efficiency + debtonomics were beyond anyone’s control. No one “managed” OPEC oil and untapped Asian markets into existence. There is no reason to assume that some intricate plan changed the dynamics of the global economy if that was the natural direction to begin with. Likewise, there is no reason to believe such a plan would change or modify the current trajectory.

              Of course there will still be various kinds of transitions all over the globe, but don’t expect them to match your narrative. For one thing even local/national efficiency improvement projects which can delay living standard drop for 20 years in isolation from declining/collapsing BAU elsewhere are not analogous to the 70s.

            • the basis of the problem is the concept of ownership

              humankind is the only species that owns stuff

              we deluded ourselves that the planet was there to be bought sold and traded. Which is only possible on an infinite world. On a finite world you run out of planet, this is the bottom line that few can grasp and accept. There must always be ‘more’ of everything.
              Why–how??

              because there always has been

              Now there’s too many of us demanding too much from too little. We all insist on owning a piece of it. This is why the earth-system is disintegrating.

              I “own” a house, car and all this other stuff. But all that ”stuff” is essentially a piece of the planet. It wont go back into the earth whence it came when I’ve finished with it. Rust and decay change the molecular structure

            • Right. Also, the “stuff” owns you, as much as you own it. You somehow must organize it and fix broken parts. If it takes electricity or oil to operate, you must find these. Stuff you don’t need can get in the way of how you would like to live.

              I went to a party a couple of days ago at the home of a couple that keeps their home incredibly clean and polished. The house looked like the inside a hotel room, when a person arrive. Trash cans were carefully hidden away in special bins. There were decorator items everywhere, but no family photos or souvenirs from trips. It seemed very strange to me. Even the garage was free from any leaves, or lawn mowers, or any other devices. Their home is part of a development were the homeowners association takes care of all outside maintenance, so these things aren’t needed.

            • lol

              we visit a home just like that—might even be the same folks
              never a newspaper left lying around–or a used cup or glass—i’ve even had crumbs picked up from around my feet when such a thing dared to get dropped

              everybody calls it ”the show house”

            • JesseJames says:

              Home Owners Associations (HOAs) are another form of debt that never goes away. Even if you pay your home mortgage off, you still owes the HOA fees FOREVER.

        • Duncan Idaho says:

          The Russians import little.
          You need another strategy.

  2. Baby Doomer says:

    A $9 trillion corporate debt bomb is ‘bubbling’ in the US economy

    https://www.cnbc.com/2018/11/21/theres-a-9-trillion-corporate-debt-bomb-bubbling-in-the-us-economy.html

    Debt numbers the world over, corporate, national, provincial/state, municipal, household & individual are beyond absurd. Most of it is never getting paid back. There are not enough economically extractable fossil fuels left to service the interest let alone pay back the principle.

    • You will note that the chart does not put households at the bottom. They are the problem. They can’t handle as much other debt now that they have student loans to deal with.

      • Chrome Mags says:

        Gail, is there any kind of projection as to what will happen when part or all of the debt bubble begins to pop, i.e. in the aftermath? Is there a plan B? Maybe a new currency, a debt jubilee, some way to begin anew? Hard to find someone to lend I suppose would be the biggest problem.

  3. Harry McGibbs says:

    “Mounting global growth fears rippled across Wall Street on Friday.

    The Dow dropped 497 points, or 2%, on Friday. The S&P 500 declined 1.9%, sinking to the lowest level since early April. The Nasdaq tumbled 2.3%.

    Markets were dinged by a batch of negative corporate and economic developments, especially weak growth numbers out of China and Europe.

    “Something is wrong here. There is this global slowdown. We can’t deny it,” said Michael Block, market strategist at Third Seven Advisors, a private wealth management firm.”

    https://www.google.com/amp/s/amp.cnn.com/cnn/2018/12/14/investing/stock-market-today-dow-jones/index.html

  4. Yoshua says:

    U.S corporate profits in 3Q 2018 rose to a record high of USD 2.07 Trillion!

    That is the equivalent of 40 percent of U.S GDP in the 3Q…or 10 percent of world GDP in the 3Q.

    Are these numbers correct? Is the U.S sucking the rest of the world dry? Or does the U.S exist in a different dimensions?

    https://tradingeconomics.com/united-states/corporate-profits

    • I am wondering if those are annualized numbers. The US usually reports quarterly figures on an annualized basis.

      Of course, profits are needed for dividends and reinvestment. With fossil fuels, a big share of what is called profits gets used for reinvestment.

    • You have to watch what you are looking at. The European numbers are gross profits. Gross profits can be on any one of a number of different bases. The US numbers are some version of net numbers.

      I prefer to get my data from a little closer to original sources, such as US Bureau of Economics Analysis Data numbers. The charts here a step removed– charts put together by FRED, using US BEA data.

      The following chart is US Corporate Profits, without Inventory Valuation Adjustment and Capital Consumption Adjustment. The chart is clearly labeled, Seasonally Adjusted Annual Rate. It looks fairly flat, with a small uptick at the end.

      The $ 2 trillion is clearly an annualized rate, not a quarterly rate.

      There is a second version available as well:

      US Corporate Profits, with Inventory Valuation Adjustment and Capital Consumption Adjustment. It looks quite different.

      I believe “inventory value adjustment” has to do with increases or decreases in the values of commodities, during the quarter. Adding this makes the numbers bounce all over. When oil prices are high, profits suddenly look very high.

      I believe that “Capital Consumption Adjustment” is a reduction for the loss of value, when an oil field pumps oil out, or a coal fields loses the coal that was originally purchased in the field. This would tend to reduce reported profits. If I had my choice, I would include (that is, reduce profits) for using up part of the original capital, but I would not include the inventory valuation adjustment. It is just too volatile. It is like including unrealized capital gains in profit calculations. Not generally done.

    • Part of the problem is that households are getting poorer, and can’t borrow as much. Their incomes are being taken up by student loans; they cannot afford mortgage loans. It is hard to get detail data on this issue. This is household debt, as a percentage of GDP, through 2016. In other words, it is not very up to date. And detail doesn’t seem to be available. But it is clear that household debt to GDP fell, and has stayed at a lower level. The peak was right at the time of the oil price peak.

      One factor that affects this ration is the fact that households are leasing more cars, rather than buying them. I believe this shows up as commercial debt for vehicles. I don’t think it appears as debt for the buyers. When the lease is up, those holding leases need to scramble for new transportation options, if interest rates go up, and if companies are less generous in calculating trade in values. These two problems are happening now.

      Also, young people are living in their parents basements, longer. When they move out, they rent apartments, rather than buy houses. An increasing share of individual homes are investor owner, rather than owned by those living in them. If there is appreciation due to inflation, the investor will gain the benefit, rather than the homeowner. Home equity cannot grow in such a situation.

      Businesses are taking over the debtor roll. But I am not convinced that this really helps the system, especially when interest rates go up. If interest rates go up, those with commercial mortgages are likely to find themselves with higher rates fairly quickly. If commercial interest rates go up, they will need to pass on these higher costs to renters. But renters cannot really afford these higher costs–their incomes are not rising enough. So building owners will be caught in a squeeze. (Homeowners more often had fixed interest rates on debt in the US. Some even paid off their mortgages, so they could live without mortgages. They could even get reverse mortgages from the government, when older.)

      • Volvo740 says:

        Vehicles are very interesting. Fords decision to not make cars in the US is a clear signal that something has shifted. Affordability is down. It’s much more profitable to sell cars to rich people but there are only so many of them.

        On the EV front it’s even more interesting. More or less a scam. The fuel consumption will not be lower with these cars and if deployed at scale the self discharge of the batteries will start to amount to something substantial.

        Tesla keeps talking about a $35000 car, but GM already has one, and it’s not selling! It mat not havs the looks or a Tesla bit still. 3000 sold last month. And then there is the lack of infrastructure and solutions for people without driveways. The list goes on. TCO including batter change is through the roof.

        We’re in a predicament because there are no solutions. That’s kind of by definition.

        Most of the “solutions” are just for the 1% to continue to skim from the 99%. Or so it seems.

        • Most of the “solutions” are just for the 1% to continue to skim from the 99%. Or so it seems.

          I am afraid you are right.

        • Chrome Mags says:

          They’ve been gaming the system for the top 1% ever since Reagan substantially dropped their tax rate, and now some judge in Texas has sent Obamacare back to the Supreme Court. Says it’s unconstitutional. Wow, I didn’t know it was such a threat to top 1%, excuse me for wanting affordable healthcare.

          But the trouble with gaming the system for a tiny percentage of the population is it begins to cave in as we see with household indebtedness for the rest of us. People will do whatever they can to keep up including going deep into the red, but it doesn’t make for a very happy populace. There’s what I call the happy/laughing factor. In the 60’s-70’s people smiled a lot, laughed it up, but not so much anymore. Things have gotten downright serious and even deadly if you’re in the wrong place at the wrong time.

          • Baby Doomer says:

            Huge Human Inequality Study Hints Revolution is in Store for U.S (Kohler 2017) Nature
            https://www.inverse.com/article/38457-inequality-study-nature-revolution

          • xabier says:

            One can be poor, just going from day to day, and (if not starving) comparatively happy. Italian and Spanish peasants really did once sing and dance after work: Northerners who saw them thought they were crazy, but were they?

            Poor rural people used to grit their teeth to get through the winter, when everyone was in the same boat and deaths were higher; and were certainly very anxious at harvest time, but they didn’t always live in the shadow of fear – it was seasonal.

            But one cannot be deeply indebted and carefree: it’s the stuff of nightmares and constant anxiety. Still less when advertising tells you that you should be getting more every day and be one of the happy smiling people in the ads.

  5. Volvo740 says:

    Weird how peakoil.com nowadays contain so many “happy ever after” stories and oil independence stuff. True that there are some depletion stories still but very bi-polar.

    • peak oil’s refs are weird

      they are scathing about gore saying global warming was the cause of syria’s civil war—when it’s obvious that’s exactly what happened

      • Peak oil in Syria played a big role as well.

        Peak oil badly hurts the finances of a country. When the finances are in terrible shape, any weather problem becomes a big deal.

        • Another BIG piece of the mosaic is that Syria as Russian ally refused to host that Gulfies to EU markets bound natgas pipeline.. So if you combine all these major triggers to single bowel of misfortune:

          domestic energy balance going awry, overpop and crop failure-droughts, instable regional setting, proxy war for natgas pipeline..

        • agreed that peak oil affected their economic system, but the 4 year drought drove farmers off their land into cities, and into conflict there for space and jobs

          if the drought hadnt happened, they would have stayed on their land

          • A lot of other things drove people into cities as well. Look at every other country in the world. Jobs are disappearing in rural areas, as they are being added in cities. It is another example of what happens when there is not enough energy to go around. Physics freezes out the areas with poorer returns on energy investment, and encourages growth of the areas with better returns on energy investment. This is part of what caused the Soviet Union to collapse in 1991. The Soviet system was not efficient. (Besides the Soviet Union being an oil exporter, in the days when oil prices were low.)

            I suppose that physics is freezing out young people with advanced degrees, today, as well. By the time they finally graduate, they have so much debt, and they are so old, that they can’t have families. The part of the world that seems to most encourage growth is sub-Sahara Africa. There, birth rates remain high. Homes are simple huts. A man can have as many wives as he can afford. Young women don’t have a choice in husbands; the system decides for them.

            • all equally unpleasant—on balance

            • Sven Røgeberg says:

              Have you ever been to Africa, Gail? They are leaving for the cities there too.
              «Sub-Saharan Africa (SSA) is often regarded as the world’s fastest urbanizing region. Urban areas currently contain 472 million people, and will double over the next 25 years. The global share of African urban residents is projected to grow from 11.3 percent in 2010 to 20.2 percent by 2050. SSA’s 143 cities generate a combined $ 0.5 trillion, totaling 50 percent of the region’s gross domestic product (GDP).»
              https://www.google.no/amp/s/www.csis.org/analysis/urbanization-sub-saharan-africa%3famp

            • I have never been to Africa. My father grew up in Madagascar, and I have a cousin who is often in Africa on medical missionary do-good trips. So I have seen and heard a lot over the years. My cousin is my facebook friends, so I see the pictures she takes. She is a semi-retired nurse, whose husband has died, and who has no children. Without dependents, she feels that this is a good kind of service to be in.

              Africa is clearly growing rapidly. It is the one area of the world where the birth of new babies still seems to be increasing. Energy consumption per capita is pretty much flat. All of the growth in energy supply goes into longer-life expectancy and more new births.

            • Thanks for the link to the interesting article. The diseases in Africa have always “put me off” from visiting. My father became a physician, because disease was such a problem in Africa. Also, tours seem to revolve around “see the wild animals” or something else I am not as interested in.

          • JesseJames says:

            When people cannot eat, revolutions occur. Droughts have always occurred throughout history. The mini ice age that occurred during the period roughly 1300s to the 1700s also contributing to massive famine and deaths throughout Europe, and contributed to the French Revolution. These conditions are currently returning to our earth, courtesy of our sun, that controls our climate, along with our inter-planetary magnetic environment. If the mini ice age conditions kick in for 20-30 yrs, shorter summers, longer winters, rainy, wet springs and falls, that prevent crops from being planted, or, if they are planted, prevent them from being harvested, expect some large scale food shortages. When that happens, you haven’t seen nothing yet when it comes to revolution, chaos and death across the world.

            Add the coming energy deficit to this, and add multiple popping bubbles due to unsustainable debt, and we have multiple cascading disasters of biblical proportions heading our way.

      • Volvo740 says:

        Roger Hallam talks about farming in the UK and the Extinction Rebellion.

        http://prn.fm/nature-bats-last-12-05-18/

        Fast forward to 18:50 for his piece.

      • Volvo740 says:

        https://topdocumentaryfilms.com/global-dimming/

        Really interesting video about the changing weather patterns. Related to the Syria situation as well as Africa.

  6. Baby Doomer says:

    Most Americans Received No Pay Increase In 2018

    Most Americans say they didn’t get a pay raise at their current job, or start a better paying job in the last 12 months, according to a Wednesday survey from Bankrate.com.

    According to the poll, 62% of Americans report not getting a pay raise or better paying job in the past year – up from 52% last surveyed last year.

    https://www.bankrate.com/personal-finance/financial-security-december-2018/

    • From the article:

      Households in the lowest income brackets were the least likely to report getting a pay raise or a better paying job, with 76 percent stating they received neither.

      As a result, the lowest income households (under $30,000) have the highest likelihood of looking for a new job in the next 12 months, at 42 percent, compared with just 17 percent of the highest income households ($75,000 or more).

      These are the folks who get whatever kind of low paid job happens to be available, often part time. I am sure that people in rural areas are particularly hard hit.

      • Let me piggyback a blast from very recent past, I’m going to print it and hang it on the wall – it’s that important and far reaching knowledge of human nature:

        Lastcall says:
        December 9, 2018 at 7:43 pm
        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:
        December 10, 2018 at 6:46 am
        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.

        • Obviously such situation eventually reverses, but that’s likely several generations away.
          Namely, retreat to fortified manor dwellings providing at least some ad hoc protection to some (lucky) part of their subjects working 24/365 in the open land again..

        • Volvo740 says:

          Debt slavery? Pay off the tractor or else…

          • Chrome Mags says:

            That’s an interesting YouTube video discussion on debt. I’d jump in at 19:00 and go to about 28:00. She doesn’t think debt will be forgiven. That’s an interesting viewpoint, considering how much debt there is globally.

            • jupiviv says:

              The function of debt within industrial civ is to reassure people that the system won’t collapse anytime soon. The need to forgive debt won’t arise until after the system begins collapsing.

            • Volvo740 says:

              Thanks, I’ll check that out. For a good X-mad read check out Atwood:

  7. Davidin100millionbilliontrillionzillionyears says:

    Bitcoin was having an Xmas sale today at $3130

    a bit higher now but by next weekend we might be seeing under $3000…

    heading towards trivia…

  8. Third World person says:

    Why Colombia has taken in 1 million Venezuelans

    Colombia is currently dealing with a massive wave of refugees coming from Venezuela. Venezuelans are fleeing their home because of a severe economic crisis under President Nicolas Maduro. There are high inflation rates and there isn’t enough food available for people within Venezuela to even eat. Thousands of Venezuelans cross the Simon Bolivar bridge located at Cúcuta every day and Colombia doesn’t seem to be turning anyone way.

    this just a trailer

  9. Uncle Bill says:

    What happens when there is no place to go!?

    Venezuelans who have fled the country already surpass the 3 million mark, with over one million in Colombia. Colombian authorities have stated that they expect the amount of Venezuelans in the country to double over the next 12 months. Venezuela appears to be tragically stuck in a perverse modern-day “Malthusian trap”, where lack of access to food is an important determinant of the emigration rate. The current conditions are so bad that even if the government were to put all of its net income from oil—Venezuela’s main and almost only export, which is publicly owned—to feed the poorest of the poor, there would still be a substantial portion of the population whose basic caloric needs wouldn’t be covered.

    https://www.brookings.edu/blog/up-front/2018/12/10/how-many-more-migrants-and-refugees-can-we-expect-out-of-venezuela/

    Set sail in a boat with a pantry?

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