2019: World Economy Is Reaching Growth Limits; Expect Low Oil Prices, Financial Turbulence

Financial markets have been behaving in a very turbulent manner in the last couple of months. The issue, as I see it, is that the world economy is gradually changing from a growth mode to a mode of shrinkage. This is something like a ship changing course, from going in one direction to going in reverse. The system acts as if the brakes are being very forcefully applied, and reaction of the economy is to almost shake.

What seems to be happening is that the world economy is reaching Limits to Growth, as predicted in the computer simulations modeled in the 1972 book, The Limits to Growth. In fact, the base model of that set of simulations indicated that peak industrial output per capita might be reached right about now. Peak food per capita might be reached about the same time. I have added a dotted line to the forecast from this model, indicating where the economy seems to be in 2019, relative to the base model.1

Figure 1. Base scenario from The Limits to Growth, printed using today’s graphics by Charles Hall and John Day in Revisiting Limits to Growth After Peak Oil with dotted line at 2019 added by author. The 2019 line is drawn based on where the world economy seems to be now, rather than on precisely where the base model would put the year 2019.

The economy is a self-organizing structure that operates under the laws of physics. Many people have thought that when the world economy reaches limits, the limits would be of the form of high prices and “running out” of oil. This represents an overly simple understanding of how the system works. What we should really expect, and in fact, what we are now beginning to see, is production cuts in finished goods made by the industrial system, such as cell phones and automobiles, because of affordability issues. Indirectly, these affordability issues lead to low commodity prices and low profitability for commodity producers. For example:

  • The sale of Chinese private passenger vehicles for the year of 2018 through November is down by 2.8%, with November sales off by 16.1%. Most analysts are forecasting this trend of contracting sales to continue into 2019. Lower sales seem to reflect affordability issues.
  • Saudi Arabia plans to cut oil production by 800,000 barrels per day from the November 2018 level, to try to raise oil prices. Profits are too low at current prices.
  • Coal is reported not to have an economic future in Australia, partly because of competition from subsidized renewables and partly because China and India want to prop up the prices of coal from their own coal mines.

The Significance of Trump’s Tariffs

If a person looks at history, it becomes clear that tariffs are a standard response to a problem of shrinking food or industrial output per capita. Tariffs were put in place in the 1920s in the time leading up to the Great Depression, and were investigated after the Panic of 1857, which seems to have indirectly led to the US Civil War.

Whenever an economy produces less industrial or food output per capita there is an allocation problem: who gets cut off from buying output similar to the amount that they previously purchased? Tariffs are a standard way that a relatively strong economy tries to gain an advantage over weaker economies. Tariffs are intended to help the citizens of the strong economy maintain their previous quantity of goods and services, even as other economies are forced to get along with less.

I see Trump’s trade policies primarily as evidence of an underlying problem, namely, the falling affordability of goods and services for a major segment of the population. Thus, Trump’s tariffs are one of the pieces of evidence that lead me to believe that the world economy is reaching Limits to Growth.

The Nature of World Economic Growth

Economic growth seems to require growth in three dimensions (a) Complexity, (b) Debt Bubble, and (c) Use of Resources. Today, the world economy seems to be reaching limits in all three of these dimensions (Figure 2).

Figure 2.

Complexity involves adding more technology, more international trade and more specialization. Its downside is that it indirectly tends to reduce affordability of finished end products because of growing wage disparity; many non-elite workers have wages that are too low to afford very much of the output of the economy. As more complexity is added, wage disparity tends to increase. International wage competition makes the situation worse.

A growing debt bubble can help keep commodity prices up because a rising amount of debt can indirectly provide more demand for goods and services. For example, if there is growing debt, it can be used to buy homes, cars, and vacation travel, all of which require oil and other energy consumption.

If debt levels become too high, or if regulators decide to raise short-term interest rates as a method of slowing the economy, the debt bubble is in danger of collapsing. A collapsing debt bubble tends to lead to recession and falling commodity prices. Commodity prices fell dramatically in the second half of 2008. Prices now seem to be headed downward again, starting in October 2018.

Figure 3. Brent oil prices with what appear to be debt bubble collapses marked.

Figure 4. Three-month treasury secondary market rates compared to 10-year treasuries from FRED, with points where short term interest rates exceed long term rates marked by author with arrows.

Even the relatively slow recent rise in short-term interest rates (Figure 4) seems to be producing a decrease in oil prices (Figure 3) in a way that a person might expect from a debt bubble collapse. The sale of US Quantitative Easing assets at the same time that interest rates have been rising no doubt adds to the problem of falling oil prices and volatile stock markets. The gray bars in Figure 4 indicate recessions.

Growing use of resources becomes increasingly problematic for two reasons. One is population growth. As population rises, the economy needs more food to feed the growing population. This leads to the need for more complexity (irrigation, better seed, fertilizer, world trade) to feed the growing world population.

The other problem with growing use of resources is diminishing returns, leading to the rising cost of extracting commodities over time. Diminishing returns occur because producers tend to extract the cheapest to extract commodities first, leaving in place the commodities requiring deeper wells or more processing. Even water has this difficulty. At times, desalination, at very high cost, is needed to obtain sufficient fresh water for a growing population.

Why Inadequate Energy Supplies Lead to Low Oil Prices Rather than High

In the last section, I discussed the cost of producing commodities of many kinds rising because of diminishing returns. Higher costs should lead to higher prices, shouldn’t they?

Strangely enough, higher costs translate to higher prices only sometimes. When energy consumption per capita is rising rapidly (peaks of red areas on Figure 5), rising costs do seem to translate to rising prices. Spiking oil prices were experienced several times: 1917 to 1920; 1974 to 1982; 2004 to mid 2008; and 2011 to 2014. All of these high oil prices occurred toward the end of the red peaks on Figure 5. In fact, these high oil prices (as well as other high commodity prices that tend to rise at the same time as oil prices) are likely what brought growth in energy consumption down. The prices of goods and services made with these commodities became unaffordable for lower-wage workers, indirectly decreasing the growth rate in energy products consumed.

Figure 5.

The red peaks represented periods of very rapid growth, fed by growing supplies of very cheap energy: coal and hydroelectricity in the Electrification and Early Mechanization period, oil in the Postwar Boom, and coal in the China period. With low energy prices,  many countries were able to expand their economies simultaneously, keeping demand high. The Postwar Boom also reflected the addition of many women to the labor force, increasing the ability of families to afford second cars and nicer homes.

Rapidly growing energy consumption allowed per capita output of both food (with meat protein given a higher count than carbohydrates) and industrial products to grow rapidly during these peaks. The reason that output of these products could grow is because the laws of physics require energy consumption for heat, transportation, refrigeration and other processes required by industrialization and farming. In these boom periods, higher energy costs were easy to pass on. Eventually the higher energy costs “caught up with” the economy, and pushed growth in energy consumption per capita down, putting an end to the peaks.

Figure 6 shows Figure 5 with the valleys labeled, instead of the peaks.

Figure 6.

When I say that the world economy is reaching “peak industrial output per capita” and “peak food per capita,” this represents the opposite of a rapidly growing economy. In fact, if the world is reaching Limits to Growth, the situation is even worse than all of the labeled valleys on Figure 6. In such a case, energy consumption growth is likely to shrink so low that even the blue area (population growth) turns negative.

In such a situation, the big problem is “not enough to go around.” While cost increases due to diminishing returns could easily be passed along when growth in industrial and food output per capita were rapidly rising (the Figure 5 situation), this ability seems to disappear when the economy is near limits. Part of the problem is that the lower growth in per capita energy affects the kinds of jobs that are available. With low energy consumption growth, many of the jobs that are available are service jobs that do not pay well. Wage disparity becomes an increasing problem.

When wage disparity grows, the share of low wage workers rises. If businesses try to pass along their higher costs of production, they encounter market resistance because lower wage workers cannot afford the finished goods made with high cost energy products. For example, auto and iPhone sales in China decline. The lack of Chinese demand tends to lead to a drop in demand for the many commodities used in manufacturing these goods, including both energy products and metals. Because there is very little storage capacity for commodities, a small decline in demand tends to lead to quite a large decline in prices. Even a small decline in China’s demand for energy products can lead to a big decline in oil prices.

Strange as it may seem, the economy ends up with low oil prices, rather than high oil prices, being the problem. Other commodity prices tend to be low as well.

What Is Ahead, If We Are Reaching Economic Growth Limits?

1. Figure 1 at the top of this post seems to give an indication of what is ahead after 2019, but this forecast cannot be relied on. A major issue is that the limited model used at that time did not include the financial system or debt. Even if the model seems to provide a reasonably accurate estimate of when limits will hit, it won’t necessarily give a correct view of what the impact of limits will be on the rest of the economy, after limits hit. The authors, in fact, have said that the model should not be expected to provide reliable indications regarding how the economy will behave after limits have started to have an impact on economic output.

2. As indicated in the title of this post, considerable financial volatility can be expected in 2019 if the economy is trying to slow itself. Stock prices will be erratic; interest rates will be erratic; currency relativities will tend to bounce around. The likelihood that derivatives will cause major problems for banks will rise because derivatives tend to assume more stability in values than now seems to be the case. Increasing problems with derivatives raises the risk of bank failure.

3. The world economy doesn’t necessarily fail all at once. Instead, pieces that are, in some sense, “less efficient” users of energy may shrink back. During the Great Recession of 2008-2009, the countries that seemed to be most affected were countries such as Greece, Spain, and Italy that depend on oil for a disproportionately large share of their total energy consumption. China and India, with energy mixes dominated by coal, were much less affected.

Figure 7. Oil consumption as a percentage of total energy consumption, based on 2018 BP Statistical Review of World Energy data.

Figure 8. Energy consumption per capita for selected areas, based on energy consumption data from 2018 BP Statistical Review of World Energy and United Nations 2017 Population Estimates by Country.

In the 2002-2008 period, oil prices were rising faster than prices of other fossil fuels. This tended to make countries using a high share of oil in their energy mix less competitive in the world market. The low labor costs of China and India gave these countries another advantage. By the end of 2007, China’s energy consumption per capita had risen to a point where it almost matched the (now lower) energy consumption of the European countries shown. China, with its low energy costs, seems to have “eaten the lunch” of some of its European competitors.

In 2019 and the years that follow, some countries may fare at least somewhat better than others. The United States, for now, seems to be faring better than many other parts of the world.

4. While we have been depending upon China to be a leader in economic growth, China’s growth is already faltering and may turn to contraction in the near future. One reason is an energy problem: China’s coal production has fallen because many of its coal mines have been closed due to lack of profitability. As a result, China’s need for imported energy (difference between black line and top of energy production stack) has been growing rapidly. China is now the largest importer of oil, coal, and natural gas in the world. It is very vulnerable to tariffs and to lack of available supplies for import.

Figure 9. China energy production by fuel plus its total energy consumption, based on BP Statistical Review of World Energy 2018 data.

A second issue is that demographics are working against China; its working-age population already seems to be shrinking. A third reason why China is vulnerable to economic difficulties is because of its growing debt level. Debt becomes difficult to repay with interest if the economy slows.

5. Oil exporters such as Venezuela, Saudi Arabia, and Nigeria have become vulnerable to government overthrow or collapse because of low world oil prices since 2014. If the central government of one or more of these exporters disappears, it is possible that the pieces of the country will struggle along, producing a lower amount of oil, as Libya has done in recent years. It is also possible that another larger country will attempt to take over the failing production of the country and secure the output for itself.

6. Epidemics become increasingly likely, especially in countries with serious financial problems, such as Yemen, Syria, and Venezuela. Historically, much of the decrease in population in countries with collapsing economies has come from epidemics. Of course, epidemics can spread across national boundaries, exporting the problems elsewhere.

7. Resource wars become increasingly likely. These can be local wars, perhaps over the availability of water. They can also be large, international wars. The timing of World War I and World War II make it seem likely that these wars were both resource wars.

Figure 10.

8. Collapsing intergovernmental agencies, such as the European Union, the World Trade Organization, and the International Monetary Fund, seem likely. The United Kingdom’s planned exit from the European Union in 2019 is a step toward dissolving the European Union.

9. Privately funded pension funds will increasingly be subject to default because of continued low interest rates. Some governments may choose to cut back the amounts they provide to pensioners because governments cannot collect adequate tax revenue for this purpose. Some countries may purposely shut down parts of their governments, in an attempt to hold down government spending.

10. A far worse and more permanent recession than that of the Great Recession seems likely because of the difficulty in repaying debt with interest in a shrinking economy. It is not clear when such a recession will start. It could start later in 2019, or perhaps it may wait until 2020. As with the Great Recession, some countries will be affected more than others. Eventually, because of the interconnected nature of financial systems, all countries are likely to be drawn in.

Summary

It is not entirely clear exactly what is ahead if we are reaching Limits to Growth. Perhaps that is for the best. If we cannot do anything about it, worrying about the many details of what is ahead is not the best for anyone’s mental health. While it is possible that this is an end point for the human race, this is not certain, by any means. There have been many amazing coincidences over the past 4 billion years that have allowed life to continue to evolve on this planet. More of these coincidences may be ahead. We also know that humans lived through past ice ages. They likely can live through other kinds of adversity, including worldwide economic collapse.

Note:

[1] Note that where the dotted line for 2019 is placed is based on where I see the 2019 economy relative to the downturn in industrial output per capita, based on a number of kinds of evidence, not all of which is cited in this article. The 1972 base model would give a slightly different timing of the downturn, a few years earlier. Also note that while the original “The Limits to Growth” book is no longer in print, Limits to Growth: The 30-Year Update by the same authors is available for sale.

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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2,080 Responses to 2019: World Economy Is Reaching Growth Limits; Expect Low Oil Prices, Financial Turbulence

  1. i1 says:

    Looks like the US is making a move in Venezuela.

    • Duncan Idaho says:

      They have been making a move for quite a while——-
      Maduro is still in power.
      He was to be gone years ago.
      Seems to win elections on a regular basis also (probably more valid than US elections).
      But we shall see– the US would really like to get their hands on all that oil.

    • They will help the climate get worse!!

      • Chrome Mags says:

        Yeah, but if you’re wealthy flying first class on commercial flights is just so pedestrian. Got to have immediate personalized service with a big open cab to yourself, an in flight desk, maybe stretch out and take a snooze or get on an exercycle. Just too confining on a commercial flight and then there’s all those dumb rules like being buckled up most of the flight. Ok, where are the chocolate liqueurs!

        • Baby Doomer says:

          I read in Reuters a few years ago..That the former CEO of GE used to fly in his own private jet and had a second identical private jet follow behind him everywhere..Just in case there was a small chance that his plane would have mechanical issues..Not kidding.

          • Very good point..

            In fact very few people understand the hardship, paranoia and emptiness when reaching top of the social pyramid, i.e. most of the time it’s not about being the fat cat at all!

            For one thing, you have to maintain your weight to stay fit and reach the desired longevity (supposedly enjoying the wealth status), and that at certain age, say after ~45, means keeping 24/365 certain level of hunger periods, because you can’t exercise so much anymore.

            Also, the expensive and privileged toys as you nicely demonstrated are completely out of your control in terms of operational procedures (few owner pilots), maintenance, and service.

            Moreover, you have to socialize with almost exclusive club of other sociopaths only.
            And always on the alert about possibly new antagonistic social movements and political developments.

            Hence the motivation to enter such club can be explained only as some sort of satanic cult chain-gang calling, well only the bird’s eye viewpoint might be nice, although achievable through other means for normal people as well.

            So in summary, who is the truly rich and enjoying the life fully in the end?
            Sometimes when I see scenes like heavily obese south american guy in dirty tshirt (~working class ) performing large and loud barbecue for this 5x kids and ~20x other relatives and friends mingling around happily, one has to wonder..

            • Harry McGibbs says:

              People will pay lip-service to the adage that money does not buy happiness but of course most secretly believe that it does.

              The truth is though that abundance is actually a state of mind that entails being grateful for what you have in the here and now. Given that the very wealthy tend to be driven by a bottomless sense of lack, their wealth ironically fails to translate into a feeling of sufficiency, let alone abundance.

              And if the global economy can be understood as a thermodynamic heat engine, these driven individuals are the cogs doomed to spin fastest. Pathologies tend to eventuate in their relationships, marriages and offspring.

            • xabier says:

              One thinks of the Inuit, some 60-odd years ago, quoted in ‘Last Kings of Thule’ who defined happiness as a full stomach and a ‘plump and cheerful wife’.

              Having a full stomach implied, of course, being a good and lucky hunter, too, in a stabel ecological environment.

              And the whole set-up implied also a stable society, and equality between families.

              This is certainly not the world of the rich, nor of most of us.

              It is not the life pushed on us by advertising, proposed to us by Neo-Liberaliam, nor the one dreamed of by radical-Left revolutionaries (all those indoctrination sessions, perpetual Revolution, hunting out of enemies, worship of the Great Leader, the annihilation of individuality and the spirit, etc).

            • There are surprisingly few people who believe that money doesn’t buy happiness. I know I lived in a variety of apartments and houses over my lifetime. I discovered as a teenager, when my parents had the nicest house in a small town, it was, in fact, not as good a situation for me as when they had had a modest home across from a garage mechanic and his family. As a graduate student, I ended up in some quite modest apartments. Later on, at one point, we bought a house on a small lake and I had a decorator help me decorate the house. But the decorator-decorated house wasn’t quite me. When we moved later, I chose a home with more modest looking decorations, in a modest subdivision, living in a neighborhood that is convenient for my son who doesn’t drive.

              My kids asked, “Why didn’t you buy a fancy house like so-and-so’s parents have? You obviously could afford one.” We answered, “Because we really didn’t want such a house.”

            • GBV says:

              “There are surprisingly few people who believe that money doesn’t buy happiness”

        • Greg Machala says:

          It is difficult to go backwards. If your wealthy, your baseline is higher than most. However, this baseline is still their minimum expectation in life. No matter if it seems superfluous. The same goes for middle and lower-class incomes. Electricity and iPhones and cars are the baseline. It is hard to accept less than our learned baseline standard of living.

          • xabier says:

            For the mass of people the ‘baseline’ is determined by:

            1/ what their parents have or had, and 2/ what immersion advertising tells them they should have (not so much the promises of politicians, as they are (unsurprisingly !)very careful indeed not to be too precise. And indeed what the social environment tells them they ought to have: peer-comparison.

            Young Left ‘radicals’ in Europe, for example, angry at Capitalism, feeling short-changed by it, and seeing that they are falling below the baseline as portrayed in the media, suppose that if they overturn it, they’ll get all the goodies.

            They are completely unaware of the energy per capita factor in all of this, and see it as a problem with a political solution – just like ‘eliminating global poverty’. …..

  2. Baby Doomer says:

    Americans Have Lost Faith In Their Ability To Move From Poverty To Riches

    More than two-thirds said it’s no longer commonplace for hard work to be a path from poverty to wealth, according to a new World Economic Forum poll.

    https://www.huffingtonpost.com/entry/american-dream-world-economic-forum-poll_us_5c4583b7e4b027c3bbc33c48?utm_source=reddit.com

    • Moving from poverty to riches requires the expenditure of energy. During the boom period when energy consumption was growing rapidly, it was perfectly possible to move from poverty to riches. Now it is not any more. In fact, the moves for young people are generally the other way.

      This is a statement about energy consumption per capita, and how it is trending. It is not a statement about faith in a system, or leadership.

      • Davidin100millionbilliontrillionzillionyears says:

        I agree it’s about energy per capita…

        but the average person doesn’t know that…

        • Greg Machala says:

          People are starting to believe in fairy tales. That “other peoples money” can be used to raise everyone’s standard of living. Ignoring that the “other people” will go broke and no longer be able to subsidize the rest. Ignoring the fact that it isn’t money that makes prosperity – it is resources (and in a large part energy resources) that allow prosperity.

    • Davidin100millionbilliontrillionzillionyears says:

      “Americans Have Lost Faith In Their Ability To Move From Poverty To Riches”…

      therefore their faith is moving towards the AOC type socialist agenda…

      “Exclusive: A new Axios/SurveyMonkey poll finds that 74% of Democrats (and people who lean Dem) would consider voting for Ocasio-Cortez if she were old enough to run for president. (She’s 29; you have to be at least 35.)”

      end-game economics are hammering the average American…

      many are looking for change…

      • Greg Machala says:

        “Many are looking for change…” – Yes, American’s are looking for unicorns and fairy tales to save them. It is cheap energy and resources (and only that) which has the power to create positive changes. Not politicians. Not promises. Not hope. Not dreams. If you could vote for prosperity we would have that in spades by now.

  3. Chrome Mags says:

    https://www.cnbc.com/2019/01/22/us-cancels-trade-planning-meeting-with-china-source-says.html

    ‘US cancels trade planning meeting with China, source says’

    •The White House has rejected a trade planning meeting with China this week due to outstanding disagreements over intellectual property rules.
    •Should Beijing and Washington fail to agree on a permanent solution by March 1, President Donald Trump has said he will reinforce punitive tariffs.

    You’d think from the latest articles, that the US & China had pretty much agreed on enough points in their dialogue to draw the conclusion the trade war was imminently close to being over. Ah, no, it’s not as we can see from the above article. My view on this is the same as it is for North Korea, although different situations, the Asians are great at pretending to agree, but in reality that’s only to placate a person or country into thinking things are rosy when in fact they are no closer to a deal. It’s the fine art of lulling the opposition into a state of complacency, then when asked to sign, they say, oh, not so fast, maybe we talk over some more.

    And that idea that China will go on a spending spree to even out the trade deficit – Just more jockeying to pretend it’s all good. Guaranteed that’s a ploy. They might buy some stuff but as the months pass the trade deficit will be right back to where it has been recently.

  4. Baby Doomer says:

    IEA Chief: EVs Are Not The End Of The Oil Era

    Electric vehicles (EVs) today are not the end of global oil demand growth, nor are they the key solution to reducing carbon emissions, Fatih Birol, the Executive Director of the International Energy Agency (IEA), said during the ‘Strategic Outlook on Energy’ panel at the World Economic Forum in Davos on Tuesday.

    According to Birol, analysts need to put things into perspective and consider that five million EVs globally is nothing compared to 1 billion internal combustion engine (ICE) cars.

    https://oilprice.com/Energy/Energy-General/IEA-Chief-EVs-Are-Not-The-End-Of-The-Oil-Era.html

    • Davidin100millionbilliontrillionzillionyears says:

      do you think she clutched her pearls?

      anyway…

      they always seem to cut their “growth” forecast, but never dare to forecast actual recession…

      I think the historical record shows that recessions always start months before TPTB admit to it…

      keep that in mind throughout this year…

    • Rodster says:

      Excellent article but I always find it fascinating how the Elites who got rich off the backs of the Plebs are now worried about social unrest. I bet not one of them would give back their wealth to the poor. It’s all words, symbolism over substance. I recently read a Hugo Salinas Price interview and he too said that he was worried about the future. His remedy to bring the world back into balance is for the “poor” to accept that there will always be two claases, i.e. the Rich vs the Poor.

      Sometimes you just can’t makethis stuff up. That’s how the Elite think and people are starting to get fed up with the BS, hence why we’re seeing protests perculating aroundthe world.

      Zimbabwe is quickly turning into another Powder Keg and the Gov’t is fighting back the protest with violence.

      • violence is the point

        below a certain level the poor will kick off and demand ”more”

        while the rich will not surrender anything unless forced to do so—usually at the messy end of a guillotine

        then in the space of a single generation, things are pretty much back where they were, apart from a few missing heads

        getting rid of aristos creates job vacancies, rapidly filled by guillotine operatives

        • GBV says:

          “violence is the point”
          Indeed!

          I do hate it when people say “violence solves nothing”; violence solves everything!
          That’s why our governments use it against us in such a heavy-handed manner.

          • don’t think i was quite saying that in the context you mean

            i may have missed one or two—but violent revolution causes an immediate upheaval and apparent change–but after a generation or less, the aristos who’ve been bumped off are replaced with another lot

            a case in point is Russia, the obscene spending of the ruling class on palaces and such by the royals—then look to Abramovich, with a 12000 ton private yacht, etc etc,
            The Tsars fed on the resources of the nation
            The current crop of aristos do exactly the same thing

            China is taking the same path, oppression of those who do not conform–after a violent revolution last century

            take any state, particularly (but not necessarily) the oil rich ones, and the same rules apply

            In Africa, when the colonists were removed, the locals just moved up a notch

  5. Baby Doomer says:

    Schlumberger: Warning Signs Flash For U.S. Shale

    The largest oilfield services company in the world says that shale drilling activity is slowing, creating an uncertain outlook for 2019.

    Schlumberger’s chief executive also warned that the shale industry could see other problems going forward that could be even more significant. Shale drilling suffers from a precipitous decline in output soon after a well is completed. After an initial burst in output, wells see a rapid decline in production. This is not news; it has characterized shale drilling for years.

    But this dynamic appears to be a growing problem, one that could soon catch up with the industry. “It is also worth noting that with the continued growth in U.S. shale production, an increasing percentage of the new wells drilled are being consumed to offset the steep decline from the existing production base,” Kibsgaard told shareholders and analysts on Schlumberger’s earnings call. “The third party analysis shows that in 2018, this number was 54% of total CapEx and is expected to increase to 75% in 2021, clearly demonstrating the unavoidable treadmill effect of shale oil production.”

    Beyond that, well interference is also a mounting problem. Drilling wells too close to one another can cannibalize production, raising costs and leading to less overall output. That becomes a larger problem over time after companies pick over the best acreage. Additionally, the length of laterals and the use of frac sand and other proppants have reached the limits of what they can achieve. “We could be facing a more moderate growth in U.S. shale production in the coming years than what the most optimistic views have been suggesting,” Kibsgaard warned.

    https://oilprice.com/Energy/Energy-General/Warning-Signs-Flash-For-US-Shale.html

    • cal48koho says:

      All true baby doomer. M&A of the small shale players seems to be picking up in the shale patch by the big boys who have upstream and downstream businesses as well as conventional crude to mix in with the thin volatile frac oil and hide the money losing in the opaque paperwork and letters to investors. This should keep fracing going for a while that is until the rest of their business model falls apart. But what else is Exxon or BP supposed to do? Get into money losing production sharing arrangements with unreliable and fragile National oil companies in the ME? I suppose it is the lesser of 2 evils and hoping to hang on until oil prices finally go through the roof and save them.

  6. jupiviv says:

    I think I’ve posted Steve Ludlum’s latest article before, but it bears repeating:

    “That we cannot afford our economy is its immediate vulnerability. Asymmetries within the lending regime such as maturity mismatches make it fragile. The regime depends on a marginal agent or class of agents that sets conditions for all the others. Keynes notwithstanding, a certain level of borrowing restraint, something short of universal borrowing has little affect on the system as a whole. But, some percentage of economic agents must borrow with a fraction of that borrowing deployed to service and retire existing debts. Small leaks- or water over the top of a dike will not damage it but one small leak too many will wash the dike away. In the same way, a small percentage of non-performing loans or defaults is tolerable to the system, a portion of lender reserves and equity is set aside to resolve these as they appear. Then, there is one default too many for whatever reason … this is disaster! The ‘capital’ structure of the lender is upset; this calls into scrutiny the capitalization of all other lenders that are similarly situated. Uncertainty is rapid and corrosive, given time it widens into a self-amplifying spiral of insolvency. This is what occurred in 1929 and 2008 and what looks to be underway right this minute.

    Compounding the problem, the marginal borrower is impossible to identify or for immediate institutional convenience is disregarded. The tiny leak with the potential to destroy the dike can be one of any (very large) number. Globalization has rendered the marginal agent opaque; official denial and central bank happy talk permits known problems to fester. The marginal borrower can be an individual or a firm, or a class like Chinese peer-to-peer lenders, Italian footwear manufacturers or Spanish residential real estate speculators and the banks that supply these with funds. Eventually, all of them together become marginal. Structured finance operates outside the reach of policy makers at the same time are tightly bound to all the others by way of swaps, corresponding- and exchange lenders, counterparty agreements, derivatives-based hedges and money markets. Like a flood, marginality propagates outward, with the ‘new’ marginal borrowers becoming major banks, dark money pools, bond- and derivatives market makers, national governments and foreign exchange. In any event, agents cannot be compelled to borrow and in a crisis refuse to do so. Insolvent, zombie-like walking dead firms which continue to borrow/lend in the aggregate are lethal to the regime: they can only offer the (fraudulent) appearance of a cure while delaying the inevitable reckoning. Accounts cannot be overdrawn indefinitely, it is impossible to borrow out of debt. “If something cannot go on forever, it will stop,” says economist Herbert Stein. No amount of marginal borrowers can rescue a system that is foundationally bankrupt.

    … this is after hundreds of trillion$ have been borrowed around the world already. The simple fact of the trillions suggests the managers are inept and perhaps insane. Our debts have grown beyond human scale, even the billionaires all together cannot hope to retire them, in fact their borrowings have contributed significantly to the total. Along with their managers, these stupendous debts fade to irrelevance in the practical sense; they can never be repaid. They are empty claims against resources that have long since been converted into useless waste. Machines that are dependent upon credit for their very existence cannot repay, certainly not labor which is feeble; which is otherwise depreciated, subordinated and oversupplied.

    This is all part of the current crisis, it may indeed be its entirety. Whether the markets are repricing (in)competence, (in)solvency, systemic bankruptcy or perhaps all of the above; it is too soon to tell.”

    https://www.economic-undertow.com/2018/12/25/collapse-something-or-other/

    • Basically, the world waits till the moment as “the US alliance” is no longer preferred host nation of the global debt system, what happens afterwards is unknown, it could be anything from nuclear, biogerm wars to mere econ/social implosion and attempted lower plateau elsewhere with at least some JITs stabilization for few selected powers and their respective population.. for a while..

      Understandably nothing exciting to visualize (and act upon) for anybody concerned vs. today’s opulence and cat fights, hence the very protracted and dragged timeline so far..

    • Lots of people are depending on this system, for their bank accounts and for their pensions. A person wonders what part will fail first. Derivatives seem like a likely candidate, but just plain rising default levels could push the system over.

  7. MG says:

    A Canadian woman has launched a writing contest for her luxury home

    https://www.bbc.com/news/world-us-canada-46913322

    “Her health has left her confined to the upper floor of the home, making living there “unbearable”.”

    “In the UK, a couple who launched a raffle for their “megahome” in Hampshire were criticised that the substitute cash prize was too low when they did not to sell enough tickets to give away the mansion jackpot.”

    Well, the people invent various ways how to get rid of the immovables that have become their burden…

    One married couple in Slovakia, who tried to organize a lottery in a village (where, by the way, a landslide damaged a part of the village), got a fine from the authorities amounting to EUR 32.000.

    https://kosicednes.sk/tema-dna/jedinecna-hra-o-dom-sa-skoncila-manzelia-dostali-pokutu-32-tisic-eur/

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