A Different View of Venezuela’s Energy Problems

It would be easy to write a story about Venezuela’s energy problems and, in it, focus on the corruption and mismanagement that have taken place. This would make it look like Venezuela’s problems were different from everyone else’s. Taking this approach, it would be easy to argue that the problems wouldn’t have happened, if better leaders had been elected and if those leaders had chosen better policies.

I think that there is far more behind Venezuela’s financial and energy problems than corruption and mismanagement.

As I see the story, Venezuela realized that it had huge oil resources relative to its population, back as early as the 1920s. While these oil resources are substantial, the country misestimated how high a standard of living that these resources could support. To try to work around the issue of setting development goals too high, the country chose the path of distributing the benefits of oil exports in an almost socialistic manner. This socialistic approach, plus increased debt, hid the problem of a standard of living that could not really be supported for many years. Recent problems in Venezuela show that these approaches cannot be permanent solutions. In fact, it seems likely that Venezuela will be one of the first oil-exporting nations to collapse.

How the Subsidy from High-Priced Exported Oil Works 

Oil is a strange resource. The cost of oil production tends to be quite low, especially for oil exporters. The selling price is based on a world oil price that changes from day to day, depending on what some would call “demand.” The difference between the selling price and the cost of extraction can make oil exporters rich. In a sense, this difference might be considered an “energy surplus” that is being distributed to the economies of oil exporters. The greater the energy surplus being distributed, the greater the quantity of goods and services (made with energy products) that can be purchased from outside the country with the hard currency that is made available through the sale of oil.

In fact, the existence of such a profitable resource tends to crowd out development of other, less profitable, enterprises. Thus, Venezuela has tended to be a country whose economy revolves around oil. There is a small amount of agriculture and quite a bit of services, but for the most part, the goods used by the economy must be purchased from outside the country. Furthermore, nearly all of the revenue that is available to purchase these goods comes from the sale of oil exports. Thus, the economy tends to follow the fortune of oil sales.

Figure 1 shows a rough estimate of the benefit that Venezuela’s oil exports have provided in inflation-adjusted US dollars. Based on this approach, the per capita benefit from oil exports seems to have peaked very early, in about 1981.

Figure 1. Venezuela per capita value of oil exports, calculated by multiplying Venezuela’s year-by-year quantity of oil exports by the price in 2017$ of oil, and dividing by estimated population. Both price and quantity determined using BP 2018 Statistical Review of World Energy. Population based on 2017 United Nations middle estimates.

The people of Venezuela did not realize that the amount of benefit that oil exports would provide would start falling very early. Instead, leaders set their sights on living standards that would be affordable if the level of subsidy that the economy could obtain from oil exports were to remain as high as during the 1973 to 1981 period.

Figure 2 shows how much energy the population, on average, consumed over the 1965 to 2017 period. This figure shows that energy consumption per capita rose dramatically between 1973 and 1981. In this way, citizens were able to benefit from the huge rise in per capita oil export revenue, shown in Figure 1.

Figure 2. Energy consumption per capita for Venezuela, based on BP 2018 Statistical Review of World Energy data.

This higher level of energy consumption meant that the economy readjusted in a way that added more goods and services using energy. For example, the economy added paved roads, airports, schools, electricity generating capacity and healthcare. People came to expect this higher standard of living going forward, even if the level of subsidy that oil exports had been adding was rapidly disappearing.

The way the amounts in Figure 1 “work” is that they depend both on the quantity of oil exported and the market price for that oil. If Venezuela’s oil exports are not rising quickly enough, or if the price of oil is not high enough, the level of oil subsidy fails to rise enough to support the economy. Also, rising population becomes an issue because as population rises, more homes, cars, electricity, streets, and other goods (requiring energy consumption) are needed. Because Venezuela must import practically everything other than oil, it must either (a) export an increasing quantity of oil per year, or (b) get an increasingly high price for the oil it exports, if it wishes to support its rising population at its chosen standard of living.

It became evident very early that Venezuela had set its sights on a living standard that was far higher than it could really support. In the period since 1965, Venezuela’s first debt crisis took place in 1982, as the subsidy suddenly started falling. Later debt crises occurred in 1990, 1995, 1996, 1997, 1998, 2004, and 2017. Clearly, as soon as the per capita subsidy started falling in 1982 (see Figure 1), Venezuela’s economy became very troubled. It could not really support its chosen standard of living.

How could Venezuela hide the problem of an unsupportable living standard for over 35 years?

I see three major ways the insupportable living standard could be hidden:

(a) Pushing the problem off into the future using added debt

Nearly everyone is willing to believe that oil prices will rise as high as is needed to extract oil resources that seem to be available with current technology. Would-be lenders are also willing to believe that oil resources can be extracted as rapidly as needed to support the economy. Given this combination of beliefs, Venezuela has had little difficulty adding more debt, even in periods not long after it has been forced to restructure previous debt.

Recently, the biggest lender to Venezuela has been China. With this arrangement, Venezuela has been able to obtain the economic benefit of part of its oil resources, before the oil has actually been extracted. Unfortunately, this arrangement makes Venezuela more quickly susceptible to the adverse impact of a downturn in oil prices. To make matters worse, the debt to China appears to include a provision that creates a lower repayment level (in oil) if prices rise, but creates a higher repayment level (in oil) if oil prices fall. This provision no doubt looked favorable to Venezuela, back in the time period when it was believed that oil prices could only rise.

As far as I know, Venezuela is the only oil exporting country that has used debt as extensively as it has. Some oil exporters, such as Saudi Arabia, have taken the opposite approach, setting aside reserve funds to use in the event that oil prices fall. Needless to say, Venezuela’s use of debt has tended to make its economy very vulnerable to restructuring or defaults if oil prices fall.

(b) Pursuing economic simplification 

A complex economy is one that is set up, as much as possible, to keep up with growing technology. A significant share of expenditures go both toward making new capital goods and maintaining existing capital goods. There are considerable differences in pay levels, to make certain that those who are providing technical expertise are adequately compensated for their efforts. Business leaders also are adequately compensated for their contributions.

A much simpler economy, which is what most of the Venezuelan leaders have been aiming for, is an economy in which everyone gets a basic level of housing, transportation, and healthcare, but virtually no one gets very much. There is also not much investment in new technology and new capital goods because nearly all of the hard currency being obtained by selling oil exports is being used to purchase imported goods and services to support the basic level of goods and services (such as roads, electricity, education, and food) being provided to the many citizens of the economy. Since the external value of oil exports sets an upper limit on the quantity of goods and services that Venezuela can import, this leaves virtually no capacity to purchase imported goods and services needed to support new capital investment and research.

In Venezuela’s economy, the cost of both oil and electricity have been kept very low–below the cost of production. This helps keep citizens happy, but it also cuts off funds for new investment in these areas. This, too, is part of the simple economy approach.

One disadvantage of a simple economy is that the low wages for engineers and other professionals encourage these professionals to move to other countries, where compensation is more adequate. Another disadvantage of a simple economy is that it encourages bribery, because graft is a way of adjusting the system so that those who “can make things happen” are adequately compensated for their efforts. The simple economy approach also tends to discourage research and investment in new areas, such as natural gas production and improved methods of heavy oil extraction.

A simple economy can be kept operating for a while, but it quickly reaches limits in many ways:

  • The limited skill level of residents who have not emigrated for higher wages elsewhere makes the completion of complex projects, such as new electricity generation facilities, difficult.
  • The inadequate level of oil export revenue puts a limit on the amount of spare parts and other goods needed to maintain the infrastructure, such as electricity transmission.
  • As existing oil wells deplete, little funding (in hard currency needed for imports) is available to make investments in new wells for extraction.
  • Research on new techniques for oil extraction is also inhibited.

(c) Neglect of current systems becomes an increasing issue, as the lack of hard currency revenue from oil exports becomes a bigger issue. 

Venezuela can, in theory, buy what it needs from abroad, but there is a limit to the total amount of goods and services that can be imported, based on the amount of hard currency funds it obtains from selling crude oil. If the price of oil falls, then Venezuela must, in some way, cut back on goods and services that it had previously supplied. One of the least obvious way of doing this is by cutting back on maintenance and repairs.

The recent long electricity outage in Venezuela seems to be at least partially related to neglect of usual maintenance activities. It seems that Venezuela’s state-owned electrical company failed to keep the brush cleared under electric transmission lines leading away from the very major Guri Dam. It now appears that one of the causes of Venezuela’s recent long electricity outage was damage to transmission lines caused by a brush fire within the Guri complex. This could perhaps have been prevented by better maintenance.

Figure 2 shows that energy consumption per capita has been falling, especially since 2011. This would suggest that standards of living have been falling. Needless to say, if Venezuela’s oil exports drop further, a further reduction in standard of living can be expected.

Why Is America Issuing Sanctions Against Venezuela’s Oil Company PDVSA?

On January 28, 2019, the United States imposed sanctions against Venezuela’s state oil company, PDVSA. The reasons given for these sanctions are the following:

  • To hold accountable those responsible for Venezuela’s tragic decline in oil supply
  • To restore democracy
  • To help prevent further diverting of Venezuela’s assets by Maduro, and thereby preserve those assets for the people of Venezuela

These reasons sound good, but I expect that the primary real reason for the sanctions was to try to take Venezuela’s oil production offline and, through this action, force oil prices higher.

World oil prices have been far too low for oil producers since at least 2014.

Figure 3. Historical inflation-adjusted oil prices, based on inflation adjusted Brent-equivalent oil prices shown in BP 2018 Statistical Review of World Energy.

Many people, thinking about the oil price situation from the consumers’ point of view, are completely unaware of the problem that low oil prices can cause for producers. Oil producers may not go out of business immediately because of low oil prices, but eventually the low prices will cause a cutback in investment, and thus production. Countries that have sold some of their oil production in advance, such as Venezuela, are especially vulnerable.

Figure 4. Venezuela’s energy production by type, based on data of BP 2018 Statistical Review of World Energy.

Figure 4 shows that oil production for Venezuela has been dropping for a very long time. Its highest year of production was 1970, the same early high year as for the United States’ oil extraction. Natural gas is mostly “associated” gas, which is made available through oil production. Hydroelectric is small in comparison to oil and gas. Hydroelectric production has been generally falling since 2008.

There is a widespread belief among oil executives and politicians that reducing oil production will force oil prices up. I expect to see, at most, a brief spike in oil prices. The major issue is that the world economy is a networked system. Prices for oil and for electricity cannot rise higher than consumers, in the aggregate, can afford. If there is too much wage disparity around the world, the low wages of many workers will tend to hold oil prices down, because these workers cannot afford goods such as smartphones and automobiles made with oil and other energy products. These lower oil prices reflect the fact that the economy has been changing in ways that leave less surplus energy to distribute to oil exporters to operate their economies.

The way the networked economy works is determined by the laws of physics, whether we like it or not. As far as I can see, the end of oil extraction comes because oil prices cannot be raised high enough to make extraction profitable. Once oil extraction becomes unprofitable, oil exporting nations will start collapsing. Venezuela is the “canary in the coal mine” in this collapse process, because of the extensive use it has made of debt.

What If Oil Prices Can Be Forced Upward? 

If somehow oil prices could be forced up by reducing Venezuela’s exports to practically zero, this would have a double benefit:

  1. More oil from around the world, including the United States, could be profitably extracted, because oil resources that are more expensive to produce would suddenly become profitable.
  2. Venezuela’s oil could be more profitably extracted.

If prices actually rise, and if the United States remains in control of the situation, the US could theoretically expand Venezuela’s oil production. Venezuela has the largest oil reserves of any country in the world. Its expected cost of production is relatively low, if the exports of oil are not expected to support essentially the whole economy. The cost of pulling the oil out of the ground in Venezuela seems to be about $28 per barrel, if we believe a 2016 estimate by Rystad Energy.

Figure 5. Cost of producing a barrel of oil and gas in 2016. WSJ figure based on Rystead Energy analysis.

The cost of supporting the entire economy with the revenue from oil exports is far higher. Figure 6 shows that back in 2013-2014, the cost of oil, including the subsidies needed to maintain the operation of the rest of the economy, amounted to about $110 per barrel. I would expect that with all of Venezuela’s debt, the real cost might be even higher than this.

Figure 6. Estimate of OPEC break-even oil prices, including tax requirements by parent countries, from Arab Petroleum Investments Corporation.

If the US doesn’t plan to support all of Venezuela’s population with the export revenues from oil extraction, it can theoretically extract the oil more economically than the $110 per barrel price that is needed to support the whole economy. Thus, it could get along with a price closer to $28 per barrel.

Furthermore, the investment capabilities and technical expertise of the United States could, at least in theory, ramp up Venezuela’s oil production, if this is desired at some future date. Similarly, “non-associated” natural gas production could be ramped up, if desired, because this seems to be available, but has been neglected.

I expect that all of this development would be more difficult and expensive than a simple comparison such as this seems to suggest. The ultimate problem is that a whole economy needs to be in place to make the extraction possible. Even if a cursory examination suggests that substantial savings are possible, the cost associated with maintaining necessary support services would make the total cost of energy extraction much higher.

Conclusion

Venezuela seems to be the canary in the coal mine with respect to where oil exporters are headed. Other countries will want to push them out of oil production, so as to try to raise prices for themselves. Debt defaults and lack of availability of debt may also become issues.

One item of interest is the fact that in Venezuela, lack of oil revenues can adversely affect electricity supply. Thus, we should not be surprised if electricity supply fails at about the same time that oil production falls. Even electricity supply provided by hydroelectric plants seems to be at risk.

Another item of interest is how Venezuela’s attempt at even distribution of goods and services, using a somewhat socialistic approach, is working out. This approach (which is now being advocated by some political candidates) seems to have some short-term benefits, because it tends to keep the population happy–almost everyone seems to have a minimum standard of living. But, over the long term, this approach leads to the loss of the ability to maintain today’s high-tech economy. This approach doesn’t prevent collapse either, because a lack of investment and expertise eventually causes important parts of the system to stop operating.

 

 

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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1,454 Responses to A Different View of Venezuela’s Energy Problems

  1. Chrome Mags says:

    https://www.bloomberg.com/news/articles/2019-03-22/u-s-treasury-yield-curve-inverts-for-first-time-since-2007

    ‘U.S. Treasury Yield Curve Inverts for First Time Since 2007’

    Did you catch that year in the headline, 2007? Didn’t that predate the mortgage meltdown by a year or so? Check out the information from the article below. Well worth a quick look over.

    “A closely watched section of the Treasury yield curve on Friday turned negative for the first time since the crisis more than a decade ago, underscoring concern about a possible economic slump and the prospect that the Federal Reserve will have to cut interest rates. The gap between the 3-month and 10-year yields vanished on Friday as a surge of buying pushed long-end rates sharply lower. Inversion is widely considered a reliable harbinger of recession in the U.S. The 10-year slipped to as low as 2.439 percent.”

    “It looks like the global slowdown worries have been confirmed and the market is beginning to price in Fed easing, potential recession down the road,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. “It’s clearly a sign that the market is worried about growth and moving into Treasuries from riskier asset classes.”

    Fed easing? Are they hinting the Fed may resurrect Quantitative easing once again? Please say it isn’t so. Please say all this CB intervention to bolster markets and the economy with added liquidity has already done the trick to igniting the economy to run on its own, i.e. by way of its own momentum via net energy. Please don’t say that there isn’t enough surplus energy to avoid more CB action.

    • I see the stock market is -460 today.

      • AlfredCairns says:

        According to Martin Armstrong – who knows a lot more about capital flows than anyone else – as soon as the Europeans panic, they will move their money into USD. They will buy shares (private sector) not government bonds (public sector). All of that will result in a relatively higher USD and a much higher Dow Jones. Of course, that may change a few years later.

        Here is a prediction of his from 18 months ago. Since then, the dollar has gone up by another 5%. Totally against the wishes of the Federal Reserve and Trump

        “The Euro & the dollar”

        https://www.armstrongeconomics.com/markets-by-sector/foreign-exchange/euro/the-euro-the-dollar/ (2017)

        Anyone buying into the Dow Jones with Euros at that time would have made a return of 15+%

      • The market is meant to be ‘forward looking, Gail but in my view they are behind the curve. It has only just occured to them that the global economy is slowing down. It is so confused with HFT and algos that human interactions are limited. I follow the markets but don’t indulge – too risky in these days of unpredictable volatility – it’ll all crash in then end.

    • Sorry Chrome, I can’t give you any assurances. IMHO The Fed will continue with QE, they have no option, and the music keeps playing so we have to dance until it stops at some pint in the near future. The markets can stay irrational longer than you can stay solvent – so stay away now and buy gold bullion!

  2. Sven Røgeberg says:

    «One of China’s biggest state-owned investment companies has exited the coal industry three years earlier than originally planned, joining a growing list of sovereign wealth funds globally bowing to investor pressure over climate change.»
    https://www.afr.com/news/world/asia/china-state-investment-giant-drops-coal-20190318-p51597

  3. Xabier says:

    Cheerful news: Uri Geller is going to deploy his telepathic powers to ensure that Brexit doesn’t happen, and also bend the keys to No 10 the British PM’s residence, should they get into the hands of Corbyn, thus denying him access to the levers of power.

    This is a very hopeful and hitherto unexpected development in economic affairs, which may well render Gail’s inter-connected stick model obsolete.

    That Seneca Cliff may well soon point upwards again, who knows?

    • Tim Groves says:

      Never mind the Seneca Cliff. When Uri starts deploying his telepathic powers, better check your cutlery draw for bent forks.

      • Xabier says:

        I was really excited when as a boy of 8 the spoon I’d put in a drink came up bent: super-powers were mine!

        I should have realised that my aim in life should have been to become a Central Banker – unlimited power to change the course of history….

      • Zanbar Miller says:

        Spoons also

    • SomeoneInAsia says:

      Not cheerful enough.

      I want to read of occultists using black magic to lay a curse on the global elite so they get their dues. Let their homes (and yachts and collapse hideouts etc) become infested with demonic entities that eventually drive them insane. Let them run into mysterious ‘accidents’ at every turn in their daily lives. Let them contract inexplicable forms of illness no doctor knows how to cure. Let them see terrifying things that are not there whenever they look into a mirror. Let them…

      • Xabier says:

        No need to sully your own soul with thoughts of well-merited vengeance: they’ll get their punishment in the next life, and the next, and the……

        I do wonder about Soros though: will he, can he, ever die?

        He’s like the supermarket apple I tossed into the dung heap: it came up month after month unchanged, just going a little bit spongy…..

        • SomeoneInAsia says:

          It would still be more satisfying if one could see the miscreants get their comeuppance in this life, though. As for Soros, he probably accumulated enough brownie points in his previous lives to enable him to last a little longer. That is all.

          As for what you said elsewhere regarding certain people who lived in Mexico in the past, I don’t know how many of them chose to be born into that cultural milieu. (Same with the whiteys for that matter, I guess.)

          Nor do I know just what good the West really did for the rest, if we look at the state of affairs the legacy of the West is about to bring us all. Sure, the white man also did a few good things, but how do the good and the bad things balance out?

          • SomeoneInAsia says:

            Private pedo islands, huh?

            And this is still not the worst stuff?

            Only makes the elite even more deserving of what I recommended if you ask me. High time the black magicians of the world united to work a mega-curse on them.

          • Tim Groves says:

            I am waiting for the elites to upload their souls into AI androids as part of their quest for immortality. Then I intend to sneak up behind them one at a time and remove their rechargeable batteries.

          • Xabier says:

            Blackmail would explain very much that occurs. Berlusconi was quite a master at it, and as for the inner workings of the British Conservative party……

        • Duncan Idaho says:

          Soros?
          Please, have you swallowed that diversion?
          (sorry- I find it humorous)

  4. Mike Roberts says:

    Figure 5 seems far too optimistic for the cost of production. This Forbes article, for example, gives the Saudi figure as about the same (perhaps a bit higher) but gives US shale as between $30 and $50, in 2017. The PostCarbon Institute has often talked of shale costs being at the top of that range, or above. It seems inconceivable, to me, that shale costs are only a little higher than conventional oil costs.

    • There seem to be a lot of ways to count the cost of oil from shale developments. Those drilling the wells count the cost in as optimistic a way as possible, to make investors think that investing money will be an extremely good idea.

      One of the issues is that oil wells in shale will supposedly produce oil for a very long period, something like 40 years. (These wells really deplete quite rapidly, but no one can prove that it won’t be producing at least a little oil for quite a long period.) If a person builds a model with optimistic assumptions, it is possible to have the wells produce much more oil than they will produce.

      Another issue is “infill drilling.” When wells in shale formations were first drilled, they were quite widely spaced. They then decided to add more wells, in all directions from the same pad. Most models assumed that the new wells would not simply cannibalize the old output. It is becoming increasingly clear that the while the additional wells add some production, it does not increase total production anywhere near proportionately. So barrels to be produced in the future, from current investments, have been overestimated from this as well.

      Another implicit assumption has been that oil prices will be at least as high or higher, going forward, so that it will be economic to take out. A more realistic assumption is that overhead expenses are likely to start eating the owners alive, it prices stay at their current level or fall.

      Then there is the issue of what should be included when estimated the cost of extraction. Does this consider the least cost of the land? Interest and dividends that need to be paid to owners and lenders? Is enough profit being set aside, so that the company can keep reinvesting?

      How about taxes paid to the government? These can be half of the cost. Are these included?

      The Energy Returned on Energy Invested calculations are not any help either. There is a EROEI widely quoted study by Cutler Cleveland on the EROEI on Shale Oil, but this relates to a totally different kind of oil, produced by heating a large area for a long time. Its EROEI is very low. But this has nothing to do with what is produced today. The study that I am aware of that is more relevant is on Bakken Oil by Adam Brandt. It shows quite a high EROEI for Bakken oil. EROEI leaves out a lot of important costs, however. Also, other oil we are now extracting, such as deep sea oil, aren’t winners in terms of cost either.

      I think that extraction from the Permian Basin is too new to have any EROEI studies. But basically, unless heating is used, the EROEI of extraction techniques tend to be pretty good, especially if a person assumes that a lot of future oil can be extracted from a well, without needed to perform future energy expenditures. There is no time value of money in EROEI calculations, so the fact that a huge amount of money needs to be borrowed to support the operation is not an energy cost, for example.

  5. jupiviv says:

    @Gail, like Mike Roberts above I am skeptical of the Rystad graph. How can shale have a $25 breakeven? They’re probably excluding things like overhead and transportation?

    Also, I don’t see how forcing Venezuela to abandon its oil production causes more profitability in the future. Prices may go higher for a while but restarting production in a failed state will be enormously difficult. The only lesson here is that like any country, Venezuela is broke without sufficient profits and unrestricted access to the global energy-economy.

    The story about ‘socialist inefficiency’ isn’t believable because Venezuela isn’t that socialist even relative to the US.

    • Paulo says:

      Yes, Shale is much higher and they have yet to make a profit. Just sayin’

      • Rodster says:

        I believe Steve St Angelo of the SRSRoccoreport has that number around $100 p/b. There’s also cleanup fees and now Shale producing States are beginning to chargeback Shale producers for cleanup costs which they weren’t doing just so they could create jobs in their State.

      • Duncan Idaho says:

        With the current Shale model, profit doesn’t seem necessary.
        You just can’t stop the ponzi—-

    • See my comments to Mike Roberts, above, regarding how difficult it is to determine the real cost of oil.

      I might add that in some sense the only way that the whole economy can be kept going is by keeping the oil, coal, natural gas, hydroelectric, and nuclear operating. In fact, their production needs to be rising. Pretty much all of these are running into financial difficulties, in part because of competition from subsidized wind and solar, which are pretty close to worthless in the whole scheme of things.

      In some sense, the cost of production is higher than the market price for pretty much every energy source we have. We are just covering up the problems of un-affordability of energy prices at today’s prices by charging such low prices that it drives all of the types of production (other than wind and solar) out of business.

      Of course, the government cannot last without these fuels. Without the government, the subsidies for wind and solar cannot continue. Ultimately, the whole economy collapses, for lack of energy supplies. Or perhaps the debt bubble goes first.

      The mythology that everyone has been taught is “If the cost of energy production rises, the price of energy products will rise. These higher prices will allow renewables to be competitive in price.” This is simply nonsense, based on a very inadequate model of how supply and demand work.

      Higher energy costs represent, in some sense, inefficient production of energy supplies. There is no reason to believe that these higher costs can be passed on to consumers. A debt bubble can act to temporarily hide the problem, but it cannot be hidden indefinitely. Ultimately the debt bubble will cause the economy to collapse.

      Unless the cost of energy supplies (combined with efficiency gains) can keep falling, the rest of the economy cannot keep growing. Energy growth is needed to keep the debt bubble from collapsing, among other things.

  6. Duncan Idaho says:

    Mexicans Are Stealing Border Wall Materials, Using Them For Home Security

    https://www.huffpost.com/entry/border-wall-stolen-tijuana-home-security_n_5c9291bbe4b08c4fec33b5f4

    As a former resident of Mexico, my comrades were always resourceful.
    I wonder if Don The Con can figure out a cut?

    • Chrome Mags says:

      That’s hilarious!

    • Interesting! The stones of the Great Wall of China in many places were later taken away and used elsewhere.

      In Atlanta, It doesn’t seem like we have run into many problems with Mexican workers. Of course, they are not a majority here. They do a lot of construction, painting, yard work, and similar jobs.

  7. Volvo740 says:

    If Ponziworld is done posting that would be sad. He has some great insights. Daily read.

    • jupiviv says:

      I thought he’d stopped also but actually he has been consolidating all of his posts since last week or so in one big post.

      http://ponziworld.blogspot.com/2019/03/ponzi-world-is-ending.html

      “In order to keep my most recent posts near the top of the blog, this post will be an open-ended stream of consciousness. The most recent ramblings will be at the top. But first, I want to set the tone by borrowing from hedge fund manager Hugh Hendry, who characterized this era of Powerball gambling far better than anyone else. His words are every bit as appropriate now as they were in early 2015. To paraphrase:

      I am taking the blue pill now. There are times when an investor has no choice but to believe in things that don’t exist, and be long risk assets in the full knowledge that this is all going to end painfully. The good news is that this era has proven beyond all doubt that mankind has the ability to suspend rational judgment long and often. Today there is no half-assed stimulus program that our Disney markets will not consider to be successful. China is set to record its weakest growth in GDP in 25 years, yet it amply demonstrates the power of imagined realities. Therefore that is where we have deployed the majority of YOUR capital in 2019. Just thought you would like to know. Cheers, your money manager.

      What he calls “Imagined reality”, I call “Consumer Choice”

  8. In France the situation gets slowly more interesting, yesterday one of the opposition leaders said at his press conference the following major three points, basically calling upon the military to not obey orders issued by the french president and his cabinet.. (because of looming EU Parliament elections the msm/TVs have to held more political debates which are often redirected to the domestic situation and that keeps the boiling pressure up)

    – A call to the military not to respect the orders which would be contrary to their engagement and thus not to shoot the demonstrators.

    – An appeal to citizens to mobilize widely, strongly and without violence for this act 19 Yellow Vests.

    – A call to the government to reconsider its decision to use Operation Sentinel for law enforcement tasks.

    • Rodster says:

      Zerohedge just posted an article where French authorities have been given the legal right to use “deadly force” against the Yellow Vests if they feel threatened or if they feel the public is at harm. Should be interesting to see how it develops.

      • Xabier says:

        All too late, perhaps: the army should have been deployed at key points long ago, these things have to be nipped in the bud.

        Now, with tensions so high after such a prolonged period of unrest, so much resentment
        (rightly) for injuries to protesters, the probability of fatalities is so much higher than if timely action had been take and the repression had been firm.

        Quite fascinating to see this developing, almost as exciting as 1968, which seems to excite so much nostalgia among the elderly.

        Our Duncan must be thrilled?

      • yt75 says:

        There is really nothing there, the “sentinel forces” (military) are the ones already surveying critical places for terrorism under the “vigi pirate” procedure. The only thing decided was to use more of them for that purpose, in order to free up policemen for surveying/maintaining order for the yellow vest protests. Never as it suggested to use the army in front of the yellow vests.

  9. JG says:

    Gail, can you tell us more of what value Venezuela’s oil is? My understanding is that it’s quite heavy. Does it mix well with the light oil from tracking? What can it be used for on its own if anything?

    • Every oil is also a mix of molecules of various chain lengths. The very short lengths are more like natural gas. The heaviest are like asphalt or lubricating oils. The middle are the ones we tend to use for transportation fuels.

      Gasoline is a mixture of fairly short-chain molecules. Diesel has a mix of somewhat longer chain molecules.

      At one point (and still today, to some extent) natural gas was simply a waste product. It doesn’t sell for very much, compared to gasoline or diesel. The cost of the pipelines are often were very high, relative to the selling price of natural gas. Natural gas can be transported by ship in a super-chilled state, but the cost of this transportation is very high as well. There seems to be a lot of natural gas in the world, but getting it out and transporting it cheaply enough to its destination gets to be an issue.

      The “conventional” oil that oil companies extracted first were a mixture of molecule lengths, but emphasized the middle of the range of lengths, so provided a lot of gasoline and diesel. Oil from shale formation is a mixture, but the mixture tends to be on the light end of the range, with relatively less diesel. Heavy oil is a mixture that includes more of the relatively long chains. Since we started with the middle mixtures, these oils are the ones that tend to be depleting first. So now we must “make do” with some crude oils that have relatively an over-abundance of shorter chains, together with some crude oils that are on average too heavy to be easily transported by pipeline, without using a diluent.

      In theory, we should be able to make do with the combination of oil from shale and heavy crude oil if we can get the cost of producing the desired end products down to an affordable level. I explained earlier that we left the affordable selling price for oil, long ago.

      The real issue isn’t whether end products based on a combination of very light crude oils and very heavy crude oils will work (they certainly can produce gasoline and diesel), the big issue is whether the gasoline, diesel, and other end products produced become too expensive for consumers to afford.

      The fuel that is in shortest supply today is diesel. Europe made the bad choice of running practically all of its transportation vehicles on diesel. It encouraged the use of diesel-powered cars. Its trucks also use diesel. Diesel has fairly long chains, so it is most abundantly provided in heavy oils. The US uses a lot more gasoline. Oil from shale tends to produce quite a bit of the length of chains used in making gasoline.

      Refineries divide up oils into their component parts. They separate out the very short chains, the medium chains, and the longer chains. They also remove impurities. Some refineries are set up to “crack” long hydrocarbon chains into shorter hydrocarbon chains. Cracking long hydrocarbons into short hydrocarbon chains uses natural gas in the process. The US has had a good supply of fairly cheap natural gas, so cracking hydrocarbons into short hydrocarbons is a service that quite a few US refineries sell as a way of making money. To some extent, the US imports heavy crude oil, sells the service of refining this oil, including cracking long molecules into short, and exports the output as diesel and other products. In some sense, heavy oils are the most flexible oils. But the refinery takes a fairly big chunk of the price for its services, so heavy oils need to be extracted and shipped very cheaply, in order for the system to be profitable for all.

      I have written many times about the argument regarding whether oil prices can rise endlessly. If they can rise endlessly, then there is no problem with producing oil and gasoline using some oil from shale and some heavy oil. But if there is an affordability cap on oil prices, then we find that someone comes up “short” when oil companies try to work around the problem of depleting conventional oil using a combination of very light and very heavy oil.

      Regarding your specific questions: The big issue is how high a price crude oil can sell for. Venezuelan oil would be worth a lot, if oil prices could rise to $300 per barrel. At $50 or $60 per barrel, Venezuelan oil isn’t worth much because refinery and transportation costs become too high.

      Does heavy oil mix well with oil from fracking? There may be some cases that refineries want to purchase oil from shale to balance out a mix that is on the heavier side, but I would expect that heavy oil would usually need to go to refineries set up to provide cracking services. These refineries may choose to mix some light oil from shale in their mix as well. I don’t think that oil from shale would be used as a diluent; Canadian bitumen is diluted with something like naphtha, for transport purposes.

      “What can it be used for on its own if anything?” I don’t think that any kind of crude oil is very useful without refining. Natural gas, on the other hand, can be burned directly, if it can be used nearby. Offshore oil drilling rigs often take some of the “associated gas,” and burn it to produce electricity. So, if transportation is not a problem, natural gas can be very useful on its own. But if crude oil is refined, it provides a whole array of products. Each refinery is set up differently; it uses a different range of input crude oils. The mix of output will differ, depending on the types of crude oil inputs and the extent that cracking services are provided.

      • doomphd says:

        if Venezuela or neighboring countries have natural gas, then on-site refining would make their heavy oil transportable and profitable. perhaps that is what the US wants to do there, in the long run.

        • I am still not sure it would be cheap enough, even with the availability of on-sight natural gas for cracking. The cracking facilities are expensive to build. The real affordability threshold for finished goods is very low–probably equivalent to about $20 per barrel of crude oil, and no one can get close to that. This is why crude extraction is becoming profitable, and the debt bubble looks likely to pop!

      • Davidin100millionbilliontrillionzillionyears says:

        “Natural gas, on the other hand, can be burned directly. Offshore oil drilling rigs often take some of the “associated gas,” and burn it to produce electricity. So, if transportation is not a problem, natural gas can be very useful on its own.”

        this is where I think natural gas might give the world a higher overall EROEI if it is used more…

        and it’s a cheap FF… $17 of natural gas has the energy equivalent of a $59 barrel of oil (today’s USA prices)…

        NG might extend BAU and give us many more years of IC…

        or not… time will tell…

        • jupiviv says:

          NG lacks gasoline’s energy density by far. I read somewhere that a lt of NG will propel passenger vehicles 10 m vs 10000 m for gasoline. The solution is chill-compression in thick metal tanks at high energy and money cost.

          • Davidin100millionbilliontrillionzillionyears says:

            okay, I don’t think it would be necessary to use NG in transportation to get a higher usage of NG in the world’s energy system…

            but for production of electricity, it seems to be a cheap FF, and also perhaps abundant enough to keep up the growth in electricity for quite a few years ahead…

            countering that is the ongoing slow decline in net (surplus) energy from oil…

            I think the net (surplus) energy from NG may be enough to keep the wobbling world economy from falling over for perhaps another decade…

            maybe not BAU FULL THROTTLE, but maybe quasi-BAU…

            • jupiviv says:

              NG storage near power plants isn’t feasible. Pipelines can’t supply everywhere and require fairly intensive maintenance.

              Sustainable quasi-BAU is a pipe-dream. It’s either full throttle or rapid metamorphic collapse over several years.

        • EROEI is calculated at the wellhead. Natural gas EROEI is very high at the well-head. The costs that eat you alive are the transportation costs, from the well-head to the end user.

          People used to talk about “stranded natural gas.” This is natural gas that is easy to get out, but the cost of transporting it to where it is needed makes it non-economic. At one point, there was a lot of stranded natural gas in the world. After the run-up in natural gas prices in 2007-2008, it seemed likely that quite a bit of this stranded natural gas might actually be economic. But high-priced natural gas only works if buyers (in the aggregate) can buy goods made with natural gas. Prices have not stayed high.

      • Gail, This is a very valuable summary for me and I would like to reproduce it in my 3rd Edition book (with acknowledgement of course). Please may I have your permission to do so?

      • Jan Steinman says:

        That’s an excellent summary of the situation as I understand it!

        I do have one minor nit, or perhaps a question you can answer:

        Europe made the bad choice of running practically all of its transportation vehicles on diesel. It encouraged the use of diesel-powered cars. Its trucks also use diesel. Diesel has fairly long chains, so it is most abundantly provided in heavy oils. The US uses a lot more gasoline. Oil from shale tends to produce quite a bit of the length of chains used in making gasoline.

        You go on to discuss “cracking,” the process by which heavy, long-chain hydrocarbons can be converted to lighter, short-chain hydrocarbons. This does use some energy in the process, but as you point out, it usually comes from cheap and abundant natgas. Heavy oils also contain more energy per unit (volume or weight) than light oils, so cracking is energetically almost free.

        But my understanding is that the opposite process — creating long-chain hydrocarbons from short-chain ones — is a lot more complex, is energetically fairly expensive, and has long been economically infeasible.

        If this is true, then heavy oils are, by their nature, potentially more valuable than light oils, because you can make light oils out of heavy ones, but not vice-versa.

        If this is true, then the “fracking revolution” is even less useful than Wall Street has indicated. Fracked oil cannot power America’s long-distance truck transportation fleet, nor its farm machinery fleet. Given abundant kerogen (light oil from fracking), America would still need to import heavy oil for those particular uses.

        This would tend to make Europe look prescient in comparison, no? Unless the oil industry moguls have planned to usurp Canada’s tar sands all along.

        I don’t think that oil from shale would be used as a diluent; Canadian bitumen is diluted with something like naphtha, for transport purposes.

        My understanding is that diluent is pretty much a product of what are called “NGLs,” or “natural gas liquids,” and thus, tends to be a byproduct of fracked natgas.

        So I guess this too-long question is about the comparative merit of light versus heavy oils. I used to think that the heavy oils were the trash that needed taking out, but I’m coming to see that the lighter oils are ultimately less useful, even though oil workers are known to put fracked light oil right in their gasoline cars. The gasoline-powered farm tractor or highway truck simply doesn’t exist.

        • Duncan Idaho says:

          Diesel is more energy dense—
          Very simple, only the lower ends of society would use gasoline for truck transport.

          • If gasoline is what you have, you would use gasoline. Gasoline is a lot more energy dense than natural gas.

            When crude oil comes out of the ground, it provides a mix of end products. The trick is to find uses for all of those products in an efficient way. Perhaps Europe thought that when they were importing, it wouldn’t matter what they imported. It does, if their overuse of diesel drives the price up. Diesel tends to be more polluting as well.

        • You are right: It is possible to crack long molecules to make them short, but trying to do the reverse doesn’t work at a reasonable cost. So in that sense, heavy oil is preferable. In practice, I think that there are some other considerations as well.

          The advantage of oil from shale is that it produces a fair amount of molecules that can be used in creating gasoline. Gasoline prices are what voters tend to worry about. If a person is concerned about what US voters think, oil from shale is helpful. Also, with very light oil, the simplest refinery will do. Furthermore, natural gas can be burned off as a waste product, or it can be burned locally, to provide electricity. (There may be a little processing to do, especially if the natural gas includes sulfur.)

          On the other hand, we tend to have a superabundance of very light oil products, at current prices. It is the longer molecules that are more in demand, relative to supply. So from that point of view, heavy oil is more worthwhile.

          I think that the real problem is that neither oil from shale nor heavy oil really produces end products end products cheaply enough to be affordable by consumers. We really need crude oil production inn the $20 per barrel range. Nearly all oil left the sub-$20 per barrel range years ago back in the 1970s.

      • Sheila chambers says:

        Thank you Gail for your clear, understandable explanation of the different grades of oil & how they could be used & how much more expensive they have become to extract.
        I will need to save that as a .txt for future reference.

        So it would seem the reason the US want’s Venenzualia’s oil is to mix it’s light oil with it’s heavy oil to produce diesel & products that need a heavier oil I also expect diesel is needed for it’s military machines like tanks, ships etc.
        Why can’t the US be satisfied with just buying Venenzualia’s oil like everyone else?
        Is it about world domination as I suspect?

        • Venezuela cannot get a high enough price for its oil to make its extraction worthwhile. If oil were $300 per barrel, it is likely that Venezuela would be able to support it entire economy on the price of oil it exports. At current prices, Venezuela’s economy tends to collapse. A collapsing economy cannot keep oil production flowing. So Venezuela continuing to produce the oil is not a real option.

          It is not at all clear that the US could do any better than Venezuela, in producing the oil cheaply enough to work in the economic system. The big problem is oil price too low relative to the overall cost of production, including producing electricity needed by the system and repaying the debt owed to China and Russia. In theory, the US could stop repaying China and Russia, so its costs would be a little lower.

          The suggestion I gave was that the US was trying to get Venezuela’s production off line. In that way, it might be able to get the world price of oil up (it hopes). I don’t think strategy will really work very well. It it does, it will make more oil from around the world profitable to extract.

  10. Sergey says:

    Speaking of oil-dependent country – Russia. Standards of living are falling and it’s happening since 2008 crisis. Since the last oil-crash 2014 things are accelerating, I monitor situation very closely. The complexity of economy is falling and role of government in economy is rising, government (state owned companies) represents about 70-80% of economy now, government itself by far the biggest tax payer and biggest employer. Constant raising tax & utility costs are killing everything except government itself. Poverty grows, but it’s hidden in reports of state owned statistics providers as they are represent government. I can only guess if my country can sustain even current standards of living with current oil prices. Probably not.

    • Yoshua says:

      The next step down in oil prices is coming? Will the Russian government survive $20 oil?

      Will the U.S bomb Venezuela and Iran if the oil price collapses to $20?

      https://pbs.twimg.com/media/D2X1ex_WsAALl-d?format=jpg&name=large

      • Sergey says:

        I think comfort price is above $80/bbl. As largest-state-owned CEO said (this was a private talk which was publicly released two years ago) the break-even price average $30.

        • Yes, and comparatively speaking that’s large part behind these long term natgas lockdown deals (price+volume) and pipelines vs just crude exports.. setting aside the obvious question of bigger amounts of natgas vs oil deposits remaining.

    • Can you please explain how “the complexity of economy is falling” when dependency on formerly imported industrial goods is by gov mandate being replaced by investment in domestic production be it in various joint ventures with foreign partners etc. The spike in domestic production of food etc. is other well know subject no further comment necessary.

      Btw are you living in Russia or London/NY/Seychelles ??
      (This is not a trick question)

      • Sergey says:

        I explain how exactly “the complexity of economy is falling”. Take any industry. Banks for example. Many commercial banks fall into bankruptcy. Lot of them. It’s consolidation of banks system in favor of government owned banks like Sberbank & VTB. Monopoly. Financial system shrank. Huge insurance companies went into bankruptcy. Autodealers lot of them went into bankruptcy. And so on and on. Domestic food production. The quality below all standards. I used to buy finland’s Valio milk, but now we have domestic milk production which is very low quality. Now I am using only farmers milk/eggs/meat because the supermaket quality is below any standards. By complexity falling I mean reduction in number of service/product providers in favor of monopoly. The result is expensive services/products being eliminated from market almost completely (people have no money for them) and the number of positions in cheap segment is also reducing. That’s what is exactly happening right now. In Moscow we had food-supermakets for rich (Alie-Parysa) and they hit a bankcupcy. And yes, I am from Moscow.

        • This point has been discussed here previously several times both in general sense as well in respect to your country.

          Russia is simply in process trying to rearrange itself into more vertically integrated (‘antsy’ / Asian) style of economy and society. Now, some segments of the population, who previously flirted with the ‘western’ individualism don’t like it, that’s understandable. It’s a loss for them. Perhaps you are finding yourself a bit on the loosing side of the equation.. but what does it actually mean for the bigger part of the society? Is momentarily ‘lower’ quality of some domestic grown food (and upshot in resiliency on imports) a bad thing? Is shutting down part of the frivolous consumption (upper class condos, foreign import carz, and other crap..) via crack down on non gov approved banking a bad thing vs funds now going more towards new / repaired /ROI infrastructure (ports, bridges, power-plants, domestic tooling and machinery, ..) ?

          I recall there was a time, say 10+ yrs ago (already after some of the purges of the oligarchs) when it was still kind of understood the Russian upper classes with a hand in the gov pot on one side can also have two existing loyalties in the sense of having bolt holes abroad and appetite for imported luxury lifestyles. Well, though luck, times changed, nowadays many people close to levers of power (gov+biz/economy) must practically demonstrate they are ‘Russian firsters’ i.e. showing real goals achievement in their respective professional field, and give self indulgence much lesser priority.

          So isn’t this sort of forced quasi authoritarian rule – dictatorship and clipping the ‘wings of freedom’ ? Well, probably yes, the distribution of rewards simply shifted more towards the state and further distributed to selected priorities. Is that communism v2.0 or just rehashed Asian style mixed capitalist model? Is this model sustainable and robust enough lo deliver in near – mid – long term as well? I don’t know but it is certainly working better than the chaos and broadly distributed impoverishment before.

        • Thanks for all of the updates.

    • I wonder if a repeat of the 1991 collapse is coming. Or perhaps a different version of collapse.

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