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. Sheila chambers says:

    Gail, if Trump want’s to shut down Venenzualias oil production, why would he need Guido as president so he could have American oil companies take over their oil fields? I had thought it was so we could use Venenzualia’s heavy oil to refine with our light oil to produce diesel, am I wrong?

    Is it instead to keep their oil offline until the oil supply get’s too tight, prices too high & then switch on production to bring prices back down but still profitable?
    So far it looks as though Trump has already strangled Venenzualia’s oil output & the Saudies are going to cut their production to boost oil prices higher.
    Too bad we can’t convince our “representatives” that “renewables” cannot keep us above water & we are wasting money, resources & OIL producing them.

    • Duncan Idaho says:

      Ditch MSM and look at reality.
      Maduro is still ruler, with popular support.
      “Random Guiado, the President who wasn’t There. The longer this goes on, the stronger the Bay of Pigs smell grows.”

      The oil is not getting less valuable—
      And Russia, China and India are buying it.

      This is not a usual pricing policy, set up by capitalist.

      This is going to be a long battle.

      • Davidin100millionbilliontrillionzillionyears says:

        as you recently pointed out, VZ has some kind of a happiness rating as the #108 country…

        this wasn’t updated into 2019, so it is likely lower, perhaps way lower…

        so Maduro has “led” his citizens to low happiness… good job!

        I doubt any leader of a #108 range country has “popular support”…

        Maduro = Trump

        but I agree, it’s going to be a long battle… in the long run, there might be some hope that one of these big countries will be able to help VZ to increase their oil production and thus bring a bit of relief to the deteriorating conditions of the VZ people…

        my sympathies to the people of VZ…

      • Sheila chambers says:

        I ditched MSM decades ago, I get my news online from many sources both independent like Truthdig, The Intercept & commercial like the Guardian & Al Jazeera but with so much propaganda around, it’s hard to find “reality”.
        How can you know what is “real” these days?
        I know Maduro was democratically ELECTED & validated by UN observers unlike our fake, rigged “elections” where we refuse to allow UN observers & Guiado is a US puppet. I also expect oil will rise in price as we MUST HAVE OIL to survive now, how high it will go, I don’t know but not $200. a barrel, the economy can’t support that but the military probably could.
        But can the military, fed by our tax dollars, buy enough oil to keep oil extractors in business?
        Or will they use force to keep it flowing until it can’t?
        Our rulers will do what ever it takes to dominate the world, that’s why we have the worlds largest & nastiest military.
        It’s pretty clear to me that to our rulers, we the working class are expendable, mere pawns for them to use & disguard & our “votes” are worthless unless their tied to MONEY, lots of money.

        I’m boycotting the 2020 FAKE “elections” their a waste of time as nothing will change.
        It will indeed be a long long battle with no winners.

        • Tim Groves says:

          I don’t know much about Maduro and am woefully ignorant about Venezuela in general, but Wikipedia paints him in pretty grim colors. Of course, WIkipedia is heavily politicized to the point where its portraits are mere caricatures.

          Even so, regarding his democratic ELECTION:

          An opposition-led National Assembly was elected in 2015 and a movement toward recalling Maduro began in 2016; Maduro maintained power through the Supreme Tribunal, the National Electoral Council and the military.[6][7][10] The Supreme Tribunal removed power from the elected National Assembly, resulting in a constitutional crisis and protests in 2017. Maduro called for a rewrite of the constitution, and the Constituent Assembly of Venezuela was elected in 2017, under what many—including Venezuela’s chief prosecutor Luisa Ortega[11] and Smartmatic, the company that ran the voting machines[12]—considered irregular voting conditions;[13] the majority of its members were pro-Maduro.[14][15] On 20 May 2018, presidential elections were called prematurely;[c] opposition leaders had been jailed, exiled or forbidden to run, there was no international observation, and tactics to suggest voters could lose their jobs or social welfare if they did not vote for Maduro were used.[19][20] The majority of nations in the Western world did not recognize the Constituent Assembly election or the validity of Maduro’s 2018 reelection;[21][22][23] the Canadian,[24][25] Panamanian,[26] and the United States governments sanctioned Maduro.[27]

          https://en.wikipedia.org/wiki/Nicol%C3%A1s_Maduro

  2. Davidin100millionbilliontrillionzillionyears says:

    a fun with numbers update:

    Japan 10 year bond now lower at MINUS 0.084%

    German 10 year Bund now lower at MINUS 0.032%

    recession is on the way…

    keep calm and no Brexit?

    • David – An update on Brexit will be posted hopefully before 12th April (the new deadline):
      https://www.gofundme.com/fnahvp-free-book: If you are interested in Brexit then:

      A full article will be added to the 3rd edition of my book. A free pdf in the coming weeks will be available on request to: peter@underco.co.uk
      And also a word doc for current details of Brexit – where we are now – is available today but it is a daily moving target at present and goes out-of-date quickly.

      • Apparently, as of today, there are two new dead lines 12/22 April/May, but this could well change on Wednesday or anytime, the plot thickens, what a dizzy world, lolz.
        Lets have Mr. Juncker reach for yet another bottle..

    • Harry McGibbs says:

      “The stockpile of global bonds with below-zero yields just hit $10 trillion — intensifying the conundrum for investors hungry for returns while fretting the brewing economic slowdown.
      A Bloomberg index tracking negative-yielding debt has reached the highest level since September 2017 as 10-year bunds trade in negative territory and the U.S. yield curve flashes recession warnings.”

      https://www.bloomberg.com/news/articles/2019-03-25/the-10-trillion-pool-of-negative-debt-is-a-late-cycle-reckoning

    • Harry McGibbs says:

      “The bond market doubled down on scary warnings Monday, signaling both a possible recession is looming and that the Fed could have to cut interest rates this year to stop it.

      ““People are starting to get fearful,” said Andrew Brenner of National Alliance.”

      https://www.cnbc.com/2019/03/25/bond-market-says-a-recession-is-coming-and-the-fed-will-cut-rates.html

    • Yes the original Brexit date has been breached and blocked by both by the gov as well as direct no vote in the Parliament, the likely-hood of UK crashing on default by the original deadline is virtually zero.

      The latest development on Brexit seems to be that the issue has been just on yesterday night transferred from the gov hands towards the parliament and on Wednesday they will vote there in more detailed fashion in which direction to move forward and that decision will have to be delivered by the gov. And since this is majority ‘remainer’ assembly they will most likely end up with some sort of semi-membership of the EU, there are several existing models of it already (e.g. Norway). So, now the battle will be centered on how bad deal – treaty would come out of that process eventually, essentially what parts of the EU law and institutional framework to retain but mind you it will be definitively more biased towards sort of full membership status than the other way around..

      Since this turn of events is within the spectrum of favorable options of the continental Reich v4.0, it’s doubtful the EU is going to suddenly hasten the kickout of the UK from the club, despite some expected further prolongation and comedy is surely to be continued for a while..

      • I use this website for daily and correct assessments on the Brexit saga, Dr North is an expert on this and has been for many years. His Flexcit paper (450pages) describes a very workable Norway type option for a efta/EEA solution, BUT nobody is listening – very frustrating!:
        http://eureferendum.com/

        NB Be careful when commenting, the good Dr is very spikey and doesn’t welcome off-topic and unnecessary comments (see his instructions)

    • It is really difficult to believe that negative interest rates can be sustainable. They seem to imply that the economy is not growing fast enough to support a higher interest rate.

  3. SUPERTRAMP says:

    Keep calm!? Minus is less than…that means negative..that means Seneca Cliff, Dave!
    Got it? That means the “End of the World Party”, Dave….Game over, Bro.

  4. Harry McGibbs says:

    “Global trade has taken a sharp turn down, reinforcing the view that the world economy is in its worst state since since the financial crisis a decade ago.

    “Figures published Monday show trade fell 1.8 percent in the three months through January compared with the previous period. That’s the biggest drop since May 2009. On a year-on-year basis, trade posted its first decline in nine years in the three-month period.”

    https://www.bloomberg.com/news/articles/2019-03-25/global-trade-takes-sharp-turn-down-with-biggest-drop-since-2009

    • Harry McGibbs says:

      “Factory activity in the eurozone contracted at the fastest pace in nearly six years… The bloc’s aggregate PMI fell to 47.6 in March from 49.3, well below the 50 threshold that is the baseline for whether the sector is expanding or contracting… Japan’s manufacturing PMI also has fallen into contraction territory, following China’s weakening readings that started falling below 50 late last year… The market will likely be on pins and needles for the rest of this week awaiting readings on the U.S. economy.”

      https://www.axios.com/global-manufacturing-data-europe-japan-united-states-68c40ee5-fbdf-4517-aecd-4f7a0e5e8f9b.html

    • The downturn in trade in the last three months is indeed disturbing. Data for the US for January was missing due to the shutdown, so its change was estimated to be 0. That probably won’t have too material an impact on the overall result. It would have be to be greatly increasing, to truly be helpful to the overall result.

  5. Harry McGibbs says:

    “A second major power cut in just a few hours has plunged the Venezuelan capital Caracas into darkness again, with other regions also affected. It came after a four-hour blackout on Monday which the government sought to blame on opposition sabotage. A nationwide power cut earlier this month prompted looting and desperation in many parts of the country.”

    https://www.bbc.co.uk/news/world-latin-america-47703864

  6. Harry McGibbs says:

    “The United States’ central bank may have to dust off some of the tools that helped steer the economy through the global financial crisis a decade ago should another recession hit, Boston Federal Reserve Bank president Eric Rosengren said on Tuesday. With interest rates already low leaving limited room for cuts, the US Federal Reserve would likely have to turn to quantitative easing and other balance sheet tools to stimulate its economy, in the case of a downturn.”

    https://www.scmp.com/economy/global-economy/article/3003312/central-banks-must-turn-global-financial-crisis-tool-box

    • Harry McGibbs says:

      “The emergency tool kit that helped to pull the global economy out of the Great Financial Crisis might not work a second time, the world’s lender of last resort has warned. David Lipton, deputy director of the Washington-based International Monetary Fund, delivered a stark warning about the depleted power of central banks and governments to combat another sharp economic shock.”

      https://www.telegraph.co.uk/business/2019/03/25/world-has-run-firepower-fight-next-recession-imf-warns/

      • Harry McGibbs says:

        “The world is wealthier now than it’s ever been – but only on paper. Much of this prosperity may prove illusory as a global shift toward less liquid investments undermines the basis of valuation.

        “Private equity, infrastructure and private credit have become a bigger share of investment portfolios, making mark-to-market values increasingly uncertain. The standard method of valuing assets assumes prices are available and that there is adequate trading liquidity to be able to sell at those levels. This may hold for traditional investments such as stocks and bonds. But assets such as private equity are rarely traded or not tradeable at all, necessitating the use of models or proxies instead.”

        https://www.thenational.ae/business/economy/the-illusion-of-global-wealth-is-just-that-1.841165

        • Harry, I just wanted to say how grateful I am for all your reports – it is saving me an immense amount of research time! I hope you are being rewarded for your continuing efforts! This one is a humdinger.

        • The value of an asset is the amount that you can actually sell it for, often on short notice.

          Now that the younger generation is poorer than the older generation, we shouldn’t be surprised if there is a chronic shortage of buyers of expensive real estate, jewelry, and other goods that older people want to sell. The WSJ recently published an article called, “A Growing Problem in Real Estate: Too Many Too Big Houses.”

          Baby boomers and retirees built large, elaborate dream homes across the Sunbelt—only to find that few people want to buy them.

          Tastes—and access to credit—have shifted dramatically since the early 2000s. These days, buyers of all ages eschew the large, ornate houses built in those years in favor of smaller, more-modern looking alternatives, and prefer walkable areas to living miles from retail.

        • Chrome Mags says:

          Harry, good line of articles posted in this thread. What happened after 2008/2009 debacle 1st major step down was a shift from organic growth from net energy to forced growth by way of CB intervention. Almost like a person having trouble breathing, fitted with a ventilator/oxygen assist. We all knew eternal growth was a myth and coupled with declining net energy, financial additives have been warranted, but its an end game strategy. When the next recession hits the usual QE and lower interest rate tactics will begin anew, but the process of people having less to pay for more and going further into debt to try and make it work will reach a point of cascading loan defaults much like they did in 08/09, but this next time it won’t mostly be mortgages, but all types of loans across the board on a huge scale. That will mark the 2nd major step down. I figure we’ll get some time after the 2nd, before the 3rd and final, but not anywhere near as much as from the 1st to the 2nd. Maybe a year or two at most.

          So strange to drive around while everything is still BAU, realizing it won’t be indefinitely.

  7. IMHO you are so right about the Russiam experience, Yoshua. I was in Belarus in 1994 and gained a good insight into the Russian psyche. They are morally strong, sensible, resilient and resouceful people. I would much rather spend the coming crisis with them in their motherland than here in UK, where the collapse will be catastrophic with so many people on a tiny Island.

    My experience in UK during the 2000 fuel crisis convinced me that the Brits will be eating each other in short order, so I’m off at the first signs.

    • Yoshua says:

      Maybe I should prepare for an immigration into Russia as well?

      • If you are still somewhat ~youngish and hands on guy do it pronto.
        There have been few cases of even way older people relocating there but this was more of a multi generational coherent family situation (very few old single individuals), e.g. some SAfrican white farmers or Germans moved there recently on the .ru gov’s supported relocation scheme.

      • Not a bad idea IMO. We are planning to go to South Africa (my wife is South African) first at least, although living there is expensive and risky. In fact they are suffering extreme electricity cuts at present and they are short of diesel too. Still, they do have resources if they can get their act together and take advantage, and there is plenty of sun so solar power is OK.

        Lots to think about. BTW Russia is four times larger in land area than USA I discovered the other day.

        • go and live near Mr McGibbs on his island

          not much sun but nobody knows where Islay is and at least the whisky will make you oblivious to everything

          • Xabier says:

            As he has revealed, the ‘travellers’ know how to get there and steal gas cannisters!

            • Harry McGibbs says:

              South Africa would not be high on my list, as it is a multi-racial tinderbox and likely to be beset by worsening droughts.

              The Mediterranean is where I would be in an ideal world. But then if we were in an ideal world I wouldn’t have had to move in the first place. And the Med is far too densely populated and in any event likely to desertify as the Sahara expands northwards (the Costa Del Sol and the Algarve have just had their driest winters on record, I noted).

              Even Islay is far from foolproof. The AMOC is slowing down most unnervingly and we are a long way north. It could get very cold indeed here. Ageing Hunterston Nuclear Power Station, which is in a parlous state with hundreds of hairline fractures in the reactor core even before the Fast Eddy era gets started, is only 60 miles to the east.

              But what can one do but play the percentages and hope for the best? And of course, as Norman points out, there is enough whisky here to keep every last resident sozzled for decades.

          • :-))) Very good idea – I’m still laughing!

        • Yorchichan says:

          BTW Russia is four times larger in land area than USA I discovered the other day.

          Russia has almost twice, but certainly not four times, the land area of the USA.

        • I expect that the problem in South Africa is that they if the country really reflected the cost of coal extraction, the price of electricity and goods made from electricity would be outrageous, relative to salaries. Solar is not at all helpful in fixing this problem, either, no matter what kind of silliness you read in the press.

          Commodities other than coal also tend to sell for prices that are too low, relative to the cost of extraction, forcing wages to be low, and tax revenue for the government of South Africa to be low. South Africa should be another country on the “watch list” for collapse.

          • I don’t disgree Gail. It’s just better for us to be in a warmer climate and maybe scratch a basic living in the Karoo, herding and local crops which like dry weather. Also, being in the southern hemisphere, we should miss much of the polution and wars which tend to be in the northern countries if history is any guide. The air quality in Cape Town is fabulous, straight from the Antarctic. And contrary to popular opinion the people of all colours are really nice and friendly. Plus plenty of land area. Water shortage is a problem but many bore wells are used with plenty aquafers well stocked.

            So it’s pluses and minuses, but we know the area well and can’t wait to get back there when I can work our finances right. The British pension is frozen for expats in ex-commonwealth countries. We have been fighting it for years to no avail. And the ridiculous situation of pensioner expats in Spain et al getting the £200 Cold Weather Payment each year is a joke!

    • Xabier says:

      Much of the sense of strain in the air here in England comes from the over-population inflicted on us: this results in steady pressure and discomfort, and the over-whelming of public services.

      The innumerable subliminal tensions resulting from class, racial and religious conflicts are exacerbated by being all on top of one another, not to over-look the effective collapse of public authority – most notably in policing (less than a 10% chance of being convicted for a crime -great business to be in!) and in schools.

      Not a pretty picture. An Italian barber, who has been here 50 years said to me ‘I look around, and I think is this the England I was so happy to come to, when everyone was so smart, clean and polite? ‘ Coming from poverty in Italy, England was his paradise and he did well: the perfect – very welcome – economic immigrant.

      A relative visiting from Spain for the first time in 45 years simply said ‘What happened here?!!’ What indeed!

      • Peter Hitchens explains it quite logically, large (volume) and hastily done immigration is just by default impossible to deliver smooth integration (small dosage valuable), and it’s an obvious drag on prosperity.

        • Xabier says:

          The perfect model for immigration was established in the 17th/18th century, with the integration of the Huguenots fleeing Catholic persecution.

          Same culture, more or less; same religion as the host state; many highly skilled, often in industries undeveloped in England; no welfare to depend on, although some charitable help was given.

          While they were allowed to listen to sermons by their own preachers in French, all services had to be conducted in English as per the Book of Common Prayer.

          By the second generation they had fully adopted English, and many had anglicized their names so as to further their integration and avoid any prejudice. Result? One of the most successful, entrepreneurial, and law-abiding communities in the country, also with a strong record of honourable service in the military – many of the impoverished enlisted, and others were noble, trained, soldiers and sailors.

          The only unpleasant incident I have found was the stoning (!) of Huguenots in Yorkshire in the 16th or 17th century, but they then moved to the East of the country and settled down happily enough.

          I suppose the nearest equivalent today would be the Hindu Indians, who speak excellent English, dress in Western style for everyday wear, and contribute to the professions in a way which is an asset to everyone here, much as my Iranian friends who have been only too grateful to arrive in a civilised country far away from the mullahs, and who work hard and successfully.

          An even earlier assimilated community was the Flemings, who brought the skill of clog-making to England, and the dish of ‘Lancashire’ hot-pot.

          But of course, mass migration has nothing to do with these important lessons of the past, nor with applying the best and most sensible models.

          • jupiviv says:

            In the collapsosphere it should go without saying that the good or harm attributed to any type of migration can only be confirmed within its larger energy-economic context.

            There never has or will be a “perfect model” of immigration. Such a thing could never account for either the desire/need to migrate or the long-term effects of any type or size of migrant population and labour.

            I see no valid reason – other than to serve the ends of performative cruelty and/or bigotry – for blaming the crisis/crises awaiting almost everyone on recent mass migration. Once economies collapse to the point where a lot of high-skilled jobs disproportionately occupied by immigrants become redundant, it’s an easy guess where “von hinten erdolcht” will first be heard.

            • jupiviv says:

              On a somewhat related note – the best place to go after/during the collapse is wherever I can use my well-honed fighting/farming/hunting/gathering skills most effectively. What’s that, I hardly have one of those? I guess I’m fracked.

            • Xabier says:

              On the contrary Jupiviv, I have just provided some historical examples of large settlements that actually worked out rather well, which justifies calling them ‘perfect models’. So I am not a bigot as you imply.

              Same as the French who moved to Spain in the 10th and 11th centuries ( from whom I am in part descended): they arrived by invitation, were skilled and in fact they restored civilisation in Northern Spain after the terrible destruction caused by the Roman collapse and the Arab conquest and slave raiding expeditions.

              Now, of course our Collapse has far wider-ranging causes than mass migration, but large numbers of unassimilable migrants, with a high % of criminals among them – above all in the 2nd and 3rd generations – and the spread of violent organised crime (Turkish, East European, African, etc) under the guise of ‘open borders’, is a part of the declining quality of life in many major cities in Europe these days, and the way it would turn out was apparent to anyone objective from the 1970’s.

              The unfortunate thing is that resentment is growing, even boiling over now in some places, and innocent settlers will be blamed for things which are not of their doing, resulting in many tragedies: a wiser policy would have avoided this and not balkanised European society. Balkanised communities eventually explode.

            • jupiviv says:

              However you put it, you’re referring to largely unrestricted and unvetted movements of people as has been the norm throughout our species’ history. Also not sure what “skilled” is supposed to mean in a mediaeval context!

              It is true that the recent immigration waves will worsen the European situation when SHTF. That doesn’t however justify the half-baked fas_cistic BS being passed off as poignant commentary on the West’s decline. Given the disproportionately senescent perusers of said BS, crime is predictably central to its narrative.

            • Tim Groves says:

              Bigotry: noun
              intolerance towards those who hold different opinions from oneself.

              Looked in the mirror much recently, have you, Jup?

            • jupiviv says:

              Only bigots think calling people whom they agree with bigots is bigotry.

            • Tim Groves says:

              If you’re not sure what “skilled” is supposed to mean in a medieval context, then perhaps you should stop commenting so authoritatively and superciliously on the subject until you’ve given the matter sufficient thought and study.

              Here”s a clue to point you in the right direction. Medieval people possessed plenty of skills, obviously, even though they didn’t code or use Microsoft Office.

      • You are so right Xabier and such a tragedy that a once proud and prosperous nation who offered sanctury to so many distressed people has come down to this. I remember the 1950s, not so long ago, when my mum said if in trouble always ask a policemen. What has become of us?
        https://www.bbc.co.uk/news/uk-44884113

        • Duncan Idaho says:

          Move to Marin–
          You’re less likely to die prematurely in Marin than nearly every other county in the US
          https://www.sfgate.com/bayarea/article/Marin-healthiest-county-California-longevity-13710031.php

          I’m a former resident.

          • Jason says:

            Wealthy people live longer, in general.

          • Chrome Mags says:

            Hi Duncan, my wife and I are former residents of Marin County, CA. We moved and have never regretted it. Having grown up in Sausalito since 63, I saw it change over time not for the better. On the surface it seems nice enough, but the roads are crowded, the people under a lot of pressure to make a lot of money to afford the super high housing costs. We moved a ways north and love where we are away from that hustle. Hope it all worked out well for you too.

        • Dan says:

          Well I certainly wouldn’t recommend asking a cop in the U.S. for help. In fact I instruct my 6 yr old son to avoid the police and not to look to them as your friends. They are not there to help they are there to hurt and kill.

          Whenever I hear a politician praising police and wanting to “get tough on crime” that is an automatic no vote in my book.

          There are hundreds if not thousands of videos and stories from the U.S. similar to this below. I think this is part of the reason that people are actually looking forward to a collapse because as they see it it is the only way out from the authoritarian yoke they must live under day in and day out with no escape.

          https://www.vox.com/policy-and-politics/2017/12/8/16752914/police-arizona-philip-brailsford-daniel-shaver

          • At one time, cops were people’s friends. In some places they still are, I expect. When cops are being asked to deal with too much breakdown in society, it seems like it can be too much for the cops. The people most likely to be shot by the police are the mentally ill and the ones with problems like autism. Perhaps people who are high on drugs as well.

          • Yes Dan, the USA is well ahead on the authoritarian stakes but UK is catching up fast. We famously had no armed cops in UK up to a decade or so ago. Now all we hear are swat squads and armed attacks, just like America.

            We always said in UK that America will come over here in time. France not so much. They still have those cute little blue lights on their police cars but UK has those glaringly bright multi coloured strips on their roof which I find to be emblematic of a failing state security system

  8. Yoshua says:

    The Brits are sitting in a nuclear bunker preparing for Brexit…while EU nations are selling off everything to Communist China during Xi Jingpin’s tour in Europe.

    A bad omen?

    • Brexit has been canceled in its original meaning as leaving the club.

      In terms of China, that Italian strategy to put wedge into status quo (EU-Germania) via direct deals with Asia as the first G7 country to do that is quite clever, at least in the sense of buying time at the edge of precipice. Simply there is new parliament and gov in place where the old establishment is hugely marginalized by ratio of ~1 : 4 , very unique situation, that’s why they have been able to smash the illegal migrant influx and deliver other nationalistic reform goodies (blocking NGOs is on the way ala Hungary) already.

    • But you have a point on the zoomed out macro level, Brexit is a great laboratory of post empire status balkanization in progress, almost every tribe and faction at each other’s throats today, especially in these times when pushed to make last minute decisions.

      You have got the Tory conservatives who split into hard core brexiteers group ERG, but also into more numerous centrist almost ‘left leaning’ ideologues aka EU-global agenda drone group.. And moreover each faction has its inner sub faction, hah. Then you have also various factions inside the Labour party, there are also the SNP and DUP, regional nationalists etc..

      • And don’t forget the Brexit Party led by Nigel Farage. They will get lots of votes if we stay in:
        https://thebrexitparty.org/thank-you-for-signing-up/
        We have never been more divided, sadly.

        • Farage made great mistake not leading UKIP after the referendum, as that would have kept the white hot burner under both parties (especially their centrist wings) as well as the civil servants never leaving swampers, media, EU-politburo affiliated and other foreign agent NGOs etc..

          You are correct, that the threat of new/revamped Brexit party makes the Westminster guys nervous now, it would be surely more numerous than previous third party attempts like Libdem etc.

          The daily evolving Brexit saga is very fascinating, apart from the already mentioned balkanization process underway, very noteworthy are all the ‘old sins’ returning like boomerangs to the UK, like these various international law shenanigans (to be exploited only by specialized lawyer caste), unwritten constitution, not proportionally representative parliament, sectarian boarding school fraternities breeding socio/psychopats, etc.. and much more..

          All of it is just feeding the self destructive explosion.

          • All agreed – TPTB have had it wrapped up for many a long year. But now, thanks to the internet and rapid communications generally, people are beginning to wake up to the fact that they have been had all these decades and are not actually living a happy and fulfilled life after all..

            They are debt-slaves, trapped in the merry-go-round of work – sleep – work and still fail to make enough to live on. Globalisation, zero hours contracts and the gig economy have much to answer for; but it will all end soon enough and hopefully a better and more sane world will emerge.

  9. Greg Machala says:

    The prices of palladium have gone up more than 3 fold over the last 3 years. From $500 in 2016 to nearly $1600/oz today. The trace amounts in the automotive catalytic converter are generating incentives for thieves to steal the devices. Apparently the Prius design leaves the catalytic converter in a place where it is easily stolen. Some Prius owners are installing cages around the converter to protect them from theft.

  10. Xabier says:

    Sir Harry: the grandfather of a former girlfriend owned the land which the creaky old Hunterston Reactor was dumped on: he moved to, I think, Switzerland or France as soon as the monstrosity appeared, driven out after 900 years! Once among the best farmland in Scotland, beautifully farmed.

    The dry winters are certainly worrying in Spain, although reservoirs have filled up quite well recently, they could always plummet again, and shepherds on the east coast are worried about dessicating pastures even in the Pyrenees.

    Catalonia may well burn up, literally as there are more fires and more furious ones, so even though I’d love to live near cousins on the coast there, and go totally Mediterranean, I have the dampest part of the Pyrenees in mind. Barely any snow there this winter, and some nasty fires this February, which is a trend to watch.

    One could easily go quite mad trying to weigh it all up and find the optimum location…..

    • Harry McGibbs says:

      Well, no more weighing it all up for me, as I fear neither my bank balance nor my marriage could survive another move.

      At the risk of sounding horribly bleak, it still seems likely to me that our socio-economic complexity will at some point unravel so rapidly that any relocation one might make now is going to be a fairly meagre time-buying exercise rather than any kind of panacea for what lies ahead. The Pyrenees sounds very pleasant though. You can get one of those splendid mountain dogs to defend your stash of chorizos.

      • doomphd says:

        we have a Border Collie, now we only need some land and a small herd of goats and/or sheep for him to manage.

        • Harry McGibbs says:

          We have a three-month-old, black Labrador puppy because we promised the kids a dog ages ago. She is a most beguiling creature but I struggle to see her savaging hungry marauders. Perhaps she will channel her inner wolf when the need is greatest.

          • Xabier says:

            If I know labradors, she’ll lick’em to death! Or just sitting on them.

            Sporting spaniels are also fantastic guard dogs: they will bark like crazy and….. run, but give you warning at least of any ‘strangeness’, and sound far larger than they are.

            Our province in Spain actually has its own ancient breed of hunting dog, the Pachon Navarro, with a most amusing split nose, (as painted by Goya and Velasquez) so I plan to get one of those, or three.

            As for the chorizo stash: I have my axes. Not,officer, that I’d think of using them on anything other than fire-wood. 🙂

        • goats and sheep might appear as idyllic setup, but are simply too prone to irreversably destroying – overgrazing any land available, either heavily undershoot their numbers vs given land area (and rotate diligently) or try something different..

          • Jan Steinman says:

            goats and sheep… are simply too prone to irreversably destroying…

            That’s called “bad management.”

            There’s no reason to not raise goats and sheep, if you’re going to properly take care of them and the land.

          • Pigs are better, and they plough and fertilise the field at the same time.

            • Jan Steinman says:

              Pigs are better, and they plough and fertilise the field at the same time.

              Follow the pigs (plough) with turkeys (disk), then with chickens (rake), and your field is prepped — no petroleum needed!

            • Oh great, I hadn’t thought of this – you have made my day. I did ‘self-sufficency’ for 20 years here in Somerset UK in the 1970-80s on 2 acres, it was all the rage. We had horses, goats, chickens (not turkeys though – I never thought of them), rabbits, ducks. We never got round to pigs but I did think about it and bees of course. My daughter is following in our footsteps, I’m too old now to manage the heavy work. And it is lots of work and many failures in weather, bugs, escaped animals etc.

            • Jan Steinman says:

              many failures in weather, bugs, escaped animals etc.

              “Failures?”

              Failure is an attitude. As Margaret Meade once told a nosey reporter who wanted some dirt on her three “failed” marriages: “I didn’t have any “failed” marriages — I had three wonderful marriages… that ended!”

              If I thought every little thing that I’ve tried that didn’t work out as expected was a “failure,” I’d have ended it all by now.

              “Bugs” are little messengers, trying to tell me what plants are weak or need help. “Escaped animals” are little messengers, telling me there’s something inside the fence that they’re not getting. “The collapse of civilization” is a little messenger, telling me… I’m still figuring that one out!

            • Ah, you speak words of wisdom, Jan, you clearly are a spiritual person and in touch with the reality of that with which we are endowed:
              https://www.amazon.co.uk/Children-Law-Lost-Teachings-Atlantis/dp/0966001532

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