Debunking ‘Lower Oil Supply Will Raise Prices’

We often hear the statement, “When oil supply is lower, oil prices will rise because of scarcity.” Now, we are getting to see firsthand whether oil prices really do rise, as oil supplies become more scarce.

Figure 1. Figure from the OPEC Monthly Oil Market Report for August 2019 showing world and OPEC oil production by month.

Figure 1 shows that world oil supply hit a peak in November 2018 and has declined since then, mostly because of a decline in OPEC’s production. So, total oil production seems to be down for about eight months, relative to the peak in November 2018.

Despite this big cutback by OPEC in its oil production, prices have not responded as OPEC had hoped:

Figure 2. Average monthly spot Brent Oil prices, based on EIA data.

In fact, as I write this, Brent oil price is currently quoted as $60.48, which is back in the range of December 2018 and January 2019 low prices. Also, reducing production doesn’t seem to be reducing inventories. Figure 3 suggests that they are now higher than they were before the reduction in oil supply took place.

Figure 3. Figure from the OPEC Monthly Oil Market Report for August 2019 showing OECD commercial oil stocks.

Why aren’t oil prices rising and oil inventories falling, if oil production has fallen?

The basic issue is that the economy is very much interconnected under the laws of physics, because energy is required for every activity that is considered part of GDP. Energy is required for any kind of heat or any kind of movement. Energy is even required for electricity. Without energy from the sun, food can’t grow; without supplemental energy of some kind (such as using electricity to heat an electric stove or burning animal dung or sticks), it becomes impossible to cook food or smelt metals.

One strange phenomenon that arises from the interconnected nature of the economy is the fact that the prices of all energy products (including those not listed on Figure 4) tend to move together.

Figure 4. Comparison of changes in oil prices with changes in other energy prices, based on time series of historical energy prices shown in BP’s 2019 Statistical Review of World Energy. The prices in this chart are not inflation-adjusted.

This strange phenomenon arises because energy products are well-buried within every part of the world economy. A person’s job requires energy consumption. The tasks that governments do, such as building roads and schools, require energy consumption. Both transporting and cooking food require the use of energy products. Refrigerating food requires energy products. These energy uses, as well as many other everyday hidden uses of energy, aren’t things that we can easily cut back on.

Consumers often think, “I will drive less, and that will cut back on my energy consumption.” Unfortunately, in the whole scheme of things, whether or not individuals cut back on their optional use of gasoline doesn’t get the world economy very far. Gasoline accounts for about 26% of world oil consumption, or about 8.7% of total energy consumption, based on the most recent BP energy data. Cutting back on the optional use of gasoline would not reduce total consumption very much. If it were possible to reduce gasoline consumption by 10% by voluntary cutbacks, it would still reduce world energy consumption by less than 1%.

The strange pattern of the price changes shown on Figure 4 indicates that there is something affecting energy prices of many kinds, simultaneously. I would describe this as “affordability.” It has to do with how affordable finished goods and services are to the population in general, much more than it does scarcity. (Economists call this affordability issue “demand.”) If finished goods and services are affordable to a large number of consumers, as they were in 2008 and in 2012 and 2013, prices will be bid up to very high levels (Figure 4). If finished goods and services aren’t very affordable, a drop-off in prices, such as that experienced in November and December of 2018 (Figure 2), is likely to occur.

When OPEC decided to cut back its production of oil in response to the low prices in late 2018, this cutback in oil production didn’t help the affordability of finished goods and services. In fact, this cutback probably made the worldwide total quantity of affordable finished goods and services a little lower. This happened because, with the cutback in oil production, the governments of OPEC countries were able to collect less tax revenue on the smaller quantity of oil that the countries were selling. In fact, this smaller quantity of oil wasn’t even being sold at a higher price.

With lower revenue, governments of OPEC countries are being forced to cut back on funding of new projects such as roads and schools. These projects will use fewer energy products, and the would-be workers will have less money to spend on goods made with energy products. Thus, these cutbacks help to lower the world’s “demand” for oil and other energy products and thus help lower the price of oil.

The fact that the economy is interconnected in this strange way makes shifting prices upward much more difficult than if scarcity were the primary issue. In effect, the whole stack of energy prices in Figure 4 must somehow be made to rise. This is difficult to do because it is the lack of wages of the many poor people around the world that is holding back “demand” for energy products. If, somehow, higher wages could be sprinkled on the many poor workers of the world, including those in India and Africa, then oil (and other energy) prices would tend to rise. With higher wages, these poor people would be able to afford items such as nice homes, cars, and air conditioning, pulling world food and energy demand upward.

One difficulty with rising oil (and other energy) prices: They don’t translate into rising wages.

Rising oil prices tend to cause recessions and layoffs. We can see this from historical data. Average wages, considering layoffs, tend to fall rather than rise during times of spiking oil prices. In fact, the chart seems to suggest that the big increases in average wages tend to occur when oil prices are under $40 per barrel. A growing supply of cheap energy thus seems to be the magic ingredient that shifts wages upward.

Figure 5. Average wages in 2017 US$ compared to Brent oil price, also in 2017 US$. Oil prices are from BP’s 2018 Statistical Review of World Energy. Average wages are total wages based on BEA data adjusted by the GDP price deflator, divided by total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Because of this difficulty with spiking energy prices, high energy prices tend not to last for very long. One issue is that regulators quickly raise short-term interest rates to solve what they perceive as “the problem of rising food and energy prices.” Once recession sets in (gray bars in Figure 6), regulators find that they need to lower interest rates and raise the level of debt to stimulate the economy again. With lower interest rates and more debt, major purchases (such as homes, cars, and factories) become more affordable, because purchases bought on credit have lower monthly payments. With greater affordability, food and energy prices again rise, to again encourage more production.

Figure 6. Three-month and ten-year interest rates through July 2019, in chart by Federal Reserve of St. Louis.

So we end up with an endless seesaw of energy and food prices. In fact, the peaks have tended to fall lower and lower since 2008, as can be seen in Figure 7, showing monthly average prices.

Figure 7. Monthly average Brent Oil prices since January 2000, based on data of the US Energy Information Administration.

Monthly average peaks started at $132.72 in July 2008. More recently, peaks have fallen as follows:

  • Peak of $125.25 for the month of March 2012
  • Peak of $109.54 for May 2014.
  • Low month average price of $30.70 in January 2016.
  • Most recent average peak was $81.03, for the month of October 2018.

From this pattern of falling peaks, we can see that the stimulus being used recently (which includes Quantitative Easing in some parts of the world) has become less and less effective at stimulating demand for food and energy products.

It looks as though growing debt at ever-lower interest rates is becoming a less effective workaround for the economy’s real need, which is a need for a rapidly growing supply of under $40 per barrel oil and other low-priced energy products.

Oil prices can be a problem in two different directions: (a) Too high for consumers or (b) Too low for producers.

From the Point of View of the Consumer. Many people have had the “Ah Ha” moment, in which they have figured out that high oil prices are a problem from the point of view of consumers. In part, they have deduced that these high oil prices may mean that we are “running out” of cheap-to-extract oil. Processes are becoming more complex, and as a result, consumers need to pay more to cover the higher cost of extracting and refining the oil.

But there is a related issue: Higher oil prices are likely to cause recession. If oil prices rise, the prices of many different types of goods and services (such as food, goods transported by truck or airplane, and vacation travel) rise at the same time. Wages don’t rise as quickly, in part because it is the true energy content (measured in Btus, barrels of oil equivalent, or something similar) that the economy requires. If the economy needs to dedicate a larger share of its resources to producing energy products, this is an issue that is akin to growing inefficiency. There are fewer resources remaining (such as human labor, metals, fresh water, and energy products) for investment that might provide goods such as new homes, cars, clothes and air conditioning.

With fewer resources to use, the economy reacts by shrinking back. I think of the situation as being akin to the way a chemist might “make a smaller batch,” if the quantity of one necessary reagent is low. An adequate supply of energy products is what makes the economy operate as it does; if buying an adequate amount of energy products becomes too expensive for consumers, a cutback in the buying of discretionary goods is forced on the economy (Figure 8). Lowering interest rates tends to make the debt repayment portion on new purchases lower, helping to alleviate the squeeze.

Figure 8. Chart made by author in 2010, to illustrate a talk called Peak Oil: Looking for the Wrong Symptoms.

From the Point of View of the Oil Producer. There are oil producers of many kinds, including:

  • Tight oil producers from shale operations,
  • Heavy oil producers in places such as Canada and Venezuela,
  • Producers of oil from deep water such as Brazil and Angola, and
  • Middle Eastern oil exporting countries that seem to have a very low direct cost of oil production.

Strange as it may seem, Middle Eastern oil exporting countries are among the most vulnerable to problems associated with continued low oil prices. The reason why these countries are so vulnerable is because their entire economies are oriented toward oil and gas production. They often have large populations with inadequate income unless the government provides them with handouts or with programs that provide jobs. If these governments need to cut back too much, there is a real danger that the governments will be overthrown. In fact, the population may break down into warring factions. Oil production may stop because of internal disorder.

It is because of issues such as these that the OPEC countries have cut back on oil production, in the hope that prices would rise to more acceptable levels for their countries. Fiscal Breakeven prices, relating to the level of oil prices that are needed so that each government can collect sufficient taxes for its budget, are published from time to time.

Figure 9. Chart published by the Arab Petroleum Investments Corporation (APICORP) giving Fiscal Breakeven Prices estimated to be needed for 2013.

Now that oil prices have been low since late 2014, Middle Eastern countries won’t admit to the true level of oil prices that are needed to operate their countries in the way that they have in the past. Their populations have been rising faster than their oil production, so it is hard to believe that the oil prices that the countries truly need, if they do not cut back on programs, are any lower than the amounts shown in Figure 9. At about $60 per barrel, the current Brent Oil price is clearly far too low for the major oil producers of the Middle East.

Shale and heavy oil producers are often less vulnerable than Middle Eastern producers, because the entities funding their operations (that is, buyers of shares of stock and providers of debt) believe that “of course” oil prices will rise in the future because of scarcity. Because of this, they are willing to provide additional funding, even when a recent owner has gone bankrupt from low prices. Middle Eastern oil producers have less of this benefit. If the money isn’t available for major programs, they are forced to cut back. Growing debt is unlikely to cover more than a portion of the shortfall.

There are other producers in the energy price “stack” in Figure 4 that are vulnerable to collapse or bad outcomes from continued low energy prices. One example is coal producers in China. China seems to be experiencing Peak Coal because of continued low coal prices; while new mines have been opened, they do not act to increase the total quantity produced, because so many mines needed to be closed because they were losing money at current low prices.

Figure 10. China energy production by fuel, based on 2019 BP Statistical Review of World Energy data. “Other Ren” stands for “Renewables other than hydroelectric.” This category includes wind, solar, and other miscellaneous types, such as sawdust burned for electricity.

If the world economy is hoping for China’s increasing demand to pull the world economy forward in the future, it is likely kidding itself. China cannot expect imports to make up for its lack of growth in coal production. China’s lack of adequate energy supplies likely underlies the tariff issue that we hear so much about. There is a need to pull back production of goods from China, if China doesn’t really have the energy resources to continue in the role it has been playing.

The big question is how high oil prices will be in the future

The contention of the IEA and many others is that energy prices can rise arbitrarily high. For example, the IEA showed the figure I have numbered Figure 11 in its World Energy Outlook 2015 .

Figure 11. IEA Figure 1.4 from its World Energy Outlook 2015, showing how much non-OPEC oil can be produced at various price levels.

The big groupings in Figure 11 are

  • Conventional Crude (such as from the Middle East and perhaps deep water like Brazil),
  • Tight Oil from Shale, and
  • Extra Heavy Oil and Bitumen (such as from Canada and Venezuela).

Evidently, in 2015, the IEA believed that $300 per barrel oil prices were not too high to show as a possibility on a chart. With $300 per barrel oil, there would certainly be enough oil. At such a high price, it might be possible to move the city of Paris, France, out of the way and extract the tight oil from shale underneath it!

Unfortunately, in the real world, prices cannot rise this high. Market prices are set by the laws of physics. The economic limit we reach is a price limit that pushes the economy back into recession. We have seen in Figure 7 that this price limit seems to be dropping lower and lower, over time. In fact, I am one of the coauthors of an article published in the journal Energy called, An Oil Production Forecast for China Considering Economic Limits. This 2016 article makes the point that the economic limit we are reaching is a limit on how high oil prices can rise. I am the lead author of Section 2, which discusses this issue at length. If prices cannot rise high enough, the vast majority of the oil that seems to be available based on published reserve amounts and geological surveys cannot really be extracted.

Whether there are ways to raise oil and other energy prices higher than they are now remains to be seen.

Why don’t standard models forecast low oil prices in the future? 

Economists have put together a simple model of how the economy works. In their model, there are always substitutes. The only thing that goes wrong seems to be that prices rise, if there isn’t enough supply. These rising prices encourage greater supply and substitution. The type of chart a person typically sees is a Supply and Demand curve as shown in Figure 12.

Figure 12. Supply and Demand model from Wikipedia.
Attribution: SilverStar at English Wikipedia CC BY 2.5 (], via Wikimedia Commons

They have never considered a situation where energy products are deeply buried within essentially all goods and services that are made. If there isn’t enough supply, a “smaller batch” of the world economy is made. We think of this as recession, but it can take on other forms as well:

  • Depression
  • Wars
  • Epidemics
  • Defaulting debts; falling prices of assets
  • Failing governments and intergovernmental organizations
    • Collapse of the central government of the Soviet Union in 1991
    • UK’s decision to leave the European Union
  • Increasing conflict between political parties and between countries
  • A reduction in globalization
  • Ultimately, the collapse of a civilization

Economists have not understood the connection between physics and the economy. There is a need for a sufficient quantity of affordable energy products every moment of every day. In fact, we seem to need a vastly increased quantity of inexpensive-to-produce energy supplies right now if we are to fix the world economy’s problems from an energy point of view. The “lower interest rates and more debt” way of hiding problems seems to be reaching an end point. If nothing else, interest rates today are close to as low as they can go.

Is the economy approaching a singularity?

In physics and math, a singularity is a point at which a function takes an infinite value. We end up with a situation that seemingly cannot exist. It is like dividing the number 1 by the number 0. No matter how many times that the number 0 is added together, it will never equal 1.

The economy seems to be reaching an equally strange situation. It is not a situation where we are running out of oil; it is a situation of too much wage disparity, and this wage disparity makes the prices of many commodities too low for producers of these commodities. For example, farmers cannot afford to pay their mortgages. And prices for all fossil fuels and many metals are too low for companies extracting these materials to make an adequate profit for reinvestment and taxes. The problem is not simply low oil prices.

This situation of excessive wage disparity is related to globalization, with many workers around the world earning very low wages, so that they cannot afford goods such as homes and cars. It is related to the increased use of robots substituting for manual labor. It is also related to wage disparity within countries as jobs become increasingly specialized.

As this situation plays out, energy prices fall when common sense would seem to suggest that they should rise. In fact, the problem of falling prices extends to more commodities than fossil fuels and food; it extends to minerals of many kinds, including copper and aluminum.

In such a situation of falling commodity prices, we can expect many related problems. For example, governments of countries that depend on the revenue of these exports may fail, leading to Balkanization of these countries in some cases. A wide range of debt defaults can be expected, leading to failing financial institutions that need to be bailed out. Rapidly changing relativities among currencies are likely to put markets for derivatives at the risk of failing. Needless to say, stock markets are likely to be adversely affected. So-called renewables will quickly fail because they are currently dependent on fossil fuels for repairs and the electric grid. In fact, it is hard to see any aspect of the world economy that can continue unaffected.

How does what appears to be an approaching calamity play out?

Perhaps it is fortunate that we don’t really know. Collapses of early economies seemed to take many years, typically over 20 years. Today, the world economy depends on global supply chains and the electric grid. The financial system is also very important. It is hard to believe that the overall system can stay together for many years, but perhaps, in parts of the world, it can. We just don’t know.

Given how connected the economy seems to be, and how widespread the problems seem to be at the singularity we are reaching, it almost appears that there is a plan behind what is happening. From what we can observe, there seems to be some literal higher power behind all of the energy flows that we observe in the universe. This literal higher power seems to have put into place all of the laws of physics. This literal higher power seems to also be behind all of the self-organizing elements within the universe, including humans, ecosystems and economies. I cannot help but wonder whether there is some plan for what is ahead that we don’t understand.


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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1,469 Responses to Debunking ‘Lower Oil Supply Will Raise Prices’

  1. Dan says:

    Donald J. Trump

    · 2h

    The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet…..

    Donald J. Trump


    ….The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”
    5:42 AM – Sep 11, 2019

    • Harry McGibbs says:

      Trump was singing a different tune in 2016:

      “Republican presidential candidate Donald Trump is going after Janet Yellen again, claiming that the Federal Reserve is creating an investment bubble.

      “During the first presidential debate, Trump said that the economy is having “the worst revival of an economy since the Great Depression” and that nothing in the country is healing after the financial crisis.

      “Additionally, Trump said that because of record low interest rates from the Fed, the country’s economy is “in a big, fat, ugly bubble,” with debt increasing while the “only thing that looks good is the stock market.”‘

  2. It's different this time around....YES says:

    Please tell me it ain’t true….fake news …right?
    Trump says Fed ‘boneheads’ should cut interest rates to zero ‘or less,’ US should refinance debt
    That debt load has grown $2.6 trillion, or 13% under Trump, due in part to the 2017 tax cut that Trump shepherded through Congress. The idea for “refinancing” federal debt is without any modern precedent.
    “It’s not viable and could be a significant problem for investors, financial markets and ultimately the economy,” said Mark Zandi, chief economist at Moody’s Analytics. “The debt is not prepayable. There’s a contractual relationship the Treasury has with investors. This isn’t a mortgage, this is U.S. Treasury debt. I think it would be incredibly disruptive to financial markets, and interest rates would ultimately rise, not fall.”
    On Trump’s push for zero or negative rates, Zandi said he doesn’t see much benefit.

    Meanwhile…in the REAL WORLD…
    It has been more than a decade since the financial crisis wreaked havoc on economies around the world, but many countries are less capable of absorbing shocks now than they were back then. Of the 31 economies tracked by a new gauge from the Swiss Re Institute and the London School of Economics, about 80% had lower resilience scores in 2018 compared to 2007. The trend has been driven by ultra-accommodative monetary policy, growing dependence on financial markets and insufficient structural reform, said Jerome Jean Haegeli, group chief economist at Swiss Reinsurance Co

    Oh my…..

    Coming soon to your community . Unbelievable…you better believe it folks!

  3. Yoshua says:

    The banks are in trouble again.


    Equity price down 32 percent since January 2018.

    Total assets USD 2.75 Trillion.

    Every Hong Kong bank is breaking down from their support lines.

  4. something on uk BBC radio that might interest OFW doomsters

    50 things that made the modern world

    • Harry McGibbs says:

      Thanks, Norman. Made me think of David Korowicz’s comments on the Green Revolution in his ‘Tipping Point’ essay:

      “The interwoven nature of our predicament is clear – for example, in the Green Revolution of the 1960s, which supposedly “solved‟ the increasing pressure on food production from a growing population. Technology was marshaled to put food production onto a fossil fuel platform, which allowed further population overshoot and thus a more general growth in resource and sink demands.

      “The result is that even more people are more vulnerable as their increased welfare demands are dependent upon a less diverse and more fragile resource base. As limits tighten, we are responding to stress on one key resource (say reducing greenhouse gas emissions or fuel constraints with biofuels) by displacing stresses on other key resources that are themselves already under strain (food, water). This demonstrates how little adaptive capacity we have left.”

      • something going on right now that intrigues me—would like comments on it

        that we should eliminate mosquitoes, by releasing sterile mosquitoes to stop reproduction.

        The benefits are obvious, stop malaria and so on

        But surely mosquitoes are part of the essential food chain for everthing else.

        And if you eliminate malaria, won’t that lead to more overpopulation

        not being callous here, just trying to examine all the angles

        • Harry McGibbs says:

          They are indeed an important part of the food chain. Eliminating them would be unwise and short-sighted for the reasons you mention but when has that ever stopped us as a species? 😀

          It’s not just malaria but zika and dengue that are no doubt concentrating minds in this fashion:

          “Vietnam alone reported 115,186 dengue cases as of July 20, compared to just 29,000 for the same period last year, according to figures.

          “The Philippines is also experiencing an unusually severe outbreak, prompting health officials to declare it a national emergency…

          “Dr Rachel Lowe, of the London School of Hygiene & Tropical Medicine, has warned mosquitoes thrive in warm climates, with July being the hottest globally on record.”

        • info says:

          Eliminating malaria will force humans to be more k-selected in the long term. Since malaria is indiscriminate in targetting humans.

          Removal of predation pressure will increase pressure for K-selection.

          And long term sustainable population.

        • Xabier says:

          It’s not callous at all: all human beings are fated to die, and mostly to experience extreme suffering in doing so.

          A ecologically viable society depends on the manner and timing of death, which can be discussed dispassionately.

        • Yorchichan says:

          According to this piece:

          What would happen if we eliminated the worlds mosquitoes,

          the few species of mosquitoes that carry human diseases can be eliminated without any adverse ecosystem effects (apart from to the species that get eliminated).

          • thanks for that—-brilliant article, answered at lot of questions i was curious about

          • Duncan Idaho says:

            Aedes aegypti is not native to the Western Hemisphere.
            That bad boy (actually only pregnant female mosquitos are the carriers) causes big time problems, and its illumination would be really good.

      • That is a good quote. Thanks for mentioning it!

      • Xabier says:

        Korowicz, not Greta Thunberg, should be a household name…….

    • I would be willing to bet that all 50 of the things that made the modern world depend on fossil fuels. I don’t have time now to listen to the whole series of recordings describing all of these things, however.

  5. Harry McGibbs says:

    “Fannie and Freddie are less equipped for a downturn now than they were before the crisis, Senate Banking Chairman Mike Crapo (R-Idaho) said. Before 2008, he said, the companies held 45 cents in capital for every $100 in mortgages; today that figure is 19 cents.”

  6. Harry McGibbs says:

    “The last time major central banks shifted gears together, it was a cooperative move to keep the financial crisis of a decade ago from becoming a full-bore, worldwide depression.

    “Now, a new round of global ratecutting risks taking on a competitive edge as policymakers try to stay ahead of rising trade tensions, a volatile investment climate, and a shift in the political mood from shared support for globalisation to a more zero-sum battle over a slower-growing world economy.

    “It’s a situation that has created deep internal divisions at the European Central Bank, the Bank of Japan and the U.S. Federal Reserve as officials debate how to confront a global slowdown with limited room to cut interest rates, and with elected officials pursuing policies that may be doing harm, at least in the short run…

    ““The worst thing that could happen is a global race to the bottom,” among central bankers in Tokyo, Frankfurt and Washington, said one official familiar with the BOJ’s thinking, who spoke on condition of anonymity.”

  7. It's different this time around....YES says:

    An external cost that will be paid for by all living things…
    Massive amounts of toxic water from the Fukushima Dai-ichi nuclear power plant in Japan have to be dumped into the Pacific Ocean because the facility is running out of space, the country’s environment minister said Tuesday
    The water is treated, but remains slightly toxic and has been stored in large tanks. Nearly 1,000 of them hold more than 1 million tons of water
    The only option will be to drain it into the sea and dilute it,” Harada said at a news conference, according to Reuters. He didn’t elaborate as to how much water he thought would be dumped into the ocean. Will run out of room 2022…
    The solution to pollution is dilution!

    We’ve seen nothing yet…wait till Trump hears about this! Hell up the ante, I’m sure🤗

  8. Harry McGibbs says:

    “China’s producer price index fell further into contraction, signaling a worsening economic slowdown that threatens to add deflationary pressures to the global economy. Factory prices fell 0.8% in August from a year earlier, compared with a decline of 0.9% in the median estimate of economists in a Bloomberg survey.”

    • Harry McGibbs says:

      “Pork prices in China soared 46.7% year-on-year in August, as the country faced rising shortage of the meat amid a swine fever outbreak which has killed millions of hogs. That was a far bigger increase than July’s pork prices which jumped 27% from a year ago.”

      • The article mentions that other foods are also higher priced now as well. To the extent that people spend more for food, this will almost certainly cut back demand for other types of goods and services. It will tend to push the Chinese economy toward contraction, regardless of what tariffs do.

    • Harry McGibbs says:

      “The rapid escalation of the China-US trade war in recent weeks has left Beijing’s policymakers with the choice of two evils: either enlarge the obvious “grey rhino” risk of rising debt or face the unpredictable “black swan” threat of a further economic slowdown, analysts said…

      “But Beijing’s policy balancing act might have come to an end last week when the People’s Bank of China announced that it would pump an estimated US$126 billion in additional liquidity into the banking system to boost credit.”

      • The article says,

        Hu said Beijing was expected to enact yet more stimulus, which could be rolled out in the next quarter or two, with infrastructure a key target for further government investment.

        The catch is that there are definitely diminishing returns to infrastructure investments. The first major road or railroad across China would be expected to have huge payback, but adding paved roads in rural areas would have little benefit. Adding solar panels and electric transmission would add as many problems as the hoped for benefit from the additional electricity.

        • Well if you recall that recently discussed documentary about these western desert low sulfur coal deposits (power plants) connected to east via new HV transmission lines it seemed to make a lot of sense. They also have large NPP manuf (over) capacity like ~10x reactors per year in one factory complex, plus various military and space “needs”.

          But you are correct in the sense at some point (of saturation) not much other opportunities to burn easy money on new “important” infrastructure projects. Japan set decades ago a lot of similar trends to watch for..

          Well the Chinese could surprise us again, e.g. in enviro type of projects, clearing up past damage. Actually, today’s AI and small scale robotics is so cheap and advanced it could perhaps run permaculture farms with very tiny human management in situ. But again you end up with overcrowded cities (slowly rotting away) without meaningful occupation for the pop..

          As we all know (suspect) the best infrastructure is the one you never have to build in the first place. And the second best option is “renewable civ” based on only token use of iron chiefly for biomass cutting tools.

      • Xabier says:

        Does one really have to worry about ‘grey rhinos’ as well now? !

        Where will it end? The Pink Flamingo of Doom?

        I’ll put this depressing zoo out of my mind, and go and pick some apples – a wonderful season this year!

      • Chrome Mags says:

        We are definitely in the post 08 mortgage meltdown, random, new normal, recurring stimulus required global economy. Letting the economy run its course is no longer a viable option apparently due to too much fear of potential downside, the feared R word, recession, or even outright collapse. I just point this out because the CB tweaking is written about in articles so much.

    • Clearly, this kind of change is deflationary.

  9. Harry McGibbs says:

    “The Organisation for Economic Co-operation and Development (OECD) has warned almost $200 trillion in public and private debt could be the catalyst for another global economic crisis if trust in government and financial institutions deteriorates…

    “A decade after “excessive debt” in the housing market brought the global economy to its knees, the OECD said even more debt today could precipitate a loss of trust in financial and political institutions.

    “”Should global economic growth and credit conditions continue to deteriorate, a new bout of financial stress could erupt, the financial markets could become more vulnerable to episodes of contagion,” it said.”

    • Harry McGibbs says:

      “Total potential debt for the U.S. by one all-encompassing measure is running close to 2,000% of GDP, according to an analysis that suggests danger but also cautions against reading too much into the level.

      “AB Bernstein came up with the calculation — 1,832%, to be exact — by including not only traditional levels of public debt like bonds but also financial debt and all its complexities as well as future obligations for so-called entitlement programs like Social Security, Medicare and public pensions.”

      • Harry McGibbs says:

        “The American middle class is falling deeper into debt to maintain a middle-class lifestyle.

        “Cars, college, houses and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.”

      • ~18x “leverage” no too shabby, recently the alt fin blogosphere usually mentioned something more like 5-7x ratio only, evidently it doesn’t matter much these days when the sys goes into its final lala land stage..

      • A big issue is financial system debt, according to this report:

        450% for financial debt, which carries “conceptual issues and risks,” namely that debt held by financial firms often represents potential in a worst-case scenario involving various derivative instruments that can carry high notional levels that are unlikely ever to be realized.

  10. Harry McGibbs says:

    Speculative capital leaking away from the oil market:

    “Hedge funds are becoming more pessimistic about the outlook for oil prices as trade tensions between the United States and China remain unresolved and global economic growth grinds to a halt.

    “Hedge funds and other money managers were net sellers of petroleum futures and options last week for the fifth time in seven weeks, according to an analysis of data published by regulators and exchanges.

    “Overall, the hedge fund community’s positioning across the petroleum complex is now neutral to bearish, with concerns about the deteriorating economy more than offsetting production cuts by Saudi Arabia and its allies.”

  11. Yoshua says:

    China auto sales -9.9 percent YoY in August.
    India auto sales -41 percent YoY in August.

    Ford has been downgraded to junk by Moody’s. A fallen angel with 200 percent debt to equity.

    As we go down the net energy cliff, the machine builders will go down first.

    Energy + Machine = Work

    • Harry McGibbs says:

      “The crisis at Japanese automotive giant Nissan deepened today, after chief executive Hiroto Saikawa was asked to quit by the company’s board…

      “In July, Nissan reported a 98.5 per cent plunge in operating profit in the first quarter of 2019, and announced it was slashing 12,000 jobs across the globe.”

      • Harry McGibbs says:

        “Global manufacturing is experiencing its sharpest and most geographically widespread downturn in at least six years…

        “The manufacturing slowdown is the main factor dragging on the global economy, fuelling fears that growth is stalling and ramping up pressure on governments and central banks to ready fresh stimulus efforts.

        “The gloom is centred on the car industry. Activity across car producers globally reached a near-record low in August…”

        • Kowalainen says:

          People waiting for electric cars. Nobody wants to buy an already obsolete “new” fossil burner.

          • More likely, no one wants to buy a car period. If they have one, they will keep what they have. New cars that they buy, whether ICE or electric will depreciate faster than before. New electric ones are too high-cost and problematic from a charging point of view to be worthwhile. Countries are mandating electric cars but not putting up enough in subsidies to make them affordable. It is also doubtful that the charging apparatus needed will ever be built out.

            • Kowalainen says:

              I would strongly disagree.

              People wait for cheap electric cars and postpone their purchases until these become available. If they become available. In the mean time a clunker will do as fine.

            • Gail’s angle on the affordability issue is demonstrably correct.
              We have been at this numerous times already, specifically entry level cars are getting more expensive every year, because of legislation as well as manufs (+credit) wanting to move upscale into higher margin. Hence, the times you could get EUR7k brand new car are over, now (recent yrs) it’s more like 10-13k for entry level econobox.. double and triple that for “middle price” segments, and 4-5x for lower upper-luxury..

              Besides ~80% of new purchases are bought on lease/credit anyway.

            • Kowalainen says:

              Well, I don’t disagree that it is an affordability issue. The point where I find Gail’s statement wrong is where she states that quote:

              “No one wants to buy a car”

              Which is flatly wrong. People want to have cars, however due to affordability issues, can’t.

              As for the infrastructure for charging these cars you have to consider the lack of gas stations when the fossil burners was introduced. It didn’t stop that from happening.

              Electric cars are superior. Period.

            • What people forget is that the whole system of electricity distribution is very unstable. It only became available very late–-much after oil products in most parts of the world. Parts of it disappear with every wind storm. We don’t have a way of keeping it fixed. Adding intermittent wind and solar add huge amount more difficulties to the system.

              If California charged the real amount it needs to for its green grid that it needs to, businesses would close down. Importing hydroelectric from Washington State cannot be a long term way of providing electricity for California without a great deal more attention to grid maintenance than has been the case to date. The use of intermittent wind and solar is problematic as well.

              Traditionally, the cost of fuel has included a charge for road repair besides the cost of the fuel itself. In mountainous places like Norway or Switzerland or Japan, this road building/upkeep cost needs to be very high. Part of the reason why people think that electricity will be cheap is because they omit this cost.

              People also have the impression that oil is leaving us before other fuels. This is simply untrue. The whole system is collapsing. Building a redundant new system, when the old one is still working, doubles the total overhead required. It doesn’t fix the system.

          • DJ says:

            The indians waiting for an EV?
            And isnt Nissan like dominating EV-manufacturer?

      • I would guess that a big part of the firing had to do with the plunging operating profit and low auto sales. Also, the large number of layoffs.

  12. Chrome Mags says:

    Wow, I just saw an EBAY ad on cable TV that was an eye opener. Different people in different retail locations first looking at the price tag of something and then the lower price found on EBAY on their phone, then laughing. Imagine being a store owner and watching that ad. No wonder so many retail stores are closing. Who wants to be laughed at for the price tag on products after investing in a brick and mortar location improvements, lease or buy, inventory including the props, employees, insurance, etc.?

    • Harry McGibbs says:

      Sounds like a depressingly cynical but no doubt effective ad campaign.

      I recall when I was a kid my father encouraged me to write a letter of complaint to my local, independent toy store when I bought a ‘Zoid’ toy from them only to find an identical one priced more cheaply at a larger chain-store in the area.

      They were really nice about it and wrote me a reply explaining that they had to price in relatively much higher overheads and inviting me in to choose a free Zoid, which I did. I cringe a little when I think about it. They eventually went bust, of course.

      Seems that if people have to choose one or the other, cheaper prices will always win out over pleasant human interactions in the end.

    • Xabier says:

      For some years now booksellers have had to put up with potential customers standing in front of them at book fairs while they check prices on Amazon and the various antiquarian book sites, who then say ‘Great book, and a good price but there’s a cheaper copy on the net, even with the postage. Bye.’ Pretty soul-destroying.

      • Harry McGibbs says:

        Very galling indeed. Family Guy lampooned the depressing retail shift to Amazon splendidly:

        • but it’s not just books is it

          most of us are guilty one way or another

          we never stop to consider that Bezos’ 250Bn used to be distributed round all the high street shops as wages. When the high st structure goes, a vast system of commerce and supply goes with it

          we cant exist on betting shops and loan shops.

          • Kowalainen says:

            It is mind boggling thinking that spending this amount of money cause anything other than inflation in a severely resource constrained system.

            But don’t you worry, UBI is coming your way, because people who has negative productivity need to eat too. Forget about living large, as you are doing currently, however.

            Yes, the rich will get richer, relatively speaking when resource constraints hits hard in the near-term. That or inflation – which will inevitably render everyone equally poor through inflation and capital flight. So good luck with that.

            • Collapsing financial systems are a possibility as well. So are collapsing governments, or governments overturned by unhappy citizens, leading to Balkanized smaller states, each with a need for its own currency.

              Your imagination is not broad enough.

            • but i do worry

              if you had my embarrassment of riches
              you would be worrying how to spend it all before there’s nothing left to spend it on

              I’m thinking of throwing a last doomster party—anybody on record as saying ”they will fix things” will be barred by my heavies at the gates to my vast English estate.

          • Xabier says:

            Retail jobs, although despised by many, are one of the bedrocks of a functioning society.

            Personally, I also like small traditional shops where you can get to know the owners and their staff over time, become a welcome regular, and have some pleasant social interaction: I’m down to only two of those now in this city……

            • It would be nice, too, to live in a world where there is not so much dispersion in products, and so much need to sort through “stuff I don’t want” to get to the few things I want.

              I remember growing up in a world where we walked downtown (in a town of 3,000) to the three stores that sold women’s clothing. (Two also sold men’s clothing.) We could also order from the catalogs of Sears Roebuck or Montgomery Ward. There were also a very small number of stores that sold hardware and furniture. There were two “Dime Stores” that sold toys and a lot of low priced goods of various sorts. There were also a couple of grocery stores that a person could walk to.

              In this limited world, there weren’t a whole lot of choices, but in a way, that made choices easier. There was less disparity between the somewhat rich and others. Everyone had pretty much the same limited choices. When you went shopping, you knew the shop keepers. You often ran into your friends and could stop and visit for a while.

  13. Gankdalf says:

    is the central committee having deliberations now?the whiff of pathetic Marxism is particularly overwhelming now.

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