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 see-saw 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 oil low 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 (http://creativecommons.org/licenses/by/2.5)%5D, 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. Theedrich says:

    “Peer polities then tend to undergo long periods of upwardly-spiraling competitive costs, and downward marginal returns.  This is terminated finally by domination of one and acquisition of a new energy subsidy (as in Republican Rome and Warring States China), or by mutual collapse (as among the Myceneaeans and the Maya).  Collapse, if and when it comes again, will this time be global.  No longer can any individual nation collapse.  World civilization will disintegrate as a whole.  Competitors who evolve as peers collapse in like manner.”

     —  Joseph A. Tainter, The Collapse of Complex Societies, Cambridge University Press, 1988, 1992, p. 214.

    • Thanks! I had forgotten about this quote. Joe Tainter has been talking about this issue for a long time.

      This is a photo taken back in 2011 of a group of us, hanging out in pub after a BioPhysical Economics conference. I am on the left. Next is David Packer (Editor for Springer of Charlie Halls’ book series), Charlie Hall (of EROEI fame), Joseph Tainter, and James Howard Kunstler. I don’t know the next person; he was a speaker at that conference. The last two, who are only partially shown, are George Mobus (With Question Everything Blog) and Dave Murphy (at that time, grad student of Charlie Hall).

    • DJ says:

      But if there is no competing systems, do the one system have competitive costs?

      • The system needs to have enough energy to support the overall civilization that provides the demand for energy products. If workers are becoming too poor to buy the output of the products of the system, there is a major problem.

        • DJ says:

          I understand that complexity demands unequality, while still keeping the lowest level part of the system.

          But the soviet broken by losing competition against US, currencies collapsed by escape to gold/other currency doesnt really exist anymore.

        • Kowalainen says:

          Indeed there is a problem for the regular workers. Who are increasingly becoming less productive and thus less relevant as the technological progress marches relentlessly forward.

          It is none of their fault, it is evolution on its course toward ever greater complexity by encoding the intricacies of this civilization into software, instead of in corruptible human chauvinistic organizations, which is running on machines that is created using software, which is being used to create software, which runs on machines, which…… [ad perpetuum].

          There is no turning back on this epic journey towards total and utter irrelevance for humans. I can think of few engineers and scientists who would conclude this necessarily a bad idea or even possible to stop at this stage of the evolutionary processes which governs Gaia.

          We simply just don’t care. If that’s the way it will be, then so be it. Who are we to judge what the evolutionary traits which is encoded in our brains and thought processes eventually leads to. Yes, we simply don’t care and pursue what we find great satisfaction in, even though it will inevitably lead to our own total and utter irrelevance. But then, at least we will have great teachers in the mystery of the universe and get to admire the technology and machines produced by superhuman intellect. Just as we, today, admire great scientists and engineers from the past.

          • Pedro says:

            Not my idea of evolution.
            Just a dead end path from which any surviving humans (but not computer hardware/software) might evolve via their DNA in another direction.
            Computers only ‘write’ software according to the rules set down by humans.
            For software to evolve in relation to Gaia it would need a lot of ‘facts’ about the current state of the planet, resources available and a means to equate all the information,
            in short intelligence which doesn’t evolve from software.
            As an ex programmer I can understand how the media waffle is accepted by the general public but I do not accept that machines are likely to evolve to suit their continuance on this planet.
            For humans to evolve requires the mechanisation to collapse (which it will) and for the basic animal functions which we are born with start working again.
            That won’t be pleasant by our current standards. No more aged care, cancer cures, limited support for person with any defects etc. I.e. Study animals in the wild to get an idea
            of the realities of natural life. Gonna be survival of the most fit.

          • Slow Paul says:

            Sorry to soil your dream of becoming irrelevant, but computers lack this thing called “life”, that is the natural driving force within every living cell within every living organism. This force magically makes all cells and organisms reproduce themselves and consume energy for no other reason.

            You can program a single computer to want this but this computer (and its copies) will have no instinct, no intuition to how to physically do all the thousands and thousands of small operations an animal do every day to survive, not to mention copulate (assemble?)… And for what ends would you want this to happen?? So the sci-fi-fantasy of your childhood becomes true??

    • Kowalainen says:

      The flaw in this reasoning is that all complexity is a burden carried by the organizational structure of an agent or organization which is subject to competition. A flaw of human chauvinism.

      Yet competitive and collaborative structures of extreme complexity, which is yet not fully understood in mankind’s scientific endeavor, created from and of natural selection and adaptation producing an enormous biodiversity on planet earth. Eventually producing the mind boggling complexity of the human and mammal brain. Which central governing organ was behind this emergence? The answer is that no such organization is necessary in a system which implicitly has this encoding scheme built into its principles. The principle of mutual benefit from a distributed ecosystem of competitive collaboration.

      Software is a principle which encodes the industrial civilization organization as a symbolic representations of complex economic and industrial processes. It carries no cost of an complex human organizational structure. As with genetic expressions, the software encodes the creation of hardware in which it executes. May it be the manufacturing process of semiconductors or of machinery which extracts energy from earth.

      Civilizations, however collapse from their own brutality and divergence from the natural order of competitive collaboration driven by an energy and resource accounting scheme, by its own organizational overhead. Once departed from the natural order, stagnation from overspecialization and obscurity and esotericism sets in, eventually to the creation of an all encompassing central governing organ of brutality and horrors where everything and nothing is possible, thus guaranteeing its own demise by the principles of departing from the natural order with no central ruler or governor.

    • Davidin100millionbilliontrillionzillionyears says:

      “Collapse, if and when it comes again, will this time be global. No longer can any individual nation collapse. World civilization will disintegrate as a whole. Competitors who evolve as peers collapse in like manner.”

      I wonder if Tainter would reconsider this quote…

      perhaps all countries are “peers” in some context, but there are vast differences in their energy supplies, and thus various collapses could occur as individual countries are cut off completely from FF resources…

      it seems that the initial stages of this scenario are happening right now, so I would say that it’s more than theoretical..

      of course, other scenarios are possible, and collapse could be triggered from within The Core and thus be a full one-time global collapse…

      but for now, it seems that the bigger faster stronger countries will cut off the weaker periphery as a means of extending their survival…

      the 365 days of 2020 will tell us much more…

      • The EU organization seems to be particularly at risk. So do oil exporters. China and Japan both have risks of their own.

        It seems like some of these could fail in a partial cutback.

  2. Harry McGibbs says:

    “The global bull run that started in 1985 is now one of the most intense in the debt market’s 700-year history, comparable with a deleveraging and economic growth spurt that followed the Napoleonic wars.

    “Despite longstanding predictions of the end of the bond bull market that started after former Federal Reserve chair Paul Volcker quashed inflation in the 1980s, government debt has kept rallying this year, taking the average annual fall in yields to 17.4 basis points (0.174 percentage points) over the past 34 years.

    “That puts it on the cusp of surpassing the 1873-1909 bull run in length, and makes it the strongest decline in long-term interest rates since 1817-1854, when bond yields declined by 22 bps a year, according to research by Paul Schmelzing, a visiting scholar at the Bank of England.”

    https://www.ft.com/content/417dce0c-ce3e-11e9-b018-ca4456540ea6

  3. Harry McGibbs says:

    “Numerous indicators in the U.S. and around the world are signaling a slowing economy at best and a near-term recession at worst.

    “The slowing global economy, along with low interest rates, ongoing trade tensions, and intensifying Brexit uncertainty will weigh on banks’ profitability for the foreseeable future. In the US, whatever benefits banks derived from Trump’s tax reform, if any, are long gone.”

    https://www.forbes.com/sites/mayrarodriguezvalladares/2019/09/08/banks-around-the-world-face-significant-profits-pressure-for-the-foreseeable-future/#2d02d81b7b5d

    • Harry McGibbs says:

      “Regulators are surveying Japan’s financial firms to determine their exposure to foreign assets, including risky credit products, as the global economy slows, according to sources.

      “The Bank of Japan and Financial Services Agency want to get a more detailed picture of domestic banks’ and insurers’ investments in collateralized loan obligations (CLOs) and leveraged loans to assess how they will fare if the borrowers run into difficulties, the sources said.”

      https://www.japantimes.co.jp/news/2019/09/09/business/financial-markets/regulators-boost-scrutiny-clos-banks-buy-billions-worth-risky-assets/#.XXYH3ChKjIU

      • Harry McGibbs says:

        “The prospect of more deeply negative rates is particularly painful for Deutsche Bank, which recently announced a massive turnaround effort that includes 18,000 job cuts. The bank has pledged to increase revenues by 10% to €25 billion ($28 billion) by 2022, leaving little room for error or higher costs.”

        https://edition.cnn.com/2019/09/04/economy/ecb-cut-deutsche-bank-scli/index.html

        • How is it possible to operate an economy on negative interest rates?

          • Harry McGibbs says:

            The EU is slowly finding out that it isn’t. That isn’t going to stop the ECB from cutting rates further though and trying to help prop up banks as they do so:

            “The ECB is leaning towards a package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates, sources told Reuters last week.

            “At the very least, markets expect a 10 basis point cut in the deposit rate to -0.50% — the first cut since 2016…

            “Nearly 90% of economists polled by Reuters expect the ECB to announce a return to quantitative easing (QE), starting with monthly asset purchases of 30 billion euros from October.”

            https://uk.reuters.com/article/uk-eurozone-markets-ecb/time-for-shock-and-awe-five-questions-for-the-ecb-idUKKCN1VU0F5

            • Robert Firth says:

              Modern monetary theory meets reality. In the old, sane world of classical economics, innovation was driven by investment. To increase production, you raised interest rates, which encouraged more people to save, hence allowing more investment. The engine of the economy was the saver, or, as Samuel Smiles put it, “thrift”. And more innovation, more production created more wealth, and hence more savings. It was a virtuous spiral.

              But in a debt based economy the arithmetic works the other way. Lower interest rates encourage more debt, but discourage savings. And fewer savings mean less investment, and the missing investment can be replaced only with more debt. So the modern economy needs ever increasing amounts of debt just to stand still. Remember the Gadarene Swine? That’s where we are now, with the demons of debt running all developed economies off the cliff.

            • “Lower interest rates encourage more debt, but discourage savings. And fewer savings mean less investment, and the missing investment can be replaced only with more debt. So the modern economy needs ever increasing amounts of debt just to stand still.”

              Good point. Also, all of the so-called renewables are debt-based form of energy. Fossil fuels are much more pay-as-you-go.

            • Kowalainen says:

              Robert, not quite right.

              Debt is needed for circulating the enormous amounts of goods and services which industrial civilization have created by the means of cheap energy and mass production, and by doing so liberated the uneducated plebs from crushing drudgery and enabled them to an upward movement in the social strata.

              Now what does the (highly educated) upper middle class do? Well, they save money by investing it back into the apparatus which they are dependent upon by the means of production and employment. Nobody “saves” money anymore in a bank account. The debt is used for shifting assets from old, stagnant money.

              Therefore the enormous hatred from old money to fiat currency. But they are fighting their own delusions of going back to a feudal order of a gold backed currency. Because, you see, the gold has all been swallowed up by the industrial apparatus which produces things like the gold plated Apple Watch and an copious amount of other applications which is dependent of the technical properties of the precious metal.

              There is absolutely no way back. The lions share of the gold is simply…. GONE!

              “So far, the Fed has denied the German financial regulator access to the vast deposits that are literally being held hostage overseas. Thus, the Bundesbank has had no opportunity to audit the reserves that belong to Germany.

              Various theories circulated about Germany’s foreign gold reserves, with some experts questioning whether it is still there or if it has been used by foreign central banks. However, the German government doesn’t seem very worried about the issue.”

              https://www.rt.com/business/445133-germany-access-gold-us-fed/

    • Epidemics don’t need to be human epidemics to be a problem. Humans can get along with less meat, but they still need pretty much the same calories, especially if they have grown to mature size based on a higher calorie meat-containing diet.

  4. MG says:

    The proces of putting into operation of the new block of the Mochovce nuclear power plant in Slovakia is connected with various unfinished things and defects, as the checks by the supervisory authority reveal. The supervisory authority must wait with licencing the operation, untill all defects are removed.

    https://ekonomika.sme.sk/c/22207655/odhalili-nedostatky-v-mochoveckej-elektrarni-nie-je-ich-malo.html?ref=trz

    It seems our problems will be more and more about machines not being able to operate 24/7 due to various (hidden) errors, lack of or improper maintenance etc. As Gail points out, adding intermittent energy makes the things worse. We need to add reliable sources of energy, not more and more intermittent ones.

    • High interest rates several hundred years ago may have had to do with the very high default rate on debts when people depended on unreliable wind energy to power their sailing boat. Wind energy might or might not get your boat to the desired final destination, in a reasonable length of time. If the storm encountered was bad enough, the cargo might need to be thrown overboard to try to save the boat and crew. Many ships were lost completely.

      • hkeithhenson says:

        ” If the storm encountered was bad enough, the cargo might need to be thrown overboard to try to save the boat and crew.”

        I doubt it. Think about trying to throw cargo overboard in a raging storm. The last thing you would want to do is open a cargo hatch in a storm.

        “Many ships were lost completely.”

        That’s still a problem.

        • Not to the same extent. I have heard that archeologists estimate the number of ships in a particular historical period by the number of remains of shipwrecks found from that period.

      • hkeithhenson says:

        “High interest rates several hundred years ago”

        Gregory Clark in “Genetically Capitalist?” makes a case that one of the things that happened during the run-up to the industrial revolution was a substantial reduction in interest rates. How this might relate to the present day is not clear to me.

        • DJ says:

          If the capitalism genes (plural!) causes carrier to delay consumption for higher return in the future, then spread of capitalism genes could increase capital and thereby lower interest rates.

          But know theyre replaced by negative interest debt binge handout genes.

          • hkeithhenson says:

            According to Clark, the genetic advantage of being well off ended about 1800. I.e., the industrial revolution increased wealth enough that the poor reproduced about as well as the rich.

            What goes on now is not closely related to the selection during the runup to the industrial revolution. Except that we still have people with the kind of drive that gained their ancestors’ wealth.

            • DJ says:

              Interesting to see what will be selected for if there is a bottleneck with few survivors.

            • hkeithhenson says:

              “bottleneck”

              A large part of the race went through such a bottleneck between the start of agriculture and the rise of states. We lost over 90% of the diversity of Y chromosomes.

            • Around the world, things are at least somewhat different. Sub-Sahara Africa and parts of the Middle East still have very high birth rates. The pattern is often that rich older men have several wives. Poorer men don’t get wives. Brides are often young, so wives can have many children.

            • hkeithhenson says:

              If this went on for tens of generations, I would expect the genes related to acquiring wealth would become more common.

              Of course, the death rate has come down due to the various outputs of the industrial revolution, including food.

            • Kowalainen says:

              The industrial revolution and its factory-style education system shifted large swaths of an untapped resource into the semi-literate productive work force. The expanded work force and readily available schooling system is a tour de force in wealth generation and prevalence over inferior states.

              It is a competitive, collaborative structure within itself where an upward movement in the social strata is encouraged and not set in stone by enforcing the status quo of class hierarchy.

              The threat to this system is of course collapse from obscurity and overspecialization where the state itself becomes overburdened by its own administration complexities, eventually leading to theft, corruption and misallocation of resources, as it is explicitly trying to shape its course to the benefit of its new class, the nomenclature, instead of implicitly by the just actions of its inhabitants and adhering to the principles of liberty.

              The dominance scheme always eventually fail since more effectively run states will act as a corrosive where the productive and competent work force will migrate to those where the private and common wealth generation is the greatest.

              Therefore artificial and enforced welfare states eventually will fail as people start to prioritize equality of outcome instead of equality of opportunity. Watch it unfold in real time in Sweden.

    • The higher API gravity of US oil makes it more desirable for mixing with heavy oil elsewhere.

      Back in the “good old days,” it was possible to pull oil out of the ground cheaply and refine it using a very simple refining process. Now it is necessary to mix together various types from around the world and use more advanced (that is, energy consuming) approaches to produce the energy.

      All of this make essentially a less efficient approach to get the desired end product. If oil prices could rise to cover inefficiency, we would be all set. But they don’t unfortunately.

      • hkeithhenson says:

        “using a very simple refining process.”

        Distillation. It’s the way we sort out hydrocarbons since the shorter chains boil at lower temperature. The high boiling (long chains, essentially Vasoline) go to https://en.wikipedia.org/wiki/Fluid_catalytic_cracking FCC dates back to the 1940s.

        ” to mix together ”

        It’s been a long time since I worked in a refinery, but I don’t think this is commonly done. The place I worked for processed mostly heavy crude from Venezuela.

        “a less efficient approach”

        I think it is quite a bit more efficient, at least for making gasoline.

        • Perhaps I am not right.

          There certainly seem to be a lot of overseas buyers for US crude oil, however. This may partly be because WTI has been less expensive than Brent. These overseas shipments are help level the price differential. I know that that was one of the hoped outcomes of the exports.

          The biggest buyer of US crude oil exports is Canada. https://www.eia.gov/dnav/pet/pet_move_expc_a_EPC0_EEX_mbblpd_m.htm It certainly does have a lot of heavy oil that needs to be diluted and eventually refined.

          India and South Korea are other big buyers. Also Netherlands, Taiwan, and UK. Perhaps their refineries are just looking for some kind of oil inexpensively, that will work in their equipment.

          • hkeithhenson says:

            “biggest buyer of US crude oil exports is Canada”

            Yep.

            But it looks like we buy almost ten times as much *from* Canada.

            “just looking for some kind of oil inexpensively”

            That’s probably the case. Oil production, transport, and use is a really complicated system. And it changes all the time.

            • Kowalainen says:

              Light US oil is used for diluting the heavy oil from the Canadian tar sands and preparing it for refining if I understand the process correctly?

            • As I understand the situation, at one point, natural gas liquids were exported for mixing with Canadian bitumen. In fact, Canada’s own natural gas production has been rising, so it may have more natural gas liquids of its own to mix in recently.

              More recently, the US has also been exporting crude oil to Canada. This seems to be going to a refinery in Montreal. The Montreal refinery uses a combination of the US oil plus Canadian sourced heavy oil to produce refined products for Canadians living in Quebec.
              https://www.nationalobserver.com/2018/11/13/news/guess-where-quebec-gets-its-oil

              US imports (Gross, not net) from Canada of Crude Oil and Petroleum Products keep rising.

  5. All is Dust says:

    Solar Panels not generating the promised return on investment
    https://www.bbc.co.uk/news/uk-england-49566130

    • Without huge subsidies, this story can be expected to play out throughout the world.

    • Robert Firth says:

      I use a gas water heater; it turns on when I turn on the water. Currently, a large (and heavy!) cylinder of gas costs EUR 30 and lasts 6 months. Instead, I could go to solar panels, for which I was quoted EUR 3000. Assuming they need zero maintenance, the payback time would be 50 years.

      If the poor people in the article were charges GBP 10,000 to 15,000, they were ripped off.
      Colour me unsurprised.

      • The people in Great Britain bought larger systems than needed to simply replace the gas hot water. This is part of the way they were ripped off. Also, Great Britain is a cloudy country (see the photo). Getting much solar energy from the panels there is a problem.

        • Robert Firth says:

          Gail, agreed. Solar power makes little sense in the UK. It makes a little more sense here (46 North 14 East) but even so would be problematic in winter. And it would have made no sense in my previous home, Singapore (1.5N), which has heavy rainfall on an almost daily basis year round.

          But it works in Egypt! When I visited Cairo, most houses had solar powered hot water. But they used a low technology system: big metal tanks painted black. Heat the water during the day, drain it from the roof into another metal lank insulated against heat loss, and you have an essentially zero cost system. Also fully sustainable and with zero pollution.

          A part of my philosophy I quote often: work with Nature, not against Her.

          • Yes, hot water in the sun definitely works, especially in climates where it doesn’t freeze. There are also workarounds to make a somewhat more expensive system work in sunny areas where it does freeze.

          • Artleads says:

            +++++++++

          • Artleads says:

            It would still need civilization to pull off. And the trope that civilization must grow (ALONG ITS CURRENT LINES!) or collapse quickly is probably not well founded.

            • I’d be happy to be shown otherwise, but I can’t see another ‘state’ (ie static), between infinite growth and collapse

              because static infers humankind with no ambition to self improve. Something we all seem to be born with to a greater or lesser degree.

              No other species seems to have that

              We do, and it’s what has led us into the mess we are in.

              when we reach a state where no further growth is possible, our immediate reaction will be denial, our second reaction will be to look for ‘blame’ our third reaction will be conflict in order to steal ‘growth stuff’ from somewhere else.
              That ultimately accelerates collapse

              Which is more or less where we are right now. Things just haven’t kicked into top gear yet.

  6. Harry McGibbs says:

    “Saudi Arabia’s new energy minister has said he favours cutting oil production in order to shore up prices amid a global over-supply, according to reports.

    “Prince Abdulaziz bin Salman, who was appointed by father King Salman Sunday, is said to have made the remark at the World Energy Congress in Abu Dhabi Monday.”

    https://www.dailymail.co.uk/news/article-7443595/Saudia-Arabia-cut-oil-production-attempt-raise-prices.html

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

    Oh my, Still can post so here it goes Folks…all that glitters

    Russia’s Huge Gold Stash Is Now Worth More Than $100 Billion
    Yuliya Fedorinova and Anya Andrianova
    BloombergSeptember 9, 2019, 9:06 AM EDT

    (Bloomberg) — Russia’s long-running bet on gold is looking better every month.

    The country quadrupled gold reserves in the past decade as it diversified away from U.S. assets, a move that has paid off recently as haven demand sent prices to a six-year high. In the past year, the value of the nation’s gold jumped 42% to $109.5 billion and the metal now makes up the biggest share of Russia’s total reserves since 2000.

    Russia’s central bank has been the largest buyer of gold in the past few years as President Vladimir Putin seeks to break reliance on the U.S. dollar as relations between the countries remain strained. If Russia did need to tap its gold holding, it would fetch a hefty price — the metal is heading for the best year since 2010 as the U.S.-China trade war hurts global growth and central banks ease monetary policy.

    “Russia prefers to cushion its macroeconomic stability through politically neutral tools,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “There is a massive substitution of U.S. dollar assets by gold — a strategy which has earned billions of dollars for the Bank of Russia just within several months.”

    Russia isn’t alone in hoarding gold. China, Kazakhstan and Poland have been among the biggest buyers in the past couple of years, and global holdings are expected to increase for a while yet

    Yes, they see a yellow brick road ahead of the funny money trail that’s paved by the CB of the world.

    Ahh, here is an oldie from 1971 Freda Payne, Band of Gold….

    All I got left is a band of Gold…..I can hear us all good bugs sing that after BAU….😛

  8. Hubbs says:

    More ominous, with lightning bolts etc.
    https://www.youtube.com/watch?v=7gej3hLOLDU @ 2:44
    Or for those of religious beliefs and silver:
    https://www.youtube.com/watch?v=lpWS1dlm5i8 @2:40
    “You always were a Judas
    But I got you anyway
    You may have got your silver…..”

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