Our Energy and Debt Predicament in 2019

Many people are concerned that we have an oil problem. Or they are concerned about recession and the need to lower interest rates.

As I see the situation, we have a problem of a networked economy that is not functioning well. A big part of this problem is energy-related. Strange as it may seem, energy prices (including oil prices) are too low for producers. If debt levels were growing more rapidly, this low-price problem would go away.

The “standard way” of encouraging more debt-based purchases is by lowering interest rates. But we are running out of room to do this now. We also seem to be running out of economic investments to make with debt. If expected returns on investment were greater, interest rates would be higher.

Without economic investments, demand for commodities of all kinds, including energy products, tends to stay too low. This is the problem we have today. Our debt problem and our energy problem are really different aspects of a networked economy that is no longer generating enough total return. History suggests that these periods tend to end badly.

In the following sections, I will explain some of the issues involved.

[1] Our problem is not just that oil prices are too low. Prices are too low for practically every type of energy producer, and in many parts of the globe.

Oil: OPEC oil producers have cut back production because they view oil prices as too low. OPEC reports a cutback in production of 2.7 million barrels per day between November 2018 and July 2019 (from 32.3 million bpd to 29.6 million bpd).

In the US, there has been an increase in bankruptcies of oil producers during 2019, relative to 2018. There has also been a reduction in the number of oil drilling rigs of 17% since the week of November 16, 2018, according to reports by Baker Hughes. These are signs of producer distress.

Natural gas: While recent US natural gas prices have bounced up off their recent lows, as recently as August 8, 2019, we were reading:

U.S. gas futures this week collapsed to a three-year low, while spot prices were on track to post their weakest summer in over 20 years. In other markets, such lackluster pricing would cause investment to retrench and supply to contract.

But gas production is at a record high and expected to keep growing. Demand is rising as power generators shut coal plants and burn more gas for electricity, and as rapidly expanding liquefied natural gas (LNG) terminals turn more of the fuel into super-cooled liquid for export.

Analysts believe the natural gas market is not trading on demand fundamentals because supply growth continues to far outpace rising consumption. Energy firms are pulling record amounts of oil from shale formations and with that oil comes associated gas that needs either to be shipped or burned off.

When we look worldwide, we see that the Wall Street Journal is reporting, “U.S. Glut in Natural Gas Supplies Goes Global.” A chart from that article shows falling natural gas prices in Europe and Asia, almost to the level of US natural gas prices.

Coal: The US Energy Information Administration writes, “More than half of US coal mines operating in 2008 have since closed.” USA Today writes, “Is President Trump losing his fight to save coal? Third major company since May files for bankruptcy.”

China has also been closing coal mines in response to low prices. Its coal production ramped up quickly after it joined the World Trade Organization in 2001, but since the 2012 to 2013 period, production has been close to level. An academic paper talks about a “de-capacity program” undertaken in China in 2016 in response to plunging coal prices and overall financial loss of coal enterprises.

Figure 1. 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.

Uranium: A recent article says, “Plummeting global uranium prices hit Namibia hard.” Another article talks about the huge amount of capacity that has been taken off-line because of continued low uranium prices. The article estimates that 25% to 35% of global uranium production had already been taken off-line by the time the article was published (May 20, 2019).

Ethanol: According to the Wall Street Journal, the ethanol industry has been losing money since at least 2015, and is now closing ethanol plants in three states. The trade war has exacerbated its problems, but clearly its problems began before the trade war.

[2] The general trend in oil prices has been down since 2008. In fact, a similar trend applies for many other fuels.

Figure 2 shows that oil prices since 2008 have been trending downward.

Figure 2. Inflation adjusted weekly average Brent Oil price, based on EIA oil spot prices and US CPI-urban inflation.

Figure 3 shows that other energy prices have been following a similar price trend to that of oil. This situation happens because energy products are primarily used in finished goods and services of many kinds, such as cars, homes, vacation travel, and air conditioning. If demand for finished goods and services is high, prices for all commodities can be expected to be high; if demand for finished goods and services is low, prices for all commodities can be expected to be low. Thus, it shouldn’t be too shocking that the problem of prices that are too low for energy producers is very widespread.

Figure 3. 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. They are annual averages, so smooth out quite a few smaller bumps.

[3] The situation of prices being too low for many types of energy producers simultaneously is precisely the problem I found back in December 2008 when I wrote the article Impact of the Credit Crisis on the Energy Industry – Where Are We Now? 

The article mentioned was written in December 2008. If we look back at Figure 2, this was a time when oil prices were very low. I had first noticed a cutback in credit of various kinds (including credit card debt and mortgage debt) in the middle of 2008, about the time oil prices crashed. Later in the year, additional financial problems emerged, including the collapse of Lehman Brothers. Banks became less willing to offer credit to buyers who were deemed insufficiently creditworthy.

In my December 2008 article, I wrote about suppliers in various supply chains not being able to get credit. Without credit, supply chains could not operate. Businesses depending on supply chains were forced to cut back on their purchases. In fact, some suppliers went bankrupt. Workers were laid off in this process; these layoffs added to the lack of buyers for finished goods and services. Energy prices of many types crashed simultaneously because of the lack of demand for commodities used to make finished products of many kinds.

The fix for the problem back in late 2008 was for the US to begin Quantitative Easing. Quantitative Easing lowered longer-term interest rates and allowed more credit to get back to supply chains. By 2011, oil prices had risen to a level that was more tolerable for producers. These higher prices slowly slipped away, especially disappearing when the US discontinued its Quantitative Easing program in 2014.

If a person looks at the late 2008 situation, it is clear that a lack of debt availability indirectly led to low commodity prices. Prices dropped almost vertically when the debt bubble popped. This time, the situation is a little different. We arrived at low prices through the long diagonal black dotted line on Figure 2; this time other factors besides an obvious lack of debt have been involved.

One issue that seems to be involved this time is a shift in relativities between the dollar and other currencies, making energy products more expensive for those outside the US.

A second contributing issue this time is growing wage disparities, as goods are increasingly manufactured in low-wage countries. Low-wage workers (both in developing countries and in advanced economies trying to compete with developing countries) are less able to buy finished goods and services. This contributes to the lack of demand for finished goods and services using commodities of all kinds, including energy products.

[4] In the right circumstances, a rapidly growing supply of cheap energy products can help the world economy grow.

If we look back, there was a period of rapid growth in the world’s energy consumption between World War II and 1980. This was a period of rapid growth in the world economy.

Figure 4. Average growth in energy consumption for 10 year periods, based Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent.

In fact, both population and energy consumption per capita were growing. This growing energy consumption per capita allowed living standards to grow as well (Figure 5).

Figure 5. Energy growth amounts shown in Figure 4, divided between amount that supported population growth (based on 2019 world population estimates and earlier estimates by Angus Maddison) and all other, which I have called “living standards.”

Most people would agree that a major increase in living standards took place between World War II and 1980. New buildings were constructed to replace those destroyed or damaged during World War II. Many people were able to buy cars for the first time. Interstate highway systems were built. Electric transmission lines were built, and oil and gas pipelines were laid. In rural areas, homes were often electrified for the first time. With the aid of energy saving appliances and birth control pills, many women joined the workforce. The US, Europe, Japan, and the Soviet Union all saw their economies grow.

[5] It is striking that the period of rapid energy consumption growth between World War II and 1980 corresponds closely to the long-term rise in US interest rates between the 1940s and 1980 (Figure 6).

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

If interest rates rise, it becomes more expensive to borrow money. Monthly payments for homes, cars, and new factories all rise. Evidently, the US economy was growing robustly enough in the 1940 to 1980 timeframe that US short term interest rates could be raised without much economic harm. The big concern seemed to be an overheating economy as a result of too rapid growth.

The huge increase in interest rates in 1980-1981 put an end to any concern about an overheating economy (compare Figures 6 and 7). Oil prices came back down once the world economy was in recession from these high interest rates.

Figure 7. Historical inflation-adjusted Brent-equivalent oil prices based on data from 2019 BP Statistical Review of World Energy.

[6] Starting about 1980, the US economy began substituting rapidly growing debt for rapidly growing energy supplies. For a while, this substitution seemed to pull the economy forward. Now growth in debt is failing as well.

Figure 8 shows how the ratio of total US debt (including governmental, household, business and financial) has changed since 1946. It becomes clear that once the big “push” that the economy received from rising consumption of energy products began to fail about 1980, the US moved to the addition of debt as a substitute.

Figure 8. Ten-year average increase in US debt relative to GDP. Debt is “All Sectors, Liability Level” from FRED; GDP is in dollars of the day.

I think of debt as being one of many kinds of promises. Figure 9 illustrates that while the total amount of goods and services has been growing, debt levels and other kinds of promises have been growing even more rapidly.

Figure 9. Promises of future goods and services tend to rise much more rapidly than actual goods and services. Chart by Gail Tverberg.

Many things can go wrong with this system. If the growth in added debt slows too much, we can expect to start seeing financial problems similar to those we saw in 2008. Also, if the level of debt (such as student debt) gets too high, its payback interferes with the purchase of other needed goods, such as a home. If energy providers decide prices are too low and stop producing, then promised Future Goods and Services can’t really appear. Huge defaults on promises of all kinds can be expected. This happens because the laws of physics require the dissipation of energy for physical processes underlying GDP growth.

[7] Since 2001, world economic growth has been pulled forward by China with its growing coal supply and its growing debt. In the future, this stimulus seems likely to disappear. 

Figure 10. Figure similar to Figure 5, with bump that is primarily the result of China’s accelerated growth circled.

China has been financing its rapid economic growth since 2001 with growing debt.

Figure 11. China Debt to GDP Ratio, in figure by the IIF.

We know that low prices for coal have led to flattening production since the 2012 – 2013 period (Figure 1). In fact, part of the reason for the flattening of non-financial corporate debt in recent years in Figure 11 may reflect swaps of uncollectible coal mine debt for equity, removing part of coal mine debt from the chart.

The failure of coal production to grow rapidly puts China at an economic disadvantage because coal is a very low-cost energy source. Any substitution, even imported coal, is likely to raise its cost of making goods and services. This makes competition in a world economy more difficult. And China’s debt level is already very high, putting it at risk of the problems discussed in Section [6].

[8] The world economy needs much more rapidly growing debt if energy prices are to rise to a level that is acceptable to energy producers. 

Debt acts like a promise of future goods and services. Growing debt, plus increases in other types of promises of future goods and services, helps to keep energy prices high enough for energy producers. There are at least three reasons that growing debt helps an economy:

First, increasing debt can be used to build factories, and these factories hire large numbers of people. The factories utilize various raw materials and energy products themselves, raising demand for goods and services. Furthermore, the workers hired by the factories, with their incomes from their jobs, also raise the demand for goods and services. These goods and services are made with commodities. Growing debt thus raises demand for commodities, and thus their prices.

Second, increasing debt levels by governments are often used to hire workers or to raise benefits for the unemployed or the elderly. This has a very similar effect to building new factories. These workers and these beneficiaries can afford more goods and services, and these goods and services are made using commodities. Governments also use some of their funds to build schools, pave roads and operate police cars. All of these things require energy consumption.

Third, consumers can afford to buy more of the output of the economy, if their debt levels are increased. If debt can be structured so that anyone who walks into a car dealership can afford a new car (such as longer durations, lower interest rates, and no down payment), this added debt allows increasing demand for new cars. It also allows increasing demand for the energy products used to make and operate these new vehicles. Furthermore, if new homes can be made more affordable for young people, this works in the direction of adding more mortgage debt.

The Institute of International Finance (IIF) reports that the ratio of world debt to GDP (red line on Figure 12) has been falling since 2016. This falling ratio of debt to GDP no doubt contributes to the low-priced energy problem with which energy producers are now struggling.

Figure 12. IIF figure showing total world debt and the ratio of total world debt to GDP.

Non-debt promises of many types can also have an impact on energy prices, but it is beyond the scope of this article to discuss their impact. Some examples of non-debt promises are shown on Figure 9.

[9] The world economy seems to be running out of truly productive uses for debt. There are investments available, but the rate of return is very low. The lack of investments with adequate return is a significant part of what is preventing the economy from being able to support higher interest rates.

In a self-organizing networked economy, market interest rates (especially long-term interest rates) are determined by the laws of physics. Regulators do have some margin for action, however. They can raise or lower certain short-term interest rates. They can also use their central banks to purchase existing securities, thereby influencing both short- and long-term interest rates. In addition, they can indirectly affect the system by raising and lowering tax rates and by adopting stimulus programs.

Market interest rates, in some sense, tell us how productive investments truly are at a point in time. Years ago, investments that the economy was able to make were far more productive than the investments we are making today. For example, the first paved road in an area had a huge beneficial effect. New roads were able to open whole areas up to commerce. Once an area had been developed, later investments were much less beneficial. Fixing up a road that has many holes in it takes energy and materials of many types, but it doesn’t really add productivity to the system. It just keeps productivity from falling.

After a point, adding new roads or other infrastructure doesn’t add much of anything. This is especially the case if population is level or falling. If population is falling, it would likely make sense to reduce the number of roads, but this is difficult to do, once there are a few occupied homes along a road.

As another example, a car that gets a person from home to work is a great addition if the vehicle allows the person to take a job that he could not otherwise take. But added “bells and whistles” on cars, such as air conditioning, a musical system, sturdier bumpers, and devices to reduce emissions, are of more questionable value, viewed from the point of view of allowing the economy to function cheaply and efficiently.

Another type of investment is education. At one point, a high school education was sufficient for the vast majority of the population. Now additional years of schooling, paid for by the student himself, are increasingly expected. An investment in higher education can be “productive,” in the sense of helping to differentiate himself/herself from those with no post-secondary education. But the overall level of wages has not been rising enough to compensate for all of the extra education. It is the growing complexity of the system that is forcing the need for extra education upon us. In a sense, the extra education is a tax we are required to pay for having a more complex system.

The need for pollution control might be considered another kind of tax on the system.

Our hugely expensive health care system is another tax on the system. After paying the cost of health care, workers have less funding available for buying or renting a home, raising a family, food and transportation.

[10] Since 1981, regulators have been able to prop up the economy by reducing interest rates whenever economic growth was faltering. Now we have pretty much run out of this built-in source stimulus.

Many observers have noted that central bankers are running out of tools to fix our economic problems. The lack of room to take down interest rates can be seen in Figure 6.

Figure 13 shows that long-term patterns of reductions in interest rates (darker bands) have happened previously. These reductions in interest rates came to an end because they couldn’t go any lower, given inflation expectations and likely levels of defaults. We seem to be facing a similar situation today.

Figure 13. Chart from the Financial Times showing historic interest rates and periods during which interest rates fell.

According to Figure 13, there have been three periods of falling interest rates in the last 200 years:

  • 1817-1854
  • 1873-1909
  • 1985-2019

In the gap between the first two periods of falling interest rates (1854 to 1873), the US Civil War took place. This was a period of very poor return on investments. Somehow it ended in war.

Immediately after the second two periods of falling interest rates (after 1909), the world entered a very unstable period. First there was World War I, then the Great Depression, followed by World War II.

Now we are facing the possibility of yet another end-point for the take-down in interest rates.

[11] The total return of the economy seems to be too low now. This seems to be why we have problems of many types, ranging from (a) low interest rates to (b) low profitability for energy producers to (c) too much wage disparity. 

All of the problems listed above are manifestations of an economy that is not producing sufficient total return. The laws of physics distribute the problem to many areas of the economy, simultaneously.

A person wonders what could be ahead. We seem to be reaching the end of the line regarding the takedown of interest rates, as shown in Figure 13. If a takedown in interest rates is possible, it acts as a relief valve for some of the other problems the economy is facing, including too much wage disparity and energy prices that are too low for producers.

In Section [10], we saw that when the relief valve of lower interest rates had disappeared, wars and depressions have taken place. We can’t know the precise outcome this time, but our current situation doesn’t look good. Will we encounter wars, or a serious depression, or financial problems worse than 2008? We can’t know for certain. Or will we somehow find a way around serious problems?

 

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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1,324 Responses to Our Energy and Debt Predicament in 2019

  1. Harry McGibbs says:

    “Shares in African diamond miner Petra Diamonds hit an all-time low on Monday after reporting a net loss of $258.1 million for the year ending in June, compared to a $203.1 million-loss in 2018, amid challenging market conditions.

    “The company, which has mines in South Africa and Tanzania, said the loss reflected an impairment charge of $246.6 million triggered by lower diamond price assumptions.

    “Richard Duffy, who has been at Petra’s helm since April, said the diamond market was in its worst state since the financial crisis in 2008…”

    https://www.mining.com/petra-diamonds-shares-hit-all-time-low-as-loss-widens/

    • All materials seem to move together. Energy prices have been generally moving down (before the attack in Saudi Arabia). Diamonds are feeling the same downdrafts. If the world economy is growing more slowly, there is less need for diamonds in industrial uses. If young people are poorer, buying diamond engagement rings goes out of style. I understand styles have already changed.

      • beidawei says:

        Diamonds are not really a commodity that can be freely bought and sold, like gold is, and so make a terrible “investment.” Due to the difficulty of detecting flaws etc., diamond merchants won’t do business with anybody they don’t absolutely trust, which means you can’t resell your second-hand diamonds and get anything like what they’re theoretically worth.

        • Harry McGibbs says:

          I recall that historically the De Beers cartel held a monopoly and fixed prices accordingly. They were fined US$295 million class-action settlement for that in 2008 and now “market supply and demand dynamics, not the De Beers monopoly, drive diamond prices.”

          https://www.kitco.com/ind/Zimnisky/2013-06-06-A-Diamond-Market-No-Longer-Controlled-By-De-Beers.html

          • beidawei says:

            The main barrier to selling your old diamonds is not De Beers, but the fact that the predominantly Orthodox Jewish (in the USA, in India it would be Jain) merchants who dominate the industry will trust each other, but not you. Michael Roach (a New Yorker who became a Tibetan lama, and went kind of crazy) wrote an interesting book about his experiences in diamond industry, which he did manage to break into.

      • Artleads says:

        ++++++++++

    • Kowalainen says:

      Synthetic diamonds are superior, conflict free and manufactured to specifications and not arbitrarily by the random processes of nature.

      • beidawei says:

        So naturally there is some feeling that artificial diamonds are not as good as regular diamonds (and so have to be specially labeled). Which is no more irrational than any other aspect of the valuation of diamonds.

        • Kowalainen says:

          We are talking about transparent and an incredibly hard crystal of goddamn COAL!!! Yes, it consists of the same atoms that we burn to form the molecule CO2 + electricity in power plants.

          What a marketing scam.

          • Robert Firth says:

            You mean, when we run out of coal we can produce energy by burning diamonds? You may have just saved industrial civilisation! But I hope de Beers have installed good defences against drones.

            • Kowalainen says:

              de Beers diamonds will hopefully end up as drill bits as we scavenge earth for the final barrels of cheap oil. With the majority of gold gone into industrial processes, it is only natural if diamonds follow course.

            • Robert Firth says:

              Kowalainen, for a really good show about diamond drill bits, mounted on the front of a machine designed to visit the centre of the Earth (!) check out “Journey to the Centre of Toronto”, Murdoch Mysteries season 7 episode 11.

  2. Harry McGibbs says:

    “Between 2007 and 2012 the [US] government’s publicly held debt doubled as a share of the economy. That was partly due to the Great Recession, but even since then the debt has continued to mount.

    “It now stands at its highest level since the Truman administration and is on course to eclipse the size of the entire economy in about a decade. At some point investors will abandon Treasury notes or demand much higher returns.”

    https://thehill.com/opinion/finance/461477-tom-price-the-fiscal-crisis-at-hand

    • Harry McGibbs says:

      “Year-over-year freight volume is down nine consecutive months starting December of 2018. The Cass Freight Index report cites “More Signs of Contraction”

      “…weakness in demand is being seen across most modes of transportation, both domestically and internationally, with many experiencing increases in the rates of decline.”

      https://www.fxstreet.com/analysis/cass-freight-index-down-9th-month-signaling-economic-contraction-201909160104

      • Harry McGibbs says:

        “Parts of Wall Street’s debt securitisation engine are back running at levels not seen since the pre-financial crisis boom.

        “Data group Dealogic’s indices of US securitisation activity show that issuance of collateralised debt obligations — structured products made up of bundles of bonds and loans — rose above its pre-crisis peak late last year and is currently back close to those levels this year.”

        https://www.ft.com/content/482f7ba6-d884-11e9-8f9b-77216ebe1f17

      • The Cass Fright also has some non-US findings:

        Airfreight volumes in Europe continue to suggest that the region’s economy continues to cool.

        Airfreight volumes in Asia suggest that the region is on the verge of, or is already entering, a recession.

        Ouch!

    • The Hill article is one written by Tom Price. It is a popular opinion, but the system really needs rising debt to function. Of course, the promises will not really be repaid. Somehow, something that cannot grow anymore will come to an end.

  3. Neil says:

    What is very interesting is the rather muted (in my opinion) reaction to the attack on Saudi oil fields. The press is very quick to talk about the ‘massive’ jump to $67/barrel, but inflation adjusted, $67 oil is what we had back in the early-to-mid 2000’s. So what does this say? That with a larger global population than in 2000-2005 (by ~1.5B people) supply of oil has massively outstripped demand? Or that 15-20 years of economic growth were a mirage?

    • Kowalainen says:

      The only substantial growth is in consumption. Which is a pretty lousy measure of real economic and societal development.

      Now with Ghawar drying up, well, the end of consumerism is approaching. Are we ready for less stuff we don’t need, bought with money we no longer have, to impress people we don’t like.

      I wonder what the wastrels will busy themselves with as prosperity goes down the tubes?

    • Harry McGibbs says:

      It’s early days, of course, and there are still so many unknowns, but I was also expecting a more stratospheric spike in the first instance, given that this was an unprecedented but worryingly repeatable attack on the most important oil refinery on the planet, and which knocked 5% of global supply off-line in one fell swoop.

      We briefly had Brent as high as $86 p/b on Iranian sanctions at the start of October 2018.

    • Dana says:

      The last 30 years of “growth” were nothing more than a debt powered hallucination.

    • The issue is not any of the things you suggest.

      Oil companies and oil exporting economies today are not receiving nearly enough money for their products. If this keeps up, they will go out of business. Or they will get involved in wars, to try to eliminate some of the competition. We have imagined that prices go up because of “scarcity.” In fact, they go up because of more “demand,” when the economy is growing rapidly.

      Growth in the economy can come in two ways:

      1. From greater productivity, as human labor is leveraged with more and more devices (broadly defined) made with cheap to produce energy. For example, electricity transmission lines and paved roads greatly help an economy become more productive. So do trucks, and machines used in factories.

      2. From greater debt (at ever lower interest rates) pulling the economy along. This debt can be used to hire workers or to make more devices that could, in theory, leverage the labor of worker. Or it can be used to hand out benefits to retired and unemployed people, so that they too, can afford the output of the economy.

      Neither of these ways is really sustainable, because the (1) the cheap energy becomes more expensive to extract and (2) the interest rate on the debt eventually falls so low that it cannot go any lower. We seem to be reaching the second of these limits now.

      • Karl says:

        Gail,

        I’ve been following you for quite a while now. I believe I have a pretty firm grasp on your ideas about the networked economy and energy. I can’t find any hole in your reasoning (though not being a person of faith, I don’t share your hope for any sort of divine intervention).
        I made the typical survivalist mistake of thinking the world was going to end the day after I learned about peak oil, and ended up looking pretty silly ( my Mormon canned food is now 9 years old, and it looks like I should have been more proactive in building my business). I understand how shale oil and monetary easing staved off disaster for the last decade, and that it can’t go on forever. Despite this, BAU lumbers along. Although your ideas point to a relatively fast collapse, I’m wondering if you would indulge us with any thoughts you have about a slow collapse, and particularly what might be prudent steps for a household to take financially? You always seem to have a unique way of looking at problems. Thanks.

        • Here are a few ideas:

          1. With respect to funds you have available to invest/put in bank accounts, diversify to the extent possible. Have accounts in more than one bank, so if a weekly limit on withdrawals is imposed, or one bank has derivative problems, the other bank account will work, for example. Diversify non-bank investments, to include at least a little precious metals. If you are old enough, an insurance company annuity might work for part of your funds. Even a Swiss bank account might work in this diversification. This way, if there are bailouts in one sector but not another, you are better covered. Or if one segment does better, it helps also.

          2. Keep some spare cash around the house, under the mattress or wherever. (I see that fake Campbell’s soup cans are for sale.) Even if bank withdrawals are not available, cash will likely have some value. Probably not too high denominations, though. If there is deflation, the value of the cash will rise.

          3. Don’t depend on just one form of income, such as Social Security, or one person’s job. From the point of weathering crises, it is best to be able to work with family members. Or if a person is depending on Social Security, have a part time job as well. Strengthen ties with adults children, if you are older.

          4. Regarding debt, I am not sure what to say. Running up a lot of credit card debt, buying stuff that you really don’t need, is a bad idea, regardless of how the economy is operating. I generally don’t suggest that a person make a huge effort to get out of debt, because once a person has a lot of debt, there is generally not a lot a person really can do. I doubt that there will be a huge number of foreclosures on home and farm loans if there are a lot of layoffs and similar problems, but I could be wrong on this. There very well could be. If payments are not made on auto loans or leases, it is very possible that vehicles will be repossessed. But after a certain point, there will no point in repossessing any more vehicles. If there is no job to go to, the need for vehicles will go way down.

          5. Think about what went wrong in the 2008-2009 crisis in your area and at least try to work around those issues, to the extent you can.

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

    Gail has stated the grid is likely to be the first infrastructure to go down…
    The Fast Eddie Challenge…
    HONDURAS-BLACKOUT/
    TEGUCIGALPA, Honduras (AP) — A failure in Central America’s electrical grid left millions of people without power for hours in at least four countries Monday.
    Honduras was the country hardest hit, with the entirety of its territory and its more than 9 million inhabitants affected. Traffic snarled as more than 600 stoplights went dark in the capital, Tegacigalpa.
    Leonardo Deras of Honduras’ state electric company said at a news conference that the problem arose from an overload at a substation on the Caribbean coast
    https://news.yahoo.com/blackout-hits-4-nations-central-223353218.html
    Power began to be restored in the afternoon. Honduras’ government said the process would take three or four hours.
    El Salvador and Guatemala also had partial outages.
    The four nations plus Costa Rica and Panama have shared a linked electrical network since the late 1980s.

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

    Boy, talk about BS Pretzel Logic!
    Pleaaasssseeee….😜

    Duke Energy to accelerate coal-plant closings, target ‘net zero’ carbon emissions by 2050
    John Downey
    American City Business Journals•September 17, 2019

    Partly as the result of a review of carbon-reduction targets announced by the state earlier this year, Duke Energy Corp. has established more ambitious goals to reduce carbon emissions from its electric power operations
    The 2050 targets in Duke’s new effort to address issues surrounding climate change match some of the most aggressive carbon-reduction plans in the industry. That will require Duke to speed up the closure of its remaining coal plants, says Diane Denton, vice president for state energy policy.

    “Duke … recognizes that reducing carbon dioxide emissions is a critical part of addressing the global challenge of climate change,” she says. “And we believe that reducing risks associated with a changing climate, including greenhouse gas emissions and hardening the system against more extreme weather, is good for our customers and good for our business
    Duke’s new internal goals still come with caveats. For instance, the company talks about “net zero” carbon emissions by 2050 rather than saying no carbon emissions by 2050. That leaves open the possibility that the company will use offsets — possibly including the purchase of renewable energy credits or other mechanisms — to account for some carbon emissions that may remain from the use of natural gas plants.
    Oh, some creative accounting will make it net zero! Have a Coke!

  6. poopypants says:

    Well looks like trump inc doesn’t want war just yet. Thank god! There is no way a war with Iran would be contained. Iran comes out long and strong out of this. They can hit Saudi any time they want. Those holes on the tanks… Each in exactly the same place on the tank. Demonstration of precision munitions. Iran wont be like Iraq. The spice flow will end. Unthinkable!

    • Harry McGibbs says:

      All out war in the Middle East really would send oil prices into the stratosphere (until the price spike inevitably started puncturing debt bubbles left, right and centre) – and Trump does not want the cost of living rocketing upwards for US consumers with his re-election bid pending.

      And for all that his negotiating style is bellicose, he does not seem to have much stomach for real military conflicts. You may recall that he was all set to order a strike on Iran in January after they shot down a US spy drone but had a last minute change of heart because he didn’t like the idea of 150 dead people and felt it was disproportionate.

      My feeling is that Trump will do everything he can to avoid war.

    • The report now seems to be that Saudi production could be restored in weeks. This is what led to today’s big price drop. WTI price is now about $60.

      • MG says:

        If the problem is machines that can be repaired and the world needs lower prices due to the huge debts then the quick lower prices are logical. If somebody is poor, he or she simply delays purchases. And this dynamics will finally make the zero interest rates (which means that the banks charge other fees they make profit from) not functioning. The process of the demise of the human species goes on.

    • Robert Firth says:

      I would suggest munitions with pattern recognition: not that hard to do. Put the intelligence in the missiles, not in the generals, and certainly not in the Pentagon!

      And one thing in Trump’s favour: he may be a loud mouth, but he evidently prefers “jaw jaw” to “war war”. Good for him. Now, Donald, do us all a favour and scrap the F35.

      • Kowalainen says:

        Indeed, drone wizardry with various cameras are cheap an’ easy today.

        IR sensors 65×65 pixels res including lenses at $35 a pop.
        CMOS cameras 5mpix 100fps wide angle lenses with NIR capability at too cheap to bother.
        Short range radar arrays at less than $100
        FPGA/MCU at close to for free
        IMU IC’s; and why not put in ten of them to average out any tolerance and mfg issues.
        GPS/GLONASS/Galileo modules, well, also ridiculously cheap
        PCB’s milled out of prototype boards using $1000 Chinese CNC’s
        3D metal print the engine parts, cheap ass Chinese CNC machined for finer tolerance details.
        Why not throw in a Saudi 3G/4G module to stream the whole escapade on YT or Twitch. I’d watch.
        Pattern recognition, control systems, AHRS and navigation software readily available and downloadable from the internet.

        Assemble it all inside a home built or Chinese hobbyist airframe powered by micro jet turbines or rockets, just send it, then call it a day.

        JUST SEND IT.

    • Chrome Mags says:

      Trump said China would never be allowed to use artificial islands for a naval/military base.
      He also drew a red line saying NK would never be allowed to be a nuclear power. Then he said Iran was responsible for the drone attacks on the Saudi’s oil facilities and he was locked and loaded.

      China has their military base on artificial islands. NK is a nuclear power. No military action against Iran so far. Hmm, anyone see a pattern?

      • Robert Firth says:

        Do I see a pattern? Perhaps; perhaps not: you be the judge. I see Trump’s belligerent comments as created to appease the warmongers in his administration, and his inaction as a response to the sane military advisors who tell him that the US no longer has the weapons, the competence, or the prestige to wage a major war.

        The US “hyperpower” fantasy is disintegrating under their feet. I believe Trump knows this, and is doing as much damage control as his limited discretion allows.

        • Kowalainen says:

          Let me quote Sun Tzu:

          😉

        • poopypants says:

          I certainly hope Trump is scared of a war with Iran. I know I am. Iraq was a diferent era. Saddam made big big mistakes. I would assume that Iran has studied the US wars and capabilities in the region. There proxy certainly did b4 the 1996 lebanon conflict. Now at least some technical expertise is demonstrated. The results of Us intervention in iraq and libya are clear. Failed states and extremism. And thats when usa “won”. I hope trump is smart enough to see this. His not taking the obama deal with Iran was stupid. I believe it was because he just wanted to tear down all that obama did. If we couldnt establish working USA friendly regimes in Iraq and libya how on earh could we in Iran? I ran has certainly figured out some game plans and teched up. Straight gets closed. Saudi infrastructure gets demolished. Both Iran and saudi stop oil production at the same time. No wonder media is treating this like a non event. No wonder saudi is not to retaliate.Yes the USA could carpet bomb Iran. Would this demonstrate we are a trusted world power? What would this demonstrate? The sad part is lack of options. It would be nice to have some graceful options. Blowing up the world not very graceful. Getting choked out by a clever opponent not very graceful. Blundering about using force because your image of yourself is a tough guy not very graceful. Really not responding is the most graceful action. Trump shows class in this path if that is his motive even if his lack of skill has removed the more graceful less humiliating options. He says he doesnt want war. He fired Bolton. The last two presidents both started wars. If Trump doesnt start a war thats improvement. Even as flawed as trump is he is less scary than self righteous social justice war monger. Ive never seen such hate and intolerance as i am witnessing from the left. They are insane. Whipped into a frothing mouth fury from the propaganda. Their ideas are no more crazy than the rights. Their attitude is truly frightening. i wouldnt want them fixing a slurpee machine let alone in control of the USA military. Thats when the fireworks start. When a leftist sanctimonious war monger extremist gets elected. Inspector klusko trump will probably stumble through.

        • Chrome Mags says:

          “Do I see a pattern? Perhaps; perhaps not: you be the judge.”

          Pattern; All bark and no bite.

        • Chrome Mags says:

          “Do I see a pattern? Perhaps; perhaps not: you be the judge.”

          Pattern: All bark and no bite. That pattern loses credibility really fast.

          I’m not advocating war, because I’m anti-war. Just saying if a President wants to keep credibility, vacuous bluffing is not be a good strategy on the international stage.

          • Tim Groves says:

            If you can work all this out, I’m sure Trump’s adversaries in Iran, China and elsewhere can, in which case everything is going to be hunky dory and we have no reason to fear a major US-led war like the aggressions launched by G.W. Bush and B. Obama.

            Perhaps this POTUS is not overly concerned about credibility on the international stage and is content to leave such vanities to the likes of Elton John and Mick Jagger. As long as his vacuous bluffing helps keep America Great, he can sleep easy while deranged Democrats pace the floor at night doing passable impersonations of Inspector Dreyfus.

          • Robert Firth says:

            Chrome Mags, agreed 100%. That’s why I mentioned Trump’s “limited discretion”. I think he would like to move towards a general peace, but he can’t. He tried it with North Korea, and Pompeo promptly torpedoed him. He tried it with Iran, and John Bolton threw a hissy fit.

            But he cannot confront the warmongers directly, because behind them stands AIPAC, and behind AIPAC stands Mossad. As John F Kennedy discovered in Dealey Plaza. They are the eminence grise, the power behind the throne.

    • Kowalainen says:

      Shaped charges to cut through the skin of the pressure vessel, image recognition SW for path/position calibration/planning before the mayhem starts, celestial navigation for global positioning the drone/rocket and MEMS IMU + AHRS dead reckoning for the final approach since cameras are no longer viable when the fireworks starts as the first rocket hits. Not a single radio TX/RX needed for this operation. Basically any tech savvy engineer could make it happen.

  7. Blissex says:

    I am grateful again to Gail Tverberg to provide interesting data, and as usual I would also refer to Steve Keen for more discussion of the incredible debt bubble in “anglo american” culture countries since 1980.

    As the to big picture my current best guess is that since 1980 “western” government have been keeping the real economy *deliberately* in a state of semi-recession, in part to keep down worker wages, in part to keep down commodity prices.

    Government economic policy is about spending/taxing (“fiscal”) or debt (“monetary”) and since 1980 most “anglo american” governments have had a recessionary fiscal policy and an expansionary monetary policy, but only for debt “secured” with assets, with the effect that the real economy has been kept in a nearly permanent state of semi-recession, and the financial economy in a nearly permanent state of boom. The result has been falling wages and commodity prices, and rapidly rising asset prices and financial corporate profits. This has generally been summarized as wages and commodity prices being “inflationary” (as many people benefit from them) but asset prices and financial profits not being “inflationary” (as few people benefit from them).

    I suspect that it all goes back to the oil shock of the 1970s and the dire unpopularity of Jimmy Carter’s *explicit* arguments and plans for *planned* reductions in energy growth rates: the governing elites decided then to achieve the same indirectly, with a fiscal squeeze, and to compensate only themselves with a long debt and asset prices and financial profits boom.

    Looked at it another way, the “anglo american” elites have decided to asset strip their own countries, having classified large parts of those countries as “dogs” or “cash cows” by following the Bain Consulting Group “matrix”.

    • That is an interesting viewpoint. I haven’t heard it before.

      • Blissex says:

        it is no longer common, but that used to be the “orthodoxy” in the 1970s-1980s among political economists, the reasoning was explicit:

        * In the short-medium term commodity production is fixed.
        * Therefore at full capacity every increase in demand simply increases the price of commodities, transferring income from consumers to producers, and blowing up the trade deficit.
        * The only way to avoid that is to keep demand below that fixed capacity.
        * To limit the demand for oil the Carter way, explicitly by planning, is very unpopular.
        * To limit the demand for oil, which goes into everything that is produced, then the only way is to limit the demand for everything.
        * To limit the demand for everything means limiting the incomes and thus the living standards of most people, via a permanent semi-recession (“austerity”) disguised as “anti inflationary policy”.

        Note: you point the side effect that keeping the demand for commodities below the current capacity is never going to stimulate and finance increases in that capacity, but that may be a good thing is that capacity is impossible or very expensive to increase (e.g. “peak oil”).

        The difference with the original version is that the ruling elites did not enjoy their own incomes being limited, felt that themselves and their supporters were a minority so their demand for commodities was small, and thus awarded themselves enormous capital gains and rents via massive asset price and rent inflation fueled by a gigantic debt bubble. For example private jet planes and 100m long yachtes consume a lot of oil, but there are so few of them that their impact on oil price is small.

        I have come to suspect that “carbon footprint” (that is, “global warming”) are in large part propaganda ruses to get most people to *voluntarily* limit their demand for commodities, so keeping their price low, and so perhaps is the “meatless burger” idea.

        • I have come to suspect that “carbon footprint” (that is, “global warming”) are in large part propaganda ruses to get most people to *voluntarily* limit their demand for commodities, so keeping their price low, and so perhaps is the “meatless burger” idea.

          I think global warming is a “kill two birds with one stone” idea. We know that there is a lot of fossil fuels in the ground. We have two options:

          1. If energy prices don’t rise very high, then most of them stay in the ground. People need to voluntarily cut back on their carbon footprint, to remain within what is available.

          2. If energy prices do rise very high, then most of the fossil fuels can be extracted. If this happens, global warming of several degrees that models predict might be right. To prevent such a rise in temperature, people need to voluntarily cut back on their carbon footprint.

        • By the way, thanks for your comments on the political orthodoxy during the 1970s and 1980s. I wasn’t involved with this back then, so missed out on what was being said. I noticed that the International Energy Agency published forecasts that included both peak oil (Using Jean Laherrere estimates) and climate change issues, up until 1998. Then they dropped the peak oil issues, at the time that peak oil became uncomfortably close.

          • Blissex says:

            «the political orthodoxy during the 1970s and 1980s. I wasn’t involved with this back then, so missed out on what was being said.»

            BTW that economic orthodoxy was the (sensible) motivation for very high levels of taxes on oil in european countries: those high taxes reduce a lot the demand for imported oil, and thus its price. If they were not applied, oil prices would rise and then the much of that money would go abroad as revenue for a foreign government, instead of the local government.
            Nowadays that instead is justified with “carbon footprint”.

            «I noticed that the International Energy Agency published forecasts that included both peak oil (Using Jean Laherrere estimates) and climate change issues, up until 1998.»

            Fascinating discussion of Bubbert peak or not starting on page 95.

            «Then they dropped the peak oil issues, at the time that peak oil became uncomfortably close.»

            Note the first time: in 2011 the Bank of England published some scary statistics about how many UK mortgages were technically unrecoverable but had been frozen (“forbearance”), that created some worries, and they stopped; several other cases (mostly in the USA though).

            • The forecast added fresh ten year periods. Peak oil was getting alarmingly close. Also, the USGS came out with new oil resource numbers in 2000. These helped justify higher future extraction.

        • Kowalainen says:

          Which is perfectly useless because China and India happened. Try asking a the 2.7 billion inhabitants of those two countries to “cut back” on their newly found prosperity. It ain’t gonna happen.

          Thus the oil will eventually become expensive as depletion progresses and demand will ultimately slump. No matter what, the humanoid wastrel “worker” drones will go the way of the dodo. However, the (few) elites will continue to reap the benefits from an almost completely automated production system of goods and services energized by the last remaining pockets of FF’s.

          • Blissex says:

            «Which is perfectly useless because China and India happened.»

            But I think the opposite, that’s the point: arguably in the 1970s the oil price rose a lot because new demand from the expanding japanese economy pushed global demand above what was then the production capacity, and there was a massive transfer of wealth from “first-world” countries to oil producers.
            Now that it is the chinese economy that is expanding, the “first-world” countries seem determined to accommodate the expansion of chinese demand for oil by cutting their own, also for example by offshoring whatever they can to China.
            Also China is less of a problem (in some waysa) than Japan because it has been using mostly its own coal (making a mockery of “carbon footprint”) rather than imported oil, and the chinese government is very keen to reduce oil imports to avoid pushing demand above the current level of fixed capacity.

            • The developed world pretty much made it clear that it was turning production over to the Chinese and Indians. Go ahead and use as much coal as you like. We won’t tax these goods. We will tax similar goods made in our own country.

            • Kowalainen says:

              The offset from the first-world countries is in the single digit margin of error. The real growth in consumption is the Chinese and Indian domestic markets.

              Well, at least for a little while longer, until adding more debt starts to generate an immediate inflationary situation as FW resource depletion issues incapacitates the silver bullet of printing.

              Then the road to serfdom ensues.

    • Sven Røgeberg says:

      Do you have a reference to where Steve Keen is making this assessment?

  8. Art Berman is saying he sources are saying the attack was an inside job.

    The hits on the oil tanks were way too precise. They struck me as awfully precise, too, to be done from any distance.

    • Kowalainen says:

      The “insiders” only needs to paint a big goddamn arrow only visible in IR on the pressure vessel. Above the arrow, write: “MAMA IM COMING HOME”.

    • Chrome Mags says:

      If a drone had a camera fitted on to it transmitting back, couldn’t the controller be very precise?

    • Yoshua says:

      Saudi Arabia has a Houthi population and a Shia population that are suppressed by the Sunni tribes.

      There are 1800 tribes fighting for power in Saudi Arabia. The attacks came after the Saudi king put one of his sons to head Aramco.

      • These kinds of things are worthwhile to know.

        We in the United States have little idea of how the Middle Eastern countries really operate.

        I read about the new appointment of a second person to be involved with Aramco in the last few days.

  9. Sven Røgeberg says:

    This is a good article to read, because of the way it challenges our assumption. So Gail, if you want to write more about the (socialist) concept of a Green New Deal, you should read this article.
    https://www.opendemocracy.net/en/oureconomy/degrowth-delusion/

    • Thanks this is very interesting material chiefly as far as mapping the agenda for the scene of possible factions forming among the new socialists (and other parties) who might get closer to levelers of power in major IC hubs before 2030. Any explicit overlap towards OFW/Surplus issues is also there although on very shallow and contextually different ground, but tangential links are discussed or hinted..

    • Kowalainen says:

      Yes, central planning for the win. What could possibly go wrong trying to break the government corporate complex and replace it with GND. Instead just wait for peak prosperity and then smile all the way down to serfdom and misery, it’s implicitly what you want and it’s what you will get. But GND must be oh so tempting for the government drones and other wastrels soon to be irrelevant.

      For the reasonable and few remaining productive; just say no thanks to more centralized wickedness and go fully distributed and direct democracy. It’s enough to flush down the self-serving nomenclature together with their enablers in the mass production corporatist complex and their propaganda megaphones in MSM to reduce the resource depletion rate and pollution.

      JUST SEND EM HOME!

    • Some good quotes:

      The degrowth promise of “radical abundance” is ultimately no material abundance at all, but simply a secular repetition of the Christian encouragement of James 2:5 that however poor in the world we may be, we are nevertheless rich in spirit.

      So if we already have enough, then there can be no more development, no further scientific discovery, no additional technological invention. It is the Amish-ification of the world.

      Thus an end to growth declares an end to technological development, an end to science, an end to progress, an end to the open-ended search for freedom—an end to history.

      So for these three reasons—that degrowth is not necessary to solve ecological challenges and is a distraction from them, that degrowth is unjust, impoverishing and austerian, and that degrowth would bring progress to an end—the concept must be rejected.

      Ultimately, climate change and the wider biocrisis are problems because they have the potential to inhibit human flourishing; that is, the specific danger they pose is a retarding of the expansion of freedom.

      So why would we impose an end to expansion of freedom in order to preserve the expansion of freedom?

      I would strongly disagree with, “that degrowth is not necessary to solve ecological challenges and is a distraction from them.” We humans do not have the ability to solve the ecological challenges, with or without the ideas of degrowth. It promotes the idea that high-cost resources can substitute for low-cost resources. Unfortunately, it doesn’t work this way. The laws of physics set market prices. Distorting these prices doesn’t fix anything. High-cost resources make citizens poor!

      • Robert Firth says:

        ” …however poor in the world we may be, we are nevertheless rich in spirit.”

        While reading that, I was listening to Soave sia il Vento, from Cosi fan Tutte. The man who wrote that music was buried in a pauper’s grave. But name any ten bankers put together who have enriched us as much as Wolfgang Amadeus Mozart.

        Yes, I am comfortably well off, after twenty years of thrift. But my greatest treasures are still my children and grandchildren; and after that, my library. Ars longa, vita brevis.

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