Energy, Oil & Money: Interrelationships

Following below are a couple of the posts I made so far in a very interesting debate begun by Ilargi of The Automatic Earth in a thread called There Is Not Enough Money On Planet EarthYou can follow the full set of arguments being made on TAE by following the link.

Do you follow Steve’s argument? Possibly not, because much as I agree with his analysis, he has a very confusing style for making arguments. Sorry Steve, this is true. LOL.

I’ll just pick out a core argument he makes and try to flesh it out from my perspective.

Central banks cannot print oil or jobs, they cannot move interest rates (money worth is set continually at gas pumps) they can do very little. They do not print money. – Steve from Virginia

Any money created in the Oil Economy has to work to BUY OIL. Helicopter Ben can issue more Credit to the TBTF Member Banks which own Da Fed, but he cannot make them lend out the credit he hands off to them for others to buy and burn oil.

It is not remunerative now for lenders to make Loans to individuals, biznesses or Goobermints to buy and burn Oil. It never was, but while there was a ton of it out there to waste the owners of the Oil could keep issuing credit to buy more of it, and collect on the interest of what they loaned out to buy it in the first place.

The problem the lenders face now is two-fold. First, all the consumers of the oil cannot repay on the debt of the oil already consumed, so old loans are now all going south. Second, they will not issue new credit to buy more Oil, because they just do not have all that much left to sell anymore to EVERYBODY. So some places are being triaged off the Credit Train, namely places like Egypt, Greece and Spain right now.

Money is not STRICTLY oil based, since clearly money existed before the Oil economy did. Money IS always energy based though, even in an Ag system where the energy to run the civilization is coming from what grows from the land. Monetary systems fail when the resources upon which it is based fall from surplus to scarcity. So an Egyptian monetary system fails when the Grain held in the Warehouse is no longer sufficient to feed the population. Money Tokens of whatever sort held are no good, because the grain just is not in the warehouse to redeem for the tokens.

Similarly here with Oil. there are numerous claims to the Oil held in the geound, as Stoneleigh puts it often “multiple claims to underlying wealth”. The Money issued though cannot make more Oil available, all you really can do is restrict credit to buy the oil from some places so others who still have credit can buy it. The credit system is collapsing because in this economy, the Oil resource upon which that credit was issued and is based is collapsing. The credit collapse of the monetary system is an EFFECT of Peak Oil, because since the beginning of the age of Oil, credit has been issued to BUY OIL.

RE

All the problems in the credit markets are directly traceable to money’s role as a proxy for Oil in the industrial era.-RE

At the same time, Karl Marx just about predicted all of the problems occurring in global markets right now, and he didn’t write a lick about energy or oil. OTOH, he implicitly recognized its importance when he focused on the global expansion of industrial capitalism and its constant means of “revolutionizing production” through technology.-Ashvin

I don’t think Marx was wrong in what he did analyze, I just don’t think it was a complete analysis.  Like other economists of the era, I think Marx viewed energy as an inexaustible resource.  His focus was on the flaws in the Industrial model far as finance goes, and those are accurate observations for the most part, though by no means am I well read in Marxist analysis to be able to defend that idea.  I’m sure Ashvin could defend that better than I could.  The thing is, there is no way you can make an accurate analysis of this problem without looking carefully at what underpins it, which is energy extraction and utilization.

Saying money/credit is a proxy for energy (and, most importantly now, oil) is like saying working hours during the day is a proxy for energy. It is axiomatic. There can be no logical separation of the financial/monetary system from the extraction/production of net energy.-Ashvin

No Labor and Energy are not comparable in this way because of the vast differential in terms of thermodynamic input into the manufacturing process that Oil has over Labor.  You cannot substitute Labor for Oil in many aspects of this economy, a simple example would be the Interstate Highways, which took the power of many Caterpillar Back Hoes and Front End Loaders and Cranes to build.  A force of Slaves would have taken millenia to build such a thing, even if it could be built at all.  Laborers cannot make the huge steel beams that support those Spaghetti intersections.

While it is possible to base your Money on just about any commodity, in the Oil economy MOST of the money in existence, probably 99.9% of it is tagged to the Oil it can buy.  The Oil produces the Food through the Industrial Ag process, literally we do Eat Oil that is processed this way.  Oil produces the McMansions we buy and sell and it provides the Energy to run them and make them livable.

The folks who Own the Oil issued the Credit to buy the Oil, in many ways through Sovereign, Corporate and Private debt issuance over the course of the Age of Oil.  It is no coincidence of course that John D Rockefeller who created the Monopoly of Standard Oil ALSO was the main force behind Chase Manhattan Bank, the bank my Dad the Pigman worked for making many bad loans to South American countries back in the 60s.

As the Oil decreases in its availability due to extraction costs in more difficult locales and more places with expanding populations demand the Oil, the truth is the Rockefellers do not have enough left to SELL to everyone anymore, and so the Credit to buy it is disappearing here now.  Various economies all over the world are being Triaged off of the Oil Economy, Steve expresses this as “Cosnervation by Other Means”.  Demand crushed in Greece is exported to the FSofA, which still has some credit to buy Oil, but that is disappearing as well.  It is just masked because so many other places are doing WORSE here in the contraction of credit availability.

Any Nation State can issue it’s own Credit, but if that credit won’t buy Oil, then it is useless as a means to maintain an Oil based economy.  The Greeks can go ahead and issue Credit in Drachmas, but the Drachmas won’t buy Oil or it’s products.  They can try and trade Olives for Oil, but it’s unclear how many barrels of Oil a barrel of Olives would actually buy.  In any event, they cannot get “productive” enough with an Ag based economy to buy much Oil at all.

However, not every issue that arises within the former is directly a function of the latter, as evidenced by the theories of people like Marx, Fisher, Keynes, Minsky, etc. which accurately describe the dynamics of the economic/financial system but do not directly rely on the functions of the energy/oil industry to do so.-Ashvin

Again, I do not think any of these economists directly confronted the issue of limitations to the energy reserves of the world.  The assumptions they make sometimes hold true in a world of surplus energy, but for the most part I do not think any of these economic theories are holding up too well as the energy inputs become scarce and expensive.

It remains true that in an Energy intensive economy based primarily on Oil now, whatever Money is issued out must serve to Buy Oil.  More debt issuance can increase the Money Supply (if it is lent out), but it will not be lent out if the Lender knows from the Get-Go its a losing bet.  The non-productive nature of Industry is revealed as the Energy input crosses a threshold price level and there isn’t enough cheap energy to keep subsidizing it.

Marx foresaw a crisis in Capitalism based on economic principles, and he was largely correct far as I understand Marx anyhow.  The analysis is not complete though, because Avaialble per capita Energy puts even more stress on the system and undermines the Finance economy further.  Basically, this just produces a Bigger and Better Collapse than Marx ever foresaw.

RE

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