Published on The Doomstead Diner on March 5, 2017
Discuss this article at the Energy Table inside the Diner
I ran across a chart on Bloomberg which is perhaps the best demonstration to date that the Oil Economy is in Full On Collapse mode now. The chart is of Oil Inventory in storage, and covers the last 35 years since 1982 of Oil Inventory in the FSoA, and is the Header Pic for this article.
Do you note the Hockey Stick nature of this graph? For 35 years until 2014, Oil Inventories were kept within a very narrow range. Supply & Demand were kept in balance by the folks in control of both the extraction of Oil and the production of money. A more or less steady "growth" rate of the entire system was maintained, as oil output and population increased, the money supply increased in tandem with it, a couple of percentage points ahead which provided return on investment for those in charge of creating the money in the first place. For everyone else, this appeared as Inflation as the cost of housing, food and just about everything else besides techological gizmos kept spiralling upward.
However, even through all the recessions through the 1980s to today, Oil Inventories always stayed inside this narrow range. That includes the Great Recession following the 2008 Financial Crisis. Something CHANGED in 2014 though, and my good friend Steve Ludlum of Economic Undertow pegged it to the month more than 2 years in advance with his "Triangle of Doom". What changed at this time was that the cost of extracting oil went higher than the price the customers could afford to burn it at. The price crashed, from over $100/bbl down to $40/bbl or so.
Charts by Steve Ludlum of Economic Undertow
August 2012 Prediction
April 2015 Reality
At this price, virtually nobody extracting oil makes a profit. A few folks like the Saudis still have Legacy fields they can extract oil at a profit at $20/bbl, but across the whole of Saudi ARAMCO their costs are a good deal higher than that. Here in Amerika, the Frackers may have got their extraction costs down to $60/bbl in some of their better fields, but they're still not making a profit at $50/bbl. Just not bleeding money quite so fast,and if they are TBTF, then Wall Street keeps rolling over their loans to keep them floating another day. This is better in the short term than having to write down $Billions$ in losses, which then would make the bank itself insolvent.
So what has occured here in the Oil Trading market since 2014? Well, Oil Traders keep holding back selling until they can make a profit. But in the $50 range they mostly can't, so the oil stays in a tank somewhere while they wait for the price to go back up, but it doesn't. Meanwhile, the Extractors of Oil all around the world keep extracting, because they have to do that to pay their bills. Crude keeps piling up because Konsumers refuse to burn the shit fast enough, because they can't AFFORD to burn it faster!
Until they lower the price DRASTICALLY, the glut will continue to accumulate. Eventually here, they will run OUT of tanks to store this shit in, and it does cost money every day to keep the Oil you bought at one price stored in a tank somewhere to sell on another later date at the higher price you hope for. NOBODY wants to "buy high, sell low"! That's a recipe for Bankruptcy of course. So they keep the oil in the tanks, and they keep filling up more and more.
Oil Tanker Parking Lot off Singapore
Inevitably, a LIQUIDATION SALE has to come here. There is not endless room for storage of this stuff above ground, and besides that it's expensive to store all that oil. Whoever owns it is bleeding red ink as long as they hold onto it.
Now, whenever you read any of the Oil pundits, they will tell you the reason for the glut is either OPEC members cheating on their quotas, Iranians bringing more Oil online or FSoA shale frackers drilling more wells. But is the total global production really up all that much? No, in fact it's been going down since it peaked in August of 2015. So if it's not the supply going up, why the glut?
IT'S THE DEMAND, STUPID!
Because they massage the figures everywhere else in the economy to show "growth" and nobody wants to admit being in a recession, Oil inventory keeps growing. This figure you can't massage (well not too much), because the stuff is a physical quantity that has to be stored in…something. So they have to know where they are going to put it.
Oil is a Global Commodity, in which the FSoA is among the largest consumers but it's not the only consumer. Europe as a whole consumes a lot, China consumes a lot also. All the consumption is not Happy Motoring either, a lot of it is industrial consumption. Globally in aggregate, if the economy was truly growing we would be consuming more Oil, not less.
Sometimes when I make the Demand Argument with respect to both the price and the glut, critics will tell me, "But RE, the traffic is just as bad as ever and everybody in my neighborhood is still driving gas guzzling SUVs!". Well, that may be true in your neighborhood, but in somebody's neighborhood somewhere it's definitely NOT true.
My best guess is most of the reduction in demand is coming from southern Europe, where they have been in severe recession for years now. This is probably also bleeding into the Chinese manufacturing sector with declining demand for their toys. So then they use less Oil in the manufacturing process.
With a declining amount of total production, along with a Hockey Stick graph of skyrocketing inventory, the only answer can be declining global demand for Oil. In order to get the demand up, they have to drop the price down. But they're already losing money at the current price in the $50 range. So the traders keep hanging on for the day the demand will magically rebound here and the consumers will step back up to the pump and pay the prices they need to make a profit. There is however no reason at the moment to believe that the consumers will magically get more money to pay more for the oil, they already have trouble paying for it at the price it is selling for now.
Unlike the magical world of Money where you can conjure as many digibits as you want out of thin air and which takes virtually no room to store inside a laptop, Oil is a physical commodity which must be burned to have value. If it's not burned as fast as it is pumped, then it's going to lose value. The traders don't want to recognize the loss of value though, because they will take a serious bath. A bloodbath. They don't have to take the write down though until they actually sell the stuff. So they don't sell, they keep it stored on a tanker somewhere and pay the daily storage fees out of more borrowed money, which the banks keep lending them because they will go tits up when the traders they lent money to go tits up. No matter how much money they lend to keep storing the Oil though, eventually they're going to run out of room. Then EVERYBODY will HAVE to stop pumping Oil until they work through the glut. Given there is double the normal inventory, this could take a little while. Can any Oil Producing nation go even a week without the revenue from their Oil?
This condition of extreme glut has to break, and the only way to break it is a major reduction in the price. When that comes, there will be carnage all across the energy and banking industries. I don't know how long before the last storage tank and VLCC tanker will be full up, but I can't imagine it is too far off. The End Game Approaches.
Published on The Doomstead Diner on January 8, 2017
Discuss this article at the Economics Table inside the Diner
The First Law of Thermodynamics:
Energy is neither created nor destroyed, only transformed from one form to another.
How is wealth created? Is it created at all? An important idea in capitalist epistemology is that the capitalist system creates wealth, and that those who become wealthy within the system do so by creating that wealth. Do they really?
The issue here is the idea that some people are "Wealth Creators". Bill Gates, Elon Musk, Mark Zuckerberg, they all got incredibly wealthy, right? So they must have "created" wealth, right? This concept depends a whole lot on whether you view the idea of "wealth" from the POV of the Individual or from the POV of the System as a whole. Which lens you use on this microscope on makes a HUGE difference on how you view the distribution of wealth in the society at large.
In order to better elucidate my POV, I am going to use 3 different examples of biznesses that supposedly "create wealth". I will look at my own last bizness of the many I have been involved with first, the Gymnastics Bizness. Then I will look at the Dental Bizness, which is my friend Eddie's type of biz. Then I will look at Tesla, Elon Musk's really BIG bizness, currently creating tons of wealth for Elon. lol.
The Gymnastics Bizness
Now, in the case of the Gym Biz, what the Gym Owner does is to insert himself in between well to do parents of kids who can afford a pretty high price tag of around $400/mo to be on the Team and coaches who know how to teach gymnastics. Then there are lots of recreational gymnasts who come for 1 class a week for around $100/mo. The typical gym has between 500-1000 gymmies running through it at any given time. Because it is such a pricy sport to be putting your kid into and it is an optional thing to do (you don't absolutely NEED to do gymnastics like you need to have your teeth drilled when you have a toothache), the clientele has a pretty high average income. Poor people do not send their kids to a gymnastics school. So I put the average income for the Victims here at around $100K.
Now, if out of the 1000 Gymmies you have 200 on Team, that is $400 X 200 =$80K/mo income, x12 = $960K/year. Your 800 other Rec gymmies are paying $100/mo for another $80K/mo, another $960K/year. Total gross income here around $2M for a well organized gymnastics school.
On the outflow end of this conduit, the gym owner has the cost of his facility, equipment, salaries for coaches and the taxes & insurance he has to pay. Facility costs can vary tremendously from old warehouses to custom buildings. Equipment also varies from old beat up stuff bought used to brand spanking new stuff from Spieth-Anderson or AAI. Coaches are almost universally paid low wages, often teenage ex-gymnasts are used as coaches at Min Wage before they even go to college. You gotta be a really first class coach to get out of this Min Wage level and actually make a living at coaching the sport. Even so, you never get into 6 figures as a coach unless you own the gym and run the conduit scheme.
Depending on the market they insert themselves into, Gym Owners can both become exceedingly rich or they can fail miserably, I've known both types over the last 30 years. In neither case though did anyone "create" any wealth. All they did was sieve wealth from one end, the victims, on the way to it's other end downhill in this process. The gym owners who got rich were the ones who were best at soaking their victims, but they never created any wealth here.
Where did that wealth come from? Well, many of the parents here are professional, doctors, dentists, lawyers and so forth. They in turn were using their own conduit schemes to sieve wealth from their victims. They have nice big paychecks incoming, so they can afford to pitch $400/mo after tax income to keep gymmie happy. In fact it costs a good deal more than that when you include all the meet fees, team leos and warmups, private lessons etc.
The Dental Racket
So now let us look at one of the Victims of the Gym Biz, the Dentist with his prized young daughter with this quite rare talent of extreme coordination, strength and flexibility and also pychological qualities of fearlessness and a drive to succeed, who sees Simone Biles/Mary Lou Retton/Shannon Miller/Shawn Johnson/Nadia Comanice on TV at the Olympics and wants to make her a STAR! How is he "creating wealth" to do this?
In order to analyze the Dental Biz in detail,, I made a new Infographic to examine how the Dental Conduit Scheme works!
There are 3 basic Nodes here, the Dental Victims, The Dentist and the higher level extractors taking profit from the Dentist, which makes him a second level Victim.
I used some average numbers here, giving the low level Victims an average take home salary of $50K (which is probably a high estimate) and the Dentist an average take home salary of $250K (which is probably a low estimate). I put the tax bill for the Dentist at a 50% rate, so it costs also $250K in taxes for the dentist every year.
For the wage slaves working for the dentist answering the phones, filling out the medical records and dealing with regulations and insurance companies, I figured 8 employees each making around $60K average, for around a total of $500K. A dental hygenist might make a bit more, a records clerk less.
The dentist also has to buy a lot of expensive stuff to run his bizness, those gold fillings don't come cheap these days you know! Nor does the hardware for implants or aything else. You also gotta upgrade all the time and buy those expensive new Digital X-Ray Cameras, and you gotta fly all the time all over the country to Utah and other spots for getting your continuing education credits to maintain your license. Then there are the Malpractice Insurance bills.
So, in order to maintain a $250K/year income here in this Conduit Scheme, the Dentist needs a Gross Income of around $2M before expenses, taxes, insurance, materials etc etc etc. All of that money has to come from the Victims of the Dentist, each making an average of $50K.
So one way to look at this is how many Victims the Dentist needs to cover $2M in costs, and how much they have to pay him each year? If the Dentist has 100 Victims, then each Victim would need to pay the Dentist $20,000 every year to keep this conduit scheme going. Obviously, people making $50K a year cannot afford to pay $20K of that to a Dentist! So really the Dentist needs more like 1000 Victims to be successful with the conduit scheme. Now you are down to $2000 per victim, which is a bit more affordable at a $50K salary. BUT, can a single dentist really drill the teeth of 1000 different people every year?
I Googled the cost of Dental Fillings in TX.
On average, a silver filling costs between $50 and $150 for one or two dental surfaces. However, the price increases to the $120 to $300 range, if three or more surfaces require a filling. The good news is that dental insurance covers a majority of the cost since a filling is considered a necessary procedure.Sep 20, 2013
Mansfield, TX Dentist Explains the Cost of Dental Fillings | Mansfield, TX
Call the average cost $200. To work up a $2000 bill, each patient of the 1000 needs 10 fillings every year. So the dentist needs to drill 10,000 teeth each year, in 250 working days. That's 40 a day, 5/hr in an 8 hour day. So he has to drill & fill a tooth every 10 minutes, with a 10 minute break every hour to check for Doom on the Diner. lol.
Another way to look at it is how much money the Dental Biz needs to bring in each day to cover those $2M in bills. If you figure the dentist works 5 days a week 50 weeks out of the year, he has 250 days of extracting money from the Victims. That means that every last day of that 250 days, he has to bring in $8000 from the Victims. If he is working 8 hour days, that works out to $1000/hr!
Now, since I do not have PRECISE numbers on this to work with, these are all just estimates. BUT, even if you knocked my numbers down by half, you can see why it is not sustainable. The folks who pay the bills at the BOTTOM cannot retire the debt and costs that the Dentist has! They just don't make enough money to do that! Somebody somewhere is working up a nice debt bill. No wealth has been created, just an ever increasing pile of debt!
The only way this shit gets paid for these days is through ever increasing debt, and the asset in this example goes on the side of the Dentist and the liability goes on the side of the Victim. That is straight economics. You cannot make something from nothing.
Clearly here, the Dentist has created no wealth, all he has done is insert himself into a position where he can serve as a conduit between people who have dental pain or issues and those free of dental pain or issues. Unlike the Gymnastics Biz, it is not optional to visit or not visit a Dentist when you have a bad enough toothache. You have no options here within the borders of the FSoA, you MUST pay whatever the Dentist will charge to relieve your pain. Unless you cross the border into Mexico, you will bankrupt yourself if you make an average salary trying to pay off the dentists for fixing your teeth. I have visited at least a dozen different dentists over the course of my life trying to repair teeth here in the FSoA that other dentists in Brazil ruined in my childhood and adolescence. Every root canal and every cap cost me $thousands$ on a very average salary of median income for the time period. You are talking at least a dozen of these things over the time period. In the end, all that money went to waste, every single one of those teeth had to be pulled out of my mouth by a Mexican Dentist, who did it at the Bargain Basement price of $25 a tooth, whereas a Dentist here in Alaska would have charged me $300 a tooth to do the same job. It's a great racket here in the FSoA if you can get licensed to do it. Every last Dentist that I ever visited owned a Mercedes and had a nice huge McMansion to live in. I paid for that, along with all the other Dental Victims.
Why can dentists here in the FSoA charge such high prices for these tasks? Because they run a gated profession with few Dental Schools relative to population size and they make it EXTREMELY difficult for a foreign trained dentist to get licensed to practice dentistry in the FSoA. So there exist a LARGE pool of victims (basically everyone since everyone has some kind of dental problem at some point), and a relatively SMALL number of dentists licensed to do the job on your teeth that needs to be done. So they can pretty much set the price as they please, the only constraint on this being what the other local dentist will charge, since most people will not cross the border into Mexico. As a Dental Pain Sufferer, you are over a barrel if you cannot make the border crossing to Mexico, you MUST pay whatever the Dentist charges or else suffer agonizing pain until you figure out how to yank the offending tooth out of your mouth yourself. This is called a contract under DURESS, and it is illegal in Tort Law. In reality, you are not obligated to pay any of these charges by tort law. In reality, all dental patients shoudl file a Class Action Lawuit against all Dentists and strip them of their criminally stolen money and property.
The Elon Musk Flim-Flam
OK, we have now moved through 2 types of Small Biz, the Gymnastics Biz and the Dental Biz. To finish off for the day here, let us look at BIG BIZNESS, Elon Musk's Tesla, Gigafactory Battey facility and Rocket Ship Biz.
Not a single one of these biz makes any profit at all, but they have a Market Cap of $BILLIONS$ WTF did all the money come from so Elon could build his toys without making a dime of profit for YEARS? Can you imagine going for years with a negative net income and still getting credit to keep going?
Like all of the really large corporations and big biz of our society, it is all run on CREDIT, and if you are well enough connected the credit has been quite endless. The "money" flowing down through the society into all the small biz like Gymnastics Schools and Dental Offices actually begins with these very large corporations and their associated banking industry, they are all created through the massive issuance of debt in the form of corporate bonds. The other big money creation mechanism is from Goobermint bonds, debt which the population is supposed to retire through paying their taxes. The debt of corporate bonds is supposed to be retired by profits from the industry, again which the population at large is supposed to provide the money for by buying the products. In reality, in neither case can the population ever make enough money to retire the debt either created by the corporations or by da goobermint. This can be masked for a long time, but if you notice just about every large corporate entity eventually goes bankrupt. The railroads all went bankrupt, the big automotive companies like GM and Chrysler went bankrupt, and the airlines like TWA and PanAm also went bankrupt. Then new ones pop up with new issuance of debt and reorganizations, mergers and acquisitions, but they too will all go BK in the bye and bye. No wealth was created here in any of these industries, only an ever increasing pile of debt along with a lot of landfill.
Similarly, Da Goobermint never created any wealth either by issuing out its vast quantities of debt. While certainly Goobermints have built many roads, bridges, tunnels, power plants, sports stadiums etc, the maintenance cost on all of it is always greater than the revenue brought iin through taxation to pay for it. So the only way to keep going with it is to issue out still more debt. Which they do as long as they can, but eventually smaller countries like Greece get cut off from the bond market, at which time their economy immediately tanks. Similarly, any large corporation cut of from the corporate bond market immediately goes BK.
The "wealth" Elon creates is simply a bigger pile of debt somewhere else, bur unlike the gym owner or dentist, he has inserted himself into the very TOP of the food chain, getting his debt money directly from the folks in charge of manufacturing money, the TBTF banks. Elon hardly needs Victims to bilk at all selling Teslas, hell he's only sold around 150,000 of them since 2008! In the end, he's really bilking the taxpayer, who will end up with all the bad debt he has created on their balance sheet.
Nobody in this whole chain of events ever creates wealth. They only sieve wealth in various types of schemes and rackets on it's way down the thermodynamic hill. So where then IS the wealth "created"?
It's not created, it's EXTRACTED. The wealth is the resources of the earth, and all that debt money that is created are little tickets (or now digibits) which allow you to buy some of the resources, most particularly the energy resource of oil. Those little tickets trickle down through the rest of the economy, and various types of biznesses and rackets insert themselves along the way as the energy moves its way down the thermodynamic hill. Who gets the privilege of creating these little debt tickets? The folks who control the energy of course, which is why the Energy Industry and Bankstering Biz are so closely related. It's why the Rockefellers who controlled Standard Oil ALSO founded the Chase Manhattan Bank, now JP Morgan Chase. They issue the credit to buy the Oil, and it gets burned up all the way down the line in various stages as it moves through all the rackets. The BEST rackets are at the very top of the food chain here, like Elon Musk or Mark Suckerbug's rackets. Neither one creates any wealth though.
By the time you get down to small time rackets like the Gym Biz and Dental Biz, you're getting close to the end of the line on the way down to the final stop, the end consumer of everything that happened above in the chain. The end consumer DEFINITELY creates no wealth, but rather destroys what is left of it on its way to its final destination as waste in the landfill or CO2 in the atmosphere.
What wealth there was in the Earth was captured over billions of years by photosynthetic organisms collecting energy from the sun. Animal life just extracts that energy from the plant, then eventually both die and sequester carbon, and then after that Homo Saps evolve to burn up all that energy, and develop an economic system which does that. Very rapidly too!
How long does the game last? Only as long as there is a big enough thermodynamic gradient to support a downhill flow of the energy. It appears we are getting quite close to the point where no work can be done exploiting the energy flow left. At least not on the scale globally we have been doing it anyhow.
Published on Cassandra's Legacy on December 15, 2016
Discuss this article at the Energy Table inside the Diner
Michael Klare has published an extensive comment on "Tomgram" about what appear to be the current policy choices by Donald Trump on energy and he correctly notes how contradictory they are. Basically,
The main thrust of his approach couldn’t be clearer: abolish all regulations and presidential directives that stand in the way of unrestrained fossil fuel extraction, including commitments made by President Obama in December 2015 under the Paris Climate Agreement.
In other words, Trump seems to be locked in a market-only vision of the problem, thinking that physical realities have no role in the extraction of fossil resources. On this, he is surely not alone, but the problem is that deregulation is not so important as Trump seems to think. It was not because the market was over-regulated that oil prices spiked up to $150 dollars/barrel in 2008 and kept hovering at around $100/barrel from 2011 up to late 2014. And it was not because oil production was suddenly deregulated that prices collapsed to below $40 in 2015. The oil market, as all markets, suffers from instabilities that may be, sometimes, cured by regulations. Eliminating all the regulations may well cause further price swings and wild oscillations, rather than increase production.
If oil companies are in trouble, right now, is because the oil prices are too low, not because oil extraction is over-regulated and Trump's policies – if they were to work – may damage the fossil fuel industry even more. That, in itself, would not be a bad thing – especially in terms of the effects on climate. The problem is that Trump's ideas to revitalize the fossil fuel industry may not be limited to deregulation, but could involve actively discouraging renewable energy, a policy that, for instance, the Italian government has been successfully applying during the past few years.
So, why does Trump want to do such a thing? Here, we can only imagine what passes in the mind of a 70-year old man who is not known to be especially expert in anything. Klare puts forward a possible explanation as:
To some degree, no doubt, it comes, at least in part, from the president-elect’s deep and abiding nostalgia for the fast-growing (and largely regulation-free) America of the 1950s. When Trump was growing up, the United States was on an extraordinary expansionist drive and its output of basic goods, including oil, coal, and steel, was swelling by the day. The country’s major industries were heavily unionized; the suburbs were booming; apartment buildings were going up all over the borough of Queens in New York City where Trump got his start; cars were rolling off the assembly lines in what was then anything but the “Rust Belt”; and refineries and coal plants were pouring out the massive amounts of energy needed to make it all happen.
And don’t forget one other factor: Trump’s vindictiveness — in this case, not just toward his Democratic opponent in the recent election campaign but toward those who voted against him. The Donald is well aware that most Americans who care about climate change and are in favor of a rapid transformation to a green energy America did not vote for him,
Given his well-known penchant for attacking anyone who frustrates his ambitions or speaks negatively of him, and his urge to punish greens by, among other things, obliterating every measure adopted by President Obama to speed the utilization of renewable energy, expect him to rip the EPA apart and do his best to shred any obstacles to fossil fuel exploitation. If that means hastening the incineration of the planet, so be it. He either doesn’t care (since at 70 he won’t live to see it happen), truly doesn’t believe in the science, or doesn’t think it will hurt his company’s business interests over the next few decades.
This interpretation by Michael Klare may or may not be correct but it underlies a basic problem: elections give power to people on the basis of their promises, but nobody really knows how they will behave once they have power in their hands. The world's history is full of leaders who had mental problems of all kinds or even just had a vision of the world that was completely out of touch with reality. The result was normally unmitigated disasters as leaders, in most cases, refuse to learn from their mistakes. And not just that, they tend to double down, worsening things.
Published on the Doomstead Diner on October 8, 2016
Discuss this article at the Geopolitics Table inside the Diner
Many commentators have sought explanations and solutions for the Syrian debacle. Only by accurately identifying the underlying cause(s) of a situation can we begin to craft workable solutions, if any solutions are possible at all.
To me, this is akin to making an accurate diagnosis when faced with a complex pathological condition, then trying to shape a management plan to achieve a cure (or at least to aim for symptomatic relief and palliation, if the situation is irredeemable). As I have stated before in my essay "How to cure Terrorism" 1 it is essential to identify not only the underlying cause(s) of a situation and any predisposing factors, but should also (in the case of sudden collapse), identify any proximate triggers.
How do we know a diagnosis is accurate? Because the correct paradigm bears all the hallmarks of Truth, viz:
It is supported by the best evidence
It is coherent (internally and externally consistent), with plausible underlying mechanisms operating within its framework
It offers the best explanation for the situation
It may have useful predictive value for future outcome(s) ie it can offer a prognosis
The elimination/resolution of properly identified underlying cause(s), predisposing factors(s) and proximate trigger(s) will offer the best prospect of a cure.
Again, I have used these principles in past essays when outlining the epidemiological truth that smoking causes lung cancer (even though it is impossible to demonstrate a one-to-one cause and effect relationship in any individual lung cancer case). I also used these principles to prove that the US invasion of Iraq in 2003 had nothing to do with WMDs or the pursuit of "freedom" or "democracy" nor was it about deposing a tyrant "for the sake of the Iraqi people". The truth was that the invasion of Iraq was about OIL: specifically about the US pursuit of oil related economic, political and military global power. The ideology of US neoconartist global dominance mediated by the control over the flow of oil and the enforced continuity of the petrodollar scheme.
I cannot delve into the Syrian situation in detail here, which would require a lengthy Phd type thesis. Instead I will simply outline various useful lenses through which the Syrian situation may be viewed. Lenses are meant to help us see better. They may help us see clearly various portions of a jigsaw puzzle which make up our "big picture" of Truth. However some lenses may be fabricated for political purposes and cause complete distortion. They are contrived propaganda, crafted to serve the agenda of the angloeurozionist "GIMME" (Government, Industrial, Military, Media & Economic) establishment. Intellectual Kool Aid to keep the masses brain dead (to mix several metaphors).
Let us first cast aside a couple of blatantly bogus paradigms:
The Syrian situation is a revolution against tyranny by the common Syrians who are clamouring for democracy and freedom, which was what the "Arab Spring" was all about.
This utterly bullshit paradigm was best demolished by Tom Lewis with his inimitable wry manner in a podcast I have referenced in the past. 2
The Syrian situation is a religious civil war, mainly a domestic Sunni versus Alawite/Shi'ite conflict. As I mentioned in a previous essay, Bashar Al-Assad, nominally an Alawite, was a member of the Baathist secular party and he himself married a Sunni lady. There are NO clearcut religious lines here. Nor is it a particularly domestic dispute. The so-called Syrian Sunni rebel groups include among their numbers many foreign intruders. ISIS is a foreign invasion force. The most effective fighters against ISIS are the Kurds and most of those in Syria are indeed Syrian. Kurds are nominally Sunni and may be genuinely religious, but their outlook is fairly progressive and they take pride in their courageous female soldiers who do not wear headscarves. ISIS claim to be pious Sunni Muslims, which is a complete lie. ISIS are fake Muslims, they are primarily terrorists, rapists and gangsters who hide behind the bogus banner of a religion to legitimise their anti-human activities in pursuit of their unrestrained lust for power. This is identical to how the US corporate owned politicians hide behind the bogus banner of "freedom" or "democracy" to legitimise their anti-human agenda of global ecocide, in pursuit of their unrestrained lust for power. ISIS was in fact the creation of the US GIMME establishment. The "religious civil war in Syria" paradigm ignores the numerous external operators who are major players. The so-called "moderate" Sunni rebels in Syria are deeply intertwined with many Salafist extremists including the notorious Jabhat Al Nusra (who are Al Qaeda in Syria). US State Department spokesperson Elizabeth Trudeau admitted this fact at a press conference on 3 October, which was held to announce the breakdown of discussions between Russia and the US over Syria. Trudeau said the US had been unable to "demarble" (her word) the "moderate" Sunni rebels from entities such as Al Nusra, who she admits are Al Qaeda terrorists. Hence by their own admission, ongoing US support for these rebels represents support for terrorist criminals. I have provided other references for these facts in previous essays.
Evidence-based "lenses" with good explanatory power, which confer better understanding of the Syrian situation:
The events leading up to the collapse of Syria were manifestations of the Limits to Growth. In a previous essay I outlined the problem of declining Syrian petroleum production which intersected with their increased domestic oil consumption (Peak Oil combined with the ELM) which resulted in zero oil income and hence contributed to their economic demise. 3 A smaller Syrian population of the past could have been sustained by fewer resources, but the large population of 23 million by 2011 faced severe per capita shortfalls of everything. The worst drought in living memory from 2006 to 2010, which was aggravated by climate change, led to agricultural collapse, the mass migration of impoverished farmers to the cities, food shortages, conflicts and the breakdown of society.
The LtG re-ignited old tribal and sectarian conflicts which were greatly magnified by the post colonial legacy of egregious gerrymandering (Sykes-Picot "treaty") 3. Each sect is largely motivated by their own self interest, irrespective of whatever religious banner they may claim live under, whether they be the Sunni Muslim Brotherhood (who have a long history of striving to gain power in Syria), the Kurds (who are struggling for an independent homeland), the Alawites (who initially hoped to maintain control over Syria but are now engaged in an existential struggle for survival) and so forth.
Syria is a proxy war in the new Great Game. The US has more than 800 overseas military bases 4 around the world. In contrast, Syria is the last remaining foreign outpost of Russian military influence in the world, with the port of Tartus and the airfield at Latakia hosting Russian warships and planes. Since the end of the Cold War, the unbridled US hegemonic agenda of complete global dominance has been characterised by their mindless and destructive policy of foreign regime change to install puppet leaders under US control. This agenda was exemplified by the US / NATO covert regime change imposed on Ukraine with resultant civil war and the ongoing encirclement of Russia by US nuclear missles. Ukraine, formerly the bread basket of Europe, has now become the basket case of Europe. Let is not even delve into Iraq or Libya. In the case of Syria, the US have been trying to get rid of Russian ally Bashar Al-Assad and replace him with a US puppet. Why did Russia begin their foray into Syria by dramatically launching low flying, contour hugging "under the radar" cruise missiles from ships far, far away in the Caspian sea? Why not just use their bombers based in Latakia? ISIS may have copped the cruise missiles, but the Russians were primarily sending a message to Uncle Sam: your super expensive high tech US aircraft carrier fleets are now completely obsolete. Russia these days is able to deploy unstoppable massive conventional force from a distance which the US cannot possibly counter (the same capability is certainly true for China, who spend far more on their military than Russia). The USA is now railroading the entire world into a possible Hot War which can easily turn into a global thermonuclear war, for no reason other than their crazed hunger for power.
Apart from Russia and the US, there are other "lesser puppet masters" who have their own reasons for meddling in Syria. In the "Russian" camp there are Iran, Shi'ites from Iraq and Hezbollah. In the "US" camp there are Saudi Arabia and Qatar (and to a lesser extent other Gulf players such as Kuwait), who have also employed foreign mercenaries such as Chechens.
The schizophrenic involvement of a particular proxy player, Turkey: Turkey, as a NATO member, nominally claims to be on the US side and against ISIS. However under the wily maneuvering of the duplicitous Recep Tayyip Erdogan, the reality is much more complex. What Erdogan says and does are often contradictory and discordant. One fact is crystal clear however: Erdogan's actions are always in the service of his own self interest and in that sense he cannot be regarded as a true US puppet. Recent events in Turkey have been thoroughly fascinating and warrant detailed analysis far beyond the scope of this short essay. Some examples:
Erdogan had been buying cheap oil illegally from ISIS, oil which had been stolen from Iraq. This oil entered Turkey via road trains through the (intentionally) porous Turkish-Syrian border. Erdogan was therefore in fact financing ISIS, his nominal enemy. This fact was patently obvious to the USA from satellite images, which America chose to ignore, which adds credence to the view that the US actually supports ISIS while pretending to oppose it. This illegal oil trade was abruptly terminated by Russian bombing, in response to which Erdogan petulantly shot down a Russian plane, a reckless act of despicable bastardry which could have triggered wider scale war if not for Russian restraint.
Last year, Turkish media exposed the fact that the Erdogan government had been illegally supplying weapons to extremist insurgents across the (intentionally) porous Turkish-Syrian border. Such a domestic media expose will not happen again, not because Erdogan has changed his ways, but because he has now muzzled the Turkish media.
Erdogan regards his primary enemy as the Kurds because the Turkish Kurds threaten to secede from his neo-Ottoman aspirational empire to form an independent Kurdistan in conjuction with the Syrian and Iraqi Kurds. Therefore he does not hesitate to use a secondary enemy, ISIS, as a tool against his primary enemy. This explains his partial support for ISIS, even as he fights against ISIS at other times and in other places that suit him. Note that the Turks, Kurds and ISIS are all supposedly Sunni, hence none of this has anything to do with religion.
We do not know for sure who masterminded the recent "failed coup" in Turkey, but we do know who has benefited the most from it. Erdogan has since been able to cast aside any pretence of due process and has summarily purged more than a hundred thousand potential dissidents and opponents from all positions of influence in Turkey. He has thoroughly entrenched his power and is essentially now a totalitarian dictator. He embarrassed the US with the accusation that America was harbouring and supporting the purported coup organiser Fetullah Gulen. It is true that America will stand to gain by installing a more US compliant puppet leader in Turkey, hence this accusation is not one which can be easily dismissed by US propaganda, given America's well known repetitive policy of foreign regime change.
Being irate (or pretending to be irate) with the US, Erdogan then decided to kiss and make up with Putin, who then allowed the resumption of Russian tourism into Turkey, an extremely valuable source of income for Ankara. That, as well as the future possibility of a Russian gas pipeline through Turkey to Europe, another money spinner.
It is true that Turkey has taken on more than its fair share of Iraqi and Syrian refugees, now harbouring more than three million 5. On the other hand, Erdogan has cynically used the Syrian refugees as human bargaining chips to get what he wants from the EU. He has shown he is willing and able to open and close the floodgates of refugees from Turkey into Europe and thereby has been able to extort money from the EU and prise out freedom of movement privileges for Turks into the EU.
By offering Turkish citizenship to more than 2 million Syrian Sunni Muslims, Erdogan will be able to increase his support and power base in Turkey, as he is aligned with the Sunni fundamentalists. Erdogan opposes and is opposed by secular Turks (especially those in the military who had traditionally been faithful to the secular principles of Mustafa Kemal Ataturk).
The Machiavellian Erdogan has repeatedly demonstrated a nimble ability to have his cake and eat it (that is, until such future time when an jackal can find a way to penetrate his security detail and assassinate him). Any serious coup organiser worth their salt would have commenced their operation by assassinating the incumbent. The fact that Erdogan escaped such a fate indicates that either the coup planners were utterly incompetent or that it may indeed have been a false flag event engineered by Erdogan himself.
Syria is a proxy war over natural gas pipelines: In order to understand the geopolitical considerations about this proxy pipeline war, it is essential to understand the physical properties of natural gas, which render it a far inferior source of energy (and source of money) compared with petroleum. Nevertheless if sold in vast quantities to a vast market, the money to be made can be mind boggling. Key considerations:
If a natural gas field straddles a political border and is "shared" by two parties, the party which extracts the gas first and fastest will be able to harvest most, if not all the wealth from that field, because the gas will rapidly move through the field towards the extraction point. Contrast that characteristic with viscous crude oil, which can only sluggishly migrate at a maximum rate of 6% per year through porous rock.
Early gas extraction is of no value unless you have an immediate market to offload the gas. Natural gas is just too energy sparse to economically store above ground in significant quantities for any length of time.
The optimal market for the gas is one close to the gas field. The further away the market, the more expensive it is to transport the gas and hence the lower the profit margin. Even if the market is thousands of kilometers away however, profit margins can still be good, so long as the gas can be transported by pipeline in gaseous form. Export to far distant locations (eg another continent) is only feasible by liquefaction to render it far more energy dense. Making energy dense liquid natural gas requires refrigeration down to about minus 163 degrees Celsius, cryogenic storage and transportation in highly insulated, massive, purpose built LNG tankers which require continuous refrigeration. Refrigeration energy requirements are particularly high when the tankers sail through the tropics. Any power failure will be catastrophic. The LNG trade requires special facilities at the importing port which can accept and process this tricky commodity. All those factors amount to huge energy expenditure, huge capex, custom construction of port facilities and tankers and also requires a cashed up customer with advanced infrastructure. If the market price for natural gas falls, the whole system collapses financially, hence LNG schemes can be likened to unconventional oil scams. LNG export in lifecycle analysis has very poor EROEI compared with piped gas export.
The above considerations form the foundation for an understanding of the Syrian pipeline proxy war. The South Pars / North Dome gas field is the largest conventional natural gas field in the world. It is mostly located under the seabed of the Persian Gulf and straddles the borders of Iran to the NorthEast and Qatar to the SouthWest who are bitter enemies. Even though it has been in production for more than a decade, the party who accelerates their extraction will effectively steal most of that remaining resource away from the other party. However that gas cannot be quickly harvested without first ensuring there is a big market for it. A big market cannot be assured unless there are pipelines in place to supply that market. Qatar does export LNG (mainly to East Asia), but this is subject to the substantial constraints outlined above, with limited profit margins. The most prized gas market from the view of both Qatar and Iran, is Western Europe. The party that can establish a pipeline to Europe first will win that prize. The critical territory the pipeline must cross, determined by geography, is Syria. In 2009 Qatar, a Sunni client state of the US, approached Bashar Al Assad proposing such a pipeline through Aleppo province. Not surprisingly, Assad knocked back Qatar's proposal because it ran counter to his political alliances. A Qatari pipeline would undermine the price of Russian gas exported to Western Europe and would scuttle Iran's chance of benefiting from South Pars. When Iran subsequently approached Assad about such a pipeline, economic circumstances in Syria had by then greatly deteriorated. This new pipeline proposal from Iran, a Shi'ite state and ally of both Syria and Russia, came with the promise they would turn Syria into an energy processing, money making hub. Assad was therefore ready to proceed with Iran's deal. Shortly thereafter, the "civil war" in Syria broke out, instigated by so-called "Syrian" rebel groups which actually consisted of many foreign mercenaries funded largely by Qatar and Saudi Arabia.
At the time of writing of this essay in early October, Aleppo city is on the verge of being recaptured from ISIS by Syrian government forces with the help of Russia. That did not stop Turkey from moving troops into Aleppo province last month under operation "Euphrates shield", Turkey's proposal being to create and occupy a "neutral" buffer zone. Of course, it is nonsensical to regard such a zone in Northern Syria as neutral: if defacto occupied by Turkey, it is defacto neo-Ottoman empire annexed territory. Perhaps we should rename Erdogan's country "Vulture" rather than "Turkey", or perhaps Turkey Vulture. Of course such an occupation will also mean that Turkey Vulture may benefit financially in future by renting a gas pipeline corridor in Aleppo province to the highest bidder. No mention about that lucrative prospect from Turkey Vulture though, whose motives, so we are told, are purely altruistic, as is true for all Vultures.
Enter another player, Israel, into this sorry saga of greed. In December 2010 a gas field off the Levantine coast was discovered so massive that Israel called it "Leviathan". Whereas there is little risk of another country tapping into that field, there is a risk that either Qatari or Iranian gas piped through Syria to Europe will seriously undermine the price of gas exported to Western Europe. And what will be the natural market for gas from the Leviathan field? Why Western Europe of course. It is obvious that Israel will stand to benefit from ongoing chaos in Syria, chaos which will ensure that both Qatar and Iran cannot establish a pipeline to Europe, thus allowing Israel to develop its own Leviathan field for export to Europe at a premium price (expected start of production is 2017). America's failed agenda of "regime change" in Syria has resulted in nothing but chaos, however Israel is more than happy to support and maintain that chaos. Let us recall Netanyahu's squealing insistence that the US should bomb the crap out of Syria during his rabid rant to an insane Republican audience at the US congress in March last year. Who gives a shit about 23 million Syrian lives anyway if there is gas money to be made.
The gas story does not quite end there however. Get ready for an anticlimax. Only last year, an even larger offshore gas field, much bigger than Leviathan, possibly even larger than South Pars, was discovered off the coast of Egypt, the Zohr field 6. Due to Egypt's greater experience with the fossil fuel and gas industries, they have good prospects of fast tracking the gas production which will offer stiff competition with Israel's fledgling gas industry and severely blunt Israel's expected economic windfall. Oy vey, enough already!
Any astronomer will tell you that to properly study the true nature of a star, it is necessary to examine it using all the different electromagnetic spectra available to us, whether radiowave, microwave, infrared, visible light, UV, Xrays or gamma rays. That is the best way for us to build up a comprehensive and accurate overall picture of that star. Furthermore it is necessary to eliminate or compensate for other factors which may distort or falsify our interpretation, such as atmospheric interference or doppler shifts or gravity distortions by dense bodies (eg black holes) which may bend the incoming electromagnetic beams.
Similarly in order to properly understand Syria, we must view the situation through all evidenced based lenses available to us, while simultaneously discarding bent and bogus paradigms fabricated by the Murdoch/mainstream media and their fee-for-opinion prostitute talking heads, even though they may hold "impeccable" ivy league "qualifications".
US and Australian rightwing nuts will undoubtedly accuse me of being a greenie commie freedom hating eco-terrorist. Anyone who has read my articles will know I strongly support open, liberal democratic processes which must be guided by evidence, reason and fairness with particular emphasis on transparency and accountability. I strongly support responsible free speech based on facts and reason. I strongly oppose irresponsible deceitful speech based on blatant lies such as Holocaust denial or global warming denial. Opposing and suppressing such deceitful Neonazi or Orwellian speech does NOT contradict the principle of free speech, it removes noise and promotes the process of constructive dialogue and the transmission of useful information. I strongly support the original stated ideals of America; the ideals of Abraham Lincoln, of Franklin Roosevelt and of Martin Luther King. I view Americans (or Australians or any other nationality) with similar values as my natural allies, my friends. The America of Lincoln, FDR and MLK that I admired, with all the promise it held, no longer exists. It has been replaced by a perverse mockery of what might have been. The beacon on the hill has been extinguished, not from without, but from within.
The voices of ordinary Syrian people have been drowned out in all these proceedings. We can only imagine what they must want, be they Sunni, Alawite, Christian, Druze, Yazidi or any other group. Is it so difficult to imagine that they simply want peace, security, shelter, food, clean water, education for their children, health care? That they simply want what we, in more stable societies take for granted? Simple human requirements that the so-called "leaders of the free world", through their despicable foreign policy, have deprived them of? The best thing the USA can do, to allow any prospect of any beneficial outcome for the Syrian people, is for the USA and its client states to fuck off.
G. Chia, October 2016
Published on Peak Surfer on September 24, 2016
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"“There is a bottleneck right here … and today I am directing my administration to cut through the red tape, break through the bureaucratic hurdles, and make this project a priority.”— Barack Obama, March 22, 2012."
On April 1, in the last phase of istawicayazan wi, the moon of sore eyes, acting with love and fierce determination, the youth of the Standing Rock reservation stood together in prayer at the place called Sacred Stone. At the close of their prayer, they remained. Figuratively, they drove stakes into the ground and tied their legs to them. They might be killed there, but they would not leave.
Facing them were the arrayed forces of the U.S. Army Corps of Engineers, the White House, four state governments, and the corporations and banks that form Energy Transfer Partners. ETP (NYSE:ETP) owns and operates Panhandle Eastern Pipe Line Company, successor to Southern Union Company, and Lone Star NGL. ETP also owns 67.1 million common units of Sunoco Logistics Partners (NYSE:SXL) a company that hopes to see the United States become an oil-exporting nation once more.
The Dakota Access Pipeline (DAPL) is a 1,172-mile, 30-inch diameter steel pipe that will connect the million-barrel-per-day Bakken and Three Forks fracked oilfields of North Dakota to a bigger pipeline in Illinois for transportation to Louisiana and Texas SXL crude oil terminal facilities and there to be loaded onto ocean-going tankers.
DAPL will carry 570,000 barrels per day. Unless one of those supertankers sinks, one hundred percent of that will go to the atmosphere as deadly, human-extinction-intending, greenhouse gases. So will the oil and gas flowing through the other 71,000 miles of pipelines owned by ETP.
It will cost more to build capacity, produce, refine and burn that oil than to provide the same energy from clean, solar power sources.
On March 12, 2012, two years and three months after successfully derailing the Copenhagen climate agreement, President Obama issued a presidential memorandum ordering federal agencies to expedite the licensing of new oil and gas projects.
Two months before the Standing Rock youth assembled, the US Army Corps of Engineers, acting for the Obama Administration, gave DAPL an allotment of NWP “fast track” permits. These permits are usually reserved for powerlines or other utility right-of-ways that do not threaten water supplies. NWP approval meant that ETP could legally bypass public notice and regulatory review under the National Environmental Policy Act and the Clean Water Act.
Sierra Club, National Wildlife Federation, several 350.org local chapters, the Center for Biological Diversity, WildEarth Guardians, Corporate Ethics International, and others used the comment process on the KXL/Transcanada pipeline to detail the flow of abuses to environmental and native sovereign rights that issued from the White House “all of the above” policy.
Both the Clinton and Trump campaigns count ETP and its allies as major funders. Harold Hamm, founder and CEO of fracking giant Continental Resources, is an energy aide to the Trump campaign and potential future U.S. Secretary of Energy. Hillary Clinton has remained studiously silent on the Dakota pipeline protests but openly supports the Obama fast track policy.
On September 3, only a day after the Standing Rock Sioux filed action in court identifying their sacred sites, ETP brought in bulldozers to raze the land named in that complaint and affidavits and render the issue moot. To prevent that, entire families left their homes on the reservation and went onto the sacred sites in an attempt to block the bulldozers. Pipeline security workers responded by letting loose dogs and pepper spray.
There have been at least 58 arrests thus far at the #NoDAPL protests, with arrest warrants pending against both journalist Amy Goodman, who filmed the dog attacks and was charged with trespass, and Green Party presidential candidate Jill Stein, who spray-painted a bulldozer blade and was charged with vandalism.
When a federal judge denied a tribal motion to halt pipeline construction, the Obama administration stepped in to ask that ETP voluntarily cease other construction than in the area in controversy. Most news media, including ourselves, mistook this for meaning the White House was coming to the aid of the Sioux. In fact, it was exactly the opposite, and anyway the ETP voluntarily chose not to stop.
Construction continues. ETP just purchased the ranch where the Sacred Stone Camp is located and where additional native burial grounds and sacred sites have just been identified.
The tactics chosen by the Standing Rock Sioux could have come straight from the rules for satyagraha by Mohandas Gandhi. The Nation followed the letter of the law in making its timely public comments and administrative interventions, in filing for an injunction, and in opposing this assault on its safety and sovereignty by physically standing in the way. Its protests are peaceful and nonviolent. It invited the whole world to watch as military blockades re-routed traffic and kept away the press, the National Guard was brought up to support the corporate goons and then praying children were uprooted with attack dogs, their mouths filmed dripping with the blood of those children.
When individuals are betrayed by a government, they can sue or protest. When the treaty protections of an occupied nation are betrayed by their occupier, their recourse must be to the international legal system. This week, Standing Rock Chairman Dave Archambault II addressed the 49-member United Nations Human Rights Council in Geneva Switzerland. He invoked the memory of Sitting Bull:
Sitting Bull came from Standing Rock and one the most famous quotes that he has is, “Let’s put our minds together and see what we can build for our children.” So today as this is the topic, something that guides us in our decision-making as leaders: We are putting our minds together so that the kids, the ones not yet born, have something better than what we have today.
Were you born too late to be a suffragette or freedom rider? To march across the Edmund Pettis Bridge in Selma? To encircle the Pentagon with the Yippies and try to levitate it? To sail with Albert Bigelow on Golden Rule and later Earle Reynolds aboard Phoenix, and still later Peter Willcox on Rainbow Warrior or David McTaggert on Vega, into the Pacific test zone to block the H-bombs?
Climate change is coming to the plains. Mother Nature doesn’t care how many dogs the oil barons have.
This is our moment. We are this season’s people. Its a good day to die.
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Published on The Daily Impact on September 12, 2016
When an oil well like Deepwater Horizon explodes, the images are unforgettable. When the entire industry starts to collapse, it’s hard to see and to remember.
Discuss this article at the Energy Table inside the Diner
In a recent essay I proposed the existence of a new human subspecies – homo sapiens ephemera — that is smart (thus sapiens) but severely afflicted by attention deficit disorder and long-term memory loss. Thus ephemera may understand, for example, the connection between a burning fuse at his feet and an imminent explosion, but almost immediately forgets it, goes on to something else, and is surprised by the blast. Nowhere is this behavior more evident than in the U.S. oil patch, whose collapse, predicted here and elsewhere for years, is now described by none other than Moody’s Investors Service, quoted in Bloomberg News as “catastrophic” and perhaps “the worst bust of any industry this century.”
Does anybody remember the Savings and Loan debacle? The Enron (“smartest guys in the room”) implosion? The Dot-Com collapse? And the Sub-Prime Mortgages that Ate the World? After each of these episodes, Ephemera slapped his slanted forehead and said, “Boy, that was dumb. But nobody could have seen it coming.” Put on your protective headgear, because it’s happening again.
When they came to you, Ephemera, and asked you to invest gazillions of dollars up front in the New American Oil Revolution, they talked about energy independence! and America, Number One! and everything back the way it was in 1950! But the burning fuse at your feet was about fracking wells that cost ten times that of a conventional oil well and play out nearly ten times faster, about exploding trains and polluted water and earthquakes, in a market that would soon devalue the product by 50%.
Of course you gave them the money. You bought their stock, you bought their bonds, you bought their junk bonds. You lent them money, and when they couldn’t pay it back you lent them more to roll over the debt, which almost immediately became enormous because every one of those expensive wells had to be replaced every three years. You let them convert your secured debt to unsecured debt, or to watered down stock, or to fairy dust. Now, according to Moody’s, there has finally been an explosion. Who could have seen that coming?
Moody’s reports that twice as many oil and gas companies have gone bankrupt so far this year than did so in all of last year. Investors affected by these failures have seen an average 21 percent return. No, that’s not return on their investment, it’s return of their investment; they lost 80 per cent of their money. And those were secured lenders; junk-bond holders got back 6 cents for every dollar they invested.
Yet the fuse burns on. In the Bakken fracking field in North Dakota, for example, where no oil company has made any money, even when oil was priced at over $100 a barrel, where the total accumulated debt of the players is north of $30 billion, where production has been declining for over a year with oil prices below $50 and well below the cost of production — the zombie companies, almost all of them technically insolvent, continue to borrow operating money through such creative pitches as “distressed exchanges.”
The fuse burns faster, smokes even more, and doesn’t have much farther to go. What’s that? Hillary sneezed? Tell me more…..
Published on the Doomstead Diner on August 25, 2016
Discuss this article at the Energy Table inside the Diner
This open letter to The Zeitgeist Movement replaces an essay I originally promised to Diners, "Peak Oil Revisited Part 2: Why business as usual guarantees that global industrial collapse will be complete by 2030". I have not had the time to elucidate all aspects of my argument in detail and Dr Louis Arnoux is probably doing a better job with his articles on this topic anyway. He is a true energy expert, I am merely a lay person trying to interpret the thoughts of the experts for the general public.
The other "Peak Oil Revisited" essay I promised, "Part 1b: Is an International Standardised Energy Dollar feasible?" has proved to be much more complicated than originally envisioned and is the lowest of my priorities at the moment. Even if an ISED is feasible it is unlikely to ever see the light of day for political reasons.
Graph 1 Graph 2 Graph 3
OPEN LETTER TO TZM:
by G. Chia, August 2016
Dear L and C (Queensland TZM organisers),
As you know I ran sustainability meetings for doctors and scientists from 2006 to 2013. I note your Zeitgeist group is holding a meeting on sustainability on 10 September 2016. As a starting point for your discussion you may wish to display on your projection screen the letter I wrote earlier this year to "Doctors for the Environment Australia" (see attached pdf). When I subsequently met with the Queensland DEA representative, Dr David King, he could not offer any factual or logical objections against my letter. His only comments were that although my views were consistent with those of many scientists, he felt he had to give DEA members "hope". DEA are operating on the false hope they can fix rampant global warming which has now spiralled out of control. They have completely ignored more immediate energy and economic issues.
Energy analyst Dr Louis Arnoux has informed me that world average1 EROI (energy return over invested, or to use the proper mathematical description for this ratio, energy return divided by energy invested) for petroleum fell below 10:1 a few years ago. Dr David Murphy's figure for world average EROI of 17:1 for 2013 was an overestimate because Murphy himself wrote in his paper (published by the Royal Society) that his figure did not account for the energy costs of fuel refinement and transportation2.
According to other EROI luminaries, Drs Hall and Lambert3, a ratio of 10:1 is the minimum required for a complex industrial economy to function properly.
Some parts of the industrial world can continue to function at present because they have captured4 the few remaining high EROI (>10:1) sources for themselves. Others areas eg Southern Europe are losing or have lost access to such high net energy sources ("Hi-NES")5, hence they are now deindustrialising and collapsing. The rest of the world will never industrialise. We have no significant liquid hydrocarbon replacements for conventional petroleum. Unconventional petroleum, with its woeful EROI of 3:1 or less, is an environmentally devastating scam and a stock market Ponzi scheme.
Decline in Hi-NES is the primary reason for the current global economic contraction6, a fact that conventional economists are too venal or too stupid to acknowledge. The present low price of oil is deeply misleading and is hiding the fact that oil has become less affordable/available for most people around the world due to demand destruction and deflation, temporarily freeing up more oil for "lucky" countries such as Australia.
Dr Jeffrey Brown's export land model (ELM) shows that oil availability for oil importing countries will eventually fall off a cliff (see graph 1 from postpeakliving.com in which I have corrected a caption: the red line shows GROSS world oil production, which does NOT take into account the energy invested in that oil production. Hence the yellow circle is an overestimate of when zero oil will be available to oil importing countries). A more accurate curve on which to superimpose the ELM should be downslope of the Net Hubbert curve as shown in graph 2. Prior to me doing this, I do not believe anyone else has combined ELM and EROI concepts and it is high time someone did so.
A most vital concept to understanding why global industral societies will soon suddenly and catastrophically collapse, just as a teetering Jenga tower suddenly collapses, is the mathematical fact that the net energy available (= energy return minus energy invested) falls off a cliff when EROI declines to 5:1 (see graph 3).
Sudden catastrophic collapse is consistent with the view of Dr Ugo Bardi, one of the original "Limits to Growth" scientists, who calls this phenomenon the "Seneca cliff". Dr Bardi is an incredibly smart scientist whose dire warnings over many years have been blithely ignored by all the stupid sheeple around him, hence he titled his blog "Cassandra's Legacy".
In human terms, plummeting EROI in the absence of any plan to transition to a post carbon lifestyle, will mean social breakdown, war, starvation7 and mass die off on a monumental scale. No part of the world which depends on petroleum will be spared.
We can understand why TPTB promote false hopes for the future to the clueless sheeple, using extravagant bread and circuses like the Olympics. Such theatrics keep the herd distracted and subdued. Be assured that once the masses revolt, the drones will be deployed.
On the other hand, offering intelligent people false hope for the future is in my view deeply inappropriate, especially if useful measures can be taken right now to mitigate impending hardships. Unfortunately the window of opportunity is closing fast. What is your transition plan?
You may vehemently reject my warnings and choose to ignore this letter because everything seems "fine" to you now, however denial will not make a looming catastrophe magically disappear.
One of your previous speakers promoted manned space travel to Mars. How useful, do you think, is that sort of meeting?
Geoffrey Chia, August 2016
Global "average" EROI of below 10:1 at present means that most oil fields now yield EROI below 10:1 (eg perhaps only 8:1 or 6:1). However there are a few oil fields which continue to yield a high EROI (eg perhaps 20:1), oil fields which the vultures are now circling.
Murphy DJ. 2014 The implications of the declining energy return on investment of oil production. Phil. Trans. R. Soc. A 372: 20130126.
Lambert, Jessica G., Hall Charles A. S. et al. 2014. Energy, EROI and quality of life. Energy Policy 64:153–167 "There is evidence…that once payments for energy rise above a certain threshold at the national level (e.g. approximately 10 percent in the United States) that economic recessions follow. "
Such capture can be accomplished by fair means (eg providing useful products to the oil vendors in exchange for their oil), or foul (eg the criminal protection racket known as the Petrodollar).
Being starved of credit
In China, intolerable pollution has been a major factor for their economic slowdown, as well as the marked reduction in overseas demand for their industrial output
Mass agriculture is crucially dependent on petroleum (also natural gas)
The Ongoing Collapse of Turkey’s Secular Democracy and… the Backstory to the Attempted Turkish Coup (part 2/3)
Off the keyboard of Allan Stromfeldt Christensen
Published on From Filmers to Farmers on August 19th, 2016
Mustafa Kemal Atatürk (photo courtesy of rene de paula jr)
So where did I leave off in part 1? Oh yeah. Erdoğan and Putin are now BFF-FAW (Best Friends Forever For A While), Erdoğan’s Turkey has quite possibly been helping ISIS unload its oil, the United States / Europe / NATO has purportedly been turning a blind eye to it all, and Turkey is trying to avoid joining its western neighbour for as long as it can before embarking on its journey to the endarkenment. But before I continue from where I left off and address whether or not a local supply of fossil fuels from the north could be enough to sway Erdoğan “from the bad guys to the bad guys,” a little bit of Turkish history is in order. And fortunately, having introduced my Turkish confidant to the Turkish (falafel) joint I frequent, in return I was introduced by him to the work of Turkish writer Efe Aydal, whose writings went a long way in clearing things up for me.
As Aydal explained it in May of 2016, when the AKP first came into power “The American media was calling Erdoğan ‘second Atatürk.'” Mustafa Kemal Atatürk, in case you aren’t aware, is sometimes described as Turkey’s George Washington. In the 1920s he became the first president of the country, and upon putting through various political, economic and cultural reforms meant to transform Turkey’s religiously-oriented Ottoman caliphate into a secular, democratic, and modern nation-state, he also went out of his way to make sure that the military would not be answerable to the government. The purpose behind the latter move was to ensure that above all else the military would uphold its mandate of protecting Turkey’s new constitutional principles of secularism. This is why Turkey has had six coups/attempted coups since 1960, the military moving in when it believes that civilian governments are violating its secular principles (although it’s possible that outside interests played some roles in those coups).
On top of that, Atatürk had thousands of new schools built, primary education was made free, taxation on peasants was reduced, the use of Western attire was promoted, and women were given equal civil and political rights. And contrary to what I initially thought, none of this is to say that Atatürk was some kind of Western stooge. Unbeknownst to me, and as my Turkish confidant filled me in, the ANZAC holiday which many Australians and Kiwis celebrate every year was originally in reference to Australia’s and New Zealand’s failed invasion of Constantinople (in what is now Turkey) back in World War I – and which Kiwi mates of mine see as a ridiculous thing to celebrate since ANZAC Day is essentially about glorifying the (attempted) invasion of another country and of sending our young men to needlessly fight and die in a banker’s war. But regardless of all that, it just so happens that the commander of the Turkish army that held back the Aussie and Kiwi minions of British bankers was none other than Mustafa Kemal Atatürk.
It’s been nearly a century since Atatürk’s time though, and while Atatürk’s image is currently being paraded around Turkey by the AKP – even though it’s been talking about abandoning the constitution’s tenet of secularism, and so is likely just jumping on the bandwagon because it now needs the support of the secularists after having split with the Gülenists – “democracy” also seems to have become a mostly-empty buzzword as well.
Where the world’s finest go to shine (photo by United Nations Photo)
First off there’s the president, Recep Tayyip Erdoğan, who after supporters he was addressing outside his Istanbul residence began chanting for the death penalty to be restored, summarily stated that “We cannot ignore this demand… In democracies whatever the people say has to happen.” Or in other words, mob rules.
(As an aside to that, if Turkey reinstates the death penalty, which it scrapped in 2004 as a condition for eventually gaining admittance to the European Union, its chances for gaining passage onto the Titanic drop to zero. Furthermore, even if Turkey could squeeze its way in onto the lower decks of the EU, admittance to the club pales in comparison to the allure of a new imperial Turkey that could dominate the region. Granted, the EU is Turkey’s biggest trade partner, but with possibility of membership in the Moscow-led Eurasian Economic Union [EEU – a two-year-old, five-member free trade zone], and with the BRICS consortium a possible trading partner as well, a turn away from the EU may not actually be as bad as it sounds – as far as these things go, that is.)
Moving on in this darlings-of-democracy showcase (which is certainly giving the United States’ Democratic Party a run for its money – to the bottom), next in line is Fethullah Gülen, the Muslim cleric living in self-imposed exile in Pennsylvania who the mainstream media likes to portray as a “staunch advocate of democracy,” who is then said to have “left Turkey in 1999 just ahead of a treason charge,” but from what I’ve strangely noticed hardly ever seems to get explained any further.
But according to an old BBC article I came across, it turns out that shortly after Gülen left to the United States in 1999 for what he claimed were medical reasons, Turkish television channels broadcast recordings of comments by Gülen “in which he urges his followers in the judiciary and public service to work patiently to take control of the state.” Gülen dismissed the allegations (from the United States) and said his comments were taken out of context. He was tried in absentia in 2000 by Turkey’s then-secular courts, but ultimately cleared in 2008 by Erdoğan’s more Islamic-leaning courts, his acquittal possibly a gesture of gratitude for his support of Erdoğan’s election to prime minister in 2003. Nonetheless, Gülen has remained in self-imposed exile ever since his initial departure.
Apparently not everyone is a fan of Fethullah Gülen
(photo courtesy of SHOTbySUSAN)
To make things even murkier, United States immigration authorities had planned to expel Gülen in 2006, but plans for such were rescinded following a letter of recommendation written to the FBI and the United States Department of Homeland Security by former Vice Chairman of the CIA’s National Intelligence Council, Graham Fuller (who openly admits to this, and which is part of the public record anyhow).
As it turns out, and as Aydal also states,
In Turkey, the governments come and go, the one thing which doesn’t change is every government had to get the approval of Fethullah Gülen until now. Because he had so much vote potential, if he didn’t approve a party, that party wouldn’t be able to win. When AKP came to lead [in 2003], it was made possible by the Gülen power again.
However, and as Aydal also states, “Something I never expected happened” (which an article in Foreign Policy delved into):
[In 2013] AKP and the Fethullah cult started fighting. And everything you see today in Turkey is the result of that. AKP has the government advantage, but Fethullah has the advantage that it’s backed by USA.
Moreover, and as Aydal put it a couple of months before the attempted coup shenanigans,
[I]n the future AKP will eventually lose. Because ever since they broke the bonds with USA based Fethullah cult, they’re not useful for USA anymore. And they will be replaced by one which is useful. That’s why in recent months the foreign press started attacking him [Erdoğan] and calling him a dictator, whereas they used to hail and love him.
“Love him”? And refer to him as the “second Atatürk”? Well sure, if – and contrary to the wishes of most of the world’s global Muslim population – you sign up as a full supporter of the 2003 Anglo-American invasion of Iraq, and even pen an article for the Wall Street Journal, you’re the United States’ latest BFF-FAW. (Just don’t get too uppity, lest you want to end up like the United States’ former BFF-FAW, Saddam Hussein.)
Regardless, that’s pretty much all changed now. For as Aydal concludes,
You guys have to understand, for Turkey this is HISTORY. It’s the day when USA lost total control over Turkey. I was always wondering how long can Erdoğan resist the Gülen cult, but he actually waged straight-up war. And every party who’s against Gülen is supporting Erdoğan in this.
And not just every party, but many – most – run-of-the-mill Turks. Although Erdoğan is generally a divisive figure, his recent purges of Gülenitsts from judiciaries, police forces, and other government sectors is being praised by Turks of all political stripes, even those who normally oppose him. Post coup, his approval ratings have shot up to 68% from 47% prior to the coup, and a recent rally saw more than two million Turks, of various political persuasions, join together in solidarity. As one attendee put it, “We came together to save our nation from outside forces, so we are here for the love of our country and flag.”
While the west generally sees Erdoğan’s purges as a witch hunt and Erdoğan as little more than an authoritarian, many Turks are frustrated that the West isn’t taking the Gülen network (FETO) seriously. As an article in the Intercept put it, for years Gülentists have been using “clandestine methods to sneak into the military schools” as well as recruit in the police, judicial, and other government agencies. (According to the article’s informant, military pilots who could fly the American-made F-16 fighter jets were the most prized of all.) Anybody who spoke up about what was going on was swiftly punished. And while it was (secular) Kemalists that were the first targets of the Gülen network due to their sought after positions in public offices, Erdoğan’s AKP became the most recent target after the fallout in 2012.
Granted, prior to 2012 the AKP had actually assisted the Gülenist take-over of the judiciary, and so in return had any laws it wanted passed done so. Likewise, the government also turned a blind eye to the Gülenist infiltration of the army. That being so, even though (secular) Kemalists are generally supportive of the purges, they are nonetheless concerned that after Erdoğan is finished with the Gülenists he will set his sights on them and it will be back to the old divisive ways, if not worse. As someone by the name of “actual turk” stated in the comment section of part 1 in this Turkey series, “Erdogan is no angel – he is a scumbag – but this purge is getting rid of an islamic cancer far worse than Erdogan.”
Having said all that, the West has not been all to happy with the outcome of the attempted coup. As the not-conspiracy-oriented Oil Price put it, “European leaders were not too enthusiastic when the attempted coup failed, despite official declarations in support of Erdogan’s government.” Taking it a bit further, others have even stated that “Only when it became clear the coup was in fact smashed President Obama and the ‘NATO allies’ officially proclaimed their ‘support for the democratically elected government’.” The Unites States’ government obviously denies this, and while some simply dismiss the United Statesian government’s retort as “damage control,” it’s perhaps not too hard to imagine who the United States was likely rooting for.
In the meantime, the Erdoğan/AKP government has been vehemently calling for the United States to extradite Gülen back to Turkey so he can face charges of treason (since they see him as the mastermind of the failed coup), but the United States is having no part in this. Following that, Western media sources have repeatedly reported that the United States’ government is demanding evidence of Gülen’s involvement before any judicial process can begin, full stop. But look outside the bubble, and you’ll see it stated that
According to Erdogan, “Documents have been sent to the U.S.” establishing Gulen’s guilt. But the Obama administration remains unmoved, even though Turkey has handed over terrorists to the US in the past without evidence.
And as Erdoğan has also apparently stated (and which I’ve never seen quoted in any Western mainstream media source),
Now I ask, does the West give support to terror or not? Is the West on the side of democracy or on the side of coups and terror? Unfortunately, the West gives support to terror and stands on the side of coups… We have not received the support we were expecting from our friends, neither during nor after the coup attempt.
Like the saying goes, “better the devil you know than the devil you don’t,” which is perhaps useful when you know which one of them you know better than the other.
Nearly everybody likes a good Ponzi scheme
Anyhow, what has now emerged following Erdoğan’s displeasure with the United States is an ultimatum over the delayed visa-free access for Turks to the European Union. That is, in return for Turkey stemming the flow of illegal migrants to Europe, Turks were to receive a free pass to the land of not-exactly-plenty. But despite Turkey working on its end of the bargain (five of seventy-two demands are still to be met), the visa-free access still eludes Turks, and the recent post-coup crackdowns have added a bit of a sore-spot to the whole thing. But as Turkey’s foreign minister Mevlüt Çavuşoğlu recently stated, Turkey could renege on its efforts to hold back said migrants. As Reuters put it,
Asked whether hundreds of thousands of refugees in Turkey would head to Europe if the EU did not grant Turks visa freedom from October, Çavuşoğlu told Bild: “I don’t want to talk about the worst case scenario – talks with the EU are continuing but it’s clear that we either apply all treaties at the same time or we put them all aside… It can’t be that we implement everything that is good for the EU but that Turkey gets nothing in return.”
To drive the point home even further, Çavuşoğlu has also stated that
We worked very hard to have good relations with Europe for 15 years. If the West one day loses Turkey – whatever our relations with Russia and China – it will be its own fault.”
Working off of a few things I mentioned in part 1, if Turkey’s demands aren’t met, this may very well mean Turkey will turn a blind eye to Syrians and other refugees flooding into Europe, some of which may very well be jihadi-wannabes from neighbouring countries. On the other hand, if Turkey does somehow get its way and its citizens are granted visa-free access to the European Union, the 2.7 million Syrians that Erdoğan plans on granting citizenship to may very well gain a form of access to Europe anyhow – and some of which, again, may be jihadi-wannabes from other countries. So the solution is…?
In other words, the story in Turkey is a whole lot messier than what those of us in the West are being led to believe. And when penultimate control of energy supplies is the hidden agenda, the devil you know is apt to partake in actions contrary to what might be expected. I’ll finish off the story in part 3.
EDIT 29/08/2016: Upon completion of the last part of this Turkish trilogy a few changes were made to better clarify things and improve its overall structure. In part 2 the only significant change was the addition of three paragraphs describing the rather favourable reaction Turks have had to Erdoğan’s purges, why that is so, and what some fear could transpire following said purges.
Published on Cassandra's Legacy on July 15, 2016
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Part 2 – Enquiring into the appropriateness of the question
Crude oil prices are dropping to the floor
The Oil Fizzle Dragon-King
The Tooth Fairy Syndrome
Bio: Dr Louis Arnoux is a scientist, engineer, and entrepreneur committed to the development of sustainable ways of living and doing business. His profile is available on Google+ at: https://plus.google.com/u/0/115895160299982053493/about/p/pub
Published on Cassandra's Legacy on July 12, 2016
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Part 1 – Alice looking down the end of the barrel
The energy cost of system replacement
The end of the Oil Age is now
If we had a whole century ahead of us to transition, it would be comparatively easy. Unfortunately, we no longer have that leisure since the second key challenge is the remaining timeframe for whole system replacement. What most people miss is that the rapid end of the Oil Age began in 2012 and will be over within some 10 years. To the best of my knowledge, the most advanced material in this matter is the thermodynamic analysis of the oil industry taken as a whole system (OI) produced by The Hill's Group (THG) over the last two years or so (http://www.thehillsgroup.org).
In an Alice world
At present, under the prevailing paradigm, there is no known way to exit from the Perfect Storm within the emerging time constraint (available time has shrunk by one order of magnitude, from 100 to 10 years). This is where I think that Doomstead Diner's readers are guessing right. Many readers are no doubt familiar with the so-called “Read Queen” effect illustrated in Figure 2 – to have to run fast to stay put, and even faster to be able to move forward. The OI is fully caught in it.
I estimate the limit growth rate for the alternative whole system at 7% growth per year.
On the way to Olduvai
In my view, given that nearly everything within the GIW requires transport and that said transport is still about 94% dependent on oil-derived fuels, the rapid fizzling out of net energy from oil must be considered as the defining event of the 21st century – it governs the operation of all other energy sources, as well as that of the entire GIW. In this respect, the critical parameter to consider is not that absolute amount of oil mined (as even “peakoilers” do), such as Million barrels produced per year, but net energy from oil per head of global population, since when this gets too close to nil we must expect complete social breakdown, globally.
In 2012 the OI began to use more energy per barrel in its own processes (from oil exploration to transport fuel deliveries at the petrol stations) than what it delivers net to the GIW. We are now down below 4GJ/head and dropping fast.
Part 2 – Enquiring into the appropriateness of the question
Part 3 – Standing slightly past the edge of the cliff
Off the keyboard of Allan Stromfeldt Christensen
Published on From Filmers to Farmers on June 21, 2016
Living in highly technological civilizations that generally place the greatest importance and value upon the material gadgetry and inventiveness of our societies, it should come as little surprise that the luminaries and household names that we can readily conjure and associate with are those related to the technological aspects of our lives. For example, when one mentions the telephone, the light bulb, the automobile, the airplane, or nuclear bombs, it's likely that many a grade-schooler can rhyme off the names Alexander Graham Bell, Thomas Edison, Henry Ford, the Wright brothers, and, perhaps, Albert Einstein.
But segue into more ecological matters and the fathers and mothers of these vocations are certainly not household names the way the aforementioned are. For what comes to mind when we think of organic farming, climate change, the environmental movement, or limits to growth? For most of those who flick light switches on and off as much as they eat food and depend on stable planetary ecological balances, the answers are probably little more than a shrug. While children can quite easily conjure up the aforementioned names, you'd be hard pressed to find even an adult who could easily slip off of their tongues the names Sir Albert Howard, Svante Arrhenius, Rachel Carson, and the team of Donella Meadows, Dennis Meadows, and Jørgen Randers.
But while the topics of organic farming, climate change, and the environmental movement can certainly elicit recognition in the average citizen, the reality of peak oil quite often does not, with even less of a recognition expected in reference to the person that initially brought it to our attention. That largely unknown individual would be M. King Hubbert, the subject of Mason Inman's timely new biography, The Oracle of Oil: A Maverick Geologist's Quest for a Sustainable Future.
As Inman describes it, after having spent his early formative years on a farm in the Hill Country of Central Texas, and gone through two years of community college, a young Hubbert ended up making his way through various hardscrabble jobs on his way to the University of Chicago. It was there that the mathematically inclined Hubbert got exposed to a variety of disciplines that would aid him in his future endeavours, those ranging from geology to physics to math.
It was while still an undergrad that the first inklings of Hubbert's future interest can be seen, that moment when he first glimpsed a chart depicting the exponential growth of coal extraction rates. After a following lecture on petroleum extraction, Hubbert apparently couldn't help but muse to himself, "How long will it last?" For now, as he put it, it was "Difficult to estimate reserves."
By no means though was Hubbert afflicted with a one-track kind of mind, for as Inman astutely weaves within his story, Hubbert, and at only 26-years-of-age, accepted a job offer to teach geophysics at Columbia University in New York City, the place where he became an original member of what would become the second focus of his life – the nascent movement soon to be known as Technocracy. In short, Technocracy was a not-quite totalitarian system whereby government-owned industries were envisioned as being managed by scientists, engineers and technicians. In fact, all of North America, even all the way down to Venezuela (because it had oil?) would be under the "continental control" of a united government, known as a "Technate." Technocracy also disdained "the price system" in favour of "energy certificates," a highly relevant notion that Inman fortunately repeatedly returns to.
In the meantime, Hubbert was all the while dissatisfied with the supposedly common sense notion that the extraction of a given mineral increases exponentially until one day, poof!, there's nothing left. As he understood it, extraction and depletion rates could be related to the so-called S-curve that can be seen in an isolated pair of breeding fruit flies: their population soars and eventually tapers off at a plateau (or a flattened peak). And as Hubbert was in the minority with his belief that there were limits to growth, he similarly saw various facets of industrial society as fitting on this S-curve.
Being one of the leading proponents of Technocracy and an ardent writer on its workings, it was in Technocracy publications that Hubbert dabbled in writing about peaks and declines of resources. Come 1938, Hubbert came up with his first, but somewhat unsubstantiated (and rather off), estimate of the year that US oil extraction rates would peak: 1950. But having moved from academia to the government in the early 40s, it wasn't until he then took a job at the US branch of Royal Dutch Shell in 1943 (eventually becoming the top geologist in a new lab it created) that Hubbert would have the resources and access to information that would allow him to formulate a more detailed analysis which led to his ground-breaking predictions.
For it was on March 8th, 1956, that Hubbert gave his talk "Nuclear Energy and the Fossil Fuels," his revelatory paper that laid out his thoroughly analysed prediction that US oil extraction rates would peak sometime between 1965 and 1970 (to go along with a global peak in 2000). I won't spoil things with a recitation of the rather humorous tensions, but I will point out that Hubbert was in fact correct, and that US oil extraction rates peaked in 1970. Furthermore, while much derision of Hubbert's findings resulted both before and after 1970 (to go along with a smattering of praise), what may come as surprising to those thoroughly familiar with peak oil but too young to have been around back then (such as I, who was busy being born while President Jimmy Carter was wearing cardigans and having solar panels placed on the White House) is the amount of media attention given to estimates of US oil supplies, including both before and after Hubbert's famous paper.
For while peak oil is nowadays generally dismissed – and more commonly ignored – by the mainstream media in lieu of financial abracadabra and/or dreams of a 100% replacement of fossil fuel energy with renewable ("renewable") energy, the amount of serious talk that domestic US oil supplies garnered in the mid to late-mid 20th century is comparatively astounding. Inman's surprising historical account relays the fact that the topic made the front pages of the New York Times and the Washington Post on more than one occasion, while the New York Times even visited Hubbert at his home to interview him! And even more absurd is Inman's account of the US administration's – all the way up to President Jimmy Carter's – interest in Hubbert's work, President Carter even making a quasi-reference to Hubbert's work in one of his talks.
The question(s) that these shocking revelations (shocking to me at least) that Inman conveys is, What happened? Why were oil supplies and extraction rates such a big issue a few decades ago, when today the talk, if anything, is all about energy prices?
As Inman points out, one of the ordeals that began to drown out talk of oil extraction rates was the Watergate scandal of 1973. Following that, the "doom and gloom" of President Jimmy Carter (Carter's sources called for worldwide oil extraction rates to peak in the mid-1980s [!?], while Hubbert's calculations saw 2000 as the peak year) was no match for the sunny optimism of Ronald Reagan in the 1980 election, resulting in a new President and the removal of the White House's interloping solar panels.
Jump ahead a few decades, and from what I can tell, not only does it seem that this Reagan-esque sunny optimism continues to reign supreme, but that it has imbued itself into the thinking of many progressives and environmentalists today, through the optimistic attitude of the "clean and green" notion that "renewables" can provide a 100% substitution for fossil fuels. As far as I can see it, it is this techno-optimist attitude of technology-as-saviour, to go along with another round of obeisance to financialization as itinerant saviour, that has convinced many people that energy supplies, and thus peak oil, need not be an issue (anymore, supposing that they ever really were).
But as Inman's account also explains, Hubbert wasn't quite averse to the techno-optimist way of thinking either. Although he did eventually do away with his staunch support for nuclear power, Hubbert ended up trading a reliance on nuclear power for a rather oversized belief in solar power. That is, Hubbert envisioned deserts covered in solar panels that would generate electricity of which could be converted into methanol or to generate hydrogen, and that such ventures could power high-energy societies (New York City!) for thousands of years. It was thus Hubbert's belief that
with our technology and with adequate supplies of energy, we ought to have a lot of leisure. And the proper use of this leisure can bring us an intellectual renaissance.
This attitude gels with the stated Technocratic "embrace [of] the abundance created by machines," which for me is hard to equate with the notion that peak oil and diminishing energy supplies in general imply less energy to power those machines, unless you believe in the sunny optimism of solar-panel-covered-deserts (to go along with other "renewables") that can match the energetic output of fossil fuels (which the low EROEI levels of, say, solar panels, says isn't quite feasible).
Having said all that, Hubbert did fortunately have the all-too-rare understanding that
One of the most ubiquitous expressions in the language right now is growth – how to maintain our growth. If we could maintain it, it would destroy us.
So although, and from my understandings, Hubbert had the questionable belief that nuclear power, and then solar panels, could provide not quite infinite growth but (rather conveniently?) a kind of infinite steady state of what the current energetic usage happened to be at the time, he did nonetheless realize that none of this could do anything for the problems of overpopulation and diminishing water supplies.
Bringing things into the present, Inman conveys the fact that worldwide conventional oil extraction rates peaked (or perhaps hit their plateau) in 2006 at 70 million barrels per year, finally dropping down to 69 million barrels per year in 2014. As it is, the only thing keeping overall oil extraction rates increasing – and giving the last push to the economic growth which Hubbert so despised – are the unconventional oil supplies of tight oil (via fracking) and tar sands oil.
This brings us back to Technocracy's disdain for "the price system" (or as Hubbert put it, "the monetary culture"), which was the status quo and scarcity-based economics system that measures everything in dollars and cents, and which ignores physical limits. For as Technocracy conversely saw it, money would be abandoned for "energy certificates," allowing for everything to be paid in their energy equivalent.
Upon first coming across the name M. King Hubbert some ten years ago I happened to read about Hubbert's disagreement with our practice of fractional-reserve banking, of which I've never seen mentioned again until Inman's book (kind of, as Inman doesn't mention fractional-reserve banking directly). It is from this knowledge that I've come to understand the situation of diminishing energy supplies: since money is a proxy for energy, limits on energy supplies will imply limits to the continuance of our economic (Ponzi scheme) system, leading to an inability for sufficient payments to service even the interest payments on previous loans – which implies and will contribute to the collapse (implosion) of economies, be it slowly or quickly. As Hubbert put it, "exponential growth is about over. We're entering something new."
But not being much of a fan of a grandiose Technate myself (nor of the belief that there would ultimately be enough alternative energy supplies to maintain such a massive and centralized system anyway), we could still work off of Hubbert's disdain for "the monetary culture" towards something like the Ecological Economics of Herman Daly and Joshua Farley, a discipline which is also in favour of moving away from fractional-reserve banking and the notion of infinite growth. And since peak oil means growth is coming to an end, perhaps a look to biophysical economics (see Energy and the Wealth of Nations by Charles Hall and Kent Klitgaard, or the new journal BioPhysical Economics and Resource Quality, edited by Hall, Ugo Bardi, and Gaël Giraud) could help us to envision a worthy alternative to Technocracy's monetary substitution.
Regardless, there does seem to be merit for Hubbert's belief in perhaps a partially planned economy, supposing that that would even be politically possible. Market forces are quite obviously doing little to nothing to ween us away from the usage of fossil fuels (be they diminishing or not), and the primary effect that high oil prices (reaching $147 a few years back) had was to spur investment in the higher costing unconventionals.
In the meantime, supposing that conventional and unconventional oil supplies continue their slight overall increase for years to come, this also poses a problem in light of carbon dioxide levels contributing to climate change. Inman thus poses the ultimately unavoidable and extremely pertinent questions: Do we really think market forces will come to our rescue? And if not, are we going to impose limits on ourselves, or are we simply going to sit back and wait until nature imposes those limits for us?
So whether you're new to the notion of peaking oil supplies or rather familiar with it, I can certainly say that The Oracle of Oil has much new to shine on the story – and now history – of peak oil. With oil supplies being what they currently are, and with no off-planet supply to make up for what will this time not just be a US shortfall but a planetary shortfall, Inman's book could certainly do us a favour by helping us to familiarize ourselves with the reality of peak oil, and by helping us to make M. King Hubbert the household name it ought to be.
That is of course a lot to ask, and after the virtual silence on peak oil that occurred after the global peak of conventional oil extraction rates in 2006 (to go along with all that has ensued since), one couldn't be blamed for expecting little different upon the reaching of the global peak of conventional and unconventional oil extraction rates in the coming months or years (?). But one can always hope of course.
Godspeed the overall global peak?
Published on the Our Finite World on June 20, 2016A coal train once supplied the city of Holland, Michigan with fuel for its electric generating plant. They converted the plant to natural gas. Their costs are down, their emissions are down, and coal is down for the count. (Photo by wsilver/Flickr)
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The world’s coal resources are clearly huge. How could China, or the world in total, reach peak coal in a timeframe that makes a difference?
If we look at China’s coal production and consumption in BP’s 2016 Statistical Review of World Energy (SRWE), this is what we see:
Figure 2 shows that the quantities of other fuels are increasing in a pattern similar to past patterns. None of them is large enough to make a real difference in offsetting the loss of coal consumption. Renewables (really “other renewables”) include wind, solar, geothermal, and wood burned to produce electricity. This category is still tiny in comparison to coal.
Why would a country selectively decide to slow down the growth of the fuel that has made its current “boom” possible? Coal is generally cheaper than other fuels. The fact that China has a lot of low-cost coal, and can use it together with its cheap labor, has allowed China to manufacture goods very inexpensively, and thus be very competitive in world markets.
In my view, China really had no choice regarding the cutback in coal production–market forces were pushing for less production of goods, and this was playing out as lower commodity prices of many types, including coal, oil, and natural gas, plus many types of metals.
China is mostly self-sufficient in coal production, but it is a major importer of natural gas and oil. Lower oil and natural gas prices made imported fuels of these types more affordable, and thus encouraged more importing of these products. At the same time, lower coal prices made many of China’s mines unprofitable, leading to a need to cut back on production. Thus we see the rather bizarre result: consumption of the cheapest energy product (coal) is falling first. We will discuss this issue more later.
China’s Overall Historical Production of Energy Products
With the pattern of energy consumption shown in Figure 2, growth in China’s total fuel consumption has slowed, as shown in Figure 3.
The indicated increases in total fuel consumption in Figure 3 are as follows: 8.1% in 2011; 4.0% in 2012; 3.9% in 2013; 2.3% in 2014; 1.5% in 2015.
Unless there is a huge shift to a service economy, we would expect China’s GDP to decrease rather rapidly as well, perhaps staying 1% or 2% higher than the growth in fuel consumption. Such a relationship would suggest that China’s reported GDP for 2014 and 2015 may be overstated.
The Problem of Low Coal Prices
Most of us don’t pay attention to coal prices around the world, but according to BP data, coal prices have been following a similar pattern to those of oil and natural gas.
Oil prices tend to cluster more closely than those of coal and natural gas because there is more of a world market for oil than for the other fuels. Coal and natural gas have relatively high delivery costs, making it more expensive to trade these products internationally.
The one place where natural gas prices failed to follow the same pattern as oil and coal prices was in the United States. After 2008, shale producers extracted more natural gas for the US market than it could easily absorb. This overproduction, together with a lack of export capacity, led to falling US prices. By 2014 and 2015, prices were falling everywhere for oil, coal and natural gas.
Why Prices of Fossil Fuels Move Together
The reason why prices of fossil fuels tend to move together is because commodity prices reflect “demand” at a given time. This demand is determined by a combination of wage levels and debt levels. When wage levels are high and debt levels are increasing, consumers can afford more goods, such as new homes and new cars. Building these new homes and cars takes many different kinds of materials, so commodity prices of many kinds tend to rise together, to encourage production of these diverse materials.
Why Fossil Fuel Prices Don’t Necessarily Rise Indefinitely
Rising fossil fuel prices depend on rising demand. Wages are not really rising fast enough to increase fossil fuel prices to the levels shown in Figures 4, 5, and 6, so the world has had to depend on rising debt levels to fill the gap. Unfortunately, there are diminishing returns to adding debt. We can witness the poor impact that Japan’s rising debt level has had on raising its GDP.
Adding more debt is like using an elastic rubber band to increase the world output of goods and services. Adding debt works for a while, as the relatively elastic economy responds to growing debt. At some point, however, the amount of debt required becomes too high relative to the benefit obtained. The system tends to “snap back,” and prices fall for many commodities at the same time. This seems to be what happened recently in late 2008, and what has happened again recently. The challenge is to restore world economic growth, since it is really robust world economic growth that allows commodity prices to rise to high levels.
Some Historical Perspective on Rising Energy Prices and Rising Debt
In “normal” times, a small increase in demand will increase production of fossil fuels by several percentage points–generally enough to handle the rising demand. Prices can then fall back again and there is no long-term rise in prices. This situation occurred for quite a long time prior to about 1970.
After about 1970, we found that it became more difficult to raise production levels of energy products, without permanently raising prices. US oil production began to decline in 1970. This started an energy crisis that has been simmering beneath the surface for 45 years. Various workarounds for our energy shortage problem were tried, such as adding nuclear, drilling for oil in new areas such as the North Sea, and building more energy efficient cars. Another approach used was reducing interest rates, to make high-priced homes, cars and factories more affordable.
By the late 1990s, even these workarounds were no longer providing the benefit needed. Another idea was tried: encourage more international trade. This would allow the world access to untapped energy sources, including coal, in the less developed parts of the world, such as China and India.
This too, worked for a while, but resource depletion tended to continue to raise the cost of energy extraction. Also, the competition with low-cost labor in India, China, and other countries tended to hold down the wages of the less-educated workers in the developed countries. Higher prices at the same time that wages for some of the workers were depressed is, of course, a bad mismatch.
One way of “fixing” the problem was with cheaper debt, and more debt, so that consumers could buy homes and cars with lower incomes. This fix of more debt stopped working in 2008, as repayment on “subprime” debt faltered, and all fossil fuel prices collapsed.
To “re-inflate” the world economy, world leaders began to try to add even more debt. They did this by fixing interest rates even lower, starting in late 2008, using a program called Quantitative Easing (QE). This program was successful in raising commodity prices again, although its effect seemed to diminish with time. China’s huge growth in debt during this period helped as well.
Energy prices turned downward again in mid-2014, when the United States discontinued its QE program, and China (under new leadership), decided not to continue increasing debt as quickly as before. The result was a second sharp drop in commodity prices, without a corresponding drop in the cost of producing these fossil fuels. This shift was devastating from the point of view of energy supply producers.
Impact of Lower Prices on China’s Coal Producers
China has a lot of coal resources, but not all of these resources can be produced cheaply. Generally, the least expensive resources tend to be produced first. When prices are high, it may look like deeper, thinner seams can be extracted, in addition to the easier and cheaper to extract seams, but this is never certain. At some point, prices may fall and thus issue a “stop mining” instruction.
When coal prices drop, producers are likely to encounter debt problems, as loans related to coal operations become due. The reason why this happens is because loans taken out when coal prices were high are likely to reflect an optimistic view of how much can be extracted. Once prices drop, operators discover that they have committed themselves to paying back more in loans than their coal mines can actually produce. This seems to be happening now.
What Are the Implications for Future World Coal Production?
If we look at a chart showing world consumption of energy products by fuel, we see that world coal production has turned down in a similar manner to the downturn in Chinese coal production.
There are many large areas of the world that seem to be beyond their peak in coal production, including the United States, the Eurozone, the Former Soviet Union, and Canada. Note that the United States’ coal production “peaked” in 1998. This added to pressures for globalization.
If we consider the rest of the world excluding the areas shown separately in Figure 9 as the “Non-Peaking Portion of the World,” we find that China’s current coal production far exceeds that of the Non-Peaking portion of world production.
Figure 10 indicates that even the non-peaking portion of the world is showing a downturn in production in 2015, no doubt relating to current low prices.
Another issue is that India’s coal production now falls far short of its consumption. Thus, India is becoming a major coal importer. In 2015, India’s consumption of coal slightly exceeded that of the United States, making it the second largest consumer of coal after China, and the largest coal importer. If China should decide to increase its coal consumption by adding imports, it would need to compete with India for supplies.
India’s hope for continued economic growth is also tied to coal, even though it doesn’t produce enough itself. India’s use of natural gas is declining, because its own locally-produced natural gas supplies are declining, and imports are expensive.
Imported coal is more expensive than locally produced coal, because of the transportation costs involved. Thus, adding an increasing portion of imported coal will eventually make India’s products less price competitive. India started from a lower wage level than China, so perhaps it can temporarily withstand a somewhat higher average coal price. At some point, however, it will reach limits on how much of its mix can be imported, before workers cannot afford its products made with this high-priced coal.
As noted above, India and China will be competing for the same exports, if they both expect to grow using imported coal. We can modify Figure 9 to show what the size pool producing imports might now look like, if the countries needing imports is “China + India,” and the part with perhaps extra coal to export is the Non-Peaking Areas from Figure 9, less India.
This comparison shows an even a worse mismatch between the peaking areas, and the current production of areas that might raise their supply.
Is Future Coal Production a Function of Resources Available, or of Prices?
Future coal production is clearly a function of both the amount of resources available and future prices. If there are no resources available, it is pretty clear that no resources can be extracted.
What most researchers have not understood is that future prices are important as well. We can’t expect that prices will rise indefinitely, because low-paid workers, especially, find themselves in a squeeze. They find homes and cars increasingly unaffordable, unless the government can somehow manipulate interest rates down to never heard of levels. Because of this lack of understanding of the role of prices, most of today’s models don’t consider the possibility that price levels may cut back production, at what seems to be an early date relative to the amount of resources in the ground.
Part of the confusion comes from the view economists have regarding prices, innovation, and substitution. Economists seem to be firmly convinced that prices will always rise to fix the problem of future shortages, but their models do not seem to take into account the major role that energy plays in the economy, and the lack of available substitutes. Certainly, the history of energy prices does not support this claim.
If I am correct in saying that prices cannot rise indefinitely, then all three of the fossil fuels are likely to peak, more or less simultaneously, when prices can no longer stay high enough to enable extraction. The downslope after the peak will be based on financial outcomes, such as the bankruptcies of coal operators, not on the exhaustion of reserves or resources in the ground. This dynamic can be expected to produce a much sharper downturn than modeled by the Hubbert Curve.
If analysts consider the possibility that prices will never again rise very high for very long, they realize such a low-price scenario would be a catastrophe. That is why we hear very little about this possibility.
It appears likely that China’s coal production has “peaked” and has begun to decline. This is especially likely if energy prices stay low, or never rise very high for very long.
If I am correct about energy prices not rising high enough in the future, all fossil fuels may reach peak production more or less simultaneously in the not too distant future. Widespread debt defaults seem likely if this happens.
If we are, in fact, reaching peak coal, even before peak oil, this is disconcerting for those who believe that the Hubbert Model is the only way of viewing the world. Maybe we are expecting too much from the model; maybe we need a model that considers prices, and how prices depend on wages and rising debt. Falling energy prices are especially bad for the system; they seem to lead to debt defaults.
Published on The Doomstead Diner on May 29, 2016
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One of the biggest controversies among people who are aware of the Energy problems we face moving into the future is whether Renewable Energy (RE) can substitute for the Fossil Fuels (FF) we currently use to run our Industrial Lifestyle and Civilization. Can they produce enough energy, can we transition to them fast enough, can they replace all the things we use fossil fuels to power?
Last week, Ugo Bardi of the blog Cassandra's Legacy and Professor of Physical Chemistry at the University of Firenza in Italy put up the results of an Informal Survey he did of “experts” in RE who participate on a discussion forum dedicated to the topic. There were 70 respondents to this survey, and they mostly were positive in their view of the future potential of RE as a replacement for FFs. I thought it would be a good idea to get a wider sample of opinions on this topic, and hopefully a larger Sample Size as well in a new Renewable Energy Survey. The first question in this survey is a duplicate of Ugo's question, the rest of the questions are designed to get further detail on your opinions on the future of RE as we move forward toward a Different Tomorrow. I won't say better or worse, just that it surely will be different.
Now, our survey by no means is a Random Sample of the population at large, it is a sample of people who read blogs & websites where we are dropping the Links on to take the survey. However, we are not just dropping the links on Collapse oriented sites, we also are dropping them on Renewable Energy sites where the readers are generally more positive about the future potential for RE than on Collapse oriented sites. So we hope to get a balance of opinions in this way.
We also hope that the readers will email Friends & Relatives with the link to the survey, so we can get an even wider sample of opinions from people who don't usually concern themselves with this topic and don't haunt either the Renewable Energy blogs or Collapse Blogs. The larger the sample size we can get, the more accurate the results of the survey will be as a reflection of what people think about these issues. Larger sample size also allows better parsing of data based on demographics.
RE doesn't come in only One Flavor, there are many forms of it, some used since Antiquity such as Mechanical Windmills and Water Wheels, which go back to the Roman Empire at least. Animal Labor from Draft animals is also a form of Renewable Energy, as long as you have food for the Horses & Oxen anyhow. Similarly with Slave Labor of Homo Saps, as long as you can feed, clothe and house them in enough numbers they reproduce effectively, this also is a form of RE. The energy itself in both the latter 2 cases comes in the form of FOOD, but for that energy to be converted to usable work, it needs a biological machine that does that, which mainly are draft animals and slave Homo Saps.
More commonly though, when you talk to modern people about RE, what they think of are Photovoltaic Panels popping up on some of the rooftops around Suburbia amongst people seeking to go “off grid”. They also picture the large Arrays of Wind Turbines sprinkled across mountains in California, along with huge Hydro plants like the Hoover Dam. One of the questions in our survey is what you think the relative effectiveness of each of these types of RE will have as we move into the future?
Other questions revolve around your opinions on how much energy we need to maintain the techno-industrial lifestyle, and how large a population of Homo Sap is sustainable on the planet in the absence of FFs, with only REs as a source of usable energy? If we made the transition today, how many people could live sustainably on Mother Earth? We also would like to know your opinion on when serious Energy Shortages for maintaining the Industrial Lifestyle will begin to be apparent in 1st World countries, using the United States as the primary example of a highly consumptive Industrial society.
Our survey provides room for detailed text answers to each question, along with the Multiple Choice and Ranking options for the questions. No matter what you do on such a survey, you never can provide all the answer choices everyone would like to see. The most common criticism we get with our surveys is that “you did not ask this or that” or “you did not provide this or that answer choice”. First off, you never can think of EVERY possibility in advance, and second even if you could your questions and answers would get way too long. So inevitably, any Survey is just a subset of possibilities.
Another common criticism is that our surveys are not "scientifically" designed. This is fucking horseshit to begin with, you don't need a Ph.D to ask a fucking question. lol. However, insofar as designing tests that provide a decent measure of WTF you are trying to measure goes, I'm as close to an expert as you will get. I spent several years working for The Princeton Review designing test questions to mimic the SAT for wannabee Ivy Leaguers seeking to get a leg up on that test. I got the job because I myself am a first class test taker, it's a gift. lol. I also taught Args (Arguments) for wannabee Lawyers taking the LSAT, and all sections of the MCAT for wannabee Doctors. In fact I'm the only person I know of who taught all of those tests for TPR. 🙂 So take it from me, this survey is measuring exactly what I set out to measure here. That doesn't mean there isn't room for improvement though, and based on responses and criticisms so far dropped on, I may do a follow up of this later on.
One criticism which has popped up in text responses so far is WHY did we not include Nuclear Energy as a Renewable energy resource? This one I will answer now, so I don't get more of the same critique in the text fields as more responses roll in. There are several reasons for this.
First off is that strictly speaking fissionable material that can be mined up is not infinite, so this is not renewable. Even with breeder reactors, eventually this will run out, although it might take quite some time. Then you have the spent fuel problem and the waste generated by these plants. Although in THEORY you might make such waste benign through further nuclear processing and reactions, such a method has not been implemented anywhere, and poisonous spent fuel continues to accumulate everywhere that nuclear reactors are running. Third is that although some projected forms of Nuclear energy such as Thorium Reactors are claimed to be safe and clean, no such reactor has been built to date to demonstrate even on small scale that it can be run economically. So all in all, to date Nuclear energy does not appear to be renewable, but rather presents its own existential threat to the environment due to the waste problems it has.
Next Week or the week after, depending on the Survey Sample size we will present the results here on the Diner for further discussion, and we will keep the survey open after that to see if the discussion materially affects the total numbers for any category. You can't change your answers from your first submission, but if the discussion materially affects your choices, you can make a second submission. Put a “#2” in the beginning of the email field along with your email address if you submitted one, and I will filter the second set. Or I may just duplicate the whole survey to get a whole new sample. Or I may filter the data by submission date. One way or the other, I will try to sort this out.
We did a "pre-release" of the survey in the last week, dropping links on Cassandra's Legacy, Our Finite World, Economic Undertow and various Reddit Subs as well as on the Diner Forum to get some initial readings on what the zeitgeist is out there as far as RE Questions go. As of this publication, we currently have 121 respondents so far, which is not a bad sample size to begin with, but hopefully we can expand it some from this.
I'm not going to publish the current stats on answers to the the substantive questions from this sample, because that would skew answers from people who have not yet responded. However, I will drop down here some of the early Demographics on the respondents.
The most ASTOUNDING one so far is the Formal Education level of the respondents, it is extraordinarily high. 14% of respondents have Doctorate Level education, 29% with Masters level. This compared to a general population level of 3% Doctorate and 12% Masters or above. So by NO MEANS is this a Random Sample! lol.
You can look at this as a Good or Bad thing depending on your perspective. If you consider that getting opinions from mostly well educated people is a good thing, then a survey which draws in mostly well educated people in responses is good. If you would rather have a general cross section of the population at large, then such a survey is not valid for that population.
A disappointing (though not unexpected) demographic so far is the number of Females who have responded. Not unexpected because the collapse blogosphere is heavily weighted toward males, so there just aren't that many females reading this stuff to be able to get them to post up their opinions. A suggestion I have to remedy this problem is for male respondents to the survey to coax females they know into filling it out. Your mom, wife, girlfriend etc. Transgender people self identifying as female are also welcome to check this box! 🙂 Or you can choose the "other" selection (nobody has picked that yet).
The rest of the Demographic questions are coming out distributed nicely, particularly the Age Demographic which is almost a perfect Bell Curve at the moment, though this has fluctuated some. In any event, there are substantial responses in all categories besides <18 or >70 to parse out opinions by age. Global distribution is weighted heavily to North America as to be expected given the Diner is an English language blog based in NA, but substantial contribution from Europe as well since this is where Ugo's blog Cassandra's Legacy is based in Italy. It's been holding pretty steady at 55% North America, 30% Europe, 10% Oz & NZ and the rest everywhere else.
The next question you face when analyzing such statistics is their VALIDITY across the population you sample. Across the entire population of the earth at around 7.2B people right now, this survey has virtually no statistical significance at all! However, that is not the population being sampled here. This population is mainly those who consider energy/collapse questions and regularly participate in net discussions on these topics. How BIG is that population? Well, I have been doing this biz for almost a decade now, and my estimate on the population size for people who both are aware of the eenrgy problems AND regularly haunt the websites concerned with this topic is around 50,000. I get that number because for a variety of reasons I know what the subscription numbers are for the largest sites concerned with the topic.
So, if you take the current Sample Size of ~100 and the estimate of the total population you are sampling as 50,000, what is the Validity of this survey with those numbers? For a Population size of 50,000 with a Confidence Level of 95% and a Margin of Error of 10%, we need 96 respondents to the survey, which we have ALREADY exceeded! Plug the numbers in on Survey Monkey if you don't believe me. lol
I really don't think we need a greater Confidence interval than this, so the main thing a bigger Sample Size will do is to increase the total size of population that sample is valid for. I expect by the time this survey has accumulated maximum responses that we will easily have a 99% confidence interval on the results for a population size of 50K. I only do this statsitical shit because I constantly get hammered when I do surveys they are not "scientific" enough. The only criticism that beats "your question and answer choices SUCK!" when you do a survey is how "scientific" it is and what validity it has. lol. You can easily tell using CFS principles what is going on though, you don't really need to do the math.
Remember though, for surveys to have good validity and make them tough to deny, they need a good Sample Size! So get as many people as you can to fill it out! This is particularly important if you want to parse the data based on different demographic parameters, which is quite interesting already. Everybody who drops an email addy on the survey will get a copy of the complete dataset (less the emails and website referrals) to do their own analysis. If you do undertake such a dissection, let me know and I will publish your analysis. A real nice one to look at is the difference in results between males and females. Parsing by education level and age also is quite interesting.
At current pace, I'll probably have enough numbers for a publication next week of results, but I may wait 2 weeks on this depending on what the stream is and the decay rate in responses.
Thanks to all who have contributed to the survey so far, and for the rest of you, TAKE THE SURVEY NOW!
Published on the Our Finite World on May 12, 2016
Discuss this article at the Energy Table inside the Diner
For a long time, a common assumption has been that the world will eventually “run out” of oil and other non-renewable resources. Instead, we seem to be running into surpluses and low prices. What is going on that was missed by M. King Hubbert, Harold Hotelling, and by the popular understanding of supply and demand?
The underlying assumption in these models is that scarcity would appear before the final cutoff of consumption. Hubbert looked at the situation from a geologist’s point of view in the 1950s to 1980s, without an understanding of the extent to which geological availability could change with higher price and improved technology. Harold Hotelling’s work came out of the conservationist movement of 1890 to 1920, which was concerned about running out of non-renewable resources. Those using supply and demand models have equivalent concerns–too little fossil fuel supply relative to demand, especially when environmental considerations are included.
Virtually no one realizes that the economy is a self-organized networked system. There are many interconnections within the system. The real situation is that as prices rise, supply tends to rise as well, because new sources of production become available at the higher price. At the same time, demand tends to fall for a variety of reasons:
- Lower affordability
- Lower productivity growth
- Falling relative wages of non-elite workers
The potential mismatch between amount of supply and demand is exacerbated by the oversized role that debt plays in determining the level of commodity prices. Because the oil problem is one of diminishing returns, adding debt becomes less and less profitable over time. There is a potential for a sharp decrease in debt from a combination of defaults and planned debt reductions, leading to very much lower oil prices, and severe problems for oil producers. Financial institutions tend to be badly affected as well. If a person looks at only past history, the situation looks secure, but it really is not.
Substitutes aren’t really helpful; they tend to be high-priced and dependent on the use of fossil fuels, including oil. They cannot possibly operate on their own. They add to the “oversupply at high prices” problem, but don’t really fix the need for low-priced supply.
Why supply tends to rise as prices rise
For any non-renewable commodity, there are a wide variety of resources that will “sort of” work as substitutes, if the price is high enough. If the price can be raised to a very high level, the funds available will encourage the development of more advanced (and expensive) technology.
If it is possible to raise the price to a very high level, it is likely that a very large quantity of oil will be available. Figure 1 shows some of the types of oil available:
I got my idea for Figure 2 from a natural gas resource triangle by Stephen Holditch.
A similar resource triangle is available for coal (from National Academies Press; Coal Resource, Reserve, and Quality Assessments):
Because of the availability of an increasing amount of resources, we are likely to get more oil, natural gas, and coal, if prices rise. We associate high prices with scarcity; instead, high prices tend to make a larger quantity of energy product available.
The International Energy Agency (IEA) has a different way of illustrating the likelihood of huge future oil supply, if prices can only rise high enough.
The implication of this chart is that the IEA believes that oil prices can rise to $300 per barrel, giving the world plenty of oil to extract for many years ahead.
Can consumers really afford very high-priced energy products?
In my view, the answer is “No!” If oil is high priced, then the many things made with oil will tend to be high priced as well. Wages don’t rise with oil prices; most of us remember this from the oil price run-up of 2003 to 2008.
Because of this affordability issue, the limit to oil production is really an invisible price limit, represented as a dotted line. We can’t know in advance where this is, so it is easy to assume that it doesn’t exist.
The higher cost of extraction is equivalent to diminishing returns.
As we are forced to seek out ever more expensive to extract resources, the economy is in some sense becoming less and less efficient. We are devoting more of our human labor and other resources to extracting fossil fuels, and to extracting minerals from ever-lower-quality ores. In some sense, we could just as well be putting these resources into a pit and burying them–they no longer help us grow the rest of the economy. Using resources in this way leaves fewer resources to “grow” the rest of the economy. As a result, we should expect economic contraction when the cost of oil extraction rises.
In fact, economic contraction seems to happen when oil prices rise, at least for oil importing countries. Economist James Hamilton has shown that 10 out of 11 post-World War II recessions were associated with oil price spikes. A 2004 IEA report says, “. . . a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. Inflation would rise by half a percentage point and unemployment would also increase.”
Energy products play a critical role in the economy.
Economic activity is based on many kinds of physical changes. For example:
- Using heat to transform materials from one form to another;
- Using energy products to help move goods from one place to another;
- Moving electrons in such a way that light is provided
- Moving electrons in such a way that Internet transmission can be provided.
A human being, by himself, exerts only about 100 watts of power. A human being is also quite limited in what he can do; he can provide a little heat, but no light, for example. Energy products are very helpful for making capital goods such as buildings, machines, roads, electricity transmission lines, cars and trucks.
We can think of energy products, and capital goods made using energy products, as ways of leveraging human energy. If per capita energy consumption increases over time, leveraging of human labor can grow. As a result, humans can become ever more productive–think of new and better machines to help humans do their work. Dips in this leveraging tend to correspond to economic contraction (Figure 7).
To have a growing economy, wages of non-elite workers need to be growing.
Our economy is in a sense a “circular economy,” in which non-elite workers (less educated, non-managerial workers) play a pivotal role because they are both producers of goods and potential consumers of the output of the economy. Because there are so many non-elite workers, their demand for homes, cars, and electronic goods plays a critical role in maintaining the total demand of the economy.
If the wages of these non-elite workers are growing, thanks to increased productivity, the economy as a whole can grow. If the wages of these workers are shrinking or are flat (in inflation-adjusted terms), the economy is in trouble. The recycling process cannot work very well.
If there is not enough economic growth–often caused by not enough growth in energy consumption to leverage human labor–then we tend to get a growing imbalance between the sector on the left with businesses, governments, and elite workers, and the sector on the right, with non-elite workers. Part of this wage imbalance comes from sending jobs to low-wage countries. As jobs are shifted to low-wage countries, the workers of the world increasingly cannot afford the goods that they and other workers are producing.
If the wages of non-elite workers are not rising sufficiently, rising debt can be used to hide this problem for a while. The way this is done is by allowing workers to buy goods at ever-lower interest rates, over ever-longer time periods. This strategy has an endpoint, which we seem to be close to reaching.
Debt is a key factor in creating an economy that operates using energy.
A generally overlooked problem of our current system is the fact that we do not receive the benefit of energy products until well after they are used. This is especially the case for energy used to make capital investments, such as buildings, roads, machines, and vehicles. Even education and health care represent energy investments that have benefits long after the investment is made.
The reason debt (and close substitutes) are needed is because it is necessary to bring forward hoped-for future benefits of energy products to the current period if workers are to be paid. In addition, the use of debt makes it possible to pay for consumer products such as automobiles and houses over a period of years. It also allows factories and other capital goods to be financed over the period they provide their benefits. (See my post Debt: The Key Factor Connecting Energy and the Economy.)
When debt is used to move forward hoped-for future benefits to the present, oil prices can be higher, as can be the prices of other commodities. In fact, the price of assets in general can be higher. With the higher price of oil, it is possible for businesses to use the hoped-for future benefits of oil to pay current workers. This system works, as long as the price set by this system doesn’t exceed the actual benefit to the economy of the added energy.
The amount of benefits that oil products provide to the economy is determined by their physical characteristics–for example, how far oil can make a truck move. These benefits can increase a bit over time, with rising efficiency, but in general, physics sets an upper bound to this increase. Thus, the value of oil and other energy products cannot rise without limit.
Using hoped-for benefits to set oil prices is likely to lead to oil prices that overshoot their maximum sustainable level, and then fall back.
A debt-based system of setting oil prices is different from what most of us would have considered possible. If wages of non-elite workers had been growing fast enough (Figure 9), increasing debt would not even be needed, because the whole system could grow thanks to the increased buying power of the many non-elite workers. These workers could buy new houses and cars, have more meat in their diet, and travel on international vacations, adding to demand for oil and other energy products, thereby keeping prices up.
As wages of non-elite workers fall behind, an increasing amount of debt is needed. For the US, the ratio of the increase in debt to the increase in GDP (including the rise in inflation) is as shown in Figure 10:
Thus, the increase in debt has never been less than the corresponding increase in GDP over five-year periods, even when oil prices were low prior to 1970. In general, the pattern would suggest that the higher the oil price, the higher the increase in debt needs to be to generate one dollar of GDP. This is to be expected, if economic growth depends on Btus of energy, and higher prices lead to the need for more debt to cover the purchase of necessary Btus of energy.
We are reaching a head-on collision between (1) the rising cost of energy production and (2) the falling ability of non-elite workers to pay for this high-priced energy.
The head-on collision we are reaching is what causes the potential instability referred to at the beginning of this article, as illustrated in Figure 1. Of course, such a collision has the potential to cause debt defaults, as it becomes impossible to repay debt with interest.
Turchin and Nefedov in the academic book Secular Cycles analyzed eight agricultural economies that eventually collapsed. The problem that these economies encountered was exactly the same one we are now encountering: falling wages of non-elite workers at the same time that the cost of producing energy products (food, at that time) was rising. Rising costs were often an end result of too many people for the arable land. A workaround could be found, such as building irrigation or adding a larger army to conquer a neighboring land, but it would add costs.
As the problems of these economies progressed, debt defaults became more of a problem. Governments found it hard to collect enough taxes, because so many of the workers were increasingly impoverished. Often, workers became sufficiently weakened by an inadequate diet that they became vulnerable to epidemics. Governments often collapsed.
In the economies analyzed by Turchin and Nefedov, food prices temporarily spiked, but it is not clear that this was the final outcome, given the inability of workers to pay the high prices. Debt defaults would tend to further reduce ability to pay. Thus, it would not be surprising if prices ended up low (from lack of demand), rather than high. We know that ancient Babylon is an example of one economy that collapsed. Revelation 18:11-13 seems to describe the situation after Babylon’s collapse as one of lack of demand.
11 “The merchants of the earth will weep and mourn over her because no one buys their cargoes anymore— 12 cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble; 13 cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and human beings sold as slaves.
Other parts of the oil limits story that researchers have missed
As I have previously mentioned, most researchers begin with the view that soon there will be a problem with energy scarcity. The real issue that tends to bring the system down is related, but it is fairly different. It is the fact that as we use energy, the system necessarily generates entropy. This entropy takes the form of rising debt and increased pollution. It is these entropy-related issues, rather than a shortage of energy products per se, that tends to bring the system down. See my post, Our economic growth system is reaching limits in a strange way.
We could, in theory, fix our problems by adding infinite debt at the same time that wages of non-elite workers tend toward zero. We could then use this additional debt to fight pollution problems and pay all of the workers. All of us know that this solution would not work in the real world, however.
The two-sided economy I have described in Figures 8 and 9 is one part of our problem. There is a popular saying, “We pay each other’s wages.” Unfortunately, paying each other’s wages does not work well, if the wage level of elite workers differs too much from the wage level of the non-elite workers. A worker making $7.50 per hour in a part-time job is not going to be able to pay the wages of a surgeon making $300,000 per year, no matter how an insurance policy is designed to spread costs evenly. A worker in India or Africa will not be able to afford goods made by human workers in the United States, because of wage differences.
Governments can try to fix the problem of non-elite workers getting too small a share of the output of the system, but this is not easy to do. The real problem is that the system as a whole is not producing enough goods and services. This happens because the high cost of energy extraction (plus related issues–pollution control; need for more education for workers; need for ever-larger government and more elite workers) is removing too many resources from the system. The result is that the economy as a whole tends to grow ever more slowly. The quantity of goods and services produced by the economy does not rise very rapidly. When there are not enough goods produced in total, non-elite workers tend to find that their allocation has been reduced.
If governments attempt to add debt to fix the problems with the system, the addition of debt tends to raise asset prices on the left side of Figures 8 and 9. Unfortunately, the additional debt usually has little impact on the wages of non-elite workers (that is, the right hand part of the system).
Governments have talked about minimum income programs to raise incomes of those who are not elite workers. Whether or not this approach can work depends on many things–how much additional debt can be added to the system; whether this debt will actually raise the total amount of goods and services produced; how tolerant those in the left-hand side of Figures 8 and 9 are of losing their share of goods and services; the impact on relative currency levels.
Research involving Energy Returned on Energy Investment (EROEI) ratios for fossil fuels is a frequently used approach for evaluating prospective energy substitutes, such as wind turbines and solar panels. Unfortunately, this ratio only tells part of the story. The real problem is declining return on human labor for the system as a whole–that is, falling inflation adjusted wages of non-elite workers. This could also be described as falling EROEI–falling return on human labor. Declining human labor EROEI represents the same problem that fish swimming upstream have, when pursuit of food starts requiring so much energy that further upstream trips are no longer worthwhile.
Falling fossil fuel EROEI is a contributor to falling EROEI with respect to human labor, but there are other contributors as well (Figure 12). (My list is probably not exhaustive.)
If our problem is a shortage of fossil fuels, fossil fuel EROEI analysis is ideal for determining how to best leverage our small remaining fossil fuel supply. For each type of fossil fuel evaluated, the fossil fuel EROEI calculation determines the amount of energy output from a given quantity of fossil fuel inputs. If a decision is made to focus primarily on the energy products with the highest EROEI ratios, then our existing fossil fuel supply can be used as sparingly as possible.
If our problem isn’t really a shortage of fossil fuels, EROEI is much less helpful. In fact, the EROEI calculation strips out the timing over which the energy return is made, even though this may vary greatly. The delay (and thus needed amount of debt) is likely to be greatest for those energy products where large front-end capital expenditures are required. Nuclear would tend to be a problem in this regard; so would wind and solar.
To evaluate the extent to which a given energy product tends to raise debt levels, a better approach might be to look at debt levels directly. Another measure might be to compare the required system-wide capital expenditures for a particular purpose, for example, to provide sufficient non-intermittent electricity for the state of California over a period of say, 50 years, using different electricity generation scenarios.
Our academic system of inquiry, with its peer reviewed literature system, has let us down.
Our peer reviewed academic system is not telling this story. Part of the problem is that this is a difficult story. It has taken me most of the last ten years to figure it out.
Part of the problem with our academic system seems to be excessive reliance on past analyses. Once one direction has been set, it is hard to change. Another part of the problem is that the focus of each researcher tends to be quite narrow. The result can be that it is hard to “see the forest for the trees.”
Furthermore, politicians and academic publishers tend to “push” results in the direction of a desired outcome. Grant money goes to researchers who follow the government-preferred fields of inquiry; publishers prefer books that are not too alarming to students.
I am coming at this issue from “out in left field.” I don’t have a Ph.D., although I am a Fellow of the Casualty Actuarial Society, which many would consider similar. I also have an M. S. in Mathematics. I do not work in a university setting. I do not have a strong background in subjects a person might expect, such as geology, economic theory, or physics. I do have a fair amount of practical experience with financial modeling from my actuarial background, however.
My approach is very different from that of most researchers. I come to the problem from the point of view of how a finite world might be expected to operate. I write most of my articles on the Internet, where I get the benefit of comments from readers. Many of these commenters point me in the direction of articles or books I should read, or raise additional issues I should consider.
Over the years, I have become acquainted with many researchers in related fields. These people have generally reached out to me–invited me to speak at their conferences, or corresponded with me about issues they considered important. As a result of this collaboration, I have been able to put together a more complete story than others.
I have stayed away from publishers and funding sources that might try to influence what I say. I have not been taking donations, and do not run ads on my website. The story is one that needs to be told, but it easily gets distorted if the person telling the story is influenced by what will generate the largest donations, or the most grant money.
Published on the Our Finite World on May 2, 2016
Discuss this article at the Economics Table inside the Diner
There are many who believe that the use of energy is critical to the growth of the economy. In fact, I am among these people. The thing that is not as apparent is that growth in energy consumption is dependent on the growth of debt. Both energy and debt have characteristics that are close to “magic” with respect to the growth of the economy. Economic growth can only take place when growing debt (or a very close substitute, such as company stock) is available to enable the use of energy products.
The reason why debt is important is because energy products enable the creation of many kinds of capital goods, and these goods are often bought with debt. Commercial examples would include metal tools, factories, refineries, pipelines, electricity generation plants, electricity transmission lines, schools, hospitals, roads, gold coins, and commercial vehicles. Consumers also benefit because energy products allow the production of houses and apartments, automobiles, busses, and passenger trains. In a sense, the creation of these capital goods is one form of “energy profit” that is obtained from the consumption of energy.
The reason debt is needed is because while energy products can indeed produce a large “energy profit,” this energy profit is spread over many years in the future. In order to actually be able to obtain the benefit of this energy profit in a timeframe where the economy can use it, the financial system needs to bring forward some or all of the energy profit to an earlier timeframe. It is only when businesses can do this, that they have money to pay workers. This time shifting also allows businesses to earn a financial profit themselves. Governments indirectly benefit as well, because they can then tax the higher wages of workers and businesses, so that governmental services can be provided, including paved roads and good schools.
Debt and Other Promises
Clearly, if the economy were producing only items for current consumption–for example, if hunters and gatherers were only finding food to eat and sticks to burn, so that they could cook this food, then there would be no need for the time shifting function of debt. But there would likely still be a need for promises, such as, “If you will hunt for food, I will gather plant food and care for the children.” With the use of promises, it is possible to have division of labor and economies of scale. Promises allow a business to pay workers at the end of the month, instead of every day.
As an economy becomes more complex, its needs change. At first, central markets can be used to facilitate the exchange of goods. If one person brings more to the market than he takes home, a record of his credit balance can be kept on a clay tablet for use another day. This approach works as long as the credit can only be used at that particular market. If the credit balance is to be used elsewhere, or if the balance is to hold its value for a period of years, a different, more flexible approach is needed.
Over the years, economies have developed a wide range of debt and debt-like products. For the purpose of this discussion, I am including all of them as debt, broadly defined. One type is what we think of as “money.” Money is really a portable promise for a share of the future output of the economy. It can provide time shifting, if this money is held for a time before it is spent.
Another type of debt is a loan with a fixed term, such as a mortgage or car loan. Such a loan provides time shifting, allowing something to be paid for over a significant share of its life. Equity funding for a company is not really a loan, but it, too, allows time shifting. Those purchasing shares of stock do so with the expectation that they will be repaid in the future through price appreciation and dividends. It thus acts much like a loan, for the purpose of this discussion. There are many other types of promises regarding future funding that are closely related–for example, government loan guarantees, derivatives, ETFs, and government pension promises. All indirectly add to the willingness of people and businesses to spend money now–someone else has somehow made promises that remove uncertainty regarding future income flows or future payment obligations.
The Magic Things Debt Does
It is not immediately obvious how important debt is. In fact, neoclassical economists have tended to ignore the role of debt. I see several, almost magic, ways that debt helps the economy.
- Debt brings forward the date when an individual or company can afford to purchase capital goods. Without debt, the only way to afford such a purchase would be to save up the full price in advance. Using debt, a business can add a new machine to allow it to produce more goods before the business saves up money from its prior operations. A young person can afford to buy a house or car, long before he could save up funds for such a purchase. With the help of debt, the price of capital goods can be financed over much of their working life.
- Adding debt raises the prices of commodities. Commodities, such as lumber, iron, copper, and oil are what we use to make cars, houses, and factories. “Demand” for these commodities rises because more people and businesses can afford to buy capital goods that use these energy products. Often these capital goods also use energy products over their lifetime (for example, gasoline to operate a car), so there is a long-term impact on the demand for energy products, in addition to the demand associated with making the capital goods. Of course, with higher prices, it becomes profitable to extract oil and other energy resources from more marginal areas of production. More companies enter the field. As long as prices remain high, they are able to earn a profit.
- Adding debt stimulates the economy, almost like turning the heat up on a stove. When debt is added for any purpose–even starting a war–it starts a whole chain of purchases, each of which acts to stimulate the economy. If a young person takes out a loan to buy a car, the purchase of the car leads to the salesman having more money to buy goods for his family. The company selling the cars is able to make a bigger profit, which the business can reinvest or pay to shareholders as dividends. The purchase of the car leads to more demand for metals used to make the car, and thus tends to increase the number of mining jobs. Each new worker in turn is able to buy more goods and services, starting a beneficial cycle that gradually radiates out through the economy.
Adding debt tends to lead to higher asset prices. Clearly, (from Item 2), adding debt can raise the price of commodities. Adding debt can also make it possible for more people to afford real estate and investments in the stock market. For example, Japan greatly ramped up its debt level between 1965 and 1989.
During this time, a major price bubble occurred in land prices (Figure 2).
There is a reason why this bubble could occur. Because of the stimulating effect that debt had on the economy, more people had the wealth to buy real estate, especially if this too was sold on credit. Once private debt levels stopped rising rapidly, price levels crashed both for land and stock prices. TheBubbleBubble.com explains what happened: “By 1989, Japanese officials became increasingly concerned with the country’s growing asset bubbles and the Bank of Japan decided to tighten its monetary policy.” Doing so popped both the home and stock price bubbles.
Adding debt adds to GDP. GDP is a measure of the goods and services produced during a period. Many of these goods and services are bought using debt, so it is not surprising that adding more debt tends to add more GDP. The amount of GDP added is less than the amount of debt added, even when inflation growth is considered as part of GDP.
The general tendency is toward the need for an increasing amount of debt per dollar of GDP added. This is especially the case when oil prices are high. In the US, the ratio of non-financial debt to GDP added was almost down to 1:1 for a time, back when oil prices were less than $20 per barrel (in today’s dollars).
Adding debt tends to increase wealth disparity. Adding debt tends to increasingly divide an economy into “haves” and “have-nots.” Many of the “haves” own the means of production, including an ever-increasing amount of capital goods, and thus can earn profits and dividends from these capital goods. Others are high-level officials in businesses and the government who earn high salaries. Interest payments also tend to transfer payments from the poor to the more wealthy. We might say that the common laborers are increasingly “frozen out” of the economy that otherwise is heating up. This shift started to take place in the United States about 1981.
Adding debt is something that governments can influence, either by lowering interest rates or by borrowing the money themselves. Actions by governments to reduce interest rates can be effective, because they lower monthly payments that borrowers need to make to take out a loan of a given amount. Thus, they tend to encourage more borrowing. In Figure 5, below, note that the decrease in interest rates in 1981 corresponds precisely with the rise in debt to GDP ratios is Figure 3 and the shift in income patterns in Figure 4.
Figure 6 later in this post shows that changes in Quantitative Easing (QE) (which affects interest rates and the level of the US dollar relative to other currencies) also correspond to sharp changes in oil prices. Changes in the level of the dollar also affect demand for oil. See a recent post related to this issue.
What Goes Wrong as More Debt Is Added?
It is clear from the discussion so far that quite a few things go wrong. These are a few additional items:
1. There are limits to government manipulation of debt levels. First, interest rates eventually drop so low that they become negative in some countries. Negative interest rates tend to cause bank profitability to drop and lead to hoarding by those who planned to use savings for retirement.
Second, government borrowing doesn’t work as well at stimulating the economy as investments made by the private sector. A likely reason is that private sector investments are made when the borrower believes that the return on the investment will be high enough to pay back the debt with interest, and still make a profit. Government investments often do not meet this standard. Some reports indicate that Japan’s government has used borrowed money to fund bridges to nowhere and houses with no one home. China’s centrally directed economy seems to lead to similar over-borrowing problems. Chinese businesses also borrow to cover interest on prior loans.
2. Ratios of debt to GDP tend to rise, worrying government leaders. Debt is a way of accessing the benefits of Btus of energy, in advance of the time they are really available. As the amount of easy-to-extract oil depletes, the cost of oil extraction gradually rises. Unfortunately, the amount of “work” a barrel of oil can perform–for example, how far it can make a truck travel–doesn’t rise correspondingly. As a result, the higher price simply reflects increasing inefficiency of extraction, and thus the need to use a larger share of the economy’s output to extract oil. The amount of debt needed to keep GDP rising keeps growing, in part because oil is becoming higher priced to extract, and in part because goods that use oil in their production also tend to rise in cost. As a result, the ratio of debt to GDP tends to spiral upward.
3. Rising debt allows for a temporary false valuation of the benefit of energy products. The true value of oil and other energy products comes primarily from the Btus of energy they provide, such as how far a truck can be made to travel. Thus we would expect that the true value of energy products would remain relatively constant over time. If anything, the value of energy products will tend to rise by a small amount (say, 1% per year) as technology improvements lead to growing efficiency in their use.
What we think of as the magic hand of the economy determines a price for commodities at all times, based on “supply” and “demand.” This price clearly is not very close to the future energy profit that the energy products will actually provide, because it tends to vary widely over time. We don’t know what the true value of a barrel of oil to society is. If the true value is $100 per barrel (in today’s money), then back when oil prices were $10 or $20 per barrel (in today’s money), there would have been $80 to $90 (equal to $100 minus the actual price) of “energy profit” that could be pumped back into the economy as productivity gains for workers, interest on debt, and dividends on stock, tax revenue, and money for new investment. The economy could (and did) grow quickly. There was less need for added debt, because goods made with oil were cheap. Wages for workers could rise rapidly, as they did in the 1950 to 1968 period (Figure 4).
If prices approach the true value of oil (assumed to be $100 per barrel), the extra energy profit would pretty much disappear. The economy would increasingly become “hollowed out.” Productivity gains that lead to wage gains would mostly disappear. Businesses would find it hard to earn adequate profits, and would cut back on dividends. Some companies might need to borrow money in order to pay dividends. World economic growth would slow.
Prices can even temporarily overshoot their true value to the economy, then drop sharply back. This happens because prices are set by demand, and demand depends on a combination of wage levels and debt levels. Oil prices can be high for a while, if borrowing is temporarily high, and then fall back as it becomes clear that profitable investments are not really available if oil is at such a high price level.
4. Wages of non-elite workers tend to drop too low. Workers play a very special role in the economy: they both (a) provide the labor for the economy and (b) act as consumers for the economy. If workers aren’t earning enough, there is a problem with many of them not being able to buy the goods and services the economy produces. This is especially the case for purchases such as homes and cars, which are often bought using debt. Indirectly, this lack of ability to afford the output of the system puts a downward pressure on the price of commodities, particularly energy commodities. Prices may fall below the cost of production, or may not rise high enough.
The reason that wages of the less educated, non-managerial workers tend to lag behind is related to the issue of diminishing returns. A workaround is a more “complex” society, with bigger businesses, bigger government, more capital goods, and more debt. In some cases, manufacturing is shifted to parts of the world with lower wages. Non-elite workers increasingly find themselves with too small a share of the output of the economy. Figure 7 shows some influences that tend to lead to too low wages for non-elite workers.
When wages for a large share of workers drop too low, there is a problem with workers not having enough money to buy goods like cars and houses. The economy tends to contract. This is a different form of too low Energy Return on Energy Invested (EROEI) than most people think of. In my view, low return on human labor is the most important type of EROEI. Falling wages of a large share of workers can lead to economic collapse, because there are not enough buyers for the output of the system.
5. Eventually, debt defaults become a problem. As the world becomes more divided into “haves” and “have-nots,” falling ability to repay a debt becomes more of a problem. To some extent, this happens at the individual level, with auto loans, student debt, and mortgages. If commodity prices fall or stay too low, it happens to commodity producers, including oil producers. It also happens to countries, especially to those who are dependent on commodity exports.
The rise in the cost of oil extraction is another factor. As the cost of extraction begins to exceed the benefit of oil to the economy (assumed above to be $100 per barrel), the energy profit from oil is no longer sufficient to allow the economy to grow as in the past. Without economic growth, it becomes much harder to repay debt with interest.
6. At some point, we reach peak debt. The economy acts like a pump. As long as there are sufficient energy profits coming through the system (based on $100 per barrel minus the actual oil price, in our example), wages can rise and corporate profits can rise. Asset prices can rise, and energy prices can stay high. Once these energy profits start falling back, wages stagnate and business profits decline. Businesses cut back on borrowing, because they see fewer profitable opportunities for investment. Individuals cut back on borrowing, because with their lower wages, it becomes more difficult to buy a house or car. Governments try to fight declining demand for debt, but eventually reach limits of the economy’s tolerance for negative interest rates.
Once debt begins contracting, the contraction tends to bring down commodity prices. This is a huge problem for commodity producers, because they need prices that are high enough to cover their cost of production. Ultimately, falling debt, together with falling wages, and lack of energy profit have the potential to bring down the system.
The situation we are facing today is one in which growing debt has been holding up oil prices and other commodity prices for a long time. We are now reaching limits on this process, as evidenced by growing wealth disparity, low commodity prices, and the frantic actions of government leaders around the world regarding slow economic growth and the need for more stimulus. These issues are becoming major ones in the upcoming US political election.
Those studying oil issues from an EROEI perspective tend to miss the connection with debt, because EROEI analysis strips out timing differences. In my view, debt is essential to oil extraction, because it brings forward an estimate of the value of the oil and other energy products, so that businesses of all kinds can make use of the “energy profit” in paying their employees and in paying their taxes. Most people don’t think of the issue this way.
In this article, I suggest a different way of thinking about the limit we are reaching–oil prices can’t rise above some price limit without adversely affecting the economy. It is the savings below this limit that aid productivity growth and government funding. Perhaps researchers should be examining this price limit approach more carefully. This is not the same approach as EROEI analysis, but has the advantage of having fewer “boundary issues.” It also offers a check for reasonableness of EROEI indications developed through conventional analysis. If an energy product needs a government subsidy, it is doubtful that that energy product is really providing an energy profit.
Published on FEASTA on March 23, 2016
Discuss this article at the Energy Table inside the Diner
The Boom and Bust of Sub Prime Oil and Natural Gas
Those whom the gods wish to destroy they first send mad
The aim of this article is to show that the shale industry, whether extracting oil or gas, has never been financially sustainable. All around the world it has consistently disappointed profit expectations. Even though it has produced considerable quantities of oil and gas, and enough to influence oil and gas prices, the industry has mostly been unprofitable and has only been able to continue by running up more and more debt. How could this be? It seems paradoxical and defies ordinary economic logic. The answer is to be found in the way that the shale gas sector has been funded. It is part of a bubble economy inflated by monetary policy that has kept down interest rates. This has made investors “hunt for yield”. These investors believed that they had found a paying investment in shale companies – but they were really proving that they were susceptible to wishful thinking, vulnerable to hype and highly unethical practices that enabled Wall Street and other bankers to do very nicely. Those who invested in fracking are going to lose a lot of money.
A Global Picture of disappointed expectations
Around the world big expectations for fracking have not been realised. One example is Argentina where shale oil reserves were thought to rival those in the USA. It is a country where there has been local opposition while central government pushed the industry in alliance with multinational companies and its own company YPC. However profitability has been elusive. To have any hope of profitability shale development has to be done at scale to rapidly bring down costs enough to make a profit. That requires a lot of capital and companies will not make this capital available without being sure that they are going to make a lot of money – but they cannot be sure until they have done tests for up to two years.
“It’s a sort of chicken and egg dilemma. Without profits, the estimated $20 billion a year needed to develop the play won’t come. And without this investment in drilling tens of thousands of wells, the economies of scale won’t be reached on the fields to cut costs.
“A reason not to rush into production — only 400 wells have been drilled — is that wells must be tested for up to two years to gauge the potential of the shale rock before a company will commit billions of dollars. This is especially the case now that low global oil prices have slimmed investment budgets for frontier plays.” (Charles Newbury, “Struggles to cut cost delay oil production in Argentina” Platts Oilgram News. August 17th 2015 at http://blogs.platts.com/2015/08/17/cut-cost-delay-oil-play-argentina/ )
The situation in Argentina highlights the underlying problem for the economics of shale oil and shale gas. Unconventional oil and gas fields have much higher costs than conventional ones. Tapping “conventional” oil and gas from permeable geological strata is cheaper in that the oil and gas flows underground and can be pumped out with less engineering. In contrast an “unconventional gas field” has to release the gas from impermable rock and therefore needs up to 100 more wells for the same amount of gas (or oil). A field must achieve economies of scale to have any chance of making a profit. It needs more activity underground to fracture the rock and it needs more activity on the surface to facilitate that. That is why it is more dangerous to the environment and public health – and also why it is more financially expensive. It requires more ongoing capital equipment too. Without a high gas (or oil ) price all of these activities cannot be made profitable.
Looked at in this way “unconventional oil and gas” is not the magical answer for peak oil (or later for peak natural gas) that it might have once seemed to be. To be long term viable the fracking sector requires three things: favourable geology, high oil and gas prices and easy and cheap credit. All three have proven elusive, making for disappointing results in all of the locations around the world where it has been tried. Unconventional gas is struggling to get off the ground outside of the USA and Australia. And in the USA, where it started, although it managed to get the credit to pay for the capital expenditure there are now grave doubts that a mountain of credit will ever be paid pack.
But let’s look outside of the USA too. Take Europe for example. In 2011 the international oil and gas industry and the Polish government thought Poland was going to be a major source of shale gas. 75 exploratory wells were drilled up to 2015 and 25 were fracked. The amount of gas recovered was one tenth to one third of what was needed for the wells to be commercially viable. Besides retreating from Poland, the industry has pulled out of nascent shale drilling efforts in Romania, Lithuania and Denmark, usually citing disappointing yields.
In the UK and Ireland too fracking is still stuck at the pre-exploratory stage, largely because of the rapid and powerful development of a movement of opposition. Although not definitive, a moratorium in Scotland and a “presumption against” fracking by planners in Northern Ireland, are political set backs for the industry. Yet even if the public and political opposition was not there, there would be reasons to doubt that fracking is viable in the UK. The doubt starts with the geology. While the British Geological Survey has produced maps of shale layers, and while it has been suggested that the carbon content might be there, the data is lacking for other key parameters, for example for rock porosity. In addition the shale in the UK has more folds and faults when compared to US fields. This might to lead to more earthquakes which would damage the wells – plus leading to a potential failure to achieve the pressure needed for fracturing if fracking fluid leaks into small faults when pushed underground.
Oil and Gas Prices
Now there are further doubts because of low and falling oil and gas prices. Here the issues are a little different for oil compared to natural gas on the one hand and for the situation in the USA as compared to other producing zones in the world on the other. That said, what all exploration and production companies are facing, whether in oil or gas production or whether in the USA or elsewhere, is that prices that are too low. It is proving difficult or impossible for most producers to make a profit given the costs of extracting and distribution. That has been especially noticeable for shale gas. Let us however first look at oil prices.
During the crash of 2007-2008 global oil prices crashed from a high peak but then recovered again. Between November 2010 and September 2014 there were 47 months in which oil prices were over $90 a barrel. This period of high oil prices can be described as being broadly reflective of supply and demand. On the demand side the global economy recovered, to a large degree stimulated by a massive credit-fuelled residential and infrastructure boom in China. This pumped up demand. On the supply side production from Libya and Iran was kept out of the world market because of the turmoil in Libya and sanctions against Iran. Thus, while there was some production increase from Saudi Arabia and, eventually, even more from Iraq, these increases were largely cancelled by Iran and Libya. Demand exceeded supply and prices remained high but the situation began to change in the autumn of 2014.
On the demand side the Chinese economy stalled while on the supply side production increased. OPEC as a whole was not the main source of that increasing production, and nor was Russia – the main source of increasing oil production was the boom in US shale oil. For reasons to be explored, production from the USA continued to soar even though prices fell and after a price rally early in 2015 prices continued to fall into 2016.
A similar downward trend has occurred around the world in natural gas prices – though in the USA they have been lower far longer – and certainly too low to allow for profitability.
In regard to gas the issues are somewhat different from oil because the market for natural gas is less globally networked. Natural gas markets are based on global regions and different gas prices in different parts of the world. Thus there is a north american gas market, a european gas market and a market in the far east. There are multiple long distance gas pipelines that are important economically and geopolitically. Wars and rivalries are fought over pipeline routes – this is a component in the Syrian conflict. However natural gas could not be transported so easily between continents – until recently, because now there is an infrastructure for sea transported liquified natural gas under development (LNG). Sea transported LNG begins to change things because it makes the market for natural gas more globally competitive.
At a risk of simplifying a varied picture natural gas prices in various areas have been stable at a low level or drifting downwards over the last two years and insufficient for profitability in a gas fracking sector. In both the USA and Europe natural gas prices are a half of what they were in 2014. In the USA this has been because of overproduction of gas, conventional and unconventional, with conventional production declining and being replaced and overtaken by unconventional production – as of late in 2015 however shale gas production too began to fall. For years production has been unprofitable in all but the best areas and in decline. Now it is in decline generally.
In Europe production decline because of depleting conventional gas fields has not prevented a fall in the gas price because demand has been falling too and this is likely to remain the case. Thus a recent report published by the Natural Gas Programme of the Oxford Institute for Energy Studies, concludes that European gas demand will not recover its 2010 level until about 2025. The decline in demand has been due to warmer winters but also due to low demand because of the low growth in manufacturing which has shifted to Asia, because of low population growth and because of energy saving measures too. At the time of writing it is being suggested that the competitive threat from the development of an LNG infrastructure will encourage Gazprom to change its pricing strategy to try to fight off future competition from sea transported supplies. In summary, it is highly likely that the gas price in Europe will remain low for a long time. If so, this completely undermines any remaining case for fracking for natural gas in europe, and particularly Britain.
At current gas prices all the exploration and production companies active in the UK and Ireland would struggle to make a profit. There are 4 studies of extraction costs of natural gas by fracking in the UK – by Ernst and Young, Bloomberg, Oxford Institute of Energy Studies and Centrica. All have maximum and minimum extraction costs. Current gas prices per therm are less than the minimum extraction cost in the lowest study. So for the industry to continue at all it has to assume that gas prices will rise in the future.
Low Gas price vs high extraction costs: Zachery Davis Boren, Greenpeace Energy Desk; August 2015 http://energydesk.greenpeace.org/2015/08/20/super-low-gas-price-spells-trouble-for-fracking-in-the-uk/
So what is the future for oil and gas prices? Of course the future is inherently uncertain – a President Trump might provoke any number of wars making America great again – it is difficult to see how Muslims could be banned from entry into the USA without that affecting oil and gas imports from Muslim countries. Or again heightened conflict between Iran and Saudi Arabia might escalate with massive consequences, and not just for the oil and gas price. In these and other conceivable situations, the more chaos the less companies will want to invest anyway. Whether prices are high, or low, if there is too much turmoil conditions will not favour new investment. But leaving aside extreme geo-political scenarios will prices go up or will they go down? If oil and gas prices rise will this be sufficiently and for long enough for unconventional gas to be developed sustainably in the narrow financial or business sense?
The rising price scenario
It is important to grasp the idea that a rising prices scenario is only credible in conditions where a proportion of the industry has been driven out of the business – which is the hope of the Saudi oil industry. What the Saudis would like to see is not only the US fracking companies driven to bankruptcy but the banks that fund them with badly burned fingers and unwilling to finance the industry any more. That said the Saudis too have limited pockets. Their current aggressive foreign policy has to be funded from somewhere and it is conceivable that they could lose the capacity to push the anti-shale agenda through to the bitter end.
If the oil price does bounce back the beneficiaries would be the survivors. There is a view then that the current low prices will eventually lead, not only to falling production in the future but to bankruptcies and capital expenditure cut backs both in the conventional and unconventional sectors. It would speed the decline of oil fields like those in the North Sea where investment is now being slashed. With declining supply, inventories will be sold off, the market will move back into balance…. and then further the other way – so that eventually demand again exceeds supply. Higher prices, possibly spiking, will encourage new investment and the fracking companies will surge back at the other side of the crisis.
What must however be assumed for this to happen is that at some point “growth will resume” because, over the last two hundred years, it always has. If growth resumes the demand for energy will revive in order to feed it – making more material production and consumption possible. Some economists argue that one factor encouraging a revival in demand ought to be the low energy prices themselves. Higher energy prices act as a drag on the economy so low energy prices should do the opposite – i.e. stimulate it. In a recent speech the chair of the US Federal Reserve, Janet Yellen, said that falling energy prices had, on average put an extra $1,000 in the pockets of each US citizen. It is assumed that this would encourage extra spending and thus extra income.
The falling or stagnant prices scenario
An alternative view is more sceptical about the revival of the global economy and of demand because of the high level of debt. In an economy where indebtness is low, falling energy prices probably would act as a stimulus for energy consumers. But will there be any or enough stimulus where the debt to income ratio is high? In an indebted economy windfall gains from reduced energy prices are likely to be partly used to pay off debts rather than being spent. A further issue is what will happen because of the way in which the finance sector has made itself vulnerable? It has channelled substantial credit to the energy sector – to exploration and development companies that now have difficulties paying this credit off? It certainly will not help in finding investment money to get fracking off the ground in the UK and elsewhere if it all ends in tears in the USA.
In the pessimistic scenario if the economy does not revive then there can be some scepticism that energy prices will revive too. This is the scenario in which deflationary conditions continue and even deepen. On this view the global economy is entering a long period of stagnation, decline and chaos. Some economists are describing how growth has slowed using descriptive phrases like “secular stagnation”. The fate of the Japanese economy from the early 1990s onwards gives grounds for comparison and concern. After a quarter of a century Japan has not escaped prolonged recessionary conditions. Because the global economy is highly indebted central banks have driven down interest rates to zero and now even below that. This has led to a bubble in asset markets but it has done little to spur generalised economic growth.
There could be a vicious circle here – without demand arising in a sustained growth process pushing up energy prices the profitability of the unconventional sector will never be sufficient to make future investment in that sector pay. In these circumstances future oil and gas production will not rise. Production will fall in the USA, especially as more of the identified sweet spots in the best plays are exhausted. In textbook supply and demand theory falling supply should eventually lead, ceteris paribus, to a rise in prices that justifies more investment and therefore more production. However “ceteris paribus” (other things remaining unchanged) does not apply in a stagnating or a declining economy. A declining economy is not one where private economic actors invest money in the hope of a future return because the necessary confidence and conviction about the future is not there. Purchasing power is hoarded, purchases are deferred where possible, debts are paid off where possible. These actions tend to intensify the deflation. If this is what happens, and it seems likely, it will make the problems of the shale gas sector even worse.
The Fracking Companies and the Finance Sector
Before the current difficulties Wall Street made a fortune in fees arranging debt finance for the US shale sector. Investors who were “looking for yield” instead of the ultra low interest rates payable on government debt thought the way to find that yield was to pile their money into junk finance to fund the frackers. Despite the economic reality Wall Street encouraged the misinvestment. Now the wall of energy sector junk finance repayable in the future is huge. The further forward one goes the higher it is. How much of this debt will ever be repaid? And what will happen to those who lent it if it is not? Given what has already been said the long run ability of the sector to repay its debt seems highly questionable. How did it come to this?
For several years prior to the crash of 2007-2008 the finance sector in the USA were knowingly giving loans to people with no income, no jobs and no assets. The people who organised this were doing so because they were earning fees on each loan arranged. What did they care about the virtual certainty that the loans would never be paid back? The crash was the inevitable result – the consequence of an ethical catastrophe. The banks had packaged the loans up into mortgage backed securities and sold them on so that someone else other than the originating bank carried the risk. Ratings agencies played their role in this crooked system and got fees rating securities that others called “toxic trash” as AAA. Meanwhile derivates contracts against defaults on these rotten securities were also sold even though it was not possible to pay up when the defaults happened – without being bailed out by the monetary authorities, as happened with AIG.
The Shale Bubble – toxic water, toxic air and toxic finance too
For several years after 2007-2008 shale was the next big money spinner – and the next ethical catastrophe for Wall Street. Just as it was blindingly obvious for years that sub prime would crash, but it was a nice money spinner at the time, so Wall Street has made a lot of money pumping up the shale bubble. All the evidence about health and environment costs have been ignored and the information about them suppressed. The information about the economics was ignored too. Of course, someone has to lose eventually but “while the music has played” there has been plenty of money for all sorts of players – petroleum engineers and geologists, PR companies, corrupt politicians, the companies supplying the pipelines, rigs and fracking gear. They had their snouts in the money trough and in many cases abandoned their ethics and their critical faculties while they were feeding.
Nor were investors looking closely enough at where they were going or at what they were funding. Even before the current price crash, many US fracking companies, just like those in Argentina and Poland, were struggling to make real profits yet vast quantities of money were channelled to them. Honest and astute observers who could see that the shale boom was a Wall Street induced bubble were ignored. One example was a report written by Deborah Rogers in early 2013 in which she drew attention to the difference between the reality and the message put out by the PR machine.
According to Rogers “Industry admits that 80% of shale wells ‘can easily be uneconomic.’ Massive write-downs have recently occurred which call into question the financial viability of shale assets and possibly even shale companies. In one case, assets were written off for more than 50% of the purchase price within a matter of months……publicly traded oil and gas companies have essentially two sets of economics. There is what may be called field economics, which addresses the basic day to day operations of the company and what is actually occurring out in the field with regard to well costs, production history, etc.; the other set is Wall Street or “Street” economics. This entails keeping a company attractive to financial analysts and investors so that the share price moves up and access to the capital markets is assured. “Street” economics has more to do with the frenzy we have seen in shales than does actual well performance in the field. With the help of Wall Street analysts acting as primary proponents for shale gas and oil, the markets were frothed into a frenzy. Boom cycles have the inherent characteristic of optimism. If left unchecked, such optimism can metamorphose into a mania such as we saw several years ago in the lead up to the mortgage crisis. (Deborah Rogers, “Shale and Wall Street” Energy Policy Forum 2013 http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf)
Long before the price slide beginning late in 2014 the much hyped boom was not what it seemed. Roger’s article shows many parallels between the crazy and unethical excesses of Wall Street prior to the 2007 crash and what has been happening in the shale boom. As had happened with sub prime mortgages which were bundled up to become part of mortgage backed securities and then sold on – new kinds of financial assets were invented and sold to allow the unwary to invest their money in order as to “get a part of the action” and participate in the shale bonanza too. One bank instrumental in all of this was Barclay’s Capital, working together with a company called Chesapeake Energy. To help Chesapeake the Barclay’s financial wizards invented a structure called a Volumetric Production Payment (VPP). Rogers quotes a finance industry magazine, Risk, from March 2012.
“The main challenges in putting together the Chesapeake VPP deal were getting the structure right and guiding the rating agencies and institutional investors—who did not necessarily have deep familiarity with the energy business—through the complexities of natural gas production.”
The resulting financial assets were highly complex, off balance sheet, and as Barclay’s admitted the rating agencies had to be “guided” so that they could understand the complexities of the deal. (So much for the competence and independence of the resulting “rating”. ).
Production taking precedence over profitability (and over economic rationality)
The result was that current profitability took second place to an industry PR narrative about what was supposedly going to happen in the future as the shale companies grew and grew. Prior to the crash of 2007 bank employees were under pressure and being incentivised by bonuses to make as many loans as possible – even though many loans were unsound. Now the fracking company managers were being incentivised to produce as much product as possible even though they were losing money. The measure of the future dream was production growth rather than what it ought to have been – profitable production growth. The latter depended on whether that production growth was actually covering costs of production and it was not. It should be stressed again that this was happening before the current price slide. For example an analyst Arthur Berman looked at the financial figures for Exploration and Development Companies representing 40% of the US shale industry for 2013 and 2014 and found them to be powerfully in the negative. There was a $14 billion negative cash flow in 2014. (http://www.artberman.com/art-berman-shale-plays-have-years-not-decades-of-reserves-february-23-2015/)
Nevertheless the good news headlines about the production growth kept the share prices rising and the managers were on bonuses to make that production growth happen. Apart from the sceptics and the communities whose environments and health were under attack, the industry, the government, some naïve academics and Wall Street, all played their part in pumping up the dramatic narrative of the resurgent American Oil and Gas Dream. Eventually the USA would rival Saudi Arabia and more…becoming great again no doubt. As a more recent article in the Wall Street Journal explained:
“Markets have been waiting for U.S. energy producers to slash output during a period of depressed crude prices. But these companies have been paying their top executives to keep the oil flowing. Production and reserve growth are big components of the formulas that determine annual bonuses at many U.S. exploration and production companies. That meant energy executives took home tens of millions of dollars in bonuses for drilling in 2014, even though prices had begun to fall sharply in what would be the biggest oil bust in decades. The practice stems from Wall Street’s treatment of such companies’ shares as growth stocks, favoring future prospects over profitability. It has helped drive U.S. energy producers to spend more unearthing oil and gas than they make selling it, energy executives and analysts say.
It has also helped fuel the drilling boom that lifted U.S. oil and natural-gas production 76% and 31%, respectively, from 2009 through 2015, pushing down prices for both commodities. “You want to know why most of the industry outspent cash flow last year trying to grow production?” William Thomas, CEO of EOG Resources, said recently at a Houston conference. “That’s the way they’re paid.” (Ryan Dezember, Nicole Friedman and Erin Aillworth. “Key Formula for Executives Pay: Drill Baby Drill” http://www.wsj.com/articles/key-formula-for-oil-executives-pay-drill-baby-drill-1457721329)
The Euphoric Economy at Work – how to rip off manic investors
All of this raises the question of how, with profitability so low, this reckless show has managed to stay on the road for so long and still continues. A cynical answer would be to say that the function of Wall Street is to connect the greedy and stupid with people and institutions without scruples who will spend their money for them. For this to happen optimism must be generated at all times whether this optimism has any foundation or not. The study of bubbles is all about people who are able to swim in an ethical sewer oblivious to their environment. They are too “euphoric” or high on the prospect of making a lot of money to calmly calculate what is happening. Another word for this is mania. It helps to consider this as a period of collective madness like a mania – a period of collective excitement in which the capacity for ethical and other judgements are impaired.
In this collective insanity one can think of the money making calculations like this – if you buy the right to drill and are able to identify the geologically favourable “sweet spots” then at first the results are likely to be good. Instead of then drilling the less favourable locations and seeing your profits fall away you tell beautiful stories to another company with deep pockets enticed by the good news of the early success. So it is possible to sell the less favourable areas. Or maybe you sell the company, merging it with another. In this Wall Street (or the City of London no doubt) will come to your aid because it makes nice fees from mergers and acquisitions. The new owners then makes the loss. It is the buying company that then has to write down its balance sheet when it subsequently discovers that it was sold a mirage.
The stories about being duped are never told as loudly and plainly as the stories of the wonderful shining future that sell the fraud in the first place. That’s because managers do not like to speak loudly about their incompetence to avoid the embarrassment of admitting they were duped. It is usually possible to deny that it would have been possible for them to know what was happening and, after all, why should these managers care when it was other people’s money that they were losing? (The money of shareholders or bond holders).
But if the faith in the industry can be maintained then these kind of deals can at some time make the banksters and crooked production company bosses much more money than merely by drilling and fracking for shale gas or oil. Thus buying and selling drilling leases (bundled up together just like sub prime mortgages were) was a great money spinner for companies like Chesapeake. The greater the euphoria generated, the more money to be made. This is Deborah Rogers again:
“Aubrey McClendon, CEO of Chesapeake Energy, stated unequivocally in a financial analyst call in 2008: ‘I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 mcf.’”
Eight years later Aubrey McClendon was dead. He had been charged on a federal indictment of bid rigging from late 2007 to 2012 and drove his car at high speed into a bridge. There was a strong suspicion that he had killed himself.
The madness of shale goes on. Wall Street and the shale companies are still managing to play the same game of passing the risk parcel to the bigger fools who will take the loss. If people can be persuaded to buy into the companies just before they go bust then the smarter and bigger players can get out. At the time of writing (March 2016) there are suspicions that the banks are orchestrating a rise in the price of oil in order to help the shale companies raise capital which will enable them to pay off the banks while letting “the suckers” take the fall. This led one analyst to describe the glut, not just of oil, but of stupidity.
“Even the experts are stunned by this unprecedented glut in stupidity of managers of other people’s money: “Billions of dollars of dilutive equity continue to roll in with seemingly no end in sight,” Houston-based oil investment bank Tudor, Pickering, Holt & Co. said in a research note.” (http://oilprice.com/Energy/Crude-Oil/In-Risky-Move-Wall-St-Backs-Shale-With-Nearly-10-Billion-In-Equity.html)
Ethical or Financial Bankruptcy – which is more fundamental?
It is common in economics to refer to markets becoming frothy at times like this. Commentators seek to find the fundamentals underlying the “froth” (perhaps better described as scum). But what are “the fundamentals” in this story? The really fundamental thing is not that this sector is financially bankrupt – it is that it is ethically bankrupt too. An ethically bankrupt sector is definitely not sustainable. Any economic sector that destroys the environment including the climate, assaults public health and then enlists government in a corrupting endeavour to write and use the regulations in such a way as to undermine the very possibility of resistance is corrupt to the core. An industry that destroys people’s health and environment and then settles in court on condition that people are bound to secrecy about what has happened to them, as is common practice in the USA, cannot be trusted to tell the truth. It does not surprise in the least therefore that the unethical business methods of this sector, as well as the unethical methods of its allies in finance, also rely on trickery and defrauding anyone stupid enough to invest their money in it.
What will happen in the USA will no doubt have a big impact for the future credibility of the fracking industry in the UK and elsewhere in the world. That story is not yet in its final chapter but what has happened in the USA is already a cautionary tale and we would be stupid to ignore it. Local authorities in the UK should be careful that they are not caught out picking up the environmental costs of a collapsing industry. It has already happened in the USA and Canada – the advantage of limited liability to an industry without ethics is that it enables it to pass the cost of clearing up to communities after bankruptcies.
“CBC News reported that falling gas and oil prices have prompted many smaller companies to abandon their operations in Alberta, Canada, leaving the provincial government to close down and dismantle their wells. In the past year alone, the number of orphaned wells in Alberta increased from 162 to 702. At the current rate of work,
deconstructing the inventory of wells abandoned just in the past year alone will be a 20-year task.” (Source: Johnson, T. (2015, May 11). Alberta sees huge spike in abandoned oil and gas wells. CBC News. http://www.cbc.ca/news/canada/calgary/alberta-sees-huge-spike-in-abandoned-oil-and-gas-wells-1.3032434 )
In conclusion – a mountain of debt that will never be repaid?
People might ask, if the future of fracking is so much in doubt then why bother to build a movement of opposition to oppose it? The answer can be expressed by adapting a famous quote by John Maynard Keynes. In the original Keynes says “the market can remain irrational longer than you can remain solvent”. The market can also remain irrational long enough to do a lot of damage. What this article has barely done at all is refer to what are called, in economics-speak, the “external costs” of fracking – the damages to climate, to local environments and to public health. Nor has this article examined the claimed benefits to employment and to local economies which are usually grossly overstated. There is now plenty of evidence about these things. What I have tried to do instead is to show that even in the narrowest of meanings of “economic” fracking does not make sense. A lot of damage is being done and there will be little positive to show for it. The ability to continue this destructive path is due to the legacy of political influence of the fossil fuel lobby in government and in the finance sector. The legacy influence has been strong enough to ignore and crush the opposition despite the damage. In the USA it can be argued that the fracking boom has been an irrational, unethical and ultimately unprofitable attempt to extend the lifetime of fossil fuels in order to keep the oil and gas industry in work, aided and abetted by Wall Street. It is an industry trying to secure a future for an influential network of professional and business interests that should, in truth, be being wound down – including the engineers, the university departments of petroleum geology, the regulators to name a few. A mountain of debt has been accumulated to perpetuate the illusion that these people have a future in which they can go on much as before – a mountain of financial debt that will never be repaid.
Stupidity has a knack of getting its way – Albert Camus
Sources and further reading:
On geological uncertainties: Mason Inman “Can Fracking Power Europe?”, March 2016 at http://www.scientificamerican.com/article/can-fracking-power-europe/
Charles Newbury, “Struggles to cut cost delay oil production in Argentina” Platts Oilgram News. August 17th 2015 at http://blogs.platts.com/2015/08/17/cut-cost-delay-oil-play-argentina/
Low Gas price vs high extraction costs: Zachery Davis Boren, Greenpeace Energy Desk; August 2015 http://energydesk.greenpeace.org/2015/08/20/super-low-gas-price-spells-trouble-for-fracking-in-the-uk/
European natural gas supply and demand: https://www.oxfordenergy.org/publications/the-outlook-for-natural-gas-demand-in-europe/ and https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/01/Gazprom-Is-2016-the-Year-for-a-Change-of-Pricing-Strategy-in-Europe.pdf
Oil Majors as a source of investment capital http://www.telegraph.co.uk/business/2016/02/12/oil-firms-urged-to-avoid-dangerous-investment-cuts /
Deborah Rogers, “Shale and Wall Street” Energy Policy Forum 2013) http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf
Fragility of UK explorer’s finances: http://www.companywatch.net/wp-content/uploads/2016/01/oil-and-gas-smaller-cap-research-11-January-2016-final.pdf
Arthur Berman “The Miracle of Shale Gas and Tight Oil is Easy Money” http://www.artberman.com/the-miracle-of-shale-gas-tight-oil-is-easy-money-part-i/
Ryan Dezember, Nicole Friedman and Erin Aillworth. “Key Formula for Executives Pay: Drill Baby Drill” http://www.wsj.com/articles/key-formula-for-oil-executives-pay-drill-baby-drill-1457721329
“Energy in the economy”: Brian Davey Credo. Economic Beliefs in a World in Crisis Feasta books 2015. http://www.credoeconomics.com Chapters 32 and 33.
Former Brazilian President Luiz Inacio Lula da Silva © Paulo Whitaker / Reuters
Originally published in RT on March 8, 2016
“BRICS” is the dirtiest of acronyms in the Beltway/Wall Street axis, and for a solid reason: the consolidation of the BRICS is the only organic, global-reach project with the potential to derail Exceptionalistan’s grip over the so-called “international community.”
So it’s no surprise the three key BRICS powers have been under simultaneous attack, on many fronts, for some time now. On Russia, it’s all about Ukraine and Syria, the oil price war, the odd hostile raid over the ruble and the one-size-fits-all “Russian aggression” demonization. On China, it’s all about “Chinese aggression” in the South China Sea and the (failed) raid over the Shanghai/Shenzhen stock exchanges.
Brazil is the weakest link among these three key emerging powers. Already by the end of 2014 it was clear the usual suspects would go no holds barred to destabilize the seventh largest global economy, aiming at good old regime change via a nasty cocktail of political gridlock (“ungovernability”) dragging the economy to the mud.
Myriad reasons for the attack include the consolidation of the BRICS development bank; the BRICS’s concerted push for trading in their own currencies, bypassing the US dollar and aiming for a new global reserve currency to replace it; the construction of a major underwater fiber-optic telecom cable between Brazil and Europe, as well as the BRICS cable uniting South America to East Asia – both bypassing US control.
And most of all, as usual, the holy of the holies – connected with Exceptionalistan’s burning desire to privatize Brazil’s immense natural wealth. Once again, it’s the oil.
Get Lula or else
WikiLeaks had already exposed how way back in 2009 Big Oil was active in Brazil, trying to modify – by all extortion means necessary – a law proposed by former president Luiz Inácio Lula da Silva, known as Lula, establishing profitable state-run Petrobras as the chief operator of all offshore blocks in the largest oil discovery of the young 21st century; the pre-salt deposits.
Lula not only kept Big Oil – especially ExxonMobil and Chevron – out of the picture but he also opened Brazilian oil exploration to China’s Sinopec, as part of the Brazil-China (BRICS within BRICS) strategic partnership.
Hell hath no fury like Exceptionalistan scorned. Like the Mob, it never forgives; Lula one day would have to pay, like Putin must pay for getting rid of US-friendly oligarchs.
The ball started rolling with Edward Snowden revealing how the NSA was spying on Brazilian President Dilma Rousseff and top Petrobras officials. It continued with the fact that the Brazilian Federal Police cooperate, receive training and/or are fed, closely, by both the FBI and CIA (mostly in the anti-terrorism sphere). And it went on via the two-year-old “Car Wash” investigation, which uncovered a vast corruption network involving players inside Petrobras, top Brazilian construction companies and politicians from the ruling Workers’ Party.
The corruption network is real – with “proof,” usually oral, rarely backed up by documents, obtained mostly from artful dodgers-cum-serial liars who rat on someone as part of a plea bargain.
But for the “Car Wash” prosecutors, the real deal was, from the beginning, how to ensnare Lula.
Enter the tropical Elliott Ness
That brings us to the Hollywood spectacular enacted last Friday in Sao Paulo that sent shockwaves around the world. Lula “detained,” interrogated, humiliated in public. This is how I analyzed it in detail.
Plan A for the Hollywood-style blitz on Lula was an ambitious double down; not only to pave the way for the impeachment of President Dilma Rousseff under a “guilty by association” stretch, but to “neutralize” Lula for good, preventing him from running for office again in 2018. There was no Plan B.
Predictably – as in many an FBI sting – the whole op backfired. Lula, in a political master class of a speech beamed live across the country, not only convincingly clad himself as the martyr of a conspiracy, but also re-energized his troops; even respectable conservatives vocally condemned the Hollywood show, from a minister in the Supreme Court to a former justice minister, as well as top economist Bresser Pereira, one of the founders of the PSDB – the former social democrats turned Exceptionalistan-allied neoliberal enforcers and leaders of the right-wing opposition.
Bresser actually stated the Brazilian Supreme Court should intervene on Car Wash to prevent abuses. Lula, for instance, had asked for the Supreme Court to detail which jurisprudence was relevant to investigate the accusations against him. Moreover, a lawyer on center stage during the Hollywood blitz said Lula answered all questions during the almost four-hour interrogation without blinking – questions he had already answered before.
Lawyer Celso Bandeira de Mello, for his part, went straight to the point: the Brazilian upper middle classes – which include a largely appalling lot wallowing in arrogance, ignorance and prejudice, whose dream is a condo in Miami – are fearful and terrified to death that Lula may run, and win again, in 2018.
And that brings us to the judge and executioner of the whole drama: Sergio Moro, Car Wash’s leading actor.
Moro’s academic career is hardly exciting. He’s not exactly a theorist heavyweight. He graduated as a lawyer in 1995 in a mediocre university in the middle of nowhere in one of Brazil’s southern states and made a few trips to the US, one of them financed by the State Department to learn about money laundering.
As I noted before, his chef-d’oeuvre is an article published way back in 2004 in an obscure magazine (in Portuguese only, titled Considerations about Mani Pulite, CEJ magazine, issue number 26, July/September 2004), where he clearly extols “authoritarian subversion of juridical order to reach specific targets” and using the media to intoxicate the political atmosphere.
In a nutshell, judge Moro literally transposed the notorious 1990s Mani Pulite (“Clean Hands”) investigation from Italy to Brazil – instrumentalizing to the hilt mainstream media and the judiciary to achieve a sort of “total delegitimization” of the political system. But not the whole political system; just the Workers’ Party, as if the comprador elites permeating Brazil’s rightwing spectrum were cherubic angels.
So it comes as no surprise that Moro’s prime sidekick as Car Wash unrolled is the Marinho family’s oligopoly, the Globo media empire – a nest of reactionary, and not very clever, vipers who entertained very cozy relations with the Brazilian military dictatorship from the 1960s to the 1980s. Not by accident, Globo was informed about Lula’s Hollywood-style “arrest” way before the fact, allowing it to invest in CNN-style blanket coverage.
Moro is viewed by legions in Brazil as an indigenous Elliot Ness. Other lawyers who have closely followed his work though hint he harbors the warped fantasy of a Workers’ Party as a mob leeching and plundering the state apparatus with the aim of delivering it, in pieces, to trade unions.
According to one of these lawyers who talked to Brazilian independent media, a former president of the Lawyers’ Association in Rio, Moro is surrounded by a bunch of young fanatical prosecutors, with little juridical knowledge, and posing as the Brazilian Antonio di Pietro (but without the solidity of the “Clean Hands” Milanese prosecutor). Worse, Moro is oblivious that the implosion of the Italian political system led to the rise of Berlusconi. In Brazil, it would certainly lead to the rise of a clown/village idiot supported by the Globo empire, whose oligopolistic practices are quite Berlusconian.
The digital Pinochets
A case can be made that the Hollywood blitz on Lula holds a direct parallel to the first attempt at a coup d’etat in Chile in 1973, which tested the waters in terms of popular response before the real deal. In the Brazilian remix, assorted Globo media maggots pose as digital Pinochets. At least many a street in Sao Paulo now bears graffiti to the effect of “Military coup – Never again.”
Yes, because this is all about a white coup – in the form of a Rousseff impeachment and sending Lula to the gallows. But old (military) habits die hard; Globo media maggots are now extolling the Army to take to the streets to “neutralize” popular militias. And this is just the beginning. Right-wingers are getting ready for a national mobilization on Sunday calling for – what else – Rousseff’s impeachment.
Car Wash’s merit is to investigate corruption, collusion and traffic of influence in abysmally corrupt Brazil. But everyone, every political faction, should be investigated – including those representing Brazilian comprador elites. That’s not the case. Because the political project allied with Car Wash couldn’t care less about “justice”; the only thing that matters is to perpetuate a vicious political crisis as a means to drag the seventh largest economy in the world into the mud and reach the Holy Grail: a white coup, or good ol’ regime change. But 2016 is not 1973, and the whole world by now knows who’s a sucker for regime change.
Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan (Nimble Books, 2009).
What is ahead for 2016? Most people don’t realize how tightly the following are linked:
1. Growth in debt
2. Growth in the economy
3. Growth in cheap-to-extract energy supplies
4. Inflation in the cost of producing commodities
5. Growth in asset prices, such as the price of shares of stock and of farmland
6. Growth in wages of non-elite workers
7. Population growth
It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about Peak Oil, the Limits to Growth, and the Debt Supercycle without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.
There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high a population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.
The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.
I expect that the particular problem we are likely to reach in 2016 is limits to oil storage. This may happen at different times for crude oil and the various types of refined products. As storage fills, prices can be expected to drop to a very low level–less than $10 per barrel for crude oil, and correspondingly low prices for the various types of oil products, such as gasoline, diesel, and asphalt. We can then expect to face a problem with debt defaults, failing banks, and failing governments (especially of oil exporters).
The idea of a bounce back to new higher oil prices seems exceedingly unlikely, in part because of the huge overhang of supply in storage, which owners will want to sell, keeping supply high for a long time. Furthermore, the underlying cause of the problem is the failure of wages of non-elite workers to rise rapidly enough to keep up with the rising cost of commodity production, particularly oil production. Because of falling inflation-adjusted wages, non-elite workers are becoming increasingly unable to afford the output of the economic system. As non-elite workers cut back on their purchases of goods, the economy tends to contract rather than expand. Efficiencies of scale are lost, and debt becomes increasingly difficult to repay with interest. The whole system tends to collapse.
How the Economic Growth Supercycle Works, in an Ideal Situation
In an ideal situation, growth in debt tends to stimulate the economy. The availability of debt makes the purchase of high-priced goods such as factories, homes, cars, and trucks more affordable. All of these high-priced goods require the use of commodities, including energy products and metals. Thus, growing debt tends to add to the demand for commodities, and helps keep their prices higher than the cost of production, making it profitable to produce these commodities. The availability of profits encourages the extraction of an ever-greater quantity of energy supplies and other commodities.
The growing quantity of energy supplies made possible by this profitability can be used to leverage human labor to an ever-greater extent, so that workers become increasingly productive. For example, energy supplies help build roads, trucks, and machines used in factories, making workers more productive. As a result, wages tend to rise, reflecting the greater productivity of workers in the context of these new investments. Businesses find that demand for their goods and services grows because of the growing wages of workers, and governments find that they can collect increasing tax revenue. The arrangement of repaying debt with interest tends to work well in this situation. GDP grows sufficiently rapidly that the ratio of debt to GDP stays relatively flat.
Over time, the cost of commodity production tends to rise for several reasons:
1. Population tends to grow over time, so the quantity of agricultural land available per person tends to fall. Higher-priced techniques (such as irrigation, better seeds, fertilizer, pesticides, herbicides) are required to increase production per acre. Similarly, rising population gives rise to a need to produce fresh water using increasingly high-priced techniques, such as desalination.
2. Businesses tend to extract the least expensive fuels such as oil, coal, natural gas, and uranium first. They later move on to more expensive to extract fuels, when the less-expensive fuels are depleted. For example, Figure 1 shows the sharp increase in the cost of oil extraction that took place about 1999.
Figure 1. Figure by Steve Kopits of Westwood Douglas showing the trend in per-barrel capital expenditures for oil exploration and production. CAGR is “Compound Annual Growth Rate.”
3. Pollution tends to become an increasing problem because the least polluting commodity sources are used first. When mitigations such as substituting renewables for fossil fuels are used, they tend to be more expensive than the products they are replacing. The leads to the higher cost of final products.
4. Overuse of resources other than fuels becomes a problem, leading to problems such as the higher cost of producing metals, deforestation, depleted fish stocks, and eroded topsoil. Some workarounds are available, but these tend to add costs as well.
As long as the cost of commodity production is rising only slowly, its increasing cost is benevolent. This increase in cost adds to inflation in the price of goods and helps inflate away prior debt, so that debt is easier to pay. It also leads to asset inflation, making the use of debt seem to be a worthwhile approach to finance future economic growth, including the growth of energy supplies. The whole system seems to work as an economic growth pump, with the rising wages of non-elite workers pushing the growth pump along.
The Big “Oops” Comes when the Price of Commodities Starts Rising Faster than Wages of Non-Elite Workers
Clearly the wages of non-elite workers need to be rising faster than commodity prices in order to push the economic growth pump along. The economic pump effect is lost when the wages of non-elite workers start falling, relative to the price of commodities. This tends to happen when the cost of commodity production begins rising rapidly, as it did for oil after 1999 (Figure 1).
The loss of the economic pump effect occurs because the rising cost of oil (or electricity, or food, or other energy products) forces workers to cut back on discretionary expenditures. This is what happened in the 2003 to 2008 period as oil prices spiked and other energy prices rose sharply. (See my article Oil Supply Limits and the Continuing Financial Crisis.) Non-elite workers found it increasingly difficult to afford expensive products such as homes, cars, and washing machines. Housing prices dropped. Debt growth slowed, leading to a sharp drop in oil prices and other commodity prices.
Figure 2. World oil supply and prices based on EIA data.
It was somewhat possible to “fix” low oil prices through the use of Quantitative Easing (QE) and the growth of debt at very low interest rates, after 2008. In fact, these very low interest rates are what encouraged the very rapid growth in the production of US crude oil, natural gas liquids, and biofuels.
Now, debt is reaching limits. Both the US and China have (in a sense) “taken their foot off the economic debt accelerator.” It doesn’t seem to make sense to encourage more use of debt, because recent very low interest rates have encouraged unwise investments. In China, more factories and homes have been built than the market can absorb. In the US, oil “liquids” production rose faster than it could be absorbed by the world market when prices were over $100 per barrel. This led to the big price drop. If it were possible to produce the additional oil for a very low price, say $20 per barrel, the world economy could probably absorb it. Such a low selling price doesn’t really “work” because of the high cost of production.
Debt is important because it can help an economy grow, as long as the total amount of debt does not become unmanageable. Thus, for a time, growing debt can offset the adverse impact of the rising cost of energy products. We know that oil prices began to rise sharply in the 1970s, and in fact other energy prices rose as well.
Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.
Looking at debt growth, we find that it rose rapidly, starting about the time oil prices started spiking. Former Director of the Office of Management and Budget, David Stockman, talks about “The Distastrous 40-Year Debt Supercycle,” which he believes is now ending.
Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.
In recent years, we have been reaching a situation where commodity prices have been rising faster than the wages of non-elite workers. Jobs that are available tend to be low-paid service jobs. Young people find it necessary to stay in school longer. They also find it necessary to delay marriage and postpone buying a car and home. All of these issues contribute to the falling wages of non-elite workers. Some of these individuals are, in fact, getting zero wages, because they are in school longer. Individuals who retire or voluntarily leave the work force further add to the problem of wages no longer rising sufficiently to afford the output of the system.
The US government has recently decided to raise interest rates. This further reduces the buying power of non-elite workers. We have a situation where the “economic growth pump,” created through the use of a rising quantity of cheap energy products plus rising debt, is disappearing. While homes, cars, and vacation travel are available, an increasing share of the population cannot afford them. This tends to lead to a situation where commodity prices fall below the cost of production for a wide range of types of commodities, making the production of commodities unprofitable. In such a situation, a person expects companies to cut back on production. Many defaults may occur.
China has acted as a major growth pump for the world for the last 15 years, since it joined the World Trade Organization in 2001. China’s growth is now slowing, and can be expected to slow further. Its growth was financed by a huge increase in debt. Paying back this debt is likely to be a problem.
Figure 5. Author’s illustration of problem we are now encountering.
Thus, we seem to be coming to the contraction portion of the debt supercycle. This is frightening, because if debt is contracting, asset prices (such as stock prices and the price of land) are likely to fall. Banks are likely to fail, unless they can transfer their problems to others–owners of the bank or even those with bank deposits. Governments will be affected as well, because it will become more expensive to borrow money, and because it becomes more difficult to obtain revenue through taxation. Many governments may fail as well for that reason.
The U. S. Oil Storage Problem
Oil prices began falling in the middle of 2014, so we might expect oil storage problems to start about that time, but this is not exactly the case. Supplies of US crude oil in storage didn’t start rising until about the end of 2014.
Figure 6. US crude oil in storage, excluding Strategic Petroleum Reserve, based on EIA data.
Once crude oil supplies started rising rapidly, they increased by about 90 million barrels between December 2014 and April 2015. After April 2015, supplies dipped again, suggesting that there is some seasonality to the growing crude oil supply. The most “dangerous” time for rapidly rising amounts added to storage would seem to be between December 31 and April 30. According to the EIA, maximum crude oil storage is 551 million barrels of crude oil (considering all storage facilities). Adding another 90 million barrels of oil (similar to the run-up between Dec. 2014 and April 2015) would put the total over the 551 million barrel crude oil capacity.
Cushing, Oklahoma, is the largest storage area for crude oil. According to the EIA, maximum working storage for the facility is 73 million barrels. Oil storage at Cushing since oil prices started declining is shown in Figure 7.
Figure 7. Quantity of crude oil stored at Cushing between June 27, 2014, and June 1, 2016, based on EIA data.
Clearly the same kind of run up in oil storage that occurred between December and April one year ago cannot all be stored at Cushing, if maximum working capacity is only 73 million barrels, and the amount currently in storage is 64 million barrels.
Another way of storing oil is as finished products. Here, the run-up in storage began earlier (starting in mid-2014) and stabilized at about 65 million barrels per day above the prior year, by January 2015. Clearly, if companies can do some pre-planning, they would prefer not to refine products for which there is little market. They would rather store unneeded oil as crude, rather than as refined products.
Figure 8. Total Oil Products in Storage, based on EIA data.
EIA indicates that the total capacity for oil products is 1,549 million barrels. Thus, in theory, the amount of oil products stored can be increased by as much as 700 million barrels, assuming that the products needing to be stored and the locations where storage are available match up exactly. In practice, the amount of additional storage available is probably quite a bit less than 700 million barrels because of mismatch problems.
In theory, if companies can be persuaded to refine more products than they can sell, the amount of products that can be stored can rise significantly. Even in this case, the amount of storage is not unlimited. Even if the full 700 million barrels of storage for crude oil products is available, this corresponds to less than one million barrels a day for two years, or two million barrels a day for one year. Thus, products storage could easily be filled as well, if demand remains low.
At this point, we don’t have the mismatch between oil production and consumption fixed. In fact, both Iraq and Iran would like to increase their production, adding to the production/consumption mismatch. China’s economy seems to be stalling, keeping its oil consumption from rising as quickly as in the past, and further adding to the supply/demand mismatch problem. Figure 9 shows an approximation to our mismatch problem. As far as I can tell, the problem is still getting worse, not better.
Figure 9. Total liquids oil production and consumption, based on a combination of BP and EIA data.
There has been a lot of talk about the United States reducing its production, but the impact so far has been small, based on data from EIA’s International Energy Statistics and its December 2015 Monthly Energy Review.
Figure 10. US quarterly oil liquids production data, based on EIA’s International Energy Statistics and Monthly Energy Review.
Based on information through November from EIA’s Monthly Energy Review, total liquids production for the US for the year 2015 will be about 700,000 barrels per day higher than it was for 2014. This increase is likely greater than the increase in production by either Saudi Arabia or Iraq. Perhaps in 2016, oil production of the US will start decreasing, but so far, increases in biofuels and natural gas liquids are partly offsetting recent reductions in crude oil production. Also, even when companies are forced into bankruptcy, oil production does not necessarily stop because of the potential value of the oil to new owners.
Figure 11 shows that very high stocks of oil were a problem, way back in the 1920s. There were other similarities to today’s problems as well, including a deflating debt bubble and low commodity prices. Thus, we should not be too surprised by high oil stocks now, when oil prices are low.
(Click to enlarge)
Figure 11. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure by EIA.
Many people overlook the problems today because the US economy tends to be doing better than that of the rest of the world. The oil storage problem is really a world problem, however, reflecting a combination of low demand growth (caused by low wage growth and lack of debt growth, as the world economy hits limits) continuing supply growth (related to very low interest rates making all kinds of investment appear profitable and new production from Iraq and, in the near future, Iran). Storage on ships is increasingly being filled up and storage in Western Europe is 97% filled. Thus, the US is quite likely to see a growing need for oil storage in the year ahead, partly because there are few other places to put the oil, and partly because the gap between supply and demand has not yet been fixed.
What is Ahead for 2016?
1. Problems with a slowing world economy are likely to become more pronounced, as China’s growth problems continue, and as other commodity-producing countries such as Brazil, South Africa, and Australia experience recession. There may be rapid shifts in currencies, as countries attempt to devalue their currencies, to try to gain an advantage in world markets. Saudi Arabia may decide to devalue its currency, to get more benefit from the oil it sells.
2. Oil storage seems likely to become a problem sometime in 2016. In fact, if the run-up in oil supply is heavily front-ended to the December to April period, similar to what happened a year ago, lack of crude oil storage space could become a problem within the next three months. Oil prices could fall to $10 or below. We know that for natural gas and electricity, prices often fall below zero when the ability of the system to absorb more supply disappears. It is not clear the oil prices can fall below zero, but they can certainly fall very low. Even if we can somehow manage to escape the problem of running out of crude oil storage capacity in 2016, we could encounter storage problems of some type in 2017 or 2018.
3. Falling oil prices are likely to cause numerous problems. One is debt defaults, both for oil companies and for companies making products used by the oil industry. Another is layoffs in the oil industry. Another problem is negative inflation rates, making debt harder to repay. Still another issue is falling asset prices, such as stock prices and prices of land used to produce commodities. Part of the reason for the fall in price has to do with the falling price of the commodities produced. Also, sovereign wealth funds will need to sell securities, to have money to keep their economies going. The sale of these securities will put downward pressure on stock and bond prices.
4. Debt defaults are likely to cause major problems in 2016. As noted in the introduction, we seem to be approaching the unwinding of a debt supercycle. We can expect one company after another to fail because of low commodity prices. The problems of these failing companies can be expected to spread to the economy as a whole. Failing companies will lay off workers, reducing the quantity of wages available to buy goods made with commodities. Debt will not be fully repaid, causing problems for banks, insurance companies, and pension funds. Even electricity companies may be affected, if their suppliers go bankrupt and their customers become less able to pay their bills.
5. Governments of some oil exporters may collapse or be overthrown, if prices fall to a low level. The resulting disruption of oil exports may be welcomed, if storage is becoming an increased problem.
6. It is not clear that the complete unwind will take place in 2016, but a major piece of this unwind could take place in 2016, especially if crude oil storage fills up, pushing oil prices to less than $10 per barrel.
7. Whether or not oil storage fills up, oil prices are likely to remain very low, as the result of rising supply, barely rising demand, and no one willing to take steps to try to fix the problem. Everyone seems to think that someone else (Saudi Arabia?) can or should fix the problem. In fact, the problem is too large for Saudi Arabia to fix. The United States could in theory fix the current oil supply problem by taxing its own oil production at a confiscatory tax rate, but this seems exceedingly unlikely. Closing existing oil production before it is forced to close would guarantee future dependency on oil imports. A more likely approach would be to tax imported oil, to keep the amount imported down to a manageable level. This approach would likely cause the ire of oil exporters.
8. The many problems of 2016 (including rapid moves in currencies, falling commodity prices, and loan defaults) are likely to cause large payouts of derivatives, potentially leading to the bankruptcies of financial institutions, as they did in 2008. To prevent such bankruptcies, most governments plan to move as much of the losses related to derivatives and debt defaults to private parties as possible. It is possible that this approach will lead to depositors losing what appear to be insured bank deposits. At first, any such losses will likely be limited to amounts in excess of FDIC insurance limits. As the crisis spreads, losses could spread to other deposits. Deposits of employers may be affected as well, leading to difficulty in paying employees.
9. All in all, 2016 looks likely to be a much worse year than 2008 from a financial perspective. The problems will look similar to those that might have happened in 2008, but didn’t thanks to government intervention. This time, governments appear to be mostly out of approaches to fix the problems.
10. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.
Figure 12. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.
We are certainly entering a worrying period. We have not really understood how the economy works, so we have tended to assume we could fix one or another part of the problem. The underlying problem seems to be a problem of physics. The economy is a dissipative structure, a type of self-organizing system that forms in thermodynamically open systems. As such, it requires energy to grow. Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. Thus all economies have finite lifetimes, just as humans, animals, plants, and hurricanes do. We are in the unfortunate position of observing the end of our economy’s lifetime.
Most energy research to date has focused on the Second Law of Thermodynamics. While this is a contributing problem, this is really not the proximate cause of the impending collapse. The Second Law of Thermodynamics operates in thermodynamically closed systems, which is not precisely the issue here.
We know that historically collapses have tended to take many years. This collapse may take place more rapidly because today’s economy is dependent on international supply chains, electricity, and liquid fuels–things that previous economies were not dependent on.
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BUT those stocks did not just appear because prices fell — or in order to make prices fall. If you go back ten years or more in IEA records, you find that there have always been around 2.7 billion barrels in the pipeline, so to speak. So the present number, far from representing a sudden tsunami of unwanted oil, represents an uptick of just 300 million barrels, a 10 per cent increase. It represents about a three day supply of oil at current global consumption rates.
As long as we can’t afford to buy gas, it will remain cheap. The minute we start buying it again, it will become expensive and scarce. And it will happen so fast that the thrill of victory and the agony of defeat will be simultaneous.
Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.
Facing the gleaming Doha skyline on a Persian Gulf winter carries the merit of a panoramic perspective. Most nations around it are going into melt down and the remaining ones – with the exception of Iran – exhibit neither the political leadership nor the economic and institutional infrastructure to do anything other than to meekly accept whatever tsunami hits their shores. They are nothing but scared spectators.
The Empire of Chaos has enough warmongering hardware pre-positioned within spitting distance to turn the whole of Southwest Asia into ashes – as a gaggle of usual suspects in the Beltway, neocon or neoliberalcon, still can’t find a cure to their itching to "really win the next war" in a sort of exponential Shock and Awe.
Fear reigns supreme. Jim Rickards, the author of Currency Wars, economist and CIA asset, has just released a new book, The Big Drop, with a pretty grim message. For his part Jim Rogers, a.k.a. the "Sage of Singapore", most of the time China-bound informing the Chinese elite where to place their investments, holds on to a nuanced perspective on the West blaming all the current global economy turmoil on China.
According to Rogers, "Yes, China is slowing. But mostly the world is doing so. Japan, one of China’s largest trading partners is officially in recession. Much of Europe is worse. The US stock market was down in 2015 while the Chinese stock market was one of the strongest in the world."
Rogers adds, "things are going to get worse worldwide so everyone will suffer and is to ‘blame’. The original source is the US Federal Reserve and its ludicrous, artificial interest rates caused by massive money printing which the world has copied. Throw in staggering debt increases by the US government [which the world has also copied] and there will soon be hell to pay."
So no wonder apocalyptic war rumors are the new normal – even as old timers boost their case for "only" a "good old-fashioned world war", as if nuclear exchanges wouldn’t be part of the equation. A few sound minds in the Atlanticist axis worry that if Il Duce Trump wins the next US presidential election, that translates into guaranteed bankruptcy for the US, and – what else – war if Il Trumpissimo implements half of what he’s boasting about.
Short all the oil you can
The Davos annual talkfest is about to begin; that’s one of those occasions when the Masters of the Universe – who usually decide everything behind closed doors – send their minions to "debate" the future of their holdings. The current debate centers on whether we are still in the midst of the Third – digitalized – Industrial Revolution and the Internet of Things or whether we’re already entering the Fourth.
In the real world though all the cackle is about the age of old-fashioned oil. Which brings us to the myriad effects of the cheap oil strategy deployed by the House of Saud under Washington’s command.
Persian Gulf traders, off the record, are adamant that there is no longer any real global oil surplus of consequence as all shut-in oil has been dumped on the market based on that Washington command.
Petroleum Intelligence Weekly estimates the surplus is at a maximum 2.2 million a day, plus 600,000 barrels a day coming from Iran later this year. The US consumption of oil – at 19,840,000 barrels a day, 20% of world production – has not increased; it’s the other 80% that have been mostly absorbing the dumped oil.
Some key Persian Gulf traders are adamant that oil should be surging by the second half of 2016. That explains why Russia is not panicking with oil plunging towards $30 a barrel. Moscow is very much aware of the "partners" that are carrying oil market manipulation against Russia, and at the same time is anticipating this won’t last too long.
That explains why Russia's Deputy Finance Minister Maxim Oreshkin issued a sort of "keep calm and carry on" message; he expects oil prices to remain in the $40-60 range for at least the next seven years, and Russia can live with that.
The Masters of the Universe – just like the Russians – have realized their oil manipulation cannot last. Hysteria, predictably, took over. That’s why they ordered major Wall Street firms to short oil using cash settlement. Compliant US corporate media was ordered to spin the shortfalls will last forever. The target is to drive down the price of a barrel of oil to $7 if possible.
The original Masters of the Universe strategy would eventually lead to regime change in Russia and the usual oligarch suspects back in the saddle re-conducting the massive looting operation Russia suffered during the 1990s.
A fearful House of Saud is a mere pawn in this strategy. Assuming the plan would work, the House of Saud under – virtually demented – King Salman, now confined to a room in his Riyadh palace, would also be regime-changed, via Saudi military officers trained in the West and recruited by Western agents. As a bonus, the Islamic Republic of Iran would also collapse, with "moderates" (rebels?) taking control.
So the Masters of the Universe strategy essentially boils down to regime-change in Russia, Iran and Saudi Arabia, leading to Exceptionalistan-friendly elites/vassals; in sum, the ultimate chapter in the global Resource Wars. Yet what this is yielding so far is the House of Saud having absolutely no clue of what may happen to them; Riyadh royals may think that they are undermining both Iran and Russia, but in the end they may be only accelerating their own demise.
Losing my religion
In Europe, it’s as if we’re back to 1977 when The Stranglers sang No More Heroes. Now, no more heroes and no more ideals. Even as some of European youth’s best and brightest have tried to fight the immense violence of neoliberalism, via alter-globalization, the poorest among the young are now mired in violence and suicidal nihilism – extreme Wahhabism which they've learned online. Yet this has nothing to do with Islam, and it’s not a war of religion, as myriad extreme-right parties across Europe routinely insist.
All across the spectrum, driven by fear, the toxic mix of political and economic instability continues to spread, leading quite a few insiders to wonder whether both the Fed and the Politburo Standing Committee in Beijing don't really know what’s happening.
And that once again feeds the warmongering hordes, for which that "good old-fashioned world war" is the easiest ticket out. Cancel all the old debt; issue loads of new debt; turn ploughshares and iPhones into cannons. And after a little thermonuclear exchange, welcome to full employment and a new (waste)land of opportunity.
It’s in this context that, under the volcano, surfaces an essay by Guido Preparata, an Italian-American political economist now based as a scholar in the Vatican. In The Political Economy of Hyper-Modernity, soon to appear in an anthology published by Palgrave/Macmillan, Preparata offers an account of the last 70 years of US/international monetary dynamics/history by using a single indicator: the overall US balance of payments – which has not been released since 1975.
Yet the most important conclusion in the essay seems to be that "the neoliberal engine, which has had to run mostly on domestic fuel, has shown… appreciable resilience". The US Treasury and the Federal Reserve, "together" managed to erect a "wall of money".
And yet "US technocrats seem to have grown disillusioned with the neoliberal machine". So, "as a momentous alternative, the technocrats have called for some kind of ‘global rebalancing’". The US-led system "seems to be transitioning to a neo-mercantilist regime". And the answer is the TPP (The Trans-Pacific Partnership) and the TTIP (The Transatlantic Trade and Investment Partnership) trade agreements that, together, "will place the United States at the center of an open trade zone representing around two-thirds of global economic output".
This would imply, ultimately, a sort of Make Trade, Not War endgame. So why so much fear? That’s because in the internal battle raging among the Masters of the Universe, the freewheeling neoliberalcons have not yet imprinted the last word. So beware the Falcons of War.
© Strategic Culture Foundation
Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007), Red Zone Blues: a snapshot of Baghdad during the surge (Nimble Books, 2007), and Obama does Globalistan (Nimble Books, 2009).