Published on Cassandra's Legacy on September 13, 2016
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– the real cause of the growing social inequality in the US
In a recent article on the Huffington Post, Stan Sorscher reports the graph above and asks the question of what could have happened in the early 1970s that changed everything. Impressive, but what caused this "something" that happened in the early 1970s? According to Sorscher,
X marks the spot. In this case, “X” is our choice of national values. We abandoned traditional American values that built a great and prosperous nation.
Unfortunately, this is a classic case of an explanation that doesn't explain anything. Why did the American people decide to abandon traditional American values just at that specific moment in time?
In reality, the turning point of that time has been known for a long time. The first to notice it were Harry Bluestone and Bennet Harrison with their 1988 book "The Great U-turn: Corporate Restructuring And The Polarizing Of America." They noted that a lot of economic parameters had completely reversed their historical trends in the early 1970s, including the overall inequality measured in terms of the Gini coefficient. For nearly a century, the US society had been moving toward a higher degree of equality. From the early 1970s, the trend changed direction, bringing the US to an inequality level similar to that of the average South-American countries.
So, what was that "something" that changed everything in the early 1970s? Nobody really knows for sure, but at least there was a major measurable change that took place in 1970: peak oil in the US. (image below, from Wikipedia).
It was a true asteroid that hit the US economy and that changed a lot of things. Possibly the most important change was that the US ceased to be an oil exporter and became an oil importer. That change was "user transparent," in the sense that the Americans who were filling up the tanks of their cars didn't know where the oil that had produced their gasoline was coming from (and mostly didn't even care). But the change implied a major transfer of capital from the US to foreign producers, while a large part of it returned to the US in the form of investments. It was the "petrodollar recycling" phenomenon that mainly affected the financial system; all that money never really trickled down to the poorer sections of the US society. That may well explain the increasing inequality trend that started in the early 1970s.
But, if the oil peak of 1970 explains the inequality trends, shouldn't the new reversal of the trend – the "shale oil revolution" change everything again? Perhaps surprisingly, there is some evidence that this may be the case
The data from the World Bank indicate that the Gini coefficient for the US has peaked in 2006 and has remained constant, or slightly declining, ever since. Again, that makes some sense; one wouldn't have expected a return to the low inequality values of the 1960s since the great shale oil boom didn't transform the US into an oil exporter. At present, with the recent peaking of the Bakken field, it looks like that the good times of half a century ago will never return.
All this would require a lot of work to be better quantified and proven. But it is not a surprise that our life depends so much and so deeply on the production of that vital black liquid that we call "crude oil". And with the probable downturn of the US production that seems to be starting right now, we are going to see more, and more radical, changes in our society. What these changes will be, we have to see, but it is hard to think that they will be for better equality.
Published on Cassandra's Legacy on September 8, 2016
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Peak oil by any other name is still peak oil.
Published on Pray for Calamity on August 18, 2016
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She bends low in the dark. Her index finger and thumb clumsy as they meet, she pulls from the waist and the stalk she holds rises out of the hummus eagerly, offering no resistance. Her hand is dwarfed by the firm yet undulating orange blossom. The sun’s remaining light barely penetrates the gauntlet of trees that stand sentry across the rise and fall of the ridge line. Tangerine daubs speckle through the here and there breaks in the thick ceiling of maple and oak leaves.
“Say, ‘thank you, Chanterelle.’ ”
“Thank you, Chanterelle.”
Her small voice is sincere because I am sincere. She watches her feet as she steps high over sticks and briars heading back towards the trail where her mother stands smiling.
“Remember to shake it.”
She passes the mushroom side to side, moving it from her shoulder instead of her wrist. I follow behind her with long slow steps, my hat in my hand, it is full of chanterelles. Holding the bill like the handle of a small skillet, I gently bounce the mushrooms to release their spores. The rains have finally passed and the trail is soft beneath our feet.
Summer is an incredibly busy time on the homestead, which usually means I put away the effort of writing in favor of merely ruminating as I attend to the constancy of the tasks before me. This has been our most productive year yet insofar as providing our food is concerned, which is encouraging as we have accomplished this yield while living off site until our septic system installation is completed. The abundance of foods like tomatoes and green beans has been overwhelming, and the high heat has made the effort of canning very unappealing. Fortunately, we have friends willing to can for us if we are willing to share the end product, and there are even local restaurants eager to buy our produce.
Squash bugs infested my yellow crook necks and zucchini, and they killed off my Crenshaw and cucumber vines. I collected a satisfying quantity of fruit from all of these plants over the past couple of months so it is with even temper that I yank them by the root, shake them, and place them in a compost pile. When the space is clear I walk over to a wooden gate and lift the chain that holds it closed. As I pull it open a single file line of Rouen ducks comes marching out, quaking proudly as they all make their way to the now bare space before lowering their beaks and feasting on the slow moving squash bugs. I lift my feet high to avoid stepping on the kudzu like sprawl of sweet potato vines and make my way to the garden gate where I pause to wipe the sweat from my forehead. It’s hot. Humid and hot at four in the afternoon. I think on what else I can get accomplished today. We will be moving back into our home soon and there are still jobs to finish up before doing so, mainly rigging the cistern to the gutters, and installing a hand pump in the kitchen to draw from the cistern. That and cutting another few ricks of firewood. And slapping walls on the barn. And laying the flooring in my daughter’s bedroom. And planting the winter garden.
I could “and” for days. Instead I take a breath and look back at my little girl as she giggles watching the ducks. Its hard to not feel rushed and I make a conscious effort to be present, to be content with the work already done instead of always existing in the stress of that yet to do. The moist air is stagnant, and as I take a moment to scan the spaces around me, noting the tasks big and small that require attention, my mind wanders a bit, and I feel like we are on the edge of something.
This July was globally the warmest month in human memory. Such headlines are almost blase these days as warming trends continually break records. Thousands of people in Louisiana have lost their homes in what FEMA has dubbed the worst natural disaster in the United States since hurricane Sandy. Fires rage in the drought stricken American west from southern California to Glacier National Park in Montana. Social tensions continue to flare too, as the National Guard was called in to subdue rioters in Milwaukee, and random acts of violence seem to break loose from the percolating underworld of racist authoritarians emboldened by Donald Trump’s presidential campaign. Venezuela’s economic collapse continues apace, various African nations are succumbing to famine, the war in Syria is drawing larger battle lines between major powers, and despite the best efforts of central banks across the globe, major financial institutions just cannot turn a profit in a world of net energy decline.
For years I have watched the world through a particular lens, and that is the lens of peak oil. Despite the failures of particular peak oil advocates to predict the future, and despite the inability of even larger numbers of critics to actually understand the peak oil concept before engaging in attacking it and its proponents, I still feel that this is a particularly useful lens for viewing the macro picture of human industrial civilization. Of late, I have admittedly felt that I am without a map, and I have found myself in my quiet moments attempting to piece one together. Of course, drawing a map begins with placing a center pin where you currently stand. So where am I? Or if I may be so bold, where are we?
I first became aware of the peak oil concept in 2004 when I was twenty-three years old. After reading the various assessments of the issue that were available on the internet at the time, and of course, being young and impressionable, I took to some of the worst case scenarios presented by outlying bloggers. By and large, these were not the better experts to trust, and I was convinced that ten years out we would be living in a very different world. The economic crash of 2008 felt validating in a sense, but the divergence from prediction that followed forced me to begin rethinking how the decline of industrial civilization would play out. Eight years of very, let us say, creative economics have prevented the full on breakdown of the growth based financial paradigm. I do not believe I am alone in wondering exactly how long such creative policies can sustain the physical world of the production and distribution of material goods.
To be perfectly clear, I am no fan of the civilized model of human organization, and I have repeatedly stated this in my writing. But I do my best to be aware of its functionality so I can properly place myself and my family to best buffer ourselves from the swings of forces beyond our control. The internet is rife with commenters who are eager to bargain with Moloch, hoping to right what they perceive to be the ills of state and capital so that some form of industrial civilization can carry them into the future. These commenters have altars to different demigods. Some light a candle to technology while others burn incense for invisible hands and supposedly free markets. I look out and see dying ash trees and the onslaught of invasive stilt grass and I know in the core of my being that there is no bargaining with civilization. No vertical farm, no vegan diet, no gold-backed currency, no handing over of the means of production to the proletariat will stop what’s coming.
But it is equally true that it is next to impossible to know exactly what is coming, or when it will get here. That is why we try to draw maps. And if we want our maps to be of any use, they should probably start with what we know about the past and the present, so maybe, the best of our efforts can draw lines between the two that give some clue as to the trajectory and direction of the future.
Over the years as I have written on these topics I have been careful to avoid prediction, simply because most people who in engage in it are so often wrong. What’s worse, is that so many people who make names for themselves as so called “trends analysts” and such, not only are often wrong, but they refuse to acknowledge when they are so, and they just continue with the business of making predictions. I would rather make a map, a sketch of the terrain we have covered and of that which I can see through the fog in front of me. As this is a map of the industrial civilization in which we live, there are two compass points which are of extreme importance.
First, is net energy. All work done requires energy to make it happen. The primary energy source for this civilization is oil. This is what makes an understanding of peak oil concepts so valuable. Oil is the foundation of the lion’s share of the work done in this civilization, even being the foundational energy source behind the manufacture of items like solar panels. The diesel trucks that mine for metals or that grow the crops that feed workers are all run with oil. The economic and social architecture of this society requires a growth in the net energy available with which to do work. This is not necessarily a growth in the amount of barrels of oil available at any given time. If those specific barrels of oil utilized more energy in their acquisition than usual, we may be in a situation where we have more quantity of oil available yet less total energy. This will hamper growth, which while good for the ecology of the planet, is a death sentence to financial paradigms where debt is the basis of currency and investment.
The second compass point of importance is the ecological material available to support society. Drinkable water, healthy soil, viable biomes thrush with life, a stable climate; all are necessary to maintain human life and activity. Unfortunately, this point is lost on the so-called educated class who think only in terms of capital. I stress this point because even in the event that a miracle occurs and our energy woes vanish, there is still the issue of our destabilizing climate and over burdened ecosystems. We need bees and butterflies and ants to pollinate crops. We need amphibians to keep insect populations in balance. We need birds to spread seeds. We need fungus and soil life to make plants viable at all. Human activity threatens all of these beings and their habitats.
So as I sketch my map I note the peak of conventional oil production that occurred in the 2005-2008 timeframe. I note the bankruptcies that are tearing through the US unconventional oil industry. I note the banks across Europe that are on the verge of insolvency. I definitely note the trillions of dollars worth of debt monetization across the global financial sector which have been an attempt to cover the spread of missing growth that is required to make good on previous loans and outstanding interest. I also note the shortfalls in needed rain in the American west, the predicted water shortage in Lake Mead, the rising seas and the unprecedented storms. When I step back at my scrawled lines, I see images reminiscent of times past. Politically there are movements that seem to rhyme with what came out of the depression era, and economically there are movements that very much remind me of the warnings that began flashing in 2007 as the mortgage industry began to implode. The page, too, is dotted with the unpredictable lines of natural disaster and ecological calamity.
Simply stated, this is what I see: A period of economic depression is on the wind. My gut says we see an undeniable beginning of this period before winter. Where it all leads is too far out to say. I think it is simplistic when people draw a timeline of the future that consists merely of one trend-line pointing downward. There are hundreds if not thousands of trend-lines that together combine to graph the arch of a particular civilization, and some will yet be on the rise. It is when a majority of the significant trend-lines slump downward that we can say with certainty a society is in decline. It is my humble position that what we have on the horizon is a period of greater unemployment and struggle on a family by family level here in the “first world west.” There will be a shake out of never-to-be-solvent again institutions, and a generalized acknowledgement of a paradigm of “hard times” being upon us. Natural disasters will be harder and harder to recover from as they will strike more often in regions where status quo thinking believes them too unlikely or impossible and this will combine with a financial inability to afford repair. Politically, people will seek easy and incorrect answers, so on that front we will have nothing new in thinking modality, but we will see new lows in practical application.
Of course, this is a map I am trying to draw for myself so that I can better prepare for the terrain before me and mine. And I’m just some guy who likes homegrown beets and wild mushrooms, so take anything I have to say with that in mind. But at least I’m not trying to sell you a pamphlet about gold coins, and you’ll notice there are no ads for gas masks or survival seeds on my web page (unless word press puts them there.)
My personal activity includes shoring up on the basics. Preventative car maintenance on both of our four wheel drive Jeeps, which each contain tools and flashlights, so that floods and storms are more navigable. Selling off unneeded items to pay for home improvements as well as a bit more archery gear as I want to take a deer by bow this fall and to make as much jerky as possible. Buying all of my spring seeds now, and making sure we have plenty of simple things like candles and lighters, lard and honey. This is all stuff that gets regular use, so there are no regrettable wastes of money.
My index finger presses into the soft soil with ease. A dried pea falls silently into the hole and I sweep lose earth with the blade of my hand to cover it. Four inches to the left, I repeat the process, and then again, and then again, all the way down the fence line. The red cabbage have only just broken through the surface of the dirt in their seed trays, so it’ll be a week or so yet before I move them into the field where right now potatoes are living their final days before harvest. Parsnip greens are tall, and I mentally make note of which ones I want to leave to winter over before checking on the newly planted kale. Everbearing strawberries are still putting on fruit, and my daughter is occupied now lifting their leaves and excitedly yanking the plump red berries.
Cicada chatter rises and falls in the nearby tree canopy and again I stand to survey the land. Tent worms are killing an apple tree. Sunflowers stand tall in the afternoon heat. I see dead trees that need felling, weeds that need mowing, fence posts that need straightening, and job after job after job that lay before me. I have a plenty of time to ruminate, observe, and ruminate again, and will revisit writing again when cold winds blow. Maybe I will think back to this piece and feel foolish, but I will not be afraid to say I was wrong. My immediate terrain is so much knowable, even if it is pocked with struggle and strain. To my left our gravel drive stretches off into the woods, and as I look off to the cool forest there is a flash in my mind of a hunter walking with his bow, and in this moment, I envy him.
Published on Peak Surfer on August 7, 2016
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Like many in the Peak Everything/Age of Limits psychographic, we find ourselves rolling our eyes whenever we hear techno-utopians describing AI implants, self-driving Teslas and longevity DNA-splices. We know all too well that each Google search uses enough energy to boil a cup of water, and that the average cellphone adds one ton of carbon to the atmosphere each year – roughly 3 jet passenger trips back and forth between New York and Cancun.
The insularity of Silicon Valley leads to confirmation bias, to the point where someone like Kevin Kelly, in a recent Long Now talk, can describe the diversification of Artificial Smartness as "alien intelligences" without grasping that we have, right now living amongst us, vastly diverse typologies of intelligence in the biological world, but that our overconsuming, polluting technosphere is killing them off in the Sixth Mass Extinction before we even grok their quantum entanglement.
In Kelly's view we will soon be tapping into artificial, alien intellect like we do electricity or wifi. We will become cyber-centaurs — co-dependent humans and AIs. All of us will need to perpetually upgrade just to stay in the game. And power-up too.
Groan. The digital divide on steroids.
We've opined in many posts here that we thought a rubber-road interface would soon be upon this kind of techonarcissism. Limits will be in the driver's seat again. But oddly enough, it might not be the energy shortfall that pitches all that Teslarati into the ditch.
There is no shortage of energy and there never has been.
Take it back an Ice Age or two. So we discovered fire. Get over it! Being stupid apes, we have become completely obsessed with fire. So now we are burning down the house.
All around us there are much more abundant forms of energy than fire. Consider the gravitational pull of the moon that raises oceans. Consider the spin of the Earth, or the latent heat within its slowly cooling core. Who needs dilithium crystals? We travel through space aboard a dynamo.
In the eight years since the post below was originally published in the summer of 2008, it has received a grand total of 68 page views, many of which were doubtless our own. Not wanting to see such gems disappear into the akashic records without at least a few more reads, we're republishing in this summer re-run series.
Bear in mind that Nicola Tesla was a steampunk. In Iceland we can see steam and hydrogen being generated by geothermal heat, but the Teslovian technology being applied — pumped water and steam — is inefficient and self-defeating. It sets up a depletion curve — years to decades — because it cools the magma. Apply today's dielectric alloys instead of steam and you can imagine live current from the temperature differential without cooling the Earth below. But have a look.
Drill, Drill, Drill say the Republicans
Drill, Drill, Drill say the Democrats
Drill, Drill, Drill says McCain
Drill, Drill, Drill says Obama
It polls well.
And, meanwhile, the climate just goes to Hell.
It is interesting to see the major oil companies take on a really tough challenge, like drilling deep continental or deep ocean sites. In order to drill the Bakken formation, where gigatons of carbon deposits are entombed beneath the wheat fields of North Dakota, Montana, Saskatchewan and Manitoba, they are going to have to go very deep, into very hard and hot rock.
Even tougher challenges await Chevron's mega-well, Jack 2 in the Gulf of Mexico, or Petrobras' Saudi-scale Tupi or Carioca fields in the equatorial Atlantic off Brazil. Individual wells in those fields are expected to run $180 million to $200 million each, assuming Big Oil can even solve the impressive technical issues.
Engineers are estimating three decades will be needed to develop alloys for drills and pipes that can withstand the heat 2 to 6 miles down, with 18,000 pounds per square inch of pressure, and temperatures above 500° Fahrenheit (260°C).
Two years ago, Exxon Mobil and Chevron saw diamond-crusted drill bits disintegrate and steel pipes crumple when they attempted to tap deep deposits in the outer continental shelf. Anadarko Petroleum is successfully extracting natural gas under a mere 8,960 feet of water in the Gulf of Mexico, where pressure measures 3,069 pounds per square inch, but it costs a lot to keep replacing imploded joints and ruptured seals.
Pumping oil from the Brazilian fields, parts of which are 32,000 feet (10,000 m) below the surface, will require drilling more than three times the depth of the Anadarko wells and almost twice the world’s deepest Gulf wells, in the Tahiti lease, which cost Chevron $4.7 billion to produce.
But here is the irony. At those depths, the heat is a constant. In energy output worldwide, it measures in the exoWatt range. It could power everything. And you don’t have to sail halfway across the Gulf of Mexico, down into the South Atlantic, or up to the North Pole to find it. Wherever you are on Earth, it is right below you.
We’ve known about this energy source, deep geothermal, for centuries, and we have known how to go about harnessing it, big time, for decades. In 1932, Nicola Tesla wrote in The New York Times, “It is noteworthy that … in 1852 Lord Kelvin called attention to natural heat as a source of power available to Man. But, contrary to his habit of going to the bottom of every subject of his investigations, he contented himself with the mere suggestion.”
Tesla went on, “The arrangement of one of the great terrestrial-heat power plants of the future (illustration). Water is circulated to the bottom of the shaft, returning as steam to drive the turbine, and then returned to liquid form in the condenser, in an unending cycle…. The internal heat of the earth is great and practically inexhaustible….”
Karl Grossman produced a piece on it for WVVH-TV in Long Island. You can see that on YouTube. An MIT study in 2007 estimated you could produce 100 GWe (the equivalent of 1000 coal plants) for less than the cost of a single coal plant.
So why can’t we see the forest for the trees?
Published on the Economic Undertow on July 24, 2016
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What experience and history teach is this — that people and governments never have learned anything from history, or acted on principles deduced from it …
We solved Hegel’s pesky problem in 1998 when Francis Fukuyama posited the prospect of universal liberal democracy, along with it, the end of history:
What we may be witnessing in not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.
This is not to say that there will no longer be events to fill the pages of Foreign Affairs yearly summaries of international relations, for the victory of liberalism has occurred primarily in the realm of ideas or consciousness and is as yet incomplete in the real or material world. But there are powerful reasons for believing that it is the ideal that will govern the material world in the long run …
… because that is the futurist narrative in its entirety: to consign whatever it deems obsolete/old/unfashionable including history itself, to the dustbin of history!
By 1998, the narrative made some sort of sense: the outré Soviet Union had crumbled under its own weight even as the Chinese export ‘miracle’ was gathering force; in Europe the ground was being prepared for the euro. The West had triumphed over what it had painted as socialist tyranny — the absence of consumer choices. Gone were the, gloomy, paranoid Stalinist dictators in Russia and across Eastern Europe, swept aside by cheap color televisions and counterfeit Levis, menthol cigarettes and Ronald Reagan. The nuclear boogeyman had been seemingly stuffed back into a bottle then redeemed for a 10¢ ‘peace dividend’. Oil prices were low and American confidence in endless Ponzi wealth was high. Technologies were appearing out of what seemed to be nowhere offering solutions to problems we did not know existed: robots (to replace workers), Internet (to replace more workers) and genetic engineering (to replace the remaining workers). Certainly all of the above would bury history forever … right?
The West was to become a Keynesian paradise of endless abundance and leisure, a suburbanite fairyland of Negro-free gated ‘communities’, of pastel McMansions and luxury SUVs; of gourmet meals crafted from GMO ingredients washed down with magnums of Veuve Clicquot and narcissism. We would play croquet as eternal children under the glorious sunshine of prosperity while ‘disutility’ (labor) would be performed ‘somewhere else’ (Mexico). The waste and destruction associated with industrialization would vanish because we would all be rich enough to hire robots to clean up after us.
There were a few clouds: the tail-end of trivial conflicts in Central America; the ‘War on Drugs’, the Asian finance crisis in 1997 and the collapse of the Russian economy the following year. Long Term Capital Management followed the Russian economy into the toilet in early 1998 necessitating the first ‘rescue us or else’ mega-bailout of Wall Street. These events were diversionary theater: people who could afford it lost some money, bosses who badly needed new jobs lost theirs. All in all the entire reconfiguration process turned out to be remarkably painless.
Looking back, the notion of final geopolitical resolution was naively optimistic, a quaint artifact of a particular zeitgeist, like Beatle Boots or flip cellphones. What was really happening was the ending of the ending: ancient monsters were not vanquished only hibernating so as to take new forms. Now, when we need it most and want it least, history has stormed out of its coffin like a vengeful, blood-hungry vampire, reminding us all why we wanted to be rid of it in the first place.
Enter the new millennium and (quasi-)liberal democracy and finance capitalism are being shellacked and nobody can figure out why. Extreme events are tripping over each other like – add your favorite cliché here – cheese and macaroni. Radicals are ascendant as the status quo proves unable to prevent the consumption utopia from slipping out of reach. Strategies that once bore fruit are revealed as nonsense; military ‘stimulus’, central bank witch doctoring, austerity, institutionalized discrimination, trivial interest rate- and foreign exchange manipulation. The outcome is credit transfers from those with less to those with everything … and fury. With chaos on one side, dithering on the other, the public turns toward autocrats while societies — particularly across the arc of northern- and central Africa to south Asia — blow apart at the seams, writhing in agony, frantic to escape the vice-like grip of ‘less’ and unmet expectations.
This is the terror that dares not speak its name; not to be engulfed by refugees or shot by militants but forced by desperate necessity to become one! Rage is fear by another name.
Events rise up like rogue waves, smash with shocking force … and then vanish. In the space of a month there is the #Brexit vote — against the backdrop of faltering credit — US police shootings, also people shot by police; terrorist truckers, airport attackers, car bombings in city markets, nightclub massacres and more nightclub massacres. There are the coups that aren’t and the rounding up the usual suspects … the droughts and floods, grinding wars, food shortages and millions of desperate refugees, all lingering on Twitter for an instant then … gone. Staring us in the face is the breakup of the Eurozone and the end of the euro, currency- and economic failure in Venezuela and Brazil, environmental degradation and habitat collapse, the deflation of property/asset bubbles worldwide … unraveling is no longer a matter of ‘if’ but ‘how bad’.
Figure 1: … the status quo proves unable … Mazama Science (click on for big). Turkey has almost nothing in the way of domestic oil resources yet it burns through three-quarters of a million barrels per day, paid for with borrowed euros and dollars. Turkey earns some hard currency from tourists as well as a modest margin from pipeline fees. These last are far from enough: without loans the economy collapses in a hurry, with loans the collapse takes a little longer. The Turks could save themselves by way of stringent conservation but choose instead to wager the rent on a New Ottoman Caliph, betting that utopia can be rationed away from domestic enemies or stolen from its (even more bankrupt) neighbors.
Figure 2: Turkish lira relative to the US dollar, chart by XE (click for big). Depreciation of lira is the means by which Turks are forced to conserve against their will. With the passage of time, more liras are needed to obtain the dollars and euros needed to pay for imports. Economic theory suggests that currency ‘values’ run in cycles and that the lira will eventually regain its footing. History suggests the lira is a disposable relic and that markets have not yet ‘caught down’ with reality. Turkey’s currency represents little other than empty gestures and voracious demand. When history was on vacation, symbols and demand were assets to be leveraged; in the new Age of Less these things are liabilities. As the Turkish inter-temporal balance sheet breaks down so does the currency.
Tyrants like Trump and Erdogan (and Clinton) are products of industrial resource capitalism no different from McMansions and automobiles, they are also fetishes. Unlike vicarious pleasure-pussy Taylor Swift, tyrants symbolize power, ruthlessness and control … and increasing surpluses. Their promise to harvest gains by whatever means is the substance of their public appeal. The relationship between tyrant and followers is symbiotic and self-reinforcing. Adherents give form and color to the tyrant’s outline while the tyrant suspends- or outruns institutional restraints, providing the necessary sanction for adherents to act out their own impulses, destructive or otherwise.
The emergence of tyrants like Trump and Erdogan (and Clintons) is suggestive: that technology cannot produce the consumer outcomes we are desperate to preserve. If technology could save us autocrats would not be necessary. They are reductive rather than creative, their first- and last resort is coercion as when governments dragoon pensioners rather than machines to rescue finance.
We are in the middle of a crisis that has been ongoing for over five years: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?
The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Europe, in the US … in cities and states: pensions everywhere are under attack.
Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying our grandparents? Technology is supposed to save us but the raiding of pensions insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology doesn’t work, from the people who are in a position to know.
What happens after the retirements are pillaged? Who knows? Nobody has a plan.
The world’s Trumps and Erdogans (and Hitlers) are First Law change agents and as such are integral/inevitable components of national- or supranational surplus aggregation … one of the costs of our ‘success’. History shows us that empires at the point of decline choose rotten emperors and incompetent caliphs. This is analogous to Hyman Minsky’s ‘Financial Instability Hypothesis’ that suggests periods of investment success are by themselves destabilizing w/ speculative malinvestments leading to crashes. Socio-political ‘Minsky Moments’ are products of long periods of dominion by a particular clique or political enterprise which becomes fertile ground for corruption and self-dealing, also malinvestments in perverse reasoning.
Because industrialization has produced outsized surpluses, the rottenness of caliphs (cost) is increased in proportion. Tyrants’ failures are more destructive; so are the failures of well-intentioned elected caliphs. The First Law outcome is invariably surplus reduction, nothing can stop it; conventional policies only makes things worse. Resource depletion is both unpleasant and permanent, the only strategy is to carefully navigate decline; to surf the smashing waves rather than be swept away by them. Depletion cannot be defeated in battle or outmaneuvered, it cannot be negotiated away or paid off. Less can only be adjusted to: unwillingness to adjust leads to exhaustion and ruin. Sadly, no leader, not one … no economist, no central banker or financier proposes to voluntarily make do with less, to embrace the ancient virtues of restraint, patience and modesty; to corral our competitive greed and tread lightly upon our life-support system …
Appearance is higher than mere Being −− a richer category because it holds in combination the two elements of reflection−into−self and reflection−into−other: whereas Being (or immediacy) is still mere relationlessness, and apparently rests upon itself alone.
“It is only shallow people who do not judge by appearances. The true mystery of the world is the visible, not the invisible….”
— Oscar Wilde
In the twilight of modernity we have become intoxicated with the idea of power, to have our way at the expense of others who are powerless to do anything to stop us. The idea (appearance) has more potency than does the thing itself, as the exercise of power carries with it consequences.
American Exceptionalism boils down to a kind of property right; to own human and mechanical slaves, to stake claims against the entirety of nature; the plants and animals and water even the rocks under our feet … to possess whatever is in sight like a chair or pair of pants … and with the same degree of accountability/carelessness.
There is our pitiless assault on everything, living and non-living, without which there is no ‘our’. The frenzy is to burn the world before someone else beats us to it, to render and distill and catalyze everything into money. Our precious tycoons will burn that as well … we have gone insane.
The fetishes have us in their thrall: the rifle and machine gun, the tank and the airplane and the hydrogen bomb … also the strip mine, the excavator, the chain saw and the automobile. Also the lies on television.
If we possessed the wits we would be mortified, would beg forgiveness and search for wisdom … As inhabitants of Sodom and Gomorrah we are simply cursed to live out the consequences of our own madness.
Published on the Economic Undertow on June 8, 2016
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Figure 1: Chart by TFC Chartz (click for big): It’s called the Triangle of Doom for a reason, carried through to the end, no outcome is possible other than demise of the automobile industry and its petroleum dependencies. Since 2000, there have been a series of petroleum price surges intended to meet the industry’s exorbitant extraction costs. Each attempt has failed as credit conditions outside the fuel markets deteriorated. As can be seen, many of the credit failures originated within the European Union. These fails, credit shocks and price retrenchments are to some degree, a product of EU structural shortcomings. Now, the British have voted to leave the EU, panic ensues: (NY Times).
‘Brexit’ Sets Off a Cascade of Aftershocks …
Maybe the future does not include flying electric cars after all.
By Steven Erlanger
Britain’s startling decision to pull out of the European Union set off a cascade of aftershocks on Friday, costing Prime Minister David Cameron his job, plunging the financial markets into turmoil and leaving the country’s future in doubt. The decisive win by the “Leave” campaign exposed deep divides: young versus old, urban versus rural, Scotland versus England. The recriminations flew fast, not least at Mr. Cameron, who had made the decision to call the referendum on membership in the bloc to manage a rebellion in his own Conservative Party, only to have it destroy his government and tarnish his legacy.
So it goes. There is a huge reaction and certainly more to come as markets digest what has happened … and what is certain to come. In the end it is very simple …
The Brexit vote was inevitable. Britain had no choice but to jump in the lifeboat and abandon the sinking EU Ponzi scheme.
Will it succeed? Probably not but it has to try. If not England it would have been another big European country, perhaps Italy as the first to abandon the scheme. The rest have to wait … but not for long. England’s alternative would be to devolve in a few short years to a petty euro protectorate like Greece or Ukraine begging Russia for fuel and Frankfurt for loans and forbearance. At issue is UK’s massive (£6+ trillion) external balance sheet, its banking liabilities vs. the dubious quality of its assets.
Brexit states unequivocally the City of London is insolvent; at the the point where it cannot finance itself any longer. This is the reason why the establishment rolled out the Brexit referendum in the first place, to save the banks. Think of Brexit as a bailout: the small will pay for the excesses of the great. The City certainly cannot finance the rest of the country and its massive and non-remunerative fleet of gas-guzzling automobiles; something has to give. There are 31.5 million cars in a country of 64 million humans, each car requires the resources of 20 persons. UK staggers under the equivalent human population of 630 millions on a small island … the bulk of those being dented, metal deadbeats. Talk about immigration, no wonder the economy struggles.
The automobiles and their need for fuel imports and infrastructure paid for w/ endless credit issue have bankrupted the entire West, not just England. In Europe: the euro = gasoline. For once — maybe not realizing exactly why and not being entirely happy about it — the British have voted against their cars.
It’s about time!
Published on Cassandra's Legacy on June 27, 2016
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(adapted from a story told by Wouter Diederen)
King of Babel: Minister, faithful minister, speak to me! I hear that there is unrest at the great tower that my workers are building. I hear that some workers want to leave, and I see that the tower is not growing anymore so fast as it was growing not long ago. Minister, tell me what's happening with my tower; the great tower of Babel of which, I, the King of Babel, am so proud!
Minister: King, what you say is true. There is unrest at the great tower of Babel, the workers are clamoring for better pay and a group of them have voted among themselves to stop working at the tower and go back to their land beyond the sea, where they will build their own tower. And because of this, the Great Tower of Babel is not growing anymore.
King: But, minister, why is that happening? Haven't these workers worked for so many years at my tower? Wasn't my tower nicely growing up until not long ago? What's happened that made the workers rebel against me, their master?
Minister: King, you see, we have a problem of energy return on investment…..
Minister: King, let me explain to you. In order to build the tower, we need stones from quarries. And it has happened that the nearby quarries have produced so many stones for the tower that there is no stone anymore there.
King: Minister, I was told about this problem. But I was also told that there are many quarries a little farther away that still hold plenty of stone. So what is the problem with getting good stones from these quarries?
Minister: King, you see, there lies the problem. In order to carry these stones from the quarry to the tower, we need a caravan of many mules pulling carts.
King: And what is the problem with that, minister?
Minister: Well, the problem is that we keep extracting stones and the quarries we get it from are farther and farther away.
King: But that just means that the caravans will have to travel farther away, right?
Minister: King, this is the energy problem I was telling you about. You see, mules need energy, in the form of food. And the people driving the mules need energy, too, in the form of food. So, some carts in the caravan must carry food for the mules and for the mule drivers, and therefore these carts cannot carry stones. And the farther the quarry is, the more food loaded carts there have to be in it.
King: So be it. What is the problem?
Minister: It is that the quarries we are exploiting at present are so far away that most of the carts must be loaded with food and only a few can carry stones. And so what you have are long, long caravans arriving from the quarry to the tower, but carrying very few stones.
King: So, make the caravans bigger, then there will be more carts loaded with stones for the tower.
Minister: King, we are doing that, but we are running out of mules. And we also need more caravans to bring wood for the scaffolding of the towers, and here, too, we must travel to far away forests to find good wood. In addition, the bureaucrats managing the tower have been growing in numbers and are now more numerous than the workers. And we need more caravans and more mules to feed the bureaucrats. As a result, the workers are now living on reduced food rations and they are not happy about that. As I said, it is a question of diminishing energy returns. We call this the "Limits to Growth."
Minister: So, I think we should start thinking of a sustainable tower, that won't need to grow anymore since it is already tall enough. And we could make a steady state tower that would need just a few stones to replace those that wear out. The energy investment would be much smaller……
King: Close your mouth, unfaithful minister! I do not believe a single word of what you told me. I think this story of the energy return is something you invented in order to confuse me. I think, rather, that the workers have become lazy. That the mule drivers have become lazy. And that the mules themselves have become lazy. And so, what I will do will be to punish the lazy workers, the lazy mule drivers, and the lazy mules as they deserve. And I will severely punish those workers who voted to move back to their island to build their own tower. They will feel the wrath of the king of Babel. Also, I think that my enemies outside the borders are plotting against me. And hence I will enlarge the army and attack them. And they, too, will feel the wrath of the king of Babel.
King: And, now that I think about that, I also need a new minister.
Published on the Economic Undertow on May 2, 2016
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As JP Morgan famously remarked, markets fluctuate; its impossible at any particular moment to pick trends out of the background noise. Nobody can say for sure whether tops or bottoms are in. Trends only reveal themselves in the rear-view mirror, even as they are obscured by non-stop advertising campaigns and PR. By the time a trend is clear it is usually too late for investors — otherwise known as ‘fools in the market’ — to do anything about it, the free lunch is already eaten and the punch bowl taken away …
Figure 1: Is the bottom in? Chart by TFC Charts (click for big). Oil prices have been fluctuating higher in futures’ markets but nobody can be sure whether prices will rise from here or head back for the cellar.
With current prices at- or below the cost of extraction, drillers look to survive by reaching for the plastic, offering themselves and their properties as collateral. This is a medium-sized problem for drillers: along with all the other industries they have been borrowing from the beginning of time. In the good ol’ days they borrowed less, now they borrow more while praying for the trend change that brings that punch bowl back.
Ordinarily, the oil drillers’ customers step forward with their own borrowed funds to retire the drillers’ loans. Customers don’t simply sign over the money to the drillers, they over-pay for drillers’ products. This is what the term, ‘sustainable business model’ actually means; customers pay higher prices for successive rounds of cheaper-to-produce goods; the margin is used by firms for debt service and the retirement of maturing loans. Naturally, as each round of financing is rolled over the firms borrow more. Some of this money flows to executives, by way of this process CEOs become tycoons. Economists gain as well because every increase in borrowing represents GDP growth they can take credit for.
Fast-forward to the present: goods are unaffordably expensive to produce, emptied-out customers are no longer able to over-pay. They have nothing to offer as collateral for loans but their (near worthless) labor and frantic urge to Waste as seen on TV. Because the customers are unable to borrow, they cannot benefit the drillers, the drillers must borrow for themselves and pray …
Because the ‘waste as collateral’ concept is absurd/ridiculous, both the customers’ AND the drillers’ loans are effectively unsecured. This leaves a maturity mismatch between drillers and their customers. Firms are borrowing tens- of billions of dollars even as their customers are standing in line at the food bank. Customers cannot borrow => they cannot overpay => prices crash as drillers have no place to put unsold crude => whatever collateral the driller offers becomes worthless. The customers stiff their lenders => there is nothing for lenders to seize. At the end of the day, drillers, customers and lenders are all ruined … this dynamic is playing out in real time, right this minute, under everyone’s nose, all over our Great Round World.
This is perfect if unremarkable sense; conditions within oil industry finance must reflect resource depletion and it is clear that they do. The non-stop PR campaigns touting driller technology, efficiency and innovation are irrelevant, none of these things touch the customer. Losses cannot be made up with volume. Real returns, solvency and cash flows matter; when customers cannot gain the means to buy fuel industry products there is ultimately no more fuel industry. Redistribution, or giving customers the means to buy fuel is an immediate-term (non)solution. Some expensive time is borrowed until the customers’ financing is exhausted. Because resource waste offers no tangible returns to the waster; his credit will eventually run out, he will waste no more.
Meanwhile, the drillers must borrow or go out of business while lenders hold their noses and lend! The alternative is an output crash; we are caught between a looming crash and conditions that are pregnant with crash possibilities. Credit access becomes a matter of desperate necessity with every borrowed dollar lodged against the lenders’ deteriorating balance sheets. At the twilight of the petroleum age, drillers survive by cannibalizing their bankers who in turn are becoming the global economic link under the greatest strain.
Giant finance firms preserve the illusion of system sufficiency by lending to each other. Self-pleasure here is deadly; the lenders have become zombies rotten with non-performing loans. Growth is stagnating, economies are falling into deflation, turning Japanese. The zombification of the banks becomes both the reason for- and the consequence of extraordinary monetary quackery: the intent is to goad finance into squeezing out every possible loan, to kick that can one more day while hoping for a miracle. For business as usual, there is no alternative: interest rates fall to zero- then negative, currencies depreciate, pensions are looted and depositors bailed in … we must endure these abuses or else! Everywhere in the Westernized world useless industries and sectors are propped up regardless of consequences. Deflation results from the longer-term inability of billions of end-users to gain purchasing power or returns on capital from a mechanized regime that is designed from the ground up to annihilate capital.
No capital, no purchasing power, no problem; we’ve got iPhones, instead!
Blows are starting to rain down on the technology sector. Instead of saving our bacon as its promoters endlessly insist, the industry is having problems saving itself:
Figure 2: It isn’t just the energy sector: looking at this pretty chart (Yahoo Finance, click for big): Apple’s decline looks to be part of a longer-running trend rather than a fluctuation. The firm reported earnings, which were terrible; the company is being punished for its customers’ misbehavior.
Rotten Apple: Stock plunges 8% on earnings, revenue miss
Apple reported quarterly earnings and revenue that missed analysts’ estimates on Tuesday, and its guidance for the current quarter also fell shy of expectations.
The tech giant said it saw fiscal second-quarter earnings of $1.90 per diluted share on $50.56 billion in revenue. Wall Street expected Apple to report earnings of about $2 a share on $51.97 billion in revenue, according to a consensus estimate from Thomson Reuters.
That revenue figure was a roughly 13 percent decline against $58.01 billion in the comparable year-ago period — representing the first year-over-year quarterly sales drop since 2003.
Shares in the company fell more than 8 percent in after-hours trading, erasing more than $46 billion in market cap. That after-hours loss is greater than the market cap of 391 of the S&P 500 companies.
AAPL is not some disposable startup at the end of a cul-de-sac somewhere in suburbia, it is (or was) the world’s largest company by capitalization. It is the technology sector’s tech company. When people hear the word ‘progress’, chances are they think robots and iPhones. Yet, markets are becoming unfriendly for the behemoth: its shares presently lurk at a support level, that if breached, would indicate a decline to $55 or so … from $125 per share a little over a year ago. In other words, a slump that mimics the fuel price crash.
This is very serious business. Stockholders are a who’s who of finance: pension funds, sovereign wealth funds, central banks, private equity and hedge funds. Shares are collateral for billions in debt that has been used for stock buy-backs and mergers. The entire tech investment ecology is at risk. Damage from a sixty-percent-ish price decline would be severe. Leverage against the shares applied backward compounds the damage just as it expands returns on rising prices; this puts more pressure on the hapless lenders reeling from their debacle in the oil patch. It isn’t just the money: against a backdrop of hand-wringing and denial, the science fiction narrative of a future running on innovation (and sharp business practices) is falling apart.
Ironically, Apple is constrained by a cleverness shortage: successive iterations of iWhatevers have become predictable variations on now-familiar themes. Offering customers novelty in modest increments at stratospheric prices has consequences; buyers are skipping over the brand and buying cheaper look-alikes. Commodity ‘clone’ products represent the race to the price basement, they can’t generate the marginal returns or snazzy narratives that support inflated share prices. In this sense, Apple is a victim of its own success, it must either compete going forward with its imitators on price or invent the next great must-have-at-all-cost consumer product that will re-establish its position of leadership in the technology firmament.
This is what AAPL has come up with …
So much for redemptive innovation and technology … Apple aims to reinvent the Dodge Caravan. It turns out all roads lead to more and more roads. Why not battleships, instead?
HMS Dreadnought, a brilliant technological achievement in 1906, it was rendered obsolete before its keel was laid by the airplane.
Apple cannot be serious! In choosing the car, AAPL lurches in the direction of the hapless Japanese, who make brilliant cars (made brilliant battleships) but cannot return value to the cars’ users (neither do battleships). The auto (battleship) industry is a subsidy hog, it twists in the wind even as it is on life support. By way of its actions, APPL admits its customers can no longer subsidize the company and its lenders, it looks instead toward the government (just like battleship manufacturers), to gorge at the public trough.
Figure 3: TSLA, another investors’ darling, (click for big). Strapped customers can afford the cars by bellying up to their friendly sub-prime auto lender for eight-year loans. Even this absurd financing is inadequate without billions in additional subsidies. These in turn can only come from finance, the same industry under so much solvency pressure from resource depletion … resulting from over-reliance on cars (battleships).
And all for what end? Nobody connects the big picture dots behind the empty gestures; battleships, Teslas and iPhones are status symbols, worth little- or nothing outside their self-generating, hubristic narratives. “In the long run,” said Keynes, “we are all dead”, it seems certain that we have to humiliate ourselves first.
Published on Peak Surfer on February 14, 2016
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"Oil in the ground is wealth only on paper – you may own that oil, but it earns you nothing until you recover and sell it. Yet paper wealth is still wealth. It goes on your balance sheet as an asset that you can sell. You can use it as collateral to borrow cash and buy other assets."
Our 2006 book, The Post-Petroleum Survival Guide and Cookbook was published just as conventional hydrocarbons struck their all-time global production top and began to decline (a picture that emerged only years later). The book challenged readers to consider how they might cope with $20 per gallon gasoline and the absence of public transit alternatives.
It also described the undulating top we now see, where high price destroys demand, which crashes price, which boosts demand, which raises price, and so on. Think of this part as the whoop-de-doos after the roller coaster cranks its way to the top and lets gravity take over.
Lately there have been a spate of articles in the financial press beating up on Peak Oil theorists for being so widely wrong in their predictions. They point to charts showing global oil production rising from 86.5 million barrels per day in 2008 to 96 million in 2015. Of course, they are mixing apples and oranges. What peaked, right on schedule in 2006, was conventional liquids.
After 2006 Big Oil played its hole card, unconventional oil and gas. Those inside the sector had been telling the Peak Oilers about this all along, but it still caught some incautious prophets out on a hoisted petard. "Our community would concede that we underestimated or didn't quite understand this whole fracking thing," said Jan Lars Miller of ASPO-USA (Association for Study of Peak Oil). "It exceeded everyone's expectations."
What Big Oil did not tell the pundits was that the unconventionals are a Ponzi scheme, too expensive to compete with renewable energy, made up mostly of a great credit bubble and churning real estate plays. Like all such schemes, unconventionals run on a short fuse that is only as long as the credibility of its grifters. As long as the con can keep up an appearance of legitimacy, people still buy houses, cars, planes and college educations riding on cascades of fraud.
On Big Oil's books, proven reserves of oil are presently estimated at 1,700 billion barrels. Just in the past 18 months, and accelerating after the Paris Agreement, the decline in value has been $70 per barrel. The value of oil shares, therefore, has been reduced by $119,000,000,000,000. That is 119 trillion. It is only a matter of time until the market catches up to that peg. It is already on its way. Maudlin said, "The lost value in crude oil is equivalent to a couple of hundred Googles and Apples going up in smoke."
But lest we forget, we are not just over the top of Peak Oil, we're at Peak Everything: coal, natural gas, iron, copper, zinc, nickel, lead, palladium, platinum, silver, and aluminum – all suffered double-digit percentage valuation drops in 2015.
One of our earliest blogs here on this site was published August 14, 2007. It was called "The Mexican Trigger." We still do not know if what we prophesied then will yet come to pass, but it is worth looking at. We laid it out more completely in September, 2007 for Energy Bulletin:
In 2004, Pemex was pleased to announce that its oil wealth would continue for many years to come. Pemex's head of exploration and production, Luis Ramirez, was quoted in the daily newspaper El Universal as saying that Pemex had mapped seven new offshore blocks with large pools of oil and natural gas, likely in the range of 54 billion barrel-equivalents, more even than México’s proven plus probable reserves at that time.
“This will put us on a par with reserves levels of the big players like Iraq, United Arab Emirates, Kuwait or Iran,” Ramirez said. “What's more, we would be in a position to reach production levels like those of Saudi Arabia, which produces 7.5 million barrels per day, or Russia, which produces 7.4 million.”
Just 3 years later, Pemex's tune had changed. It had reckoned the cost of unconventionals versus conventionals and fully understood that high prices would be required if it was going to become a big league star. As we described in our post, on July 27, 2007, Raúl Muñoz Leos, Director General of Pemex, warned that México had less than seven years before the country would run out of conventional oil. Not seven years until it peaked. Not seven years for Cantarell, its super field. Seven years, and Méxican production would run dry.
Let's see. 2007 plus 7 equals 2014. So what happened?
What happened was that Mexico did the same thing as the United States did in 1970. It deployed technological advances, it went unconventional (first offshore, later shale and fracked gas), and it imported to fill the gaps. When Enrique Peña Nieto was elected he quickly moved to privatize the national oil company. Pemex stopped being a public agency and became a "State Production Enterprise." Thanks to Peña Nieto's government, Pemex is now authorized to attract foreign investment of $8.5 billion dollars by selling parts of itself to private companies, including the US oil cartel.
Fast forward to 2016.
30 January: With budget cuts, the abandonment of the oil installations on land and in the Campeche Sound, it appears that the Federal Government is determined to liquidate Petroleos Mexicanos (Pemex) and return to where we were before the oil boom, which would create an economic and social catastrophe for the oil states like Campeche….
The government, which previously milked Pemex oil revenues to pay for breathtakingly rapid development of the country, found itself having to now raise taxes from tourism and other sources to keep Pemex afloat. In 2015 it cut what it spent on Pemex by 340 million dollars. Pemex shed 11,735 jobs and did not replace 80% of those retiring. It canceled $10 billion in pensions for those in retirement.
|Mexico: Oil Production 1960-2015|
Editorials in the Mexican press say the crisis was "the most important in the sector since the 1938 constitutional change [nationalizing energy companies]."
What is still not being widely recognized is that the crisis in oil is the main reason for the crisis in the finances of Mexico. The crash of the peso against the dollar — 20% per year since 2013 — is seen as good for tourism. How tourism will fare when the national grid fueled by petroleum cannot provide power to beach resorts is not discussed.
In January, 25 Pemex buildings had no electricity service for a period because the Federal Electricity Commission (CFE) cut off service for nonpayment. Some workers ran to the hardware store and bought portable generators so they could continue monitoring critical functions like pipelines and offshore drill rigs.
The average price Pemex received for oil in 2015 was $49/bbl. It is now below $25. Some analysts estimate that government, in full-blown financial free-fall, may cut investment in Pemex by $3 billion in 2016, which would take production to 2.0 million barrels per day, down from 2.27 million last year and 3.4 million at the peak in 2004.
Pemex revenues are down 70% in the past 18 months. That is what Peak Oil looks like. Mounting debt for exploration, which must be paid in dollars to US companies, is $11.7 billion, or 63.8% of the present value of Mexico's declining proven reserves. Remittances — money earned abroad and sent back to the families – are now one-third larger for the Mexican economy than oil revenues. Will those be used to pay Pemex's foreign debt service, 65% of which is due in dollars, and 15% in euros, yen and yuan? Or perhaps the government just can switch to legalizing and taxing marijuana?
This month Mexican Association of Petroleum Industry (AMIPE) Chairman Erik Legorreta told potential investors:
"Petróleos Mexico is and remains the ideal for Mexican companies and foreign participants in the sector, and this is the time to invest in it, to seize the coming period of rising prices, that are historically cyclical." He said Pemex was among the most competitive companies in the world .
In January Pemex issued a tranch of 10-year junk bonds valued at 5 billion pesos, roughly 300 million dollars, with promised interest rates of 6.9%, or 491.6 basis points over comparable US Treasuries. Standard & Poor's rates them BBBB. Those are still for sale. Want some?
And, lest we forget, Mexico was until recently the largest source of crude oil flowing to the United States. Its share was down to just 9% of US imports in 2015 and the flow will change direction in 2016. But then, the US no longer needs to import oil, right?
Shale oil fields, by their nature, are easy to turn on and off. If your oil costs $40 a barrel to produce and you can sell it for only $35, you can cap your wells and wait for higher prices. Canada, which supplies 37% of oil imports to the US, is doing this now.
However, if you borrowed or fleeced gullible investors for the money to drill your wells you need cash to service debt and pay dividends. You will keep pumping even if you only break even or run a loss, as long as you can pay the debt. The alternative is default. Bondholders are the only ones getting quick liquidations from drilling — in bankruptcy court. Oil patch bond prices have collapsed.
Fracked gas is a different story. Once you drill you have to extract. If you are not fast enough, you can wind up with a methane gusher like Porter Ranch (or Deepwater Horizon's Macando blowout). So you have a monkey on your back. It doesn't matter what you paid to drill the well, you have to sell at a loss, as North Dakota fracker Hess Oil recently discovered to the tune of negative $875 million (forcing it to sell off all its retail gas stations to Marathon and shares of its stock it had only just purchased at twice the price, in exchange for a couple more quarters of solvency and hope).
|Current Depletion Projections by Industry Analysts|
Fraud is a fragile mistress that likes to be pampered. She does best with the trendy urbane who imagine that to the clever, reward comes without work and that pushing paper between desks, or electrons through the ether, is the same as growing potatoes or pounding nails. She avoids being seen around reality-based communities, preferring to find dark embrace where the fog of deception is thick and judgments are clouded by greed.
In his documentary, Capitalism: A Love Story, Michael Moore observed that during the Bush Recession when the auto industry laid off much of its workforce and shut down most its lines, it wasn't because it could not make and sell cars. It was because the Bank of America would no longer loan it money to upgrade its production lines. Mexico is able to extend the illusion of development only as long as someone loans it money. The same is true of the United States.
What if the banks would or could no longer loan money? That day may be nearer than most economists believe, but then, predictions of peaks, or a systemic crash, are a risky proposition.
Originally Published on Clusterfuck Nation February 15, 2016
It ought to be a foregone conclusion that Mr. Obama’s replacement starting January 20, 2017 will preside over conditions of disorder in everyday life and economy never seen before. For the supposedly thinking class in America, the end of reality-optional politics will come as the surprise of their lives.
Where has that hypothetical thinking class been, by the way, the past eight years? Don’t look for it in what used to be called “the newspapers.” The New York Times has become so reality-averse that the editors traded in their blue pencils for Federal Reserve cheerleader pompoms after the Lehman incident of 2008. Every information-dispensing organ has followed their lede: The Recovery Continues! It’s a sturdy plank for promoting the impaired asset known as Hillary.
Don’t look for the thinking class in the universities. They’ve surrendered their traditional duties to a new hybrid persecution campaign that is equal parts Mao Zedong, the Witches of Loudon, and the Asylum at Charenton. For instance the President of Princeton, Mr. Eisgruber, was confronted with a list of demands that included 1) erasure of arch-segregationist Woodrow Wilson’s name from everything on campus, and 2) creation of a new all-black (i.e. segregated) student center. He didn’t blink. Note: nobody in the media asked him about this apparent contradiction. That’s how we roll these days.
Don’t look for the thinking class in business. The C-suites are jammed with people still busy buying back stock in their own companies at outlandish prices with borrowed money. Why? To artificially boost share price and thus their salaries and bonuses. Does it do anything for the fitness of enterprise? No, in fact it makes future failure more likely. Why is their no governance of their insane behavior? Because they’ve also bought and paid for boards of directors composed of a rotating cast of praetorian shills, with fresh recruits entering the scene weekly through the fabled “revolving door” between business and government regulators.
Oh, and then there’s government. Anyone viewing the boasting-and-defamation contests that the cable TV networks call “debates” knows that these spectacles are based on the opposite of thinking. They are not only reality-optional, they’re thought-optional. Hence, it appears for now that America is fixing to elect either a primal screamer or a road-tested grifter to preside over the epochal collapse of our hobbled, exhausted, way of life.
The recent carnage in the stock markets will probably see a retracement after the President’s Day hiatus. They’re bouncing up in other parts of the world today, the triumph of hope over all the available evidence that something fatal has happened out there in Tom Friedman’s supposedly permanent global economy. Some observers suspect that it has something to do with the price of oil, because the oil futures market and the stock indexes seem to go up and down in tandem. But they don’t really get it.
How hard is it to understand that A) that something adverse happens to oil companies when it costs them $70-a-barrel to hoist the product out of the ground and then sell it for $30-a-barrel? And B) that all of the infrastructure of techno-industrial civilization was designed to run on oil under $30-a-barrel and founders when the price goes higher? That’s how it is. That’s your basic reality.
We’ve been trying to work around this vexing problem — the non-linear manifestation of the supposedly bygone predicament called “peak oil” — since the early part of this century. Mainly, we worked around it by borrowing money that wasn’t there. Having created this matrix of borrowed money, we’ve also created an expectation in market obligations that it must be paid back. In fact, the process of paying back money owed is the only thing that supports confidence in a system based on that essential trust — even if that expectation was unreal to begin with. When it is violated, terrible things happen in markets and economies.
Those terrible things are underway. We’re going to be a much-distressed and poorer so-called republic when this year is done with us. The markets will crack and the trade relations that comprise globalism will fall apart as nations and regions of nations struggle to survive. We’ll move inexorably to a very possibly disastrous election. We’ll face the basic choices, as distressed societies always do, of freaking-and-acting-out (usually in the form of war), or opting for a reunion with reality and its mandates. So far, it’s not looking good for the better option.
If you are a thinking person, the months ahead might be your last chance to protect whatever wealth you have and to move to some part of the country where, at least, you can grow some of your own food and become a useful part of a social and economic network that might be called a community.
James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.
Published on Peak Surfer on February 7, 2016
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When a person you know dies, a part of you must go too, like a thread being cut and a part of yourself unraveling. We are a weave of such threads, we two-leggeds, and our knits are a biochemical, emotional, electrical and microbial gestalt. We interweave with each other in ways that are seen and unseen, forming a fabric that we call, for lack of precision, "community."
We have been spending some winter months in recent years in a small village on the North coast of the Yucatán Peninsula. When we first arrived it was a not atypical coastal town with dirt streets and thatched or tin roofs. It is secure within one of Mexico's largest nature preserves, and it is here because the village pre-existed the reserve, so it was allowed to remain as long as it behaved, and then even when it didn't. Development has been very cruel to this region in recent years, has made it socially, economically and ecologically more fragile, and has set it up for a big fall in the not very distant future.
We are much more comfortable wintering here than in the cold north, in Tennessee, or in touristy trendy spots like Mazatlan, Puerto Vallarta, Cabo San Lucas or Playa del Carmen. Here we can find the quiet time we need to gather and sort our lost or jumbled thoughts, recover from our summer labors and travels and prepare for the work to come. We have written 5 books here and substantially contributed to at least twice that many more.
Before there was Cancún or the state of Quintana Roo, this had been just one more fishing village — a few hundred souls. It was known mainly for the quality of its hammocks and the beautiful seashells that washed up on its beaches. Because of its position along Cabo Catoche and the Straits of Cuba, it receives annual migrations of fish, birds, sea turtles and marine mammals and the biodiversity runs deep. The name of a nearby town is the Mayan word for manatee. The name for this place in Mayan is "black hole," a reference perhaps to the freshwater Yalahau cenote that for more than five centuries attracted whalers, pirates and explorers to refill their water casks. Among the older family lines you can recognize Russian, Nordic, Moorish, Maori and Portuguese lineages in facial hair, skin complexion, physical build and other features that are neither Yucatec nor Mestizo.
Here, where it is so full of life, is a strange place to think of death, but there come times when everyone needs to. Mexico has very different customs regarding death than its neighboring countries to the North. As Octavio Paz wrote in Labyrinth of Solitude:
"The Mexican … is familiar with death, jokes about it, caresses it, sleeps with it, celebrates it. True, there is as much fear in his attitude as in that of others, but at least death is not hidden away: he looks at it face to face, with impatience, disdain or irony."
When Hernan Cortes conquered the region that is now Mexico City, his conquistadors noticed a local ritual of making offerings to the goddess Mictecacihuatl, Queen regnant of Mictlan, the underworld, ruling over the afterlife. In the Aztec codices, Mictecacihuatl is represented with a defleshed body, jaw agape to swallow the stars during the day. Cortes' priests were quick to link the Aztec rituals to the Catholic observances of All Hallows Eve, All Saints' Day and All Souls' Day, just as they brilliantly connected the dark-skinned indigenous Madonna, the Virgin of Guadalupe, to the corn goddess, Chicomecoatl. Unlike the masses for the dead celebrated elsewhere, however, Dia de los Muertos is a happy occasion, with a carnivalesque atmosphere.
For the south of Mexico and in rural areas, death holds far greater social and cultural significance than in the north and large cities; families and communities may spend large parts of the year in smaller rituals and processions and it is not uncommon to find an altar in every home with images of the departed. The pre-Columbian concept of life and death was as part of a broader, never-ending cycle of existence, which dovetailed neatly with Christian and Asian traditions of veneration of the deceased, afterlife and reincarnation. In places and periods where unnatural death is a regular feature, as it was in much of Turtle Island after European contact and for 500 years, death becomes engrained as a cultural expression. As the artist Diego Rivera said in 1920: "If you look around my studio, you will see Deaths everywhere, Deaths of every size and color."
Our neighbor across the way on Calle Gonzalo Guerrero is Capitán Carmelo, a fisherman and whale shark diving guide. He is part of an old family in the town and an "abuelo" now, with grandchildren in their teens. A day ago his wife, Maria Coral de Sabatini, died and today the community laid her to rest. We are going to spend a few moments now describing that process, because it has a lot to say about the power of community, how it is built, how it is held, and how it passes between generations.
We started noticing Maria's cough a few years ago. She sort of shrugged it off, sitting as she did in her chair in front of her home every day, but we couldn't help but notice as it became deeper, more throaty and more painful. We suspected that because she and Carmelo neither drink nor smoke and neither does anyone else in their house, that it was not likely lung cancer but more probably tuberculosis. Her family simply called it las garras (the claws, or what we might call the grip). When we returned last year it had gotten so severe that she had lost a lot of weight and could not sit outside on dusty days. When we returned this year she was gone. We asked after her and Carmelo said she was in the hospital.
Then on Christmas she returned home. We asked her about her health and she said she lived day to day, “poca a poca,” little by little. We understood her to be dying. She had come to do that at home, among friends.
The knowledge that a person will die, combined with the uncertainty of not knowing when the event will happen, can be very stressful for family members and we witnessed this as the family drew together over the holidays. Then she seemed to recover, was up and about, and we were happy to see her walking to the corner store for eggs or fruit again, frail but smiling. The family dispersed again, the kids back to school, Carmelo and his son-in-law to fish each morning before sunrise.
A few days ago Maria's condition worsened and the family was pulled back together. Then one morning she suffered an arrest and the paramedics were summoned, followed by the police with the village pickup truck that doubles as an ambulance. We watched from our home and after an hour or so, the medics and police left and soon the village priest arrived.
Maria was given last rites by the priest and anointed with holy oil. If she was able, the priest heard her final confession, provided communion and offered absolution. Then began the vigil.
The vigil was attended mostly by immediate family, close neighbors and friends and lasted a day and a night, until Maria passed, peacefully, in her sleep. In the morning the family closed off the street and erected a tent. Chairs were brought and placed in a circle. A white coffin arrived, and Maria was bathed, dressed, and placed in it, on a pedestal in the front room of her home. For the next 24 hours, everyone who knew her came to pay their respects and say goodbye. They filed into the home and then out to the tent, where they sat, told stories, ate, sang. Musicians — different ones, separately and in groups — came with instruments, some several times. Choirs appeared and serenaded. Prayers were recited. Children came and sat with their elders or wandered in to stare at the body in the open coffin. Candles were lit. Elders were helped in, touched her, held her hand, said a prayer and were helped back out to the street. More candles were lit. More hymns, more prayers.
The wake continued through the night. A heavy rain fell, the heaviest of the winter so far. The songs got louder to drown the rain. Because Carmelo and Maria were teetotalers, there was no alcohol. This was a time for friends and family members to share memories of the past, to speak of their concerns for their own families, the village, the future. It is a moment when the fabric of the tribe is being woven. Lost threads are recovered. Wrongs are forgiven. Apologies are made. Expressions of friendship, kinship and love patch tears in the fabric. The children witness it all. This is part of their formative experience.
Maria was royalty. She bears the family name of José María Sabatini, for whom the annual fishing tournament is named. Her family, and the family of Carmelo, go back to the group that endured the great hurricane that swept away the original village on the Southwest point of the peninsula and made new islands there. They migrated their ejido southeast and built the village that is here now. There are a few names that appear most often in the cemetery that mark these families: Moguel, Ancona, Betancort, Avila, Nuñez, Rosado, Coral, Sabatini. Notice that these are not Mayan names and some are also not Spanish.
At sunrise a pickup truck fords the deep puddles and backs up to the house. The coffin and flowers are raised into the truck bed and the procession of mourners follows it at a walking pace to the church. There the coffin is unloaded, brought to the front of the nave and opened for viewing again. It is 8 am. Now the village gathers.
Capitan Carmelo is a vicar in the church and normally it would be his duty to prepare the way, usher the family to seats, read part of the scripture, and make the collection. Instead, he takes his position in the front row with his family while his fellow deacons, dressed in white, perform those functions. A choir forms at the vestry door and sings energetically at various points in the service. Loudspeakers in the nave make their small number seem larger than it is, but they sing in a style that is definitely homespun and authentic, not canned.
|The cement angel motions the dead to hush up and sleep|
Midway through, the town's power is lost, a not uncommon daily occurrence in this place. The priest does not even pause to acknowledge the loss. Lit through stained glass and with acapella choir, his mass does not miss a beat.
After communion, the pallbearers return to stand beside the coffin and Carmelo leans in to plant one last kiss on Maria before the lid comes down. It is a touching moment.
Then the coffin and flowers are carried back onto the bed of the pickup, which gets stuck turning around in the mud, and once unstuck, the long procession passes slowly through town and out to the cemetery in a light rain.
In Mexico it is said the dead return on certain days of the year. Those days they are remembered through special ceremonies. The body must be buried, not cremated, for their return to occur. Because we are on the sandy coast, the cemetery consists of aboveground vaults, cemented and tiled to protect from the sea. During Hurricane Wilma, the entire cemetery, and the town, went a meter or more under the waves and although the cemetery wall had to be repaired, relatively few of the vaults were badly damaged. Maria's family names, Coral and Sabatini, are on several of headstones.
Afterward, the mourners gather back in our street for a meal and reception. This is a time for levity, good food, and comforting those who are still dealing with their grief. Then, after two or more days awake, the family gets to sleep a short while and Maria Coral de Sabatini is gone but not forgotten.
The tent remains for the next 8 days, and each day there are visitors. Twice each day the front room of the house is filled with voices raised in hymn and the recitation of the rosary. On the final day, it is an all-night ceremony.
The cemetery is particularly poignant because this is a town that is built on the coral sand of a barrier island. The highest point of land is no more than 3 meters above the sea. Wetlands approach the edge of the cemetery and trash is being dumped there to fill the sinkholes. Some of that trash includes old monuments and broken crypts of the departed whose names have been forgotten, the marks on their stones and crosses rubbed out by time and salt air.
It might be denied by the government or wishful thinkers, but this is an entire town on death watch. The vigil begins every June, when it enters hurricane season, because one more Wilma could erase everything but the memories. Already regular tides that coincide with the moon are bringing seawater inland to places it has not reached in the memory of the elders. Many seawalls that were constructed after Wilma are now nearly obsolete. The population here continues to grow on the strength of tourism and Catholic fecundity, but where it will go when the town vanishes is anyone's guess. It is likely that many of these families could break apart. This is a community of place.
How long does it have? That's anyone's guess too. It could be a decade. Maybe two. Three seems unlikely, because both the Caribbean and the Gulf of Mexico are warming dramatically and molecular thermal expansion of the water, combined with the westerly currents at this latitude which dictate that sea level rise here will be stronger and faster than most other parts of the Earth. Southeastern Mexico, Galveston, New Orleans and Miami are on the front lines of climate change. Miami Beach, like here, has been sinking one inch each year, one foot every 12 years, and that is accelerating.
Some here believe that some supernatural event will spare this place its preordained fate. Denial is common among our kind of sapient apes and faith in the supernatural — angels, aliens, and economists — exposes our deeper fear of overdue reckonings. Still, not even the most hopeful provisions of The Paris Agreement can alter the fate of coastal cities and low islands now.
In the not-too-distant future the only way to visit Maria will be with a mask and snorkel. Unless the government decides to relocate everything, an unlikely prospect, she will still be here, and probably alongside Carmelo, when the rest of us have moved to higher ground.
Published on Peak Surfer on January 31, 2016
Discuss this article at the Geopolitics Table inside the Diner
We all had expected that by now the Asian countries that have dumped their goods here and almost bankrupted our country by causing our trade deficit would have felt the bite of tough new rules, but the Trans Pacific Partnership tied Donald's hands on that one.
Mexico still won’t keep its illegals — the source for Americans’ drugs — on their side of the border. NAFTA prevented the border closing there. It wouldn't even take those Mexican tractor-trailers off our roads, and who knows how many of them are filled with illegals being dropped off in Ohio and Pennsylvania? Still, we are pouring concrete for a bigger wall all the time, whether Mexico pays for it or not. They should because they created this problem, but so far Donald has not gotten a single peso from the ingrates.
And, of course, the Muslims have always been fighting us when they are not too busy squirmishing between themselves. The Donald's executive order closed all our borders to refugees from Syria, Libya, Egypt, and Afghanistan; countries populated by still more ingrates who are unwilling to pay for the wars that we started on their behalf. And wouldn't you know? That is now going to the Supreme Court, challenged by the Democrat Party as unconstitutional. As if the President of the United States, as Commander in Chief, doesn't have the power to keep all the riffraff out. That wishy washy Supreme Court is not conservative enough! The Donald will get his chance to change that, soon, with real right-winging, bitter-clinging, proud clingers of our guns, our God, and our religion, and our Constitution.
Solving our trade deficit wasn't as simple as ending the supply of cheap Chinese stuff. Donald got around Congress and the TPP by calling that retailer CEO summit at the White House. But it still comes in from places protected by those bad trade deals negotiated by idiot presidents who didn't know the first thing about the art of the deal. Now the Chinese stuff goes to Australia and gets rebranded before the container ships take it to WalMart. That is why the prices we pay didn't change much, so I guess we can be grateful. The Chinese and Koreans should be too, but are they? No way.
When the Donald sent the marines to grab Iraq’s oilfields last month there was a big uproar at the UN but what could they do, the toothless liberals? Donald just vetoed any Security Council resolution they passed. Now we control a significant supply of the world’s oil and can set prices where we like, and not just where the Saudis want them, in the basement. We all have to put up with higher prices at the pump now, but rising crude prices have stopped the slump in fracked gas futures and got us back on the path to the energy independence that made America strong.
If the Saudis gripe about that, Donald says he is ready to send a bunch of oil sheiks to his reopened Guantanamo just to let them know who's in charge. Sure, he hasn't gotten rid of ISIS yet, but give him time. He will get their oil too, and you can take that to the bank. The marines are just settling into Iraq now. Syria is a quick hop.
Donald's poll numbers are quite good, and it is long past the honeymoon stage. People are calling him the Second Great Communicator. Doubters have to eat crow. Our military is stronger than ever, and we are respected again, whether foreigners like it or not.
We will know soon whether that do-nothing Congress passes the President's energy plan and American builders can get started on those 100 new nuclear plants. That will be a real shot in the arm for the economy, as well as making energy cheap again. People say the President is a climate denier, but those new nukes will do more to stop climate change than anything Obama did in Paris. Put a trillion dollars into nuclear power, like we will, and your other countries can be energy independent too, you UN people.
People criticize the President for ordering the National Football League to move the Super Bowl to New Jersey, but now that more than a third of the teams have relocated to California, it seems only reasonable that the East Coast should get its share of the action. Some of the best football we've ever seen was played in snow.
When the Donald took office the economy was in shambles. Stocks were getting schlonged. Oil, coal, and car companies were talking bankruptcy and wanting bailouts. The Donald doesn't do bailouts. How about that?
The Donald met with all the banks and cut them checks. He refinanced the country. Remember: this is a guy who knows what it is to go bankrupt and still wind up with high-rise penthouses and golf courses. That's exactly what he did for America. Who cares what the dollar is now worth in Timbuktu? We will soon have legal casinos in every city and every state, and they won't be run by Indians, either.
We are still only a year into this presidency, but from here it sure looks like an unqualified success. We guess that's only to be expected when you buy the best.
“I’m Donald Trump and I endorse this message” — Trump for President 2016
Published on Peak Surfer on January 24, 2016
Discuss this article at the Environment Table inside the Diner
Charlie said, "That's the trouble. You see it the way the banking industry sees it and they make money by manipulating money irrespective of effects in the real world. You've spent a trillion dollars of American taxpayers' money over the lifetime of the bank and there's nothing to show for it. You go into poor countries and force them to sell their assets to foreign investors and to switch from subsistence agriculture to cash crops. Then, when the prices of those crops collapse, you call this "nicely competitive" on the world market. The local populations starve and you then insist on austerity measures even though your actions have shattered their economy….
"You were intended to be the Marshall Plan, and instead you've been carpetbaggers."
— Kim Stanley Robinson, Sixty Days and Counting: Science in the Capitol (2007).
“With fundamentals changing slowly and risk appetite falling rapidly, the stage is set for a longer period of risk asset underperformance,” Jabaz Mathai, a strategist at Citigroup Inc., said. “There is no quick fix to the headwinds facing global growth.”
"Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009 … all either overlapped with a recession, or preceded a recession by a few quarters."
There has been a storm brewing since the last trifle with full-on collapse in 2008-2009. The extend-and-pretend debt balloon was reinflated and stretched to new enormities as Keynesian cash infusions fueled a Minsky Moment, if not a Korowicz Crunch.
The instability in finance is compounded by the instability in demographics. In Mexico City, Bogata and Rio they call them NINIs — the millions of youth between 15 and 24 who neither study nor work. They are now about a fifth of the population in the underdeveloping world, responsible for higher rates of homicide, gangs, and unwed pregnancy. Of those born to NINI mothers, there is a 22.3% greater likelihood of becoming a NINI, according to the World Bank. All this tinder simply builds, bides its time, wanders the streets, waits for a revolutionary spark.
As we said here last week, the trigger for the markets' sudden move may have been what happened in Paris but could not stay in Paris. When it filtered out from the December summit that 195 countries had actually done the unimaginable and set a goal of carbon neutrality, meaning phasing out net fossil fuel emissions by 2050, the financial sector was at first caught dumbfounded. The World Bank guys flinched.
Now it has sunk in. The Guardian reports:
Former OMB Chief David Stockman's recap
Investors face a “cataclysmic year” where stock markets could fall by up to 20% and oil could slump to $16 (£11) a barrel, economists at the Royal Bank of Scotland have warned. In a note to its clients the bank said: “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” It said the current situation was reminiscent of 2008, when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time China could be the crisis point.
Government subsidies are about to undergo a titanic shift. Many governments spend more on fossil-fuel subsidies than they do on health and education, more than a trillion dollars. Consumer benefits such as subsidized fuels and cheap finance add $548 billion per year. Government support for companies to expand production add another $542 billion just in G20 overdeveloped countries, and a mere top 8 of those will spend $80 billion of this kind every year, four times the investments going to renewables globally.
Tomorrow those same Big-8, and 188 others, will begin spending several times those trillions subsidizing renewables. Jeremy Leggett, founder of Solar Aid and Solarcentury, calls it "trillionization." It won't begin to fill the energy gap that the switch will create, but the psychology of sunk investment will be in charge from thereon out.
Oil producing states and countries are aghast. The "clear signal" that Paris sent was not what they were expecting. In Alaska, the Permanent Fund has been running in the red and the legislature is talking about an income tax. Had the Paris Agreement not come together, they might hope for a rebound of fossil prices and investments in drilling the North Slope and Arctic Refuge.
Petroblas, the national oil company of Brazil and wellspring of the Brazilian Economic Miracle, is now cash negative. It will be forced to turn to the government for a bail-out, but to where will its government turn?
In Mexico, the deficit is running 100 billion and the peso has dropped from 12 in 2014 to soon-to-be 20 against the dollar. If you have dollars you can get a meal in a good restaurant or a room for the night for 5 or 10 of them. So far in January the price rise of food for the average Mexican is alarming. Onions are up 19%, poblanos 15%, bananas 10%, tomatoes 9%.
The national oil company, PEMEX, came out on Monday saying it is not true that its operating with losses, but below the $26 per barrel it would be. On Tuesday the price dropped to $24.74. It closed the week at $22.77 but as we write this you can buy a barrel in Mexico City for as little as $20.32. Mexico's federal budget is entirely dependent on oil money and don't look now but Mexico, when it was petrodollar flush, became a net importer of most staple foods and many other essential commodities, which helps explain the grocery dilemma. Mexico now buys onions, poblanos, bananas and tomatoes from California. Also beans, corn and rice.
Gotta love those World Bank guys.
Venezuela, which surprised everyone by signing the Paris Agreement at the final hour, declared an economic emergency on January 15. France, which foolishly drank too much atomic kool aid thinking it might spare itself from petrocollapse, has a budget shortfall of 2.2 billion dollars and declared national economic emergency on January 17. The jobless rate in France, the eurozone's 2d largest economy, is above 10%, compared with a 9.8% EU average.
Andrew Roberts, RBS’s credit chief, said:
European and US markets could fall by 10% to 20%, with the FTSE 100 particularly at risk due to the predominance of commodity companies in the UK index. London is vulnerable to a negative shock. All these people who are long [buyers of] oil and mining companies thinking that the dividends are safe are going to discover that they’re not at all safe.
We suspect 2016 will be characterized by more focus on how the exiting occurs of positions in the three main asset classes that benefited from quantitative easing: 1) emerging markets, 2) credit, 3) equities … Risks are high.
"For dry bulk, China has gone completely belly up,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, talking about ships that haul everything from coal to iron ore to grain. “Present Chinese demand is insufficient to service dry-bulk production, which is driving down rates and subsequently asset values as they follow each other.”
“China’s slowdown has come as a major shock to the system,” said Hartland Shipping’s Prentis. “We are now caught in the twilight zone between shifts in China’s economy, and it is uncomfortable as it’s causing unexpected slowing of demand.”
The continued collapse of The Baltic Dry Index remains ignored by most.
According to Zero Hedge:
Commerce between Europe and North America has literally come to a halt. For the first time in known history, not one cargo ship is in-transit in the North Atlantic between Europe and North America. All of them (hundreds) are either anchored offshore or in-port. NOTHING is moving.
This has never happened before. It is a horrific economic sign; proof that commerce is literally stopped.
The slow response to the Paris outcome has been a complete portfolio review by every actuary and bean-counter in the biggest banks and investment houses, pension funds and mutuals. Hedge fund managers are scratching and sniffing for places to park billions being lifted from soon-to-be-stranded fossil assets. The clean-tech market, signaled first by China, is reacting by recycling cash out of fossil holdings.
Peter Sinclair of ClimateCrocks.com reports:
The Energy Information Administration calculates in its 2015 analysis that the average U.S. levelized cost for new natural-gas advanced combined cycle plants is 7.3 cents per kilowatt-hour — the same as solar.
However, to compare accurately, we have to add about 10 percent to the cost of solar to firm up this variable resource. So we’re close to cost parity, but not quite there.
At $1 per watt, the levelized cost falls to just 5.7 cents per kilowatt-hour, well below cost parity with new natural-gas plants. With two-axis trackers and the best solar resources, which increase the capacity factor to 32 percent, that cost falls to just 4.5 cents per kilowatt-hour. We’re headed to $1 per watt as an all-in cost in the next five to 10 years.
Bloomberg New Energy Finance reported last summer that wind power was the cheapest source of power in the U.K. and Germany in 2015, even without subsidies. The article’s tagline reads: “It has never made less sense to build fossil fuel power plants.” The same article highlights the feedback loop that solar and wind power have in terms of reducing the cost-effectiveness of fossil fuel power plants due to the dispatch order of renewables versus fossil fuel plants.
The solar singularity is indeed near (here?) in the U.S. and increasingly around the world. I described previously that 1 percent of the market is halfway to solar ubiquity because 1 percent is halfway between nothing and 100 percent in terms of doublings (seven doublings from .01 percent to 1 percent and seven more from 1 percent to reach 100 percent). The U.S. will reach the 1 percent solar milestone in 2016. We’re halfway there. Buckle your seatbelts.
There are plenty of unemployed oil workers ready for retraining. James Howard Kunstler:
So, in 2015, the shale oil companies laid off thousands of workers, idled the drilling rigs, and kicked back to pray that the price would go back up. Which it didn’t…. The landscape of North Dakota is littered with unfinished garden apartment complexes that may never be completed, and the discharged construction carpenters and roofers drove back to Minnesota ahead of the re-po men coming for their Ford F-110s.
To see what does well in the new, post-Paris domain, watch stocks like First Solar (FSLR), Renewable Energy Group (REGI), SolarCity (SCTY) and Siemens (SIE) over the next quarter, and mutuals like Firsthand Alternative Energy (ALTEX), New Alternatives (NALFX) and Guinness Atkinson Alternative Energy (GAAEX). Some of these know their audience and have vowed to screen for social justice. Gabelli SRI AAA says, for instance:
The fund will not invest in the top 50 defense/weapons contractors or in companies that derive more than 5% of their revenues from the following areas: tobacco, alcohol, gaming, defense/weapons production….
There is a psychology that sets in once the corner is turned on fossil investments that may make a big difference in the political debate about climate change. For more than half a century the GOP, the Fossil Lobby and Wall Street have blocked, cut or delayed investments in renewables and papered it over with greenwash. Forced by pledges made in Paris — and a legally-binding agreement with the word "shall" used 143 times — and the emergence of a huge new global competition to begin not only unchaining the clean-tech sector, but to actively promote it with subsidies, research grants and moonshot-scale deployments, the psychology of chasing after sunk investments will drive an apolitical energy conversion.
Moreover, 350.org and Greenpeace are ramping up campaigns to make sure the promises made in Paris are kept.
Clean energy will not deliver a 1:1 replacement for fossil fuels. Get over it. We will not suddenly convert steel mills, cement kilns and road surfacing machines to operate on sunbeams. But the investments we do make, and the worsening weather, will drive us to make even more and ever larger investments, in a forlorn search for a full replacement. While wasteful, it is not nearly as wasteful as the industrial and military investments of the past century or more.
Persian Gulf wars, going back to antiquity, have never been fought over sunlight. As David Stockman recently recalled:
[A] 45-year old error … holds the Persian Gulf is an American Lake and that the answer to high oil prices and energy security is the Fifth Fleet.***
That doctrine has been wrong from the day it was officially enunciated by one of America’s great economic ignoramuses, Henry Kissinger, at the time of the original oil crisis in 1973. The 42 years since then have proven in spades that its doesn’t matter who controls the oilfields, and that the only effective cure for high oil prices is the free market.
The switch to sunlight will make the lives we are living better for many, especially those on the front lines of the oil wars, even as we continue towards an Anthropocene Armageddon with little sign of being able to change that trajectory.
In a well-read article in Climate Change in November 2010, Garrett ran the simple arithmetic:
Specifically, the human system grows through a self-perpetuating feedback loop in which the consumption rate of primary energy resources stays tied to the historical accumulation of global economic production — or p×g — through a time-independent factor of 9.7±0.3 mW per inflation-adjusted 1990 US dollar.
If civilization is considered at a global level, it turns out there is no explicit need to consider people or their lifestyles in order to forecast future energy consumption. At civilization’s core there is a single constant factor, λ = 9.7 ± 0.3 mW per inflation-adjusted 1990 dollar, that ties the global economy to simple physical principles. Viewed from this perspective, civilization evolves in a spontaneous feedback loop maintained only by energy consumption and incorporation of environmental matter.
Unsold cars sit on receiving docks all over the world
Because the current state of the system, by nature, is tied to its unchangeable past, it looks unlikely that there will be any substantial near-term departure from recently observed acceleration in CO2 emission rates. For predictions over the longer term, however, what is required is thermodynamically based models for how rates of carbonization and energy efficiency evolve. To this end, these rates are almost certainly constrained by the size and availability of environmental resource reservoirs. Previously, such factors have been shown to be primary constraints in the evolution of species
What this means is the same thing that Gail Tverberg, Richard Heinberg and many others have been saying for a very long time — modern economies are a product of cheap energy. Take that away and they crash and burn. That’s the good news. Garrett says there is no other climate remediation model that works. Civilization is a heat engine whether it is powered by nuclear fusion or photovoltaics. The global economy must crash for humanity to stand a chance. McPherson would take it a step farther and say it is already too late, enjoy what time you have.
The famous Fermi paradox raises the question: why haven’t we detected signs of alien life, despite high estimates of probability, such as observations of planets in the “habitable zone” around a Sun-like star by the Kepler telescope and calculations of hundreds of billions of Earth-like planets in our galaxy that might support life. To produce a habitable planet, life forms need to regulate greenhouse gases such as water and carbon dioxide to keep surface temperatures stable. Early extinction, before interstellar communication, solves the Fermi Paradox. So does merely the extinction of civilization capable of interstellar communication without the same degree of trauma. No civilization, no heat.
But wait! Can that excess heat civilization is producing be turned into air conditioning for the planet? Is there a permacultural decroissance that could rescue our genome? Stay tuned, but first, next week, we play the Trump card.
Published on Peak Surfer on January 17, 2016
Discuss this article at the Environment Table inside the Diner
The World Bank Guys talked about rates of return and the burden on investors and the unacceptable cost of the doubling of the price of a kilowatt hour. Everyone there had said all of this before, with the same lack of communication and absence of concrete results.
Charlie saw that the meeting was useless. He thought of Joe, over at the daycare. He had never stayed there long enough even to see what they did all day long. Guilt stuck him like a sliver. In a crowd of strangers, 14 hours a day.
The bank guy was going on about differential costs. "And that's why its going to be oil for the next 20, 30 and maybe even 50 years," he concluded. "None of the alternatives are competitive." Charlie's pencil tip snapped.
"Competitive for what?" he demanded. He had not spoken until that point and now the edge in his voice stopped the discussion. Everyone was staring at him.
He stared back at the World Bank guys. "Damage from carbon dioxide emission costs about $35 per ton. But in your model, no-one pays it. The carbon that British Petroleum burns per year by sale and by operation runs up a damage bill of $50 billion dollars. BP reported a profit of $20 billion so actually its $30 billion in the red, every year.
"Shell reported a profit of $23 billion but if you added the damage cost it would be $8 billion in the red. These companies should be bankrupt. You support their exteriorizing of costs so your accounting is bullshit. You are helping to bring on the biggest catastrophe in human history.
"If the oil companies burn the 500 gigatons of carbon that you are describing as inevitable, because of your financial shell games, then two-thirds of the species on the planet will be endangered, including humans. But you keep talking about fiscal discipline and competitive edges and profit differentials. It's the stupidest head-in-the-sand response possible."
The World Bank guys flinched at this. "Well, we don't see it that way."
While the story coming out of the White House Press Room this week was phrased as a temporary moratorium on new coal mining leases on federal lands, the bigger story was in the details of the review that the President had ordered. Like Robinson's character in Sixty Days, the White House recognized that the real cost of coal is not currently accounted for in its price, so the new review will tally the environmental impacts, including destruction of public lands from air and water pollution from strip mining and failed mine reclamation, public health impacts from transporting and burning coal, damage from ash spills, greenhouse gas emissions and climate change. It will set a price on future leases based on this thoroughgoing review that brings the cost of coal in line with the reality of the actual costs.
If this had to be run through Congress, powerful coal-state Senators like Mitch McConnell would derail it before it got out of committee. As merely Bureau of Land Management regulatory policy, it falls under the Executive Branch, where the President's is the only opinion that counts.
Tomorrow senior politicians, digiratti activists and Hollywood stars ski into the Swiss resort of Davos for the annual World Economic Forum. The theme was to have been the 4th Industrial Revolution – robots, AI and the biotechno singularity — but the buzz is all about the latest crash of the world economy.
The trigger for all this change may have been what happened in Paris but could not stay in Paris. In December we reported from the United Nations climate meeting where many of these same characters — John Kerry, Leonardo DiCaprio, Justin Trudeau, Angela Merkel — were on stage. We described then how an amazing role reversal was in progress and how it had transformed COP-21, midway through the second week of deadlocked negotiations.
The roles that switched were between the dominants, like Exxon-Mobil, Shell and BP, and the submissives — the entire renewables industry. Renewables are largely a digital world, enjoying advancements in crystal structure, solid state controllers, neodymium and other rare earth metallurgy that follow the proscribed arc of Moore's law, doubling in efficiency and halving in cost at close intervals, driving exponential adoption and dissemination.
Fossils, in contrast, are an analog industry, trying to wring the last drops of intoxicating elixir from the carpet of the pub after closing time. In 2015 those two curves crossed, and renewables are now cheaper (even free at some hours for select consumers in certain markets) while coal, oil and gas are queuing up outside bankruptcy court.
|Salvaging beer from the bar floor after last rounds|
The US Department of Energy reported this week:
The Short-Term Energy Outlook (STEO) released on January 12 forecasts that Brent crude oil prices will average $40 per barrel (b) in 2016 and $50/b in 2017. This is the first STEO to include forecasts for 2017. Forecast West Texas Intermediate (WTI) crude oil prices average $2/b lower than Brent in 2016 and $3/b lower in 2017. However, the current values of futures and options contracts continue to suggest high uncertainty in the price outlook. For example, EIA's forecast for the average WTI price in April 2016 of $37/b should be considered in the context of recent contract values for April 2016 delivery, suggesting that the market expects WTI prices to range from $25/b to $56/b (at the 95% confidence interval).
The decline in oil price is too little, too late. It cannot keep pace with the price decline we are seeing in the clean tech revolution. Consequently, more people now work in the US solar industry than in oil and gas at the wellhead. In 2015, for the third straight year, the solar workforce grew 20 percent. Clean tech employs far more women than fossil, and 5 percent of the workforce is African American, 11 percent Latino, and 9 percent Asian/Pacific Islander.
At the same time, rear-guard action by the Coal-Baron-selected legislatures in Arizona and Nevada — states that could be leading the nation in solar power production — have led to layoffs in the renewables sector. The pushback over solar and wind fees by grid owners, punitive taxes, and net metering promise to keep those states in the Dark Ages, as they did the United States for the past four decades.
In a famous L'il Abner cartoon, Pappy Yokum tells L'il Abner, "Any fool can knock down a barn, it takes a carpenter to build one." To which L'il Abner replies, "Any fool? Let me try!"
Listening to the Republican presidential candidates debate is like watching a Fox-den full of L'il Abners.
|US Solar Power 2010-2015|
So it is not surprising that at the stroke of a pen, three Republican appointees on the Nevada Power Utility Commission decided the fates of millions of ratepayers when they killed solar feed-in-tariffs in that state. It was not unlike Michigan governor Rick Snyder deciding to kill and maim thousands of Detroit residents by switching their water to a polluted source and then covering up the damage. You might say no-one gets killed or maimed from solar energy, and that's closer to true, but plenty more get poisoned every year from the fossil alternative.
The numbers being parsed in Davos will be puzzling to many attending that meeting. From a peak in January 2015 to last October, movements of crude by rail declined more than a fifth. The research group Genscape said rail deliveries to US Atlantic coast terminals continued to drop to the end of the year and the spot market for crude delivered by rail from North Dakota’s Bakken region “is at a near standstill.”
Just 5 years ago investors clamored for more tank cars to pick up the slack from overwhelmed pipeline capacity. Now those cars sit idle on sidings and no one is ordering more. Pipelines are idle too, as refineries on the coasts have found that it is cheaper to buy crude of higher quality than shale oil, shipped by ocean tanker from Canada, Nigeria and Azerbaijan.
Junk bond sales are all that supports
the fracked gas Ponzi scheme.
A Congress desperate to please its oil masters in an election year abolished four-decade-old restrictions on exporting domestic crude. While some tankers now take crude from the Gulf Coast to refineries in Venezuela, where the heavy sludges and half-formed keragens can be more economically processed because of fewer environmental restrictions, the US then imports back the finished products at a hefty mark-up.
The idling of rail, barge, ship and pipeline traffic is the biggest change of its kind in 30 years. And while the shift away from coal-powered energy, the long recession, and the petering out of the fracking and shale Ponzi real estate play would obviously lead to fewer tons, barrels and cubic feet being moved, it doesn't explain the full depth of the stoppage. The rail and barge slowdown is now spreading to more consumer-oriented segments. Intermodal carloads typically related to consumer goods fell 1.7 percent in the final quarter of last year.
"We believe rail data may be signaling a warning for the broader economy," the recent note from Bank of America says.
"Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009."
“When people get hungry, governments fall” — Stuart Scott, Through A Dark Portal, Radio Ecoshock, January 13, 2016
If you can read the tea leaves, or even if you can't, we are now in the long slide. We will examine the financial road ahead, and the Paris Effect on that, in greater detail next week.
Published on the Doomstead Diner on December 21, 2015
Discuss this article at the Energy Table inside the Diner
This past week, I gave a presentation to a group interested in a particular type of renewable energy–solar energy that is deployed in space, so it would provide electricity 24 hours per day. Their question was: how low does the production cost of electricity really need to be?
I gave them this two-fold answer:
1. We are hitting something similar to “Peak Oil” right now. The symptoms are the opposite of the ones that most people expected. There is a glut of supply, and prices are far below the cost of production. Many commodities besides oil are affected; these include natural gas, coal, iron ore, many metals, and many types of food. Our concern should be that low prices will bring down production, quite possibly for many commodities simultaneously. Perhaps the problem should be called “Limits to Growth,” rather than “Peak Oil,” because it is a different type of problem than most people expected.
2. The only theoretical solution would be to create a huge supply of renewable energy that would work in today’s devices. It would need to be cheap to produce and be available in the immediate future. Electricity would need to be produced for no more than four cents per kWh, and liquid fuels would need to be produced for less than $20 per barrel of oil equivalent. The low cost would need to be the result of very sparing use of resources, rather than the result of government subsidies.
Of course, we have many other problems associated with a finite world, including rising population, water limits, and climate change. For this reason, even a huge supply of very cheap renewable energy would not be a permanent solution.
This is a link to the presentation: Energy Economics Outlook. I will not attempt to explain the slides in detail.
Some people falsely believe that energy supplies are “only needed for industrial purposes.” Energy supplies are, in fact, needed for many things: cooking our food, keeping our homes warm, and creating the clothing we expect to wear. It would be impossible to feed, house, and clothe 7.3 billion people without supplemental energy of some kind.
Slide 4 suggests that the world economy is heading into recession, because recent growth in the use of energy supplies is very low recently. Another sign that we are headed into recession is that fact that CO2 emissions fell in 2015. They usually don’t fall unless a global crisis exists. Emissions fell when the Soviet Union collapsed in 1991, and they fell during the economic crisis in 2008. Perhaps the world economy is hitting headwinds that are not being picked up well in conventional calculations of GDP growth.
Slide 5 shows a chart I put together, using data from several different sources, showing how growth in energy consumption has compared with growth in GDP. Growth in GDP tends to be somewhat higher than growth in energy consumption.
Economic growth (and growth in energy use) was low prior to 1950. There was a big jump in economic growth immediately after World War II, in the 1950-65 period. There was almost as much growth in the 1965- 75 period. Since 1975, economic growth has generally been slowing.
Between the years 1900 and 1998, the use of electricity rose (black line) as the cost of electricity fell (purple, red, and green lines). Electricity consumption could rise because it was becoming more affordable. Rising electricity consumption allowed the economy to make more goods and services. Workers (with the use of electricity) were becoming more efficient, so wages could rise. With higher wages, workers could afford more products that used electricity, such as electric lights for their homes and radios.
If electricity prices had risen instead of fallen, it seems doubtful that this pattern of rising consumption could have taken place.
The comments in Figure 7 represent my own view. It is based on both theoretical considerations and historical relationships. Many who have studied the economy believe that energy is important for economic growth. In my view, the real need is for cheap-to-produce energy, not just any energy. If cheap energy is not really available, then adding more debt can somewhat make up for the high cost of energy production.
Debt is important because it makes goods affordable that would not otherwise be affordable. For example, having a loan for a house or a car makes a huge difference regarding whether such an item is affordable.
Even when energy products are cheap, debt seems to be needed to get oil or coal out of the ground, or to make a new device such as a wind turbine. Part of the problem is the cost of the capital equipment needed to extract the oil or coal, or the cost of the wind turbines themselves. Another part of the problem is paying for factories to make devices that use the energy product. A third problem is making it possible for users to afford the end products, such as houses and cars. It is much easier to borrow the money for a new tractor, and pay the loan off as the tractor is put to use, than it is to save money in advance, using only the funds earned when farming with simple hand-held tools.
I mentioned the need for $20 per barrel oil on Slide 7. This is a very inexpensive price. Slide 8 shows that the only time when oil prices were that low was prior to the mid-1970s. (Note that the amounts in Slide 8 have already been adjusted for inflation, so my $20 per barrel target is an inflation-adjusted amount.) The cost of oil production is now far above $20 per barrel. The sales price now is about $37 per barrel. This is below the price producers need, but still above my target price level.
Slide 9 explains where I got my $20 per barrel price target. Back prior to 1975–in other words, back when oil prices were generally low, $20 per barrel or less–the increase in debt more or less corresponded to the growth in GDP. Once prices rose above $20 per barrel, the amount of debt needed to produce a given amount of GDP growth rose dramatically.
Slide 10 shows interest rates for US debt with 10-year maturity. These interest rates often underlie mortgage rates. As interest rates fall, homeowners can afford increasingly expensive homes. If shorter-term interest rates fall as well, auto loans become cheaper too.
The value to society of a barrel of oil is determined by how many miles it can make a diesel truck go, or how far it can make an airplane fly. This value to society is more or less fixed. The only change is the small increment each year from efficiency changes, making a barrel of oil “go farther.”
In the 2000-14 period, the cost of new oil production was increasing very rapidly–by more than 10% per year, by some estimates. The rising cost of oil production occurred much more quickly than efficiency changes. The result was a falling difference between the value to society and the cost of production. When oil prices are high, oil-importing nations tend to suffer recession. When oil prices are low, oil-exporting nations find it hard to collect enough taxes to support their many programs.
The fact that we need energy for economic growth means that we somehow must obtain this energy, even if doing so costs more. The big run-up in oil prices is a major reason for the historical run-up in debt levels. China’s big build-out of homes, roads, and factories was also financed by debt.
The higher cost of oil affects many things that we don’t think are related, including the cost of building new homes, the cost of building cars, and the cost of building roads. As consumers are forced to buy increasingly expensive homes and cars, and as governments find that the building of roads is increasingly expensive, more debt is used. The terms of loans are often longer as well, to hold down monthly costs.
If we still had cheap oil, this oil by itself could provide a “lift” to the economy. An increasing amount of debt can “sort of” compensate for the absence of cheap oil.
The problem we encounter is that neither cheap energy nor the continued run-up of debt is sustainable. Cheap energy tends to change to expensive energy, because we use the cheapest sources first. The continued debt run-up becomes more and more difficult to handle, unless interest rates fall lower and lower. At some point, interest rates can’t fall enough, and the whole pile of debt tends to collapse, like a Ponzi scheme.
I gave this talk on December 15; the first increase in interest rates took place on December 16. With rising interest rates, we suddenly have “the prop” that was attempting to hold up economic growth taken away.
We need ever expanding debt–that is, debt rising faster than GDP levels–to try to keep the world economy growing, so that the whole pile of debt doesn’t fall over and collapse. If we are to have non-debt growth in the future (because we are reaching limits on debt), it needs to again come from cheap energy alone. We need to get back to something similar to the low-cost energy that fueled the economy before the debt run-up.
Most of us have heard the Peak Oil story, and assume it represents a reasonable view of where we are headed. I think it is close to 180 degrees off course.
M. King Hubbert talked about a very special situation–a situation where another cheap, abundant fuel took over, before fossil fuels began to decline. In this particular situation (and only in this particular situation), it is reasonable to assume that production will follow a symmetric “Hubbert Curve,” with half of the production coming after the peak, and half beforehand. Otherwise, the down slope is likely to be much steeper.
Many peak oilers missed this important point. We certainly are not in a situation today where another very cheap fuel has taken over.
Slide 16 represents what I see as the predominant “Peak Oil” view of the oil limits situation. Some individuals will of course have different opinions.
Peak oilers certainly did get part of the story right–at some point, the cost of oil extraction would rise. What they got wrong was how the whole scenario would play out. It turns out, it plays out pretty much the opposite of what most had supposed–that is, with stagnating wages, loss of buying power, and prices of all commodities falling because of lack of “demand.”
We seem to be hitting energy limits, right now. That is why debt is such a problem, and it is why prices of many commodities, including oil, are far too low compared to the cost of production.
Slide 18 shows the fall of commodity prices up through 2014. The fall in commodity prices has continued in 2015 as well. The story we frequently hear is about low oil prices, but there is also a problem with low natural gas prices. Coal prices are low now too, and, in fact, many coal producers are near bankruptcy. Prices of iron ore, steel, copper, and many other metals are very low, as are prices of many kinds of staple foods traded internationally.
The problem with low commodity prices is that there are many loans that have been taken out to support their production. There is a significant chance of default, if prices remain low. Also, low commodity prices affect asset prices–for example, prices of coalmines, or prices of agricultural land. As the prices of commodities fall, the price of the land used to produce those commodities falls. When this happens, it becomes difficult to repay the loans on the property.
Peak Oilers were right about the cost of production continuing to rise. What they missed was the fact that prices would at some point fall behind the cost of production because of affordability issues. Low prices would then bring the economy down, as it did in the Depression in the 1930s, and in quite a few earlier collapses.
I think of increased demand, provided by debt, as being like a rubber band. Just as a rubber band can stretch for a while, the price of oil can rise for a while, fueled by more and more debt. At some point, debt can’t rise any higher–the rate of return on investments made using debt is too low, and defaults become too frequent. Instead of continuing to rise, commodity prices fall back. Market prices of commodities fall to much lower prices than the costs of production.
In order to get oil prices up higher, the wages of factory workers, restaurant workers, and other non-elite workers need to rise, so that they can afford to buy nice cars and nice homes. Commodities of many types are used both in making homes and cars, and in operating them.
If space solar (or for that matter, any renewable energy) is to be helpful, it needs to be very cheap, so that products made using renewable energy are affordable.
If the replacement energy source is cheap enough, perhaps there will not be a huge run-up in debt to GDP ratios, to finance the new devices used to provide electricity or other energy.
We are encountering problems now, so we need a replacement now, not 20 or 50 years from now.
We cannot expect the cost of electricity production to be more than the current wholesale selling price of electricity. Thus, it needs to be four cents per kWh or less. Ideally, the price of electricity should be falling, as in Slide 6.
Another consideration is that we need to be able to operate our current vehicles using a liquid fuel, made with electricity, because of the time and materials involved in switching over to electric vehicles. This requirement likely reduces the maximum cost of electricity even below four cents per kWh.
It is possible to run into many different kinds of limits, over a period of time. In my view, the first limit we reach is an affordability limit. We can tell we are hitting this limit when high prices reverse to low prices, as they have done since 2011. The fact that prices are continuing to fall is especially worrisome.
There has been a popular myth that it is OK for energy costs to rise. We will just choose the least costly of the high-priced alternatives. This approach doesn’t really work, because wages do not rise at the same time.
Also, we have to compete with other countries. If their energy costs are cheaper, their manufacturing costs are likely to be lower.
If conditions existed that allowed oil prices to rise endlessly (in other words, rising wages of non-elite workers together with debt that could spiral ever higher, as a percentage of GDP), we wouldn’t really have a problem–we could afford increasingly expensive substitutes. Unfortunately, the story of ever-rising oil prices is simply fiction. It is a pleasant story, but not really true. I explain some of the issues further in “Why ‘supply and demand’ doesn’t work for oil.”
Published on the Economic Undertow on December 10, 2015
Discuss this article at the Environment Table inside the Diner
The most effective policy is to pay people to conserve: to offer a basic income conditioned to meeting conservation standards; to pay citizens who do not have children or own cars.
Figure 1: CO2 content of the atmosphere increases, now over 400 ppm. NOAA and Scripps Institution of Oceanography (click on for big).
Right now thousands of the world’s bosses and their underlings are meeting in Paris in an attempt to wrangle some sort of global reduction of warming gases without actually doing anything, from CNN:
COP21 climate change summit: ‘Never have the stakes been so high’
Leaders of 150 nations, along with 40,000 delegates from 195 countries, are attending the conference, called COP21. COP stands for Conference of Parties, an annual forum to try to tackle climate change on a global political level.
The leaders have one mission: Agree on legally binding reductions in greenhouse gas emissions meant to hold global average temperatures short of a 2 degrees Celsius increase over pre-industrial global temperatures.
The cognitive dissonance is head-spinning: the delegates are flown first-class into Paris or in their countries’ official jetliners; they meander in long convoys of armored limousines from Five-star hotels to Michelin-rated restaurants where they are stuffed like geese destined to become foie gras. Eventually, the meetings end and the delegates jet off to other conferences elsewhere. Filling the otherwise boring interval between flights and limo rides is mindless pontificating and empty promises, all of it paid for by the same sorts of industries that emit most of the carbon pollution in the first place!
One would think bringing relief from what is becoming a runaway global meltdown would be an all-hands-on-deck emergency. You would be wrong … because the only action that will make a difference is to reconfigure our Westernized, garbage-producing society from the ground up, to ditch the gangrenous American Way and its polluting industries and their ‘products’ at once, starting with the hundreds of millions of worthless, non-remunerative automobiles. But the bosses and their minions are like children with their hands caught in the cookie jar; they refuse to give up anything even if it means total destruction. Their strategy is to end pollution is to wait until after everyone as become rich, countries will then be able to afford expensive pollution-remediation technology, that so far nobody has been able to produce.
We live in ridiculous times: bosses are working against themselves. The newer, less-polluting industries are subsidized by legacy versions. Because these standbys — such as coil-fired power stations — are critically important, they are given a continuous lease on life. The output of new and old added together increases ‘economic growth’ that cannot be willingly surrendered. As it is, when the growth fails to materialize on its own, every effort is made to gain it, regardless of consequences. Regardless of consequences. Regardless of consequences. regardless of consequences!
François Hollande’s 34 projects aimed at sealing France’s ‘industrial renaissance’
Driverless cars, nanotechnology and electric aeroplanes – François Hollande launches 34 projects aimed at sealing France’s “industrial renaissance”.
François Hollande denied he was returning France to a bygone age of state interventionism as he launched 34 state-aided projects aimed at sealing the country’s “industrial renaissance” – from futuristic fast trains to electric-powered satellites.
Unveiling the state-subsidised “industrial battle plans”, the French president insisted cutting edge research into “energy transition”, health and food and new technologies would help return France to its glorious industrial past in a globalised world.
Projects include plans to develop a car that can run 60 miles on two litres of fuel, electric aeroplanes, driverless cars, nanotechnology and “intelligent” fabrics, such as incubators made of a material that “cures” jaundice without medical intervention.
… and more pontification and empty promises. What the bosses refuse to understand is there will be the reduction of climate gases; this is an absolute certainty. The process appears to be underway, but not for the reasons often cited. Rather, it is resource constraints/peak oil, deleveraging, breakdown in credit infrastructure, bankruptcies and increases in poverty, ‘Conservation by Other MeansTM‘ whereby citizens are reduced to penury and are unable to afford resources in any form … no matter how low the prices go.
The fundamental problem of any emission-reduction strategy is the benefits and risks are in the future while costs accrue in the immediate present. It makes business sense to do nothing and push the costs into the future even though doing so causes them to multiply. An alternative strategy would be to de-emphasize the frontal assault on carbon and target other forms of pollution, by doing so mitigate carbon emissions indirectly. The idea is to break the main problem into smaller components and deal with them in detail. For instance there are multiple heat-trapping items besides carbon dioxide; there is soot, also nitrous oxides, hydrofluorocarbons, methane- and related, perfluorocarbons and sulfur hexafluoride: some of these emissions are controlled, others such as carbon gas emissions have been reduced to some degree within the US and Europe by shifting manufacturing to other countries.
- The means to manage pollution are familiar and have been deployed successfully for decades, such as the regulatory requirement to produce and market diesel fuel without sulfur. This requirement is uncontroversial, there are no arguments against it. The means to produce sulfur-free fuel exist now and have been proven cost effective. Management is relatively simple because diesel fuel is the product of a relative handful of large, centralized industrial facilities which can be monitored. If the facilities don’t produce the correct diesel they are easily shut down. After the introduction of sulfur-free fuel there are visible benefits both in the form of lower fuel user costs and cleaner air, the diesel fuel producers’ margins aren’t effected.
- Administrative and technical tools to limit emissions can be perfected against more commonplace forms of pollution. Over time these tools can be improved enough to be effective against carbon emitters.
- As components of the climate problem are chipped away, the problem shrinks, it becomes underwhelming. The final reduction of the carbon problem becomes a relatively modest exercise.
There is low-hanging fruit to harvest by reducing smog in developing countries where it is considered to be a naturally occurring by-product of progress. As Americans and Europeans discovered in the 1950s, the costs of smog can be unbearable. Clean air and non-polluted water are not luxuries but a basic requirement for a functioning country.
Once there are visible pollution ‘victories’ — whatever they might be — it becomes easier to produce follow-on victories. Right now there is nothing to the climate dilemma but one administrative failure after another … managers are perceived to be inept and untrustworthy, each failure making it more difficult to take effective action in the future.
- To do nothing is to allow resource depletion and energy deflation to sharply diminish fuel consumption which will in turn reduce the output all hydrocarbon fuels including coal. Mining coal on an industrial scale is no longer a pick-and-shovel operation but requires vast amounts of petroleum. The coal customer must bear these costs otherwise, the coal remains in the ground. Resource depletion is the default solution to climate problems and is underway. The only word one must be mindful of regarding depletion is cost.
- The world-wide increase in suburbs, cars, developments, infrastructure, mines and oil wells ironically renders carbon fuels too costly and valuable to waste. Cost is a hard school, but accelerated development is the most likely cure for climate ills because it is the most certain. The conjecture that billions of tons of fossil fuel resources are immediately available for conversion into climate gases is false, these resources are not affordable in a world visibly going broke.
Kobane, Syria, 2015. Image by AFP Photo/Bulent Kilic: default climate gas management in action. Pollution is not emitted from these buildings. Consider changing the economic paradigm and look to Syria rather than Europe or the United States as the model customer for alternative energy. The shattered country filled with desperately impoverished people is somehow supposed to afford expensive replacement prime movers when they can barely afford what they have now.
- Climate scientists are overexposed in the media and elsewhere, they should step off the public stage. Questions about climate should be answered with a terse, “no comment”. Climate change should become a hip and trendy insider secret, accessible by only a privileged few. This is strictly a cynical marketing ploy as the businessmen would rush to fill the information vacuum with obvious, self-defeating lies. Events and word-of-mouth would do the heavy lifting. Ominous silence from the science community would be terrifying … perhaps enough to stir individual action.
- All climate scientists should get rid of their cars and other polluting luxuries: drive them to the junkyards and crush them. The scientists are either serious or they are not. If not, why should anyone else be?
- Focus on ‘other’ ordinary pollution culprits: ozone, nitrous oxides, volatile hydrocarbon photochemical smog, soot, methane and chlorofluorocarbon gases used in refrigeration, perfluorocarbons and sulfur hexafluoride.
- The primary components of smog are particulates, nburned fuel and nitrous oxides. Ordinary smog is reduced by the use of catalytic converters and fuel management systems. The catalyst combusts the unburned fuel in the stream of engine exhaust gas. Unburned fuel, nitrous oxides in the presence of sunlight produces ozone which is poisonous to vegetation. This in turn accelerates the release of greenhouse gases from agriculture lands and forests. Attacking ozone is a tactic to attack carbon emissions indirectly.
- There is a long history or successful management of photochemical smog sourced from vehicles, this effort should be expanded laterally … to countries without effective smog controls … and vertically … to include all kinds of engines. This includes fixed sources of ozone producing pollution such as generators and industrial prime movers; ship power plants and aircraft engines.
- Catalytic converters should be retrofitted to older engines. Those that cannot be retrofitted should be removed from service and scrapped. A country-by-country approach or by way of the WTO, the setting of requirements for manufacturers; all of these approaches would be effective and non-controversial. Half of the world operates engines equipped with with these converters and does so at low cost, the use of them in the other half represents a manageable expense. The public benefit is cleaner air, fewer pollution-related health problems and less damage to agriculture. The private benefit is the sales of catalysts and replacement engines.
- Soot- and soot-like particles are important components of climate change and is sourced from coal- and oil fired boilers, auto tire wear, brake- and clutch linings, diesel exhaust and from poorly performing gasoline engines, also from wood-burning and forest fires. Soot can be managed by using cleaner fuels, reducing open fires and using particulate traps on prime movers.
- Eliminate chlorofluorocarbon refrigerants that are produced and sold in developing countries. CFC’s are potent greenhouse gases: production and sale of bootleg refrigerants is a marginal activity whose loss would not effect national economies at all. Unlike narcotics and other contraband, CFCs are produced only in a few large factories which can be shut down or modified to produce non-destructive products. What is needed is the administrative impulse to do so.
- Institute a universal ban on 2-cycle engines including those which burn lubricating oil along with gasoline. Unburned oil and diesel fuel in the exhaust stream contaminates catalysts in catalytic converters; the poorly combusted oil is also a source of soot. There are four-cycle alternatives that do not burn lubricating oil, that allow the use of catalytic converters. A short phase-in period would retire or replace all 2-cycle engines including outdoor equipment, chain saws, scooters and mopeds.
- Ban carburetors on gasoline engines. Carburetors are obsolete and generally only found in the US on smaller engines used off-highway such as portable generators and lawn mowers. Carburetors do not allow fuel to mix completely with the air and are a source of photochemical smog. Carburetors are replaceable with electronic fuel management systems such as fuel injection.
- End the export trade in older vehicles and prime movers from the West to developing countries. Older vehicles are a large source of pollution. Ending this trade would be a step away from the proposal that every human is entitled to personal automobile transport without regards to the consequences. There are hundreds of millions of 2-cycle engines, carburetors and antiquated junkers in the world, removing them would make a noticeable difference at very low cost or even provide a return as the use of these things is subsidized.
- End the trade in partially-refined and unblended low quality fuels including but not limited to leaded gasoline and high-sulfur diesel. There should be an industry agreement regarding fuel quality; an international standard to meet. This standard would cost a modest amount of money to implement; like CFCs, fuels are the products of a few large factories that can be managed.
- Mandate the switch to low-sulfur fuels, gas scrubbers and catalytic converters on all ocean-going ships.
- Mandate only up-to-date electric generating plants which use low-sulfur fuels and pollution reducing technology … all of which is readily available. A schedule to update power stations should be agreed to reduce then eliminate non-carbon waste gases … doing so would indirectly reduce the carbon emissions. Non-performing prime movers would be scrapped even those that are relatively new. A fifteen year old thermal plant that produces excess waste gases can be scrapped the same as the fifteen year old merchant ship that falls into the same non-performing category. ‘Forced updating’ is cost-free as the new plant uses less fuel than what it replaces.
- Any sort of conservation policy is low-cost and highly effective. Conservation is the cheapest form of power generation as the plant not built represents billions of dollars of credit effectively earned. At the same time, tackling smog, particularly in developing countries, would demonstrate that managing carbon emissions is possible.
- The most effective policy is to pay people to conserve: offer a basic income conditioned to meeting conservation standards; pay citizens who do not have children or own cars.
- Eliminate fuel subsidies in all countries! This would accomplish a number of goals; a) reduce sovereign expenses in countries currently being bankrupted by their fuel subsidies; b) fuel consumption would be reduced along with auto fleets. This is because subsidies are more useful to those with sub-standard vehicles, c) carbon emissions would be indirectly reduced as there would be less fuel consumed: fuel pricing is a form of rationing.
- Ending subsidies risks aggravating motorists. Drivers and their entitlements will have to be dealt with sooner or later, easy way or hard: the ongoing world-wide bailout of motorists is unaffordable. Once government gains any sort of ascendancy over drivers it becomes a far simpler matter to bring the hammer down on them with regards to climate gas emissions as well as fuel waste. The default strategy to constrain drivers is to do nothing. This leaves fuel shortages caused by drivers’ bankruptcy to do the dirty work.
- Implement a world-wide moratorium on forest clear cutting. This is another easy fix that is practically cost free except to gangsters/Chinese who traffic in bootleg lumber. Commandos would earn their keep by killing loggers who would be otherwise paid not to log. Implementation would suggest a hard limit: this and no more! Forest removal and followup agricultural exploitation add only the smallest marginal additions to national GDP at the same time the costs to the environment and ability of the biosphere to absorb carbon are extraordinarily high. Deforestation by itself is a greenhouse gas emitter.
- Implement and fund a world-wide program of re-forestation, wherever possible. The cost would be modest, the returns would be felt in areas where deforestation has led to degraded soils and watersheds. Reforestation can also be a jobs-providing platform.
- It is important to reforest in ways that increase diversity making forests less susceptible to pests.
- Implement more effective forest-fire fighting efforts. The costs would be modest measured against the increased climate costs of forest fires.
- Put out coal mine- and coal seam fires. This is more low-hanging fruit.
- End gas flaring from oil wells, refineries and terminals. Not only do the flares produce carbon gases but they are also tremendously destructive of insect life.
- Eliminate ‘incidental’ methane leakage from oil and gas wells. Most oil and gas wells do not leak, those that do should be denied connection and ordered plugged immediately at drillers’ expense. Given a few such expensive duds, there would soon be no methane leaks from hydrocarbon wells.
- Eliminate tax advantages and subsidies for fuel use in the US, the world’s greatest waster of fossil fuels. Accelerated depreciation, depletion allowances for oil reservoirs, income tax deductions for ‘business vehicle’ purchases, favorable royalty rates and low cost access to public lands, access roads by the state(s), borrow-and-spend highway subsidies, mortgage interest deduction, favorable treatment of capital gains, etc. Reforms would not cost anything but would reduce costs, the obstacle is politics.
- Reformulate plastics so they degrade when exposed to sunlight or sea water. At the same time, place a ‘producer deposit’ — no different from the old-fashioned bottle deposit — on plastic factories for the packaging products they produce.
- Reform agriculture. CAFO’s — concentrated animal feeding operations or very large feedlots — provide utility the CAFO operator only. These operations with their confined animals contaminate water supplies with animal waste; they also produce massive amounts of climate gases. Shutting down CAFO’s would be a low-cost tactic that indirectly reduces climate gas emissions.
- Reform agriculture, make wider use of biochar.
Figure 2: Warming scenarios from UNEP by way of Robert Scribbler: Efforts to reduce carbon emissions and warming look to fall short, leaving the world to heat up to massively destructive +4°C which would wipe out our agriculture.
- End biofuel subsidies. Feeding cars and feeding humans together at the same time means that ultimately neither get fed. Biofuels are barely net-energy neutral and subsidy dependent, the beneficiaries are a handful of biofuel tycoons who would ‘lose’ with the elimination of subsidies.
- Implement a world-wide moratorium on road building. This is yet another easy fix that is cost free, both it and the moratorium on logging are easily enforced by way of satellite surveillance. Another, related step is to eliminate World Bank subsidies for logging, road building, dam building and other environmentally destructive policies that also produce climate gases or reduce the ability of the biosphere to sequester carbon.
- Electrify railroads and increase both freight and passenger capacity.
- Ban land-grabbing in undeveloped countries by 3d parties. Much of the so-called ‘new’ farm land becomes biofuel plantations, cash crop industrial monocultures that produce climate gases.
The most effective step is to provide incentives — to pay people — to conserve. Subsidizing conservation provides a direct capital return on investment that remains with the recipient. Subsidizing consumption as we do now leaves consumer without the resource, without the subsidy and his children with a mountain of unpayable debts. He’s older and poorer even if his consumption suggests otherwise.
The most effective tool is good management. Individuals can effect small scale changes on their own, in aggregate they can do much. American cities are being made over by younger people acting as individuals, who have turned their backs on suburbia. Managing at-scale industrial processes and mandating engineering approaches is more effectively done by governments with the wit to take action.
Ironically, government activism here would save the tycoons from themselves: left to their own unrestrained cruelty and greed, the tycoons’ self-serving activities will continue to price resources beyond the reach of their customers. Eventually, both resource- and the tycoon ‘problems’ are ‘solved’.
With a bit of effort it is not hard to think of other, indirect forms of action against carbon gas emitters. The benefit of these alternatives is that they would not cost very much or would provide economic gains. Meanwhile, the climate crisis is deflated by a thousand cuts leaving (hopefully) our descendants to wonder what all the fuss was about.
Charting by Steve Ludlum
Published on the Doomstead Diner on November 14, 2015
Triangle of Doom from Steve Ludlum at Economic Undertow
Discuss this article at the Energy Table inside the Diner
PEAK OIL REVISITED PART 1a: The Triangle of Doom and the Failure of Price as a Metric
Geoffrey Chia is an Australian physician with a long standing interest in Peak Oil. This essay on oil prices is a necessary prelude to Peak Oil Revisited Part 1b: Is an International Standardised Energy Dollar feasible? followed by Peak Oil Revisited Part 2: Why business as usual guarantees that global industrial collapse will be complete by 2030.
Is Peak Oil dead?
Quote: “Reports of my death have been greatly exaggerated” – attributed to Samuel Clemens AKA Mark Twain, upon reading his own obituary in a newspaper
The delusionists who declared that the “theory” of Peak Oil is dead are simply demonstrating their profound ignorance, if not downright duplicity. Peak Oil is not a theory, it is an observation of a physical fact. It is a simple fact that this world has finite supplies of oil. It is a simple fact that every oil well has finite recoverable oil and will go through phases of rising production, peaking of production and terminal decline. Peak Oil refers to (and has always referred to) the maximum rate of production of conventional oil (applied in particular contexts to either a well, a field, a country or the entire world). Global conventional oil output hit a plateau around 2006 and is now on an inexorable downward trend and even the cornucopian EIA admit this.
Fudging current data by adding gas condensates (which cannot be used to derive diesel or kerosene) or other unconventional oils to the total liquid hydrocarbon output does not change the fact that the world is now well past the peak rate of production of conventional oil and we are entering terminal decline soon.
As an alternative tactic, the denialists have tried to change the definition of Peak Oil. They declared that since oil prices are now low, we cannot have gone past Peak Oil, which has therefore been disproved. They ignore the fact that Peak Oil is and was always defined as the peaking of the rate of production of conventional oil i.e. the maximum volume output per unit time (usually over a year) and was not and was never defined by price.
The triangle of doom
As many readers will be aware, Steve Ludlum's triangle of doom http://www.economic-undertow.com/ refers to the post Peak Oil fluctuation of oil prices, which as time goes by is hypothetically expected to converge to a particular oil price (of say, US$100/- per barrel), above which customers cannot afford the oil, and below which it is uneconomic for vendors to produce the oil (they cannot recuperate their investment costs). In other words, oil which is too expensive leads to destruction of demand (or "demand destruction") and oil which is too cheap leads to destruction of production (or "production destruction"). If $100 per barrel oil is too much for customers to afford but is also too low to meet the cost of production, then in theory, market forces dictate that both oil consumption and production will cease, petroleum will no longer be available and industrial civilisation will collapse. One projection suggested this convergence would occur sometime in 2015 (see graph) however this has obviously not happened for a few reasons:
Firstly, not all oils are the same. Current low oil prices are certainly accelerating "production destruction" of expensive low EROEI oil. However, as long as substantial cheap-to-produce high EROEI oils remain, the latter will continue to supply the market until that high net energy source (Hi-NES) itself eventually transforms into Lo-NES (see explanation below).
Secondly, we have a fair way to go before all discretionary (or non-essential) oil consumption is eliminated from our bloated and wasteful system. Once that occurs, we are in for big trouble.
Furthermore, price is not an accurate predictor of collapse of the oil industry because it is not a reliable marker of whether, where, when and how oil will be produced or consumed, as price can be grossly distorted and manipulated by non-market forces to create perverse incentives.
In the longer term, price as a number is meaningless, unless corrected for inflation/deflation and related to a reference date, or related to a standard basket of goods and services.
The major concern about the current low oil price is that it is strangling upstream funding for oil production in the near future (even for conventional wells) which will eventually cause severe supply constraints in the near term. This will undoubtedly cause another oil price spike and even though restoration of production will take time and effort, it will eventually be done, albeit not to the same previous level. Petroleum will still continue to be produced and consumed in a fluctuating manner, irrespective of the hypothetical triangle of doom, until we run out of easy oil. Going by current trends however, oil will become completely unavailable to the vast majority of humanity within 15 years according to analysis of other parameters (not price) which we will discuss in part 2.
Production issues: Easy and Difficult oil:
The monetary price of a barrel of crude (whether WTI, Brent or Tapis) depends on a large number of factors which may partly be related to genuine physical and chemical issues (eg ease of extraction, ease of refinement) and partly related to genuine supply and demand issues. However price is also prone to all sorts of political and fraudulent distortions and manipulations. Consequently, the adjectives “cheap” and “expensive” are unhelpful and inaccurate, indeed they can lead to great confusion.
Whereas demand destruction in recent times has led to a fall in global oil prices1 , another major contributing factor was the US instructing their proxy Saudi Arabia to maintain maximum oil production2 regardless of reduced global demand, in an aggressive act of predatory pricing which is damaging the economies of Russia and Iran (who face higher production costs than the Saudis). Furthermore unconventional oil producers have been forced to sell at prices below their production costs, accelerating their demise (which was inevitable anyway), to the delight of the Saudis. This “expensive” oil is being sold artificially cheaply, hence the adjectives “expensive” and “cheap” have lost all meaning.
I propose we instead use the terms “easy” and “difficult” oil instead, the difference between them being the ENERGY costs of extracting and processing these types of oil.
Hence easy oil refers to oil from a conventional field of light sweet crude before (and shortly after) production peaks (when EROEI is high). Ultimately this easy oil will become progressively more difficult to extract (because oil extraction from a depleting well requires ever more energy). Even the Peak Oil deniers concede that the days of easy oil are over, however they refuse to acknowledge the underlying reason for this.
Difficult oil refers to low net energy or low EROEI oil, either:
– Unconventional oil of any sort (tar sands, ultra-deep oceanic oil, shale oil, Fischer-Tropf oil, biofuels etc.) or
– Conventional oil from a depleting field well past peak production.
Please note that the terms Easy oil and High EROEI oil are interchangeable, as are the terms Difficult oil and Low EROEI oil. However the adjectives “easy” and “difficult” are simpler and more intuitive to adopt and less of a mouthful.
My term “Hi-NES” is a general term for a high net energy source (or sources). Hi-NES embraces high EROEI conventional oil, high EROEI conventional natural gas and other high EROEI sources. In theory, wind generated electricity in a location where the wind blows strongly and continuously (e.g. the Antarctic coast) may offer an EROEI of more than 10:1 and is therefore potentially a hi-NES. However in practice that is seldom achievable.
The term Conventional oil (i.e. petroleum derived from a conventional oilfield) is not necessarily interchangeable with Easy oil for reasons explained above.
Use of the terms “easy” and “difficult”, rather than “cheap” and “expensive” helps to clarify our thought processes, but remains inadequate to enable deeper understanding of what is happening. Orwell, through the voice of Napoleon the pig, famously said that all animals are equal, but some animals are more equal than others. Accordingly we must appreciate that among difficult oils, some are more difficult than others, which is related to their EROEI. Similarly, among easy oils, some are easier than others, which is also related to their EROEI. Here is an example: Saudi Arabia and Russia as nations are both past Peak Oil, but Russia is further down the curve. Nevertheless both can still be said to possess easy oil, the difference being that the EROEI for Saudi Arabia may be (for example) 20:1 but the EROEI for Russia may be (for example) 18:1. This difference means that Saudi production costs are cheaper than Russia and enables the Saudis to engage in short term predatory pricing which causes trouble for the Russian economy.
The astute reader will naturally ask this question: what is the numerical dividing line between easy/high EROEI oils and difficult/low EROEI oils? We need to invoke the thoughts of Hall, Lambert and Murphy to help us answer this question in Part 2.
Consumption issues: demand destruction:
The confusing terms “cheap” and “expensive” oil will unfortunately continue to be used in common parlance. Most people will continue to focus on price as it can be a useful comparator when considering short term trends.
However even if we were to focus microscopically on just one household budget, price is not the important consideration, it is affordability. Affordability is related to one's income balanced against one's expenditure. Expenditure can be divided into discretionary or non-essential spending (which defines one's disposable income) and non-discretionary or essential spending (food, housing, utilities, transport for work/study, health expenses etc).
Similarly we can adopt the concept of discretionary and non-discretionary petroleum use. Discretionary use refers to frivolous or non-essential consumption of petroleum e.g. jet travel for overseas holidays, running a power boat on weekends etc. Non-discretionary use refers to essential use.
Let us take the example of a tradesman who must drive his pick-up truck (containing his heavy power tools, ladders, trestles, materials etc.) to his clients' locations to perform his work (he cannot use a bicycle or public transport for this purpose). Let us say he is just making ends meet. If two thirds of his petroleum use is discretionary and one third non-discretionary, then when faced with oil escalating in price from, say, $33 per barrel to $100 per barrel, he can initially cope by eliminating 2/3 of his total consumption to keep his petrol bill unchanged. If however the price then exceeds $100 per barrel, he cannot now afford to run his vehicle for work. Continuing work will mean he loses money. After losing money for a few months he is forced to stop work, sell his pick-up (then uses that capital to pay debts incurred when he lost money and for ongoing living expenses) and he drops out of the oil market completely. The latter represents demand destruction. Loss of his job releases the oil he previously consumed into the market. Widespread demand destruction in the general population "frees up" considerable oil supply into the market. Overall oil supply now exceeds demand and leads to a drop in the oil price. However the former tradesman cannot now afford to buy another vehicle to resume his old work. He cannot consume oil again as he did previously and the market price of oil stays low for the time being. Repeat this poor tradesman's story a million fold and you will get an idea of how depletion of the easy (high EROEI) oil will lead to the impoverishment of nations and why low oil prices will not necessarily reinvigorate economic activity3.
Eventually all discretionary oil use will be eliminated from all sectors of all economies, all around the world. All the fat will be cut from the system, leaving only absolutely essential oil use remaining (e.g. petroleum to run ambulances, to produce and distribute food etc.). Demand is now inflexible. As global conventional oil depletes further, oil supply will once again fall behind this fixed, inflexible demand and the oil price will escalate. Hyperinflation will now ensue. This will be the terminal phase of the industrial economy.
Prospects for future resurrection of low EROEI oil production:
The first flurry of low net energy oil production is all but over now. Many ultra deep water projects were shelved after Macondo blew up. The US tight oil producers in particular are now collapsing in droves, their investors, AKA suckers, are losing their shirts. Shell has pulled out of investing in Canadian tar sands. Other potential start-up low EROEI projects are being suppressed by the current low oil price as they need a price of at least $60 (more like $80 to $100) per barrel to get off the ground (price of WTI at the time this article is written is around $44 per barrel)
However in the future, after the eventual elimination of discretionary oil use from the global economy and with subsequent permanent escalation of oil prices, will low EROEI projects be attempted once again? It has been calculated that an EROEI of around 10:1 is required to run basic industrial civilisation and when EROEI drops under 5:1 our net energy availability falls off a cliff4, hence physical laws dictate that very low EROEI projects (especially unconventional oil projects which tend to have an EROEI of 3:1 or less) are for practical purposes useless (not to mention extremely harmful to the environment) and are extremely stupid. For Ponzi purposes however, lo-NES projects are useful scams for fraudsters to promote. We can never underestimate the stupidity of human beings. Hence it seems likely that stupid
fucking fracking projects in new locations and other lo-NES projects will arise again, zombie-like in the future, funded by yet another cohort of greedy suckers with goldfish memories.
The failure of price as a metric:
You will note that the idea of the "triangle of doom" alluded to the post Peak oscillating price of oil (as a result of fluctuating supply and demand) which would progressively diminish in amplitude and eventually converge to the point where demand destruction meets production destruction, then the whole oil industry would vanish in a puff of smoke (at least in theory). Price on its own however can be extremely rubbery and is prone to all sorts of manipulation (e.g. inappropriate government subsidies for biofuels from grain) and distortion (e.g. speculation by futures traders). Hence oil prices consistently above $100 per barrel may still be possible in the future, particularly if there is government subsidy (AKA misappropriation of taxpayers money) to favour certain sectors. Expensive oil will not be affordable to all, but it will be affordable to a chosen few, enabling some (albeit diminished) part of the oil production system to continue functioning.
Prices in theory should reflect the simple interaction between supply and demand. Prices in a sane and rational market should be an honest representation of true cost and true value. Proper pricing should stimulate healthy (as opposed to harmful) economic activities. However in reality our markets are insane, irrational and dishonest. In reality prices are frequently distorted by TPTB to create perverse stimuli in the service of vested interests eg the fossil fuel industry or the corn lobby, irrespective of harm caused to ordinary people or the environment. Furthermore price comparisons between different years require corrections for inflationary or deflationary trends. Price as a number is an extremely noisy signal and interpreting circumstances or trends according to price is prone to all sorts of pitfalls.
Forces other than a "sane" market will guarantee future delivery of oil to certain favoured sectors, come hell or high water. The American military is one such sector, and the production and supply of oil to them will be given priority over, say, the allocation of petroleum to produce food for the poor5.This will be one way by which the US military will promote general population die-off, apart from the fact that they will kill poor people directly. When chaos on the streets ensues as a result of the limits to growth, the National Guard will be called in and will start shooting people.
Here is another reason why price, as a number, is essentially meaningless and must be related to some other objective index: any sum of money, say $100, must be related to the goods and services it can buy at that time. We know that $100 could go a lot further a hundred years ago than $100 today because of inflation, which is defined as the expansion of money supply relative to the available pool of goods and services. Accordingly if there is contraction of money supply in the future due to collapse of yet more debt bubbles, deflation will occur and $100 in that future will buy more than the $100 of today (at least until the pool of goods and services also contracts, which will lag behind the money supply contraction). In other words, quoted price must be referenced to a particular year (e.g. 2015) and price must always be corrected for purchasing power (i.e. corrected for inflation or deflation) to have any meaning.
Perhaps a better way to ascribe objective meaning to price is to relate it to a standard basket of goods and services. To simplify things further, the Economist magazine, originally as a joke, decided to relate price to one particular standardised product, the MacDonald's Big Mac burger, which is made to identical specifications in almost all locations around the world (although in India beef is not used). This was in fact found to be a useful means of comparing the true values of different currencies, such that the Economist now publishes its "Big Mac index" twice a year.
The "triangle of doom", being based on price (a variable which can be immensely rubbery), is not an accurate predictor for the global collapse of the oil industry although it does highlight industry difficulties. It was nevertheless an interesting concept because low oil prices can certainly destroy production in many (but not all) instances and high oil prices can certainly destroy demand in many (but not all) instances, however we must also take many other factors into consideration.
Energy as the “gold standard” for money
I previously wrote that money represents the promise of delivery of future useful goods and services. However FUGS can only be created and delivered through the application of energy. I also previously wrote that if Greece had their own hi-NES (such as a Leviathan gas field), they would have no problem leaving the Eurozone to print their own Drachma, which would then be backed up by their hi-NES.
Can we thus say that money is a proxy for energy? Well, yes and no. It is probably too simplistic a paradigm. If money was a true proxy for energy then net oil importing countries with low oil reserves such as the USA should have low currency values, and net oil exporting countries with high oil reserves such as Russia should have high currency values, however in real life the opposite is the case, for many economic and political reasons. Furthermore, it is impossible to accurately value a particular country's currency against its national energy reserves because it may be impossible to accurately estimate the recoverable energy reserves, which may be wrongly declared by that country for various economic and political reasons. For example we know the sudden escalation (on paper) of purported oil reserves in the OPEC countries in the 1980s had nothing to do with discovery of new oil resources but had everything to do with their greed (it was prompted by the then new OPEC oil exporting policy based on stated reserves).
Despite those shortcomings, will it still be worthwhile to use energy as the standard index for money? Should energy be the "gold standard" for money and not gold?
One may argue that this has already been attempted in the form of the US Petrodollar, which from the point of view of the USA has been a massive economic windfall, but from the point of view of the rest of the world has enabled America to become a global parasite, to leech oil and high value products from other countries for free. The Petrodollar scheme has also incentivised the US to keep the Middle East politically unstable, in order to perpetuate this military protection racket. The explanation for this has been previously detailed in this essay:
As a thought experiment however, can we conceive of a global system in which we index money to energy in a more objective fashion? When all its ramifications are explored, such a system seems unlikely to be workable in practice. Even if potentially feasible however, it will almost certainly be sabotaged and violently opposed by the USA as it will threaten their Petrodollar status. (see Part 1b which discusses the ISED, to follow soon).
The Ehrlich-Simon wager:
On a slight tangent, let us briefly mention the famous bet in 1980 between the environmentalist Paul Ehrlich and economist Julian Simon regarding the future prices of five selected minerals. After ten years it was found that all the prices had fallen, hence Simon was declared "winner" and economists around the world trumpeted their triumph over the scientists. Ehrlich's error was to make the bet on the basis of price, which as we mentioned is a rubbery variable prone to all sorts of fluctuations, distortions and manipulations. The point Ehrlich wanted to make was that as time goes by, it becomes progressively more difficult for us to harvest, process and deliver the same amount of product (e.g. metal ingots). This is because we would have previously harvested all the "low hanging fruit", the easy pickings, ab initio. We always transition from initially easily scooping up high concentration ores to eventually scrounging the depths for low grade dregs. If Ehrlich had bet that the ENERGY costs of delivering the same amount of product would be higher after ten years (actually a fifteen or twenty year bet would have been preferable), he would have made a better wager6. This is an example of how even the smartest of scientists can run into trouble when trying to extrapolate the future on the basis of that most unreliable of variables, price.
On the other hand, was Simon's victory a result of greater wisdom or intelligence with regard to how prices work? Actually, no, he was just lucky, as was explained in David Murphy's 2011 post in TOD: http://www.theoildrum.com/node/7343
Moral of this story? Making judgements and predictions based on price is prone to all sorts of pitfalls.
Making judgements and predictions about oil availability on the basis of price, is like trying to make sense of a conversation between two people at the far end of a crowded room during a noisy party, with music blaring at full volume. The voices are there, but they are drowned out by too much extra noise. If one has a parabolic microphone and electronic audio filtering mechanisms however, it may be possible to achieve clarity and eliminate the background noise. We may be able to do so with regard to petroleum availability issues by looking at parameters other than the extremely noisy variable of price. This is discussed in Part 2.
Geoffrey Chia, November 2015
1. Another factor contributing to low oil prices is economic deflation. Default of irredeemable debt in many sectors, due to the failure of real economic growth as a result of Peak Oil, has resulted in a contraction of the money supply relative to the pool of goods and services available ie deflation. This results in a fall in commodity prices across the board, oil included.
2. Please note this does not refer to Saudi Arabia increasing their oil output (which they cannot significantly do in a post Peak Oil situation with limited spare capacity), it refers to them refusing to substantially reduce their oil output in an atmosphere of global demand destruction. A sane exporter would reduce oil output in order to preserve high prices for this non-renewable finite resource, to maximise their long term sovereign earning capacity. Indications are that this Saudi insanity was pursued at the behest of the USA http://www.counterpunch.org/2014/12/16/the-oil-coup/ Like most of America's foreign policy dirty tricks, this tactic will result in future unintended consequences which will return to bite them. The current predatory low oil pricing is based on the US gamble that loss of foreign revenue by Russia and Iran will lead to their economic collapse and chaos in the short term, which will enhance Washington's ability to covertly implement “regime change” – to appoint US friendly administrations – in those countries. There are numerous examples in history of this US modus operandi, including regime change inflicted by the CIA on Iran itself in 1953. This time it will fail because the world is now wise to their tactics. The other “benefit” of flooding the market with cheaper Saudi oil is this: either Saudi oil will be preferentially purchased over Russian oil by Europe or it will force Russia to sell their oil cheaply to Europe. Either way it will diminish Russia's leverage over Europe, at least in the short term. What the US/Saudi axis is now unintentionally doing is forcing the Russians and Iranians to conserve their petroleum reserves while Saudi Arabia depletes theirs, for a price lower than the Saudi's would otherwise earn if they were not insane. In due course when the Saudi oil becomes more difficult (and hence more expensive) to extract, as it inevitably will, the Russians and Iranians will then, with their huge remaining quantities of (relatively) easy oil, gain the upper hand and be able to dictate the terms of the Great Game in the future. Blowback yet again. Americans see the eclipse of their empire looming and are adopting all sorts of short term desperate measures to forestall the inevitable.
3. Admittedly, this simple story of a struggling tradesman is prone to many "what ifs". Let us ignore the fact that in a deflationary environment, credit usually dries up and obtaining a bank loan may be impossible for a small business such as his. What if he does manage to get a bank loan to purchase another pick-up truck? Even with temporarily low oil prices, resuming work in a new environment of economic contraction with fewer clients, who themselves are under financial stress (and may go bankrupt and default on their payments to this tradesman) is likely to render resumption of his work unviable, apart from the fact he will probably never earn enough to pay back the bank loan for his new pick-up, in which case he will become a permanent debt slave. Much better if the tradie sells all his assets and moves to an off-grid rural community where he can grow his own food and offer his handyman services to his neighbours in an exchange economy.
5. At almost $600 billion per year, the US government spends more on its military than the next eight ranked countries in the world spend on their military combined.
Just diverting 2% of the US military budget per year to feed the poor over 5 years will be sufficient to completely solve world poverty. (Estimated cost to solve global poverty today is $58 billion http://www.borgenmagazine.com/much-money-end-global-poverty/ ) This situation was as true a decade ago as it is today. Why was this not done and why is it not being done and why will it never be done? Because US military expenditure is given priority over saving lives of the poor.
6. The situation is more complicated however. Just like petroleum, minerals go through a phase of rising extraction, a peak of extraction then terminal decline. Even if extraction of a particular ore is entering terminal decline, if that time period coincides with increasing energy availability (as was the case around 1990 with abundant petroleum available pre Peak Oil), then even though ore extraction and processing require more energy, the product may be cheaper due to energy being cheap at the time.
Published on Resource Crisis on October 8, 2015
Discuss this article at the Energy Table inside the Diner
The idea that peak oil will save us from climate change has been occasionally popping up in the debate, but it never really gained traction for a number of good reasons. One is that, in many cases, the proponents were also climate science deniers and that made them scarcely credible. Indeed, if climate change does not exist (or if it is not caused by human activities), then how is it that you are telling us that peak oil will save us from it? Add to this that many hard line climate science deniers are also peak oil deniers (since, as well known, both concepts are part of the great conspiracy), then, it is no surprise that the meme of "peak oil will save us" never went viral.
That doesn't mean that we shouldn't ask the question of whether we have sufficient amounts of fossil fuel to generate a truly disastrous climate change. The debate on this point goes back to the early 2000s. At the beginning, the data were uncertain and it was correctly noted that some of the IPCC scenarios overestimated what we are likely to burn in the future. But, by now, I think the fog has cleared. It is becoming increasingly clear that fossil fuel depletion is not enough, by far, to save us from climate change.
Nevertheless, some people still cling to the old "peak oil will save us" meme. In a recent post on "Energy Matters", Roger Andrews argues that:
All of the oil and gas reserves plus about 20% of the coal reserves could be consumed without exceeding the IPCC’s trillion-tonne carbon emissions limit.
Now, that sounds reassuring and surely many people would understand it in the sense that we shouldn't worry at all about burning oil and gas. Unfortunately, that's just not true and Andrews' statement is both overoptimistic and misleading. One problem is that the "2 degrees limit" is a last ditch attempt to limit the damage created by climate change, but there is no certainty that staying beyond it will be enough to prevent disaster. Then, there is a problem with Andrew's use of the term "reserves," to be understood as "proven reserves". Proven reserves include only those resources that are known to exist and to be extractable at present; and that's surely much less than all what could be extracted in the future. The parameter that takes into account also probably existing resources is called "Ultimate Recoverable Resources" or URRs
So, let's consider a world fossil URR estimate that many people would consider as "pessimistic," the one by Jean Laherrere that I already discussed in a previous post. It turns out that we have enough oil and gas that, together, they can produce enough CO2 to reach the 2 degrees limit; even though, maybe, not more. There follows that, if we really wanted to burn all the oil and gas known to be extractable, to stay withing the limit we would need to stop all carbon burning; starting from tomorrow! Not an easy thing to do, considering that coal produces more than 40% of the energy that powers the world's electrical grid and, in some countries, much more than that. It is true that coal is the dirtiest of the three fossil fuels and must be phased out faster than oil and gas, but the consumption of all three must go down together, otherwise it will be impossible to remain under the limit.
In the end, we have here one more of the many illusions that surround the climate issue; one that could be dangerous it were to spread. However, in addition to the other problems described here, Andrew's post falls in the same trap of many previous attempts: it uses the data produced by climate science to try to demonstrate its main thesis, but only after having defined climate science as "Vodoo Science." No way: this is not a meme that will go viral.
Published on Our Finite World on September 29, 2015
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Most people believe that low oil prices are good for the United States, since the discretionary income of consumers will rise. There is the added benefit that Peak Oil must be far off in the distance, since “Peak Oilers” talked about high oil prices. Thus, low oil prices are viewed as an all around benefit.
In fact, nothing could be further from the truth. The Peak Oil story we have been told is wrong. The collapse in oil production comes from oil prices that are too low, not too high. If oil prices or prices of other commodities are too low, production will slow and eventually stop. Growth in the world economy will slow, lowering inflation rates as well as economic growth rates. We encountered this kind of the problem in the 1930s. We seem to be headed in the same direction today. Figure 1, used by Janet Yellen in her September 24 speech, shows a slowing inflation rate for Personal Consumption Expenditures (PCE), thanks to lower energy prices, lower relative import prices, and general “slack” in the economy.
What Janet Yellen is seeing in Figure 1, even though she does not recognize it, is evidence of a slowing world economy. The economy can no longer support energy prices as high as they have been, and they have gradually retreated. Currency relativities have also readjusted, leading to lower prices of imported goods for the United States. Both lower energy prices and lower prices of imported goods contribute to lower inflation rates.
Instead of reaching “Peak Oil” through the limit of high oil prices, we are reaching the opposite limit, sometimes called “Limits to Growth.” Limits to Growth describes the situation when an economy stops growing because the economy cannot handle high energy prices. In many ways, Limits to Growth with low oil prices is worse than Peak Oil with high oil prices. Slowing economic growth leads to commodity prices that can never rebound by very much, or for very long. Thus, this economic malaise leads to a fairly fast cutback in commodity production. It can also lead to massive debt defaults.
Let’s look at some of the pieces of our current predicament.
Part 1. Getting oil prices to rise again to a high level, and stay there, is likely to be difficult. High oil prices tend to lead to economic contraction.
Figure 2 shows an illustration I made over five years ago:
Clearly Figure 2 exaggerates some aspects of an oil price change, but it makes an important point. If oil prices rise–even if it is after prices have fallen from a higher level–there is likely to be an adverse impact on our pocketbooks. Our wages (represented by the size of the circles) don’t increase. Fixed expenses, including mortgages and other debt payments, don’t change either. The expenses that do increase in price are oil products, such as gasoline and diesel, and food, since oil is used to create and transport food. When the cost of food and gasoline rises, discretionary spending (in other words, “everything else”) shrinks.
When discretionary spending gets squeezed, layoffs are likely. Waitresses at restaurants may get laid off; workers in the home building and auto manufacturing industries may find their jobs eliminated. Some workers who get laid off from their jobs may default on their loans causing problems for banks as well. We start the cycle of recession and falling oil prices that we should be familiar with, after the crash in oil prices in 2008.
So instead of getting oil prices to rise permanently, at most we get a zigzag effect. Oil prices rise for a while, become hard to maintain, and then fall back again, as recessionary influences tend to reduce the demand for oil and bring the price of oil back down again.
Part 2. The world economy has been held together by increasing debt at ever-lower interest rates for many years. We are reaching limits on this process.
Back in the second half of 2008, oil prices dropped sharply. A number of steps were taken to get the world economy working better again. The US began Quantitative Easing (QE) in late 2008. This helped reduce longer-term interest rates, allowing consumers to better afford homes and cars. Since building cars and homes requires oil (and cars require oil to operate as well), their greater sales could stimulate the economy, and thus help raise demand for oil and other commodities.
Following the 2008 crash, there were other stimulus efforts as well. China, in particular, ramped up its debt after 2008, as did many governments around the world. This additional governmental debt led to increased spending on roads and homes. This spending thus added to the demand for oil and helped bring the price of oil back up.
These stimulus effects gradually brought prices up to the $120 per barrel level in 2011. After this, stimulus efforts gradually tapered. Oil prices gradually slid down between 2011 and 2014, as the push for ever-higher debt levels faded. When the US discontinued its QE and China started scaling back on the amount of debt it added in 2014, oil prices began a severe drop, not too different from the way they dropped in 2008.
I reported earlier that the July 2008 crash corresponded with a reduction in debt levels. Both US credit card debt (Fig. 4) and mortgage debt (Fig. 5) decreased at precisely the time of the 2008 price crash.
At this point, interest rates are at record low levels; they are even negative in some parts of Europe. Interest rates have been falling since 1981.
I showed in a recent post (How our energy problem leads to a debt collapse problem) that when the cost of oil production is over $20 per barrel, we need ever-higher debt ratios to GDP to produce economic growth. This need for ever-rising debt contributes to our inability to keep commodity prices high enough to satisfy the needs of commodity producers.
Part 3. We are reaching a demographic bottleneck with the “baby boomers” retiring. This demographic bottleneck causes an adverse impact on the demand for commodities.
Demand represents the amount of goods customers can afford. The amount consumers can afford doesn’t necessarily rise endlessly. One of the problems leading to falling demand is falling inflation-adjusted median wages. I have written about this issue previously in How Economic Growth Fails.
Another part of the problem of falling demand is a falling number of working-age individuals–something I approximate by using estimates of the population aged 20 to 64. Figure 8 shows how the population of these working-age individuals has been changing for the United States, Europe, and Japan.
Figure 8 indicates that Japan’s working age population started shrinking in 1998 and now is shrinking by more than 1.0% per year. Europe’s working age population started shrinking in 2012. The United States’ working age population hasn’t started shrinking, but its rate of growth started slowing in 1999. This slowdown in growth rate is likely part of the reason that labor force participation rates have been falling in the United States since about 1999.
When there are fewer workers, the economy has a tendency to shrink. Tax levels to pay for retirees are likely to start increasing. As the ratio of retirees rises, those still working find it increasingly difficult to afford new homes and cars. In fact, if the population of workers aged 20 to 64 is shrinking, there is little need to add new homes for this group; all that is needed is repairs for existing homes. Many retirees aged 65 and over would like their own homes, but providing separate living quarters for this population becomes increasingly unaffordable, as the elderly population becomes greater and greater, relative to the working age population.
Figure 10 shows that the population aged 65 and over already equals 47% of Japan’s working age population. (This fact no doubt explains some of Japan’s recent financial difficulties.) The ratios of the elderly to the working age population are lower for Europe and the United States, but are trending higher. This may be a reason why Germany has been open to adding new immigrants to its population.
For the Most Developed Regions in total (which includes US, Europe, and Japan), the UN projects that those aged 65 and over will equal 50% of those aged 20 to 64 by 2050. China is expected to have a similar percentage of elderly, relative to working age (51%), by 2050. With such a large elderly population, every two people aged 20 to 64 (not all of whom may be working) need to be supporting one person over 65, in addition to the children whom they are supporting.
Demand for commodities comes from workers having income to purchase goods that are made using commodities–things like roads, new houses, new schools, and new factories. Economies that are trying to care for an increasingly large percentage of elderly citizens don’t need a lot of new houses, roads and factories. This lower demand is part of what tends to hold commodity prices down, including oil prices.
Part 4. World oil demand, and in fact, energy demand in general, is now slowing.
If we calculate energy demand based on changes in world consumption, we see a definite pattern of slowing growth (Fig.11). I commented on this slowing growth in my recent post, BP Data Suggests We Are Reaching Peak Energy Demand.
The pattern we are seeing is the one to be expected if the world is entering another recession. Economists may miss this point if they are focused primarily on the GDP indications of the United States.
World economic growth rates are not easily measured. China’s economic growth seems to be slowing now, but this change does not seem to be fully reflected in its recently reported GDP. Rapidly changing financial exchange rates also make the true world economic growth rate harder to discern. Countries whose currencies have dropped relative to the dollar are now less able to buy our goods and services, and are less able to repay dollar denominated debts.
Part 5. The low price problem is now affecting many commodities besides oil. The widespread nature of the problem suggests that the issue is a demand (affordability) problem–something that is hard to fix.
Many people focus only on oil, believing that it is in some way different from other commodities. Unfortunately, nearly all commodities are showing falling prices:
Energy prices stayed high longer than other prices, perhaps because they were in some sense more essential. But now, they have fallen as much as other prices. The fact that commodities tend to move together tends to hold over the longer term, suggesting that demand (driven by growth in debt, working age population, and other factors) underlies many commodity price trends simultaneously.
The pattern of many commodities moving together is what we would expect if there were a demand problem leading to low prices. This demand problem would likely reflect several issues:
- The world economy cannot tolerate high priced energy because of the problem shown in Figure 2. We have increasingly used cheaper debt and larger quantities of debt to cover this basic problem, but are running out of fixes.
- The cost of producing energy products keeps trending upward, because we extracted the cheap-to-produce oil (and coal and natural gas) first. We have no alternative but to use more expensive-to-produce energy products.
- Many costs other than energy costs have been trending upward in inflation-adjusted terms, as well. These include fresh water costs, the cost of metal extraction, the cost of mitigating pollution, and the cost of advanced education. All of these tend to squeeze discretionary income in a pattern similar to the problem indicated in Figure 2. Thus, they tend to add to recessionary influences.
- We are now reaching a working population bottleneck as well, as described in Part 4.
Part 6. Oil prices seem to need to be under $60 barrel, and perhaps under $40 barrel, to encourage demand growth in US, Europe, and Japan.
If we look at the historical impact of oil prices on consumption for the US, Europe, and Japan combined, we find that whenever oil prices are above $60 per barrel in inflation-adjusted prices, consumption tends to fall. Consumption tends to be flat in the $40 to $60 per barrel range. It is only when prices are in the under $40 per barrel range that consumption has generally risen.
There is virtually no oil that can be produced in the under $40 barrel range–or even in the under $60 barrel a range, if tax needs of governments are included. Thus, we end up with non-overlapping ranges:
- The amount that consumers in advanced economies can afford.
- The amount the producers, with their current high-cost structure, actually need.
One issue, with lower oil prices, is, “What kinds of uses do the lower oil prices encourage?” Clearly, no one will build a new factory using oil, unless the price of oil is expected to be sufficiently low over the long-term for this use. Thus, adding industry will likely be difficult, even if the price of oil drops for a few years. We also note that the United States seems to have started losing its industrial production in the 1970s (Fig. 15), as its own oil production fell. Apart from the temporarily greater use of oil in shale drilling, the trend toward off-shoring industrial production will likely continue, regardless of the price of oil.
If we cannot expect low oil prices to favorably affect the industrial sector, the primary impact of lower oil prices will likely be on the transportation sector. (Little oil is used in the residential and commercial sectors.) Goods shipped by truck will be cheaper to ship. This will make imported goods, which are already cheap (thanks to the rising dollar), cheaper yet. Airlines may be able to add more flights, and this may add some jobs. But more than anything else, lower oil prices will encourage people to drive more miles in personal automobiles and will encourage the use of larger, less fuel-efficient vehicles. These uses are much less beneficial to the economy than adding high-paid industrial jobs.
Part 7. Saudi Arabia is not in a position to help the world with its low price oil problem, even if it wanted to.
Many of the common beliefs about Saudi Arabia’s oil capacity are of doubtful validity. Saudi Arabia claims to have huge oil reserves, but as a practical matter, its growth in oil production has been modest. Its oil exports are actually down relative to its exports in the 1970s, and relative to the 2005-2006 period.
Low oil prices are having an adverse impact on the revenues that Saudi Arabia receives for exporting oil. In 2015, Saudi Arabia has so far issued bonds worth $5 billion US$, and plans to issue more to fill the gap in its budget caused by falling oil prices. Saudi Arabia really needs $100+ per barrel oil prices to fund its budget. In fact, nearly all of the other OPEC countries also need $100+ prices to fund their budgets. Saudi Arabia also has a growing population, so it needs rising oil exports just to maintain its 2014 level of exports per capita. Saudi Arabia cannot reduce its exports by 10% to 25% to help the rest of the world. It would lose market share and likely not get it back. Losing market share would permanently leave a “hole” in its budget that could never be refilled.
Saudi Arabia and a number of the other OPEC countries have published “proven reserve” numbers that are widely believed to be inflated. Even if the reserves represent a reasonable outlook for very long term production, there is no way that Saudi oil production can be ramped up greatly, without a large investment of capital–something that is likely not to be available in a low price environment.
In the United States, there is an expectation that when estimates are published, the authors will do their best to produce correct amounts. In the real world, there is a lot of exaggeration that takes place. Most of us have heard about the recent Volkswagen emissions scandal and the uncertainty regarding China’s GDP growth rates. Saudi Arabia, on a monthly basis, does not give truthful oil production numbers to OPEC–OPEC regularly publishes “third party estimates” which are considered more reliable. If Saudi Arabia cannot be trusted to give accurate monthly oil production amounts, why should we believe any other unaudited amounts that it provides?
Part 8. We seem to be at a point where major debt defaults will soon start for oil and other commodities. Once this happens, the resulting layoffs and bank problems will put even more downward pressure on commodity prices.
Wolf Richter has recently written about huge jumps in interest rates that are being forced on some borrowers. Olin Corp., a manufacture of chlor-alkali products, recently attempted to sell $1.5 billion in eight and ten year bonds with yields of 6.5% and 6.75% respectively. Instead, it ended up selling $1.22 billion of bonds with the same maturities, with yields of 9.75% and 10.0% respectively.
Richter also mentions existing bonds of energy companies that are trading at big discounts, indicating that buyers have substantial questions regarding whether the bonds will pay off as expected. Chesapeake Energy, the second largest natural gas driller in the US, has 7% notes due in 2023 that are now trading at 67 cent on the dollar. Halcon Resources has 8.875% notes due in 2021 that are trading at 33.5 cents on the dollar. Lynn Energy has 6.5% notes due in 2021 that are trading at 23 cents on the dollar. Clearly, bond investors think that debt defaults are not far away.
The latest round of twice-yearly reevaluations is under way, and almost 80 percent of oil and natural gas producers will see a reduction in the maximum amount they can borrow, according to a survey by Haynes and Boone LLP, a law firm with offices in Houston, New York and other cities. Companies’ credit lines will be cut by an average of 39 percent, the survey showed.
Debts of mining companies are also being affected with today’s low prices of metals. Thus, we can expect defaults and cutbacks in areas other than oil and gas, too.
There is a widespread belief that if prices remain low, someone will come along, buy the distressed assets at low prices, and ramp up production as soon as prices rise again. If prices never rise for very long, though, this won’t happen. The bankruptcies that occur will mean the end for that particular resource play. We won’t really be able to get prices back up to where they need to be to extract the resources.
Thus low prices, with no way to get them back up, and no hope of making a profit on extraction, are likely the way we reach limits in a finite world. Because low demand affects all commodities simultaneously, “Limits to Growth” equates to what might be called “Peak Resources” of all kinds, at approximately the same time.
Published on Resource Crisis on September 21, 2014
Discuss this article at the Energy Table inside the Diner
Likely, you haven't heard much, recently, about peak oil. If you did, it was only to hear that it was "wrong". Indeed, as you see in the figure above, peak oil had a peak of interest around 2006, a second one around 2008, then it gradually declined.
Why this decline? You might say that it was because the recent drop in oil prices. Maybe, but note, from the figure, that the interest in peak oil started a steady decline just when oil prices went up to reach a plateau at levels over 100 $/barrel. Then, you might say that the decline is because peak oil didn't appear when it was predicted. Maybe, but the record of the "peakist" approach is not bad at all when compared with of mainstream oil pundits. Had any of them anticipated such things as the burst of high oil prices that started in 2005? Did any of them foresee that the oil industry would have had to switch to expensive and difficult resources, that they had always shunned before, in order to keep production from falling?
So, why is peak oil fading away from our consciousness? The problem seems to be that, as a meme (a knowledge unit replicating in virtual space), peak oil just doesn't seem to have a large viral power. Peak oil is not the only case of a loss of interest in some concepts (memes) for no obvious reason. Take a look to the Google trends for "Global Warming." ("climate change" does a little better, but not so much)
So, the planet is going to hell, but people just don't care. Not even a blip of interest, for instance, in 2012, when the Arctic ice sheet collapsed to levels never seen before. The last peak of interest in global warming was created only by the climategate story, and then it was flatland all over.
There are many other examples of peaking and successive decline of various concepts. Take a look, for instance, to "communism"
Of course, the fact that a concept shows a peak of interest doesn't mean that it has to fade away forever. You could identify a peak of interest also in many commonplace concepts such as "electricity." But, here, the interest never faded away and, indeed, electricity remains a normal element of our lives.
Perhaps we could use the concept of "full width at half maximum" (FWHM) as an approximate measurement of the lifetime of these concepts. In this way, we can put together a list of memes and their lifetimes, measured by Google's trends or Google ngrams. This is, obviously, a very approximate set of numbers, they are there just to give an idea of the spread in the lifetime of some memes.
Meme approx FWHM, years
Andrea Rossi's E-Cat 1
Peak Oil 5
Global Warming 5
Cold Fusion 17
Limits to Growth 30
Nuclear Energy 35
Electricity > 100
The FWHM (time duration) associated with these concepts can be seen as an indication of the capability of a meme to establish itself in virtual space. This depends, first of all, on the capability of the meme to replicate itself rapidly: the meme must be interesting, understandable, and, often, have some relation with reality. Then, if a meme is the equivalent of a gene (or a virus) in biology, then, if there are antigens, there must be antimemes (or, perhaps, "antimems"). This immune response may take the form of "memetic antibodies" which directly fight the invading meme. This is a fight that we see everyday: we call it "debate". As a result, the meme may go viral and infect the infospace of the Internet, or be rejected. In the second case, it may remain in a quiescent state, infecting only marginal areas.
This behavior can be seen in many examples. For instance, the meme of Andrea Rossi's nuclear device, the "E-Cat," flared up rapidly and then practically disappeared, just as rapidly. In this case, there was no need for a strong intervention of the immune system. The meme itself was weak, since the E-Cat simply couldn't deliver the cheap energy that it had promised to deliver. The same can be said of a meme such as the planet Nibiru hitting the Earth. It rapidly disappeared after that it was clear that no such thing was going to happen.
How about the "peak oil" meme? Unlike Nibiru or the E-Cat, peak oil is a serious concept, backed up by a lot of research. However, it didn't really get viral enough to become a mainstream meme. The main problem, here, may have been the choice of the term: "peak oil" conjures a specific moment in time when something exceptional should happen, even though it is not clear what. When people saw that nothing special was happening, they lost interest. The decline of the peak oil meme was helped by the anti-memetic system that created effective antimemes such as "they have been predicting peak oil already for 30 years ago."
About "global warming", we have problems, too: first of all, we propose a concept that people can't perceive in their everyday experience. Then, the immune system has generated strong antimemes that turned out to be extremely effective; such as "there has been no warming during the past 19 years". Indeed, "climate change" has fared much better than "global warming" as a meme. But even climate change is hard to perceive for the public, and it fails to evoke such things as ocean acidification, sea level rise, food supply disruption, and many others.
In the end, it is all part of the game: the memetic immune system does its job of filtering away memes that are silly, useless, and dangerous. However, like its biological counterpart, sometimes it attacks the wrong targets, a true "autoimmune" genetic reaction. There are memes we badly need to diffuse in the world's infospace: that oil depletion is real and dangerous if we don't do something about it; that climate change is real and it is dangerous, if we don't do something to stop it.
Biological autoimmune diseases are common and dangerous; and the therapy is always difficult. In the memetic case, we are in also in a difficult situation. Maybe there are ways to avoid the slaughter of good memes; but it is not an easy task. In any case, I think that at least one thing is clear from this discussion: memes that have already generated a strong immune response have little or no chance to diffuse. "Peak oil" is basically a dead meme.
We need new memes that describe the same concepts. For instance, we should mention "depletion" rather than "peaking" as a way to describe the gradual loss of high yield mineral resources. Maybe ASPO (the association for the study of peak oil) should be renamed as something like ASOD (association for the study of oil depletion) (*). Maybe we could develop something more creative, such as "oil senility," why not? Then, it has been proposed to replace the term "climate change" with "climate disruption," and that could be a good idea. These are just examples; surely we can think of other possibilities. Just remember one thing: a good virus is a virus that mutates a lot!
(*) But we should be very careful with acronyms. I just discovered that, really, ASOD would not be a good name for an association studying oil depletion!