Quantitative Easing

Black Swan Dive

Off the keyboard of Steve Ludlum

Follow us on Twitter @doomstead666
Like us on Facebook

Published on Economic Undertow on January 7, 2015

Be careful of what you wish for, you might get it.
— Proverb

Triangle of Doom 010115

Figure 1: Triangle of utility function by rational agents; by TFC Charts, (click on for big). In a cash economy the inability to afford crude oil would manifest itself as the steady decline of ‘too high prices’. Our economy is built around structured finance; once credit structures are undermined they collapse.

Discuss this article at the Energy Table inside the Diner

There is a ‘perfect storm’ underway; of insolvent customers, over-stressed finance, willful ignorance on the part of the establishment and denial. Both commodity prices and US Treasury yields are indicating another recession. Customers and drillers are asking how low will fuel prices go and how long will they stay there?

Fund manager Jeff Gundlach responds that no one will know until they stop falling. “That answer isn’t meant to be cute,” he says. “When you have a market that showed extraordinary stability for five years — trading consistently at $90 [a barrel] or above — undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible.”

Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Workers have been able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, diminishing the productivity of credit.

There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. The borrowing requirements of the driller increase over time because he is constrained by geology while the customer is limited only by access to credit and to wasting infrastructure. At the same time, the customer must take on the drillers’ debts by bidding for- and buying fuel. The relationship between the sets of borrowers conforms to simple game theory:
Crude Game Theory 1
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrowed or didn’t borrow. Not borrowing by both meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices! During this period, there was no need to allocate between drillers or customers.

From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the Undertow argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Crude Game Theory 2
Figure 3: Post-1998, brutal new game theory: mutually assured (demand) destruction!

Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers, returns diminish and borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by costs.

The alternative is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller now compete for the same credit dollar: the customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers.

Unlike finance, petroleum is a bottom up business. At the end of the day every drop of oil/refined product has to be bought by a customer. Because there is so little return on what he does with the product he must borrow to pay for his purchase. He borrows, his boss borrows, his government borrows, his nation borrows other countries’ money (borrow by way of foreign exchange). Our economies are nothing more than interconnected daisy-chains of loans. Over time these chains have grown to amount to hundreds of trillions of dollars. As debt piles up it can only be serviced and retired by taking on more loans.

Even as the US makes less in the way of physical goods like clothing, shoes, washing machines or table radios, its Wall Street firms manufacture the bulk of the world’s credit; this is needed to substitute for absent monetary returns for just about everything else. Driving a car does not pay for the car (times- 1 billion cars), nor does it pay for the fuel, the roads, the massive governments including costly military endeavors, nor does driving pay for the ordinary costs of finance … risk premia and interest carry, which have ballooned exponentially. Other than for the smallest handful of customers — transit, construction, farming, delivery, emergency/first responder — customer use of fossil fuels and other capital is non-remunerative waste, for pleasure-fun, convenience, status, etc. The fashionable wasting processes — including fuel extraction industries — are collateral for more and more loans.

The simplest of models is all that is required to see where this ends up: subtract the costs of petroleum extraction from the small use that provides an actual return. This difference is the price that the economy can actually afford to pay without the use of credit. With extraction costs rising — which cannot be denied by anyone — and with actual returns being very small, the output of the model looks to be a negative number. What that implies is the price of fuel will fall all the way to zero with nothing to be done in the way of ‘administrative adjustments’ to alter this outcome.

Managers appear to be helpless because they have thrown everything at the economy but the kitchen sink: key men have been propped, banks bailed out; interest rates across all maturities are near zero, real rates are negative- or nearly so. Governments around the world are at the borrowing limit, there is little in the way of good collateral remaining for central banks to take on as security for new loans. Conventional marketplace fixes such as debt jubilees/write-offs, re-distribution, bailouts, stimulus, austerity policies, monetary easing, etc. are efforts to reclaim resource capital that no longer exists. Remedies accelerate unraveling process by increasing gross debt (claims against capital) while exposing remaining capital to consumption at higher rates. The capital ‘pie’ cannot be created anew or redivided, only a new and much smaller pie is to be had and carefully tended. Our smaller pie of non-renewable resources is what we have to make use of, to last us and the rest of the world’s creatures until the end of humanity.

Managers certainly understand but refuse to acknowledge that resource extraction over extended periods has consequences. Nations, regions, individuals and firms have experienced temporary shortages of fuel, credit and other resources in the past due to wars, droughts and other disruptions. A grand civilization at the height of its power has not exhausted its prime mover since the Romans stripped their empire of firewood beginning in the first century BCE, precipitating its decline.

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 48.82 +0.89 +1.86% Feb 15
Crude Oil (Brent) USD/bbl. 51.18 +0.08 +0.16% Feb 15
RBOB Gasoline USd/gal. 133.95 -1.48 -1.09% Feb 15
NYMEX Natural Gas USD/MMBtu 2.88 -0.06 -1.97% Feb 15
NYMEX Heating Oil USd/gal. 170.08 -2.54 -1.47% Feb 15

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,212.20 -7.20 -0.59% Feb 15
Gold Spot USD/t oz. 1,215.30 -3.28 -0.27% N/A
COMEX Silver USD/t oz. 16.54 -0.10 -0.58% Mar 15
COMEX Copper USd/lb. 276.15 -0.55 -0.20% Mar 15
Platinum Spot USD/t oz. 1,221.25 +1.81 +0.15% N/A

Graphic by Bloomberg:

– Energy deflation is when increased fuel demand relative to supply does not cause prices to rise but undermines the ability of consumers to meet the price even as it falls. This is what is taking place wherever one makes an effort to look. A component of the onrushing crash is the easy money policy in Japan/Abenomics added to the other bits of monetary stimulus in other currency regions. It isn’t the end of the policy that is causing the crash but the policy itself as purchasing power flows from customers toward big business (drillers) and lenders. More easing => more purchasing power diversion => less credit => lower fuel price => more bankruptcies => more credit distress => more easing in a vicious cycle. What drives the process is the foolishness of central bankers who do not understand the consequences of their (obsolete) policies.

– Drillers rely on loans, lease flipping and share offers than upon revenue from sales, this is largely because of higher costs which would otherwise leave them underwater. The fracking boom and other expensive second-generation extraction regimes are as dependent upon structured finance as the real estate plungers were in the US beginning in 2002. The ‘waterfall’ decline in oil prices suggest that financing structures are coming undone. Finance innovations such as CLOs disguise risk and shuffle it around rather than eliminating it. When risks ultimately emerge they overwhelm the structures intended to manage them; hedging strategies rebound against hedgers, those that can race for the exits, the rest suffer severe losses as the prices collapse.

– It is possible that energy companies’ hedging strategies are contributing to the ongoing crash the same way ‘portfolio insurance’ abetted the stock market swan-dive in 1987: that is, sales of contracts in futures markets in order to hedge finance losses, elsewhere.

Because the leverage structures cannot simply reconfigure themselves after they collapse, oil prices cannot ‘bounce back’; a replacement credit regime must take the place of the broken system. Shadow-banking was vaporized by the housing crash in 2008; it was imperfectly replaced by a generalized credit expansion by way of Treasury borrowing along with central bank moral hazard: both of these offer diminished- or negative returns which is why this regime looks to be failing now … with nothing to replace it.

– Every dollar of price decline cuts output. Any oil that would be available at the higher price is removed from the market when prices fall. As the price declines, the only fuel available is that which costs that amount to extract or less:

Canada oil prices 010615

Figure 4: Prices for selected petroleum-fuel plays from Scotiabank (click on for big). Sub-$50/barrel prices looks to shut in as much as 3 million barrels per day, a cutback equal to a third of Saudi Arabia’s output. Price decline is the industry’s fuel cutback mechanism, no other actions by drillers, nations or organizations such as OPEC are needed. This is another component of energy deflation; the only issue is how cuts will affect the customers.

Fuel cutbacks do not occur overnight: contracts between drillers and refiners remain in force and there is inventory in storage. Drillers will borrow as long as they are able to, hoping for a miracle. As the contracts are satisfied and inventories depleted uneconomical supplies will be shut in leaving what remains of lower-cost fuels. Under the circumstances, this remaining supply would likely be hoarded as it would be worth more than other possible uses.

– ‘Dollar Preference’, from the Debtonomics series is the convergence between the value of oil capital and the dollars that are exchanged for it. Fuel by itself is worth more than the real-world enterprises that waste it regardless of what means are used to adjust the price. Enterprises earn nothing on their own and are essentially worthless. They exist solely to borrow, gaining- and making use of credit is their primary product: other goods and services are intended to justify credit issuance in ever-increasing amounts. Part of this stream becomes the property of well-positioned ‘entrepreneurs’: enormous unearned borrowed profits are what drives the system. When debt = wealth, there is an incentive to take on as much debt as possible, keep what you can for yourself and to shift the burdens onto others.

Management is paralyzed by the internal contradictions of the debtonomy. We cannot get rid of (some of) the debt without getting rid of (all of) the wealth. We cannot get rid of the debt because we would need to take on even more ruinous debts immediately afterward to keep vital services operating such as water supply. If we get rid of the debts the prices will fall leaving debt-tending establishments without investment funds. Our debts cannot be rationalized, the absence of debts cannot be tolerated. The debt system is rule-bound. Debts that were increased because of favorable rules face annihilation because of the same rules, changing the rules threatens debt elsewhere. Nowhere are there real returns to service the debts much less retire them. Nothing remains but the arm-waving of central bankers. As the banks create more debt (against their own accounts), their efforts are felt at the gasoline pump which adversely effects debt service.

The debtonomy is Gresham’s Law applied (on purpose?) to goods and services; the bad drives out the good, the worst drives out everything else. The ‘bad’ enterprises which groan under massive obligations possess a competitive advantage over the virtuous ones that earn without taking any debts on. Debts are artificial earnings which are used to price the good companies out of business then engulf their markets. The final step is for the debt-gorged monstrosities to fall bankrupt due to their massive size, these are then bailed out by the even-more bankrupt sovereigns.

Energy guru Chris Cook uses the term ‘Upper Bound’ to describe the fuel price level that constrains economic activity. The price rise can be caused by increases in the available credit or by a decrease in the amount of available fuel relative to the current credit supply.

What happens at the other end of the bound? If the upper is tough to deal with the lower is good, right?

It goes without saying that the crude is vital. The ‘Business of debtonomy is debt’ but the presumption is of fuel waste for a ‘higher purpose’ which is embodied within our progress narrative. Without continuous waste debt becomes an unsupportable dead weight on all enterprises. Here is the confusion over the effects of fuel shortages on economies: ending waste is thrift, it is economical to do so. Ending waste is fatal to our debtonomy which needs the waste to justify its existence: economic thrift is an un-debtonomic catastrophe.

It is different this time: the decline of the fuel price means there is less fuel made available to waste, that the high cost variety is off the market. Low priced fuel means there are no businesses with credit. Lower price fuel is worth more than any enterprise that uses it, the lowest possible price means the industrial scale fuel waste enterprises are ruined, both producers and consumers.

The decrease in the dollar price of crude is ipso facto marketplace repricing more valuable dollars. The lower bound is where dollars become a proxy for crude and are hoarded. At that point all things are discounted to the dollar because the dollar traded for crude is more favorable than a trade of anything else for crude, that includes other currencies as well as dollar-denominated credit.

Just like the upper bound where a dollar is worth less with each increase in fuel price, the lower bound represents a dollar that is worth more because of its price in crude. A low crude price has a dollar that is worth too much to be used for carry trades or interest rate arbitrage which is the primary business activity within the debtonomy.

The lower bound is reached when currencies are discounted to dollars. A reason for this is the universality of the dollar. Because the US has been for so long the world’s consumer of last resort, goods that were sold for dollars in the US are tradeable everywhere in the world for the same dollars. The dollar purchases of the past and dollars in circulation now are the purchasing power of the future.

The dollar is also the world’s reserve currency, dollars being used to settle trade accounts. The trade of goods between countries whose currencies are illiquid may have foreign exchange risks that exceed the profit to be had by way of the trade. The exchange of the currencies for dollars bypasses the risks because the universal dollar is a liquid, stable substitute for third-party currencies. Reserve status of the dollar and its universality provide leverage that other currencies do not possess.

The trade of dollars for crude sets the worth of the dollars rather than do the central bank(s), this trade takes place millions of time a day at gasoline stations all over the world.

Motorists determine the worth of money; this strands the central banks. In their futile attempts to assert some sort of relevance the central bankers and policy makers manipulate interest rates, pillage bank depositors, ignore moral hazard and bail out their friends. They seek to reduce the worth of money relative to other money. In doing so the bank surrenders what small fragments of policy-making ability which remain to it. Bankers can set interest rates to zero but no further, can whitewash the accumulation of risk but cannot set the money price of petroleum except to make it unaffordable which precipitates the catastrophe the bankers are desperate to prevent.

The catastrophe the bankers are desperate to prevent is the destruction of demand, where fuel falls into strong hands and dollars are hoarded because they are proxies for scarce petroleum, energy in-hand.

For this reason, dollar preference effects net energy which is consumption taking place in energy producing countries. This consumption is entirely dependent upon consumer goods that are affordable because of high fuel prices. Russians produce automobiles and other Russians buy them because the national oil companies are able to sell their product for +$100 per barrel. The price subsidizes both Russia’s debts and her energy waste. Ditto for the energy consumption of Saudi Arabia, Iran, US, Kuwait, Iraq and all the rest. When energy prices fall so will energy consumption in producer countries if only because lower priced oil production will be too scarce to waste.

At $10 per barrel, Russia will produce very little fuel, only from the cheapest and easiest to produce fields and will trade it for hard currency only. Domestic sales will take place in black markets for dollars or gold, few Russians will have dollars and those that do will hold onto them for emergencies. Hard currency earned by the export of crude will be used to buy food and medicine, not imported luxury automobiles and television sets.

Diminished net exports are dependent on high prices which are in turn dependent upon constantly expanding credit. When cash is preferred over credit there is nothing to support the high prices or fuel waste. Cash is hoarded and credit is evaporated.

The end-game of dollar preference is crude-driven dollar deflation as took place in the US in 1933. Dollars were held as ‘gold in hand’ and business in the country was the buying and selling of currency to obtain gold which was necessary to settle contracts. The deflationary impulse was ended when the world’s governments ended specie and fixed convertibility, cutting the currency links to gold. The need will be for the US to end the dollar’s convertibility to crude, to go ‘off crude’ as countries went ‘off gold’. The alternative is for dollars to vanish from circulation and cease to be a medium of exchange. Local currencies emerging in the dollar’s place will be of little use in the obtain of fuel imports, the country will be limited to the petroleum that can be sustainably produced on its own soil.

Dollar preference is self-limiting. Dollar preference in 2015 is the demise of the euro, yen, ruble, peso, real … their unraveling illuminates widespread mismanagement. Doubts about currency regimes take root. The differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the dollar other than a military machine that is debt-dependent and failure-prone. Dollar preference condemns the rest which starts the clock on the ultimate death of the dollar.

Last Line of Defense

Off the keyboard of Steve from Virginia

Follow us on Twitter @doomstead666
Friend us on Facebook

Published on Economic Undertow on November 4, 2014

Triangle-of-Doom-1101141Figure 1: Continuous WTI futures (TFC Charts, click on for big). Price convergence results in a breakdown as customers are unwilling- or unable to bid prices higher. Absent the high prices there is insufficient cash flow to enable drillers to continue operations. Today’s marginal barrels are extracted from high cost deepwater offshore plays, from tight-oil shale formations and from ‘tar’ sands: without customer credit, drillers are more dependent upon junk bond leverage than ever.

Discuss this article at the Economics Table inside the Diner

Of course, once on the borrowing treadmill, it is impossible to step off. Borrowers must run faster to stay in place, ever-increasing amounts are needed to keep pace with operating- and service costs as well as to rollover maturing legacy debt. Consumer access to credit must be considered a ‘hard limit’ to petroleum extraction along with geology. Even as drillers are able to borrow they find there are fewer ‘end users’ with available credit … onto whom the drillers can lay off their ballooning exposure.

Conventional analysis insists that fuel constraints result in higher prices due to simply supply and demand. The assumption is that consumers will always find more funds. Instead, fuel constraints reduce customer purchasing power: customers stumble first, the drillers fail afterwards. As customers’ borrowing capacity shrinks the petroleum industry has little choice but to adjust prices to meet the market which forces drillers to reduce output. At some point they fail outright. Fuel supply cuts => diminished consumer borrowing capacity => more fuel supply cuts in a vicious, self-reinforcing cycle.

Saudi Arabia Signals It Will Let Oil Slide Further, FACTS SaysAnthony DiPaola, Robert Tuttle

Saudi Arabia, the world’s biggest oil exporter, is telling the market it won’t cut output to lift crude back to $100 a barrel and that prices must fall further before it does so, according to consultant FACTS Global Energy.

Swelling supplies from non-OPEC producers drove Brent crude into a bear market on Oct. 8 amid waning demand from China, the world’s second-largest importer. The Organization of Petroleum Exporting Countries meets Nov. 27 to consider changing its production target in the face of the highest U.S. crude output in almost 30 years.

“Production of shale oil in the U.S. will not be hit as hard as the Saudis think” by the price decline, FGE Chairman Fereidun Fesharaki said at a conference today in Doha, Qatar. Producers in the U.S. “can withstand a lot of pressure” by reining in their operating costs before they curb investment in new wells and production, he said.

Crude could drop to between $60 and $80 a barrel and stay within that range there for about six months until global production aligns with demand, Fesharaki said at the Condensate & Naphtha Forum. Oil in that range is the “right price” to balance the market, Fesharaki said.

Nobody knows what the ‘right price’ is, Saudia cannot push the oil price by reducing output: fuel constraints reduce customer purchasing power: the customers stumble first, the drillers fail afterwards. The oil industry is waking in a new world, where fuel waste is discretionary rather than inelastic; where shortages constrain- or eliminate customer purchasing power altogether rather than diverting an increased share toward the petroleum industry.

Petroleum prices have been high relative to historical norms for decades, with the breakout appearing in dollars in 1974, after the Yom Kippur War and the OPEC oil embargo:

Figure 2: nominal- and adjusted historical crude oil prices by way of BP Statistical Review, (Charts Bin – click on for big). The world’s consumption enterprise has been designed and built assuming sub-$20/barrel petroleum into perpetuity … with energy-guzzling consumer products intermediating every human activity. While the (borrowed) profits from this venture have been collected already, the costs continue to mount. One of the largest is aggregating credit expense. The question now is whether enough (resource) capital can be mustered to re-order our living arrangements or whether the status quo will simply fall apart under its own weight?

After 1974, the establishment chose to hedge against capital-resource shortages rather than meet the problem directly. Strategies included increased financialization and globalization; the shipping of Western industrial jobs offshore to cheap-labor countries, using finance credit to inflate asset prices worldwide as well as by instituting the European currency union: all of these are energy price hedges, all of them have failed completely.

Shipping Western industrial jobs overseas saved manufacturers money but not fuel, which was shipped overseas along with the jobs. Workers in newly industrialized countries used their purchasing power to buy cars and other gas-guzzling gadgets at the same time the Western workers’ purchasing power was chopped. Fuel consumption overseas (supported with direct fuel subsidies) pushed prices higher, this ultimately eroded purchasing power everywhere. Instead of conservation as an outcome of policy there is ‘conservation by other means™’.

Bubbles offer the ‘wealth effect’ that occurs when credit streams into assets … prices rise faster than the price of fuel. At some point credit becomes expensive, there are no more buyers to be had and prices collapse all at once. Those left behind are stripped of their ‘wealth’. Asset price bubbles are Ponzi schemes, the beneficiaries are the bubble promoters and well-positioned shills/insiders who are able to exit asset markets before other speculators.

Globalization allows the free flow of labor and funds, the fuel markets are globalized along with the rest. While more resources-capital is made available to industry so are more risks. Anyone, anywhere is likely be the marginal fuel consumer; that is, the user that sets the price for the everyone else ‘on the margin’. With billions of customers, it is far more likely ‘Marginal Man’ is an inhabitant of a newly impoverished country such as Russia, Brazil, China or Japan; the odds against price support for oil drillers lengthen as more countries become vulnerable due to adverse changes in exchange rates or flight of investment funds out of these countries.

The Europeans created the euro as a hard-currency alternative to the US dollar and UK sterling; to give the little countries of Europe the same purchasing power as the larger nations (and to create a captive market for larger nations’ manufacturers). Ironically, the same administrative structures put in place to support the euro have turned out to make practical fiscal union impossible. Mercantile powerhouse Germany is pitted against the rest: the outcome is failure as the vulnerable countries Greece, Spain and Italy — also Ukraine and Russia — drag everyone down.

Desperation is almost palpable as the Bank of Japan announces an expansion of its bond-buying program in an attempt to keep market forces (reality) from overwhelming the economy in that country and elsewhere. Bank of Japan boss Kuroda is a fireman for the US Federal Reserve Chairperson Janet Yellen. The central bankers are now the last line of defense for a waste-based enterprise that has exhausted both its resource- and intellectual capital. Our economic problem is not a shortage of cheap credit but a shortage of cheap petroleum. At the same time, getting our hands on the petroleum would not solve anything: our conceptual problem is dependence upon a system that only functions when capital is annihilated. Cheap credit lets us pretend a little while that ‘business as usual’ has a future; the bankers’ success undermines that future.

Petroleum is a resource, it is capital; credit and money are simply purchasing power claims against capital. In Japan and elsewhere, purchasing power is wrenched away from citizens toward the stock and bond gamblers as well as toward overseas energy producers: as the gamblers ‘win’ the citizens lose and energy producers falter. As the Bank of Japan lends, the yen is depreciated on world currency markets; as it falls the fuel price in yen increases, it becomes less affordable. Japanese customers are less able to meet higher prices for fuel => marginal demand is reduced => this causes fuel prices everywhere to tumble. The bankers are working against themselves; the more easing, the less Japanese support there is for fuel prices; the more Kuroda, the greater likelihood that the critical marginal petroleum consumer is a bankrupted Japanese.

What goes up must come down.

Monetary easing reduces borrowing costs but only for those who actually borrow. After years of easing, the only remaining borrowers are finance market gamblers. Cheap (finance) credit is used to push share- and bond prices higher in one-way markets:

L < Rs

With apologies to Thomas Piketty: leverage costs less than what the market offers to speculators. Returns Rs are determined by (artificially constrained) supply relative to demand; leverage costs L are manipulated to near-zero by the central banks: all other costs are considered to be externalities.

Credit is not the product of the central banks but of finance. The aim of central bank intervention is to manipulate the interest rate, to force real borrowing costs (interest-less rate of inflation) as low as possible. Low interest cost renders reduces risks associated with carry trades and stock speculation; low cost + high returns = one-way markets. Theoretically, with sufficient credit, these markets can run forever. In reality, as speculators borrow, the total aggregate debt load increases exponentially while force-fed markets are subject to same diminishing returns as every other speculative endeavor. Over time there is less return for each borrowed dollar, at some point even the most outrageous finance borrowing cannot not move the markets. When borrowing capacity is required to service debts => Minsky Moment.

Manias, panics and crashes are expressions of the ‘Paradox of Thrift’, which states that one-way markets — all buyers or all sellers (or all savers) — cannot exist without severe consequences. A market where all participants are buyers means a market that is ultimately deprived of them. Everyone who is willing to buy has done so: no one remains able to ‘buy from the buyers’. A market where all are thrifty is one where money is ‘saved’ out of circulation so that day-to-day business becomes impossible. A market crash occurs when free-spenders are forced by conditions … to be thrifty all at once!

The need for a new way of economic thinking is more urgent than ever.

Quoted at length from Steve Waldman, (Interfluidity):

“Quantitative Easing” — economics jargon for central banks issuing a fixed quantity of base money to buy some stuff — has been much in the news this week. On Wednesday, US Federal Reserve completed a gradual “taper” of its program to exchange new base money for US government and agency debt. Two days later, the Bank of Japan unexpectedly expanded its QE program, to the dramatic approval of equity markets. I have long been of two minds regarding QE. On the one hand, I think most of the developed world has fallen into a “hard money” trap, in which we are prioritizing protection of existing nominal assets over measures that would boost real economic activity … “

Real economic activity so far has been little other than strip-mining capital and burning it for fun. Asset protection is a bit misleading since worth of assets = their (useless) purchasing power claims against capital: as capital is exhausted so is purchasing power. At the end of the day there are mountains of diluted or redundant claims with nothing to purchase with them. This is the fatal flaw within all redistributionist regimes which either multiply the numbers of claims or shuffle them around.

“My preferred policy instrument is “helicopter drops”, defined as cash transfers from the fisc (government) or central bank to the general public, see e.g. David Beckworth, or me, or many many others. But, as a near-term political matter, helicopter drops have not been on the table.

There are no helicopter drops because the general public has little or nothing to offer as collateral. Central banks are unable to offer unsecured loans. Should they do so they become indistinguishable from insolvent private sector lenders and are insolvent themselves => there is no effective lender of last resort => no guarantor for bank deposits (unsecured loans to banks from the general public). The effective collateral for unsecured loans to depositors would be their own deposits: the outcome => bank runs.

Support for easier money has meant support for QE, as that has been the only choice. So, with an uncomfortable shrug, I guess I’m supportive of QE. I don’t think the Fed ought to have quit now, when wage growth is anemic and inflation subdued and NGDP has not recovered the trend it was violently shaken from six years ago. But my support for QE is very much like the support I typically give US politicians. I pull the lever for the really-pretty-awful to stave off something-much-worse, and hate both myself and the political system for doing so.

‘Something-much-worse’ would be the consequences of capital exhaustion, ‘Something-much-better’ is folly: to somehow gain access to what remains of our capital so that it too might also be annihilated … in a futile attempt to pursue ‘prosperity’ for a vanishingly small period of time.

20141028_oilgdp

Figure 3: Declining economic activity precedes fuel price decline, (chart by ZeroHedge): unsurprisingly, expensive crude oil adversely affects economic activity.

“Much better potential economies may be characterized by higher interest rates and lower prices of housing and financial assets. But transitions from the current equilibrium to a better one would be politically difficult. Falling asset prices are not often welcomed by policymakers, and absent additional means of demand stimulus, would likely provoke a real-economy recession that would harm the poor and precariously employed. Austrian-ish claims that we must let a recession “run its course” will be countered, and should be countered, on grounds that a speculative theory of economic rebalancing cannot justify certain misery of indefinite duration for the most vulnerable among us. We will go right back to QE, secular stagnation, and all of that, to the relief of both homeowners, financial asset-holders, and the most precariously employed, while the real economy continues to under-perform.”

Waldman sees outcomes but not clearly enough. Consumption economies cannot be ‘fixed’ or adjusted but replaced with something less destructive … the Austrian economic rebalancing hypothesis is indeed faulty yet misery of indefinite duration for the most vulnerable among us is both certain and underway. It is a consequence not an alternative. We multiply ourselves and our appetites without restraint and devour our increasingly scarce capital without any thought other than to do so before someone else beats us to it. A better economy would reward those who husband our capital, to tend what remains rather than seeking to gain the pawnbroker’s pittance …

The drillers are canaries in the coal mine, even as they are able to borrow they find there are fewer ‘end users’ with available credit … onto whom they can lay off their ballooning exposure. In place of the non-existent customers is the central bank, a conduit by which credit costs are shifted from the bankrupt customers to the same customers’ children. This is the last line of defense … what remains between our fantasies of endless creature comforts and the pit.

Monetary Heroin Cold Turkey

Off the keyboard of Michael Snyder

Follow us on Facebook
Follow us on Twitter @Doomstead666

Published on Economic Collapse on October 29, 2014

helicopterben

Discuss this article at the Economics Table inside the Diner

From This Day Forward, We Will Watch How The Stock Market Performs Without The Fed’s Monetary Heroin

Money - Public DomainMark this day on your calendars.  The Dow is at 16974, the S&P 500 is at 1982 and the NASDAQ is at 4549.  From this day forward, we will be looking to see how the stock market performs without the monetary heroin that the Federal Reserve has been providing to it.  Since November 2008, the Fed has created about 3.5 trillion dollars and pumped it into the financial system.  An excellent chart illustrating this in graphic format can be found right here.  Pretty much everyone agrees that this has been a tremendous boon for the financial markets.  As you will see below, even former Fed chairman Alan Greenspan says that quantitative easing was “a terrific success” as far as boosting stock prices.  But he also says that QE has not been very helpful to the real economy at all.  In essence, the entire quantitative easing program was a massive 3.5 trillion dollar gift to Wall Street.  If that sounds unfair to you, that is because it is unfair.

So why is the Federal Reserve finally ending quantitative easing?

Well, officially the Fed says that it is because there has been so much improvement in the labor market

The Fed’s language, however, did suggest that they were getting more comfortable with the economy’s improvement. It cited “solid job gains,” citing a “substantial improvement in the outlook for the labor market,” as well as pointing out that “underutilization” of labor resources is “gradually diminishing.”

But that is not true at all.

The percentage of Americans that are working right now is about the same as it was during the depths of the last recession.  Just check out this chart…

Employment Population Ratio 2014

So there has been no “employment recovery” to speak of at all.

And as I wrote about yesterday, the percentage of Americans that are homeowners has been steadily falling throughout the quantitative easing era…

Homeownership Rate 2014

So let’s put the lie that quantitative easing helped the “real economy” to rest.  It did no such thing.

Instead, what QE did do was massively inflate stock prices.

The following is an excerpt from a Wall Street Journal report about a speech that former Fed chairman Alan Greenspan made to the Council on Foreign Relations on Wednesday

Mr. Greenspan’s comments to the Council on Foreign Relations came as Fed officials were meeting in Washington, D.C., and expected to announce within hours an end to the bond purchases.

He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”

Moving forward, what did Greenspan tell the members of the Council on Foreign Relations that they should do with their money?

This might surprise you…

Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.

Wow.

It almost sounds like Greenspan has been reading the Economic Collapse Blog.

Since November 2008, every time there has been an interruption in the Fed’s quantitative easing program, the stock market has gone down substantially.

Will that happen again this time?

Well, the market is certainly primed for it.  We are repeating so many of the very same patterns that we saw just prior to the last two financial crashes.

For example, there have been three dramatic peaks in margin debt in the last twenty years.

One of those peaks came early in the year 2000 just before the dotcom bubble burst.

The second of those peaks came in the middle of 2007 just before the subprime mortgage meltdown happened.

And the third of those peaks happened earlier this year.

You can view  a chart that shows these peaks very clearly right here.

The Federal Reserve appears to be confident that the stock market will be okay without the monetary heroin that it has been supplying.

We shall see.

But it should be deeply troubling to all Americans that this unelected, unaccountable body of central bankers has far more power over our economy than anyone else does.  During election season, our politicians get up and give speeches about what they will “do for the economy”, but the truth is that they are essentially powerless compared to the immense power that the Federal Reserve wields.  Just a few choice words from Janet Yellen can cause the financial markets to rise or fall dramatically.  The same cannot be said of any U.S. Senator.

We are told that monetary policy is “too important” to be exposed to politics.

We are told that the independence of the Federal Reserve is “sacred” and must never be interfered with.

I say that is a bunch of nonsense.

No organization should have the power to print up trillions of dollars out of thin air and give it to their friends.

The Federal Reserve is completely and totally out of control, and Congress needs to start exerting power over it.

The first step is to get in there and do a comprehensive audit of the Fed’s books.  This is something that U.S. Senator Ted Cruz called for in a recent editorial for USA Today

Americans are seeing near-zero interest rates on their savings accounts while median incomes are falling, and millions of people are facing higher gas prices, food prices, electricity prices, health insurance prices. Enough is enough, the Federal Reserve needs to open its books — Americans deserve a sound and stable dollar.

Whether you agree with Ted Cruz on other issues or not, this is one issue that all Americans should be able to agree on.

If you study any of our major economic problems, usually you will find that the Federal Reserve is at the heart of that problem.

So if we ever hope to solve the issues that are plaguing our economy, the Fed is going to need to be dealt with.

Hopefully the American people will start to send more representatives to Washington D.C. that understand this.

World Oil Production at 3/31/2014–Where are We Headed?

Off the keyboard of Gail Tverberg

Follow us on Twitter @doomstead666
Friend us on Facebook

Published on Our Finite World on July 23, 2014

oilwell

Discuss this article at the Energy Table inside the Diner

The standard way to make forecasts of almost anything is to look at recent trends and assume that this trend will continue, at least for the next several years. With world oil production, the trend in oil production looks fairly benign, with the trend slightly upward (Figure 1).

Figure 1. Quarterly crude and condensate oil production, based on EIA data.

If we look at the situation more closely, however, we see that we are dealing with an unstable situation. The top ten crude oil producing countries have a variety of problems (Figure 2). Middle Eastern producers are particularly at risk of instability, thanks to the advances of ISIS and the large number of refugees moving from one country to another.

Figure 2. Top ten crude oil and condensate producers during first quarter of 2014, based on EIA data.

Relatively low oil prices are part of the problem as well. The cost of producing oil is rising much more rapidly than its selling price, as discussed in my post Beginning of the End? Oil Companies Cut Back on Spending. In fact, the selling price of oil hasn’t really risen since 2011 (Figure 3), because citizens can’t afford higher oil prices with their stagnating wages.

Figure 3. Average weekly oil prices, based on EIA data.

The fact that the selling price of oil remains flat tends to lead to political instability in oil exporters because they cannot collect the taxes required to provide programs needed to pacify their people (food and fuel subsidies, water provided by desalination, jobs programs, etc.) without very high oil prices. Low oil prices also make the plight of oil exporters with declining oil production worse, including Russia, Mexico, and Venezuela.

Many people when looking at future oil supply concern themselves with the amount of reserves (or resources) remaining, or perhaps Energy Return on Energy Invested (EROEI). None of these is really the right limit, however. The limiting factor is how long our current networked economic system can hold together. There are lots of oil reserves left, and the EROEI of Middle Eastern oil is generally quite high (that is, favorable). But instability could still bring the system down. So could popping of the US oil supply bubble through higher interest rates or more stringent lending rules.

 

The Top Two Crude Oil Producers: Russia and Saudi Arabia

When we look at quarterly crude oil production (including condensate, using EIA data), we see that Russia’s crude oil production tends to be a lot smoother than Saudi Arabia’s (Figure 4). We also see that since the third quarter of 2006, Russia’s crude oil production tends to be higher than Saudi Arabia’s.

Figure 4.  Comparison of quarterly oil production for Russia and Saudi Arabia, based on EIA data.

Both Russia and Saudi Arabia are headed toward problems now. Russia’s Finance Minister has recently announced that its oil production has hit and peak, and is expected to fall, causing financial difficulties. In fact, if we look at monthly EIA data, we see that November 2013 is the highest month of production, and that every month of production since that date has dropped from this level. So far, the drop in oil production has been relatively small, but when an oil exporter is depending on tax revenue from oil to fund government programs, even a small drop in production (without a higher oil price) is a financial problem.

We see in Figure 4 above that Saudi Arabia’s quarterly oil production is quite erratic, compared to oil production of Russia. Part of the reason Saudi Arabia’s oil production is so erratic is that it extends the life of its fields by periodically relaxing (reducing) production from them. It also reacts to oil price changes–if the oil price is too low, as in the latter part of 2008 and in 2009, Saudi oil production drops. The tendency to jerk oil production around gives the illusion that Saudi Arabia has spare production capacity. It is doubtful at this point that it has much true spare capacity. It makes a good story, though, which news media are willing to repeat endlessly.

Saudi Arabia has not been able to raise oil exports for years (Figure 5). It gained a reputation for its oil exports back in the late 1970s and early 1980s, and has been able to rest on its laurels. Its high “proven reserves” (which have never been audited, and are doubted by many) add to the illusion that it can produce any amount it wants.

Figure 5. Comparison of Russian and Saudi Arabian oil exports, based on BP Statistical Review of World Energy 2014 data. Pre-1985 Russian amounts estimated based on Former Soviet Union amounts.

In 2013, oil exports from Russia were equal to 88% of Saudi Arabian oil exports. The world is very close to being as dependent on Russian oil exports as it is on Saudi Arabian oil exports. Most people don’t realize this relationship.

The current instability of the Middle East has not hit Saudi Arabia yet, but there is increased fighting all around. Saudi Arabia is not immune to the problems of the other countries. According to BBC, there is already a hidden uprising taking place in eastern Saudi Arabia.

US Oil Production is a Bubble of Very Light Oil

The US is the world’s third largest producer of crude and condensate. Recent US crude oil production shows a “spike” in tight oil productions–that is, production using hydraulic fracturing, generally in shale formations (Figure 6).

Figure 6. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from  AEO 2014 Early Release Overview.

If we look at recent data on a quarterly basis, the trend in production also looks very favorable.

Figure 7. US Crude and condensate production by quarter, based on EIA data.

The new crude is much lighter than traditional crude. According to the Wall Street Journal, the expected split of US crude is as follows:

Figure 8. Wall Street Journal image illustrating the expected mix of US crude oil.

There are many issues with the new “oil” production:

  • The new oil production is so “light” that a portion of it is not what we use to power our cars and trucks. The very light “condensate” portion (similar to natural gas liquids) is especially a problem.
  • Oil refineries are not necessarily set up to handle crude with so much volatile materials mixed in. Such crude tends to explode, if not handled properly.
  • These very light fuels are not very flexible, the way heavier fuels are. With the use of “cracking” facilities, it is possible to make heavy oil into medium oil (for gasoline and diesel). But using very light oil products to make heavier ones is a very expensive operation, requiring “gas-to-liquid” plants.
  • Because of the rising production of very light products, the price of condensate has fallen in the last three years. If more tight oil production takes place, available prices for condensate are likely to drop even further. Because of this, it may make sense to export the “condensate” portion of tight oil to other parts of the world where prices are likely to be higher. Otherwise, it will be hard to keep the combined sales price of tight oil (crude oil + condensate) high enough to encourage more tight oil production.

The other issue with “tight oil” production (that is, production from shale formations) is that its production seems to be a “bubble.”  The big increase in oil production (Figure 6) came since 2009 when oil prices were high and interest rates were very low. Cash flow from these operations tends to be negative. If interest rates should rise, or if oil prices should fall, the system is likely to hit a limit. Another potential problem is oil companies hitting borrowing limits, so that they cannot add more wells.

Without US oil production, world crude oil production would have been on a plateau since 2005.

Figure 9. World crude and condensate, excluding US  production, based on EIA data.

Canadian Oil Production

The other recent success story with respect to oil production is Canada, the world’s fifth largest producer of crude and condensate. Thanks to the oil sands, Canadian oil production has more than doubled since the beginning of 1994 (Figure 10).

Figure 10. Canadian quarterly crude oil (and condensate) production based on EIA data.

Of course, there are environmental issues with respect to both oil from the oil sands and US tight oil. When we get to the “bottom of the barrel,” we end up with the less environmentally desirable types of oil. This is part of our current problem, and one reason why we are reaching limits.

Oil Production in China, Iraq, and Iran

In the first quarter of 2014, China was the fourth largest producer of crude oil. Iraq was sixth, and Iran was seventh (based on Figure 2 above). Let’s first look at the oil production of China and Iran.

Figure 11. China and Iran crude and condensate production by quarter based on EIA data.

As of 2010, Iran was the fourth largest producer of crude oil in the world. Iran has had so many sanctions against it that it is hard to figure out a base period, prior to sanctions. If we compare Iran’s first quarter 2014 oil production to its most recent high production in the second quarter of 2010, oil production is now down about 870,000 barrels a day. If sanctions are removed and warfare does not become too much of a problem, oil production could theoretically rise by about this amount.

China has relatively more stable oil production than Iran. One concern now is that China’s oil production is no longer rising very much. Oil production for the fourth quarter of 2013 is approximately tied with oil production for the fourth quarter of 2012. The most recent quarter of oil production is down a bit. It is not clear whether China will be able to maintain its current level of production, which is the reason I mention the possibility of a decline in oil production in Figure 2.

The lack of growth in China’s oil supplies may be behind its recent belligerence in dealing with Viet Nam and Japan. It is not only exporters that become disturbed when oil supplies are not to their liking. Oil importers also become disturbed, because oil supplies are vital to the economy of all nations.

Now let’s add Iraq to the oil production chart for Iran and China.

Figure 12. Quarterly crude oil and condensate production for Iran, China, and Iraq, based on EIA data.

Thanks to improvements in oil production in Iraq, and sanctions against Iran, oil production for Iraq slightly exceeds that of Iran in the first quarter of 2014. However, given Iraq’s past instability in oil production, and its current problems with ISIS and with Kurdistan, it is hard to expect that Iraq will be a reliable oil producer in the future. In theory Iraq’s oil production can rise a few million barrels a day over the next 10 or 20 years, but we can hardly count on it.

The Oil Price Problem that Adds to Instability

Figure 13 shows my view of the mismatch between (1) the price oil producers need to extract their oil and (2) the price consumers can afford. The cost of extraction (broadly defined including taxes required by governments) keeps rising while “ability to pay” has remained flat since 2007. The inability of consumers to pay high prices for oil (because wages are not rising very much) explains why oil prices have remained relatively flat in Figure 3 (near the top of this post), even while there is fighting in the Middle East.

Figure 3. Comparison of oil price per barrel needed (Brent) with ability to pay. Amounts based on judgement of author.

When the selling price is lower than the full cost of production (including the cost of investing in new wells and paying dividends to shareholders), the tendency is to reduce production, one way or another. This reduction can be voluntarily, in the form of a publicly traded company buying back stock or selling off acreage.

Alternatively, the cutback can be involuntary, indirectly caused by political instability. This happens because oil production is typically heavily taxed in oil exporting nations. If the oil price remains too low, taxes collected tend to be too low, making it impossible to fund programs such as food and fuel subsidies, desalination plants, and jobs programs. Without adequate programs, there tend to be uprisings and civil disorder.

If a person looks closely at Figure 13, it is clear that in 2014, we are out in “Wile E. Coyote Territory.” The broadly defined cost of oil extraction (including required taxes by exporters) now exceeds the ability of consumers to pay for oil. As a result, oil prices barely spike at all, even when there are major Middle Eastern disruptions (Figure 3, above).

The reason why Wile E. Coyote situation can take place at all is because it takes a while for the mismatch between costs and prices to work its way through the system. Independent oil companies can decide to sell off acreage and buy back shares of stock but it takes a while for these actions to actually take place. Furthermore, the mismatch between needed oil prices and charged oil prices tends to get worse over time for oil exporters. This lays the groundwork for increasing dissent within these countries.

With oil prices remaining relatively flat, importers become complacent because they don’t understand what is happening.  It looks like we have no problem when, in fact, there really is a fairly big problem, lurking behind the scenes.

To make matters worse, it is becoming more and more difficult to continue Quantitative Easing, a program that tends to hold down longer-term interest rates. The expectation is that the program will be discontinued by October 2014. The reason why the price of oil has stayed as high as it has in the last several years is because of the effects of quantitative easing and ultra low interest rates. If it weren’t for these, oil prices would fall, because consumers would need to pay much more for goods bought on credit, leaving less for the purchase of oil products. See my recent post, The Connection Between Oil Prices, Debt Levels, and Interest Rates.

Figure 4. Big credit related drop in oil prices that occurred in late 2008 is now being mitigated by Quantitative Easing and very low interest rates.

Because of the expectation that Quantitative Easing will end by October 2014 and the pressure to tighten credit conditions, my expectation is that the affordable price of oil will start dropping in late 2014, as shown in Figure 13. The growing disparity between what consumers can afford and what producers need tends to make the Wile E. Coyote overshoot condition even worse. It is likely to lead to more problems with instability in the Middle East, and a collapse of the US oil production bubble.

Conclusion

I explained earlier that we live in a networked economy, and this fact changes the way economic models work. Many people have developed models of future oil production assuming that the appropriate model is a “bell curve,” based on oil depletion rates and the inability to geologically extract more oil. Unfortunately, this isn’t the right model.

The situation is far more complex than simple geological decline models assume. There are multiple limits involved–prices needed by oil producers, prices affordable by oil importers, and prices for other products, such as water and food. Interest rates are also important. There are time lags involved between the time the Wile E. Coyote situation begins, and the actions to fix this mismatch takes place. It is this time lag that tends to make drop-offs very steep.

The fact that we are dealing with political instability means that multiple fuels are likely to be affected at once. Clearly natural gas exports from the Middle East will be affected at the same time as oil exports. Many other spillover effects are likely to happen as well. US businesses without oil will need to cut back on operations. This will lead to job layoffs and reduced electricity use. With lower electricity demand, prices for electricity as well as for coal and natural gas will tend to drop. Electricity companies will increasingly face bankruptcy, and fuel suppliers will reduce operations.

Thus, we cannot expect decline to follow a bell curve. The real model of future energy consumption crosses many disciplines at once, making the situation difficult to model.  The Reserves / Current Production model gives a vastly too high indication of future production, for a variety of reasons–rising cost of extraction because of diminishing returns, need for high prices and taxes to support the operations of exporters, and failure to consider interest rates.

The Energy Return on Energy Invested model looks at a narrowly defined ratio–usable energy acquired at the “well-head,” compared to energy expended at the “well-head” disregarding many things–including taxes, labor costs, cost of borrowing money, and required dividends to stockholders to keep the system going. All of these other items also represent an allocation of available energy. A multiplier can theoretically adjust for all of these needs, but this multiplier tends to change over time, and it tends to differ from energy source to energy source.

The EROEI ratio is probably adequate for comparing two “like products”–say tight oil produced in North Dakota vs tight oil produced in Texas, or a ten year change in North Dakota energy ratios, but it doesn’t work well when comparing dissimilar types of energy. In particular, the model tends to be very misleading when comparing an energy source that requires subsidies to an energy source that puts off huge tax revenue to support local governments.

When there are multiple limits that are being encountered, it is the financial system that brings all of the limits together. Furthermore, it is governments that are at risk of failing, if enough surplus energy is not produced. It is very difficult to build models that cross academic areas, so we tend to find models that reflect “silo” thinking of one particular academic specialty. These models can offer some insight, but it is easy to assume that they have more predictive value than they do.

Unfortunately, the limits we are reaching seem to be financial and political in nature. If these are the real limits, we seem to be not far away from the simultaneous drop in the production of many energy products. This type of limit gives a much steeper drop off than the frequently quoted symmetric “bell curve of oil production.” The shape of the drop off corresponds to (1) the type of drop off experienced by previous civilizations when they collapsed, (2) the type of drop-off I have forecast for world energy consumption, and (3) Ugo Bardi’s Seneca cliff.  The 1972 book Limits to Growth by Donella Meadows et al. says (page 125), “The behavior mode of of the system shown in figure 35 is clearly that of overshoot and collapse,” so it tends to come to the same conclusion as well.

Peak Oil Revisited

Off the keyboard of Brian Davey

Follow us on Twitter @doomstead666
Friend us on Facebook

Published on FEASTA on June 3, 2014

20130410-peak-oil-america

Discuss this article at the Energy Table inside the Diner

In a lecture to the Columbia University Center on Global Energy Policy in February of 2014 Steven Kopits, who is the Managing Director of the consultancy, Douglas Westwood explains how conventional “legacy” oil production peaked in 2005 and has not increased since. All the increase in oil production since that date has been from unconventional sources like the Alberta Tar sands, from shale oil or natural gas liquids that are a by-product of shale gas production. This is despite a massive increase in investment by the oil industry that has not yielded any increase in ‘conventional oil’ production but has merely served to slow what would otherwise have been a faster decline.

More specifically the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. Of that $3.5 trillion was spent on the ‘legacy’ oil and gas system. This is a sum of money equal to the GDP of Germany. Despite all that investment in conventional oil production it fell by 1 million barrels a day. By way of comparison investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.

Further to this, unfortunately for the oil industry, it has not been possible for oil prices to rise high enough to cover the increasing capital expenditure and operating costs. This is because high oil prices lead to recessionary conditions and slow or no growth in the economy. Because prices are not rising fast enough, and costs are increasing, the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues. Overall profitability is falling and some oil majors have had to borrow and sell assets to pay dividends. The next stage in this crisis has then been that investment projects are being cancelled – which suggests that oil production will soon begin to fall more rapidly.

The situation can be understood by reference to the nursery story of Goldilocks and the Three Bears. Goldilocks tries three kinds of porridge – some that is too hot, some that is too cold and some where the temperature is somewhere in the middle and therefore just right. The working assumption of mainstream economists is that there is an oil price that is not too high to undermine economic growth but also not too low so that the oil companies could not cover their extraction costs – a price that is just right. The problem is that the Goldilocks situation no longer describes what is happening – another story provides a better metaphor – that story is ‘Catch 22’. According to Kopits the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel. But it is these oil prices that drags down the economies of the OECD economies.

For several years however there have been some countries that have been able to afford the higher prices. The countries that have coped with the high energy prices best are the so called “emerging non OECD countries” and above all China. China has been bidding away an increasing part of the oil production and continuing to grow while higher energy prices have led to stagnation in the OECD economies. (Kopits, 2014)

Now lets put that in a bigger context. In a presentation to the All party Parliamentary Group on Peak Oil and Gas Charles Hall showed a number of diagrams on slides to express the consequences of depletion and rising energy costs of energy. I have taken just two of these diagrams here – comparing 1970 with what might be the case in 2030. (Hall C. , 2012) What they show is how the economy produces different sorts of stuff – some of the production is consumer goods – either staples (essentials) or discretionary (luxury) goods. The rest of production is devoted to goods that are used in production – investment goods in the form of machinery, equipment, buildings, roads, infrastracture and their maintenance. Some of these investment goods must take the form of energy acquisition equipment. As a society runs up against energy depletion and other problems more and more production must go into energy acquisition, infrastructure and maintenance – less and less is available for consumption, and particularly for discretionary consumption.

Cheese-Slicer-1970Cheese-Slicer-2031

Click on images to enlarge

Whether the economy would evolve in this way can be questioned. As we seen the increasing needs of the oil and gas sector implies a transfer of resources from elsewhere through rising prices but the rest of the economy cannot actually pay this without crashing. That is what the above diagrams show – a transfer of resources from discretionary consumption to investment in energy infrastructure. But such a transfer would be crushing for the other sectors and their decline will likely drag down the whole economy.

Over the last few years central banks have had a policy of quantitative easing to try to keep interest rates low – the economy cannot pay high energy prices AND high interest rates so, in effect, the policy has been to try to bring down interest rates as low as possible to counter the stagnation. However, this has not really created production growth – it has instead created a succession of asset price bubbles. The underlying trend continues to be one of stagnation, decline and crisis. The severity of the recessions may be variable in different countries because competitive strength in this model goes to those countries where energy is used most efficiently and which can afford to pay somewhat higher prices for energy. Such countries are likely to do better but will not escape the general decline if they stay wedded to the conventional growth model. Whatever the variability this is still a dead end model and at some point people will see that entirely different ways of thinking about economy and ecology are needed – unless they get drawn into conflicts and wars over energy by psychopathic policy idiots. There is no way out of the Catch 22 within the growth economy model. That’s why de-growth is needed.

References

Hall, C. (2012, March 30th). “Peak Oil, declining EROI and the new economic realities” The All party Parliamentary Group on Peak Oil and Gas: http://www.slideshare.net/APPGOPO/energy-return-on-energy-investment/ (Slides 94 and 98)

Kopits, Steven (2014) “Global Oil Market Forecasting: Main Approaches and Key Drivers” Columbia University, SIPA, Center on Global Energy Policy, http://energypolicy.columbia.edu/events-calendar/global-oil-market-forecasting-main-approaches-key-drivers

Related posts:

  1. Climate Change and Peak Oil: two sides of the same coin?
  2. Even the Economist now gets Peak Oil and its effect on Growth
  3. High oil prices kill growth prospects
  4. Tipping Point: Near-Term Systemic Implications of a Peak in Global Oil Production – An Outline Review
  5. Why confusion exists over when the oil peak will occur

Deflation Doom

Off the microphone of RE

Follow us on Twitter @doomstead666
Friend us on Facebook

logopodcast

Published on the Doomstead Diner on April 19, 2014

Snippet:

…What the CBs and Financial Pundits like Ambrose Evans-Pritchard are TERRIFIED by now is apparent DEFLATION through numerous of the micro economies throughout Eurotrashland. Prices are FALLING! Horrors! Even in SWEDEN prices are falling! This really gets nasty in the world of Real Estate, because falling prices put many McMansion “Owners” underwater, where they owe more than the box is worth on the market. Combine that with defaults and foreclosures (which actually are the cause of the falling prices) and banks get stuck with a lot of White Elephants they can’t sell.

To solve THAT problem, the Cbs start offering up lots of low interest money to the well connected to go buy the junk and keep the prices propped up, leading to Hedge Funds like Blackrock getting into the rental bizness, which generally is a nightmare to run….

For the rest, listen to the RANT!

RE

View From the Bottom of the Energy Barrel

Off the keyboard of Steve from Virginia

Follow us on Twitter @doomstead666
Friend us on Facebook

Published on Economic Undertow on February 1, 2014

http://th04.deviantart.net/fs71/PRE/i/2013/050/9/9/bottom_of_the_barrel_by_satansgoalie-d5vkmpr.jpg

Discuss this article at the Energy Table inside the Diner

Anyone paying attention cannot be surprised by economic distress being felt around the globe … we are all reaching the neck of the funnel, the farthest corner of the box we have built for ourselves out of foolish contradictions and hoped-for perpetual motion machines. There are multiple ways out of the box but we cannot bring ourselves to turn around and step away, to turn loose of our toys that drag us off the edge toward oblivion. Instead, we press ever more tightly into the corner, hoping an escape hatch will materialize by magic.

Triangle of Doom 020114

Figure 1: The World-famous Triangle of Doom: continuous Brent Crude futures price up to the end of January, 2014, chart by Commodities Charts.com. Click on chart for big. The upper bound declines along with creditworthiness. The cost of fuel production increases due to geology and the increased difficulty in gaining fuel to replace that which we have wasted. $110 per barrel appears to be the new upper bound; as the Brent price neared that level a host of countries’ economies began to vomit.

The declining trend is what customers can afford to pay: the advancing trend is the crude oil price required by drillers to remain in business. Soon enough, the price required by drillers will be unaffordable, the outcome will be shortages as first the highest- cost supplies are shut in. Shortages will further affect customers who will purchase less fuel pressing on prices in a vicious cycle.

Our unhappy date with destiny can only be ahead of us as long as nothing important breaks and the managers avoid errors. Keep in mind, any shortages that occur because fuel is unaffordable … will be permanent. One cannot dig oneself out of a hole, having constrained fuel supplies does not make countries richer or more fuel available.

It is axiomatic when fuel prices are too high there are adverse economic consequences which cause prices to decline. Consequences have arrived it is reasonable to propose fuel prices are too high, they are set to decline. Prices have been high for a very long period, for the wealthy and ambitious, at least ten years. Organic economic growth has been impossible due to fuel prices allocating funds away from non-fuel sectors, what has stood in for growth has been the ‘wealth-effect’ of expanding credit. This last is coming to an end because credit has also become unaffordable. Welcome to the energy crisis in 2014; there are no gas lines or ‘odd-even days’, there is no hated ‘double nickel’. Instead, credit is rationed and countries are left with worthless money that cannot be swapped for fuel; conservation by other means.

It is possible that the model is too conservative, that we have already reached the end of the affordability road. That the effect of high prices is felt at a level that is lower than the trend would indicate. It is also possible the ‘too-high’ price is too low at the same time; so that producers such as Russia and Mexico are unable to meet expenses.

Meanwhile, the managers are not error-free. The new regime of monetary tightening on the part of US and China looks to be a serious misstep, (Ambrose Evans-Pritchard, Telegraph UK):

 

World risks deflationary shock as BRICS puncture credit bubblesHalf the world economy is one accident away from a deflation trap. The International Monetary Fund says the probability may now be as high as 20pc.It is a remarkable state of affairs that the G2 monetary superpowers – the US and China – should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.“We need to be extremely vigilant,” said the IMF’s Christine Lagarde in Davos. “The deflation risk is what would occur if there was a shock to those economies now at low inflation rates, way below target. I don’t think anyone can dispute that in the eurozone, inflation is way below target.”It is not hard to imagine what that shock might be. It is already before us as Turkey, India and South Africa all slam on the brakes, forced to defend their currencies as global liquidity drains away.

The World Bank warns in its latest report – Capital Flows and Risks in Developing Countries – that the withdrawal of stimulus by the US Federal Reserve could throw a “curve ball” at the international system.

 

The tightening error is perhaps unavoidable. The energy problem cannot be solved by substitution, by swapping credit for energy; the credit has ballooned to become its own problem. The government strategy of propping key men and hoping for the best turns out to have a limited shelf-life. The personal- and business strategy of relying on public relations in place of facing reality and taking the necessary, albeit painful steps to either adjust or find alternative business models has also failed. While these are not errors per se, they are longer term expedients whose consequences have arrived sooner than their architects intended.

Call this diminished returns on expedients.

While currency problems have to a large degree materialized since the beginning of the year, the forces behind the problems have been building for a long time. All of the countries in trouble today are key men that the corporate- and government establishments have done as much as possible to prop up. Wall Street has lent trillions of dollars overseas since 2008 to purchase GDP growth as if this abstraction is a thing that has some effect on the physical world. It does have an effect and that is to reduce the world further. Funds have become collateral for trillions- more loans in the currencies in question. The problem is that none of the so-called investments turn out to be remunerative, any more so than prior rounds of investments. Managers have been chasing their tails, throwing not-quite good money after terrible.

Non-Remunerative Commerce

 

It can be said, “In the long run we are all dead”; reality provides its own proofs, we can see that the increase in debt accompanies the so-called advance of progress. Common bookkeeping illustrates the absolute requirement for ‘capital’ (borrowed money) in order to advance industrial works of every kind. The assumption on the part of others is that an industry can turn around ‘at some point’ and begin to pay its own way … which industry cannot do, this is simple thermodynamics.

Rather, the process of borrowing — by itself — is become collateral for further rounds of loans, each round larger than the last. Loans are never ‘paid off’ (finance level loans are impossible to repay even with 10% growth), the growth becomes a form of permission for more loans, not the means of repayment. Eventually the costs of lending become unbearable, which is one of the burdens we are staggering under right now.

Instead there is the rolling default as the worth of funds used to repay become less than the worth of funds lent. The joke is on the borrower because his loan cost the lender nothing yet he must find circulating money and hand it over to his lender. The cost of obtaining circulating money rather than interest is the real burden associated with debt. There is far less circulating money than there are debts, the cost is then simply supply-and-demand rather than the fixed percentage of interest.

Buried within this tangled web of contradictions is the fallacy of currency debasement which will be dealt with elsewhere.

Enter Currency Preference.

 

Once upon a time, a petrodollar was one held by an overseas oil producer gained from the sale of his product. The petrodollar of the 1970s and 80′s was a problem: what to do with all of them?

The (petro)dollar is now is the preferred medium of exchange for petroleum … along with euros, yen and sterling … as opposed to other, lesser currencies.

The reason is because these media are available in needed amounts, and are freely exchangeable in foreign exchange markets … so far. The lesser currencies, much less so.

Since World War Two, money — including dollars, yen, euros, etc. — has been a proxy for commerce. In this context, commerce is deemed to be worth more than money so there is incentive for ‘customers’ to trade money they hold for goods and services as quickly as possible.

Almost everything the establishment has attempted since the Lehman crisis has been to reinforce this theme of commerce being worth more than money. Now this regime is falling apart.

Meanwhile, under the establishments’ noses, money is becoming a proxy for petroleum. In that context, petroleum is observed as being worth more than commerce; this is because commerce is revealing itself to be unproductive/auto-destructive. The ‘money choice’ is being made starting within the marginal economies around the world: money is less about commerce and more the capital inputs that are precursors for commerce … indeed, tools necessary for survival.

If money as a proxy for commerce, customers rapidly trade it for goods and services. When money becomes a proxy for petroleum, customers hold money because it becomes the last, best chance to gain goods that are certain to be scarce in the future. Here, the dollar becomes a hard currency, much like 1930s dollar, redeemable for gold.

Right not the ‘price’ of dollars and other currencies is set — not by central bankers or by government fiat — but by millions of motorists using dollars in exchange for gasoline in filling stations all over the world 24/7. Here, other, lesser currencies are proxies for dollars; again, some moreso than others.

It’s a very short distance from exchangeability to redeemability. Making that step is what is underway right now. In the early 1930s, the economy of the developed world shifted from a preference for commerce toward one of holding gold. Gold became the last, best chance to get a roof overhead or something to eat. The world’s economy became gold arbitrage and little else; contracts, currencies and credit were deployed as blunt instruments in a deterministic contest to gain gold. In 3 short years business, banking and to some degree agriculture collapsed.

Preference takes place in people’s minds, it effects how they perceive relative worth and what their own conditions allow. In the 1930s, the US and other countries severed the gold-money connection, they ‘went off gold’. Today, we face ‘petroleum arbitrage’ and the use of blunt instruments to gain fuel the same way our hapless ancestors struggled to gain gold. This is what we see in southern Europe, in Middle East and northern Africa and across Central- and South America. It is a pitiless contest, the losers are deprived of imported resources, those with resources are obliged to part with them cheaply.

As then, our challenge is to ‘go off petroleum’, we do so or else. We must grasp the nettle and court an industrial depression in order to avoid the alternative, an endless Greater Depression that is right now unfolding at our feet.

Failed Public Relations Strategy.

 

A Federal District Court judge recently allowed a defamation suit by climate scientist Michael Mann to proceed against the periodical National Review and a carbon shill Mark Steyn:

 

Climate scientist’s lawsuit could wipe out conservative National Review magazineDavid FergusonThe National Review magazine, longstanding house news organ of the establishment right, is facing a lawsuit that could shutter the publication permanently. According to The Week, a suit by a climate scientist threatens to bankrupt the already financially shaky publication and its website, the National Review Online (NRO).Scientist Michael Mann is suing the Review over statements made by Canadian right-wing polemicist and occasional radio stand-in for Rush Limbaugh, Mark Steyn. Steyn was writing on the topic of climate change when he accused Mann of falsifying data and perpetuating intellectual fraud through his research.Steyn went on to quote paid anti-climate science operative Rand Simberg — an employee of the right-wing think tank the Competitive Enterprise Institute — who compared Mann to Penn State’s convicted child molester Jerry Sandusky.

Mann, Simberg said, is “the Jerry Sandusky of climate science, except that instead of molesting children, he has molested and tortured data.”

Mann sued for defamation. Steyn and the Review vowed to fight the suit, given that defamation is notoriously difficult to prove in court.

“My advice to poor Michael is to go away and bother someone else,” said Review editor Rich Lowry. “If he doesn’t have the good sense to do that, we look forward to teaching him a thing or two about the law and about how free debate works in a free country.”

As the case has played out, however, Lowry’s hubris has proven to be unwarranted …

Now, as the suit grinds onward, the Review faces fairly dismal prospects. The suit could eventually be dismissed, but that is looking less likely. What’s looking more likely is that Mann could win a substantial judgment in court or the magazine could settle out of court.

The Week doubts that the publication could financially survive either of those outcomes. In 2005, before his death, Buckley estimated that the Review had lost more than $25 million in its 50 years of operation. It has never enjoyed a single moment of robust financial health competing in the “free market of ideas,” but has relied on reader contributions and bailouts from wealthy donors for the entirety of its history.

Conservatives like to point Buckley’s legacy and the Review as the reasonable, moderate edge of an regressive, reactionary party. In its history, the magazine has consistently staked out far-right positions that favor whites over nonwhites and plutocrats over the middle and working classes.

 

Here is the warmed-over response from the so called business community by way of Bloomberg:

 

Climate-Change Skeptics Have a Right to Free Speech, TooStephen L. CarterOf course we need defamation law. But our constitutional tradition correctly makes it difficult for public figures to prevail. Close cases should go to the critic, no matter how nasty or uninformed. The preservation of robust dissent allows no other result, and robust dissent is at the heart of what it means to be America.I am old-fashioned enough to believe that the cure for bad speech is good speech. Yes, it’s a cliche. But it’s also a useful reminder. Nobody is forced to enter public debate. Once you’re there, it’s rough and tumble. Unfair attacks are as common as dew and sunshine, and everybody’s reputation takes a beating. That’s the price of freedom.

 

The central issue has little to do with the likely outcome — the bankruptcy of the worthless National Review.

Rather, there is the panic over the likelihood of carbon emitters and their shills being held to account. Right now, a jury aims to measure shills against their words: the shills don’t like it one bit. If the trial ends in settlement there will be other trials holding shills to account for their lies. If the emitters are lucky there will be trials holding emitters accountable for their actions.

If the emitters aren’t lucky: (finger cutting gesture across throat).

Because there are indeed consequences to carbon emissions and even the most stupid shill knows it.

Pride of Failure and the Fall

Off the keyboard of Steve from Virginia

Follow us on Twitter @doomstead666
Friend us on Facebook

Published on Economic Undertow on November 18, 2013

we-were-soldiers

Discuss this article at the Geopolitics Table inside the Diner

“It was a miserable damn performance, just like it always is. These people won’t listen. They make the same mistake over and over again in the same way”.

– John Paul Vann after the battle of Ap Bac in South Vietnam, 1963

 

One of the great themes of the ongoing unraveling is the establishment’s tendency toward failure and the choice taken — usually with great cynicism — to adopt over-elaborate and punitive strategies in the place of simpler, less destructive alternatives. At the same time, this failure strategy is almost always hidden behind a scrim of public theater which by itself indicates the managers understand the choices yet purposefully make the wrong ones.

Administrative failure isn’t new or a monopoly good of the current regime, nor is it entirely the by-product of our current unraveling. Failure is the 600-year-old stepchild of modernity. Along with contrived ‘scarcity’, failures of past regimes are offered as reasons to justify modernity’s expansion into every area of human- and non-human life. Without failures there are no reasons for more ambitious follow-ups. The cans are kicked; the latest- and greatest expedients are duct-taped into place on top of all the others. Complexity isn’t designed, it grows like a fungus; as failures emerge there are more complex responses which reveal more failures which in turn give birth to more complexity.

Permanently eliminating the sources or cause for failure is always judged to be ‘costly’ or ‘difficult’, it ‘takes too long’ or discomforts wealthy clients. Structural adjustments are rejected when the choice endangers some precious aspect of modernity. Because making minor reforms risks the entire enterprise, we hesitate and the status-quo becomes institutionalized.

Failure inhabits military adventures gone awry, policies that pitch the small- but self-sufficient enterprises into competition with gigantic- but credit dependent varieties, decrees which encourage evasions of the law rather than compliance, processes that demand the worst from people other than their best. Failure emerges from money- and credit policies that enrich lenders at the expense of borrowers, support asset prices rather than incomes, that sacrifice the future to the insatiable present. Waiting for us at the end of the road is the entropic failure for which there are no possible antidotes; the light at the end of the tunnel is a grave marker. “Here lies modernity” … when the entire edifice of patched and tattered expedients collapses with a sigh of exhaustion and disillusion.

The ‘Modern America’ the world’s citizens inhabit in 2013 sprang almost fully- formed from the US’s victory over Germany and Japan in World War Two. We defeated two military superpowers in two different parts of the world at once; this was our first- and defining, ‘If we can put a man on the Moon’ moment. Americans were competent; we did things right, we were efficient yet (somewhat) humane and civilized. Our armies triumphed without massacring prisoners or raping and pillaging, they gave candy to the enemy’s children. America succeeded in spite of internal differences and a crushing economic environment. After saving the world from Nazism and Japanese militarism Americans believed they could do anything including remake the debauched old world in their own, atomic-powered, tail-finned image … and to the large degree they succeeded.

America’s failure regime emerged twenty years later in Vietnam; which gave birth to ‘Blunder, American-style’. Vietnam war is the template for our subsequent- and ongoing failures: policy-making as play; denial, the over-commitment to faulty premises and propagandistic marketing, institutionalized stupidity and sadism, fetishized violence and technology, complexity for its own sake; the refusal to consider limits, preening arrogance and intellectual dishonesty; colossal/heedless waste of irreplaceable social capital — Americans’ narcissistic idealism and naive patriotism — all of this for non-existent gains. Ambitious, corrupt men set about to satisfy trivial personal ambitions; even as they failed, the country was broken: red versus blue, old vs. young, hawk versus dove, urban against rural, liberal/conservative. Beavis vs. Butthead … The great failure in Vietnam sits like Carlos Castaneda’s death upon the left shoulder of the United States. Everything the US does and has done since 1968 has been a desperate effort on the part of both the establishment and culture to re-write history; to find a different outcome to the Vietnam War.

Enter the monetary policy failure …

… enter Janet Yellen. It’s not hard to feel sorry for Yellen because she has absolutely no clue what she is about to step into …

Triangle of Doom 110313(1)

Figure 1: The sublime Triangle of Doom: both Bernanke’s and Yellen’s cognitive failure is that they ignore the ongoing exchange relationship between money and petroleum, where both are priced regardless of interest rates. Central banks cannot ‘print’ crude oil, they cannot print jobs or value … they cannot even print money. Central banks can only refinance existing loans, they can witch-doctor and pantomime.

Yellen’s eligibility has less to do with her ordinary talents as an economist, rather more with her ability to meet public expectations of what a Federal Reserve System Chairman is supposed to look, act and sound like. Yellen is a placeholder, a technocratic character set to operate within an elaborate bit of post-modern Kabuki. Her signature characteristic to date has been unswerving support for Bernanke’s monetary accommodations, including zero-percent policy rate and securities purchases and asset swaps with commercial lenders. As Bernanke’s backup samurai, Yellen promises more of the same: more accommodation, lowest of all possible interest rates, more QE (quantitative easing or asset purchases).

That this policy is a self-evident failure does not matter! It will continue until the entire monetary/fiscal regime collapses under its own weight. How long will that take?

LR-stimulus-Fig-5

Figure 2: The thin, dashed line @ the middle of the chart is the amount of GDP gained by way of the amounts of credit indicated by the red line at the top since 2008; <$1 trillion of GDP gained from the +$35 Trillion in ongoing accommodation/rescue (Doug Short/Lance Roberts, click on for big). Soon enough Inevitably, there will be negative growth gained from accommodation, then what? There is no ‘Plan B’.

Enter the US healthcare flop, (Zero Hedge):

 

Total Healthcare “Enrollment” As A Result Of Obamacare: -3.9 Million

By Tyler Durden

“We fumbled the rollout on this health-care law,” could be President Obama’s understatement of the century. In the month-or-so since Obamacare was unleashed 106,185 people enrolled (based on a loose re-definition by the White House). However, in that same period, the WSJ reports a stunning 4.02 million people received policy cancellations. So, in a month, a total of 3,918,205 fewer people are now ‘enrolled’ in a heathcare plan than before Obamacare. So far, California, Florida, and Washington are suffering the most under Obamacare…

20131115_obamacare1

Figure 3: State net enrollment in the Affordable Care Act including policy cancellations, (ZeroHedge/Wall Street Journal). Failure is built into the strategies the government chooses, so is corruption, (Washington Post):

 

Health-care Web site’s lead contractor employs executives from troubled IT company

By Jerry Markon and Alice Crites

The lead contractor on the dysfunctional Web site for the Affordable Care Act is filled with executives from a company that mishandled at least 20 other government IT projects, including a flawed effort to automate retirement benefits for millions of federal workers, documents and interviews show.

A year before CGI Group acquired AMS in 2004, AMS settled a lawsuit brought by the head of the Federal Retirement Thrift Investment Board, which had hired the company to upgrade the agency’s computer system. AMS had gone $60 million over budget and virtually all of the computer code it wrote turned out to be useless, according to a report by a U.S. Senate committee.

The thrift board work was only one in a series of troubled projects involving AMS at the federal level and in at least 12 states, according to government audit reports, interviews and press accounts. AMS-built computer systems sent Philadelphia school district paychecks to dead people, shipped military parts to the wrong places for the Defense Logistics Agency and made 380,000 programming errors for the Wisconsin revenue department, forcing counties to repay millions of dollars in incorrectly calculated sales taxes.

Lawrence Stiffler, who was director of automated systems for the thrift board at the time and a 25-year veteran of IT contracting for the federal government, said AMS was highly unreliable. “You couldn’t count on them to deliver anything,” he said.

In the years since the purchase, CGI has grown rapidly in the United States, dramatically expanding its role as a federal and state contractor. Agencies that tapped CGI Federal often rehired the company and, in the past two years alone, the company has been awarded contracts with at least 25 federal agencies worth $2.3 billion.

 

The failure of the health insurance scheme isn’t simply a matter of poorly executed software. It would have been very simple for the government to expand Medicare to cover every American. Too simple … doing so would have rendered precious insurance companies redundant so it was not even considered. No health insurance approach can succeed without cost controls — patent reform, salaries for medical professionals, the end of piecework payments and malpractice awards, breakup of medical cartels — none of these were considered, either.

Enter home mortgage modification programs, (Town Hall):

 

The Stunning Failures of Obama’s Mortgage ProgramKevin GlassWay back in 2009, President Obama’s Treasury Department launched the Home Affordable Modification Program, a massive authorization to help homeowners struggling with their mortgages in the wake of the financial crisis. 1.2 milllion people participated in the program at a cost to taxpayers of $4.4 billion.A report [pdf] dropped this week from the Office of the Special Inspector General for TARP (SIGTARP) that HAMP has a stunning failure rate. Of the 1.2 million HAMP participants, 306,000 have re-defaulted on their mortgages, at an additional cost to taxpayers of $815 million. What’s more, another 88,000 homeowners in the HAMP program have missed payments and are at risk to re-default.

The mortgage modification schemes share many of the characteristics of the health care enterprise: complexity for its own sake, denial regarding the extent of the problem and capture by the same industries that caused the original breakdown in the first place. HARP is another failed home mortgage modification program, (Examiner);

 

HARP loan program has been a dismal failure

Shelby Bateson

December 13, 2009

The HARP loan refinance program, which was supposed to have aided four to five million home owners with a streamlined refinance of their existing mortgage has been a dismal failure.

The HARP (Home Affordable Refinance Program) program was designed to help those with loans owned by either Fannie Mae or Freddie Mac, but underwater, refinance their mortgages to lower prevailing mortgage rates. The program was rolled out in April 2009 with lots of anticipation that this program would free up cash for those home owners and help the economic recovery.

The end result is that only 116,677 loans, as of September 30, 2009, have been modified. The problem has not been a lack of interest by home owners, but a lack of interest by lenders. As originally rolled out, lenders were able to refinance loans up to 105% underwater on the first mortgage, regardless of the amount of a second mortgage.

As home values continued to fall, during the summer, the ratio underwater was raised to 125%, but almost no lenders permitted the increased ratio. And, in fact, lenders found almost any reason under the sun to decline these loans.

Enter foreign development failures, (World Affairs Journal):

 

Money Pit: The Monstrous Failure of US Aid to Afghanistan

Joel Brinkley

More than half of Afghanistan’s population is under twenty-five, which shouldn’t be surprising since the average life span there is forty-nine. But the United States Agency for International Development looked at this group and decided it needed help because, it said, these young people are “disenfranchised, unskilled, uneducated, neglected—and most susceptible to joining the insurgency.” So the agency chartered a three-year, $50 million program intended to train members of this generation to become productive members of Afghan society. Two years into it, the agency’s inspector general had a look at the work thus far and found “little evidence that the project has made progress toward” its goals.

The full report offered a darker picture than this euphemistic summary, documenting a near-total failure. It also showed that USAID had handed the project over to a contractor and then paid little attention. Unfortunately, the same can be said for almost every foreign-aid project undertaken in Afghanistan since the war began eleven years ago.

 

Deja vu all over again … (Washington Post):

 

Top Democrat: Obama’s red line strategy on Syria ‘not well thought out’,

By Aaron Blake

The top Democrat on the House Armed Services Committee says President Obama’s decision to draw a “red line” when it came to Syria using chemical weapons “was not well thought out.”

“I don’t think you draw a red line like that, that is not well thought out,” (Representative Adam) Smith said during an appearance at the Council on Foreign Relations on Thursday. “You do not say, ‘If you step across this line, we will commit U.S. military force,’ unless you really mean it, unless you know the full implications of it.”

Smith also accused the administration of not working with Congress on foreign policy and of making it look like it was developing that policy “on the fly.”

 

There is the failure to craft responsible energy policy and climate policies … instead there is denial, (Bloomberg):

 

U.S. to Be Top Oil Producer by 2015 on Shale, IEA Says

By Grant Smith

The U.S. will surpass Russia as the world’s top oil producer by 2015, and be close to energy self-sufficiency in the next two decades, amid booming output from shale formations, the International Energy Agency said.

Crude prices will advance to $128 a barrel by 2035 with a 16 percent increase in consumption, supporting the development of so-called tight oil in the U.S. and a tripling in output from Brazil, the IEA said today in its annual World Energy Outlook. The role of the Organization of Petroleum Exporting Countries will recover in the middle of the next decade as other nations struggle to repeat North America’s success with exploiting shale deposits, the agency predicted …

U.S. crude production rose to 7.896 million barrels a day in the week ended Oct. 18, the most since March 1989, according to the Energy Information Administration. West Texas Intermediate futures dropped as much as 83 cents to $94.31 a barrel in trading today on the New York Mercantile Exchange and was $94.83 as of 11:36 a.m. in London.

Global oil demand will expand by 14 million barrels to average 101 million a day in 2035, according to the IEA report. The share of conventional crude will drop to 65 million barrels by the end of the period because of growth in unconventional supplies, the IEA said without providing current data …

Brazil will triple output to 6 million barrels a day by 2035 as it exploits deep-water reserves, an expansion that will account for one-third of the increase in global production and make the nation the world’s sixth-largest oil producer, according to the agency.

 

How goes Brazil, really?

Screen Shot 2013-11-12 at 10.08.35 AM

Figure 4: Brazilian net exports by way of BP/Mazama Science Who knows what will occur twenty years from now when the promoters have retired and cannot be held accountable for their misstatements? Right now Brazilian demand is rapidly outstripping diminishing Brazilian supply. Putting cars on the highway — in Brazil as elsewhere — costs a lot less than extracting oil from oil reservoirs under thousands of feet of ocean water, (FT).

 

From burgeoning start-ups to Brazil’s own state-controlled behemoth Petrobras, many of the industry’s players are struggling to live up to the heady expectations of five years ago when vast offshore oil discoveries promised to transform the country.

Brazil’s 2007 pre-salt finds, estimated to contain up to 100bn barrels of oil, came as oil prices soared towards $150 a barrel and capital began to pour into emerging markets, creating a sense of euphoria in the industry that has gradually turned to disappointment.

“There was the idea that Brazil would solve all its problems with the pre-salt oil and this optimism contaminated the market, creating a large speculative bubble,” says Adriano Pires, founder of the Brazilian Centre of Infrastructure and a former member of the country’s oil regulator ANP.

 

The International Energy Agency says Brazil will more than double its production while the Brazilians themselves are unable to hold the modest level of production they already have; Brazil looks to have entered terminal decline, its oil fields have ‘vast’ potential but apparently little accessible oil …

_63032028_jam_ap624

Both climate change and energy depletion are serious as a heart attack. Meanwhile, Americans are unwilling to even consider make the needed material sacrifices so that the human race might escape the consequences of dumping billions of tons of carbon- and other gases into the atmosphere. As in Vietnam, we refuse to face reality, we believe our machines will save us rather than destroy us contrary to all available evidence.

 

Surviving Climate Change Is a Green Energy Revolution on the Global Agenda? By Michael T. KlareA week after the most powerful “super typhoon” ever recorded pummeled the Philippines, killing thousands in a single province, and three weeks after the northern Chinese city of Harbin suffered a devastating “airpocalypse,” suffocating the city with coal-plant pollution, government leaders beware!  Although individual events like these cannot be attributed with absolute certainty to increased fossil fuel use and climate change, they are the type of disasters that, scientists tell us, will become a pervasive part of life on a planet being transformed by the massive consumption of carbon-based fuels.  If, as is now the case, governments across the planet back an extension of the carbon age and ever increasing reliance on “unconventional” fossil fuels like tar sands and shale gas, we should all expect trouble.  In fact, we should expect mass upheavals leading to a green energy revolution.

What is a ‘green energy revolution’? It sounds like all the other energy revolutions, more waste and another opportunity for people to fool themselves …

ADDENDUM: The lesson of Vietnam

Americans in Vietnam believed that it was impossible for the US military to be beaten by poorly equipped Vietnamese farmers and tradesmen. Yet, they were beaten, and the reason was the tremendous advantages that the Americans had over their Vietnamese adversaries — of money, economic power, intelligence gathering, transport, technology and weapons. In Vietnam and elsewhere, the greater the advantages = greater certainty of defeat.

Advantages were the American’s undoing because they relied on them to the exclusion of everything else and became over-confident. The Vietnamese communists cleverly planted false information regarding communist infiltrators inside neutral- and pro-South villages and towns, this was picked up by US military intelligence networks which led to the Americans launching artillery and air strikes to harass the infiltrators. These attacks caused the deaths of many civilians who quickly turned against the Americans. Over a three-year period beginning in 1963, most of South Vietnam changed from being pro-South Vietnam and pro-American to pro-communist due to compromised intelligence and indiscriminate American bombing and shelling. Once the marginal citizen in South Vietnam become an adherent of the communist North, the war was effectively lost for the Americans. Past that point, it didn’t matter how many Vietnamese the Americans killed, more deaths simply tilted the balance against the Americans and their Vietnamese adjuncts. Toward the end, the frustrated Americans were reduced to waging a genocidal air campaign against their putative allies.

The same manner, our technological advantages are the root cause of our ongoing economic, social and political failures. Use of technology incurs costs which add up, eventually costs become greater than any possible benefit that can be gained by the technology. In the beginning the costs are so modest to be invisible, they aggregate over time, like the rate of depletion in oil fields or amounts due as interest. Eventually, the costs become breaking, like our debts, taken on to pay for and operate our precious — and money losing — machines.

The Chinese philosopher Sun Tzu remarked, “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

In Vietnam the Americans had false ideas about themselves and contempt for the Vietnamese citizens whom they were intended to support; Americans also had purposeful ignorance about the enemy. The Americans did not know themselves or their enemy; as a result they succumbed despite a vast expenditure of treasure, materials and millions of lives.

We don’t bother to know ourselves right now, we prefer to live within bubbles of distraction that emerge from the television and from in front of the windshield of a car. We have made the world and all it contains into our enemy at the same time! We can’t bother ourselves to know anything about the world, we have contempt for it. This leaves us with a choice that is rapidly becoming barren: we can stop fighting, lay down our advantages and become peaceable. We will be uncomfortable but we need not “fear the result of a hundred battles” as Sun Tzu would say … because we would not fight any. Alternatively … we can be crushed, just as we were in Vietnam instead by the world we have taken up arms against.

Knarf plays the Doomer Blues

https://image.freepik.com/free-icon/musical-notes-symbols_318-29778.jpg

Support the Diner

Search the Diner

Surveys & Podcasts

NEW SURVEY

Renewable Energy

VISIT AND FOLLOW US ON DINER SOUNDCLOUD

" As a daily reader of all of the doomsday blogs, e.g. the Diner, Nature Bats Last, Zerohedge, Scribbler, etc… I must say that I most look forward to your “off the microphone” rants. Your analysis, insights, and conclusions are always logical, well supported, and clearly articulated – a trifecta not frequently achieved."- Joe D

Archives

Global Diners

View Full Diner Stats

Global Population Stats

Enter a Country Name for full Population & Demographic Statistics

Lake Mead Watch

http://si.wsj.net/public/resources/images/NA-BX686_LakeMe_G_20130816175615.jpg

loading

Inside the Diner

Quote from: K-Dog on Today at 09:51:41 AMSo now Trump is going to do a roundup on Stephen Miller's advice.  Things could get interesting.  There may be blood. As the articles indicate, ICE has neither the money...

If posting such a big picture of Stephen Miller is not a violation of the CoC it should be.  Saying he is a POS is not a violation unless he is on the membership rolls.  I don't think he is so a total POS he is.I stopped in for a $7 dollar pastry and ...

Really good (although long) piece on the futility of trying to tame the Mighty Mississippi.REhttps://slate.com/business/2019/06/new-orleans-mississippi-river-high-water-climate-change.htmlHell Is High WaterWhen will ...

http://www.youtube.com/v/McnKrV0aDjo

Trumpovetsky is, as usual, FULL OF SHIT 💩.REhttps://slate.com/news-and-politics/2019/06/trump-ice-illegal-immigration-undocumented-crackdown-siege-arrests-deportation.htmlTrump Says Next We...

Diner Twitter feed

Knarf’s Knewz

Researcher David Spratt warns in a new report that [...]

Belgian Trappist monk Manu Van Hecke is to sell hi [...]

With the stroke of the governor's pen on Mond [...]

Boeing is open to renaming its troubled 737 Max, i [...]

Diner Newz Feeds

  • Surly
  • Agelbert
  • Knarf
  • Golden Oxen
  • Frostbite Falls

Doomstead Diner Daily June 18The Diner Daily is av [...]

Doomstead Diner Daily June 17The Diner Daily is av [...]

The Illiberal Right Throws a TantrumA faction of t [...]

THE TERRIFYING WORLD OF ALEX JONES[html] [...]

Doomstead Diner Daily June 16The Diner Daily is av [...]

Quote from: UnhingedBecauseLucid on March 18, 2019 [...]

CleanTechnicaSupport CleanTechnica’s work via dona [...]

QuoteThe FACT that the current incredibly STUPID e [...]

Researcher David Spratt warns in a new report that [...]

Belgian Trappist monk Manu Van Hecke is to sell hi [...]

With the stroke of the governor's pen on Mond [...]

Boeing is open to renaming its troubled 737 Max, i [...]

In November 2018, a 66-year-old man named Tommy Th [...]

Dear Readers, Things in Venezuela are getting mess [...]

Quote from: Golden Oxen on April 27, 2019, 01:49:4 [...]

Quote from: Eddie on April 25, 2019, 09:09:46 AMQu [...]

Alternate Perspectives

  • Two Ice Floes
  • Jumping Jack Flash
  • From Filmers to Farmers

The Brainwashing of a Nation by Daniel Greenfield via Sultan Knish blog Image by ElisaRiva from Pixa [...]

A Window Into Our World By Cognitive Dissonance   Every year during the early spring awakening I qui [...]

Deaf, Dumb and Blind Who Is Better at Conceding They Are Wrong - Conservative or Liberal Extremists? [...]

The Apology: From baby boomers to the handicapped generations. by David Holmgren Re-posted from Holm [...]

Society Is Made Of Narrative. Realizing This Is Awakening From The Matrix. By Caitlin Johnstone Orig [...]

Event Update For 2019-06-16http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.htmlThe [...]

Event Update For 2019-06-15http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.htmlThe [...]

Event Update For 2019-06-14http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.htmlThe [...]

Event Update For 2019-06-13http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.htmlThe [...]

Event Update For 2019-06-12http://jumpingjackflashhypothesis.blogspot.com/2012/02/jumping-jack-flash-hypothesis-its-gas.htmlThe [...]

With fusion energy perpetually 20 years away we now also perpetually have [fill in the blank] years [...]

My mea culpa for having inadvertently neglected FF2F for so long, and an update on the upcoming post [...]

NYC plans to undertake the swindle of the civilisation by suing the companies that have enabled it t [...]

MbS, the personification of the age-old pre-revolutionary scenario in which an expiring regime attem [...]

Daily Doom Photo

man-watching-tv

Sustainability

  • Peak Surfer
  • SUN
  • Transition Voice

Carbon in the Dale"Rather than put back the coal mines, we should seriously think about putting back the forests. [...]

Farewell to the Fishes"Ninety percent of the world’s marine fish stocks are now fully exploited, overexploited or dep [...]

Climate Change Reversal at Whole Village"During the burn people were taken around the farm to see the 40,000+ trees we have planted, ou [...]

Pitching Seaweed Straws"Kelp-based straws will beat the price of paper straw competitors later this year and could und [...]

What is your climate pawprint?"If US dogs had their own country it would be bigger than 200 other countries and likely be on [...]

The folks at Windward have been doing great work at living sustainably for many years now.  Part of [...]

 The Daily SUN☼ Building a Better Tomorrow by Sustaining Universal Needs April 3, 2017 Powering Down [...]

Off the keyboard of Bob Montgomery Follow us on Twitter @doomstead666 Friend us on Facebook Publishe [...]

Visit SUN on Facebook Here [...]

Why has it taken so long for the climate movement to accomplish so little? And how can we do better [...]

To fight climate change, you need to get the world off of fossil fuels. And to do that, you need to [...]

Americans are good on the "thoughts and prayers" thing. Also not so bad about digging in f [...]

In the echo-sphere of political punditry consensus forms rapidly, gels, and then, in short order…cal [...]

Discussions with figures from Noam Chomsky and Peter Senge to Thich Nhat Hanh and the Dalai Lama off [...]

Top Commentariats

  • Our Finite World
  • Economic Undertow

I'd dearly love to be stimulated by Signor Draghi, but the last 10 years really haven't do [...]

GBV, A bit like the users of MySpace fled in search of pastures new and came across a little town kn [...]

ECB is ready for more stimulus to fight low inflation. The time has come to end old rules and buy mo [...]

Re-election campaign scam, unicorn promises or not, POTUS has just announced the mass deportations o [...]

If I recall it correctly this DeutscheBank story has been chiefly about one particular faction of eu [...]

Hi Steve. I recently found what I believe is a little gem, and I'm quite confident you'd a [...]

The Federal Reserve is thinking about capping yields? I don't know how long TPTB can keep this [...]

As some one who has spent years trying to figure out what the limits to growth are. let me say that [...]

Peak oil definitely happened for gods sake. Just because it isn't mad max right now is no indic [...]

@Volvo - KMO says he made some life choices he regrets. Not sure what they were. And I don't th [...]

RE Economics

Going Cashless

Off the keyboard of RE Follow us on Twitter @doomstead666...

Simplifying the Final Countdown

Off the keyboard of RE Follow us on Twitter @doomstead666...

Bond Market Collapse and the Banning of Cash

Off the microphone of RE Follow us on Twitter @doomstead666...

Do Central Bankers Recognize there is NO GROWTH?

Discuss this article @ the ECONOMICS TABLE inside the...

Singularity of the Dollar

Off the Keyboard of RE Follow us on Twitter @doomstead666...

Kurrency Kollapse: To Print or Not To Print?

Off the microphone of RE Follow us on Twitter @doomstead666...

SWISSIE CAPITULATION!

Off the microphone of RE Follow us on Twitter @doomstead666...

Of Heat Sinks & Debt Sinks: A Thermodynamic View of Money

Off the keyboard of RE Follow us on Twitter @doomstead666...

Merry Doomy Christmas

Off the keyboard of RE Follow us on Twitter @doomstead666...

Peak Customers: The Final Liquidation Sale

Off the keyboard of RE Follow us on Twitter @doomstead666...

Collapse Fiction

Useful Links

Technical Journals

The South Atlantic Ocean is currently undergoing significant alterations due to climate change. This [...]

This paper assessed the variability and projected trends of solar irradiance and temperature in the [...]

Following the impact of droughts witnessed during the last decade there is an urgent need to develop [...]

A “nadir-only” framework of the radiometric intercomparison of multispectral sensors usi [...]

A fuzzy random conditional value-at-risk-based linear programming (FCVLP) model was proposed in this [...]