Triangle of Doom

Ciao, Britannia!

TriangleofDoomgc2reddit-logoOff the keyboard of Steve Ludlum

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Published on the Economic Undertow on June 8, 2016

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Figure 1: Chart by TFC Chartz (click for big): It’s called the Triangle of Doom for a reason, carried through to the end, no outcome is possible other than demise of the automobile industry and its petroleum dependencies. Since 2000, there have been a series of petroleum price surges intended to meet the industry’s exorbitant extraction costs. Each attempt has failed as credit conditions outside the fuel markets deteriorated. As can be seen, many of the credit failures originated within the European Union. These fails, credit shocks and price retrenchments are to some degree, a product of EU structural shortcomings. Now, the British have voted to leave the EU, panic ensues: (NY Times).

‘Brexit’ Sets Off a Cascade of Aftershocks …




Maybe the future does not include flying electric cars after all.

By Steven Erlanger





Britain’s startling decision to pull out of the European Union set off a cascade of aftershocks on Friday, costing Prime Minister David Cameron his job, plunging the financial markets into turmoil and leaving the country’s future in doubt. The decisive win by the “Leave” campaign exposed deep divides: young versus old, urban versus rural, Scotland versus England. The recriminations flew fast, not least at Mr. Cameron, who had made the decision to call the referendum on membership in the bloc to manage a rebellion in his own Conservative Party, only to have it destroy his government and tarnish his legacy.




So it goes. There is a huge reaction and certainly more to come as markets digest what has happened … and what is certain to come. In the end it is very simple …

The Brexit vote was inevitable. Britain had no choice but to jump in the lifeboat and abandon the sinking EU Ponzi scheme.

Will it succeed? Probably not but it has to try. If not England it would have been another big European country, perhaps Italy as the first to abandon the scheme. The rest have to wait … but not for long. England’s alternative would be to devolve in a few short years to a petty euro protectorate like Greece or Ukraine begging Russia for fuel and Frankfurt for loans and forbearance. At issue is UK’s massive (£6+ trillion) external balance sheet, its banking liabilities vs. the dubious quality of its assets.

Brexit states unequivocally the City of London is insolvent; at the the point where it cannot finance itself any longer. This is the reason why the establishment rolled out the Brexit referendum in the first place, to save the banks. Think of Brexit as a bailout: the small will pay for the excesses of the great. The City certainly cannot finance the rest of the country and its massive and non-remunerative fleet of gas-guzzling automobiles; something has to give. There are 31.5 million cars in a country of 64 million humans, each car requires the resources of 20 persons. UK staggers under the equivalent human population of 630 millions on a small island … the bulk of those being dented, metal deadbeats. Talk about immigration, no wonder the economy struggles.

The automobiles and their need for fuel imports and infrastructure paid for w/ endless credit issue have bankrupted the entire West, not just England. In Europe: the euro = gasoline. For once — maybe not realizing exactly why and not being entirely happy about it — the British have voted against their cars.

It’s about time!


TriangleofDoomgc2reddit-logoOff the keyboard of Steve Ludlum

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Published on the Economic Undertow on May 2, 2016


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As JP Morgan famously remarked, markets fluctuate; its impossible at any particular moment to pick trends out of the background noise. Nobody can say for sure whether tops or bottoms are in. Trends only reveal themselves in the rear-view mirror, even as they are obscured by non-stop advertising campaigns and PR. By the time a trend is clear it is usually too late for investors — otherwise known as ‘fools in the market’ — to do anything about it, the free lunch is already eaten and the punch bowl taken away …

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Figure 1: Is the bottom in? Chart by TFC Charts (click for big). Oil prices have been fluctuating higher in futures’ markets but nobody can be sure whether prices will rise from here or head back for the cellar.

With current prices at- or below the cost of extraction, drillers look to survive by reaching for the plastic, offering themselves and their properties as collateral. This is a medium-sized problem for drillers: along with all the other industries they have been borrowing from the beginning of time. In the good ol’ days they borrowed less, now they borrow more while praying for the trend change that brings that punch bowl back.

Ordinarily, the oil drillers’ customers step forward with their own borrowed funds to retire the drillers’ loans. Customers don’t simply sign over the money to the drillers, they over-pay for drillers’ products. This is what the term, ‘sustainable business model’ actually means; customers pay higher prices for successive rounds of cheaper-to-produce goods; the margin is used by firms for debt service and the retirement of maturing loans. Naturally, as each round of financing is rolled over the firms borrow more. Some of this money flows to executives, by way of this process CEOs become tycoons. Economists gain as well because every increase in borrowing represents GDP growth they can take credit for.

Fast-forward to the present: goods are unaffordably expensive to produce, emptied-out customers are no longer able to over-pay. They have nothing to offer as collateral for loans but their (near worthless) labor and frantic urge to Waste as seen on TV. Because the customers are unable to borrow, they cannot benefit the drillers, the drillers must borrow for themselves and pray …

Because the ‘waste as collateral’ concept is absurd/ridiculous, both the customers’ AND the drillers’ loans are effectively unsecured. This leaves a maturity mismatch between drillers and their customers. Firms are borrowing tens- of billions of dollars even as their customers are standing in line at the food bank. Customers cannot borrow => they cannot overpay => prices crash as drillers have no place to put unsold crude => whatever collateral the driller offers becomes worthless. The customers stiff their lenders => there is nothing for lenders to seize. At the end of the day, drillers, customers and lenders are all ruined … this dynamic is playing out in real time, right this minute, under everyone’s nose, all over our Great Round World.

This is perfect if unremarkable sense; conditions within oil industry finance must reflect resource depletion and it is clear that they do. The non-stop PR campaigns touting driller technology, efficiency and innovation are irrelevant, none of these things touch the customer. Losses cannot be made up with volume. Real returns, solvency and cash flows matter; when customers cannot gain the means to buy fuel industry products there is ultimately no more fuel industry. Redistribution, or giving customers the means to buy fuel is an immediate-term (non)solution. Some expensive time is borrowed until the customers’ financing is exhausted. Because resource waste offers no tangible returns to the waster; his credit will eventually run out, he will waste no more.

Meanwhile, the drillers must borrow or go out of business while lenders hold their noses and lend! The alternative is an output crash; we are caught between a looming crash and conditions that are pregnant with crash possibilities. Credit access becomes a matter of desperate necessity with every borrowed dollar lodged against the lenders’ deteriorating balance sheets. At the twilight of the petroleum age, drillers survive by cannibalizing their bankers who in turn are becoming the global economic link under the greatest strain.

Giant finance firms preserve the illusion of system sufficiency by lending to each other. Self-pleasure here is deadly; the lenders have become zombies rotten with non-performing loans. Growth is stagnating, economies are falling into deflation, turning Japanese. The zombification of the banks becomes both the reason for- and the consequence of extraordinary monetary quackery: the intent is to goad finance into squeezing out every possible loan, to kick that can one more day while hoping for a miracle. For business as usual, there is no alternative: interest rates fall to zero- then negative, currencies depreciate, pensions are looted and depositors bailed in … we must endure these abuses or else! Everywhere in the Westernized world useless industries and sectors are propped up regardless of consequences. Deflation results from the longer-term inability of billions of end-users to gain purchasing power or returns on capital from a mechanized regime that is designed from the ground up to annihilate capital.

No capital, no purchasing power, no problem; we’ve got iPhones, instead!

Blows are starting to rain down on the technology sector. Instead of saving our bacon as its promoters endlessly insist, the industry is having problems saving itself:


Figure 2: It isn’t just the energy sector: looking at this pretty chart (Yahoo Finance, click for big): Apple’s decline looks to be part of a longer-running trend rather than a fluctuation. The firm reported earnings, which were terrible; the company is being punished for its customers’ misbehavior.

Rotten Apple: Stock plunges 8% on earnings, revenue miss

Everett Rosenfeld

Apple reported quarterly earnings and revenue that missed analysts’ estimates on Tuesday, and its guidance for the current quarter also fell shy of expectations.

The tech giant said it saw fiscal second-quarter earnings of $1.90 per diluted share on $50.56 billion in revenue. Wall Street expected Apple to report earnings of about $2 a share on $51.97 billion in revenue, according to a consensus estimate from Thomson Reuters.

That revenue figure was a roughly 13 percent decline against $58.01 billion in the comparable year-ago period — representing the first year-over-year quarterly sales drop since 2003.

Shares in the company fell more than 8 percent in after-hours trading, erasing more than $46 billion in market cap. That after-hours loss is greater than the market cap of 391 of the S&P 500 companies.



AAPL is not some disposable startup at the end of a cul-de-sac somewhere in suburbia, it is (or was) the world’s largest company by capitalization. It is the technology sector’s tech company. When people hear the word ‘progress’, chances are they think robots and iPhones. Yet, markets are becoming unfriendly for the behemoth: its shares presently lurk at a support level, that if breached, would indicate a decline to $55 or so … from $125 per share a little over a year ago. In other words, a slump that mimics the fuel price crash.

This is very serious business. Stockholders are a who’s who of finance: pension funds, sovereign wealth funds, central banks, private equity and hedge funds. Shares are collateral for billions in debt that has been used for stock buy-backs and mergers. The entire tech investment ecology is at risk. Damage from a sixty-percent-ish price decline would be severe. Leverage against the shares applied backward compounds the damage just as it expands returns on rising prices; this puts more pressure on the hapless lenders reeling from their debacle in the oil patch. It isn’t just the money: against a backdrop of hand-wringing and denial, the science fiction narrative of a future running on innovation (and sharp business practices) is falling apart.

Ironically, Apple is constrained by a cleverness shortage: successive iterations of iWhatevers have become predictable variations on now-familiar themes. Offering customers novelty in modest increments at stratospheric prices has consequences; buyers are skipping over the brand and buying cheaper look-alikes. Commodity ‘clone’ products represent the race to the price basement, they can’t generate the marginal returns or snazzy narratives that support inflated share prices. In this sense, Apple is a victim of its own success, it must either compete going forward with its imitators on price or invent the next great must-have-at-all-cost consumer product that will re-establish its position of leadership in the technology firmament.

This is what AAPL has come up with …


So much for redemptive innovation and technology … Apple aims to reinvent the Dodge Caravan. It turns out all roads lead to more and more roads. Why not battleships, instead?


HMS Dreadnought, a brilliant technological achievement in 1906, it was rendered obsolete before its keel was laid by the airplane.

Apple cannot be serious! In choosing the car, AAPL lurches in the direction of the hapless Japanese, who make brilliant cars (made brilliant battleships) but cannot return value to the cars’ users (neither do battleships). The auto (battleship) industry is a subsidy hog, it twists in the wind even as it is on life support. By way of its actions, APPL admits its customers can no longer subsidize the company and its lenders, it looks instead toward the government (just like battleship manufacturers), to gorge at the public trough.


Figure 3: TSLA, another investors’ darling, (click for big). Strapped customers can afford the cars by bellying up to their friendly sub-prime auto lender for eight-year loans. Even this absurd financing is inadequate without billions in additional subsidies. These in turn can only come from finance, the same industry under so much solvency pressure from resource depletion … resulting from over-reliance on cars (battleships).

And all for what end? Nobody connects the big picture dots behind the empty gestures; battleships, Teslas and iPhones are status symbols, worth little- or nothing outside their self-generating, hubristic narratives. “In the long run,” said Keynes, “we are all dead”, it seems certain that we have to humiliate ourselves first.

Euro Margin Call

Off the keyboard of Steve Ludlum

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Published on Economic Undertow on July 5, 2015

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Figure 1: Triangle of you-know-what, continuous WTI futures contracts, chart by TFC Charts, (click for big). Petroleum price decline is just one piece of evidence for credit distress; another is the steady increase in bond yields which reflects the anxiety on the part of lenders that they might not be repaid.

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It is difficult to make heads-or-tails out of the Greek melodrama playing out at this moment. To default or not default, in the eurozone or out. Who knows? Observers are confused and so are the participants, what is clear is that the stakes are very high. The group designated to absorb the hardest blows cling to the bottom of the economic mast; workers, pensioners, students and suckers lured into investing in countries like Greece … then again, maybe not. There is the chance of contagion, anything is possible including the chance that some tycoons might lose their fortunes.

Regardless of outcome, the politicians are winners. Even as their follies multiply they meet nothing in the way of discomfort. Walking on gilded splinters, they spend every moment within settings as extravagant as Hollywood sets, fawned over by hordes of lackeys. Stuffed like geese for foix-gras on mysterious ‘luxury food’, their greatest hazard is that they might get too fat … or that they might be revealed as libertines. When their crimes and blunders have ripened they retire with their fortunes; enormous (borrowed) pensions, favorable (borrowed) business arrangements, excessive (borrowed) speaking fees and … (borrowed) … consulting jobs even as their constituents are hounded into penury so as to make the interest payments.

Other winners include the ordinary ‘Brand X’ criminals who take advantage of the vacuum that is the natural outcome of their betters’ ineptitude. Misery multiplies … none of this is new. The die for the current round of crises was cast long before the turn of the millennium … there has been that long to do something about it.

One thing is clear; that the brouhaha in credit markets is a symptom, not the disease. Analysts must observe carefully the larger trends and connect the dots. The problem is not a matter of adjusting the model but with the model itself. Industrial enterprise does not offer a return. Capital and value — and purchasing power — are converted into waste, what stands for ‘wealth’ is a measurement of the wasting process. Our economy has bloated into a monstrous organism that consumes everything and puts nothing back. The disease is the reaching of planetary limits; access to water, fuel, minerals, soil fertility, waste-carrying capacity and credit. Capital resources are being allocated by rationing access to loans. No credit = no resources, taking place under everyone’s nose is ‘Conservation by Other MeansTM‘.

This is a nasty and unpredictable process, what connects the dots together is the common outcome: ‘less’.

The one fact about parties is that they all end. The cocaine runs out. Everyone has to go home.


In the Eurozone and elsewhere, the cocaine — cheap credit — is running out. What remains is the hangover and daunting task of sobriety. Along with the credit, going is the gasoline. Things will never be the same.

‘Never be the same’ are fighting words for the Establishment which entrenches itself more deeply into the present even as both it and establishment become less relevant. Because it has lost the ability to reform itself, the establishment lashes out in a reflexive attempt to preserve its vanishing prerogatives. This is self-evident: if reform was possible it would have already taken place, the reforms would have prevented the crises.

Managers do not grasp the currency risk that emerges from both continued austerity programs or default. Economies are containers of social- and political values, shared understanding built upon edifices of trust. Within economies a collective suspension of disbelief takes place that insists bits of colored paper or electronic data are worth something. The trust emerges as more people share the same ‘worth’ idea and gain benefits from it.

Germany is Europe’s responsible party, it is EU’s paymaster and the long-time primary beneficiary of the Euro-economic activity. Mercantile Germany sits at the center of Continental trade; German euro surpluses are the consequence of its partners’ deficits. Ironically, German currency risk is no different from Greek risk, because both countries do business in what amounts to a foreign currency. Germany holds a borrowing advantage at the moment but both are built with the same financial armature, the defects of one country are the defects of all the others. The idea that Germany can integrate Europe around its economy … then somehow pull up the ladder when convenient is a hallucination.

Presently, managers carelessly discount one group’s sense of worth then another’s. Today is Greece, tomorrow is another country. Trust wavers then evaporates, at that point the economy is junk and the money is worthless, even if ‘the numbers’ indicate otherwise.

Reckless Germany gambles with euro risk even as it cannot afford to do so. It holds trillions of EU liabilities both in the form of currency and credits in its banking system along with ongoing business relationships with companies outside of Germany and the Eurozone. German wealth is nothing other than the trust earned over the entire post-WWII period. The ideal is that each European will engage profitably with others; not as slaves, some paying while others collect. Germany pretends it controls its destiny but this is something it cannot guarantee. Trust cannot be directly inserted into the minds of others: what Germany has cultivated carefully with one hand it casually undermines with the other.

Right now Germany plays the part of enforcer for Europe’s criminal banks. The blows it levels against its neighbors rebound against itself; the outcome of this is slow suicide. The impaired assets on European balance sheets outweigh investor equity and bondholder credit together. Europe is insolvent, liabilities are looking for a place to hide. The logical destination is Germany whether there is a euro or not. Within the euro, Germany cannot escape the full weight of its neighbors’ liabilities. Consequently, it has no choice but to succeed at its unification endeavor … otherwise, the worthlessness of the others’ balance sheets will be marked up against its own.

German banks and industry are right now stuffed with euros but this is momentary. There is no way possible for the current conditions within German finance to survive the demise of the currency. Germany cannot simply pick up its luggage and move itself away from Europe taking its ‘wealth’ with it. There is no road map for Germany to get from the euro to a substitute currency space The Germans and other creditor countries frozen to the spot: any sign that the Germans might abandon the euro would be the alarm for the others to do the same, to the instant ruin of German creditors, who are owed tens of trillions of euros.

The end of the euro anywhere within the Eurozone would also cast into doubt the security of Germany’s bank deposits. Uncertainty would trigger a run on German banks just as there is a run on Greek banks today. Germany would find itself bound by domestic politics to defend the euro to the bitter end, to protect its depositors. By doing so, Germany would become the fool of the market, the dumping ground for all European liabilities. This is a fate it cannot avoid, because of its long-running success it is the only European country with money!

The alternative strategy would have Germany racing Greece and Italy out the door. The survivor would be the first to grab a lifeboat on the Titanic. This is the nature of unraveling Ponzi schemes where the few winners get out early.

Add the currency trap to Keynes’ liquidity trap amplified by the political expediency trap. In its desire to party forever Europe is confronted with the persistence of liabilities that are generated along the way. These liabilities pitch Germany’s tent on the lip of the abyss. With the passage of time and accumulating mis-management, holders question whether euros are ‘worth the hassle’ and ‘worth the risk’ or not. This is not the proper sort of inner dialog to have about any currency.

With a non-euro currency, Germany’s option would be to depreciate. Doing so at a scale that would ‘manage’ liabilities would be default by another name with the costs falling on German depositors. To choose otherwise and not depreciate would leave Germany facing the same ruin as Greece faces right now; it would ‘become’ Greece, with massive and unsupportable demands for repayments in a foreign currency, a shortage of money, the absence of liquidity and a breakdown of export trade.

The only way for Germany to manage EU-legacy repayment claims would be to re-denominate them from euro to d-mark and then somehow inflate them away against a background of economic growth. However, jettisoning the euro would cut Germany off from its now-captive European markets. This would eliminate the growth potential; Germany would be crushed by its debts in a deflationary environment.

As bad as conditions would be for Germany, they would be worse for the other European countries. There would be a scramble for hard currency: everyone for themselves. If this is to be a hard German currency there would be a shortage much worse than there is today. The Europeans would be faced with the task of cobbling together a monetary system while the rubble of the current regime collapses on its head. Constructing a new model would require enormous investment of funds and good will that the Continent does not now possess; a breakdown would remove any possibility of either, there would be insufficient capital with which to (re)build anything.

The euro monetary union has had obvious structural defects from the get-go as admitted to by the Euromasters themselves. Now there is resolute refusal to address these defects even as the entire European enterprise accelerates to destruction. If not now, when? Does Angela Merkel or Wolfgang Schäuble honestly believe the Greeks will ever trust the Germans again after such rough treatment at the hands of faceless Troika functionaries? What good can this portend for German business? How do German businessmen expect their enterprises to succeed, on what alternative planet?

Dire times are when political instincts abandon professional politicians at a moment when these instincts are necessary. The Germans refuse to share any of the hardships their policies inflict upon their neighbors. Germans whine but their finance industry underwrote the bad loans, with eyes wide open, for the benefit of German manufacturers … whose ‘goods’ cannibalize the trading partners’ capital. German finance ignored the risks as it ignores currency risk today.

There are depositors run from Greek- and other banks into Northern Europe. The run itself is a part of the long-standing flow of funds from the rest of Europe into Germany’s national account. The ‘First Law’ states that as surpluses increase, the cost of managing them becomes greater than the surpluses’ worth. This can be seen in Europe where cost of Germany’s current account surplus is a shortage of liquidity and broken markets. Germany must unwind its surpluses, reducing the costs to both its customers and itself. It can unwind its smug sense of institutional superiority at the same time.


The world falls apart, nobody has an idea what to do about it.


Europe has been in a finance crisis for years, there has been plenty of time to ‘innovate’ solutions. Sadly for the Euros, all of the real solutions require giving up something … which nobody wants to do. Instead there is punishment for those tied to the mast; the workers, pensioners, students and suckers lured into investing in countries like Greece. The best the bosses have come up with so far is bailouts for giant banks, ‘appropriation’ of depositor funds and (incoherent) public relations.

Europe needs debt relief and stringent energy conservation. Finance collapse turns out to be the implement of conservation as bankrupt Europeans cannot drive, small countries with nothing to offer but their own worthless currencies cannot import fuel. Finance dares not risk relief to Greece because it cannot withstand the losses. Relief to Greece means granting relief to other Euro-deadbeats France and Italy (Germany). What is taking place right now is a margin call against the euro. The absence of relief insures the collapse of the entire finance edifice as defaults proliferate and distrust propagates.

In Part II we will look at some of the steps that can be taken including The Greek government issuing non-liability fiat euros — Greenbacks — and use them to retire euro denominated obligations on a fixed schedule.

Fantasy Islanders

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on April 26, 2015

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Figure 1: We have now entered the post-economic Triangle of Doom period TFC Charts, (click on for big); the triangle has outlived its usefulness, the oil – credit markets have broken down. What remains is relentless decline … as resources along with purchasing power are annihilated.

Can we handle it? In place of hard-headed realism and a turn toward effective policy, there is denial and lies. Analysts insist lower oil prices have no affect on output. Others pretend that debt-riddled economies can be cured by adding more debt. In ways great and small, the real world offers clear warnings about consequences of consumption … but these are ignored as the establishment frolics on Fantasy Island.

From the dawn of the industrial era, companies have been able to stay afloat by borrowing. This included oil drillers: since 2008, extraction firms have borrowed over a trillion dollars at very low cost. They can certainly and reasonably expect to borrow more, after all the funds cost the lenders nothing to create. But who repays? Someone must: a firm can borrow from its own lenders for a long time but at some point the customers must step up and borrow for the firm’s benefit. Otherwise the firm’s indebtedness becomes greater than any potential number of customers can bear: at that point the firm is insolvent and out of business.

The ongoing petroleum price crash is by itself evidence that customers can no longer support the oil industry. Citizens cannot lend their own funds into existence, they must borrow from others or swap their time- and skills for (borrowed) funds. Because the aggregate worth of human labor represents a kind of upper bound to leverage, the outcome is a ‘repayment shortage’ which strands the drillers and their lenders; every additional dollar a firm borrows to stay alive is a dollar that is ultimately uncollectible from the firm’s tapped-out customers.

Stripped to fundamentals, oil use turns out to be recreational not economic. Modernity is revealed to be nothing more than ‘lifestyle’, pointless wars and other distractions. We must eat and drink to live, we drive to fill the empty spaces between television shows.

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Figure 2: The gold futures continuous contract by way of TFC Charts, (click for big): gold has led the industrial commodity markets down, with its own break occurring in 2012. The gold price trend over the past year and a half is generally sideways. Look for similar price action in other commodities including petroleum over the intermediate term.

Gold can be sold below cost because it is indestructible whereas oil is simply wasted. Any shortage of new gold results in a scarcity premium being attached to the gold that remains above ground. The premium is real, not necessarily nominal, the beneficiaries are the gold holders who gain whether new gold is mined or not.

Selling below cost does not work with petroleum because consumers destroy it, what they gain in return is generally worthless. In this way, fuel users turn their asset into a compounding liability. Unlike gold, the petroleum scarcity premium doesn’t benefit anyone either holders (drillers or distributors) or customers, scarcity takes the form of a disruptive tax … that is ultimately uncollectible from the firms’ tapped-out customers.

Denial creates its own perverse dynamic: when low prices do not provoke the needed ‘lifestyle adjustments’ they decline further until they do. Conservation is the necessary adjustment, yet low prices are an incentive to waste more. When customers conserve there is the appearance of a ‘glut’, this in turn leads to lower prices. The outcome is a price signal that is hard to interpret, confusion rather than clarity because the consumer response to the ‘false glut’ and a real one is the same.

Real price increases can only occur when customers become wealthier relative to the drillers … when they become able- willing to borrow more; when repayment obligations can be shifted onto others. None of this is happening right now, instead customers are bankrupted by their own energy waste. Because fuel use does not produce anything; industries can only offer improved efficiency, that is, the exhaustion of what remains of our non-renewable capital at a slightly slower pace. The same efficiency means losses that must be made up with volume => diminished (non-existent) collateral for loans => less ‘growth’ and lower prices including interest cost of money. Increased efficiency means more unsecured lending, more finance industry risk along with diminished ability to properly price it; along with customer bankruptcy, these are forms the petroleum scarcity premium assumes.

A long-term resident on Fantasy Island is Ambrose Evans-Pritchard:

Oil slump may deepen as US shale fights Opec to a standstill







Continental’s Harold Hamm says US shale industry has ‘only begun to scratch the surface’ of vast and cheap reserves, driving growth for years to come.

The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America’s “flexi-frackers” remain largely unruffled.

One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an energy superpower with greater political staying-power than Opec.

It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world’s “Federal Reserve” and opted instead to drive out competitors.

If the purpose was to choke the US “tight oil” industry before it becomes an existential threat – and to choke solar power in the process – it risks going badly awry, though perhaps they had no choice. “There was a strong expectation that the US system would crash. It hasn’t,” said Atul Arya, from IHS.

“The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise,” said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.

Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. “This is going to last for a while,” he said, warning that any rallies are likely to prove false dawns.






Enter the Petro-industry Ponzi buzz-words: ‘vast and cheap’, ‘flexi-frackers’, ‘energy superpower’ and ‘price discovery exercise': what is wrong with these? A: just about everything …

Hamm and Exxon have both lost billions since the beginning of the year. It isn’t just private companies: Russia, Saudia, Brazil even Islamic State have lost ‘vast’ amounts of income from fuel sales. It is nonsense to believe that these losses are inconsequential. Someone must bear them, if not the firms then the firms’ lenders and loan guarantors; if not the governments then certainly the drilling agencies which require investment funds. Every one, company and country, is dependent upon the borrowing capacity of their customers …

A large percentage of mid-sized energy firms are simply failing. So are lenders who stand to be wiped out, also Canada and its poorly conceived real estate extravaganza … also Canada banks. Don’t forget Australia; also Russia. Previously drilled wells are left uncompleted, rig count has plunged. The assumption is that shortages will re-ignite a bidding contest; however, customer purchasing power shrinks faster than the rate of depletion. This is because the elites’ share of purchasing power expands at the expense of the customers’. As a consequence, even very low prices for petroleum and other resources are unaffordable at any given time.

Fantasy Islander Jeffrey Sachs suggests American fuel- guzzling, Las Vegas lifestyles can be powered with solar panels and windmills. Sachs ignores how wimpy/pathetic these power sources are compared to gigaton carbon burning and nuclear, (Project Syndicate):


Photo of Jeffrey D. Sachs  

Jeffrey D. Sachs, Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University, is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals.

ExxonMobil’s Dangerous Business Strategy

Jeffery Sachs

NEW YORK – ExxonMobil’s current business strategy is a danger to its shareholders and the world. We were reminded of this once again in a report of the National Petroleum Council’s Arctic Committee, chaired by ExxonMobil CEO Rex Tillerson. The report calls on the US government to proceed with Arctic drilling for oil and gas – without mentioning the consequences for climate change.

While other oil companies are starting to speak straightforwardly about climate change, ExxonMobil’s business model continues to deny reality. That approach is not only morally wrong; it is also doomed financially.

The year 2014 was the hottest on instrument record, a grim reminder of the planetary stakes of this year’s global climate negotiations, which will culminate in Paris in December. The world’s governments have agreed to keep human-induced warming to below 2º Celsius (3.6º Fahrenheit). Yet the current trajectory implies warming far beyond this limit, possibly 4-6º Celsius by the end of this century.

Just as the global shift toward renewable energy has already contributed to a massive drop in oil prices, climate policies that will be adopted in future years will render new Arctic drilling a huge waste of resources.






Sachs is as hopeful as Evans-Pritchard, he fusses over extraction but simply dismisses the consumption side with a breezy, hand-waving reference to: “low-carbon energy like wind and solar power, and to electric vehicles powered by low-carbon electricity.”

Low-carbon wind and solar are high cost, dispersed power sources that cannot provide the same loss-leading subsidy to industry that petroleum has offered since the turn of the 20th century. Sachs assumes that the same consumers who are too broke to afford diesel and gasoline will somehow pony up for alternatives that have greater life-cycle costs … alternatives that are themselves entirely dependent upon unaffordable diesel and gasoline for manufacture, transport, installation and maintenance.

Wind and solar might become something more than a marginal amendment to conventional grid electric or portable generators but this is hard to quantify due to intermittancy. EROI calculations tend to omit storage- and grid/infrastructure costs. Also avoided is energy cost of the factories making the turbine- and panel factories, factory components and these factories’ components in turn. Transportation and installation costs are difficult to calculate because they are not monolithic, self-contained processes but widely distributed (most panels are made in China and installed elsewhere). The manufacturing base of transportation industry is itself fossil fuel dependent.

Widespread penetration of low-carbon electric vehicles is found on Fantasy Island and nowhere else: every kind of car is possessed of immense life-cycle costs including interconnected chains of energy gobbling factories and infrastructure. There are no solar tires or window glass, no wind-turbine highways, bridges or real estate developments. Infrastructure requires steel, concrete, plastic and asphalt; all of these require work, high-density power derived from fossil fuels.

Our planetary scale built environment is likewise dependent upon ‘vast’ and ‘massive’ finance industry debt … as are solar panels and wind turbines.

Most likely, that ” … global shift toward renewable energy,” has added to fossil fuel demand where it would otherwise decline. Only indirectly has renewable energy triggered Prof. Sachs’ “massive drop in oil prices …” Solar and wind firms must borrow, in doing so they strip credit from their hapless customers … collapsing oil prices by way of the back door.

Energy Commodity Futures (Bloomberg)

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 55.74 -0.97 -1.71% May 15
Crude Oil (Brent) USD/bbl. 63.45 -0.53 -0.83% Jun 15
RBOB Gasoline USd/gal. 192.99 -0.55 -0.28% May 15
NYMEX Natural Gas USD/MMBtu 2.63 -0.05 -1.86% May 15
NYMEX Heating Oil USd/gal. 188.24 -2.56 -1.34% May 15






Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,203.10 +5.10 +0.43% Jun 15
Gold Spot USD/t oz. 1,204.22 +5.67 +0.47% N/A
COMEX Silver USD/t oz. 16.23 -0.06 -0.34% May 15
COMEX Copper USd/lb. 277.00 +0.25 +0.09% Jul 15
Platinum Spot USD/t oz. 1,171.50 +11.75 +1.01% N/A

Next to Sachs and Evans-Pritchard on Fantasy Island are the Greeks and their European bankers, (Wolf Richter):

The Greek People Just Destroyed Syriza’s Strategy







Greek stocks ventured deeper into purgatory. The ASE index dove below 700 intraday on Wednesday for the first time since the crisis days of June 2012. Then word spread that the ECB had raised the cap on the Emergency Liquidity Assistance for Greek banks by €1.5 billion to €75.5 billion. It’s the oxygen line for Greek banks. Without it, they’re toast.

The ELA provides the liquidity so that the Greeks can continue yanking their beloved euros out of their banks to stash them elsewhere before their desperate government confiscates them.

The government, under the cool leadership of Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, is already confiscating €2.5 billion in “idle” cash that state agencies, state-owned enterprises, and local governments kept at commercial banks, the same banks that the ELA is propping up and that the Greeks are fleeing. Now these entities have to transfer the money to the central bank so that the government can “borrow” it for other purposes.






Did you get it? The flow of funds into and out of Greece is almost farcical. Money loaned by the ECB originates in EU banks, the ECB is a conduit. The funds flow to ordinary Greeks who remove them from Greek banks and re-deposit them in the same EU banks the loans came from; full circle! The EU banks are not deploying Greek savings but are instead offering loans to Greek depositors who are themselves are on the hook for repayment … the Greeks are in essence getting loans instead of their own money … the costs of which the depositors are attempting to dodge by hustling their funds out of Greece … Meanwhile, repayment for loans to Greek depositors are being extracted from the same Greek depositors by the Greek government!

You cannot make this s**t up. Behind the Vaudeville is the fantasy of Greece leaving (being forced out of) the euro. This is impossible, it cannot happen and everyone knows it. The only outcome is the euro lives or the euro dies.

The euro = gasoline. The Europeans including Greeks will never voluntarily give the euro up because it enables driving. Without the euro half of the Europeans would have to walk … horrors! Even if the Greeks could somehow ‘go off’ the euro, it would still circulate in Greece but outside the reach of government. Greece outside the euro would create more instability than it does now. Greeks would use the euros (gasoline) and do whatever they could to get them including discount their own ‘replacement’ currency. Jettisoning the euro would not solve euro-related debt problems, either. The problems — petroleum scarcity premium — would simply be shifted around from one country to others wreaking havoc.

Greece could dollarize but the country’s credit problems would not go away. Not because the government overspends or because the Greeks have too many overpaid workers (who sadly happen to be temporarily indisposed) but because Greeks have too many cars and cannot earn anything by driving them. Greece — like the rest of the world — is bankrupted by its own fuel waste and the uncollectible petroleum scarcity premium.

Greece is an agrarian vacation paradise with smuggling rings. It has its own currency — the euro — but acts like the currency is a gift from (banking) gods. Because Greece has its own currency it really controls its own destiny to the degree that it can buy some time and use it to wean itself from imported fuel and Northern European finance credit.

Another Fantasy Island resident is Yanis Varoufakis:

A New Deal for Greece – a Project Syndicate Op-Ed







ATHENS – Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece …

The “troika” institutions (the European Commission, the European Central Bank, and the International Monetary Fund) have, over the years, relied on a process of backward induction: They set a date (say, the year 2020) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates. Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, working backward to the present.

Our government’s position is that backward induction should be ditched. Instead, we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece’s economy and debt ratio. If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximizing the effective present value that will be returned to Greece’s creditors.

Besides convincing the troika that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the “reform trap.” The previous reform program, which our partners are so adamant should not be “rolled back” by our government, was founded on internal devaluation, wage and pension cuts, loss of labor protections, and price-maximizing privatization of public assets.

Our partners believe that, given time, this agenda will work. If wages fall further, employment will rise. The way to cure an ailing pension system is to cut pensions. And privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable.

By contrast, our government believes that this program has failed, leaving the population weary of reform. The best evidence of this failure is that, despite a huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports).






More buzzwords: ‘forward-looking’, ‘reasonable’, ‘surpluses’ (who doesn’t like surpluses?), ‘sustainability': reassuring and even-tempered like the mad computer Hal 9000 in Kubrick’s ‘Space Odyssey’.

It’s pretty sad to see the genial/obnoxious Varoufakis scuffling from pillar to post, tugging his forelock like a latter-day Oliver Twist, begging criminals like Wolfgang Schäuble and Christine Lagarde for ‘more'; “Please sir, some more” … more loans of course. Without loans-constant increase in credit there is no Greek ‘industry’ … or any other countries’ industry for that matter.

Using econo-speak, Varoufakis attempts to square the circle, arguing the Greek claims to live large: “The others do it,” thunders/pleads Varoufakis, “why not us?” Solving an excess debt problem with more loans works on Fantasy Island but offers no hope elsewhere. Varoufakis cannot grasp the post-petroleum world he now inhabits, the world bankrupted by non-remunerative, resource-depleting ‘lifestyles’. Europe burns through 12 million barrels of imported crude oil per DAY, every barrel paid for with borrowed euros (BP). As a consequence the Continent is entirely-hopelessly insolvent; monetary flexibility is a myth, there is no such thing as independent policy; the price of the euro is set at the gas pump by millions of motorists buying (or not buying) fuel. The monetary- and fiscal establishment in Brussels and elsewhere are irrelevant. At the same time, Europeans have enslaved themselves to the (non)establishment status quo because the euro = gasoline.

The first thing the humans must do is face reality. What is underway in Greece and elsewhere is ‘Conservation by Other Means™’. There is no chance at the ‘good old days’ of wasteful consumption and auto-centric ‘development’. It’s over, its untenability IS the crisis … this should be clear to both the Greek government, the IMF, the ECB and the monetary establishment. The second order of business is for the Greek government — not finance or the central bank — to begin to issue euro payments to banks as well as individuals/firms in Greece who do business with the government. If Greek government can issue collateral by fiat it can issue payments the same way. By doing so the Greeks can end the imposed, artificial ‘money shortage’ that is strangling them and buy some precious time.

Greeks can then use the time gained to reconfigure their economy around conservation and husbandry, for the Greeks to begin to live within their means … they have no choice, one way or the other this is something that Greeks and others will do.

Cannibalizing the world’s capital/resource endowment for fun is at the heart of the ongoing crisis in Europe and elsewhere. The human technology experiment including its myriad mechanical toys is coming hard up against the limits set by thermodynamics. Physical forces do not negotiate, conditions are set and humans adapt … or else. The inevitable outcome should the Greeks stubbornly carry on is that the country becomes a kind of hybrid mafia gangland dependent upon smuggling and murder.

MapNobody will admit that Europe is undone by peak oil, nobody will even discuss it or entertain the possibility! This isn’t economists in 2004 missing a prediction about what might happen in 2008. This is an entire army of exceptionally well-paid, over-educated analysts, policy makers, business leaders, economists, university professors, pundits, finance- and energy bloggers, fiction writers, poets and bass fishermen not seeing what is taking place right under their noses!

Welcome to Fantasy Island …



Dead Man on the Side of the Road

Off the keyboard of Steve Ludlum

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Published on Economic Undertow on March 6, 2015


Discuss this article at the Economics Table inside the Diner

Somebody shot Boris Nemtsov to death late last Friday evening as he was walking along a street in downtown Moscow with his girlfriend. The couple were making their way toward his apartment near the Kremlin when an unknown assailant ran up from behind and emptied a pistol into Nemtsov before fleeing in a car. The girlfriend, Ukrainian model Anna Duritskaya was unhurt.

According to her account, she was waiting for Mr. Nemtsov since 10 pm at the Bosco-café of the GUM shopping mall at the Red Square right across the Kremlin.The couple had dinner at around 11 pm Moscow time and then left the mall and went for a walk toward Vasilievsky embankment right by the Kremlin walls. Their intended destination was the posh building half a mile away from the Kremlin where the murdered politician had an apartment.

As they were crossing the Bolshoi Moskvoretsky Bridge, an unidentified man ran out of the underpass of the bridge and shot Mr. Nemtsov multiple times. Then he jumped into the passing white car without a license plate.

Mr. Nemtsov died on the scene.

Nemtsov was deputy Prime Minister in the Yeltsin government, an implementer along with Yegor Gaidar and Anatoly Chubais of the Washington Consensus, ‘shock therapy’ and market reforms of the Soviet economy. At the time, the charismatic minister was briefly considered as a potential alternative to Vladimir Putin. He most recently opposed the Russian invasion of Ukraine. Nemtsov killing is the latest in a long line of unsolved politically related murders in Russia that have punctuated the Putin regime.

Part of the mystery is how such a lurid crime could take place in one of the most tightly guarded areas in the World, under constant surveillance with hundreds of security officers nearby. The easy answer is that the officers themselves, acting covertly under orders, were responsible. Nemtsov clearly felt comfortable walking in plain view without escorts or entourage; he expected to be followed closely and under constant scrutiny by agents of the FSB. Nobody knows anything for certain, no group has come forward to claim responsibility.

Because the majority of ordinary Russians support are distracted by both Putin and Russian territorial expansion it is hard to imagine Nemtsov as anything other than an sideshow/irritant. Gunning down celebrity activists risks making martyrs out of them; this is reason for governments to be cautious. Yet, none of the Kremlin’s alleged crimes to date have triggered a backlash: like Nemtsov before his final stroll, the government — if indeed it was directly involved — appears to feel secure in its actions.

Nemtsov’s death is a component of the onrunning collapse of the Soviet Union.

Many of the places that are suffering unrest and war were components of- or client states of the USSR during its heyday: Libya (client), Egypt (a Soviet client before becoming an American client), Somalia (client), Eritrea (client), Afghanistan (client) Yemen (client), Syria (long-term client), Iraq (client); Armenia, Azerbaijan, Chechnya, Georgia, Ukraine, Dagestan, Nagorno-Karabakh (all components of USSR); also Vietnam, Laos, Angola and North Korea (all Soviet clients but wars have ended in these countries) … also Russia itself. Seen from a long-term perspective, the end of the Soviet Union government turns out not to be the bloodless event as was advertised, the rotting empire still has some collapse left in it.

One of the duties of the Economic Undertow is to turn conventional historic narratives on their heads, to where they begin make sense. What Americans have been fed about the demise of the Soviet Union is a self-serving, political/ideological fairy tale: that the United States under the direction of Ronald Reagan’s brilliant conservative leadership outspent the USSR in an arms race that eventually — along with collapsing oil prices caused by new oil on the markets from Prudhoe Bay and the North Sea — bankrupted the Communist government. Once the economic and ideological fault lines were revealed, the various client/satellite states that made up the Soviet empire peaceably went their own way without interference from Moscow. All of this ‘revealing’ and ‘peaceable-ness’ took place over a remarkably short period of time in the early 1990s: here today, gone the next.

The more realistic narrative has Soviet intelligence agencies — perhaps collaborating with those of the West along with Western interests (banks) — gaining control over Russian assets, shifting them to well-connected insiders, with the decrepit- and ossified Communist government powerless to do anything about it. This process began before- or during the Brezhnev period with matters well underway by the time of Gorbachev … Perestroika being a (feeble) attempt on the part of the Communist establishment to regain both credibility and some measure of control. What happened in Russia was not reform and the end of communism was an accident: what actually took place was the greatest crime of the modern era, the theft of an empire by the country’s intelligence services and criminal associates.

This outcome was a natural consequence of the Soviet Union as a regimented national security state with outsized spy agencies … as well as the slow commercial opening with the West beginning during the Khrushchev era. Within the immense ganglia of the Soviet intelligence- and internal security apparatus there was a kind of singularity or dawning self-awareness … the managers grasped in an instant they had access to the levers of control outside the reach of the Party, the Politburo and the Red Army. The rise of the agencies’ power was a consequence of Stalin’s paranoia; the Stalinist Russia was built on a foundation of intrusive spying and control/liquidation of potential internal enemies. Stalin held the agencies in check by way of periodic purges, no group of operatives could become too comfortable or entrenched, they had to constantly look over their own shoulders. Once ‘Uncle Joe’ was gone there were no further checks on spy agency power, they could act with impunity and did: what occurred was a silent coup d’etat with the KGB state first emerging publicly under Yuri Andropov. Once the looting and undermining was well-established in the center it spread out and took hold among the clients with consequences that can be seen clearly today.

At the same time, contact with the West, as tentative as it was, informed the Russian intelligence elite what was possible … that the Western standards for wealth and success were both qualitatively- and qualitatively superior to what was available under egalitarian communism. In 1975, to be wealthy and successful as a Swiss or Londoner far exceeded what was possible in Leningrad or Kiev.

Under this scenario, ‘Nemtsov the reformer’ was either a co-conspirator — or, more likely a tool of intelligence services and/or Western business interests; an operative within the looting scheme along with Gaidar, Chubais and others. Instead of being the heir to Stalin’s strongman legacy, Putin recedes to become the technocratic figurehead who serves to distract public attention as the Russian Mario Monti or Antonis Samaras … meanwhile, the stealing takes place in the background. The context for the Nemtsov hit becomes much murkier with a wider range of potential adversaries, not necessarily Putin but unknown ‘others’ deep within intelligence nebulae … and for possibly more prosaic reasons such as an unpaid debt. It is also likely that the Ukrainian ‘model’ had something to do with Nemtsov’s death as well; perhaps she was bait, leading him by the hand to a carefully mapped kill zone.

No doubt Nemtsov had more to do with running Russia into the ground than Western media lets on, his Yeltsin- era associates have bona-fides that raise questions:

From 1998 to 2008, he (Chubais) headed the state-owned electrical power monopoly RAO UES. A 2004 survey conducted by PricewaterhouseCoopers and the Financial Times named him the world’s 54th most respected business leader. Currently, he is the head of the Russian Nanotechnology Corporation RUSNANO. He has been a member of the Advisory Council for JPMorgan Chase since September 2008 and a member of the global board of advisers at the Council on Foreign Relations since October 2012.

Honore de Balzac famously remarked, “Behind every great fortune is a great crime;” hovering near the crimes is the criminal banker. Readers can come to their own conclusions about Chubais; regarding Gaidar, (Pravda – 2006):

Litvinenko’s death, Gaidar’s poisoning and Politkovskaya’s murder may have the same rootsDoctors in Moscow said yesterday that the former Russian prime minister, Yegor Gaidar, had been poisoned with an unidentified toxic substance on a recent visit to Ireland , adding a new twist to the Alexander Litvinenko affair.

Mr Gaidar, an economist and one of the “young reformers” responsible for privatising Russia in the early 1990s, lost consciousness and was rushed to hospital last Friday during a conference near Dublin. Last night his daughter said she believed it was “a political poisoning”. Doctors saw “no other grounds” for his sudden illness, she told the BBC’s News 24.

Gaidar died in Moscow in 2009 of coronary artery disease. He was 53; while it is not unheard of for a person to die of heart trouble at a relatively young age, the circumstances of his death … like Chubais’ relationship with JP Morgan-Chase … is suggestive.

Regarding public perception of Nemtsov within Russia, (National Interest):

In a 2011 survey of twenty-three Russian political experts, a lack of fresh faces, ideas, or practical programs aimed at helping ordinary citizens were cited as the primary reasons for the perennial failure of Russian liberalism. Along with Anatoly Chubais and Egor Gaidar, Nemtsov was named as one of those most directly responsible for discrediting liberal discourse in Russia, Unlike Chubais and Gaidar, however, Nemtsov was not regarded as being an intellectual driving force for liberalism, but rather a pure politician. For a person of such staunch principles, it must of been particularly galling to be regarded as a mere politician.

Perhaps less galling than being regarded as a spy … a stalking horse for uncertain international business interests.

The new, improved narrative fits into the theory of, ‘Zero Government’, which postulates a transition from a functioning government to technocracy as the means to loot national assets. Technocracy is the last step before default/repudiation of non-payable debts. After technocracy comes the void: ‘zero-government’; the capitulation of the establishment, its dissolution into factions and chaos. This is part of post-petroleum transition, the breakdown of the status quo. The process runs like this:

Government => Technocracy => Zero Government

The process is easy to remember for even simple- minded business tycoons and their agents, also easy enough to set into motion particularly when the thermodynamic headwinds are blowing in the world’s face.

In Russia, the Soviets made up the last, functioning government, what followed was the relatively long technocracy that was born as Perestroika and ‘Shock Therapy’ that continues under Putin. The ordinary citizens’ collective wealth was swindled away- or hyperinflated into worthlessness. Entire industries and resources were stolen- or handed off to well-positioned opportunists. Russia itself is a gigantic country with massive resources, it has taken a lot of time to steal it all, the thefts are ongoing. To fill the vacuum left by the vanished wealth there is bread and circuses: demonstrations of Russian ‘power’ and evanescent ‘personal mobility’. What comes next is economic and political breakdown — already underway — then dissipation when there is nothing left to steal = zero government.

The zero-government dynamic is not necessarily political, rather it is a component of decline in energy throughput. Governments and ideological ‘operating systems’ are nothing more than mechanisms to allocate- and manage the costs associated with energy surpluses; as the costs multiply the ideologies are stranded. Conventional wasting regimes are unable to adapt to straitened conditions where waste cannot be easily financed: zero-government is a manifestation of ‘Conservation by Other Means ™’.

Triangle of Doom 030315

Figure 1: Oil industry has become a dead man on the side of the road: WTI forward continuous contract by TFC Charts (click on for big). As Russian bosses steal everything the citizens are bankrupted => the price of crude declines. At the same time, the ability of the Kremlin to function properly unravels; citizens are murdered a few feet away from Red Square even as war rages in Ukraine next-door. The marginal oil consumer turns out be as likely a Russian as a Japanese. Under the circumstances, with increase of marginal deadbeats worldwide, it is hard to see oil prices ever increasing, certainly not to the level that would allow extraction of expensive unconventional fuels.

We can see what zero-government looks like because some of the ex-Soviet clients have already crossed the River Styx into oblivion: Syria, Iraq, Ukraine and Libya. In these countries effective government is a myth, the countries themselves are ruins. In Syria, hundreds of different militias operate without rhyme or reason, some claim regions within the country such as Rojava Kurds or Islamic State; others control a neighborhood or a few blocks in a city … or they control nothing at all! Syria has descended to bellum omnium contra omnes, Hobbes’ war of all against all. At this point, whether Syria has resources or not is particularly relevant because there are no means or opportunity to extract them.

The militaries of a dozen Western- and allied nations operate with impunity within Syria’s territory without any legal basis, declaration of war, absent any aggression on the part of Syria in complete disregard of the country’s (non-existent) sovereignty. It is the concept of sovereignty itself that is disintegrating right under everyone’s nose; even putative states offer non-state alternatives to conventional nationality. Syria’s armed trespassers include Iran, Jordan, Israel, UAE, Qatar, UK, US, France, Hezbollah/Lebanon; last week, Turkey. Bashar al-Assad is ‘leader’ in name only, and that in only within a relatively small part of the country. Even if he were to somehow magically make the militias vanish overnight he would not be able to govern. Syria has been so reduced by violence and natural disaster that it has become unmanageable. Assad is damaged goods, anyway … credibility he might have at one time possessed has been destroyed along with the cities his air force has flattened with barrel bombs.

The tragedy that has overtaken Syria … that has rendered millions of its citizens into refugees … has many more years to run according to those who are in the best position to know.

There is little difference in Iraq where the south of the country has become a de-facto province of Iran, where the Baghdad government is made up of Iranian spies … all of this taking place with the acquiescence/participation the United States, nominally Iran’s adversary. The tapeworm process that was perfected in the Soviet Union has been applied without mercy to the Iraqis … with dire consequences. One only needs to examine both countries together to see the process play out. Unlike Russia, theft in Iraq has been accompanied with wanton, high-tech devastation. The country has been bombed and rocketed flat, then lavished with artillery with over a million deaths. Roaming across the north-western and central parts of the country is an alphabet soup of militant groups bent on outdoing each other in corruption and barbarity. Like Syria, Iraq has become a free-for-all Western militaries and their regional allies all acting without restraint … except those imposed by their own onrushing bankruptcy.

Ukraine has been looted by a succession of corrupt post-Soviet governments, what remains is to fight over the scraps. The country is fast becoming a Syria on Europe’s doorstep, a theater of operation for countless militant battalions fighting each other for ‘gains’ that evaporate as soon as they are obtained. Ukraine, like the other countries — and Libya too — has resources, but ‘zero-government’ leaves these in the ground … this is what conservation by other means ™ amounts to.

When the wars finally die out due to exhaustion of combatants, these countries will become sparsely inhabited wastelands.Without economic growth/business expansion, without the increased flows of energy, without decrease of energy efficiency that drives all business expansion, there are no means to recover after wars- or other disasters. Managers either understand the implications completely and are too corrupt to care … or they refuse to understand because the implications are too frightening.

The zero-government world that we are now entering into is not at all like the one that the human race has occupied for the past five-hundred and fifty odd years, there is no more growth to it. For Syria or others to rebuild some prosperous countries such as France or Canada — or China — must fall into ruin; for anyone to gain others must lose. If this is not serious business then such a thing does not exist.

Zero-government is literally what it says it is; a one way state of existence whereby a country is rendered into an administrative vacuum that convention cannot occupy. The rot of technocracy leading to zero-government is plainly evident not only in Russia but in the West as well: the American and European governments are riddled with corruption and self-dealing, irrelevance and denial. Ballooning intelligence services and ‘internal security’ agencies gain ascendency/tighten their grip. What saves the West so far is that its property is already mostly owned by the thieves; they can only steal from each other. Issues are disregarded or waved away; there are no more statesmen only advertising managers and shallow demagogues offering blatant lies/crowd-pleasing distractions. Meanwhile, in the background a thermodynamic process that cannot be negotiated with is steadily and relentlessly underway …

Black Swan Dive

Off the keyboard of Steve Ludlum

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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.

Petroleum/Economic Endgame

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on October 8, 2014
Triangle of Doom 100714

Figure 1: classic doomsday scenario as fuel prices begin to decline below what drillers require to bring new fuels to the marketplace. Fuel shortages do not drive prices higher; instead, capital depletion is reflected by the parallel decline of purchasing power. Customers are unable to gain credit while banking/finance systems break down. (Chart by TFC Charts, click on for big.)

Discuss this article at the Economics Table inside the Diner

Every part of the world is experiencing distress as modernity requires cheap fuel and other resources to squander. Since 2000, waste- for- pleasure confronts resources increasingly priced in line with their value; resources that are becoming too costly to waste. Sadly, we humans never figured out alternative uses for our capital, the time to find such uses has run out.

Failure (Financial Times):

Sumitomo’s US shale oil foray turns sourBen McLannahanSumitomo Corp of Japan has drawn a line under its disastrous two-year foray into shale oil in the US, with writedowns connected to the project almost completely erasing its full-year earnings.On Monday, Sumitomo, the fourth biggest of Japan’s trading companies by market capitalization, said that an impairment loss of Y170bn ($1.6bn) on a “tight oil” project in west Texas would form the bulk of Y240bn of charges for the fiscal year to March 2015.… on Monday, Sumitomo said it had decided to sell roughly three-quarters of its acreage, triggering the loss on the assets and the agreement to fund their development. “It is difficult to extract the oil and gas efficiently,” the company said, adding that it could not “expect as much production to recover the investment”.Other Japanese trading companies have taken big writedowns as shale bets have soured. Itochu Corp, the third largest trader by market capitalization, has written down about four-fifths of the Y78bn it paid in 2011 for a 25 per cent stake in family-owned Samson Investment of the US.

More Failure, Tim Morgan (Telegraph UK):

Shale has been hyped (“Saudi America”) and investors have poured hundreds of billions of dollars into the shale sector. If you invest this much, you get a lot of wells, even though shale wells cost about twice as much as ordinary ones.If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US.The key word here, though, is “initial”. The big snag with shale wells is that output falls away very quickly indeed after production begins. Compared with “normal” oil and gas wells, where output typically decreases by 7pc-10pc annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60pc or more in the first 12 months of operations alone.Faced with such rates of decline, the only way to keep production rates up (and to keep investors on side) is to drill yet more wells. This puts operators on a “drilling treadmill” (running with the Red Queen), which should worry local residents just as much as investors. Net cash flow from US shale has been negative year after year, and some of the industry’s biggest names have already walked away.The seemingly inevitable outcome for the US shale industry is that, once investors wise up, and once the drilling sweet spots have been used, production will slump, probably peaking in 2017-18 and falling precipitously after that. The US is already littered with wells that have been abandoned, often without the site being cleaned up.

2017-18 is optimistic. Drilling is undermined by an overall shortage of credit; oil prices are declining b/c oil customers around the world are bankrupt. Declining wages and the inability to ‘earn’ by wasting petroleum means customers cannot borrow, they are insolvent.

Loans are made to firms, instead; they are larger, they can offer up their leases as collateral. The result is that customers are starved for funds. Credit turns out to be another non-renewable resource; drillers compete against their own customers — and their lenders as well — to gain access to loans.

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 87.67 -1.18 -1.33% Nov 14
Crude Oil (Brent) USD/bbl. 91.60 -0.51 -0.55% Nov 14
RBOB Gasoline USd/gal. 232.05 -4.78 -2.02% Nov 14
NYMEX Natural Gas USD/MMBtu 3.86 -0.10 -2.40% Nov 14
NYMEX Heating Oil USd/gal. 258.23 -2.50 -0.96% Nov 14

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,221.20 +8.80 +0.73% Dec 14
Gold Spot USD/t oz. 1,220.56 -0.58 -0.05% N/A
COMEX Silver USD/t oz. 17.38 +0.14 +0.81% Dec 14
COMEX Copper USd/lb. 302.75 -1.15 -0.38% Dec 14
Platinum Spot USD/t oz. 1,279.31 -0.44 -0.03% N/A

Table by Bloomberg, A decline in prices from current levels will reveal the fracking enterprise as a Ponzi scheme. This will in turn upset markets which have been promoting fracking returns as a ‘sure thing’, both for finance as well as for the consumption economy as a whole. Meanwhile, energy company internals deteriorate further, (Bloomberg):

Drillers Piling Up More Debt Than Oil Hunting Fortunes in ShaleAsjylyn LoderFloyd Wilson raps his fingertips against the polished conference table. He’s just been asked, for a second time, how he reacted when his Halcon Resources Corp. (HK) wrote off $1.2 billion last year after disappointing results in two key prospects.Wilson once told investors that the acreage might contain the equivalent of 1.2 billion barrels of oil. He fixes his interlocutor with a blue-eyed stare and leans forward. At 67, he bench-presses 250 pounds (110 kilograms) and looks it. Outside the expansive windows of his 67th-floor executive suite, downtown Houston steams in its July smog.He responds, unsmiling, with a one-syllable obscenity: “F—.”Wilson has reason to curse, Bloomberg Markets magazine will report in its October issue. On the wall behind him hang framed stock certificates of the four public energy companies he’s built in his 44-year career. The third, Petrohawk Energy Corp., discovered the Eagle Ford shale, now the second-most-prolific oil formation in the country. He sold Petrohawk three years ago for $15.1 billion.

Then came Halcon. Since Wilson took over as chairman and chief executive officer in February 2012, the company’s shares have dropped by about half, trading at $5.67 on Sept. 5.

Halcon spent $3.40 for every dollar it earned from operations in the 12 months through June 30. That’s more than all but six of the 60 U.S.-listed companies in the Bloomberg Intelligence North America Independent E&P Valuation Peers index. The company lost $1.4 billion in those 12 months. Halcon’s debt was almost $3.2 billion as of Sept. 5, or $23 for every barrel of proved reserves, more than any of its competitors.

Figure 2: the first appearance of the Triangle of Doom, in October, 2012. Economists fail to predict crashes and other events, their models are not particularly useful. At the same time, non-economists have little difficulty predicting onrushing adversity: in 2007, almost everyone in the real estate industry was concerned about questionable loan origination and underwriting. Most economists ignored the warning signs, just like they do today.

Almost every one …

Zero-percent interest rates, direct asset purchases and swaps by central banks, stock market rigging and propaganda have had the affect of pushing oil driller credit costs as low as possible, resulting in a modest increase in the flow of unconventional petroleum. This increase has been sufficient to offset declines in conventional plays elsewhere in the world but not enough to support our ‘affluence lifestyles’ built around waste. This leaves us with the choice to conserve voluntarily or for conservation to be forced upon us by events.

The Fifth Horseman

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on September 2, 2014


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John Maynard Keynes famously remarked, “in the long run we are all dead … ”

It is hard to tell whether Keynes had the entire United States in mind. Watching the leering, blithering president stumbling around like a drunk at a Christmas party it is clear that the country’s organizational framework is hopelessly corroded. The only question is how long is it going to last?

If you take some time away from the Internet (as I have been doing for the past few weeks) it is stunningly clear that content for the most part is aggravating noise. Every argument has fifteen sides larded over with conspiracy theories. The web is truly Hobbes’ war of all against all … with kitten videos. The major media outlets offer platefuls of propaganda-advertising disguised as ‘news stories’ while (most of) the rest churn out nonsense. The Internet enables those with modest mental horsepower but with co-optable ideology to disrupt/distract everyone else. Common purpose — reality — is confined to the obscure corners where the bulk of users idiots can’t be bothered to look.

— Moral clarity versus the president’s bumbling duplicity. Events of the past year or so indicate that the West has reached the end of the ‘Age of Expedients’ and entering the far more demanding ‘Age of Consequences’.
Civilization advances by way of the general increase in of the distribution of information. We humans invented language first to coordinate our activities as hunters, then to confuse our (ballooning numbers of) enemies. Prior to Johannes Gutenberg, there was the spoken word and hand copied manuscripts. Due to the labor cost of copyists, the Catholic Church was able to maintain a +1,000 year monopoly over information. The churchmen had access along with elites, the ordinary citizens were left ignorant, with edicts from above and superstitions.

Post- Gutenberg, information cost no more than ink on paper; it could not be hoarded and so the monopoly of the priests and bishops was ended. Because information on a page could be filed and accumulated, the amount of information within the reach of a literate person exploded … along with the numbers of literate persons! As an unintended consequence, the human capacity for memory and the oral tradition became diminished, then largely disappeared. It was unnecessary to recall Beowulf from memory, only remember where to find it on a shelf.

Fast forward and with the Internet has arrived with the thump-and-drag of the one-legged John Silver. The quality of information has relentlessly deteriorated even as it has become ubiquitous. Our smart phones know in advance what we want for dinner or where to park but nothing tells us what is really happening with our country! The information we need to thrive … or even survive … does not fall to hand. With the incoming tides of ‘trivinformation’ comes a decreasing ability to comprehend. We have no need to learn because we can find an app that does it for us. As a consequence … we have become bereft of the ability to make good judgements. We equivocate, rationalize every evil, we compartmentalize … our moral compasses are shut off, we drink the Kool-Aid and beg for more. With time, appreciation for all non-consumable things vanishes because our capacity for empathy is exhausted, what remains is the immediate-term stimulus of acquisition and little else. We have come full circle; from beasts, to partly civilized due to our mastery of spoken language, to print-educated, civilized literates … to machine-dependent incompetents and back to beasts. Consequences emerge to take the form of a post-Warholian dark age of electronic dazzle; the deathly white light where Candy Crush™ stands as equal to Milton. We have become our appetites and nothing more …


Triangle of Doom 090114

The fearsome and relentless Trianglial of Doom, no mincing words here or cacophony; this is the chart that kicks the modern world in the balls and leaves it gasping, by TFC Charts (click for big). With two major wars and a handful of minor ones in petroleum producing regions the present price movement is unexpectedly down. Our precious wars are bankrupting the world’s customers faster than the same wars can adversely affect oil supply. Add one more war or two and the entire world oil extraction enterprise will shut down due to insufficient funds!

Witness the change of age: The Age of Expedients => wars raise oil prices and increase profits; becomes the Age of Consequences => wars bankrupt countries so that they cannot bid for petroleum => the drillers become destitute => leaving everyone without petroleum.

Economists fail to grasp that people (in aggregate) can indeed go broke. In our world of nearly unlimited finance credit, there seems to be no end to money. This leads economists into believing that there is likewise no end to other things. That when liquid fuels run out the world can turn to ‘something else’ and use it as replacement … something like common rocks: if the price is right the rocks will become fuel. In a world of endless money, individuals or firms can be marooned without funds but others will ‘gain theirs’ and by doing so have enough to provide a market. Here is the triumph of hopeful expectations over common sense: funds are nothing more than promises made against (often faulty) expectations. Those whose promises prove empty are bereft of funds, not the other way around. In the Age of Expedients, adding credit => meant more funds available to spend on capital. In the Age of Consequences, adding credit => bankrupts the system with credit costs => there are less funds available to spend on capital. There are less funds because existing claims are exposed as worthless faster than new claims can be created.

Economists have problems with costs because individuals and firms have been so clever in shifting them to unsuspecting ‘others’ across the economic ambit. To the economist, ‘shifted costs’ are little different from ‘no cost at all’. Because he refuses to consider the externalized costs or trivializes them, the economist does not believe there is capital depletion. In the Age of Expedients more capital can be gained by drilling more holes, in the Age of Consequences the costs of holes added to the costs of credit become become breaking => adding more (costly) holes does not add more capital.

Here, ‘capital’ always means non-renewable resources; capital the basis of all of our so-called ‘production’ (which is really extraction and waste).

In the Age of Expedients, costs are shifted forward by multiples of generations so that great-grandchildren are on the hook for yesterdays’ generations’ waste. The economist blithely assumes that the future will be avoided with time machines or other technological whizmos that somehow denature consequences. Else, he is the cynic, realizing that the future is irrelevant because he, like others in the ‘long run’ will be dead: that consequences are someone else’s problem.

In the Age of Expedients, certain direct actions produced certain predictable results. Rattling the sabers in the Middle East was always good for a ten-dollar pop in the price of crude. Building a road would generate more real estate- and retail ‘growth’. Lowered interest rates would generate more borrowing and spending, it would trigger needed inflation … that fighting a real war would stimulate the economy and increase ‘growth’. Growth is the reason behind the state of perpetual war that has occupied the United States since the end of World War Two. In the Age of Expedients, there is no penalty for stupidity, all of it contributes to GDP.

In the Age of Consequences, actions produce … consequences. The future becomes the present bringing demands for repayment of old debts that cannot be retired with new loans. The toxic waste of prior generations becomes a problem we cannot move away from. Wars are likewise too costly to fight, there is no growth to give nations second chances at ‘victory’. Instead, the consequence of defeat is permanent devastation. Waste-infrastructure does not add anything but to the burdens of debt repayment which in turn are stranded as the infrastructure is fundamentally non-remunerative. Perpetual war = national suicide; stupidity now has dire consequences. The non-linear shift from expedients to consequences emerges as a perilous Fifth Horseman: every habit we have learned during the Age of Expedients is now set to work with deadly effect against us; the time to learn new habits simply does not exist.

The War Against Labor

The businessman’s class war against labor began with the flowering of US industry during the 19th century. The Long Depression in the late-19th century as well as the 1930’s Great Depression were class wars. During the latter, the citizens fought the tycoons with the one instrument that the rich had left them: their refusal to spend their money. Instead, they held onto it, giving bits of paper value while denying it to the tycoons. Prior to the Depression, the country’s industrial laborers had vented upon them every sort of abuse, and then the full fury of militarized authority: clubs and bats of strikebreakers and Pinkertons, knives in the dark from goons and machine gun bullets from the Army. All of this failed, yet by their refusing to spend, by keeping clear of finance industry speculations, the public starved the tycoons who could not meet the service expense of their own enormous debts; the tycoons and American-style capitalism became wraiths.

The citizens would have destroyed capitalism save for the rise of the powers in the East and the desire on the part of government to accommodate the industrialists … the government needed the products of industry to engage in World War Two. The reader can come to his- or her own conclusion as to the economic necessity for the war and the roles played by the industrialists in enabling Hitler, Stalin and the Japanese in the first place.

After the war came the crusade against Communism. This crusade was of a piece with the prior labor struggles. In America, ‘Communism’ has always been a code word for labor agitation as well as civil rights for blacks. As during the previous periods of labor strife, the crusade against ‘Communism’ was dark and violent. As Hedges indicates, institutions as well as reputations were destroyed by public witch-hunts, overseas, the US pursued a series of ruinous yet inconclusive wars. When the Soviet Union collapsed — undone by the failure of its agriculture — and China took the path to Las Vegas style ‘reform’, there was no more Communism, no ‘enemy’ that could be superimposed upon the what remained of organized labor. Keeping in mind that by the time of Communism’s decline and fall, these remains had been thoroughly co-opted by mafia criminals, undone by endless ‘investigations’ and rendered impotent from the inside by union corruption. In place of the Communist boogeyman came the ‘terrorist’.


The Man in Black, is he a terrorist murderer … or a Navy Seal? Who can say for sure? The government will not tell you only the examination of US interests gives the game away.

In the twilight of empire the US tries again and again to enrage the citizens against the boogeymen it creates by itself; what better, cheaper way to buy some cheap rage than to cut off a man’s head on television? Already there are Americans fighting again in Iraq, the third (or fourth) attempt to impose our will on that country. Besides attempting to push up the price of crude, the purpose of our wars is to elevate the price of Boeing, Raytheon, General Dynamics, Northrup-Grumman, Oshkosh, etc. shares. Without perpetual war there are few perpetual defense industry profits, no need for half of the country’s discretionary spending to flow toward the military, and from there to our precious hedge fund managers (gangsters).

In the Age of Consequences, success = failure, assets are now liabilities. There is little on the way to mark the change, certainly nothing discernible in the media or the Internet scramble. Instead of rage and fury, the Fifth Horseman ‘non-linearity’ steals in on little cat feet. We are obsessed with the increase in growth, we equate this with success … not realizing that very same success has instantly become a deadly poison. Make quick, now; sell more cars and build more freeways, towers, bridges as this process of selling and building is the means by which the car-and-tower building monster annihilates itself.


Prediction Gap

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on August 9, 2014

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There are people who read this blog religiously, eager to find out when the next giant crash is going to occur. Blogman sez the giant crash is occurring right now under everyone’s nose. It just doesn’t look like a crash, rather more like a bit of vaudeville grafted onto a horror movie.

Bloggers, economists and finance analysts gain credit from their peers by predicting crashes and for no other reason. A good crash prediction allows financiers to shift away from potentially illiquid asset markets before they freeze up … so they might re-enter the same markets later when it is safe to do so. Prior to the Lehman collapse, about fifty high-level analysts fingered the last giant crash out of 6.2 billion humanoids on this planet (none of those other billions really cared). Estimable Gary Karz, CFA has taken the time to curate a comprehensive list of them. Included are familiar names like Dean Baker, Richard Baker, Roy Barnes, Susan Bies, Rick Bookstaber, Claudio Borio, Brooksley Born, Jesse Colombo, Vox Day, Richard Duncan, Marc Faber, Fred Foldvary, Robert Gnaizda, Wynne Godley, James Grant, Jeremy Grantham, Jeffrey Gundlach, Fred Harrison, Kenneth Heebner, Michael Hudson, Eric Janszen, Med Jones, Steve Keen … etc.

Where are these guys now? Some analysts like James Grant and Robert Prechter have been calling for a crash every week for the past twenty five years, but others are vague or they demur. In the foreground, the media circus trumpets ‘recovery’ and growth. In the background, nothing in the West’s finance- or energy throughput systems has been fixed or even amended since the beginning of the millennium and the ‘Dot-Com Crash’. Credit overstretch is greater now than in 2007, there are hundreds of trillions of dollars of derivatives cluttering the finance industry’s books, the too-big-too-fail banks are more bulbous and corrupt than ever … The same banks’ low-cost credit has inflated asset prices far beyond their underlying, fundamental worthlessness. The fuel for a giant crash is in place, all that is needed is a match. Everywhere in the world the economies are staggering; Japan, Russia, India, Brazil … even manufacturing powerhouse China is on the ropes.

When the slide passes the point where it cannot be ignored any more, people will cry, “nobody could have seen it coming!”

To a large degree, nobody will. Because the establishment adapts to crashes over time, each new one takes a slightly different form. The toolkit to combat money panics has been expanded and refined: bank depositors are possessed of almost universal government treasury-backed guarantees. Central banks offer cheap credit by the trainload which validates the worth of collateral taken in exchange for it. Risk-averse, under-capitalized retail speculators that were quick to leap head first out of windows have been driven out of markets; their places occupied by professionally-managed funds which have in turn been consolidated into behemoths. The monolithic firms tend to be panic- resistant because they are able to hedge themselves across multiple markets and have access to liquid credit at near-zero cost. At the first sign of trouble political establishments around the world rush in to ‘prop up’ key institutions with bailouts. Markets and banks certainly aren’t risk-proof but the finance system is more able to respond to a margin call more effectively than could markets twenty or thirty years ago.

The current crash has unrelated, non-financial components falling apart at distant margins: the un-crash crash. Emergencies pop up then disappear as soon as the mediasphere changes focus or is distracted by something else: Argentina defaults (again), Russia, Israel, Iraq and Libya engulf themselves or their neighbors with mad war, methane bubbles out of the ground in Siberia … returns on CAPEX in the oil patch decline … the air leaks out of bonds …

Figure 1: Back in 2012 the gnomes at Economic Undertow predicted that there would be ‘trouble’ sometime right about now … How it works is simple: at some ‘high crude price’, the economy seizes up; an ‘oil shock’ as in 1973. Conventional analysis assumes that the economy-killing price will trend higher with inflation and the passage of time: $147 crude in 2008 is followed by $200 crude then the $300 crude. This is a false assumption: observations since 2008 indicate that the economy-killing high price has declined and is now a little more than a $110/barrel for Brent crude. As extraction costs increase, the price that shocks the economy is lower than the price needed by the energy industry to bring new crude oil to the marketplace. The result is a shortage of fuel …

The incipient fuel shortage is manifest as credit ‘problems’, runs out of bonds, wars, social disturbances; things other than gas lines and ration coupons.

Before 1998, each succeeding dollar spent on fuel extraction accessed an increased amount of petroleum, much of this petroleum was simply left alone as spare capacity. From 1999 onward, every dollar spent has accessed diminished amounts of petroleum … with no end to this trend in sight. At the same time, demand for fuels has exploded with the addition of millions of Chinese, Indian and the Middle Eastern consumers … something has to give.

Three things are occurring simultaneously:

– oil prices are too high — regardless of what that price is. Even if prices aren’t high enough to cause an outright crackup as such, their effect is to slow the economy to a crawl. Our economic infrastructure has been built assuming sub-$20/barrel crude oil into the foreseeable future. Current $100+/barrel prices are unaffordable, our consumption infrastructure is stranded.

– Customers are less solvent and are less able to borrow due to the high cost of both fuel and debt. This means there are less funds available, fuel prices cannot be bid higher.

– The result is insufficient funds for oil drillers whose need for funds increases with time and whose costs can only be met with borrowing, (from, ‘The Mother of All Free Lunches’)

The maximum price customers can afford to pay for fuel decreases while the price required to bring crude to market continuously increases. The current price at any given time is too high, firms fail and customers are left with diminished discretionary income. At the same time, the current price is too low to allow drillers to complete the increasing numbers of wells in difficult areas that are needed to keep pace with demand- plus depletion in older wells.High prices strand consumption infrastructure. Low prices strand the drillers … When prices are ‘low’, the high priced reserves become unavailable. At some near point in the future both the too high- and the too low prices will be the same … then it’s game over. From the chart it looks to be about two years in the future … all else being the same. If conditions change, the price will plunge and oil shortages intensify. Under no possible circumstance will our pauperizing meat-grinder-economy be able to afford higher real costs: resource waste is unproductive everywhere but at the margins, so is the debt taken on to subsidize it

The proposition is that more loans can command capital to appear: analysts assume that changes in the rules governing finance can change conditions on- and under the ground. Central banks offer loans used to gain capital but they cannot offer capital itself, which requires work to extract and make usable. Additional work is required due to the ‘destroyed capital’ effect and continually diminished capital concentrations.



The fifty- or so prognosticators peering forward in 2007 thereabouts were looking through the prism of mortgage debt. Post crisis, the mortgage origination and funding regimes have been cleared; the housing speculator ‘weak hands’ sent into bankruptcy. Today’s debt related risks are spread out across a constellation of regimes that also happen to be subprime: auto loans, college education loans, stock buy-back funding, M&A, IPO/angel funding, also energy lending. Analysts today looking to predict must look through the telescope of energy cost. Energy firms are able to fund themselves because of the central banks’ concerted efforts to keep interest rates below the rate of inflation. Firms must fund themselves because their customers cannot afford to do so; that being the definition of ‘sustainability’ … when customers borrow in the place of the businesses they are buying from, putting themselves on the hook for repayment rather than the firms.
fredgraph EFFR
Figure 2: US Effective Federal Funds Rate by FRED, (Click on for big). The modest rise of interest rates beginning in 2004 was the proximate cause of the mortgage crisis; the reason behind the increase was the marketplace response to ‘inflation’, that is, rising fuel prices due to vanished spare capacity. After the crisis began, rates plunged to current levels: some of this credit flowed toward the finance industry itself and its pyramid schemes, much of the rest is flowing now to the energy extraction industry.

The International Energy Agency estimates that $48 trillion will be needed over the next twenty years to procure the modern world’s needed energy, a doomsday machine in all but name. Approximately half of the $48 billion will be required by the petroleum industry. Keep in mind, these fuel industry’s costs are ultimately the responsibility of customers to retire … assuming that individuals will be able to borrow these amounts … which are themselves likely to be an underestimation.

If the world’s GDP remains the same at roughly $60+ trillions per year, the IEA percentage appears modest; however, GDP cannot be assured any more than the cost estimates. Procurement amounts to a modest fraction of total energy- or even petroleum budgets. When fuel shortages actually materialize the GDP numbers will decline while the amounts directed by necessity toward the fuel industry will increase. As the industry attempts to compensate for legacy depletion it drills more wells, the new wells deplete along with the others. The result is an industry race against itself as accelerated extraction pressure draws down reservoirs that much faster …

Fast forward to the onrushing crisis under our feet: credit is stressed, customers are broke and cannot pay. Fuel prices are declining because there is less credit. Drillers are dependent upon Wall Street finance and central bank interest rate policy even though the finance is drying up and rates are set to rise regardless of what the central banks do. Everyone is running as fast as possible trying to catch up to themselves … and finding themselves always a little out of reach.

A personal note:

My friend Jim Hansen announced the other day that he is ceasing publication of his excellent newsletter ‘Master Resource Report’. Says Jim:

Since 2006 nearly 400 issues of The Master Resource Report have been distributed as a free educational service of our firm. The motivation was to share some of our insight with a broader group of interested people so they could make better informed decisions in their lives concerning energy. But now it is time to end this venture due to a combination of time constraints and other demands for my attention. In closing out the report I would like to leave a few observations concerning what history might tell us about what may be ahead.The first observation is that we have been here before with forecasts of oil abundance and lower prices on the horizon. While it is frequently pointed out that we have not run out of oil as if that is what Peak oil is about. The abundance side of the debate is seldom given the same critique.

Over the last 15 years there have been as many calls for cheap and abundant oil as there have been for scarce and expensive. But one reality holds, the inflation adjust price of oil today remains near an all-time high while the global economy remains sluggish and crude oil production flat lines. On this point always remember to check and see what is being represented as oil. When the term liquids is used it is a tip off that everything from NGLs, biofuels and the absolutely useless refinery gains are probably in the volume mix being quoted.

Energy is The Master Resource required to extract all others. Without the cheap transportation fuels provided by oil the global economy as we know it today would not exist. The food supply depends not only on the diesel fuel for farms and transport but the fertilizers and chemical inputs that oil and natural gas have provided the “Green Revolution”.

I hope that by making these points through this report I have given readers some perspective to plan both their lifestyle and investments. The risks we face are great but so are the opportunities. How it works out for all of us depends on how we choose to use or not use the information we have.

Best Wishes to All and thanks for all your feedback over the years.

It’s understandable that Jim would bring an end to his long-running project. After awhile behind the computer you forget your family members’ names or what they look like. I sent him an email suggesting that if he ever feels the need to write a commentary to feel to send it over this way. Thanks, Jim, for the timely intelligence!

The Great Question Mark?

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on July 25, 2014

Triangle of Doom 080114Discuss this article at the Energy Table inside the Diner

Triángulo de la Muerte, August 2014 edition. Chart by TFC, click on it for big. Oil prices in world markets fail to jump when oil producing countries engage in open warfare. Right up to the Libya crisis, bloodshed in the oil patch was always good for a ten- to twenty dollar ramp in the price of each new barrel of oil. Now, oil price is the dog that refuses to bark.

Organized bloodletting is underway in oil states Iraq, Nigeria, South Sudan, Yemen, Syria and Libya; nearby Russia, Saudi Arabia, Iran and Kuwait. Even as the bullets fly the prices crawl sideways on fuel markets. Absent a flood of new oil the only possible explanation is that the world’s oil consumers are experiencing financial difficulties.

The vicious cycle emerges from the chart: high fuel prices adversely affect credit provision as vulnerable firms are compromised. Due to high prices, the marginal debtor hesitates to borrow or is unable to repay; creditors are unwilling to lend outside of self-driven finance market pyramid schemes. Reduced credit provision leads to declining bid for petroleum supplies; drillers lack the credit to meet their own costs, fuel supplies are constrained which leads to higher real fuel prices. Debtors and drillers chase their tails; wash, rinse and repeat in a self-amplifying cycle that ends when credit runs out.

The answer to the question, “how high is too high?” is, “it’s a lot lower than you think!” When the prices decline, the ability to meet them declines faster. In our haste to consume, our success has created a perverse and poisonous meta-environment where every outcome — to consume or not consume — is fatal. The entire fuel waste infrastructure of the United States and its imitators has been built assuming sub- $20/barrel crude oil into perpetuity: the freeways, tract houses, shopping malls, our massive tower-cities and a billion automobiles. Within this context, $105/barrel oil strands just about everything we own. Meanwhile, ‘use’ of the fuel does not pay for the fuel, nor does it pay for the junk; our fuel is simply wasted for entertainment purposes only. What must pay is debt and lots of it: since World War Two hundreds of trillions of dollars worth.

The dynamic is ‘energy deflation’, it is very similar to Irving Fisher’s ‘debt deflation’, there is the same positive feedback mechanism. With debt deflation, the more the borrowers repay, the more in real terms they owe because repayment removes funds from circulation. The vanishing supply of circulating money continually becomes more expensive, a ‘scarcity premium’ appends itself to the marketplace cost of funds. If the borrowers do not repay, then the assets become liabilities that the lenders themselves must retire … which they are unable to do for the same reason as the borrowers.

With energy deflation, when the customer conserves — whether by accident or on purpose, it makes no difference — the remaining petroleum becomes more costly to extract in real terms. A scarcity premium attaches itself to the real cost of extraction for each new barrel of oil; the result is fewer available barrels as the scarcity premium per-barrel increases. At some point even a decrease in nominal price is exceeded by the scarcity premium. Energy deflation undermines a pillar of conventional reasoning: that at some price oil supply is always available.

Ironically, ‘use’ of each barrel of oil results in the same increased scarcity premium as conservation. Use puts oil out of reach by destroying it where conservation keeps the oil in the ground. At the point where oilfield flows diminish, every barrel out of the ground increases the cost of extracting all the remaining barrels. This is the reverse of how process works leading up to the peak; where each new barrel extracted makes more oil available to extract. By attempting to increase petroleum flows to 90 million barrels per day and more, we undermine the economically necessary process of increasing petroleum flows: we aren’t simply shooting ourselves in the foot, we are cutting off our feet with a chain saw and blowing them up with dynamite!

Conservation is a decline in consumption and vice-versa; prices decline due to simple supply and demand. However, the system extraction costs don’t follow into decline because these are fundamentally thermodynamic in nature. As such, these costs are fixed regardless of what we do; when we conserve, unit extraction costs expand faster than any market price reductions that are to be had by decreasing demand. This cycle is also self-amplifying: when fuel becomes unavailable due to its unaffordability it tends to remain so indefinitely. Fuel shortages cannot make the oil user wealthier or more credit worthy, the driller does not become wealthier by way of reduced production, either. We can see this process underway right now as oil companies spend more borrowed funds to gain diminished returns in the form of less petroleum at higher per-barrel cost.

The entire ‘waste fuel- borrow against the process’ enterprise is bankrupt. Even at 90+ million barrels of petroleum-like substances per day, we humans cannot burn enough to pay for tomorrow’s extraction of petroleum; that is, we are unable to borrow sufficient amounts to enable us to extract more. The fuel burning process is insufficient as collateral. What passes for ‘good collateral’ is inflated finance industry assets; claims against fuel that we cannot destroy enough of, fast enough.

The debt-deflation dynamic can, and likely will operate alongside energy deflation and amplify it: conservation is both the natural outcome of scarcity at the same time it is evidence that scarcity exists. As this incredible dynamic spools itself out under everyone’s nose, very few seem to be paying attention. Maybe they don’t want to;

How the term, ‘Finance Crisis’ appears over time on Google Trends … These charts track percentages so that all searches are rendered more or less the same way, with the absence of searches being zero, the maximum number being one hundred.

There doesn’t seem to be a lot of interest in something that is taking place right now under everyone’s nose. Maybe finance crisis is called something else like ‘Cute Kittens’ or ‘Green Balloons’:

Color me crazy, but maybe there is something to this … how many times the term ‘green balloons’ appears on Google Trends. It is possible there is a paradigmatic sleight of hands underway that nobody is aware of. Pay careful attention to the next appearance by the Federal Reserve Chairman before Congress and note how often she mentions ‘green balloons’.

Here is the Googler interest in Peak Oil:

The triumph of public relations and advertising over discernible reality: peak oil is background noise, the ‘wall of worry’ that every bull market is required to climb to reach every greater heights, ‘Dow, 36,000′.

… guys like me were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. “That’s not the way the world really works anymore.” He continued “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality -— judiciously, as you will -— we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors … and you, all of you, will be left to just study what we do.”

— Ron Suskind quoting Karl Rove

The dependency upon credit for physical output is not always clear. It isn’t simply energy return on energy invested (EROEI) but ‘Energy Return On Credit Financed Energy Investment’: another link in the chain, ‘EROCFEI’. Emerging from the murk of misunderstanding and denial is the outline … of a precipitous drop in petroleum and other fossil fuel extraction in the event of a (fuel price-driven) credit ‘event’. A shortage of credit would close otherwise functioning extraction enterprises, the downstream consequences of no fuel would feed back toward the credit providers and from them toward extraction enterprises. Right now there is no strategy in place to manage this sort of crisis because there is no discussion about it … instead, we have created our own reality.


Off the keyboard of Steve from Virginia

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Published on Economic Undertow on May 10, 2014

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Triangle of Doom 050114

Figure 1: Funnel of Doom (by TFC Charts, click on for big): As we near the end of the auto age we twist in agony, first one way, then the other to avoid our fate, which is to walk everywhere we need to go. Problems are emerging everywhere, not simply car-dependent US and EU; Russia attempts to rattle the saber so as to force fuel prices higher. The outcome: Russia’s foreign exchange collateral flees the country, (Ambrose Evans-Pritchard):

The European Central Bank says capital flight from Russia since the Ukraine crisis erupted may be four times higher than admitted by the Kremlin, a clear sign that sanctions pressure is inflicting serious damage on the Russian economy.Mario Draghi, the ECB’s president, said the outflows from Russia have been large enough over recent weeks to push up the euro exchange rate, complicating monetary policy for the ECB.“We had very significant outflows that have been estimated by some to be in the order of €160bn out of Russia,” he said, without specifying where the information came from.This is equivalent to $222bn. It is the highest figure suggested so far by a senior official with access to confidential data. The Russian finance ministry said outflows had been just $51bn in the first quarter, though the total has almost certainly risen since then.“Draghi’s figure is a huge amount. If this is correct, it shows that Russia is in much more trouble than people think,” said Tim Ash, from Standard Bank. “This is the same scale of outflows we saw in late 2008 after the Lehman crisis.”

Russia needs higher prices so that its oil extraction industry can meet its skyrocketing costs. Putin, like the rest of us, has reached the neck-line of the Triangle of Doom, the pointy-end of the gangplank where there is negligible room to maneuver, where the conventional solutions — such as threats of war to inflate the oil prices — don’t work any more.

There is almost nothing Putin can actually do: he certainly cannot escape the triangle. He dares not risk a conflict with Europe as that would entail Europeans deciding to do without Russian petroleum and gas; this would cause prices to drop, the opposite of what Putin intends. He also dares not risk an outright war with Ukraine that Russia might is certain to lose. He dares not risk a credit embargo, although the market voting with its feet amounts to the same thing. Putin pretends … he cannot control his own destiny.

He cannot afford to build a larger, more threatening army, nor could he use one if he had it. Russia would have to borrow more from London and Frankfurt. Armies like cars are non-remunerative. Anything Putin could gain in a war would be worth less that what his army would cost!

Despite the whoopla and armored brigades, the crude price is holding steady. The best evidence of the oil peak is the inability of the threat of wars in an oil producing- regions to inflate the price. It means the customers cannot borrow any more; they are broke. Under the circumstances, something has to give, if the oil price cannot jump (w/ more funds proportionately flowing to Russian energy companies), the ability of ordinary Russians to buy fuel with roubles must plummet. This is underway right now: Russia’s national account is deleveraging, foreign currency collateral is flying out of the country as fast as Russians can get their hands (computers) on it. To some degree, Russia = Cyprus.

A reason for the flight of funds out of Russia and the other BRICs is the fact of their dependence upon overseas loans in the first place. Countries like Russia and China are desperate to industrialize, to ‘get rich quick’ and damn the consequences. Managers never look to see whether industrialization is appropriate or even possible in their countries, they improvise using whatever comes to hand, relying on funds borrowed from overseas. These outside creditors are both capricious and untouchable; they act with impunity, lending- or withholding funds as the spirit moves them, when there is a better deal elsewhere or after they have assembled short positions in the borrowers’ assets. There is nothing the borrowers can do to control the lenders or protect themselves from the unpleasant consequences when the credit tides turn.

Because there is shrinking (forex) collateral relative to claims against it the Russian rouble is underwater. Like a bank in the midst of a run, the Russians won’t stand aside and watch foreign exchange fly out the window leaving the rouble effectively worthless. Interest rates in Russia will jump. If this doesn’t work there will be capital controls, effectively ‘closing the bank’ … but also cutting off Russian domestic credit — and Putin’s nose to spite his face.

Russia Sector Credit Flows

Figure 2: The Russian economy and finance is basically a money-laundering scheme that directs the returns from energy sales to tycoons. Funds flow from EU and UK banks by way of fuel customers to Gazprom and the Bank of Russia. Some funds are held as currency reserves, the rest flow to tycoons’ overseas accounts where they are used to purchase luxury real estate, yachts, artworks, gold and other easily exchangeable goods … The Bank of Russia uses overseas currency as collateral for rouble loans, refunding the roubles to commercial banks, thence into the Russian economy. See ‘Debtonomics; Currency Crisis’ for an explanation of how the process works.

Russia lacks the ability to produce needed organic credit, it lacks infrastructure including strong banks, a freely tradeable currency, goodwill and the rule of law; instead there are weak banks, a rouble that circulates little outside of Russia, absence of trust and arbitrary rule by Putin. Because Russian credit is no good the country requires overseas loans from European lenders acting indirectly through Russia’s energy customers.

Industrial modernity requires a credit subsidy to function. A constant flow of new funds into Russia from overseas is necessary as the leakage to tycoon safe-havens is a collateral drain with an accompanying reduction in rouble purchasing power. If Russia holds onto its collateral the tycoons are starved of funds. The alternative is for the Bank of Russia to make unsecured loans to its commercial bank clients in an attempt to ‘make good purchasing power losses with volume’. The outcome is there is no lender of last resort and bank runs … which are underway right now.

Unsecured rouble lending by Bank of Russia is indicated by red-outlined arrow. Weak Russian banks are unable to distribute their own losses into the Russian economy, attempts to force such losses results is a vicious cycle- black market currency arbitrage leading to hyperinflation as in Argentina, Venezuela, Belarus, Iran and previously in Russia, itself. Citizens and speculators use whatever local currency they can get their hands on to ‘purchase’ the desired hard currency heedless of the affect on the exchange/inflation rate as indicated by the black-outlined arrow.

The ground rules are changing under the Russians’ feet; it is possible their foolishness will by itself trigger the exact crisis they are desperate to avoid. Events that signal major economic turning points can be hard to identify as they occur; the background accompaniment tends to be rising borrowing costs that are added to already-bankrupting fuel costs.
Oil Price Volume 050814(1)
Figure 3: Chart by ‘Political Economist’ by way of Ron Patterson’s ‘Peak Oil Barrel’, (Click on for big). A record of cumulative crude- and condensate (C&C) since 1965 with prices in constant 2012 dollars (from BP Statistical Review).

Notice that the bulk of C&C extraction cost less than US$40 per barrel; prior to 1973, the inflation adjusted cost was less than US$20.

Back of the envelope calculations give the following quantities at different price levels:

  • Less than $40/barrel (2012 dollars) = 73,175 million metric tons since 1965.
  • Less than $60/barrel (more than $41) = 23,050 million metric tons. It’s likely that oil in the sub-$60/barrel price categories has been completely exhausted, all that remains is petroleum and near- petroleum substances that are more costly to extract.
  • Less than $80/barrel (more than $61) = 20,200 million metric tons.
  • Less than $100/barrel (more than $81) = 35,300 million tons. roughly 12,000 million MT of this crude was extracted during the period of Middle East wars that occurred during the 1970s and early 1980s.

Without the wars and their affect on transport, it is likely that crude price would have remained $40/barrel or less ($16/barrel in 1972); there was no shortage of petroleum in the ground and demand was inelastic. Higher rates of consumption at lower prices would have brought forward the onset of depletion-related difficulties that we are facing now. Critics of Hubbert linearization point out that it does not adjust for changes in oilfield technology. It also cannot adjust for above-ground interruptions in the consumption regime: the various Middle East conflicts in the seventies and eighties put off the world oil extraction peak by about ten years.

The question mark in figure 3 represents what crude are we going to use going forward? Peak oil analysts insist that the production plateau does not mean ‘running out of oil’. It is hard to see it meaning anything else when the only petroleum our economy can afford has already been burned up.

The suggestion that similar amounts of fuel will be available after extraction peak as before is not borne out by cost/volume analysis. The lower-priced, sub- $60/barrel fuels have been exhausted; lower price made fuel a loss-leader for the burgeoning automobile industry; the consequence of low prices was a world filled with cars and accelerating rates of depletion. Lower costs reflected the ready accessibility of pre-2000 crudes: volumes were easy to extract from large, conventional onshore- or shallow-water offshore formations. Going ‘up’ the extraction rate curve was affordable with relatively little credit being required, the external costs were easily pushed into the future.

The fuels we have today are not the same fuels we used to build out our consumption infrastructure. We have cleverly trapped ourselves: we must support higher prices because there are no low-priced fuels available. At the same time, our waste-infrastructure does not offer returns that would support the higher prices! We either bankrupt ourselves with loans from criminals to support our lifestyles or learn to do without.


Crude oil prices 1861-2012


Figure 4: oil price chart from BP. Nominal prices from the end of the 19th century to 1973 were less than $10/barrel; from the 1978-82 period to the late 1990s the nominal crude price did not reach US$40/barrel. Nominal wages during this period were also very low. Fast forward to the present; wages have been stagnant since the late-1990s while cost of fuel has jumped in both nominal and real terms by over 500%.

What is emerging from background noise is current business practices offer the prospect of geometrically expanded costs for credit and fuel access … without end. Automobile waste was a losing proposition at $15 per barrel, genius is not required to imagine how poisonous $95 per barrel is to the same enterprise. Our economy does not meet its ordinary expenses by way of cash flow, we are insolvent. We are able to ‘fake it’ for a little while; this is because finance is willing to lend … until we are undone by the absence of real returns and our refusal to face reality.
Gas Buddy 042914
Figure 5: Enter American Dream- killing four dollar gasoline; the heat map from (Click on for big.) Fuel industry costs emerge in wealthy California where residents are better able to stump up for fuel; in lesser parts of the world, folks address the structural fuel constraints by not buying.

Californians create the constraints the same time they battle its effects by destroying every bit of gasoline they buy! They are trapped like the Russians. If they continue to drive they push the cost of gasoline to the level where demand is ‘effected’ and the price cannot be met, where consumers begin to vanish. At the same time, Californians cannot afford to stop driving, they have invested too much in the process. Aside from speculating in real estate, the entire economy of the state — as well as the rest of the developed world — revolves around buying and using cars for everything.
Vehicle Miles Traveled 042914
Figure 6: Vehicle Miles Traveled by way of the St. Louis Fed: Americans by right should be driving 3.6 trillion miles this year but are stuck in reverse. Sadly, less driving has little effect on the fuel price, there needs to be far less driving and less fuel waste, this would reduce prices further but would bankrupt oil drillers at the same time.

China finds itself perched at the end of the same triangular gangplank as the Russians, (New York Times):

China Flexes Its Muscles in Dispute With VietnamJane Perlez and Rick GladstoneBEIJING — China’s escalating dispute with Vietnam over contested waters in the South China Sea sent new shudders through Asia on Thursday as China demanded the withdrawal of Vietnamese ships near a giant Chinese drilling rig and for the first time acknowledged its vessels had blasted the Vietnamese flotilla with water cannons in recent days.While China characterized the use of water cannons as a form of restraint, it punctuated the increasingly muscular stance by the Chinese toward a growing number of Asian neighbors who fear they are vulnerable to bullying by China and its increasingly powerful military. The latest back-and-forth in the dispute with Vietnam — the most serious in the South China Sea in years — sent the Vietnamese stock market plunging on Thursday and elicited concern from a top American diplomat who was visiting Hanoi.Political and economic historians said the China-Vietnam tensions signaled a hardening position by the Chinese over what they regard as their “core interest” in claiming sovereignty over a vastly widened swath of coastal waters that stretch from the Philippines and Indonesia north to Japan. In Chinese parlance, they say, “core interest” means there is no room for compromise.

Chinese saber rattling is no different from the Russians. The desire is to reflate the economy and push prices higher, to forestall deflation or ship it overseas to its trading partners. This endeavor is certain to fail, like Russia viz Ukraine, China dares not risk a war with violent and militaristic Vietnam which has been the graveyard of Chinese ambitions for centuries.

Like Russia, China is dependent upon Western (dollar) credit. Collateral for China credit and its currency (RMB) is trillions of US dollars, euros, yen and sterling. When overseas credit flows out of China, RMB purchasing power evaporates. Unlike Russia, China has strong banks, tens of trillions of bank system losses have been distributed into the Chinese economy in the form of worthless infrastructure, all that remains is for the extent of these losses to be revealed as the credit tides flow out.

China is dependent upon the solvency of its biggest customer and credit provider, the US. As the Land of the Free becomes the Land of Out of Reach, so does China at a remove. China also goes broke for reasons its own. One is the government’s ‘Tapering Error’; it must reduce the flow of RMB credit and face the inevitable consequences. The alternative course is to continue with credit expansion which offers sharply diminished returns. Credit shrinkage will remove a large part of World fuel- resource demand along with support for petroleum drillers.

China is overdue for an ordinary inventory-driven business-cycle recession, not having experienced such a slowdown since the country began to modernize during the mid-1980s. China also faces what Richard Koo calls a ‘balance sheet recession’. China’s finance losses overhang the economy, these reside uneasily as ‘assets’ on China’s ledgers. Deleveraging reveals assets as worthless, which causes further deleveraging which in turn reveals more losses in a vicious cycle. China has little in the way of effective tools to manage this sort of thing: it is at the end of a long regime of very easy credit. Since 2008, there has been a ‘money dump’ by SOE (state-owned enterprise) banks and shadow- ‘loan shark’ banks. Once enough foreign exchange collateral flees there is likely no more easy credit to be had. China’s currency will be underwater, essentially worthless.

The land of 1.2 billion faces an agricultural emergency. As much as seventy-percent of China’s land and water contaminated with metals and mining waste, toxic chemicals and fertilizers; pesticides, sewage runoff and pharmaceuticals, fuel, smog components, soot and radionuclides (mostly from coal burning). This leaves out agricultural land and watershed areas surrendered to urbanization, desertification plus the over-draw from aquifers. This takes place within the context of global warming, driven to a large degree by aggressive Chinese industrialization and massive fossil fuel waste.

China is also subject to dollar-preference, the desire to hold dollars because of what can be obtained with them relative to what can be had with other currencies or by way of barter; the eagerness of locals to trade local currencies to gain dollars at any price; the ‘currency war’.

Russia claims it can offset losses in the West with trade gains from China. This is nonsense; Russian managers don’t understand that China is just as dependent upon Western credit and flows of funds as Russia, itself.

Our fuel system exists to support the automobile industry and all its dependencies. Take away the autos and there is a vanishingly small need for petroleum, the reverse is also true: take away or diminish the fuel system and the autos are stranded along with all the frivolous junk that has been put into service to rationalize universal auto use. None of these bits of junk pay for themselves; what is occurring in Russia and China and their trading partners is the necessary coming-to-grips with both credit- and resource limits. Malthus was right; machines multiply until the outstrip their supply of ‘food’; the outcome is catastrophe, coming to a freeway or strip mall near you.

Knarf plays the Doomer Blues

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