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The Peak Oil Story We Have Been Told Is Wrong

The Peak Oil Story We Have Been Told Is Wrong thumbnail

Most people believe that low oil prices are good for the United States, since the discretionary income of consumers will rise. There is the added benefit that Peak Oil must be far off in the distance, since “Peak Oilers” talked about high oil prices. Thus, low oil prices are viewed as an all around benefit.

In fact, nothing could be further from the truth. The Peak Oil story we have been told is wrong. The collapse in oil production comes from oil prices that are too low, not too high. If oil prices or prices of other commodities are too low, production will slow and eventually stop. Growth in the world economy will slow, lowering inflation rates as well as economic growth rates. We encountered this kind of the problem in the 1930s. We seem to be headed in the same direction today. Figure 1, used by Janet Yellen in her September 24 speech, shows a slowing inflation rate for Personal Consumption Expenditures (PCE), thanks to lower energy prices, lower relative import prices, and general “slack” in the economy.

Figure 1. Why has PCE Inflation fallen below 2%? from Janet Yellen speech, September 24, 2015.

What Janet Yellen is seeing in Figure 1, even though she does not recognize it, is evidence of a slowing world economy. The economy can no longer support energy prices as high as they have been, and they have gradually retreated. Currency relativities have also readjusted, leading to lower prices of imported goods for the United States. Both lower energy prices and lower prices of imported goods contribute to lower inflation rates.

Instead of reaching “Peak Oil” through the limit of high oil prices, we are reaching the opposite limit, sometimes called “Limits to Growth.” Limits to Growth describes the situation when an economy stops growing because the economy cannot handle high energy prices. In many ways, Limits to Growth with low oil prices is worse than Peak Oil with high oil prices. Slowing economic growth leads to commodity prices that can never rebound by very much, or for very long. Thus, this economic malaise leads to a fairly fast cutback in commodity production. It can also lead to massive debt defaults.

Let’s look at some of the pieces of our current predicament.

Part 1. Getting oil prices to rise again to a high level, and stay there, is likely to be difficult. High oil prices tend to lead to economic contraction.  

Figure 2 shows an illustration I made over five years ago:

Figure 1. Chart I made in Feb. 2010, for an article I wrote called, Peak Oil: Looking for the Wrong Symptoms.

Clearly Figure 2 exaggerates some aspects of an oil price change, but it makes an important point. If oil prices rise–even if it is after prices have fallen from a higher level–there is likely to be an adverse impact on our pocketbooks. Our wages (represented by the size of the circles) don’t increase. Fixed expenses, including mortgages and other debt payments, don’t change either. The expenses that do increase in price are oil products, such as gasoline and diesel, and food, since oil is used to create and transport food. When the cost of food and gasoline rises, discretionary spending (in other words, “everything else”) shrinks.

When discretionary spending gets squeezed, layoffs are likely. Waitresses at restaurants may get laid off; workers in the home building and auto manufacturing industries may find their jobs eliminated. Some workers who get laid off from their jobs may default on their loans causing problems for banks as well. We start the cycle of recession and falling oil prices that we should be familiar with, after the crash in oil prices in 2008.

So instead of getting oil prices to rise permanently, at most we get a zigzag effect. Oil prices rise for a while, become hard to maintain, and then fall back again, as recessionary influences tend to reduce the demand for oil and bring the price of oil back down again.

Part 2. The world economy has been held together by increasing debt at ever-lower interest rates for many years. We are reaching limits on this process.

Back in the second half of 2008, oil prices dropped sharply. A number of steps were taken to get the world economy working better again. The US began Quantitative Easing (QE) in late 2008. This helped reduce longer-term interest rates, allowing consumers to better afford homes and cars. Since building cars and homes requires oil (and cars require oil to operate as well), their greater sales could stimulate the economy, and thus help raise demand for oil and other commodities.

Figure 2. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Following the 2008 crash, there were other stimulus efforts as well. China, in particular, ramped up its debt after 2008, as did many governments around the world. This additional governmental debt led to increased spending on roads and homes. This spending thus added to the demand for oil and helped bring the price of oil back up.

These stimulus effects gradually brought prices up to the $120 per barrel level in 2011. After this, stimulus efforts gradually tapered. Oil prices gradually slid down between 2011 and 2014, as the push for ever-higher debt levels faded. When the US discontinued its QE and China started scaling back on the amount of debt it added in 2014, oil prices began a severe drop, not too different from the way they dropped in 2008.

I reported earlier that the July 2008 crash corresponded with a reduction in debt levels. Both US credit card debt (Fig. 4) and mortgage debt (Fig. 5) decreased at precisely the time of the 2008 price crash.

Figure 3. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data of the Federal Reserve.

Figure 6. US Mortgage Debt Outstanding, based on Federal Reserve Z1 Report.

At this point, interest rates are at record low levels; they are even negative in some parts of Europe. Interest rates have been falling since 1981.

Figure 6. Chart prepared by St. Louis Fed using data through July 20, 2015.

I showed in a recent post (How our energy problem leads to a debt collapse problem) that when the cost of oil production is over $20 per barrel, we need ever-higher debt ratios to GDP to produce economic growth. This need for ever-rising debt contributes to our inability to keep commodity prices high enough to satisfy the needs of commodity producers.

Part 3. We are reaching a demographic bottleneck with the “baby boomers” retiring. This demographic bottleneck causes an adverse impact on the demand for commodities.

Demand represents the amount of goods customers can afford. The amount consumers can afford doesn’t necessarily rise endlessly. One of the problems leading to falling demand is falling inflation-adjusted median wages. I have written about this issue previously in How Economic Growth Fails.

Figure 7. Median Inflation-Adjusted Family Income, in chart prepared by Federal Reserve of St. Louis.

Another part of the problem of falling demand is a falling number of working-age individuals–something I approximate by using estimates of the population aged 20 to 64. Figure 8 shows how the population of these working-age individuals has been changing for the United States, Europe, and Japan.

Figure 8. Annual percentage growth in population aged 20 - 64, based on UN 2015 population estimates.

Figure 8 indicates that Japan’s working age population started shrinking in 1998 and now is shrinking by more than 1.0% per year. Europe’s working age population started shrinking in 2012. The United States’ working age population hasn’t started shrinking, but its rate of growth started slowing in 1999. This slowdown in growth rate is likely part of the reason that labor force participation rates have been falling in the United States since about 1999.

Figure 9. US Labor force participation rate. Chart prepared by Federal Reserve of St. Louis.

When there are fewer workers, the economy has a tendency to shrink. Tax levels to pay for retirees are likely to start increasing. As the ratio of retirees rises, those still working find it increasingly difficult to afford new homes and cars. In fact, if the population of workers aged 20 to 64 is shrinking, there is little need to add new homes for this group; all that is needed is repairs for existing homes. Many retirees aged 65 and over would like their own homes, but providing separate living quarters for this population becomes increasingly unaffordable, as the elderly population becomes greater and greater, relative to the working age population.

Figure 10 shows that the population aged 65 and over already equals 47% of Japan’s working age population. (This fact no doubt explains some of Japan’s recent financial difficulties.) The ratios of the elderly to the working age population are lower for Europe and the United States, but are trending higher. This may be a reason why Germany has been open to adding new immigrants to its population.

Figure 9. Ratio of elderly (age 65+) to working age population (ages 20 to 64) based on UN 2015 population estimates.

For the Most Developed Regions in total (which includes US, Europe, and Japan), the UN projects that those aged 65 and over will equal 50% of those aged 20 to 64 by 2050. China is expected to have a similar percentage of elderly, relative to working age (51%), by 2050. With such a large elderly population, every two people aged 20 to 64 (not all of whom may be working) need to be supporting one person over 65, in addition to the children whom they are supporting.

Demand for commodities comes from workers having income to purchase goods that are made using commodities–things like roads, new houses, new schools, and new factories. Economies that are trying to care for an increasingly large percentage of elderly citizens don’t need a lot of new houses, roads and factories. This lower demand is part of what tends to hold commodity prices down, including oil prices.

Part 4. World oil demand, and in fact, energy demand in general, is now slowing.

If we calculate energy demand based on changes in world consumption, we see a definite pattern of slowing growth (Fig.11). I commented on this slowing growth in my recent post, BP Data Suggests We Are Reaching Peak Energy Demand.

Figure 11. Annual percent change in world oil and energy consumption, based on BP Statistical Review of World Energy 2015 data.

The pattern we are seeing is the one to be expected if the world is entering another recession. Economists may miss this point if they are focused primarily on the GDP indications of the United States.

World economic growth rates are not easily measured. China’s economic growth seems to be slowing now, but this change does not seem to be fully reflected in its recently reported GDP. Rapidly changing financial exchange rates also make the true world economic growth rate harder to discern. Countries whose currencies have dropped relative to the dollar are now less able to buy our goods and services, and are less able to repay dollar denominated debts.

Part 5. The low price problem is now affecting many commodities besides oil. The widespread nature of the problem suggests that the issue is a demand (affordability) problem–something that is hard to fix.

Many people focus only on oil, believing that it is in some way different from other commodities. Unfortunately, nearly all commodities are showing falling prices:

Figure 12. Monthly commodity price index from Commodity Markets Outlook, July 2015. Used under Creative Commons license.

Energy prices stayed high longer than other prices, perhaps because they were in some sense more essential. But now, they have fallen as much as other prices. The fact that commodities tend to move together tends to hold over the longer term, suggesting that demand (driven by growth in debt, working age population, and other factors) underlies many commodity price trends simultaneously.

Figure 13. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank

The pattern of many commodities moving together is what we would expect if there were a demand problem leading to low prices. This demand problem would likely reflect several issues:

  • The world economy cannot tolerate high priced energy because of the problem shown in Figure 2. We have increasingly used cheaper debt and larger quantities of debt to cover this basic problem, but are running out of fixes.
  • The cost of producing energy products keeps trending upward, because we extracted the cheap-to-produce oil (and coal and natural gas) first. We have no alternative but to use more expensive-to-produce energy products.
  • Many costs other than energy costs have been trending upward in inflation-adjusted terms, as well. These include fresh water costs, the cost of metal extraction, the cost of mitigating pollution, and the cost of advanced education. All of these tend to squeeze discretionary income in a pattern similar to the problem indicated in Figure 2. Thus, they tend to add to recessionary influences.
  • We are now reaching a working population bottleneck as well, as described in Part 4.

Part 6. Oil prices seem to need to be under $60 barrel, and perhaps under $40 barrel, to encourage demand growth in US, Europe, and Japan. 

If we look at the historical impact of oil prices on consumption for the US, Europe, and Japan combined, we find that whenever oil prices are above $60 per barrel in inflation-adjusted prices, consumption tends to fall. Consumption tends to be flat in the $40 to $60 per barrel range. It is only when prices are in the under $40 per barrel range that consumption has generally risen.

Figure 8. Historical consumption vs price for the United States, Japan, and Europe. Based on a combination of EIA and BP data.

There is virtually no oil that can be produced in the under $40 barrel range–or even in the under $60 barrel a range, if tax needs of governments are included. Thus, we end up with non-overlapping ranges:

  1. The amount that consumers in advanced economies can afford.
  2. The amount the producers, with their current high-cost structure, actually need.

One issue, with lower oil prices, is, “What kinds of uses do the lower oil prices encourage?” Clearly, no one will build a new factory using oil, unless the price of oil is expected to be sufficiently low over the long-term for this use. Thus, adding industry will likely be difficult, even if the price of oil drops for a few years. We also note that the United States seems to have started losing its industrial production in the 1970s (Fig. 15), as its own oil production fell. Apart from the temporarily greater use of oil in shale drilling, the trend toward off-shoring industrial production will likely continue, regardless of the price of oil.

Figure 15. US per capita energy consumption by sector, based on EIA data.

If we cannot expect low oil prices to favorably affect the industrial sector, the primary impact of lower oil prices will likely be on the transportation sector. (Little oil is used in the residential and commercial sectors.) Goods shipped by truck will be cheaper to ship. This will make imported goods, which are already cheap (thanks to the rising dollar), cheaper yet. Airlines may be able to add more flights, and this may add some jobs. But more than anything else, lower oil prices will encourage people to drive more miles in personal automobiles and will encourage the use of larger, less fuel-efficient vehicles. These uses are much less beneficial to the economy than adding high-paid industrial jobs.

Part 7. Saudi Arabia is not in a position to help the world with its low price oil problem, even if it wanted to. 

Many of the common beliefs about Saudi Arabia’s oil capacity are of doubtful validity. Saudi Arabia claims to have huge oil reserves, but as a practical matter, its growth in oil production has been modest. Its oil exports are actually down relative to its exports in the 1970s, and relative to the 2005-2006 period.

Figure 16. Saudi Arabia oil production, consumption, and exports, based on BP Statistical Review of World Energy 2015 data.

Low oil prices are having an adverse impact on the revenues that Saudi Arabia receives for exporting oil. In 2015, Saudi Arabia has so far issued bonds worth $5 billion US$, and plans to issue more to fill the gap in its budget caused by falling oil prices. Saudi Arabia really needs $100+ per barrel oil prices to fund its budget. In fact, nearly all of the other OPEC countries also need $100+ prices to fund their budgets. Saudi Arabia also has a growing population, so it needs rising oil exports just to maintain its 2014 level of exports per capita. Saudi Arabia cannot reduce its exports by 10% to 25% to help the rest of the world. It would lose market share and likely not get it back. Losing market share would permanently leave a “hole” in its budget that could never be refilled.

Saudi Arabia and a number of the other OPEC countries have published “proven reserve” numbers that are widely believed to be inflated. Even if the reserves represent a reasonable outlook for very long term production, there is no way that Saudi oil production can be ramped up greatly, without a large investment of capital–something that is likely not to be available in a low price environment.

In the United States, there is an expectation that when estimates are published, the authors will do their best to produce correct amounts. In the real world, there is a lot of exaggeration that takes place. Most of us have heard about the recent Volkswagen emissions scandal and the uncertainty regarding China’s GDP growth rates. Saudi Arabia, on a monthly basis, does not give truthful oil production numbers to OPEC–OPEC regularly publishes “third party estimates” which are considered more reliable. If Saudi Arabia cannot be trusted to give accurate monthly oil production amounts, why should we believe any other unaudited amounts that it provides?

Part 8. We seem to be at a point where major debt defaults will soon start for oil and other commodities. Once this happens, the resulting layoffs and bank problems will put even more downward pressure on commodity prices.

Wolf Richter has recently written about huge jumps in interest rates that are being forced on some borrowers. Olin Corp., a manufacture of chlor-alkali products, recently attempted to sell $1.5 billion in eight and ten year bonds with yields of 6.5% and 6.75% respectively. Instead, it ended up selling $1.22 billion of bonds with the same maturities, with yields of 9.75% and 10.0% respectively.

Richter also mentions existing bonds of energy companies that are trading at big discounts, indicating that buyers have substantial questions regarding whether the bonds will pay off as expected. Chesapeake Energy, the second largest natural gas driller in the US, has 7% notes due in 2023 that are now trading at 67 cent on the dollar. Halcon Resources has 8.875% notes due in 2021 that are trading at 33.5 cents on the dollar. Lynn Energy has 6.5% notes due in 2021 that are trading at 23 cents on the dollar. Clearly, bond investors think that debt defaults are not far away.

Bloomberg reports:

The latest round of twice-yearly reevaluations is under way, and almost 80 percent of oil and natural gas producers will see a reduction in the maximum amount they can borrow, according to a survey by Haynes and Boone LLP, a law firm with offices in Houston, New York and other cities. Companies’ credit lines will be cut by an average of 39 percent, the survey showed.

Debts of mining companies are also being affected with today’s low prices of metals. Thus, we can expect defaults and cutbacks in areas other than oil and gas, too.

There is a widespread belief that if prices remain low, someone will come along, buy the distressed assets at low prices, and ramp up production as soon as prices rise again. If prices never rise for very long, though, this won’t happen. The bankruptcies that occur will mean the end for that particular resource play. We won’t really be able to get prices back up to where they need to be to extract the resources.

Thus low prices, with no way to get them back up, and no hope of making a profit on extraction, are likely the way we reach limits in a finite world. Because low demand affects all commodities simultaneously, “Limits to Growth” equates to what might be called “Peak Resources” of all kinds, at approximately the same time.

our finite world



20 Comments on "The Peak Oil Story We Have Been Told Is Wrong"

  1. Hello on Wed, 30th Sep 2015 4:44 pm 

    Oil is almost too cheap to be measured. Why would anybody go and drill for more?

  2. energy investor on Wed, 30th Sep 2015 5:16 pm 

    Well, Hello, that may be why they are abandoning drilling in many places…

  3. Outcast_Searcher on Wed, 30th Sep 2015 5:24 pm 

    Or, people can spend less on “everything else” that they don’t need. (People having to adjust expectations downward isn’t doom — even if they don’t like it.)

    People could afford oil just fine for the four years ending roughly a year ago, at average global oil prices near $100. The global economy grew during that period.

    Now, suddenly people can’t afford oil at half the price? The world hasn’t changed enough recently for that to make sense.

    The economic-doomers don’t like any conditions, so they can always preach doom.

    Whether the dollar is strong or weak, they don’t like it. Whether growth is fast or slow they don’t like it.

    Whether inflation is low or high they don’t like it.

    When ANY major factor changes in the global economy, there will be some losers as things adjust. This doesn’t mean economic doom.

    To me, this looks like a case of same song, different verse.

  4. Plantagenet on Wed, 30th Sep 2015 5:25 pm 

    Today’s low oil prices are caused by a glut in oil supply. Low prices are already producing cutbacks in exploration and drilling in US TOS deposits, in deep sea oil fields, and in risky Arctic oil fields. Eventually the production of oil will fall enough that the oil glut will end, and then the price of oil will go back up again.

    Current low oil prices are simply obeying the Law of Supply and Demand—-you get a supply glut and the price falls.

    CHEERS!

  5. idontknowmyself on Wed, 30th Sep 2015 5:30 pm 

    What Janet Yellen is seeing in Figure 1, even though she does not recognize it, is evidence of a slowing world economy. The economy can no longer support energy prices as high as they have been, and they have gradually retreated.

    Gail does not understand what propaganda and date manipulation is. (see above).

    Using FED graph and data and considering them worthy discredit her writing.

  6. apneaman on Wed, 30th Sep 2015 5:43 pm 

    “To me, this looks like a case of same song, different verse.”

    Of course it does when you think there is only one possible song. A one track mind. Only one record in the juke box. Corny clowns like you have been saying the same thing throughout history, in spite of the fact that the same shit keeps happening over and over for all the same reasons. You’re the one singing the same song – the one they drum into your head with the propaganda machine. Here is how they sang it last time we were in his spot….

    1927-1933 Chart of Pompous Prognosticators

    “We will not have any more crashes in our time.”
    – John Maynard Keynes in 1927

    “I cannot help but raise a dissenting voice to statements that we are living in a fool’s paradise, and that prosperity in this country must necessarily diminish and recede in the near future.”
    – E. H. H. Simmons, President, New York Stock Exchange,
    January 12, 1928

    “There will be no interruption of our permanent prosperity.”
    – Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

    “No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment…and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding.”
    – Calvin Coolidge December 4, 1928

    “There may be a recession in stock prices, but not anything in the nature of a crash.”
    – Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

    “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”
    – Irving Fisher, Ph.D. in economics, Oct. 17, 1929

    “This crash is not going to have much effect on business.”
    – Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

    “There will be no repetition of the break of yesterday… I have no fear of another comparable decline.”
    – Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

    “We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices.”
    – Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

    “This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.”
    – R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

    “Buying of sound, seasoned issues now will not be regretted”
    – E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

    “Some pretty intelligent people are now buying stocks… Unless we are to have a panic — which no one seriously believes, stocks have hit bottom.”
    – R. W. McNeal, financial analyst in October 1929

    “The decline is in paper values, not in tangible goods and services…America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin.”
    – Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929

    “Hysteria has now disappeared from Wall Street.”
    – The Times of London, November 2, 1929

    “The Wall Street crash doesn’t mean that there will be any general or serious business depression… For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game… Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before.”
    – Business Week, November 2, 1929

    “…despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation…”
    – Harvard Economic Society (HES), November 2, 1929

    “… a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.”
    – HES, November 10, 1929

    “The end of the decline of the Stock Market will probably not be long, only a few more days at most.”
    – Irving Fisher, Professor of Economics at Yale University, November 14, 1929

    “In most of the cities and towns of this country, this Wall Street panic will have no effect.”
    – Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

    “Financial storm definitely passed.”
    – Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

    “I see nothing in the present situation that is either menacing or warrants pessimism… I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.”
    – Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

    “I am convinced that through these measures we have reestablished confidence.”
    – Herbert Hoover, December 1929“[1930 will be] a splendid employment year.”
    – U.S. Dept. of Labor, New Year’s Forecast, December 1929

    “For the immediate future, at least, the outlook (stocks) is bright.”
    – Irving Fisher, Ph.D. in Economics, in early 1930

    “…there are indications that the severest phase of the recession is over…”
    – Harvard Economic Society (HES) Jan 18, 1930

    “There is nothing in the situation to be disturbed about.”
    – Secretary of the Treasury Andrew Mellon, Feb 1930

    “The spring of 1930 marks the end of a period of grave concern…American business is steadily coming back to a normal level of prosperity.”
    – Julius Barnes, head of Hoover’s National Business Survey Conference, Mar 16, 1930

    “… the outlook continues favorable…”
    – HES Mar 29, 1930

    “… the outlook is favorable…”
    – HES Apr 19, 1930

    “While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”
    – Herbert Hoover, President of the United States, May 1, 1930“…by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent…”

    – HES May 17, 1930“Gentleman, you have come sixty days too late. The depression is over.”
    – Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

    “… irregular and conflicting movements of business should soon give way to a sustained recovery…”
    – HES June 28, 1930

    “… the present depression has about spent its force…”
    – HES, Aug 30, 1930

    “We are now near the end of the declining phase of the depression.”
    – HES Nov 15, 1930

    “Stabilization at [present] levels is clearly possible.”
    – HES Oct 31, 1931

    “All safe deposit boxes in banks or financial institutions have been sealed… and may only be opened in the presence of an agent of the I.R.S.”
    – President F.D. Roosevelt, 1933

    http://www.theburningplatform.com/2014/10/16/permanently-high-plateau/

    Does the tune sound familiar?

  7. apneaman on Wed, 30th Sep 2015 5:53 pm 

    planty sucks her favorite soothy again.

  8. BC on Wed, 30th Sep 2015 7:17 pm 

    @Outcast_Searcher: “People could afford oil just fine for the four years ending roughly a year ago, at average global oil prices near $100. The global economy grew during that period.
    Now, suddenly people can’t afford oil at half the price? The world hasn’t changed enough recently for that to make sense.”

    https://app.box.com/s/xt8fhcxp62igds328g7q6mzorpytq9pw

    Growth of world trade has decelerated back to where the Fed panicked in 2012 and went “all in” to avoid a recession.

    https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1Zo4

    https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1Zr0

    Tejas is already in recession.

    China is in the process of a hard landing, owing to US and Japanese FDI contracting and firms and expats exiting en masse, causing China’s production and export sectors (~55% of GDP) to crash, subtracting at least 2-2.5% from GDP, and construction another 1%.

    BTW, global real GDP per capita is no higher than in 2007-08. So, not only can the global economy NOT afford $147 and $100 oil and grow the 5- and 10-year real GDP per capita, it won’t grow per capita in the future at $20-$40 oil.

    The marginal demand for $100 oil came from China that created the largest credit and fixed investment bubble as a share of GDP in world history, far surpassing Japan in the 1980s and the US in the 2000s to date and in the 1920s. Now China is staring down a debt-deflationary crash, social unrest, gov’t reaction, PLA generals flexing their muscle, and turning China inward from the rest of the world as they did in the 1780s, 1850s, 1890s-1900s, and during WW II, the civil war, and Mao’s revolution.

    Now the entire world is an unprecedented debt and asset bubble having grown far faster than wages, profits, and GDP. The consequences of the debt-deflationary wipeout the world faces is too grim to contemplate.

  9. shortonoil on Wed, 30th Sep 2015 7:20 pm 

    When made the point about lower oil prices here at PO News in May of 2014, and we put up this page in September of 2014 (the date is on the second graph):

    http://www.thehillsgroup.org/depletion2_022.htm

    We have posted our results on Gail’s blog several time, and several people who have been following our research closely have also. Posting this article without the proper accreditation is in very poor form, and is disingenuous. Gail is posting a well worded, but conceptually inconsistent analysis. Her attempt to translate our energy analysis into an Econ 101 presentation fails miserably.

    “Part 6. Oil prices seem to need to be under $60 barrel, and perhaps under $40 barrel, to encourage demand growth in US, Europe, and Japan.”

    The Etp Model highlights that it is not the cost of oil that is damaging to an economy; it is the difference between the cost, and the benefit that is damaging. Missing that very vital point allows her to avoid the dreaded word “depletion”, but it leaves the reader with the impression that low enough oil prices will eventually bring an economic equilibrium. That is not the case; depletion is an ongoing event that will not stop until a thermodynamic equilibrium is reached. The Etp Model provides a calculation for when that will occur.

    Taking our research that we have invested many years into without acknowledgment is piracy. Using it incorrectly is doing more damage than it is good.

    http://www.thehillsgroup.org/

  10. makati1 on Wed, 30th Sep 2015 11:01 pm 

    Outcast… if you buy a new Rolex and use your credit card, you appear wealthy to the fools you know. You are not. The bank owns that Rolex, not you. That is how the $100 oil was paid for, and now all those credit cards are maxed out and the owners are in bankruptcy proceedings or soon will be.

    I will not use the derogatory phrase I heard in my childhood that described this type of faux wealth, but many here can remember is they try. Starts with the letters “N and R”. It now applies to most of the West.

  11. Brian on Thu, 1st Oct 2015 6:02 am 

    Short,
    I saw you questioning why the price is lower than your model suggests. Does your model model wealth being turned into consumption? Example might be something like tight oil has negative returns on an energetic basis but we pump it to eat our roads, rigs, etc. The price might then be benefit of “oil” minus cost to extract minus wealth destruction. While I’m not a huge fan of the petri dish analogy, the reason bacteria populations in media follow a bell curve is that they eat each other when the food runs out, ie their wealth.

  12. Davy on Thu, 1st Oct 2015 6:05 am 

    Short, Gail is a decent person and one of our own in our fight for intellectual justice. You should at least bring your concerns to her attention. I may be wrong but I believe she would listen to you and adapt her message per yours. Maybe she has me deceived with the nice grandmother appearance. I have communicated by email to her and she always replied.

  13. rockman on Thu, 1st Oct 2015 7:22 am 

    ” The Peak Oil story we have been told is wrong. The collapse in oil production comes from oil prices that are too low, not too high.”. And once more thoughts from a source that only understands apportion of the POD.

    Lots of great comments here…keep it up. But mucho words that can easily be saved by just referring to the POD. Which is exactly why I created that acronym long ago. And yes: it is very inclusive…just like our energy predicament. Again the blind men and the elephant story comes to mind: the dynamics are incomprehensible if one only focuses on 1 or 2 aspects at a time.

  14. marmico on Thu, 1st Oct 2015 9:03 am 

    The Etp Model provides a calculation for when that will occur.

    Bull shit. The ETP model is already dead. No doubt you will leave out the (low) 2015 oil price just like you left out the (high) 1979-1983 prices because it doesn’t fit the curve.

  15. Don Stewart on Thu, 1st Oct 2015 9:16 am 

    Dear Shortonoil
    I have a thought about why your model may be divergent from the price of oil at the present time.

    The Central Banks efforts at debt stimulation as a way to get the economy to grow robustly is at the heart of the problem. And our current situation is related to famous historical bubbles such as the Tulip Mania, the South Sea bubble, and the land and railroad bubbles which plagued frontier America. In the Tulip and South Sea bubbles, the prices rose to very high levels, and then collapsed. Entrepreneurs, prompted by the high prices, rushed to increase production. With prices high, there was a lot of mal-investment. In the aftermath of the collapse of the bubble, prices sank very low. In short, the trajectories were more like roller coasters and less like any curves in Econ 101 textbooks.

    Rockman’s analysis of Eagle Ford wells a day or two ago indicates that rational investors should never have put money into these wells….just as rational investors should never have gotten swept up in the Tulip Mania or the South Seas bubble or the land and railroad bubbles in frontier America. Yet a combination of clever marketing and the ZIRP policy has led investors to continue to buy securities backed by shale into the first half of 2015.

    In order to make your model correctly depict the developments of the last few years, I think you would have to build a ‘bubble model’, which operates independently of depletion and the normal, rational economy.

    I’m not sure it is worth the effort, since we may be coming to the end of the bubble. But perhaps it is necessary because, otherwise, the temptation is to ignore the price ceiling limits in your model and assume that, after the bubble collapses, we will march right back up to 125 dollar oil. If we, in fact, need to be making some hard adjustments to the reality of depletion, then we need to become convinced that depletion is real and bubble finance can’t last forever

    Don Stewart

  16. shortonoil on Thu, 1st Oct 2015 10:49 am 

    “Short, Gail is a decent person and one of our own in our fight for intellectual justice. You should at least bring your concerns to her attention.”

    “Gail is a decent person” Don’t know, I’ve never met her. But, in the email correspondence we have had, she has explicitly stated that she was not going to write about the Etp Model. That was offered even though we never suggested that she should? She kept insisting that the Model was an ERoEI analysis, and that they are used incorrectly, and that they don’t work. That was even though I assured her that ERoEI had absolutely nothing to do with the formation of the Model, and that ERoEI was just one of the many outputs from it. We offered to give her a copy of the study so that she could review it for herself, but as far as I can tell, she never downloaded it.

    The idea that oil prices can fall far enough to again allow for economic growth, and increased demand in the economy is “wrong”. They can’t! To understand that statement it is necessary to comprehend the energy dynamics of the situation; it can not be determined from an Econ 101 perspective. Economic analysis is the wrong tool to use for this situation, and if attempted it will produce erronous results. We stated over a year ago that results generated from the Model projected that oil prices must now be in a long term downward phase. The Model even allowed us to project what those prices were going to be.

    It has been the general obsession with relying on an unproven pseudo-science that has placed the world in its present dilemma. The assurance from economists that substitution would take place to provide for any shortages has been shown to be a falsehood. It was the excuse used to deplete a finite planet at an astronautical rate for the economic benefit of those doing the depleting. For Gail to plagiarize the results generated from the Etp Model (after insisting that it was an ERoEI analysis that didn’t work) by concocting an economic travesty, is BAU at its best!

    http://www.thehillsgroup.org/

  17. shortonoil on Thu, 1st Oct 2015 12:01 pm 

    “I have a thought about why your model may be divergent from the price of oil at the present time.
    The Central Banks efforts at debt stimulation as a way to get the economy to grow robustly is at the heart of the problem.”

    I am quit sure that you are correct. The translation from energy units to dollar units is accomplished by the use of this function:

    http://www.thehillsgroup.org/depletion2_008.htm

    It was plotted from the best data sources that we could find: the World Bank and the EIA. The paradox we are seeing is that as the CBs increase printing the price of oil appears to be going down more than our Model indicates that it should. This could be from the mal-investment that occurred before the price began its decline. It wasn’t only shale that was heavily invested into, but it was also bitumen, ultra deep water, and even legacy conventional fields. The Saudis definitely spent a great deal on horizontal drilling at Ghawar even though that field is more than 90% depleted out. That was when oil was close to $100. They could now be producing oil that is no longer economically justifiable.

    The ZIRP policy, and wholesale printing of the CBs over the last few years must have had some impact on Graph# 12 above. An increase in the money supply should have reduced the BTU/$ term more than the graph indicates. The Affordability Curve which comes from here:

    http://www.thehillsgroup.org/depletion2_022.htm

    should have fallen less that what the graph projected, as it is derived from Deliverable Energy divided by BTU/$. It didn’t – it fell more. Apparently, the CBs printed money is not entering the system, or it is being destroyed faster than it is being created. Anyway, there is 730 trillion BTU per year that is totally unaccounted for. As my partner Roy says, “how do you lose 730 trillion BTU, you lose your car keys, your dog; you would think someone would notice 730 trillion BTU laying around somewhere”? It is an enigma!

  18. marmico on Thu, 1st Oct 2015 12:01 pm 

    The idea that oil prices can fall far enough to again allow for economic growth, and increased demand in the economy is “wrong”. They can’t

    Bull shit. Just like Tverberg’s blather, you would fail a basic microeconomics course. And since you haven’t figured out by now that demand curves slope down and to the right, not up and to the left, you and Tverberg belong in the same basket. Fuctards.

  19. shortonoil on Thu, 1st Oct 2015 12:31 pm 

    “I saw you questioning why the price is lower than your model suggests. Does your model model wealth being turned into consumption?

    That is a definite possibility, and we have mentioned the cannibalization process that would take place as oil prices fall. What we didn’t expect is that it would begin to occur before the price fell to below the average well’s lifting cost. Looking at water cut projections we expect that to be between $25 and $30/ barrel. But, the disruption that falling oil price is having on economies around the world, and the social unrest that is occurring as a result just might be accelerating that process. The bugs haven’t started eating each other yet; they could, however, be starting on the woodwork?

  20. shortonoil on Thu, 1st Oct 2015 12:45 pm 

    “The Etp Model provides a calculation for when that will occur.
    Bull shit.”

    You are about as entertaining as three nights in Acapulco with your mother in-law!

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