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Peak conventional oil adversely impacts the economy

Consumption

By Drs. Robert & Sonia Vogl
President and Vice President, Illinois Renewable Energy Association

Our economy was built on cheap fossil fuels, which supported our economic and technological progress. As sources of conventional low-cost oil are depleted, we have turned to unconventional sources with higher extraction costs. With current oil prices around $80 to $85 per barrel, it has been estimated that new tar sands oil requires $95 per barrel to be extracted. If the oil is not extracted, prices could still rise, as competition for the existing oil would intensify.

Energy economist Douglas Reynolds believes our economic malaise is a result of a decrease in energy supplies. He notes that the United States has a vast global military presence that we are unable to pay for, a decreasing standard of living, increased concentration of wealth, and a continuous energy crisis that began in 1973. He sees our budget deficit rooted in the oil crisis, and that our government is printing more money to keep the economy from collapsing.

Gail Tverberg reminds us that higher oil prices damage the economies and increases unemployment in countries reliant on imported energy, such as Japan, the European Union and the United States. History suggests oil prices may have to fall below $40 per barrel for substantial increases in employment.

Higher oil prices allow exporting countries to maintain their economies and job opportunities. Saudi Arabia announced they were willing to accept lower prices for their oil to maintain market share by eliminating energy suppliers with higher production costs. Yet, prior to the announcement, they had cut production, which would cause prices to rise, so their intent is not clear.

Tverberg cites a recent Apicorp report that only two OPEC (Organization of the Petroleum Exporting Countries) members, Qatar and Kuwait, can break even with oil prices between $80 and $85 per barrel. She suggests the global economy needs to be redesigned to operate on much less oil.

The recent claims of new oil and natural gas abundance in the United States along with the fall in energy prices has created a sense that we no longer need to be concerned about the economic impacts of a decline in peak conventional oil.

Energy analyst Nate Hagens is also concerned about the impact of peak oil on our economy. While he supports the move toward solar energy, he remains concerned that the implications of peak oil include a lower standard of living. He believes that endless economic growth on a finite planet is impossible, and that the peaking of oil marks the beginning of the end of such growth.

If we are faced with the end of growth, there are numerous alarming possibilities based on how the global society reacts to it. While we as individuals have little impact on global events, we can take actions to make our lives more sustainable. Hagens suggests we surround ourselves with people of similar values and work with them toward a cleaner world on a personal, local and regional level. By modeling the behavior we believe in, we are in a position to share our knowledge and skills to assist others in reaching similar goals.

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19 Comments on "Peak conventional oil adversely impacts the economy"

  1. Davy on Wed, 29th Oct 2014 9:46 am 

    Article said – If we are faced with the end of growth, there are numerous alarming possibilities based on how the global society reacts to it. While we as individuals have little impact on global events, we can take actions to make our lives more sustainable. Hagens suggests we surround ourselves with people of similar values and work with them toward a cleaner world on a personal, local and regional level. By modeling the behavior we believe in, we are in a position to share our knowledge and skills to assist others in reaching similar goals.

    Nothing wrong with the above statement. It is pure risk management in action. I would suggest embracing prep if doom is too uncomfortable. Doom is extreme and abstract. Prep is practical and cautious. There is nothing wrong with acknowledging some doom and taking some preparatory actions. Even the NOo can stock his wine cellar, shelves with caviar, and humidor with Cubans for a period of hard times.
    If you insist on being a corn and continue to believe that technology, markets, knowledge, and substitution will save the day then you are not interested in prep. If you are a corn you are probably a 1%er or a 1%er wanna-be so wealth transfer is of no concern so the dangerous financial repression we are seeing is of no issue. A die hard corn will be blindsided and has no future when BAU stutters. He has made no preparations other than his portfolio.
    I suggest making some key changes to your life at this point. The biggest change is move to a location that the available science shows to be more sustainable and resilient post BAU. I need not list those places fully. IMA some of the most popular places are the worst positioned post BAU i.e. Miami, Las Vegas, and East Coast corridor.
    Community is another key variable. Our prep efforts will yield little results except for the short term. You can prepare short term and make a difference for a few months. Longer term your region’s sustainability and resilience is the key. So after the physical location it will be the abstract of social fabric that is critical.
    We can’t change the top but we can make a huge difference locally. I am talking going to the final degree of locally with your family and all the way into your heart. Attitudes and lifestyle changes with you and your family are the starting point. These basic changes are what can be built upon to change your community. These actions will make a difference if you are in a location that even has a chance of survival.

  2. Plantagenet on Wed, 29th Oct 2014 10:24 am 

    Another excellent posr by Daver. Read it carefully and thoughtfully.

  3. paulo1 on Wed, 29th Oct 2014 10:53 am 

    Terrific post, Davy.

    Good advice for even a BAU world. There is more to life than consumer driven growth. We are more than hamsters in a wheel always striving and grasping and supposedly getting ahead.

    Enjoy the ride.

    Paulo

  4. Kenz300 on Wed, 29th Oct 2014 11:16 am 

    Time for the top 1% to lose their tax cuts and go back to rates that existed 30 years ago.

    Income inequality is destroying the fabric of society and the tax cuts for the rich have done nothing for society.

  5. Northwest Resident on Wed, 29th Oct 2014 11:25 am 

    “By modeling the behavior we believe in, we are in a position to share our knowledge and skills to assist others in reaching similar goals.”

    In other words, set an example, learn and practice the skills that will make a difference when BAU ends. Be ready to teach others. Develop the mental attitude and the mindset that enhances your chances of survival and enables you to stand tall and strong even when surrounded by a raging sea of despair, confusion and disillusionment. Prepare yourself to be a teacher, a leader and a source of moral strength — because if we can’t or won’t do it, then who knows what demons might step in to fill that void.

  6. nemteck on Wed, 29th Oct 2014 12:47 pm 

    “History suggests oil prices may have to fall below $40 per barrel for substantial increases in employment.” Who can sell crude for this price?

    Gate price of $40 minus transport $15 for Bakken minus $4 OPEX minus 22% taxes and royalties yielding $16.38 at the well head, not including 7% profit and 3% interest on debt.

    Increase employment? Absolutely! A lot of wood cutters are needed.

  7. nemteck on Wed, 29th Oct 2014 1:03 pm 

    Assume a refinery gate price of $80/b, $15/b for Bakken crude transport, $4/b OPEX. Assume that a good Bakken well produces 90,000b/year (about 246b/day). Let the tax and royalties be $22% and interest on the debt be 3%.

    Then, (80-15-4)x90,000×0.72×0.07 = $3.83 Million/year. If the construction of a well cost $8 Million then it takes more than 2 years for break even without considering any profit.

    Using this example shows that $80/b is not enough except if investors are willing to wait 3 years for any profit.

  8. oilystuff on Wed, 29th Oct 2014 2:51 pm 

    Well done, Mr. Nemteck. An understanding of shale oil economics need not be a whole lot more complicated than yours. I think, however, that North Dakota has a severance tax on crude oil (in Texas it is 4.6%)and I would take exception to the $4.00 per incremental barrel lift cost number; I think its more like 7 or 8 dollars with administrative overhead charges, etc. Maintenance on rod lift wells producing at 9000 feet is horrendous; one workover to pull a down hole pump is a 100K.

    Remember, please, that at 100 dollar WH prices a lot of LTO operators were spending more like 10 million dollars per well, borrowed money at that, to earn 80-100% total rate of return on their capital investment, spread out over 20 years. They were hoping to earn 80% internal rate of return. They’re guessing they might based on their on EUR’s.

    Shale oil barely worked at 100 dollar oil. It absolutely does not work at 80 dollars.

  9. Perk Earl on Wed, 29th Oct 2014 6:23 pm 

    The Fed closed out QE today but will keep interest rates near zero. I was wondering when they would sell those bonds, but like a scene right out of ‘Lawnmower Man’, they found a ‘Back Door!’ as they will not sell them, but instead hold on them until they mature and come off the books. Very crafty.

    http://www.usatoday.com/story/money/business/2014/10/29/fed-october-meeting/18115435/

    Fed ends bond buying but keeps low-rate pledge

    “Although the conclusion of the purchases spells the end of a historic infusion of easy money into financial markets, Fed policymakers have said it’s unlikely to sell most of the securities and will instead allow them to gradually come off the Fed’s books as they mature through the remainder of this decade. As a result, the banking system is likely to be flush with the Fed’s cash at least for several years.”

  10. James Fisher on Wed, 29th Oct 2014 8:02 pm 

    Google the financial performance of shale oil wells and you will find that they are an economic disaster even at 100 dollars a barrel. The top 35 largest shale oil companies are loosing 3-4 billion a year according to a recent forbes article.

  11. Ted Wilson on Wed, 29th Oct 2014 9:30 pm 

    Before talking about Peak Oil, we should define Oil.

    Earlier most of the Oil was Light Crude, now a days lot of medium and heavy crude is in the market.

    And then Tar Sands (which is in Solid form)
    And then Natural Gas Liquids (which is in Gaseous form)
    And now the Biofuels is also included in Oil.

    There is literally no limit to Biofuels and so including them means there will never be Peak Oil.

  12. Perk Earl on Thu, 30th Oct 2014 12:23 am 

    NWR, you’ll like this article, saying much the same as you have regarding MSM being used for propaganda:

    http://www.zerohedge.com/news/2014-10-29/20-year-cbs-news-veteran-details-massive-censorship-and-propaganda-mainstream-media

    20-Year CBS News Veteran Details Massive Censorship And Propaganda In Mainstream Media

    …the major network news decisions get made by a handful of New York execs who read the same papers and think the same thoughts.

    Often they dream up stories beforehand and turn the reporters into “casting agents,” told “we need to find someone who will say . . .” that a given policy is good or bad. “We’re asked to create a reality that fits their New York image of what they believe,” she writes.

  13. Northwest Resident on Thu, 30th Oct 2014 12:40 am 

    Isn’t it interesting that on the same day that the Fed officially ends QE, Alan Greenspan makes a high profile appearance in the WSJ. And what among other things does Mr. Greenspan say?

    “Effective demand is dead in the water” and the effort to boost it (demand) via bond buying “has not worked.”

    But boosting (inflating) asset prices has been “a terrific success” of QE. (I wonder if he meant that sarcastically?)

    In other words, QE has been “terrific” at creating an overvalued market, otherwise known as a bubble.

    He also said: “It’s only by bringing the economy down can you burst the bubble.”

    Some people may think that it was just coincidence that Greenspan published his article in the WSJ on the same day that QE is officially ended, but others (like me) believe that it is no coincidence at all, and that there is a message being sent to any and all who are perceptive enough to get its meaning.

    I agree with an article over on AutomaticEarth website titled “Everything The Fed Does Is Scripted”. And I think there is a lot of validity to the point of view expressed in that article that what Greenspan might just be telegraphing is that there is a time approaching when the economy will be “brought down”. As in, serious correction, nosedive, crash, whatever you want to call it.

    And one of my thoughts on that possibility is, wow, what a perfect “cover story” for what many of us on this website have been anticipating — a BAU crash and burn. It won’t be due to peak oil, it won’t be due to energy shortages, it won’t be due to rapidly decreasing EROI. No, it will be because of over inflated asset values, and just a natural market reaction.

    Three big events — HUGE! — all hitting at about the same time. Saudi oil price announcement combined with dramatic drop in the price of oil, stock market turmoil, end of QE. And to top it all off, Greenspan telling us that the only way we’re going to burst this bubble economy is to bring the economy down.

    Things are definitely getting interesting.

  14. Northwest Resident on Thu, 30th Oct 2014 12:53 am 

    Perk — Thanks for the link. No doubt, MSM programming is strictly controlled and designed not just for entertainment and education, but for manipulative purposes as well. Also note how the MSM channels and their executives are very sensitive to what may or may not offend their advertisers. Which, to me seems like just another part of the scam, because if you look at the parent companies of the advertisers and the parent companies of the MSM, you’ll sometimes find they are part of the same mega corporation or financial network of companies.

  15. Perk Earl on Thu, 30th Oct 2014 4:03 am 

    “And I think there is a lot of validity to the point of view expressed in that article that what Greenspan might just be telegraphing is that there is a time approaching when the economy will be “brought down”.”

    NWR, even my wonderful cornucopian wife thinks the wealthy have the system rigged to make money while the middle class get the information (to sell those overinflated stocks) too late and lose their investments. So I’m wondering if Yellen was playing good cop for the slow whitted masses and Greenspan was scripted to play bad cop for the wealthy and their stock brokers, that a major market correction is coming. The masses following Yellen will keep their money in thinking Greenspan is just mouthing off in retirement, but the wealthy & their brokers will catch the obvious hint.

    I mean how could that giant bubble on Wallstreet not have its days numbered now the QE juice is tapped out? It got plumped up and now it’s time at some juncture to dump. This is how the wealthy get wealthier, because there is no wealth accumulation in a steady state, but rather in the volatility of crash and burn followed by drawing the lemmings into the market (same as 29 crash), drive it up into a bubble, the wealthy get out and leave the 9to5ers to eat their losses. The country is fueled by the worker bees in more ways than just taxes.

    “Three big events — HUGE! — all hitting at about the same time. Saudi oil price announcement combined with dramatic drop in the price of oil, stock market turmoil, end of QE.”

    I know, this past few weeks has been chalk full of dramatic events. That stock market more and more as we go forward into winter is going to seem more and more like a big matso ball hanging out there ready to blow big time. Keep some canned food on hand, know where your seeds are, wash the solar panels, clean the weapons – lock & load.

    The worn out masses will shout a little bit because they lost x % of their IRA’s & Keogh’s, but that’s life in America. Meanwhile the rich will just hope the masses don’t get too angry and go back to working hard and get lulled into slopping some of their hard earned $’s back into the stock market, then away we go again or we’ll have total collapse, whichever comes first.

  16. Davy on Thu, 30th Oct 2014 5:21 am 

    Perk/NR, I thought it was awesome that the Maestro was talking up Gold! How sacrilegious for a central banker type to even mention the word “Gold” and to even mention it as a currency!! What is going on with the scripted Fed speak because we know the Maestro’s statement has to have some kind of official blessing. All these rats are in cahoots even the retired ones.

    “Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”
    http://www.zerohedge.com/news/2014-10-29/alan-greenspan-qe-failed-help-economy-unwind-will-be-painful-buy-gold

    There are multiple indications the market is heading for a correction or crash. The financial analysis is showing similar trends to other crashes. The difference now is the financial repression, yet, the financial repression appears to hit diminishing returns in multiple areas.
    One important area is interest rates. The Fed knows it can’t repress away business cycles. It know this (so called) recovery has gone longer than most. The Fed must raise rates some to have the ability to react to a recession. I suspect the Fed see signs of 2015 for rate rise and a recession shortly after that.

  17. Makati1 on Thu, 30th Oct 2014 7:32 am 

    Personally, I would like to see a 50%+ drop in the Market next year. It would end the Empire and it’s ability to fund 800 bases and their wars of conquest and plunder.

  18. Northwest Resident on Thu, 30th Oct 2014 9:48 am 

    Perk, Davy — Great comments. We can rest assured that Greenspan’s words were very carefully chosen and that much consideration was given to how those words would be interpreted by the target(ed) audience(s) prior to publishing that article in WSJ. He was not just rambling incoherently, not just shooting off at the mouth, and not just making it up as he went along. There is solid, real meaning to his words. TPTB *could* have just come right out and printed an article in WSJ announcing that the market will be “brought down”, and for everybody to make preparations for that moment, but that wouldn’t suit their purposes. So, they send out Greenspan with these coded words. And like I said, when the market (and BAU) does crash, they’ll have a built-in excuse — hey, assets were overvalued, shit happens, don’t blame us for God’s sake.

    I wonder what Greenspan means by “bringing the economy down”? That phrase can be interpreted many different ways. Bringing it down, as in shooting an airplane out of the sky? Or bringing it down, as in lowering the flag to half-mast? Or somewhere in-between?

    We’ve been put on notice!!! The economy is going to crash — it is going to be “brought down”. Coming up soon. Like that one article I posted, 2014 is definitely shaping up to look like “the last good year”.

  19. Davy on Thu, 30th Oct 2014 10:13 am 

    I believe you are right NR this will be the last good year for the economy. It is down from here on out. How fast and how severe is the big question.

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