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Peak Oil Ass-Backwards: Peak Oil, Meet Fractional-Reserve Banking

Peak Oil Ass-Backwards: Peak Oil, Meet Fractional-Reserve Banking thumbnail

 

If the ongoing crash of oil prices over the past  year – and now the stock market crashes of last week – have continuously taught me one thing, that would be that I’ve got very little clue regarding the economic implications of peak oil. To explain this I’ll have to take a circuitous, roundabout route here, but if you’ve been as afflicted as I’ve been then you might find the following a bit illuminating.

For starters, even though I learned about peak oil in 2005, fractional-reserve banking in 2006, and pretty much instantly proceeded to put two and two together, I still ended up falling for what I might unfairly call the “peak oil orthodoxy.” I’m not sure where I first came across this “orthodoxy” I speak of, but an example as good as any – and maybe even better than any – would be that of author and a former Chief Economist at CIBC (one of Canada’s Big Five banks), Jeff Rubin.

As Rubin explained it in his first of two peak oil books, because peak oil implies a curtailment on the supply of oil, and since the demand end of a growing economy is by definition increasing, the notion of supply and demand imply that prices will head upwards if supply is limited. Because of this, upon oil’s peak its price will eventually rise to such ungodly high levels that it’ll become unaffordable by many. Following that, its demand will therefore peter out, and so thanks to the new glut in supply the price will crash to equally ungodly low levels. Once things settle down and the consumer can once again afford the now lower-priced oil, the process will repeat itself since the new (and increasing) demand will once again bump up against the limits imposed by peaking oil supplies. As a result, another crash will occur. On and on the process repeats itself, but with the higher price spikes followed by higher troughs.

For better or worse, that’s what I now call the “peak oil orthodoxy,” and is why I, for one, was waiting for the Second Coming of high oil prices after the spike of $147 in July of 2008. But after patiently waiting for six years, it never came. (At least those 2012 folk had a set date and could just re-apply for their jobs on the 22nd.) In fact, not only did oil’s price spend a few years bouncing around the $100 level after rebounding from its low of $32.40 on Dec. 19, 2008, but beginning in June of 2014 it began to dive-bomb to its current level of about $40 (which has now jumped back up to $50 or so in the few days it’s taken me to write this). Although the initial price-dive threw me off at first, a bit of reading near the end of 2014 (and I unfortunately can’t remember the exact online sources) enlightened me in regards to the notion of demand destruction.

Although demand destruction made so much sense to me that I wrote my first oil piece on it – Peak Oil and the Fracking Bubble: Could this Mimic the 2004-2008 Housing Bubble? – I apparently hadn’t properly comprehended the underlying factors and the ultimate implications of demand destruction as I was still expecting oil to eventually rise again, if not just hang out in some mushy middle-area of $70 or so. Although I knew enough that I could have known better, my background in economics – and especially my predisposition to even think in economic terms – is pretty much zilch, so I suppose I’ve got somewhat of an excuse for being a complete idiot here. In other words, although I’d at least managed to notice and call out the incongruences brought about by peak oil in a world of fractional-reserve banking, it took me until just recently to fully clue into the underlying and long-term implications of demand destruction. My apologies if you’ve already read me explain this a few times, but I’ll repeat myself here for posterity’s sake.

First off, the majority of “money” sloshing around out there – let’s say 95% of it – is not created by governments but by private banks when they make loans. Secondly, the method by which this money is brought into existence, via fractional-reserve banking and double-entry bookkeeping, is upon the creation of new loans. In other words, money is created as debt. Furthermore, it is because banks create the principal and not the interest that there is never enough money in existence to pay off all the debts plus the interest. As a result, the debt bubble must be continually enlarged via ever-expanding credit so that previous loans can be serviced, lest the system implode in on itself. This is the debt treadmill, and is why economic growth must be maintained at all costs, even at the cost of utterly trashing the planet we live within.

So along with being gobsmacked when I learned about how most of our “money” is created, what pretty much instantly hit me was that since economic growth requires an increase in energy supplies to power that growth, and since peak oil implies an eventual maximum level of energy extraction, this limit to energy supplies is going to put us in a bit of a pickle.

In the meantime, seeing how the only friend I had amenable to chatting about these things lived half-way across the world in New Zealand, and seeing how I’d quit the Internet (which actually ended up being a five-year hiatus) and so didn’t have an Oil Drum or whatever to bounce these thoughts and ideas off of, it was quite some time before I came across any written material putting the two issues I speak of together (the first time came in the book Fleeing Vesuvius I think).

So seeing how we both lived in Toronto at the time, I figured it might be worth stopping over at one of the talks that Jeff Rubin was giving for the release of his second book (The End of Growth), as here was not only some guy writing about peak oil, but an economist writing about peak oil! When the talk – with David Suzuki!? – was over and both authors got to the book signing part of the night, I slowly made my way to the front of the Rubin cue and asked him the following:

If peak oil means the end of growth, and if fractional-reserve banking requires perpetual growth to keep the system going, doesn’t that mean we should be moving away from fractional-reserve banking?

“But that’s not what I’m talking about.”

Well, yeah. But still. Doesn’t peak oil imply a serious problem to the way in which our banking and monetary systems currently operate, since they need ever more energy to keep growing?

“You’re talking about the money-multiplier effect, right?”

Uhhh, yeah. [I’d only heard it referred to in this way once before.]

“Well that’s not what I’m talking about.”

He then proceeded to say something which I’d already read in his book (of which didn’t address my question at all), and as I’d obviously come upon a brick wall, I didn’t bother pressing any further and so made my way home.

My stone-walling with Rubin should have been expected though, for if you take a look at his first book, the summation of his peak oil prognostication is pretty much this: Californian’s will be eating less Ontario maple syrup, Ontarians will be eating less California avocadoes, and we’ll all be eating more locally grown carrots. In short, it’s all about basic market mechanisms of supply and demand, which mean that we don’t really need to do anything ourselves, nor change our ways, since markets will tidily work out this oil issue for us. But in the meantime, we should get cracking on creating locally-manufactured television sets (according to his second book)! In other words, if you’re looking for a ho hum story of peak oil, look no further than Jeff Rubin.

Nevertheless, for a while now I’ve had the hunch – based on nothing but a gut feeling – that oil was going to head on down to $20. I even got all techno-savvy and tweeted it, even before the recent stock market and oil price crashes (which, as already mentioned, have had a more recent upswing):

But then came the biggie. A few days after that I was reading the comments from an article on Resilience when it finally hit me: “Wait a second! Demand destruction doesn’t imply a minor and/or temporary dip in prices to some mushy middle. It means the opposite of inflating prices – deflating prices! They’re going to keep going downwards!”

In other words, not only have I somewhat been in the deflationary closet for nearly a decade now, but I didn’t even realize there was a counter-argument, or even a counter-argument closet!

Having finally clued into all that, the implications that my willingness to put two and two together nearly a decade ago was finally leading somewhere. On top of that, that willingness of mine allowed me to take that further step that I’d been looking for, and so allowed me to put two and two and two together. That next “two” being peak credit, as I’ll get to in Part 2.

From Filmers to Farmers



32 Comments on "Peak Oil Ass-Backwards: Peak Oil, Meet Fractional-Reserve Banking"

  1. Michael Jones on Tue, 1st Sep 2015 10:28 am 

    You should look at Gail’s articles on ourfiniteworld.com for a good explanation of the interaction of debt and increasing costs of oil extraction. I find her logic very convincing.

  2. GregT on Tue, 1st Sep 2015 10:42 am 

    Gail’s articles are routinely posted here on PO.com.

  3. Boat on Tue, 1st Sep 2015 2:49 pm 

    When the cycle of prices reach high we will see how the fracking industry will respond. Will they foresee the higher price and gear up early thus lessening the trough from low to high prices.
    Being nimble to oil pricing is an advantage the frackers have. Fracking in vast quantities is a new paradigm that will get more efficient with experience.

  4. Makati1 on Wed, 2nd Sep 2015 12:07 am 

    Boat, frakers have no advantage. They have to drill like crazy to stay in place. Thier wells don’t last 20-30 years. Maybe 2-3.

  5. apneaman on Wed, 2nd Sep 2015 12:20 am 

    Boat, good thing those frackers left some of the sweet spots for a rainy day huh?

  6. shortonoil on Wed, 2nd Sep 2015 7:26 am 

    The faster an economy is growing the more demand there is for the products it produces; that includes petroleum. As petroleum’s ability to power the economy declines, so too does the economy, and the demand for petroleum declines with it. Petroleum’s per unit ability to power the economy is now falling faster than petroleum production can increase. That spread is now about 1.5% per year.

    This is not good news for our debt based fiat currency system that requires continuous credit growth to be maintained. CBs are attempting to plug the deficiency by putting more currency into circulation, unfortunately that does not produce more credit formation. It only moves the deflation bear from one party to another. The bear is now eating the entire commodities market. Every thing from petroleum, to copper to food stocks is feeling the squeeze. Oil producers around the world are looking to cut cost in anyway possible:

    http://www.zerohedge.com/news/2015-09-01/conocophillips-fires-10-global-workforce-warns-dramatic-downturn-oil-industry

    The decline in oil prices is the result of the ongoing depletion that takes place after a resource has been frantically extracted for 150 years. That extraction process results in the entropic decay of that resource. It affects the primary purpose of extracting petroleum, which is to provide energy to the economy. The notion that debt formation, and, or CB’s response to that formation is the cause of the present economic malaise is putting the cart before the horse. Debt formation is the effect of depleting resources, not the cause. Only an economist could get the two confused.

    As the depletion process goes forward the value of the commodity declines. The result is a downward spiral in prices that eventually makes producing petroleum unprofitable, and uneconomical. That is show in this graph which was calculated from the projected energy delivering capability of a unit of petroleum:

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

    The products with the lowest energy delivery capability, and thus the highest production cost will be phase out first in this resource death spiral. Shale, ultra deep water, bitumen, and extra heavy oil production will be terminated first.

    The oil age ends when producing petroleum, and its products is no longer a profitable endeavor. That is the point where it can no longer supply enough energy to power its own production. Regardless of how much currency the monetary/ financial system creates the energy will not be available to continue the process. Fiat money is not a substitute for energy!

    Over the next decade we will see a plethora of M&As, shut-ins, bankruptcies, Sovereign debt crisis, and the evaporation of entire nation states. The end of the oil age will not go unnoticed! It is likely, however, that depletion, as usual, will be completely ignored, and the blame will laid at the feet of some female hobbit pulling the world’s monetary strings from her ivory tower.

    “When the only tool is a hammer, every problem looks like a nail”

    http://www.thehillsgroup.org/

  7. Davy on Wed, 2nd Sep 2015 8:04 am 

    Per Shorts post our only solution in regards to more or less future normality I.e. “Civilization” is embracing food and fuel restriction as a policy. This will slow the economy enough to force lifestyle and attitude changes. It will cause relocalization and “real” conservation. It will also be the end of the status quo and the beginning of the end of modern man.

    The alternative that will likely be persued is BAU to the bitter end. This will likely ensure a hard landing with the least amount of normality longer term. Often we slow down to heal to to extend life in a terminal illness. This is what we are facing now.

  8. onlooker on Wed, 2nd Sep 2015 8:17 am 

    Davy this is what on the main forum we have also been discussing. Drastic changes are coming our way one way or another. Yet every day we prolong BAU and everyday we continue cutting forests, polluting the air, overfishing etc etc is just one more day of undermining our life support systems and resetting Earth to a inhabitable mode. I do know putting an abrupt end is not feasible but we have to give it our best shot it is only slim hope remaining.

  9. onlooker on Wed, 2nd Sep 2015 8:18 am 

    I meant to say uninhabitable mode. Darn this area has no editing functions.

  10. Davy on Wed, 2nd Sep 2015 9:42 am 

    Onlooker, it is really very simple but likely unattainable since the cultural narrative is growth and progress. The solution is forced degrowth and mitigation of the consequences. Food and fuel are the tools of this forced slow down. Food choices and fuel availability would be restricted. This would force a population into adjustment to less consumption. Non critical economic sectors would be eliminated. Emergency services and vital sectors would be promoted by decree.

    This would end consumerism as we know it. The effects would be manageable but the process would likely not be. This would be a step into the abyss. Society will likely go into crash mode but at least it would have purpose. The alternative of full speed ahead into a train wreck is far worse. A forced degrowth solution would be irreversible and end the economic system as we know it. Globalism would dissolve. We could as a world body take steps to mitigate this as far as food and fuel to prevent as many failed states and famines as possible. It would by no means stop them. The rebalance of consumption and population must start soon one way or the other.

  11. BC on Wed, 2nd Sep 2015 11:21 am 

    short nails it, with or without a hammer. 😀

    I’ll reiterate for confirmation purposes that the value of US oil production adjusted for money supply and population is where it was during the Great Depression, after having peaked in the the late 1970s, and well below the levels of the 1950s-70s.

    IOW, despite many multiples of increase in debt-money supply for 35-80 years, the value of US oil production adjusted for debt-money supply and population is where it was 80 years ago during the depths of the worst deflationary depression in history.

    Now with the structural constraint from declining net energy per capita, we have the huge debt overhang requiring a large share of real, after-tax wages and profits to service. The more debt-money we create, the more it costs the economy at the same time net energy per capita continues to decline. We create more money for less net energy and economic activity per capita.

    Larger asset bubbles, mass immigration, and climate change only exacerbates the debt and net energy constraints.

  12. marmico on Wed, 2nd Sep 2015 12:05 pm 

    the value of US oil production adjusted for money supply and population is where it was during the Great Depression, after having peaked in the the late 1970s, and well below the levels of the 1950s-70s.

    So what. Vehicle mile travelled per capita has increased since oil consumption per capita peaked in 1980. Greater mobility per unit consumed. Efficiency trumps consumption.

    The Freddy Fluff chart.

  13. Davy on Wed, 2nd Sep 2015 12:34 pm 

    Efficiency trumps consumption says the king of corn. What a shallow MF.

  14. apneaman on Wed, 2nd Sep 2015 12:45 pm 

    More Economic numerology from the desperate clinging panicking corns.

  15. GregT on Wed, 2nd Sep 2015 12:52 pm 

    Come on marmico, this stuff really isn’t that difficult to understand. Are you a complete simpleton, or just being willfully ignorant?

  16. onlooker on Wed, 2nd Sep 2015 1:02 pm 

    marmico, efficiency trumps consumption unless you got a whole lot of rapacious apes on a consuming and populating splurge or binge.

  17. marmico on Wed, 2nd Sep 2015 1:13 pm 

    No comment on BC, the KING OF FREDDY FLUFF, you innumerate word salad prattle peak oil prepper assholes who live 50 miles away from the nearest co-op to avoid the TEOTWAWKI zombie hordes so they can bask in their Leave It to Beaver childhoods.

  18. shortonoil on Wed, 2nd Sep 2015 1:24 pm 

    “So what. Vehicle mile travelled per capita has increased since oil consumption per capita peaked in 1980.”

    That is because we have transformed from a capital accumulation society to a consumption orientated society. The energy is no longer there to drive massive capital accumulation. In other words we have entered the cannibalization stage of the oil age. We will drive more, and invest less into the future. The primary objective now is to maintain the illusion of normalcy. We will drive around; eat our Pacific salmon while the civilization rots beneath our feet!

  19. GregT on Wed, 2nd Sep 2015 1:50 pm 

    “you innumerate word salad prattle peak oil prepper assholes who live 50 miles away from the nearest co-op to avoid the TEOTWAWKI zombie hordes so they can bask in their Leave It to Beaver childhoods.”

    What a total loser you are Nony.

  20. Davy on Wed, 2nd Sep 2015 1:54 pm 

    Folks, you know how you can predict a Marmi day? The color of the market. Today is a green day and the Marm is out. On red days he is too depressed to come out. We likely won’t hear much from him in September. September is notoriously bad market month if August was bad. Adios marmios.

  21. onlooker on Wed, 2nd Sep 2015 2:09 pm 

    If what I am thinking is true that the 4 years or so bull market in the US is ending, then I fear we will not see Marm for awhile. What a shame.

  22. GregT on Wed, 2nd Sep 2015 2:15 pm 

    With any luck, maybe he’ll self destruct. I just hope that he doesn’t go ‘postal’ on somebody else.

    The guy has serious psychological problems.

  23. marmico on Wed, 2nd Sep 2015 3:44 pm 

    Go howl at the moon, Greggie. You ain’t an alpha male in the doomer tribe.

  24. GregT on Wed, 2nd Sep 2015 4:08 pm 

    I rest my case.

  25. apneaman on Wed, 2nd Sep 2015 4:42 pm 

    Greg what else would you expect from guys whose entire identity is wedded to a worldview that is crumbling. We get to watch marm-nony sanity collapse right along with the construct its founded upon. In his lifetime his country went from the most powerful nation in history to a diseased loser junkie on death’s door throwing away every last bit of energy and dignity for one last fix.

    https://www.youtube.com/watch?v=Vfzqzo31zag

  26. apneaman on Wed, 2nd Sep 2015 4:53 pm 

    We’ll do anything to cling-on for a little while longer, because that is our collective programming. The Yeasty boys.

    World’s Biggest Economies Devise Plan That Spells Doom for Planet Earth
    Experts warn that the G20’s massive infrastructure plan will cause “rapid ecological deterioration.”

    http://www.alternet.org/environment/worlds-biggest-economies-have-devised-plan-spells-doom-planet-earth

  27. marmico on Wed, 2nd Sep 2015 4:54 pm 

    The apeman is discarded uterus in the doomer tribe. Mommy called him back. She thought she was June and the apeman was the Beav. Heh, Wally, is Davy’s limp dick as small as he brags about?

    Circle jerkers!

  28. GregT on Wed, 2nd Sep 2015 5:08 pm 

    He certainly does have an active imagination, I’ll give him that much.

  29. apneaman on Wed, 2nd Sep 2015 5:22 pm 

    Poor little nony-marm all your rage will not put humptydumpty back together again and it’s obviously not doing anything to improve your mood – getting worse actually. Try not to hurt yourself.

  30. apneaman on Wed, 2nd Sep 2015 5:30 pm 

    Never despair non-marm, there may be an agriculture job waiting for you out there. Never despair – don’t do it.

    https://www.youtube.com/watch?v=dn2z19QnEfQ

  31. alokin on Wed, 2nd Sep 2015 5:43 pm 

    Short, you explained it very well! But I disagree with Davi – or at least as I understand him- some centralized government should move us away from the consumer society. That will never work out! Even in fat times the communist central systems did not work. We need not less democracy we need more. We need decentralization of power!
    As for the miles driven – it is most often not the people’s fault, it is due to miserable town planning, new suburbs without appropriate public transport and so on. And it is due to poverty, you take any job even if you drive one hour because there are no jobs close by.

  32. Davy on Wed, 2nd Sep 2015 7:50 pm 

    Al, there is a difference between governments and economies in the status quo and in crisis. When I say crisis I mean serious system ending crisis. This may not be immediate but my point is a collapse process of debilitating proportions could unfold. I think peak oil dynamics and food insecurity qualify when in their latter stages as the likely triggers.

    There is no other solution for a complex society then to have some kind of centralized control in an emergency situation. The alternative is conflict and possible civil war. Decentralization will certainly happen in various aspects of this scenario as this scenario unfolds. As we relocalize, if we are lucky enough to have the opportunity over time, we will turn away from the global and complex out of necessity. This is because of the descent characteristics of abandonment, dysfunction, and irrational policy. Localism is the only answer when the centralized support system starts to fail.

    An agricultural localism is primarily the necessary choice in this scenario because food will be paramount especially with a population in overshoot. The getting from here to there will require centralized control and security of some kind. Communism is not my thought. It is not likely considering it was a failure and the population is habituated to free markets. This will not be pleasant nor comfortable but it will be necessary.

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