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Fatal Ignorance

Fatal Ignorance thumbnail

Triangle of Doom 020215

Figure 1: The Triangle of Flop: (chart by TFC Charts, click on for big). Industrial economies are set to go the way of the Dodo as cost of credit proves to be too great for customers to bear. As oil prices fall the drilling industry calls for more support. The rationale is that drillers borrow already, there can be no harm in adding to the pile of existing debt: if customers cannot pay immediately they certainly will when prices ‘recover’.

(The prices cannot rise unless the customers begin to pay … )

Additional repayment obligations are set to be heaped upon the same customers who can’t bear the drillers’ present costs … this is what the crashing oil prices actually mean. Credit breakdown is taking place in plain sight, under the noses of- and unremarked by ‘real’ economists. That people cannot afford their petroleum doesn’t appear to matter; not nearly as much as how the same people ‘feel’ about the economists themselves.

If the customers could pony up for high-cost fuel they would be doing so; oil prices would be unchanged from last year. In a high-cost environment, lower prices = less petroleum: as with ‘invisible’ credit collapse, the oil extraction peak is occurring right now, but in the shadows! There will never be more oil on petroleum markets than there is right now. It is hard to see how having less petroleum available will make us wealthier or more able to borrow- or service our debts. Instead, lower prices => more oil industry failures + more credit exposure => lower prices in a compounding cycle.

The signs of credit breakdown can be seen everywhere one chooses to look. The US appears to be the cleanest dirty shirt in the laundry basket but the illusions cannot be maintained too much longer, (Gallup):

The Big Lie: 5.6% UnemploymentJim Clifton

Here’s something that many Americans — including some of the smartest and most educated among us — don’t know: The official unemployment rate, as reported by the U.S. Department of Labor, is extremely misleading.

Right now, we’re hearing much celebrating from the media, the White House and Wall Street about how unemployment is “down” to 5.6%. The cheerleading for this number is deafening. The media loves a comeback story, the White House wants to score political points and Wall Street would like you to stay in the market.

None of them will tell you this: If you, a family member or anyone is unemployed and has subsequently given up on finding a job — if you are so hopelessly out of work that you’ve stopped looking over the past four weeks — the Department of Labor doesn’t count you as unemployed. That’s right. While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news — currently 5.6%. Right now, as many as 30 million Americans are either out of work or severely underemployed. Trust me, the vast majority of them aren’t throwing parties to toast “falling” unemployment.

There’s another reason why the official rate is misleading. Say you’re an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 — maybe someone pays you to mow their lawn — you’re not officially counted as unemployed in the much-reported 5.6%.

Clifton speaking truth to American (business) power leaves him looking nervously over his shoulder, presumably for CIA hitmen:

The industrial regime has oversold ‘productivity’. What meets industry costs are loans, not returns: economists don’t understand thiseconomists don’t understand thiseconomists don’t understand this. Maturing loans are refinanced or repaid with new loans; ‘wages’, ‘earnings’, ‘profits’ are all borrowed. In the eurozone, anything that qualifies as ‘money’ is borrowed from commercial financiers in Frankfurt. Total credit expands exponentially. No matter how to to what extent loans are restructured, all repayments are borrowed, the new amounts added to the debt total. Debts can be repudiated, but industry cannot exist or function without a steady diet of loans. If such a thing were possible, industry would be loan-free already! There would not be a crisis, the ordinary operation of a single, remunerative industry would retire all debts, would make every human being rich.

Four-hundred-plus years of industrialization and factory efficiency has done exactly the opposite, the world is sunk up to its nostrils in a incalculable morass of non-payable debt and strangling pollution. The ‘efficiency’ of debt has declined sharply; that is, each marginal dollar (or euro, yen or whatever) lent into existence returns less in the way of real output. Part of this is the simple exponential function applied to money supply over time: new loans taken on to refinance existing loans increase at a (modest) fixed rate of interest adding to the immensely growing pile. Another component is increased financing for hedging purposes in derivatives’ markets (the costs of which must be borrowed), part of it is confluence of demographics and politics (fewer, older people in industrial nations buy- and borrow less which means governments must borrow more in their place). The basic premise of industrial West is to leverage itself beyond its means … the credulous fools at the base of the economic pyramid cannot afford to pick up the tab any longer.

Diminished funding in the oil patch will result in actual shortages, not immediately but as reservoirs are depleted … a matter of months in ‘unconventional’ plays. All the talk about ‘production’ (or its absence) misses the point: our problems are entirely on the consumption side. We have burned up a trillion barrels of oil and have nothing to show for them … nothing that can replace the oil or match its usefulness. The more the drillers borrow the further underwater they find themselves because their customers have no value that can be ‘spent’ back to the drillers.

Against the background of the ‘non-peak oil discussion’ what turns out to be in short supply is credit, something that is technically infinitely reproducible. Credit (or money) is a claim against purchasing power, not purchasing power itself. The number- or amount of claims can be infinite, underlying purchasing power is tightly bound to the ‘good’ (in aggregate) that is being purchased. When this good runs short, so does purchasing power. Increasing credit claims overall cannot increase purchasing power but shifts it instead from one group (customers) toward others (drillers and their lenders). Drillers and lenders are firms, they can borrow more than customers. The drillers become rich = so what? They beggar their own customers by front-running them: when the customers can no longer borrow or are unwilling, the drillers are stranded. In an trice, drillers’ assets become liabilities: this transformation is occurring right now. It turns out the limit to ‘infinite’ claims is the credit-worthiness of customers.

The stranding process is underway, both in the US and everywhere in the world. Prices cannot rise to reflect perceived shortages (supply vs. demand) because the customers do not bid. Instead prices decline even as the (credit) means to meet the prices declines faster. Eventually, they fall to the level where they can be supported by actual returns, not credit.

Claims against purchasing 020815

Figure 2: Purchasing power in the form of petroleum-capital vs. money-claims against it; chart by Deborah Lawrence- Energy Policy Forum. Purchasing power claims by drillers have consequences, not the least of them is the difficulty on the part of drillers to find and extract oil to replace the oil that has already been consumed.

Desperate drillers who cannot borrow must cut their credit exposure any way they can:

Cash-Starved Oil Producers Trade Treasured Pipelines for MoneyOil and natural gas producers confronting a cash drain are auctioning off the family silver: pipelines and processing plants.

Bakken shale billionaire Harold Hamm and Canadian gas giant Encana Corp. are among the latest to peddle some of their most valuable assets and steadiest earners. They don’t have much choice — as the oil price collapse deflates the value of drilling operations, pipes and plants are about the only things attracting big payments for producers vying to stay afloat.

The deals for quick cash are another facet of the energy industry meltdown leading to more than $40 billion in spending cuts and thousands of job losses. The capital infusion comes with a trade-off because producers pay more to process and transport fuel over the lines and in the facilities they used to own.

“At some point they all get desperate enough,” said Michael Formuziewich, a fund manager at Leon Frazier & Associates Inc. in Toronto. Low prices will spur a rise in deals, he said. “The longer it goes on, the more we’ll see.”

Vulnerable drillers can put whatever spin they want onto this process but the end result is little different from liquidation.

Energy return on investment (EROI) does not matter so much as energy return on consumption (EROC). This turns out to be a negative number. Because the energy return on extraction was so great during the beginning of the twentieth century, the absence of returns on the consumption side didn’t matter. Oil became a ‘loss-leader’ for the automobile, real estate and construction industries. Wasting oil was a conversation piece, then a way of life.

This wasting process is coming to a long overdue end. We have no choice but to find some better use for our resources other than to burn them up for nothing. The first step is to stop lying to ourselves, time is running short.

Economic Undertow

23 Comments on "Fatal Ignorance"

  1. Makati1 on Sun, 15th Mar 2015 8:17 am 

    The Great Unwinding has begun…

  2. Davy on Sun, 15th Mar 2015 8:35 am 

    Eventually lies propagate lies and even lies hit limits of growth and diminishing returns. Wall Street and their bought of DC thieves are alive and kicking but looking less and less powerful all the time. Predicaments have a way of kicking your ass eventually. You ever try to beat your head against the wall because something won’t work like that is going to make it work? I have.

    The triangle of doom signals a crisis at the door step. A financial crisis and energy crisis is nearby but no more than a few years away. Human nature is fascinating. Denial and lies can keep the herd calm for a long time until enough get spooked at the edges and the stampede starts.

  3. paulo1 on Sun, 15th Mar 2015 9:14 am 

    A distraction (war) is in the offing, plus the chance for MEC insiders to make some serious dinero.

    Will enough poor folks enlist in the military and sign on to this course of action? That is the question going forward.

  4. shortonoil on Sun, 15th Mar 2015 10:01 am 

    Almost 40% of the world’s economy is powered by oil; but, “on average” every barrel ever produced required a little more energy to extract than the barrel that came before it. We have the laws of physics to blame for that situation. Because the energy content of a barrel of oil is fixed by its molecular structure, a point will be reached when the energy to extract it, and produce its products becomes equal to the energy that is available from it for the rest of the economy. That point was reached in 2012!

    To produce oil, the oil industry must now borrow energy from the economy to keep production constant. This appears as debt formation by the industry; energy is a commodity, and thus has a monetary value. With less and less energy going to the economy the economy slows, and the price of oil falls. Less economy equates to lower demand.

    At some point the economy becomes short of energy to loan to the industry, and the credit markets begin to fail. Without borrowed energy to drive production, the industry must contract. With falling prices the industry will keep production as high as possible to maintain needed cash flow. This merely aggravates the imbalance in the inevitable energy balance equation.

    To translate this situation into an economic analysis requires a full interpretation of the complexities of the monetary financial system. To avoid that we have done an energy analysis to circumvent those difficulties:

    Lag times are likely to appear (which are not included in our analysis) as energy is transferred back, and forth via the credit markets. Attempts to manipulate the energy/ monetary system may camouflage the outcome by several years. This can only lead to the growing imbalances which are becoming so obvious in the present system.

    Once the economy can no longer loan energy to the producing sector, production will begin to fall. Viewing the credit formation now taking place in the non energy goods producing sector of the economy (NEGs) that is likely to be in the very near future. Because oil prices are now upper limit range bound, from this point forward petroleum industry credit formation can only decline. That will ultimately result in falling world production!

  5. penury on Sun, 15th Mar 2015 10:03 am 

    It is not just the oil industry, every nation, every industry is bankrupt and running on fiat which is being invented out of nothing. A war will happen and expose finally the fact that every nation is destitute, people will be starving in the streets and there will be nothing that can be done. The U.S. next week will raise there debt target to another new high, and people will celebrate that the MIC can afford to bomb more people than ever. No one seems to know or care that it is all fantasy.

  6. Plantagenet on Sun, 15th Mar 2015 10:38 am 

    Obama says the economy is good and getting better. The oil glut has driven oil prices down to the point that growth can occur.

    Things could bumble along nicely here for a few years

  7. Davy on Sun, 15th Mar 2015 11:51 am 

    Pen, it is not so much that we are bankrupt as it is that we are living beyond our means thinking we have more than we really have. This allows poor lifestyles and attitudes. The rich in reality have only a fraction of their wealth. Most of their notional wealth is an illusion in the digital. A digital that is not physical and real. The Pensioners don’t have a retirement. I could go on and on.

    We are in overshoot physically and mentally. How different life would be if this digital notional fantasy wealth were gone and those with the digital wealth had to face reality of a much smaller world for them. Now the rich have money as the limit to their horizons. It will not be long that everyone will be facing reality of the real and physical. The complexity of today’s BAU will not be able to support the fantasy and fiction we see everywhere in modern life.

  8. shortonoil on Sun, 15th Mar 2015 11:58 am 

    It is not just the oil industry, every nation, every industry is bankrupt and running on fiat which is being invented out of nothing.

    That is certainly true; every major economic indicator has been deteriorating for the the last few years. The world is in a downward spiral from which there is no escape. War, however, is not the solution; you can’t go to war against depletion. The problem is the handful of lunatics who have attained positions of power in most governments. In the US we have the neocons. Whether or not they will blow up the world in an attempt to maintain their positions of power is yet to be seen. Such action would rate as the world’s greatest, most egregious exercise in futility ever known. Let’s hope they are just crazy; not stupid.

  9. TemplarMyst on Sun, 15th Mar 2015 12:08 pm 

    While I certainly think a war, or a set of wars, is possible, my reading is that war itself is the main driver for the fiat money in the first place.

    Not quite half way through David Stockman’s The Great Deformation. A fantastic read that I would recommend to folks here (tho ghung seems keyed into Stockman already).

    Bottom line is you can’t maintain a stable, commodity-based money and go to war. There ain’t enough gold in the world to do it. So you just create money out of thin air to do it.

    I’m not so sure we’ve reached the point yet where that won’t work. Unfortunately. Everyone is in hock up to their ears, but the CBs just keep on printing…

  10. Davy on Sun, 15th Mar 2015 12:18 pm 

    Short said “The every major economic indicator has been deteriorating for the last few years. The world is in a downward spiral” Short you better run that by Marm and his Freddy Fluff Charts. He has charts that indicate everything in life is good and getting better. Short I have seen them myself here on PO and wow they are impressive with the exponential increases exuding progress and wealth.

  11. Davy on Sun, 15th Mar 2015 12:23 pm 

    Temp, I have Stockman’s site bookmarked. He has some great hard hitting articles that questioning the broad spectrum of the participants in the global economic system. He shows little agnedist tendencies like the global research folks or the multitude of mainstream BAUtopian sites. He is definitely a winner.

  12. TemplarMyst on Sun, 15th Mar 2015 12:32 pm 


    Well, there are plenty of charts that indicate things are good and getting better. And I’m still pretty pessimistic about things, but I have to admit it doesn’t look like it’s hit the fan just yet.

    Not to say it won’t at any moment, but when I first became PO, CC, and EC aware, gradually, just after the 2008 debacle, I thought it all would have hit by now.

    Still wondering how long it might take. Wondering if I’ve grossly underestimated the ability of BAU to remain, well, BAU.

  13. Northwest Resident on Sun, 15th Mar 2015 1:19 pm 

    “Still wondering how long it might take.”

    The early peak oil doomsday predictors failed to recognize the extreme lengths that TPTB would go to in order to keep BAU creaking onward for a few more years. What person outside of the “need to know” loop could have predicted the enormous debt creation, the perversion of the stock market, the intense barrages of lies and propaganda, the security lockdowns that blatantly disregard long cherished rights of privacy?

    We’ve been subjected to shock and awe already, observing all of these desperate measures run their course. Now we know — TPTB will go to ANY AND ALL extremes to keep BAU going for a little longer. But our minds have been opened, we are no longer shocked by anything. And we see what tricks and strategies that TPTB used to stretch BAU forward into the future this far. And we can reasonably KNOW that they are out of tricks and that the end of the road is in clear sight.

    Things are already falling apart. They might be able to stretch it out another year or two, maybe three, but I personally expect that a serious unraveling event will occur this year, setting off a chain reaction. At some point, and who knows when that is, panic and desperation and loss of faith in “the system” will reach critical mass. When that happens, we’ll be thinking “this is it”.

  14. TemplarMyst on Sun, 15th Mar 2015 1:36 pm 

    Well, I suppose, NWR, that it might happen within three years at the most, but that’s what I thought, well, three years ago.

    Not disagreeing that TPTB will stretch it as far as possible. I’m just getting a bit jaded on how far that might be. I’m currently thinking it could be quite a bit farther than I ever would have thought.

    And I’m still thinking the monetary and financial systems are just constructs. Theoretically TPTB (or even us of the 99%) could come up with another construct if forced to. Money is currently just an idea. It ain’t tied to anything real in a real sense.

    Which then leads me to wonder about the depletion protocols we talk about here. Not that I’m denying them. Oil fields deplete.

    But clearly not as fast as I thought. I don’t think we’ve seriously tapped the stuff in Iraq yet, and that seems pretty energy dense material, fairly close to the surface, and with an easy flow rate.

    I’m gonna go head over to the Hills Group stuff shortonoil references. See if he/they have something on that in there.

    This all just seems, at this point, to be unraveling far slower than I would have thunk.

  15. penury on Sun, 15th Mar 2015 1:43 pm 

    Since 2001 the U/S. has been constantly engaged in shooting wars. We are currently engaged in what 8 or 9 active combat situations and are attempting to get another started in Europe. We have been engaged in currency wars with several countries over the past three years and still counting. Most of these actions have been done “off budget” so we really are not aware of where the financial system stands. I would say that it is a pretty safe bet that the wheels will come off shortly.

  16. Davy on Sun, 15th Mar 2015 1:46 pm 

    Temp, you know that it takes a long time to bring water to boil but the phase change to steam is quick when it does finally happen. We may be in for such a ride ourselves.

  17. TemplarMyst on Sun, 15th Mar 2015 1:50 pm 


    Well, mebbe. But if they’ve been able to string along this long, what’s to say they can’t just keep that hay ride going? It’s all funny money now, and has been for years.


    Yeah, but now I’m beginning to think mebbe the boil from climate chaos will hit before the resource and financial collapse occurs. The latter water looks to be taking a lot longer to boil than I ever would have given it credit for.

  18. Apneaman on Sun, 15th Mar 2015 2:26 pm 

    TemplarMyst, in our interconnected, interdependent global society it might only take 1 domino to start the fall. Remember, one minute every domino is standing straight and true, then the next there is noisy chaos and everyone is laying in one big fucking mess.

    Brazil: hundreds of thousands of protesters call for Rouseff impeachment

    Right-wing demonstrations across the country come amid frustration over economy and corruption scandal at state oil company, Petrobras

  19. TemplarMyst on Sun, 15th Mar 2015 2:53 pm 


    Yeah, I know, it all could go at any moment I suppose, but the damn thing just seems so resilient, somehow.

    It’s a Lernaean Hydra, I swear. Cut off one head, two more grow back.

  20. Apneaman on Sun, 15th Mar 2015 3:20 pm 

    I hear you TemplarMyst. The trick is to remember that we operate on emotion and science is counterintuitive. Even after decades of constantly studying psychology and our ever repeating history of collapse, I still have to work to overcome my inherent cognitive biases. Another thing I regularly remind myself of is that the global system is so large and complex that no one truly understands or controls it. The trend is obvious but it will happen when it happens and there will be stuff that no one expected as well. Here is just a few things to ponder.

    The frozen calm of normalcy bias

    Power And The Illusion Of Control

    “Groupthink occurs when a group values harmony and coherance over accurate analysis and critical evaluation. It causes individual members of the group to unquestioningly follow the word of the leader and it strongly discourages any disagreement with the concensus.”

    List of cognitive biases

  21. Apneaman on Sun, 15th Mar 2015 3:27 pm 

    ‘The real threat to our future is peak water’
    As population rises, overpumping means some nations have reached peak water, which threatens food supply, says Lester Brown

  22. Apneaman on Sun, 15th Mar 2015 3:30 pm 

    Tomgram: William deBuys, A Global War on Nature

  23. peakyeast on Sun, 15th Mar 2015 8:15 pm 

    I am thinking: Since the TPTB are hell-bent on keeping BAU.

    The BAU could be extended quite a while for the “important” countries while starving and destroying demand in “unnecessary” countries…

    More or less like what has happened in many places already.

    I suppose this could be interpreted as the stair-case power down.

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