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Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply

Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply thumbnail

Oil and other commodity prices have recently been dropping. Is this good news, or bad?

Figure 1. Trend in Commodity Prices since January 2011. Brent spot oil price from EIA; Australian Coal from World Bank Prink Sheet; Food from UN's FAO.

Figure 1. Trend in Commodity Prices since January 2011. Brent spot oil price from EIA; Australian Coal from World Bank Prink Sheet; Food from UN’s FAO.

I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long–since World War II, at least–is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty.

Many people have the impression that falling oil prices mean that the cost of production is falling, and thus that the feared “peak oil” is far in the distance. This is not the correct interpretation, especially when many types of commodities are decreasing in price at the same time. When prices are set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.

A person can tell from Figure 1 that since the first part of 2011, the prices of Brent oil, Australian coal, and food have been trending downward. This drop in prices continues into September. For example, as I write this, Brent oil price is $97.70, while the average price for the latest month shown (August) is $105.27. It is this steeper, recent drop, which many are concerned about.

We are dealing with several confusing issues. Let me try to explain some of them.

Issue #1: Over the short term, commodity prices don’t reflect the cost of extraction; they reflect what buyers can afford.

Oil prices are set on a worldwide basis. The cost of extraction varies around the world. So it is clear that oil prices will not match the cost of extraction, or the cost of extraction plus a reasonable profit, for any particular producer.

If oil prices drop, there is a temptation to believe that this is because the cost of production has dropped. Over a long enough period, a drop in the cost of production might be expected to lead to lower oil prices. But we know that many oil producers are finding current oil prices too low. For example, the Wall Street Journal recently reported, “Royal Dutch Shell CEO: Can’t deny returns are too low. Ben van Beurden prepared to shrink company in order to boost returns, profitability.” I wrote about this issue in my post, Beginning of the End? Oil Companies Cut Back on Spending.

In the short term, low prices are likely to signal that less of the commodity can be sold on the world market. Commodities such as oil and food are very desirable products. Why would less be needed? The issue, unfortunately, is affordability. Affordability depends largely on (1) wages and (2) debt. Wages tend to be fairly stable. The likely culprit, if affordability is leading to lower demand for desirable products like oil and food, is less growth in debt.

Issue #2: Economic growth tends to produce a debt bubble.

Many economists believe that technological innovation is the key to economic growth. In my view, economies need a combination of the following to have economic growth of the type experienced in the last 100 years:1

(Increase in debt) + (cheap-to-extract fossil fuels) + (cheap-to-use non-fossil fuel resources) + (technological innovation)

In such a case, debt keeps increasing as an economy grows. Unfortunately, this economic growth is only temporary, because resources tend to become more expensive to use over time, making the “cheap” resources required for economic growth disappear.

The problem underlying the rising cost of resources (both for fossil fuels and others) is that we tend to use the cheapest-to-extract resources first. Technological innovation continues to occur, but as diminishing returns hit both fossil fuels and other resources, there are larger and larger demands on technology to keep costs in line with what workers can afford. Eventually, the cost of resources (net of technological improvements) rises too much, and economic growth is cut off. By this time, a huge mountain of debt has been built up.

Let me explain further how this happens. Without fossil fuels, the world is pretty much stuck with the goods that can be made with wood, or from other basic resources such as animal skins, cotton, flax, or clay. A small quantity of metal and glass goods can be made, but deforestation quickly becomes a problem if an attempt is made to “scale up” the quantity of goods that require heat in their production.2

Once inexpensive coal became available, its availability opened the door to technological innovation, because it provided heat in quantity that had not been available previously. While ideas such as the steam engine had been around for a long time, the availability of inexpensive coal made the production of metals needed for the steam engine, plus train tracks and railroad cars, available at reasonable cost.

With the ability to make steel and concrete in quantity (both requiring heat) came the ability to make hydroelectric dams and electrical transmission lines, thus enabling electricity for public consumption. Oil, as a liquid fuel, paved the way for widespread use of additional innovations, such as private passenger automobiles, mechanized farm equipment, and airplanes. Between coal and oil, many workers could leave farming and begin jobs in other sectors of the economy.

The transformation that took place was huge: from wooden tools and human or animal labor to a modern industrial society. How could such a big change take place? Before the change, the ability to generate a profit that might be used for future capital investment was very limited. Also, the would-be purchasers of products made in an industrial economy were very poor. I would argue that the only way of bridging this gap was debt. See my earlier posts, Why Malthus Got His Forecast Wrong and The United States’ 65-Year Debt Bubble.

The use of debt has several advantages:

  1. It allows the consumer to buy the end product made with the new resources, assuming the end product isn’t too expensive relative to the consumer’s earnings.
  2. It gives resource-extracting businesses the money they need to buy equipment and to hire workers, prior to the time they have earned profits from resource extraction.
  3. It gives the companies the ability to build factories, before they have accumulated profits to pay for the factories.
  4. It allows governments to fund needed infrastructure, such as roads and bridges, before having the tax revenue available to pay for such infrastructure.
  5. Most importantly, the “demand” generated by (1), (2), (3) and (4) raises the price of resources sufficiently that it makes it profitable for companies in the business to extract those resources.

Because of these issues, debt and cheap fossil fuels have a symbiotic relationship.

(1) The combination of debt, inexpensive fossil fuels, and inexpensive resources of other kinds allows the production of affordable goods that raise the standard of living of those using them. The result is what we think of as “economic growth.”

(2) The economic growth provides the additional income needed to pay back the debt with interest. The way this happens is indirectly, through what is sometimes described as “greater productivity of workers.” This greater productivity is really human productivity enhanced with devices made possible by fossil fuels, such as sewing machines, electric milking machines, and computers that allow workers to become more productive. Indirectly, the higher productivity of workers benefits both businesses and governments, through higher sales of goods to consumers and through higher taxes. In this way, businesses and governments can also repay debt with interest.

Higher-priced resources are a problem. Higher-priced resources of any kind tend to “gum up the works” of this payback cycle. Higher-priced oil in particular is a problem. In the United States, when oil prices rise above about $40 or $50 barrel, growth in wages stops.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Figure 2. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

With higher oil prices, the rise in the standard of living stops for most workers, and good-paying jobs become difficult to find. There are a couple of reasons we would expect wages to stagnate with higher oil prices:

(1) Competition with cheaper energy sources. When oil prices rose, countries using a very high percentage of oil in their energy mix (such as the PIIGS in Europe, Japan, and United States) became less competitive in the world economy. They tended to fall behind China and India, countries that use much more coal (which is cheaper) in their energy mix.

Figure 3. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 3. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

(2) Need to keep the price of goods flat. Businesses need to keep the total price of their products close to “flat” despite rising oil prices, if they are to continue to sell as much of their product after the oil price increase as previously. Oil is one major cost of production; wages are another. An obvious way to offset rising oil prices is to reduce wages. This can be done in several ways: outsourcing work to a lower cost country, greater automation, or caps on wages. Any of these approaches will tend to produce the flattening in wages observed in Figure 2.

Based on Figure 2, an oil price above $40 or $50 per barrel seems to put a cap on wages, and indirectly leads to much less economic growth. Even if we didn’t hit this oil price limit–for example, if we had discovered a liquid fuel that could be produced in quantity for less than $40 barrel–we would eventually hit some kind of growth limit. For example, the limit might be climate change or too much population for food production capability. Even too much debt can be a limit, if citizens’ incomes don’t rise in a corresponding manner. At some point, it becomes impossible even to make interest payments if the debt level is too high. Indirectly, citizens wages even support business and government debt, because business revenues and tax revenues depend indirectly on wages.

Issue #3: Repaying debt is very difficult in a flat or declining economy.

Once growth stops (or slows down too much), the debt bubble tends to crash, because it is much more difficult to repay debt with interest in a shrinking economy than in a growing one.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 4. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The government can hide this issue for a very long time by rolling over old debt with new debt and by reducing interest rates to practically zero. At some point, however, the system seems certain to fail.

Not all debt is equivalent. Debt that simply blows bubbles in stock market prices has little impact on commodity prices. In order to keep commodity prices high enough for producers to want to continue to produce them, the debt really has to get back into the hands of the potential buyers of the commodities.

Also, any changes that tend to reduce world trade push the world economy toward contraction, and make it harder to repay debt with interest. Thus, sanctions against Russia, and Russia’s sanctions against the US and Europe, tend to push the world toward debt collapse more quickly.

Issue #4: Rising oil and other commodity prices are a problem, especially for countries that are importers of those commodities.

Most of us are already aware of this issue. If oil prices rise, or if food prices rise, our salaries do not rise by a corresponding amount. We end up cutting back on discretionary purchases. This cutback in discretionary purchases leads to layoffs in these sectors. We end up with the scenario we had in the 2007-2009 recession: falling home prices (since higher-priced homes are discretionary purchases), failing banks, and many without jobs. See my article Oil Supply Limits and the Continuing Financial Crisis.

The reason that low oil and other commodity prices are welcomed by many people now is because the opposite–high oil and other commodity prices–are so terrible.

Issue #5: Falling oil and other commodity prices are a problem, if the cost of production is not dropping correspondingly.

If commodity prices drop for any reason–even if it is because a debt bubble is popping–it is going to affect how much companies are willing to produce. There is going to be a tendency to cut back in new production. If prices drop too far, it is even possible that some companies will leave the market altogether.

Even if it doesn’t look like a country “needs” the current high oil price, there may still be a problem. Oil exporters depend on the high taxes that they are able to obtain when oil prices are high. If they cannot collect these taxes, they may need to cut back on programs such as food subsidies and new desalination plants. Without these programs, civil disorder may lead to cutbacks in oil production.

Issue #6: The growth in oil sales to China and to other emerging markets has been fueled by debt growth. This debt growth now seems to be stalling.

Growth in oil consumption has mostly been outside of the United States, the European Union, and Japan, in the recent past. China and other emerging market countries kept demand for oil high.

Figure 5. Oil consumption by part of the world updated through 2013, based on BP Statistical Review of World Energy 2014 data.

Figure 5. Oil consumption by part of the world updated through 2013, based on BP Statistical Review of World Energy 2014 data.

Ambrose Evans-Pritchard reports, China’s terrifying debt ratios poised to breeze past US levels. He shows the following chart of China’s growth in debt from all sources, including shadow banking:

Figure 6. China's total debt, based on chart displayed in Ambrose Evans-Pritchard article.

Figure 6. China’s total debt, based on chart displayed in Ambrose Evans-Pritchard article.

This rise in debt now seems to be slowing, based on a Wall Street Journal report. A person wonders whether this stalling debt growth is affecting world oil and other commodity prices.

Figure 7. Figure from WSJ article PBOC Struggles as Chinese Borrowers Hold Back.

Figure 7. Figure from WSJ article PBOC Struggles as Chinese Borrowers Hold Back.

Other emerging markets also seem to be experiencing cutbacks. Since 2008, the United States, Europe, and Japan have had very easy money policies. Some of the money available at low interest rates was invested in emerging markets. Now the WSJ reports, Fed Dims Emerging Markets’ Allure. According to the article investors, investors are taking a more cautious stance on new investment because of fear of rising US interest rates.

Of course, other issues affect debt and world commodity demand as well. If interest rates rise, they many have a tendency to shrink new lending, in general, because loans become less affordable. Sanctions of one country against another, such as the US against Russia, and vice versa, also tend to reduce demand.

Issue #7: Debt bubbles have been a problem in past collapses.

According to Jesse Colombo, the Depression was to a significant result the result of debt bubbles that built up during the roaring twenties. Another, longer-term cause would seem to be the loss of farm jobs that occurred when coal allowed tasks that were previously done by farm workers to be done by either electricity or by horses pulling metal plows. The combination of a debt bubble and loss of jobs seems to have parallels to our current situation.

Many believe the subprime housing bubble crash contributed to the Great Recession. The oil price spike of 2007 and 2008 played a major role as well.

Issue #8: If we are facing the collapse of a debt bubble, it is quite possible that prices of many commodities will fall. This could possibly lead to a collapse in the supply of many types of energy products, more or less simultaneously.

Figure 8, shown below, is a very rough estimate of the kind of decline in energy use we could be facing if a debt collapse leads to very low prices of many types of fuels simultaneously. Prices of many commodities crashed in 2008, and it was only with massive intervention that prices were propped up to 2011 levels. After the beginning of 2011, prices began sinking again, as shown in Figure 1.

Figure 8. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 8. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Clearly governments will try to prevent another sharp crash in commodity prices. The question is whether they will be successful in propping up commodity prices, and for how long they will be successful. In a finite world, fossil fuel energy production eventually must decline, but we don’t know over precisely what timeframe.

Issue #9: My steep decline contrasts with the “best case” forecast of future oil consumption given by M. King Hubbert.

M. King Hubbert wrote about a scenario where another type of fuel completely takes over, before oil and other fossil fuels are phased out. He even discusses the possibility of making liquid fuels using very cheap nuclear energy. The way he represents the situation is the following:

Figure 9. Figure from Hubbert's 1956 paper, Nuclear Energy and the Fossil Fuels.

Figure 9. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

In such a scenario, it is possible that oil supply will begin to decline when approximately 50% of resources are exhausted, and the down slope of the curve will follow a symmetric “Hubbert curve.” This situation seems to represent a best possible case; it doesn’t seem to represent the case we are facing today. If a debt collapse occurs, much of the remaining fuel is likely to stay in the ground.

Issue #10: Our economy is a networked system. Increasing debt is what keeps the economy inflated. If wages fail to keep pace with debt growth, the system seems likely to eventually crash.

In previous posts, I have represented the economy as a self-organized networked system, consisting of businesses, consumers, governments (with laws, regulations, and taxes), financial system, and international trade.

Figure 10. Dome constructed using Leonardo Sticks

Figure 10. Dome constructed using Leonardo Sticks

One reason the economy is represented as hollow is because the economy loses its capability to make goods that are no longer needed–such as buggy whips and rotary dial phones. Another reason why it might be represented as hollow is because debt is used to “puff it up” to its current size. Once the amount of debt starts shrinking, it makes it very difficult for the economy to maintain its stability.

Many “peak oilers” believe that if we have a problem with the financial system, all we have to do is start over with a new one–perhaps without debt. Everything I can see says that debt is an essential part of the current system. We could not extract fossil fuels in any significant quantity, without an ever-rising quantity of debt. The problem we are encountering now is that once resource costs get too high, the debt-based system no longer works. A new debt-based financial system likely won’t work any better than the old one.

If we try to build a new system without fossil fuels, we will be really starting over, because even today’s “renewables” are part of the fossil fuel system.3 We will have to go back to things that can be made directly from wood and other natural products without large amounts of heat, to have truly renewable resources.

Notes:

[1] This is really a simplification of the real issues. As world population grows, it is necessary to obtain an increasing amount of food from the same arable land. Thus, it is necessary to find new processes to increase food production, at the same time that soil is quite possibly degrading. Soil is in a sense a “resource other than fossil fuels,” but I have not mentioned this issue specifically.

Growing pollution problems are in some sense an indirect cost of extracting fossil fuels and other resources. These represent another growing cost that I have not specifically identified. Furthermore, there are indirect expenses that do not fit neatly into any category, such as required desalination plants to handle growing populations in areas where water is scarce. We may need to consider mitigation expenses of all types as part of the “cost of resource extraction.”

My point is that it becomes increasingly difficult to offset these many cost increases with technological innovations. Furthermore, if no changes are made, a larger and larger share of both the workforce and resources are required for maintaining the status quo, leaving fewer workers and a smaller quantity of resources to “grow” the economy.

[2] Wind and water are additional sources of energy, but they are sources of mechanical energy, not heat energy, so are not helpful unless they can be converted first to electricity, and then to heat. In quantity, they never were very large in pre-fossil fuel days.

Figure 11. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Tony Wrigley from Opening Pandora's Box. Figure originally from Energy and the English Industrial Revolution, also by Tony Wrigley.

Figure 11. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Tony Wrigley from Opening Pandora’s Box. Figure originally from Energy and the English Industrial Revolution, also by Tony Wrigley.

[3] Of course, any existing “renewable” will continue to work until it needs repairs that are unavailable. Other parts of the system (such as electric transmission lines, batteries, inverters, and attached devices such as pumps) may fail more quickly than the renewables themselves.

OurFiniteWorld.com



29 Comments on "Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply"

  1. Plantagenet on Mon, 22nd Sep 2014 1:08 pm 

    Gails claim that currently falling oil prices “reflect what consumers can afford” doesn’t match reality. Prices aren’t set by what consumers can afford, but by SUPPLY and DEMAND. Global DEMAND continues to slowly rise, while global oil SUPPLY is currently growing rapidly due to US tracking, and so the price of oil is coming down. No doubt this is a temporary situation, especially as falling prices typically result in greater consumption of the commodity. In this case falling gas prices will result in more DEMAND for gas and eventually result in higher prices again.

  2. Northwest Resident on Mon, 22nd Sep 2014 1:28 pm 

    Plant boldly asserts: “…global oil SUPPLY is currently growing rapidly due to US fracking.”

    Define “growing rapidly”. Just try.

    And out of all that fracked oil, how much net energy actually is made available to the economy? Very little, and it may even be a negative amount when all costs and considerations are included.

    Yesterday Plant posted that Gail is making the argument that “falling oil prices are somehow linked to falling production prices”. Which is false and a complete distortion of what Gail’s POV is.

    Plant — Master of not understanding facts, but using them to contrive and fabricate his own warped points of view. Plant is either trying to be really, really dumb — or it just comes to him naturally. I suspect the latter.

    Being wrong is okay — if you’re willing to learn from your mistakes. Pretending to know it all is heinous when it is a dumb fact-challenged s.o.b. beating his chest and claiming to know it all. Neanderthals like Plant when grouped together can be very dangerous to all forms of life. Incapable of understanding what is really happening, thugs like Plant tend to lash out at others and to cast blame against minority groups (and minority presidents). They are prone to great stupidity, to grotesqueness of the worst kind. Plant is a scourge on the human race, a shit stain on this forum, and should have been flushed a long time ago. But HE’S BACK, every day, numerous times, posting his crap daily.

  3. Plantagenet on Mon, 22nd Sep 2014 1:35 pm 

    Look at Gail’s figure #5 above. Global oil consumption continues to rise.

    The only way that oil prices can fall at the same time that oil demand is rising is for supply to grow even more rapidly.

    pssst: NWR—your potty mouth is overflowing again. Please flush.

  4. nemteck on Mon, 22nd Sep 2014 2:13 pm 

    In Figure 2 there is no correlation between wages and the cost of oil. The wage curve is generally on an upside trend despite the wildly fluctuation oil cost. The slight variations in the wage curve is nothing but a response to many factors {e.g. tax changes, worker demand/supply) impacting the wages.

    “Many “peak oilers” believe that if we have a problem with the financial system, all we have to do is start over with a new one–perhaps without debt.” What has this to do with peak-oilers? I have never heard that from them since it is a different issue that is not specific to peak-oilers.

  5. Davy on Mon, 22nd Sep 2014 2:14 pm 

    Planter, if it were only so simple. Do you read what Rock and Short post or does your Cornucopian filter exclude those comments. The word dynamics relates complexity. We are talking a very complex and dynamic relationship between consumer, producer, and the wider global economy. The quality of product and expense of producing is a big factor. I am not saying you are wrong planter it is just, using your words “simple minded” to try to be an armchair economist with oil supply and demand issues.

  6. Plantagenet on Mon, 22nd Sep 2014 2:39 pm 

    Davi, I’m just pointing out the current reality that oil prices are going down, demand is continuing to grow, and supply is continuing to grow. I don’t expect this to continue for much longer but it is the current reality in global oil markets.

    The problem here isn’t that I have a “cornucopian filter”—I don’t. The problem here is that some people here have a “reality filter”—they can’t see that the current reality that oil prices are going down, demand is continuing to grow, and supply is continuing to grow as well.

  7. shortonoil on Mon, 22nd Sep 2014 3:49 pm 

    I just posted this below in response to Perk Earl’s question:

    “Question; is 117 optimistic for 2016?”

    The 2016, $117/b projection is derived from a thermodynamic model. What it gives us is the upper most boundary confidence limit. It tells us that the consumer can not pay more than $117/b for oil, regardless of who, or what, does what! As far as we know, these laws of physics can not be breached by human intervention.

    If you are asking have we already seen the limit to oil price, all I can say is “it’s possible”. The model has a 4 1/2% margin of error. We could be on the bottom of that margin now, or this could be just a short term dip. I just read that condensate production in the Eagle Ford is now displaying a drastic decline. This was expected, and will be followed by other condensate fields of the same vintage. They are reaching the dew point of the fields which is caused by their declining pressure as the fields are produced. Since a large number of these wells were drilled at about the same time, many of them will reach their dew point at about the same time. Once the industry begins to understand what is happening, there is likely to be upward pressure on price from a sudden supply constraint shock.

    However, if it does happen, it won’t last very long. A $20 increase in the price of petroleum would have an almost immediate effect on the economy, and demand would plunge. Expect huge variability in the oil market over the next couple of years. Although we are bound by the laws of physics, not many of us are fully aware of it!

    http://www.thehillsgroup.org/

  8. indigoboy on Mon, 22nd Sep 2014 4:46 pm 

    We are in the Goldilocks range:
    Oil (too cheap), will kill exploration and production, and (too expensive), will kill the global economy. And worst of all, those two ranges are converging. At some point in time, (No prediction here!), we will converge on (say about), $127 per barrel, when oil companies cannot realistically make a profit so will stop looking and producing, whilst simultaneously, the global economy cannot create any growth at that oil price.
    Then it’s Game Over.

  9. synapsid on Mon, 22nd Sep 2014 4:51 pm 

    NR,

    Please not to defame Neanderthals. I’m part Neanderthal (and proud of it!)

  10. MSN Fanboy on Mon, 22nd Sep 2014 5:00 pm 

    Plant, why do you assert there is a seperation betwixt demand and income.
    Plant:
    “Prices aren’t set by what consumers can afford,but by SUPPLY and DEMAND”

    So lets test your hypothesis, take A, A is unemployed and lives on the street (aka African) can A DEMAND a car?, house? central heating? sky tv? fashion, expensive food etc…

    Well he can, but he has no INCOME thus can’t afford his DEMAND. Thus Demand remains equal or reduced (deflationary pressure).

    Man B however is a banker, with many wants and desires, but he can pay for them, as such he can DEMAND, so he can buy more thus put inflationary pressure on prices via consuming supply.

    And SUPPLY and DEMAND = PRICE.

    So plant, do you see the fallacy at the start of your arguement?

    Like debating effects without considering their causes.

    Prices are set by what consumers can afford plant.

    Supply does matter too.

    They both create a gremlin called money LOL

  11. Northwest Resident on Mon, 22nd Sep 2014 5:04 pm 

    synapsid — Plant gets to spew non-facts, twisted half-truths, wishful thinking presented as “fact” and all kinds of other B.S. on a daily basis. I get to practice my dagger-worded slapdowns, putting into writing thoughts that I would never say in real life or anywhere else that I might actually have to answer for those harsh words. I mean — come on everybody — haven’t you ever had the overwhelming temptation to just put a really stupid person in his place, to just hammer that sucker hard with tough-love words of reality and pound the idiot into the dirt with your words??? Well, that’s what I’m practicing on Plant, a well-deserving and ripe target for this kind of exercise. Plant gets to pollute this forum with his idiotic posts. I get to pollute this forum with my harsh and (hopefully) lacerating denunciations of Plant and his B.S. posts.

    No offense to Neanderthals. We could all be Neanderthals coming up in the not too distant future — maybe not genetically, not at first, but in a club-wielding cave-dwelling female-dragging kind of way.

  12. Mike999 on Mon, 22nd Sep 2014 6:34 pm 

    1) What she didn’t graph is the falling cost of Solar, and Wind.

    2) No graph for the growing population of hybrids, the student loan bubble, and communities on the internet, like your son’s friends all on the same game on the PS4 = lower demand for oil.

  13. Mike999 on Mon, 22nd Sep 2014 6:35 pm 

    AU coal has lost out on new Chinese regulations to not burn high sulfur coal.

  14. Mike999 on Mon, 22nd Sep 2014 6:41 pm 

    With high priced oil average wage growth stops.
    This is the perfect example of speculation, of correlation without causation.

    It’s nice to have a theory, how about some proof.

    Or, it could be the rise of Criminal Capitalism, where the modern CEO has no ethics, and purely robs workers of wages.

  15. Mike999 on Mon, 22nd Sep 2014 6:48 pm 

    Anyway, China is setting up a carbon market, and has contracted out 20 Gigawatt of additional solar capacity. Also EV incentives are increasing in Chinese cities. All will slow their appetite for oil and coal.

  16. Mike999 on Mon, 22nd Sep 2014 7:11 pm 

    This Lady is missing a lot in her “analysis”, like:

    http://finance.yahoo.com/news/world-oil-prices-drop-strong-dollar-002750392.html

  17. Nony on Mon, 22nd Sep 2014 8:07 pm 

    Gail does not understand basic concepts of finance and economics.

  18. GregT on Mon, 22nd Sep 2014 8:58 pm 

    Economists don’t understand basic concepts of finance and economics. If they did, the world wouldn’t be in such a mess.

  19. trickydick on Mon, 22nd Sep 2014 9:16 pm 

    I fail to see how lack of oil would slow debt growth. They could write debt based on coal power, wind, solar, etc. Debt existed before steam power even. Back in the days of horse and carriage.

    Will the debt ‘bubble’ collapse? Yes, probably, in GDP terms, but the debt itself will remain and even grown as they paper over it.

    “Prices aren’t set by what consumers can afford,but by SUPPLY and DEMAND” – This is the same thing. Consumers pay what they can afford for something. If the supply drops, they will pay a little more and a little more. Until they can’t. Or won’t. Same result. Demand drops, so supply drops with it. Demand dropped because prices were too high. I have no issue with this logic.

  20. Makati1 on Mon, 22nd Sep 2014 10:05 pm 

    Economists would all be wealthy if their pseudo science worked and they applied it to the real world. But it doesn’t and they are not. Most got famous/wealthy by advising others and made some lucky guesses or by selling books after they got a rep by warming some government or big bank chair for a few years. How many of them are billionaires from their ‘investments’ and not some related job like Greenspan and Bernanke enjoyed?

    Greenspan: Net Worth: about $10 million. Mostly from his books. http://www.celebritynetworth.com/view/en/alan_greenspan/

    Bernanke: Net worth today: about $2 million. He hasn’t sold as many books yet. http://www.therichest.com/celebnetworth/politician/republican/ben-bernanke-net-worth/

  21. Chris Hill on Mon, 22nd Sep 2014 10:21 pm 

    It has been several years since the end of an official recession. We are likely due for one real soon now. The author could be right, or this could be just another garden variety recession, they seem to happen regularly.

  22. Sharpie on Mon, 22nd Sep 2014 10:32 pm 

    Never thought I’d see the day where $91/barrel was considered a low oil price.

  23. Northwest Resident on Mon, 22nd Sep 2014 11:40 pm 

    It makes sense that the general populace is finding it very hard to sustain their usage of oil when using that oil doesn’t provide enough excess energy to enable higher wages and greater consumption. Barrel count in general — and shale oil barrel count specifically — provides far less energy than the same barrel count from ten years ago. We find ourselves in a situation where we have to pay far more per barrel, but get far less energy out of that barrel. It isn’t far fetched at all to suspect that part of the reason for the current sinking price trend for oil is due to less demand from consumers and businesses. Just because shale oil producers are generating noteworthy increases in daily barrels of oil production does not mean that more energy is being pumped into the economy — and it is energy, not barrel count that matters.

  24. marmico on Tue, 23rd Sep 2014 6:01 am 

    Tverberg resides in another galaxy to posit that energy production will decline by 80% in the next 20 years.

    Just picking on her wage/affordability word salad, this is a chart from 1947 through June 2014 showing the ratio of U.S. gasoline expenditures to wages and salaries. There will be another tick down on the chart when the September data is published due to wage inflation, higher employment and declining gasoline prices.

    What’s the issue?

  25. Davy on Tue, 23rd Sep 2014 6:25 am 

    Just as grapes ripen so does instability and increasing entropy in a complex self-organizing system. A system bubble demonstrates an unstable growth that generally goes from exponential to nonlinear. We see this in nature with finite-time singularity or when a point fails to be well behaved and accelerates towards a new state. In our human system imitations and word of mouth are a vector for this process when we look at our markets. Currently we are seeing increased mental unease. Market players are increasing their tendency at buying patterns (BTFD). Discrepancies are increasing between normal financial fundamentals and a “new normal” sets. This nonlinear increasing of intensity is yielding added false or irrelevant information which is trending towards poor predictability or unstable forecasts. All of this is causing the fluctuations of the market to increase in amplitude. It is well known bubbles are very difficult to define when in them. It is even harder to predict their demise. Yet, we can look on our current state of affairs with science and history and see our economic environment is exhibiting some of this behavior. Gail’s article shows disconnect between debt and commodities. Gail is hitting the nail squarely with her proposition that debt supply will affect oil supply catastrophically. This is primarily because oil is no longer cheap or simple to extract. The same is true of the economy which is no longer cheap or easy to grow. Limits of growth and diminishing returns at this point in the game could very easily signal the end of a significant portion of oil supply that will never be recovered if we see a bifurcation in our financial system. The complexity will never be regained and the current economic level will never be seen again or should I say the 2008 level. The economy to vital inputs ratio is unstable and this is due primarily from a long term and short term bubble. The long term bubble is our population and economic growth levels. The short term is our financial system and its employment of debt to mitigate faltering growth and the diminishing returns of that debt and lower quality of input resources. Currently because of this unstable state with low sustainability and system resilience we may see only one or a few of these vital elements fail or disrupt bringing down the whole system. My bet is liquid fuel shortages and or food shortages but there are so many. At this point of dysfunction the disruption could be insignificant and propagate into a powerful contagion.

  26. marmico on Tue, 23rd Sep 2014 6:47 am 

    Gail is hitting the nail squarely with her proposition that debt supply will affect oil supply catastrophically

    Whatever and whatever. More catastrophic word salad.

  27. Davy on Tue, 23rd Sep 2014 7:27 am 

    The Russian dog speaks. What’s new with the propagandist ideologue who has gone paranoid schizo. The expat dog will love this article. I skimmed it and will wait for him to digest it. Folks I am not saying allot of what he says is not true or relevant it is the delivery system that is not true. Propaganda and ideology are not a part of the scientific process. P&I do not lend to cooperative efforts at management and mitigation of problems nor acceptance of predicaments. P&I are unbalanced and divisive. I guess to be fair to Orrrlov the DC/Wall street mafia is a tough sucker to compete with so you have to throw Orrrlov cocktails to make your point. Orrrlov is a smart guy and funny but he has turned paranoid and mean. I guess that is what happens to collapsniks in their older age. The despair affects the mind in dangerous ways. I am a doomer but on the lite side. I am not making my name like Orrrlov. As our maturation towards instability increases people on the front line like Orrrlov demonstrate unconsciously the fate of our global system by their behaviors. Maybe psychological analysis of Orrlov shows the end is near. Like reading tea leaves. How’s that catastrophic word salad, M.

  28. Davy on Tue, 23rd Sep 2014 7:27 am 

    sorry wrong article post…appologies

  29. Perk Earl on Tue, 23rd Sep 2014 8:37 pm 

    “This is the perfect example of speculation, of correlation without causation.

    It’s nice to have a theory, how about some proof.”

    Well, let’s see what happens with oil price and whether she is right not. Give it some time.

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