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How do ex-Saudi Aramco geologist Dr Husseini’s oil price spike predictions of USD 140 by 2016-17 stack up?

How do ex-Saudi Aramco geologist Dr Husseini’s oil price spike predictions of USD 140 by 2016-17 stack up?.

by Matt Mushalik, originally published by Crude Oil Peak  | TODAY

In an interview with ASPO USA in January 2014 Ex-Saudi Aramco geologist Dr. Sadad-Al-Husseini predicted oil price spikes of $140 by 2016/17. This post shows some graphs explaining why this could happen.

Husseini: My base oil price forecast in 2012 dollars still ranges between $105 and $120/barrel Brent with a volatility floor of $ 95/barrel and more probable upward spiking to $140/barrel within 2016/2017.

Husseini did not elaborate how he arrived at that time frame but this question and answer give us a hint:
ASPO: “In the larger context, how has your view of future world oil production supply evolved over the last four or five years? As a benchmark, I reference your slides from the 2009 Oil & Money Conference slides”
Husseini: “The realities of the 2009 O&M forecast of a limited plateau of oil supplies have been pretty much vindicated since then. The oil plateau may now be inflated by about 1 – 2 Mbd of high cost unconventional oils but all major forecasters see this as pretty much transitional. The plateau itself remains a reality and unfortunately its duration is still unlikely to extend beyond the end of this decade.”
So how did Husseini’s 2009 plateau look like and how does it compare with actual production data? The slides are contained in a presentation titled “Structural realities that define the oil supply outlook”
This was done continent by continent and country by country. In the following graphs, the grey shaded columns are from Husseini’s 2009 projection and the colored columns represent actual production (data from EIA).
Central and South America

Actual production in 2013 was 1 mb/d less than in the 2009 projection, mainly due to limited Brazilian production.
Europe
Actual production in 2013 was 460 kb/d less than in the 2009 projection, mainly due to higher decline rates in UK.
Former Soviet Union

Actual production in 2013 was slightly less (80 kb/d) than in the 2009 projection due to weaker output in Kazachstan. Note that crude oil production in West Siberian fields peaked in the mid 80s, triggering the collapse of the Soviet Union.
Asia
Actual production in 2013 was 300 Kb/d higher than the 2009 projection mainly as a result of higher production in China.
Africa
The 2009 projection estimated a peak of around 11 mb/d in 2015 but actual production in 2013 was only 8.7 mb/d or 1.9 mb/d less than projected for that year. Production was less in Angola, Algeria, Libya and Sudan.
Middle East

Actual production in 2013 was 1.2 mb/d higher than in the 2009 projection. While there was an actual decrease in Iran, Yemen and Syria (together -850 kb/d), this was more than offset by an increase in all other countries including Iraq (+ 440 kb/d), Kuwait (300 kb/d), Qatar (250 kb/d), Oman (290 kb/d), UAE (220 kb/d) and Saudi Arabia (+ 540 kb/d).
North America 
While in the above all of Husseini’s underlying 2009 graphs relate to crude oil, the North American graph includes NGLs .
First, we need to re-stack the columns to show the impact of shale oil:

For 2013, Husseini’s projection for Mexico was spot on and for Canada slightly over-estimated. The big difference is US shale oil, 3.3 mb/d, but that contains NGLs because shale oil is a very light oil as we have seen in recent fires in oil train accidents.

The uptick in crude was less, around 2.6 mb/d. So Husseini’s North America projection for crude and NGL has to be adjusted by the ratio crude/(crude+NGL).
All together now.

We see that total actual crude production was slightly higher than Husseini’s forecast, 600 kb/d or 0.8% in 2013, a small percentage in view of all the uncertainties. As is usual for estimates there is a lot of plus and minus.
The biggest difference is the unforeseen increase in US shale oil which was, however, cancelled out by too optimistic forecasts for Africa and South America.
So how might Dr. Husseini in his interview have come to oil price spikes in 2016/17?
Let’s adjust his original 2009 projection as follows: + 600 kb/d to bring projected production into line with actual production in 2013, then shift his projection by a further +2 mb/d to add unconventional oil as mentioned in the interview.
On the demand side, let us take the long-term view of the IEA WEO 2013 (p. 501): “Demand for oil grows from 87.4 mb/d in 2012 to 101.4 mb/d in 2035 in the New Policies Scenario, but the pace of growth slows steadily, from an average increase of 1 mb/d per year in the period to 2020 to an average of only 400 kb/d in the subsequent years to 2035”.
So for crude oil this means +800 kb/d pa until 2020 and + 300 kb/d pa thereafter. Let’s put that into a simplified graph:
We see that the intersection point is somewhere in 2016. What is more important than the precise year in which the next oil crunch may happen is the widening gap in the 2nd half of this decade.
Conclusion:
Whether the world wants to follow the New Policies Scenario of the IEA WEO 2013 is another question altogether. It seems governments are rather on a current policies track which increases oil demand and therefore pressure on oil prices.
Oil dollars teaser image via shutterstock. Reproduced at Resilience.org with permission.

How do ex-Saudi Aramco geologist Dr Husseini's oil price spike predictions of USD 140 by 2016-17 stack up?

How do ex-Saudi Aramco geologist Dr Husseini’s oil price spike predictions of USD 140 by 2016-17 stack up?.

by Matt Mushalik, originally published by Crude Oil Peak  | TODAY

In an interview with ASPO USA in January 2014 Ex-Saudi Aramco geologist Dr. Sadad-Al-Husseini predicted oil price spikes of $140 by 2016/17. This post shows some graphs explaining why this could happen.

Husseini: My base oil price forecast in 2012 dollars still ranges between $105 and $120/barrel Brent with a volatility floor of $ 95/barrel and more probable upward spiking to $140/barrel within 2016/2017.

Husseini did not elaborate how he arrived at that time frame but this question and answer give us a hint:
ASPO: “In the larger context, how has your view of future world oil production supply evolved over the last four or five years? As a benchmark, I reference your slides from the 2009 Oil & Money Conference slides”
Husseini: “The realities of the 2009 O&M forecast of a limited plateau of oil supplies have been pretty much vindicated since then. The oil plateau may now be inflated by about 1 – 2 Mbd of high cost unconventional oils but all major forecasters see this as pretty much transitional. The plateau itself remains a reality and unfortunately its duration is still unlikely to extend beyond the end of this decade.”
So how did Husseini’s 2009 plateau look like and how does it compare with actual production data? The slides are contained in a presentation titled “Structural realities that define the oil supply outlook”
This was done continent by continent and country by country. In the following graphs, the grey shaded columns are from Husseini’s 2009 projection and the colored columns represent actual production (data from EIA).
Central and South America

Actual production in 2013 was 1 mb/d less than in the 2009 projection, mainly due to limited Brazilian production.
Europe
Actual production in 2013 was 460 kb/d less than in the 2009 projection, mainly due to higher decline rates in UK.
Former Soviet Union

Actual production in 2013 was slightly less (80 kb/d) than in the 2009 projection due to weaker output in Kazachstan. Note that crude oil production in West Siberian fields peaked in the mid 80s, triggering the collapse of the Soviet Union.
Asia
Actual production in 2013 was 300 Kb/d higher than the 2009 projection mainly as a result of higher production in China.
Africa
The 2009 projection estimated a peak of around 11 mb/d in 2015 but actual production in 2013 was only 8.7 mb/d or 1.9 mb/d less than projected for that year. Production was less in Angola, Algeria, Libya and Sudan.
Middle East

Actual production in 2013 was 1.2 mb/d higher than in the 2009 projection. While there was an actual decrease in Iran, Yemen and Syria (together -850 kb/d), this was more than offset by an increase in all other countries including Iraq (+ 440 kb/d), Kuwait (300 kb/d), Qatar (250 kb/d), Oman (290 kb/d), UAE (220 kb/d) and Saudi Arabia (+ 540 kb/d).
North America 
While in the above all of Husseini’s underlying 2009 graphs relate to crude oil, the North American graph includes NGLs .
First, we need to re-stack the columns to show the impact of shale oil:

For 2013, Husseini’s projection for Mexico was spot on and for Canada slightly over-estimated. The big difference is US shale oil, 3.3 mb/d, but that contains NGLs because shale oil is a very light oil as we have seen in recent fires in oil train accidents.

The uptick in crude was less, around 2.6 mb/d. So Husseini’s North America projection for crude and NGL has to be adjusted by the ratio crude/(crude+NGL).
All together now.

We see that total actual crude production was slightly higher than Husseini’s forecast, 600 kb/d or 0.8% in 2013, a small percentage in view of all the uncertainties. As is usual for estimates there is a lot of plus and minus.
The biggest difference is the unforeseen increase in US shale oil which was, however, cancelled out by too optimistic forecasts for Africa and South America.
So how might Dr. Husseini in his interview have come to oil price spikes in 2016/17?
Let’s adjust his original 2009 projection as follows: + 600 kb/d to bring projected production into line with actual production in 2013, then shift his projection by a further +2 mb/d to add unconventional oil as mentioned in the interview.
On the demand side, let us take the long-term view of the IEA WEO 2013 (p. 501): “Demand for oil grows from 87.4 mb/d in 2012 to 101.4 mb/d in 2035 in the New Policies Scenario, but the pace of growth slows steadily, from an average increase of 1 mb/d per year in the period to 2020 to an average of only 400 kb/d in the subsequent years to 2035”.
So for crude oil this means +800 kb/d pa until 2020 and + 300 kb/d pa thereafter. Let’s put that into a simplified graph:
We see that the intersection point is somewhere in 2016. What is more important than the precise year in which the next oil crunch may happen is the widening gap in the 2nd half of this decade.
Conclusion:
Whether the world wants to follow the New Policies Scenario of the IEA WEO 2013 is another question altogether. It seems governments are rather on a current policies track which increases oil demand and therefore pressure on oil prices.
Oil dollars teaser image via shutterstock. Reproduced at Resilience.org with permission.

The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge

The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge.

A critical element for investors to consider is that the Fed is not forward thinking when it comes to monetary policy. Indeed, if we reflect on the last 15 years, we see that the Fed has been well behind the curve on everything.

First and foremost, recall that Alan Greenspan was concerned about deflation after the Tech Crash (this, in part is why he hired Ben Bernanke, who was considered an expert on the Great Depression).

Bernanke and Greenspan, both fearing deflation (Bernanke’s first speech at the Fed was titled “Deflation: Making Sure It Doesn’t Happen Here”), created one of the most extraordinary bouts of IN-flation the US has ever seen.

From 1999 to 2008, oil rose from $10 per barrel to over $140 per barrel. Does deflation look like it was the issue here?

Over the same time period, housing prices staged their biggest bubble in US history, rising over three standard deviations away from their historic relationship to incomes.

Here are food prices during the period in which Greenspan and then Bernanke saw deflation as the biggest threat to the US economy:

The message here is clear, the Greenspan/ Bernanke Fed was so far behind the economic curve, that it created one of the biggest inflationary bubbles in history in its quest to avoid deflation.

Indeed, by the time deflation did hit (in the epic crash of 2007-2008), the Fed was caught totally off guard. During this period, Bernanke repeatedly stating that the subprime bust was contained and that the overall spillage into the economy would be minimal.

Deflation reigned from late 2007 to early 2009 with the Fed effectively powerless to stop it. Then asset prices bottomed in the first half of 2009. From this point onward, generally speaking, prices have risen.

The Fed, however, continued to battle deflation in the post-2009 era, unveiling one extraordinary monetary policy after another. They’ve done this at a period in which stocks and oil have skyrocketed:

 

Home prices bottomed in 2011 and have since turned up as well (in some areas, prices now exceed their bubble peaks):

 

 

Which brings us to today. Inflation is once again rearing its head in the financial system with the cost of living rising swiftly in early 2014.

 

Rents, home prices, food prices, energy prices, you name it, they’re all rising.

 

And the Fed is once again behind the curve. Indeed, Janet Yellen and Bill Evans, two prominent members what is now the Yellen Fed (Bernanke stepped down in January), have both recently stated that inflation is too low. They’ve also emphasized that rates need to remain at or near ZERO for at least a year or two more.

 

Investors should take note of this. The Fed claims to be proactive, but its track record shows it to be way behind the curve with monetary policy for at least two decades. Barring some major development, there is little reason to believe the Yellen Fed will somehow be different (Yellen herself is a huge proponent of QE and the Fed’s other extraordinary monetary measures).

 

Which means… by the time the Fed moves to quash inflation, the latter will be a much, much bigger problem than it is today.

 

For a FREE Special Report on how to protect your portfolio from inflation, swing by

www.gainspainscapital.com

 

Best Regards

Phoenix Capital Research

The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge

The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge.

A critical element for investors to consider is that the Fed is not forward thinking when it comes to monetary policy. Indeed, if we reflect on the last 15 years, we see that the Fed has been well behind the curve on everything.

First and foremost, recall that Alan Greenspan was concerned about deflation after the Tech Crash (this, in part is why he hired Ben Bernanke, who was considered an expert on the Great Depression).

Bernanke and Greenspan, both fearing deflation (Bernanke’s first speech at the Fed was titled “Deflation: Making Sure It Doesn’t Happen Here”), created one of the most extraordinary bouts of IN-flation the US has ever seen.

From 1999 to 2008, oil rose from $10 per barrel to over $140 per barrel. Does deflation look like it was the issue here?

Over the same time period, housing prices staged their biggest bubble in US history, rising over three standard deviations away from their historic relationship to incomes.

Here are food prices during the period in which Greenspan and then Bernanke saw deflation as the biggest threat to the US economy:

The message here is clear, the Greenspan/ Bernanke Fed was so far behind the economic curve, that it created one of the biggest inflationary bubbles in history in its quest to avoid deflation.

Indeed, by the time deflation did hit (in the epic crash of 2007-2008), the Fed was caught totally off guard. During this period, Bernanke repeatedly stating that the subprime bust was contained and that the overall spillage into the economy would be minimal.

Deflation reigned from late 2007 to early 2009 with the Fed effectively powerless to stop it. Then asset prices bottomed in the first half of 2009. From this point onward, generally speaking, prices have risen.

The Fed, however, continued to battle deflation in the post-2009 era, unveiling one extraordinary monetary policy after another. They’ve done this at a period in which stocks and oil have skyrocketed:

 

Home prices bottomed in 2011 and have since turned up as well (in some areas, prices now exceed their bubble peaks):

 

 

Which brings us to today. Inflation is once again rearing its head in the financial system with the cost of living rising swiftly in early 2014.

 

Rents, home prices, food prices, energy prices, you name it, they’re all rising.

 

And the Fed is once again behind the curve. Indeed, Janet Yellen and Bill Evans, two prominent members what is now the Yellen Fed (Bernanke stepped down in January), have both recently stated that inflation is too low. They’ve also emphasized that rates need to remain at or near ZERO for at least a year or two more.

 

Investors should take note of this. The Fed claims to be proactive, but its track record shows it to be way behind the curve with monetary policy for at least two decades. Barring some major development, there is little reason to believe the Yellen Fed will somehow be different (Yellen herself is a huge proponent of QE and the Fed’s other extraordinary monetary measures).

 

Which means… by the time the Fed moves to quash inflation, the latter will be a much, much bigger problem than it is today.

 

For a FREE Special Report on how to protect your portfolio from inflation, swing by

www.gainspainscapital.com

 

Best Regards

Phoenix Capital Research

Reasons for our Energy Predicament – An Overview | Our Finite World

Reasons for our Energy Predicament – An Overview | Our Finite World.

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system.

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

 

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and service affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transpire food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energyin 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

Figure 1. Average weekly West Texas Intermediate “spot” oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30′s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply
  3. GDP growth
  4. Wage growth
  5.  Debt growth
  6. Growing government programs

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

Reasons for our Energy Predicament – An Overview | Our Finite World

Reasons for our Energy Predicament – An Overview | Our Finite World.

Quiz: What will cause world oil supply to fall?

  1. Too little oil in the ground
  2. Oil prices are too low for oil producers
  3. Oil prices are too high for oil consumers leading to recession, debt defaults, and ultimately a cut back in credit availability and very low oil prices
  4. Oil exporters are subject to civil unrest and overthrow of governments, due to low prices and/or depleting reserves
  5. Lack of money (and physical resources that might be purchased with this money) to pull oil out of the ground.
  6. Pollution related issues–too much smog in China; too many problems with fracking; too many problems with CO2.
  7. The financial current system fails, and can only be replaced by one that allows much less debt. Oil prices remain too low under such a system.

In my view, any answer other that the first one is likely to be at least partially right. Ultimately, the issue is that to extract oil or any fossil fuel, we have to keep the financial and political systems together. These systems can be expected to fail, far before we run out of oil in the ground. Most oil in the ground (as well as most other fossil fuels in the ground) will be left in the ground, in my view.

Basing estimates of future oil production on oil reserves is likely to give far too high an indication with respect to actual future production. Even more absurd numbers come from using “resource” numbers (which are higher than reserve numbers) to make estimates of future oil production. Coal and natural gas production is likely to fall at exactly the same time as oil, because the problems are likely to be financial and political ones, not “resources in the ground” problems.

Direct Application of M. King Hubbert Theory is Incorrect

M. King Hubbert is known for his estimates of future oil production  (195619621976) based on reserve amounts. There are two things of importance to notice about his estimates:

(a) The oil reserve estimates used are of free flowing oil reserves of the type that geologists currently were looking at. Thus, they were restricted to “cheap to extract” reserves, and

(b) When Hubbert showed graphs of world oil production following a generally symmetric curve (so downslope looks like a mirror image of upslope), Hubbert showed some other source of energy supply (nuclear in his early papers, solar in later ones) rising to high levels, before world oil production ever dropped. He even talked about making liquid fuels using a huge amount of energy plus carbon dioxide and water–in other words, reversing combustion (1962). In order to ramp nuclear or solar up to these very high levels, they would need to be  extremely cheap.

The assumptions that M. King Hubbert makes are effectively ones that would allow the economy to continue to grow and the financial system to “hang together.” If a person looks at today’s situation, it is quite different. We do not have an alternate fuel supply that will  allow the economy to continue to grow, regardless of fossil fuel consumption. The published reserves include large amounts of oil in the ground that are not of the very cheap to extract type. Extracting such oil will be impossible if oil prices are very low, or if credit availability is lacking. It is tempting for observers to look at oil reserves and assume that all is well, but this is definitely not the case.

 

Basic issue: Future oil extraction and future substitution is uncertain 

One basic issue is the “iffiness” of the reported reserve and resource amounts:

There is lots of oil in the ground, if we can actually get it out. Getting it out requires a combination of a financial system that allows us to do this (high enough prices for producers, adequate credit availability for producers, equity investment available if credit is not available, buyers who can afford the products) and political system that allows this to happen (citizens in countries with oil extraction not rioting for lack of food; banks open in countries trying to import oil; adequate trade connections among countries).

Likewise, substitution is possible among energy products, if it is possible to overcome the many hurdles involved in doing this. There are two cost hurdles: the higher ongoing cost of the substitute and the transition cost. The transition cost gets to be very high if there are a lot of “sunk costs” that are lost–for example, if citizens  are forced to quickly change from gasoline powered cars to electric cars, so that the resale value of their gasoline powered cars drops precipitously. There is also a technology hurdle: we need to have the technology to enable using the different energy source.

If the cost of the substitute is higher than the cost of the original energy source, a change to the substitute will tend to make the economy shrink, because wages will “go less far”. If citizens need to pay a whole lot more for new cars, or if electricity is more expensive, citizens will cut back on discretionary expenditures. This cut-back on expenditures will lead to layoffs in discretionary sectors, and will make it more difficult for the government to collect enough tax revenue.

Another basic issue: Wages don’t rise as oil (or energy) prices rise

Economists would like us to believe that we just pay each other’s wages. Wages can rise arbitrarily high independently of actually creating goods and services using energy products.

Unfortunately, this doesn’t seem to be true in practice. Based on my research, in the US high oil prices are associated with flat wages, in inflation-adjusted terms. Wages do not rise as fast as oil prices. Instead, wages tend to rise when oil prices are low, making goods and service affordable.

Part of the problem with rising oil prices is that they radiate through the economy in many ways: in higher food prices, because oil is used to produce and transpire food; in higher metal prices, because oil used in metal production; and in higher finished products, such as automobiles and new homes, because they use oil in their production. With wages not rising sufficiently, as oil prices rise, workers find they need to cutback on discretionary goods. The result is recession and job layoffs. I document this issue in the article Oil Supply Limits and the Continuing Financial Crisis, published in journal Energyin 2012.

The flip side of this issue is that without wages rising as fast as the cost of oil extraction, it is hard for the selling price of oil to rise high enough to provide an adequate profit margin for oil producers. It is inadequate oil prices for oil producers that seem to be the current problem. I talk about this issue in two recent posts: What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs and Beginning of the End? Oil Companies Cut Back on Spending.

Economists don’t think that prices can remain too low for oil producers. It can happen, because their model of supply and demand is not correct in a world with energy limits. Even if prices temporarily rise again, recession hits again, and we are back to low prices again.

Another basic issue: Diminishing returns

Diminishing returns occurs when it takes more and more energy or other resources to produce the same amount of goods. In the case of oil supply, we reach diminishing returns because companies extract the easy-to-extract oil first. Thus, the price of oil rises because the oil that can be produced cheaply is mostly gone. If we want to obtain more oil, we need to extract the more expensive to extract oil.

One way to see what diminishing returns does is to think about an economy producing two kinds of goods and services:

  1. The goods and services the consumer really wants–such as food, fresh water, transportation that takes the consumer from door to door, electronic goods, and housing that meets the person’s needs.
  2. All of the intermediate “stuff” that goes into making the end products in (1).

What happens with diminishing returns is more and more of society’s physical labor and its resources go into intermediate products, leaving less and less to produce end products, and less to actually “grow” the economy. In some sense, it is as if we are becoming less and less efficient at producing final goods and services. In my view, this is a major reason why wages stop rising as oil prices rise, and as other energy prices rise.

Another basic issue: The rate of growth in energy supply is closely tied to the rate of GDP growth

We use energy to make goods and services, so it stands to reason that using more energy would lead to more GDP growth. Economists don’t necessarily agree. They are sometimes of the view that the connection has only to do with “Demand”–in other words, when the economy is growing rapidly it needs more oil and energy products to support it its growth. I discuss Steve Kopits’ talk on this subject in Beginning of the End? Oil Companies Cut Back on Spending.

Something that is perhaps not obvious is the fact that cheap energy supply tends to easier to ramp up than expensive energy supply. Cheap energy supply requires relatively less investment. Goods created using cheap energy supply tend to be inexpensive, making them easier to sell to consumers and more competitive in the world market. I talk about these issues in Oil Limits Reduce GDP Growth; Unwinding QE a Problem.  

Another basic issue: The role of debt

Long term debt plays an extremely important role in the economy, because it allows consumers to buy expensive goods like houses and automobiles that they could not otherwise afford, and because it allows businesses to invest in projects before they have saved up sufficient profits from past projects to fund the new projects. It also allows governments to spend more money than they have in tax dollars. All of this purchasing power tends to prop up the price of commodities such as oil and metals, making it feasible to extract them.

We had a chance to see how important a role debt plays in 2008, during the debt crisis in the second half of the year. During that period, the price of oil dropped from briefly hitting $147 barrel to the low $30s range. Major banks needed to be bailed out, and the insurance company AIG was taken over by the US government because of problems with derivatives.

Figure 1. Average weekly West Texas Intermediate "spot" oil price, based on EIA data.

Figure 1. Average weekly West Texas Intermediate “spot” oil price, based on EIA data.

The big drop in oil price in 2008 was due to a drop in oil demand because of lack of credit availability. I wrote an article in 2008  about the huge impact this decrease in credit availability had on energy prices of all kinds, even uranium.

A related concern relates to the fact that “borrowing from the future” — which is what we do with long-term debt, is a great deal more feasible in a growing economy than it is in a shrinking economy. There are a lot more defaults in the latter case, because people keep losing their jobs and businesses keep closing.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The concern I have is that as economic growth slows, we will reach a point where long term debt becomes very hard to obtain. The lack of credit in 2008 has not been fully fixed. It was only with the help of Quantitative Easing (QE), which added more demand to the marketplace because of very low interest rates, that oil prices have been able to rise again after the drop in 2008. With the very slow economic growth we have been experiencing recently, it has been necessary to use QE to keep interest rates low enough that people can still afford to buy homes and cars.

If the economy shifts from adding debt to subtracting debt, we are likely to see a huge drop in oil prices, perhaps similar to the drop in oil prices in 2008 to the low $30′s range. If this should happen again, it is not clear that the Federal Reserve would be able to find a way to make the price rise again because is already using a huge amount of stimulus, and thus has fewer options left.

If oil prices drop to a low level and stay down, a large share of oil production will be discontinued. Very little new drilling will be done. Similar effects are likely to happen for other fossil fuels and for mining for metals as well. Such a drop in oil production is likely to be steep–at least as steep as when the Former Soviet Union collapsed. Oil production dropped by about 10% per year, and other energy use dropped rapidly as well. Customers such as the Ukraine and North Korea saw even steeper declines in their oil imports.

Another basic issue: Government funding

Governments are only possible because of the surpluses of an economy. Greater surpluses allow more government employees and more services. Mario Giampietro (2009) is one researcher who writes specifically about this issue. Furthermore, as an economy grows, rising tax revenue makes it is easy to add more programs and services.

As an economy reaches diminishing returns, studies of past economies show that inadequate government funding is one of the major bottlenecks. This occurs because falling resources per capita leads to increasing disparity of wages, with new workers finding it difficult to find good-paying jobs. Governments are called on to provide more programs at precisely the time when their ability to raise sufficient funds to pay for these programs is lacking. A major factor leading to collapse is the inability of governments to collect sufficient taxes from increasingly impoverished citizens.

The Two Way Escalator Problem

As I see it, the economy as it is currently constructed only gives us two options: up and down. The markers of the “up escalator” are

  1. Cheap energy
  2. Growing energy supply
  3. GDP growth
  4. Wage growth
  5.  Debt growth
  6. Growing government programs

The markers of the “down escalator” are

  1.  Expensive to produce energy supply
  2. Energy supply grows slowly
  3. GDP Growth lags or declines
  4. Wages lag
  5. Outstanding debt tends to shrink
  6. Increasing inability to fund government programs

The two deal-killers with respect to these two escalators are

  • Moving from debt supply growth to debt supply shrinkage. This is like moving from Keynesian economics to the opposite. Or from getting a credit card with a large available balance, to having to pay back old credit card debt without adding new debt.
  • Increasing inability to fund government programs

The above two reasons are why I expect financial and governmental problems to lead to the end of our current system. Diminishing returns is already leading to higher oil prices, and thus moving us from the up escalator to the down escalator.

I am doubtful we can reestablish very widespread use of long-term debt after a collapse because by that time, the economy will clearly be shrinking. A person often hears people talk about getting rid of the fractional reserve banking system because it requires growth to maintain, but in fact, having such a system has been very helpful in enabling extraction of fossil fuels and allowing the economy to use metals and concrete in quantity. The availability of bonds for financing has been helpful as well.

One essential part of today’s economy is very long supply lines. These allow very complex products to be made, using supplies from all over the world. What we found in the 2008 credit crisis is that many businesses (both large and small) in these supply chains were hit hard by lack of credit availability. I see this issue as being very difficult to solve. If it cannot be solved, we will be faced with making goods locally using smaller companies and very much shorter supply lines. It would be a different system than we have today, and would likely support a smaller world population.

A lot of “peak oilers” would like to think that somehow it is possible to “get off at the mezzanine,” and have a viable economy similar to today’s with a small amount of expensive renewables, plus a continuing supply of fossil fuels. I have a hard time seeing this actually happen. One problem is the likelihood that fossil fuel supply will decline quickly because of low price. Another potential problem is a major cutback in credit availability making transactions difficult; a third issue is governmental problems, as taxes fall short of what is needed to fund programs.

We could in theory get back on the up escalator if we find alternative fuels that meet all of the required specifications–very cheap; available in huge quantity, expanding year by year; can be transformed to a liquid fuel similar to oil; and non-polluting. This seems unlikely right now.

Otherwise, what we do have is all the “stuff” we have today, for as long as it lasts. The economy won’t stop on a dime. We also have the ability to recycle things that we can no longer use, that might be more helpful in another place. Solar panels that people currently own will continue to function for a while (especially off-grid), and the grid will probably continue for a while. We know that many people lived in local economies, before we had fossil fuels, and it is likely to be possible again. We certainly live in interesting times.

Peak Oil is Real and the Majors Face Challenging Times « Breaking Energy – Energy industry news, analysis, and commentary

Peak Oil is Real and the Majors Face Challenging Times « Breaking Energy – Energy industry news, analysis, and commentary.

By  on February 18, 2014 at 9:32 AM

Surging Oil Industry Brings Opportunity To Rural California

The idea that global oil production was nearing its peak, only to plateau and then decline was a common view in the energy world for many years. The geophysicist M. King Hubbard predicted in the 1950’s that US oil production would peak in the 1970’s, a forecast that held true until technology allowed companies to economically extract oil and gas from tight geologic formations like shale.

The recent surge in US liquids output – crude plus natural gas liquids (NGLs) – quieted the peak oil community. A well-known, largely peak oil-focused website – The Oil Drum – shut down in 2013, an event some considered the death knell of the peak oil theory.

But not so fast says Steven Kopits from energy business analysis firm Douglas-Westwood. Total global oil supply growth since 2005 – 5.8 million barrels per day – came from unconventional sources, shale oil and NGLs in particular, Kopits recently told the audienceat Columbia University’s Center on Global Energy Policy.

“Not only US, but global, oil supply growth is entirely leveraged to unconventionals right now,” and the legacy, conventional system still peaked in 2005, he said. This gets a bit technical, as shale oil and liquids produced with natural gas are fed into the main crude oil stream and priced as such. But the strong degree to which increasing oil supply growth is dependent on unconventional sources is important to remember and often gets lost in the exuberance over top-line output figures.

And despite prolific incremental oil and gas production made possible by hydraulic fracturing and horizontal drilling advances, maintaining legacy production has been expensive and arguably of limited success.

Total upstream spend since 2005 has been $4 trillion, of which $350 billion was spent on US and Canadian unconventional oil and gas, with an additional $150 billion spent on LNG and GTL, according to Kopits’ presentation. About $2.5 trillion was spent on legacy crude oil production, which still accounts for about 93% of today’s total liquids supply. And despite that hefty investment, legacy oil production has declined by 1 mmb/d since 2005, said Kopits.

By comparison, between 1998 and 2005 the industry spent $1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. The industry “vaporized the GDP of Italy,” with its $2.5 trillion upstream spending for oil since 2005, which barely maintained the legacy oil production system. Kopits argues this level of investment by the major oil companies appears unsustainable, and the major’s current cost structure is troublesome.

Collective oil production of the world’s largest listed oil companies has faltered, while upstream capex soared, Kopits said. Profits have suffered because costs are rising faster than revenues in a range-bound crude oil price environment. “E&P capex per barrel has been rising at 11% per year,” he said, but Brent oil prices have largely been flat. As a result, Chevron, ExxonMobil, Statoil and BP all recently put major projects on hold or cancelled them outright.

“If your costs are rising faster than your revenues, do you sell your assets? The majors have been doing this, but is it sustainable?” asked Kopits. The industry was able to maintain conventional crude oil production levels by throwing $2 trillion dollars at the system – essentially “putting it on steroids” – but now that’s run its course and capex is being curtailed, a trend that looks set to continue, in his view.

Why turning a buck isn’t easy anymore for oil’s biggest players | Jeff Rubin

Why turning a buck isn’t easy anymore for oil’s biggest players | Jeff Rubin.

Posted by Jeff Rubin on January 27th, 2014

Judging by pump prices, Canadian drivers might think oil companies were rolling in profits that only move higher. Lately, though, the big boys in the global oil industry are finding that earning a buck isn’t as easy as it used to be.

Royal Dutch Shell, for instance, just announced that fourth quarter earnings would fall woefully short of expectations. The Anglo-Dutch energy giant warned its quarterly profits will be down 70 percent from a year earlier. Full year earnings, meanwhile, are expected to be a little more than half of what they were the previous year.

The news hasn’t been much cheerier for Shell’s fellow Big Oil stalwarts. Exxon, the world’s largest publicly traded oil company, saw profits fall by more than 50 percent in the second quarter to their lowest level in more than three years. Chevron and Total, likewise, are warning the market to expect lower earnings when fourth quarter results are released.

What makes such poor performance especially disconcerting to investors is that it’s taking place within the context of historically high oil prices. The price of Brent crude has been trading in the triple digit range for three years running, while WTI hasn’t been far off. But even with the aid of high oil prices, the supermajors haven’t offered investors any returns to write home about. Since 2009, the share prices of the world’s top five publicly traded oil and gas companies have posted less than a fifth of the gains of the Dow Jones Industrial Average.

The reason for such stagnant market performance comes down to the cost of both discovering new oil reserves and getting it out of the ground. According to the International Energy Agency’s 2013 World Energy Outlook, global exploration spending has increased by 180 percent since 2000, while global oil supplies have risen by only 14 percent. That’s a pretty low batting average.

Shell’s quest for new reserves has seen it pump billions into money-devouring plays such as its Athabasca Oil Sands Project in northern Alberta and the Kashagan oilfield, a deeply troubled project in Kazakhstan. It’s even tried deep water drilling in the high Arctic. That attempt ended when the stormy waters of the Chukchi Sea crippled its Kulluk drilling platform, forcing the company to pull up stakes.

Investors can’t simply count on ever rising oil prices to justify Shell’s lavish spending on quixotic drilling adventures around the world. Prices are no longer soaring ahead like they were prior to the last recession, when heady global economic growth was pushing energy prices to record highs.

Costs, however, are another matter. As exploration spending spirals higher, investors are seeing more reasons to lighten up on oil stocks. Wherever oil producers go in the world these days, they’re running into costs that are reaching all-time highs. Shell’s costs to find and develop oil fields, for instance, have tripled since 2003. What’s worse, when the company does notch a significant discovery, such as Kashagan, production seems to be delayed, whether due to the tricky nature of the geology, politics, or both.

Shell ramped up capital spending last year by 50 percent to a staggering $44 billion. Oil analysts are basically unanimous now in saying the company needs to rein in spending if it hopes to provide better returns to shareholders.

Big Oil is discovering that blindly chasing production growth through developing ever more costly reserves isn’t contributing to the bottom line. Maybe that’s a message Canada’s oil sands producers need to be listening to as well.

THE RETAIL DEATH RATTLE « The Burning Platform

THE RETAIL DEATH RATTLE « The Burning Platform.

“I was part of that strange race of people aptly described as spending their lives doing things they detest, to make money they don’t want, to buy things they don’t need, to impress people they don’t like.” ― Emile Gauvreau

 

 

If ever a chart provided unequivocal proof the economic recovery storyline is a fraud, the one below is the smoking gun. November and December retail sales account for 20% to 40% of annual retail sales for most retailers. The number of visits to retail stores has plummeted by 50% since 2010. Please note this was during a supposed economic recovery. Also note consumer spending accounts for 70% of GDP. Also note credit card debt outstanding is 7% lower than its level in 2010 and 16% below its peak in 2008. Retailers like J.C. Penney, Best Buy, Sears, Radio Shack and Barnes & Noble continue to report appalling sales and profit results, along with listings of store closings. Even the heavyweights like Wal-Mart and Target continue to report negative comp store sales. How can the government and mainstream media be reporting an economic recovery when the industry that accounts for 70% of GDP is in free fall? The answer is that 99% of America has not had an economic recovery. Only Bernanke’s 1% owner class have benefited from his QE/ZIRP induced stock market levitation.

 

 

The entire economic recovery storyline is a sham built upon easy money funneled by the Fed to the Too Big To Trust Wall Street banks so they can use their HFT supercomputers to drive the stock market higher, buy up the millions of homes they foreclosed upon to artificially drive up home prices, and generate profits through rigging commodity, currency, and bond markets, while reducing loan loss reserves because they are free to value their toxic assets at anything they please – compliments of the spineless nerds at the FASB. GDP has been artificially propped up by the Federal government through the magic of EBT cards, SSDI for the depressed and downtrodden, never ending extensions of unemployment benefits, billions in student loans to University of Phoenix prodigies, and subprime auto loans to deadbeats from the Government Motors financing arm – Ally Financial (85% owned by you the taxpayer). The country is being kept afloat on an ocean of debt and delusional belief in the power of central bankers to steer this ship through a sea of icebergs just below the surface.

 

The absolute collapse in retail visitor counts is the warning siren that this country is about to collide with the reality Americans have run out of time, money, jobs, and illusions. The most amazingly delusional aspect to the chart above is retailers continued to add 44 million square feet in 2013 to the almost 15 billion existing square feet of retail space in the U.S. That is approximately 47 square feet of retail space for every person in America. Retail CEOs are not the brightest bulbs in the sale bin, as exhibited by the CEO of Target and his gross malfeasance in protecting his customers’ personal financial information. Of course, the 44 million square feet added in 2013 is down 85% from the annual increases from 2000 through 2008. The exponential growth model, built upon a never ending flow of consumer credit and an endless supply of cheap fuel, has reached its limit of growth. The titans of Wall Street and their puppets in Washington D.C. have wrung every drop of faux wealth from the dying middle class. There are nothing left but withering carcasses and bleached bones.

 

The impact of this retail death spiral will be vast and far reaching. A few factoids will help you understand the coming calamity:

  • There are approximately 109,500 shopping centers in the United States ranging in size from the small convenience centers to the large super-regional malls.
  • There are in excess of 1 million retail establishments in the United States occupying 15 billion square feet of space and generating over $4.4 trillion of annual sales. This includes 8,700 department stores, 160,000 clothing & accessory stores, and 8,600 game stores.
  • U.S. shopping-center retail sales total more than $2.26 trillion, accounting for over half of all retail sales.
  • The U.S. shopping-center industry directly employed over 12 million people in 2010 and indirectly generated another 5.6 million jobs in support industries. Collectively, the industry accounted for 12.7% of total U.S. employment.
  • Total retail employment in 2012 totaled 14.9 million, lower than the 15.1 million employed in 2002.
  • For every 100 individuals directly employed at a U.S. regional shopping center, an additional 20 to 30 jobs are supported in the community due to multiplier effects.

 

The collapse in foot traffic to the 109,500 shopping centers that crisscross our suburban sprawl paradise of plenty is irreversible. No amount of marketing propaganda, 50% off sales, or hot new iGadgets is going to spur a dramatic turnaround. Quarter after quarter there will be more announcements of store closings. Macys just announced the closing of 5 stores and firing of 2,500 retail workers. JC Penney just announced the closing of 33 stores and firing of 2,000 retail workers. Announcements are imminent from Sears, Radio Shack and a slew of other retailers who are beginning to see the writing on the wall. The vacancy rate will be rising in strip malls, power malls and regional malls, with the largest growing sector being ghost malls. Before long it will appear that SPACE AVAILABLE is the fastest growing retailer in America.

 

The reason this death spiral cannot be reversed is simply a matter of arithmetic and demographics. While arrogant hubristic retail CEOs of public big box mega-retailers added 2.7 billion retail square feet to our already over saturated market, real median household income flat lined. The advancement in retail spending was attributable solely to the $1.1 trillion increase (68%) in consumer debt and the trillion dollars of home equity extracted from castles in the sky, that later crashed down to earth. Once the Wall Street created fraud collapsed and the waves of delusion subsided, retailers have been revealed to be swimming naked. Their relentless expansion, based on exponential growth, cannibalized itself, new store construction ground to a halt, sales and profits have declined, and the inevitable closing of thousands of stores has begun. With real median household income 8% lower than it was in 2008, the collapse in retail traffic is a rational reaction by the impoverished 99%. Americans are using their credit cards to pay their real estate taxes, income taxes, and monthly utilities, since their income is lower, and their living expenses rise relentlessly, thanks to Bernanke and his Fed created inflation.

The media mouthpieces for the establishment gloss over the fact average gasoline prices in 2013 were the second highest in history. The highest average price was in 2012 and the 3rd highest average price was in 2011. These prices are 150% higher than prices in the early 2000′s. This might not matter to the likes of Jamie Dimon and Jon Corzine, but for a middle class family with two parents working and making 7.5% less than they made in 2000, it has a dramatic impact on discretionary income. The fact oil prices have risen from $25 per barrel in 2003 to $100 per barrel today has not only impacted gas prices, but utility costs, food costs, and the price of any product that needs to be transported to your local Wally World. The outrageous rise in tuition prices has been aided and abetted by the Federal government and their doling out of loans so diploma mills like the University of Phoenix can bilk clueless dupes into thinking they are on their way to an exciting new career, while leaving them jobless in their parents’ basement with a loan payment for life.

 

The laughable jobs recovery touted by Obama, his sycophantic minions, paid off economist shills, and the discredited corporate legacy media can be viewed appropriately in the following two charts, that reveal the false storyline being peddled to the techno-narcissistic iGadget distracted masses. There are 247 million working age Americans between the ages of 18 and 64. Only 145 million of these people are employed. Of these employed, 19 million are working part-time and 9 million are self- employed. Another 20 million are employed by the government, producing nothing and being sustained by the few remaining producers with their tax dollars. The labor participation rate is the lowest it has been since women entered the workforce in large numbers during the 1980′s. We are back to levels seen during the booming Carter years. Those peddling the drivel about retiring Baby Boomers causing the decline in the labor participation rate are either math challenged or willfully ignorant because they are being paid to be so. Once you turn 65 you are no longer counted in the work force. The percentage of those over 55 in the workforce has risen dramatically to an all-time high, as the Me Generation never saved for retirement or saw their retirement savings obliterated in the Wall Street created 2008 financial implosion.

 

To understand the absolute idiocy of retail CEOs across the land one must parse the employment data back to 2000. In the year 2000 the working age population of the U.S. was 213 million and 136.9 million of them were working, a record level of 64.4% of the population. There were 70 million working age Americans not in the labor force. Fourteen years later the number of working age Americans is 247 million and only 144.6 million are working. The working age population has risen by 16% and the number of employed has risen by only 5.6%. That’s quite a success story. Of course, even though median household income is 7.5% lower than it was in 2000, the government expects you to believe that 22 million Americans voluntarily left the labor force because they no longer needed a job. While the number of employed grew by 5.6% over fourteen years, the number of people who left the workforce grew by 31.1%. Over this same time frame the mega-retailers that dominate the landscape added almost 3 billion square feet of selling space, a 25% increase. A critical thinking individual might wonder how this could possibly end well for the retail genius CEOs in glistening corporate office towers from coast to coast.

 

This entire materialistic orgy of consumerism has been sustained solely with debt peddled by the Wall Street banking syndicate. The average American consumer met their Waterloo in 2008. Bernanke’s mission was to save bankers, billionaires and politicians. It was not to save the working middle class. You’ve been sacrificed at the altar of the .1%. The 0% interest rates were for Jamie Dimon and Lloyd Blankfein. Your credit card interest rate remained between 13% and 21%. So, while you struggle to pay bills with your declining real income, the Wall Street bankers are again generating record profits and paying themselves record bonuses. Profits are so good, they can afford to pay tens of billions in fines for their criminal acts, and still be left with billions to divvy up among their non-prosecuted criminal executives.

Bernanke and his financial elite owners have been able to rig the markets to give the appearance of normalcy, but they cannot rig the demographic time bomb that will cause the death and destruction of our illusory retail paradigm. Demographics cannot be manipulated or altered by the government or mass media. The best they can do is ignore or lie about the facts. The life cycle of a human being is utterly predictable, along with their habits across time. Those under 25 years old have very little income, therefore they have very little spending. Once a job is attained and income levels rise, spending rises along with the increased income. As the person enters old age their income declines and spending on stuff declines rapidly. The media may be ignoring the fact that annual expenditures drop by 40% for those over 65 years old from the peak spending years of 45 to 54, but it doesn’t change the fact. They also cannot change the fact that 10,000 Americans will turn 65 every day for the next sixteen years. They also can’t change the fact the average Baby Boomer has less than $50,000 saved for retirement and is up to their grey eye brows in debt.

 

With over 15% of all 25 to 34 year olds living in their parents’ basement and those under 25 saddled with billions in student loan debt, the traditional increase in income and spending is DOA for the millennial generation. The hardest hit demographic on the job front during the 2008 through 2014 ongoing recession has been the 45 to 54 year olds in their peak earning and spending years. Combine these demographic developments and you’ve got a perfect storm for over-built retailers and their egotistical CEOs.

The media continues to peddle the storyline of on-line sales saving the ancient bricks and mortar retailers. Again, the talking head pundits are willfully ignoring basic math. On-line sales account for 6% of total retail sales. If a dying behemoth like JC Penney announces a 20% decline in same store sales and a 20% increase in on-line sales, their total change is still negative 17.6%. And they are still left with 1,100 decaying stores, 100,000 employees, lease payments, debt payments, maintenance costs, utility costs, inventory costs, and pension costs. Their future is so bright they gotta wear a toe tag.

The decades of mal-investment in retail stores was enabled by Greenspan, Bernanke, and their Federal Reserve brethren. Their easy money policies enabled Americans to live far beyond their true means through credit card debt, auto debt, mortgage debt, and home equity debt. This false illusion of wealth and foolish spending led mega-retailers to ignore facts and spread like locusts across the suburban countryside. The debt fueled orgy has run out of steam. All that is left is the largest mountain of debt in human history, a gutted and debt laden former middle class, and thousands of empty stores in future decaying ghost malls haunting the highways and byways of suburbia.

The implications of this long and winding road to ruin are far reaching. Store closings so far have only been a ripple compared to the tsunami coming to right size the industry for a future of declining spending. Over the next five to ten years, tens of thousands of stores will be shuttered. Companies like JC Penney, Sears and Radio Shack will go bankrupt and become historical footnotes. Considering retail employment is lower today than it was in 2002 before the massive retail expansion, the future will see in excess of 1 million retail workers lose their jobs. Bernanke and the Feds have allowed real estate mall owners to roll over non-performing loans and pretend they are generating enough rental income to cover their loan obligations. As more stores go dark, this little game of extend and pretend will come to an end. Real estate developers will be going belly-up and the banking sector will be taking huge losses again. I’m sure the remaining taxpayers will gladly bailout Wall Street again. The facts are not debatable. They can be ignored by the politicians, Ivy League economists, media talking heads, and the willfully ignorant masses, but they do not cease to exist.

“Facts do not cease to exist because they are ignored.” – Aldous Huxley

 

The Real Oil Extraction Limit, and How It Affects the Downslope | Our Finite World

The Real Oil Extraction Limit, and How It Affects the Downslope | Our Finite World.

There is a lot of confusion about which limit we are reaching with respect to oil supply. There seems to be a huge amount of “reserves,” and oil production seems to be increasing right now, so people can’t imagine that there might be a near term problem. There are at least three different views regarding the nature of the limit:

  1. Climate Change. There is no limit on oil production within the foreseeable future. Oil prices can be expected to keep rising. With higher prices, alternative fuels and higher cost extraction techniques will become available. The main concern is climate change. The only reason that oil production would drop is because we have found a way to use less oil because of  climate change concerns, and choose not to extract oil that seems to be available.
  2. Limit Based on Geology (“Peak Oil”). In each oil field, production tends to rise for a time and then fall. Therefore, in total, world oil production will most likely begin to fall at some point, because of technological limits on extraction. In fact, this limit seems quite close at hand. High oil prices may play a role as well.
  3. Oil Prices Don’t Rise High Enough. We need high oil prices to keep oil extraction up, but as we reach diminishing returns with respect to oil extraction, oil prices don’t rise high enough to keep extraction at the required level. If oil prices do rise very high, there are feedback loops that lead to more recession and job layoffs and less “demand for oil” (really, oil affordability) among potential purchasers of oil. One major cut-off on oil supply is inadequate funds for reinvestment, because of low oil prices.

Why “Oil Prices Don’t Rise High Enough” Is the Real Limit

In my view, our real concern should be the third item above, “Oil Prices Don’t Rise High Enough.” The problem is caused by a mismatch between wages (which are not growing very quickly) and the cost of oil extraction (which is growing quickly). If oil prices rose as fast as extraction costs, they would leave workers with a smaller and smaller percentage of their wages to spend on food, clothing, and other necessities–something that doesn’t work for very long. Let me explain what happens.

Because of diminishing returns, the cost of oil extraction keeps rising. It is hard for oil prices to increase enough to provide an adequate profit for producers, because if they did, workers would get poorer and poorer. In fact, oil prices already seem to be too low. In years past, oil companies found that the price they sold oil for was sufficient (a) to cover the complete costs of extraction, (b) to pay dividends to stockholders, (c) to pay required governmental taxes, and (d) to provide enough funds for investment in new wells, in order to  keep production level, or even increase it.  Now, because of the rapidly rising cost of new extraction, oil companies are finding that they are coming up short in this process.

Oil companies have begun returning money to stockholders in increased dividends, rather than investing in projects which are likely to be unprofitable at current oil prices. See Oil companies rein in spending to save cash for dividends. If our need for investment dollars is escalating because of diminishing returns in oil extraction, but oil companies are reining in spending for investments because they don’t think they can make an adequate return at current oil prices, this does not bode well for future oil extraction.

A related problem is debt limits for oil companies. If cash flow does not provide sufficient funds for investment, increased debt can be used to make up the difference. The problem is that credit limits are soon reached, leading to a need to cut back on new projects. This is particularly a concern where high cost investment is concerned, such as oil from shale formations. A rise in interest rates would also be a problem, because it would raise costs, leading to a higher required oil price for profitability. The debt problem affects high priced oil investments in other countries as well.  OGX, the second largest oil company in Brazil, recently filed for bankruptcy, after it ran up too much debt.

National oil companies don’t explain that they are finding it hard to generate enough cash flow for further investment. They also don’t explain that they are having a hard time finding sites to drill that will be profitable at current prices.  Instead, we are seeing more countries with national oil companies looking for outside investors, including Brazil andMexico. Brazil received only one bid, and that for the minimum amount, indicating that oil companies making the bids do not have high confidence that investment will be profitable, either. Meanwhile, newspapers spin the story in a totally misleading way, such as, Mexico Gears Up for an Oil Boom of Its Own.

US natural gas is another product with a similar problem: the price is not high enough to justify new production, especially for shale gas producers. The huge resource that some say is there is simply too expensive to extract at current prices. Would-be natural gas producers cannot tell us this. Instead, we find a recent quote in the Wall Street Journal saying:

“We are not dealing with an era of scarcity, we are dealing with a situation of abundance,” Ken Cohen, Exxon’s vice president of public and government affairs, said in an interview. “We need to rethink the regulatory scheme and the statutory scheme on the books.”

Cohen could explain that without natural gas exports, there is no way the natural gas price will rise high enough for Exxon-Mobil to extract the resource at a profit. Without exports, Exxon Mobil will lose money on the extraction, or more likely, will have to leave the natural gas in the ground. With low prices, the huge resource that Obama has talked about is simply a myth–the prices need to be higher. Of course, no one tells us the real story–it seems better to let people think that the issue is too much natural gas, not that it can’t be extracted at the current price. The stories offered to the news media are simply ways to convince us that exports make sense. Readers are not aware how much stories can be “spun” to make the current situation sound quite different from what it really is.

What Goes Wrong with “Climate Change” and “Limit Based on Geology” Views

The Illusion of Reserves. Oil and gas reserves may seem to be “be there,” but a lot of conditions need to be in place for them to actually be extracted. Clearly, the price needs to be high enough, both for current extraction and to fund new investment. Other conditions need to be in place as well: Debt needs to be available, and it needs to be available at a sufficiently low rate of interest to keep costs down. There needs to be political stability in the country in question. Something as simple as a continuation of the uprisings associated with the Arab Spring of 2010 could lead to the inability to extract reserves that seem to be present. Other requirements include availability of water for fracking and the availability of skilled workers and drilling rigs.

In the past, we have been far enough away from limits that issues such as these have not been a big problem. But as we get closer to limits and stretch our capabilities, these become more of a problem. Right now, availability of debt at low interest rates is a particularly important issue, as is the need for adequate oil company profitability–things that are easy to overlook.

Wrong Economic Views Leading to Wrong Oil Views. Economists have put together economic models based on a world without limits. A world without limits is the easy approach, because mathematical relationships are much simpler in a world without limits: a relationship which held in 1800 is expected to hold in 1970 or in 2050.  A world without limits never offends politicians, because growth always seems to be possible, meaning a never-ending supply of jobs and of goods and services for constituents. A model without limits produces the simple relationships that we are accustomed to, such as “Inadequate supply will lead to a rise in price, and this in turn will tend to create greater supply or substitutes.” Unfortunately, these models omit many important variables and thus are inadequate representations of the world we live in today.

In a world with limits, there are feedback loops that cause high oil prices to lead to lower wages and more unemployment in oil importing countries. Thus “demand” can’t keep rising, because workers can’t afford the higher oil prices. Oil prices stagnate at a level that is too low to maintain adequate investment. High oil prices also feed back into slower economic growth and a need for ultra-low interest rates to raise demand for high-priced goods such as cars and homes.

When prices remain in the $100 barrel range, they are still high enough to damage the economy. Businesses are not much damaged, because they have ways they can work around higher oil prices, especially if interest rates are low.  Most of the ways businesses can work around high oil prices involve reducing wages to US workers–for example, outsourcing production to a lower cost country, or cutting the pay of workers, or laying off workers to match lower demand for goods. (Lower demand for goods tends to occur when oil prices rise, and businesses raise their prices to reflect the higher oil costs.)

Workers are still affected by costs in the $100 barrel range, and so are governments. Governments must pay out higher benefits than in the past, to keep the economy afloat. They must also keep interest rates very low, to try to keep demand for homes and cars as high as possible. The situation becomes very unstable, however, because very low interest rates depend on Quantitative Easing, and it does not appear to be possible to continue Quantitative Easing forever. Thus, interest rates will need to rise. Such a rise in interest rates is likely to push the country back into recession, because taxes will need to be higher (to cover the government’s higher debt costs) and because monthly payments on homes and new car purchases will tend to rise. The limit on oil production then becomes something very remote from geology–something like, “How long can interest rates remain low?” or “How long can we make our current economy function?”

The Interconnected Nature of the Economy. In my last post, I talked about the economy being a complex adaptive system. It is built from many parts (many businesses, laws, consumers, traditions, built infrastructure). It can operate within a range of conditions, but beyond that range it is subject to collapse. An ecosystem is a complex adaptive system. So is a human being, or any other kind of animal. Animals die when their complex adaptive system moves out of its range.

It is this interconnectedness of the economy that leads to the strange situation where something very remote from the real problem (oil limits) can lead to a collapse. Thus, it can be a rise in interest rates or a political collapse that ultimately brings the system down. The path of the downslope can be very different from what a person might expect, based on the naive view that the problems will simply relate to reduced supply of oil.

A Case Study of the Collapse of the Former Soviet Union 

The Soviet Union was major oil exporter and a military rival of the United States in the 1950s through 1980s. It also was the center of a huge economic system, involving many other countries. One thing that bound the countries together was the use of communism as its method of government; another was trade among countries. In effect, the group of communist countries had their own complex adaptive system. Things seemed to go fine for many years, but then in December 1991, the central government of the Soviet Union was dissolved, leaving the individual republics that made up the Former Soviet Union (FSU) on their own.

While there are many theories as to what all caused the collapse, it seems to me that low prices of oil played a major role. The reason why low oil prices are important is because in an oil exporting country, such as the FSU, oil export revenues represent a major part of government funding. If oil prices drop too low, there is a double problem: (1) it becomes unprofitable to drill new wells, so production drops and, (2) the revenue that is collected on existing wells drops too low. The problem is then a huge financial problem–not too different from the financial problem the US and many of the big oil importing countries are experiencing today.

Figure 1. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Figure 1. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

In this particular situation, oil prices (in inflation adjusted prices) hit a peak in 1980. Once oil prices hit a peak, FSU oil production very much flattened. There was a continued small rise until 1983, but without the very high prices available until 1980, aggressive investment in new oil extraction dropped back.

Not only did FSU oil production flatten, but FSU oil consumption also flattened, not long after oil production stopped rising (Figure 2). This flattening helped maintain exports and the taxes that could be collected on these exports.

Figure 2. Former Soviet Union Oil Production and Consumption, based on BP Statistical Review of World Energy, 2013.

Figure 2. Former Soviet Union Oil Production and Consumption, based on BP Statistical Review of World Energy, 2013.

Even though total exports were close to flat in the 1980s (difference between consumption and production), there were some countries where exports that were rising–for example North Korea, shown in Figure 4. This mean that oil exports for some allies needed to be cut back as early as 1981. Figure 3 shows the trend in oil consumption for some of FSU’s allies.

Figure 3. Oil consumption as a percentage of 1980 consumption for Hungary, Romania, and Bulgaria, based on EIA data.

Figure 3. Oil consumption as a percentage of 1980 consumption for Hungary, Romania, and Bulgaria, based on EIA data.

A person can see that oil consumption dropped off slowly at first, and increased around 1990. All of these countries saw their oil consumption drop by at least 40% by 2000. Bulgaria saw is oil consumption drop by 65% to 70%.

The FSU exported oil to other countries as well.  Two countries that we often hear about, Cuba and North Korea, were not affected in the 1980s (Figure 4). In fact, Cuba’s oil consumption never seems to have been severely affected. (It is possible that exports of manufactured goods from the FSU dropped, however.) Cuba’s drop-off in oil consumption since 2005 may be price-related.

Figure 4. Oil consumption as a percentage of 1980 oil consumption for Cuba and North Korea, based on EIA data.

Figure 4. Oil consumption as a percentage of 1980 oil consumption for Cuba and North Korea, based on EIA data.

North Korea’s oil consumption continued growing until 1991. Its drop-off was then very severe–a total of an 83% reduction between 1991 and 2010. In most of the countries where oil consumption dropped, consumption of other fossil fuels dropped as well, but generally not by as large percentages. North Korea experienced nearly a 50% drop in other fuel (mostly coal) consumption by 1998, but this has since somewhat reversed.

By 1991, the FSU was in poor financial condition, partly because of the low oil prices, and partly because its oil exports had started dropping. FSU’s oil production left its plateau and started dropping about 1988 (Figure 2).  The actual drop in FSU oil production meant that oil consumption for the FSU needed to drop as well–a big problem because industry depended upon this oil. The break-up of the FSU was a solution to these problems because (1) it eliminated the cost of the extra layer of government and (2) it made it easier to shift oil consumption among the member republics, so that those republics that produced more oil could keep it for their own use, rather than sending it to republics which did not produce oil. This shortchanged non-oil producing republics, such as the Ukraine and Belarus.

If we look at oil consumption for a few of the republics that were previously part of the FSU, we see that oil consumption was fairly flat, then dropped off quickly, after 1991.

Figure 5. Oil consumption as a percentage of 1985 oil production for Russia, the Ukraine, and Belarus, based on BP Statistical Review of World Energy 2013.

Figure 5. Oil consumption as a percentage of 1985 oil production for Russia, the Ukraine, and Belarus, based on BP Statistical Review of World Energy 2013.

By 1996 (only 5 years after 1991), oil consumption had dropped by 78% for the Ukraine, by 61%  for Belarus, and by “only” 47% for Russia, which is an oil-producing state. At least part of the reason for the fast drop off was the fact that in the years immediately after 1991, oil production for the FSU dropped by about 10% per year, necessitating a quick drop off in consumption, especially if the country was to continue to make some money from exports. The 10% drop-off in oil production suggests that the decline in oil production was more than would be expected from geological decline alone. If the decline were for geological reasons only, without new drilling, one might the expect the drop off to be in the 4% to 6% range.

When oil consumption dropped greatly, population tended to decline (Figure 6). The decline started earliest in the countries where the oil consumption drop was earliest (Hungary, Romania, and Bulgaria). The steepest drop-offs in population occur in the Ukraine and Bulgaria–the  countries with the largest percentage drops in oil consumption.

Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data.

Figure 6. Population as percent of 1985 population, for selected countries, based on EIA data.

Some of the population drop is from emigration. Some of it is from poorer health conditions. For example, Russia used to provide potable water for its citizens, but it no longer does. Some is from conditions such as alcoholism. I haven’t shown the population change for North Korea. It actually continued to increase, but at a much lower rate of growth than previously. Cuba’s population has begun to fall since 2005.

GDP growth for the countries shown has tended to lag behind world economic growth (Figure 7).

Figure 7. GDP compared to world GDP - Change since 1985, based on USDA Real GDP data.

Figure 7. GDP compared to world GDP – Change since 1985, based on USDA Real GDP data.

Nearly all of the countries listed above have had financial problems, at different times.

Belarus’s GDP seems to be doing better than the rest on Figure 7. Belarus, like the Ukraine, is a pipeline transit country for Russia. In Belarus, natural gas consumption has increased, even as oil consumption has decreased. This increase is likely helping the  country industrialize. Inflation occurred at the rate of 51.9% in 2012 according to the CIA World Fact Book. This high inflation rate may be distorting indications.

Conclusion

We can’t know exactly what path our economy will follow in the future. I expect, though, that the path of the FSU and its trading partners is closer to the path we will be following than most forecasts we hear today. Most of us haven’t followed the FSU story closely, because we wrote off most of their problems to deficiencies of communism, without realizing that there was a major oil component as well.

The FSU situation may, in fact, be better that what the Industrialized West is facing in the next few years. The FSU had the rest of the world to support it, offering investment capital and new models for development. Oil production for Russia was able to rebound when oil prices rose again in the early 2000s. As situations around the world decline, it will be harder to “bootstrap.”

One of the things that hampered the recovery of the FSU was the fact that the communist economic model proved not to be competitive with the capitalistic model. In a way, the situation we are facing today is not all that different, except that our challenge this time is competition from Asian economies that we have not had to compete with until the early 2000s.

Asian economies have several cost advantages relative to the Industrialized West:

(1) Asian competitor countries are generally warmer than the industrialized West. Because of this, Asian workers can live more comfortably in flimsy homes. They also don’t need much salary to cover heating and can more easily commute by bicycle. It is often possible to produce two crops a year, making productivity of land and of farmers higher than it otherwise would be. In other words, Asian competitor countries have an energy subsidy from the sun that the Industrialized West does not.

(2) Asian competitors are often willing to ignore pollution problems, reducing their costs relative to the West.

(3) Asian competitors generally depend on coal to a greater extent than we do, keeping their costs down, relative to countries that use higher-priced fuels.

(4) Asian competitors are less generous with employee benefits such as health care and pensions, also holding costs down.

Economists, through their wholehearted endorsement of globalization, have pushed industrialized countries into a competitive situation which we are certain to lose. While oil prices tend to push wages down, competition with Asian countries makes the downward push on wages even greater. These lower wages are part of what are pushing us toward collapse.

To solve our problems, economists have proposed a shift toward renewable energy and the implementation of carbon taxes. Unless these changes are done in a way that actually reduces costs, these “solutions” are likely to make us even less competitive with low-cost competitors such as those in Asia. Thus, they are likely to push us toward collapse more quickly.

To support this position, economists point to climate change models based on the view that the burning of fossil fuels will increase greatly in the decades again. In fact, if collapse occurs in the next few years in the Industrialized West, carbon emissions are likely to fall quickly. Because of the interconnectedness of the world system, the rest of the world will likely also encounter collapse in not many more years, and their carbon emissions are likely to fall quickly, as well. Even the “Peak Oil” emissions that are used in climate change models are way too high, relative to what seems likely to be the case.

If I am right about collapse being a possibility for the Industrialized West, then our problem will be that we as nations become so poor that we can no longer find goods to trade with Asian countries. Most of our goods will not be competitive as exports, and we won’t be able to simply add more debt to rectify the situation. Thus, we will become unable to buy many goods we depend on, including computers and replacement parts for wind turbines.

Breakups of many types are possible. The European Union may cease to operate in the way it does today. The International Monetary Fund is likely to cease operating in the way it does today, because of the collapse of many of its members who provide funding. The US will be subject to strains of the type that lead to break up. If nothing else, oil producing states will want to withdraw, so that they are not, in effect, subsidizing the rest of the US economy.

It is unfortunate that economists are tied to their hopelessly out-of-date economic models.  Part of the problem is that the story of “collapse around the corner” doesn’t sell well. The alternate story economists have come up with really isn’t right, but it is pleasing to the many who benefit from subsidies for renewables, and it makes politicians look like they are doing something. The specter of climate change in the distance gives an excuse to cut back oil use, among other things, so has at least some theoretical benefit.

It is unfortunate, however, that we cannot look at the real problem. Unless we can understand the problem as it really is, it is impossible to find solutions that might actually be helpful.

 

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