Damn it, this blog needs an economist...now accepting applications...

JiO and J are having a conversation about this piece in the Asia Times in the comments a couple of posts back. The piece is a lengthy discussion of the economics of $50/bbl oil and the ramifications from an Asian perspective looking critically at the US in particular.

Being a political scientist, it's tough for me to assess the economics of this article from my lay perspective. (And yes, seriously, if any of you out there are an economist and have something to say about this, think of the comment box as a job application...I think we're ready to hire J and karlof and even a few others (with our massive pay and benefits package, how can he turn us down?) to do some guest blogging, so we might as well find an economist to do some tea leaf interpretation with an R-squared of .99 like they always seem to do). So, by all means, chime in!

Some initial thoughts: Is this author seeing something that we don't see because of his distance/Asian perspective? Or is this piece just rhetorical? Does the "The US is crashing first" idea that pervades this piece make sense?

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I started to read Liu's piece as he's someone who is usually correct. I initially forgave some small errors. But when I got to his "Fact 9," I had to stop. He clearly doesn't have a handle on the realities of oil or its depletion, an assessment I immediately emailed to Asia Times Online, and lost his authoritativeness. I did not even try to finish, which is too bad becaause his initial economic assessments were good.

Perhaps this http://www.copvcia.com/free/ww3/052505_world_stories.shtml#1 will prove to be better. I only had time to skim the first couple paragraphs because chores await. Will comment more later.

My training in economics isn't comprehensive, but what Liu says doesn't fit with what I see covering Middle Eastern markets.

The recycling argument doesn't square with the huge amount of investment that is occurring in the ME as a result of high oil revenues. If they had to recycle all $200bn of their revenues, there'd be no money to build man-made islands, would there? Some recycling does happen to prevent local inflation rising, but I think Liu over-estimates quite how much.

Fact 2 basically says that if input costs increase, output costs increase. Economists call this inflation. Higher inflation doesn't necessarily lead to lower unemployment, though the two are linked. This seems particularly so given that services now account for such a large chunk of GDP. Yes, there's no risk of hyperinflation, but even inflation within the NAIRU can dampen spending, which is why OECD countries tend to be cutting interest rates at present.

Fact 8 doesn't square with OPEC strategy. Their crudes (primarily sour and heavy) are trading at a large discount to sweet light crudes because of the global lack of refining capacity to deal with heavy sours - in that respect he's right. But Saudi Arabia is now investing $50bn in refineries, both in Saudi Arabia and in JVs in Asia.

That said, I'm intrigued by his linking of high oil prices and increased asset worth and I'm going to run that past someone I know who works in the loans and derivatives markets to get his take.

Another web site to look at is "The Cost of Energy" http://www.grinzo.com/energy/

The problem with "economics" is that it is based on "accounting".

Practitioners of "accounting" cherry pick what they are going to account for and what they will simply ignore. The numbers are massaged to make the boss look good.

For example, when a coal or gas-fired electrical generating plant is going full blast, the accountants will count the revenue stream from customers but they will not allocate costs to the damage they do to the nearby stream feeding their condensers. That externality is a freebie to them but not to society as a whole. Similarly, they won't "account" for the damage to the planet due to air pollution, global warming, etc. resulting from their dumping their garbage (their smoke & CO2) into the common cesspool (aka our atmosphere). They won't account for similar damages caused by the gathering of raw materials to build and run their plant. In they end, they can show large "profits". The economists will readily agree that all this is good. They will see demand as being high on their price v. demand graph. Supply is summarily assumed to be plentiful and therefore it's all thumbs up for this unsustainable but growing venture.

So you see, when you put your faith in economists and accountants, you are agreeing to the fairness of not fully accounting for all the ramifications of actions by our society. You are agreeing to credentials (i.e. a PhD in economics) trumping reality. Delusion makes for strange but happy bedfellows.

stepback -

Thank you for succinctly stating what was pong-pinging around just below my conscious awareness.

It is very clear when reading his piece again (after vigorously jerking weeds from my plantation, listening to some easy Cranberries and sipping an icy home brew for calm) that profit and loss are the only items he is concerned about, period. Nothing else is important except for how it affects cash flow and balance sheets...

Man, I feel better!

But I'm still waiting to hear what karlof has to say about all of this...

And why do I have this feeling that all of this stuff Liu is writing about will only enrich the already filthy rich? (J says wonderingly, scratching head)

One of the first axioms of "Peak Oil" is that whoever controls the oil when the prices escalate uncontrollably is going to be control the wealth of the planet.

But only if "Alternative" energy sources are not in play. Hence the decimation of all attempts to develop "Sustainable" energy sources -- mainly by keeping the price of oil just below that which would make other sources of energy economically feasible (going back to Liu's argument about the pricing of oil) until it is no longer feasible to do so -- for example today!

I count "Useful Conservation of energy" as an alternative energy source

Stepback's discussion of "economics" being based on accounting points out one of the fundamental flaws of classical economics. Economists would be far more useful if they first became well-grounded in ecological science. The natural ecology is fundamentally the basis for human economic systems, which is a point that most classical economists miss completely or at best don't properly understand. An understanding of ecology allows one to avoid such problematic thinking as the idea that "growth can go on forever" or "natural resources are infinite", and therefore be a much more useful economist.

OT -

Energy bulletin headlines had this tidbit:


Apparently Senators Lamar Alexander and John Warner want to pull the PTC from wind power. What foresight! What incalculable savings to the environment!!

With geniuses like these representing us, we will soon be back in the stone age...

Thanks for the mention upthread, Rajiv.

Yes, I'm an economist. (Why do I feel like I just introduced myself at a 12-step meeting?)

As part of my site, I'm buiilding a crash course intro to economics. The current version is at:


(That link looks wrong, but it seems to take you to the right place.)

*laugh* At least you have admitted you have a problem, Lou. :)

(and by the way, I just realized that I hadn't added you to the blogroll. will rectify that when I get to my home computer with that password on it!)

and, Lou, no comment on the R-squared comment in the initial post? *laugh* (hell, I'm just happy with my data when I can get to an R2 of .1 or so!)

I read through the article and alot of what he has to say is true. I am neither a geologist or an economist, but I do understand the current system which has lead to a greater amount of wealth moved from the bottom to the top.

They say because Oil prices go up then more investment, jobs, etc.. will happen. While this is true the prices of goods will also rise right behind this influx of investment.

Think of a rubber band if you take it and stretch it one end goes further away and eventually you will have to release some of the tension from one end or it will snap.

The economy is also interconnected and money is not the only thing effected people are effected. Their wages, jobs, goods, etc are also effected. It comes down to the basic fact that people will be left behind each time they stretch this rubber band and release the pressure. As shown from the past decades the way the system is set up the top get more and the bottom is left behind. In other words even though they are releasing pressure it is almost the same as the rubber band snapping alittle bit each time.

In regards to China they studied the US and basically copied some of the parts of our economy when it was at its best like manufactoring, the gold standard, etc.. They are in a much better position to buy up any remaining oil than the us because of their current economy as they can offer funds backed by something real ( goods, gold ) and not created out of thin air ( US dollars, Deficit ). I cant say this for a fact either, but If I was a country in need of goods and real value I would look to trade my Oil for tangible things.

The US on the other hand has POWER ( military ) and will use its best asset to control and make sure they get their fair share of the OIL remaining. One thing they also have is FOOD which can be used as a tool in this battle for the OIL. But as the rubberband effect happens the cost of this food and production (which is controlled by the OIL price) will increase. We've already have seen efforts to use Food for OIL and they havent been exactly perfect. This Food could be the last straw. Once we lose our ability to supply food to the world we lose alot in the eyes of the world.

I do not know whats going to happen or how it will all go down, but I do see many countries accepting goods due to the increase in prices of these goods before taking I.O.U's for their Oil as time and the Oil crisis wears on.

Anyhow I do not know If I made any sense at all in this rambling ;) but I myself understand the direction things are headed. First a recession, then a depression. The time scale is an unknown as there are too many variables ( Oil, Food and Water shortages, Unemployment, Global Warming, Real Compassion, Greed, etc.. ) that can cause up and down swings in the economy, But as the OIL situation ( shortage ) gets worse so will things in this country as well as the rest of the world.

Foremost I want to tell people who read this and other info about Peak Oil that you alone cannot effect what is going to happen and it would be best that those of us who are in the "know" start preparing for ourselves and our families and communities for what ever crisis may arrive in the future.

I wish you wellness! ( I was told Luck has nothing to do with it ;) )

From the Asian Times article, 'fact 9':

"According to the Energy Information Administration (EIA), the US had 21.8 trillion barrels of proven oil reserves as of January 1, 2001".

This has got to be a typo - billion is more like it. Having a proven reserve of 21.8 billion barrels implies that additional resources (unproven estimates) may be another 10 billion or so. I don't know what the numbers really are, but I do know that there is no possibility of having a multi-trillion barrel reserve in the U.S. So from this perspective the article does not pass muster.

Another bogus claim is in Fact 3:

"US prices for existing homes have been rising more than 30% annually for almost a decade". If true, then a $100,000 home in 1996 would be worth more than $1,000,000 now, clearly not the case (although I wish it were).

Fact 8 includes:

"oil in the ground can be more valuable than oil above ground because it can serve as a monetizable asset through asset-backed securities (ABS) in the wild, wild world of structured finance (derivatives). So while there is incentive to find more oil to enlarge the asset base, there is little incentive to pump it out of the ground merely to keep prices low." This is true, but cash flow to the oil corporations is very important for stock prices, and simply keeping the resource under ground will not make the shareholders happy, to say nothing of the difficulty in making dividend payments. When push comes to shove in the coming energy crisis, any oil company hording assets will be targets for government take-over or public wrath.

Bottom line - article is interesting and provocative but is lacking in reality.

Fact 3 could be another typo, wether intenional or not I do not know. But it is misleading.

Fact 8 actually has some merit. although it does assume some things in the end. Oil in the ground is estimated and monies are loaned based on these estimates. If pumped out they could be more or less than the estimate and effect the real value.

Do not think that our government if pressed would not take over reserves for national security reasons. although this may be a long shot we already have military scatterd all over the globe protecting OIL. By the way we are the only country doing this.

Economics 101: It's all about one group of people switching into a mental mode where they agree to trade one thing for another (goods or services or hot air) with another group of people.

It's about mental illusions (perceptions) rather than reality. Sometimes perceptions are close to reality. Only in such a case does the "economic model" also model reality.

Here's an example. When traders on the commodity markets are buying options, they are trading in illusions about further illusions. Say you are buying July crude at $50/barrel. You probably are making all the following deluded assumptions: (1) there will be oil in July, (2) there will be tankers to transport it here, (3) there will be a viable infra-structure on this side of the pond to absorb that transported oil, and (4) consumers will have enough exchange units (cash) to purchase the oil or its refined byproducts. But if the boats don't show up Spartacus, you're stuck with nothing but hot air. You've converted your stored wealth (your accumulated treasures) into vapor. That's the reality of economics.

Well, I've read the comments and flummery. First let me say that I've been reading Liu ever since I stumbled on atimes.com 5 or so years ago, so I have a handle on his perspective and biases. I would contend that he rushed this piece, which resulted in some really bad editorial and research errors, because he just finished another lengthy series and failed to proofread well and research a new area well--something all of us teachers have seen from good students under pressure. I hope the Asia Times editor provides him with my critique and he corrects his errors. I also hope that some of you used the commentary link too.

That said, J's short comment is correct: the main thread with all of Liu's writing is trying to illuminate how the fix is put into play by the Empire, which in this case is the USA, but would almost equally apply to the UK prior to WW1--trickle down is newspeak for suck-it-up.

Disclosure: I was certified to teach the Secondary social science core in California, which now includes basic economics. I also worked as the main economics and global economic geography tutor (amongst other things) at several San Jose area JCs until I was pink slipped as I previously noted. I have also stated that my focused area of study is the US Empire, and Imperial and world history in general. My approach to these subjects is holistic, which means I need to learn all I can about almost everything--a helluva challenge. While trying to fulfill that pursuit, I manage my financial portfolio, which has led me into areas and taught me things I never would have thought of pursuing or learned elsewhere, and I'm trying to raise awareness of Peak Oil and related issues in my community. And I call myself semi-retired.

This blog is very dynamic, motivated and satisfying, and I've only been participating for 3 weeks. We'll likely revisit Liu's article as we place it in context with what others are saying.

The author's idea of increasing prices merely redistributing profits and increasing asset prices doesn't convince me.

He may as well be saying that $200 oil is even better for asset prices. It obviously is not.

He may be right within a tolerable limit (i.e. the amount of disposable income consumers have), but when disposable income is forced into essential income, even the inelasticity of the oil price breaks.

So, yes, higher oil prices moves consumer money from leisure providers to energy providers. The leisure providers lose money and lay off workers and default on debt and equity (asset destruction). It is a debatable point whether the increased revenues for oil companies compensates with more jobs. My view is that the rate of asset appreciation is always slower than the rate of asset destruction.

Let's cut to the chase. What did the oil shock of 1973 achieve? Off the top of my head, a 300% increase in crude prices led to a 75% drop in equity values on the Dow Jones Industrial Average. Hardly asset appreciation. Interest rates took off, I'd have to check how money supply changed, but asset inflation is only good if you own the asset and people still want it.

The one surprise was that US GDP only dropped a few percent over that 1973-1975 period. One assumes that some asset "fat" was being burned off to maintain productivity.


On the distribution of wealth in the US, you may be interested to look at

I found the whole piece completely out of whack with my conception of reality, though he does sound plausible.

One thing he repeated a few times was "if oil prices rise, proven reserves rise". Is this true - do proven reserves get adjusted to account for what is economical to retrieve, or do they represent what is physically possible to produce (and therefore stay relatively static, other than accounting for depletion) ?

I'm not an economist, but having read "The Winner's Curse" and "The Blank Slate" I'd probably try to balance traditional economics (math) with my idea of human nature (our expectation of "fair exchange" and our responses to "danger").

The bottom line might be that any oil price can work, if people believe in it. We happily participate in fair exchange. On the other hand, things can get disrupted when we pull back from "unfair" exchange, or worse yet when we go into some kind of "fear/danger" response.

"Oil shocks" happen when people get scared and stop buying. I don't think traditional economics can predict when that might occur.

But we do know from recent surveys that people are starting to drive less .. a sign that they aren't totally happy with their "exchange" down at the gas pump.

Gav -

Higher prices can make expensive projects more economical. However, they also drive up the costs of our raw materials, tools, services and manpower. This can actually make smaller deposits UNeconomical, as they do not have enough volume to pay out their extraction costs. Extreme prices will have to come into play to offset the higher extraction costs of these smaller deposits.

It's always been a double-edged sword for us. What is different this time is that there are very few pending "big prospects". Yet with rig utilization at 100%, goods at premium prices, and manpower scarce and expensive, $50 oil isn't high enough for many smaller plays.

My personal opinion is that more of our oil here in the states is uneconomical to retrieve due to the increased lifting and finding costs than there are increases in domestic "big play" economics. Net result is a broader "economic window" for prospects, but the broadening is at the upper end. They must be big enough to support the increased cost of extraction, in an era where the big finds are already over.

Bear in mind that Liu is an economist and all becomes clear. When prices rise, proven reserves rise - IN VALUE. Before, they also rose in volume - not today.

Traditionally, when prices rose, we drilled more and opened new areas. Liu is unaware of the state of exploration in the world. If BP faced terrorists in Colombia to get their oil out a decade ago at $25, it is logical for outsiders to assume that $50 oil would drive us into almost any country.

But we already know where most of the oil is, and have a very educated guess on how much potential there may be. And we have already been to these places, trying to increase reserves and our overall corporate value just to RETAIN shareholders during the dotcom boom.

We are at 100% drilling rig utilization - effectively, we are in a huge drilling boom. The problem is there are fewer prospects, and the price isn't high enough to make everything economical.

Let me toss in a comment or three on the whole "do higher prices bring out more resources" issue, since it gets bandied about a lot in energy discussions.

In the short run, higher prices definitely increase resources, even when you're talking about a non-renewable commodity, like crude oil. If you had the rights to an oil field in very deep water or an arctic region, and you couldn't extract the oil for less than $70 a barrel, you sure as hell wouldn't do it until you could sell the oil for at least that much.

In the medium term, depending on the circumstances, you can get a lot more of a resource from less desirable sources (like oil sands), but only at higher, sometimes much higher, prices.

In the long run, it doesn't matter how high prices go--if the oil isn't there, it isn't there, period. Someone offering you $100,000 for a barrel of oil is meaningless.

The problem I see in many online discussions is that there's too much pointless division along field-of-study boundaries. Geologists think in terms of, well, geologic time, so they naturally focus on the long run scenario. Economists focus on market response, which is inherently tied to the short and medium term scenarios, and almost never talks about absolute resource limits. What we need to do regarding our policies on all fossil fuels is break down that artificial barrier between the two world views and look at the whole time line. We need to recognize that increasing costs in the short run, as in raising gasoline taxes, causes some people some real pain now (gas taxes are horribly regressive), but it also boosts supply and curtails demand in the short run. (The demand reduction is partially caused by the higher price, but also the confidence people have about the future price level, so they make the rational economic choices we all need and want them to make; uncertainty in markets is a Very Bad Thing.)

We also need to work hard to ensure we can make the transition through the time when the resource gets scarce, and move on to alternatives. That requires overt steps, and not just blindly relying on the market. Markets have exactly one way to send signals: prices. Once energy prices rise significantly it's too late to make the massive R&D efforts and infrastructure investments necessary for a comfortable transition--we're in a classic overshoot condition. And that means major economic and non-economic pain, or far worse, for many people.

Focusing on this longer term view tells us that it's critical that the industrialized nations, particularly the US, work hard NOW to beef up our electricity grid and increase generation capacity. Today only an insignificant portion of transportation is fueled directly or indirectly by electricity, but very soon that will change. People will begin buying plug-in hybrids and all-electric scooters and cars, which will begin to shift our overall energy demand from liquid fuels to electricity. Luckily for the US, only a trivial percentage of our electricity is generated with oil; we'll begin fueling our cars, albeit indirectly, with coal, natural gas, nuclear power, and renewables.

So please, everyone reading this, no matter which side of the economist/geologist fence you're on, try to reach out to the other side. There are several sites where I don't contribute because the resident economist haters will give me endless grief and accuse me of holding bizarre views I've never in my life expressed. (And yes, I've seen this happen to other people who announced that they were economists, so this isn't just paranoia talking.)

Ironically, I had an early lunch with my wife just before writing this, and a fortune cookie message I got says, "Ignorance never settles a question." That's exactly the mistake we're making when we rely solely on either economists or geologists, as we're then trying to make predictions and set policy partially through ignorance.

Thanks Grinzo -

I agree, and the fact that you actually are an economist and that you "get it" heartens me greatly.

It may also prevent future hair-pulling while reading this blog...

With your background, what do YOU believe it will take for the FedGov to do a U-turn and focus on renewables and conservation?

If past records are any indication of what the government will do they will do too little too late. It takes leaders who do not give a damn about ecomonic stability and profits. But care about people more in general.

I dont see this happening any time in the near future. perhaps 10-20 years from now when most people start to feel a real crisis they will elect a real leader if one was available. But which party is willing to give up their hardball stance on their political positions to do this??

I think it will take a man like Ross Perot to enter the picture. Someone willing to give up their fortune to help the people. Even then the two major parties will fight tooth and nail to not let that happen. theres just too much money being pumped into the political system for the average person to have a fair say.

So basically when things start collapsing around the government at that point they might say "houston we have a problem".

JD -

Which is why I urge everybody to have a plan. Simple or complex, but some kind of plan for what you would do IF... (insert any of our pending disasters here)

Relying on the government, you guarantee yourself whatever the government deigns to dole out. Look around - it will not be much, if anything. And it will never be without you giving up slices of your freedoms and individual rights. The Patriot Act has basically gored our Constitution already.

Glad I was around in the 1960's, because it taught me to never trust "the man". Where we are today only illustrates that Hippies and Flower Children had it oh so very right.

Need a plan? Email me... (grin)

The only hope of a reasonable focus on renewables from the US federal gov't lies in a change of leadership. I'm not being sarcastic--I really think that nothing will change the warped views Bush and certain extremists in the House and Senate.

Put another way, the only way elected representatives will be forced to act on the energy situation is if voters force them. That's precisely why sites that push energy education for mainstreamers are so important--we need more enlightenment among the consumers and the voters.

If you're wondering what I would do, if given a chance, it wouldn't be too surprising: Much tougher, universally-applied CAFE standards; gas price hike (with a 10-year announced schedule of future hikes, to provide cost certainty); investment in bioenergy, wind, solar, electricity grid and generation; very little or no gov't investment in hydrogen fuel cells (they're the "New Coke" of energy, at least for cars); vastly tougher CO2 and mercury controls; long-term schedule of tax breaks for renewable energy R&D and end-use purchase (lower cost/prices + greater certainty).

The bottom line: Get us off fossil fuels and onto other energy sources as quickly as possible. It won't be cheap, but there are huge economic benefits to doing it (which are very often overlooked), and even if there weren't, we don't have a choice.

There are lots of levers we can pull and there's still time to make a difference; it's up to the voters to make sure our politicians have the spine needed to take action.

A point from Econ 101; what does GDP measure? It tabulates the total of final transactions for goods and services. For example, your cancer treatment payment is good for GDP; that the cancer might kill you isn't factored in.; and when you finally die from that cancer, the mortuary and other death related services also boost GDP. Another example, rising NG rates are good for GDP, while the four pizzas a month you give up to pay the rising rates reduces GDP. Now if you paid your gas bill with your VISA card so you could continue to buy the four pizzas, GDP would increase further because of the additional interest you'll pay.

The above is a part of what Liu was trying to show: How a bubble gets inflated. It is also what you hear referred to as a debt-based recovery at a time when real job growth is negative, while GDP continues to rise.

Last example, the US government borrows money to pay for the manufacture of a 2000# bomb, which is a replacement for one dropped in Iraq, which was a replacement for one dropped in Afghanistan, which was a replacement for one dropped in Serbia, which was a replacement for one dropped in Iraq, which was a replacement for one dropped in Panama, which was a replacement for one dropped in Nicaragua, which was a replacemnent for one dropped in Grenada, which was a replacement for one sold to the UK and dropped on the Falklands..... You get the idea. This is known as Military Keynesianism and forms the foundation of our imperial economy.

J -

"Bear in mind that Liu is an economist and all becomes clear. When prices rise, proven reserves rise - IN VALUE. Before, they also rose in volume - not today."

Thanks for the clarification - that one sentence made it all clear.

I was thinking of volumes, and I couldn't get my head around the idea that each year Shell or BP or whoever would look at the market price, look at their extraction costs across their full portfolio, and then define their "proven" reserves based on which reserves meet the price cutoff.

The fact that Mr Liu thinks that the "value" of the reserves is significant shows just how big the gulf is between engineer and scientist style thinking and economist thinking.

That said - I did like Lou Grinzo's comment above - it is important to understand both sides of the equation.

And I must admit I do actually use the "total value" of proven reserves number myself in one context - as an indicator of relative value of oil and gas companies - I buy the cheapest reserves I can find (which down here means that Papua New Guinea based Oil Search is by far the best value play in the market).