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Oil, House Prices, Credit? Three parts of the same story
Posted by Phil Hart on October 27, 2008 - 9:50am in The Oil Drum: Australia/New Zealand
The long forgotten 'oil crisis' of just a few months ago has been replaced by a full blown 'credit crisis' - related events that represent the unravelling of half a century of unsustainable trends in oil consumption and debt. These two ingredients have been used in a special 'compound growth formula' to finance the construction of suburbia and fuel the (un)happy residents on their long journey to work and home again via the shopping mall, so they could spend more than their earnings on stuff to put beside the TV and inside the microwave oven.
Environmentalists have tried to teach economists a thing or two about sustainability over recent years, largely without success. However, even within the narrow world view of economists, the trends in credit growth could be clearly seen to be unsustainable (unless your name is Alan 'I made a mistake' Greenspan). That oil consumption could not grow forever comes as no surprise to a global community aware of 'peak oil', but the inevitability of oil depletion will remain hidden from economists; lost as it will be in a crisis of their own making.
The Growing Gap: Oil Imports
This is a global crisis, but the US dollar is our global currency, so the story centers on that country. Exhibit A is the growing gap since 1950 between domestic oil production in the United States and oil consumption.
Source: Energy Information Administration
Click to enlarge.
In theory of course, it is possible to produce many other 'real things' to export to the rest of the world to earn those oil imports. For three decades, the United States did that quite successfully. Oil was relatively cheap and booming domestic industries had lots to export. Eventually though, manufacturing moved overseas to developing nations where it could be done more 'efficiently'. Instead of developing other 'real things', the United States turned to credit and the power of its US dollar hegemony to keep the consumer economy ticking. Based on this next chart, I suggest that the descent into a 'fake things' economy began around 1990 when household net worth started to decline.
Credit: The Long Term View
Exhibit B is an even more remarkable and longer term view of the role of credit in the economy of the United States, Britain and Australia. The world has been on an incredible credit ride since as far back as 1950. The steep climb over the last ten years screams 'jump' and indeed that is what we have just done.
Source: Steve Keen at www.debtdeflation.com
For those of you asking the obvious question about what happened in Australia back in 1890, there is this paper from the Reserve Bank of Australia: Two Depressions, One Banking Collapse. The current crisis looks far more like the 1890's than the 1930's, although I find such distant historical parallels hard to comprehend at the best of times. The end of the gold standard in 1971 is also an important part of this story - a monetary system backed by gold could not have permitted such a rapid rise in fake wealth. An even more fundamental change to our system of currency may be needed to get us out of this mess and reach a true state of enlightenment and sustainability.
The link between Oil and Credit
The explanation below for how trends in oil consumption and credit are linked is taken from the ASPO USA Peak Oil Review: 20 October 2008. (You can subscribe to their weekly newsletter for free).
Commentary: Peak Oil and the Current Economic Opportunity
Richard E Vodra, CFPThe run-up to Peak Oil was a major factor in the current economic crisis, and the changes emerging from the crisis may help us deal better with the challenges of the coming decade.
The financial problems that emerged in the summer of 2007 led to the collapse of Bear Stearns in March, the nationalization of Fannie Mae and Freddie Mac, and a cascade of subsequent events, policies, and impacts that continues as this is being written. The nature of the crisis started from the fact that the large financial institutions – banks, hedge funds, pension funds, and such – have created and used a lot of securities that are either mispriced or hard to value. They’ve taken a lot of home loans that are “sub-prime” (the borrowers had little income or wealth compared to the loan size; there was too much loan-to-value; future payments would be beyond the borrowers’ ability to pay, etc), put them together into large packages (mortgage-backed securities, or MBS), secured high ratings for the bonds (higher than the component loans justified), and sold them to domestic and foreign lenders/investors looking for high, secure yields.
At the same time, another industry was created selling “insurance” on whether these or other loans might default, and the resulting “credit default swaps” were unregulated. As long as the system worked, it worked well – as long as we kept clapping, Tinkerbell lived. The models used by the regulators, the rating agencies, and the borrowers and lenders assumed that the past records of defaults would continue. The old patterns failed, and now no one knows how much anything is worth or how big the losses will be.
I attempted to link high oil prices with the housing finance craze and early stockmarket wobbles back in August 2007. However, the links go back much further than just the last few years.
Yet while all these financial instruments were being created, there were plenty of voices pointing out that American home prices would peak in 2005 or so, and that the quality of loans was declining rapidly. According to the October 15, 2008, Washington Post, sub-prime mortgages made up 8.0 to 8.6% of all mortgages from 2001 to 2003, but 18.5 to 20.1% from 2004 to 2006. The dollar value of subprime MBS rose from $121 billion in 2002 to $401 billion in 2004 and about $500 billion in 2005 and 2006. Why the big jump in junk?
The US balance of payments deficit has grown rapidly during this decade, and one of the big drivers of that has been the rising cost of imported oil and other petroleum products. In 2002 we spent $102 billion importing oil, but that figure rose to $300 billion in 2006, and to $328 billion last year. Those imports (along with Jim Kunstler’s salad shooters and all the other things we buy) had to be financed, to the tune of $2 billion a day by last year. We convinced the Chinese, Japanese, and many others that our MBS were safe because they were sorta guaranteed (wink, wink) by Freddie Mac and Fannie Mae. We needed the oil, so we needed product to sell to finance our “addiction.” Our suppliers wanted bonds, the government deficit wasn’t large enough, so we created an endless supply of MBS to sell.
After reading this, I had to try and plot the relative scale of the growth in credit against the oil import bill (import volume times average price for each year). The resulting chart shows that the pace of credit growth has two broad periods which match the corresponding change in the oil import bill.
Source: Energy Information Administration
and Steve Keen at www.debtdeflation.com
Click to enlarge.
- Moderate credit growth in the 1950's and 60's matched the early days of slowly expanding oil imports into the United States.
- The twin oil crises of the 1970s made for a volatile oil import bill, but credit growth slowed as the economy was hit by the supply shock.
- After a recovery in the late 80's, both trends then declined during the recession of the early 1990's.
- Demonstrating the link that Richard describes above, both the U.S. oil import bill and debt (credit) have grown explosively over the last ten years.
There's little doubt that the credit curve is going to nosedive now, and for a short while at least the oil import bill may do the same.
Historically though, credit cycles change much more slowly than oil prices, the volatility of which shows up in the oil import bill particularly in the 1970's but also in the short price slump of 2000/2001. In that sense, credit growth is a heavily smoothed trend of the oil import bill - relatively steady for several decades but rising sharply over the last ten years to fund an increasing volume of increasingly expensive oil imports.
Credit growth is actually more closely correlated with the volume of oil imports, rather than the oil bill. This presumably reflects the fact that credit is expanding to match the growth in the total economy, rather than just oil prices. So oil imports are here a proxy for economic growth, which has been substantially funded by credit (debt). Both lines are zero scaled, so the proportional change in credit and oil imports has been very similar over the period since 1980.
Is the Economy Less Sensitive to an Oil Shock?
As the oil price hit $40 all the way back in 2004, warnings were sounded of economic trouble ahead. Instead, measures of GDP continued to increase leading Alan Greenspan and other 'enlightened' economists to the conclusion that our economies were less dependent on oil than they used to be and thus less vulnerable to another oil shock.
Stuart Staniford debated that point here on The Oil Drum back in 2005. His conclusion at the time was that "The only reason current events have had far less impact on the economy than the events of the 1970s is that there has been no reduction in supply!. By contrast, past oil shocks involved real 7%-10% reductions in oil supply. However, if the current tightness persists [..] the economy will be no more oil proof now than it was in the 70s".
Score 1 (of many) to Stuart. Score 0 (again) to Alan "I'm Shocked" Greenspan.
Far from being less dependent on oil now, the economy actually suffers the same disease affecting the rest of the financial sector - it is heavily leveraged. We can now turn 1 unit of oil into 2 units of economic growth, which is great on the way up. The trouble is that when oil production declines, the leverage unwinds and we get two units of economic pain for each unit of oil production decline.
Richard concludes..
Nobody – the government, the American people, the Wall Street crowd, mortgage brokers, home builders – wanted to take away the punch bowl, or look too closely at what was being produced. Rising oil import volumes multiplied by rising prices contributed to the crisis we are now experiencing.
So the housing bubble was being used to create securities (Collateralized Debt Obligations) which could be sold overseas to finance the oil import bill to keep building more houses. On the back of this, credit was expanding everywhere. The private equity boom pushing sharemarket prices further up was just another side effect of cheap credit. The risks were seen as low and just to be sure the losses were insured as well (with 'good as gold' AAA ratings to prove it).
It all worked fine until it didn't. Isn't that the economic definition of sustainable?
As oil prices started to bite, the new housing being built in distant suburbs and even more remote 'exurbs' became less viable for commuters. Once house prices started to unwind (who would have thought it could happen everywhere at once?) the game was up, but it was always only a matter of time. The United States (and now the rest of the world) could no longer find willing buyers for their 'assets' and so the global financial system could no longer expand credit to the world's consumers.
Source: US Department of Traffic: Traffic Volume Trends
and Case-Shiller Composite Housing Index.
Click to enlarge.
Global oil supplies have been all but flat for the last three years. With China and the oil producing countries still increasing their share of the pie, first the poorest and then even OECD nations were forced to reduce their consumption the only way the market knows - higher prices.
So consumers started driving less because global oil supply simply could not meet everyone's expectations. Next the value of their house fell. Finally they found the bank wouldn't (couldn't) lend them anymore money, so they stopped shopping as well. That was the last straw, as there is nothing that strikes fear into the heart of an economist more than the sight of a consumer who has stopped shopping.
Oil, House Prices, Credit? It's all part of the same story.
You can contact the author at www.philhart.com
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Interesting post Phil.
For those inclined, please give this a vote on reddit :
http://www.reddit.com/r/Economics/comments/79g0b/oil_house_prices_credit...
Phil,
Thanks for the interesting article. I do not understand what you are trying to show in the last graph "Vehicle miles traveled versus house prices"?
I can accept that both have increased as debt expanded. People who live in the outer suburban regions are now stuck in these locations unless they can move in with family.Even if house prices have declined in inner city locations they have probably declined even more in the suburbs. Also new buyers will still find suburban houses more affordable even with rising fuel prices. Thus they will still need to commute if they have jobs, but may do so in a smaller less expensive vehicle and may drive less non-essential trips.
The argument that the 2008 economy was less sensitive to oil prices was based on the lower oil intensity of the economy than in 1980. That is still true, vehicles have higher fuel economy(25mpg versus 12mpg), but VMT has also doubled. I would suspect that more of to-days VMT are non-essential compared with 1980, so we should see a much larger reduction in gasoline consumption relative to overall GDP.
The conventional wisdom is that this financial crisis is a result of a housing bubble in the United States. While that is true, it is also a result of limits to oil supply being reached. So in this article, and particularly in the final graph, I'm showing that the decline in the availability of oil to drive vehicles is linked to the decline in house prices.
Phil,
I think a lot of TOD readers would agree with your hypothesis that high oil prices have contributed to financial stress and accelerated house foreclosures. If this is true we would expect a rebound in VMT( not necessarily gasoline consumption) and a rebound in house prices. If the financial crisis is unconnected with high oil prices, we may see a rebound in VMT but a continued decline in house prices, until effective(inflation adjusted) interest rates are negative. I think its too early to draw any correlations.
If the average family household income is $50,000, and that family has two vehicles each using 500 gallons, then a price rise from $2 to $4 a gallon is going to cost that household an extra $2,000. The other "transportation" costs are financing of vehicles, depreciation and repairs, and public transport which probably account for more than the cost of gasoline. A 4% interest rate rise on a $150,000 sub-prime mortgage would cost that household an extra $6,000. It could be that the two increases together tipped these households over the edge, but most households do not have sub-prime mortgages, but do drive, so the sub-prime rate rises are large and concentrated on only a small proportion of households. The fact that the US economy only started to decline in last few months, while housing has been in decline for a year indicates that the US is having a housing induced recession, that has spread the the rest of the economy, not an oil induced recession, but cannot say what would have happened if oil prices had declined last year instead of increasing.
Your statement; "The trouble is that when oil production declines, the leverage unwinds and we get two units of economic pain for each unit of oil production decline" doesn't make sense, a less oil intensive economy would not "unwind" to become more oil intensive with rising oil prices, but would become even more less oil intensive.
I definitely do not expect a rebound in vehicle miles anytime soon! Lower oil prices may help alleviate some of the pain, but they won't be anywhere near enough to help the economy recover in the short term.
The credit financing for the enormous 'fake wealth' economy has now collapsed. Oil prices may stay low but expanding credit which was driving the economy has vanished so there will be no quick recovery. I'm not so worried about what is correlation and what is cause over the last few years. The housing bubble was unsustainable in it's own right - the slope on the final graph should make that clear. High oil prices leading to reduced travel was the pin that popped the bubble, but it couldn't have gone on much longer anyway.
My point is more about the longer term. The expanding credit cycle has lasted fifty years and was related to oil imports. That cycle is now over. The United States and much of the OECD world is going to need to find a more sustainable way of paying for its oil supplies in future.
A clear and succinct analysis Phil. Oddly the current meltdown doesn’t feel so unique to me. I moved to Houston in 1978 at the beginning of the oil boom. Of course, this was a period of “oil shock” for the rest of the country. In retrospect that period locally has many similarities with the national trends of the last 10 to 15 years: rapid economic growth, low unemployment, very easy credit (all you had to do was put “Oil Industry” employment on the app and you got a $10,000 unsecured limit on any number of credit cards), rapidly escalating home values with easily obtained mortgages (even with mortgage rates hitting 16%), strong infrastructure growth and a tremendous rush towards the suburbs.
Then there was the local bust in the 80’s which mimicked many of the current negative trends. In the sense that you describe, Houston was highly leveraged by high oil prices as was the national economy leveraged by low energy costs. The huge drop in home valuations coupled with crushing high end unemployment (favorite joke at the time: home many geologist can you fit in the back of a pickup: two…you have to leave room for the lawn mowers) delivered just as bleak future as we now see for the nation as a whole. Houston did survive, of course, but it took every bit of 10+ years to recover to any significant degree. Excluding agriculture, Houston’s economic history could serve as a model for the nation’s current ills. Some big differences though: Houston didn’t have the Feds trying to bail it out (a double edged sword) nor was the world pushed into a recession. Just the opposite: $10 oil in 1986 can be defined as the beginning of this last national/global boom IMO. It’s difficult to imagine current ills being corrected any quicker than Houston recovered. In fact, a 15+ year time frame seems more reasonable.
And, true to the cyclic nature of commodities, Houston’s boom continues today. How long it will continue to do so will again depend on how long oil prices stay low.
The whole energy intensity measure is flawed mightily. It uses GDP in the denominator and that is the flaw. GDP is a horrible measure of the economy since it includes all dollar transactions as income. It does not correct for maintenance and defensive spending such as repairs from hurricane Katrina or the military budget. It is not a measure of the health of the economy; most economists know this, but argue we haven't got anything better.
Then consider that we now claim to have a service economy. If you take a hard look at what these so-called services entail you discover that most of them are just moving paper (or bits) around from one place to another. Or they involve fast food and broker services. Each of these kinds of jobs involves far less energy consumption than, say, automaking. These are the jobs that have accounted for most of the growth over the last twenty years or so. I'm betting that the growth of the service sector will go a long way to explain the reduction in energy intensity. Use a corrected GDP and I bet most of this so-called efficiency disappears. Actually I bet a lot of the so-called growth disappears as well.
Question Everything
George
George Mobus:
Energy efficiency is a tricky thing. Alone, it will not solve our problems. As our economy has grown more energy efficient, energy consumption has risen - contrary to what the New York Times continuously advocates. Look at this chart from the EIA:
www.eia.doe.gov/pub/international/iealf/tablee1g.xls
Our btu's per dollar gdp has dropped significantly, yet energy consumption is rising - the EIA expects these trends to continue. This situation is even more interesting in the automobile sector.
A recent study by the National Commission on Energy Policy examined the federal mandate for automakers to meet certain efficiency targets, the Corporate Average Fuel Economy (CAFÉ) standard. The Commission found that even if Congress forced the U.S. auto fleet to raise its average fuel economy from 27.5 to 44 miles per gallon (a massive increase of 60%), fuel consumption would still jump by nearly 4 million barrels of oil per day by 2025. The Jevons Paradox at work.
Well understood in modern economics, the Jevons Paradox is a very important concept when it comes to energy efficiency. William Jevons first described the phenomena in his 1865 book, The Coal Question. Increasing the efficiency with which a resource is used tends to increase (not decrease) the rate of consumption of that particular resource.
Jevons first discovered the idea after observing England's consumption of coal soon soared after James Watt introduced his coal-fired steam engine, which greatly improved the efficiency of the previous design by Thomas Newcomen.
What this really means is we need "all of the above" approach that McCain discusses. We need more energy solutions such as clean coal, EOR, CCS, etc.
Which all assumes that demand reduction is impossible.
By which reasoning, Melbourne and Brisbane's reduction of water consumption which has happened over the last decade was impossible, and that we should still have most people being smokers, and the Chinese should still have a big opium problem.
Efficiency goes up -> cost goes down -> usage goes up
That can be attacked in the middle, with cost. Peak oil by itself could do some of that, the state of the economy could increase the relative cost vs. income, and carbon taxes could increase the cost (capturing what would otherwise go to an oil company windfall).
While there is obvious interconnections between the different markets, I don't think there is much of an energy component to the current credit problem, outside of the damage done to investors by the whipsawing prices in the oil and other commodity markets.
This is probably a greater problem than a reading of Mr. Hart's article would suggest.
I suspect that long term flat or declining real wages and long term suppressed yield are behind the credit mess. Declining comparative wages left workers unable to afford housing without resorting to exotic credit which was magnified up the credit distribution chain by poor underwriting and risk management - the willful suspension of disbelief. Low wages and low yields conspired to reduce savings which left credit as the most accessible and least responsible form of capital. Low yields and the accompanying flood of liquidity translated to cheap lending which had increased amounts of capital chasing fewer acceptable investments.
The result has been a capture by the credit system of both current wages and wages well into the future. (Savings being considered past wages, aggregated.) When it became clear a couple of years ago that the future wages available were inadequate to service the corresponding liabilities, the system broke down.
When it becomes apparant to our overseas creditors that future growth will be inadequate to service the corresponding liabilities, the international system of credit will also break down.
Since both problems are structural and driven in exactly the wrong direction by both prejudice and public policy, the likelihood of a 'quick fix' - less than several years - is exactly nil.
The implications are sobering because this suggests the full weight of energy supply difficiencies lie in the future, after the credit system's deconstruction has accelerated. With some credit availabile there would be the possibility that some number of petro- alternatives could be brought into service rapidly, paid for by captured future earnings. With the credit dislocating and the likelihood that the US government's credibility and competence will be questioned, the difficulties of gaining the trust of creditors in any financial marketplace will be large indeed.
Further weighing on credit are the derivative/swaps originations. The fallout from the credit malfunction has just begun to ripple through the swaps and counterparty markets. The potential liabilities are stupendous and the consequences ... applying to the central concepts of 'market management', 'government responsibility' and 'authority' ... are possibly severe.
... then, Antarctica melts and the Cubs win the World Series.
It's actually pretty amazing that our foreign creditors have not already caught on. Old flight-to-safety habits die much harder than I would have thought.
fat_tail_rider
I disagree with these assumptions - primarily that house prices and VMT must remain correlated. Given that house prices were totally artificially stimulated via central bank policies intended to do exactly that, a return of VMT may not mean a returning rise of house prices. House prices could remain severely depressed while workers return to work, choosing to rent as existing housing stock is absorbed back into the economy at distressed pricing.
Correlation does not imply causation. A rise in VMT may not cause a rise in house prices, even though the price of fuel is currently fairly low.
VMT are just a proxy statistics for consumer oil consumption. It is an indicator of how rising oil prices impacts the consumer.
The correct causation is similar to the pressure on a wooden stick that broke it. The inflation from high energy price is the pressure. The credit system collapse is the wooden stick breaking. Releasing the pressure does not glue the stick back. Broken it is, broken it remains. Oil prices, VMT and housing prices do not have to remain correlated because the collapse of the credit is a discontinuity in the economic system.
What I wonder is, since oil price has gone down so much, have we seen (or are we starting to see) any signs that the dip in driving (as proxy for oil consumption) is being reversed back into an uptrend now?
I believe some here on TOD have commented anecdotally that "SUV" are again in more demand. Other signs?
Memmel has a good and very elaborated post on VMT under this very article. He brings a convincing argument that we should be at the bottom of it. Search for Memmel's posts for details.
I posted a link to that.
Overall I think we will simply flatten out with VMT not going down nor going up.
It might trend slowly up with population growth but even thats debatable at least for a few years. Historically the VMT in depressed regions remains flat per capita.
Farther out as the Baby boomers retire assuming we have not collapsed I think that the combination of retiring boomers and oil prices finally reaching the point of real pain i.e 10-15% of income we will actually see declines.
A short rant. Its been assumed that high oil prices lead to the recent collapse in demand. The decline in VMT however follows closer to housing thus and I have tons of articles which show VMT is not correlated with the price of oil but with general recessions regardless of the price of oil. This does not mean that expensive oil does not spark the recession but actual decline only happen once the economy starts declining overall. For the housing lead bubble this started in 2005 and VMT increased the years before the bust of the housing bubble and oil prices continued to increase even as VMT decreased post housing bubble burst.
We did not actually hit the point that VMT was directly declining because of high Oil prices. Thus it seems to make sense that this is in the future and happens only after we have had a stagnant economy and flat VMT and reach the point that we don't have enough oil to support this and prices have risen to a onerous level. Thus the direct coupling is only after we have had my flat bubble.
Wrong VMT is not correlated with oil prices. This has been shown many times.
VMT is correlated with overall economic growth and so is housing.
The link between high oil prices and VMT is indirect. Our recent growth was in housing as oil prices roses and housing rose we had to drive but did not have to buy a new house
thus the consumer pulled back on spending for a new house. The housing bubble popped first oil prices kept increasing and VMT turned down in 2006.
Its a bit of a who's on first game but regardless the combination eventually resulted in the consumer unable to afford the rapid appreciation in house prices.
In any case the correlation is between VMT to growth and growth to housing construction. High oil prices are secondary and acted as part of the break on the housing bubble. As this article points out flow of funds and oil imports plays a bigger role over the long term irrespective of the actual price of oil.
The debt bubble is correlated to rising imports not price per barrel. Until recently we could always increase the amount of debt to cover either a per barrel increase in price or a increased need for imports. Serial bubble blowing in various asset classes hid the inflation as nominal growth. The reality was simply certain assets became overpriced for no fundamental reason injecting "wealth" into the economy and keeping the game going. Housing just happened to be the most recent bubble.
In one of my long posts on this thread I identify the effective move to socialism and direct capitol injections into companies as the next bubble that is forming to keep the game going.
Any day now the correlation will then jump off the popped housing bubble and on to the size of cash injections into the economy made by the Fed. The more money injected the more VMT will increase. Viola a new bubble and happy times again. This will reignite the commodities bubble.
But note this is the last bubble possible since once all the governments start printing and taking on failed debt your headed towards sovereign currency defaults.
So in the last bubble possible we will see nation after nation default on debt. Iceland is the first but won't be the last. Argentina looks ready to do it again.
Eventually of course the US will either hyperinflate or default.
In fact if we can get some good stats on the cash injections by the various government s we should be able to show VMT becoming uncorrelated with the moribund housing market and become correlated with the direct injections. They are using so many different ways to inject cash however that its almost impossible to track. My best guess as far is tracking it would be US Treasuries and VMT will become correlated in some fashion as Government Debt explodes.
The Bank of England is coming out with some estimates on the losses incurred so far:
http://www.telegraph.co.uk/finance/financetopics/recession/3269827/Toxic...
The UK authorities are to try to maintain borrowings at near the peak level in 2007 by capitalising the banks and enforcing lending - God knows how they imagine it will ever be paid back.
Thats my point they won't. I'd be surprised to see the Fed as forthcoming as the Bank of England with a grand total :)
Thats why this is the last of the bubbles. Fiat currencies always eventually die inflated away. We probably will continue to see asset deflation across a broad range of asset classes even with this last bubble. I think it will be like Japan in that sense esp for anything that requires long term debt.
My understanding is that Japanese wages have been flat despite the enormous amount of debt taken on by the Government.
http://www-econ.stanford.edu/faculty/workp/swp06009.pdf
For this and a host of other reasons we can expect wages to probably remain flat and thus tax revenue flat. Maybe at some point the US government will start setting high minimum wages for various occupations dunno.
In any case lets not forget peak oil since any actual inflation will probably result in higher oil prices so I think this great last bubble will end fairly quickly as the link between debt and oil imports becomes blatant and unavoidable.
Also as far as I know this will be the first time the entire world goes on a printing spree at the same time because of globalization.
Its one last grand experiment. My best guess is that this will be intertwined with attempts to decouple economies and strengthen internal demand as exports of goods become problematic. Asia for example probably will allow their currencies to appreciate vs others this would support running the printing presses.
So for the Yen for example I suspect we can see a reversal of policy and Japan start allowing the Yen to rise to allow it to print and spur further internal economic development.
The US has of course pulled of the big one with the recent strengthening of the dollar its in position to do some serious inflationary printing for free.
The key point is I think that the blocking point is how much debt our outright printing can be done before required imports like oil get to expensive in the local currency. I think we will finally eventually see all the fiat currencies finally come to the same value i.e zero.
In any case its hard to figure but right now the world has decided to allow the US to print trillions and still have its currency increase in value. And amazing feat and one that can't last forever.
I see why Don Sailorman is 50% deflation and 50% inflation for the future. I think its just a matter of how much each country can get away with before commodity prices stall the ability to print.
As this thread shows good chance that this played a key role in popping the last printing bubble so it stands to reason it will pop the next one.
But as you noticed this effectively means the worlds governments will default ala the Soviet Union.
Regardless given the existing debt loads from our last bubble I only give this socializing of debts a few years say four at most before it blows up.
For example its good to read about the last time we bubbled.
http://www.financialsense.com/stormwatch/oldupdates/2002/0412.html
We now know the housing bubble pulled us out.
Look like government debt pulls us out of this one.
However given that we will have less energy every year all that can happen is blowing one more bubble all this money can't go into anything useful since we simply don't have enough energy to expand any part of the economy that uses energy.
The final ruse of course has still yet to be done but its probably coming once everyon e starts printing and fiat currencies imploding as the government default the one last trick left is a world wide currency. Everyone converts to this erasing existing government debt and we have the real last blast.
I'm wondering how this will be pulled off sense its useless unless the debt is defaulted. I guess the trick will be the new currency is created then a Government defaults and is "switched" over each in turn until all are converted.
It makes sense then to concentrate all debt into the government first before switching so it can be defaulted on or hyper-inflated away. We have had hints that a new currency is already on the agenda.
I go along with a lot of what you say. However, I think that perhaps you are assuming links are very tight in some things when that may not be the case.
To enumerate:
Peak oil is not the same as peak energy.
Now your contention is that they are effectively the same thing, as ever-reducing EROI will increase all energy costs, not just oil. I would agree that there is a tendency for the EROI of many other energy sources to drop, but the timescales are unclear, and what is more they vary from region to region.
For instance, in the US it would appear that they will be able to continue their distressing practise of mountain top removal in West Virginia for some time to provide coal, and reserves of coal in many other regions, at admittedly lower EROI than is traditional are vast, and so some sort of plateau may occur in many regions of the world for many years.
Both advanced nuclear power and renewables display the opposite to the characteristics you describe, as they are likely to get more efficient in resource use over time, not less, and some sort of plateau in fossil fuel production might allow time to develop them.
In the case of wind, for instance, new 7.5MW turbines would be more efficient than the old.
In the case of nuclear, the barriers to building more efficient reactors have been primarily regulatory.
If not in the US, then in many regions of the world shortages and hardship are likely to result in some pretty drastic measures to ensure speedy authorisation.
Similarly I find your arguments for the inefficacy of energy conservation less than conclusive.
If one assume that you are correct, and to date energy conservation has done very little to improve the ratio of production to energy, that was in a very different context.
Energy has been a relatively cheap input for many years, and so the incentive to economise has been limited.
This can be seen in common experience.
Where energy is cheap, there is little incentive to insulate.
It would also appear to make a difference how some of these printed dollars, yen and so on are employed.
You are correct that Japan's roads to nowhere have done very little to turn the economy round.
But is we hypothesise that the public works programs are devoted to building rail, to building renewables and nuclear power, to insulating, and to altering the sewage and agricultural cycles to reclaim nutrients, then the least we can say is that the outcome from such policies would be preferable to if they were just frivolously thrown away.
Things are pretty bleak, and there is certainly no way of continuing BAU, but it seems to me that very different outcomes will obtain depending on how this last bubble is deployed.
Thanks for a fine analysis.
Well coal is not evenly distributed and not nearly as fungible as oil so its story is different and more complex. To look at and example of what I'm talking about you can look at Europe and the mass migration to America in the 1800's as the European debt/EROEI pyramid collapsed.
Next as far as renewables what people ignore is that not only would they have to replace our current energy sources but they would also have to pay off the immense debt pyramid we have created. Its a two part problem. You have to solve both to transform a society.
In retrospect its clear we would have had to make a concerted effort to move to renewable/alternative energy and not initiated the final debt bubble of the 1990's to effectively move to renewables without disrupting the status quo.
And this does not include the miss-allocation of resources issues from both suburban expansion and from the distorted global trade imbalances.
We have two problems to solve 30 years of piling on debt worldwide and ever less more expensive energy. Today in my opinion the debt problem has probably overshadowed the original reason for the debt declining EROEI. Furthermore given that we have even more distortions such as that the energy consumers print the money used to pay for energy i.e the petrodollar you have to deal with the intrinsic structure of the banking system thats unfavorable to renewable energy.
So in short you really have to show how renewable energy can beat the system and last but not least increase the flow of capitol to the wealthiest individuals no solution is viable if it interferes with the concentration of wealth even if it offers long term gains.
Obviously I feel that today the deck is heavily stacked against renewables and will remain so until we default on our impossible debt load. We probably will rebuild our economies using renwables and nuclear but we won't build a new economy on them.
Lower EROEI Oil can't even solve our problems so I don't see renewable's as useful for our current economy.
"the mass migration to America in the 1800's as the European debt/EROEI pyramid collapsed."
Could you elaborate on that? I haven't heard anything about that.
http://www.let.leidenuniv.nl/history/migration/chapter52.html
Enclosure or taking over the commons.
http://www.eh-resources.org/timeline/timeline_transformation.html
http://www.eh-resources.org/wood.html
Basically what happend in europe in general was a shortage of wood and charcoal and clearing of forest for farming and a shortage of food.
The old fashioned farming methods not all that different from the ones of the Middle ages. In general a Middle ages agricultural community was supporting the new industrialization not to mention numerous wars and a rapped expansion of population.
Although coal usage was certainly increasing esp in the cities 18'th century farming was in dire straits and starved for just about everything.
The mass migration to America is probably the only thing that prevented the outright collapse of 18'th century Europe. This coupled with the flow of resources back to Europe allowed it to industrialize.
The industrial revolution and switch to coal would have almost certainly failed without the resources of America and use of a America as a way to offload excess population.
A good lead up to the period.
http://www.econ.ubc.ca/dp9814.pdf
To a large extent this transition period has been glorified in the history books and the fact we barely pulled it off is ignored.
Whats really interesting is the argument is made that the transition from wood to coal was a transition from a lower value energy resource to a higher value one.
http://hypertextbook.com/physics/matter/energy-chemical/
But Charcoal is 29 MJ/kg vs
coal, bituminous > 23.9 and
coal, anthracite 31.4
The change in direct energy density is to close to be of consequence and worse coal production took dedicated labor and had its own EROEI.
Charcoal manufacture could readily be interleaved with other jobs or made by fairly low energy dedicated labors.
The move to coal from wood and charcoal was probably a net loss in EROEI !
A good article on this and previous wood shortages.
http://www.energybulletin.net/node/10128
Needless to say this is not the first time that civilization has hit the EROEI wall.
Well, thanks for the detailed answer - I don't have the time to digest it in detail right now, but I'll try to soon.
It's truly amazing to me how good some of these comments are. So many brains to pick, so little time. TOD is like a small version of cloud computing!! Every morning I get up well before dawn to see what shoe has dropped and how that particular shoe might link to this current discussion of VMT, PO supply/demand, deflation, inflation, fiat currencies etc. Today's shoe appears to be a recognition of worldwide credit and currency collapse and European bank losses from immense lending to emerging markets in Eastern Europe,Russia, Latin America and Asia. These losses may end up being several orders of magnitude worse than the sub prime CDO scam we foisted on the world. The BIS lists loans of $4.7 Trillion to these markets with European banks holding over 70%. If you look at the losses as a percentage of each country's GDP, make sure you are sitting down: 50% for Switzerland for example and roughly 25% for Germany, Spain, Sweden yet the good ole US of A is only 4% of GDP. We have other ways to lose money than loaning money to emerging economies apparently. The same BIS website has estimated numbers for the various derivatives which is almost beyond comprehension, in the hundreds of trillions. IMO, the level of worldwide debt and credit extended in the past decade will make it impossible for the recipients of this debt ever to repay it. This the Panic of 2008 will dwarf any of the panics of the last 200 years. And then along comes the consequences of PO......Growth will stagnate and then enter inexorable decline and we wont have laid track, or built reactors or rebuilt the grid. Darn.
"worldwide credit and currency collapse and European bank losses from immense lending to emerging markets in Eastern Europe,Russia, Latin America and Asia...may end up being several orders of magnitude worse than the sub prime CDO scam...The BIS lists loans of $4.7 Trillion to these markets with European banks holding over 70%...50% for Switzerland for example and roughly 25% for Germany, Spain, Sweden yet the good ole US of A is only 4% of GDP. "
Could you provide a source for this, or more information of some sort? I haven't seen this elsewhere...
It is from the Bank of International Settlement figures, which have been reported in a number of places:
http://www.finfacts.com/irishfinancenews/article_1015088.shtml
The exposure of the UK to Asian emerging markets is also notable.
You're right. The magnitude and complexity of the global debt created and flung into the works of everything make it impossible for it all ever to be rightly valued let alone all paid back with interest. That's why I suspect that at some point in the evolving mess, a global Jubilee will be declared - a nulling and voiding of all debts and currencies with a totally new money system.
You must have misread me. I never meant to correlate VMT with oil prices. I meant the very logical equation:
miles traveled * price per mile = cost of travel fuel
In other words I meant that when the price of oil increase, the cost of high VMT increase as well and people grow unable to pay for housing. As a result the bubble popped.
Reading back the thread, I think I must have misread Greyzone. I thought he argued that VMT and housing must remain correlated when he argued the opposite. My bad.
Thanks for the explanation anyway. It brought into light many details of your thinking that had otherwise escaped me.
Having read Mish Shedlock and others, I wonder if this particular bubble will be stillborn. The point of capital injection is to restart the credit bubble again but there is a shortage of solvent borrowers.
----------------
Edit
Memmel,
I went back to read the post where you describe the new bubble. It is different from the recapitalisation of banks that is going on. You think of sort of massive subsidies to all kind of companies to keep production going.
Where will be the buyers for this production? If there is a shortage of solvent borrowers for credit, won't there be a shortage of buyers of subsidized goods? Or will the government have to channel the funds through the buyers to ensure transactions occur?
In any event if government is to print money for company subsidies, they should subsidize a transition off oil. The economy may still go bust, but at least we get a chance to get out of the poor EROI vicious circle in the process.
True and as you noticed they are giving the money to banks not directly to people.
The Banks will use the money to but other banks not lend money. The money will go directly to businesses so layoffs will be low. AIG is just the tip of the iceberg.
My best guess is that as long as your not doing subsidized long term loans for houses and cars or even if you our the buyers are the employees of the companies and their wages are the subsidies so they continue to be able to purchase a lot of goods.
Maybe I should make this clear without intervention our economy would have collapsed completely over the last weeks. A big part of this bubble is like a iceberg mainly hidden the bubble is more a not collapsing then probably our last bubble.
Literally just being able to do BAU is a bubble these days !
But BAU will run smack into peak oil as the short term collapse of housing fades and depletion lowers oil production.
So I think our next bubble will be one of static to slightly growing GDP with continuous cash injections keeping all kinds of businesses going that should have collapsed and with Peak oil causing commodities to increase in cost necessitating even more case injections to keep these ever more useless businesses functioning.
Outside of commodities I see the price of most goods to be flat or falling as you note no one actually gets credit so they can afford them. Consumers are moving to cash.
This means guess what inputs will cost more than they make and the loss will need even more subsidies and cash injections !
The next bubble is like the .com bubble but on a larger scale. Everyone will be selling for a loss and making it up in Volume with the Gov acting like a mega hedge fund.
Will we get actual growth ?
I doubt it Japan could not and I don't see why the US will what we will get is a land full of dysfunctional companies with bloated payrolls. Also I'm sure the Government will soon be bailing out states and then local governments starting with California so you will keep a lot of the fat thats in State and local governments.
Mish is expecting the unemployment rate to soar I agree it will go up but doubt it will go over 10%. What you will see however is companies trying to make it without government assistance esp if they compete with those that are on the dole go out of business. As you have noticed so far this money is not being equably distributed as it starts to take over it will distort our economy into the traditional state run economies.
And last but not least all this has to happen with less and less oil.
Ohh and as far as supporting a transition off oil. One can only hope however I doubt it in the short term only once it becomes obvious that this last bubble is just resulting in high oil prices will they eventually figure out the obvious and try to support moving off of oil. However I'd be surprised if we last that long. I think the US government can easily pump trillions of dollars into the status quo and keep it moving along even as oil prices increase.
Also politically supporting moving off of oil or the car economy means job losses in existing industries so change under this sort of socialistic economy is even harder then it is today and today its close to impossible.
But again I just don't think we have the time left for all this to play out. I think that the pumping that just keeps the economy afloat coupled with China and India pumping to keep theirs slightly growing will be enough to send oil prices climbing if we are really now in actual decline in production not just a plateau.
Don't forget that under the covers population is still increasing many of the worlds economies are still actually growing the world probably still experienced overall growth this year. Supply will quickly not meet the demand of even what I'm describing.
Whats ironic is its actually the steady state economy that a lot of people talk about but done exactly the wrong way.
Memmel,
What you describe is a totally broken nightmare.
I can't imagine governments incompetent enough to pull this stunt without knowing it is doomed from the get go. Maybe they will be desperate enough to try it anyway, but I don't expect the media to let it happen without saying it is crazy. I also expect every opposition party to ridicule any government that dare doing this. I guess that should make it a political no go.
LOL
You must have missed the blank check congress gave Paulson recently.
Your a bit late but welcome to the party.
Mish
http://globaleconomicanalysis.blogspot.com/
And CR and Tanta
http://calculatedrisk.blogspot.com/
Are doing a good job documenting this.
Example
http://calculatedrisk.blogspot.com/2008/10/wsj-gm-may-get-5-billion-loan...
The problem at the moment is keeping track of all the money flowing out in bailouts
through all the numerous channels.
Don't forget that the Fed now accept stinky tennis shoes as collateral for short term loans you can roll these loans and a rolling loans gathers no defaults.
So some of the bailouts are hidden behind loans on worthless collateral.
Its not just obvious bailout money.
To be honest I've lost track esp with all the CB's getting into the bailout game.
I did not miss the blank check. Congress would rather have a root canal than grant one of those as we saw. This stunt won't be easy to repeat.
I visit Mish and CR a lot nowadays. I also visit Financial Sense. I see the printing press going on. They are running around with hand held fire extinguishers because they don't have a fire truck suited for the task. For the moment political oppositions let the governments do the running in hope that this somehow ends up working. But at some point the futility of it will be apparent to all. Then the ability of leaders to stay in charge will collapse.
This blank check given to Paulson has a cap on it. Even for the apparent target purpose of recapitalizing banks this blank check isn't barely enough. Even those hidden bailouts you refer to are not enough. All the monopoly money they are printing is disappearing into a black hole that serves only to erase the paper losses of toxic securities and fund the merge of dying corporations. I didn't count but my impression is they will need to increase these funds by an order of magnitude or two to complete that job. Then they will need at least to double that amount to do what you say they will do. This is just the US. More printed money will be needed globally.
Also what they promised Congress they would do and what they actually do are two different things. The cap on the blank check was there to ensure some accountability would occur at some point. By definition the political class is filled with clan divisions that are rivals for power. If those gaming the system can't produce results, something is bound to backfire... or worse. I think political unrest is much more likely than the scenario you described because such scenario is not politically sustainable.
I wouldn't hold your breath waiting for political unrest in the USA-Obama is marketed as a change and he works for Robert Rubin. There is no viable third party/political alternative.
It looks like I need to clarify myself.
The political class is divided into clans that vie for power. This competition is not on friendly terms. If one group makes himself vulnerable, the others will stab him in the back. I was arguing the next bubble envisioned by memmel is a political no go because because it is a conspicuous absurdity. Any politician trying this stunt would make himself an easy target for such backstabbing. I don't expect politicians to go for political suicide. This has nothing to do with bringing into office a viable alternative.
I think it is more likely that politicians fail to deliver any illusion of prosperity after trying something that superficially looks plausible but is ineffective in reality. This avoids immediate political suicide and has the dubious merit of buying the politicians some time. Therefore I think it is quite possible that after a bit of such ineffectual policies impoverished workers to start demonstrating or perhaps rioting. This is the political unrest I have in mind. Again this has nothing to do with bringing into office a viable alternative.
Actually, house prices climbed dramatically between 1998 and 2006 only because cheap and easy credit bridged the gap between real wages and escalating house prices. Assuming the days of easy credit are over, either disposable income must rise dramatically (not likely), or house prices must continue to fall until they are in balance with more traditional mortgage qualifying ratios (+/- 28% - 31% of Adjusted gross income). This graph suggests house prices still have a long way to fall.
Median New Home Prices vs Median Household Disposable Income
The situation requires even greater falls than that, as the initial fall will lead to greater job insecurity which will throw at least one of many households out of work, and so the reversion is likely to be to a multiple of 2.5-3 times main income winner, rather than joint incomes.
This in turn means that the bail-out of the banking system is not based on realistic figures, as the security behind most bank loans is far worse than allowed for even in the case of the proportionally much greater UK bail-out.
The only thing which might sustain house prices would be very fast inflation, but I doubt that in the UK almost certainly and in the US probably the authorities will be able to get away with issuing currency on the scale required without provoking a total collapse in the currency and credit rating of the country.
I see things happening a lot faster than some believe, on the scale of weeks or months rather than years, as dominoes are falling over at an accelerating rate.
Stock exchanges are still grossly overvalued, with 3000 more realistic for the DOW.
... and also because of, in a $13.3 trillion economy,
- US public debts of $9.3 trillion (prior to bailout)
- non-bank commercial debts of $10.1 trillion
- $2.6 trillion credit card debt (42% of Americans making minimum or no payments on their credit card debts)
- unfunded Medicare and Social Security liabilities of $42 trillion
... and of all this US debt, $13.7 trillion of it is owed to foreign companies or governments - possibly something to do with the $700 billion trade deficit.
And then there's the Defense Department spending of $515 billion, plus $23.4 billion for nuclear warheads (goes into the Dept of Energy budget), about another $250 billion in the wars in Iraq/Afghanistan and other discretionary spending which are not counted in the regular DoD budget... it costs a lot more to lose a war than it used to! Nor is the $74 billion of the Dept of Veteran's Affairs counted in the DoD budget... and we can expect this amount to rise a lot as the US cares for its maimed soldiers.
And then there is growing unemployment in the US, too, and a growing rich-poor gap, which inevitably leads to growing civil conflict - crime or guerilla warfare, or a bit of both, there are attacks on oil and gas pipelines in Canada so perhaps we'll see something like that spread south?
The situation is well-expressed by a Russian who like Dmitry Orlov is familiar with the signs of a Great Power's collapse.
If it weren't subprime mortgages or oil, it'd have been something else. Given how noisy and often hysterical Americans are, we forget just how tired and weak their country really has made itself - it has many fundamental strengths in its vast size and natural resources and many educated and hardworking people - but they've done their best to undermine them. The US is like some old old man who's been bed-ridden in a nursing home for thirty years. He has diabetes, heart disease, emphysema, renal failure, arthritis, glaucoma, and stomach cancer. Pointing to a definite cause of death will be difficult.
i would have uprated you if you hadnt bugged my room and peeked at my medical records.
If you believe the reasons for war given on TV, then yes they were lost. I do not believe the reasons for war given on TV. The wars are to establish and maintain a network of military bases in the Middle East, near where the oil is, before peak oil became too obvious. Afghanistan is also about the heroin trade. These objectives were met.
I don't think anyone in power seriously believed that the wars were about establishing peaceful pro-USA democracies, like post WWII Japan and Germany have been. If you read PNAC you will see no such plans.
In the beginning of the war on Iraq, when US troops guarded only Baghdad's Oil Ministry, everything else was looted by organized mobs. Secretary of Defense Rumsfeld explained:
I didn't say that the wars were to establish pro-US democracies. After all, those two things don't always go together - what if the people elect an anti-US government? Or not even anti-US, just a government telling the US to leave forever? "Thanks, we'll take it from here."
Obviously the war against Iraq was about oil. However, they're losing it because they don't control the oil. Lots get bunkered by the insurgents and criminal gangs (sometimes both, insurgents have to fund themselves somehow!), foreign contractors and Iraqis both corruptly siphon some away for themselves, and a good part of the rest is stopped by pipelines being blown up and the like. And then of course there's plain old rusting and other corrosion in pipelines and refineries since Iraq has been at war or under blockade since 1979, so things got worn down.
Thus, as an attempt to secure a reliable oil supply for the US, the war against Iraq has been a failure.
I don't hold to conspiracy theories about Afghanistan being a desire to control the heroin trade, or the two wars being a deliberate attempt at creating chaos in the world, etc. We shouldn't mistake incompetence for malice. If a man ploughs his car into a crowd waiting at a bus stop, it's not necessarily murder - usually he's just a really crappy driver.
Very fine and detailed post, Phil. Many superb comments but the winner is Kiashu for his detailed data filled thoughts. The huge total US debt is the big stunner and 13.7 trillion being held by foreigners is the fragile pillar holding up our happy motoring card house. Barrons carried a story of Taiwan moving to reduce agency and treasury debt ASAP. In July 2007 they held $55 Billion in agency debt and $43 billion in treasuries, a fraction of its bigger brother across the Taiwan Straits. An article in seekingalpha cites an article in the chinaspeople's daily calling for "banishing" the US dollar from direct trade relations:http://seekingalpha.com/author/edward-harrison.
I could not find that statement but if true , we could be in a world of pain very soon. But today's issue also states that Chinese baby formula is safe, so take it for what it's worth.. Most TOD ers "know" a few things: 1. Rapid US postwar economic growth was facilitated by cheap fossil energy, primarily oil. 2. PO hit here in 1970 and imports soared, consumption soared, debt soared. The buy now something-for-nothing Las Vegas mentality took hold, our domestic manufacturing capacity collapsed except for the medical sector and the suburban sh_t box sector. "Rebuilding" our economy the old way will depend on cheap oil and cheap money. What will we rebuild? We have little manufacturing, 18 million vacant houses in the suburbs, horrific debt, destroyed worldwide credibility and a congress that bailed out the companies most directly responsible for this debacle. PO has come and gone and world oil production falls off a cliff within the next 5 years. We can't afford cheap oil now. What happens when it really get's expensive? But these problems aren't the biggest issue. We humanoids rely on our limbic system and not our neocortex to plan and adapt. This has been widely reported as following a "hyperbolic discount function" curve. Excuse me a minute. The captain just came over the ships intercom saying we had hit something. I goota go and look for a life jacket.
Thirty years?
GDP per person Unemployment (2007)
US--$45,725 4.8%
Aus--$36,226 4.9%
Nz--$26,611 3.8%
http://en.wikipedia.org/wiki/Richest_country
Hmm..that sounds familiar.
- Yes, that's her.
- Lot of problems?
Multiple traumas, spleen,
liver, lung, flail chest...
...left neck of femur, renal shutdown.
Reads like a grocery list. She salvageable?
(To Johnny the Boy aka kiashu)
The chain in those handcuffs
is high-tensile steel.
It'd take you ten minutes
to hack through it with this.
Now, if you're lucky...
...you could hack through your ankle
in five minutes.
Go.
http://en.wikipedia.org/wiki/Mad_Max
As most people know, unemployment figures are meaningless since they're counted in ways to minimise them; if a university student works they're counted towards employment figures, if they don't they're not counted towards unemployment figures, if a person works at least one hour in a week for money they're counted as "employed", which in a country with a rather low minimum wage does not exactly indicate great prosperity.
GDP per capita also doesn't mean much. How is it spread out? If I'm receiving a disabled pension of $10,000 and a $100,000 accountant moves in with me, the per capita income of the people in my flat went from $10,000 to $55,000, am I better off? Is the accountant worse off?
In the US in 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. The bottom 40% owned less than 1% of the nation's wealth. If 40% of your body economic gets only 1% of the blood circulating to it, then your body economic is sick.
By comparison, in Australia in 1999-2000, the richest 20% of households received 48.5% per cent, and the poorest 20% of households 4% of total income. So we have terrible income inequality, but much less so than the US.
How many banks have collapsed in the US? How many of the country's mortgages foreclosed on as a fraction of the whole? What proportion of the population are homeless? What is the rate of murders, assaults, armed robberies and aggravated burglaries? Compare now to Australia or NZ.
It goes beyond per capita GDP. Me and the accountant's incomes do not reflect how happy and healthy we are. It's thinking that the only important thing is total money got the US into its current problems in the first place.
"In the US in 2001, 10% of the population owned 71% of the wealth...in Australia in 1999-2000, the richest 20% of households received 48.5% per cent"
That's comparing wealth distribution to income distribution - it's not apples to apples. How do they compare if you use income for both (income is more important for analyzing economic stability and day to day welfare, I think).
Another interesting fact: the graphs that show the current US housing decline coincide with the peak in CC.The extreme volatility in the world markets only reflect the fact the world is headed to unprecedented economic dislocation.In an economy based upon infinite growth for success - the decline in energy resources is a death knell.I believe our Scandinavian friend Kjell Aleklett predicted this type of volatility in the economy when the peak is being crested.Kudos to him....What is taking place as we write is ostensibly the consolidation of all the assets of the world into the hands of a very select few through fear and the over extension of credit via printing money on a scale unprecedented in contemporary history in an attempt to prevent the inevitable collapse; i.e. national socialism on a scale never seen before.
I fear that the next 'bubble' is going to be the USD itself.
Whether one call it communism, socialism, or capitalism it does not matter - they are merely semantics during this current paradigm.'Communist' China is more capitalist now than 'capitalist' America, which is perhaps the largest socialist economy in the world at this point in time, and it seems this trend in America is increasing with rapidity.
And just think, the vehicle of this socialistic consolidation of wealth is by means of a fiat currency that in reality has always been worthless...amazing what greed can do to some people.I guess the appellative 'masters of the universe' given to the elites of Wall Street is somewhat justified.Maybe we Americans should start calling ourselves 'the cattle of the masters of the universe'....CYA
Good post.
Re: measures of GDP continued to increase leading Alan Greenspan and other 'enlightened' economists to the conclusion that our economies were less dependent on oil than they used to be and thus less vulnerable to another oil shock.
I wonder how much of the GDP growth of the past decade is based on "growth" in the financial sector which now appears to be completely bogus.
It's clear that oil prices have been a trigger of the current crisis, as well as high commodity prices across the board (steel, cement, copper, etc.). Now, oil prices are crashing and may go below $40 for a while, putting at risk capital intensive new supply such as tar sand production and fragile new transportation alternatives (what will happen to the new GM electric car?).
The drama is that the time to develop a sustainable energy infrastructure is now but our capacity to invest will be compromised for a long period of time because of the financial meltdown.
Unfortunately I can't find the exact link right now, but somewhere in his 2005 series on what was driving the GDP, Stuart tried to answer that question and came to the (contentious) conclusion that almost all of the growth in GDP was down to consumer spending and not transactions in the financial world.
However, Steve Keen at debtdeflation.com did calculate that around 16% of recent GDP growth has come from the expansion of credit.
Phil,
Stuart had two articles on 21st Oct,2005 showing that VMT and GDP are constant. However, he also showed that that oil intensity had dropped by 50% from 1970-2003, a 2% annual reduction. Overall OECD countries have had a 1.3% annual reduction in energy intensity over last 50 years. Oil intensity would probably be higher than 2% reduction per year.
The interesting conclusion by Stuart in a linked article was that transport has been the slowest to reduce oil consumption but if we had zero GDP growth( and thus constant VMT) the economy could reduce oil consumption by up to 4% per year if all new vehicles had to meet much higher CAFE standards( equivalent to the Prius).
Its a cop-out to say that GDP increases are not real. Just compare the expansion of new residential housing, the renovation of older inner city housing, compare your life-style with your grandparents or parents. VMT is a lot more than just longer commutes to work.
Other economies have high living standards( high GDP) and much lower energy /and oil intensity than US, in fact most developed countries, with the exception of Australia and Canada that are large resource exporters.
Seems relevant to this topic:
A Desire Named Streetcars: Alan Drake to be Interviewed on “Think” at KERA.org at Noon Central Time (US, on Monday)
No, it's even simpler than the picture you paint, Phil. Oil prices rose steadily in the last 8 years, leading to a steady rise in inflation, and this led directly to interest rate hikes by central banks all over the world, which in turn led directly to the problems with mortgage repayments. A chain as easy as dominoes to follow.
Mamba,
EXCELLENT job in seeing a much more obvious chain of events. There are so many convoluted theories out in the peak oil press now attepting to connect peak oil to the financial crisis it boggles the mind.
If there is any connection (which I think is greatly debatable), it is at the price point, and you have shown the directness of it. I personally think there is virtually no connection between the current economic mess and peak oil, and even folks who try to make such a connection usually say somewhere near the end of a long and complex analysis, "but, even without oil price increases, it was coming undone anyway", thus pretty much undercutting their own complicated analysis.
Remember what a boom the world was on from about 1982 to 1999, with only a very brief "psuedo crash" in 1987...huge long run up=huge and potentially long downturn. Things are going exactly as they should, peak oil or not.
RC
If this is correct then why all the credit ?
Why not allow the economy to grow using real gains in wealth ?
How come we had to resort to a ever growing debt bubble to keep the GDP increasing ?
I disagree with your analysis. Sorry oil and fiat currencies and debt are interwoven.
You can look at it from different points of view but the bottom line is your dealing with a tightly coupled system changing your view points does not alter the reality.
Since oil is finite obviously if we continue to extract it production would increase then decrease over time regardless of the financial systems we use. The depletion of a natural resource does not change just because we deplete it using different monetary systems. In fact if you look Russia and China which where not based on capitalism have very similar production profiles to the US. However a peek under the covers shows mountains of debt and fiat principals at play. Different rules same intrinsic problem.
Its always been a petrodollar problem and will remain a petrodollar problem. Not a oil problem not a fiat dollar problem but both and tightly coupled. The fact that both also obviously have a natural or intrinsic peak and fall independently is irrelevant.
memmel,
Your first question "then why all the credit?" is a very good one, and it has amazed me that almost no businesses now seem to run on profit from ongoing operations! Even local little shops and restaurants seem to run on a constant stream of borrowed money, literally week to week, so when the credit lines dried up, the business fell on it's face. Where was the operating profit? Some of these little shops have been in business long enough they should have been able to buy and pay for the place 10 times over, but they were still running on borrowed money!
The "oil is finite" argument to explain the economic crisis to me is more problematic. Oil has always been finite. Did we suddenly just realize that? I do not disagree with the core concept of peak oil at some time, the problem is not if, but when? It could have happened last week or last year, or it could be happening today. On the other hand, we have to accept that our count could be wrong and it could happen sometime in the next 10, 20, or even 30 years. One day is as good as another, and we have no real way to know what day peak has or will occur. This is what makes peak oil so very dangerous, because all planning has to be done in the dark. But it is also what keeps peak oil from having a direct effect on the economy until well after oil production has dropped year on year for several years in a row, and even then, recession and changes in vehicle efficiency and driving habits along with fuel switching could also disguise peak oil. Peak oil will be almost impossible to prove, even a decade after the event. It can even be hard to define, much less prove!
On a slightly different note, but somewhat related, has anyone noticed that NOBODY seems to be hoarding oil? Instead they are hoarding so called "fiat" money! People who were talking oil hoarding at $147 per barrel now have no interest in hoarding it at the givaway price of $65 per barrel! Likewise propane and natural gas...fascinating.
I was the one who tried to warn people (and was usually very rudely dismissed) of a possible fast drop right here on TOD back when oil was $140 per barrel. I have also said that anything below $85 to $90 was insane, given the demand for oil from Asia and the price inflation of other major living expenses in the economy (at the price of $65 per barrel, oil is not even keeping up with college tuition, medical and insurance expenses, rent and house prices even after the recent home price collapse) Oil at the current price is essentially giving it away for at least a third off compared to real market value and barely above cost to produce for many nations, a cost that has to be rising. RIGHT NOW is the time to be hoarding oil, and especially propane, not when it is $150 per barrel! After we get the speculators and hedge fund idiots somewhat shaken out, I am long on oil at $55 to $65 per barrel, and think propane is a STEAL at these prices. Nat gas is harder to read, but must be nearing the floor price.
RC
Oil has always been finite. That has always been reality. That reality is only now starting to bite as we are approaching or are probably even already past the peek.
So sure, the supply has always been finite. But things change when you reach the point where growing demand "bumps into" the hard physical limits. Before you reach those limits, you have "frictionless growth" once you hit the limits, more and more friction gets added to the system, until the growth has to come to a stop and eventually reverse itself.
Think of it this way. You have a vast amount of stuff in the ground. Some of it is easier to get out, and some of it much harder. Initially, as we only start discovering how great this stuff is, we don't really use much of it. As we discovered how great it is, we continue to use more and more of it every year. Because there is so much of this stuff that is easy to do at first, since what we use is so small in comparison to what is in the ground. And of course we also start by extracting the easy to get to stuff first.
But with steady growth then there comes a point where our consumption is so enormous that the supply cannot keep this pace of growing at the same rate. This starts to put a brake on the system, which was close to "frictionless" before. Then we also start to run out of the easy to get stuff, and we have to go for increasingly harder to get stuff. So more fiction keeps getting added to the system as less of the easy stuff remains.
Eventually there must come a point where shrinking physical limits become the main driving force of the system and rather than an accellarating/growing econony we are transitioning into one that is decellarating/shrinking.
I guess you could argue (as you did) "why now?". Maybe the transition point is far into the future. But I guess most people here don't think so. And with all the stuff going on right now: crazy swings in oil prices, credit meltdown, etc. it sure looks like times are changing.
It looks like we passed peek-oil a while ago and serious economic fall-out from the brakes that are being put on the engine of the economy, because it is literally running out fuel, are starting to really show themselves in a number of different ways.
The 65$ oil price is amazing. But in a way it is just another sign that the economy is slowing down. Probably in the not too distant future we'll see a reversal of the trend, and it is hard to predict when that will be or how high it will spike next time, only to plunge again after reaching a peak... etc.
I must admit I never believed oil could drop down to this level again. The reason is that I never believed there to be much elasticity in demand for oil, so I thought price would remain high. Clearly I was wrong there. As many people here where wrong about the direction of oil price.
But does that mean we haven't passed peak? I don't think so. It just means that price spike to 140$ sent a bigger shock through the world economy and resulted in some serious demand destruction. Prices plunging so drastically, I'm afraid, only sets up the conditions for the next shock: as some people here have posted, these price levels mean that production cuts are happening, and new projects may be scrapped or put on hold. When these "supply destruction" bubbles percolate through the system and start to byte, just as demand is recovering we will get another upward price shock...
So what we seem to be getting into is a kind of "Jo jo" between high and low oil prices sending successive shockwaves to consumption and production side of an oil-based economy. On each successive wave demand or supply is destroyed and it then takes some time for the other side to catch up again. This then brings about the next price swing to the other side and another shock to the economy.
That's how I interpret these wild price movements anyway.
it has amazed me that almost no businesses now seem to run on profit from ongoing operations!
I wonder, don't you confuse profit and cash flow? I ask because it appears to me that this distinction is the answer to some of your puzzlement.
You can be able to turn a profit from ongoing operations and still be unable to pay your bills. One situation is your customers don't pay fast enough to meet the due date of your bills. In this case your profit takes the form of a receivable accounts that can't be used to pay your bills when they are due. Another situation may be you are profitable on the long run but short term you have a very large one-time payment that exceeds your liquid assets that is due. In both examples, you need credit to bridge the gap in time between when payment is due and when you collect your profit.
Little shops and restaurants have to pay merchandise and food before they sell it. This is a typical cash flow problem because the expense must be paid before the the profit can be cashed in. Either the shop has plenty of cash in its banking account, or it uses credit to bridge the time gap.
The issue of having enough liquidity when the debt is due (cash flow) is different from turning a profit. You need to solve both to avoid bankruptcy.
Well the point is that these should only be issues for very new businesses.
Credit should not be normal for day to day operations even up to large purchases which should be budgeted for well in advance.
Other parts of the world run a variety of business without extensive use of bank credit.
In many cases this means the producer waits for payment.
So in the case of the restaurants if needed credit is extended by the bulk seller.
Sounds like US companies have been booking excessive profits and using credit to hide empty bank accounts. This makes sense given the quarterly driven returns and expectations of the stock market. However it means your in deep doodoo if you have a downturn since the "profits" have been converted into expansion or dividend and bonus payments. Although I don't like Microsoft they do run a very tight ship on the money side and actually a lot of Technology companies keep significant reserves for hard times.
Back to startups or new companies generally they are high credit risks so most often they are not funded by traditional bank loans but via hard money investments or fully secured loans at best.
So a well run business should seldom actually need a loan esp for day to day operations the fact thats considered normal says a lot about how we do business.
Plenty of large and small companies of all types choose to maintain significant cash reserves and not use credit so you don't have to run a business this way. Esp one thats been in business for any length of time.
Liquidity issues are a signal of a company thats on the doorstep of bankruptcy at the first bump in the road.
The point I was making is that poor cash flow management is a different issue from not running a profit from day to day operations and may lead to bankruptcy just as well.
The use of credit to handle cash flow issues may or may not be a good management practice depending on circumstances. In both cases it is still a different issue from turning a profit.
We will have to agree to disagree here. The differences between the two situations are huge in a stressed situation. The problem is business are allowed to record a profit if they are rolling short term loans. The reality is that the business is not profitable in the conservative sense that I'm using.
I wish our accounting systems recognized this situation correctly. The use of debt instruments should cause the profit to be marked down unless it was twice the debt if its operational credit different mark downs for longer term debt. So you don't get to show a profit until you can show you don't have to take on debt to operate.
This is nothing more than the fractional banking game translated to business its leverage and companies that use it should be hammered.
People are now realizing that the two are not equal.
Well the best approach to answer you would be to give my own interpretation since from my view peak oil and credit are tightly coupled.
Probably the weakest argument in peak oil theory is that oil production peaks at 50% URR. A better and immensely more robust argument is that 50% URR and maximum production capacity are tightly coupled.
Next given that maximum capacity for oil production would exist at 50% URR if we don't actually use all of the oil we would then expect the lowest prices for oil to exist at maximum capacity if its not needed. I.e demand is less then potential supply.
This puts peak production capacity back in 1995 but basically centered on a broad range from 1990-2000. Given that demand did not exceed production capacity you get a broad period of low priced oil around maximum production capacity.
http://www.wtrg.com/prices.htm
If you assume this non mainstream view point then it makes sense that increasing credit flows since the 1990's have hidden peak oil. What they did was paper over the ever increasing flow of imported oil into the US and the outflow of dollars. And it kept demand growing. Technical improvements in oil extraction capabilities allowed production rates to increase even as the cost of oil extraction increased as we passed 50% URR.
The image that I feel most clearly indicates peak capacity is for Non-OPEC
The problem for global peak is that the first half of production is far far easier to extract than the second half. But we for the most part have overcome these technical difficulties.
In any case putting the peak back in 1995 and then assuming that credit expansion worked going forward to hand the fact that the problem was more of a flow of funds issue then a oil issue perse works quite well. Money spend on oil was leaving the country and oil imports where increasing even with low prices. Credit expansion worked fairly well to continue to spur the economy even though the fundamentals had changed for the US.
You can see the acceleration of credit since 1995 as the world and esp the US economy drifted further and further away from the ability to do real growth and we burned through the imported oil and our capacity cushion.
To justify this just consider how much oil we could have produced in 1995 if oil had been 50 bucks a barrel ?
100mbd would not have been impossible something much higher than the actual production.
The picture is much much clearer if you look at what I consider the important variables which are per-capita energy consumption and EROEI which started downslope during this period this indicates we passed the most important peak in the oil industry where oil became more expensive to extract back during the 1990's.
If your demand is below capacity then EROEI and per-capita energy consumption are your leading indicators of passing 50% URR. Next its fairly blatantly obvious that this was covered up if you will by simply expanding credit.
Of course this has lead to people rejoicing in how we are so smart and able to increase GDP despite declining energy. Are we such smart apes ? See we don't need energy to grow we just need to type a few zeros into a computer a viola instant growth !
So the truth is as we passed 50% URR we simply expanded credit and kept right on going. As this failed to work we did what anyone would do and expanded credit even more.
Now the incredibly intelligent apes among us that disputed peak oil crowed even louder see historically high prices for oil can't stop economic growth we a still growing !
See all we have to do is keep pushing more and more credit into the system and it will just grow just like we have doing since the 1990's.
So the two variables are tightly linked and the real truth is to grow you need cheap energy over the short term a few decades at most you can use credit expansion and technological advancement to hide the true situation. The fact that the distortion has been pulled off for almost 30 years does not change the truth.
CERA is correct in one respect peak oil in the traditional sense won't happen we will be on a undulating plateau but what I think few realize since they refuse to look at the right variables is that we have been on this plateau for 25 years.
The US production actually had a similar long high production period.
Production in 1965 was not reach until 1990. 25 years with production not far off of peak about 12%. And this was with supporting imports and very little pricing pressure.
Using this metric on either side of peak for the world then 25 years is sensible.
10 or 12% may sound like a big number but above ground factors have a big influence on oil production.
Once you make the assumptions I made then the tight coupling between EROEI and debt are obvious. Its also obvious that debt goes to infinity as EROEI approaches 1:1.
Right now I've read that five dollars of debt are needed to create 1 dollar of GDP growth. I suspect right now its much higher somewhere between 10 and 100 and rising exponentially.
This also neatly explains why economic growth did not hit production capacity its actually hard to drive a economy to grow using fiat currency debt. Our leaders have had to resort to all kinds of tricks to induce unnatural growth as real energy availability has fallen. Its non trivial to attempt to use a ponzi scheme to beat the laws of nature. Whats impressive is that everyone played the game for this long so long in fact that its considered normal and in fact the success of the game is used to disprove the effects of peak oil itself ! The irony is overwhelming.
As far as prices go yes oil right now is high undervalued and in my opinion we are nea r the end of the pullback from bubble expansion not the start. The world economy would have to fall back to 1990's levels of usage at least to be balanced with a lot larger population since then so think 1990 with half the wages. That would balance it and get oil prices down towards 10 dollars a barrel so we are not pushing resource constraints.
Given that we are going to certainly double down and try one more push this time it looks like via monetizing debt I doubt we will get there. So the current prices are simply a short term situation that will be corrected.
If you trust your long term analysis then you can use a trick to prove this.
Given that the long term approaches are unable to predict a short term drop in prices then they must arguably be of short term duration or the long term models are incorrect. I.e they must act like a 1/f spike in the overall trend or your long term models are flawed and must be thrown out.
Now given that ever increasing loads of debt coupled with evert decreasing real EROEI is the actual heart of our economy the game literally cannot stop.
It is our economy by definition. Sure we have a hiccup right now and we have had many in the past it should be obvious to all like I said above that this is a hard game to play but its the only game in town. This means that our government has no choice but to print as many dollars as it takes to force growth and this means that we are certain that commodities will become ever more expensive. Existing or fixed assets can vary wildly in price given that long term credit for consumers is probably not going to be widely available and that we can expect living costs to increase dramatically we can assume that asset bubbles in durable consumer goods are a thing of the past.
In fact this time around the situation is so out of control it looks like simple direct cash injections into all sorts of businesses will be used to drive our economy.
More and more companies will get on the dole producing unneeded stuff and getting more money as commodity input prices increase and product prices decrease. Make work on a vast scale. Think government subsidies beyond anything we have ever known.
The flip side of this and inline with my assertion that 50% URR was back in 1995 is that EROEI started heading off a cliff this year. The evidence that future production was tied in many cases to 80+ oil support this hypothesis.
So if my model is right the Oil production hit the EROEI wall and will drop rapidly to 1:1 over the coming years as debt explodes to infinity. It probably does not actually go to infinity but gets eaten in spiraling commodity prices and defaults so a sort of event horizon is more probable. Not deflation and not inflation but a sort of stopped system with defaults and commodity prices preventing the creation of more debt.
We are seeing this black hole of defaults right now thus the other shoe that has to drop any day now is spiraling oil prices once they can inflate fast enough to get over the default rate. The can and will throw as much money as required to achieve this and the moment they overcome the default problem further injections go right into commodity prices. I figure 2-3 more trillion is probably enough.
Enjoy the cheap oil while it lasts since if I'm right then the wheels are going to fall off within a few years.
the profit is extracted as dividend payments, thus crystallised in the wallets of the owners. The owners have limited liability so extract the money they can so they don't lose it.
Your first question "then why all the credit?" is a very good one, and it has amazed me that almost no businesses now seem to run on profit from ongoing operations! Even local little shops and restaurants seem to run on a constant stream of borrowed money, literally week to week, so when the credit lines dried up, the business fell on it's face. Where was the operating profit? Some of these little shops have been in business long enough they should have been able to buy and pay for the place 10 times over, but they were still running on borrowed money!
JIT for money. I asked the same question. Borrowed money = just in time money. reserves = wasted potential/fun.
It's crazy there is an anti-inventory attitude that permeates all business expenses.
Perhaps because US corporations didn't let the wages go up and consistently increased the gap between riches and poors?
You can't bring the economy up without consumers. You can't have consumers without paying them good wages. But you can delay the collapse by extending credit.
You got me here. Why do you think they are tightly coupled?
I can see that they are coupled. It is the work "tightly" that I don't understand. Even if we move to a gold backed currency and a Koranic banking system with no interest on debt, oil would still depletes and suburbia would remain a misallocation of resources. And even if we push peak oil 35 years in the future, the credit bubble would still have busted. This tells me the coupling is not so tight. We have two independent problems that have been somehow coupled due to circumstances but can be uncoupled if circumstances change.
My perception of the credit problem is partly due (I insist on "partly") to the fact we have a ruling class that didn't care to keep the gap between riches and poors in check, leaving everything to the market. The offshoring of manufacturing jobs in third-world countries to save on wages is an example of this. The working class increasingly grew unable to consume without credit. Therefore the economy as a whole became unable to continue without credit. Then the ruling class made the mistake to believe credit was a permanent solution and went overboard with strange credit derivatives and swaps, building systemic risks in the process. They still keep doing the mistake of believing into credit as a solution and this does not look good for the future.
Well its a chicken and egg problem. I'm saying your seeing the result of finite energy not the cause.
If per capita EROEI had continued to increase then wealth could have been continued to be concentrated at the top without impoverishing the masses. If wealth was moving to fast to the top it only needed to be reinvested to expand the core resource base create new jobs and more wealth. This is the lie we have been taught that we are living.
But since the 1990's EROEI has not increased it has decreased therefore concentration of wealth results in impoverishment that cannot be stopped. Doing it by expanding debt or by reducing wages makes no real difference its the same result in the end.
Expanding debt is more sophisticated and less prone to causing civil war till the bitter end since a debt slave is a happy slave.
End the end the result is the same the wealthy remain wealth since they own everything and barring a civil war they create a traditional stagnant feudalism derivative.
At this point can't get any richer except via war which also helps eliminate excessive peasant populations this is actually one of the reasons I suspect the world will break up into enclaves some probably continuing to have functional nuclear capabilities to keep live interesting.
The sophistication of the mechanism does not change the fundamentals weather its and outright reduction in wages debt or some combination once your resource base or more correctly EROEI stops increasing you immediately turn towards impoverishing the masses to ensure concentration of wealth continues.
This is why I say they are tightly coupled. They are and have been throughout history.
People can all kinds of subtle nuances to the problem and talk about high GDP with lower energy intensity whatever the hell that is. But bottom line is you get rich using energy to create value added products a complete economy needs a crap load of energy and a lot of industry is energy intensive. To get rich you need energy and resources. The world does not get rich creating good cheeses and fine wine it gets rich making concrete and steel and shipping grains and wood and building buildings.
We play the low energy game economy on top of this brutal honest energy intensive base economy. Calling the games the economy is a joke.
Yes and no.
On the one hand, a finite resource remains finite whether we extract it at some minimum dribble sort of rate, or really flog it like mad. But whether we dribble it or drag it out affects other things, too. "Mountain top removal" as a method for mining only makes sense if we're consuming really vast amounts of the stuff, if we're frugal about our consumption then we won't do things like that.
It's a bit like the way that given a choice, most surgeons will try to do "keyhole surgery" on people, creating the smallest possible disruption to the body's systems. But if someone comes in screaming and broken from a firefight or car crash, then the surgeons don't mess about, they just dig right in and crack the guy open, there's no time for finesse.
So that the impact we have on the environment is all about our sense of urgency in our resource extraction. The question then becomes,
"Can different monetary systems have different effects on people's sense of urgency to produce and consume?"
and I think the answer is an obvious "yes". Basically, if people are in debt they'll do anything to pay it back - assuming the legal system is one which pursues them, which it generally is.
Our entire money system in the West encourages debt. Firstly, the US government (for example) never creates a dollar, it creates a bond, lets others buy that bond and then pays them dividends. The debt always exceeds the money supply.
Then banks take these bonds and call them "assets", and based on $1 of assets they can create money and lend it, from $10 to $100 depending on the local laws. And there's interest on that debt, too - so again, the debt always exceeds the money supply.
The only way to pay back your personal debt is to increase your personal share of the money supply. You try to earn more money this year than you did last year. Thus, the debt exceeding the money supply drives economic growth. If anyone is inclined to say, "well, I have enough, I'll stop here," then if they have debts they'll soon change their mind.
We want more, more, more.
The debt exceeding the money supply thus drives frantic attempts at production, attempts which will sometimes mean that we knock the top off mountains to get at their resources.
Again, a finite resource remains finite whatever our money system. But our money system decides the urgency with which we extract that resource, and thus influences whether that resource is consumed in 10 years or 10,000 years.
And of course, many of our resources are neither finite nor infinite. Trees and water and fertile soil and wild fish and the like - these are things that, left to themselves, will increase to a great amount. If something increases naturally at (say) 5% a year, then it makes a great difference whether we take 4.9% or 5.1% of it each year. The Easter Islanders did not become treeless because their trees stopped growing, but because they cut them down faster than they could grow back.
Humanity can sustain civilisation for millenia if we use finite resources in a natural way, recycling them, and if we use the growing resources no faster than they grow. Whether we do that depends a lot on the money system we choose, since money systems encourage certain behaviours.
Except that the facts contradict this thesis. Interest rates were held abnormally low for an extended period over that 8 years by Greenspan himself and even subsequent interest rates are not "high" from a historical perspective over the last 4 decades. "High" interest on home loans would have been close to double digits. We never got near that.
Instead, what we got were the creation of "new financial instruments" that had even lower "teaser" loan rates that then reset to the dominant rates (still historically low) which were not payable by the latest class of
suckersborrowers.Your thesis is falsified by the available data.
I disagree. Rates started climbing just prior to the mortgage meltdown. They were "high" enough to cause unsupportable stress to losers on highly leveraged LIAR loans. You didn't need double digit rates to achieve that.
Addressing interest rates as opposed to the original thesis, I have a point to make.
10% interest on a $100,000 house might have been considered high in the past. When that $100,000 house sells for $300,000, a 3.3% interest rate produces the same monthly payment and is effectively just as high as 10% would have been previously. Thus, even the teaser rates were "high" and the rates after reset were astronomical.
Phil
I have wondered has the unwinding of credit build up been triggered by the rise in oil or in fact was the build up in credit a response which masked the declining net energy available to the economy?
Under normal circumstances you would have thought that the conventional economic indicators (Inflation, GDP) would have telegraphed this crises before now, unless it was compensating for something else
Neven
You have had Central bankers, led by the US, artificially reducing rates to pump up credit and avoid any recession.
On top of that the statistics were 'adjusted' whenever they started to show an outcome which was not desired, notably by excluding house price rises from inflations statistics, and by 're-balancing' cost of living indices to show that if you gave up eating steak and ate burgers, the burgers were worth just as much as the steak and did not indicate that you had just been priced out of the steak market.
The signals were there, but they were masked by a concerted effort.
Dave
I understand that what I am asking is did oil/net energy decline actually trigger this irrational bout of free marketeering?
No, this economic crisis has little to do with worldwide peak oil.
It has a fair amount to due with US peak oil, as US PO dramatically increased US oil imports; therefore hurt the US Current Account (trade deficit); and therefore caused a need to recycle petrodollars through borrowing.
Of course, Asian export mercantilism had something to do with the trade deficit as well - not everything has to do with oil.
I would note that net energy decline is greatly exaggerated: a change from an E-ROI of 40 to 20 only reduces net energy gain from 97.5% to 95%. We're nowhere near the kind of E-ROI (below 10, at least) that might cause real problems.
I agree 100% that the US peak was the driver however I don't exactly agree with what your saying about afterwards. Globalization itself is tied into peak US oil and the use of the dollar as the world currency.
After the US peaked the situation was convoluted at best. It should be fairly obvious that the world economy is still dependent on the US thus the decline of US oil production post peak would have continued to be influential force in the world economy.
And as far as when is EROEI low enough to put us in the the danger zone ?
Good question. As you noted 40 to 20 is not a huge change at first glance but to get the same amount of energy you need to expand production by 2.5% more. A drop to 15:1 gives 93% and a 4.5% increase is needed to give the same net energy as at 40:1
Also US population growth is around 1% a year so you need 3.5% growth in energy just to break even on the net energy per-capita front. Lets say you need and additional 2% to grow the economy thats 5.5% or EROEI plus about 3%. As you go to 15:1 it jumps to 7.5% or over 50% increase in the rate of growth just to say even.
Thus I think the danger zone starts at at least 15:1 next given that we expanded debt significantly one would expect us to also have to expand faster then implied by a 2% increase in energy usage so given the way we have run our economies the danger zone is most likely between 20:1 and 15:1.
World population grew at 1.167%
http://geography.about.com/od/populationgeography/a/populationgrow.htm
World GDP actually grew at 5.3% but oil production remained flat and we can assume EROEI steadily declined and further lets assume it started in 2004 at 20:1
Thus stagnant production in a growing world looks like declining EROEI. So the 20:1 looks more like 17:1.
Assume a constant EROEI and actual declines in production of 3% the effective EROEI then say looks more like 15:1 even though its 20:1
And it gets worse on top of a overall decline lets add in export land reducing total volume by 3% so now we begin to see say and effective EROEI closer to 12:1
And lets make it a tad worse and say that the real EROEI is not stagnant but declining from 20:1 to 15:1 say over ten years. Our effective EROEI goes below the 15:1 high end danger zone early rather than later.
So you can see how you enter into a dangerous EROEI at some point less than 20:1 but greater than 15:1 not the simple conjecture of 10:1 which would I agree be correct in a stagnant world.
Given the above I think the world is actually highly sensitve to a fairly small decline in oil production of 3-5% thats sufficient depending on the above factors to cause some serious problems esp with even a fairly small decline in EROEI at the same time.
The sensitivity if you will to fairly small changes in these numbers seems robust its actually fairly easy to see a large drop in effective EROEI with a fairly reasonable set of assumptions.
The underlying problem that causes this is continued and relentless economic and population growth and the export land effect which tend to amplify the natural decline in real EROEI and overall volume to give a surprisingly rapid decline in effective EROEI. Any one of the assumptions I've made can be removed and it fairly clear that all this does is buy say maybe a year or two time shift before the other factors result in the same effective EROEI.
"World GDP actually grew at 5.3% but oil production remained flat and we can assume EROEI steadily declined and further lets assume it started in 2004 at 20:1
Thus stagnant production in a growing world looks like declining EROEI. So the 20:1 looks more like 17:1."
I don't understand that at all - population growth, all else being equial, might increase demand for energy, I suppose, but isn't GDP the bottom line? Isn't that conflating two very different things?
The bottom line, as best I can tell, is that GDP grew 5.3%, while oil production was flat. That seems to indicate pretty clearly that E-ROI, whatever it was, was adequate.
Then you don't understand the keypost.
Pumping debt for a nominal increase in GDP is a dead end process.
Try dividing the gdp by debt then compare it to the amount of oil and its fairly
obvious that the effective EROEI has probably hit a critical point.
Once you accept EROEI as a real variable then even without a good handle on its actual value its fairly east to set up the various relationships between the economy and energy and know which way they would go if we pass certain critical points.
Don Sailorman has a far better understanding of this than I do. He calls them discontinuities but they are related to the critical points of smooth functions that are differentiable. I suspect that part of the argument is he recognizes that a number of scale invariant truths exist that are lost if you focus on the smooth variables.
The trick is that these critical points trigger abrupt jumps and fundamental changes in our unknown complex function thats the economy.
You can see in our key post that we passed a critical point back in 1995 that caused what should be classified as a phase change in our world economy.
My own thesis is we passed 50% URR for oil and probably for a significant fraction of our other energy sources. Although most peak oil theorist like to use the idea that peak production and hitting 50% URR occure at the same time this is probably the weakest point of the theory.
However we do know that the cost of extraction will well correlated with have extracted 50% or more of oil. Its exponentially more difficult to extract the second half of the reserves vs the first half. Almost all resources have this heuristic such that the costs of extraction for the first 50% can readily be shown to be much less than the second half. Since in general its a energy intensive process energy use follows the same curve.
Around 1995 it become harder if you will to run our real economy instead of allowing it to contract we started inflating the debt. Local peak likes the US's earlier peaks started the ball rolling but by 1995 the entire world could no longer grow without increasing the debt.
Certainly technology continued to save us and the combination of debt and technical advances in a real sense papered over these changes.
Think about it like cutting down trees up one side of a mountain and down the other.
As you go down the back side the cost of taking the tree back over the top then down decreases EROEI so this simple analogy shows how EROEI acts as a powerful signal for 50% EROEI. Now what the world did when it reached this system was borrow some money and hire some more tree cutters. In addition we figured out how to cut trees in deep ravines left on the original march upslope.
This all shows up in the debt signal because to play this game you have to borrow forward into the future. Or you take the other route and allow the input energy to remain constant and the amount fore resource extracted to decline i.e keep the debt level constant and increase the price.
You can see that by just working the equations and excepting them that they are sensible and explain the situation since the 1970's.
Certainly other parts of the game such as moving production to lower wage regions etc helped the party but all of this is secondary to the basic equations.
We don't actually have to know the exact relationship needed to transform between EROEI, GDP and Debt to understand how the relate to each other. Just like traditional supply and demand graphs are independent of the dynamics of the system.
This suggest that what I'm proposing is invariant to scale.
http://en.wikipedia.org/wiki/Scale_invariant
If you can describe something thats invariant to scale then your either a complete fool or have a high probability that you have hit on a fundamental truth.
Supply and Demand have a obvious fundamental truth. I'd say it should be obvious that what I'm suggesting has a fundamental truth. You can believe it or not believe it but the relationships are well defined and have well defined mathematical behavior.
One slight quibble with WHT work is he did not have a good driver for the actual dispersive search that drives the overall extraction rate. I'd suggest that this linkage between money and resources acts as a obvious motivator. To be honest its so obvious that the search was driven by money that its not worth discussing unless you look at what I'm saying and try and discern the links between money and energy and to some extent the search itself. What really cool is despite all the money and debt thrown at the search problem to continue to grow we never beat the physical limits of the dispersive search.
Obviously on the backside we put more and more money into search and into extraction equally. Extraction responded but search did not.
My best guess using my model and the fact that its scale invariant is that it has no effect on the search volume. What I mean is WHT generally treats the search volume as a smooth surface but its probably really fractal. Searching harder in a region with no oil at a finer and finer grain with better and better technology does not change the fact that no oil exists. It simply makes your certainty that nothing exists where you searched the first time has nothing.
A way to see this is say consider a house on the edge of a contorted bay you can sail around the bay and find the house or walk the bay and find the house searching harder by walking does not change anything. Or you could look at it as sending 100 ships in each direction around the bay and scatter some walkers around the bay i.e disperse the searchers themselves you still don't change the situation.
Obviously I'd be very interested in what WHT has to say about dispersive searches in fractal dimensions but you get the point. Looks to me like a exponential increase in the search effort barely changes the discovery rate.
Also I suspect if WHT wrote a paper on dispersive search over a fractal surface he should be able to get published in some prestigious journal.
Googling did not turn up the concept of searching in a fractal dimension so maybe this is now. From a physical standpoint this fits well with the real worlds surface which is effectively a fractal.
So we come full circle in a sense the fractal nature of the earths surface forces the search for resources to fit a simple dispersive model regardless of how "hard" you search thus forcing the consumer to adopt ever increasing technical and financial tricks to hide the ever declining resource.
"Pumping debt for a nominal increase in GDP is a dead end process."
What is "Pumping debt"? All we're talking about here is recycling petrodollars.
"Try dividing the gdp by debt then compare it to the amount of oil "
That makes no sense to me. What does that have to do with "effective EROEI"?
"we passed a critical point back in 1995 that caused what should be classified as a phase change in our world economy. "
No, it was an artificial marker for a process that began long before when the US began to run chronic trade deficits, and started to lose it's position as a net creditor to the world.
"by 1995 the entire world could no longer grow without increasing the debt."
Nah. You're getting lost in some kind of mystical oil-debt thing. You appear to be trying to quantify, in some extremely complex fashion, oil prices vs the cost of oil exploration & production, but it's very simple: oil importers, especially the US, ran a chronic trade deficit (partly oil, partly asian imports), and had to finance it. That's it. That's all there is to the debt explosion.
Oil exports lowered US GDP, so the Fed lowered interest rates. US households, especially poor ones, were encouraged to borrow by low interest rates, and Wall Street create CDO's which allowed these households to borrow directly from KSA and China. Then the housing bubble broke, and this method of recycling petrodollars broke. Now we're replacing household borrowing with National borrowing, by having the Feds buy bad mortgage debt.
That's it. Pretty simple.
One slight quibble with WHT work is he did not have a good driver for the actual dispersive search that drives the overall extraction rate. I'd suggest that this linkage between money and resources acts as a obvious motivator. To be honest its so obvious that the search was driven by money that its not worth discussing unless you look at what I'm saying and try and discern the links between money and energy and to some extent the search itself.
I've been saying all along that the driver is greed. But since greed is not quantifiable, then money will work in a pinch.
A way to see this is say consider a house on the edge of a contorted bay you can sail around the bay and find the house or walk the bay and find the house searching harder by walking does not change anything. Or you could look at it as sending 100 ships in each direction around the bay and scatter some walkers around the bay i.e disperse the searchers themselves you still don't change the situation.
Obviously I'd be very interested in what WHT has to say about dispersive searches in fractal dimensions but you get the point. Looks to me like a exponential increase in the search effort barely changes the discovery rate.
Most of the behavior has to do with the slow rates of searching not hitting the regions of interest as quickly as the fast rates. I have not really considered fractal dimensions of search volume, as those get swept up just like the larger aggregate volumes. At some point even the slow searches catch up and then no matter what you do with the search rate it won't matter.
But what I have been looking at is how oil field sizes work within this context. This might be the link that we need to establish to your "fractal dimension" idea. Some consider field sizes living within a fractal dimension. However, I think fields actually aggregate through their own "discovery" process and you find relatively fewer small fields than you would imagine (i.e Log-Normal works better than Pareto for small fields sizes). So this might also be explained by dispersion, potentially giving the 1/Size dependence in field size distribution. Fractals, like 1/f noise, are the result of randomness existing over a wide range. A limited fractal range is the byproduct of and dispersive discovery is the process that could generate the size distribution.
Both Khebab and Laherrere have worked with the Parabolic Fractal Law (PFL) and Colin Campbell mentioned it at this week's ASPO meeting. But I have no idea whether the Parabolic Fractal Law is simply a heuristic or a real law. It looks like something that Laherrere has used quite a bit without explaining its origins. In my opinion, it is neither a law nor a perfect heuristic. In the last couple of weeks, I have spent quite a bit of time deriving the statistics of field size distribution. As I said earlier, I contend that it comes from a Dispersive Aggregation of sources where the sources "discover" one another via a distribution of varying migration rates. The math is very simple and it actually follows from the Dispersive Discovery model that I have posted before on TOD. (As I am discovering, lots of things are explainable by what I call "dispersion theory").
Part 1: http://mobjectivist.blogspot.com/2008/10/dispersive-discovery-field-size...
Part 2: http://mobjectivist.blogspot.com/2008/10/estimating-urr-from-dispersive-...
plus
http://mobjectivist.blogspot.com/2008/10/significant-no-hyperbole.html
Below is a graph of North Sea data as the blue data points. The data on top is the Dispersive Aggregation model, in both Monte Carlo and analytical form). The key thing to note is that the Parabolic Fractal Law would never generate the fast downslope of sizes near the origin (which makes it a rather poor heuristic IMO), but the Dispersive Aggregation model does.explain the entire curve.
So I am all for trying to figure out what is going on, well beyond a heuristical explanation.
On Creaming Curves see the last link above. This ties the size distribution and reserve growth observations together. Either this is some weird concordance or maybe it gives the complete unified picture.
duplicate...
House prices have always been excluded from GDP statistics. Instead of house prices, the data use "imputed rent" to figure the cost of housing. There is good logic behind these GDP statistics, but it would take about five hundred words to explain and to provide examples. Briefly, GDP is a measure of gross production. On the other side of the coin, GDP is also a gross measure of Consumption spending, plus Investment spending (by businesses mostly but also includes residential construction), Government spending plus spending on imports.
I am aware of the arguments made for the use of imputed rents instead of house prices to arrive at GDP estimates.
Here in the UK at least major changes to 'improve' the way the GDP and inflation figures are computed tally remarkably with the political necessity of slipping in under targets.
Had house prices been used instead of imputed rents, then the case to put up interest rates would have been unanswerable by about 2002, which in my view would have been a far better outcome than that which has occurred.
A lot of very clever people have put a lot of time into coming up with many of these justifications, for instance as to why the 'Masters of the Universe' should have been given free reign, and how it was a good idea that they should collect hundreds of millions in bonuses for short term performance whilst gutting their companies and countries.
Now that it has all blown up in our faces it is surely becoming quite clear that these were entirely specious rationalisations rather than substantial methods of attaining sustainable prosperity for the majority.
One story not told here or in the media. A huge reason for the drop in US oil consumption is the huge falloff in home construction. During the boom, the US was builing homes at a 2 million per year rate. We are currently buiding at a 700,000 per rate and falling. We have 18 million vacant homes so homebuilding isnt coming back anytime soon. Plus many of the existing households cant afford a home and will be moving back in with parents or into an appartment. How many people have vacation homes they will be letting go in a recession? I think we could see 30 million vacant homes soon.
If you look at a new 3000sf home, imagine how much energy is embedded in it. Of course there are the construction workers driving all over in their big pickups; many of them are now staying home. All the materials must be created and delivered; wood, metals, and concrete. There will be layoffs in all the material suppliers, with the delivery trucks staying put and the workers staying home. Also less real estate agents and mortgage brokers needed; more former workers staying home. Also less new homes means less demand for furniture and appliances; more job losses and more people staying home.
The cutbacks in home construction could result in 10 million layoffs. This is 10 million people staying home, people who tended to drive larger than average cars and trucks. Plus lots less materials being mined, forested, and delivered. Lots of diesel trucks and constuction equipment idled.
I think we can see a 10% oil reduction in oil demand just from the freeze in homebuilding. Home building has cut back 65% and still falling, and homes are basically solidified petroleum on a massive scale.
"A huge reason for the drop in US oil consumption is the huge falloff in home construction."
Has anyone ever charted that?
"One story not told here or in the media."
memmel has certainly been telling it here at TOD
David,
If home construction has decreased by 1.1million units, and each unit represents $100,000 of materials and labor, how could this cause 10 million layoffs? how are those construction workers driving around with an income of $6,000 a year( assuming 50% of the house cost is materials)
Even if you assume a x5 multiplier effect of housing, the loss of 1.1 million units is only going to take out 550 Billion from the economy.
How many workers were in the construction industry in 2007? Are you assuming NO new construction and NO home repairs and renovations?
Your prediction that there will be 30 million vacant homes, represents 20% of households! Where are the 60 million people living??
Even if there are 10million construction workers/real-estate agents sitting at home, walking to buy food and beer, that's only 4% of vehicles.
Thanks your much closer than David's guess. Your leaving out the pyramid of economic activity that surrounds housing its not isolated or "contained" and never has been.
There is all kinds of primary and secondary activity associated with housing.
But on the other hand once someone loses a job in the housing or a related industry a good precentage will find other work maybe lower paying maybe higher maybe more or less driving but they for the most part don't stay around. The exception of course is the large illegal immigrant population that worked in housing it looks like a lot of them are actually leaving.
But if you read my long post the actual change seems to be about 3% not 10%. Housing is a energy intensive industry and a lot of that is in the form of oil products so its a healthy share of VMT not quite 10% but 3% is a pretty big number.
Whats interesting is this is actually probably heavily weighted towards diesel or heavier truck traffic not gasoline powered cars. Diesel is still in short supply and most people expect it to remain so. So people celebrating this drop in VMT as proof gasoline demand has dropped substantially will probably soon find out that the celebration where premature.
My best guess is that the VMT change is 2% heavy truck traffic and 1% gasoline powered so the gasoline powered VMT has only changed by 1%. However we do have a significant additional factor. Congestion causes serious drops in fuel mileage so the decrease in construction and related truck traffic should decrease congestion giving us a bit of boost in efficiency say maybe 0.5% so a total probably demand decrease for gasoline of about 1.5% maybe.
Congestion and its effect on fuel usage is a huge subject and I'd freely admit that I can't predict how the two will change or the magnitude.
Here are some links you can google and find tons.
http://www.worldtrademag.com/Articles/Feature_Article/ff3a0682175dc010Vg...
http://www.energystorm.us/Automobile_Fuel_Economy_And_Traffic_Congestion...
Also although I'm not sure the of the exact equations but congestion itself is highly sensitive to slight changes in traffic density once a road becomes congested thats it.
Most of the reports I've read indicate that most of the nations roads are seriously congested carrying about 4X greater traffic loads then they where designed for.
This leads me to believe it could be a while before we see traffic reduce enough to get serious benefits from lower congestion. Also of course going forward we can expect our road infrastructure to degrade from either higher costs or lack of money or both so again I don't expect congestion to get better in fact it may get worse as more emergency road repairs are forced to be undertaken under heavy traffic conditions.
I've been buried in this subject for a bit and only post pieces of what I've learned but now that VMT is a hot topic its pretty cool that I've learned so much about it.
And last but not least I've read that VMT estimates themselves have about a 5% error rate so even our greatest historical drops may not actually break out of the known error. The error in VMT esp for truck traffic is itself another hot topic. Esp since its used to justify expansion. But understand that the error itself is a hot topic
and I've also seen papers that claim its as low as 0.1%.
One link only.
http://cat.inist.fr/?aModele=afficheN&cpsidt=2519668
Its just to big of a topic again feel free to google and get a feel for VMT error.
Its its own little war zone and some times combined with congestion issues.
Myself I think the VMT trend is real however given that oil supply has pretty much stayed in the 5 year range I suspect that the increases over the last few years may be slightly inflated and the decreases are also slightly inflated. Maybe 1% on both sides.
Since recession are generally short and a slight overstatement of VMT during growth does not matter much since the only main use is to expand roads which almost always happens to late it did not matter that it may be inflated. And during the short recessions a drop is temporary overstating the drop is not all that important.
It does matter however over the very short term because everyone is using a number that they don't actually understand to prove certain "facts". In some cases the argument is correct in some cases its not. But the fact that few people have spent the time to educate themselves on VMT and its errors ensures a lot of GIGO is floating about.
Here is a link talking about real world VMT by people that use it to make decisions.
http://www.epa.gov/otaq/models/mobile6/r01010.pdf
And to finish your simply calculation is surprisingly close to the "real" answer I came up with of maybe 2% reduction in diesel truck traffic 1% VMT gasoline and a 0.5% WAG about additional gains from lower congestion for a total of 3.5% :)
A big question this posts brings up is what happens next ?
Do we continue down this steep cliff with credit going to zero and oil usage dropping to some absurdly low value and live within our means ?
I doubt it although this is the eventual end I suspect we have a long way to go before reaching the final bottom. In fact if you look at all the economic factors whats going on now is a economy moving from beyond insanity to just insanity we still have not even reduced to what I would call a sane growth level much less on thats really shrinking and conserving.
Here is a fantastic graph.
http://calculatedrisk.blogspot.com/2008/10/dot-us-vehicles-miles-driven-...
So going from previous recessions we expect VMT to decline by at most 3% using historical data. We have no reason yet to assume that VMT will decline more then this and more importantly that it will decline more than this and still result in low oil prices.
We have experienced effectively all of the expected VMT declines using historical data this year.
So at least from the historical data and this includes the 1970's oil crisis we are close to the bottom if not at the bottom for VMT.
Next we can look at housing and see if any further declines in starts will result in significant declines in VMT.
http://www.census.gov/cgi-bin/briefroom/BriefRm
Although housing can continue to decline further decrease will have little effect on the overall usage of oil as we enter int the long tail of the exponential.
So its safe to declare housing construction dead and also to declare any further savings from a decline in housing construction as dead.
Next we can look at population growth as another gauge for a sort of minimum expected VMT.
http://en.wikipedia.org/wiki/Demographics_of_the_United_States
In 2000 the population grew at 13% in 1990 9% so lets guess 10% through 2009 since 2000.
http://www.fhwa.dot.gov/policyinformation/travel/tvt/history/
VMT in 2000 was 2,746,925 * .10 = 274592.5 == 3021617.5
This matches very well with all the data and also matches very well with a decline back to the VMT levels supported by population growth.
Thus historical data from previous recessions and population data both support the concept that the lowest VMT can go in a normal recession is about 3% per annum.
The chances of VMT dropping below this and maintaining relatively low oil prices are vanishingly small basically we have to go right into a full blown depression without passing through a traditional recession and attempts to revive the economy.
Although the possibility of all out economic collapse are now non-zero the chance are we will hold it off for some time at least a few years.
From the big picture perspective what I believe is happening is that people are spending less and less on expensive items esp housing and cars and luxury items such as boats. The loss of these big ticket items generally financed with long term loans is a huge blow to our financial industry and falling home prices are even worse.
But underlying this is the fact that peoples disposable income remains fairly constant or even increases as they default on housing or pay less and don't buy new cars.
A lot of the cries of doom and destruction are simply at the moment a pull back from using long term debt and in many cases maxing out short term debt and defaulting on credit cards. The consumers cash flow on average is actually increasing as they fail to take on new debt for housing or cars or they do but at cheaper prices for houses.
This lead to situations like the following you drive into town and buy a CD or DVD instead of buying a new car. The GDP takes a big hit but the amount of oil used decreases less.
Thats the first level of decrease and we can certainly look at cars but it follows housing and both are approaching historic bottoms regardless of how low they actually go further decreases will not result in substantial drops in embedded energy. As housing and the auto industry deflate the workers can and will get different jobs probably lower paying but its not just a absolute decrease.
The next level if you will is closer to where we seem to be today although I don't think we are quite there yet. A person drives into town to buy a loaf of bread for the kids instead of a CD or DVD. The total energy usage is now practically constant !
Another case is a person drives into town and buys a DVD instead of a flat screen TV the energy usage decline is much smaller than TV vs a car or DVD vs a car.
As you can see even as the GDP continues to decline as people purchase less and cheaper goods the less actual overall energy usage changes.
So you have in addition to historical data a number of heursitics that indicate that changes in energy consumption rapidly decrease in the rate of decline as the economy slows. On top of this historical VMT data from rust belt regions or regions with declining economies show flat to slowly increasing VMT again in line with all the other data.
And finally even with the housing bubble VMT growth did not keep up with population over the last several years we have actually been tightening our belts. I think over the last five years a lot of the GDP growth was sucked into long term loan payments on over priced houses and new cars. As these expenditures decrease then cash flow increases.
Now given all of this what happens to oil prices ??
Well given that VMT probably won't naturally decline a lot more it makes sense that given peak oil that supply will eventually not meet demand and we will see rising oil prices with demand becoming increasingly inelastic. In fact we have plenty of indications that we are actually close to done with declining VMT which suggests that on average we will now see oil prices increase from the current levels from now on out.
Don't forget that once VMT declines to be inline with population growth. Population growth alone spurs a natural increase in demand. Until oil prices rise to the point that they take up a significant amount of income say 10-15% we probably won't see strong declines. But this is simply VMT changes under a high priced oil era. Although a chance exists for supply to exceed demand if peak oil is real then we can expect once supply is inline with current world usage we will again become supply constrained and this time effectively permanently.
Memmel,
You have made a good case that VMT are not likely to drop much more than 3%per year.
More important over the next 10 years will be the increase in vehicle fuel efficiency. This occurred for 10 years after 1980, at about 3-4% per year. Since most households have 2 vehicles, larger gains are likely if oil prices rise quickly, due to using the most fuel efficient vehicle much more. In the past the bigger less fuel efficient vehicle would have been used more on vacations or for commuting, and the smaller vehicle for shorter trips. Since 50% of VMT is by vehicles less than 7 years old, we could see a fairly dramatic decline in gasoline consumption, without a VMT decline. Diesel reductions are much more problematic, unless CNG conversions are taken up by significant medium and long haul trucks or more freight moves by rail.
Neil1947
I'm in full agreement with Mish Shedlock that we are entering a L shaped recession.
So I'd hesitate to even hazard to guess what the fleet replacement will be going forward. In general in depressed areas it drops very low. Most people are maxed out on credit and car loans are becoming very hard to get. Using historical fleet replacement numbers to predict our future is probably not a good idea. Look at the fleet replacement in Cuba for example.
The best guess is that fleet fuel mileage will probably stagnate and change very slowly in the future. For example I'm obviously peak oil aware and I have a Honda Minivan that gets fairly poor gas mileage but I have no plans to replace it ever. I see no reason to spend a dime on a car regardless of gas mileage. I don't think our economy can hold together long enough. Thats my own personal reasons for not replacing my car but given a long recession very very few people will have a good reason to replace a car.
I'll repeat I don't know but I'm unwilling to project what future changes in our car or truck fleet will be except that its a pretty good bet it probably won't change much. This fits very well with both VMT and fuel economy changes in depressed regions.
Buying cars and houses eps new houses are the two things that drop dramatically and stay low once economic expansion stops.
Memmel,
Its true that vehicle sales decline in recessions, but do not go to zero. Many companies will have regular fleet replacements, some people have no mortgage and will regularly buy a new car. If gasoline prices go up to >$10 a gallon( as they must post-peak), it will be cheaper to replace a 15mpg vehicle with a new 45mpg vehicle. If we have a long recession real interest rates will go to zero or become negative, so new vehicles will be relatively less expensive.
I think the PHEV's are going to be valued much higher than the gasoline savings, that are obtained by HEV's, or fuel efficient small cars they will be providing "gasoline independence". Early adopters will want to be the first in the street or in the office to be able to brag " I don't car about gas prices anymore, don't use gas" It won't matter whether gas is $2, $4 or $10 a gallon, but if its $10, everyone else will be putting their names on a waiting list.
Now if you are assuming total economic collapse, no planning is going to work.
How are you going to pay 20 or 50% down on a new car ?
Interest rates for people with poor credit will probably be 15-20%.
This is about auto insurance but you get the picture.
http://www.house.gov/jec/tort/cities/cities.htm
I googled for data on new car purchases amongst the poor and did not readily find anything. But I grew up poor in the South so I can readily tell you first hand about cars and poor people. First gasoline is expensive period regardless of price per gallon.
You literally have very little money so surprisingly budgeting like your talking about is simply not possible. Very often your credit is tarnished or non-exisistant.
Steady work is difficult to obtain etc.
The price of gasoline has absolutely nothing to do with your ability to buy a new car you can't afford it. As things get worse esp as we say approached 10 dollars a gallon
few Americans would be able to afford a new car. Those that do buy them would keep them for 10 years or more. The rate of turnover will slow to a trickle.
On the other hand car pooling use of public transit etc will increase so its not the end of the world just I seriously doubt that any of the current data on fleet turnover applies under the conditions your describing.
Again I grew up poor myself in the 1970's and 1980's people did not replace there cars simply because they could not afford to.
Real stats seem to be locked in here somewhere
http://wardsauto.com/
Here is a link giving the change in market dynamics during the last recession.
http://images.adesainc.com/publicweb/AnalytServ/Articles/War_and_Recessi...
If you want to make your argument you need to gather up new car sales during recession and in areas that have long term depressed economies.
And finally I'm not assuming total economic collapse but its a safe bet that credit esp at cheap rate will be withdrawn from a lot of the population simply because more people will become high credit risks.
The most probable outcome is that new car sales will slow to a trickle and that fuel efficient cars become a status symbol not really effecting the overall fleet fuel efficiency. Also they will be held longer slowing the turn over rate. Say from 3 years to 6 years. Total volume probably will decline by 75% or more.
If you think this is crazy its inline with whats happened in housing so just assuming the sales of new homes and new cars follow each other is sufficient to justify these numbers.
Given this and given most projections for the decline in oil production fleet change over will have practically no effect on our future. We will be forced to repudiate the car and make lifestyle changes. This of course will lead to the collapse of suburbia and suburban home prices ripping the foundation out from under the very people your targeting as capable and needing these new fuel efficient cars. Sending them deeply underwater on their home loans.
All I'm saying is that the cycle that resulted in the expansion of the car/suburban culture will probably run in reverse. The only interesting question is which crashes faster car sales or home sales. Right now its a close race.
Memmel,
Thanks for the link about new and used car sales in recessions. You predict;
"The most probable outcome is that new car sales will slow to a trickle"
While the actual data for 1991 recession was an 11.2% decline in new sales, ie 89% of the previous year! That's hardly "diving off a cliff"
Home starts are decreasing because of the accumulation of several years of unsold supply and foreclosures due to steep increases in interest rates, but they are still at 50% of the peak in 2007.
I wouldn't expect really poor people to ever buy a new vehicle, but they can do replace them regularly and can choose a smaller high mpg car. Most households have 2 vehicles and one is replaced about every 3 years?( from memory). The people who buy new vehicles usually replace them about every 3-6 years. They are probably amongst the 33% of households with no mortgage, or company/government fleet purchases. New vehicle sales have always only been a small proportion of vehicles, but they have much higher VMT than older cars.
The point is that 10-13 million new vehicles are going to be sold in each of the next 3years, so you are going to have at least 30 million households with the option to buy a much higher mpg vehicle. When we pass peak oil, prices will rise to at least the level they are in EU($8-10 per gallon). A lot of those households will will switch to at least one fuel efficient vehicle, and in 3-6 years these will be passed on to newer second hand purchasers and move though to lower income households.
How would the car/suburban culture run in reverse? where would the people go? suburban houses are going to be cheap to rent and even at S10 a gallon commuting to work will not be a major part of income. Total transportation is only 15% of budget( that's vehicle depreciation, fuel for recreation and work, car repairs, mass transit)
If we have fuel rationing then I would expect even higher sales of new high mpg vehicles. This could force lower income households to car pool or seek mass transit and move to inner city apartments( if available) but more likely hold onto older smaller higher mpg vehicles and accelerate the junking of the older gas guzzlers.
If car sales decline by 75% we won't be in a recession it will be a depression or WWIII. Another possibility would be that the next president/congress stops all new vehicle sales of ICE cars that get less than 37mpg and it takes a few years to re-tool to build HEV and PHEV's. That's the response we will need if oil declines at 8% per year.
Just going from replace your car every 3 years to every 6 would cut car sales by 50%.
New home construction is effectively dead.
The effectively complete loss of housing has resulted in a 0.3% decline in official GDP probably worse. Cutting the automobile industry by 50-75% probably gives another 1-2% retraction in the economy.
As far as poor people my running assumption is real wages or purchasing power could readily decrease by 20-50%.
This is not the end of the world but something closer to a steady state economy.
Unemployment my guess is 10-15%.
Expansion of Government handouts and attempts to stimulate the economy will probably make the employment numbers better but would also increase overall expenses.
Bottom line is we can live without both the housing industry and most of the car industry fairly well. When people pull back from buying new cars it frees up a lot of cash as more people keep cars past the end of the normal 3-5 year loan period.
Thus the slowing auto industry and actually using cars for longer will stimulate the rest of the economy. Also of course the continued contraction of the auto industry frees up oil and more important probably electricity for other uses.
We will see but my overall thesis is that consumers will increasingly shun long term debt in exchange for some savings for the repeatedly rainy day and purchasing smaller items and basics. It only takes losing your job once and having a hard time finding a new one probably for lower pay to convince your typical consumer to not buy a car every three years.
Overall fuel use would probably even go down esp if the auto industry is reduced by 75%. We have seen a big drop recently that can readily be attributed to the loss of the housing industry the loss of the auto industry should also give a big drop in consumption.
Sure new fuel efficient cars will enter the market but a structural change such as I'm predicting is probably far more important and powerful. Furthermore cars can readily last 10-15 years without serious problems and could easily be built to last longer so we really only need a fraction of our current automobile manufacturing base anyway.
memmel,
That's actually a pretty sensible sounding read on things.
You say, "Although a chance exists for supply to exceed demand if peak oil is real then we can expect once supply is inline with current world usage we will again become supply constrained and this time effectively permanently."
As I said upstring in another reply to you, the question is what timeframe are we talking in? I once said that the consensus seemed to somewhere in the 2012 to 2020 window, after current new megaprojects kick in, and we see if the Saudi Khurais megaproject can actually deliver in 2009, and also what some of the projects in the non-OPEC world can deliver (such as Brazil offshore and certain African nations, who badly need the money).
Given the slow economy worldwide, which should last about 3 years minimum possibly 7 years) before it starts to grow to any real degree, and the fact that new megaprojects should be able to match depletion worldwide, unless we get by a major shock (Ghawar actually collapses fast and Khurais delivers essentially nothing but water) oil prices should hold somewhere under $110 in inflation adjusted terms, which is about fair market price if you use the price of other costs in the economy and the cost of production as a starting place (which in a non peak world, should be the guides and should have tipped everybody off that the hedgies and specs were driving the price to stupidity levels a few months ago).
So about 2013 to roughly 2018 we run into the supply limits, assuming that China, India and other developing nations resume growth.
Now here's what is interesting. That would be about 3 to 5 years into the next generation of technology, particularly in the area of transportation. You know what I mean, the stuff that everybody here says can't possibly work, but that no one explains WHY it can't work: Plug hybrid cars and trucks and advanced fuel switched vehicles using small volumes of natural gas or propane, combined with still growing solar, wind and distributed electric power generation.
So the price of oil will come down, right? No, I wouldn't think so. If we assume that the supply limits are real, and that the Asian and developing markets are still growing, we can assume that no matter what the most advanced nations of U.S., Europe and Japan do, it will have little impact on price. The guess is that as the grid, propane, natural gas, and even manufactured fuels such as ethanol/methanol come into more direct competition, they will have a tendency to equalize, and all at a higher base. But the good news is that they will be used much more efficienty, particularly in transportation, and the grid will provide something a "backstop" in preventing wild price swings and emergencies. It will essentially be a stable but well funded energy market, but a more expensive one for the consumer.
So what's all the worry about? Well, the big issue is that we have essentially abandoned technology as a respected career path. The kids now in elementary school will be graduating high school in about 10 years, or 2018. The unruly kid you see in Junior High will be graduating in 2014. It's not that long from now, and we will need their talent to pull this off. Otherwise, it will be done in Europe, China, Japan, and India, and we will be hard put to afford or even judge the newer advanced, efficient technology if our next generation is working as a stock clerk at Walmart. The destruction of a belief and willingness to sacrifice for education, and particularly technical and scientific education, has been one of the great errors of the recent past in the United States, and will haunt us for decades to come. I will go so far as to say that it is the American anti-intellectual streak that is a far greater threat to the United States than peak oil could ever be.
Luckily, we still have a few kids who want to learn, despite all our culture does to try to dissuade them. They are the tinkers, the kit builders, the geeks, the motorheads,the "hackers". We only need a few that are really ahead of the average. They will get us started, and our open small shop system can do the rest. it's going to be fun to watch!
RC
Hey RC,
I'm 19 and a sophomore in college and seeking a masters in Industrial Engineering at the University of Oklahoma. I have been reading TheOilDrum and memmel's, khebab's, westexas's, Nate's, Gail's, Prof gooses and ever your posts and comments for about two years now. The realization of peak oil, a very dynamic world and the fact the world just isn't black and white, has had a HEAVY and lasting influence on my career and education decisions. I view the problems of an energy constrained world caused by a world we have set up to be too inflexible and complex, as one big logistics and systems analysis problem. I have many ideas and I'd like to set up a business that capitalizes on working on these type of problems. I agree with you and it's saddening how all the technical fields are being shrugged off so people can be fashion designers and professional football players and all manner of unrealistic things. I suppose I have a few more years invested in this world and I better damn well do all I can to keep it from falling apart, but it definitely has to change. I am just hoping I still have a bit of time to graduate and start doing things, I mean, that's all I can really do, right? Any ideas or advice for me?
Thanks,
Crews
Pay attention to finance and credit, all business depends on it being done right.
"Oklahoma State Is Officially Screwed
http://www.faniq.com/blog/T-Boone-Pickens-165-Million-Donation-To-Oklaho...
Seems that T. Boone Pickens gave Oklahoma State a $165 million donation to be used all for helping the school's athletic program.
Fair enough, kudos for good intentions.
"Well, there was one problem with Boone's donation. He left the donation in the hedge fund, which initially seemed to be a good idea as oil prices soared ... swelling the initial gift to over $300 million."
The school, which had watched as the gift swelled up 70%, decided to borrow again the Whole Wad, then lost it ALL on margin calls that wiped out the gains and principal, leaving them holding the full Debt of $300mn."
Good thing for me thats OSU and not OU! Can't Pickens recoup all that money when oil prices go back up, which is a certainty at some point in the future
Crews,
Keep doing what your doing, we need you. :-) As for advice, I am an older guy so anything I say would be outdated, you guys are far out in front of us older fellows on the technical side.
I would just hope you don't get discouraged, firstly, and don't become too specialized. Mix up the technology and read about everything, electronics, hydraulics, thermodynamics, aerodynamics,nanotech, chemistry, etc, etc. It's all connected or can be connected. Hope you can create a firm of your own, and do it your way and cut out the pinhead managers who will only slow you down! :-) good luck!
RC
Thanks, RC, I appreciate the encouragement.
Hm 2012-2018 ?
I was think more like three months at most I actually still don't see any reason why we won't see 160 dollar oil by December.
I think we both would probably agree that at this moment the price of oil is probably a bit low.
The simplest answer is to wait and see. Personally I think supply cannot meet demand right now even with the recent declines in VMT. I have yet to see anything that proves this. The current oil price has plenty of other factors influencing it without even assuming a overall supply and demand imbalance.
But please lets just wait and see what happens if I'm right then the current price drop is a very short term negative spike or blip and we will see strong oil price increases in a matter of weeks months at most. If I'm wrong and I'll give myself till March since this is a tricky business and we still have low oil prices then we can revisit the supply and demand equation it could take as long as March to know the truth. One of my primary triggers for the next strong increase does not actually fire until Feb or early March. Also lot of the triggers are suppressed as long as the dollar stays strong so although I don't want to go into detail but the window for it to become obvious what our real situation is is from December to March. I'll repeat that according my calculations 160 dollar a barrel oil is highly probable as early as December. If I'm wrong then I'm wrong so be it.
At the moment know one knows what the supply and demand situation is like especially the markets but it should become clear very quickly. We still have quite a bit of oil coming in thats at sea at the moment every indication so far is that very little oil will actually follow it. But it will still take a good bit of November to get back to normal if you will. Don't forget about the Hurricanes and the recent shortages the third quarter of 2008 was completely messed up.
Given that I actually see a effectively stagnant economy lets hope your right and we do have oil for as long as you think. This means that government intervention will not have to be all that drastic in the big scheme of things and we should see some tepid but real slight growth or better a more robust if stagnant economy.
But as far as your overall post its honestly to early to tell. As I said above we will know by second quarter 2009 what our real situation is.
memmel,
The spooky part is that you could be absolutely right and I could be completely wrong. If we are absolutely at peak now or have already went past it, things could happen very very fast. I have always felt that when peak does occur, there won't be much warning. We may argue about whether it is the "final" geological peak for years afterward, but the effects will occur relatively quickly.
My timeline is based on averaging the consensus of opinion in the peak community (Campbell, Deffeyes, Staniford, Rapiar, Khebab, and of course memmel, etc.)and considering the NPC (National Petroleum Council) and it's politically veiled warnings in it's major report. The slow world economy may have delayed things a bit but probably not much.
To me, the absolute wall is 2020. If oil consumption in the developed world has not began to drop considerably (2% to 4% every year at minimum) in the 5 years leading up to it, and we are not well diversified in our fuel use for transportation by then, we are in deep trouble.
That's only 12 years from now. It may seem like a long time, but as the Hirsch Report warned us, it is not nearly as long as some may think. And that is if everything goes PERFECTLY and peak does not sneak up on us (or hasn't already) in the meantime. We are already cutting it very close and we are late, possibly very late, in getting out of this mess without a trainwreck. If your right, memmel, then all we have to worry about is trying to pick up the wreckage.
RC
Roger: I would be surprised if anyone (including yourself) does not feel that net oil exports are post-peak. With the latest OPEC cuts they should slide back to early 2004/late 2003 levels. As the most important industrial nations are all importers, oil export levels are more important to the global economy than oil supply.
Very informative post, Phil.
Thanks!
I never believed the story that we produced more with less oil and were, therefore, less vunerable to and oil shock. The fact seems to be that we just started buying stuff made overseas with oil "embedded" in the salad shooters. We got lower prices not only because the third world laborers were paid less but they also did without any of the labor or environmental protections that we are so proud of.
Figures from IEA 2007 "CO2 emissions from Fuel Combustion" indicate that China has decreased energy intensity x4 from 1970.
Manufacturing isn't a big part of oil use(<25%) in US its manly transportation(70%). Its both the low fuel economy of US vehicles, and high VMT per person, that accounts for the US using >20% of worlds oil.
I was curious as to where U.S. VMT data came from. This website http://www.fhwa.dot.gov/ohim/tvtw/08augtvt/08augtvt.pdf explains that there are 4,000 traffic monitoring stations in the U.S. that count vehicles on an hourly basis. There must be some pretty complicated statistical methods in place to generate the large amounts of data that result.
It would be interesting to see a graph that tracks monthly transportation fuel use compared to monthly VMT. Would that graph show a noticeable trend indicating annual improvements in the fuel efficiency of the nation's vehicle fleet as old, less fuel efficient vehicles are replaced by new, higher fuel efficient vehicles every year? Or, is there data already available that shows how the average MPG of the nation's fleet changes from month to month or year to year?
This is not the first crisis of capitalism. In its early days there used to be a crisis more or less every ten years. These cycles became more irregular, especially so in the 20th century, with monopolies and greater state intervention. Crisis is inherent in capitalism. Each one differs in detail. So I am inclined to believe that this one too has as its general cause the workings of capitalism. As for particulars, one biggie is the role of credit. Never before has credit and leverage been piled so high. How much of role energy played in precipitating, not causing, this particuloar crisis, I'm not sure, but it surely had some.
BUT, I think that what makes this crisis completely different is its context: peak energy and peak resources. Before, e.g. in the 30s, there was a resource future to mortgage. Not this time. We can't grow our way out of this one. The only way is to shrink, not grow -- to retrench. Any attempt to grow is bound to run against ever growing costs. On the other hand, shrinking without gov't planning and assistance means hardship and starvation. The only resources we have left are the soil, water, forests and so forth -- and they are vastly impoverished compared to 1000, 100, and 50 years ago.
So all gov't efforts should aimed exclusively at keeping what parts of the economy are needed to enable a phased retrenchment and at making sure everyone has the basics, food, shelter, meds, and something constructive to in the retrenchment. Small towns need to densify, go up, be walkable, bikeable, and engage in nearby agriculture and light industry. The suburbs also need to contract and densify, and return land to farming, parks, forests and agriculture and light industry.
In a sense, it does not really matter the precise causes of the crisis -- the cure doesn't depend on it. It should not be our goal to restore what prevailed before the crisis. It's a great opportunity if looked at in the right way. It is no longer possible to live as we lived before. People would never voluntarily give up the way of life the crisis is taking away from them. But now they need to realize that nothing can give that back to them, except very temporarily. A new and decent life, in some ways perhaps better, is very possible, if we but had a gov't that was ours.
There is no longer any excuse for restricating ourselves to "market solutions". This crisis IS the market solution!
List 1 - Conventional Wisdom Going Strong:
The conventional wisdom is that the United States does not have to balance it's budget.
The conventional wisdom is that massive off-shoring of service jobs to India is a good thing.
The conventional wisdom is that massive movement of manufacturing jobs to Asia is a good thing.
The conventional wisdom is that endless immigration is a good thing.
The conventional wisdom is that world population growth will peak long before it becomes a problem.
The conventional wisdom is that oil production will not peak before replacements are in place.
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List 2 - Conventional Wisdom Of The Past:
The conventional wisdom WAS that Iraq has WMDs despite the fact that UN inspectors could find nothing at over 300 sites given to them by the United States government.
The conventional wisdom WAS that giving mortgages to people who couldn't afford them and then using leverage to magnify any defaults is a good thing.
If any one critical point that had led to the current economic crisis in US is that in the last three decades US had lost the leadership in innovation in every new technolgy, be it automotive, Computer Hardware or enrgy production,which it enjoyed before.
US should start to drastically reengineer its educational system to produce innovators as it used to do in the past. I am afraid, this may take altlaest 10 to 12 years to recapture its leadership position in innovation.
There is currently no evidence of any plan to implement such changes in the USA educational system.
Who leads the US in computer hardware technology?
The US has decided that if it needs engineers it will import them from India. Rich and powerful people like Bill Gates cherish their ability to import large quantities of foreign (primarily Indian) tech workers. As long as Microsoft, Intel, Cisco and their ilk can hire all the foreign engineers they want, that will be Plan A as far as getting engineers for US companies.
In the context of the present debate, it might be useful to (re)read the article "Economy Shows Signs of Strain From Oil Prices" (http://www.nytimes.com/2005/08/17/business/17oil.html) published August 17, 2005 by JAD MOUAWAD and DAVID LEONHARDT in the New York Times.